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 June 30, 2002
[ ] 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.)
900 N. Federal Highway
Suite 410
Boca Raton, FL 33432
(Address of principal executive offices) (Zip Code)
Issuer's telephone number: (561) 237-0776
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) 24,750,361
(Title of Class) Shares Outstanding as of August 1, 2002
Transitional Small Business Disclosure Format: [ ] YES [X] NO
CAPITOL COMMUNITIES CORPORATION
Form 10-QSB
QUARTER ENDED JUNE 30, 2002
TABLE OF CONTENTS
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)............................................... F-1
Consolidated Balance Sheet
June 30, 2002..................................................... F-1
Consolidated Statement of Cash Flows
For the Six Months Ended June 30, 2002 and 2001 .................. F-2
Consolidated Statement of Operations
For the Six Months ended June 30, 2002 and 2001................... F-3
Consolidated Statement of Operations
For the Three Months ended June 30, 2002 and 2001................. F-3
Consolidated Statement of Stockholders' Equity
For the nine Months ended June 30, 2002........................... F-4
Notes to Consolidated Financial Statements June 30, 2002............. F-5
Item 2. Management's Discussion And Analysis or Plan of Operation...................... 3
PART II. OTHER INFORMATION
Item 1. Legal Proceedings.............................................................. 9
Item 3. Defaults Upon Senior Securities................................................ 10
Item 6. Exhibits and Reports on Form 8-K............................................... 10
Signatures........................................................... 10
-2-
PART I. FINANCIAL INFORMATION
ITEM 1. Financial Statements (Unaudited)
--------------------------------
CAPITOL COMMUNITIES CORPORATION
CONSOLIDATED BALANCE SHEET
AS OF JUNE 30, 2002
UNAUDITED
Current Assets
Cash in Bank $ 98,057
Accounts Receivable 150
Accrued Interest Receivable 34,521
Notes receivable-Current 1,070,000
Prepaid Assets 358
------------
Total Current Assets 1,203,086
Plant property and equipment
Furniture and Equipment, net of accumulated
depreciation of $11,362 4,897
Other Assets
Land and Real Estate Holdings 1,300,140
Notes receivable-Non-Current 1,030,000
Investment in Trade Ark Properties 2,335,447
------------
Total Other Assets 4,665,587
Total Assets $ 5,873,570
============
Current Liabilities
Notes Payable $ 6,996,187
Accounts Payable & Accrued Expenses 1,985,226
------------
Total Current Liabilities 8,981,413
Non Current Liabilities --
Liabilities of Subsidiary Subject to Compromise 409,251
------------
Total Liabilities 9,390,664
Shareholders' Equity (Deficit)
Preferred stock-$.01 par value, none issued --
Common Stock-$.01 par value, 40,000,000 shares 282,900
authorized; 28,290,050 shares issued
Additional Paid in Capital 10,036,671
Note Receivable for Class A Common Stock (300,000)
Treasury Stock; 3,539,689 shares (4,795,852)
Accumulated Deficit (8,740,813)
------------
Total Shareholders' Equity (Deficit) (3,517,094)
Total Liabilities and
Shareholders' Equity (Deficit) $ 5,873,570
============
F-1
CAPITOL COMMUNITIES CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE NINE MONTHS ENDED JUNE 30, 2002 AND 2001
UNAUDITED
2002 2001
---- ----
Cash Flows from Operating Activities:
Net Income (Loss) $ 1,719,305 $(1,280,817)
Amortization -- --
Depreciation 1,367 1,634
Services paid by Issuance of Common Stock 1,712,718
Common Stock Options granted for Services 19,545
Adjustments to Reconcile Income (Loss)
to Net Cash Used for operating Activities
(Increase) Decrease in Receivables 4,515
(Increase) Decrease in Accrued Interest Receivable (34,521)
(Increase) Decrease in Real Estate Holdings 4,057,370 10,278
(Increase) Decrease in Investments 281,433 98,500
(Increase) Decrease in PrePaid Assets 635 (344)
Increase (Decrease) in Accrued Expenses (887,082) 1,005,891
Liabilities Subject to Compromise 14,959 (19,779)
----------- -----------
Net cash provided by (used in) operating activities 6,885,729 (180,122)
----------- -----------
Cash Flows from Investing Activities:
Collections of Notes Receivable 457,520
Increase in Notes Receivable (2,100,000) --
----------- -----------
Net cash provided by (used in) investing activities: (2,100,000) 457,520
----------- -----------
Cash Flows from Financing Activities:
Proceeds from sale of Common Stock 5,000
Increase in Notes Payable 298,000
Payment of Notes Payable (4,990,806) (321,056)
----------- -----------
Net cash provided by (used in) financing activities: (4,687,806) (321,056)
----------- -----------
Net Increase (Decrease) in Cash 97,923 (43,658)
Beginning Cash 134 51,932
----------- -----------
Ending Cash $ 98,057 $ 8,274
=========== ===========
Schedule of Noncash Financing Activities
Common Stock Issued for Accrued Expenses $ 700,095 $ --
Common Stock Issued for Note Receivable 300,000 --
Common Stock Issued for Services 1,712,718 --
Common Stock Options granted for Services 19,545 --
Supplemental Information:
Operating cash flows from reorganization items:
Professional fees paid for services rendered in connection
with the Chapter 11 proceeding, included in net cash used
in operating activities $ 28,746 $ --
Interest paid, net of amounts capitalized of $0 and $0
and net of payoff discount of $1,184,497 in 2002 $ 683,173 $ 93,267
F-2
Capitol Communities Corporation
Consolidated Statements of Operations
For the Nine months Ended June 30, 2002 and 2001
UNAUDITED
2002 2001
---- ----
Revenues:
Sales $8,200,000 $75,000
Miscellaneous Income 1,290 8,325
Recognition of Deferred Land Sale Profit - 118,726
------------------ ------------------
Total Revenues $8,201,290 $202,051
Cost of Sales 4,376,899 10,278
------------------ ------------------
Gross Profit $3,824,391 $191,773
Operating Expenses:
General & Administrative
Expenses 2,330,921 326,037
------------------ ------------------
Net Income (Loss) Before
Other Income/(Expense) 1,493,470 (134,264)
Other Income and (Expense)
Operations of Unconsolidated Investments (281,433) (217,226)
Interest Income 34,521 1,159
Interest Expense (711,750) (930,486)
------------------ ------------------
Net Income (Loss) from continuing operations $534,808 ($1,280,817)
Provision for Income Taxes - -
------------------ ------------------
Net Income (Loss) before Extraordinary Items $534,808 ($1,280,817)
Extraordinary Items
Gain from retirement of debt at a discount
net of income tax benefit of $0 $1,184,497
------------------ ------------------
Net Income (Loss) $1,719,305 ($1,280,817)
================== ==================
Basic Income (Loss) per share
Income (Loss) before extraordinary item $0.022 ($0.303)
Extraordinary Item
Gain from retirement of debt at a discount 0.048 0.000
------------------ ------------------
Net Income (Loss) $0.070 ($0.303)
================== ==================
Weighted average shares outstanding: 24,611,899 4,230,361
================== ==================
Fully Diluted Income (Loss) per share
Income (Loss) before extraordinary item $0.022 ($0.303)
Extraordinary Item
Gain from retirement of debt at a discount 0.048 0.000
------------------ ------------------
Net Income (Loss) $0.069 ($0.303)
================== ==================
Weighted average shares outstanding: 24,738,650 4,230,361
================== ==================
Capitol Communities Corporation
Consolidated Statements of Operations
For the Three months Ended June 30, 2002 and 2001
UNAUDITED
2002 2001
Revenues:
Sales $0 $75,000
Miscellaneous Income - 1,888
Recognition of Deferred Land Sale Profit - -
------------------ ------------------
Total Revenues $0 $76,888
Cost of Sales - 10,278
------------------ ------------------
Gross Profit $0 $66,610
Operating Expenses:
General & Administrative
Expenses 240,013 104,293
------------------ ------------------
Net Income (Loss) Before
Other Income/(Expense) (240,013) (37,683)
Other Income and (Expense)
Operations of Unconsolidated Investments (139,133) (24,190)
Interest Income 32,723 186
Interest Expense (183,350) (307,717)
------------------ ------------------
Net Income (Loss) from continuing operations ($529,773) ($369,404)
Provision for Income Taxes - -
------------------ ------------------
Net Income (Loss) before Extraordinary Items ($529,773) ($369,404)
================== ==================
Extraordinary Items
Gain from retirement of debt at a discount
net of income tax benefit of $0 $0
------------------ ------------------
Net Income (Loss) ($529,773) ($369,404)
================== ==================
Basic Income (Loss) per share
Income before extraordinary item ($0.021) ($0.087)
Extraordinary Item
Gain from retirement off debt at a discount 0.000 0.00
------------------ ------------------
Net Income (Loss) ($0.021) ($0.087)
================== ==================
Weighted average shares outstanding: 24,750,361 4,230,361
================== ==================
F-3
Capitol Communities Corporation
Statement of Changes in Stockholder's Equity
For the Nine Months Ended June 30, 2002
Unaudited
Preferred Preferred Common Common Additional Treasury Retained
Shares Stock Shares Stock Paid in Capital Stock Earnings
- ------------------------------------------------------------------------------------------------------------------------
Balance at 9/30/01 0 $ - 7,770,050 $ 77,700 $ 7,504,513 $(4,795,852) $(10,460,118)
Common Stock issued 10/18/01
for Services 9,895,100 98,951 1,392,378
for Accrued Expenses 4,104,900 41,049 577,622
for Note Receivable 2,000,000 20,000 280,000
Sold 100,000 1,000 4,000
Common Stock issued 2/25/02
for Services 3,473,260 34,733 182,593
for Accrued Expenses 726,740 7,267 65,407
Common Stock issued3/26/02
for Services 5,000 50 263
for Accrued Expenses 140,000 1,400 7,350
Common Stock issued3/29/02
for Services 75,000 750 3,000
Outstanding Stock Options 19,545
authorized April 18, 2002
Net Income (Loss) for
the Period Ended 6/30/02 1,719,305
- ------------------------------------------------------------------------------------------------------------------------
Balance at 6/30/02 0 $ - 28,290,050 $ 282,900 $ 10,036,671 $(4,795,852) $ (8,740,813)
=============================================================================================
F-4
CAPITOL COMMUNITIES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2002
NOTE 1 - BASIS OF PRESENTATION AND SIGNIFICANT ACCOUNTING POLICIES
Background
----------
The consolidated balance sheet at June 30, 2002 and the related statements of
operations and cash flows for the nine month period ended June 30, 2002, 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, 2001 fiscal year end financial statements and
related notes. The unaudited interim financial statements reflect all
adjustments which are, in the opinion of management, necessary for a fair
statement of results for the interim periods presented and all such adjustments
are of a normal recurring nature. Interim results are not necessarily indicative
of results for a full year.
The Company was originally incorporated in the State of New York on November 8,
1968 under the name of Century Cinema Corporation. In 1983, the Company merged
with a privately owned company, Diagnostic Medical Equipment Corp. and as a
result changed its name to that of the acquired company. By 1990, the Company
was an inactive publicly held corporation. In 1993, the Company changed its name
to AWEC Resources, Inc. and commenced operations. On February 11, 1994 the
Company formed a wholly owned subsidiary AWEC Development Corp., an Arkansas
corporation, which later changed its name to Capitol Development of Arkansas.
In February, 1994 Petro Source Energy Corporation transferred the majority of
its holdings in the common shares of the predecessor corporation, AWEC
Resources, Inc., to Prescott Investments Limited Partnership and Charlie
Corporation. Mr. Todd is a beneficial owner of Prescott Investments, L.P., and
the Company. Herbert Russell and John DeHaven, the beneficial owners of the
Company and affiliates of Mr. Todd until June 1999. These shares were
transferred in consideration for public relations services provided by Prescott
Limited Partnership and Charlie Corporation to Petro Source. Such services were
deemed by Petro Source to be integral and indispensable to the concurrent
acquisition of approximately 2,041 acres of land in Maumelle, Arkansas by the
Company's Operating Subsidiary. The Company was not a party to the transfer of
shares. The Company did not issue any new shares pursuant to the acquisition of
the land. Accordingly, the transfer of shares did not affect the capitalization
of the Company, and was non-dilutive to all other shareholders.
In order to effectuate a change in domicile and name change approved by a
majority of the Predecessor Corporation shareholders, the Predecessor
Corporation merged, effective January 30, 1996, into Capitol Communities
Corporation, a Nevada corporation formed in August 1995 solely for the purpose
of the merger. The Company is currently in the business of developing and
selling real estate properties.
F-5
On July 21, 2000 Capitol Development of Arkansas, Inc., a wholly owned
subsidiary, filed a voluntary petition for relief under Chapter 11 of the United
States Bankruptcy Code.
Revenue Recognition
-------------------
The full accrual method is used to determine the recognition of revenue. In
order to recognize revenue and profit under the full accrual method the
following criteria must be met. The profit from the sale must be determinable,
that is, the collectibility of the sales price is reasonably assured, or any
portion which may not be collectible can be reasonably estimated. In addition,
the earnings process must be complete, with no significant activities required
of the seller after the sale in order to earn the profit from the sale.
Earnings/Loss Per Share
------------------------
Primary earnings per common share are computed by dividing the net income (loss)
by the weighted average number of shares of common stock and common stock
equivalents outstanding during the year. The number of shares used for the nine
months ended June, 2002 and 2001 were 21,268,438 and 4,230,361, respectively.
NOTE 2 -GOING CONCERN CONSIDERATIONS
While the company has recognized significant profits from operations for the
current year, it has a substantial accumulated deficit, has non-productive
assets and is highly illiquid. The Company is currently in default on $6,698,187
of short term unsecured debt. No claim for payment has been made for a $200,000
note due January 6, 1996. Management has begun implementation of plans to make
the company more viable. The ultimate outcome of these plans cannot be
determined.
The Company's wholly owned subsidiary, Capitol Development of Arkansas, Inc.,
which holds substantially all of the Company's assets, filed a voluntary
petition for relief under Chapter 11 of the United States Bankruptcy Code in the
United States Bankruptcy Court, Eastern Division on July 21, 2000.
On November 16, 2000, the Operating Subsidiary filed a Disclosure Statement and
a Plan of Reorganization (the Plan) with the Bankruptcy Court to satisfy its
existing debts. The Plan has not yet been presented to creditors for acceptance
or rejection. As of the date of this Report, the Bankruptcy Court has not
scheduled a hearing to consider confirmation of the Plan. The Bankruptcy Court
approved the Operating Subsidiary's Disclosure Statement on January 19,2001.
On December 20, 2001, the Operating Subsidiary and Resure reached a
settlement agreement( 2001 Settlement Agreement ) to resolve payment on the
outstanding Resure Note, and accordingly the Resure Motions and Competing Plan
of Reorganization currently before the Bankruptcy Court. The Bankruptcy Court
entered an Order approving the 2001 Settlement Agreement on December 20, 2001,
and dismissed all pending motions by Resure, subject to the Liquidator for
Resure receiving approval of the agreement by the Cook County Court. At a
hearing on January 9 that approval was granted and on February 4, 2002 from the
proceeds of sales, see Notes 4 and 5, the Resure Note was paid. From the
proceeds of another sale contracted on March 13, 2002 and closed on March 26,
2002 after approval of the Bankruptcy Court, see Note 5, the secured debts to
First Arkansas Valley Bank and Bank of Little Rock were satisfied. As a result
F-6
the remaining developable Real Estate is significantly reduced and the operating
Subsidiary has no secured debt.
The Plan is still pending approval. If the Plan is not confirmed, the Operating
Subsidiary may be forced into Chapter 7, at which point the Operating Subsidiary
would be forced to liquidate its assets to meet the obligations of the
creditors.
There can be no assurance the plan will be approved, or if approved it may not
be approved under the terms submitted. Accordingly the Company has accrued
interest through June 30, 2002 on all debt. The company has not adjusted the
carrying value of its real estate assets.
NOTE 3 - CAPITAL TRANSACTIONS
On October 18, 2001 the Company issued 100,000 shares of common stock to M. L.
Schehin, a consultant of the Company, in consideration of cash at the price of
$0.05 per share and services at an additional $0.10 per share.
On October 18, 2001 the Company issued 6,000,000 shares of common stock to
Prescott Investments LLC, an affiliated company for the purchase price of $0.05
per share payable in a note payable in full no later than March 31, 2002.
Additional compensation for services was recognized at the rate of $0.10 per
share.
On October 18, 2001 the Company issued 10,000,000 shares of common stock to
Michael G. Todd, an officer of the Company, in consideration of and in lieu of
unpaid cash compensation and benefits at the price of $0.15 per share.
On February 25, 2002 the Company issued 500,000 shares of common stock to Robert
Hardin, an attorney to the Company, in consideration of and in lieu of unpaid
cash compensation at the price of $0.10 per share.
On February 25, 2002 the Company issued 500,000 shares of common stock to
Elizabeth Brandon-Brown, an attorney to the Company, in consideration of and in
lieu of unpaid cash compensation at the price of $0.10 per share. On March 29,
2002 an additional 75,000 shares were issued in lieu of unpaid cash compensation
at the price of $0.05 per share.
On February 25, 2002 the Company issued 600,000 shares of common stock to Steven
Telsey, an advisor to the Company, in consideration of and in lieu of unpaid
cash compensation at the price of $0.10 per share.
On February 25, 2002 the Company issued 2,000,000 shares of restricted common
stock to Tom Blake, a Director of the Company, in consideration of and in lieu
of unpaid cash compensation at the price of $0.05 per share.
On February 25, 2002 the Company issued 500,000 shares of restricted common
stock to Will Schwartz, an advisor to the Company, in consideration of and in
lieu of unpaid cash compensation at the price of $0.05 per share.
On February 25, 2002 the Company issued 100,000 shares of restricted common
stock to M.L. Schehin, an advisor to the Company, in consideration of and in
lieu of unpaid cash compensation at the price of $0.05 per share.
On March 26, 2002 the Company caused to be issued by releasing from escrow,
5,000 shares of common stock to Jens Olsen, an advisor to the Company, in
F-7
consideration of and in lieu of unpaid cash compensation at the price of $0.0625
per share.
On March 26, 2002 the Company caused to be issued by releasing from escrow,
5,000 shares of common stock to Michael Todd, an officer of the Company, in
consideration of and in lieu of unpaid reimbursements at the price of $0.0625
per share.
On April 18, 2002 the Company issued options for an aggregate of 200,000 shares
of the Corporation's Common Stock to Michael G. Todd, an officer of the Company
in consideration of and in lieu of unpaid reimbursements at the price of $0.045
per share.
On April 18, 2002 the Company issued options for an aggregate of 200,000 shares
of the Corporation's Common Stock to Howard Bloom, an advisor to the Company who
subsequent to the June 30, 2002 period became a controlling shareholder of the
Company and an affiliate of Mr. Todd, in consideration of and in lieu of cash
compensation at the price of $0.045 per share.
On April 18, 2002 the Company issued options for an aggregate of 200,000 shares
of the Corporation's Common Stock to Kenneth E. Richardson, an advisor to the
Company who subsequent to the June 30, 2002 period became a controlling
shareholder of the Company and an affiliate of Mr. Todd,in consideration of and
in lieu of cash compensation at the price of $0.045 per share.
On April 18, 2002 the Company issued options for an aggregate of 200,000 shares
of the Corporation's Common Stock to Allan Katz, an advisor to the Company, in
consideration of and in lieu of cash compensation at the price of $0.045 per
share.
As of June 30, 2002, there were 800,000 options granted under the Employee
Incentive Stock Plan of the Company that were outstanding under the Plan. During
the nine months ended June 30, 2002, the Company recorded non-cash compensation
charge relating to the Company's common stock options of $19,545 for those
options granted to non-employees. No expense has been recognized for options
granted to employees.
NOTE 4 - SETTLEMENT AGREEMENT
On December 20, 2001, the Operating Subsidiary and Resure reached a settlement
agreement to resolve payment on the outstanding Resure Note. The Bankruptcy
Court entered an Order approving the 2001 Settlement Agreement and dismissed all
pending motions by Resure, subject to the Liquidator for Resure receiving
approval of the agreement by the Cook County Court. At a hearing on January 9
that approval was granted. On February 4, 2002 the sale was completed and the
payment of $3,850,000 was made to Resure to under the terms of the 2001
Settlement Agreement to pay in full the Resure Mortgage. The Company had a
liability accrued to Resure of $5,034,497. The transaction is considered a
Troubled Debt Restructuring under SFAS 15 and resulted in the Company
recognizing an extraordinary gain of $1,184,497.
NOTE 5 - LAND SALES
On December 20, 2001, concurrently with reaching the 2001 Settlement Agreement
with Resure, the Company also entered into a contract to sell 451 acres of the
F-8
Operating Subsidiary's Real Property in Maumelle, Arkansas, with a cost basis of
$2,345,452, for $4,000,000 with net proceeds of $3,850,000 available to satisfy
the 2001 Settlement Agreement. At the time the Liquidator for Resure received
approval of the agreement by the Cook County Court, the contract was submitted
to the Bankruptcy Court for approval. It was provided to the Creditors for a
review and objection period. The Bankruptcy Court subsequently approved the sale
and on February 4, 2002 the sale was completed and the payment of $3,850,000 was
made to Resure to under the terms of the 2001 Settlement Agreement to pay in
full the Resure Mortgage.
On March 13, 2002 the Company entered into a contract to sell approximately 300
acres of the Operating Subsidiary's Real Property in Maumelle, Arkansas composed
of the remaining 289 acres subject to the First Arkansas Valley Bank mortgage
and the 11 acre Apartment Tract subject to the Bank of Little Rock mortgages.
The Bankruptcy Court approved the sale and closing occurred on March 26, 2002.
The sale price was $4,200,000 plus a 10% profits interest in the 289 acre
parcel. The property had a cost basis of $1,711,919. At closing, according to
the terms of the sale, the buyer paid $2,100,000 and executed notes payable to
the Operating Subsidiary for $1,070,000 due on September 22, 2002 and for
$1,030,000 due on March 26, 2005. Both notes bear interest at 6.25% and terms
call for payment of the principal and accrued interest at maturity. The 10%
profits interest is considered a contingency according to paragraph 43 of SFAS
66, Accounting for Sales of Real Estate. Accordingly sales value is assigned to
the profits interest and any profit will be recognized when received.
Additionally, according to the same paragraph, all costs of the sale were
recognized in full at the time of sale.
NOTE 6 - SUBSEQUENT EVENTS
On April 25, 2002 the Company announced an agreement between Michael Todd,
President and CEO and Prescott Investments L.P., an affiliate of Todd's, to
transfer their controlling interest in the Company to Boca First Capital, Ltd.,
a Florida based real estate development and investment concern. The transaction
involves the granting of a credit line to the Company and requires the Company
to meet certain conditions.
CHANGES IN CONTROL
On July 17, 2002, Boca First Capital, LLLP ("Boca First"), a Florida limited
liability limited partnership acquired control of Capitol Communities
Corporation (the "Company") in an exchange of 16 million shares of Common Stock
of the Company held by Michael G. Todd, the Company's president, and Prescott
Investments, L.P. ("Prescott"), a Nevada limited partnership beneficially owned
by Mr. Todd for a combined 33% interest in Boca First. Boca First is controlled
by its general partner, Addison Capital Group LLC ("Addison"), a Nevada limited
liability company. The manger/members of Addison are Howard Bloom, an individual
residing in the State of Florida, Kenneth Richardson, an individual residing in
the State of Florida and Michael G. Todd, an individual residing in the State of
California ("Addison Managers"). The Addison Managers, except for Mr. Bloom
who's beneficial interest in Boca First is held by a Florida limited liability
F-9
company, are limited partners of Boca First, as is Prescott Investments L.P.,
and control Boca First, which now owns 64.6% of the Company's outstanding
shares.
As part of the change of control, the Company has moved its principal place of
business from Torrance, California to 900 N. Federal Highway, Suite 410, Boca
Raton, Florida 33432, effective July 22, 2002.
DEBT REDUCTION - ISSUANCE OF PREFERRED STOCK
As a condition of the transfer of control of the Company to Boca First, the
Company has reduced its obligations to Note holders by an offer of a cash
settlement or an exchange of the note for Series A Preferred Stock of the
Company.
Effective August 15, 2002, the Company agreed to exchange $4,360,653 in debt,
including principal and interest, with a group of existing promissory note
security holders ("Note Holders") for 4,360,653 shares of Convertible Preferred
Stock, Series A (the "Series A Preferred Stock"), par value $0.01 per share.
Each share of Series A Preferred Stock bears a cumulative dividend rate of 5.25%
per annum. Commencing 60 days from the date of issuance, but not sooner than
August 15, 2002, each Series A Preferred Stock shall have a mandatory
conversion, at the Company's sole option, to convert into one share of Common
Stock for each share of Series A Preferred Share held by Investor, predicated
upon certain events ("Triggered Events"). The Triggered Event shall occur, when
and if, the Company's stock, based on the average of the high and low prices of
the Common Shares for a consecutive period of ten (10) trading days, as reported
by the National Quotation Bureau, Inc. ("NQB"), and reflect inter-dealer prices
as reported on the NASDAQ electronic bulletin board, reaches a price of $1.50
per share of Common Stock. However, in the event the Company elects such option,
it will use its best efforts to register such common shares for resale within
180 days from the date of conversion. Commencing 90 days after issuance (the
"Conversion Date"), and any time thereafter, the Series A Preferred is
convertible, at the option of the holder, into one share of the Company's Common
Stock. All or any number of Series A Preferred Stock may be converted by the
holder thereof from time to time on or after the Conversion Date. However, such
optional conversion is limited by the Triggered Events. The Series A Preferred
Stock is restricted stock.
The Series A Preferred Stock is non-voting, except as otherwise provided under
Nevada law. The Series A Preferred Stock, in the event of any liquidation,
F-10
dissolution or winding up of the Company, is senior to the holders of Common
Stock. Series A Preferred Stock holders are entitled to receive a liquidation
preference of $1.00 per share, plus accrued and unpaid dividends to the payment
date.
Simultaneously to the exchange, the Company negotiated a settlement of existing
promissory note debt, including principal and interest, in the amount of
$1,652,372.61 for a cash settlement of $492,964.53 with certain existing Note
Holders.
DAVISTER NOTE RELEASE
Effective August 7, 2002, Davister Corp., released the Operating Subsidiary from
any and all claims, obligations and demands arising from the Davister Note, an
unsecured pre-petition note in the principal amount of $200,000, plus all
accrued interest. The release was in consideration of the assumption by Maumelle
Limited Partnership ("Maumelle Partnership") of the obligation in return for a
reduction of the six month note of $1,030,000 to $1,000,000 provided by Maumelle
Partnership as partial consideration for the purchase of single family and
multi-family acres of the Maumelle Property, and the elimination of the 10% in
the profits derived from the development of the purchased land. See also, ITEM
2, "MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION - Financial
Condition."
TRADEARK PROPERTIES, LLC
On July 26, 2002, the Company was notified by Trade Partners, Inc. ("Trade
Partners"), of its intention to dissolve and liquidate TradeArk Properties, LLC.
("TradeArk") and distribute the assets and liabilities to the members. Trade
Partners holds a 65% interest, subject to certain conditions, and the Operating
Subsidiary holds a 35% interest. The Company is currently in the process of
requesting an audit of TradeArk to facilitate the process and verify the value
of the Company's interest.
The Company has not received recent financial information from TradeArk. The
last information provided was as of December 31, 2001, the end of TradeArk's
fiscal year. The Company has estimated results of TradeArk for the interim
periods. Following is a condensed Balance Sheet of TradeArk Properties, LLC
prepared from the unaudited statements provided by TradeArk.
The Company's Operating Subsidiary holds a 35.16% ownership interest in
TradeArk. The Company deferred profit on this transaction in accordance with
provisions of FASB 66, "Accounting for Sales of Real Estate". As of June 30,
2002 the deferred profit is $1,373,069 and the carrying value of the investment
in TradeArk is $2,335,447.
TRADEARK PROPERTIES LLC
CONDENSED BALANCE SHEET (UNADITED)
December 31, 2001
ASSETS
- ------
Real Estate held for resale $ 7,225,250
Viatical Settlement Contract Investments 8,208,553
Other Assets 45,752
----------
TOTAL ASSETS $15,479,555
LIABILITIES & EQUITY
Mortgage Payable $ 3,315,915
Loan Payable-Partner 992,563
Accured Interest Payable 217,568
-----------
TOTAL LIABILITIES & EQUITY $15,479,553
F-11
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION.
Forward-Looking Statements
- --------------------------
In addition to historical information, this Report on Form 10-QSB
contains forward-looking statements within the meaning of the Private Litigation
Reform Act of 1995. Such forward-looking statements are generally accompanied by
words such as "intends," "projects," "strategies," "believes," "anticipates,"
"plans," and similar terms that convey the uncertainty of future events or
outcomes. The forward-looking statements contained herein are subject to certain
risks and uncertainties that could cause actual results to differ materially
from those reflected in the forward-looking statements. Factors that might cause
such a difference include, but are not limited to, those discussed in ITEM 2 of
this Report, the section entitled "MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN
OF OPERATION." Readers are cautioned not to place undue reliance on these
forward-looking statements, which reflect management's analysis only as of the
date hereof and are in all cases subject to the Company's ability to, (1)
reorganize under Chapter 11 of the Bankruptcy Code of United States, its
wholly-owned subsidiary which controls substantially all of the Company's
assets, (2) cure its current liquidity problems and (3) raise sufficient capital
to overcome uncertainties regarding the availability of sufficient liquidity to
continue operations. If the Company cannot reorganize its current debt, the
Company's status as a viable going concern will remain in doubt. There can be no
assurance that the Reorganization Plan (the "Plan") filed with the United States
Bankruptcy Court will be approved or that Company will be able to raise
sufficient capital to cure its liquidity problems and pursue the business
objectives discussed herein.
In addition, the forward-looking statements contained in this report
may be impacted by the September 11, 2001 terrorist attacks and the related
military action, as well as the possibility of further incidents of terrorism.
The effect of these events on the business of the Company, if any, is currently
unclear. However, any adverse effect on the general economic conditions and
consumer confidence resulting from these events may adversely affect the
business of the Company.
Capitol Communities Corporation undertakes no obligation to publicly
revise these forward-looking statements to reflect events or circumstances that
arise after the date hereof. Readers should carefully review the risk factors
described in other documents the Company files from time to time with the
Securities and Exchange Commission (the "SEC"), including without limitation
those identified in the "Risk Factors" section of the Company's Registration
Statement filed with the SEC in September 1996 on Form 10-SB.
The the following discussion should be read in conjunction with the
unaudited financial statements appearing in Item 1, of this Part 1 ("the
Financial Statements"), and the information provided later in Item 2, of this
Report. As noted in the subsequent events discussed below, the Company is in the
process of reorganizing its defaulted debt and raising capital/and or debt to
overcome its present illiquidity and commence significant operations.
Financial Condition
- -------------------
On July 21, 2000, the Operating Subsidiary, a wholly-owned subsidiary
of the Company that holds substantially all of the Company's assets, filed a
voluntary petition for relief under Chapter 11 of the United States Bankruptcy
Code in the United States Bankruptcy Court, Eastern District of Arkansas
("Bankruptcy Court"). Since then, the Company has continued to operate its
business as a debtor-in-possession. If the Company's Operating Subsidiary cannot
reorganize under its petition for voluntary bankruptcy under Chapter 11, and if
the Company cannot cure its current severe liquidity problems, the Company's
status as a viable going concern will remain in doubt. There can be no
assurance, however, that the Reorganization Plan filed with the United States
Bankruptcy Court will be approved or that Company will be able to raise
sufficient capital to cure its liquidity problems and pursue the business
objectives discussed herein. See discussion below "LIQUIDITY AND CAPITAL
-3-
RESOURCES - - Subsequent Events."
Accordingly, some of the amounts presented below may be subject to
future adjustments depending on Bankruptcy Court actions, further developments
with respect to disputed claims, determination as to the security of certain
claims or other events.
The Company is currently negotiating to secure additional debt
financing, however, there can be no assurance that financing can be obtained, or
that the Company will be able to raise the additional capital needed to satisfy
long-term liquidity requirements.(See discussion below, "MANAGEMENT'S DISCUSSION
AND ANALYSIS OR PLAN OF OPERATION "LIQUIDITY AND CAPITAL RESOURCES," below).
Change in Financial Condition Since the End of Last Fiscal Year.
-------------------------------------------------------------------
At June 30, 2002 the Company had total assets of $5,823,570 a decrease of
$2,180,361 or 26.41% of the Company's total assets, as of the Company's fiscal
year end of September 30, 2001. The Company had cash of $98,057 as of June 30,
2002 compared to $134 at September 30, 2001.
The current portion of Notes Receivable increased to $1,070,000 on June
30, 2002 from $0 on September 30, 2001. The increase was a result of the sale of
approximately 289 acres of single family residential land and 11 acres of
multifamily land. See discussion below..
The carrying value of the Company's real estate holdings decreased by
$4,057,370 during the six months, from $5,357,510 as of September 30, 2001 to
$1,300,140 on June 30, 2002 . The net decease was a result of two sales during
this period. The first sale was for approximately 451 acres of residential land
in Maumelle for a sale price of $4,000,000 in cash. The other sale was for
approximately 289 acres of single family residential land and 11 acres of
multifamily land for a sale price of $4,200,000. The terms of the sale include
$2,100,000 cash at closing, a six month note for $1,070,000, a three year note
for $1,030,000. Additionally, the Company retains a 10% interest in the profits
derived from the development of the land. According to the provisions of
Statement of Financial Accounting Standards No. 66, Accounting for Sales of Real
Estate, this 10% profits interest is not valued in determining the sale price.
The Company's investment in Trade Ark, decreased from $2,616,880 to $2,335,447
reflecting the Company's portion of the net loss by Trade Ark, which is
accounted for by the equity method.
Total liabilities of the Company at June 30, 2002 were $9,390,664, a
decrease of $6,265,024 from the September 30, 2001 total of $15,655,688. The
current liability for notes payable decreased by $4,692,806 during the six
months, from $11,688,993 to $6,996,187. The decrease was the result of net
payments of all of the secured notes of the Company.
Accounts payable and accrued expenses decreased by $1,587,177. At
September 30, 2001 the liability for accounts payable and accrued expenses
totaled $3,572,403. At June 30, 2002 the balance was $1,985,226. The major
portion of the decrease, or $483,671, was comprised of accrued officers salaries
and $1,154,394 in recaptured accrued interest payable.
Accrued real estate taxes payable decreased from the September 30, 2001
balance of $13,042 to a balance of $2,129, a decrease of $10,913, as of June 30,
2002.
Shareholders' Equity increased by $4,156,663. The increase resulted
from the issuance of 100,000 new shares of the Company's common stock at $0.05
per share for cash and an additional $0.10 per share for services , the issuance
of 10,000,000 new shares of the Company's common stock at $0.15 per share as
payment of services rendered and in lieu of unpaid cash compensation and
benefits due an employee, and the issuance of 6,000,000 new shares of the
Company's common stock at $0.05 per share to an affiliate for a Note and
additional compensation for services was recognized at the rate of $0.10 per
share, the issuance of 2,600,000 new shares of the Company's common stock at
$0.05 per share to affiliates and consultants as payment of services rendered
and additional compensation for services was recognized at the rate of $0.01 per
share, the issuance of 1,600,000 new shares of the Company's common stock at
$0.10 per share to an affiliates and consultants as payment of services
rendered, the issuance of 75,000 new shares of the Company's common stock at
$0.05 per share to affiliate and consultant as payment of services rendered, the
issuance of 140,000 shares of the Company's common stock at $0.0625 per share as
-4-
payment of services rendered and in lieu of unpaid cash compensation and
benefits due an employee, the issuance of 5,000 shares of the Company's common
stock at $0.0625 per share to affiliate and consultant as payment of services
rendered, the issuance of options for an aggregate of 200,000 shares of the
Company's common stock at $0.045 per share to an officer of the Company in
consideration of and in lieu of unpaid reimbursements, the issuance of options
for an aggregate of 200,000 shares of the Company's common stock at $0.045 per
share to an affiliate and advisor of the Company in consideration of and in lieu
of cash compensation, the issuance of options for an aggregate of 200,000 shares
of the Company's common stock at $0.045 per share to an affiliate and advisor of
the Company in consideration of and in lieu of cash compensation, the issuance
of options for an aggregate of 200,000 shares of the Company's common stock at
$0.045 per share to an advisor of the Company in consideration of and in lieu of
cash compensation, and the net income of $1,719,305 for the nine month period
ending June 30, 2002. As of June 30, 2002, there were 800,000 options granted
under the Employee Incentive Stock Plan of the Company that were outstanding
under the Plan. During the nine months ended June 30, 2002, the Company recorded
non-cash compensation charge relating to the Company's common stock options of
$19,545 for those options granted to non-employees. No expense has been
recognized for options granted to employees.
Results of Operations
- ---------------------
Comparison of the Nine Months Ended June 30, 2002 to the Nine Months
-----------------------------------------------------------------------
Ended June 30, 2001. For the Nine Months ended June 30, 2002, the Company had a
- -------------------
net income of $1,719,305 compared with a loss of $1,280,817 for the Nine Months
ended June 30, 2001. The difference in performance resulted primarily from an
increase in revenues from $202,051 for the Nine Months ended June 30, 2001, to
$8,201,290 for the Nine Months ended June 30, 2002.
Revenues increased by $7,999,239 to $8,201,290 for the nine months
ended June 30, 2002, from $202,051 for the nine months ended June 30, 2001.
During the nine months ended June 30, 2002, sales totaled $8,200,000. The one
sale was for approximately 451 acres of residential land in Maumelle for a sale
price of $4,000,000 in cash. The other sale was for approximately 289 acres of
single family residential land and 11 acres of multifamily land for a sale price
of $4,200,000. The terms of sale include $2,100,000 cash at closing, a 6 month
note for $1,070,000, a 3 year note for $1,030,000. Additionally, the Company
retains a 10% interest in the profits derived from the development of the 289
acre parcel. During the nine months ended June 30, 2001, sales totaled $75,000.
The one sale was for three water well sites and a right of way. The cost of
sales for the nine months ended June 30, 2002, amounted to $4,376,899, resulting
in a gross profit of $3,824,391. The cost of sales for the nine months ended
June 30, 2001, amounted to $10,278, resulting in a gross profit of $191,773.
General and administrative expenses increased to $2,330,921 for the
nine months ended June 30, 2002 from $326,037 for the nine months ended June 30,
2001. Officers' salary increased to $1,061,329 for the nine months ended June
30, 2002 from $180,000 for the nine months ended June 30, 2001, an increase of
$881,329. Consulting fees increased to$876,313 for the Nine Months ended June
30, 2002 from $6,600 for the Nine Months ended June 30, 2001, an increase of
$874,729. Legal fees and audit fees increased by $145,707 to $150,707 for the
nine months ended June 30, 2002 from $5,000 for the nine months ended June 30,
2001. Miscellaneous charges increased by $95,418 to $100,267 for the nine months
ended June 30, 2002 from $4,849 for the nine months ended June 30, 2001. As of
June 30, 2002, there were 800,000 options granted under the Employee Incentive
Stock Plan of the Company that were outstanding under the Plan. During the nine
months ended June 30, 2002, the Company recorded non-cash compensation charge
relating to the Company's common stock options of $19,545 for those options
granted to non- employees. No expense has been recognized for options granted to
employees.
Interest expense decreased by $218,736 from $930,486 for the nine
months ended June 30, 2001 to $711,750 for the nine months ended June 30, 2002.
The operating loss recorded for unconsolidated subsidiaries accounted
for under the Equity method totaled a loss of $281,433 for the nine months ended
June 30, 2002 compared to a loss $217,226 for the nine months ended June 30,
2001.
On February 4, 2002, the Operating Subsidiary , under the terms of the
2001 Settlement Agreement with Resure, paid the outstanding Resure Note in full
-5-
for the payment of $3,850,000. The Company had a liability accrued to Resure of
$5,034,497. The Company recognized an extraordinary gain of $1,184,497 under
SFAS 15.
Comparison of the Three Months Ended June 30, 2002 to the Three Months
-----------------------------------------------------------------------
Ended June 30, 2001. For the three months ended June 30, 2002 the Company had a
- -------------------
net loss of $529,773 compared with a loss of $369,404 for the three months ended
June 30, 2001. The difference in performance resulted primarily from an increase
in general and administrative expenses from $104,293 for the three months ended
June 30, 2001, to $220,468 for the three months ended June 30, 2002.
Revenues decreased by $76,888 from $76,888 for the three months ended
June 30, 2001, to $0 for the three months ended June 30, 2002. During the three
months ended June 30, 2001, sales totaled $75,000. The one sale was for three
water well sites and a right of way. The cost of sales for the three months
ended June 30, 2001, amounted to $10,278, resulting in a gross profit of
$66,610.
General and administrative expenses increased to $240,013 for the three
months ended June 30, 2002 from $104,293 for the three months ended June 30,
2001. Consulting fees increased to $75,000 for the three months ended June 30,
2002 from $6,600 for the three months ended June 30, 2001, an increase of
$68,400. Legal fees and audit fees increased by $34,463 to $34,463 for the three
months ended June 30, 2002 from $0 for the three months ended June 30, 2001. As
of June 30, 2002, there were 800,000 options granted under the Employee
Incentive Stock Plan of the Company that were outstanding under the Plan. During
the nine months ended June 30, 2002, the Company recorded non-cash compensation
charge relating to the Company's common stock options of $19,545 for those
options granted to non-employees. No expense has been recognized for options
granted to employees.
Interest expense decreased by $124,367 from $307,717 for the three
months ended June 30, 2001 to $183,350 for the three months ended June 30, 2002.
The operating loss recorded for unconsolidated subsidiaries accounted
for under the Equity method totaled a loss of $139,133 for the three months
ended June 30, 2002 compared to a loss $24,190 for the three months ended June
30, 2001.
Liquidity and Capital Resources
- -------------------------------
Cash and cash equivalents amount to $98,057 as of June 30,2002, as
compared with $134 at September 30, 2001. The Company's liquidity position at
June 30, 2002, is not adequate to meet the Company's liquidity requirements. As
of June 30, 2002, the Company was in default on all of its loans in the amount
of $6,698,187, evidenced by promissory notes (the "Notes"). All of the defaulted
debts, except for the Notes discussed below, are pre-petition obligations and
collection is stayed under the Operating Subsidiary's bankruptcy petition.
As of June 30, 2002, the Company has borrowed $6,698,187 from private
sources, (the "Bridge Loans") evidenced by the Notes. All of these Bridge Loans
have matured and are in default. The Bridge Loans are unsecured; however the
Company provided a guarantee bond through New England International Surety Inc.
(the "Surety") to the Bridge Note holders. However, management has been notified
by the Surety that it has been served with a class action suit in federal court.
As such, even though the Company has defaulted on the Bridge Notes, the Surety
will not be able to make interest or principal payments to the noteholders until
the action is settled, if at all. Subsequent to June 30, 2002, the Company has
been able to eliminate $6,013,025 in Note obligations, including accrued
interest, by exchanging Note debt for Series A Preferred Stock of the Company,
or through cash settlement of the Note debt. See "Subsequent Events -- Debt
Reduction - Issuance of Preferred Stock," discussed below.
On April 26, 2002 the Company obtained a revolving line of credit in
the amount of $3,000,000 from Boca First Capital LLLP ("Boca First"), a Florida
limited liability limited partnership that purchased a controlling interest in
the Company on July 17, 2002. (See Discussion below, "Subsequent Events --
Change of Control"). The credit line bears interest at an initial rate of 10.00%
per annum. Effective on the first business day of the first calendar quarter
after the date of the Note, and on the first business day of each succeeding
calendar quarter, the rate of interest on the Note will increase or decrease to
a rate which is equal to the greater of ten percent (10%) per annum or one
percent (1.0%) pre annum above the Prime Rate, as published in the Wall Street
Journal, in effect on that date. The Note is payable in monthly installments of
-6-
interest only, and matured on November 1, 2003. The line is secured by a
collateral assignment and pledge of the issued and outstanding common stock of
Capitol Development of Arkansas, Inc. The loan is subject to the provisions of a
Business Loan Agreement dated April 26, 2002. As of June 30, 2002, Boca First
has made loan advances to the Company of $298,000; nonetheless, each subsequent
loan advance under the Agreement will be subject to the fulfillment of the loan
provisions. There can be no assurance that the Company will meet the conditions
required for additional advances under the revolving line of credit.
On December 20, 2001, the Operating Subsidiary and Resure reached a
settlement agreement (the "2001 Settlement Agreement") to resolve payment on the
outstanding Resure Note. On December 20, 2001, the Bankruptcy
Court entered an Order approved the 2001 Settlement Agreement, and dismissed all
pending motions by Resure, subject to Liquidator for Resure receiving approval
of the agreement by the Cook County Court. The Cook County Circuit Court entered
an Order approving the 2001 Settlement Agreement on January 9, 2002. See PART
II, ITEM 1, "LEGAL PROCEEDINGS."
On December 20, 2001, the Operating Subsidiary entered into an
agreement with an unaffiliated third party to sell 451 acres of the Large
Residential Tract of the Maumelle Property for a total purchase price of
$4,000,000.
On February 4, 2002, the Operating Subsidiary completed this all-cash
sale, generating $3,850,000 in net proceeds after closing costs. The net
proceeds were paid to Nathaniel S. Shapo, Director of Insurance of the State of
Illinois, as Liquidator of Resure Inc., in full satisfaction of all Resure
claims against the Operating Subsidiary.
An unsecured note to Davister Corp. (the "Davister Note") in the amount
of $200,000 has matured, and collection on this pre-petition obligation is
stayed under the Operating Subsidiary's bankruptcy petition.
On March 13, 2001, the Operating Subsidiary entered into an agreement
with an unaffiliated third party to sell approximately 289 acres of single
family residential land of the Large Residential Tract of the Maumelle Property
subject to the First Arkansas Valley Bank mortgage and 11 acres of multifamily
land, subject to the Bank of Little Rock mortgages. The total purchase price was
$4,200,000 plus a 10% interest in the profits derived from the development of
the 289 acre parcel. On March 26, 2002 the Operating Subsidiary completed this
sale. At closing, the buyer paid $2,100,000 in cash and executed notes payable
for $1,070,000 due September 22. 2002 and for $1,030,000 due March 26, 2005.
Both notes bear interest at 6.25% and terms call for payment of principal and
accrued interest at maturity.
As of March 26, 2002, the Bank of Little Rock line of credit in the
amount of $400,000 and the loan in the amount of $200,000, plus interest of
$94,642 was paid in full. As of March 26, 2002, the line of credit from the
First Arkansas Bank, in the amount of $975,000 pus interest of $130,812, was
paid in full.
The Company's current liquidity problems prevents the Company from
conducting any meaningful business activities other than selling assets from the
Maumelle Property. Although management anticipates utilizing all or a portion of
the Maumelle Property to satisfy the financial requirements of the Plan filed
with the Bankruptcy Court, if approved by the court, and/or raise equity, there
can be no assurance that the Bankruptcy Court will approve the Operating
Subsidiary's Plan or that the Company will be able to raise sufficient capital
to meet its financial requirements and cure the Company's liquidity problems. If
the Company cannot restructure its current debt, the Company's status as a
viable going business concern will be doubtful. See Part II, ITEM 1, "LEGAL
PROCEEDINGS."
Subsequent Events.
-----------------
CHANGES IN CONTROL
On July 17, 2002, Boca First Capital, LLLP ("Boca First"), a Florida
limited liability limited partnership acquired control of the Company in an
exchange of 16 million shares of Common Stock of the Company held by Michael G.
Todd, the Company's president, and Prescott Investments, L.P. ("Prescott"), a
Nevada limited partnership beneficially owned by Mr. Todd for a combined 33%
interest in Boca First. Boca First is controlled by its general partner, Addison
Capital Group LLC ("Addison"), a Nevada limited liability company. The
manger/members of Addison are Howard Bloom, an individual residing in the State
of Florida, Kenneth Richardson, an individual residing in the State of Florida
and Michael G. Todd, an individual residing in the State of California ("Addison
Managers"). The Addison Managers, except for Mr. Bloom who's beneficial interest
-7-
in Boca First is held by a Florida limited liability company, are limited
partners of Boca First, as is Prescott Investments L.P., and control Boca First,
which now owns 64.6% of the Company's outstanding shares.
As part of the change of control, the Company has moved its principal
place of business from Torrance, California to 900 N. Federal Highway, Suite
410, Boca Raton, Florida 33432, effective July 22, 2002.
DEBT REDUCTION - ISSUANCE OF PREFERRED STOCK
As a condition of the transfer of control of the Company to Boca First,
the Company has reduced its obligations to Note Offers by an offer of a cash
settlement or an exchange of the note for Series A Preferred Stock of the
Company, with offers of settlement to be satisfied partially by the line of
credit from Boca First..
Effective August 15, 2002, the Company has agreed to exchange
$4,360,653 in debt, including principal and interest, with a group of existing
promissory note security holders ("Note Holders") for 4,360,653 shares of
Convertible Preferred Stock, Series A (the "Series A Preferred Stock"), par
value $0.01 per share. Each share of Series A Preferred Stock bears a cumulative
dividend rate of 5.25% per annum. Commencing 60 days from the date of issuance,
but not sooner than August 15, 2002, each Series A Preferred Stock shall have a
mandatory conversion, at the Company's sole option, to convert into one share of
Common Stock for each share of Series A Preferred Share held by Investor,
predicated upon certain events ("Triggered Events"). The Triggered Event shall
occur, when and if, the Company's stock, based on the average of the high and
low prices of the Common Shares for a consecutive period of ten (10) trading
days, as reported by the National Quotation Bureau, Inc. ("NQB"), and reflect
inter-dealer prices as reported on the NASDAQ electronic bulletin board, reaches
a price of $1.50 per share of Common Stock. However, in the event the Company
elects such option, it will use its best efforts to register such common shares
for resale within 180 days from the date of conversion. Commencing 90 days after
issuance (the "Conversion Date"), and any time thereafter, the Series A
Preferred is convertible, at the option of the holder, into one share of the
Company's Common Stock. All or any number of Series A Preferred Stock may be
converted by the holder thereof from time to time on or after the Conversion
Date. However, such optional conversion is limited by the Triggered Events. The
Series A Preferred Stock is restricted stock.
The Series A Preferred Stock is non-voting, except as otherwise
provided under Nevada law. The Series A Preferred Stock, in the event of any
liquidation, dissolution or winding up of the Company, is senior to the holders
of Common Stock. Series A Preferred Stock holders are entitled to receive a
liquidation preference of $1.00 per share, plus accrued and unpaid dividends to
the payment date.
Simultaneously to the exchange, the Company negotiated a settlement
with certain existing promissory Note Holders for principal debt of
$1,310,068.44 for a cash settlement of $492,964.5.
TRADEARK PROPERTIES, LLC
On July 26, 2002, the Company was notified by Trade Partners, Inc.
("Trade Partners"), of its intention to dissolve and liquidate TradeArk
Properties, LLC. ("TradeArk") and distribute the assets and liabilities to the
members. Trade Partners holds a 65% interest, subject to certain conditions, and
the Operating Subsidiary holds a 35% interest. The Company is currently in the
process of requesting an audit of TradeArk to facilitate the process and verify
the value of the Company's interest.
DAVISTER NOTE RELEASE
Effective August 7, 2002, Davister Corp., released the Operating
Subsidiary from any and all claims, obligations and demands arising from the
Davister Note, an unsecured pre-petition note in the principal amount of
$200,000, plus all accrued interest. The release was in consideration of the
assumption by Maumelle Limited Partnership ("Maumelle Partnership") of the
obligation in return for a reduction of the six month note of $1,030,000 to
$1,000,000 provided by Maumelle Partnership as partial consideration for the
purchase of single family and multi-family acres of the Maumelle Property, and
the elimination of the 10% in the profits derived from the development of the
purchased land. See also, ITEM 2, "MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN
OF OPERATION - Financial Condition."
-8-
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
On July 21, 2000, the Operating Subsidiary, a wholly-owned subsidiary
of the Company that holds substantially all of the Company's assets, filed a
voluntary petition for relief under Chapter 11 of the United States Bankruptcy
Code in the United States Bankruptcy Court, Eastern District of Arkansas. Since
then, the Company has continued to operate its business as a
debtor-in-possession. As such, the Operating Subsidiary is authorized to operate
its business in the ordinary course, but may not engage in transactions outside
the ordinary course of business without Bankruptcy Court approval.
On November 16, 2000, the Operating Subsidiary filed a Disclosure
Statement and Plan of Reorganization (the "Plan") with the Bankruptcy Court to
satisfy its existing debts. The Plan will be presented to creditors for
acceptance or rejection. The Disclosure Statement was approved the Bankruptcy
Court on January 19,2001. The Plan was presented to creditors for acceptance or
rejection. The secured creditors accepted the Plan and one creditor for the
unsecured class accepted the Plan. At least two-thirds of each impaired class of
creditors and more than one-half in number of the allowed claims of the class
members entitled to accept or reject the Plan have to vote to accept it; however
the Bankruptcy Court may confirm the Plan if at least one of the impaired
classes votes for it and the Bankruptcy Court finds the Plan does not
discriminate unfairly. The hearing for confirmation of the Plan was set for
February 21, 2001, but was delayed. If the Plan is confirmed, all creditors
listed in the petition will be bound by the terms and conditions set forth in
the Plan. If the Plan is rejected, the Operating Subsidiary may be forced into
Chapter 7, at which point the Operating Subsidiary will be forced to liquidate
its assets to meet the obligations of the secured creditors and if any funds are
available thereafter to meet the obligations of the unsecured creditors. A
hearing is set for May 24, 2002 for the Court to hear unsecured creditors'
claims.
As a result of the Operating Subsidiary's bankruptcy, all acts to
collect Pre-petition Indebtedness and to enforce other existing contractual
obligations of the Operating Subsidiary were stayed.
Generally under the Bankruptcy Code, the Operating Subsidiary does not
make payments on Pre-petition Indebtedness until the Plan is approved by the
Bankruptcy Court. Liabilities and obligations first incurred after the
commencement of the bankruptcy case in connection with the operation of the
Operating Subsidiary's business generally enjoy priority in right to payment
over Pre-petition Indebtedness and must be paid by the Operating Subsidiary in
the ordinary course of business.
Under the Plan, the Operating Subsidiary proposes to satisfy in full
all outstanding amounts due to its creditors, but will modify the payment
schedule and due dates. See ITEM 2, "MANAGEMENT'S DISCUSSION AND ANALYSIS OR
PLAN OF OPERATION - - LIQUIDITY AND CAPITAL RESOURCES-Indebtedness and Other
Liquidity Requirements."
Upon filing the voluntary petition for bankruptcy relief under Chapter
11, the foreclosure action instituted by the Liquidator for Resure on April 19,
2000 against the Operating Subsidiary was stayed. The foreclosure action was
filed in the Chancery Court of Pulaski County, Arkansas (the "Resure lawsuit").
The Resure Liquidator is seeking to foreclose on approximately 701 acres of
residential land of the Maumelle Property securing the $3,500,000 Resure Note,
which is currently in default. The action also seeks $2,000,000 in Development
Fees the Liquidator claims the Operating Subsidiary owes under the terms and
conditions of the September 30, 1997, Settlement Agreement, which is secured by
the same 701 acres as the Resure Note. On May 28, 1999, the Operating Subsidiary
filed an answer, generally denying the claims.
On December 20, 2001, the Operating Subsidiary and Resure reached a
settlement agreement (the "2001 Settlement Agreement") to resolve payment on the
outstanding Resure Note and accordingly the Resure Motions and Competing Plan of
Reorganization currently before the Bankruptcy Court The Bankruptcy Court
entered an Order approved the 2001 Settlement Agreement on December 20, 2001,
and dismissed all pending motions by Resure, subject to Liquidator for Resure
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receiving approval of the agreement by the Cook County Court. The Cook County
Circuit Court entered an Order approving the 2001 Settlement Agreement on
January 9, 2002.
Under the terms of the Agreement, the Liquidator for Resure agreed to
accept $3,850,000. On February 4, 2002, the $3,850,000 was paid to Nathaniel S.
Shapo, Director of Insurance of the State of Illinois, as Liquidator of Resure
Inc., in full satisfaction of all Resure claims against the Operating Subsidiary
from the proceeds of a sale to an unaffiliated third party of 451 acres of the
Large Residential Tract of the Maumelle Property for a total purchase price of
$4,000,000.
The Company is not involved in any other litigation, other than those
actions arising from the normal course of business, and which Management does
not believe will have a material effect on the Company's operations.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
The Company incorporates by reference the information regarding
defaults of certain debt obligations from Part I, ITEM 2 "MANAGEMENT'S
DISCUSSION AND ANALYSIS OF PLAN OF OPERATION - Liquidity and Capital Resources,"
and Part II, ITEM 1, LEGAL PROCEEDINGS."
ITEM 5. OTHER INFORMATION.
The Company incorporates by reference the information in Part I, ITEM
2, "MANAGEMENT'S DISCUSSION AND ANALYSIS OF PLAN OF OPERATION - Liquidity and
Capital Resources."
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) EXHIBITS
EXHIBITS
The following Exhibits are filed as part of this Report.
11 Statement re: computation of per share earnings
(b) REPORTS ON FORM 8-K
The Company filed a Form 8-K with the Securities and Exchange
Commission on July 30, 2002, disclosing a change in control that occurred on
July 17, 2002, between Michael G. Todd, president of the Company and Prescott
Investments L.P., a Nevada limited partnership controlled by Mr. Todd, for the
exchange of 16 million shares of Common Stock of the Company for a combined 33%
interest in Boca First. Boca First, a Florida limited liability limited
partnership.
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: August 14, 2002 By: /s/ Michael G. Todd
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Michael G. Todd, Chairman,
President and Chief Executive Officer
Date: August 14, 2002 By: /s/ David Paes
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David Paes, Treasurer and Vice President
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