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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended June 30, 2000
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period _____ to _______
Commission file number: 0-28168
STRATEGIC CAPITAL RESOURCES, INC.
(Exact name of registrant as specified in its charter)
Delaware 11-3289981
- ------------------------------- ------------------
(State or other jurisdiction of (I.R.S Employer
incorporation or organization) Identification No.)
2500 Military Trail North, Suite 260, Boca Raton, Florida 33431
(Address of principal executive office)
(561) 995-0043
(Registrant's telephone number)
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $.001 par value
Indicate by check mark 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 12 months, and (2) has been subject to such filing
requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of the Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [ ]
The aggregate market value of the Registrant's outstanding Common Stock held
by non-affiliates of the registrant on September 8, 2000 was approximately
$909,000. There were 15,616,725 shares of Common Stock outstanding as of
September 8, 2000.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Registrant's Information Statement relating to the 2000 Annual
Meeting of Shareholders to be held on December 1, 2000, are incorporated by
reference in Part III hereof.
PRIVATE SECURITIES LITIGATION REFORM ACT SAFE HARBOR STATEMENT
This Annual Report on Form 10-K contains certain forward-looking statements
within the meaning of the Private Securities Litigation Reform Act of 1995,
and may be identified by the use of such words as "believe," "expect,"
"anticipate," "should," "planned," "estimated" and "potential." Examples of
forward-looking statements include, but are not limited to, estimates with
respect to our financial condition, results of operations and business that
are subject to various factors which could cause actual results to differ
materially from these estimates. These factors include, but are not limited
to, general economic conditions, changes in interest rates, real estate
values, and competition; changes in accounting principals, policies, or
guidelines; changes in legislation or regulation; and other economic,
competitive, governmental, regulatory, and technological factors that may
affect our operations, pricing, products and services.
PART I
As used in this Form 10-K, "we", "us" and "our" refer to Strategic Capital
Resources, Inc. and its consolidated subsidiaries, depending on the context.
ITEM 1. BUSINESS
General
Strategic Capital Resources, Inc. (the "Company" or "SCRI"), is a Delaware
corporation organized in 1995. The Company's principal operations consist of
the following business lines:
1) The purchase and leaseback of fully furnished model homes.
2) The acquisition, development and sale of residential real estate.
3) The purchase and leaseback of multi-family residential / commercial real
estate.
Model Home Sale Leaseback Program
We purchase and leaseback on a "triple net" basis, fully furnished model homes
complete with options and upgrades to major publicly traded homebuilders
and real estate developers.
Since 1995, we have purchased a total of 425 model homes at an aggregate
purchase price in excess of $95,000,000. The following is a summary of model
home purchases by fiscal year end since inception:
Fiscal Total Total
Year Ended Model Homes Acquisition
June 30, Purchased Cost
- ---------- ----------- -----------
2000 118 $25,725,869
1999 61 16,813,539
1998 110 26,170,860
1997 75 14,512,772
1996 61 11,836,729
--------- -----------
Total 425 $95,059,769
--------- -----------
The following is a summary by state of model home unit purchases, resales, and
inventory at June 30, 2000.
Number of Number of
Model Homes Model Homes June 30, 2000
State Purchased Sold Inventory
- ----------------- ----------- ----------- -------------
Arizona 19 3 16
California 62 0 62
Colorado 22 22 0
Georgia 5 5 0
Florida 107 102 5
Minnesota 2 2 0
Nevada 13 0 13
New Jersey 107 73 34
New York 9 5 4
North Carolina 12 4 8
Pennsylvania 31 16 15
Texas 25 6 19
Utah 5 2 3
Virginia 6 6 0
----------- ----------- -------------
Total 425 246 179
=========== =========== =============
The following chart outlines the total cost of model home purchases and sales
by state since inception and the current model home inventory at June 30, 2000.
Cost of Cost of
Model Homes Model Homes June 30, 2000
State Purchased Sold Inventory
- ----------------- ------------ ------------ -------------
Arizona $ 2,124,640 $ 334,195 $ 1,790,445
California 16,267,394 - 16,267,394
Colorado 4,715,463 4,715,463 -
Georgia 1,576,755 1,576,755 -
Florida 20,086,710 18,964,021 1,122,689
Minnesota 564,570 564,570 -
Nevada 1,667,790 - 1,667,790
New Jersey 27,411,230 17,940,559 9,470,671
New York 3,301,435 1,783,144 1,518,291
North Carolina 2,758,255 882,382 1,875,873
Pennsylvania 7,191,197 3,482,155 3,709,042
Texas 5,060,757 953,527 4,107,230
Utah 837,726 341,629 496,097
Virginia 1,495,847 1,495,847 -
------------ ------------ -------------
Total $95,059,769 $53,034,247 $ 42,025,522
============ ============ =============
The following is a breakdown of lease revenues by state for fiscal years ended
June 30, 2000, 1999, and 1998:
Lease revenue Lease revenue Lease revenue
Year Ended Year Ended Year Ended
State 6/30/2000 6/30/1999 6/30/1998
- ----------- --------------- --------------- ---------------
Arizona $ 180,445 $ - $ -
California 1,304,561 - -
Colorado $ 81,126 $ 274,911 $ 469,752
Florida 246,035 912,838 1,523,285
Minnesota 19,744 34,056 -
Nevada 183,914 1,198 -
New Jersey 1,572,944 2,336,894 845,794
New York 247,714 306,227 40,402
North Carolina 156,520 79,659 101,581
Pennsylvania 491,788 641,562 340,269
Texas 287,196 45,076 104,327
Utah 70,359 - -
Virginia - 31,119 119,383
---------- ------------ ----------
Total $4,842,346 $ 4,663,540 $3,544,793
=========== ============ ==========
Subsequent Events
During July 2000, we acquired 38 model homes at a cost of approximately $7.8
million. The model homes are located in New Jersey, Minnesota, and Iowa.
On the same date, we closed on a new $7.4 million term loan which we utilized
to acquire the model homes.
From July 1, 2000 through the date of this report, we sold 21 model homes at
an aggregate price of approximately $6.0 million which we originally purchased
for approximately $5.6 million. As of the report date, we have sales
contracts pending on three model homes for an aggregate sale price of
approximately $563,000 which we originally purchased for approximately
$543,000.
Acquisition, Development, and Sale of Residential Real Estate
We purchase parcels of residential real estate selected by the homebuilders
from non-affiliated third parties. The parcels are acquired at the lower of
appraised value or contract price. The land may require development or
consist of finished lots. If development work is required, the homebuilder
enters into a fixed price development agreement to develop the land for us,
and is required to provide completion bonds for all work by a surety company
acceptable to us. Reimbursement for development work performed is determined
on a transaction by transactions basis. A lease and exclusive option to
purchase agreement are entered into with the homebuilder simultaneously with
the land acquisition. The terms and conditions of each transaction are project
specific (lease rate, term, option deposit, takedown schedule, etc.). We
obtain various forms of insurance coverage to insure the performance of the
homebuilder as well as the value of the real estate acquired.
As of June 30, 2000, we had completed one land acquisition and development
contract. The transaction which closed in September 1996, involved the
purchase of 70 acres in western Boca Raton, Florida at a purchase price of
$8,591,956, to be subdivided into 370 lots for the development of single
family estate homes, zero lot single family homes, townhouses, and villas.
During June 1997, we were advised by the homebuilder that it was electing to
fully exercise its option to purchase the tract of land and terminate the
development agreement. The homebuilder exercised the option on July 3, 1997,
and purchased the property for the sum of $8,591,956.
Subsequent Events
On August 31, 2000, we acquired two parcels of land consisting of 66 finished
lots at a cost of approximately $20,500,000 and simultaneously leased the
property to a major publicly traded homebuilder. We also granted the
homebuilder an exclusive option to purchase the finished lots at prices
ranging from approximately $218,000 to $477,000 per finished lot.
During July 2000, we entered into a new $45 million revolving credit facility
which expires in July 2002, and have the right to extend the facility for one
additional year. On August 31, 2000, we drew down approximately $19.5 million
to fund the acquisition of the land parcels.
Multi-family Residential Property / Commercial Sale Leaseback Program
On July 15, 1999 we purchased a 288 unit multi-family residential property in
Jacksonville, Florida for a purchase price of $10,228,000. The purchase price
was paid as follows:
Assumption of existing first mortgage $ 4,928,000
New loan 5,300,000
-----------
Total purchase price $10,228,000
===========
Simultaneous with the purchase, we entered into an operation, maintenance, and
management agreement which provides for payment of a minimum income stream per
month. The agreement also requires the management company to purchase the
property at the end of five years. The performance under the agreement is
insured jointly and severally by two insurance companies rated "AAA" and "BB"
respectively by Standard & Poors.
Approximately $1,500,000 of the new loan is to be utilized to improve,
modernize and enhance the value of the property. As of June 30, 2000,
approximately $1,350,000 of the improvements had been completed.
Competition and Market Factors
We are subject to all the general risks associated with investment in real
estate such as adverse changes in general or local economic conditions,
changes in the supply of or demand for similar or competing properties in an
area, changes in interest rates and operating expenses, changes in market
rental rates, inability to lease properties upon the termination or expiration
of existing leases, the renewal of existing leases and inability to collect
payments from operators.
We face competition from banks, insurance companies, finance companies,
leasing companies and real estate investment trusts in the acquisition,
financing and leasing of properties, which could adversely affect our growth.
There can be no assurance that we will be able to raise sufficient capital
through borrowings, or the issuance of debt and equity securities, to achieve
our investment objectives.
Our Company is dependent on the efforts of its directors, officers and key
personnel and has employment contracts with only two such persons. There can
be no assurance that we will be able to recruit additional personnel with
equivalent experience in the event of their resignation.
Employees
At September 8, 2000, the Company employed 7 persons, which included sales and
marketing, executive, and administrative personnel. None of the Company's
employees are covered by a collective bargaining agreement and management
considers the relationship with its employees to be excellent.
Item 2. Properties
The Company's corporate office is located at 2500 Military Trail North, Suite
260, Boca Raton, Florida 33431, where the Company leases 2,798 square feet of
office space for a term expiring January 2002. We believe that our current
office space is adequate for our needs for the foreseeable future. For
additional information on properties, see Note 12 to the Company's
Consolidated Financial Statements on page F-18.
The Company owns additional properties more fully described in Item 1.
Insurance
The Company has comprehensive liability, fire, flood, extended coverage and
rental loss insurance with respect to its Properties. Management believes
that such insurance provides adequate coverage.
ITEM 3. LEGAL PROCEEDINGS
We filed a lawsuit in June 1999 against Monarch Investment Properties, Inc.,
formerly known as Iron Holdings Corp., Iron Eagle Contracting and Mechanical,
Inc., Tahoe Realty Corp., Anthony Gurino, Dennis Sommesso, and "John and Jane
Doe 1-15, in the Supreme Court of the State of New York, County of Queens. The
Action asserts seven separate causes of action arising out of a default in
payment of a $1,100,000 promissory note evidencing moneys due to the Company
from Monarch/Iron Holdings as a result of its purchase of certain corporate
stock of Iron Eagle from the Company.
The Court granted our motion for summary judgment during March 2000 against
Monarch/Iron Holdings in the sum of $1,100,000 plus interest from January 1,
1999, a judgment of possession of all collateral pledged by Monarch/Iron
Holdings and judgment that we are the rightful owner and entitled to
immediate possession of the collateral and impressing a trust on said
collateral and declaring defendants to be trustees of said collateral and
directing said trustees to deliver such collateral to us.
We have set up a reserve of $100,000 against the $1,100,000 asset. We are
in the process of enforcing our rights.
The Company is not presently involved in any other material litigation nor,
to its knowledge, is any material litigation threatened against the Company
or its properties, other than routine litigation arising in the ordinary
course of business.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Company did not submit any matters to a vote of security holders in the
fourth quarter of its fiscal year ended June 30, 2000.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Our Common Stock is traded on the OTC Bulletin Board under the symbol "JJFN".
The following table sets forth, for the periods indicated, the high and low
closing sales price for the Common Stock, as reported by the OTC Bulletin
Board. As of September 8, 2000 there were approximately 745 shareholders of
record. The closing sale price of our Common Stock as reported on the OTC
Bulletin Board, on September 8, 2000, was $0.18.
Year Ended June 30,
----------------------------------
2000 1999
------------- ---------------
High Low High Low
----- ----- ----- -----
First Quarter 0.30 0.25 0.21 0.19
Second Quarter 0.25 0.24 0.31 0.25
Third Quarter 0.35 0.30 0.31 0.27
Fourth Quarter 0.21 0.20 0.51 0.45
We have not paid any cash dividends on our Common Stock and do not anticipate
paying any in the foreseeable future. We intend to continue our present
policy of retaining cash flow for investment in our operations.
On November 2, 1995, we issued 400,000 shares of our 6% participating
convertible preferred stock. Each share is convertible into one share of our
common stock at $2.50 per share commencing in December 1996. Dividends are
declared on the basis of a 50% participation in the rental revenue stream up
to $60,000 per year. The preferred stock is redeemable at our option at par.
During July 1998, David Miller, Chairman of the Company acquired all the
issued and outstanding shares of convertible preferred stock. We had not paid
any distributions on the preferred stock since July 1996, as a result of a
dispute as to which of two unaffiliated parties were entitled to the dividend.
At September 30, 1998, we owed $130,000 in unpaid distributions. In October
1998, we began paying distributions to David Miller at the rate of $10,000 per
month, which will bring us current on preferred distributions in November 2000.
ITEM 6. SELECTED FINANCIAL DATA
The selected financial data presented below for the years ended June 30, 2000,
1999, 1998, 1997, and inception November 2, 1995 through June 30, 1996 have
been derived from the Company's audited consolidated financial statements.
This data should be read in conjunction with "Management's Discussion and
Analysis of Financial Condition and Results of Operations" and the
consolidated financial statements and related notes thereto included elsewhere
in this Report.
SELECTED FINANCIAL DATA
(In thousands, except per share data)
Years Ended June 30,
-------------------------------------------
2000 1999 1998 1997 1996
-------- -------- -------- -------- --------
Income Statement Data:
Revenues $26,073 $26,287 $21,303 $ 7,525 $ 965
Expenses 25,777 25,201 21,758 7,875 1,127
-------- -------- -------- -------- --------
Income (loss) from continuing
operations before income tax
benefit (expense) 296 1,086 (455) (350) (162)
Provision for income tax
benefit (expense) (90) (326) 298 77 -
Income (loss) from continuing
operations 206 760 (157) (273) (162)
Discontinued operations, net of taxes
Loss from discontinued operations - - - (54) (23)
Gain on disposal of
discontinued operations - - - 284 -
-------- -------- -------- -------- --------
Net income (loss) 206 760 (157) (43) (185)
Preferred stock distributions 120 90 - 5 40
-------- -------- -------- -------- --------
Income (loss) applicable to
common shareholders $ 86 $ 670 (157) (48) (225)
======== ======== ======== ======== ========
Per Share Data:
Basic:
Net income (loss) 0.01 0.04 (0.01) 0.00 (0.02)
Weighted average number
of common shares outstanding 15,790 16,185 16,911 16,551 10,801
Assuming Dilution:
Net income (loss) 0.00 0.04 (0.01) 0.00 (0.02)
Weighted average number
of common shares outstanding 18,859 18,916 16,911 16,551 10,801
June 30,
-------------------------------------------
2000 1999 1998 1997 1996
-------- -------- -------- -------- --------
Balance Sheet Data:
Total assets 56,129 37,094 40,186 32,430 14,727
Mortgages and notes payable 46,541 27,958 31,539 23,658 6,477
Other liabilities 1,192 766 685 683 192
Stockholders' equity 8,396 8,370 7,962 8,089 8,058
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Overview
A summary of the operating results of Strategic Capital Resources, Inc. and
subsidiaries for the fiscal years ended June 30, 2000, June 30, 1999, and June
30, 1998 are presented below:
Years Ended June 30,
--------------------------------------------
2000 1999 1998
--------------------------------------------
(Dollars in thousands)
Revenues:
Lease revenue $ 4,842 19% $ 4,664 17% $ 3,545 17%
Model home sales 19,551 75% 21,496 82% 9,028 42%
Multi-family residential 1,356 5% - -% - -%
Acquisition / development sales - -% - -% 8,601 40%
Interest & other income 324 1% 127 1% 129 1%
----------------------------------------------
Total revenues 26,073 100% 26,287 100% 21,303 100%
Costs and expenses:
Interest expense 3,948 15% 2,806 11% 2,135 10%
Cost of model homes sold 19,144 74% 20,368 77% 8,701 41%
Multi-family operating 355 1% - -% - -%
Cost of land development - -% - -% 8,592 40%
Depreciation & amortization 676 3% 593 2% 1,182 6%
Corporate 1,654 6% 1,434 6% 1,148 5%
----------------------------------------------
Total costs and expenses 25,777 99% 25,201 96% 21,758 102%
----------------------------------------------
Income (loss) before income
tax benefit (expense) 296 1% 1,086 4% (455) (2%)
Income tax benefit (expense) (90) -% (326) (1%) 298 1%
----------------------------------------------
Net income (loss) $ 206 1% $ 760 3% $ (157) (1%)
==============================================
Results of Operations
Year Ended June 30, 2000 Compared to Year Ended June 30, 1999.
The Company's lease revenue during fiscal 2000 increased $179,000 (or 4%)
compared to the prior year period. Average model homes on lease during
fiscal 2000 increased to $40.4 million compared to $38.9 million during
fiscal 1999 resulting in the increased lease revenue.
Revenues from the sale of model homes decreased $1.9 million (or 9%) compared
to the prior year period. Our average holding period for model homes from
acquisition to resale has been approximately 18 months. The holding period
for each model home varies depending on the stage of completion of the
communities at the time of acquisition, and the expected completion of each
community from start to finish, which typically ranges from 2 to 7 years.
Revenues from the sale of model homes fluctuate subject to the mix in our
model home portfolio and other economic conditions.
Interest expense related to lease revenues increased approximately $310,000
(or 11%) during fiscal 2000 compared to the prior year period, primarily due
to the increase in loans utilized to purchase additional model homes. Cost of
interest expense as a percentage of lease revenues is consistent with fiscal
1999.
Cost of model homes sold decreased $1.2 million (or 6%) compared to the
prior year period, primarily due to the related decrease in model home sales
revenue. Cost of model home sales as a percentage of model home sale revenues
is consistent with fiscal 1999.
The Company's corporate costs increased $220,000 (or 15%) during fiscal year
2000 as compared to fiscal year 1999. This increase was primarily attributable
to a $147,000 increase in salaries and employee benefits and a $142,000
increase in professional fees during fiscal 2000 compared to the prior year
period. Corporate costs as a percentage of revenues is consistent with fiscal
year 1999.
Net income before taxes for the period was $296,000 compared to $1,086,000 for
fiscal 1999, a decrease of $790,000 or (73%). The decrease was primarily
attributable to a decrease of $720,000 on the gain on the resale of model homes
from $1,128,000 in fiscal 1999 to $408,000 in fiscal 2000.
Year Ended June 30, 1999 Compared to Year Ended June 30, 1998.
The Company's lease revenue during fiscal 1999 increased $1.1 million (or 32%)
compared to the prior year period. The increase is attributable to additional
lease revenues generated from the purchase of approximately $17 million in
model homes during the fiscal year. Option fees decreased $.8 million during
fiscal 1999 compared to the prior year period. The decrease was due to the
exercise of the client's option to purchase resulting in the sale of a land
parcel for $8.5 million on July 3, 1997.
Revenues from the sale of model homes increased $12.5 million (or 138%) compared
to the prior year period. The increase is attributable to the maturity of the
model home portfolio with the expected turnover of the homes in the 18-24
month range.
Revenues from land sales and fees totaled approximately $8.6 million during
fiscal 1998. The Company had no land sales during fiscal 1999.
Interest expense related to lease revenues increased approximately $671,000
(or 31%) during fiscal 1999 compared to the prior year period, primarily due
to the increase in loans utilized to purchase additional model homes. Cost of
interest expense as a percentage of lease and option fee revenues is
consistent with fiscal 1998.
Cost of model homes sold increased $11.7 million (or 134%) compared to the
prior year period, primarily due to the related increase in model home sales
revenue. Cost of model home sales as a percentage of model home sale revenues
is consistent with fiscal 1998.
The Company's selling, marketing, general & administrative expenses increased
$285,000 (or 25%) during fiscal year 1999 as compared to fiscal year 1998.
This increase was attributable to the selling, general and administrative
costs associated with generating the increased revenue levels. Corporate
costs as a percentage of revenues is consistent with fiscal year 1998.
Income from continuing operations before income tax benefit for the period was
$1,085,950 compared to a loss of $455,311 for fiscal 1998, an increase of
approximately $1,541,000 (or 338%). Depreciation and amortization decreased
$589,000 (or 99%) during fiscal year 1999 compared to fiscal 1998,
contributing to the increase in net income.
Trends in Operations
Our operations have been and continue to accelerate at a rapid pace. For the
fiscal year ended June 30, 2000, total purchases of revenue producing assets
were in excess of $35 million, compared to $16 million for the year ended June
30, 1999. Monthly revenue from leases outstanding at June 30, 2000, 1999,
and 1998 were $420,000, $347,000, and $386,000, respectively.
Liquidity and Capital Resources
General - Our business is capital-intensive requiring constant infusions of
cash as the number, size, and complexity of transactions in which the Company
is involved increases. To date, we have been financed by secured loans from
financial institutions, the sale of equity, loans provided by shareholders,
and cash flows from operations.
At June 30, 2000, 1999, and 1998, stockholder loans outstanding were
$1,141,920, $1,315,907, and $1,025,907 respectively.
At June 30, 2000, we had approximately $16.1 million of unused, committed
credit facilities available under existing revolving loan agreements which may
be utilized to acquire model homes in accordance with the terms of those
agreements. Such credit facilities expire January through August 2001.
Interest is payable monthly at rates ranging from 30 day LIBOR plus 2.50% to
prime plus 1.00%.
During July 2000, we entered into a new $45 million revolving credit facility
which expires in July 2002, and have the right to extend the facility for one
additional year. Interest is payable monthly at the 30 day LIBOR rate plus
2.00%.
During July 2000, we entered into a new $7.4 million term loan which expires
in July 2003. Interest is payable monthly at 9.00% fixed.
Our cash uses during the twelve months ended June 30, 2000 were for revenue
producing asset acquisitions, operating expenses, and our repurchase of common
stock described below.
Borrowings from financial institutions are pursuant to various secured
revolving and term loan agreements. The following is a summary of new loans,
borrowings under existing credit facilities, and asset acquisitions during the
twelve months ended June 30, 2000:
New Acquisition
Date Facilities Use of Proceeds Cost
-------- ------------ ------------------------------------ -----------
Purchase of 288 unit multi-family
07/99 $10,227,999 residential property in Florida. $10,227,999
09/99 710,000 Purchase of 5 model homes in Utah. 837,726
09/99 422,964 Purchase of 4 model homes in Nevada. 469,690
09/99 1,858,191 Purchase of 19 model homes in Arizona. 2,124,640
09/99 894,000 Purchase of 9 model homes in Nevada. 1,197,830
10/99 6,603,500 Purchase of 23 model homes in California. 6,603,500
12/99 4,150,000 Purchase of 20 model homes in Texas. 4,150,276
------------ -----------
Total $24,866,654 $25,611,661
------------ -----------
Existing Credit Acquisition
Date Facilities Use of Proceeds Cost
-------- ------------ ------------------------------------ -----------
10/29/99 $ 1,676,744 Purchase of 8 model homes in N. Carolina. $1,875,873
11/02/99 8,214,166 Purchase of 39 model homes in California. 9,663,894
------------ -----------
Total $ 9,890,910 $11,539,767
------------ -----------
Grand Total $34,757,564 $37,151,428
============ ===========
During November 1999, we announced that our Board of Directors had authorized
the purchase of an additional 1,000,000 shares to its existing Share
Repurchase Program. As of June 30, 2000, we have repurchased 242,145
additional shares in the open market at prices ranging from $0.20 to $0.28. We
anticipate the continued purchase of our shares from time-to-time in open
market and privately negotiated transactions subject to market conditions and
our capital requirements for the acquisition of revenue producing assets.
Secured loans from financial institutions and capital contributions have been
adequate to permit us to carry on operations to date. However, it may be
necessary to finance the expansion of operations over the coming fiscal year
with additional funds raised through the issuance of debt or equity
securities. Should the need arise, we will attempt to complete a securities
offering of debt or equity. The net proceeds of an offering, together with
existing cash and credit facilities, as well as new facilities obtained on an
"as needed" basis, should enable us to finance our growing level of
operations.
However as of the date of this report, we do not have a written commitment
from any investment banking firm or any other entity who has agreed to
underwrite either a public or private offering of our securities. As a
result, there can be no assurances that we will be successful in obtaining
additional capital. Failure to obtain such capital will have a negative
impact on our future growth.
Cash Flows
Net cash provided by operating activities totaled $704,196, comprised of net
income of $206,471, plus net adjustments for non-cash items of $268,624, plus
a net change in other operating assets and liabilities of $229,101.
Net cash used in investing activities totaled $2,573,072, comprised of model
home purchases of $5,105,645, plus loan advances of $1,000,000, and capital
expenditures of $3,933, offset by $3,186,506 from the sale of model homes and
proceeds of notes receivable of $350,000.
Net cash provided by financing activities totaled $2,629,705, comprised of
proceeds of mortgages and notes payable of $4,519,462, offset by payments on
mortgages payable of $958,886, deferred costs of $566,494, preferred
distributions of $130,000, purchase of treasury stock of $60,390, and
repayment of stockholder loans of $173,987.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY SCHEDULES
STRATEGIC CAPITAL RESOURCES, INC.
AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Page
Independent Auditors' Report F-2
Consolidated balance sheets as of June 30, 2000 and 1999 F-3
Consolidated statements of operations for the years ended
June 30, 2000, 1999, and 1998 F-4
Consolidated statements of stockholders' equity for the years ended
June 30, 2000, 1999 and 1998 F-5
Consolidated statements of cash flows for the years ended
June 30, 2000, 1999, and 1998 F-6
Notes to consolidated financial statements F-7 to F-21
F-1
INDEPENDENT AUDITORS' REPORT
The Board of Directors
Strategic Capital Resources, Inc.
and subsidiaries
Boca Raton, Florida
We have audited the accompanying consolidated balance sheets of Strategic
Capital Resources, Inc. and subsidiaries as of June 30, 2000 and 1999 and the
related consolidated statements of operations, stockholders' equity, and cash
flows for the years ended June 30, 2000, 1999 and 1998. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these 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 audits 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 Strategic
Capital Resources, Inc. and subsidiaries as of June 30, 2000 and 1999 and the
results of its consolidated operations and its consolidated cash flows for the
years ended June 30, 2000, 1999 and 1998, in conformity with generally
accepted accounting principles.
HORTON & COMPANY, L.L.C.
Wayne, New Jersey
September 7, 2000
F-2
STRATEGIC CAPITAL RESOURCES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
ASSETS
June 30,
--------------------------
2000 1999
--------------------------
Revenue producing assets:
Model homes on lease, at cost, net of accumulated
depreciation of $16,645 in 2000,
and $ 88,963 in 1999 $42,008,875 $34,612,978
Multi-family residential properties 10,227,999 -
----------- -----------
52,236,874 34,612,978
----------- -----------
Other assets:
Cash 1,451,548 690,719
Net assets realizable on divestiture 1,000,000 1,100,000
Note receivable 650,000 -
Deferred charges 445,810 568,431
Other 345,207 121,656
----------- -----------
Total other assets 3,892,565 2,480,806
----------- -----------
Total assets $56,129,439 $37,093,784
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
June 30,
--------------------------
2000 1999
--------------------------
Liabilities:
Mortgages and notes payable $ 45,399,792 $ 26,642,294
Accounts payable and accrued expenses 834,869 587,415
Unearned rental revenue 356,855 168,246
Stockholder loans 1,141,920 1,315,907
Preferred distribution payable - 10,000
----------- -----------
Total liabilities 47,733,436 28,723,862
----------- -----------
Stockholders' equity:
Convertible preferred stock, $.01 par value
5,000,000 shares authorized,
400,000 shares issued and outstanding
in 2000 and 1999 4,000 4,000
Common stock, $.001 par value
25,000,000 shares authorized and 17,012,005 issued
15,661,725 outstanding in 2000 17,012 -
15,903,870 outstanding in 1999 - 17,012
Additional paid-in capital 8,346,552 8,346,552
Treasury stock, 1,350,280 shares in 2000,
and 1,108,135 shares in 1999 (343,176) (282,786)
Retained earnings 371,615 285,144
----------- -----------
Total stockholders' equity 8,396,003 8,369,922
----------- -----------
Total liabilities and stockholders' equity $56,129,439 $37,093,784
=========== ===========
See notes to consolidated financial statements
F-3
STRATEGIC CAPITAL RESOURCES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
Year Ended June 30,
-----------------------------------------
2000 1999 1998
------------ ----------- -------------
Revenues:
Lease revenue $ 4,842,346 $ 4,663,540 $ 3,544,793
Sale of model homes 19,551,367 21,495,935 9,027,514
Multi-family residential 1,356,271 - -
Real estate acquisition and
development sales and fees - - 8,600,727
Interest and other income 323,620 127,445 129,488
------------ ----------- -------------
26,073,604 26,286,920 21,302,522
------------ ----------- -------------
Costs and expenses:
Interest and financing costs 3,948,480 2,806,058 2,134,870
Cost of model homes sold 19,143,589 20,368,171 8,701,169
Multi-family residential 354,722 - -
Cost of real estate acquisition
and development sale - - 8,591,956
Corporate 1,653,940 1,433,805 1,147,978
------------ ----------- -------------
Total Operating Expenses 25,100,731 24,608,034 20,575,973
------------ ----------- -------------
Income before depreciation
and amortization 972,873 1,678,886 726,549
Depreciation & Amortization 676,402 592,936 1,181,860
------------ ----------- -------------
Income (loss) before income tax
(expense) benefit 296,471 1,085,950 (455,311)
Income tax (expense) benefit (90,000) (326,000) 298,000
------------ ----------- -------------
Net income (loss) 206,471 759,950 (157,311)
Preferred stock distributions 120,000 90,000 -
------------ ----------- -------------
Income (loss) applicable to
common shareholders $ 86,471 $ 669,950) $ (157,311)
============ =========== =============
Earnings (loss) per share data:
Basic earnings (loss) per share $ 0.01 $ 0.04 $ (0.01)
Diluted earnings (loss) per share $ 0.01 $ 0.04 $ (0.01)
See notes to consolidated financial statements
F-4
STRATEGIC CAPITAL RESOURCES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
For the years ended June 30, 2000, 1999 and 1998
Preferred stock Common Stock
------------------ ---------------------
Shares Amount Shares Amount
-------- -------- ---------- ----------
Balance, July 1, 1997 400,000 $4,000 16,811,990 $ 16,812
Common stock issued in payment
of indebtedness - - 200,015 200
Treasury stock purchased - - - -
Net loss - - - -
--------- -------- ---------- ----------
Balance, June 30, 1998 400,000 4,000 17,012,005 17,012
Treasury stock purchased - - - -
Preferred distributions - - - -
Net income - - - -
--------- -------- ---------- ----------
Balance, June 30, 1999 400,000 4,000 17,012,005 17,012
Treasury stock purchased - - - -
Preferred distributions - - - -
Net income - - - -
--------- -------- ---------- ----------
Balance, June 30, 2000 400,000 $ 4,000 17,012,005 $ 17,012
========= ======== ========== ==========
Retained
Additional Treasury Stock Earnings
Paid-In ---------------- (Accumulated
Capital Shares Amount Deficit)
---------- -------- ---------- -----------
Balance, July 1, 1997 $8,296,049 - $ - $(227,495)
Common stock issued in payment
of indebtedness 50,503 - - -
Treasury stock purchased - (77,920) (20,354) -
Net loss - - - (157,311)
---------- -------- ---------- -----------
Balance, June 30, 1998 8,346,552 (77,920) (20,354) (384,806)
Treasury stock purchased - (1,030,215) (262,432) -
Preferred distributions - - - (90,000)
Net income - - - 759,950
---------- -------- ---------- -----------
Balance, June 30, 1999 8,346,552 (1,108,135) (282,786) 285,144
Treasury stock purchased - (242,145) (60,390) -
Preferred distributions - - - (120,000)
Net income - - - 206,471
---------- -------- ---------- -----------
Balance, June 30, 2000 $8,346,552 (1,350,280) $(343,176) $371,615
========== ======== ========== ===========
See notes to consolidated financial statements
F-5
STRATEGIC CAPITAL RESOURCES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Year Ended June 30,
-------------------------------
2000 1999 1998
---------- ---------- ---------
Net income (loss) $ 206,471 $ 759,950 $(157,311)
Adjustments to reconcile net income (loss) ---------- ---------- ----------
to net cash provided by operating activities:
Amortization expense 647,300 494,604 455,911
Depreciation expense 29,109 98,332 725,949
Gain on sale of model homes (407,778)(1,127,764) (326,345)
Operating expenses satisfied through issuance
of common stock - - 50,703
Changes in assets and liabilities:
(Increase) decrease in net assets
realizable on divestiture 100,000 - -
(Increase) decrease in deferred income tax asset 13,000 326,000 (298,000)
(Increase) decrease in other assets (241,746) 26,527 54,896
Increase (decrease) in accounts payable and
accrued expenses 169,236 47,972 14,550
Increase (decrease) in unearned rental revenue 188,611 (35,121) (11,976)
---------- ---------- ----------
Total adjustments 497,725 (169,450) 665,688
---------- ---------- ----------
Net cash provided by
operating activities 704,196 590,500 508,377
---------- ---------- ----------
Cash flows from investing activities:
Purchase of model homes and real estate (5,105,645)(4,216,654)(7,840,827)
Proceeds from sale of model homes 3,186,506 4,897,860 8,929,429
Proceeds from sale of land - - 1,716,956
Loan advanced (1,000,000) - -
Proceeds from note receivable 350,000 - -
Capital expenditures (3,933) (14,594) (607)
Proceeds from note receivable of
divested segment - - 212,500
---------- ---------- ----------
Net cash provided by (used in)
investing activities (2,573,072) 666,612 3,017,451
---------- ---------- ----------
Cash flows from financing activities:
Proceeds from mortgages & notes payable 4,519,462 972,109 3,981,691
Principal payments on mortgages payable (958,886)(1,390,406)(7,614,045)
Deferred finance charges (566,494) (460,891) (330,829)
Deferred offering costs - - (8,330)
Proceeds from (repayment of)
stockholder loans (173,987) 290,000 -
Preferred distributions (130,000) (80,000) -
Purchase of treasury stock (60,390) (262,432) (20,354)
---------- ---------- ----------
Net cash provided by (used in)
financing activities 2,629,705 (931,620)(3,991,867)
---------- ---------- ----------
Net increase (decrease) in cash 760,829 325,492 (466,039)
Cash at beginning of year 690,719 365,227 831,266
---------- ---------- ----------
Cash at end of year $1,451,548 $ 690,719 $ 365,227
========== ========== ==========
See notes to consolidated financial statements
F-6
STRATEGIC CAPITAL RESOURCES, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the years ended June 30, 2000, 1999 and 1998
1. Summary of significant accounting policies
This summary of significant accounting policies of Strategic Capital
Resources, Inc. and subsidiaries (hereinafter "Strategic" or the "Company") is
presented to assist in understanding the consolidated financial statements.
The consolidated financial statements and notes are representations of the
Company's management, which is responsible for their integrity and
objectivity. These accounting policies conform to generally accepted
accounting principles and have been consistently applied in the preparation of
the consolidated financial statements.
Use of estimates
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions
that affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of financial statements, and the
reported amounts of revenues and expenses during the reporting period. Actual
results could differ from those estimates.
Principles of consolidation
The accompanying consolidated financial statements include the accounts of
Strategic Capital Resources, Inc. and of its inactive, wholly-owned
subsidiary, JJFN Holdings, Inc. ("Holdings") for the years ended June 30,
2000, 1999, and 1998, and of its wholly-owned subsidiaries, Model Funding I,
L.L.C. ("MFI") from its date of inception, July 7, 1997, and LLC Oak Hills
Associates Limited Partnership ("Oak Hills") from its date of inception,
March 30, 1999. Intercompany transactions and balances have been eliminated
in consolidation.
History and business activity
The Company is engaged in three lines of business, all with major homebuilders
and real estate developers:
1) The purchase and leaseback of fully-furnished model homes.
2) The acquisition, development and sale of residential real estate.
3) The purchase and leaseback of multi-family residential/commercial real
estate.
From its inception through June 30, 2000, the Company has purchased a total of
425 model homes and sold 246, resulting in a portfolio of 179 model homes
owned at June 30, 2000. All such purchases have been from twelve
nationally-known, homebuilders and real estate developers. Concurrent
therewith, the Company entered into arrangements to lease the units back to
the builders under operating lease agreements (Note 3). The Company also
acquired and sold a tract of land which was being developed for it by the
homebuilder.
F-7
1. Summary of significant accounting policies (continued)
Special-purpose subsidiary
During 1997, the Company formed Model Funding I, L.L.C. ("MFI"), a
wholly-owned, special-purpose subsidiary. MFI was formed for the exclusive
purpose of acquiring model homes and leasing them back to a single major real
estate developer and homebuilder until such time as they are sold to third
parties. In connection with the acquisition of model homes, MFI entered into
loan agreements which impose restrictions applicable only to MFI. These
restrictions are not applicable to the Company. The restrictive covenants
impose limits on the following: (a) employees, (b) operating costs, (c) asset
acquisitions, (d) a single lessee, (e) minimum dollar value of lease payments,
(f) incurring additional debt without prior approval, and (g) transaction
duration.
Due to the limited nature and short life of MFI's business, and the
restrictive covenants of the loan documents, MFI is not depreciating the model
homes acquired.
Fair value of financial instruments
The Financial Accounting Standards Board ("FASB") issued Statement of
Financial Accounting Standards ("SFAS") No. 107, "Disclosure about Fair Value
of Financial Instruments", which requires the disclosure of the fair market
value of off- and on-balance sheet financial instruments. The carrying value
of all financial instruments, including long-term and short-term debt, cash
and temporary cash investments, approximates their fair value at year-end.
Concentration of credit risk
Financial instruments, which potentially subject the Company to concentration
of credit risk, consist principally of cash, note receivable, and net assets
realizable on divestiture (Note 5).
At June 30, 2000 and 1999, the Company had cash balances with two banks which
were, in the aggregate, $920,560 and $322,259, respectively, in excess of the
$100,000 limit insured by the Federal Deposit Insurance Corporation. Based on
credit analysis of the financial institutions with which it does business, the
Company believes it is not exposed to any significant credit risk on cash.
Cash balances include $111,444 and $50,000 in restricted cash accounts at June
30, 2000 and 1999, respectively.
As of June 30, 2000, the Company has purchased, and is leasing, model homes
located in Florida, California, Arizona, North Carolina, Texas, New Jersey,
New York, Pennsylvania, Nevada, and Utah. All such homes have been leased to
twelve different major homebuilders and real estate developers (Note 3).
F-8
1. Summary of significant accounting policies (continued)
Depreciation
Revenue-producing assets (consisting of model homes on lease and multi-family
residential properties) and office furniture and equipment are carried at
cost. Office furniture and equipment (included in other assets) is
depreciated on the straight-line method over a five-year period.
Through the year ended June 30, 1997, the Company depreciated all model homes
on lease on the straight-line method over a 30-year period. During the years
ended June 30, 2000, 1999 and 1998, the Company changed its policy regarding
depreciation of model homes on lease. The Company no longer depreciates model
homes on lease in instances where the properties are under lease agreements
which are covered by additional surety bonds as described in Note 3. The
reasons for the change were twofold. First, the establishment of additional
surety bonds serve as credit enhancements as a result of insuring the lessee's
performances under the lease and other related agreements. Such arrangements
effectively eliminate the Company's risk of selling model homes at less than
their purchase price. Second, it achieves a better matching of revenues and
expenses. Management believes that recording depreciation expense in one year
and gain on sale of the property in a subsequent year results in a distortion
of earnings. Therefore, no depreciation is recorded on any properties which
are covered by the additional surety bonds mentioned above. Accumulated
depreciation which was previously recognized was reversed during the year
ended June 30, 1999 and was recorded as a reduction of cost of model homes
sold. For the year ended June 30, 1999, such reversal of previously
recognized accumulated depreciation totalled approximately $170,000. Model
homes which are not covered by such additional surety bonds continue to be
depreciated on the straight-line method over a 30-year period.
Depreciation expense was $29,102, $98,332, and $725,949 for the years ended
June 30, 2000, 1999, and 1998, respectively.
F-9
1. Summary of significant accounting policies (continued)
Accounting standards changes
In October 1995, the Financial Accounting Standards Board issued "Accounting
for Stock Based Compensation" ("SFAS 123") which is effective for fiscal years
beginning after December 15, 1995. With respect to stock options granted to
employees, SFAS 123 permits companies to continue using the accounting method
promulgated by the Accounting Principles Board Opinion No. 25 ("APB 25"),
"Accounting for Stock Issued to Employees," to measure compensation or to
adopt the fair value-based method prescribed by SFAS 123. The Company has
elected to continue to account for stock-based compensation in accordance with
APB 25 and therefore, SFAS 123 has no effect on the financial statements of
the Company for the years ended June 30, 2000, 1999 and 1998. Under APB 25,
the Company does not recognize compensation expense for its stock option plans
as options are granted at an exercise price equal to, or greater than, the
market price, the Company would then recognize compensation expense in an
amount equal to the excess of the market value of the underlying stock over
the exercise price of the stock option. If the APB 25 method is continued and
if the differences are material, pro forma disclosures are required as if SFAS
123 accounting provisions were followed. No pro forma disclosures have been
presented since, in the opinion of management, the effect of the application
of such provision is immaterial to the financial statements for the years
ended June 30, 2000, 1999 and 1998.
In June 1997, the Financial Accounting Standards Board issued "Reporting
Comprehensive Income" ("SFAS 130") which is effective for years beginning
after December 15, 1997. This statement establishes standards for reporting
and display of comprehensive income and its components in a full set of
general-purpose financial statements. Comprehensive income consists of
foreign currency translation adjustments, unrealized gain and losses on
certain investments in debt and equity securities and minimum pension
liability adjustments. The Company currently has no items of comprehensive
income and therefore the pronouncement has had no impact on the Company's
financial statements.
Earnings (loss) per common share
Basic earnings (loss) per common share is computed by dividing the net income
or loss applicable to common stock shareholders by the weighed average number
of shares of common stock outstanding during the period. Diluted earnings
(loss) per share is computed by dividing net income or loss by the weighted
average number of common shares and dilutive common share equivalents then
outstanding using the treasury-stock method. Conversion of dilutive
securities is not presented for the year ended June 30, 1998 because it is
anti-dilutive.
Years ended June 30,
-----------------------------------
2000 1999 1998
---------- ---------- ----------
Earnings:
Net income (loss) $ 206,471 $ 759,950 $ (157,311)
Dividends on preferred shares (120,000) (90,000) -
---------- ---------- ----------
Income (loss) applicable to common
shareholders $ 86,471 $ 669,950 $ (157,311)
========== ========== ==========
F-10
1. Summary of significant accounting policies (continued)
Earnings (loss) per common share (continued)
Years ended June 30,
-----------------------------------
2000 1999 1998
---------- ---------- ----------
Basic:
Income (loss) applicable to common
shareholders $ 86,471 $ 669,950 $ (157,311)
========== ========== ==========
Weighted average shares outstanding during
the period 15,790,441 16,185,044 16,911,168
========== ========== ==========
Basic earnings (loss) per share $ .01 $ .04 $ (.01)
========== ========== ==========
Diluted:
Income (loss) applicable to common
shareholders $ 86,471 $ 669,950 $ (157,311)
========== ========== ==========
Weighted average shares outstanding during
the period 15,790,441 16,185,044 16,911,168
Effect of dilutive securities:
Stock options 1,027,146 968,524 -
Warrants 2,041,923 1,762,673 -
---------- ---------- ----------
Diluted weighted average shares
outstanding 18,859,510 18,916,241 16,911,168
========== ========== ==========
Diluted earnings (loss) per share $ .00 $ .04 $ (.01)
========== ========== ==========
In addition, the Company's 400,000 shares of preferred stock are convertible
into 400,000 shares of common stock. Such conversion has not been assumed
since the effect on earnings per share would be anti-dilutive.
2. Deferred charges
Deferred charges consist of the following:
June 30,
------------------------
2000 1999
-------- --------
Deferred finance charges $337,050 $434,557
Deferred offering costs 62,160 62,160
Deferred income tax asset 36,000 49,000
Goodwill 10,600 22,714
-------- --------
$445,810 $568,431
======== ========
F-11
2. Deferred charges (continued)
Deferred finance charges are carried at cost. Amortization is provided on the
straight-line method over the lives of the loans to which the deferred finance
charges relate. Amortization expense of deferred finance charges was $635,186
for the year ended June 30, 2000, $482,490 for the year ended June 30, 1999,
$443,797 for the year ended June 30, 1998. Accumulated amortization of
deferred finance charges totalled $1,015,137, $1,180,273, and $697,783 at June
30, 2000, 1999 and 1998, respectively.
Goodwill is carried at cost and is being amortized over a five-year period.
Amortization expense of goodwill was $12,114 for each of the years ended June
30, 2000, 1999 and 1998. Accumulated amortization of goodwill was $49,970,
$37,856, and $25,742 at June 30, 2000, 1999 and 1998, respectively.
3. Leasing arrangements
The Company has entered into a series of operating leases with twelve
different major homebuilders and real estate developers (the "Lessees") (Note
1) which provide for monthly lease payments which are negotiated on a per
transaction basis and are designed to cover debt service as well as to provide
positive cash flow. Under the terms of the lease agreements, all expenses
arising during the term of the lease are paid by the Lessee including, but not
limited to, utilities, homeowner association assessments, maintenance,
insurance and real estate taxes.
The leases terminate only upon the sale of the model homes. In connection
therewith, the Company has entered into net listing agreements with the real
estate brokerage affiliates of some of the Lessees. Such agreements provide
for commissions and incentives which are negotiated on a per transaction
basis. The sales price may not be less than the original cash closing
purchase price unless the Lessee elects to pay any deficiency at the closing.
All Lessees are required to provide a surety bond or equivalent financial
instrument in order to assure the performance of their obligations. The
financial instruments provided by Lessees have historically ranged from 5% to
110% of the Company's purchase price of the model homes, including related
costs.
In many cases, the Company has obtained various forms of insurance which
effectively serve as credit enhancements. The Lease Bond insures the timely
payment by the lessee of the lease payments. In the event of default by the
lessee, the surety has an obligation to continue to make the lease payments.
The Company negotiates the premium for the surety bonds on a case-by-case
basis. All such surety bonds have been obtained from major domestic based
insurance companies rated "A" through "AAA" by major credit rating agencies.
The intent of these arrangements is to reduce the cost of funds, and to
increase the amounts borrowed, thereby increasing profitability.
F-12
3. Leasing arrangements (continued)
Major customer
Revenues derived from one lessee, represent 57%, 74% and 39% of total lease
revenue for the years ended June 30, 2000, 1999 and 1998, respectively.
4. Multi-family residential property operations
On July 15, 1999, the Company purchased a 288 unit multi-family residential
property in Jacksonville, Florida for a purchase price of $10,228,000. The
purchase price was paid as follows:
Assumption of existing first mortgage $ 4,928,000
New loan 5,300,000
-----------
Total purchase price $10,228,000
===========
Approximately $1,500,000 of the new loan is being utilized to improve,
modernize and enhance the value of the property. As of June 30, 2000,
approximately $1,350,000 of the improvements had been completed.
Simultaneously, the Company entered into an operation, maintenance, and
management agreement which provides for an independent management company to
manage the property and to pay the Company a minimum income stream per month
sufficient to service debt and provide positive cash flow. The agreement also
provides for the management company to purchase the property at the end of
five years. The performance of the management company under the agreement is
guaranteed jointly and severally by two major insurance companies rated "AAA"
and "BB" by Standard & Poors.
5. Net assets realizable on divestiture
During the year ended June 30, 1997, the Company disposed of its construction
subsidiary, Iron Eagle Contracting and Mechanical, Inc. ("IECM"). Under the
terms of the agreement, the Company sold the net assets of IECM for a note in
the amount of $1,312,500. The note bears interest at the prime rate plus 1%.
Interest is payable in monthly installments. The note is secured by all assets
of IECM's parent company, Monarch Investment Properties, Inc. ("Monarch"),
which was formerly known as Iron Holdings Corp., and by all of the issued and
outstanding shares of IECM.
F-13
5. Net assets realizable on divestiture (continued)
During June 1999, the Company filed a lawsuit against Monarch, and its
subsidiaries, IECM and Tahoe Realty Corp., as well as two of its officers and
other individuals, in the Supreme Court of the State of New York, County of
Queens. The action asserts seven separate causes of action arising out of a
default in payment of the remaining $1,100,000 balance due under the
promissory note evidencing moneys due to the Company from Monarch as a result
of its purchase of IECM from the Company. The Company has set up a reserve
of $100,000 against the $1,100,000 asset.
The Court granted the Company's motion for summary judgment during March 2000
against Monarch in the sum of $1,100,000 plus interest from January 1, 1999,
a judgment of possession of all collateral pledged by Monarch and judgment
that the Company is the rightful owner and entitled to immediate possession
of the collateral, impressing a trust on said collateral, declaring
defendants to be trustees of said collateral and directing said trustees to
deliver such collateral to the Company.
Based on information currently available to the Company, it anticipates that
it will collect the outstanding balance, accrued interest, as well as
collection costs. The Company has not accrued interest on the note since
March 31, 1999.
6. Note receivable
During December 1999, the Company entered into a contract to purchase and
lease back on a triple-net full payout basis, four office buildings in Nevada
for an aggregate purchase price of $16,650,000 supported by lease payment
performance bonds.
The Company advanced the seller/lessee $1,000,000 of the purchase price in the
form of a loan, bearing interest at the rate of 12% per annum. The loan is
secured by Deeds of Trust recorded on three of the four office buildings, and
is guaranteed by a non-affiliated third party.
During March 2000, the Company agreed to terminate the purchase and lease back
agreements due to the seller/lessee's desire to sell the properties to
non-affiliated third parties. The seller/lessee has entered into contracts
for the sale of the office buildings and anticipates closing prior to
December 31, 2000.
Repayment of principal and interest due under the loan is to be paid out of
the proceeds of sale of the office buildings to third parties. In
addition, the seller has agreed to reimburse up to $250,000 in expenses
incurred by the Company relating to the transaction.
Prior to June 30, 2000, $350,000 of the principal amount of the loan was
repaid.
F-14
7. Mortgages and notes payable
Mortgages and notes payable consist of the following:
June 30,
---------------------------
2000 1999
----------- -----------
Mortgages payable to various financial
institutions. As of June 30, 2000 and 1999,
approximately $29.6 million and $15.4
million, respectively, of such mortgage
obligations require payment of interest
only, including approximately $16 million
payable under revolving loan agreements with
an aggregate credit limit of $23 million.
The remaining loan agreements are payable in
monthly installments totaling $62,624 at
June 30, 2000 and $156,093 at June 30, 1999,
including interest. As of June 30, 2000 and
1999 approximately $5.9 million and $10.6
million, respectively, of such obligations
are payable under a $15 million revolving
loan agreement. The loan agreements bear
interest ranging from 8.5% to 10.5% and
mature between January 2001 and December
2002. The loans are secured by model homes
purchased and by the related surety bonds
and leases described in Note 3. $35,483,938 $26,642,294
Note payable to a financial institution in
monthly installments of $53,352, including
interest at 8.75%. The loan agreement
matures in July 2004. The loan is secured
by the surety bond and management agreement
described in Note 4. 5,120,752 -
Mortgage payable to a financial institution
in monthly installments of $69,828,
including interest at 7.96%. The loan
agreement matures in March 2017. The loan
is secured by the multi-family residential
property and the surety bond described in
Note 4. 4,795,102 -
----------- -----------
$45,399,792 $26,642,294
=========== ===========
F-15
7. Mortgages and notes payable (continued)
At June 30, 2000, maturities of mortgages and notes payable are as follows:
Year ending June 30, 2001 $ 8,177,137
Year ending June 30, 2002 15,315,443
Year ending June 30, 2003 13,118,183
Year ending June 30, 2004 443,204
Year ending June 30, 2005 4,399,127
Thereafter 3,946,698
-----------
$45,399,792
===========
8. Stockholder loans payable
Stockholder loans payable arose from advances various stockholders made to the
Company. The notes are payable on demand and interest at 9% is payable
monthly. Interest on stockholder notes payable totalled $112,220 for the year
ended June 30, 2000, $108,663 for the year ended June 30, 1999, and $103,252
for the year ended June 30, 1998.
During the years ended June 30, 2000, 1999, and 1998, the Company issued a
total of 1,146,000, 1,959,000, and 2,101,094 warrants, respectively, to
stockholders who had made loans to the Company. The warrants are exercisable
at the fair value of the stock on the date the warrant was issued. As of
June 30, 2000, there are a total of 6,732,094 warrants outstanding. The
exercise price ranges from $0.12 to $0.47 per share. To date, none of the
warrants have been exercised.
9. Stockholders' equity
Convertible preferred stock
The Company has 400,000 shares of its 6% participating preferred stock
outstanding. Each share is convertible into one share of the Company's common
stock at $2.50 per share. The preferred stock is redeemable at the option of
the Company.
As a result of a dispute as to which of two unaffiliated parties were entitled
to receive the distributions, there were no preferred distributions during the
year ended June 30, 1998. During the year ended June 30, 1999, the Company
resumed payment of preferred distributions in arrears. Preferred distribution
payments $120,000 and $90,000 for the years ended June 30, 2000 and 1999,
respectively. As of June 30, 2000, there are $25,000 of unpaid distributions
still in arrears. The Company is paying such arrearage at the rate of $5,000
per month.
Warrants
In conjunction with a loan agreement entered into by a former subsidiary, IECM
(Note 5) in December 1995, the Company issued 1,200,000 warrants convertible
into 1,200,000 shares of the Company's common stock at $.001 per share of
which 500,000 are still outstanding.
F-16
9. Stockholders' equity (continued)
Stock option plan
During August 1996, the Company established an Equity Incentive Plan (the
"Plan") to attract and retain key employees, to provide an incentive for them
to achieve long-range performance goals and to enable them to participate in
the long-term growth of the Company. Under the terms of the plan, the
Company may award Incentive Stock Options which are intended to qualify under
Section 422A of the Internal Revenue Code. All such options may be exercised
during a four-year period commencing one year from the date of the option
grant and terminating five years from date of issuance.
The following is a summary of option transactions during the years ended June
30, 2000, 1999 and 1998:
Weighted
Number of average
Shares exercise price
--------------- ---------------
Outstanding at July 1, 1997 1,050,000 $0.22
Granted - December 1997 700,000 $0.14
Cancelled (75,000) $0.25
----------
Outstanding at June 30, 1998 1,675,000 $0.19
Granted - August 1998 800,000 $0.20
Granted - December 1998 975,000 $0.42
Cancelled (75,000) $0.25
----------
Outstanding at June 30, 1999 3,375,000 $0.26
Granted - November 1999 775,000 $0.29
Cancelled (450,000) $0.28
----------
Outstanding at June 30, 2000 3,700,000 $0.26
==========
10. Income taxes
The Company has a $441,515 net operating loss available for carryforward to
offset future years' taxable income. The net operating loss expires in 2013.
Deferred income taxes arise from temporary differences in reporting assets and
liabilities for income tax and financial accounting purposes primarily
resulting from net operating losses.
F-17
11. Supplemental cash flow information
The Company's non-cash investing and financing activities were as follows:
During the years ended June 30, 2000, 1999, and 1998, the Company acquired
revenue producing assets at a cost of $35,953,869, $16,813,539, and
$26,170,860, respectively. Such purchases were financed as follows:
Year ended June 30,
-----------------------------------
2000 1999 1998
----------- ----------- ------------
Revenue producing assets $35,953,868 $16,813,539 $26,170,860
Bank borrowings (30,848,223)(12,596,885) (18,330,033)
----------- ----------- ------------
Expenditures for acquisition of
model homes and real estate $ 5,105,645 $ 4,216,654 $ 7,840,827
=========== =========== ============
On June 30, 1998, at the request of one law firm, the Company issued 200,000
shares of stock in payment of $50,703 of fees owed to that firm.
Interest paid totalled $3,848,251, $2,756,454, and $2,112,778 during the years
ended June 30, 2000, 1999 and 1998, respectively.
12. Commitments and contingencies
Lease agreement
The Company leases its office space under an operating lease for a five-year
term ending in January 2002. Rent expense for the years ended June 30, 2000,
1999 and 1998, was $75,015, $87,577, and $71,389, respectively. The
following is a schedule of future minimum lease payments:
Year ending June 30, 2001 $ 70,761
Year ending June 30, 2002 41,782
---------
$ 112,543
=========
Employment agreements
Effective July 29, 1997, the Board of Directors elected the Company's
principal shareholder to the position of Chairman of the Board and entered
into a ten-year employment agreement with the shareholder. Effective January
1, 1998, the employment agreement provides for annual compensation of
$225,000 with 10% annual increases during the second through tenth years.
Effective January 1, 1998, the Company entered into a five-year employment
agreement with its Vice President. The agreement specifies that the Vice
President shall receive annual compensation of $91,000 with 10% annual
increases during the second through fifth years.
F-18
12. Commitments and contingencies (continued)
Model home sale contracts
As of June 30, 2000, and through the report date, the Company had sales
contracts pending on 35 model homes at an aggregate sales price of $9,785,106.
The model homes were acquired at an aggregate cost of $9,413,033.
Qualified retirement plans
During the year ended June 30, 1997, the Company adopted the provisions of a
savings incentive match plan for employees ("SIMPLE") which covers
substantially all employees of the Company. The SIMPLE is a qualified plan
under the provisions of The Internal Revenue Code which permits employees to
make elective contributions to a retirement plan on a pre-tax basis.
Effective January 1, 2000, the Company instituted a 401(K) plan. The Company
makes matching contributions which totalled $12,654, $11,514, and $6,159 for
the years ended June 30, 2000, 1999 and 1998, respectively.
Financing activities
At June 30, 2000, the Company had approximately $16.1 million of unused,
committed credit facilities available under existing revolving loan agreements
which may be utilized to acquire model homes in accordance with the terms of
those agreements. Such credit facilities expire January through August 2001.
As a part of its ongoing business, the Company is in constant discussion with
financial institutions for credit facilities, as well as private or public
placements of its debt or equity securities. An offering or private placement
of senior notes with warrants, convertible preferred stock or similar type of
security is currently being evaluated. It is the policy of the Company not to
incur costs from activation of credit facilities unless and until needed.
Legal proceedings
Other than as disclosed in Note 5, the Company is not presently involved in
any material litigation nor, to its knowledge, is any material litigation
threatened against the Company or its properties, other than routine
litigation arising in the ordinary course of business. Although the ultimate
outcome of litigation both as a plaintiff or defendant cannot be predicted
with any certainty, based on information presently known to management and
counsel, management does not believe that there are any legal actions that,
individually or in the aggregate, will have a material adverse effect on the
Company's financial condition, cash flows or a results of operations.
F-19
13. Subsequent events
Financing activities
During July 2000, the Company entered into a new $45 million revolving credit
facility. Such credit facility expires in July 2002 but the Company has the
right to extend the facility for one additional year.
During July 2000, the Company entered into a new $7.4 million term loan.
The term loan expires in July 2003.
Acquisition of residential real estate
On August 31, 2000, as part of the ordinary course of business the Company
acquired two parcels of land consisting of 66 finished lots at a cost of
approximately $20,500,000 and simultaneously leased the property to a major
publicly traded homebuilder. The Company also granted the homebuilder an
exclusive option to purchase the finished lots at prices ranging from
approximately $218,000 to $477,000 per finished lot.
Model home acquisitions
During July 2000, the Company acquired 38 model homes at a cost of
approximately $7.8 million. The model homes are located in New Jersey,
Minnesota and Iowa.
F-20
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE
NONE
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information required by this Item 10 will be contained in the Company's
information statement to be filed with the Securities and Exchange
Commission and is incorporated in this Annual Report on Form 10-K by this
reference.
ITEM 11. EXECUTIVE COMPENSATION
The information required by this Item 11 will be contained in the Company's
information statement to be filed with the Securities and Exchange
Commission and is incorporated in this Annual Report on Form 10-K by this
reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this Item 12 will be contained in the Company's
information statement to be filed with the Securities and Exchange
Commission and is incorporated in this Annual Report on Form 10-K by this
reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this Item 13 will be contained in the Company's
information statement to be filed with the Securities and Exchange
Commission and is incorporated in this Annual Report on Form 10-K by this
reference.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) 1. Financial Statements:
Reference is made to the index set forth in "ITEM 8, FINANCIAL
STATEMENTS and SUPPLEMENTARY DATA" of this Annual Report on
Form 10-K.
2. Financial Statement Schedules:
Reference is made to the index set forth in "ITEM 8, FINANCIAL
STATEMENTS and SUPPLEMENTARY DATA" of this Annual Report on
Form 10-K.
3. Exhibits:
The following exhibits are filed as part of this Annual Report on
Form 10-K.
Incorporated by
Reference to Registration
Exhibit No. Statement 333-1842 Description
- ----------- ------------------------- -----------------------------------
3.1 X Company Certificate of
Incorporation, as amended
to date
3.2 X Company By-laws, as amended
to date
Incorporated by
Reference to Form
Exhibit No. 10K June 30, 1998 Description
- ----------- ------------------------- -----------------------------------
10.12 X Employment Contract with David
Miller dated as of January 1, 1998.
10.13 X Employment Contract with John
Kushay dated as of January 1, 1998.
Incorporated by
Reference to Form
Exhibit No. 10K June 30, 1997 Description
- ----------- ------------------------- -----------------------------------
10.14 X Incentive Stock Plan of the Company.
21.1 (Filed herewith) List of Company subsidiaries.
27.1 (Filed herewith) Financial Data Schedule
(b) Reports on Form 8-K
No reports on Form 8-K were filed during the last quarter of the
period covered by this report.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
STRATEGIC CAPITAL RESOURCES, INC.
By: /s/David Miller
David Miller, Chairman of the Board
By: _/s/John P. Kushay
John P. Kushay, Treasurer,
Chief Financial Officer and
Chief Accounting Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
/s/David Miller Dated: September 25, 2000
David Miller, Director
/s/Samuel G. Weiss Dated: September 25, 2000
Samuel G. Weiss, Director
/s/Joan E. Kushay Dated: September 25, 2000
Joan E. Kushay, Director
/s/John P. Kushay Dated: September 25, 2000
John P. Kushay, Director
/s/Ralph Wilson Dated: September 25, 2000
Ralph Wilson, Director
/s/Kenneth MacKenzie Dated: September 25, 2000
Kenneth MacKenzie, Director
/s/John H. Roach, Jr. Dated: September 25, 2000
John H. Roach, Jr., Director
EXHIBIT 21.1
List of Registrants' subsidiaries
Subsidiary Name State of Incorporation
- ------------------- ----------------------
JJFN Holdings, Inc. Delaware
Model Funding I, LLC Delaware
Model Funding II, LLC Delaware
LLC Oak Hills Limited Partnership Florida