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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, 2001
[ ] 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 August 2, 2001 was approximately
$852,000. There were 15,438,525 shares of Common Stock outstanding as of
August 2, 2001.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Registrant's Information Statement relating to the 2001 Annual
Meeting of Shareholders to be held on November 1, 2001, 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, ability to
continue insurance coverage, 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
Throughout this report, we refer to Strategic Capital Resources, Inc., together
with its wholly owned subsidiaries, as "we," "us," "our," or "the Company."
ITEM 1. BUSINESS
General
We are a Delaware corporation organized in 1995. Our 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 and other real
estate.
Model Home Sale Leaseback Program
We purchase and leaseback fully furnished model homes complete with options
and upgrades to major publicly traded homebuilders. The model homes are
leased pursuant to a triple-net lease where the lessee is obligated to pay all
maintenance, taxes, insurance, etc.
Since inception, we have purchased a total of 463 model homes at an aggregate
purchase price in excess of $102,000,000.
The following is a breakdown of model homes and purchase price by state at
June 30, 2001 and June 30, 2000:
June 30, 2001 June 30, 2000
------------------------- -----------------------
State # of homes Amount # of homes Amount
- ---------------- ------------------------- -----------------------
Arizona 7 $ 764,356 16 $ 1,790,445
California 44 11,669,315 62 16,267,394
Florida 3 836,403 5 1,122,689
Iowa 15 2,622,695 - -
Minnesota 7 1,683,505 - -
Nevada 13 1,667,790 13 1,667,790
New Jersey 29 8,079,198 34 9,470,671
New York 3 883,291 4 1,518,291
North Carolina 7 1,648,741 8 1,875,873
Pennsylvania 8 1,851,686 15 3,709,042
Texas 9 2,299,900 19 4,107,230
Utah 3 496,097 3 496,097
------- ------------- ------- ------------
Total 148 $ 34,502,977 179 $ 42,025,522
======= ============= ======= ============
The following is a summary by state of model home purchases and sales
since inception, as well as our inventory at June 30, 2001.
Number of Number of Model Home
Model Homes Model Homes Inventory at
State Purchased Sold June 30, 2001
- ----------------- ----------- ----------- -------------
Arizona 19 12 7
California 62 18 44
Colorado 22 22 0
Georgia 5 5 0
Florida 107 104 3
Iowa 15 0 15
Minnesota 21 14 7
Nevada 13 0 13
New Jersey 111 82 29
New York 9 6 3
North Carolina 12 5 7
Pennsylvania 31 23 8
Texas 25 16 9
Utah 5 2 3
Virginia 6 6 0
----------- ----------- -------------
Total 463 315 148
=========== =========== =============
The following chart summarizes our model home purchases and sales by state
since inception as well as the current model home inventory at June 30, 2001.
Cost of Cost of Model Home
Model Homes Model Homes Inventory at
State Purchased Sold June 30, 2001
- ----------------- ------------ ------------ -------------
Arizona $ 2,124,640 $1,360,284 $ 764,356
California 16,267,394 4,598,079 11,669,315
Colorado 4,715,463 4,715,463 -
Georgia 1,576,755 1,576,755 -
Florida 20,086,710 19,250,307 836,403
Iowa 2,622,695 - 2,622,695
Minnesota 4,852,110 3,168,605 1,683,505
Nevada 1,667,790 - 1,667,790
New Jersey 28,335,475 20,256,277 8,079,198
New York 3,301,435 2,418,144 883,291
North Carolina 2,758,255 1,109,514 1,648,741
Pennsylvania 7,191,197 5,339,511 1,851,686
Texas 5,060,757 2,760,857 2,299,900
Utah 837,726 341,629 496,097
Virginia 1,495,847 1,495,847 -
------------ ------------ -------------
Total $102,894,249 $68,391,272 $ 34,502,977
============ ============ =============
The following is a breakdown of lease revenues by state for fiscal years ended
June 30, 2001, 2000, and 1999:
Lease revenue Lease revenue Lease revenue
Year Ended Year Ended Year Ended
State 6/30/2001 6/30/2000 6/30/1999
- ----------- --------------- --------------- ---------------
Arizona $ 132,499 $ 180,445 $ -
California 1,529,366 1,304,561 -
Colorado - 81,126 274,911
Florida 102,954 246,035 912,838
Iowa 290,065 - -
Minnesota 356,362 19,744 34,056
Nevada 200,135 183,914 1,198
New Jersey 1,085,792 1,572,944 2,336,894
New York 110,837 247,714 306,227
North Carolina 204,057 156,520 79,659
Pennsylvania 331,163 491,788 641,562
Texas 407,561 287,196 45,076
Utah 59,532 70,359 -
Virginia - - 31,119
---------- ------------ ----------
Total $4,810,323 $ 4,842,346 $4,663,540
=========== ============ ==========
Model Home Program Subsequent Events
From July 1, 2001 through the date of this report, we sold five (5) model
homes at an aggregate sales price of approximately $1.5 million which we
originally purchased for approximately $1.2 million. As of the report date,
we have sales contracts pending on seven (7) model homes for an aggregate sale
price of approximately $2.8 million which we originally purchased for
approximately $2.6 million.
Acquisition, Development, and Sale of Residential Real Estate
We purchase parcels of residential real estate selected by homebuilders from
non-affiliated third parties. We also purchase residential real estate owned
by the homebuilders and lease it back to them on triple-net basis. The
parcels of land are acquired at the lower of appraised value or contract
price. The parcels of land may require additional government approvals or
entitlements and development work or consist of finished lots. If development
work is required, the homebuilder enters into a fixed price development
agreement to develop the parcels of land for us, and in some cases, is
required to provide completion bonds for some or all work by a surety company
acceptable to us. Reimbursement for development work performed is typically
paid monthly. 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.). Insurance coverage is obtained to
insure the prompt payment and performance of the homebuilder, as well as the
fully developed value of the real estate acquired.
During the year ended June 30, 2001, we entered into six (6) Acquisition,
Development and Sale of Residential Real Estate agreements in the following
states; California (2), Nevada (2), Arizona, and Utah.
The following is a summary of the project costs by project number:
Development Total Remaining Total
Project Purchase Costs Paid Costs Paid Development Project
Number Price to Date to Date Work Costs
- ------- ----------- ----------- ----------- ----------- -----------
1 $20,546,010 $ - $20,546,010 $ - $20,546,010
2 1,680,925 328,232 2,009,157 846,477 2,855,634
3 2,539,458 470,687 3,010,145 1,879,855 4,890,000
4 3,554,591 800,335 4,354,926 1,512,874 5,867,800
5 8,083,084 1,176,468 9,259,552 3,431,190 12,690,742
6 6,762,000 - 6,762,000 - 6,762,000
----------- ----------- ----------- ----------- -----------
Total $43,166,068 $ 2,775,722 $45,941,790 $ 7,670,396 $53,612,186
=========== =========== =========== =========== ===========
The following is a summary of total costs paid to date, sale of finished lots,
and residential real estate balance at June 30, 2001:
Total Sale of
Project Costs Paid Finished Balance at
Number to Date Lots June 30, 2001 Location
- ------- ----------- ----------- ------------- ------------
1 $20,546,010 $ - $20,546,010 California
2 2,009,157 49,663 1,959,494 Arizona
3 3,010,145 1,169,347 1,840,798 Utah
4 4,354,926 197,791 4,157,135 Nevada
5 9,259,552 - 9,259,552 Nevada
6 6,762,000 - 6,762,000 California
----------- ----------- -----------
Total $45,941,790 $ 1,416,801 $44,524,989
=========== =========== ===========
The following is a breakdown of interest income on residential real estate
direct financing leases by state:
Year Ended
June 30,
State 2001 2000
- ------------- -------------------------
Arizona $ 146,417 $ -
California 2,453,415 -
Nevada 454,122 -
Utah 210,645 -
---------- ----------
Total $3,264,599 $ -
========== ==========
Acquisition, Development, and Sale of Residential Real Estate Subsequent Events
The following is a summary of development costs paid and sale of finished
lots from July 1, 2001 through the date of this report.
Sale of
Project Development Finished
Number Costs Paid Lots
- ------- ----------- -----------
2 $ 29,486 $ 188,720
3 675,729 504,946
4 59,785 -
5 207,863 406,391
----------- -----------
Total $ 972,863 $ 1,100,057
=========== ===========
Multi-family Residential and Other Real Estate
On July 15, 1999 we purchased a 288 unit multi-family residential property in
Jacksonville, Florida for a purchase price of $10,227,999. The purchase price
was paid as follows:
Assumption of existing first mortgage $ 4,927,999
New loan 5,300,000
-----------
Total purchase price $10,227,999
===========
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 by an insurance company rated "AAA" by Standard & Poors.
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, changes in and compliance with accounting issues relating to off
balance sheet financing, inability to procure residual value insurance
polices, inability to lease properties upon the termination or expiration of
existing leases, the renewal of existing leases and inability to collect
payments from operators.
Our business operates in a highly competitive environment. The financial
services industry consists of a large number of companies, including banks,
pension funds, insurance companies, finance companies, leasing companies, and
real estate investment trusts, most of which are larger and have greater
financial resources than we do.
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.
We are dependent on the efforts of our executive officers, key employees and
directors. We have 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 our loss of their services.
Employees
At August 2, 2001, we employed 7 persons, which included sales and marketing,
executive, and administrative personnel. None of our employees are covered by
a collective bargaining agreement and management considers the relationship
with its employees to be excellent.
ITEM 2. PROPERTIES
Our corporate office is located at 2500 Military Trail North, Suite 260, Boca
Raton, Florida 33431, where we lease 2,798 square feet of office space. Our
lease terminates January 2002. We are currently evaluating new office space in
the Boca Raton, Florida area similar to our existing office space.
We own additional properties more fully described in Item 1.
Insurance
We have comprehensive liability, fire, flood, extended coverage and rental
loss insurance with respect to our Properties. We believe that such insurance
provides adequate coverage for potential exposure.
ITEM 3. LEGAL PROCEEDINGS
We are not presently involved in any other material litigation nor, to our
knowledge, is any material litigation threatened against us or our properties,
other than routine litigation arising in the ordinary course of business.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
We did not submit any matters to a vote of security holders in the
fourth quarter of our fiscal year ended June 30, 2001.
However, during June 2001, a majority of our shareholders by consent approved
a 2001 incentive stock option plan.
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 June 30, 2001 there were approximately 738 shareholders of
record. The closing sale price of our Common Stock as reported on the OTC
Bulletin Board, on August 2, 2001, was $0.18.
Year Ended June 30,
----------------------------------
2001 2000
------------- ---------------
High Low High Low
----- ----- ----- -----
First Quarter 0.20 0.18 0.30 0.25
Second Quarter 0.14 0.12 0.25 0.24
Third Quarter 0.13 0.12 0.35 0.30
Fourth Quarter 0.19 0.15 0.21 0.20
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 earnings for investment in our operations.
On November 2, 1995, we sold 400,000 shares of our 6% participating
convertible preferred stock for $1,000,000 in cash. 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 the year ended June 30, 1999, the Company commenced payment of current
preferred distributions and distributions in arrears. As of June 30, 2001,
there are no unpaid distributions in arrears.
ITEM 6. SELECTED FINANCIAL DATA
The selected financial data presented below for the years ended June 30, 2001,
2000, 1999, 1998, and 1997 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,
-------------------------------------------
2001 2000 1999 1998 1997
-------- -------- -------- -------- --------
Income Statement Data:
Revenues $27,538 $26,073 $26,287 $21,303 $ 7,525
Expenses $26,218 25,749 26,019 21,336 7,479
-------- -------- -------- -------- --------
Operating income 1,320 324 268 (33) 46
Impairment charge 1,000 100 - - -
-------- -------- -------- -------- --------
Income (loss) from continuing
operations before income tax
benefit (expense) 320 224 268 (33) 46
Deferred income tax
benefit (expense) (95) (67) (80) 10 97
-------- -------- -------- -------- --------
Income (loss) from continuing
operations 225 157 188 (23) 143
Discontinued operations, net of taxes
Loss from discontinued operations - - - - (54)
Gain on disposal of
discontinued operations - - - - 284
-------- -------- -------- -------- --------
Net income (loss) 225 157 188 (23) 373
Preferred stock distributions 85 120 90 - 5
-------- -------- -------- -------- --------
Income (loss) applicable to
common shareholders $ 140 $ 37 $ 98 $ (23) $ 368
======== ======== ======== ======== ========
Per Share Data:
Basic:
Net income (loss) 0.01 0.00 0.01 0.00 0.02
Weighted average number
of common shares outstanding 15,540 15,790 16,185 16,911 16,551
Assuming Dilution:
Net income (loss) 0.01 0.00 0.01 0.00 0.02
Weighted average number
of common shares outstanding 17,105 18,859 18,916 18,072 18,911
June 30,
-------------------------------------------
2001 2000 1999 1998 1997
-------- -------- -------- -------- --------
Balance Sheet Data:
Total assets 94,671 56,146 37,159 40,824 32,934
Mortgages and notes payable 84,642 46,541 27,958 31,538 23,658
Other liabilities 1,591 1,192 765 685 683
Stockholders' equity 8,438 8,413 8,436 8,601 8,593
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, 2001, June 30, 2000, and June
30, 1999 are presented below:
Years Ended June 30,
--------------------------------------------
2001 2000 1999
--------------------------------------------
(Dollars in thousands)
Revenues:
Interest income on direct
financing leases:
Model homes $ 4,810 17% $ 4,842 19% $ 4,664 18%
Residential real estate 3,265 12% - -% - -%
Multi-family residential 1,378 5% 1,356 5% - -%
Sale of direct financing leases:
Model homes 16,532 60% 19,551 75% 21,496 82%
Residential real estate 1,417 5% - -% - -%
Other income 136 1% 324 1% 127 -%
----------------------------------------------
Total revenues 27,538 100% 26,073 100% 26,287 100%
Costs and expenses:
Interest and financing costs 5,814 21% 3,948 15% 2,806 11%
Multi-family operating 365 1% 355 1% - -%
Cost of direct financing lease sold:
Model homes 16,155 59% 19,227 74% 21,270 81%
Residential real estate 1,417 5% - -% - -%
Depreciation & amortization 931 3% 665 3% 509 2%
Corporate 1,536 6% 1,554 6% 1,434 5%
----------------------------------------------
Total costs and expenses 26,218 95% 25,749 99% 26,019 99%
----------------------------------------------
Operating income 1,320 5% 324 1% 268 1%
Impairment charge 1,000 4% 100 -% - -%
----------------------------------------------
Income before income tax expense 320 1% 224 1% 268 1%
Income tax expense 95 -% 67 -% 80 -%
----------------------------------------------
Net income $ 225 1% $ 157 1% $ 188 1%
==============================================
Comparison of Year Ended June 30, 2001 to Year Ended June 30, 2000.
Interest income on direct financing leases for the year ended June 30, 2001
increased $3,254,517 (or 53%) compared to the prior year period. The increased
revenue was primarily attributable to the interest income on the residential
real estate leases which amounted to $3,264,599 for the period, compared to $0
for the prior year period.
Sale of direct financing leases decreased $1,602,324 (or 8%) for the year
ended June 30, 2001 compared to the prior year period. During the year ended
June 30, 2001, we sold 69 model homes at an average price of $260,131,
compared to 76 model homes at an average price of $257,255 for the prior year
period, resulting in the decreased revenue.
Interest expense increased $1,865,551 (or 47%) during the year ended June 30,
2001 compared to the prior year period, primarily due to the increase in loans
utilized to purchase additional assets under direct financing leases.
Net income for the year ended June 30, 2001 was $ 224,537, compared to net
income of $156,954 for the prior year period. Net income as a percentage of
total revenue was consistent with the prior year period.
Corporate costs decreased $17,822 (a 1% decrease), from $1,553,940 for the
year ended June 30, 2000, to $1,536,118 for the year ended June 30, 2001.
Corporate costs as a percentage of total revenue was consistent with the prior
year period.
Comparison of Year Ended June 30, 2000 to Year Ended June 30, 1999.
Interest income on direct financing leases for the year ended June 30, 2000
increased $1,535,077 (or 33%) compared to the prior year period. The increased
revenue was primarily attributable to the interest income on the multi-family
residential leases which amounted to $1,356,271 for the period, compared to $0
for the prior year period.
Sale of direct financing leases decreased $1,944,568 (or 9%) for the year
ended June 30, 2000 compared to the prior year period. During the year ended
June 30, 2000, we sold 76 model homes at an average price of $257,255,
compared to 95 model homes at an average price of $226,273 for the prior year
period, resulting in the decreased revenue.
Interest expense increased $1,142,422 (or 41%) during the year ended June 30,
2000 compared to the prior year period, primarily due to the increase in loans
utilized to purchase additional assets under direct financing leases.
Net income for the year ended June 30, 2000 was $ 156,954, compared to net
income of $187,834 for the prior year period. Net income as a percentage of
total revenue was consistent with the prior year period.
Corporate costs increased $120,135 (a 8% increase), from $1,433,805 for the
year ended June 30, 1999, to $1,553,940 for the year ended June 30, 2000.
Corporate costs as a percentage of total revenue was consistent with the prior
year period.
Segment Information
Segment Information - Statement of Financial Accounting Standards No. 131
("FAS 131") "Disclosures About Segments of an Enterprise and Related
Information" established new standards for segment reporting based on the way
management organizes segments within a company for making operating decisions
and assessing performance. We have determined that we did not have any
separately reportable operating segments for the years ended June 30, 2001,
June 30, 2000, and June 30, 1999.
Trends in Operations
Our operations continue to accelerate at a rapid pace. For the fiscal year
ended June 30, 2001, total purchases of revenue producing assets were in
excess of $53 million, compared to $35 million for the year ended June 30,
2000. Monthly revenue from direct financing leases outstanding at June 30,
2001, 2000, and 1999 were $912,000, $521,000, and $347,000, respectively.
Inflation
Inflation has not had a significant impact on the results of operations and is
not anticipated to have a significant negative impact in the foreseeable
future. Although increases in the rate of inflation may tend to increase
interest rates which may increase our cost of borrowed funds, we attempt to
pass the increases through to our customers through increased lease rates. The
potential adverse impact of inflation on our lease operations is further
mitigated by requiring lessees to pay all operating expenses, including real
property taxes, insurance and utilities.
However, there is no assurance that inflation will not have a material adverse
impact on our future results of operation.
Liquidity and Capital Resources
Our uses for cash during the year ended June 30, 2001 were for revenue
producing asset acquisitions, interest, operating expenses, and repurchase of
common stock. We provided for our cash requirements from borrowings, the sale
of direct financing leases, and other revenues. We believe that these sources
of cash are sufficient to finance our working capital requirements and other
needs.
Common Stock Repurchase Plan
In 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, 2001, 965,345 shares have been repurchased
under this program, of which 723,200 shares were purchased during the
year ended June 30, 2001.
Impairment Charge
We have taken a pre-tax non-cash charge for the impairment of the remaining
$1,000,000 balance on a Promissory Note, effectively writing down the carrying
value of the Note to $0. In March 2000, we set up a loss reserve of $100,000
against the Note, and have taken the remaining $1,000,000 charge during the
current period. The amount of the write down was determined by evaluating the
underlying value of the collateral and the difficulty anticipated in efforts
to realize the value of such collateral securing the Note. We also evaluated
cost of recovery, ongoing litigation costs, and other economic conditions and
trends in making our determination. Actual losses could differ from our
current estimate and will be reflected as adjustments in future financial
statements.
The Note was received on October 1, 1996, in connection with the sale by the
Company 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.
Cash Flows
Net cash provided by operating activities totaled $1,861,974, comprised of net
income of $224,536, plus net adjustments for non-cash items of $1,553,549,
plus a net change in other operating assets and liabilities of $83,889.
Net cash used in investing activities comprised investment in direct financing
leases of $5,356,597, plus capital expenditures of $9,511, offset by
$1,983,897 in proceeds from sale of direct financing leases, and proceeds from
note receivable of $650,000.
Net cash provided by financing activities comprised proceeds from mortgages
payable of $5,773,240 plus proceeds from stockholder loans of $81,680, offset
by deferred financing costs of $948,012, purchase of treasury stock of
$114,823, principal payments on mortgages payable of $1,301,753, and preferred
distributions of $85,000.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We are exposed to changes in interest rates primarily as a result of our
floating rate debt arrangements, which includes borrowings under lines of
credit. These lines, along with cash flow from operations, are used to
maintain liquidity and fund business operations. The nature and amount of our
debt may vary as a result of business requirements, market conditions and
other factors. It has not been necessary for us to use derivative instruments
to adjust our interest rate risk profile, although we continuously evaluate
the need for interest rate caps, swaps, and other interest rate-related
derivative contracts, to mitigate this risk.
A hypothetical 100 basis point adverse move (increase) in interest rates
along the entire interest rate curve would adversely affect our annual interest
cost by approximately $575,000.
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, 2001 and 2000 F-3
Consolidated statements of operations for the years ended
June 30, 2001, 2000, and 1999 F-4
Consolidated statements of stockholders' equity for the years ended
June 30, 2001, 2000 and 1999 F-5
Consolidated statements of cash flows for the years ended
June 30, 2001, 2000, and 1999 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, 2001 and 2000 and the
related consolidated statements of operations, stockholders' equity, and cash
flows for the years ended June 30, 2001, 2000 and 1999. 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 auditing standards generally
accepted in the United States of America. 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, 2001 and 2000 and the
results of its consolidated operations and its consolidated cash flows for the
years ended June 30, 2001, 2000 and 1999, in conformity with accounting
principles generally accepted in the United States of America.
HORTON & COMPANY, L.L.C.
Wayne, New Jersey
July 24, 2001
F-2
STRATEGIC CAPITAL RESOURCES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
ASSETS
June 30,
--------------------------
2001 2000
--------------------------
Revenue producing assets:
Net investment in direct financing leases:
Model Homes $34,502,977 $42,025,522
Residential real estate 44,524,990 -
Multi-family residential properties 10,227,999 10,227,999
----------- -----------
89,255,966 52,253,519
----------- -----------
Other assets:
Cash 3,986,639 1,451,548
Net assets realizable on divestiture - 1,000,000
Note receivable - 650,000
Deferred charges 673,382 445,810
Other 754,519 345,207
----------- -----------
Total other assets 5,414,540 3,892,565
----------- -----------
Total assets $94,670,506 $56,146,086
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Mortgages and notes payable $ 83,351,379 $ 45,399,792
Accounts payable and accrued expenses 1,290,159 834,869
Unearned income 368,003 356,855
Stockholder loans 1,223,100 1,141,920
----------- -----------
Total liabilities 86,232,641 47,733,436
----------- -----------
Stockholders' equity:
Convertible preferred stock, $.01 par value
5,000,000 shares authorized,
400,000 shares issued and outstanding
in 2001 and 2000 4,000 4,000
Common stock, $.001 par value
25,000,000 shares authorized,
17,512,005 shares issued, 15,438,525 outstanding in 2001 17,512 -
17,012,005 shares issued, 15,661,725 outstanding in 2000 - 17,012
Additional paid-in capital 8,346,552 8,346,552
Treasury stock, 2,073,480 shares in 2001,
and 1,350,280 shares in 2000 (457,999) (343,176)
Retained earnings 527,800 388,262
----------- -----------
Total stockholders' equity 8,437,865 8,412,650
----------- -----------
Total liabilities and stockholders' equity $94,670,506 $56,146,086
=========== ===========
See notes to consolidated financial statements
F-3
STRATEGIC CAPITAL RESOURCES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
Year Ended June 30,
-----------------------------------------
2001 2000 1999
------------ ----------- -------------
Revenues:
Interest income on direct
financing leases:
Model homes $ 4,810,323 $ 4,842,346 $ 4,663,540
Residential real estate 3,264,599 - -
Multi-family residential 1,378,213 1,356,271 -
Sale of direct financing leases:
Model homes 16,532,241 19,551,367 21,495,935
Residential real estate 1,416,802 - -
Interest and other income 135,798 323,620 127,445
------------ ----------- -------------
27,537,976 26,073,604 26,286,920
------------ ----------- -------------
Costs and expenses:
Interest and financing costs 5,814,031 3,948,480 2,806,058
Multi-family residential 365,696 354,722 -
Cost of direct financing leases sold:
Model homes 16,154,849 19,227,557 21,270,040
Residential real estate 1,416,802 - -
Depreciation & Amortization 930,942 664,751 508,783
Corporate 1,536,118 1,553,940 1,433,805
------------ ----------- -------------
26,218,438 25,749,450 26,018,686
------------ ----------- -------------
Operating income 1,319,538 324,154 268,234
Impairment charge 1,000,000 100,000 -
------------ ----------- -------------
Income before income tax expense 319,538 224,154 268,234
Deferred income tax expense 95,000 67,200 80,400
------------ ----------- -------------
Net income 224,538 156,954 187,834
Preferred stock distributions 85,000 120,000 90,000
------------ ----------- -------------
Income applicable to
common shareholders $ 139,538 $ 36,954 $ 97,834
============ =========== =============
Earnings per share data:
Basic earnings per share $ 0.01 $ 0.00 $ 0.01
------------ ----------- -------------
Diluted earnings per share $ 0.01 $ 0.00 $ 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, 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
Treasury stock purchased - - - -
Warrant exercised - - 500,000 500
Preferred distributions - - - -
Net income - - - -
--------- -------- ---------- ----------
Balance, June 30, 2001 400,000 $ 4,000 17,512,005 $ 17,512
========= ======== ========== ==========
Additional Treasury Stock
Paid-In ---------------- Retained
Capital Shares Amount Earnings
---------- -------- ---------- -----------
Balance, June 30, 1998 $8,346,552 (77,920) $(20,354) $ 253,474
Treasury stock purchased - (1,030,215) (262,432) -
Preferred distributions - - - (90,000)
Net income - - - 187,834
---------- -------- ---------- -----------
Balance, June 30, 1999 8,346,552 (1,108,135) (282,786) 351,308
Treasury stock purchased - (242,145) (60,390) -
Preferred distributions - - - (120,000)
Net income - - - 156,954
---------- -------- ---------- -----------
Balance, June 30, 2000 8,346,552 (1,350,280) (343,176) 388,262
Treasury stock purchased - (723,200) (114,823) -
Preferred distributions - - - (85,000)
Net income - - - 224,538
---------- -------- ---------- -----------
Balance, June 30, 2001 $8,346,552 (2,073,480) $(457,999) $527,800
========== ======== ========== ===========
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,
---------------------------------
2001 2000 1999
----------- ---------- ----------
Net income $ 224,538 $ 156,954 $ 187,834
----------- ---------- ----------
Adjustments to reconcile net income
to net cash provided by operating activities:
Amortization expense 912,191 647,300 494,604
Depreciation expense 18,751 17,451 14,179
Gain on sale of direct financing leases (377,396) (323,810) (225,895)
Impairment charge 1,000,000 100,000 -
Changes in assets and liabilities:
(Increase) decrease in deferred income tax asset 36,000 (9,800) 80,400
(Increase) decrease in other assets (418,554) (241,746) 26,527
Increase (decrease) in accounts payable and
accrued expenses 455,292 169,236 47,972
Increase (decrease) in unearned income 11,149 188,611 (35,121)
----------- ---------- ----------
Total adjustments 1,637,433 547,242 402,666
----------- ---------- ----------
Net cash provided by
operating activities 1,861,971 704,196 590,500
----------- ---------- ----------
Cash flows from investing activities:
Investment in direct financing leases:
Model homes (482,502)(5,105,645)(4,216,654)
Residential real estate (4,874,095) - -
Proceeds from sale of direct financing leases:
Model homes 1,913,058 3,186,506 4,897,860
Residential real estate 70,839 - -
Loan advanced - (1,000,000) -
Proceeds from note receivable 650,000 350,000 -
Capital expenditures (9,511) (3,933) (14,594)
----------- ---------- ----------
Net cash provided by (used in)
investing activities (2,732,211)(2,573,072 666,612
----------- ---------- ----------
Cash flows from financing activities:
Proceeds from mortgages & notes payable 5,773,240 4,519,462 972,109
Principal payments on mortgages payable (1,301,754) (958,886)(1,390,406)
Deferred finance charges (948,012) (566,494) (460,891)
Proceeds from (repayment of)
stockholder loans 81,680 (173,987) 290,000
Preferred distributions (85,000) (130,000) (80,000)
Purchase of treasury stock (114,823) (60,390) (262,432)
----------- ---------- ----------
Net cash provided by (used in)
financing activities 3,405,331 2,629,705 (931,620)
----------- ---------- ----------
Net increase in cash 2,535,091 760,829 325,492
Cash at beginning of year 1,451,548 690,719 365,227
----------- ---------- ----------
Cash at end of year $3,986,639 $1,451,548 $ 690,719
=========== ========== ==========
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, 2001, 2000 and 1999
1. Description of business and significant accounting policies
Description of business
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 and other real estate.
Basis of presentation
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.
Principles of consolidation
The accompanying consolidated financial statements include the accounts of
Strategic Capital Resources, Inc. and of its wholly-owned subsidiaries.
Intercompany transactions and balances have been eliminated in consolidation.
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.
F-7
1. Description of business and significant accounting policies (continued)
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.
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, 2001 and 2000, the Company had cash balances with two banks, which
were, in the aggregate, $3,335,738 and $920,560, 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 $25,495 and $111,444 in restricted cash
accounts at June 30, 2001 and 2000, respectively.
As of June 30, 2001, the Company has purchased, and is leasing, model homes
located in Florida, California, Arizona, North Carolina, Texas, New Jersey,
New York, Pennsylvania, Iowa, Minnesota, Nevada, and Utah. The Company has
purchased and is developing residential real estate in Arizona, California,
Nevada and Utah. The multi-family residential properties are located in
Florida. All such properties have been leased to various different major
homebuilders and real estate developers (Note 3).
Depreciation
Office furniture and equipment (included in other assets) are carried at cost
and are depreciated on the straight-line method over a five-year period.
F-8
1. Description of business and 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, 2001, 2000 and 1999.
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. If the Company were to issue options at less
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, 2001, 2000 and 1999.
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.
In September 1998, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards 133 ("SFAS 133"), Accounting for Derivative
Instruments and Hedging Activities, as amended by SFAS 137. SFAS 133
requires companies to recognize all derivatives on the balance sheet at fair
value. Derivatives that are not hedges must be adjusted to fair value
through income. If the derivative is a hedge, depending on the nature of the
hedge, changes in the fair value of derivatives are either offset against the
change in fair value of assets, liabilities or firm commitments through
earnings or recognized in other comprehensive income until the hedged item is
recognized in earnings. SFAS 133 is effective as of July 1, 2000 for the
Company and its implementation will not have a material effect on the
Company's financial position or results of operations.
In December 1999, the Securities and Exchange Commission (SEC) issued Staff
Accounting Bulletin No. 101 (SAB 101), Revenue Recognition in Financial
Statements as amended by SAB 101A, which provides guidance on the
recognition, presentation, and disclosure of revenue in financial statements
filed with the SEC. SAB 101 outlines the basic criteria that must be met to
recognize revenue and provides guidance for disclosures related to revenue
recognition policies. In June 2000, the SEC issued SAB 101B which deferred
the effective date of SAB 101 until the last quarter of fiscal years
beginning after December 15, 1999. The Company has adopted SAB 101 and
determined that there is no material effect on its consolidated financial
position or results of operations.
F-9
1. Description of business and significant accounting policies (continued)
Earnings per common share
Basic earnings per common share is computed by dividing the net income
applicable to common stock shareholders by the weighed average number of
shares of common stock outstanding during the period. Diluted earnings per
share is computed by dividing net income by the weighted average number of
common shares and dilutive common share equivalents then outstanding using
the treasury-stock method.
Years ended June 30,
-----------------------------------
2001 2000 1999
---------- ---------- ----------
Earnings:
Net income $ 224,538 $ 156,954 $ 187,834
Dividends on preferred shares (85,000) (120,000) (90,000)
---------- ---------- ----------
Income applicable to common
shareholders $ 139,538 $ 36,954 $ 97,834
========== ========== ==========
Basic:
Income applicable to common
shareholders $ 139,538 $ 36,954 $ 97,834
========== ========== ==========
Weighted average shares outstanding during
the period 15,540,242 15,790,441 16,185,044
========== ========== ==========
Basic earnings per share $ .01 $ .00 $ .01
========== ========== ==========
Diluted:
Income applicable to common
shareholders $ 139,538 $ 36,954 $ 97,834
========== ========== ==========
Weighted average shares outstanding during
the period 15,540,242 15,790,441 16,185,044
Effect of dilutive securities:
Stock options 680,317 1,027,146 968,524
Warrants 788,458 2,041,923 1,762,673
---------- ---------- ----------
Diluted weighted average shares
outstanding 17,009,017 18,859,510 18,916,241
========== ========== ==========
Diluted earnings per share $ .01 $ .00 $ .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.
F-10
1. Description of business and significant accounting policies (continued)
Lease accounting policies
FASB Statement of Financial Accounting Standards No. 13 requires that a lessor
account for each lease by either direct financing, sales-type or operating
method. The Company has historically accounted for all leases under the
operating method.
The Securities and Exchange Commission (SEC) has examined the Company's Annual
Report on Form 10-K for the year ended June 30, 2000, and commented on certain
issues relating to the Company's accounting for lease transactions under the
operating method. After discussions with the SEC, and review of FASB
Statement of Financial Accounting Standards No. 13, the Company concurs with
the SEC's comments and has revised the method of accounting for its lease
transactions to the direct financing method.
The Company's financial statements through June 30, 2000, were previously
restated to give effect to the change in lease accounting. While the direct
financing method of accounting for lease transactions has necessitated some
change in presentation, there has been no material cumulative effect on the
Company's financial position or results of operations as of June 30, 2000.
Under the direct finance lease method of accounting, the leased assets are
recorded as an investment in direct finance leases and represent the minimum
net lease payments receivable, and includes third-party guaranteed residuals,
plus the unguaranteed residual value of the leased assets, less unearned
income. Rental payments consist of principal and interest on the lease.
Principal payments reduce the investment in the finance lease, and the
interest is recorded as revenue over the term of the lease.
2. Leasing arrangements
Model home purchase and lease back
The Company has entered into a series of direct financing leases with various
major homebuilders and real estate developers (the "Lessees") 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.
F-11
2. Leasing arrangements (continued)
Model home purchase and lease back (continued)
In many cases, the Company has obtained various forms of insurance, which
effectively serve as credit enhancements. The insurance instrument insures
the timely payment by the lessee of the lease payments. In the event of
default by the lessee, the insurer has an obligation to continue to make the
lease payments. The Company negotiates the premium for the insurance on a
case-by-case basis. All such insurance has 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.
Acquisition, development and sale of residential real estate
The Company purchases parcels of residential real estate selected by
homebuilders from non-affiliated third parties. They also purchase residential
real estate owned by the homebuilders and lease it back to them on triple-net
basis. The parcels of land are acquired at the lower of appraised value or
contract price. The parcels of land may require additional government
approvals or entitlements and development work or consist of finished lots.
If development work is required, the homebuilder enters into a fixed price
development agreement to develop the parcels of land and in some cases, is
required to provide completion bonds for some or all work by a surety company
acceptable to the Company. Reimbursement for development work performed is
typically paid monthly. 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.). Insurance coverage is obtained
to insure the prompt payment and performance of the homebuilder, as well as
the fully developed value of the real estate acquired.
Major customers
Revenues derived from major customers represented percentages of total lease
revenues as follows:
Year ended June 30,
--------------------
2001 2000 1999
---- ---- ----
Customer A 52% 57% 74%
Customer B 15% 22% -
Customer C 11% - -
---- ---- ----
78% 79% 74%
==== ==== ====
F-12
3. Direct financing leases
The components of the net investment in direct financing leases are as follows:
June 30,
----------------------------
2001 2000
----------- -----------
Total minimum lease payments receivable $90,167,661 $52,774,694
Add: Estimated unguaranteed residual of
leased real estate - -
----------- -----------
Gross investment in direct financing leases 90,167,661 52,774,694
Less: Unearned income 911,695 521,173
----------- -----------
Total net investment in direct financing leases $89,255,966 $52,253,521
=========== ===========
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 $10,227,999. The
purchase price was paid as follows:
Assumption of existing first mortgage $ 4,927,999
New loan 5,300,000
------------
Total purchase price $ 10,227,999
============
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 by an insurance company rated "AAA" by Standard & Poors.
5. Impairment charge on 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. Impairment charge on 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.
During the year ended June 30, 2001, the Company took an impairment charge for
the remaining $1,000,000 balance on the promissory note. The amount of the
write-down was determined by evaluating the underlying value of the
collateral, the cost of recovery, ongoing litigation costs and the
difficulty in realizing the collateral securing the promissory note. Actual
losses could differ from our current estimate and will be reflected as
adjustments in future financial statements.
The statement of operations for the year ended June 30, 2000, has been
reclassified to conform to the 2001 presentation of the impairment charge.
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. The balance was repaid in-full during the year ended June 30, 2001.
F-14
7. Deferred charges
Deferred charges consist of the following:
June 30,
2001 2000
-------- --------
Deferred finance charges $611,222 $337,050
Deferred offering costs 62,160 62,160
Deferred income tax asset - 36,000
Goodwill - 10,600
-------- --------
$673,382 $445,810
======== ========
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
$901,591 for the year ended June 30, 2001, $635,186 for the year ended June
30, 2000, $482,490 for the year ended June 30, 1999. Accumulated
amortization of deferred finance charges totaled $1,663,104, $1,015,137, and
$1,180,273 at June 30, 2001, 2000 and 1999, respectively.
Goodwill is carried at cost and has been amortized over a five-year period.
Amortization expense of goodwill was $10,600, $12,114 and $12,114 for the
years ended June 30, 2001, 2000 and 1999, respectively. Accumulated
amortization of goodwill was $60,570, $49,970, and $37,856 at June 30, 2001,
2000 and 1999, respectively.
F-15
8. Mortgages and notes payable
Mortgages and notes payable consist of the following:
Interest Maturity June 30,
Rate (3) Date 2001 2000
------- -------- ----------- -----------
Debt secured by model homes and
residential real estate:
Floating Rate Mortgage (LIBOR based)(1) 6.06% 8/5/2002 $34,996,838 $ -
Floating Rate Mortgage (LIBOR based)(2) 6.56% 8/5/2001 10,986,045 11,403,764
Debt secured by model homes:
Fixed Rate Mortgage 8.75% 9/20/2002 385,280 385,280
Fixed Rate Mortgage 8.75% 9/30/2002 422,964 422,964
Fixed Rate Mortgage 8.75% 9/30/2002 550,317 1,534,396
Fixed Rate Mortgage 8.70% 9/30/2001 894,000 894,000
Fixed Rate Mortgage 8.50% 10/29/2002 6,128,500 6,603,500
Fixed Rate Mortgage 8.50% 12/31/2002 2,299,614 3,764,524
Floating Rate Mortgage (Prime based) 6.50% 7/15/2003 4,659,321 -
Fixed Rate Mortgage 7.76% 1/15/2004 4,050,120 -
Fixed Rate Mortgage 7.31% 1/15/2004 1,638,049 -
Floating Rate Mortgage (Prime based) 8.00% 12/31/2000 - 4,623,167
Fixed Rate Mortgage 8.71% 9/01/2000 - 2,240,464
Fixed Rate Mortgage 8.83% 10/01/2000 - 524,597
Fixed Rate Mortgage 8.62% 1/01/2001 - 3,087,282
Debt secured by residential real estate:
Floating Rate Mortgage (Prime based) 7.50% 7/01/2003 6,762,000 -
Debt related to multi-family residential:
Fixed Rate Note 8.75% 7/15/2004 4,927,099 5,120,752
Fixed Rate Mortgage 7.96% 3/01/2017 4,651,232 4,795,102
----------- -----------
Total $83,351,379 $45,399,792
=========== ===========
(1) $45,000,000 revolving credit facility.
(2) $15,000,000 revolving credit facility. Renewed August 5, 2001 for
one additional year.
(3) As of June 30, 2001.
In addition to the mortgages being secured by real estate, all loans are
secured by the leases and related security bonds and/or residual value
insurance policies.
At June 30, 2001, maturities of mortgages and notes payable are as follows:
Year ending June 30, 2002 $14,566,609
Year ending June 30, 2003 49,980,789
Year ending June 30, 2004 10,451,128
Year ending June 30, 2005 4,399,127
Year ending June 30, 2006 200,000
Thereafter 3,753,726
-----------
$83,351,379
===========
F-16
9. 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 totaled $109,653 for the
year ended June 30, 2001, $112,220 for the year ended June 30, 2000, and
$108,663 for the year ended June 30, 1999.
During the years ended June 30, 2001, 2000, and 1999, the Company issued a
total of 1,491,920, 1,146,000, and 1,959,000 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, 2001, there are a total of 7,724,014 warrants outstanding. The
exercise price ranges from $0.12 to $0.47 per share. To date, none of the
warrants have been exercised.
10. 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.
During the year ended June 30, 1999, the Company commenced payment of current
preferred distributions and distributions in arrears. As of June 30, 2001,
there are no unpaid distributions in arrears.
Warrants
In conjunction with a loan agreement entered into by a former subsidiary, IECM
(Note 5) in December 1995, the Company issued warrants convertible into
500,000 shares of the Company's common stock at $.001 per share. These
warrants were exercised in December 2000.
F-17
10. 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, 2001, 2000 and 1999:
Weighted
Number of average
Shares exercise price
--------------- ---------------
Outstanding at July 1, 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
Granted - December 2000 750,000 $0.16
Cancelled (300,000) $0.30
----------
Outstanding at June 30, 2001 4,150,000 $0.26
========== =====
11. Income taxes
The Company has a $720,000 net operating loss available for carryforward to
offset future years' taxable income. The net operating losses expire in 2012
and 2013.
Year Ended June 30,
--------------------------------
2001 2000 1999
-------- -------- --------
Current $ - $ - $ -
Deferred 95,000 67,200 80,400
-------- -------- --------
$ 95,000 $ 67,200 $ 80,400
======== ======== ========
F-18
11. Income taxes (continued)
Deferred income taxes arise from temporary differences in reporting assets and
liabilities for income tax and financial accounting purposes. These
temporary differences primarily resulted from net operating losses and from
different depreciation methods used for financial and tax purposes.
The components of the deferred income tax liabilities are as follows:
June 30,
----------------------
2001 2000
---------- ----------
Deferred tax asset $ 217,000 $ 179,000
Deferred tax liability (353,000) (220,000)
---------- ----------
Net deferred tax liability $ (136,000) $ (41,000)
========== ==========
The net deferred tax liability is included in accounts payable and accrued
expenses.
12. Supplemental cash flow information
The Company's non-cash investing and financing activities were as follows:
During the years ended June 30, 2001, 2000, and 1999, the Company acquired
revenue producing assets at a cost of $53,776,279, $35,953,869, and
$16,813,539, respectively. Such purchases were financed as follows:
Year ended June 30,
---------------------------------------
2001 2000 1999
----------- ----------- -----------
Revenue producing assets $53,776,279 $35,953,868 $16,813,539
Bank borrowings (48,419,682) (30,848,223) (12,596,885)
----------- ----------- -----------
Investment in direct financing leases $ 5,356,597 $ 5,105,645 $ 4,216,654
=========== =========== ===========
Interest paid totaled $4,569,018, $3,848,251, and $2,756,454 during the years
ended June 30, 2001, 2000 and 1999, respectively.
13. 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, 2001,
2000 and 1999, was $85,972, $75,015, and $87,577, respectively. The
following is a schedule of future minimum lease payments:
Year ending June 30, 2002 $41,782
=======
F-19
13. Commitments and contingencies
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.
Model home sale contracts
As of June 30, 2001, and through the report date, the Company had sales
contracts pending on 12 model homes at an aggregate sales price of
$4,366,877. The model homes were acquired at an aggregate cost of $3,922,916.
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 totaled $28,880, $12,654, and $11,514 for
the years ended June 30, 2001, 2000 and 1999, respectively.
Financing activities
At June 30, 2001, the Company had approximately $14 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 August 2002.
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 results of operations.
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.
(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, President, CEO, and 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: August 9, 2001
David Miller, Director
/s/Samuel G. Weiss Dated: August 9, 2001
Samuel G. Weiss, Director
/s/Joan E. Kushay Dated: August 9, 2001
Joan E. Kushay, Director
/s/John P. Kushay Dated: August 9, 2001
John P. Kushay, Director
/s/Ralph Wilson Dated: August 9, 2001
Ralph Wilson, Director
/s/Kenneth MacKenzie Dated: August 9, 2001
Kenneth MacKenzie, Director
/s/John H. Roach, Jr. Dated: August 9, 2001
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