UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES AND
EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 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) 28,962,634
(Title of Class) Shares Outstanding as of August 3, 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 - June 30, 2004(unaudited) F-1
Consolidated Statements of Operations (unaudited) - Three and
Nine Months Ended June 30, 2004 and 2003 F-2
Consolidated Statement of Changes in Stockholders' Equity -
Nine Months Ended June 30, 2004 F-3
Consolidated Statements of Cash Flows - Nine Months Ended
June 30, 2004 and 2003 F-5
Notes to Consolidated Financial Statements F-6
ITEM 2. Management's Discussion and Analysis or Plan of Operation 3
ITEM 3. Controls and Procedures 10
Part II - OTHER INFORMATION
ITEM 1. Legal Proceedings 11
ITEM 3. Defaults Upon Senior Securities 11
ITEM 4. Submission of Matter to a Vote of Security Holders 12
ITEM 6. Exhibits and Reports on Form 8-K 12
Signatures 13
Certifications
2
CAPITOL FIRST CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET (UNAUDITED)
AS OF JUNE 30, 2004
Current Assets
Cash $ 1,086,962
Accrued interest receivable 55,583
Construction in progress 2,033,013
Notes and loans receivable, net of valuation allowance of $37,205 4,322,484
Other notes receivable 277,448
Other current assets 203,308
------------
Total Current Assets 7,978,798
------------
Property and Equipment
Furniture and equipment, net of accumulated depreciation of $4,791 28,641
------------
Other Assets
Land and real estate holdings 1,958,891
Deferred tax benefit 1,203,000
Other long-term assets 58,363
------------
Total Other Assets 3,220,254
------------
Total Assets $ 11,227,693
============
Current Liabilities
Accounts payable and accrued expenses 306,776
Accrued preferred stock dividends payable 162,918
Accrued expenses - related parties 12,543
Notes and loans payable 2,347,014
------------
Total Current Liabilities 2,829,251
------------
Long Term Liabilities
Loans payable 497,663
Note payable - related party 1,337,000
Notes payable 4,850,000
------------
Total Long Term Liabilities 6,684,663
------------
Total Liabilities 9,513,914
------------
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; 26,962,634
shares issued and outstanding 269,626
Additional paid-in capital 9,511,906
Preferred stock dividend (487,196)
Minority interests 100
Accumulated deficit (7,622,033)
------------
Total Stockholders' Equity 1,713,779
------------
Total Liabilities and Stockholders' Equity $ 11,227,693
============
See Accountant's Report and Supplemental Footnotes.
F-1
CAPITOL FIRST CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
THREE MONTHS ENDED NINE MONTHS ENDED
JUNE 30, JUNE 30,
2004 2003 2004 2003
----------- ----------- ----------- -----------
Revenues
Sales of real property $ 3,400,000 $ 700,882 $ 3,400,000 $ 700,882
Interest income - notes and loans 138,111 0 255,024 95,780
Fee income 117,648 0 241,337 0
----------- ----------- ----------- -----------
Total Revenues 3,655,759 700,882 3,896,361 796,662
----------- ----------- ----------- -----------
Cost of Revenue
Cost of sales - real property 3,273,262 233,325 3,273,262 233,325
Cost of sales - loans 121,686 0 261,625 0
----------- ----------- ----------- -----------
Total Cost of Revenue 3,394,948 233,325 3,534,887 233,325
----------- ----------- ----------- -----------
Gross Profit 260,811 467,557 361,474 563,337
----------- ----------- ----------- -----------
Operating Expenses
General and administrative expenses 194,109 122,983 636,571 303,191
General and admin. expenses - related parties 7,500 64,398 28,500 87,000
Financial advisory and consulting fees 21,834 0 208,478 0
----------- ----------- ----------- -----------
Total operating expenses 223,443 187,381 873,549 390,191
----------- ----------- ----------- -----------
Net income (loss) before other income (expense) 37,368 280,176 (512,075) 173,146
----------- ----------- ----------- -----------
Other income and (expense)
Operations of unconsolidated investments 0 0 0 (75,000)
Interest income (adjustment) on cash balances 44 (207) 7,368 5,946
Interest expense (58,853) (141,656) (237,018) (941,800)
Interest expense - related parties (29,617) (67,342) (91,560) (143,439)
Gain from extinguishment of debt 146,715 320,652 237,624 726,779
Loss on discount of note 0 0 0 (70,298)
----------- ----------- ----------- -----------
Total other income and (expense) 58,289 111,447 (83,586) (497,812)
----------- ----------- ----------- -----------
Net income (loss) from continuing operations 95,657 391,623 (595,661) (324,666)
=========== =========== =========== ===========
Income tax expense (benefit)
Deferred 0 0 0 0
----------- ----------- ----------- -----------
Total income tax expense (benefit) 0 0 0 0
----------- ----------- ----------- -----------
Net income (loss) 95,657 391,623 (595,661) (324,666)
----------- ----------- ----------- -----------
Basic income (loss) per share
Income (loss) before extraordinary item $ 0.00 $ 0.01 $ (0.02) $ (0.01)
Extraordinary items 0.00 0.00 0.00 0.00
Net income (loss) $ 0.00 $ 0.01 $ (0.02) $ (0.01)
Weighted average shares outstanding 30,572,969 29,412,054 30,515,069 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 NINE MONTHS ENDED JUNE 30, 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
Common stock issued
On April 29, 2004 10,000 100 650
Common stock cancelled
On June 23, 2004 (100,000) (1,000) 1,000
Preferred Dividends
accrued as of 6/30/04
Treasury shares cancelled
on June 23, 2004 (3,861,693) (38,617) (3,861,693) 5,387,166 (5,348,549)
Net loss for the nine
months ended
June 30, 2004
Membership interests
------------ ------------ ------------ --------------- ------------ -------------- --------------
Balance at 6/30/04 4,137,591 41,376 26,962,634 269,626 0 0 9,511,906
------------ ------------ ------------ --------------- ------------ -------------- --------------
Page 1 of 2-page table
See Accountant's Report and Supplemental Footnotes.
F-3
CAPITOL FIRST CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDER'S EQUITY (UNAUDITED)
FOR THE NINE MONTHS ENDED JUNE 30, 2004
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
Common stock issued
On April 29, 2004 750
Common stock cancelled
On June 23, 2004 0
Preferred Dividends
accrued as of 6/30/04 (164,001) (164,001)
Treasury shares cancelled
On June 23, 2004 0
Net loss for the nine
months ended
June 30, 2004 (595,661) (595,661)
Membership interests 100 100
----------------- ---------------- ----------------- ------------------
Balance at 6/30/04 (487,196) (7,622,033) 100 $1,713,779
----------------- ---------------- ----------------- ------------------
Page 2 of 2-page table
See Accountant's Report and Supplemental Footnotes.
F-4
CAPITOL FIRST CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
AS OF JUNE 30,
2004 2003
----------- -----------
Cash flows from operating activities
Net loss $ (595,661) $ (324,666)
Adjustments to reconcile net loss to net cash provided by (used in)
operating activities:
Depreciation 4,791 821
Gain on debt extinguishment (237,624) (656,481)
Collection of note receivable by forgiveness of accrued expense 0 261,308
Changes in assets and liabilities:
Accrued interest receivable (14,152) (36,474)
Other current assets (63,208) 0
Accounts payable and accrued expenses 103,085 82,028
Accrued expenses - related parties 2,490 (50,794)
Notes and loans receivable (3,359,689) 1,070,000
Construction in progress (2,033,013) 0
Other notes receivable (277,448) 0
Valuation allowance 37,205 0
Deposits (8,363) 0
Loans and participations payable 2,132,281 0
----------- -----------
Net cash (used in) provided by operating activities (4,309,306) 345,742
----------- -----------
Cash flows from investing activities
Decrease in real estate holdings 2,423,617 0
Decrease in unconsolidated investment 0 75,000
Purchase of fixed assets (33,433) (2,363)
----------- -----------
Net cash provided by investing activities 2,390,184 72,637
----------- -----------
Cash flows from financing activities
Issuance of $8 million secured promissory notes 1,850,000 0
Increase in notes payable to related party 82,000 242,000
Payments of notes payable (1,707,906) (647,689)
Payment of preferred dividends (108,303) (14,385)
Change in accrual of preferred dividends 107,220 0
Issuance of common stock 120,975 0
Membership interests 100 0
----------- -----------
Net cash provided by (used in) financing activities 344,086 (420,074)
----------- -----------
Net decrease in cash (1,575,036) (1,695)
Beginning cash 2,661,998 16,981
----------- -----------
Ending cash $ 1,086,962 $ 15,286
=========== ===========
Schedule of non-cash financing activities
Preferred stock issued for debt $ 0 $ 408,850
=========== ===========
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,
Respectively $ 494,854 $ 410,600
=========== ===========
See Accountant's Report and Supplemental Footnotes.
F-5
CAPITOL FIRST CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 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. 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 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 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. Ownership of Park Place Ventures, LLC was
transferred to an unrelated individual effective from its formation date in
February, 2004. At March 31, 2004, Capitol accounted for its loan to Park Place
as a land acquisition in the amount of $107,000. As of June 30, 2004 the loan to
Park Place is accounted for as Other Notes Receivable in the amount of $277,448.
The results of operations and balance sheets of the remaining wholly-owned
subsidiaries and the 50% joint development venture are consolidated in the
financial statements of the Company.
The Company is in the business of financial lending collateralized by real
estate, acquisition and sales of real property for its own portfolio, consulting
on real estate development projects and real estate development through its
ownership or control of strategic projects.
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 June 30, 2003 financial
statements to conform to the June 30, 2004 presentation. For comparison
purposes, certain adjustments that had been made in the fourth quarter of fiscal
year end September 30, 2003, were reclassified to the third quarter of 2003.
These adjustments are reflected in the consolidated statements of operations for
the three and nine months ended June 30, 2003.
D. 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.
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-6
CAPITOL FIRST CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 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 pursuant to consulting agreements. The bulk of consulting fees
are earned on revolving construction loans for which construction of individual
units occurs in a three to four month time period.
F. USE OF ESTIMATES
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosures of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the period. Actual results
could differ from those estimates.
G. 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 June
30, 2004, approximately 77% 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 and year-to-date. The number of
shares used for the quarters ended June 30, 2004 and 2003 were 30,572,969 and
29,412,054, respectively. The number of shares used for the nine months June 30,
2004 and 2003 were 30,515,069 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.
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.
A hearing is set for August 30, 2004 for appointment of a receiver. The debtor
has an auction planned for August and is working on refinancing. The Company's
second mortgage loan receivable is in the gross 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. See "Note 7 - Legal Proceedings" below for a more
detailed discussion of the suit.
F-7
CAPITOL FIRST CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2004
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 $10,180,000 expiring in the years 2009 through 2022.
Deferred tax benefit (34% statutory rate) $ 3,060,000
Valuation allowance (1,857,000)
Additions through June 30, 2004 401,096
Additional allowance (401,096)
------------
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 June 30, 2004, no adjustment was deemed
necessary.
K. STOCK COMPENSATION
We account for stock-based compensation under the fair value method which values
stock compensation at the market price of the stock on the grant date. Under
this method, compensation expense recorded for the quarter and nine months ended
June 30, 2004 was $0.00 and $15,975, respectively.
NOTE 2 - RELATED PARTY TRANSACTIONS
On July 17, 2002, Boca First Capital, LLLP, a Florida limited liability limited
partnership acquired control of Capitol First Corporation. The Company entered
into a Business Loan Agreement with Boca First Capital LLLP dated April 26, 2002
to borrow up to the sum of $3,000,000 from Boca First Capital LLLP. On September
27, 2002, the line of credit was increased from $3,000,000 to $4,000,000.
As of June 30, 2004, and the date of this report, the Company has drawn
$1,337,000.00 on a $4,000,000.00 credit line from Boca First Capital LLLP
evidenced by a promissory note secured by all of the assets of the Company and
its wholly-owned subsidiaries, including second or third security interests in
all notes and loans receivable generated in the Company's lending operations.
The Boca First Credit Line had an initial maturity date of November 1, 2004, and
an initial interest rate of ten percent (10%) per annum adjustable quarterly to
a rate equal to the greater of ten percent per annum or one percent (1%) above
the prime rate in effect on that date.
Due to completing the sale on June 22, 2004, of 38.5 acres of commercial
property known as Tract D located in Maumelle, Arkansas, a portion of the
collateral available to Boca First Capital LLLP was converted to cash. On June
23, 2004, the Board of Directors authorized management to renew the Boca First
Credit Line and substitute its collateral in Tract D for the cash proceeds and
any substitution exchanged for the cash collateral. The renewal extends the
expiration date to November 1, 2007, under the same terms and conditions and
includes a renewal fee of 2 1/2 points on the $4,000,000 maximum line of credit
or $100,000 in cash. The current interest rate continues at 10% per annum.
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 Mr. Michael G. Todd, its former
President. Compensation under the agreement was reduced to zero as of September
27, 2002 and the employment agreement was effectively canceled upon Mr. Todd's
resignation as President in January, 2004.
F-8
CAPITOL FIRST CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2004
NOTE 2 - RELATED PARTY TRANSACTIONS (CONTINUED)
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.
During the quarter and nine months ended June 30, 2004, the Company paid
approximately $88,000 and $273,000, respectively, in gross mortgage broker,
consulting and/or development fees to beneficial owners of the Company. A
portion of the gross fees were distributed by the beneficial owners to other
mortgage brokers, professionals and consultants and to other vendors for costs.
The Board of Directors have approved the payment of fees to related parties if
disclosed and negotiated by the Board and if they are consistent with industry
standards or agreed to by the Board at the time a deal is accepted. All such
fees will be netted from the Company's revenue. These fees are paid for work
including acquisition, development, financing, management and personal
guarantees related to various projects. The related parties are entities owned
by the beneficial owner of a controlling shareholder and the Acting President of
the Company.
Potential conflicts of interest may arise from time to time as certain officers,
directors and beneficial owners have personal real estate investments. Various
conflicts of interest may arise as certain officers, directors and beneficial
owners may personally invest in real estate ventures, either individually or
with third parties, to purchase, sell or develop commercial and/or residential
properties. Several of the officers, directors and beneficial owners have
invested in real estate transactions for substantial portions of their careers,
and said officers, directors and beneficial owners will continue to make such
personal investments as they deem appropriate. Notwithstanding the foregoing,
the officers, directors and beneficial owners are aware of their fiduciary
obligations under Nevada law and will seek to act in good faith whenever making
a personal real estate investment, and if a direct conflict arises with the
Company as it relates to a particular investment, said officer, director or
beneficial owner may seek to offer a right of first refusal on a particular
investment to the Company prior to making such a personal investment in order to
absolutely avoid any appearance of impropriety.
NOTE 3 - CANCELLATION OF DEBT
During the quarter ended June 30, 2004, $146,715 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 April 29, 2004, the Company issued 10,000 shares of common stock to a former
director of the company under its equity compensation plan.
On June 23, 2004, the Company cancelled 100,000 shares of restricted common
stock in connection with its final cash payment of a settlement agreement
related to acquisition of Capitol Resorts, Inc. in 1998 and its divestiture of
Capital Resorts, Inc. in 1999.
On June 23, 2004, the Company cancelled all 3,861,693 of its common shares held
as treasury shares.
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 June 30, 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
F-9
CAPITOL
FIRST CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2004
NOTE 5 - NON-QUALIFIED EMPLOYEE STOCK OPTION PLAN (CONTINUED)
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 25,000 0
Cancelled 0 0
Outstanding at June, 2004 0 0.00
Compensation expense recorded under the non-qualified plan for the quarter and
nine months ended June 30, 2004 was $0.00 and $1,875, respectively.
NOTE 6 - COMMITMENTS AND CONTINGENCIES
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., 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 $96,000 were paid to Noble as of June 30,
2004.
NOTE 7 - LEGAL PROCEEDINGS
The Company is a defendant in a shareholder derivative action entitled
Dr. Christopher Brown vs. Capitol First Corporation f/k/a Capitol Communities
Corp., Prescott Investments, LP and Michael Todd, filed in the Superior Court in
Mecklenburg County, North Carolina (Docket No. 04-CVS-14076) on August 5, 2004.
Michael Todd, the Company's former president and current chairman of the Board
of the Company, and his affiliate, Prescott Investments, LP are also defendants
in this suit.
The suit alleges, among other things, that in 2001, Mr. Todd, either
individually or on behalf of Prescott, had several million shares of the
Company's stock issued in the names of various individuals and businesses in
order to create a perceived trading market for the Company's stock thereby
artificially increasing the stock price and induced the plaintiff to purchase
the Company's stock in an alleged scheme to defraud the market place and
potential investors in violation of the North Carolina securities fraud statutes
and in breach of fiduciary duties owed to the plaintiff. The plaintiff requests
an unspecified amount of damages in excess of $10,000, as well as punitive
damages.
Procedurally, this law suit is in a very preliminary state. The Company
believes that it has several defenses to the claims raised and intends to
vigorously defend the lawsuit. Due to the inherent uncertainties in litigation
and because the ultimate resolution of these proceedings are influenced by
factors outside the Company's control, the Company is currently unable to
predict the ultimate outcome of this litigation or its impact on the Company's
financial position or results of operations. Current management of the Company
had independently determined to investigate stock transactions by Mr. Todd and
his affiliates which investigation is ongoing. See below "Subsequent Events."
An action was filed on May 3, 2004, in the State of Arkansas, Pulaski County
Circuit Court by Old West Annuity and Life Insurance Company against Superior
Lodging, Inc., Reelfoot Bank, Tulsi Bharodia, Atul T. Patel, Amratben T. Patel,
Sweet Home, Inc., and Capitol Communities Corporation (now known as Capitol
First Corporation). The suit seeks relief for a defaulted promissory note
between Superior and others and Old West in the amount of $5,600,000, secured by
a mortgage on real property located in Pulaski County, Arkansas. Old West seeks
judgment against Superior Lodging, Inc., Tulsi Bharodia, Atul T. Patel, Amratben
T. Patel, and Sweet Home, Inc. against the mortgaged property for $5,600,000,
accrued interest through April 22, 2004 in the amount of $309,789, foreclosure
of the mortgage, declaration of Old West's first lien position, the appointment
of a receiver to take possession of and operate the mortgaged property and the
sale of the mortgaged property with the proceeds of the sale being applied
pursuant to court order and other proper relief. Old West has a Motion for
Appointment of Receiver and a Motion for Summary Judgment pending hearing on
August 30, 2004. The defendant has advertised the real property for sale by
auction scheduled for August 19, 2004.
The Company has a promissory note in the amount of $525,000 which is partially
secured by the real property in the above suit. The $525,000 note receivable is
current; however, the Company has filed a cross-complaint, counter-complaint and
third party complaint suing on the note and all the collateral and alleges that
the filing of foreclosure by the first mortgage holder is an event of default.
The $525,000 note receivable is secured by other properties in addition to its
share in the defaulted property. Management believes that in addition to the
collateral in the defaulted property, there is sufficient equity in the other
collateral to secure its investment.
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.
F-10
CAPITOL FIRST CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2004
NOTE 8 - SUBSEQUENT EVENTS
Subsequent to the Company's quarter ended June 30, 2004, the Company, through
its wholly-owned subsidiaries, Interfund Mortgage Corp. and Interfund Investment
Fund I, LLC, made secured short-term loans of approximately $466,000 which was
offset by loan participation reductions of approximately $392,000. Through its
wholly-owned subsidiary, Capitol Development, Inc., the Company purchased land,
primarily single-family lots in southwest Florida, for approximately $835,000.
Management's authority to purchase and invest in raw land was increased from an
aggregate limit of $1,500,000 to an aggregate limit of $2,500,000 at a June 18,
2004, meeting of the Board of Directors.
At a Board of Director's meeting on July 6, 2004, the Board authorized
management to settle its $580,000 Trade Partners, Inc., note, which had been
assigned to a third party, for $220,000 in cash and two million (2,000,000)
shares of restricted common stock. The note was associated with the
reacquisition of 38.5 acres of commercial property known as Tract D in January,
2003, and was scheduled for settlement upon the sale of Tract D, which sale took
place on June 22, 2004.
On June 18, 2004, the Board of Directors authorized an investigation of
transactions in the Company's stock by the former President and current Chairman
of the Company, Michael G. Todd, and his affiliates during 2001 and 2002. This
investigation is in the preliminary stages and as a result, the Company will
disclose its findings upon the conclusion of the investigation.
On August 12, 2004, the Company received notice of a derivative action
filed on August 5, 2004, in the Superior Court in Mecklenburg County, North
Carolina, entitled Dr. Christopher Brown vs. Capitol First Corporation f/k/a
Capitol Communities Corp., Prescott Investments, LP and Michael Todd. The
Company, Michael Todd, the Company's former president and current chairman of
the Board, and Michael Todd's affiliate, Prescott Investments, LP are defendants
in this suit. See below "Part II, Other Information, Item 1, Legal Proceedings,"
for a more detailed discussion.
As of July, 2004, the Company's wholly owned subsidiary, Toxaway Development
Group, LLC ("Toxaway") has substantially completed construction of six
condominium units located in Toxaway Falls, North Carolina. The units are listed
for sale with an unaffiliated real estate agent. As of the date of this report,
Toxaway has accepted three (3) offers to purchase and contract from unrelated
individual purchasers. Anticipated closing dates are in August and September.
F-11
Proceeds of Interfund Investment Fund I, LLC's, offering of 8% secured
promissory notes were $1,850,000 as of June 30, 2004 and $2,050,000 as of August
9, 2004.
The Company provides financing for development projects in Florida
including Charlotte and Lee counties, areas which were directly or indirectly
affected by Hurricane Charley on August 13, 2004. A townhome project in
Charlotte County was in early development stages and consequently, any economic
loss sustained, though not yet fully quantifiable, is anticipated to be reduced
by insurance carried by the builder/borrower and is not anticipated to be
substantial. Most of the single-family home construction projects financed by
the Company are located in Lee County which was not in the direct path of the
hurricane. At this time, management cannot predict the economic effects, if any,
the hurricane may have on the Company's loan portfolio or on the timing of
completion of projects for which it has provided financing to builders/borrowers
due to changes in the costs and availability of building supplies, materials,
labor or other factors.
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 illiquid position. During the first
nine months of the current fiscal year which ends on September 30, 2004, the
Company diversified into financial lending, real estate acquisition for its own
portfolio, consulting to real estate developers and real estate development
through its ownership or control of strategic projects. The Company may also
continue to sell portions of its inventory of 697 acres of real property located
in Maumelle, Arkansas (the "Maumelle Property"). There can be no assurance,
however, that the Company will be able to liquidate portions of 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 June 30, 2004, the Company had total assets of $11,227,693, an increase of
$1,748,646 or 18.4% from the September 30, 2003 total of $9,479,037. The
increase in total assets resulted from commencement of operations in the
Company's financial lending and development consulting subsidiaries, an increase
in real estate purchases in Florida and North Carolina offset by a decrease in
land held for sale due to the sale of 38.5 acres of commercial property located
in Maumelle, Arkansas, known as Tract D ("Tract D"), in June 2004 and a decrease
in cash due to deployment in loans receivable.
3
Current assets as of June 30, 2004, were $7,978,798 compared to $3,893,529 as of
September 30, 2003. The increase of $4,085,269 was primarily due to an increase
of approximately $5,633,000 in notes and loans receivable and construction in
progress, net of valuation allowance, offset by a decrease of approximately
$1,575,000 in cash deployed for the lending and construction programs.
Other non-current assets as of June 30, 2004, were $3,220,254 compared to
$5,585,508 as of September 30, 2003. The decrease of $2,365,254 was primarily
due to the sale of Tract D which had a book value of approximately $3,100,000
offset by purchase of land held for sale or development for approximately
$659,000.
Total liabilities at June 30, 2004 were $9,513,914, an increase of $2,387,243
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
financial lending and development consulting subsidiaries. The Company borrowed
approximately $2,100,000 of funds from banks and participants and received of
$1,850,000 from the placement of 8% secured promissory notes from March through
June, 2004, which was offset by retirement of the New Era note in the amount of
$1,665,857 in connection with the sale of Tract D.
Shareholders' Equity at June 30, 2004 was $1,713,779, a decrease of $638,587
from the September 30, 2003 total of $2,352,366. The decrease in equity resulted
primarily from the year-to-date loss of $595,661. (See below, "Results of
Operations - Comparison of the Nine Months Ended June 30, 2004 to the Nine
Months Ended June 30, 2003"). below).
CHANGE IN FINANCIAL CONDITION - COMPARING JUNE 30, 2004 TO JUNE 30, 2003
- ------------------------------------------------------------------------
At June 30, 2004, the Company had total assets of $11,227,693, an increase of
$1,908,914 or 20.5% from the June 30, 2003 total of $9,318,779. The increase in
total assets resulted from commencement of operations in the Company's financial
lending and development consulting subsidiaries, an increase in real estate
purchases in Florida and North Carolina offset by a decrease in land held for
sale due to the sale of Tract D in June 2004 and an increase in cash due to
proceeds from the sale of Tract D.
Current assets as of June 30, 2004, were $7,978,798 compared to $1,059,854 as of
June 30, 2003. The increase of $6,918,943 was due to an increase of
approximately $5,633,000 in notes and loans receivable and construction in
progress, net of valuation allowance, an increase in cash of approximately
$1,100,000 due to proceeds from the sale of Tract D and an increase in prepaid
assets of approximately $200,000 primarily related to prepaid placement agent
fees.
Other non-current assets as of June 30, 2004, were $3,220,254 compared to
$8,252,942 as of June 30, 2004. The decrease of $5,032,688 was due to the sale
of Arkansas land during the latter half of the fiscal year ended September 30,
2003 and the sale of Tract D in June 2004.
Total liabilities at June 30, 2004 were $9,513,914, an increase of $3,180,035
from the June 30, 2003 total of $6,333,879. The increase in total liabilities
resulted from proceeds of $4,850,000 from the placement of 8% secured promissory
notes in September, 2003 and another offering of 8% securities beginning in
March, 2004, as well as commencement of operations in the Company's mortgage and
development subsidiaries. In addition, the Company borrowed approximately
$2,100,000 of funds from banks and participants. These increases were offset by
a decrease of approximately $2,900,000 in notes payable to New Era due to
principal payments during the latter half of the fiscal year ended September 30,
2003 and retirement in June 2004, a reduction of approximately $121,000 in the
line of credit due to Boca First Capital, LLLP ("Boca First Credit Line" and
"Boca First") a $626,000 reduction in unsecured notes payable due to settlements
and a reduction of approximately $100,000 in accounts payable.
Shareholders' Equity at June 30, 2004 was $1,713,779, a decrease of $1,271,121
from the June 30, 2003 total of $2,984,900. The decrease in equity resulted from
fourth quarter 2003 loss of approximately $587,000, a loss of $595,661 for the
nine months ended June 30, 2004 and accrual of preferred dividends. (See below,
"Results of Operations - Comparison of the Nine Months Ended June 30, 2004 to
the Nine Months Ended June 30, 2003").
4
RESULTS OF OPERATIONS
COMPARISON OF THE THREE MONTHS ENDED JUNE 30, 2004 TO THE THREE MONTHS ENDED
JUNE 30, 2003.
Certain adjustments that were made in the fourth quarter of fiscal year ended
September 30, 2003, were reclassified to the third quarter of 2003 for
comparison purposes. These adjustments are reflected in the consolidated
statements of operations for the three months ended June 30, 2003 and are
included in the discussion below.
Revenues increased to $3,655,759 for the three months ended June 30, 2004,
compared to $700,882 for the three months ended June 30, 2003. The increase was
due to the sale of Tract D in Maumelle, Arkansas for $3,400,000 and commencement
of the company's financial lending, consulting and real estate development
programs for which interest income and management fee income totaling $255,759
was earned. Revenues for the three months ended June 30, 2003 were comprised of
$700,882 in sales of Maumelle, Arkansas land. For the three months ended June
30, 2004, interest income was $138,111 and fee income was $117,648, compared to
$0 in interest income during the three months ended June 30, 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 $88,000. A portion of these fees were distributed by the
related parties to other mortgage brokers, professionals and consultants and to
other vendors for costs.
These fees are paid for work including acquisition, development, financing,
management and personal guarantees related to various projects.
Cost of revenues increased to $3,394,948 for the three months ended June 30,
2004, compared to $233,325 for the three months ended June 30, 2003. The
increase was due to the sale of Tract D for which $3,273,262 was recognized as
cost of sales for the basis of the land, commissions paid to unrelated parties
and closing costs. Interest expense of $121,686 on funds borrowed from banks and
participants was also incurred during the quarter ended June 30, 2004 due to
commencement of the company's financial lending program. During the quarter
ended June 30, 2003, $233,325 was recognized as cost of sales for the basis of
land, commissions paid to unrelated parties and closing costs.
General and administrative expenses increased to $223,443 for the three months
ended June 30, 2004 from $187,381 for the three months ended June 30, 2003, an
increase of $36,062. The increase is primarily attributable to a $22,000
increase in amortization of placement agent and financial advisory fees paid to
Noble International Investments, Inc. ("Noble")in connection with the issuance
of secured promissory notes and a $19,000 valuation allowance for loans
receivable due to commencement of lending operations. An increase of $64,000 in
payroll incurred to support the new operations of the Company during the current
quarter is offset by a decrease of approximately $57,000 in related party
expenses.
Interest expense decreased to $88,470 for the three months ended June 30, 2004
from $208,998 for the three months ended June 30, 2003. The decrease of $120,528
was due to an adjustment in the amount of $46,853 in the quarter ended June 30,
2003 related to interest on settled notes and higher principal balances on the
New Era note and the Boca First Credit Line during the quarter ended June 30,
2003.
During the quarter ended June 30, 2004, $146,715 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 June 30, 2003, the
Company negotiated settlement agreements with unsecured promissory note holders
to exchange $472,182 in debt and accrued interest for $151,530 in cash and notes
for a gain of $320,652.
COMPARISON OF THE NINE MONTHS ENDED JUNE 30, 2004 TO THE NINE MONTHS ENDED JUNE
30, 2003.
Certain adjustments that were made in the fourth quarter of fiscal year ended
September 30, 2003, were reclassified to the nine months ending June 30, 2003,
for comparison purposes. These adjustments are reflected in the consolidated
statements of operations for the nine months ended June 30, 2003 and are
included in the discussion below.
Revenues increased to $3,896,361 for the nine months ended June 30, 2004,
compared to $796,662 for the nine months ended June 30, 2003. The increase was
due to the sale of Tract D in Maumelle, Arkansas, for $3,400,000 and
5
commencement of the company's financial lending, consulting and real estate
development programs for which interest income and management fee income
totaling $496,361 was earned. Revenues for the nine months ended June 30, 2003
were comprised of land sales of $700,882 and interest income on note receivable
of $95,780. For the nine months ended June 30, 2004, interest income was
$255,024 and fee income was $241,337, compared to $95,780 in interest income
during the nine months ended June 30, 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 nine months totaled
$273,000. A portion of these fees were distributed by the related parties to
other mortgage brokers, professionals and consultants and to other vendors for
costs. These fees are paid for work including acquisition, development,
financing, management and personal guarantees related to various projects.
Cost of revenues increased to $3,534,887 for the nine months ended June 30,
2004, compared to $233,325 for the nine months ended June 30, 2003. The increase
was due to the sale of Tract D for which $3,273,262 was recognized as cost of
sales for the basis of the land, commissions paid to unrelated parties and
closing costs. Interest expense of $261,625 on funds borrowed from banks and
participants was also incurred during the nine months ended June 30, 2004 due to
commencement of the company's financial lending program. During the quarter
ended June 30, 2003, $233,325 was recognized as cost of sales for the basis of
land, commissions paid to unrelated parties and closing costs.
General and administrative expenses increased to $873,549 for the nine months
ended June 30, 2004 from $390,191 for the nine months ended June 30, 2003, an
increase of $483,358. Approximately thirty-five percent (35%) of the increase,
$170,000 was due to placement agent and financial advisory fees paid to Noble in
connection with the issuance of $3,000,000 secured promissory notes. Commencing
in March, 2004 and continuing through June 30, 2004, the $1,850,000 of a maximum
$8,000,000 new offering of secured promissory notes was raised and $13,478 was
expensed for prorated placement fees. Legal, audit, tax and compliance fees
increased to $177,027 for the nine months ended June 30, 2004 from $102,668 for
the six months ended June 30, 2003, an increase of $74,359. The increase was due
to additional legal and compliance fees related to loan activity, amortization
of legal fees related to the formation of new operating subsidiaries and an
overall increase in auditor and tax preparation fees due to increased
operations. The current nine month period includes a $154,641 increase in
payroll expense incurred to support the new operations of the Company and a
$80,025 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 ending June 30, 2003. Stock issued in lieu of consulting fees was
$25,000 and stock issued in lieu of Board compensation was $14,100 during the
nine months ended June 30, 2004. There were no similar expenses in the same
period in the prior year. Allowance for loan losses was $37,205 for the nine
months ended June 30, 2004, compared to $0 for the nine months ended June 30,
2003. Related party expenses were $28,500 for the nine months ended June 30,
2004 and $87,000 for the nine months ended June 30, 2003.
The operating results recorded for unconsolidated subsidiaries accounted for
under the Equity method totaled $0 for the nine months ended June 30, 2004
compared to a loss $75,000 for the nine months ended June 30, 2003.
Interest income earned on cash balances increased to $7,368 for the nine months
ended June 30, 2004 from $5,946 for the nine month period ended June 30, 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 $328,578 for the nine months ended June 30, 2004
from $1,085,239 for the nine months ended June 30, 2003, a decrease of $756,661.
The decrease was due to an adjustment in the amount of $409,488 in the nine
months ended June 30, 2003 related to the dissolution of TradeArk Properties,
LLC pursuant to an agreement between the Company and Trade Partners, Inc., and
reacquisition of land for the Company's membership interests. In addition, the
New Era note and Boca First Credit Line had higher principal balances during the
nine months ended June 30, 2003.
During the nine months ended June 30, 2004, $262,624 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 nine months
ended June 30, 2003, the Company negotiated settlement agreements with unsecured
promissory note holders to exchange $1,539,414 in debt and accrued interest for
$812,635 in cash, notes and Series A preferred stock for a gain of $726,779.
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.
6
LIQUIDITY AND CAPITAL RESOURCES
At June 30, 2004, working capital was $5,149,547, as compared to working
capital of $1,021,858 at September 30, 2003, an increase of $4,127,689. The
increase is due to an increase of approximately $5,633,000 in notes and loans
receivable, construction in progress and other receivables offset by a
$1,575,000 decrease in cash. Retirement of short term debt to New Era was
substantially offset by new short term borrowings. Cash and cash equivalents
amounted to $1,086,962 as of June 30, 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 nine months ended June 30,
2004 was $4,309,306, compared to $345,742 net cash provided by operating
activities during the nine months ended June 30, 2003. The increase in net cash
used in operating activities is due to the commencement of the company's loan
program and development consulting projects and is offset by cash generated by
the sale of loan participations. During the nine months ended June 30, 2003,
$1,070,000 principal on a note receivable was paid off and no similar note
receivable payoff occurred in the current nine month period.
Net cash provided by investing activities during the nine months ended June 30,
2004 was $2,390,184, compared to $72,637 net cash provided by investing
activities during the nine months ended June 30, 2003. The increase in net cash
provided by investing activities is due to the sale of Tract D in June 2004 and
is offset by purchases of properties in Florida.
Net cash provided by financing activities during the nine months ended June 30,
2004 was $344,086, compared to $420,074 net cash used in financing activities
during the nine months ended March 31, 2003. The increase in net cash provided
by financing activities is due to the receipt of $1,850,000 as of June 30, 2004,
from a maximum $8,000,000 new offering of secured promissory notes and if offset
by the repayment of the New Era note. During the period ended June 30, 2003 cash
used in financing activities consisted of approximately $648,000 in note
settlements offset by $242,000 borrowings from the Boca First Credit Line.
INDEBTEDNESS AND OTHER LIQUIDITY REQUIREMENTS. The principal amount of the
Company's total debt at June 30, 2004, included, without limitation, the
following:
As of June 30, 2004 and the date of this Report, the Company had $35,000 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 June 30, 2004, the
Company did not negotiate any settlement agreements and wrote off $146,715 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 $1,337,000 on its $4,000,000 Boca Credit Line, as of June
30, 2004 and as of the date of this report. The Boca Credit Line is evidenced by
a promissory note secured by substantially all of the assets of the Company and
its wholly-owned subsidiaries, including second or third security interests in
all notes and loans receivable generated in the Company's lending operations.
The Boca First Credit Line matures on November 1, 2007, and has a current
interest rate of ten percent (10%) per annum. This rate is adjustable quarterly
to a rate equal to the greater of ten percent per annum or one percent (1%)
above the prime rate, as published in The Wall Street Journal, in effect on that
date.
On January 24, 2003, the Company assumed approximately $3,500,000 in a loan
from New Era 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 was 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; therefore the balance on the New Era
loan at June 30, 2004 is zero.
In connection with the contract to sell Tract D, on April 22, 2004, the
Company entered into a new note with Bank of the Ozarks in the amount of
$2,050,000 at 5%, including an interest reserve of $200,000. The refinancing of
7
Tract D extended the due diligence period to complete the sale of Tract D for
the total sum of $3,400,000. The sale of Tract D was successfully completed on
June 22, 2004 and the $2,050,000 note was paid off; therefore, the balance on
the Bank of the Ozarks note at June 30, 2004 is zero.
As of June 30, 2004 and the date of this Report, 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 on September 11, 2006. The Secured
Notes are secured by a first priority mortgage on approximately 250 acres of the
Maumelle, Arkansas property and a collateral pledge on $2,100,000 of the cash
proceeds and any substitute collateral thereafter.
During the period from March through June 30, 2004, the Company's
wholly-owned subsidiary, Interfund Investment Fund I, LLC, ("IIFI") borrowed
$1,850,000 evidenced by secured promissory notes from individual investors. As
of the date of this report, IIFI had borrowed $2,050,000 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
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 IIFI.
During the quarter ended June 30, 2004, the Company sold $0 of loan
participation agreements to investors. 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 proportion to the participant's
pro-rata interest in the loan. During the nine months ended June 30, 2004, the
Company has sold $1,216,000 of loan participation agreements. Participations
sold to related parties during the nine month period totaled $575,000.
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. A hearing is set for August 30, 2004 for appointment of a receiver.
The debtor has an auction planned for August and is working on refinancing. The
Company's second mortgage loan receivable is in the gross 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. See below, "PART II - OTHER INFORMATION,
ITEM 1. LEGAL PROCEEDINGS," for a more detailed discussion of the suit.
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 interest earned on its loan portfolio, fees earned in
development consulting, proceeds from the completion of development projects and
the sale of land owned in Arkansas and Florida will generate progressive
revenues for the Company, there can be no assurance the Company will be able to
generate sufficient revenues to meet its financial obligations or earn
sufficient profits from such activities.
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 its
Arkansas or Florida properties 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 obtain revenue generating loans or
successfully consult or develop real estate projects.
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 continues to execute its strategic business plan that management
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anticipates will allow it to generate cash flow from interest on its
investments, real estate acquisition and sales, equity participations in joint
ventures, real estate development consulting fees, real estate development,
financing arbitrage, hypothecation arbitrage and equity participations from
joint ventures. The Company has acquired and intends to continue to acquire
loans for its own portfolio and/or develop real estate in fast growing markets
such as Florida and North Carolina.
The Company 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 $3,300,000. The
Company, through its wholly-owned subsidiary, Capitol Development, Inc.,
commenced development projects in the cumulative amount of approximately
$2,000,000 during the nine months ended June 30, 2004.
Between March 16 and June 30, 2004, the Company raised $1,850,000 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., 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 designee, 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 June 30, 2004, the Company, through
its Mortgage Subsidiaries, Interfund Mortgage Corp. and Interfund Investment
Fund I, LLC, made secured short-term loans of approximately $466,000 which was
offset by loan participation principal reductions of approximately $392,000.
Through its wholly-owned subsidiary, Capitol Development, Inc., the Company
purchased land, primarily single-family lots in southwest Florida, for
approximately $835,000.
At a Board of Director's meeting on July 6, 2004, the Board authorized
management to settle its $580,000 Trade Partners, Inc., note, which had been
assigned to a third party, for $220,000 in cash and two million (2,000,000)
shares of restricted common stock. The note was associated with the
reacquisition of Tract D in January, 2003, and was scheduled for settlement upon
the sale of Tract D, which sale took place on June 22, 2004.
On June 18, 2004, the Board of Directors authorized an investigation
of transactions in the Company's stock by the former President and current
Chairman of the Company, Michael G. Todd, and his affiliates during 2001 and
2002. This investigation is in the preliminary stages and as a result, the
Company will disclose its findings upon the conclusion of the investigation.
On August 12, 2004, the Company received notice of a derivative action
filed on August 5, 2004, in the Superior Court in Mecklenburg County, North
Carolina, entitled Dr. Christopher Brown vs. Capitol First Corporation f/k/a
Capitol Communities Corp., Prescott Investments, LP and Michael Todd. The
Company, Michael Todd, the Company's former president and current chairman of
the Board, and Michael Todd's affiliate, Prescott Investments, LP are defendants
in this suit. See below "Part II, Other Information, Item 1, Legal Proceedings,"
for a more detailed discussion.
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As of July, 2004, the Company's wholly owned subsidiary, Toxaway Development
Group, LLC ("Toxaway") has substantially completed construction of six
condominium units located in Toxaway Falls, North Carolina. The units are listed
for sale with an unaffiliated real estate agent. As of the date of this report,
Toxaway has accepted three (3) offers to purchase and contract from unrelated
individual purchasers. Anticipated closing dates are in August and September.
Proceeds of Interfund Investment Fund I, LLC's, offering of 8% secured
promissory notes were $1,850,000 as of June 30, 2004 and $2,050,000 as of August
9, 2004.
The Company provides financing for development projects in Florida
including Charlotte and Lee counties, areas which were directly or indirectly
affected by Hurricane Charley on August 13, 2004. A townhome project in
Charlotte County was in early development stages and consequently, any economic
loss sustained, though not yet fully quantifiable, is anticipated to be reduced
by insurance carried by the builder/borrower and is not anticipated to be
substantial. Most of the single-family home construction projects financed by
the Company are located in Lee County which was not in the direct path of the
hurricane. At this time, management cannot predict the economic effects, if any,
the hurricane may have on the Company's loan portfolio or on the timing of
completion of projects for which it has provided financing to builders/borrowers
due to changes in the costs and availability of building supplies, materials,
labor or other factors.
ITEM 4. CONTROLS AND PROCEDURES
EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES
We carried out an evaluation, under the supervision and with the
participation of our management, including our Acting President/Chief Executive
Officer and Chief Financial Officer, of the effectiveness of our disclosure
controls and procedures as of the end of the period covered by this Quarterly
Report. Based upon that evaluation, the President/Chief Executive Officer and
Chief Financial Officer have concluded that our disclosure controls and
procedures were effective as of the end of the period covered by this Quarterly
Report in accumulating and communicating to our management, including them,
material information required to be included in the reports we file or submit
under the Securities Exchange Act of 1934 as appropriate to allow timely
decisions regarding required disclosures.
CHANGES IN INTERNAL CONTROL OVER FINANCIAL REPORTING
Based on an evaluation, under the supervision and with the
participation of our management, including our Acting President/Chief Executive
Officer and Chief Financial Officer, there has been no change in our internal
control over financial reporting during our last fiscal quarter, identified in
connection with the evaluation, that has materially affected, or is reasonably
likely to materially affect, our internal control over financial reporting.
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PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The Company is a defendant in a shareholder derivative action entitled
Dr. Christopher Brown vs. Capitol First Corporation f/k/a Capitol Communities
Corp., Prescott Investments, LP and Michael Todd, filed in the Superior Court in
Mecklenburg County, North Carolina (Docket No. 04-CVS-14076) on August 5, 2004.
Michael Todd, the Company's former president and current chairman of the Board
of the Company, and his affiliate, Prescott Investments, LP are also defendants
in this suit.
The suit alleges, among other things, that in 2001, Mr. Todd, either
individually or on behalf of Prescott, had several million shares of the
Company's stock issued in the names of various individuals and businesses in
order to create a perceived trading market for the Company's stock thereby
artificially increasing the stock price and induced the plaintiff to purchase
the Company's stock in an alleged scheme to defraud the market place and
potential investors in violation of the North Carolina securities fraud statutes
and in breach of fiduciary duties owed to the plaintiff. The plaintiff requests
an unspecified amount of damages in excess of $10,000, as well as punitive
damages.
Procedurally, this law suit is in a very preliminary state. The Company
believes that it has several defenses to the claims raised and intends to
vigorously defend the lawsuit. Due to the inherent uncertainties in litigation
and because the ultimate resolution of these proceedings are influenced by
factors outside the Company's control, the Company is currently unable to
predict the ultimate outcome of this litigation or its impact on the Company's
financial position or results of operations. Current management of the Company
had independently determined to investigate stock transactions by Mr. Todd and
his affiliates which investigation is ongoing. See above "Subsequent Events."
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. Old West has a Motion for Appointment of Receiver and a Motion for
Summary Judgment pending hearing on August 30, 2004. The defendant has
advertised the real property for sale by auction scheduled for August 19, 2004.
The Company has a promissory note in the amount of $525,000 which is partially
secured by the real property in the above suit. The $525,000 note receivable is
current; however, the Company has filed a cross-complaint, counter-complaint and
third party complaint suing on the note and all the collateral and alleges that
the filing of foreclosure by the first mortgage holder is an event of default.
The $525,000 note receivable is secured by other properties in addition to its
share in the defaulted property. Management believes that in addition to the
collateral in the defaulted property, there is sufficient equity in the other
collateral to secure its investment.
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."
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ITEM 4. SUBMISSION OF MATTER TO A VOTE OF SECURITY HOLDERS
None.
ITEM 5. OTHER INFORMATION
The Company incorporates by reference the information in Part I, ITEM
2, "MANAGEMENT'S DISCUSSION AND ANALYSIS OF PLAN OF OPERATION - Liquidity and
Capital Resources."
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) EXHIBITS
The following Exhibits are filed as part of this Report.
Exhibit 11 Statement re: computation of per share earnings
Rule 13a-14(a) and (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.
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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: August 16, 2004 By: /s/ Ashley B. Bloom
-------------------
Ashley B. Bloom
Acting Chief Executive Officer and
President
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