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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2002
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
Commission File No. 0-28168
Strategic Capital Resources, Inc.
------------------------------------------------------
(Exact name of Registrant as specified in its charter)
Delaware 11-3289981
- ------------------------------- ------------------------------------
(State or other jurisdiction of (IRS Employer Identification Number)
incorporation or organization)
7900 Glades Road, Suite 610, Boca Raton, Florida 33434
------------------------------------------------------
(Address of principal executive office)
(561) 558-0165
----------------------------------------------------
(Registrant's Telephone Number, Including Area Code)
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Sections 13 or 15(d) of the Securities Exchange Act of 1934
during the preceding twelve months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes [X] No [ ]
Indicate the number of shares outstanding of each of the issuer's classes of
common stock as of the latest practicable date. The number of shares of common
stock, part value $.001 per share, outstanding as of January 2, 2003 was 77,192.
STRATEGIC CAPITAL RESOURCES, INC. AND SUBSIDIARIES
INDEX
Part I FINANCIAL INFORMATION
Item 1. Financial Statements Page Number
Condensed Consolidated Balance Sheets as of 3
September 30, 2002 (unaudited) and June 30, 2002
Condensed Consolidated Statements of Operations 4
for the three months ended September 30, 2002 and
2001 (unaudited)
Condensed Consolidated Statements of Cash Flows for 5
the three months ended September 30, 2002 and 2001
(unaudited)
Notes to Condensed Consolidated Financial Statements 6-14
(unaudited)
Item 2. Management's Discussion and Analysis of Financial 15-21
Condition and Results of Operations
Item 3. Quantitative and Qualitative Disclosures About 21
Market Risk
Item 4. Controls and Procedures 21-22
Part II. OTHER INFORMATION 22-24
SIGNATURES AND CERTIFICATIONS 25-28
2
PART I. - FINANCIAL INFORMATION
Item 1 - Financial Statements
CONDENSED CONSOLIDATED BALANCE SHEETS
ASSETS
September 30, June 30,
2002 2002
------------ ------------
(Unaudited)
Revenue producing assets $ 83,365,990 $ 88,388,706
------------ ------------
Other assets:
Cash 1,086,399 801,415
Deferred charges 743,032 848,466
Other 864,976 758,923
------------ ------------
Total other assets 2,694,407 2,408,804
------------ ------------
TOTAL ASSETS $ 86,060,397 $ 90,797,510
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES:
Mortgages and notes payable $ 72,424,738 $ 77,592,476
Accounts payable and accrued expenses 2,088,400 1,739,401
Unearned income 176,539 173,038
Income taxes 717,126 852,128
Stockholder loans 1,909,200 1,909,200
------------ ------------
Total liabilities 77,316,003 82,266,243
------------ ------------
STOCKHOLDERS' EQUITY:
Common stock, $.001 par value, 25,000,000 shares authorized
87,560 issued, 77,192 outstanding 88 88
Additional paid-in capital 8,847,616 8,847,616
Treasury stock, 10,368 shares at cost (457,999) (457,999)
Retained earnings 354,689 141,562
------------ ------------
Total stockholders' equity 8,744,394 8,531,267
------------ ------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 86,060,397 $ 90,797,510
============ ============
See accompanying Notes to Condensed
Consolidated Financial Statements
3
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
For The Three Months Ended September 30, 2002 and 2001
(Unaudited)
2002 2001
----------- -----------
Revenues $12,881,836 $ 4,952,308
----------- -----------
Operating expenses:
Interest and financing costs 1,088,438 1,411,954
Multi-family residential 86,315 93,243
Cost of residential real estate sold 10,269,970 2,048,445
Depreciation and amortization 355,901 361,259
Corporate 448,085 402,858
Impairment Charge 250,000 --
----------- -----------
Total operating expenses 12,498,709 4,317,759
----------- -----------
Operating income 383,127 634,549
Income taxes 165,000 190,000
----------- -----------
Net income 218,127 444,549
Preferred stock distributions 5,000 15,000
----------- -----------
Income applicable to common shareholders $ 213,127 $ 429,549
=========== ===========
Earnings per share
Basic $ 2.76 $ 5.56
Diluted $ 2.76 $ 5.43
Weighted average number of shares
Basic 77,192 77,192
Diluted 77,192 79,065
See accompanying Notes to Condensed
Consolidated Financial Statements
4
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
Three Months ended September 30, 2002 and 2001
(Unaudited)
2002 2001
------------ ------------
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 218,127 $ 444,549
------------ ------------
Adjustments to reconcile net income
to net cash provided by operating activities:
Amortization and depreciation expense 355,901 361,259
Deferred Income Taxes (135,000) (190,000)
Gain on sale of direct financing arrangements, model homes net (7,950) (132,123)
Changes in operating assets and liabilities 246,445 716,526
------------ ------------
Total adjustments 459,396 755,662
------------ ------------
Net Cash Provided by Operating Activities 677,523 1,200,211
------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES
Investment in direct financing arrangements (5,381,904) (4,392,133)
Proceeds from direct financing arrangements 10,412,570 371,665
------------ ------------
Net cash Provided (Used) by Investing Activities 5,030,666 (4,020,468)
------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from mortgages and notes payable 0 326,362
Principal payments on mortgages payable (5,167,738) (118,452)
Deferred financing charges (250,467) (363,528)
Preferred distributions (5,000) (15,000)
------------ ------------
Net Cash Used by Financing Activities (5,423,205) (170,618)
------------ ------------
NET INCREASE (DECREASE) IN CASH 284,984 (2,990,875)
CASH - BEGINNING 801,415 3,986,639
------------ ------------
CASH - ENDING $ 1,086,399 $ 995,764
============ ============
See accompanying Notes to Condensed
Consolidated Financial Statements
5
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2002
(Unaudited)
Note 1. DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES
All references in the consolidated financial statements to common
shares, share prices, per share amounts and stock plans have been retroactively
restated for the two hundred-for-one stock split declared on April 8, 2002.
A. Interim Presentation
--------------------
The accompanying condensed consolidated financial statements have been
prepared by Strategic Capital Resources, Inc. and Subsidiaries (the "Company")
and are unaudited. Certain information and footnote disclosures normally
included in financial statements presented in accordance with accounting
principles generally accepted in the United States have been omitted from the
accompanying condensed consolidated financial statements. The Company's
management believes the disclosures made are adequate to make the information
presented not misleading. The condensed consolidated balance sheet information
as of June 30, 2002 was derived from the audited consolidated financial
statements included in the Company's annual report Form 10-K. The condensed
consolidated financial statements included as part of this 10-Q filing should be
read in conjunction with that report. The accompanying unaudited consolidated
financial statements reflect all adjustments, consisting primarily of normal
recurring items that, in the opinion of the management of the Company, are
considered necessary for a fair presentation of the financial position, results
from operations and cash flows for the periods presented. Results of operations
achieved through September 30, 2002 are not necessarily indicative of those
which may be achieved for the year ending June 30, 2003.
B. Description of Business
-----------------------
The Company provides specialized financing for major homebuilders and
real estate developers throughout the United States. The arrangements may take
several forms which include operating leases, option agreements, or management
6
agreements. The Company accounts for all such agreements as direct financing
arrangements. Such arrangements may represent off-balance sheet transactions for
the Company's customers.
The Company is engaged in such financing arrangements in three lines of
business, consisting of one reportable segment, all with major homebuilders and
real estate developers throughout the United States:
1. Acquisition and lease of fully furnished model homes.
2. Residential real estate land banking.
3. Multi-family residential and other real estate.
C. Basis of Presentation
---------------------
This summary of significant accounting policies of the Company is
presented to assist in understanding the condensed consolidated financial
statements. The condensed 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 accounting
principles generally accepted in the United States of America and have been
consistently applied in the preparation of the condensed consolidated financial
statements.
D. Principles of Consolidation
---------------------------
The accompanying condensed consolidated financial statements include
the accounts of Strategic Capital Resources, Inc. and its wholly owned
subsidiaries, which include special purpose subsidiaries. Intercompany
transactions have been eliminated in consolidation.
E. Special Purpose Subsidiaries
----------------------------
The Company has several wholly owned special purpose subsidiaries, all
of which are consolidated. They have been formed for the exclusive purpose of
acquiring specific properties and perform no functions other than to manage a
specific project. A special purpose subsidiary is an entity structured in a way
that its sole activity is the specific project.
7
F. Special Purpose Entities/Off Balance Sheet Arrangements
-------------------------------------------------------
The Company does not have off-balance sheet arrangements with special
purpose entities.
G. 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.
H. Fair Value of 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 the end of the reporting period.
I. Revenue Recognition
-------------------
The Company accounts for all of its financing arrangements under the
direct financing method of accounting prescribed under SFAS No. 13, Accounting
for Leases.
Under the direct finance method of accounting, the assets are recorded
as an investment in direct finance arrangements and represent the minimum net
payments receivable, including third-party guaranteed residuals, plus the
un-guaranteed residual value of the assets, if any, less unearned income.
Sales and cost of direct financing arrangements are recorded at the
time each property sale is closed and when title and possession have been
transferred to the buyer.
J. Reclassifications
-----------------
Certain amounts have been reclassified in the prior period to conform
to the current period's presentation.
8
Note 2. NET INVESTMENT IN DIRECT FINANCING ARRANGEMENTS
The components of the net investment in direct financing arrangements
at September 30, 2002 and June 30, 2002 are as follows:
September 30, June 30,
2002 2002
------------ ------------
Total minimum lease payments receivable $ 83,542,529 $ 88,561,744
Less: Unearned income 176,539 173,038
------------ ------------
Net investment in direct financing leases $ 83,365,990 $ 88,388,706
============ ============
Note 3. COMMITMENTS AND CONTINGENCIES
A. Financing Activities
--------------------
At September 30, 2002, the Company had approximately $27 million of
unused, committed credit facilities available under existing revolving loan
agreements, which may be utilized to acquire real estate assets in accordance
with the terms of those agreements. Such credit facilities expire through August
2003.
During September 2002, the Company received a commitment for a $15.7
million credit facility. The interest rate is based on a 30-day LIBOR rate plus
a premium. This facility expires May 2005.
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. The possible offering or
private placement of senior notes with warrants, convertible preferred stock or
similar type of security is constantly being evaluated. It is the Company's
policy not to incur costs from activation of credit facilities unless and until
needed.
We make preliminary commitments to acquire revenue producing assets and
to enter into various types of purchase and leaseback transactions as well as
financing arrangements. We disclose these commitments as part of our routine
reporting. Such preliminary commitments are subject to routine changes in size,
dollar amounts and closing time, prior to finalization. Such changes arise from
a variety of factors, including changes in client needs, economic conditions,
and completion of due diligence and financing agreements.
9
B. Legal Proceedings
-----------------
During the year ended June 30, 1997, we disposed of our construction
subsidiary, Iron Eagle Contracting and Mechanical, Inc. ("IECM"). Under the
terms of the agreement, we sold the net assets of IECM for a note in the amount
of $1,312,500. The note bore interest at the prime rate plus 1%. Interest was
payable in monthly installments. The note was 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.
During June 1999, we 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 monies due to us from Monarch as a result of its purchase of
IECM from us.
The Court granted our 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 we
are 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 us. A
decision of the Appellate Division limited the extent of the corporate
defendant's liability and the thrust of the action is against the guarantors.
The action is now in the discovery stage. While it is difficult to predict the
outcome of any litigation, there are no counterclaims asserted against us and
there does not appear to be a range of potential loss to us.
During the years ended June 30, 2002, 2001 and 2000, we took impairment
charges 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.
10
Also, we filed suit against BankAtlantic Bankcorp, Inc. and
BankAtlantic, a federal savings bank, in the Circuit court of the 15th Judicial
Circuit in and for Palm Beach County, Florida, by complaint dated December 30,
1998. The complaint charges a breach of fiduciary duty and seeks unspecified
damages in that the defendant undertook to act as agent or broker in connection
with obtaining a $200 million loan facility relating to a sale and lease back
program for a major, publicly-traded national builder. Rather than complete the
financing transaction, the complaint alleges economic opportunity was usurped by
defendant and entered into an agreement directly with the builder, utilizing,
inter alia, the terms of our program. This matter is in the early stages of
discovery. Since this represents a potential contingent gain for us, there are
no receivable amounts recorded in the accompanying consolidated balance sheets.
During May 2000, we, along with FPE Funding, LLC, filed a complaint
entitled "In the case of Strategic Capital Resources, Inc. and FPE Funding, LLC
v. Dylan Tire Industries, LLC, Dylan Custom Mixing, LLC; Mid-American Machine
and Equipment, LLC f/k/a Mid-American Tire and Machine, LLC; GMAC Commercial
Credit, LLC: Robert C. Liddon, Trustee, Mary Aronov, Trustee; David Feingold;
John Tindal; Brett Morehouse, Johnny Guy; Shan Sutherland; and Pirelli Tire
LLC," Chancery Court for Davidson County, Tennessee, Case No. 00-1296-III,
against the referenced defendants alleging, among other things, breach of
contract, fraud, and civil conspiracy, arising from the breach of a sale and
leaseback commitment for which we procured funding and under which FPE was to be
the owner/lessor of a manufacturing facility.
The defendants/counter-plaintiffs, Dylan Tire Industries, LLC,
Mid-American Machine and Equipment, LLC and Dylan Custom Mixing, LLC have filed
a counterclaim, seeking unspecified consequential damages "estimated to exceed
$500,000" for alleged breach of a loan commitment issued by us. The basis of the
claim is that we allegedly failed to honor our commitment to lend for the
acquisition of a manufacturing facility, resulting in damages to the
defendants/counter-plaintiffs, who borrowed the money directly from our lender
at allegedly greater cost and who allegedly had to pay a greater price for the
facility as a result of the alleged delay in the closing. We believe the
counterclaim is without merit and are vigorously defending. As such, there is no
accrual in the accompanying consolidated balance sheets.
11
Our claims were substantially dismissed by the lower court and affirmed
by the appellate court. We have appealed to the Tennessee Supreme Court. We have
additional claims that have not as yet been filed pending the appeal outcome. We
have recorded a receivable from Dylan Tire Industries, LLC for a commitment fee
of approximately $180,000. As a result of the uncertainty regarding collection
of the receivable, we have reserved the entire balance. For the year ended June
30, 2002, we recorded an impairment charge for the receivable amounting to
$91,122.
We are also party to an action entitled Star Insurance Company v.
Strategic Capital Resources, Inc., 15th Judicial Court, Palm Beach County,
Florida, Case No. CL 00-433 AD, which is an action on an indemnity bond.
Discovery has been conducted but is not completed. Mediation, which was
conducted on August 13, 2002, has been adjourned. The plaintiff has not been
vigorously prosecuting this action. We intend to vigorously defend this action
if and when the plaintiff proceeds. Due to the uncertainties of litigation, we
are unable to evaluate the likelihood of an unfavorable outcome or estimate the
amount of range of potential loss. This matter has been referred by the court
for mediation to see if the parties can settle the case. We are mediating with
the plaintiff to settle the case, but there is no assurance that the settlement
will occur. As such there are no accruals in the accompanying consolidated
balance sheet for this matter.
We are not presently involved in any other material litigation nor, to
our knowledge, is any other material litigation threatened against us or any of
our properties, other than routine litigation arising in the ordinary course of
business. See Notes to Condensed Consolidated Financial Statements.
Note 4. MORTGAGES AND NOTES PAYABLE
Mortgages and notes payable are collateralized by first mortgages on
specific properties. Interest is payable monthly in arrears at interest rates
ranging from 4.75% to 8.75% as of September 30, 2002. The maturity dates range
from one (1) to fifteen (15) years.
12
In addition to the mortgages being secured by specific properties, all
loans are secured by specific lease and related security bonds and/or residual
value insurance policies.
Note 5. SUPPLEMENTAL CASH FLOW INFORMATION
The Company's non-cash investing and financing activities were as
follows:
Three Months Three Months
Ended Ended
September 30 September 30
2002 2001
------------ ------------
Revenues producing assets: $ 5,381,904 13,893,109
Bank borrowings (4,681,678) 11,530,596
------------ ------------
Investment in direct financing leases $ 700,226 $ 2,362,513
============ ============
Interest paid totaled $1,054,072 during the three months ended
September 30, 2002 and $1,210,815 for the three months ended September 30, 2001.
Income taxes paid totaled $326,558 during the three months ended September 30,
2002, and $8,175 during the three months ended September 30, 2001.
During the year ended June 30, 2002, the Company redeemed all of its
preferred stock as follows:
Redemption price $ 1,000,000
Notes Issued (500,000)
-----------
Cash paid $ 500,000
===========
13
Note 6. EARNINGS PER SHARE
Basic and diluted earnings per share are calculated as follows:
Three Months Ended
September 30,
2002 2001
-------- --------
Earnings:
Net income $218,127 $444,549
Dividends on preferred shares 5,000 15,000
-------- --------
Income applicable to common shareholders $213,127 $429,549
======== ========
Basic:
Income applicable to common shareholders $213,127 $429,549
Weighted average shares outstanding during the period 77,192 77,192
======== ========
Basic $ 2.76 $ 5.56
======== ========
Diluted:
Income applicable to common shareholders $213,127 $429,549
Weighted average shares outstanding during the period 77,192 77,192
Effect of dilutive securities:
Stock options 0 530
Warrants 0 1,340
-------- --------
Diluted weighed common shares outstanding 77,192 79,065
======== ========
Diluted $ 2.76 $ 5.43
======== ========
Note 7. SUBSEQUENT EVENTS
A. Model Home Program
------------------
From October 1, 2002 through the date of this report, the Company sold
twelve (12) model homes at an aggregate sales price of $3,045,936. These models
were acquired at an aggregate costs of $2,649,965.
The Company also has contracts pending on nine (9) model homes at an
aggregate costs of $1,856,892.
14
B. Residential Real Estate Land Banking
------------------------------------
From October 1, 2002 through the date of the report, the Company paid
development costs in the amount of $2,226,968 and had sales of finished lots in
the amount of $14,661,760.
Item 2. Management's Discussion and
Analysis of Financial Condition and
Results of Operations
Disclosure Regarding Forward-Looking Statements
This Quarterly Report on Form 10-Q contains "forward-looking
statements" within the meaning of Section 27A of the Securities Act of 1933, as
amended, and Section 21E of the Securities Exchange Act of 1934, as amended.
Discussions containing forward-looking statements may be found in the material
set forth in the section "Management's Discussion and Analysis of Financial
Condition and Results of Operations".
These statements concern expectations, beliefs, projections, future
plans and strategies, anticipated events or trends and similar expressions
concerning matters that are not historical facts. Specifically, this Quarterly
Report contains forward-looking statements regarding:
1. our estimate that we have adequate financial resources to meet
our current working capital needs for the foreseeable future;
2. the impact of inflation on our future results of operations;
and
3. our ability to pass through to our customers in the form of
increased prices any increases in our costs.
These forward-looking statements reflect our current views about future
events and are subject to risks, uncertainties and assumptions. We wish to
caution readers that certain important factors may have affected and could in
the future affect our actual results and could cause actual results to differ
significantly from those expressed in any forward-looking statement. The most
important factors that could prevent us from achieving our goals, and cause the
assumptions underlying forward-looking statements and the actual results to
differ materially from those expressed in or implied by those forward-looking
statements include, but are not limited to, the following:
15
1. our significant level of debt;
2. our ability to borrow or otherwise finance our business in the
future;
3. our ability to locate customers in need of our services;
4. economic or other business conditions that affect the desire
or ability of our customers to build new homes in markets in
which we conduct our business;
5. a decline in the demand for housing;
6. a decline in the value of the land and model home inventories
we maintain;
7. an increase in interest rates;
8. our ability to successfully dispose of developed properties,
model homes, or undeveloped land or lots at expected prices
and within anticipated time frames;
9. our ability to compete in our existing and future markets; and
10. an increase or change in governmental regulations.
OVERVIEW
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
complete with options and upgrades.
2. The acquisition, development and sales of residential real
estate land banking.
3. The purchase and leaseback of multi-family residential real
estate.
16
RESULTS OF OPERATIONS
A summary of operating results for the three months ended September 30,
2002 and 2001 are presented below.
Three Months Ended
September 30
---------------------------
2002 2001
(as restated)
------------ ------------
Revenues: $ 12,881,836 $ 4,952,308
------------ ------------
Costs and expenses:
Interest and financing costs 1,088,438 1,411,954
Multi-family operating costs 86,315 93,243
Cost of direct financing leases sold - Land Banking 10,269,970 2,048,445
Depreciation and amortization 355,901 361,259
Corporate 448,085 402,858
Impairment Charge 250,000 --
------------ ------------
Total operating expenses 12,498,709 4,317,759
------------ ------------
Income before income taxes 383,127 634,549
Income tax expense 165,000 190,000
------------ ------------
Net income $ 218,127 $ 444,549
============ ============
Comparison of Three Months Ended September 30, 2002 to Three
Months ended September 30, 2001.
Revenue for the three months ended September 30, 2002 increased
$7,929,528 (or 160%) compared to the prior year period. The increased revenue
was primarily attributable to the sale of residential real estate which amounted
to $10,269,970 for the period, compared to $2,098,445 for the prior year period.
Interest expense decreased $323,516 (or 23%) during the three months
ended September 30, 2002, compared to the prior year period, primarily due to
reduced borrowing costs on floating rate loans.
Corporate costs increased $45,227 (an 11% increase) from $402,858 for
the three months ended September 30, 2001, to $448,085 for the three months
ended September 30, 2002.
17
Net income for the three months ended September 30, 2002 was $218,127
compared to $444,549 for the prior year period, a decrease of $226,422. The
decrease in net income was primarily attributable to the $250,000 impairment
charge related to Star Insurance which we accrued during the period ended
September 30, 2002.
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., in addition to the required lease payment.
We try to develop new programs on a continuing basis to satisfy
customer needs and changing economic conditions.
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 home units and costs by state:
September 30, 2002 September 30, 2001
------------------ ------------------
State Units Amount Units Amount
- -------------- ----------- ----------- ----------- -----------
Arizona -- -- 2 $ 248,665
California 25 $ 6,703,315 44 11,669,315
Florida -- -- 1 472,917
Iowa 8 1,259,335 13 2,247,025
Minnesota 1 226,040 6 1,443,935
Nevada 4 469,960 13 1,667,790
New Jersey 20 5,028,087 25 7,006,755
New York 1 254,000 3 883,291
North Carolina 5 1,155,778 6 1,497,891
Pennsylvania 1 250,000 5 1,196,424
Texas 2 659,000 9 2,299,900
Utah -- -- 3 496,097
----------- ----------- ----------- -----------
Total 67 $16,005,515 130 $31,130,005
=========== =========== =========== ===========
18
The following is a breakdown of interest income on model home direct
financing leases by state:
Three Months Ended
September 30,
State 2002 2001
------------------------------ -------- --------
California $200,275 $350,079
Florida 0 22,784
Iowa 23,613 55,188
Minnesota 4,238 36,557
Nevada 0 20,278
New Jersey 141,436 217,734
New York 7,620 25,712
North Carolina 34,673 49,010
Pennsylvania 5,222 42,138
Texas 19,770 68,996
-------- --------
Total $436,847 $888,476
======== ========
Acquisition, Development and Sale of Residential Real Estate
We purchase parcels of residential real estate with entitlements
selected by homebuilders from non-affiliated third parties. The parcels of land
are acquired at the lower of appraised value or contract price. The parcels of
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 parcels of 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 paid periodically (usually monthly) after receipt of an
inspection report. A lease, management agreement and/or exclusive option to
purchase option are entered into with the homebuilder simultaneously with the
land acquisition and development agreement. 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
payment performance of the homebuilder, as well as the value of the real estate
acquired.
Each project is structured so that our total project costs (land
acquisition plus development costs) is equal to the homebuilder's cumulative
purchase price for all the lots, which results in no gain or loss on the sale of
the lots. All such agreements are accounted for as direct financing
arrangements.
19
The following is a summary of our residential real estate projects:
Date Property Purchase Development Sale of Balance
Acquired Location Price Costs Paid Finished 9/30/02
to 9/30/02 Lots
---------- ------------ ------------ ------------ ------------
8/31/2000 California $ 20,546,010 $ 2,048,950 $(10,464,969) $ 12,129,991
11/15/2000 Arizona 1,680,925 1,084,052 (1,539,559) 1,225,418
11/22/2000 Utah 3,145,522 1,568,396 (4,713,918) 0
12/20/2000 Nevada 3,554,591 1,965,374 (5,519,965) 0
4/30/2001 Nevada 8,620,383 3,497,818 (6,559,279) 5,558,922
4/30/2001 California 5,762,000 1,000,000 (6,762,000) 0
9/13/2001 New Jersey 11,800,000 3,941,501 (3,609,079) 12,132,422
1/24/2002 California 11,736,233 918,714 0 12,654,947
3/28/2002 California 7,680,468 20,215,756 (14,465,447) 13,430,777
------------ ------------ ------------ ------------
$ 74,526,132 $ 36,240,561 $(53,634,216) $ 57,132,477
============ ============ ============ ============
Liquidity and Capital Resources
Our uses for cash during the three months ended September 30, 2002 were
for revenue producing asset acquisitions, interest, and operating expenses. 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.
Interest Rate Risk
The primary market risk facing us is interest rate risk on our current
and future variable rate mortgage loans which are based on a base rate plus a
negotiated premium.
To date, we have not hedged interest rate risk but continually evaluate
interest rate swaps and other financial instruments to mitigate this risk.
While we have benefited from the overall reduction in interest rates,
there is no assurance that such benefits will continue. If interest rates
increase, it may have a negative impact on margins.
20
Proposed Accounting Pronouncements
The FASB has issued an Exposure Draft "Consolidation of Certain Special
Purpose Entities ("SPEs"), a proposed Interpretation of Accounting Research
Bulletin (ARB) No. 51, "Consolidated Financial Statements" that establishes
accounting guidance for consolidation of SPEs. We believe that implementation of
this Exposure Draft, when and if it becomes a final accounting rule, would not
require our clients to consolidate our transactions.
Item 3 -- 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 include 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.
We have attempted to comply with the Sarbanes-Oxley Act of 2002. The
Securities and Exchange Commission implemented Section 302 of the Sarbanes-Oxley
Act of 2002 (the "Act") effective August 29, 2002. Provisions of the Act apply
to all public reporting companies who file reports with the Securities and
Exchange Commission. In addition to certification by the Chief Executive Officer
and Chief Financial Officer as to the accuracy and completeness of financial
statements contained in filed reports, other restrictions and requirements are
part of the Act. The consensus of the AICPA and public filers is that additional
clarification will be needed to fully comply with the Act.
Item 4 -- Controls and Procedures
During the 90-day period prior to the filing of this report,
management, including the Company's President & Chief Executive Officer and
Chief Financial Officer evaluated the effectiveness of the design and operation
of the Corporation's disclosure controls and procedures. Based upon, and as of
21
the date of that evaluation, the President & Chief Executive Officer and Chief
Financial Officer concluded that the disclosure controls and procedures were
effective, in all material respects, to ensure that information required to be
disclosed in the reports the Company files and submits under the Exchange Act is
recorded, processed, summarized and reported as and when required.
There have been no significant changes in the Company's internal
controls or in other factors, which could significantly affect internal controls
subsequent to the date the Company carried out its evaluation. There were no
significant deficiencies or material weaknesses identified in the evaluation
and, therefore, no corrective actions were taken.
PART II - OTHER INFORMATION
Item 1. CURRENT LEGAL DEVELOPMENTS
Star Insurance Company v. Strategic Capital Resources, Inc.
The Company has not resolved the Star Insurance Company action. Based
on mediation, the Company believes the case can be settled for $250,000. This
amount has been accrued as an impairment charge for the three months ended
September 30, 2002.
During December 2002, the Company reached an agreement in principal to
settle this case for $250,000. The lawsuit against the Company was far in excess
of $2,500,000.
The Company and its counsel are convinced that our defense is very
strong but decided to settle the suit in order to avoid the uncertainty of a
jury verdict as well as the expenses of the inevitable appeals that would
follow. The mediator pointed out that our costs defending the lawsuit and
appeals would exceed the $250,000 settlement.
Strategic Capital Resources, Inc. and FPE Funding, LLC v. Dylan Tire Industries,
LLC, et al.
On January 2, 2003, the Company was advised that the Tennessee Supreme
Court denied our request for appeal without an opinion (which is standard
procedure). We are currently analyzing our options.
22
We are not presently involved in any other material litigation nor, to
our knowledge, is any other material litigation threatened against us or any of
our properties, other than routine litigation arising in the ordinary course of
business. See Notes to Financial Statements.
Item 2. CHANGES IN SECURITIES
Most of our previously outstanding warrants to purchase shares of our
Common Stock had been issued to Mr. Miller, our Chairman, in connection with
loans that had been extended to us by Mr. Miller and another member of our
management from time to time since our inception. The loans represented funds
that were necessary to conclude transactions in the ordinary course of our
business, but were unavailable from other sources. According to the terms of
these warrants, in the event of a transaction that resulted in a reduction of
the number of outstanding shares of our Common Stock, including a reverse stock
split, there would be no proportionate adjustment in the number of shares
issuable upon exercise of the warrants or in the exercise price thereof. The
warrants had exercise prices that ranged from $.13 to $.47. In June 2002, an
aggregate of 1,430,000 warrants were exercised for an aggregate exercise price
of $236,100 (approximately $.17 per warrant).
In December 2002, the warrant exercise discussed above was rescinded by
the mutual consent of the former warrant holders and our Company. This
rescission was necessary due to what we believe to be inaccurate advice provided
to us by our former independent accountants, who failed to advise of various
negative tax consequences to the warrant holder, and more importantly,
significant negative impact to our income statement relating to the fact that
the applicable warrant agreement contained the provisions discussed above.
In addition, also in December 2002, pursuant to our Board of Directors
and the warrant holders, the relevant warrant agreements were amended to negate
the provisions specifying that they are not affected by any reverse stock split,
effective as of the date of our reverse stock split. As a result, the 8,797,114
previously outstanding warrants have been reduced to 38,856 pursuant to the
200:1 reverse stock split previously undertaken. The exercise prices have also
been adjusted pursuant to the reverse stock split, resulting in exercise prices
ranging from $24 to $94 per warrant. This amendment was also necessary as a
result of incorrect advice provided by our prior independent accountants.
23
Item 3. DEFAULTS UPON SENIOR SECURITIES - None.
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS - Information
statement in connection with Reverse Stock Split
Item 5. OTHER INFORMATION - Not applicable
Item 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
99.1 Certification of Financial Statements in accordance
with Sarbanes-Oxley Act
(b) Reports on Form 8-K. We did not file any reports on Form 8-K
during the three month period ended September 30, 2002.
Subsequent to September 30, 2002, we filed two reports on Form 8-K,
including the following:
1. During October 2002, we filed a report on Form 8-K, wherein we
advised of the resignation of Citrin Cooperman & Company, LLP as our independent
auditor and the retention of Weinberg & Company, P.A. as our independent auditor
who audited our financial statements for our fiscal years ended June 30, 2002,
2001 and 2000. This Form 8-K also included a lengthy narrative on the events and
circumstances surrounding the resignation of Citrin Cooperman & Company, LLP.
2. During December 2002, we filed a report on Form 8-K, advising of
various changes to the accounting treatment we had historically attributed to
the sales of our model homes, as well as the accounting treatment applicable to
our amending certain warrant agreements relating to our outstanding warrants.
24
SIGNATURES
Pursuant to the requirements 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.
(Registrant)
By: /s/ DAVID MILLER
-------------------------------------
David Miller
Chief Executive Officer
Date: January 6, 2003
25
PART II - OTHER INFORMATION
CERTIFICATION OF THE CHIEF EXECUTIVE OFFICER
I, David Miller, certify that:
1. I have reviewed this quarterly report on Form 10-Q of
Strategic Capital Resources, Inc.
2. Based on my knowledge, this quarterly report does not contain
any untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances under which
such statements were made, not misleading with respect to the period covered by
this quarterly report;
3. Based on my knowledge, the financial statements, and other
financial information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash flows
of the registrant as of, and for, the periods presented in this quarterly
report.
By: /s/ DAVID MILLER
-------------------------------------
David Miller
Chief Executive Officer
Dated: January 6, 2003
26
CERTIFICATION OF THE CHIEF FINANCIAL OFFICER
I, Cary Greenberg, certify that:
1. I have reviewed this quarterly report on Form 10-Q of
Strategic Capital Resources, Inc.
2. Based on my knowledge, this quarterly report does not contain
any untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances under which
such statements were made, not misleading with respect to the period covered by
this quarterly report;
3. Based on my knowledge, the financial statements, and other
financial information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash flows
of the registrant as of, and for, the periods presented in this quarterly
report.
By: /s/ CARY GREENBERG
-------------------------------------
Cary Greenberg
Chief Financial Officer
Dated: January 6, 2003
27