Penny Stock Blunders Its Way To First-Ever Profit

Capitol Communities Corp., now of Boca Raton, Fla., ended its fiscal year in 2002 with something never seen in its eight-year history as a public company: a profit.

The corporation this winter reported net income of more than $4.2 million for the year that ended Sept. 30.

Its stock, listed as CBCY.OB, has a 52-week trading range of 3.5 cents-26 cents per share. Shares closed at a nickel a piece on Feb. 5.

Capitol Communities, a leading residential and commercial property owner in Maumelle through its Capitol Development of Arkansas Inc. subsidiary, tallied a combined $11.1 million loss between 1995-2001. The company has a longstanding tradition of talking up the development possibilities of its land and a track record of piling up debt behind would-be deals.

Selling off undeveloped land has been its only reliable means of generating revenue. The catalyst for the land sales that ended seven successive years of red ink was its creditors. The company was forced to sell large pieces of its real estate holdings or lose the undeveloped land through foreclosure.

Motivated by the threat of having its only meaningful assets taken away, Capitol Communities hustled to close two transactions valued at $8.2 million. But the money didn’t stay in company hands for long.

Nearly all of the proceeds were used to pay off secured creditors whose patience had run out.

Chief among them was Bank of Little Rock, which dragged Capitol Development of Arkansas out from behind its Chapter 11 bankruptcy protection.

Others included its largest single creditor, Resure Inc. of Chicago, an insolvent insurance company in Chicago under the care of the Illinois Insurance Department.

In December 2001, a settlement was reached days before a bankruptcy hearing that could’ve stripped Capitol Development of much of its assets.

Less than 60 days later, the company sold 451 acres of undeveloped residential land to Maumelle Valley LLC, led by R. Lynn Dickey, Gilbert Carpenter Jr. and Russell James.

Of the $4 million purchase price, Resure received $3.85 million cash and dropped its claim on a $6.5 million debt secured by 701 acres.

The second sale, involving 289 acres of undeveloped residential land and a 10.8-acre apartment parcel, closed at $4.2 million.

But the cash proceeds from that deal only amounted to $2.1 million, which was used to repay Bank of Little Rock more than $600,000 and nearly $1.3 million to Arkansas Valley Bank of Russellville.

Capitol Communities carried the balance of the sales price in the form of two mortgages. One of the mortgages was repaid on Jan. 10 with $500,000 cash and the assignment of a $640,000 note owed by Transcontinental Realty Investors Inc.

The sale originally included a 10 percent interest in future development profits from the land. The company gave up this interest in exchange for the buyer assuming an unsecured debt of $300,000 owed to Davister Corp. of Dallas.

The buyer was West Maumelle Ltd., led by a former Capitol Communities investor, John “Jay” DeHaven.

DeHaven left the corporate picture in June 1999 and was a business partner with Michael Todd, president of Capitol Communities.

Boca First Capital LLP of Boca Raton gained controlling interest of Capitol Communities on July 17, 2002. Boca First received 16 million shares held by Todd and his Prescott Invest-ments Ltd.

In return, Todd received a one-third stake in Boca First. The 16 million shares represent about 64.6 percent of Capitol Com-munities’ outstanding shares.

Boca First is controlled by Addison Capital Group LLC — personified by Todd and two Florida businessmen, Kenneth Richardson and Howard Bloom.

Securities filings indicate that Thomas Blake, a director of Capitol Communities, is the second-largest shareholder in the company. Blake bought two million shares from Todd in Oct. 18, 2001, for $300,000 (15 cents per share).

On July 22, 2002, Capitol Communities relocated its principal place of business from Torrance, Calif., to Boca Raton. Attempts to contact Capitol Communities were unsuccessful.

Shedding Debt

Corporate liabilities plummeted as secured creditors were repaid and settlements were reached with still others.

Capitol Communities reported that total liabilities were slashed by nearly $11.4 million during the fiscal year that ended Sept. 30.

A key component to the shedding of debt was reaching a settlement on defaulted promissory notes totaling $4.24 million. The creditors received 4.24 million shares of nonvoting, preferred stock paying an annual dividend of 5.25 cents per share.

Creditors holding another $1.57 million in defaulted promissory notes opted for a cash settlement of $449,872.

The settlements represent the bulk of more than $6.7 million of unsecured short-term promissory notes Capitol Communities sold during 1999 and 2000 to 176 private investors through insurance agents. The unusual arrangement became part of a multi-state fraud investigation into short-term promissory notes backed by a surety bond.

Capitol Communities promised returns of 10.9-14 percent on the nine-month notes. The promissory notes proved as worthless as the so-called guarantee bonds backing them.

Securities regulators ordered Capitol Communities to stop selling the unsecured notes in 2001. The California Department of Corporations issued a desist-and-refrain order against Capitol Communities regarding the unregistered securities.

The bogus surety bonds connected to Capitol Communities were issued by New England International Surety Inc., led by Hendrik Rienstra.

He is on the lam overseas after issuing $250 million in worthless financial guarantees to bilk investors, including the Capitol Communities note holders.

As of Dec. 15, the company had reached additional settlements on $1.3 million in defaulted promissory notes. The deals include $470,250 cash and 593,928 shares of nonvoting, preferred stock paying an annual dividend of 5.25 cents per share.

TradeArk Ends

After completing the sales to pay off its secured creditors, Capitol Communities was left with sole ownership of 700 acres. Of that total, only 250 acres is developable, Todd said in a 2002 interview.

But the company regained sole control of an additional 251 acres after ending a joint-venture deal with Trade Partners Inc. of Grand Rapids, Mich.

On Jan. 24, Capitol Communities announced it was dissolving TradeArk Properties LLC. Formed in June 1999, the joint venture had little to show for its 3.5-year existence.

The main business of Trade Partners is buying, holding and transferring life insurance policies on persons with limited life expectancies, referred to as viatical settlement contracts.

Trade Partners negotiates a discounted cash payment to the policyholder, who in turn signs over the death benefits to the company. The discounted payment is more than the cash value of the policy but less than the death benefit.

Trade Partners contributed viatical settlement contracts valued at $8.3 million and gained a near 65 percent stake in TradeArk Properties, the joint venture with Capitol Communities.

Capitol Communities, through Capitol Development of Arkansas, contributed 192 acres of single-family lots known as the Pine Ridge tract, 19 acres of multifamily lots known as the Rector Mountain tract and a pair of commercial lots totaling 46 acres.

TradeArk Properties also assumed $3.8 million in debt linked with the property and secured a $4 million loan from New Era Life Insurance Co. of Houston.

TradeArk only sold two pieces of property totaling 6.5 acres for $1.2 million. Real estate records indicate almost all of the money was used to pay down debt.

On Nov. 27, 2002, Capitol Communities announced a would-be deal to sell a 38.6-acre commercial tract owned by TradeArk Properties for $4.5 million to an outfit called Kite Capital LLC. That transaction never closed.

Trade Partners took its viatical contracts and went on its way. Capitol Development of Arkansas took its 251 acres and assumed $3.5 million in debt remaining on the New Era mortgage.

Despite the shuffling of transactions, Capitol Communities remains a cash-poor operation. The latest creditor to join the show is its largest shareholder Boca First Capital, which is on the hook for a $4 million line of credit.

Will it take another creditor to motivate Capitol Communities to complete a second profitable year?

Based on the company’s history of slow SEC filings, that question won’t be answered for another year.