UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES AND EXCHANGE
ACT OF 1934
For the quarterly period ended December 31, 2004
[ ] 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 FIRST 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.)
7100 W. Camino Real Boulevard
Suite 402
Boca Raton, FL 33433
(Address of principal executive offices) (Zip Code)
Issuer's telephone number: (561) 417-7115
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) 28,962,634
(Title of Class) Shares Outstanding as of February 4, 2005
Transitional Small Business Disclosure Format: [ ] YES [X] NO
CAPITAL FIRST CORPORATION
INDEX
Part I - FINANCIAL INFORMATION
ITEM 1. Financial Statements Page
----
Consolidated Balance Sheet - December 31, 2004 (unaudited) F-1
Consolidated Statements of Operations (unaudited) - Three
Months Ended December 31, 2004 and 2003 F-2
Consolidated Statement of Changes in Stockholders' Equity -
Three Months Ended December 31, 2004 F-3
Consolidated Statements of Cash Flows - Three Months Ended
December 31, 2004 and 2003 F-4
Notes to Consolidated Financial Statements F-5
ITEM 2. Management's Discussion and Analysis or Plan of Operation 3
ITEM 4. Controls and Procedures 7
Part II - OTHER INFORMATION
ITEM 1. Legal Proceedings 8
ITEM 2. Unregistered Sales of Equity Securities and Use of Proceeds 9
ITEM 3. Defaults Upon Senior Securities 9
ITEM 4. Submission of Matter to a Vote of Security Holders 9
ITEM 5. Other Information 10
ITEM 6. Exhibits 10
Signatures 10
Certifications 13-16
2
CAPITOL FIRST CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET (Unaudited)
AS OF DECEMBER 31, 2004
Current Assets
Cash and cash equivalents $ 374,495
Accrued interest receivable 116,160
Notes and loans receivable, net of valuation allowance of $70,869 3,335,408
Real estate held for sale 780,871
Construction in progress 2,843,212
Other current assets 334,609
------------
Total Current Assets 7,784,755
------------
Property and Equipment
Furniture and equipment, net of accumulated depreciation of $8,678 31,300
------------
Other Assets
Notes receivable, long term 1,000,000
Land and real estate holdings 3,988,471
Deferred tax benefit 1,203,000
Other long-term assets 48,363
------------
Total Other Assets 6,239,834
------------
Total Assets $ 14,055,889
============
Current Liabilities
Accounts payable and accrued expenses 320,768
Accrued preferred stock dividends payable 271,530
Current portion of long term debt 4,737,122
------------
Total Current Liabilities 5,329,420
------------
Long Term Debt, net of current portion 6,867,112
------------
Total Liabilities 12,196,532
------------
Stockholders' Equity
Preferred Stock - $0.01 par value, 10,000,000 shares authorized; 4,137,591
shares issued and outstanding 41,376
Common Stock - $0.01 par value, 40,000,000 shares authorized; 28,962,634
shares issued and outstanding 289,626
Additional paid-in capital 9,751,908
Preferred stock dividends (595,808)
Minority interests 100
Accumulated deficit (7,627,845)
------------
Total Stockholders' Equity 1,859,357
------------
Total Liabilities and Stockholders' Equity $ 14,055,889
============
The accompanying notes are an integral part of these financial statements.
F-1
CAPITOL FIRST CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited)
Quarter Ended December 31,
----------------------------
2004 2003
------------ ------------
Revenues
Sales of land and developed properties $ 1,217,417 $ --
Interest income - notes and loans 146,663 41,682
Fee income 121,489 610
------------ ------------
Total Revenues 1,485,569 42,292
------------ ------------
Cost of Revenue
Cost of sales - land and developed properties $ 1,125,838 --
Cost of sales - loans 140,884 52,414
------------ ------------
Total Cost of Revenue 1,266,722 52,414
------------ ------------
Gross profit (loss) 218,847 (10,122)
------------ ------------
Operating Expenses
General and administrative expenses 246,693 139,061
General and administrative expenses - related parties 7,500 13,500
Financial advisory and consulting fees 24,250 145,000
------------ ------------
Total operating expenses 278,443 297,561
------------ ------------
Net loss from operations (59,596) (307,683)
------------ ------------
Other income and (expense)
Interest income on cash balances 388 5,658
Interest expense (54,491) (125,055)
Gain (loss) from extinguishment of debt 53,404 (25,000)
------------ ------------
Total other income and (expense) (699) (144,397)
------------ ------------
Net loss $ (60,295) $ (452,080)
============ ============
Basic loss per share
Net loss $ (0.002) $ (0.015)
Weighted average shares outstanding 28,962,634 30,220,750
The accompanying notes are an integral part of these financial statements.
F-2
CAPITOL FIRST CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY (UNAUDITED)
FOR THE QUARTER ENDED DECEMBER 31, 2004
Common Stock
Preferred Stock Additional
Issued o/s Paid-in
Shares Amount Shares Amount Capital
----------------------------------------------------------------
Balance at 09/30/04 4,137,591 41,376 28,962,634 289,626 9,751,908
Preferred Dividends
accrued as of 12/31/04 -- -- -- -- --
Net loss for the period
ended 12/31/04 -- -- -- -- --
Minority interests -- -- -- -- --
----------------------------------------------------------------
Balance at 12/31/04 4,137,591 41,376 28,962,634 289,626 9,751,908
----------------------------------------------------------------
Part 1 of table
Preferred Accumulated Membership
Stock Dividends Deficit Interests Total
-----------------------------------------------------------
Balance at 09/30/04 (541,502) (7,567,550) 100 $ 1,973,958
Preferred Dividends
accrued as of 12/31/04 (54,306) -- -- (54,306)
Net loss for the period
ended 12/31/04 -- (60,295) -- (60,295)
Minority interests
-----------------------------------------------------------
Balance at 12/31/04 (595,808) (7,627,845) 100 $ 1,859,357
-----------------------------------------------------------
Part 2 of table
The accompanying notes are an integral part of these financial statements.
F-3
CAPITOL FIRST CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
Quarter Ended December 31,
----------------------------
2004 2003
------------ ------------
Cash flows from operating activities
Net loss $ (60,295) $ (452,080)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation 1,998 1,475
(Gain) loss on debt extinguishment (53,404) 25,000
Changes in operating assets and liabilities:
Accrued interest receivable (7,380) (15,962)
Other current assets (37,149) (108,120)
Accounts payable and accrued expenses (91,244) 201,551
Accrued expenses - related parties -- 2,490
Notes and loans receivable 17,600 (1,131,710)
Construction in progress 321,097 (698,325)
Real estate held for sale (780,871) --
Deposits -- (8,363)
------------ ------------
Net cash used in operating activities (689,648) (2,184,044)
------------ ------------
Cash flows from investing activities
Increase in real estate holdings (436,649) --
Purchase of fixed assets -- (29,500)
------------ ------------
Net used in investing activities (436,649) (29,500)
------------ ------------
Cash flows from financing activities
Issuance of 8% secured promissory notes 75,000 --
Decrease in notes payable to related party (40,691) (10,000)
Issuances of notes payable 1,059,571 906,000
Payments of notes payable (87,130) (13,190)
Payment of preferred dividends -- (109,386)
Issuance of common stock -- 80,000
Minority interests -- 100
------------ ------------
Net cash provided by financing activities 1,006,750 853,524
------------ ------------
Net decrease in cash and cash equivalents (119,547) (1,360,020)
Beginning cash and cash equivalents 494,042 2,661,998
------------ ------------
Ending cash $ 374,495 $ 1,301,978
------------ ------------
Schedule of non-cash financing activities
Common stock issued for services $ -- $ 80,000
============ ============
Supplemental information:
Interest paid $ 206,953 $ 162,822
============ ============
The accompanying notes are an integral part of these financial statements.
F-4
CAPITOL FIRST CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2004
NOTE 1 -SIGNIFICANT ACCOUNTING POLICIES
A. BACKGROUND
The Company is in the business of financial lending collateralized by real
estate, acquisition and sales of real property for its own portfolio, real
estate development through ownership or control of strategic projects and
consulting on real estate development projects.
In addition to Capitol Development of Arkansas, Inc., formed in 1994, the
Company formed in fiscal 2004, seven wholly-owned subsidiaries and one 50% joint
development venture for which the Company performs the duties of Manager. These
entities are Capitol Development, Inc., a Nevada corporation; Toxaway
Development Group, LLC, a North Carolina LLC; Interfund Mortgage Corp., a
Florida corporation; Interfund Investment Fund I, LLC, a Florida LLC; Capitol
Management, LLC, a Florida LLC; East Greens Development, LLC, a Florida LLC; MW
Land Development, LLC, an Arkansas LLC and Philbuilt Development, LLC, a Florida
LLC. The results of operations and balance sheets of the wholly-owned
subsidiaries and the 50% joint development venture are consolidated in the
financial statements of the Company.
As of December 31, 2004, the Company considers itself to operate in three
segments: (1) real estate acquisition, sales and development, (2) financial
lending and (3) consulting on real estate development projects.
Previous History: 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. On February 11, 1994 the Company formed
a wholly owned subsidiary AWEC Development Corp, an Arkansas corporation, which
later changed its name to Capitol Development of Arkansas.
In February, 1994 Petro Source Energy Corporation transferred the majority of
its holdings in the common shares of the predecessor corporation, AWEC
Resources, Inc., to Charlie Corporation and Prescott Investments Limited
Partnership, a beneficial owner of the Company.
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 October 15, 2003, the Company filed a Certificate of Amendment
with the Secretary of State of Nevada to change its name from Capitol
Communities Corporation to Capitol First Corporation.
B. PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include accounts of its wholly-owned
subsidiaries. All material intercompany transactions have been eliminated.
C. RECLASSIFICATIONS
Certain reclassifications have been made to the December 31, 2003 financial
statements to conform to the December 31, 2004 presentation.
D. REAL ESTATE HOLDINGS
Real estate investments are stated at the lower of cost or market. In the event
that several properties are acquired in a single transaction, acquisition costs
are allocated to respective properties based on available appraisals or other
relevant documentation.
F-5
CAPITOL FIRST CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2004
NOTE 1 -SIGNIFICANT ACCOUNTING POLICIES - (Continued)
E. REVENUE RECOGNITION
Real Property: Revenue is recognized under the accrual method of accounting upon
the completed sale of real property held for development and sale. All costs
incurred directly or indirectly in acquiring and developing the real property
are capitalized.
Interest Income: Interest income is accrued on a simple interest basis according
to the terms of the loan, generally on a 365-day year. The Company does not
recognize interest income from loans once they are determined to be impaired. A
loan is impaired when, based on current information and events, it is probable
that the Company will be unable to collect all amounts due according to the
contractual terms of the loan agreement.
Fee Income: Fee income from non-refundable origination fees is recognized at
closing of escrow and reduced by any amount that would be deemed earned in a
subsequent fiscal year. Most loans mature in one year. Income from
non-refundable consulting fees is recorded net of consulting expenses paid to
related and unrelated parties. Consulting fees are considered substantially
earned at closing pursuant to consulting agreements. The bulk of consulting fees
are earned on revolving construction loans for which construction of individual
units occurs in a three to four month time period.
F. USE OF ESTIMATES
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosures of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the period. Actual results
could differ from those estimates.
G. CONCENTRATIONS OF CREDIT RISK
Cash and cash equivalents include cash on hand, cash in banks, and any highly
liquid investments with a maturity of three months or less at the time of
purchase. The Company and its Subsidiaries maintain cash and cash equivalent
balances at several financial institutions which are insured by the Federal
Deposit Insurance Corporation up to $100,000. At times, the cash balances may
exceed federally insured limits. We have not experienced any losses in such
accounts and we believe the risk related to these deposits is minimal. At
December 31, 2004, approximately 17% of the Company's cash was subject to such
risk.
The Company participates in loans originated by Transcapital Bank. As of
December 31, 2004, approximately 61% of its loans receivable were originated by
Transcapital Bank.
The Company borrows funds evidenced by notes payable and mortgages on properties
it owns from Transcapital Bank. As of December 31, 2004, approximately 23% of
its loans payable were due to Transcapital Bank.
Fair Value of Financial Instruments - The carrying amount of cash, accounts
payable and accrued liabilities reported on the balance sheet are estimated by
management to approximate fair value.
H. EARNINGS/LOSS PER SHARE
Primary earnings per common share are computed by dividing the net income (loss)
by the weighted average number of shares of common stock and common stock
equivalents outstanding during the quarter. The number of shares used for the
quarters ended December 31, 2004 and 2003 were 28,962,634 and 30,220,750,
respectively.
I. VALUATION ALLOWANCE
We determined a loan delinquency rate based on industry averages published by
the Mortgage Bankers Association at the time lending operations began. The loan
delinquency rate is applied to all loans receivable on a pro-rata basis. An
allowance is not provided for construction in progress as these projects are
currently owned or controlled by the Company. Additionally, the loan delinquency
rate is not applied to loans that are highly collateralized. The
F-6
CAPITOL FIRST CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2004
NOTE 1 -SIGNIFICANT ACCOUNTING POLICIES - (Continued)
allowance is reviewed on a quarterly basis and adjusted when necessary based on
the Company's collection experience.
The Company received notification on May 14, 2004, of default on one of the
collateral properties securing one of its second mortgage loans receivable in
the original principal amount of $525,000. A principal payment of $80,000 was
received from the borrower and the Company's remaining $445,000 loan receivable
is secured by other properties in addition to its share in the defaulted
property.
J. INCOME TAXES
In February 1992, the Financial Accounting Standards Board issued Statement on
Financial Accounting Standards 109 "Accounting for Income Taxes." Under
Statement 109, deferred tax assets and liabilities are recognized for the
estimated future tax consequences attributable to differences between the
financial statement carrying amounts of existing assets and liabilities and
their respective tax bases.
At December 31, 2004, the Company has a U.S. federal net operating loss
carryforward of approximately $9,900,000. This carryforward expires in the years
2009 through 2022. The amount available to be used in any given year will be
limited by operation of certain provisions of the Internal Revenue Code. The
Company also has U.S. state net operating loss carryforwards available, the
utilization of which will be similarly limited. The Company has established a
valuation allowance with respect to these federal and state carryforwards.
A deferred tax asset was recognized in 2002 based on the anticipation of future
profitable operations for the years subsequent to 2002. Maintaining the deferred
asset is justified because of our unrealized gains on our land holdings, which
are substantiated by appraisals. Due to the operating losses incurred during the
fiscal years ended September 30, 2003 and September 30, 2004, as well as the
during the current quarter ended December 31, 2004, we deemed it conservative
not to recognize any additional tax asset.
Deferred tax assets:
Net operating loss carryforwards........................... $ 3,370,000
-----------
Total deferred tax assets........................................ 3,370,000
-----------
Net future income tax benefit.................................... 3,370,000
Valuation allowance for net deferred tax assets.................. (2,167,000)
-----------
Net deferred tax assets.......................................... $ 1,203,000
===========
The reconciliation of the reported income tax expense to the amount that would
result by applying the U.S. federal statutory rate to the net loss is as
follows:
Tax benefit at U.S. statutory rate............................... $ (20,500)
State income taxes, net of federal benefits...................... (2,000)
Valuation allowance.............................................. 22,500
-----------
Total............................................................ $ -0-
===========
K. STOCK COMPENSATION
We account for stock-based compensation under the fair value method which values
stock compensation at the market price of the stock on the grant date. There
were no stock grants during the three months ended December 31, 2004.
F-7
CAPITOL FIRST CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2004
NOTE 1 -SIGNIFICANT ACCOUNTING POLICIES - (Continued)
L. NEW ACCOUNTING PRONOUNCEMENTS
In November 2004, the FASB issued Statement of Financial Accounting
Standards (SFAS) No. 151, Inventory Costs, which clarifies the accounting for
abnormal amounts of idle facility expense, freight, handling costs, and wasted
material. SFAS No. 151 will be effective for inventory costs incurred during
fiscal years beginning after June 15, 2005. We do not believe the adoption of
SFAS No. 151 will have a material impact on our financial statements.
In December 2004, the FASB issued SFAS No. 153, Exchanges of Nonmonetary
Assets, which eliminates the exception for nonmonetary exchanges of similar
productive assets and replaces it with a general exception for exchanges of
nonmonetary assets that do not have commercial substance. SFAS No. 153 will be
effective for nonmonetary asset exchanges occurring in fiscal periods beginning
after June 15, 2005. We do not believe the adoption of SFAS No. 153 will have a
material impact on our financial statements.
In December 2004, the FASB issued SFAS No. 123(R), Share-Based Payment,
which establishes standards for transactions in which an entity exchanges its
equity instruments for goods or services. This standard requires a public entity
to measure the cost of employee services received in exchange for an award of
equity instruments based on the grant-date fair value of the award. This
eliminates the exception to account for such awards using the intrinsic method
previously allowable under APB Opinion No. 25. SFAS No. 123(R) will be effective
for interim or annual reporting periods beginning on or after June 15, 2005. We
previously adopted the fair value recognition provisions of SFAS No. 123,
Accounting for Stock-Based Compensation, on July 1, 2003 and have accounted for
all awards granted to employees in recent years using the fair value recognition
method.. Accordingly we believe SFAS No. 123(R) will not have a material impact
on financial statements.
NOTE 2 - RELATED PARTY TRANSACTIONS
On July 17, 2002, Boca First Capital, LLLP, a Florida limited liability limited
partnership acquired control of Capitol First Corporation. The Company entered
into a Business Loan Agreement with Boca First Capital LLLP dated April 26, 2002
to borrow up to the sum of $3,000,000 from Boca First Capital, LLLP. On
September 27, 2002, the line of credit was increased from $3,000,000 to
$4,000,000.
The Company has drawn $1,224,961 as of December 31, 2004, on its $4,000,000
credit line from Boca First Capital, LLLP. The line of credit is evidenced by a
promissory note secured by all of the assets of the Company and its wholly-owned
subsidiaries, including second or third security interests in all notes and
loans receivable generated in the Company's lending operations. The Boca First
Credit Line matures on November 1, 2007 and bears an interest rate of ten
percent (10%) per annum adjustable quarterly to a rate equal to the greater of
ten percent per annum or one percent (1%) above the prime rate in effect on that
date.
Commencing in September, 2002, the Company entered into an informal agreement
with its Acting Chief Executive Officer for consulting services. The monthly fee
is $2,500. In addition, the Company agreed to pay the Acting Chief Executive
Officer a commission on loans he initiates. These consulting fees and
commissions are in lieu of salary. For the quarter ended December 31, 2004, the
Acting Chief Executive Officer received $7,500 in consulting fees and $14,942 in
sales commissions.
During the three months ended December 31, 2004, the Company paid approximately
$44,825 in gross mortgage broker, consulting and/or development fees to
beneficial owners of the Company. Approximately 40% of the gross fees were
distributed by the beneficial owners to other mortgage brokers, professionals
and consultants and to other vendors for costs. The Board of Directors has
approved the payment of fees to related parties if disclosed and negotiated by
the Board and if they are consistent with industry standards or agreed to by the
Board at the time a deal is accepted. All such fees will be netted from the
Company's revenue. These fees are paid for work including acquisition,
development, financing, management and personal guarantees related to various
projects. The related parties are entities owned by the beneficial owner of a
controlling shareholder and the Acting Chief Executive Officer of the Company.
F-8
CAPITOL FIRST CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2004
NOTE 2 - RELATED PARTY TRANSACTIONS - Continued
Potential conflicts of interest may arise from time to time as certain officers,
directors and beneficial owners have personal real estate investments. Various
conflicts of interest may arise as certain officers, directors and beneficial
owners may personally invest in real estate ventures, either individually or
with third parties, to purchase, sell or develop commercial and/or residential
properties. Several of the officers, directors and beneficial owners have
invested in real estate transactions for substantial portions of their careers,
and said officers, directors and beneficial owners will continue to make such
personal investments as they deem appropriate. Notwithstanding the foregoing,
the officers, directors and beneficial owners are aware of their fiduciary
obligations under Nevada law and will seek to act in good faith whenever making
a personal real estate investment, and if a direct conflict arises with the
Company as it relates to a particular investment, said officer, director or
beneficial owner may seek to offer a right of first refusal on a particular
investment to the Company prior to making such a personal investment in order to
absolutely avoid any appearance of impropriety.
NOTE 3 - CANCELLATION OF DEBT
During the three months ended December 31, 2004, $53,404 principal and accrued
interest relating to unsecured promissory notes was written off pursuant to
advisement by legal counsel that the statute of limitations on these notes had
expired. Attempts by the Company to contact these creditors were made prior to
the expiration of the statute of limitations.
NOTE 4 - CAPITAL TRANSACTIONS
No common stock was issued during the three months ended December 31, 2004.
NOTE 5 - NON-QUALIFIED EMPLOYEE STOCK OPTION PLAN
The Company has a non qualified Stock Option Plan under which directors,
officers, key consultants and other persons employed by the Company may be
granted options to purchase shares of the Company's authorized but unissued or
reacquired common stock. The maximum number of shares available for issuance
under the Plan is 3,000,000 shares. As of December 31, 2004 the maximum number
of shares available for future grants under the Plan is 300,000 shares. Under
the plan the option exercise price shall not be less than the fair market value
of the stock. Options currently expire no later than 10 years from the grant
date. Proceeds received by the Company from exercises of stock options are
credited to common stock and additional paid-in capital. Additional information
with respect to the Plan's stock option activity is as follows:
Number of Options Weighted Average Exercise Price
Outstanding at September 30, 2004 0 0.00
Granted 0 0.00
Exercised 0 0.00
Cancelled 0 0.00
Outstanding at December 31, 2004 0 0.00
Since no stock options were granted during the three months ended December 31,
2004, no compensation expense was recorded under the non-qualified plan during
the period.
F-9
CAPITOL FIRST CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2004
NOTE 6 - COMMITMENTS AND CONTINGENCIES
During the fiscal year ended September 30, 2004 the Company's wholly-owned
subsidiary, Interfund Investment Fund I, LLC, executed a letter agreement with
Noble International Investments, Inc., with an effective date of November 23,
2003. The letter agreement sets forth the understandings between the parties
regarding placement agent fees, non-accountable expenses and shares of common
stock to be issued upon completion of a minimum of $3,000,000 of an $8,000,000
maximum offering. Under the agreement, placement fees of $180,000 in cash,
non-accountable expenses of $25,000 in cash and 2,500,000 shares of restricted
common stock shall be paid or granted to Noble upon placement of the first
$3,000,000 of the offering. Noble raised $2,150,000 under the offering and the
offering was closed in October, 2004. Fees of $111,000 were paid to Noble as of
December 31, 2004. On January 14, 2005, the Board of Directors authorized the
issuance of 1,650,000 shares of restricted common stock to Noble or its
designees.
NOTE 7 - LEGAL PROCEEDINGS
The Company is not involved in any other litigation, other than those actions
arising from the normal course of business, and for which management does not
believe will have a material effect on the Company's operations, except for the
matters described below:
Shareholder's Derivative Action
- -------------------------------
The Company is a defendant in a shareholder derivative action entitled Dr.
Christopher Brown vs. Capitol First Corporation f/k/a Capitol Communities Corp.,
Prescott Investments, LP, Michael Todd and Edward Durante a/k/a Ed Simmons ("the
Complaint"), filed in the Superior Court in Mecklenburg County, North Carolina
(Docket No. 04-CVS-14076) on August 5, 2004. The suit seeks relief for
securities fraud in violation of North Carolina General Statute #78A-8 and
78A-12, breach of fiduciary duty and negligence, civil conspiracy, unfair and
deceptive trade practices, punitive damages and seeks a jury trial. Michael
Todd, the Company's former president and former chairman of the Board of the
Company, and his affiliate, Prescott Investments, LP are also defendants in this
suit.
The suit alleges, among other things, that in 2001, Mr. Todd, either
individually, on behalf of Prescott or in his fiduciary capacity with Capitol
First, had several million shares of the Company's stock issued in the names of
various individuals and businesses in order to create a perceived trading market
for the Company's stock thereby artificially increasing the stock price and
induced the plaintiff to purchase the Company's stock in an alleged scheme to
defraud the market place and potential investors in violation of the North
Carolina securities fraud statutes and in breach of fiduciary duties owed to the
plaintiff. The requests for relief names "an amount in excess of $10,000" for
four causes of action for a total amount in excess of $40,000, plus punitive
damages, the cost of the actions and reasonable attorney's fees.
On September 13, 2004, our legal counsel filed a Notice of Removal in the United
States District Court, Western Division of North Carolina seeking to remove the
case from the state court to the Federal Court.
On September 20, 2004, our legal counsel filed a Motion to Dismiss the Complaint
in the state court for lack of personal jurisdiction over Capitol First
Corporation and failure to state a claim.
On or about October 18, 2004, the plaintiff, Dr. Christopher Brown, filed a
First Amended Complaint in the state court to add federal securities claims to
the state action, including counts for securities fraud, failure to register
securities, a federal RICO claim and various state law and common law claims.
On November 10, 2004, our legal counsel filed a Motion to Dismiss all counts of
the amended complaint.
On December 8, 2004, the plaintiff filed a Memorandum of Law in opposition to
our Motion to Dismiss.
F-10
CAPITOL FIRST CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2004
NOTE 7 - LEGAL PROCEEDINGS - Continued
On December 22, 2004, our legal counsel filed a Reply Memorandum of Law in
further support of the Company's motion to dismiss the first amended complaint.
On January 5, 2005, the plaintiff filed a sur reply in further opposition to the
Motion to Dismiss.
The Complaint, Amended Complaint and subsequent Motions are before the judge for
a decision. The Company cannot predict the timing of the judge's decision.
The Company believes that it has several defenses to the claims raised and
intends to vigorously defend the lawsuit. Due to the inherent uncertainties in
litigation and because the ultimate resolution of these proceedings are
influenced by factors outside the Company's control, the Company is currently
unable to predict the ultimate outcome of this litigation or its impact on the
Company's financial position or results of operations. Current management of the
Company had independently determined to investigate stock transactions by Mr.
Todd and his affiliates which investigation is ongoing.
Civil Lawsuit
- -------------
On December 30, 2004, the Company filed a civil lawsuit ("Lawsuit") in the
United States District Court of New Jersey against Michael G. Todd, Prescott
Investment L.P., David Ryan, Kirlin Securities, Inc., Edward Durante,
Christopher Brown, Old Monmouth Stock Transfer Co., Inc. and Steven Telsey. This
Lawsuit relates to actions taken by Mr. Todd and the other defendants in
connection with Mr. Todd's sale of shares of the Company's common stock during
the period between October 2001 and March 2002 and whether Mr. Todd properly
fulfilled his fiduciary duties as an officer, director and controlling
shareholder of the Company during the relevant time periods described in the
complaint. The Company is seeking return of any short-swing profits (as defined
in Section 16 of the Exchange Act) that Mr. Todd made from his undisclosed sales
of the Company's common stock, compensatory damages, punitive damages,
restitution, and attorney's fees and costs and expenses that the Company has
incurred in defending itself in a shareholders derivative lawsuit, which was
filed against the Company on August 5, 2004 and is further described above.
Boca First Capital, LLP ("Boca First"), a principal shareholder that owns
approximately 55.2% of the Company's common stock, along with certain of its
partners, are also plaintiffs in the Lawsuit. Boca First is seeking damages from
Mr. Todd related to its stock exchange agreement dated April 2002 in which Boca
First acquired 64.6% of the Company's issued and outstanding common stock from
Mr. Todd.
No defendant has yet filed an answer to the Lawsuit, and the time within which
defendants are required to do so has not yet expired. A settlement conference is
scheduled for January 22, 2005; however, there can be no assurance as to the
outcome.
Foreclosure Action
- ------------------
An action was filed on May 3, 2004, in the State of Arkansas, Pulaski
County Circuit Court by Old West Annuity and Life Insurance Company against
Superior Lodging, Inc., Reelfoot Bank, Tulsi Bharodia, Atul T. Patel, Amratben
T. Patel, Sweet Home, Inc., and Capitol Communities Corporation (now known as
Capitol First Corporation). The suit seeks relief for a defaulted promissory
note between Superior and others and Old West in the amount of $5,600,000,
secured by a mortgage on real property located in Pulaski County, Arkansas. Old
West seeks judgment against Superior Lodging, Inc., Tulsi Bharodia, Atul T.
Patel, Amratben T. Patel, and Sweet Home, Inc. against the mortgaged property
for $5,600,000, accrued interest through April 22, 2004 in the amount of
$309,789, foreclosure of the mortgage, declaration of Old West's first lien
position, the appointment of a receiver to take possession of and operate the
mortgaged property and the sale of the mortgaged property with the proceeds of
the sale being applied pursuant to court order and other proper relief.
F-11
CAPITOL FIRST CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2004
NOTE 7 - LEGAL PROCEEDINGS - Continued
The Company has a promissory note in the amount of $525,000 which is partially
secured by the real property in the above suit. The $525,000 note receivable was
due in full on October 15, 2004. The Company received a principal paydown of
$80,000 and $20,000 toward reimbursement of its legal expenses on October 28,
2004. The Company has filed a cross-complaint, counter-complaint and third party
complaint suing on the note and all the collateral and alleges that the filing
of foreclosure by the first mortgage holder is an event of default. The
remaining $445,000 note receivable is secured by other properties in addition to
its share in the defaulted property. Management believes that in addition to the
collateral in the defaulted property, there is sufficient equity in the other
collateral to secure its investment.
NOTE 8 - SUBSEQUENT EVENTS
On January 14, 2005, the Board of Directors authorized management to take the
necessary actions to effect a going-private transaction via a reverse split of
the common stock in the ratio of one share for 2,000 shares. A preliminary proxy
statement was filed with the Securities and Exchange Commission on January 27,
2005, as the first step in effecting this plan.
On January 14, 2005, the Board of Directors authorized issuance of a total of
25,000 shares of restricted common stock to its four employees as part of their
compensation for the 2004 calendar year.
On January 14, 2005, the Board of Directors authorized the issuance of 1,650,000
shares of restricted common stock to Noble International Investments, Inc.,or
its designees, in connection with its services in the private placement of
$2,150,000 secured promissory notes during the period from March through
October, 2004.
F-12
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
Forward-Looking Statements
- --------------------------
This Quarterly Report on form 10-QSB contains forward-looking statements. Such
forward-looking statements are generally accompanied by words such as "intends,"
"projects," "strategies," "believes," "anticipates," "plans," and similar terms
that convey the uncertainty of future events or outcomes. The forward-looking
statements contained herein are subject to certain risks and uncertainties that
could cause actual results to differ materially from those reflected in the
forward-looking statements. Factors that might cause such a difference include,
but are not limited to those discussed in Item 2 of this Report, the section
entitled "Factors That Might Affect Future Results" on page 5 of this Report.
Overview and Recent Events
- --------------------------
Capitol First Corporation, a Nevada corporation (the "Company") and its
subsidiaries are engaged in the business of financial lending collateralized by
real estate, acquisition and sales of real property for its own portfolio,
consulting on real estate development projects and real estate development
through ownership or control of strategic projects. The Company is currently
developing residential properties in Arkansas, Florida and North Carolina.
In January 2005, the Company determined that the costs of being a public company
outweighed the benefits of being a public company and began the process to
deregister the Company's common stock with the Securities and Exchange
Commission ("SEC"). The Company filed a preliminary proxy statement with the SEC
on January 27, 2005, which sets forth in more detail the manner in which the
Company will deregister its common stock with the SEC and effectuate a going
private transaction.
RESULTS OF OPERATIONS
COMPARISON OF THREE MONTHS ENDED DECEMBER 31, 2004 TO THE THREE MONTHS ENDED
DECEMBER 31, 2003.
Revenues increased to $1,485,569 for the quarter ended December 31, 2004,
compared to $42,292 for the quarter ended December 31, 2003. This increase in
revenue is the direct result of increased activities in the Company's commercial
lending program, development consulting and real estate acquisition, sales and
development projects which commenced in the quarter ended December 31, 2003.
Revenues from the sale of land and development activities increased to
$1,217,417 for the quarter ended December 31, 2004, compared to zero revenues
from those sources for the quarter ended December 31, 2003. Interest income from
the Company's lending programs increased to $146,663 for the quarter ended
December 31, 2004, compared to $41,682 in the quarter ended December 31, 2003.
Fee income from the Company's development consulting programs increased to
$121,489 for the quarter ended December 31, 2004, compared to $610 for the
quarter ended December 31, 2003.
Cost of revenues increased to $1,266,722 for the quarter ended December 31,
2004, compared to $52,414 for the quarter ended December 31, 2003 because the
Company greatly increased its commercial lending and real estate acquisition,
sales and development projects. Cost of sales related to land acquisition and
sales and from development activities increased to $1,125,838 for the quarter
ended December 31, 2004, compared to zero cost of sales related to those sources
in the quarter ended December 31, 2003. The Company increased its borrowings
from banks and participants to fund these new activities and the interest
expense directly related to interest income from loans is reported as cost of
sales for lending activities. Cost of sales for lending activities increased to
$140,884 for the quarter ended December 31, 2004, compared to $52,414 for the
quarter ended December 31, 2003.
Operating expenses decreased to $278,443 for the quarter ended December 31, 2004
from $297,561 for the quarter ended December 31, 2003. Total operating expenses
consist of (i) general and administrative expenses, (ii) general and
administrative expenses paid to related parties and (iii) financial advisory and
consulting fees. General and administrative expenses increased to $246,693 for
the quarter ended December 31, 2004 compared to $139,061 for the quarter ended
December 31, 2003, an increase of $107,632 primarily due to (1) a $50,409
increase in legal fees for ongoing securities litigation and securities-related
filings as well as increased legal service hours related to lending and
development activities and (2) a $32,467 increase in payroll to support the
Company's new activities.
3
The remaining increase was due to small increases in property taxes, board
compensation, miscellaneous office expenses and the loan valuation allowance.
General and administrative expenses paid to related parties decreased to $7,500
for the quarter ended December 31, 2004 from $13,500 for the quarter ended
December 31, 2003, a decrease of $6,000, due to cessation of rent paid to a
related party. Financial advisory and consulting fees decreased by $120,750
because the expenses related to raising $3 million in promissory notes in late
September 2003, were primarily incurred in prior quarters and did not recur in
the quarter ended December 31, 2004. In the current quarter, financial advisory
fees of $10,000 were amortized for the $3.0 million capital raise and $14,250
was amortized for the $2.15 million capital raise that occurred during fiscal
2004.
Other expenses decreased to $699 in the quarter ended December 31, 2004,
compared to other expenses of $144,397 in the quarter ended December 31, 2003, a
decrease of $143,698. Interest income earned on cash balances decreased to $388
for the quarter ended December 31, 2004 compared to $5,658 for the quarter ended
December 31, 2003 due to a decrease in average cash balances as the Company
utilized its cash for lending activities and real property acquisitions.
Interest expense decreased to $54,491 for quarter ended December 31, 2004
compared to $125,055 for the quarter ended December 31, 2003. The decrease of
$70,564 was primarily due to repayment of the $1.6 million, 13% New Era note
during fiscal 2004.
The Company had a gain from the extinguishment of debt of $53,404 in the quarter
ended December 31, 2004 because principal and interest on unsecured promissory
notes was written off due to the statute of limitations expiring on these notes.
During the quarter ended December 31, 2003, a loss from the extinguishment of
debt in the amount of $25,000 was incurred. This loss was recorded to correct an
error in the carrying value and related overstatement of extraordinary gain
recorded in the fiscal year ended September 30, 2003, with respect to unsecured
promissory notes.
As a result of the foregoing, the Company's net loss was $60,295 for the quarter
ended December 31, 2004 compared to a net loss of $452,080 for the quarter ended
December 31, 2003.
Liquidity and Capital Resources
The Company assesses its liquidity in terms of its ability to generate cash
to fund its operating and investing activities. The Company finances its land
acquisitions, land improvements, homebuilding, development and construction
activities from internally generated funds, real estate development consulting
fees, interest on investments, proceeds from the sale of investment property and
borrowings under its various credit agreements.
At December 31, 2004, the Company's working capital was $2,455,335,
compared to working capital of $3,956,704 at September 30, 2004, a decrease of
$1,501,369. The decrease is primarily due to (1) an increase of approximately
$1,900,000 in the current portion of long term debt, due to the reclassification
of the Philbuilt construction loan from long term to short term and commencement
of approximately 13 construction loans, and (2) an increase of approximately
$500,000 in real estate held for sale and construction in progress.
At December 31, 2004, the Company had total assets of $14,055,889, an
increase of $3,946,367 or 39% from the December 31, 2003 total of $10,109,522.
The increase in total assets resulted primarily from increases in commercial
loan volume and increases in development activities. Cash decreased to $374,495
at December 31, 2004 compared to $1,301,978 at December 31, 2003. The decrease
was due to utilization of cash in commercial lending and development activities.
On December 30, 2004, the Company increased its loan portfolio by advancing
$428,105 to D.S. Rushing, Inc., a North Carolina corporation. The loan is
secured by a deed of trust on 7 single family lots located in North Carolina.
Total liabilities of the Company at December 31, 2004 were $12,196,532, an
increase of $4,013,090 or 49% from the December 31, 2003 total of $8,183,442.
The increase in total liabilities resulted primarily from borrowing
approximately $1.9 million from banks and participants to fund the Company's
commercial lending and development programs as well as approximately $2.1
million borrowed in a private placement of 8% promissory notes.
Shareholders' Equity at December 31, 2004, was $1,859,357, a decrease of
$66,723 or 3% from the December 31, 2003 total of $1,926,080. The decrease in
equity resulted primarily from accumulated losses and accrued preferred stock
dividends, and was offset increases in paid-in capital for issuances of common
stock.
Net cash used in operating activities was $689,648 during the quarter ended
December 31, 2004, compared to $2,184,044 net cash used in operating activities
in the quarter ended December 31, 2003, a decrease of $1,494,396. During the
quarter ended December 31, 2003, the Company deployed cash of approximately
$1,800,000 in new loans
4
and development projects. During the quarter ended December 31, 2004, the volume
of lending and development activity was constrained by available cash and
maturities of loans placed in earlier periods. The remaining $300,000 of the
difference is explained by changes in accounts payable activity in the
respective quarters.
Net cash used in investing activities was $436,649 during the quarter ended
December 31, 2004, compared to net cash of $29,500 used in investing activities
in the quarter ended December 31, 2003. During the quarter ended December 31,
2004, the company purchased properties in Florida in the amount of $436,649.
During the quarter ended December 31, 2003, the company purchased fixed assets,
consisting of office furniture and computer and office equipment, in the amount
of $29,500.
Net cash provided by financing activities was $1,006,750 in the quarter
ended December 31, 2004, compared to $853,524 of net cash provided by financing
activities in the quarter ended December 31, 2003, an increase of $153,226. This
increase is primarily due to increased borrowing from Transcapital Bank, which
borrowings are collateralized by real property owned by the company.
The Company currently has access to three types of credit to finance its
working capital needs: the Boca First Credit Line ("Boca First"), various loans
collateralized by real property from TransCapital Bank and an agreement with
Coral Capital, LLC.
The Company has drawn $1,224,961 on its $4,000,000 credit line from Boca
First as of December 31, 2004, a reduction of $40,691 from the September 30,
2004, balance of $1,265,652. The Boca First Credit Line is evidenced by a
promissory note secured by a subordinated mortgage on the remaining 696 acres of
the Maumelle Property, 1,000 shares of common stock of Capitol Development, a $1
million note receivable with a maturity date of January 10, 2006 and second or
third security interests in all notes and loans receivable generated in the
Company's lending operations. The Boca First Credit Line matures on November 1,
2007, and has a current interest rate of ten percent (10%) per annum. This rate
is adjustable quarterly to a rate equal to the greater of ten percent per annum
or one percent (1%) above the prime rate, as published in The Wall Street
Journal, in effect on that date.
During the quarter ended December 31, 2004, the Company borrowed $892,189
from Transcapital Bank. These borrowings are secured by mortgages on several of
the Company's properties, primarily single family home sites located in Florida.
Interest rates range from 8.00% to 12.00% and terms are one year.
During the quarter ended December 31, 2004, the Company's borrowings from
Coral Capital, LLC decreased by $4,880, to $887,969 from $892,849, due to
expenses allocated between the parties. Borrowings from Coral Capital were used
to purchase single-family lots in southwest Florida under a 50/50 joint venture
agreement. The note bears no interest and is payable when individual lots are
sold. If the lots are developed, Coral Capital will receive a portion of the
profits.
As of December 31, 2004, the Company's material commitments for capital
expenditures are construction and development expenses for its various projects
in Florida and North Carolina.
The Company continues to execute its strategic business plan that
management anticipates will allow it to generate cash flow from interest on its
investments, real estate acquisition and sales, equity participations in joint
ventures, real estate development consulting fees, real estate development,
financing arbitrage and equity participations from joint ventures. The Company
has acquired and intends to continue to acquire loans for its own portfolio
and/or develop real estate in fast growing markets such as Florida and North
Carolina.
The Company should be able to satisfy its liquidity requirements during the
short and long term by using cash on hand and credit extended by various
commercial lenders. Except for the foregoing, the Company does not have any
present commitment that it is likely to result in its liquidity increasing or
decreasing in any material way. In addition, the Company knows of no trend,
additional demand, event or uncertainty that will result in, or that is
reasonably likely to result in, the Company's liquidity increasing or decreasing
in any material way.
FACTORS THAT MAY AFFECT FUTURE RESULTS
The factors identified below are believed to be important factors (but not
necessarily all of the important factors) that could cause actual results to
differ materially from those expressed in any forward looking
5
statement made by or on behalf of the Company, whether in this section or
elsewhere in this Report or in any other written or verbal statement of the
Company or its officers or directors. Unpredictable or unknown factors not
discussed herein could also have material adverse effects on forward looking
projections. The Company does not intend to update these cautionary statements.
The principal factors that could cause the Company's actual results to differ
material from the forward looking statements include, but are not limited to the
following:
o the ability to continue to generate sufficient revenues to fund
day-to- day operations;
o the ability to compete in the Florida, Arkansas and North Carolina
real estate markets and in other markets where the Company intends to
acquire real property and the ability to expand successfully into
those areas;
o the ability to obtain necessary permits and approvals for the
development of our land;
o the ability to compete in the high-yield lending industry and provide
loans with an acceptable yield that are secured by adequate
collateral;
o adverse legislation or regulation;
o availability of labor or material costs or significant increase in
their costs;
o increase in interest rates causing a decreases in sales in the real
estate development industry and conversely a decrease in borrowers in
the high-yield lending area;
o the level of consumer confidence;
o the concentration of development and/or loans in South Florida and
southwest Florida;
o unanticipated litigation or legal proceedings;
o conditions in the capital, credit and development markets;
o risks associated with increased insurance costs or unavailability of
adequate coverage, perceived risk of travel and changes in economic
conditions due to recent events;
o adverse economic conditions;
o the risk of defaults on loans made by the Mortgage Subsidiary;
o the Company's underwriting standards and procedures may not
effectively reveal risks of under-performing loans or loans that may
go into default;
o the lack of security value or decrease in security value of the
collateral underlying the loans made by the Company;
o the Company has limited access to capital compared to its larger
competitors and there can be no assurance that the Company will be
able to acquire the necessary capital to operate its business;
o the Company may pay up-front fees to mortgage brokers, management
fees, and real estate fees if it purchases property which may reduce
the Company's earnings; and
o the Company may become liable for unforeseen environmental
obligations.
If one or more of these risks or uncertainties materializes, or if
underlying assumptions prove incorrect, our actual results may vary
materially from those expected, estimated or projected.
Critical Accounting Policies
- ----------------------------
The U.S. Securities and Exchange Commission defines critical accounting policies
as "those that are both most important to the portrayal of a company's financial
condition and results and requires management's most difficult, subjective or
complex judgments, often as a result of the need to make estimates about the
effect of matters that are inherently uncertain." The management of the Company
believes that a high degree of judgment or complexity is involved in the
following areas:
Real estate inventories and cost of sales. Real estate investments are stated at
the lower of cost or market. Acquisition costs are allocated to respective
properties based on relevant market data or appraisals, if ordered, on the
various properties acquired in the acquisition.
Impairment of long-lived assets and long-lived assets to be disposed of. Real
estate inventories, including capitalized interest and real estate taxes, are
carried at the lower of cost or fair value determined by evaluation of
individual projects. Property and equipment are recorded at cost less
accumulated depreciation and depreciated on the straight-line method over their
estimated useful lives. Whenever events or circumstances indicate that the
carrying value of our long-lived assets may not be recoverable, we compare the
carrying amount of the asset to the un-discounted expected future cash flows. If
this comparison indicates that the asset is impaired, the amount of the
impairment is
6
calculated using discounted expected future cash flows. If our estimate of the
future cash flows is significantly different from actual cash flows, the Company
may prematurely impair the value of the asset, we may underestimate the value of
the calculated impairment or we may fail to record the impairment. Interest
Rates. If interest rates continue to rise from the recent levels, the Mortgage
Subsidiary's gross profit from interest income may be negatively affected.
Rising interest rates may also negatively affect the Company's earnings due to
diminished loan demand, or increased development costs incurred by the
Development Subsidiary.
Inflation. Any inflation in the economy may impact the Company's costs of
operations both in the Company's development sector as such inflation would
place an upward pressure on cost of labor and materials, and may impact other
developers seeking loans from the Mortgage Subsidiary.
The following discussion should be read in conjunction with the unaudited
financial statements appearing in Item 1 of Part 1 ("the Financial Statements"),
and the information provided in this Item 2, of this Report.
NEW ACCOUNTING PRONOUNCEMENTS
In November 2004, the FASB issued Statement of Financial Accounting
Standards (SFAS) No. 151, Inventory Costs, which clarifies the accounting for
abnormal amounts of idle facility expense, freight, handling costs, and wasted
material. SFAS No. 151 will be effective for inventory costs incurred during
fiscal years beginning after June 15, 2005. We do not believe the adoption of
SFAS No. 151 will have a material impact on our financial statements.
In December 2004, the FASB issued SFAS No. 153, Exchanges of Nonmonetary
Assets, which eliminates the exception for nonmonetary exchanges of similar
productive assets and replaces it with a general exception for exchanges of
nonmonetary assets that do not have commercial substance. SFAS No. 153 will be
effective for nonmonetary asset exchanges occurring in fiscal periods beginning
after June 15, 2005. We do not believe the adoption of SFAS No. 153 will have a
material impact on our financial statements.
In December 2004, the FASB issued SFAS No. 123(R), Share-Based Payment,
which establishes standards for transactions in which an entity exchanges its
equity instruments for goods or services. This standard requires a public entity
to measure the cost of employee services received in exchange for an award of
equity instruments based on the grant-date fair value of the award. This
eliminates the exception to account for such awards using the intrinsic method
previously allowable under APB Opinion No. 25. SFAS No. 123(R) will be effective
for interim or annual reporting periods beginning on or after June 15, 2005. We
previously adopted the fair value recognition provisions of SFAS No. 123,
Accounting for Stock-Based Compensation, on July 1, 2003 and have accounted for
all awards granted to employees in recent years using the fair value recognition
method.. Accordingly we believe SFAS No. 123(R) will not have a material impact
on financial statements.
ITEM 4. CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
We carried out an evaluation, under the supervision and with the
participation of our management, including our Acting President/Chief Executive
Officer and Chief Financial Officer, of the effectiveness of our disclosure
controls and procedures as of the end of the period covered by this Quarterly
Report. Based upon that evaluation, the President/Chief Executive Officer and
Chief Financial Officer have concluded that our disclosure controls and
procedures were effective as of the end of the period covered by this Quarterly
Report in accumulating and communicating to our management, including them,
material information required to be included in the reports we file or submit
under the Securities Exchange Act of 1934 as appropriate to allow timely
decisions regarding required disclosures.
Changes in Internal Control over Financial Reporting
Based on an evaluation, under the supervision and with the participation of
our management, including our Acting President/Chief Executive Officer and Chief
Financial Officer, there has been no change in our internal control over
financial reporting during our last fiscal quarter, identified in connection
with the evaluation, that has materially affected, or is reasonably likely to
materially affect, our internal control over financial reporting.
7
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The Company is not involved in any other litigation, other than those actions
arising from the normal course of business, and for which management does not
believe will have a material effect on the Company's operations, except for the
matters described below:
Shareholder's Derivative Action
- -------------------------------
The Company is a defendant in a shareholder derivative action entitled Dr.
Christopher Brown vs. Capitol First Corporation f/k/a Capitol Communities Corp.,
Prescott Investments, LP, Michael Todd and Edward Durante a/k/a Ed Simmons ("the
Complaint"), filed in the Superior Court in Mecklenburg County, North Carolina
(Docket No. 04-CVS-14076) on August 5, 2004. The suit seeks relief for
securities fraud in violation of North Carolina General Statute #78A-8 and
78A-12, breach of fiduciary duty and negligence, civil conspiracy, unfair and
deceptive trade practices, punitive damages and seeks a jury trial. Michael
Todd, the Company's former president and former chairman of the Board of the
Company, and his affiliate, Prescott Investments, LP are also defendants in this
suit.
The suit alleges, among other things, that in 2001, Mr. Todd, either
individually, on behalf of Prescott or in his fiduciary capacity with Capitol
First, had several million shares of the Company's stock issued in the names of
various individuals and businesses in order to create a perceived trading market
for the Company's stock thereby artificially increasing the stock price and
induced the plaintiff to purchase the Company's stock in an alleged scheme to
defraud the market place and potential investors in violation of the North
Carolina securities fraud statutes and in breach of fiduciary duties owed to the
plaintiff. The requests for relief names "an amount in excess of $10,000" for
four causes of action for a total amount in excess of $40,000, plus punitive
damages, the cost of the actions and reasonable attorney's fees.
On September 13, 2004, our legal counsel filed a Notice of Removal in the United
States District Court, Western Division of North Carolina seeking to remove the
case from the state court to the Federal Court.
On September 20, 2004, our legal counsel filed a Motion to Dismiss the Complaint
in the state court for lack of personal jurisdiction over Capitol First
Corporation and failure to state a claim.
On or about October 18, 2004, the plaintiff, Dr. Christopher Brown, filed a
First Amended Complaint in the state court to add federal securities claims to
the state action, including counts for securities fraud, failure to register
securities, a federal RICO claim and various state law and common law claims.
On November 10, 2004, our legal counsel filed a Motion to Dismiss all counts of
the amended complaint.
On December 8, 2004, the plaintiff filed a Memorandum of Law in opposition to
our Motion to Dismiss.
On December 22, 2004, our legal counsel filed a Reply Memorandum of Law in
further support of the Company's motion to dismiss the first amended complaint.
On January 5, 2005, the plaintiff filed a sur reply in further opposition to the
Motion to Dismiss.
The Complaint, Amended Complaint and subsequent Motions are before the judge for
a decision. The Company cannot predict the timing of the judge's decision.
The Company believes that it has several defenses to the claims raised and
intends to vigorously defend the lawsuit. Due to the inherent uncertainties in
litigation and because the ultimate resolution of these proceedings are
influenced by factors outside the Company's control, the Company is currently
unable to predict the ultimate outcome of this litigation or its impact on the
Company's financial position or results of operations. Current management of the
Company had independently determined to investigate stock transactions by Mr.
Todd and his affiliates which investigation is ongoing.
8
Civil Lawsuit
- -------------
On December 30, 2004, the Company filed a civil lawsuit ("Lawsuit") in the
United States District Court of New Jersey against Michael G. Todd, Prescott
Investment L.P., David Ryan, Kirlin Securities, Inc., Edward Durante,
Christopher Brown, Old Monmouth Stock Transfer Co., Inc. and Steven Telsey. This
Lawsuit relates to actions taken by Mr. Todd and the other defendants in
connection with Mr. Todd's sale of shares of the Company's common stock during
the period between October 2001 and March 2002 and whether Mr. Todd properly
fulfilled his fiduciary duties as an officer, director and controlling
shareholder of the Company during the relevant time periods described in the
complaint. The Company is seeking return of any short-swing profits (as defined
in Section 16 of the Exchange Act) that Mr. Todd made from his undisclosed sales
of the Company's common stock, compensatory damages, punitive damages,
restitution, and attorney's fees and costs and expenses that the Company has
incurred in defending itself in a shareholders derivative lawsuit, which was
filed against the Company on August 5, 2004 and is further described above.
Boca First Capital, LLP ("Boca First"), a principal shareholder that owns
approximately 55.2% of the Company's common stock, along with certain of its
partners, are also plaintiffs in the Lawsuit. Boca First is seeking damages from
Mr. Todd related to its stock exchange agreement dated April 2002 in which Boca
First acquired 64.6% of the Company's issued and outstanding common stock from
Mr. Todd.
No defendant has yet filed an answer to the Lawsuit, and the time within which
defendants are required to do so has not yet expired. A settlement conference is
scheduled for January 22, 2005; however, there can be no assurance as to the
outcome.
Foreclosure Action
- ------------------
An action was filed on May 3, 2004, in the State of Arkansas, Pulaski
County Circuit Court by Old West Annuity and Life Insurance Company against
Superior Lodging, Inc., Reelfoot Bank, Tulsi Bharodia, Atul T. Patel, Amratben
T. Patel, Sweet Home, Inc., and Capitol Communities Corporation (now known as
Capitol First Corporation). The suit seeks relief for a defaulted promissory
note between Superior and others and Old West in the amount of $5,600,000,
secured by a mortgage on real property located in Pulaski County, Arkansas. Old
West seeks judgment against Superior Lodging, Inc., Tulsi Bharodia, Atul T.
Patel, Amratben T. Patel, and Sweet Home, Inc. against the mortgaged property
for $5,600,000, accrued interest through April 22, 2004 in the amount of
$309,789, foreclosure of the mortgage, declaration of Old West's first lien
position, the appointment of a receiver to take possession of and operate the
mortgaged property and the sale of the mortgaged property with the proceeds of
the sale being applied pursuant to court order and other proper relief.
The Company has a promissory note in the amount of $525,000 which is partially
secured by the real property in the above suit. The $525,000 note receivable was
due in full on October 15, 2004. The Company received a principal paydown of
$80,000 and $20,000 toward reimbursement of its legal expenses on October 28,
2004. The Company has filed a cross-complaint, counter-complaint and third party
complaint suing on the note and all the collateral and alleges that the filing
of foreclosure by the first mortgage holder is an event of default. The
remaining $445,000 note receivable is secured by other properties in addition to
its share in the defaulted property. Management believes that in addition to the
collateral in the defaulted property, there is sufficient equity in the other
collateral to secure its investment.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
None.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. SUBMISSION OF MATTER TO A VOTE OF SECURITY HOLDERS
During the fourth quarter of the fiscal year covered by this Report,
stockholders representing in excess of
9
two thirds of the issued and outstanding stock of the Company executed a Written
Consent of Stockholders in Lieu of Meeting. The Written Consent removed Michael
G. Todd as incumbent Director and Chairman of the Company, effective 20 days
after mailing of an Information Statement to the stockholders of the Company.
The effective date of removal was deemed to be effective November 8, 2004.
ITEM 5. OTHER INFORMATION
None.
ITEM 6. EXHIBITS
Exhibit 10.1 Promissory Note D. S. Rushing, Inc., to Interfund Mortgage Corp.*
Exhibit 10.2 North Carolina Deed of Trust granted by D.S. Rushing, Inc. to
Interfund Mortgage Corp.*
Exhibit 11 Statement re: computation of per share earnings*
Exhibit 31.1. Certification of Chief Executive Officer pursuant to Section 302
of the Sarbanes-Oxley Act of 2002*
Exhibit 31.2. Certification of Chief Financial Officer pursuant to Section 302
of the Sarbanes-Oxley Act of 2002*
Exhibit 32.1. Certification of Chief Executive Officer pursuant to Section 906
of the Sarbanes-Oxley Act of 2002*
Exhibit 32.2 Certification of Chief Financial Officer pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002*
* Filed herewith
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 FIRST CORPORATION
Date: February 14, 2005 By: /s/ ASHLEY B. BLOOM
--------------------------------------------
Ashley B. Bloom
Acting President and Chief Executive Officer
(Duly Authorized by the Registrant)
Date: February 14, 2005 By: /s/ MONICA A. SCHREIBER
--------------------------------------------
Monica A. Schreiber
Chief Financial Officer
(Principal Financial and Accounting Officer)
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EXHIBIT INDEX
Exhibit 10.1 Promissory Note D. S. Rushing, Inc., to Interfund Mortgage Corp.*
Exhibit 10.2 North Carolina Deed of Trust granted by D.S. Rushing, Inc. to
Interfund Mortgage Corp.*
Exhibit 11 Statement re: computation of per share earnings*
Exhibit 31.1. Certification of the Chief Executive Officer pursuant to Section
302 of the Sarbanes- Oxley Act of 2002*
Exhibit 31.2. Certification of the Chief Financial Officer pursuant to Section
302 of the Sarbanes- Oxley Act of 2002*
Exhibit 32.1 Certification of the Chief Executive Officer pursuant to Section
906 of the Sarbanes-Oxley Act*
Exhibit 32.2. Certification of the Chief Financial Officer pursuant to Section
906 of the Sarbanes-Oxley Act*
11