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, 2004
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES AND
EXCHANGE ACT OF 1934
For the transition period from _____ to_____
Commission File No. 00-23450
CAPITOL FIRST CORPORATION
(Exact name of Small Business Issuer as specified in its charter)
Nevada 88-0361144
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
7100 Camino Real Boulevard
Suite 402
Boca Raton, FL 33433
(Address of principal executive offices) (Zip Code)
Issuer's telephone number: (561) 417-7115
Check whether the issuer (1) filed all reports required to be filed by Section
12, 13 or 15(d) of the Exchange Act during the past 12 months (or for such
period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days.
[X] YES [ ] NO
State the number of shares outstanding of each of the issuer's classes of common
equity, as of the latest practicable date:
Common Stock ($.01 Par Value) 30,924,327
(Title of Class) Shares Outstanding as of May 7, 2004
Transitional Small Business Disclosure Format: [ ] YES [X] NO
CAPITAL FIRST CORPORATION
INDEX
Part I - FINANCIAL INFORMATION
ITEM 1. Financial Statements Page
----
Consolidated Balance Sheet - March 31, 2004 (unaudited) F-1
Consolidated Statements of Operations (unaudited) - Three and
Six Months Ended March 31, 2004 and 2003 F-2
Consolidated Statement of Changes in
Stockholders's (Deficit) Equity - Six Months Ended March 31, 2004 F-3
Consolidated Statements of Cash Flows - Six Months
Ended March 31, 2004 and 2003 F-4
Notes to Consolidated Financial Statements F-5
ITEM 2. Management's Discussion and Analysis or Plan of Operation 3
ITEM 3. Controls and Procedures 9
Part II - OTHER INFORMATION
ITEM 1. Legal Proceedings 10
ITEM 3. Defaults Upon Senior Securities 10
ITEM 4. Submission of Matter to a Vote of Security Holders 10
ITEM 6. Exhibits and Reports on Form 8-K 10
Signatures 12
Certifications
CAPITOL FIRST CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET (UNAUDITED)
AS OF MARCH 31, 2004
Current Assets
Cash $ 869,153
Accrued interest receivable 89,950
Construction in progress 1,388,476
Notes and loans receivable, net of valuation allowance of $18,096 3,524,533
Other current assets 221,593
------------
Total Current Assets 6,093,705
------------
Property and Equipment
Furniture and equipment, net of accumulated depreciation of $3,120 30,312
------------
Other Assets
Land and real estate holdings 4,702,474
Deferred tax benefit 1,203,000
Other long-term assets 58,363
------------
Total Other Assets 5,963,837
------------
Total Assets $ 12,087,854
------------
Current Liabilities
Accounts payable and accrued expenses 435,221
Accrued dividends payable on preferred stock 108,612
Accrued expenses - related parties 13,262
Notes and loans payable 4,222,381
Notes payable - related party 1,195,000
------------
Total Current Liabilities 5,974,476
------------
Long Term Liabilities
Loans payable 291,700
Notes payable 4,150,000
------------
Total Long Term Liabilities 4,441,700
------------
Total Liabilities 10,416,176
------------
Stockholders' Equity
Preferred Stock - $0.01 par value, 10,000,000 shares authorized; 4,137,591
shares issued and outstanding 41,376
Common Stock - $0.01 par value, 40,000,000 shares authorized; 30,914,327
shares issued and outstanding 309,143
Additional paid-in capital 14,858,805
Preferred stock dividend (432,890)
Treasury stock; 3,861,693 shares (5,387,166)
Minority interests 100
Accumulated deficit (7,717,690)
------------
Total Stockholders' Equity 1,671,678
------------
Total Liabilities and Stockholders' Equity $ 12,087,854
------------
See Accountant's Report and Supplemental Footnotes.
F-1
CAPITOL FIRST CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
THREE MONTHS ENDED SIX MONTHS ENDED
MARCH 31, MARCH 31,
2004 2003 2004 2003
----------- ----------- ----------- -----------
Revenues
Interest income - notes and loans 75,231 63,749 116,913 95,780
Fee income 123,079 0 123,689 0
----------- ----------- ----------- -----------
Total Revenues 198,310 63,749 240,602 95,780
----------- ----------- ----------- -----------
Cost of Revenue
Cost of sales - loans 129,525 0 139,939 0
----------- ----------- ----------- -----------
Total Cost of Revenue 129,525 0 139,939 0
----------- ----------- ----------- -----------
Gross Profit 68,785 63,749 100,663 95,780
----------- ----------- ----------- -----------
Operating Expenses
General and administrative expenses 303,401 101,124 442,462 166,196
General and admin. expenses - related parties 7,500 0 21,000 0
Financial advisory and consulting fees 41,644 22,000 186,644 22,000
----------- ----------- ----------- -----------
Total operating expenses 352,545 123,124 650,106 188,196
----------- ----------- ----------- -----------
Net loss before other income (expense) (283,760) (59,375) (549,443) (92,416)
----------- ----------- ----------- -----------
Other income and (expense)
Operations of unconsolidated investments 0 0 0 (75,000)
Interest income on cash balances 1,666 4,985 7,324 5,574
Interest expense (41,735) (768,590) (178,165) (768,590)
Interest expense - related parties (31,318) (37,598) (61,943) (57,338)
Gain (loss) from extinguishment of debt 115,909 201,000 90,909 406,127
Loss on discount of note 0 (70,298) 0 (70,298)
----------- ----------- ----------- -----------
Total other income and (expense) 44,522 (670,501) (141,875) (559,525)
----------- ----------- ----------- -----------
Net loss before provision for income tax (239,238) (729,876) (691,318) (651,941)
----------- ----------- ----------- -----------
Income tax expense (benefit)
Deferred 0 0 0 0
----------- ----------- ----------- -----------
Total income tax expense (benefit) 0 0 0 0
----------- ----------- ----------- -----------
Net loss (239,238) (729,876) (691,318) (651,941)
----------- ----------- ----------- -----------
Basic income (loss) per share
Net loss $ (0.01) $ (0.02) $ (0.02) $ (0.02)
Weighted average shares outstanding 30,754,721 29,412,054 30,486,277 29,412,054
See Accountant's Report and Supplemental Footnotes.
F-2
CAPITOL FIRST CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDER'S EQUITY (UNAUDITED)
FOR THE SIX MONTHS ENDED MARCH 31, 2004
Common Stock Additional
Preferred Stock Issued o/s Treasury Stock Paid-in
Shares Amount Shares Amount Shares Amount Capital
------------ ------------ ------------ --------------- ------------ -------------- --------------
Balance at 9/30/03 as
previously reported 4,137,591 41,376 29,290,050 292,900 3,629,989 (4,805,229) 14,172,886
Adjustment to correct
shares sent to
treasury not canceled 90,300 903 (903)
Adjustment to correct
stock contributed to
treasury 231,704 2,317 231,704 (581,937) 579,620
Common stock issued
on November 5, 2003 1,000,000 10,000 70,000
Common stock issued
on January 26, 2004 15,000 150 975
Common stock issued
on February 18, 2004 227,273 2,273 22,727
Common stock issued
On February 24, 2004 60,000 600 13,500
Preferred Dividends
accrued as of
12/31/03
Preferred Dividends
accrued as of 3/31/04
Net loss for the six
months ended
March 31, 2004
Minorty interests
------------ ------------ ------------ --------------- ------------ -------------- --------------
Balance at 3/31/04 4,137,591 41,376 30,914,327 309,143 3,861,693 (5,387,166) 14,858,805
------------ ------------ ------------ --------------- ------------ -------------- --------------
Preferred Accumulated Membership
Stock Dividends Deficit Interests Total
----------------- ---------------- ----------------- ------------------
Balance at 9/30/03 as (323,195) (7,026,372) 0 $2,352,366
previously reported
Adjustment to correct
shares sent to
treasury not canceled 0
Adjustment to correct
stock contributed to
Treasury 0
Common stock issued
on November 5, 2003 80,000
Common stock issued
on January 26, 2004 1,125
Common stock issued
on February 18, 2004 25,000
Common stock issued
On February 24, 2004 14,100
Preferred Dividends
accrued as of 12/31/03 (55,389) (55,389)
Preferred Dividends
accrued as of 3/31/2004 (54,306) (54,306)
Net loss for the six
months ended
March 31, 2004 (691,318) (691,318)
Minorty interests 100 100
----------------- ---------------- ----------------- ------------------
Balance at 3/31/04 (432,890) (7,717,690) 100 $1,671,678
----------------- ---------------- ----------------- ------------------
See Accountant's Report and Supplemental Footnotes.
F-3
CAPITOL FIRST CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
AS OF MARCH 31,
2004 2003
----------- -----------
Cash flows from operating activities
Net income (loss) (691,318) (651,941)
Adjustments to reconcile income (loss) to net cash provided by
(used in) operating activities:
Depreciation 3,120 576
(Increase) decrease in accrued interest receivable (48,519) (82,642)
(Increase) decrease in other receivables 0 (225,376)
(Increase) decrease in other current assets (81,493) 0
Increase (decrease) in accounts payable and accrued expenses 184,092 (127,908)
Increase (decrease) in accrued expenses - related parties 3,209 (37,432)
(Increase) decrease in deferred tax asset 0 0
(Increase) decrease in notes and loans receivable (2,542,629) 1,070,000
(Increase) decrease in construction in progress (1,388,476) 0
Increase (decrease) in valuation allowance 18,096 0
(Increase) decrease in deposits (8,363) 0
Decrease (increase) in loans and participations payable 2,026,318 0
Gain on debt extinguishment (90,909) (335,829)
Collection of note receivable by forgiveness of accrued expense 0 261,308
----------- -----------
Net cash used in operating activities (2,616,872) (129,244)
----------- -----------
Cash flows from investing activities
(Increase) decrease in real estate holdings (319,966) 0
(Increase) decrease in investments 0 75,000
Purchase of fixed assets (33,433) (2,363)
----------- -----------
Net cash (used in) provided by investing activities (353,399) 72,637
----------- -----------
Cash flows from financing activities
Issuance of $8 million secured promissory notes 1,150,000 0
(Payments) proceeds of notes payable to related party (60,000) 0
(Payments) proceeds of notes payable (31,816) 551,503
(Payment) of deferred dividends (109,695) (14,385)
Change in accrual of preferred dividends 108,612 0
Issuance of common stock 120,225 0
Membership interests 100 0
----------- -----------
Net cash provided by financing activities 1,177,426 537,118
----------- -----------
Net (decrease) increase in cash (1,792,845) 480,511
Beginning cash 2,661,998 16,981
----------- -----------
Ending cash $ 869,153 $ 497,492
----------- -----------
Schedule of non-cash financing activities
Preferred stock issued for debt 0 216,858
Collection of note receivable by forgiveness of accrued expenses 0 261,308
Supplemental information:
Interest paid, net of current payoff discount of $0 and $56,203, 304,356 40,414
Respectively
See Accountant's Report and Supplemental Footnotes.
F-4
CAPITOL FIRST CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2004
NOTE 1 -SIGNIFICANT ACCOUNTING POLICIES
A. BACKGROUND
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 Charlie Corporation and Prescott Investments Limited
Partnership, a beneficial owner of the Company.
In order to effectuate a change in domicile and name change approved by a
majority of the predecessor corporation shareholders, the predecessor
corporation merged, effective January 30, 1996, into Capitol Communities
Corporation, a Nevada corporation formed in August 1995 solely for the purpose
of the merger. On October 15, 2003, the Company filed a Certificate of Amendment
with the Secretary of State of Nevada to change its name from Capitol
Communities Corporation to Capitol First Corporation.
During the period from October 1, 2003 through March 31, 2004, the Company
formed eight wholly-owned subsidiaries and one 50% joint development venture for
which the Company performs the duties of Operating Manager. These entities are
Capitol Development, Inc., a Nevada corporation; Toxaway Development Group, LLC,
a North Carolina LLC; Interfund Mortgage Corp., a Florida corporation; Interfund
Investment Fund I, LLC, a Florida LLC; Capitol Management, LLC, a Florida LLC;
East Greens Development, LLC, a Florida LLC; MW Land Development, LLC, an
Arkansas LLC; Park Place Ventures, LLC, a Florida LLC; and Philbuilt
Development, LLC, a Florida LLC. The results of operations and balance sheets of
these entities are consolidated in the financial statements of the Company.
The Company is primarily in the business of real estate development and
financial lending for its own portfolio. The Company also continues to sell
property from its inventory of real property located in Maumelle, Arkansas.
B. PRINCIPLES OF CONSOLIDATION
The Consolidated financial statements include accounts of its wholly-owned
subsidiaries. All material intercompany transactions have been eliminated.
C. RECLASSIFICATIONS
Certain reclassifications have been made to the March 31, 2003 financial
statements to conform to the March 31, 2004 presentation.
D. REAL ESTATE HOLDINGS
Real estate investments are stated at the lower of cost or market. Acquisition
costs are allocated to respective properties reasonably based on appraisals of
the various properties acquired in the acquisition.
E. REVENUE RECOGNITION
Real Property: 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.
F-5
CAPITOL FIRST CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2004
NOTE 1 -SIGNIFICANT ACCOUNTING POLICIES - (CONTINUED)
E. REVENUE RECOGNITION (CONTINUED)
Interest Income: Interest income is accrued on a simple interest basis according
to the terms of the Note, generally on a 365-day year. The Company does not
recognize interest income from loans once they are determined to be impaired. A
loan is impaired when, based on current information and events, it is probable
that the Company will be unable to collect all amounts due according to the
contractual terms of the loan agreement or when the payment of interest is 90
days past due.
Fee Income: Fee income from non-refundable origination fees is recognized at
closing of escrow and reduced by any amount that would be deemed earned in a
subsequent fiscal year. Most loans mature in one year. Income from
non-refundable consulting fees is recorded net of consulting expenses paid to
related and unrelated parties. Consulting fees are considered substantially
earned at closing for the work performed pursuant to consulting agreements. The
bulk of consulting fees are earned on construction loans for which construction
of individual units occurs in a three to four month time period.
F. USE OF ESTIMATES
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosures of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the period. Actual results
could differ from those estimates.
G. CASH AND CASH EQUIVALENTS
Cash and cash equivalents include cash on hand, cash in banks, and any highly
liquid investments with a maturity of three months or less at the time of
purchase. The Company and its Subsidiaries maintain cash and cash equivalent
balances at several financial institutions which are insured by the Federal
Deposit Insurance Corporation up to $100,000. At times, the cash balances may
exceed federally insured limits. We have not experienced any losses in such
accounts and we believe the risk related to these deposits is minimal. At March
31, 2004, approximately 88% of the Company's cash was subject to such risk.
H. EARNINGS/LOSS PER SHARE
Primary earnings per common share are computed by dividing the net income (loss)
by the weighted average number of shares of common stock and common stock
equivalents outstanding during the quarter. The number of shares used for the
quarters ended March 31, 2004 and 2003 were 30,754,721 and 29,412,054,
respectively.
I. VALUATION ALLOWANCE
We determined a loan delinquency rate based on industry averages published by
the Mortgage Bankers Association. The loan delinquency rate is applied to all
loans receivable. An allowance is not provided for construction in progress as
these projects are currently owned or controlled by the Company. The allowance
is reviewed on a quarterly basis and adjusted when necessary based on the
Company's collection experience.
J. INCOME TAXES
In February 1992, the Financial Accounting Standards Board issued Statement on
Financial Accounting Standards 109 of "Accounting for Income Taxes." Under
Statement 109, deferred tax assets and liabilities are recognized for the
estimated future tax consequences attributable to differences between the
financial statement carrying amounts of existing assets and liabilities and
their respective tax bases. The Company has net operating losses (NOL's) of
approximately $9,000,000 expiring in the years 2009 through 2022.
Deferred tax benefit (34% statutory rate) $ 3,060,000
Valuation allowance (1,857,000)
Additions through March 31, 2004 235,048
Deferred tax benefit (235,048)
------------
Net Benefit $ 1,203,000
------------
A deferred tax asset was recognized in 2002 based on the anticipation of future
profitable operations for the years subsequent to 2002. Due to the operating
loss incurred during the prior fiscal year ended September 30, 2003 and the
operating loss incurred through March 31, 2004, no adjustment was deemed
necessary.
NOTE 2 - RELATED PARTY TRANSACTIONS
During part of the six months ended March 31, 2003, the Company subleased office
space from B & G Acceptance Corp., a company controlled by a beneficial owner of
the Company. The Company paid $2,200 a month for the office space and $3,800 a
month for office expenses. The Company moved its offices to a new location on
November 1, 2003. The new lease is with an unrelated party.
F-6
CAPITOL FIRST CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2004
On July 17, 2002, Boca First Capital, LLLP, a Florida limited liability limited
partnership acquired control of Capitol Communities Corporation. The Company
entered into a Business Loan Agreement with Boca First Capital LLLP dated April
26, 2002 to borrow up to the sum of $3,000,000 from Boca First Capital LLLP. On
September 27, 2002, the line of credit was increased from $3,000,000 to
$4,000,000.
NOTE 2 - RELATED PARTY TRANSACTIONS (CONTINUED)
As of March 31, 2004, and the date of this report, the Company has drawn
$1,195,000.00 on the $4,000,000.00 credit line from Boca First Capital LLLP
evidenced a promissory note secured by substantially all of the assets of the
Capitol Development of Arkansas, Inc. The collateral securing the note includes
a mortgage on the remaining 734 acres of the Maumelle Property, 1,000 shares of
common stock of the Capitol Development of Arkansas, Inc. owned by the Company,
representing one hundred percent of the issued and outstanding shares and a note
receivable payable on January 10, 2006 with a face value of $1,000,000.00,
respectively, with an annual rate of interest of 5.75%. In addition, there is a
lien on all other assets of the Company subject to senior lien positions. The
Boca First Capitol LLLP Line of Credit 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 in effect on that date.
Commencing in September, 2002, the Company entered into an informal agreement
with a related party for consulting services. The monthly fee is $2,500.
The Company had an employment agreement with its former President; however,
compensation under the agreement was reduced to zero as of September 27, 2002.
The employment agreement was effectively canceled upon the resignation of the
President in January, 2004.
The Company entered into a two year employment agreement with Ms. Monica A.
Schreiber for the position of Vice President and Chief Financial Officer on May
18, 2004. The term of the agreement may continue after two years unless either
party has given written notice of its intention to terminate the agreement. The
terms of the contract include a base salary of $90,000 and a grant of 30,000
shares of restricted common stock to vest ratably at the end of each quarter of
the term of the agreement.
In conjunction with moving its offices during the previous quarter, the Company
purchased $25,000 of used office furniture and equipment from B & G Acceptance
Corp., a company controlled by a beneficial owner of the Company.
During the quarter and six months ended March 31, 2004, the Company paid
approximately $123,808 and $193,808, respectively, in gross mortgage broker fees
to beneficial owners of the Company. A portion of the gross fees were
distributed by the beneficial owners to other mortgage brokers and consultants
and to other vendors for costs. The Board of Directors has agreed that in the
process of approving a transaction based upon its potential economic value to
the Company, fees may be paid to related parties if properly disclosed.
Additionally, as part of the approval process, the fees to related and unrelated
parties that will be netted from the Company's revenue will be disclosed and
negotiated when presented to the Company.
NOTE 3 - CANCELLATION OF DEBT
During the quarter ended March 31, 2004, $115,909 principal and accrued interest
relating to unsecured promissory notes was written off due to the statute of
limitations tolling on these notes.
NOTE 4 - CAPITAL TRANSACTIONS
On October 1, 2003, the Company issued 1,000,000 shares of restricted common
stock to Noble Financial International Inc., in consideration of consulting
services to be performed over a six-month period. The stock provides
registration rights to Noble if and when the Company registers additional
securities with the Securities and Exchange Commission.
On January 26, 2004, the Company issued 15,000 shares of unrestricted common
stock to three of its employees under its equity compensation plan.
On February 18, 2004, the Company issued 227,273 shares of restricted and
unrestricted common stock in lieu of legal services performed on behalf of the
Company during the previous fiscal year.
On February 24, 2004, the Company issued 60,000 shares of restricted common
stock to one of its outside directors as part of his compensation.
F-7
CAPITOL FIRST CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2004
NOTE 5 - NON-QUALIFIED EMPLOYEE STOCK OPTION PLAN
The Company has a Stock Option Plan under which directors, officers, key
consultants and other persons employed by the Company may be granted options to
purchase shares of the Company's authorized but unissued or reacquired common
stock. The maximum number of shares available for issuance under the Plan is
3,000,000 shares. As of March 31, 2004 the maximum number of shares available
for future grants under the Plan is 300,000 shares. Under the plan the option
exercise price shall not be less than the Fair Market Value of the stock.
Options currently expire no later than 10 years from the grant date. Proceeds
received by the Company from exercises of stock options are credited to common
stock and additional paid-in capital. Additional information with respect to the
Plan's stock option activity is as follows:
Number of Options Weighted Average
Exercise Price
Outstanding at September 30, 2003 0 0
Granted 25,000 0.075
Exercised 15,000 0
Cancelled 0 0
Outstanding at March 31, 2004 10,000 0.075
NOTE 6 - COMMITMENTS AND CONTINGENCIES
In November, 2003, the Company executed a 31 month lease for its office facility
in Boca Raton, Florida. Rent expense is approximately $4,000 per month,
including CAM.
Effective October 1, 2003, the Company entered in a financial advisory services
agreement with Noble International Investments, Inc. for a term of six months.
Fees under the agreement total $60,000 in cash and 1,000,000 shares of
restricted common stock. The fees of $60,000 were fully expensed as of March 31,
2004.
During the quarter ended March 31, 2004 the Company's wholly-owned subsidiary,
Interfund Investment Fund I, LLC, executed a letter agreement with Noble
International Investments, Inc., ("Noble") with an effective date of November
23, 2003. The letter agreement sets forth the understandings between the parties
regarding placement agent fees, non-accountable expenses and shares of common
stock to be issued upon completion of a minimum of $3,000,000 of an $8,000,000
maximum offering. Under the agreement, placement fees of $180,000 in cash,
non-accountable expenses of $25,000 in cash and 2,500,000 shares of restricted
common stock shall be paid or granted to Noble upon placement of the first
$3,000,000 of the offering. Fees of $75,000 were paid to Noble as of March 31,
2004.
NOTE 7 - LEGAL PROCEEDINGS
The Company is not involved in any other litigation, other than those actions
arising from the normal course of business which management does not believe
will have a material effect on the Company's operations.
NOTE 8 - SUBSEQUENT EVENTS
Subsequent to the Company's quarter ended March 31, 2004, the Company, through
its wholly-owned subsidiaries, Interfund Mortgage Corp. and Interfund Investment
Fund I, LLC, made secured short-term loans of approximately $750,000. Through
its wholly-owned subsidiaries, Capitol Development, Inc. and Park Place
Ventures, LLC, the Company purchased land for approximately $169,000.
At a Board of Director's meeting on May 4, 2004, the Board took the following
actions:
o Appointed Mr. Harvey Judkowitz and Mr. Michael Merlob to the Board
effective June 1, 2004 for a one year term.
F-8
CAPITOL FIRST CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2004
NOTE 8 - SUBSEQUENT EVENTS (CONTINUED)
o Formed an Audit Committee and appointed Mr. Harvey Judkowitz, Mr.
Michael Merlob and Mr. Donald LeGault to the Committee. Mr. Harvey
Judkowitz, CPA, was appointed to serve as the Chairman of the
Committee.
o Formed a Compensation Committee and appointed Mr. Michael Merlob and
Mr. Harvey Judkowitz to the Compensation Committee.
o Formed a Nominating and Corporate Governance Committee and appointed
Mr. Don LeGault, Mr. Harvey Judkowitz and Mr. Michael Merlob to the
Committee.
o Appointed Ms. Diane Bloom as an additional advisor to the loan
committee.
o Approved the appointment of Ms. Monica Schreiber as Vice President and
Chief Financial Officer as of the date of execution of her contract
and stated that Mr. Ashley Bloom is to finalize and execute her
contract on behalf of the Company.
o Authorized the Chief Financial Officer and the Chief Executive Officer
to take actions necessary to cancel the Company's Treasury shares at
soon as possible.
The Company's note receivable in the amount of $1,000,000 due from West Maumelle
LP was brought current on April 23, 2004. The borrower paid interest through
March 31, 2004 and the Company reinstated the note's interest at 5.75%.
In connection with a contract to sell Tract D, a 38.5 acre tract zoned for
commercial use, on April 22, 2004, the Company entered into a new note in the
amount of $2,050,000 at 5%, including an interest reserve of $200,000. The
previous 13% note, payable to New Era in the amount of $1,665,857 plus accrued
interest and property taxes, was paid off.
Proceeds of Interfund Investment Fund I, LLC's, offering of 8% secured
promissory notes were $1,150,000 as of March 31, 2004 and $1,550,000 as of May
1, 2004.
The Board made a decision on April 23, 2004, to accrue, but not pay dividends
due to holders of 5.25% preferred stock. The reason for this decision is that
the Company is not yet making a profit and would have to use borrowed funds or
sell assets in order to pay the dividends.
The Company received notification on May 14, 2004, that one of the collateral
properties securing one of its second mortgage loans receivable was in default.
The Company's second mortgage loan receivable is in the amount of $525,000 has
been and is current and is secured by other properties in addition to its share
in the defaulted property. Management believes that in addition to the
collateral in the defaulted property, there is sufficient equity in the other
collateral to secure its investment.
F-9
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 cure its
current liquidity problems. There is no assurance that the Company will be able
to generate sufficient revenues from its current business activities to meet
day-to-day operational liabilities or to pursue the business objectives
discussed herein.
The forward-looking statements contained in this Report also may be impacted by
future economic conditions, including but not limited to changes in interest
rates, any adverse effect on general economic conditions and consumer confidence
which may adversely affect the business of the Company.
Capitol First 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, including without limitation those identified in the "Risk
Factors" section of the Company's Registration Statement filed with the
Securities and Exchange Commission (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 is in the process of
diversifying its portfolio in order to generate revenues. Even though the
Company has enough borrowed money to meet its day-to-day operations, such
revenues are necessary to cure its current illiquidity position. During the
first six months of the fiscal year ending September 30, 2004, the Company
diversified into real estate development in Florida and North Carolina and
financial lending for its own portfolio. The Company also continues to sell
property from its inventory of 734 acres of real property located in Maumelle,
Arkansas (the "Maumelle Property") that it deems not appropriate for
development. There can be no assurance, however, that the Company will be able
to liquidate its Maumelle Property at a fair market price or at all, or acquire
projects and finance loans that generate revenues, or that the Company will be
able to generate sufficient revenues from these business activities to meet
day-to-day operational liabilities or to pursue the business objectives
discussed herein.
Change in Financial Condition Since the End of Last Fiscal Year
- ---------------------------------------------------------------
At March 31, 2004, the Company had total assets of $12,087,854, an increase of
$2,608,817 or 27.5% from the September 30, 2003 total of $9,479,037. The
increase in total assets resulted from commencement of operations in the
Company's mortgage and development subsidiaries.
Current assets as of March 31, 2004, were $6,093,705 compared to $3,893,529 as
of September 30, 2003. The increase of $2,200,176 was primarily due to an
increase of approximately $3,900,000 in loans receivable and construction in
progress , offset by a decrease of approximately $1,800,000 in cash deployed for
the lending and construction programs.
Non-current assets as of March 31, 2004, were $5,963,837 compared to $5,585,508
as of September 30, 2003. The increase of $378,329 was primarily due to an
increase in purchase of land held for sale or development.
3
Total liabilities of the Company at March 31, 2004 were $10,416,176, an increase
of $3,289,505 from the September 30, 2003 total of $7,126,671. The increase in
total liabilities resulted primarily from commencement of operations in the
Company's mortgage and development subsidiaries for which operations the Company
borrowed approximately $2,000,000 of funds from banks and participants as well
as proceeds of $1,150,000 from the placement of 8% secured promissory notes in
March, 2004. Accounts payable and accrued expenses increased by $148,181 due to
increased operating expenses incurred to support expanded operations.
Shareholders' Equity of the Company at March 31, 2004 was $1,671,678, a decrease
of $680,688 from the September 30, 2003 total of $2,352,366. The decrease in
equity resulted primarily from the year-to-date loss of $691,318. (See the
Results of Operations discussion for the six month period below).
CHANGE IN FINANCIAL CONDITION - COMPARING MARCH 31, 2004 TO MARCH 31, 2003
- --------------------------------------------------------------------------
At March 31, 2004, the Company had total assets of $12,087,854, an increase of
$2,062,625 or 20.6% from the March 31, 2003 total of $10,025,229. The increase
in total assets resulted from commencement of operations in the Company's
mortgage and development subsidiaries.
Current assets as of March 31, 2004, were $6,093,705 compared to $1,588,230 as
of March 31, 2003. The increase of $4,505,475 was primarily due to an increase
of approximately $3,900,000 in loans receivable and construction in progress, an
increase in cash of $371,661 and an increase in prepaid and other assets of
$219,080 primarily related to prepaid placement agent fees.
Non-current assets as of March 31, 2004, were $5,963,837 compared to $8,430,771
as of March 31, 2004. The decrease of $2,466,934 was primarily due to the sale
of Arkansas land during the latter half of the fiscal year ended September 30,
2003.
Total liabilities of the Company at March 31, 2004 were $10,416,176, an increase
of $2,883,959 from the March 31, 2003 total of $7,532,217. The increase in total
liabilities resulted from proceeds of $4,150,000 from the placement of 8%
secured promissory notes in late September, 2003 and late March, 2004 and
commencement of operations in the Company's mortgage and development
subsidiaries for which operations the Company borrowed approximately $2,000,000
of funds from banks and participants. These increases were offset by a decrease
of approximately $1,900,000 in notes payable to New Era due to principal
payments during the latter half of the fiscal year ended September 30, 2003, a
reduction of approximately $444,000 in the Boca First line of credit, a $909,000
reduction in unsecured notes payable due to settlements and a reduction of
approximately $173,000 in accounts payable.
Shareholders' Equity of the Company at March 31, 2004 was $1,671,678, a decrease
of $821,334 from the March 31, 2003 total of $2,493,012. The decrease in equity
resulted primarily from the year-to-date loss of $691,318 and accrual of
preferred dividends. (See the Results of Operations discussion for the six month
period below).
RESULTS OF OPERATIONS
COMPARISON OF THE THREE MONTHS ENDED MARCH 31, 2004 TO THE THREE MONTHS ENDED
MARCH 31, 2003.
Revenues increased to $198,310 for the three months ended March 31, 2004,
compared to $63,749 for the three months ended March 31, 2003. The increase was
due to commencement of the company's financial lending and real estate
development programs for which interest income and management fee income was
earned. Revenues for the three months ended March 31, 2004 were comprised of
approximately $75,000 in interest income and approximately $123,000 in fee
income, compared to approximately $64,000 in interest income for the three
months ended March 31, 2003. Fee income is reported net of fees paid to related
and unrelated parties in fee-sharing arrangements. Fees paid to related parties
and netted out of fee income for the three months totaled $86,808. A portion of
these fees were distributed by the related parties to other mortgage brokers and
consultants and to other vendors for costs.
Cost of revenues increased to $129,525 for the three months ended March 31,
2004, compared to $0 for the three months ended March 31, 2003. The increase was
due to commencement of the company's financial lending and real estate
development programs for which interest expense directly related to interest
income from loans was recorded for funds borrowed from banks and participants.
4
General and administrative expenses increased to $352,545 for the three months
ended March 31, 2004 from $123,124 for the three months ended March 31, 2003, an
increase of $229,421. The increase includes a $59,460 increase in payroll
incurred to support the new operations of the Company, a $69,464 increase in
property tax accrual on Maumelle undeveloped land not previously accrued, and a
$41,644 increase in amortization of placement agent and financial advisory fees
paid to Noble in connection with the issuance of secured promissory notes. Legal
fees and audit fees increased by $24,676 to $89,285 for the three months ended
March 31, 2004 from $64,609 for the three months ended March 31, 2003. The
increase was due to additional audit fees incurred during the first quarter
review and an increase in legal fees related to the increase in loan activity
and the formation of new operating subsidiaries.
Interest income earned on cash balances decreased to $1,666 for the three months
ended March 31, 2004 from $4,985 for the three month period ended March 31, 2003
due to a decrease in average cash balances.
Interest expense decreased to $73,053 for the three months ended March 31, 2004
from $806,188 for the three months ended March 31, 2003. The decrease of
$733,135 was primarily due to an adjustment in the amount of $409,488 in the
quarter ended March 31, 2003 related to the dissolution of TradeArk and
reacquisition of land for the company's membership interests. In addition,
interest expense on the New Era note payable was higher in the quarter ended
March 31, 2003 due to a higher principal balance.
During the quarter ended March 31, 2004, $115,909 principal and accrued interest
relating to unsecured promissory notes was written off due to the statute of
limitations tolling on these notes. In the quarter ended March 31, 2003, the
Company negotiated settlement agreements with unsecured promissory note holders
to exchange $485,000 in debt and accrued interest for $284,000 in cash and notes
for a gain of $201,000. This gain was offset by a $70,298 loss on discount of
the West Maumelle note which was discounted and assigned to a group of
investors.
COMPARISON OF THE SIX MONTHS ENDED MARCH 31, 2004 TO THE SIX MONTHS ENDED MARCH
31, 2003.
Revenues increased to $240,602 for the six months ended March 31, 2004, compared
to $95,780 for the six months ended March 31, 2003. The increase was due to
commencement of the company's financial lending and real estate development
programs for which interest income and management fee income was earned. This
increase was offset by a decrease in interest income from notes receivable due
to a reduction in both the outstanding principal amount and a three-fourth point
decrease in the interest rate charged to the borrower. Revenues for the six
months ended March 31, 2004 were comprised of approximately $117,000 in interest
income and approximately $124,000 in fee income compared to approximately
$96,000 in interest income for the six months ended March 31, 2003. Fee income
is reported net of fees paid to related and unrelated parties in fee-sharing
arrangements. Fees paid to related parties and netted out of fee income for the
six months totaled $86,808. A portion of these fees were distributed by the
related parties to other mortgage brokers and consultants and to other vendors
for costs.
Cost of revenues increased to $139,939 for the six months ended March 31, 2004,
compared to $0 for the six months ended March 31, 2003. The increase was due to
commencement of the company's financial lending and real estate development
programs for which interest expense directly related to interest income from
loans was recorded for funds borrowed from banks and participants.
General and administrative expenses increased to $650,106 for the six months
ended March 31, 2004 from $188,196 for the six months ended March 31, 2003, an
increase of $461,910. Approximately thirty-five percent (35%) of the increase,
$160,000 was due to placement agent and financial advisory fees paid to Noble in
connection with the issuance of $3,000,000 secured promissory notes. In late
March, 2004, the first $1,150,000 of a maximum $8,000,000 new offering of
secured promissory notes was raised and $1,644 was expensed for prorated
placement fees. Legal fees and audit fees increased to $134,249 for the six
months ended March 31, 2004 from $81,539 for the six months ended March 31,
2003, an increase of $52,710. Legal fees increased due to hours charged for work
related to the issuance of promissory notes, the formation of new operating
subsidiaries and commencement and growth of loan activity. Audit fees increased
due to a change in auditing firms resulting in increased hours billed during the
transition. The current six month period includes a $90,383 increase in payroll
expense incurred to support the new operations of the Company and a $69,464
increase in property tax accrual on Maumelle undeveloped land not previously
accrued; both payroll and property tax line items were $0 as of the six months
5
ending March 31, 2003. Other general expenses increased by $27,000 in support of
the Company's expanded operations. Stock issued in lieu on consulting fees was
$25,000 and stock issued as additional of Board compensation was $14,100 in the
six months ended March 31, 2004. There were no similar expenses in the same
period in the prior year. Allowance for loan losses was $18,096 for the six
months ended March 31, 2004, compared to $0 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 $0 for the six months ended March 31, 2004
compared to a loss $75,000 for the six months ended March 31, 2003.
Interest income earned on cash balances increased to $7,324 for the six months
ended March 31, 2004 from $5,574 for the six month period ended March 31, 2003.
The increase was due to an increase in average cash balances following the
issuance of $3 million promissory notes in late September, 2003.
Interest expense decreased to $240,108 for the six months ended March 31, 2004
from $825,928 for the six months ended March 31, 2003, a decrease of $585,820.
The decrease was primarily due to an adjustment in the amount of $409,488 in the
quarter ended March 31, 2003 related to the dissolution of TradeArk and
reacquisition of land for the company's membership interests. In addition,
interest expense on the New Era note payable was higher during the six months
ended March 31, 2003 due to a higher principal balance.
During the six months ended March 31, 2004, $115,909 principal and accrued
interest relating to unsecured promissory notes was written off due to the
statute of limitations tolling on these notes and was offset by a $25,000
correction of an error discovered in the first quarter. During the six months
ended March 31, 2003, the Company negotiated settlement agreements with
unsecured promissory note holders to exchange $1,067,232 in debt and accrued
interest for $661,105 in cash, notes and Series A preferred stock for a gain of
$406,127. This gain was offset by a $70,298 loss on discount of the West
Maumelle note which was discounted and assigned to a group of investors.
LIQUIDITY AND CAPITAL RESOURCES
At March 31, 2004, working capital was $119,229, as compared to working
capital of $2,687,715 at September 30, 2003, a difference of $2,568,486.
Approximately half of the decrease is due to reclassification of the Boca First
line of credit from long term debt at September 30, 2003 to short term debt at
March 31, 2004. Cash and cash equivalents amounted to $869,153 as of March 31,
2004, as compared with $2,661,998 at September 30, 2003. The reduction is due to
deployment of cash in lending programs.
Net cash used in operating activities during the six months ended March 31,
2004 was $2,616,872, compared to $129,244 net cash used in operating activities
during the six months ended March 31, 2003. The increase in net cash used in
operating activities is due to the commencement of the company's loan program
and construction projects and is offset by cash generated by the sale of loan
participations. During the six months ended March 31, 2003, $1,070,000 principal
on a note receivable was paid off and no similar payoff occurred in the current
six month period.
Net cash used in investing activities during the six months ended March 31, 2004
was $353,399, compared to $72,637 net cash provided by investing activities
during the six months ended March 31, 2003. The increase in net cash used in
investing activities is due to purchase of properties in Florida.
Net cash provided by financing activities during the six months ended March 31,
2004 was $1,177,426, compared to $537,118 net cash provided by financing
activities during the six months ended March 31, 2003. The increase in net cash
provided by financing activities is primarily due to the receipt of $1,150,000
as of March 31, 2004, from a maximum $8,000,000 new offering of secured
promissory notes.
INDEBTEDNESS AND OTHER LIQUIDITY REQUIREMENTS. The principal amount of the
Company's total debt at March 31, 2004, included, without limitation, the
following:
As of March 31, 2004 and the date of this Report, the Company had
$134,278 in non-recourse promissory notes ("Non-Secured Notes") that had matured
and were due and owing. The Company has been unable to settle these Non-Secured
Notes because of an inability to contact the note holder at their last known
address or non-response by the note holder. During the quarter ended March 31,
2004, the Company did not negotiate any settlement agreements and wrote off
6
$115,909 in principal and interest as the statute of limitations for these notes
had tolled. The Non-Secured short-term debt was financed by private sources, and
generally bear interest at a rate ranging from 10.9% to 14% per annum.
The Company has drawn $1,195,000 on its $4,000,000 Boca Credit Line, as
of March 31, 2004 and as of the date of this report. The Boca Credit Line is
evidenced by the Boca Note secured by substantially all of the assets of Capitol
Development of Arkansas, Inc. and the Mortgage Subsidiary and the assets of any
of the Company's wholly-owned subsidiaries, now owned or to be acquired. The
collateral securing the Boca Note includes a second priority mortgage on
approximately 736 acres of the Maumelle Property, (comprised of 290 acres of
developable land and 446 acres of wetlands), 1,000 shares of common stock of
Capitol Development of Arkansas, Inc. owned by the Company, representing one
hundred percent of the issued and outstanding shares and one note receivable
payable on January 10, 2006, with a face value of $1,000,000.00 and an annual
rate of interest of 5.75% and a collateralized interest in the lending
subsidiary's loan portfolio. The Boca Credit Line matures on November 1, 2004,
and has an initial interest rate of ten percent (10%) per annum which, 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.
The Company assumed approximately $3,500,000 in a loan from New Era Life
Insurance Inc. ("New Era Loan"), when it reacquired 251 acres of real property
in Maumelle, Arkansas for its membership interest in TradeArk Properties. Two
parcels of the real property were sold in the fiscal year ended September 30,
2003, and approximately $1,800,000 was paid on the loan. The loan is secured by
Tract D and carried an interest rate of 13% per annum and matured on March 12,
2004. The loan was verbally extended based on a contract to sell Tract D which
the Company entered into in January, 2004. The loan was paid off on April 22,
2004, in connection with the refinancing of Tract D. (See discussion below,
"Subsequent Events"). The New Era Loan had a balance of $1,665,857 as of March
31, 2004 and a balance of zero as of the date of this report.
In the preceding fiscal year ending September 30, 2003, the Company
borrowed $3,000,000 evidenced by secured promissory notes from individual
investors. The notes have a per annum interest rate of 8% and are payable
monthly, interest only, with the principal and interest due three years from
September 11, 2003. The Secured Notes are secured by a first priority mortgage
on approximately 250 acres of the Maumelle Property and a Collateral Pledge on
$2,100,000 of the cash proceeds and any substitute collateral thereafter.
In the current quarter ending March 31, 2004, the Company's wholly-owned
subsidiary, Interfund Investment Fund I, LLC, ("IIFI") borrowed $1,150,000
evidenced by secured promissory notes from individual investors. As of the date
of this report, IIFI had borrowed $1,550,000 of secured promissory notes in
connection with an $8,000,000 maximum offering. The notes have a per annum
interest rate of 8% and are payable monthly, interest only, with the principal
and interest due three years from August 12, 2004. Investors may earn from 8% up
to 12% in total based on a formula to be calculated after the maturity of the
notes in August, 2007. The Secured Notes are secured by the assets of Interfund
Investment Fund I, LLC.
During the quarter ended March 31, 2004, the Company sold $950,000 of loan
participation agreements to investors. Of the $950,000 in loan participation
agreements, $550,000 were sold to related parties. The participation agreements
bear interest at rates of 10.0% to 12.5% and mature with the underlying
commercial loans, which currently are 12-month to 18-month terms. The
participation agreements are secured by real property in junior and senior
prositions in proportion to the participant's pro-rate interest in the loan.
During the six months ended March 31, 2004, the Company has sold $1,216,000 of
loan participation agreements. Participations sold to related parties on during
the six month period totaled $575,000.
CERTAIN RECENT EVENTS RELATING TO THE COMPANY'S INDEBTEDNESS AND
LIQUIDITY REQUIREMENTS
The Company's current illiquidity prevents it from meeting its day-to-day
operational liabilities, except with borrowed funds. Although management
anticipates that the sale of all or portions of the Maumelle Property, its
development projects and loan portfolio will generate progressive revenues for
the Company, there can be no assurance the Company will be able to generate
enough revenues to meet its financial obligations, much less profit from such
activities.
7
The Company does not foresee any significant elements of income or loss
that would arise outside of the ordinary course of business, except for the
losses that would likely arise if the Company (i) becomes unable to continue the
growth of its operations in financial lending (ii) experiences material
delinquent or defaulted loans in its portfolio (iii) becomes unable to commence
significant operations in real estate development (iv) has to liquidate the
Maumelle Property for less than fair market value (v) is not able to raise
additional capital for its financial lending and development activities(vi) is
impacted by future adverse economic conditions in the general economy including
inflation and an increase in interest rates or (vii) is impacted by construction
and real estate industry market conditions.
Even if the Company can overcome its present liquidity issues, there is no
assurance that the Company will be able to successfully develop real estate
projects or obtain revenue generating loans.
PROSPECTIVE SOURCES OF LIQUIDITY. Current operating cash flows do not
service the Company's existing debt or the Company's day-to-day operations. The
Company has listed for sale with an unaffiliated real estate broker a
significant portion of the Maumelle Property. Any proceeds from the sale of
Maumelle land will be used to reduce current debt and provide working capital.
The Company and its wholly-owned subsidiaries, Interfund Mortgage Corp. and
Interfund Investment Fund I, LLC, (collectively, the "Mortgage Subsidiaries")
made secured short-term loans of approximately $2,500,000 and commenced
development projects in the cumulative amount of approximately $1,400,000 during
the six months ended March 31, 2004.
With respect to prospective long-term liquidity, the Company has identified
several real estate acquisition and financing opportunities as a part of its
strategic business plan that management anticipates will allow it to generate
cash flow from real estate development, interest on its investments, financing
arbitrage, hypothecation arbitrage, development fees, and equity participations
from joint ventures. The Company has acquired and intends to continue to acquire
and/or develop real estate and loans for its own portfolio in fast growing
markets such as Florida and North Carolina.
During March, 2004 the Company raised the first $1,150,000 in secured
promissory note debt through a private placement offering, pursuant to Rule 506
of Regulation D, of debt securities. This offering was subject to a minimum
placement of $1,000,000 and a maximum of $8,000,000, from private investors.
These funds are intended to be used to assist the Company in implementing its
business plans. There can be no assurance, however, that the Company will
successfully be able to raise all or some of the additional funds or if it does,
that its development and investment plans will generate revenues or net profits
to the Company.
The Company anticipates paying commissions to Noble International
Investments, Inc. ("Noble"), a registered broker/dealer firm, equal to two and
one quarter percent (2.25%) of the gross proceeds of the Offering or $180,000,
whichever is greater, and is subject to raising at least $3,000,000 in the
Offering. In addition, Noble, or its designees, shall be provided with
restricted common stock of 2,500,000 shares of the Company upon the completion
of the offering. Management of the Company anticipates that it will raise at
least a portion of the Secured Promissory Note offering. No commissions will be
paid on portions raised by management.
SUBSEQUENT EVENTS
Subsequent to the Company's quarter ended March 31, 2004, the Company, through
its wholly-owned subsidiaries, Interfund Mortgage Corp. and Interfund Investment
Fund I, LLC, made secured short-term loans of approximately $750,000. Through
its wholly-owned subsidiaries, Capitol Development, Inc. and Park Place
Ventures, LLC, the Company purchased land for approximately $169,000.
Subsequent to the fiscal quarter ended March 31, 2004, the Board of Directors
took the following actions:
o Appointed Mr. Harvey Judkowitz and Mr. Michael Merlob to the Board
effective June 1, 2004 for a one year term.
o Formed an Audit Committee and appointed Mr. Harvey Judkowitz, Mr.
Michael Merlob and Mr. Donald LeGault to the Committee. Mr. Harvey
Judkowitz, CPA, was appointed to serve as the Chairman of the
Committee.
8
o Formed a Compensation Committee and appointed Mr. Michael Merlob and
Mr. Harvey Judkowitz to the Compensation Committee.
o Formed a Nominating and Corporate Governance Committee and appointed
Mr. Don LeGault, Mr. Harvey Judkowitz and Mr. Michael Merlob to the
Committee.
o Appointed Ms. Diane Bloom as an additional advisor to the loan
committee.
o Approved the appointment of Ms. Monica Schreiber as Vice President and
Chief Financial Officer as of the date of execution of her contract
and stated that Mr. Ashley Bloom is to finalize and execute her
contract on behalf of the Company.
o Increased management's authority to purchase and invest in raw land to
an aggregate limit of $1,500,000 from a previous limit of $500,000.
o Authorized the Chief Financial Officer and the Chief Executive Officer
to take actions necessary to cancel the Company's Treasury shares at
soon as possible.
The Company's note receivable in the amount of $1,000,000 due from West Maumelle
LP was brought current on April 23, 2004. The borrower paid interest through
March 31, 2004 and the Company reinstated the note's interest at 5.75%.
In connection with a contract to sell Tract D, a 38.5 acre tract zoned for
commercial use, on April 22, 2004, the Company entered into a new note in the
amount of $2,050,000 at 5%, including an interest reserve of $200,000. The
previous 13% note, payable to New Era in the amount of $1,665,857 plus accrued
interest and property taxes, was paid off. The refinancing of Tract D extends
the due diligence period to May 14, 2004, to complete the sale of Tract D for
the total sum of $3,400,000. At the end of the due diligence period, the buyer
is to provide $250,000 in additional non-refundable earnest money. The sale is
to occur 30 days after the expiration of the due diligence period. Should the
sale not occur, the Company will receive $300,000 nonrefundable deposit and will
continue to hold the new $2,050,000 note, including a $200,000 interest reserve.
Proceeds of Interfund Investment Fund I, LLC's, offering of 8% secured
promissory notes were $1,150,000 as of March 31, 2004 and $1,550,000 as of May
1, 2004.
The Board made a decision on April 23, 2004, to accrue, but not pay dividends
due to holders of 5.25% preferred stock. The reason for this decision is that
the Company is not yet making a profit and would have to use borrowed funds or
sell assets to pay the dividends.
The Company received notification on May 14, 2004, that one of the collateral
properties securing one of its second mortgage loans receivable was in default.
The Company's second mortgage loan receivable is in the amount of $525,000 has
been and is current and is secured by other properties in addition to its share
in the defaulted property. Management believes that in addition to the
collateral in the defaulted property, there is sufficient equity in the other
collateral to secure its investment.
ITEM 3. CONTROLS AND PROCEDURES
EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES
We carried out an evaluation, under the supervision and with the
participation of our management, including our Acting President/Chief Executive
Officer and Treasurer, of the effectiveness of our disclosure controls and
procedures as of the end of the period covered by this Quarterly Report. Based
upon that evaluation, the President/Chief Executive Officer and Treasurer have
concluded that our disclosure controls and procedures were effective as of the
end of the period covered by this Quarterly Report in accumulating and
9
communicating to our management, including them, material information required
to be included in the reports we file or submit under the Securities Exchange
Act of 1934 as appropriate to allow timely decisions regarding required
disclosures.
CHANGES IN INTERNAL CONTROL OVER FINANCIAL REPORTING
Based on an evaluation, under the supervision and with the participation of
our management, including our Acting President/Chief Executive Officer and
Treasurer, there has been no change in our internal control over financial
reporting during our last fiscal quarter, identified in connection with the
evaluation, that has materially affected, or is reasonably likely to materially
affect, our internal control over financial reporting.
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
An action was filed on May 3, 2004, in the State of Arkansas, Pulaski County
Circuit Court by Old West Annuity and Life Insurance Company ("Old West")
against Superior Lodging, Inc., Reelfoot Bank, Tulsi Bharodia, Atul T. Patel,
Amratben T. Patel, Sweet Home, Inc., and Capitol Communities Corporation (now
known as Capitol First Corporation). The suit seeks relief for a defaulted
promissory note between Superior and others and Old West in the amount of
$5,600,000, secured by a mortgage on real property located in Pulaski County,
Arkansas. Old West seeks judgment against Superior Lodging, Inc., Tulsi
Bharodia, Atul T. Patel, Amratben T. Patel, and Sweet Home, Inc. against the
mortgaged property for $5,600,000, accrued interest through April 22, 2004 in
the amount of $309,789, foreclosure of the mortgage, declaration of Old West's
first lien position, the appointment of a receiver to take possession of and
operate the mortgaged property and the sale of the mortgaged property with the
proceeds of the sale being applied pursuant to court order and other proper
relief.
The Company is not involved in any other litigation, other than those actions
arising from the normal course of business, and for which Management does not
believe will have a material effect on the Company's operations.
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 4. SUBMISSION OF MATTER TO A VOTE OF SECURITY HOLDERS
On May 4, 2004, at the Annual Meeting of Shareholders, the following persons
were voted in to serve as the Company's directors for one year or until their
successors are elected and qualified: Mr. Michael Todd, Director and Chairman,
Mr. Donald R. LeGault, Director and Mr. Ashley B. Bloom, Director. The Board of
Directors ratified the continuance of the audit firm Berkovits, Lago & Company,
LLP.
ITEM 5. OTHER INFORMATION
The Company entered into a two year employment agreement with Ms. Monica A.
Schreiber for the position of Vice President and Chief Financial Officer on May
18, 2004. The term of the agreement may continue after two years unless either
party has given written notice of its intention to terminate the agreement. The
terms of the contract include a base salary of $90,000 and a grant of 30,000
shares of restricted common stock to vest ratably at the end of each quarter of
the term of the agreement.
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
The following Exhibits are filed as part of this Report.
Exhibit 10.1 Description of Cumulative Convertible Preferred Stock, Series A.
Exhibit 10.2 Placement Agent Agreement between Capitol First Corporation
(formerly known as Capitol Communities Corporation), Capitol Development of
Arkansas and Noble International Investments, Inc.
Exhibit 10.3 Collateral Security Agreement between Capitol Development of
Arkansas, Capitol First Corporation and Noble International Investments, Inc.
10
Exhibit 10.4 Collateral Security Agreement between Capitol Development of
Arkansas, Capitol First Corporation and Boca First Capitol, LLLP.
Exhibit 10.5 Mortgage, Security Agreement, Assignment of Rents and Fixture
Filing by Capitol Development of Arkansas in favor of Noble International
Investments, Inc.
Exhibit 10.6 Form of Note Purchase Agreement between Interfund Investment Fund
I, LLC and any subscriber.
Exhibit 10.7 Form of Secured Promissory Note between Interfund Investment Fund
I, LLC any holder.
Exhibit 10.8 Security Agreement between Interfund Investment Fund I, LLC and
Collateral Service Associates, LLC.
Exhibit 10.9 Collateral Agency Agreement between Interfund Investment Fund I,
LLC, Noteholders and Collateral Service Associates, LLC.
Exhibit 10.10 Form of Assignment and Assumption Agreement between an Assignor,
Interfund Investment Fund I, LLC, and Collateral Service Associates, LLC.
Exhibit 10.11 Real Estate Subordination Agreement between Boca First Capital,
LLLP and Noble International Investments, Inc.
Exhibit 10.12 Real Estate Mortgage between Capitol Development of Arkansas, Inc.
and Bank of the Ozarks.
Exhibit 10.13 Promissory Note between Capitol Development of Arkansas, Inc. and
Bank of the Ozarks.
Exhibit 10.14 Real Estate Subordination Agreement between Boca First Capital,
LLLP and Bank of the Ozarks.
Exhibit 10.15 Various Guarantees and Addendums to Guarantees with respect to
loan between Capitol Development of Arkansas, Inc. and Bank of the Ozarks.
Exhibit 10.16 Employment Agreement between Capitol First Corporation and Ms.
Monica A. Schreiber.
Exhibit 11 Statement re: computation of per share earnings
Exhibit 21.1(5) Philbuilt Development, LLC, Articles of Organization filed with
the Secretary of State Florida on October 7, 2003.
Exhibit 21.1(6) Toxaway Development Group, LLC, Articles of Organization filed
with the Secretary of State of North Carolina on December 10, 2003.
Exhibit 21.1(7) East Greens Development, LLC, Articles of Organization filed
with the Secretary of State Florida on February 3, 2004.
Exhibit 21.1(8) MW Land Development, LLC, Articles of Organization filed with
the Secretary of Arkansas on February 18, 2004.
Exhibit 21.1(9) Park Place Ventures, LLC, Articles of Organization filed with
the Secretary of State Florida on February 24, 2004.
11
Rule 13a-14(a)(15d-14(a) Certifications
Exhibit 31.1. Certification of Acting Chief Executive Officer and President
Exhibit 31.2. Certification of Chief Financial Officer
Section 1350 Certifications
Exhibit 32.1. Certification of Acting Chief Executive Officer and President
Exhibit 32.2 Certification of Chief Financial Officer
(b) REPORTS ON FORM 8-K None.
SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
CAPITOL FIRST CORPORATION
Date: May 20, 2004 By: /s/ Ashley B. Bloom
--------------------------
Ashley B. Bloom
Acting Chief Executive
Officer and President
By: /s/ Monica A. Schreiber
--------------------------
Monica A. Schreiber
Vice President and
Chief Financial Officer
12