UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES AND
EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2003
[ ] 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 North Federal Highway
Suite 410
Boca Raton, FL 33432
(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) 25,460,361
(Title of Class)Shares Outstanding as of May 9, 2003
Transitional Small Business Disclosure Format: [ ] YES [X] NO
CAPITOL COMMUNITIES CORPORATION
Form 10-QSB
QUARTER ENDED March 31, 2003
TABLE OF CONTENTS
PART I. FINANCIAL INFORMATIO
Item 1. Financial Statements (Unaudited).................................... F-1
Consolidated Balance Sheet March 31, 2003......................... F-1
Consolidated Statement of Cash Flows
For the Six Months Ended March 31, 2003 and 2002................ F-2
Consolidated Statement of Operations
For the Six Months ended March 31, 2003 and 2002................ F-3
Consolidated Statement of Operations
For the Three Months ended March 31, 2003 and 2002.............. F-4
Notes to Consolidated Financial Statements March 31, 2003......... F-5
Item 2. Management's Discussion And Analysis or Plan of Operation.......... 8
PART II. OTHER INFORMATION
Item 1. Legal Proceedings................................................... 12
Item 3. Defaults Upon Senior Securities..................................... 12
Item 5. Other Information................................................... 12
Item 6. Exhibits and Reports on Form 8-K.................................... 12
Signatures.......................................................... 13
PART 1. FINANCIAL INFORMATION
ITEM 1. Financial Statements (Unaudited)
--------------------------------
CAPITOL COMMUNITIES CORPORATION AND SUBSIDIARIES
Consolidated Balance Sheet
as of March 31, 2003
Unaudited
Current Assets
Cash $ 497,492
Accounts Receivable 225,374
Accrued Interest Receivable 88,105
Notes receivable-Current 1,000,000
Other Current Assets 2,633
------------------
Total Current Assets 1,813,604
------------------
Property and equipment
Furniture and Equipment, net of accumulated
depreciation of $12,394 6,228
------------------
Other Assets
Land and Real Estate Holdings 7,227,771
Deferred Tax Benefit 1,203,000
------------------
Total Other Assets 8,430,771
------------------
Total Assets $ 10,250,603
==================
Current Liabilities
Notes Payable $ 5,271,952
Note Payable- Related Party 227,374
Accounts Payable & Accrued Expenses 605,829
Accrued Expenses- Related Parties 13,362
------------------
Total Current Liabilities 6,118,517
------------------
Long Term Liabilities
Notes Payable Non Current-Related Party
Total Long Term Liabilities 1,639,074
Total Liabilities 7,757,591
------------------
Stockholders' Equity
Preferred Stock-$.01 par value, 10,000,000 shares 40,606
authorized; 4,060,556 shares issued and outstanding
Common Stock-$.01 par value, 40,000,000 shares 290,900
authorized; 29,090,050 shares issued and outstanding
Additional Paid in Capital 14,084,621
Preferred Stock Dividend (213,848)
Note Receivable for Class A Common Stock- Related Party (38,692)
Treasury Stock; 3,629,989 shares (4,805,229)
Accumulated Deficit (6,865,346)
------------------
Total Stockholders' Equity 2,493,012
------------------
Total Liabilities and
Stockholders' Equity $ 10,250,603
==================
-UNAUDITED-
-PREPARED INTERNALLY-
F-1
CAPITOL COMMUNITIES CORPORATION
STATEMENTS OF CASH FLOWS
FOR THE SIX MONTHS ENDED MARCH 31, 2003 AND 2002
UNAUDITED
2003 2002
---- ----
Cash Flows from Operating Activities:
Net Income (Loss) $ (651,941) $ 2,249,078
Amortization - -
Depreciation 576 911
Services paid by Issuance of Common Stock - 1,712,718
Unconsolidated Subsidiary 75,000
Loss on Discount of Note 70,298
Gain from Extinguishment of Notes (406,127)
Collection of Note Receivable by forgiveness of Accrued Expenses 261,308
Adjustments to Reconcile Income (Loss)
to Net Cash Used for operating Activities
(Increase) Decrease in Receivables (225,376) 1,272
(Increase) Decrease in Accrued Interest Receivable (82,642) (1,798)
(Increase) Decrease in Other Current Assets - 620
Increase (Decrease) in Accrued Expenses (127,908) (1,044,690)
Increase (Decrease) in Accrued Expenses-Related Parties (37,432)
Liabilities Subject to Compromise 9,973
----------------- ------------------
Net Cash Used for Operations (1,124,244) 7,126,483
----------------- ------------------
Cash Flows from Investing Activities:
(Increase) Decrease in Real Estate Holdings
(Increase) Decrease in Investments
(Increase) Decrease in Notes Receivable 1,070,000 (2,100,000)
Acquisition in Fixed Assets (2,363)
----------------- ------------------
Net Cash used in Investing Activities: 1,067,637 (2,100,000)
----------------- ------------------
Cash Flows from Financing Activities:
Proceeds from sale of Common Stock - 5,000
Proceeds from Notes Payable 551,503 (4,971,253)
Payment of Preferred Dividend (14,385) -
----------------- ------------------
Net Cash used in Financing Activities: 537,118 (4,966,253)
----------------- ------------------
Net Increase (Decrease) in Cash 480,511 60,230
Beginning Cash 16,981 134
----------------- ------------------
Ending Cash $ 497,492 $ 60,364
================= ==================
Schedule of Noncash Financing Activities
Common Stock Issued for Accrued Expenses 618,671
Common Stock Issued for Note Receivable 300,000
Common Stock Issued for Services 1,491,329
Preferred Stock Issued for Debt 216,858
Collection of Note Receivable by forgiveness of accrued expenses 261,308
Supplemental Information:
Interest paid, net of current payoff discount of $56,203 $ 40,414 $ 1,811
F-2
Capitol Communities Corporation and Subsidiaries
Consolidated Statements of Operations
For the Six Months Ended March 31, 2003 and 2002
UNAUDITED
2003 2002
Revenues:
Sales $0 $8,201,290
---------------- ---------------
Total Revenues $0 $8,201,290
Cost of Sales - 4,376,899
---------------- ---------------
Gross Profit $0 $3,824,391
Operating Expenses:
General & Administrative Expenses 188,196 2,090,908
General & Administrative Expenses- Related Parties -
---------------- ---------------
Total Operating Expenses 188,196 2,090,908
---------------- ---------------
Net Income (Loss) Before
Other Income/(Expense) (188,196) $1,733,483
Other Income and (Expense)
Operations of Unconsolidated Investments (75,000) (142,300)
Interest Income 101,344 1,798
Other Income 10 -
Interest Expense (825,929) (528,400)
Interest Expense- Related Parties -
---------------- ---------------
Total Other Income and (Expense) (869,873) (668,902)
---------------- ---------------
Net Income (Loss) from continuing operations $(1,058,068) $1,064,581
Income Tax Expense (Benefit)
Current - -
Deferred - -
---------------- ---------------
Total Income Tax Expense (Benefit) - -
---------------- ---------------
Net Income (Loss) before Extraordinary Items $(1,058,068) $1,064,581
Extraordinary Items
Gain from retirement of debt at a discount,
net of income tax provision of $0 $406,127 1,184,497
---------------- ---------------
Net Income (Loss) ($651,941) $2,249,078
================ ===============
Basic Income (Loss) per share
Income (Loss) before extraordinary item ($0.04) $0.06
Extraordinary Item
Gain from retirement of debt at a discount 0.02 0.06
---------------- ---------------
Net Income (Loss) ($0.03) $0.12
================ ===============
---------------- ---------------
Weighted average shares outstanding: 25,460,061 19,527,476
================ ===============
F-3
Capitol Communities Corporation and Subsidiaries
Consolidated Statements of Operations
For the Three Months Ended March 31, 2003 and 2002
UNAUDITED
2003 2002
Revenues:
Sales $0 $8,201,290
--------------- ----------------
Total Revenues $0 $8,201,290
Cost of Sales - 4,376,899
--------------- ----------------
Gross Profit $0 $3,824,391
Operating Expenses:
General & Administrative Expenses 123,214 422,479
General & Administrative Expenses- Related Parties -
--------------- ----------------
Total Operating Expenses 123,214 422,479
--------------- ----------------
Net Income (Loss) Before
Other Income/(Expense) (123,124) $3,401,912
Other Income and (Expense)
Operations of Unconsolidated Investments (71,150)
Interest Income 68,734 1,798
Loss on Discount of Note Receivable (70,298)
Other Income
Interest Expense (806,188) (219,969)
Interest Expense- Related Parties -
--------------- ----------------
Total Other Income and (Expense) (807,752) (289,321)
--------------- ----------------
Net Income (Loss) from continuing operations $ (930,876) $3,112,591
Income Tax Expense (Benefit)
Current - -
Deferred - -
--------------- ----------------
Total Income Tax Expense (Benefit) - -
--------------- ----------------
Net Income (Loss) before Extraordinary Items $ (930,876) $3,112,591
Extraordinary Items
Gain from retirement of debt at a discount,
net of income tax provision of $0 $201,000 1,184,497
--------------- ----------------
Net Income (Loss) $ (729,876) $4,297,088
=============== ================
Basic Income (Loss) per share
Income (Loss) before extraordinary item ($0.04) $0.14
Extraordinary Item
Gain from retirement of debt at a discount 0.01 0.05
--------------- ----------------
Net Income (Loss) ($0.03) $0.20
=============== ================
--------------- ----------------
Weighted average shares outstanding: 25,460,061 21,926,750
=============== ================
F-4
CAPITOL COMMUNITIES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
MARCH 31, 2003
NOTE 1 -SIGNIFICANT ACCOUNTING POLICIES
-------------------------------
A. Background
----------
The consolidated balance sheet at March 31, 2003 and the related statements of
operations and cash flows for the six month period ended March 31, 2003, 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, 2002 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 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 selling real estate
properties.
On July 21, 2000, Capitol Development of Arkansas, Inc., a wholly-owned
subsidiary of the Company 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 District of
Arkansas. The Company continued to operate its business as a
debtor-in-possession until September 6, 2002, when the United States Bankruptcy
Court, Eastern District of Arkansas, Little Rock Division entered an Order
Dismissing the Chapter 11 Proceedings against the Operating Company. The Company
filed a Motion to Dismiss the Bankruptcy Proceedings instead of a Plan of
Reorganization, as all claims of non-insiders of the Operating Subsidiary,
except for the claim of the Arkansas Department of Finance and Administration
had been satisfied or released.
On July 17, 2002, Boca First Capital, LLLP, a Florida limited liability limited
partnership acquired control of Capitol Communities Corporation in an exchange
of 16 million shares of Common Stock of the Company held by the Company's
president, and Prescott Investments, L.P., a Nevada limited partnership
beneficially owned by the Company's president, for a combined 50% interest in
Boca First Capital LLLP. Boca First Capital LLLP is controlled by its general
partner, Addison Capital Group LLC, a Nevada limited liability company, of which
the president of the Company is a controlling shareholder. As of the date of
this Report, Boca First Capital LLLP owns 62.84% of the Company's issued and
outstanding shares.
By reason of the exchange of securities, Addison Capital LLC, the general
partner of Boca First Capital LLLP, may be deemed to have voting power and/or
dispositive power with respect to the 16,000,000 shares of Common Stock owned by
Boca First Capital LLLP.
As part of the change of control, the Company has moved its principal place of
business from Torrance, California to Boca Raton, Florida, effective July 22,
2002.
B. Principles of Consolidation
---------------------------
The Consolidated financial statements include accounts of its wholly-owned
subsidiaries. All material intercompany transactions have been eliminated.
F-5
CAPITOL COMMUNITIES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
MARCH 31, 2003
NOTE 1 - SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
-------------------------------------------
C. Real Estate Holdings
--------------------
Real estate investments are stated at the lower of cost or market. Acquisition
costs are allocated to respective properties based on appraisals of the various
properties acquired in the acquisition.
D. Revenue Recognition
-------------------
Revenue is recognized under the full 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.
E. 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.
F. 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 six
months ended March 31, 2003 and 2002 were 25,460,061 and 21,926,750,
respectively.
NOTE 2 - CAPITAL TRANSACTIONS
--------------------
Effective March 31, 2003, the Company agreed to settle $485,000 in debt,
including principal and interest, with a group of existing promissory note
security holders for $284,000 in cash and notes.
On January 10, 2003, West Maumelle L.P., retired one of the debts owed to the
Operating Subsidiary, comprised of a promissory note in the face amount of
$1,070,000. In satisfaction of Note 1, West Maumelle paid a cash payment of
$500,000.00 and assigned a $640,000 promissory note made by an unaffiliated
third party made payable to West Maumelle L.P. The $640,000 note is secured by a
mortgage to certain real property located in Maumelle, Arkansas, and pays
interest at a rate of 5.75% per annum with interest paid monthly, with a
maturity date of July 10, 2004. On March 31, 2003, the Company assigned the
note, for the discounted amount of $570,000 to a group of investors, one of whom
is an entity controlled by an officer and a controlling shareholder of the
Company.
The Company renewed a second owed by West Maumelle to the Operating
Subsidiary in the face amount of $1,030,000.00. The new note has a face value of
$1,000,000.00 and bears interest at a rate of 5.75% per annum with interest due
annually, with a maturity date of January 10, 2006. The Renewal Note is secured
by a mortgage to certain real property located in Maumelle, Arkansas, and is
junior to a senior mortgage from an unaffiliated commercial bank. West Maumelle
also made an unsecured note payable to the Operating Subsidiary in the amount of
$46,170.00, with unpaid principal due and payable on April 10, 2003.
On January 24, 2003, Capitol Development of Arkansas, Inc. entered
into an Agreement Dissolving Limited Liability Company with Trade Partners,
Inc., a Michigan corporation. Under the terms of the Agreement, the Company and
Trade Partners, Inc., the two members of TradeArk Properties, LLC, a Michigan
limited liability company, agreed to dissolve TradeArk.
F-6
CAPITOL COMMUNITIES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
MARCH 31, 2003
NOTE 2 - CAPITAL TRANSACTIONS (CONTINUED)
--------------------------------
For its 35.16 percent membership interest, the Company received approximately
251 acres of real property, comprised of single family, multi-family and
commercial land, located in the City of Maumelle, the County of Pulaski,
Arkansas. The Company assumed approximately three million five hundred thousand
dollars ($3,500,000 00) in debt held by New Era Inc, secured by the real
property and a $580,000 liability to Trade Partners
Under the Agreement. Trade Partners, Inc., received life settlement contracts,
which were originally contributed by Trade Partners, Inc., to TradeArk for its
64.84 percent membership interest.
The real property received from TradeArk has been pledged as collateral to Boca
First Capital LLLP to secure its $4,000,000.00 line of credit.
NOTE 3 - LEGAL PROCEEDINGS
-----------------
The Company is not involved in any other litigation, other than those actions
arising from the normal course of business. Management does not believe will
have a material effect on the Company's operations.
NOTE 4 - SUBSEQUENT EVENTS
-----------------
The Company entered into a contract with a unaffiliated third party on April 23,
2003, to sell 38.65 acres of commercial property formerly owned by TradeArk for
a sales price of $3,165,156.72. The commercial tract currently secures a loan by
New Era. The buyer has 75 days from the date of execution of the contract to
perform due diligence on the property and can terminate the contract at such
time, at its sole discretion, and have its $25,000 deposit returned.
On April 17, 2003, West Maumelle paid off the Differential Note owed to the
Operating Subsidiary in the amount of $46,170.
For the period April 1, 2003 through May 1, 2003, the Company exchanged
$207,559.89 in debt, including principal and interest, with a group of existing
promissory note security holders ("Note Holders") for 56,401 shares of
Convertible Preferred Stock, Series A Non-Voting stock (the "Series A Preferred
Stock"), par value $0.01 per share and $41,529.95 in cash.
F-7
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
Forward-Looking Statements
- --------------------------
In addition to historical information, this Report 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 "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) cure its current liquidity problems, (2) liquidate
assets to meet day-to-day operations and raise sufficient capital to commence
meaningful operations. There is no assurance that the Company will be able to
raise sufficient capital or liquidate assets to pursue the business objectives
discusses herein.
The forward-looking statements contained in this Report also may be impacted by
future incidents of terrorism and the economic impact thereof. The effect of
these events on the business of the Company, if any, is currently unclear.
However, any adverse effect on 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 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 in this Item 2, of this Report.
Financial Condition
- -------------------
As noted below and elsewhere in this Report, the Company needs to cure its
current illiquidity in order to diversify its portfolio, acquire new business
opportunities and generate revenues. Accordingly, the Company is in the process
of liquidating all or portions of the Maumelle Property and raise sufficient
capital to commence meaningful operations. There can be no assurance, however,
that the Company will be able to sell portions and/or all of the Maumelle
Property for a fair market value or at all, or raise sufficient capital in order
to implement its growth strategy. (See "LIQUIDITY AND CAPITAL RESOURCES,"
below).
Change in Financial Condition Since the End of Last Fiscal Year. At March 31,
2003, the Company had total assets of $10,250,603 an increase of $3,278,242 or
47% as compared to total assets of $6,972,179, as of the Company's fiscal year
ended September 30, 2002. The Company had cash of $497,492 as of March 31, 2003
compared to $16,981 at September 30, 2002. The increase of assets was primarily
due to the purchase of the Company's membership interest in TradeArk Properties,
LLC.
The current portion of notes receivable increased to $1,000,000 on March 31,
2003 from $500,000 on September 30, 2002. The increase was primarily a result of
a $1,000,000 note becoming current, and a $500,000 note paid by West Maumelle,
L.P.
The carrying value of the Company's real estate holdings increased by
$5,927,631_during the six months, from $1,300,140 as of September 30, 2002 to
$7,227,771 on March 31, 2003. The net increase was primarily a result of the
purchase of the Company's membership interest in TradeArk Properties.
8
Total liabilities of the Company at March 31, 2003 were $7,757,591, an increase
of $3,466,584 from the September 30, 2002 total of $4,291,007. The current
liability for notes payable increased by $3,466,584 during the six months, from
$2,029,168 to $3,470,158. The increase was primarily the result of
reclassification of the Boca First Capital LLLP's line of credit to long-term
debt, the purchase of the TradeArk membership interest and corresponding debt, a
reclassification of the notes receivables by an officer and controlling
shareholder of the Company, for an offset of accrued expenses and a
reclassification of $261,000 offsetting debt for Preferred Stock, Series A.
Accounts payable and accrued expenses decreased by $389,216. At September 30,
2002 the liability for accounts payable and accrued expenses totaled $995,045.
At March 31, 2003 the balance was $605,829.
Long term debt increased to $1,601,074, as of March 31, 2003 from $1,216,000, as
of September 30, 2002, an increase of $385,074.40.
Shareholders' Equity decreased by $188,160 to $2,493,012 from $2,681,172 for the
period ended September 30, 2002. The decreased was primarily the result of a
reclassification of the notes receivables by an officer and controlling
shareholder of the Company, for an offset of accrued expenses, the settlement of
certain notes for equity, the year to date loss and a reclassification of
$261,000 offsetting debt for Preferred Stock, Series A.
Results of Operations
- ---------------------
Comparison of the Six Months Ended March 31, 2003 to the Six Months Ended March
31, 2002. For the six months ended March 31, 2003, the Company had a net loss of
$651,941 compared with a net income of $2,249,078 for the six months ended March
31, 2002. The difference in performance resulted primarily from the lack of land
sales during the period and the purchase of the Company's membership interest in
TradeArk Properties.
Revenues decreased by $8,201,290 to $0 for the six months ended March 31, 2003,
from $8,201,290 for the six months ended March 31, 2002. During the six months
ended March 31, 2003, sales totaled $0. The cost of sales for the six months
ended March 31, 2003, amounted to $0 resulting in a gross profit of $0 as
compared to the cost of sales for the six months ended March 31, 2002, which
were $4,376,899 and resulted in a gross profit of $3,824,391.
General and administrative expenses decreased to $188,196 for the six months
ended March 31, 2003, from $2,090,908 for the six months ended March 31, 2002.
Officers' salary decreased to $0 for the six months ended March 31, 2003 from
$1,001,329 for the six months ended March 31, 2002, a decrease of $1,00,329. The
decrease was primarily due to the president of the Company canceling all salary
for the six month period ended March 31, 2003, as per an agreement not to take
salary. Consulting fees decreased to $22,000 for the six months ended March 31,
2003 from $801,313 for the six months ended March 31, 2002, a decrease of
$779,313. Legal fees and audit fees decreased by $34,704 to $81,539 for the six
months ended March 31, 2003 from $116,244 for the six months ended March 31,
2002. Miscellaneous charges decreased by $99,419 to $1,347 for the six months
ended March 31, 2003 from $100,767 for the six months ended March 31, 2002.
Interest expense increased by $297,529 from $528,400 for the six months ended
March 31, 2002 to $297,529 for the six months ended March 31, 2003.
The operating loss recorded for unconsolidated subsidiaries accounted for under
the equity method totaled a loss of $75,000 for the six months ended March 31,
2003 compared to a loss $142,300 for the six months ended March 31, 2002.
Comparison of the Three Months Ended March 31, 2003 to the Three Months Ended
March 31, 2002 . For the three months ended March 31, 2003, the Company had a
net loss of $729,876 compared with a net income of $4,297,088 for the three
months ended March 31, 2002. The difference in performance resulted primarily
from the the lack of land sales during the current period from the three months
ended March 31, 2002 and purchase of the Company's membership interest in
TradeArk Properties.
9
Revenues decreased by $8,201,290 to $0 for the three months ended March 31,
2003, from $8,201,290 for the three months ended March 31, 2002. During the
three months ended March 31, 2003, sales totaled $0. The cost of sales for the
three months ended March 31, 2003, amounted to $0, resulting in a gross profit
of $0.
General and administrative expenses decreased to $123,214 for the three months
ended March 31, 2003 from $422,479 for the three months ended March 31, 2002.
Consulting fees decreased to $22,000 for the three months ended March 31, 2003
from $181,313 for the three months ended March 31, 2002, a decrease of $159,313.
Legal fees and audit fees increased by $11,013 to $64,609 for the three months
ended March 31, 2003 from $53,596 for the three months ended March 31, 2002.
Miscellaneous charges decreased by $101,959 to $0 for the three months ended
March 31, 2002 from $101,959 for the three months ended March 31, 2001.
Management fees totaled $8,829 for the three months ended March 31, 2003, an
increase of $7,134 from $1,695 for the three months ended March 31, 2002.
Interest expense increased by $586,219 from $219,969 for the three months ended
March 31, 2002 to $806,188 for the three months ended March 31, 2003.
The operating loss recorded for unconsolidated subsidiaries accounted for under
the equity method totaled $0 for the three months ended March 31, 2003 compared
to a loss $71,150 for the three months ended March 31, 2002.
Liquidity and Capital Resources
- -------------------------------
Cash and cash equivalents amount to $ 497,492 as of March 31,2003, as compared
with $60,364 at September 30, 2002, primarily due to the sale of a notes
receivable at a discounted rate.
As of March 31, 2003, the Company was in default on non-recourse promissory
notes in the amount of $441,837 and $234,278, as of May 1, 2003. Since the last
quarter ended on December 31, 2002, the Company has negotiated settlements with
certain promissory note holders to exchange $485,000 in debt and accrued
interest for cash and notes of $284,000.
As of March 31, 2003, the Company has drawn $1,601,074.40 on a $4,000,000.00
credit line from Boca First Capital LLLP ("Boca First" and the "Boca Credit
Line"), a Florida limited liability limited partnership beneficially owned and
controlled by the President and a controlling shareholder of the Company, and
$1,540,074.40, as of May 1, 2003. The loan is evidenced by a note (the "the Boca
Note") secured by substantially all of the assets of the Operating Subsidiary.
The Boca Credit Line matures on November 1, 2004, and has an initial interest
rate of ten percent (10%) per annum and will, on a quarterly basis, adjust to a
rate which is 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. As of March 31, 2003, the Boca Credit Line has an interest rate of 10
percent per annum. In January, Boca First secured a mortgage junior to New Era
Life Insurance Company on approximately 258 acres of real property located in
Maumelle, Arkansas as substitute collateral for the TradeArk Properties LLC
("TradeArk") membership interest, as TradeArk was dissolved in January and the
Company received the real property for its membership interest. See discussion,
below.
On January 10, 2003, West Maumelle L.P. ("West Maumelle"), retired its debt to
the Operating Subsidiary, comprised of a promissory note in the face amount of
$1,070,000, with a cash payment of $500,000.00 and an assignment of a $640,000
promissory note made by Transcontinental Realty Investors, Inc. (the
"Transcontinental Note"), a Nevada corporation, and payable to West Maumelle.
The $640,000 note is secured by a mortgage to certain real property located in
Maumelle, Arkansas, and pays interest at a rate of 5.75% per annum with interest
paid monthly, and a maturity date of July 10, 2004.
The Company renewed a second promissory note owed by West Maumelle to the
Operating Subsidiary in the face amount of $1,030,000.00. The new note ("Renewal
Note"), with a face value of $1,000,000.00, bears interest at a rate of 5.75%
per annum and interest due annually, with a maturity date of January 10, 2006.
The Renewal Note is secured by a mortgage to certain real property located in
Maumelle, Arkansas, and is junior to a senior mortgage from Great Southern Bank.
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West Maumelle also made a unsecured note ("Differential Note) payable to the
Operating Subsidiary in the amount of $46,170.00, with the unpaid principal due
and payable on April 10, 2003. The Notes were partial payment for sale of 289
acres of single family property, and 11 acres of multi-family property to West
Maumelle, an unaffiliated third party. On March 31, 2003, the Company assigned
the Transcontinental Note for the discounted amount of $570,000 to a group of
investors, one of whom is an entity controlled by an officer and controlling
shareholder of the Company.
On January 24, 2003, the Operating Subsidiary entered into an Agreement
Dissolving Limited Liability Company ("Agreement") with Trade Partners, Inc., a
Michigan corporation. Under the terms of the Agreement, the Company and Trade
Partners, Inc., the two members of TradeArk Properties, LLC ("TradeArk"), a
Michigan limited liability company, agreed to dissolve TradeArk, effective
immediately. For its 35.16 percent membership interest, the Company received
approximately 251 acres of real property located in the City of Maumelle, the
County of Pulaski, Arkansas. The Company also assumed approximately three
million five hundred thousand dollars ($3,500,000.00) in debt held by New Era
Life Insurance Inc. ("New Era"), and secured by the real property. Approximately
258 acres of real property were originally contributed to TradeArk by the
Company in June 1999, when the limited liability company was formed by the two
members. Since the real property was contributed, approximately six and one-half
(6 1/2) acres have been sold by TradeArk. The remaining real property is
comprised of single family, multi-family and commercial land.
Under the Agreement, Trade Partners, Inc., received life settlement contracts,
which were originally contributed by Trade Partners, Inc., to TradeArk for its
64.84 percent membership interest.
On March 24, 2003, the Company entered into a contract with a unaffiliated third
party to sell 192 acres of single-family land formerly owned by TradeArk for a
sales price of $2,016,000. The single-family tract currently secures a loan by
New Era. The buyer has until May 31, 2003, to perform due diligence on the
property and can terminate the contract at such time, at its sole discretion;
provided that it shall only have a right to receive $5,000 of its original
$25,000 deposit.
The Company entered into a contract with a unaffiliated third party on March 28,
2003, to sell 19 acres of multi- family land formerly owned by TradeArk for a
sales price of $700,000. The multi-family tract currently secures a loan by New
Era. Notwithstanding, the buyer has 30 days to perform due diligence on the
property and can terminate the contract at such time, at its sole discretion,
and have its deposit returned.
The Company, without liquidating all or portions of the Maumelle Property, does
not have sufficient capital to meet its day-to-day operations or commence any
meaningful operations. This illiquidity may prevent the Company from realizing
or consummating any of its business plans, objectives, strategies, or
transactions discussed in this and other Reports.
Except for the Company's credit line with Boca First, the Company has minimal
operating income and its primary source of funds to meet operating expenses for
the last two years has been the liquidation of its real property inventory. If
the Company has to liquidate portions of its Maumelle Property during fiscal
year 2003 to service its debt, it may be at less than fair market value.
If the Company is able to complete the sale of the single-family, multi-family
and commercial property discussed above and in "Subsequent Events," below, the
Company will have disposed of majority of its real property inventory, except
for 250 acres of undeveloped land located in Maumelle, Arkansas, and converted
the majority of its assets into liquidate capital.
If the Company is able to liquidate the property discussed above and raise
sufficient capital, the Company will retire additional secured debt and
contemplates acquiring and/or developing real estate projects in fast growing
areas such as Florida, or acquiring business opportunities that generate
revenues. There can be no assurance that the Company will be able raise
sufficient capital and/or sell the Maumelle Property in order to diversify its
portfolio or that the Company will be able to acquire real estate projects and
other business opportunities that will generate progressive revenues.
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Subsequent Events
- -----------------
The Company entered into a contract with a unaffiliated third party on April 23,
2003, to sell 38.65 acres of commercial property formerly owned by TradeArk for
a sales price of $3,165,156.72. The commercial tract currently secures a loan by
New Era. The buyer has 75 days from the date of execution of the contract to
perform due diligence on the property and can terminate the contract at such
time, at its sole discretion, and have its deposit returned.
On April 17, 2003, West Maumelle paid off the Differential Note owed to the
Operating Subsidiary in the amount of $46,170.
PART II.
ITEM 1. LEGAL PROCEEDINGS
The Company is not involved in any 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.
On April 2, 2003, David Paes, the vice president, treasurer of the Company and
assistant secretary of the Operating Subsidiary resigned for personal reasons.
Ashley Bloom, vice president of the Company, has been appointed by the Board of
Directors as treasurer. The Board of Directors appointed Michael G. Todd,
president and secretary and Ashley Bloom, vice president and assistant secretary
of the Operating Subsidiary.
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.
Exhibit 11 Statement re: computation of per share earnings.
Exhibit 99 (a) . Certification of Chief Executive Officer
Exhibit 99 (b). Certification of Treasurer
b) REPORTS ON FORM 8-K
The Company filed a report on Form 8K with the Commission on February 3, 2003,
regarding the dissolution of TradeArk Properties, LLC and the return of certain
real property located in Pulaski County, Arkansas to the Operating Subsidiary
for its membership interest.
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SIGNATURES
CAPITOL COMMUNITIES CORPORATION
Date: May 20, 2003 By: /s/ Michael G. Todd
-------------------------------------
Michael G. Todd, Chairman,
President and Chief Executive Officer
Date: May 20, 2003 By: /s/ Ashley Bloom
--------------------------------------
Ashley Bloom
Treasurer and Vice President
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