-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, N+/UbiDcXp+cU0YkF4rKkuZevRSpbKtxwh98xLHfPVk9lVV2eH9WkM8HZCZvRNqt eXwO0groTnkO2qevo1huuA== 0000722839-98-000012.txt : 19981014 0000722839-98-000012.hdr.sgml : 19981014 ACCESSION NUMBER: 0000722839-98-000012 CONFORMED SUBMISSION TYPE: 10KSB PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19980630 FILED AS OF DATE: 19981013 SROS: AMEX FILER: COMPANY DATA: COMPANY CONFORMED NAME: PROACTIVE TECHNOLOGIES INC CENTRAL INDEX KEY: 0000722839 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-MEDICAL LABORATORIES [8071] IRS NUMBER: 232265039 STATE OF INCORPORATION: DE FISCAL YEAR END: 0630 FILING VALUES: FORM TYPE: 10KSB SEC ACT: SEC FILE NUMBER: 001-08662 FILM NUMBER: 98724894 BUSINESS ADDRESS: STREET 1: 7118 BEECH RIDGE TRAIL STREET 2: STE 402 CITY: TALLAHASSEE STATE: FL ZIP: 32312 BUSINESS PHONE: 9046685800 MAIL ADDRESS: STREET 1: 7118 BEECH RIDGE TRAIL STREET 2: SUITE 402 CITY: TALLAHASSEE STATE: FL ZIP: 32312 FORMER COMPANY: FORMER CONFORMED NAME: KEYSTONE MEDICAL CORPORATION DATE OF NAME CHANGE: 19920703 FORMER COMPANY: FORMER CONFORMED NAME: KEYSTONE MEDICAL CORP INC DATE OF NAME CHANGE: 19910103 10KSB 1 U. S. SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-KSB Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the Fiscal Year Ended June 30, 1998 Commission File Number 1-8662 PROACTIVE TECHNOLOGIES, INC. formerly KEYSTONE MEDICAL CORPORATION) (Exact name of registrant as specified in its charter) Delaware 23-2265039 (State of Incorporation) (IRS Employer Identification No.) 7118 Beech Ridge Trail Tallahassee, Florida 32312 (Address of Principal Executive Offices) (850) 668-8500 (Registrant's telephone number, including area code) Securities Registered Pursuant to Section 12(b) of the Securities Exchange Act of 1934: Title of Class Name of each Exchange on which registered: Common Stock, par value $0.04 American Stock Exchange Securities Registered Pursuant to Section 12(g) of the Securities Exchange Act of 1934: NONE Check whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding twelve months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No Indicate by a check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-B is not contained herein, and will not be contained, to the best of Registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of the Form 10-KSB or any amendment to this Form 10-KSB. Yes No X The Registrant's revenues for its most recent fiscal year (twelve months ending June 30, 1998) $15,133,889. The aggregate market value of the voting stock held by non-affiliates computed by reference to the price at which the stock was sold, or the average bid and asked prices of such stock, as of a specified date within the past 60 days: As of September 29, 1998, $3,522,188.10. Check whether the issuer has filed all documents and reports required to be filed by Section 12, 13 or 15(d) of the Exchange Act after the distribution of securities under a plan confirmed by a court. Yes _X__ No The number of shares outstanding of the Registrant's Common Stock as of September 29, 1998: 16,499,253. Transitional Small Business Disclosure Format: Yes No X TABLE OF CONTENTS PART I Page ITEM 1. Description of Business General Acquisitions and Dispositions Not in the Ordinary Course of Business ITEM 2. Properties Real Estate Operations - Materially Important Properties Real Estate Operations - Other Properties Financing and Lines of Credit Policies with Respect to certain Activities Description of the Real Estate Development Business Government Regulation and Environmental Matters Warranty Bonds and Other Obligations Competition Warranties and Other Obligations Description of Markets Other Real Estate Investments Employees ITEM 3. Legal Proceedings ITEM 4. Submission of Matters to a Vote Of Security Holders PART II ITEM 5. Market for Registrant's Common Stock and Related Shareholder Matters ITEM 6. Management's Discussion and Analysis of Financial Condition and Results of Operations ITEM 7. Financial Statements and Supplementary Data ITEM 8. Changes in and Disagreements With Accountants On Accounting and Financial Disclosure PART III ITEM 9. Directors, Executive Officers, and Control Persons of the Registrant ITEM 10. Executive Compensation ITEM 11. Security Ownership of Certain Beneficial Owners and Management ITEM 12. Certain relationships and Related Transactions ITEM 13. Exhibits and Reports on Form 8-K PART I Item 1. Description of Business. General Proactive Technologies, Inc. ("PTE" or the "Company") was organized as a Delaware corporation in 1982 and has been primarily a holding company. Historically, the Company's two subsidiaries were Keystone Laboratories, Inc.("Keystone") and Proactive Solutions, Inc. ("Proactive Solutions"), respectively. Keystone operated a drug screening and confirmatory drug testing lab. Proactive Solutions was in the development stage of developing computer software for business management systems. As of June 30, 1996, the Company no longer owned these subsidiaries. As described more fully below (see "ACQUISITIONS AND DISPOSITIONS NOT IN THE ORDINARY COURSE OF BUSINESS"), on February 12, 1996, PTE acquired 100% of the outstanding common stock of Capital First Holdings, Inc. ("Capital First") through the issuance of 8,559,077 shares of PTE common stock, which represented approximately 80% of the voting shares of PTE immediately after the transaction. For accounting purposes, the acquisition of Capital First by PTE has been treated as a recapitalization of Capital First with Capital First as the acquiror (a "reverse acquisition"). After the reverse acquisition was completed, PTE determined that the drug screening business of Keystone was inconsistent with the long-term business objectives of Capital First. As a result, PTE decided to sell or otherwise dispose of its interest in Keystone. On June 29, 1996, the Company entered into an agreement to sell all of its stock in Keystone to Clark Capital Corp., Richard T. Clark, Jr., Joel C. Holt, and G. David Gordon (the "Clark Group"). The Clark Group is composed of former officers or shareholders of the Company. The purchase price under the agreement was $1,500,000, such amount payable in shares of PTE common stock, using an assigned value of $3.50 per share, or, at the option of the Clark Group, cash. Under the agreement, approximately $250,000 of the purchase price was due at closing with the remainder due on or before December 31, 1997, extended from July 31, 1997, such remainder bearing interest at the rate of 8% per annum; such interest, also at the option of the Clark Group, may be payable in PTE stock. On July 28, 1996, the Company received approximately 72,000 shares of PTE common stock towards the purchase price. During fiscal year end June 30, 1998, the Clark Group paid substantially all of its remaining obligation using common stock of the Company. As a result of the dispositions of Keystone and the acquisitions described below, as of June 30, 1998, the Company was a holding company conducting, through subsidiaries, the development of residential real estate. Certain statements contained in this report, including, without limitation, statements containing the words "believes", "anticipates", "expects", and words of similar import, constitute forward-looking statements, within the meaning of the Private Securities Litigation Reform Act of 1995. Such forward-looking statements involve known and unknown risks, uncertainties, and other factors that may cause the actual results, performance or achievements of the Company, or industry results, to be materially different from any future results, performance or achievements expressed or implied by such forward-looking statements. Such factors include, among others, the following: international, national and local general economic and market conditions; demographic changes; national interest rates; the ability of the Company to sustain, manage or forecast its growth; the ability of the Company to successfully make and integrate acquisitions; existing governmental regulatiuons and changes in or the failure to comply with, governmental regulations; adverse publicity, competition; changes in business strategy or development plans; business disruptions, weather conditions; the ability to attract and retain qualified personnel; and other factors referenced in this report. Certain of these factors are discussed in more detail elsewhere in this report. Given these uncertainties, readers of this report and investors are cautioned not to place undue reliance on such forward-looking statements. The Company disclaims any obligation to update any such factors or to publicly announce the result of any revisions to any of the forward-looking statements contained hereinto reflect future events or developments. ACQUISITIONS AND DISPOSITIONS NOT IN THE ORDINARY COURSE OF BUSINESS Real Estate Development-Completed Acquisitions Capital First Holdings, Inc. Capital First Holdings, Inc. ("Capital First"), was organized as a Florida corporation in 1994, and is engaged primarily in the design, development and sales of single-family subdivisions in Tallahassee (Leon County), Florida. In addition, Capital First has been the developer of condominium projects in Vero Beach, Florida. On February 12, 1996, the Company acquired all of the issued and outstanding shares of common stock of Capital First from Mark A. Conner ("Conner") in exchange for 8,559,077 of newly issued shares of the Company's common stock. For accounting purposes, the transaction has been treated as a reverse acquisition. After the reverse acquisition by Capital First, Conner was appointed to the Company's Board of Directors and elected its President and Chief Executive Officer. In connection with the acquisition, Conner entered into a five-year employment agreement. Killearn Properties, Inc. Killearn Properties, Inc. ("Killearn") is a developer of single- family subdivisions, now primarily operating in Stockbridge (Henry County), Georgia. In November 1993, Capital First purchased substantially all of Killearn's real estate holdings in Florida. In April 1996, the Company purchased 115,700 shares of the common stock of Killearn on the open market at an average price of $8.58 per share. In May 1996, the Company proposed a transaction with Killearn whereby Killearn would "split-off" certain assets (consisting of a golf course and country club, a newly constructed inn and certain joint venture interests) to an entity controlled by J.T. Williams ("Williams"), Killearn's Chairman of the Board, President and Chief Executive Officer, in exchange for Williams' approximately 42% effective common stock interest in Killearn. By August 1996, the Company had acquired an additional 199,750 shares of Killearn common stock in three separate transactions with Killearn shareholders. In each such purchase, for each share of Killearn common stock acquired, the Company issued four shares of its common stock to the respective seller. The 798,200 shares of the Company's common stock issued in these transactions were valued, based on the relevant closing bid prices of the common stock on the American Stock Exchange, at approximately $1,824,000. In connection with one such acquisition, whereby the Company issued 139,600 shares to James H. Dahl, IRA, 80,000 shares to James H. Dahl and Georgia P. Dahl, JTWROS, and 107,200 shares to Rock Creek Partners, Ltd., the Company agreed to register the shares of its common stock issued to the sellers under the Securities Act of 1933 (the "1933 Act") on or before July 31, 1997. In case such shares are not so registered, the Company was to be required to issue to the sellers an additional 98,040 shares of its common stock. As a result of these acquisitions, as of August 1996, the Company owned approximately 21.9% of the total number of issued and outstanding shares of Killearn's common stock. On November 16, 1996, the Company and James H. Dahl rescinded their August agreement and the Company received back 326,800 shares of its stock in return for 81,700 shares of Killearn Properties, Inc. voting common stock. On July 31, 1996, Killearn's Board of Directors approved the proposed split-off (the "Split-Off") and, on August 2, 1996, Killearn and Williams entered into an agreement regarding the Split-Off. On September 30, 1996, Killearn's shareholders (other than Williams) approved the split-off and elected Conner to Killearn's Board of Directors. Conner was also elected Chairman and Chief Executive Officer of Killearn, and two of the Company's nominees (Langdon S. Flowers, Jr. and Robert E. Maloney, Jr.) were appointed to Killearn's board. Taking into account that on November 12, 1996, the Dahl Group and the Company rescinded its stock exchange from August, 1996, PTE's interest in Killearn's outstanding common stock increased to approximately 28.26%. In addition, on July 29, 1996, PTE delivered a letter to Killearn's Board of Directors proposing that PTE and Killearn enter into an agreement under which PTE would provide sales personnel, training and techniques, and other management assistance to Killearn in order to increase Killearn's sales of residential lots. From August 1996 until March 1997, Killearn and PTE operated under an informal arrangement for such assistance. On March 10, 1997, Killearn's Board of Directors made a proposal to pay PTE $12,500.00 per month for the services of PTE's sales personnel, retroactive to July 1, 1996. The Company continued to make investments in Killearn Properties, Inc., including acquisitions during the three months ended September 30, 1997, of an additional 155,426 shares of KPI, in exchange for approximately $323,000 in cash, $198,000 in promissory notes, and 294,000 shares of Company voting stock, bringing its holdings in KPI to approximately 45.77%. Subsequent to September 30, 1997, the Company learned that J.T. Williams, Jr., whom the Company had entered into a prior agreement (see Form 13/D filed October 11, 1997) had refused to tender his shares in accordance with a stock exchange agreement between Mr. Williams and the Company. The result was that in the event the non-performance by Mr. Williams was valid, the Company's position was reduced to 315,430 shares, or 35.5% of the 887,412 issued and outstanding shares of KPI. Additionally, as filed in Form 13/D with EDGAR on January 8, 1998, the Company exercised its call rights with three other major KPI shareholders under certain Put and Call Agreements for a total of 132,000 additional KPI shares at a total price of $1,254,000, or $9.50 per share, giving the Company a total of 447,430 shares, representing 50.4% of the total issued and outstanding shares of KPI. On January 27, 1998, the Company entered into an Agreement to sell 315,430 shares of KPI stock to the Wimberly Investment Fund, L.P. for a total of $2,286,867.50, or $7.25 per share. Consequently, as of June 30, 1998, the Company currently owns of record, 132,000, or 14.87% of the total issued and outstanding shares of KPI. As part of the aforementioned January 27, 1998 agreement the Company created a new Georgia corporation called Capital First Holdings, Inc. of Georgia, which entity received at cost from Killearn Properties, Inc. title to three separate subdivisions -- The Summit, The Glen, and Simpson Mill Development, as well as Killearn's 50% interest in Henry County Land Partners, a Georgia General Partnership, and other contract assignments, the result of which brought approximately 650 acres or 1,200 lots, in various stages of development and land with an approximate cost basis of $9 million to the Company. Flowers Entities In August 1996, the Company agreed to acquire the stock of three separate corporations (the "Flowers Entities") from groups controlled by Langdon S. Flowers, Jr. ("Flowers"): Highland Properties Construction Co., Inc., a Georgia corporation ("Highland"), Flowers Properties, Inc., a Georgia corporation ("Flowers Properties"), and Barrier Dunes Development Corporation, a Florida corporation ("Barrier Dunes") for 2,000,000, 350,000, and 200,000 shares of voting common stock of the Company, respectively. Highland, now known as Capital First Holdings of Albany, Inc. ("CFH Albany"), owns 626 acres of undeveloped land in Albany, Georgia. When developed, this land should yield approximately 661 single-family lots of approximately .75 acres each. CFH Albany expects to offer these lots for sale at prices between $15,000 and $28,000. On August 13, 1996, the Company agreed to purchase all of the outstanding stock of CFH Albany from Flowers and George McIntosh (the "Sellers"), in exchange for 1,050,378 shares of the Company's common stock issuable to Flowers and 864,623 shares of the Company's common stock issuable to George McIntosh. Further, the Company agreed to issue additional stock in the event that the average trading price of the stock for the ten trading days prior to December 31, 1996 to bring the purchase price equivalent to $3.50 per share. The average per share trading price for the ten days prior to December 31, 1996 was $1.44 per share. On February 13, 1997, the agreement was amended to pay a total of 3,200,000 shares for CFH Albany. During the year ended June 30, 1998, the Company and the Sellers made a purchase price adjustment related to the acquisition of the Flowers Entities to better reflect the market value of the properties acquired by the Company as determined by more recent price and sales information. This 1998 purchase price agreement and the return of 809,441 shares by Sellers to the Company lowered the net number of shares paid for CFH Albany to a total of 2,390,559. Flowers Properties, Inc. owned about 300 acres of undeveloped land in Thomasville (Thomas County), Georgia. When developed, this land should have yielded approximately 450 single-family lots of approximately .50 acre each. At June 30, 1998 the Company no longer owned any real estate. On August 12, 1996, the Company agreed to purchase all of the outstanding stock of Flowers Properties from Flowers and Langdon S. Flowers, Sr. and certain other persons related to Flowers (the "Flowers Group"), in exchange for 350,000 shares of the Company's common stock. Further, the Company agreed to issue additional stock in the event that the average trading price of the stock for the ten trading days prior to December 31, 1996 to bring the purchase price equivalent to $3.50 per share. The average per share trading price for the ten days prior to December 31, 1996 was $1.44 per share. On February 6, 1997, the agreement was amended to pay a total of 800,000 shares for Flowers Properties. During year ended June 30, 1998 the Company and the Sellers made a purchase price adjustment related to the acqusition of the Flowers Entities to better reflect the market value of the properties acquired as determined by more recent price and sales information. The 1998 purchase price agreement and the return of 51,516 shares lowered the net number of shares paid for Flowers Properties to a total of 748,484. Barrier Dunes owns a 30-acre parcel of partially developed land in Cape San Blas, Florida. On August 12, 1996, the Company agreed to purchase all of the stock of Barrier Dunes from Flowers and Langdon S. Flowers, Sr., in exchange for 150,660 shares of the Company's common stock to Flowers and 149,340 shares of the Company's common stock to Langdon S. Flowers, Sr. Further, the Company agreed to issue additional stock in the event that the average trading price of the stock for the ten trading days prior to December 31, 1996 to bring the purchase price equivalent to $3.50 per share. The average per share trading price for the ten days prior to December 31, 1996 was $1.44 per share. On February 11, 1997, the agreement was amended to pay a total of 500,000 shares for Barrier Dunes. During the year ended June 30, 1998, the Company and the Sellers made a purchase price adjustment related to the acquiition of the Flowers Entities to better reflect the market value of the properties acquired as determined by more recent price and sales information. The 1998 purchase price agreement and the return of 241,499 shares lowered the net number of shares paid for Barrier Dunes to a total of 258,501. The Company accounted for the acquisition of the Flowers Entities as a purchase. ITEM 2. Property General The Company and Capital First maintain their offices in a 2,400 square foot building owned by Capital First and located at 7118 Beech Ridge Trail, Tallahassee, Florida 32312. Capital First also owned a 2,000 square foot building on this site, which was sold on May 30, 1997. Capital First also has small sales offices in the Golden Eagle subdivision and in Stockbridge, Georgia. Management believes that all property occupied by the Company and its subsidiaries is adequately covered by insurance. Real Estate Operations-Materially Important Properties As described in Item 1. Description of Business above, as of June 30, 1998, The Company, through its subsidiary, Capital First, was engaged in selling residential lots in eight Tallahassee residential communities, was engaged in the construction of horizontal infrastructure in three other Tallahassee residential communities and three residential communities in Stockbridge, Georgia, as well as one golf course community in Freeport, Florida. As of June 30, 1998, Capital First's only materially important properties were Summerbrooke (a golf course subdivision in Tallahassee), Golden Eagle (another golf course community in Tallahassee), Hickory Grove in Albany, Georgia, The Glen at Eagle's Landing (a single family subdivision in Stockbridge, Georgia), The Summit at Eagle's Landing (a single family subdivision in Stockbridge, Georgia), and Magnolia Bluff (a golf course community in Freeport, Florida). Capital First holds a fee simple interest in all such materially important properties. All land owned by Capital First is properly zoned for its intended use. Summerbrooke Summerbrooke features a Dean Refram-designed 18 hole championship golf course, named "The Players Club at Summerbrooke," and has a 9,000 square foot country club, grill and bar, with meeting rooms and a pro shop, which an unrelated party opened in early 1994. It also features a chain of four lakes, with more than half of the lots located on the golf course or lakefront. Summerbrooke targets upper-middle class families seeking the benefits of the lakefront and golf course living. Homes typically consist of four bedrooms and two and a half baths in 2,600 square feet of living space. The average house price is $220,000 and the average lot price is $44,000. As of June 30, 1998, there were 185 remaining developed lots for sale within Summerbrooke. Capital First expects to sell the remaining developed lots within 24 months. Golden Eagle A gated and guarded community, Golden Eagle features a Tom Fazio designed golf course rated in the top 20 courses in the Southeast by Golf Digest magazine. It is located in the heart of Killearn Lakes Plantation and is surrounded by three large lakes. The Golden Eagle community includes a 31,000 square foot club house, as well as a swimming pool, sauna, three dining rooms, banquet facilities, and tennis courts. Golden Eagle targets upper-income individuals and retirees. Homes are typically over 3,200 square feet, with four bedrooms and three baths, and with prices beginning at $250,000 and reaching in excess of $1 million. The average house price is $300,000 and the average lot price is $58,000. As of June 30, 1998, there were 57 remaining developed lots for sale within Golden Eagle, as well as 234 remaining permitted and platted but undeveloped lots on 239 acres of land. The Company expects to sell the remaining developed lots within the next eighteen months and develop and sell the undeveloped lots within the next three years. Hickory Grove - Albany, Georgia Hickory Grove subdivision in Albany, Georgia contains approximately 60 developed lots, and acreage sufficient for another approximate 410 lots, and is planned for a five year phased development. During the year, the Company sold about 60 lots to groups of smaller builders, for an average lot price of $23,500 per lot. Future lots are anticipated to be sold at comparable prices. Average house prices for this area are estimated to be in the $160,000 to $190,000 price range. The Summit at Eagle's Landing The Summit at Eagle's Landing is a 289 lot multi-phase subdivision in Henry County, Georgia, which is currently under contract to a national builder on a phase take-down schedule over the next three years. Currently, the Company is developing the first phase of 72 lots, with the completion of this phase estimated during the second quarter of fiscal 1999. The lots are to be sold at an average lot price of approximately $25,000. The average house price for this area is estimated to be in the $110,000 to $135,000 price range. The Glen at Eagle's Landing The Glen at Eagle's Landing is a multi-phase subdivision project located in Stockbridge, Georgia. This entire project has been fully contracted with another national builder. The Company currently has 22 developed lots in inventory, as well as land for an additional 92 lots, on which the Company intends to begin construction during the second fiscal quarter. The average lot price in this subdivision is approximately $25,000, and the average home price for this area is estimated to be between $130,000 to $150,000. Magnolia Bluff Magnolia Bluff represents the Company's first efforts into the Destin/Freeport, Florida market. The Company has acquired a 749 acre site consisting of a minimum of 450 single family lots, which size ranges depending on the location. The average lot is approximately one-half acre. The average interior lot price is $20,000; the average golf course lot price is $30,000. The centerpiece of the subdivision is the Diamond Players Club, which consists of an eighteen hole championship golf course designed by Mike Young, with a clubhouse of almost 5,000 square feet. The project is currently under construction and carries an estimated completion date of Spring, 1999. The Company has successfully created a community development district for the funding of this project and anticipates closing on the approximate $5.8 million in bonds sometime in October of 1998. Real Estate Operations-Other Properties Among Capital First's other properties, as of June 30, 1998, five properties were relatively significant: Henry County Land Partners As part of the January 27, 1998 Killearn stock sale to the Wimberly Investment Fund, L.P., the Company purchased a 50% interest in this partnership which owned a total of 14.4 acres of commercial property in Corporate Center, as well as 183 acres of property known as the Highlands, and approximately 80 acres known as Ward Lake, all of which are located in the Henry County, Georgia area. Killearn Lakes Plantation Killearn Lakes Plantation covers 4,000 acres of former plantation property in Tallahassee. Killearn Lakes Plantation targets young middle-income families with children. The average house price is $135,000 and the average lot price is $26,000. As of June 30, 1998, less than 5% of the lots in this subdivision were still available for sale. Eagle's Ridge Eagle's Ridge is an upscale retirement community catering to retirees who desire low maintenance living, and is located on the golf course within the Golden Eagle development. Eagle's Ridge has its own clubhouse and tennis courts. The average house price is $160,000 and the average lot price is $27,500. As of June 30, 1998, over 50% of the lots in this subdivision were still available for sale. The Landings at Golden Eagle The Landing at Golden Eagle is a two-phase multi-family community also targeted toward first-time home buyers or middle income families. Most duplex units will have two bedrooms, two baths one garage and feature approximately 1,500-1,700 square feet of living space. The average duplex unit price is $160,000 and the average lot price is $28,000. At June 30, 1998, there were 38 developed lots and 75 permitted and platted, but undeveloped lots remaining to be sold. The Glen - Tallahassee, Florida The Glen is a two-phase multi-family community also targeted toward first-time home buyers or middle income families. Most houses will have 2 bedrooms, 2 baths, and a one car garage and feature approximately 1,400 square feet of living space. The average house price is $140,000 to $160,000 and the average lot price is $20,000. As of June 30,1998, all lots in Phase I have been sold, and 110 platted, but undeveloped lots remain in Phase II. Interest Expense The interest expense on the mortgage debt for the year ending June 30, 1998 was approximately $2,213,867 of which approximately $943,950 was capitalized as a cost of land development. The interest expense for the twelve month period ending June 30, 1999, will depend on development activities, lot sales, prevailing interest rates and other factors. In general terms, the principal outstanding with respect to a mortgage loan is reduced by a certain agreed upon amount as each lot is sold. The development loans are generally renewed on an annual basis. Financing and Lines of Credit Development of the Summerbrooke subdivision Phases IX and X was financed by means of a $1,892,230 credit line with a local bank, of which the Company had fully drawn upon as of June 30, 1998. The loan matures in May 1999, carries an interest rate of prime plus 1.5%, with interest-only payments and without prepayment penalties. At maturity, based on prior history, the Company expects that this loan would be renewed for at least one year. The Company financed its purchase of Golden Eagle (as well as the Eagle's Ridge and Killearn Lakes subdivisions) in November 1993 through purchase money mortgages from the seller, Killearn. As of June 30, 1998, a total of approximately $1,992,527 was outstanding on these loans. After the fiscal year end, the Company refinanced its loan with its primary Tallahassee lender and paid off the Killearn Properties, Inc. loan in Tallahassee as of August 5, 1998. In November 1997, the Company purchased a 749 acre parcel of property in Freeport, Florida, giving a $2,100,000 purchase money mortgage to the seller. The note has an annual interest rate of 8.5%, with interest payments due semi-annually, with a balloon payment due in November of 1999. The Company expects this loan to be paid off from an estimated $5,800,000 in proposed development bonds obtained through the Community Development District. Policies with Respect to Certain Activities The following is a discussion of investment policies, financing policies and policies with respect to certain other activities of the Company. Although the Company has no formal written policies with respect to such activities, the following discussion outlines the Company's objectives and informal policies with respect to these activities, which have been determined by the Board of Directors of the Company and may be changed from time to time at the discretion of the Board of Directors without a vote of the shareholders of the Company. Investment Policies The Company's primary objective with regard to real estate is to acquire raw land in Florida and Georgia for the purpose of developing the land into residential subdivisions. However, future development or investment activities may not be limited to these geographic areas. The Company's policy is to develop or acquire raw land in circumstances where management believes that opportunities exist for acceptable investment returns. The Company may expand or develop existing properties or sell such properties in whole or in part as determined by management. The Company may also participate with other entities in property ownership, through joint ventures or other types of co-ownership. (See Note 7 to the Consolidated Financial Statements). Equity investments may be subject to existing mortgage financing and other indebtedness which would have priority over the equity interest of the Company. The Company may issue securities to persons in exchange for properties. The Company may also invest in securities of entities engaged in real estate activities or securities of other issuers, including for the purpose of exercising control over such entities and/or enhancing the value of its investment in such entities, such as its investments in Flowers Properties, Highland, and Barrier Dunes. The Company may acquire all or substantially all of the securities or assets of other entities where such investments would be consistent with the Company's investment policies. Financing Policies The Company uses internally generated and borrowed funds to purchase real estate. In reaching such financing decisions, management considers traditional mortgage debt-to-asset ratios. Borrowings may be in the form of bank borrowings, publicly and privately placed debt instruments, or purchase money obligations to the sellers of properties, any of which indebtedness may be unsecured or may be secured by any or all of the assets of the Company. The Company has not established any limit on the number of mortgages that may be placed on any single property or on its portfolio as a whole, but mortgage financing instruments usually limit additional indebtedness on such properties. To the extent the Board of Directors of the Company determines a need for additional capital, the Company may raise such capital through equity offerings, debt financings or other methods. Policies with Respect to Other Activities The Company has authority to offer and sell shares of its capital stock or other securities and to repurchase or otherwise reacquire its shares or any other securities and may engage in such activities in the future. The Company may in the future make loans to joint ventures in which it participates in order to satisfy such ventures' working capital needs. The Company has not engaged, and does not intend to engage in the trading, underwriting or agency distribution or sale of securities of other issuers. The Company intends to make investments in such a way that it will not be treated as an investment company under the Investment Company Act of 1940. DESCRIPTION OF THE REAL ESTATE DEVELOPMENT BUSINESS General Through its main subsidiaries, Capital First Holdings, Inc., Capital First Holdings of Albany, Inc. and Capital First Holdings, Inc. of Georgia, the Company is engaged primarily in the design, development and sales of lots in single-family and multi-family subdivisions in Tallahassee (Leon County), Florida, Albany (Lee and Dougherty County), and Stockbridge (Henry County), Georgia, respectively. The Company offers moderately priced lots that are designed to appeal to a wide market, ranging from first-time home buyers to upper-income retirees. Sales prices of most of Capital First's lots range from approximately $21,000 to approximately $95,000; the average sales price of lots delivered during the fiscal year ended June 30, 1998, was $32,501. At June 30, 1998, the Company had fourteen communities in various stages of planning and development, including eight communities in which the Company is currently offering lots for sale. Decision Making and Environmental Policies When determining whether to purchase a particular tract of land, the Company considers the cost of the land, the desirability of the proposed project to targeted home buyers, population growth patterns, competitive conditions, and available financing. The Company's land purchase agreements are typically subject to numerous conditions, including, but not limited to, the Company obtaining the necessary zoning and other governmental approvals for a proposed subdivision. During the investigation period, the Company confirms the availability of utilities, performs hazardous waste and other environmental analyses, arranges financing and completes its marketing feasibility studies. As a result, the Company is generally able to begin its development activities immediately after it closes a land purchase. Although the Company's policy is to maintain an approximately 4-5 year supply of raw land, it develops its subdivisions in phases. Therefore, the Company only begins developing a new phase of a subdivision after it has sold substantially all of the lots in a particular subdivision's prior phase. In developing a new subdivision (or phase thereof), the Company engages a general contractor to install the "horizontal" infrastructure of roads, water, sewer, drainage, gas and electricity. The Company typically contracts out its work on a lump-sum basis. It has used the same (unrelated) general contractor for the last 29 subdivisions it has developed. The Company does not maintain significant inventories of construction materials, except for materials being used in current construction. Generally, the construction materials used in the Company's operations are readily available from numerous sources, but prices may fluctuate due to various factors, including increased demand or supply shortages. The Company does not have any long-term contractual commitments with suppliers of building materials. Marketing and Sales The Company sells approximately 50% of its lots on a wholesale basis directly to builders participating in the Company's custom builder program. Builders participating in this program are offered the opportunity to purchase land directly from the Company. By participating in the program, a builder agrees to satisfy certain quality, uniformity and other standards when constructing a house in the Company's subdivision. As of June 30, 1998, 76 builders were participating in this program. The Company sells the remaining 50% of its lots on a retail basis directly to prospective homeowners desiring to build houses in one of the Company's subdivisions. Capital First sells these lots through commissioned sales personnel. Such sales personnel may sell lots in any Company subdivision, but typically concentrate on selling lots in upper market and golf-course communities. As of June 30, 1998, there were five such sales personnel. The Company also sells its lots through independent real estate brokers. The Company's advertising program encompasses various media. Signage is a primary medium, which is used when construction begins on a new subdivision. Upon the completion of the horizontal improvements in a subdivision, a full advertising campaign typically begins, using newspaper, radio, television and direct mail. In addition, the Company provides incentives to real estate brokers to promote broker participation. The Company has experienced significant fluctuations in quarterly revenues as a result of, among other things, the timing of lot closings, the cyclical nature of the homebuilding industry, changes in prevailing interest rates and other economic factors. The volume and timing of the Company's revenues are also substantially affected by the opening of new residential subdivisions. Generally, a residential subdivision has its highest sales volume when it is new (due primarily to the wide choice of available lots), with sales activity decreasing as a subdivision matures. The Company does not typically provide financing with respect to its sales. Occasionally, the Company will take a house or other non-cash property as consideration for land sales. At June 30, 1998, the Company had approximately $855,000 of such houses and buildings in its inventory that it is either renting or holding for sale, or both. Government Regulation and Environmental Matters In developing a project, the Company must obtain the approval of numerous governmental authorities regulating relevant matters, such as permitted land uses and levels of density, the installation of utility services and the dedication of acreage for open space, parks and schools. Several authorities in Florida have imposed impact fees as a means of defraying the cost of providing certain governmental services to developing areas, and the amounts of these fees have increased significantly during recent years. The State of Florida and various localities within the state have also, at times, declared moratoriums on the issuance of building permits and imposed other restrictions in areas where the infrastructure (e.g., roads, schools, parks, water and sewage treatment facilities and other public facilities) does not reach minimum standards. All of these factors could have a material adverse effect on Capital First's future development activities. The Company is subject to a variety of Federal, state and local regulations concerning protection of health and the environment. Prior to consummating the purchase of land, the Company engages independent environmental engineers to evaluate such land for the presence of hazardous or toxic materials, wastes or substances. The Company is unaware of any environmental liability or compliance with applicable environmental laws or regulations arising out of its properties that the Company believes would have a material adverse effect on its business, assets or results of operations. Nevertheless, in some instances, these environmental laws may result in delays, cause the Company to incur substantial compliance and other costs, or prohibit or severely restrict development by it in environmentally sensitive regions or areas. Competition The real estate development industry is extremely competitive and fragmented. Many of the Company's competitors are substantially larger and much better capitalized. The Company competes on the basis of a number of interrelated factors, including location, reputation, design, quality and price, with numerous other entities, including some entities with nationwide operations and greater financial, marketing, sales and other resources. At times, competitors may offer lots at discounted prices for financial or other reasons. The Company also competes for residential sales with individual resales of existing lots and condominiums, including sales of lots at deeply discounted prices by lenders and other similar institutions. Nonetheless, the Company's management has been successful at acquiring large tracts of land at favorable prices. The Company endeavors to identify situations where it is able to purchase quality land at favorable prices by purchasing such land either from its original owner(s) or through foreclosure. Because of its experience at expeditiously obtaining the necessary governmental approvals and then efficiently "manufacturing" raw land into attractive residential communities, the Company believes it should remain competitive. Warranties, Bonds and Other Obligations In developing subdivisions, Capital First Holdings, Inc. is sometimes required to obtain performance or maintenance bonds or letters of credit to supplement the amounts its general contractor is required to obtain. The amount of such obligations outstanding at any time varies in accordance with the Company's pending construction activities. As of June 30, 1998, the Company had no obligations under these bonds. In the event any such obligations are drawn upon because of the Company's failure to build required infrastructure or satisfy other obligations, the Company would be obligated to reimburse the issuing surety company or bank. Capital First Holdings, Inc. is also obligated under Florida law to subsidize homeowners' associations in certain of its residential developments up to a pro rata portion of expenses based on the number of lots which have not been closed in such developments. To date, Capital First Holdings, Inc. has not incurred any costs to subsidize homeowners' associations, as such associations' revenues have been adequate to cover their operating costs. Description of Markets Tallahassee, Florida Capital First Holdings, Inc. develops residential properties primarily in the Tallahassee (Leon County), Florida area. In 1998, the population of the Tallahassee Metropolitan Statistical Area was approximately 240,000. Tallahassee is the capital of Florida. It is also the location of Florida State University ("FSU"), Florida A & M University ("FAMU"), Tallahassee Community College and Lively Technical Center. These institutions have combined enrollment of nearly 60,000 students. Tallahassee also has significant resources for research and high technology. In this regard, Innovation Park/Tallahassee is a research and development center created to encourage the collaboration and transfer of technology between two affiliated universities, FSU and FAMU, government laboratories and private industry. In addition, Tallahassee is the location of the National High Magnetics Field Laboratory, one of the leading centers for research in magnet-related technologies. Because of the growth of the Florida state government and the local colleges, the Tallahassee economy has been relatively stable. Capital First Holdings believes that land regulation in Tallahassee is relatively complex, but that it is experienced in obtaining the appropriate approvals. Stockbridge, Georgia Through its subsidiary, Capital First Holdings, Inc. of Georgia, and its partnership interest in Henry County Land Partners, the Company owns approximately 280 acres of developed and undeveloped land in Stockbridge, (South Metro Atlanta) Georgia. Stockbridge, Georgia, in Henry County, is located about 25 miles south of downtown Atlanta. Henry County has an estimated population of 91,000. Henry County was the sixth fastest growing community nationally, with a population that has more than doubled since 1980. Capital First Holdings, Inc. of Georgia has two residential communities currently under development which will yield over 400 developed lots upon completion anticipated to be completed over the next 24 to 36 months. The Company believes that its subsidiary is competitive in the Henry County area, and will be able to acquire additional land in Stockbridge/Henry County as necessary for future development. Thomasville, Georgia Through its subsidiary, Capital First Holdings, the Company owns 286 acres of undeveloped land in Thomasville, Georgia. Thomasville is located in Thomas County, Georgia, and is approximately 45 miles west of Valdosta, Georgia and 35 miles northeast of Tallahassee, Florida. Thomasville has approximately 20,000 residents, with Thomas County as a whole, having about 40,000 residents. Thomas County is an agricultural and marketing center with a diversified economy, including vegetable producing, meat packing, lumber, textiles, baking, and plastics. The Company intends to develop approximately 450 single-family lots, of approximately .50 acres each, in a phased development over four years. The Company believes it to be competitive in Thomasville and that it may be able to acquire additional land in Thomasville as necessary for future development. Cape San Blas, Florida Through its subsidiary, Barrier Dunes, the Company will develop a 30-acre site in Cape San Blas, which is located approximately halfway between Apalachicola and Panama City on the St. Joseph Peninsula facing the Gulf of Mexico. Cape San Blas is a convenient resort destination for residents of Tallahassee and the rest of the Florida Panhandle. As of June 30, 1998, Barrier Dunes had sold 118 out of 200 total lots. Albany, Georgia Through its subsidiary, Capital First Holdings of Albany, Inc. ("CFH Albany")(f/k/a Highland Properties Construction Company, Inc.), the Company will develop a 626 acre site in Albany, Georgia. Albany is in Lee County, Georgia and has an estimated population of approximately 120,000. In Money magazine's 1995 survey of "Best Places" to live, Albany was rated the most livable city in Georgia. Albany has large employers such as Proctor & Gamble, Cooper Tire and Miller Brewing Co. CFH Albany originally had about 900 lots to develop, of which 770 lots remain. During fiscal year 1998, CFH Albany had sold 77 lots in Albany. The Company believes CFH Albany is competitive in Albany and that it will be able to acquire additional land as necessary for future development. Destin / Freeport, Florida The Company is undertaking its first development project in this market. The project is located in Walton County, which is a popular vacation destination located on the Florida Panhandle. The Company acquired a 749 acre site and has begun development on it. The subdivision, named Magnolia Bluff, will consist of a minimum of 450 single family lots and the Diamond Players Club, which is an eighteen hole championship golf course designed by Mike Young that includes a clubhouse of almost 5,000 square feet. Other Real Estate Investments In addition to the operations described above, the Company has certain investments in real estate partnerships formed to carry out specific development projects. (See Note 7 to the Consolidated Financial Statements.) EMPLOYEES As of June 30, 1998, the number of persons employed by the Company and each subsidiary was as follows: Proactive Technologies, Inc. 6 Capital First Holdings, Inc. 0 Capital First Holdings, Inc. of Georgia 0 Flowers Properties, Inc. 0 Capital First Holdings of Albany, Inc. 0 Barrier Dunes Development Corporation 0 Henry County Land Partners (50%) 0 The Company (and its subsidiaries) have no collective bargaining agreements with any unions and believes that overall relations with its employees are excellent. Item 3. Legal Proceedings. Under the terms of the settlement agreement entered into in 1995 with Proactive Solutions, Inc., a former subsidiary of the Company, William Davis and Donald Mitchell, two former directors of the Company, who agreed to resign as part of the settlement agreement, Proactive Solutions will be responsible for the debts listed in its bankruptcy schedules and has executed a non-recourse, unsecured, $800,000 promissory note payable to the Company (the "Note"). The Note is payable annually in an amount equal to one percent (1%) of the net sales made by Proactive Solutions each year until December 31, 1998. Under the terms of the Note, any balance remaining on December 31, 1998, will be extinguished and the Company will not have any right of recourse against Proactive Solutions. As of June 30, 1998, the Company has not received any payments with respect to the Note and does not expect to receive any payments under the Note. Additionally, one of the Company's subsidiaries was sued for a negligence claim in St. Lucie County, Florida allegedly arising from a 1994 incident from a prospective purchaser who slipped in a completed but unsold condominium unit, who is seeking in excess of $15,000. The Company has retained outside counsel and is defending the action vigorously. Management believes the claim to be defensible and anticipates a resolution during the next fiscal year. The Company and its subsidiaries are involved from time to time in various claims and legal actions in the ordinary course of business. In the opinion of management, the Company and its subsidiaries are not party to any other legal proceedings, the adverse outcome of which, would have any material adverse effect on its business, its assets, or results of operations. Item 4. Submission of Matters to a Vote of Security Holders. During the fourth quarter of the fiscal year ended June 30, 1998, there were no matters submitted to a vote of the security holders of the Company. PART II Item 5. Market for the Registrant's Common Equity and Related Stockholder Matters. Market Information On July 15, 1996, the Company's stock was listed on the American Stock Exchange under the symbol "PTE". The following table shows the high and low bid and ask prices of the stock during the last two fiscal years: Bid Ask COMMON STOCK H L H L Fiscal Year First Quarter 2 1/2 2 3 3/8 2 1/4 Ending Second Quarter 1 5/8 1 1/4 3 1/16 2 3/4 June 30, Third Quarter 1 1 1 5/8 1 1/2 1997 Fourth Quarter 11/16 1/2 1 1/16 1 Fiscal Year First Quarter 15/16 11/16 1 11/16 Ending Second Quarter 3/4 3/8 3/4 7/16 June 30, Third Quarter 9/16 1/4 9/16 3/8 1998 Fourth Quarter 1 5/16 3/8 2 3/8 3/8 The bid prices reflect inter-dealer prices, without retail markup, mark-down or commission and may not represent actual transactions. The number of record holders of the Company's common stock as of September 18, 1998, was 1,043. The Company has never paid cash dividends on its common stock and intends to utilize current earnings to expand its operations. Therefore, it is not contemplated that cash dividends will be paid on the Company's common stock in the foreseeable future. Item 6. Management's Discussion and Analysis or Plan of Operation. Overview Since the reverse acquisition of the Company by Capital First and its dispositions of Keystone and Proactive Solutions, and the discontinuation of Decocrete Worldwide operations, management has narrowed the focus of the Company to be a developer of residential properties (single family and multi-family). In the next 12-18 months, with respect to the Company's development activities, it is management's intention to continue to maintain the Company's market share in the several geographic markets where the Company currently develops and sells property and to increase its market share through planned acquisitions. Management intends to do so by continuing to aggressively "manufacture" its residential lots and sell them through its existing wholesale (76 builders on Builders Programs) and retail resale channels. Management still believes that searching for a diversified business, with which to complement its real estate development, is something the Company cannot lose sight of. At this time, the Company already owns a three to four year supply of land in Tallahassee. The acquisition of the Flowers Entities added a three to four year supply of land in Albany and Thomasville, Georgia. Also, the Company has purchased a five year supply of land in the Freeport, Florida area, as it begins to develop a 450 lot golf course community in western Florida. Additionally, through its divestment in Killearn, the Company either owns outright or shares a four-year supply of land in the Henry County submarket of the Atlanta market. Moreover, because management believes that sufficient demand for housing will continue in the markets where the Company operates, should the Company encounter opportunities to acquire undervalued well-positioned land parcels in these locations, management intends to take advantage of such opportunities. Results of Operations Year Ended June 30, 1998 compared with Year End June 30, 1997 Sales for the year ending June 30, 1998, decreased $2,433,088, or approximately 13.85%, to $15,133,889 compared to $17,566,977 for the year ending June 30, 1997. This decrease is attributable primarily to slower market conditions in the southeastern United States, as well as a decrease in the availability of new commercial property. Gross profit for this period decreased $2,496,155 from $5,741,971 for the year ending June 30, 1997 to $3,245,636 for the year ending June 30, 1998. Cost of sales increased by $63,067 from $11,825,186 for the year ending June 30, 1997 to $11,888,253 for the year ending June 30, 1998. Gross profit margin decreased 11.25% from 32.7% for the year ended June 30, 1997 to 21.45% for the year ended June 30, 1998. This decrease was due primarily to a bulk sale in the previous year of a large tract of commercial property, for which the company had a low cost basis in, resulting in a 68% gross profit margin, which significantly affected the gross profit margin of the Company last year. Normally, the Company would expect profit margins of 20% to 22%, based on the history of lot sales from inventory over the past several years. The gross profit margin for the year ended June 30, 1998 falls within this expected range. Selling, general and administrative ("SG&A") expenses increased by $835,768 from $1,951,502 for the year ending June 30, 1997, to $2,787,270 for the year ending June 30, 1998. This increase is due primarily to accounting and other professional fees associated with acquisition activities, severance pay to former CEO James Preiss, write downs of certain assets of the Company as well as additional accounting fees paid to update the accounting department of the Company. It is anticipated that professional fees may continue to be higher in the next fiscal year as the Company continues to search for diversified entities to help complement its residential and commercial development business. During fiscal year ended June 30, 1998, due to the decrease in sales and increased expenses, the Company incurred an income tax benefit from continuing operations of $332,146 as compared to an income tax expense from continuing operations of $859,887 for the year ending June 30, 1997. The minority interest expense of $656,756 incurred in the year ended June 30, 1997, did not recur in 1998 due to the sale of Piney-Z, Ltd. partnership interest. Net income decreased by $2,083,450, from $1,203,073 for the year ending June 30, 1997, to a loss of $880,377 for the year ending June 30, 1998. The decrease is primarily attributable to the decrease in sales, increase in selling, general and administrative expenses, as well as an increase in interest expense of $182,528 from $1,087,389 for the year ended June 30, 1997 to $1,269,917 for the year ended June 30, 1998. A significant amount of interest expense was capitalized due to the fact that the Company had seven different subdivisions being developed during the current fiscal year. Management believes that, on balance, revenues and income should remain somewhat constant in the year ending June 30, 1999, due to management's renewed focus on real estate sales following its recent acquisition activity. In addition, based on its current development schedule, management expects an increase in sales of lots in the Company's subdivisions and an increase in brokerage commission income generated through its newly implemented sales program, in an effort to counteract a slower economy. Inventory and Other Assets Houses, condominiums and buildings in inventory decreased from $2,769,952 on June 30, 1997 to $979,912 on June 30, 1998. This $1,790,040 decrease is primarily due to disposal of a number of the model homes owned by the Company, including those that were acquired last year as part of the Flowers acquisition. (See ACQUISITIONS AND DISPOSITIONS NOT IN THE ORDINARY COURSE OF BUSINESS at Page 5.) The inventory of developed lots decreased by $5,577,856, from $18,699,517 on June 30, 1997 to $13,121,661 on June 30, 1998. This decrease is due to both the sales of developed lots in Albany and Thomasville, Georgia and Cape San Blas, Florida that were acquired last fiscal year as part of the Flowers transaction and the sales of lots in subdivision phases that were completed just before the end of last year. Land under development increased by $5,968,437, to $12,164,226 on June 30, 1998 compared to $6,195,789 on June 30, 1997. This increase was due to the construction that began and is still underway in seven different residential communities. These communities include three in the Tallahassee, Florida market, three in the Stockbridge, Georgia market, and the golf course community being built in Freeport, Florida. The Company's inventory of (raw) land decreased about 23.58% from $8,759,754 on June 30, 1997 to $6,694,257 on June 30, 1998, a decrease of $2,065,497. This decrease was primarily due to the the development that is under way on seven residential communities, including four new subdivisions, The Glen and The Summit at Eagle's Landing, Golden Eagle Phase 8, and Magnolia Bluff, moving this land from raw land to land under development, as well as the sale of the Piney-Z partenrship interest. The largest part of the decrease in non-inventory assets resulted from the Company's financing of certain land sales last year, that have subsequently been paid by the purchasers during this fiscal year. Accounts and notes receivable decreased approximately $1,363,726 due primarily to a $2.5 million note the Company received on the sale of commercial property by Apalachee Partners, Ltd. last fiscal year, and which note was due and paid during this fiscal year. Additionally, there was approximately $300,000 which were paid off through the transfer of property to the Company. Property and equipment decreased $627,612, from $1,037,277 on June 30, 1997 to $409,665 on June 30, 1998. The decrease is primarily due to the sale of the Barrier Dunes building in Stockbridge, Georgia, as well as the disposal of all Company owned vehicles. Deferred income taxes were decreased significantly from a liability of $1,232,452 at June 30, 1997 to a liability of $297,739 at June 30, 1998 primarily due to the loss incurred by the Company, and the Flowers Entities 1998 purchase price adjustment. Liquidity and Capital Resources Generally, the Company expects to continue to sell lots in order to meet liquidity needs as it has done in the past. While the Company experienced a period with a minimal amount of operating cash, influxes of cash from loans from the President and pending closings of multi-lot sales contracts, and extended payment terms from vendors, should be sufficient, in the opinion of management, to provide sufficient operating cash for the Company. Together with revenues from other sources, sales of lots would be expected to generate sufficient cash to meet liquidity requirements. Most of the Company's significant liabilities are reflected in its Notes Payable and arise primarily from debt encumbering the real estate inventory of the Company. (See Note 8 to the Consolidated Financial Statements). Notes Payable decreased by $1,328,823, from $23,177,756 on June 30, 1997 to $21,848,933 on June 30, 1998. This decrease resulted from the net reduction of real estate inventories was caused by the repayment of approximately $8,983,000 in existing notes payable through its sales. The related party note payable decreased by its full amount to $0 for the year ended June 30, 1998 from $1,839,380 for the year ended June 30, 1997. This decrease is due to the satisfaction of the note payable to a director that arose out of the Flowers acquisitions. Accounts payable and accrued expenses decreased by $300,368 to $1,608,218 on June 30, 1998 from $1,908,586 on June 30, 1997. This decrease was due to the payment of accrued liabilities during the fiscal year. Customer deposits decreased by $447,826, to $124,569 from $572,395 on June 30, 1997. The decrease is primarily due to the closing of many of the contracts pending as of June 30, 1997, and the sale of the Company's Piney-Z partnership interest. Primarily, the bulk of customer deposits the Company has at this time are from the Golden Eagle 8 project, the development of the first phase of which is expected to be well under way during fiscal year 1999. Shareholder's equity decreased by $2,578,782, from $15,812,760 on June 30, 1997, to $13,233,978 on June 30, 1998. The decrease in equity is attributable to the net loss for the Company during the fiscal year as well as the Company stock returned under the Flowers Entities' purchase price adjustment. The Company is presently reviewing the potential impact of Year 2000 compliance issues with regard to its information and accounting systems and business operations. The preliminary determination made by management is that any costs, problems, or uncertainties associated with the potential consequences of Year 2000 issues are not expected to have a material impact on its future operations or financial condition. Item 7. Financial Statements. The following financial statements are contained in this Item 7: Report of Independent Accountants Consolidated Balance Sheets as of June 30, 1998 and 1997. Consolidated Statements of Operations for the years ended June 30, 1998 and 1997. Consolidated Statements of Changes in Shareholders' Equity for the years ended June 30, 1998 and 1997. Consolidated Statements of Cash Flows for the years ended June 30, 1998 and 1997. Notes to the Consolidated Financial Statements Report of Independent Certified Public Accountants Board of Directors Proactive Technologies, Inc. and Subsidiaries We have audited the accompanying consolidated balance sheets of Proactive Technologies, Inc. and Subsidiaries as of June 30, 1998 and 1997 and the related consolidated statements of operations, changes in shareholders' equity and cash flows for the years then ended. These financial statements are the responsibility of management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Proactive Technologies, Inc. and Subsidiaries as of June 30, 1998 and 1997, and the consolidated results of their operations and cash flows for the years then ended in conformity with generally accepted accounting principles. JONES AND KOLB Atlanta, Georgia September 30, 1998 Proactive Technologies, Inc. and Subsidiaries Consolidated Balance Sheets as of June 30, 1998 and 1997 June 30, June 30, 1998 1997 ASSETS Real estate inventories: Houses, condominiums and buildings $ 979,912 $2,769,952 Developed lots 13,121,661 18,699,517 Land under development 12,164,226 6,195,789 Land 6,694,257 8,759,754 --------------- ------------ 32,960,056 36,425,012 Cash and cash equivalents, including restricted cash of $155,243 in 1997 7,240 182,485 Certificates of deposit 92,524 109,503 Accounts and notes receivable 3,366,436 4,730,162 Investment in Killearn Properties, Inc. 1,188,000 2,253,000 Investments in equity securities 261,565 220,080 Investments in and advances to real estate joint ventures 0 22,000 Property and equipment, net 409,665 1,037,277 Other assets 174,696 249,521 ------------- ------------ Total assets $ 38,460,182 $45,229,040 LIABILITIES AND SHAREHOLDERS' EQUITY Liabilities: Notes payable $ 21,848,933 $21,338,376 Related party note payable 0 1,839,380 Accounts payable and accrued expenses 1,608,218 1,908,586 Customer deposits 124,569 572,395 Income taxes payable 1,237,495 1,716,671 Deferred income tax liability 297,739 1,232,452 Deferred revenue 109,250 109,250 Deferred compensation payable 0 386,714 Total liabilities 25,226,204 29,103,824 Minority interest 0 312,456 Commitments and contingent liabilities Shareholders' equity: Common stock, $.04 par value, 60,000,000 shares authorized, 17,092,657 and 18,151,918 issued and outstanding, respectively (see Note 1) 683,706 726,077 Additional paid-in capital 12,657,420 14,266,837 Retained earnings 2,320,453 3,200,830 Note receivable that may be settled in Company stock 0 (1,320,000) Note receivable collateralized by Company stock (477,524) (1,060,984) Treasury stock (682,192 shares) (1,950,077) 0 Total shareholders' equity 13,233,978 15,812,760 Total liabilities and shareholders' equity $ 38,460,182 $45,229,040 The accompanying notes are an integral part of these consolidated financial statements. Proactive Technologies, Inc. and Subsidiaries Consolidated Statements of Operations for the years ended June 30, 1998 and 1997 Year Ended Year Ended June 30, June 30, 1998 1997 Sales $ 15,133,889 $17,566,977 Cost of sales 11,888,253 11,825,186 ----------- ----------- Gross profit 3,245,636 5,741,791 Selling, general and administrative exp. (2,787,270) (1,951,502) Interest expense (1,269,917) (1,087,389) Equity in earnings of affiliated companies 20,568 988 Minority Interest 0 ( 656,756) Loss on attempted acquisition of Killearn (368,767) 0 Other income, net 177,282 217,744 ----------- ----------- (Loss)income before income taxes and discontinued operations (982,468) 2,264,876 Income tax benefit (expense) 332,146 (859,887) ----------- ----------- Net (loss)income before discontinued operations (650,322) 1,404,989 Discontinued operations: Loss from investment in Decocrete (less applicable tax benefit of $138,801 and 121,822, respectively (230,055) (201,916) ------------ ---------- Net (loss)income $ (880,377) $1,203,073 (Loss) earnings per share before discontinued operations ($0.04) $0.08 Discontinued operations ( 0.01) ( 0.01) ---------- ---------- (Loss) earnings per share $ ( 0.05) $ .07 Weighted average shares outstanding 16,845,746 16,732,516 The accompanying notes are an integral part of these consolidated financial statements. Proactive Technologies, Inc. and Subsidiaries
Consolidated Statements of Changes in Shareholders' Equity For the Years ended June 30, 1998 and 1997 Net Unrealized Gain Additional On Investments Common Stock Paid-In Retained In Equity Treasury Note Shares Amount Capital Earnings Securities Stock Receivable Total Balance at June 30, 1996 12,402,168 $496,087 $5,317,139 $1,997,757 $57,635 $(1,500,000) $6,368,618 Net income June 30, 1997 1,203,073 1,203,073 Purchase of common stock of Killearn Properties, Inc. 343,800 13,752 744,874 758,626 Return of common stock of Killearn Properties, Inc. (326,800) (13,072) ( 752,866) (765,938) Purchase of Flowers entities 4,500,000 180,000 6,632,500 6,812,500 Stock issued for services 24,500 980 45,020 46,000 Issuance of stock 100,000 4,000 208,000 212,000 Exercise of common stock warrants for cash and notes receivable 1,108,250 44,330 2,072,170 (1,060,984) 1,055,516 Net change in unrealized gain on investments (57,635) (57,635) Collection on Keystone Note Receivable 180,000 180,000 Balance at June 30, 1997 18,151,918 $726,077 $14,266,837 $3,200,830 $ 0 (2,380,984) $15,812,760 Net income June 30, 1998 (880,377) (880,377) Stock issued for services 43,195 $ 1,727 $ 30,356 32,083 Purchase price adjustment on Flowers acquisition (1,102,456) (44,098) (1,639,773) ( 1,683,871) Collection on notes receivable $(1,950,077) 1,903,460 (46,617) Balance at June 30, 1998 17,092,657 $683,706 $ 12,657,420 $2,320,453 $ 0 $(1,950,077) $(477,524) $13,233,978 ========== ======== ============ ========== ====== ============ ========== ===========
The accompanying notes are an integral part of these consolidated financial statements. Proactive Technologies, Inc. and Subsidiaries Consolidated Statements of Cash Flows for the years ended June 30, 1998 and 1997 June 30, June 30, 1998 1997 Cash flows from operating activities: Net (loss) income ($880,377) $1,203,073 Adjustments to reconcile net (loss) income to net cash (used) provided by operating activities: Depreciation and amortization 85,366 171,429 Expenses settled through the issuance of stock 32,083 46,000 Interest received through return of stock ( 46,617) 0 (Income) loss on real estate ventures ( 20,568) 113,169 (Gain) loss on disposal of property and equipment (133,933) 112,120 (Gain) on impairment of real estate 0 (50,000) Loss on sale of equity securities 284,592 0 Unrealized loss (gain) on equity trading securities 66,000 (75,555) Minority interest in income of consolidated subsidiaries 0 656,756 Changes in operating assets and liabilities: Real estate inventories 253,659 649,665 Deferred income taxes (934,713) (206,229) Accounts and notes receivable (158,861) (2,806,490) Other assets 161,094 (66,068) Accounts payable and accrued expenses (291,185) 705,084 Customer deposits (447,825) (170,981) Deferred compensation payable (386,714) (171,559) Deferred revenue 0 (714,284) Income taxes payable (479,176) 617,270 ------------ ----------- Net cash (used) provided by operating activities (2,897,175) 13,400 Cash flows from investing activities: Distributions from real estate joint ventures 27,568 158,785 Distributions to minority partner in real estate joint venture 0 (350,000) Purchase of investments in equity securities (318,460) ( 93,830) Proceeds from sale of equity securities 2,286,868 16,844 Purchase of property and equipment ( 10,758) ( 42,862) Proceeds from disposal of property, plant and equipment 0 582,470 Amounts loaned as notes receivable (106,826) 0 Payments on notes receivable 2,680,450 180,000 Proceeds from maturity of certificates of deposit 16,979 47,356 Purchase of certificate of deposit 0 ( 40,594) ----------- ----------- Net cash from investing activities 4,575,821 458,169 Cash flows from financing activities: Repayment of amounts borrowed (16,324,702) (14,715,778) Proceeds from issuance of notes payable 14,470,811 13,005,504 Proceeds from exercise of warrants 0 1,055,516 Proceeds from issuance of stock 0 212,000 ------------- ----------- Net cash from financing activities ( 1,853,891) ( 442,758) Net increase (decrease) in cash and cash equivalents (175,245) 28,811 Cash and cash equivalents at beginning of period 182,485 153,674 -------------- ----------- Cash and cash equivalents at end of period $ 7,240 $ 182,485 ============= ============ Supplemental disclosures of cash flow information: Cash paid during period for: Interest $ 1,304,557 $ 1,705,541 ============ ============ Taxes $ 253,998 $ 365,000 ============ ============ The accompanying notes are an integral part of these consolidated financial statements. Proactive Technologies, Inc. and Subsidiaries Notes to the Consolidated Financial Statements 1. Basis of Presentation: These financial statements include the operations of Proactive Technologies, Inc. ("PTE"), its principal subsidiary, Capital First Holdings, Inc. ("Capital First"), and several other subsidiaries. All of the companies are real estate developers with operations in Tallahassee, Florida; Stockbridge, Albany and Thomasville, Georgia; Cape San Blas, Florida; and Freeport, Florida. 2. Summary of Significant Accounting Policies: Principles of Consolidation The accompanying consolidated financial statements include the accounts of PTE (see Note 1) and its wholly owned and majority owned subsidiaries. Investments in which the Company does not own a majority interest but exerts significant but not controlling influence are reported under the equity method. All significant intercompany balances and transactions have been eliminated. Cash and Cash Equivalents The Company classifies as cash equivalents any investments which can be readily converted to cash and have an original maturity of less than three months. At times cash and cash equivalent balances at a limited number of banks and financial institutions may exceed insurable amounts. The Company believes it mitigates its risks by depositing cash or investing in cash equivalents in major financial institutions. The Company is required under certain mortgages to maintain cash deposits or certificates of deposit as collateral. Such balances are reflected either as restricted cash or certificates of deposit on the accompanying balance sheet. Real Estate Inventories Real estate inventories are recorded at the lower of cost or estimated fair value. Expenditures for land development are capitalized and allocated to development projects by the specific identification method. Costs are allocated to specific lots based on the ratio of the lot sales price to the estimated total project sales price. Interest costs and real estate taxes are capitalized while development is in progress. Total interest capitalized during the years ended June 30, 1998 and 1997 was approximately $943,950 and $960,000,respectively. Property, Plant and Equipment Property, plant and equipment are stated at cost, less accumulated depreciation. Depreciation is computed on the straight-line basis over the assets' estimated useful lives. Expenditures for maintenance and repairs are expensed as incurred and expenditures for improvements which extend the useful life or add value to the asset are capitalized. Sales and disposals of assets are recorded by removing the related cost and accumulated depreciation amounts with any resulting gain or loss reflected in income. Revenue Recognition The Company records revenue on the sale of real estate properties once the Company has fulfilled its obligation under the sales contract and is not obligated to perform significant activities after the sale to earn its profit. Revenue is only recognized when the collectibility of the sales price is reasonably assured. When land is sold prior to the completion of development by the Company, the related revenue and profit is recognized under the percentage-of-completion method as the development is completed. Generally, the Company does not provide financing on its sales of property. Utility rebates due from the City of Tallahassee for water and sewer lines built by the Company are recognized in income in the year the rebates are fixed and determinable. During the year ended June 30, 1997, rebate income of approximately $32,000 was recorded as a reduction of cost of sales. No utility rebates were received for the year ended June 30, 1998. Equity Securities The Company accounts for equity securities as provided for under Statement of Financial Accounting Standards No. 115, "Accounting for Certain Investments in Debt and Equity Securities," which requires classification of the securities as either held-to-maturity, trading securities or available-for-sale and requires fair value accounting for trading and available-for- sale securities. Management classifies as trading securities those securities which are bought and held principally for the purpose of selling them in the near term. Unrealized holding gains and losses for these securities are included in earnings. All other equity securities are classified as available-for-sale with the unrealized holding gains and losses reported as a separate component of stockholders' equity. If a decline in an available-for-sale security is judged to be other than temporary, the cost basis of the individual security is written down to fair value as a new cost basis and the amount of the write-down is included in earnings. Securities traded on national security exchanges are valued based on the last sales price. When market quotations are not readily available, securities are valued based on bid prices received from broker-dealers in the same or similar securities or are based on management's estimates. Where the fair value of an equity security is not readily determinable, the security is reported at cost, less an estimated impairment reserve, if required. Gains or losses from sales of securities are recognized on the trade date. The basis on which cost is determined in computing realized gains and losses is the specific identification method. Earnings Per Share Earnings per share are calculated based on the weighted average shares outstanding for the period. PTE warrants outstanding, entitling each holder to acquire one share of common stock for an exercise price of $2.00 per share, are included in earnings per share computations beginning on February 12, 1996, the date of the reverse acquisition by Capital First, to the extent they are dilutive. While there are no warrants outstanding at June 30, 1998, there is a note receivable outstanding related to the exercise of the warrants with a balance of $477,524. This note is secured by the stock issued from the exercise of the warrants and will be treated in a manner similar to an option until it is paid or satisfied. Income Taxes The Company's income taxes are accounted for in accordance with the liability method as provided under Statement of Financial Accounting Standards No. 109, "Accounting for Income Taxes." Accordingly, deferred income taxes are recognized for the tax consequences of differences between the financial statement carrying amounts and the tax bases of existing assets and liabilities. The measurement of deferred tax assets is reduced, if necessary, by the amount of any benefits that, based on available evidence, are not expected to be realized. 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, disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. 3. Business Acquisitions & Dispositions: Capital First acquired voting control of PTE in a reverse acquisition on February 12, 1996. At that time, the newly combined Company determined the operations of Keystone Laboratories, Inc. ("Keystone"), a former subsidiary of PTE, were inconsistent with its long-term business objectives and reached a decision to sell or otherwise dispose of Keystone. On June 29, 1996 the Company entered into an agreement to sell the stock of Keystone to certain members of Keystone management that were also shareholders of PTE. The purchase price under the agreement was set at $1,500,000 which was payable in either stock, using an assigned value of $3.50 per share, or, at the option of the buyer, cash. The purchase price was payable as follows: a deposit of 72,000 shares of the Company's common stock due at closing and the remainder due on December 31, 1997 bearing interest at the rate of 8% per annum. Such interest may also be settled in PTE stock. The initial payment was made in July 1996 in the form of approximately 72,000 shares of PTE stock, and the Company received all of the remaining shares during the current fiscal year for the remaining price and interest. PTE acts as a guarantor for a note payable of Keystone with a balance of approximately $125,000 as of June 30, 1996. The note matures in June 2001. Keystone's net earnings for the period from July 1, 1996 to June 30, 1997 amounted to approximately $135,000 (unaudited). Net earnings for the period from July 1, 1997 to June 30, 1998 were approximately $175,000 (unaudited). Management of PTE believes Keystone will honor its obligations under the note. Effective February 10, 1996, Decocrete Worldwide, Inc. ("Decocrete"), a subsidiary of PTE, operating under the direction of Capital First, acquired the net assets of Decocrete International, Inc., a manufacturer of decorative concrete with a plant located in Tampa, Florida, for an aggregate purchase price of $72,000 in cash and 20% of the outstanding shares of Decocrete. The acquisition has been accounted for under the purchase method of accounting. Identifiable assets acquired approximated the liabilities assumed; accordingly, the entire purchase price has been attributed to goodwill. During fiscal 1997 the Company decided to cease operating Decocrete. The Company has written off all existing amounts still outstanding from Decocrete in these financial statements. In August, 1996, the Company acquired all of the stock of three separate corporations (the "Flowers Entities") for 4,500,000 shares of the Company's common stock which was valued at $6,812,500, based on renegotiated terms. The acquisition was accounted for as a purchase and the results of operations of the Flowers Entities are included in the consolidated financial statements from the date of acquisition. During the year ended June 30, 1998, the Company renegotiated its acquisition of the Flower Entities after a reevaluation of the assets acquired. The modified purchase price was re-valued at $5,128,629 after the purchase price adjustment. As a result, the purchaser returned to the Company a total of 1,102,456 shares of PTE stock originally issued for the acquisition. Accordingly, real estate inventory and shareholders' equity were reduced by $1,683,871 during 1998 as a result of this purchase price adjustment. The adjusted total shares issued for the Flowers Entities totals 3,397,544 shares. During the year ended June 30, 1998, the Company acquired certain real estate from Killearn Properties, Inc. ("Killearn"), by assuming the outstanding debt. The real estate is located in the Stockbridge (South Metro) area of Atlanta. The real estate consists of two tracts of property encumbered by debt in the amount of $2,437,992. In addition, PTE received 100% of the outstanding stock in Simpson Mill Development Corporation, which it later sold at a net gain of $369,552. PTE also received a 50% interest in Henry County Land Partners, a Georgia general partnership owning three parcels of land. At June 30, 1997, the Company owned a 67% interest in two separate partnerships, Piney-Z, Ltd. and Apalachee Partners, Ltd., which were consolidated in the Company's 1997 consolidated financial statements, net of the minority interest. During the year ended June 30, 1998, Apalachee Partners collected its mortgage receivable and ceased operations. In October 1997, the Company sold its interest in the Piney Z partnership to an unrelated third party and realized a gain of $996,192 on such sale (Note 7). 4. Property and Equipment: Property and equipment consists of the following: June 30, June 30, 1998 1997 Land and land improvements $ 151,960 $ 216,988 Buildings and building improvements 249,361 617,850 Vehicles 0 118,765 Furniture, fixtures and equipment 242,927 325,897 644,248 1,279,500 Accumulated depreciation (234,583) (242,223) $ 409,665 $ 1,037,277 5. Investments in Equity Securities: In the year ended June 30, 1997, the Company has made a $130,000 investment in The Buckhead Brewery and Grill, Inc. ("Buckhead"). Buckhead owns and operates a restaurant in Tallahassee, Florida. As of June 30, 1998, PTE holds a 5% ownership interest in this company. At June 30, 1998 and 1997, the Company had securities classified as trading with a fair value of approximately $1,189,030 and $90,080, respectively. An unrealized net holding loss of approximately $66,000 related to these securities was reported in the consolidated statement of operations for the year ended June 30, 1998. An additional loss of $130,000 was recognized from the sale of trading securities during the year ended June 30, 1997. 6. Investment in Killearn Properties, Inc.: The Company has made investments in Killearn, which is the real estate development company from which Capital First acquired its Tallahassee development. Killearn's primary operations include the development of residential property surrounding a golf course in Henry County, Georgia. At June 30, 1997, PTE's aggregate holdings in Killearn were approximately 251,000 shares, representing approximately 28% ownership of Killearn, an increase from the 16% interest held at June 30, 1996. As a result of the increase in ownership during 1997, the Company recorded its investment in Killearn using the equity method for the year ended June 30, 1997. The Company reported income of $114,157 from its investment in Killearn, which is included in "Equity in earnings of affiliated companies" on the income statement. (See also Notes 8 and 10, Notes Payable, and Related Party Transactions). Summarized financial information for Killearn Properties, Inc. & Subsidiaries as of and for the year ended April 30, 1997 is as follows: Real estate $24,441,540 Other assets 8,369,977 ----------- Total assets 32,811,517 Mortgage debt 19,948,364 Other liabilities 9,736,091 Equity 3,127,062 ----------- Total liabilities and equity 32,811,517 Sales 13,349,358 Cost of sales 9,129,206 ----------- Gross profit 4,220,152 Other income and expenses, net (3,124,829) ----------- Net income $ 1,095,323 At June 30, 1997, the Company's investment in Killearn differed from its market value and the Company's equity in its net assets as follows: Recorded investment $ 2,253,000 Market value of investment at June 30, 1997 $ 1,191,000 Interest in underlying equity of net assets (book value) $ 883,700 The difference between the Company's recorded investment and its interest in the underlying equity of net assets was allocated to land inventories and was being expensed as inventory was sold. The equity in earnings of Killearn at June 30, 1997 was computed as follows: Net income for fiscal 1997 as reported by Killearn $ 1,095,323 Company's interest in earnings 28.26% Allocated income 309,498 Less amortization of excess purchase price over book value 195,341 Net equity in earnings as adjusted $ 114,157 In January 1998, the Company sold the majority of its shares in Killearn at a net loss of $284,592. At June 30, 1998, the Company held 132,000 shares of Killearn, representing 14.88% of the outstanding shares of Killearn. As a result of the decreased ownership, PTE ceased accounting for its investment in Killearn on the equity method. The investment is currently accounted for as a trading security. The accumulated costs of the Company's attempted acquisition of Killearn have been reported separately on the consolidated statement of operations. The total of $368,767 includes loss on the sale of Killearn stock, losses from the Company's share of Killearn's earnings, the unrealized net holding loss on stock held at June 30, 1998, and certain legal expenses relating to the attempted acquisition. 7. Investments In Real Estate Ventures: As discussed in Note 3 of the financial statements, the Company acquired a 50% interest in Henry County Land Partners, a Georgia general partnership. The Company is a general partner and has significant control over the partnership. As a general partner, the Company is liable for the debt and obligations of the partnership. Summarized financial information for Henry County Land Partners as of June 30, 1998, and for the period February 2, 1998 to June 30, 1998 is as follows: June 30, 1998 Real estate $ 1,226,873 Cash 98,152 Total assets 1,325,025 Mortgage debt $ 1,044,625 Other liabilities 50,033 Total liabilities 1,094,658 Partnership equity 230,367 ----------- Total liabilities and equity $ 1,325,025 Sales $ 2,925,881 Cost of sales 2,357,644 Gross profit 568,237 Other income and (expenses), net (55,869) ------------ Net income $ 512,368 PTE received partnership distributions of $205,000 and made an additional capital contribution of $64,000 during 1998. Due to its ownership interest and control, the Company's 50% share of the assets, liabilities and operations are consolidated in the Company's financial statements. In addition the Company owned a 67% interest in two separate partnerships, Piney-Z, Ltd. and Apalachee Partners, Ltd. Based on the majority ownership and control of these partnerships, they were consolidated in the Company's 1997 financial statements. The 33% minority interest in the earnings of the partnerships has been deducted from the operating results of the Company for the year ended June 30, 1997 and is reflected on the balance sheet net of a $350,000 distribution paid to the minority partner during that fiscal year. During the year ended June 30, 1998, the Company sold its interest in Piney-Z, Ltd. and Apalachee Partners, Ltd., distributed its remaining assets, and ceased operations (Note 3). 8. Mortgage Loans and Notes Payable: Debt consisted of the following: June 30, June 30, 1998 1997 Notes payable to Killearn with interest rates ranging from 7% to 10%. Interest is paid either quarterly or semi-annually. These notes are collateralized by portions of the developed lots, land under development, houses and condominiums, and land. $ 1,992,527 $ 5,459,842 Notes payable to financial institutions with interest rates ranging from 8.25% to 10.5% with several of the notes having variable interest rates at prime plus 1% or 1 1/2%. Interest is due monthly and principal is due in balloon payments at varying dates through 1999. The notes are collateralized by portions of the developed lots, land under development and land. 16,172,163 14,954,558 Notes payable to financial institutions with interest rates ranging from 8.25% to 9.75%. Payment terms differ with some paying interest monthly with balloon payments in 1998 and others paying principal and interest monthly with maturity dates from 2013 to 2025. The notes are collateralized by portions of the houses and condominiums. 715,255 679,643 Note payable to a director with interest at the prime rate. Principal and interest payments are due annually; balloon payment due in 2003. The note is collateralized with land, land under development, and developed lots in Thomasville, Georgia and Cape San Blas, Florida. 0 1,839,380 $500,000 margin loan with an investment banking firm. Interest due monthly at rate of 8.375%. Principal due on demand. Collateralized by portions of the Killearn securities. 0 88,326 Other notes payable 2,968,988 156,007 Total $21,848,933 $23,177,756 All indebtedness which is collateralized by real property include contingent principal and interest payments due when lots of the related collateral are released for sale. Substantially all of the notes are guaranteed by a major stockholder. The Company has approximately $229,000 available under existing loan arrangements for use in completing development of certain of its properties. Maturities of the notes payable, some of which are dependent on the sale of lots, are as follows at June 30, 1998: Year Amount 1999 $ 14,629,845 2000 3,342,376 2001 2,369,010 2002 262,256 2003 818,901 2004 and thereafter 426,545 Total $ 21,848,933 Based on the relatively short maturities of fixed rate debt, and the market rates of interest such debt bears, management believes the aggregate carrying amount of its fixed rate debt approximates such debt's fair value. Interest rates on variable rate debt fluctuate with market conditions. The majority of notes receivable relate to notes payable assumed by purchasers of certain real estate. Accordingly, such carrying amounts also approximate fair value. 9. Income Taxes: The components of income tax (benefit) expense attributable to continuing operations are as follows: Year Ended June 30, 1998 Federal State Total Current ($ 37,655) ($ 7,570) ($ 45,225) Deferred ($244,985) ($41,936) ($286,921) ($282,640) ($49,506) ($332,146) Year Ended June 30, 1997 Federal State Total Current $926,220 $167,535 $1,093,755 Deferred (199,719) ( 34,149) ( 233,868) $726,501 $133,386 $ 859,887 Income taxes payable at June 30, 1998 and 1997 include taxes payable from prior years which had not been paid. Capital First's 1994 and 1995 and Proactive Technologies, Inc.'s 1996 tax returns are currently under examination by the Internal Revenue Service, but no reports have yet been issued. Total income tax expense attributable to continuing operations differs from the amount computed by applying the U.S. federal statutory tax rate to pretax income from continuing operations primarily due to the effect of state taxes and penalties and interest charged on delinquent balances. The components of the net deferred tax liability (asset) are as follows: June 30, June 30, 1998 1997 Difference in basis of acquired assets $ 377,989 $ 1,424,609 Real estate inventories ( 59,123) ( 59,123) Deferred compensation ( 5,029) (144,890) Investments in equity securities ( 16,098) 0 Other 0 11,856 $ 297,739 $ 1,232,452 Prior to the reverse acquisition, PTE incurred significant net operating losses ("NOL's"). Due to the substantial limitations placed on the utilization of such NOL's following a change in control, no related deferred tax benefit has been recorded, however, the Company is seeking to maximize any available benefit. 10. Related Party Transactions: In April 1996, the Company purchased land from an entity owned by PTE's largest shareholder for a purchase price of $475,000 (which approximates the shareholder's basis in the property). In connection with this purchase, a note payable of $225,000 with an unrelated third party was assumed by PTE, and PTE entered into a note payable agreement with the seller for the remaining $250,000. The assumed note bore interest at a rate of approximately 16% and was paid off during the year ended June 30, 1998. The Company had a deferred compensation agreement with the former Chief Executive Officer James A. Preiss, which resulted in the Company having a deferred payable of $387,000 at June 30, 1997. During the year ended June 30, 1998, the Chief Executive Officer ceased employment with the Company and entered into a termination agreement whereby the deferred compensation payable would be paid in full and certain other property transferred to him as payment for past services. As a result, the Company paid the remaining $387,000 due under the deferred compensation arrangement and transferred to him cash and additional property with a total book value of $183,055, which are classified as compensation expense. From time to time the Company makes advances and repayments of loans to and from its President which are repaid either through cash payments or increases in compensation expense. Prior to year end, the Company borrowed approximately $172,000 from the President from funds acquired through the sale of his personal stock. As of June 30, 1998, the President owed $109,111 to the Company. During 1997, the Company sold one lot to its former Chief Executive Officer and one house to a director amounting to total revenues of approximately $145,000. During April, 1996, the Company acquired for investment purposes approximately 8.1% of the issued and outstanding shares of Killearn Properties, Inc. ("Killearn"). Killearn is in the business of real estate development in the Stockbridge, Georgia area. The Company filed its Schedule 13D regarding this event on April 25, 1996. In May, 1996, PTE proposed a transaction with Killearn whereby Killearn would exchange certain assets (consisting of the golf course and country club, a newly constructed inn and certain joint venture interests) to Killearn's then Chairman of the Board and Chief Executive Officer, for this approximate 42% ownership interest in Killearn, or 551,321 shares of Killearn voting common stock. In connection with this proposed transaction, PTE would be required to loan Killearn $2 million dollars, which would be used to facilitate the transfer of the assets. During August 1996, PTE acquired approximately 85,950 additional shares of Killearn stock, increasing its ownership interest in Killearn to approximately 22%. On July 29, 1996, PTE proposed to Killearn's Board of Directors that PTE be retained to provide sales personnel and sales training techniques in order to improve the sales of residential lots. In addition, PTE proposed that Killearn's board include two additional representatives of PTE. On July 31, 1996, Killearn's Board of Directors approved the transaction and the PTE proposals, and an agreement was entered into on August 2, 1996 between Killearn and Killearn's chairman. The split-off transaction was voted upon and approved at Killearn's shareholders' meeting held on September 30, 1996. At the Board meeting following the shareholders' meeting, Mark A. Conner, President of the Company, Robert E. Maloney, Jr., and Langdon S. Flowers, Jr., directors of the Company were named to the Board of Killearn. On November 1, 1996, Mr. Conner was named Chairman of Killearn. At June 30, 1997, the Company owned 250,750 shares, or 28.26% of Killearn stock. Since August 1, 1996, Killearn and PTE have been operating under an informal arrangement for the services of sales personnel. On March 10, 1997, Killearn's Board of Directors ratified a proposal to pay PTE $12,500 per month for the services of PTE's sales personnel, retroactive to July 1, 1996. During fiscal 1998 and 1997, the Company received $25,000 and $150,000, respectively, in consulting fees from Killearn. In a prior fiscal year, the Company agreed to purchase land and other assets from Killearn for approximately $25,000,000. As a result of that transaction, the Company owed Killearn on June 30, 1998 and 1997, respectively, $1,992,527 and $5,459,842. In addition, from time to time during fiscal year 1997, the Company made and received advances and repayments of short term loans to Killearn which are repaid through cash payments. In January, 1998, the Company paid all advances owed to Killearn and has incurred no additional advances to date. During August 1996, the Company purchased a new subsidiary which previously purchased a building for $550,000 from Killearn whose Chairman and Chief Executive Officer is Mark A. Conner. The purchaser signed a promissory note in the amount of $550,000 that is included in notes payable in the accompanying balance sheet that bears interest at 9% per annum. The building was sold back to Killearn in February 1998 in complete satisfaction of its note payable. During 1997, the Company sold 100,000 shares of Company stock to a subsequent director for $212,000. Effective August 12, 1996, the Company acquired from a subsequent director, all of the voting common stock of Flowers Properties, Inc., Highland Properties Construction Company, Inc., and Barrier Dunes Development Corporation, Inc., in exchange for Company stock. Under the agreement, the 2,565,000 shares originally issued were adjusted as a result of the average quoted market price of the shares for the ten trading days prior to December 31, 1996, if it was below $3.50 per share. The Company re-negotiated the transaction and issued an additional 1,935,000 additional shares for the above transactions. Then, in 1998, the Company and the directors completed their reevaluation of the assets acquired. The renegotiated purchase price was valued at $5,128,629 after the purchase price adjustment. As a result the director returned to the Company a total of 1,102,456 shares of Company stock originally issued for the acquisition. The purchased companies' operations principally consist of developed land and raw land in Middle and South Georgia, and Cape San Blas, Florida. The land owned by these corporations has been added to the land inventory of the Company. The acquisition is accounted for under the purchase method of accounting. The Company entered into certain transactions with a corporation of which an officer is the father of the Company's President. During the year ended June 30, 1998, the Company had lot sales of $208,000 to such corporation. In addition the corproation owed the Company $636,395 under a note receivable created upon the sale of an entire subdivision. All sales to the corporation were made at prices equivalent to third party transactions. 11. Supplemental Cash Flow Information for Noncash Investing and Financing Activities: During fiscal year 1998 and 1997, the Company entered into several property exchanges, whereby it traded property worth a total of approximately $304,000 and $2,303,000, respectively, for which it received equivalent value in property. During fiscal 1997, the Company issued 4,500,000 shares of its voting common stock valued at approximately $6,812,500 for all of the voting stock of Highland Properties Construction Company, Inc., Flowers Properties, Inc., and Barrier Dunes Development Corporation, which companies own real estate in Albany, Georgia, Thomasville, Georgia and Cape San Blas, Florida, respectively. During the year ended June 30, 1998, the Company renegotiated its acquisition of the Flower Entities after a reevaluation of the assets acquired. The renegotiated purchase price was valued at $5,128,629 after the purchase price adjustment. As a result, the purchaser returned to the Company a total of 1,102,456 shares of PTE stock originally issued for the acquisition. The adjusted total shares issued for the Flowers Entities totals 3,397,544 shares. During 1998, the Company satisfied its Company note payable to a director in exchange for the transferrance of inventory and notes receivable from its Capital First Holdings, Barrier Dunes, Flowers Properties and CFH Albany companies worth a total of $1,720,000. During 1998 and 1997, respectively, 43,195 and 24,500 shares of common stock were issued to two creditors as payment for services rendered. A $32,000 and $46,000 expense was recorded, respectively, in connection with these transactions. During 1998, the Company purchased 132,000 shares of Killearn stock for $1,254,000, financed by notes payables to the Sellers. During 1998, the Company transferred a Stockbridge, Georgia building to Killearn in complete satisfaction of its mortgage note payable. Certain properties worth approximately $429,770 were transferred to the former CEO under his termination agreement in satisfaction of his deferred compensation liability. 12. Contingencies During the normal course of business, the Company is subject to various lawsuits which may or may not have merit. Management intends to defend such suits vigorously and believes that they will not result in any material loss to the Company. 13. Concentration of Risk: The Company currently utilizes one vendor in the development of all of its land inventories. Although there are a limited number of development companies in the area, management believes that other suppliers could provide similar services on comparable terms. A change in vendors, however, could cause a delay in development and a possible loss of sales, which would adversely affect operating results. 14. Subsequent Events Subsequent to year end, the Company paid off its entire remaining Killearn Properties, Inc. obligation of approximately $2,000,000 through refinancing with its first mortgagee in Tallahassee, Florida. As a result, of this refinancing, the Company now has an approximate $9,000,000 obligation with its primary lender and the obligation to Killearn secured by the Florida property has been removed. The Company now owes about $346,000 to Killearn, which amounts are due and payable on or before June 30, 1999, and which amounts are secured by second mortgages on property located in Henry County, Georgia. Additionally, subsequent to year end, the Company borrowed an additional $100,000 from the President and the Company's largest shareholder, which funds were utilized to increase working capital of the Company. Also subsequent to year end, the Company contracted to sell 100 acres to a company to which a director is the majority shareholder for $610,000, which amount was greater than the largest offer the Company received from any other purchaser. The Company's cost in the land approximates the agreed upon sales price. Additionally, in September 1998 Barrier Dunes borrowed approximately $600,000 from a development line in order to begin construction of six units in Cape San Blas, Florida. Item 8. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure. As reported on Form 8-K filed on September 15, 1997, on September 5, 1997, the Company formally dismissed its former accountant, Coopers & Lybrand. This dismissal was due to a dispute over fees for the upcoming audit. The report of Coopers & Lybrand did not contain an adverse opinion or disclaimer of opinion and was not modified as set forth in Form 10-KSB/A filed on EDGAR on October 20, 1997. On September 3, 1997, the Company had engaged Jones and Kolb as its new accountant. Item 9. Directors, Executive Officers, Promoters and Control Persons; Compliance with Section 16(a) of the Exchange Act. The following table sets forth the names, ages and current positions with the Company held by Directors, Executive Officers and Significant Employees, together with the year such positions were assumed. There is no immediate family relationship between or among any of the Directors, Executive Officers or Significant Employees, and the Company is not aware of any arrangement or understanding between any Director or Executive Officer and any other person pursuant to which he was elected to his current position. Name Age Position Since Mark A. Conner 32 Chairman, President 1996 James A. Preiss 58 Director 1996 Ben S. Branch 55 Director, Audit Committee Chairman 1997 Langdon S. Flowers, Jr. 48 Director 1997 Robert E. Maloney, Jr. 34 Director Vice President-Corporate Counsel 1996 David W. Wahl 26 Vice President-Chief Financial Officer 1998 Mark A. Conner, age 32, has been President of the Company since February 1996, and President of Capital First since its incorporation in 1994. Mr. Conner earned a B.S. in Finance, with honors, from Florida State University in 1987. Mr. Conner started his own real estate company in October 1987, Conner, White & Associates, Inc., which focused on the development of affordable housing for first time and mid-priced home buyers. This approach proved to be successful, resulting by 1992 in the development and marketing of 14 communities. James A. Preiss, age 58, is the former Chief Executive Officer of Proactive Technologies, Inc., who resigned in March of 1998 to pursue other interests. He is a former partner of Proactive's President, Mark A. Conner, and co-developed more than $50 million in residential real estate from 1992 to 1995. He has substantial experience in the real estate industry and in the early 1970's, directed SunView, New Jersey's real estate divisions for the Deltona Corporation communities of Marco Island, Spring Hill, Citrus Springs, Sunny Hills, Deltona, and Pine Ridge Estates. In 1978, he founded Preiss & Preiss, Inc., a $60 million industrial real estate development corporation in Fairfield, New Jersey and Morristown, New Jersey. He has also owned Indus-Council Consultants, Inc., a New Jersey based consulting group, and has lectured at Rutgers University College of Labor and Industry. Langdon S. Flowers, Jr., 48, was born and raised in Thomasville, Georgia, and still resides there. He has also served as president of the W.R. Milton YMCA Board of Directors and is a past director of the Thomas County Habitat for Humanity. He is currently a director of the South Georgia Regional Board of NationsBank, M.L. Lynch, Co., and F&W AgriServices, Inc. In 1971, he earned a B.S. degree in Management from Georgia Tech University. From 1974 to 1984 Langdon worked in various positions with Flowers Industries, Inc. (NYSE) including serving as President of Flowers Baking Company (Thomasville, Georgia), President of Schott's Bakery (Houston, Texas), and Corporate Regional Vice President for the six Georgia and Alabama bakeries. In 1984 Langdon left Flowers Industries to form his own management company, FPI, Inc. and three real estate development companies: Barrier Dunes Development Corporation, Flowers Properties, Inc. and Highland Properties Construction Company. All three of these development companies were merged into Proactive Technologies, Inc. (AMEX) Ben S. Branch, Ph.D., 55, Professor of Finance at the University of Massachusetts, has served as the Chapter 7 Bankruptcy Trustee for the Bank of New England Corporation since 1991. Prior to that he chaired the Senior Unsecured Creditors Committee and later the Board of Directors for the First Republic Bank Corporation. Professor Branch received his Ph.D. in Economics from the University of Michigan in 1970. He taught Economics at Dartmouth College from 1970-1975 when he joined the Finance Department faculty at the University of Massachusetts. He is the author of numerous articles on investing, appearing in such publications as the Wall Street Journal and Barrons as well as numerous academic journals. He has also written several books on investing including Investments, Principal, and Practices (Longman, 1987). He is also the co-author (with noted bankruptcy lawyer Hugh Ray) of a book on investing in the claims against the bankruptcy and financially distressed firms, Bankruptcy Investing, How to Profit from Distressed Companies (Dearborn Publishing, 1992). Robert E. Maloney, Jr., age 34, has been Corporate Counsel to the Company since February 1996. He earned a B.A. with high honors (including Phi Beta Kappa) from Ohio Wesleyan University in 1986. He graduated from Wake Forest University School of Law in 1989, and served as the Executive Editor of Wake Forest Law Review in 1988-89. Mr. Maloney was with the firm of Fee, Bryan & Koblegard, P.A. in Fort Pierce, Florida from 1989 to 1995, where he specialized in litigation matters. In 1993 and 1994, Mr. Maloney served as counsel on a number of Capital First's real estate developments. He is licensed to practice law in the states of Florida, Georgia, Massachusetts, and Connecticut and is a member of the Florida Trial Attorneys and the American Bar Association. David W. Wahl, age 26, joined the Company in May 1998 as Controller and was subsequently promoted to Chief Financial Officer. Mr. Wahl earned a B.A. in Economics and Mathematics from Williams College in 1993. He also obtained his M.B.A. from Emory University in 1998, graduating with Honors. Mr. Wahl has had experience as an auditor with a Big 5 accounting firm and as an analyst in the Corporate Finance division of a pharmaceuticals company. Compliance with Section 16(a) of the Securities Exchange Act of 1934 Section 16(a) of the Securities Exchange Act of 1934, as amended, and regulations of the SEC thereunder require the Company's executive officers and directors and persons who own more than 10% of the Company's common stock, as well as certain affiliates of such persons, to file initial reports of ownership and reports of changes in ownership with the SEC. Executive officers, directors and persons owning more than 10% of the Company's common stock are required to furnish the Company with copies of all Section 16(a) forms they file. Based solely on its review of the copies of such forms received by it and written representations that no other reports were required for those persons, the Company believes that during the fiscal year ended June 30, 1998, its executive officers, directors and owners of more than 10% of its common stock complied with all filing requirements. Item 10. Executive Compensation. SUMMARY COMPENSATION TABLE (Year ended June 30, 1998) Name and Long-term Other Annual Principal Position Salary Bonus Compensation Compensation Mark A. Conner Chairman of the Board, President $61,200 --0-- --0-- $ 109,360 (1) James A. Preiss (2) CEO $131,539 --0-- --0-- $ 570,055 (3) (1) Includes other personal expenses paid by Capital First and the Company on behalf of Conner. (2) Based on an annual salary of $180,000 per year. Mr. Preiss resigned his position on March 9, 1998. (3) Includes $387,000 paid by the Company due under a deferred compensation arrangement and property transferred to him with a book value of $183,055. Item 11. Security Ownership of Certain Beneficial Owners and Management. The following table sets forth information, as of June 30, 1998, concerning shares of Common Stock of the Company beneficially owned by each beneficial owner of more than 5% of the Company's common stock and by each director and officer and by all directors and officers as a group. Unless expressly indicated otherwise, each stockholder exercises sole voting and investment power with respect to the shares beneficially owned. Name and Address Number of Shares Percent of Beneficial Owner Beneficially Owned of Class Mark A. Conner 8,000,200 46.80% (1) 7118 Beech Ridge Trail Tallahassee, Florida 32312 Langdon S. Flowers, Jr. 2,397,544 14.03% P..O. Box Thomasville, Georgia Robert E. Maloney, Jr. 25,000 <1% 7118 Beech Ridge Trail Tallahassee, FL 32312 Ben S. Branch 420,000 2.46% University of Mass. Amherst, MA George McIntosh 1,000,000 5.85%(1) P.O. Box Albany, Georgia All Directors and Officers as a Group 11,842,744 69.29% (1) (1) Based on 17,092,657 issued and outstanding shares used to calculate percentage. Item 12 Certain Relationships and Related Transactions. In December 1995, the Company's President, Conner, contributed to Capital First, his 33.3% limited partnership interests in Piney-Z, Ltd. and Apalachee Partners, Ltd. (See Note 10 to the Consolidated Financial Statements). During the twelve months ending June 30, 1998, the Company made $92,556 in debt service payments with respect to loans on Conner's home on which Conner was primarily liable. Such amounts were included in Conner's compensation. In April 1996, the Company purchased land from an entity owned by PTE's largest shareholder for a purchase price of $475,000 (which approximates the shareholder's basis in the property). In connection with this purchase, a note payable of $225,000 was assumed by PTE, and PTE entered into a note payable agreement with the seller for the remaining $250,000. The assumed note bores interest at a rate of approximately 16% and was paid off during the year ended June 30, 1998. The Company had a deferred compensation agreement with the former Chief Executive Officer which resulted in the Company having a deferred payable of $387,000 at June 30, 1997. During the year ended June 30, 1998, the Chief Executive Officer ceased employment with the Company and entered into a termination agreement whereby the deferred compensation payable would be paid in full and certain other property transferred to him as payment for past services. As a result, the Company paid the remaining $387,000 due under the deferred compensation arrangement and transferred to him cash and additional property with a total book value of $183,055, which are classified as compensation expense. From time to time the Company makes advances and repayments of loans to and from its President which are repaid either through cash payments or increases in compensation expense. Prior to year end, the Company borrowed approximately $172,000 from the President from funds acquired through the sale of his personal stock. As of June 30, 1998, the President owed $109,111 to the Company. During 1997, the Company sold one lot to its former Chief Executive Officer and one house to a director amounting to total revenues of approximately $145,000. During April, 1996, the Company acquired for investment purposes approximately 8.1% of the issued and outstanding shares of Killearn Properties, Inc. ("Killearn"). Killearn is in the business of real estate development in the Stockbridge, Georgia area. The Company filed its Schedule 13D regarding this event on April 25, 1996. In May, 1996, PTE proposed a transaction with Killearn whereby Killearn would exchange certain assets (consisting of the golf course and country club, a newly constructed inn and certain joint venture interests) to Killearn then Chairman of the Board and Chief Executive Officer, for this approximate 42% ownership interest in Killearn, or 551,321 shares of Killearn voting common stock. In connection with this proposed transaction, PTE would be required to loan Killearn $2 million dollars, which would be used to facilitate the transfer of the assets. During August 1996, PTE acquired approximately 85,950 additional shares of Killearn stock, increasing its ownership interest in Killearn to approximately 22%. On July 29, 1996, PTE proposed to Killearn's Board of Directors that PTE be retained to provide sales personnel and sales training techniques in order to improve the sales of residential lots. In addition, PTE proposed that Killearn's board include two additional representatives of PTE. On July 31, 1996, Killearn's Board of Directors approved the transaction and the PTE proposals, and an agreement was entered into on August 2, 1996 between Killearn and Killearn's chairman. The split-off transaction was voted upon and approved at Killearn's shareholders' meeting held on September 30, 1996. At the Board meeting following the shareholders' meeting, Mark A. Conner, President of the Company, Robert E. Maloney, Jr., and Langdon S. Flowers, Jr., directors of the Company were named to the Board of Killearn. On November 1, 1996, Mr. Conner was named Chairman of Killearn. At June 30, 1997, the Company owned 250,750 shares, or 28.26% of Killearn stock. Since August 1, 1996, Killearn and PTE have been operating under an informal arrangement for the services of sales personnel. On March 10, 1997, Killearn's Board of Directors ratified a proposal to pay PTE $12,500 per month for the services of PTE's sales personnel, retroactive to July 1, 1996. During fiscal 1998 and 1997, the Company received $25,000 and $150,000 in consulting fees from Killearn. In a prior fiscal year, the Company agreed to purchase land and other assets from Killearn for approximately $25,000,000. As a result of that transaction, the Company owed Killearn on June 30, 1998 and 1997, respectively, $1,992,527 and $5,329,168. In addition, from time to time during fiscal year 1997, the Company made and received advances and repayments of short term loans to Killearn which are repaid through cash payments. In January, 1998, the Company repaid all advances to Killearn and have not incurred any further advances to date. During August 1996, the Company purchased a new subsidiary which previously purchased a building for $550,000 from Killearn. The purchaser signed a promissory note in the amount of $550,000 that is included in notes payable in the accompanying balance sheet that bears interest at 9% per annum. The building was sold back to Killearn in February 1998. During 1997, the Company sold 100,000 shares of Company stock to a subsequent director for $212,000. Effective August 12, 1996, the Company acquired from a subsequent director, all of the voting common stock of Flowers Properties, Inc., Highland Properties Construction Company, Inc., and Barrier Dunes Development Corporation, Inc., in exchange for Company stock. Under the agreement, the 2,565,000 shares originally issued were adjusted as a result of the average quoted market price of the shares for the ten trading days prior to December 31, 1996, if it was below $3.50 per share. The Company re-negotiated the transaction and issued an additional 1,935,000 additional shares for the above transactions. Then, in 1998, the Company and the directors completed their reevaluation of the assets acquired. The renegotiated purchase price was valued at $5,128,629 after the purchase price adjustment. As a result the director returned to the Company a total of 1,102,456 shares of Company stock originally issued for the acquisition. The purchased companies' operations principally consist of developed land and raw land in Middle and South Georgia, and Cape San Blas, Florida. The land owned by these corporations has been added to the land inventory of the Company. During 1998 and 1997, respectively, 43,195 and 24,500 shares of common stock were issued to two creditors as payment for services rendered. A $32,000 and $46,000 expense was recorded, respectively, in connection with these transactions. PART IV Item 13. Exhibits List and Reports on Form 8-K. (a) Reports on Form 8-K - NONE (b)Exhibits. Page SEC Exhibit No.Type of Exhibit Number 27 Financial Data Schedule 44 99 Additional Exhibits N/A SIGNATURES In accordance with Section 13 or 15(d) of the Exchange Act, the registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. PROACTIVE TECHNOLOGIES, INC. Date: October 13, 1998 By: /s/ Mark A. Conner Mark A. Conner Chairman of the Board and President In accordance with the requirements of the Exchange Act, this report has been signed by the following persons on behalf of the Registrant and in the capacities and on the dates indicated. Date: October 13, 1998 By: /s/ Mark A. Conner Mark A. Conner Chairman of the Board and President Date: October 13, 1998 By: /s/ James A. Preiss James A. Preiss Director Date: October 13, 1998 By: /s/ Robert E. Maloney, Jr. Robert E. Maloney, Jr. Director Date: October 13, 1998 By: /s/ David Wahl David Wahl Vice-President Chief Financial Officer Date: October 13, 1998 By: /s/ Ben S. Branch Ben S. Branch Director Chairman - Audit Committee Date: October 13, 1998 By: /s/ Langdon S. Flowers, Jr. Langdon S. Flowers, Jr. Director INDEX TO EXHIBITS Exhibit Sequential Number Description Page Number EX-27 2 WARNING: THE EDGAR SYSTEM ENCOUNTERED ERROR(S) WHILE PROCESSING THIS SCHEDULE.
5 YEAR JUN-30-1998 JUN-30-1998 99,764 1,449,565 3,366,436 0 32,960,056 37,875,821 644,248 234,583 38,460,182 23,339,821 0 0 0 683,706 12,550,272 38,460,182 15,133,889 14,962,972 11,888,253 11,888,253 2,999,323 0 1,269,917 (982,468) (332,146) (650,322) 230,055 0 0 (880,377)
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