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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 December 31, 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 February 7, 2003 was
77,192.
STRATEGIC CAPITAL RESOURCES, INC. AND SUBSIDIARIES
TABLE OF CONTENTS
Part I FINANCIAL INFORMATION
Item 1. Financial Statements Page Number
Condensed Consolidated Balance Sheets as of December 31, 3
2002 (unaudited) and June 30, 2002
Condensed Consolidated Statements of Income for the three 4
months and six months ended December 31, 2002 and December
31, 2001 (unaudited)
Condensed Consolidated Statements of Cash Flows for the six 5
months ended December 31, 2002 and 2001 (unaudited)
Notes to Condensed Consolidated Financial Statements 6-12
(unaudited)
Item 2. Management's Discussion and Analysis of Financial Condition 13-20
and Results of Operations
Item 3. Quantitative and Qualitative Disclosures About Market Risk 20
Item 4. Controls and Procedures 21
Part II. OTHER INFORMATION
Item 1. Not applicable 21
Item 2. Change in Securities 21-22
Item 3. Not Applicable 22
Item 4. Not Applicable 22
Item 5. Not Applicable 23
Item 6. Exhibits and Reports on Form 8-K 23
SIGNATURES 24
CERTIFICATIONS 25-27
2
STRATEGIC CAPITAL RESOURCES, INC. AND SUBSIDIARIES
PART I. - FINANCIAL INFORMATION
Item 1 - Financial Statements
CONDENSED CONSOLIDATED BALANCE SHEETS
ASSETS
December 31, June 30,
2002 2002
------------ ------------
(Unaudited)
Revenue producing assets $ 68,478,073 $ 88,388,706
Cash 1,877,054 801,415
Deferred charges 503,430 848,466
Other 906,998 758,923
------------ ------------
$ 71,765,555 $ 90,797,510
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Mortgages and notes payable $ 57,642,270 $ 77,592,476
Accounts payable and accrued expenses 1,864,442 1,739,401
Unearned income 156,181 173,038
Income taxes 924,128 852,128
Stockholder loans 2,159,200 1,909,200
------------ ------------
Total liabilities 62,746,221 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 629,629 141,562
------------ ------------
Total stockholders' equity 9,019,334 8,531,267
------------ ------------
$ 71,765,555 $ 90,797,510
============ ============
See accompanying Notes to Condensed
Consolidated Financial Statements
3
STRATEGIC CAPITAL RESOURCES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
Three Months Ended Six Months Ended
December 31, December 31,
------------ ------------
2002 2001 2002 2001
(restated) (restated)
----------- ----------- ----------- -----------
Operating revenue $17,079,961 $10,632,843 $29,961,797 $15,585,152
----------- ----------- ----------- -----------
Operating expenses:
Interest and financing costs 964,740 1,296,687 2,053,177 2,708,641
Multi-family residential 200,369 94,000 286,685 187,243
Cost of residential real estate sold 14,661,759 7,650,573 24,931,729 9,699,018
Depreciation and amortization 309,606 364,117 665,507 725,376
Corporate 461,546 457,914 1,159,631 860,772
----------- ----------- ----------- -----------
16,598,020 9,863,291 29,096,729 14,181,050
----------- ----------- ----------- -----------
Operating income 481,941 769,552 865,068 1,404,102
Income taxes 207,000 260,000 372,000 450,000
----------- ----------- ----------- -----------
Net income 274,941 509,552 493,068 954,102
Preferred stock distributions 0 15,000 5,000 30,000
----------- ----------- ----------- -----------
Income applicable to common shareholders $ 274,941 $ 494,552 $ 488,068 $ 924,102
=========== =========== =========== ===========
Earnings per share
Basic $ 3.56 $ 6.41 $ 6.32 $ 11.97
Diluted $ 3.56 $ 6.41 $ 6.32 $ 11.56
Weighted average number of shares
Basic 77,192 77,192 77,192 77,192
Diluted 77,192 77,192 77,192 79,908
See accompanying Notes to Condensed
Consolidated Financial Statements
4
STRATEGIC CAPITAL RESOURCES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Six Months Ended
December 31,
----------------------------
2002 2001
(Restated)
------------ ------------
OPERATING ACTIVITIES
Net income $ 493,068 $ 954,102
Adjustments to reconcile net income
to net cash provided by operating activities:
Amortization and depreciation expense 665,507 725,375
Deferred income taxes 72,000 0
Gain on sale of direct financing arrangements, model homes net (118,862) (339,867)
Net changes in operating assets and liabilities (39,892) 466,905
------------ ------------
Net Cash Provided by Operating Activities 1,071,821 1,806,515
------------ ------------
INVESTING ACTIVITIES
Investment in direct financing arrangements (5,021,096) (7,098,597)
Proceeds from direct financing arrangements 25,050,591 1,633,877
------------ ------------
Net cash Provided By or (Used In) Investing Activities 20,029,495 (5,464,720)
------------ ------------
FINANCING ACTIVITIES
Proceeds from mortgages and notes payable 5,471,232 3,104,903
Principal payments on mortgages payable (25,421,438) (289,625)
Proceeds from stockholder loans 250,000 0
Deferred financing charges (320,471) (849,632)
Preferred distributions (5,000) (30,000)
------------ ------------
Net Cash Provided By or (Used in) Financing Activities (20,025,677) 1,935,646
------------ ------------
NET INCREASE (DECREASE) IN CASH 1,075,639 (1,722,559)
CASH - BEGINNING OF PERIOD 801,415 3,986,639
------------ ------------
CASH - ENDING OF PERIOD $ 1,877,054 $ 2,264,080
============ ============
See accompanying Notes to Condensed
Consolidated Financial Statements
5
STRATEGIC CAPITAL RESOURCES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
December 31, 2002
(Unaudited)
Note 1. DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES
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 December 31, 2002 are not necessarily indicative of those which
may be achieved for the year ending June 30, 2003.
All references in the condensed consolidated financial statements to
common shares, share prices, per share amounts and stock plans have been
retroactively restated for the two hundred-for-one reverse stock split declared
on April 8, 2002.
B. Description of Business
-----------------------
The Company provides specialized financing for major homebuilders and
real estate developers throughout the United States. The arrangements may take
6
STRATEGIC CAPITAL RESOURCES, INC. AND SUBSIDIARIES
several forms which include operating leases, option agreements, or management
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:
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
STRATEGIC CAPITAL RESOURCES, INC. AND SUBSIDIARIES
F. Special Purpose Entities/Off Balance Sheet Arrangements
-------------------------------------------------------
The Company does not have off-balance sheet arrangements with special
purpose entities or any other entities.
G. Use of Estimates and Critical Accounting Policies
-------------------------------------------------
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, 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. New Accounting Pronouncements
-----------------------------
The FASB had issued an Exposure Draft "Consolidation of Certain Special
Purpose Entities ("SPEs"), a proposed Interpretation of Accounting Research
8
STRATEGIC CAPITAL RESOURCES, INC. AND SUBSIDIARIES
Bulletin (ARB) No. 51, "Consolidated Financial Statements" that establishes
accounting guidance for consolidation of SPEs.
On January 17, 2003, FASB issued interpretation No. 46, "Consolidation
of Variable Interest Entities". The release proceeds to interpret ARB No. 51.
Due to the complexity of the exposure draft and related interpretation,
additional clarification will be needed from FASB. After reviewing the FASB
interpretation, we believe that its application would not require our clients to
consolidate our transactions.
K. Reclassifications
-----------------
Certain amounts have been reclassified in the prior period to conform
to the current period's presentation.
L. Restatement of Consolidated Financial Statements Resulting from the
-------------------------------------------------------------------
Correction of an Error.
-----------------------
The accompanying condensed consolidated statements of income and cash
flows for the periods ended December 31, 2001 has been restated to correct an
error resulting in the understatement of non-cash interest expense.
The error resulted from the Company not recording the effects of
detachable warrants issued in consideration for stockholder debt. The effect of
the error was to increase non-cash interest expense and decrease net income by
$98,668 for the three and six months ended December 31, 2001.
The condensed consolidated statements of income for the three and six
months ended December 31, 2001, and the condensed consolidated statement of cash
flows for the six months ended December 31, 2001, have been restated for the
effects of the adjustments resulting from the correction of the error.
Note 2. NET INVESTMENT IN DIRECT FINANCING ARRANGEMENTS
The components of the net investment in direct financing arrangements
at December 31, 2002 and June 30, 2002 are as follows:
9
STRATEGIC CAPITAL RESOURCES, INC. AND SUBSIDIARIES
December 31, June 30,
2002 2002
------------ ------------
Total minimum lease payments receivable $ 68,634,256 $ 88,561,744
Less: Unearned income 156,183 173,038
------------ ------------
Net investment in direct financing leases $ 68,478,073 $ 88,388,706
============ ============
Note 3. COMMITMENTS AND CONTINGENCIES
A. Financing Activities
--------------------
At December 31, 2002, the Company had approximately $35 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.
10
STRATEGIC CAPITAL RESOURCES, INC. AND SUBSIDIARIES
B. Legal Proceedings and Current Developments
------------------------------------------
Star Insurance Company v. Strategic Capital Resources, Inc., 15th
Judicial Court, Palm Beach County, Florida, Case No. CL 00-433 AD,
The Company has resolved the Star Insurance Company action. Based on
mediation, the case was settled for $250,000 in January 2003. This amount was
accrued as a corporate expense for the three months ended September 30, 2002.
The lawsuit against the Company was far in excess of $2,500,000. The Company and
its counsel were convinced that our defense was 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 mediation pointed
out that our costs defending the lawsuit and appeals would exceed the $250,000
settlement.
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.
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 December 31, 2002. The maturity dates range
from one (1) to fifteen (15) years.
In addition to the mortgages being secured by specific properties, all
loans are secured by specific lease and related security bonds, letters of
credit and/or residual value insurance policies.
Note 5. SUPPLEMENTAL CASH FLOW INFORMATION
The Company's non-cash investing and financing activities were as
follows:
11
STRATEGIC CAPITAL RESOURCES, INC. AND SUBSIDIARIES
Six Months Ended Six Months Ended
December 31 December 31
2002 2001
------------ ------------
Revenues producing assets: $ 7,524,781 $ 16,627,098
Bank borrowings (4,842,153) (13,464,948)
------------ ------------
Investment in direct financing leases $ 2,682,628 $ 3,162,150
============ ============
Interest paid totaled $2,154,403 during the six months ended December
31, 2002 and $2,198,240 for the six months ended December 31, 2001. Income taxes
paid totaled $477,120 during the six months ended December 31, 2002, and $13,234
during the six months ended December 31, 2001.
Note 6. SUBSEQUENT EVENTS
A. Model Home Program
------------------
From January 1, 2003 through the date of this report, the Company sold
five (5) model homes at an aggregate sales price of approximately $1.3 million.
These models were acquired at an aggregate costs of approximately $1.1 million.
The Company also has contracts to sell pending on four (4) model homes
at an aggregate costs of $510,000 and a sales price of $543,000.
During February 2003, we are completing the acquisition of 79 model
homes throughout the United States from a publicly traded homebuilder at a cost
of approximately $27 million. The acquisition will be financed by utilizing our
existing credit facilities, new financing and company funds.
B. Residential Real Estate Land Banking
------------------------------------
From January 1, 2003 through the date of the report, the Company paid
development costs in the amount of $335,596 and had sales of finished lots in
the amount of $3,498,925.
12
STRATEGIC CAPITAL RESOURCES, INC. AND SUBSIDIARIES
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:
1. our significant level of debt;
2. our ability to borrow or otherwise finance our business in the
future;
13
STRATEGIC CAPITAL RESOURCES, INC. AND SUBSIDIARIES
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 consisting of one (1)
business segment:
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.
RESULTS OF OPERATIONS
A summary of operating results for the three months ended December 31,
2002 and 2001 are presented below.
14
STRATEGIC CAPITAL RESOURCES, INC. AND SUBSIDIARIES
Three Months Ended
December 31
---------------------------
2002 2001
(restated)
----------- -----------
Operating Revenue $17,079,961 $10,632.843
----------- -----------
Costs and expenses:
Interest and financing costs 964,740 1,296,687
Multi-family operating costs 200,369 94,000
Cost of direct financing leases sold 14,661,759 7,650,573
Depreciation and amortization 309,606 364,117
Corporate 461,546 457,914
----------- -----------
Total operating expenses 16,598,020 9,863,291
----------- -----------
Operating Income 481,941 769,552
Income tax expense 207,000 260,000
----------- -----------
Net income 274,941 509,552
Preferred stock distributions -- 15,000
----------- -----------
Income applicable to common shareholders $ 274,941 $ 494,552
=========== ===========
Comparison of Three Months Ended December 31, 2002 to Three
Months ended December 31, 2001.
Revenue for the three months ended December 31, 2002 increased
$6,447,118 (or 61%) compared to the prior year period. The increased revenue was
primarily attributable to the sale of residential real estate which amounted to
$14,661,759 for the period, compared to $7,650,573 for the prior year period.
Interest expense decreased $331,947 (or 26%) during the three months
ended December 31, 2002, compared to the prior year period, primarily due to
reduced borrowing costs on floating rate loans and reduced balances.
The effective rate of income tax increased from 34% to 43% due to a
decrease in net operating loss carryforwards available to offset current income.
15
STRATEGIC CAPITAL RESOURCES, INC. AND SUBSIDIARIES
Net income for the three months ended December 31, 2002 was $274,941
compared to $509,552 for the prior year period, a decrease of $234,611. The
decrease in net income was primarily attributable to a decrease of $491,349 in
interest income on direct financial arrangements.
Revenue producing assets decreased by 21% to $68,478,000 resulting in
lower interest income.
A summary of operating results for the six months ended December 31,
2002 and 2001 are presented below.
Six Months Ended
December 31
---------------------------
2002 2001
(restated)
----------- -----------
Operating Revenue $29,961,797 $15,585,152
----------- -----------
Costs and expenses:
Interest and financing costs 2,053,177 2,708,641
Multi-family operating costs 286,685 187,243
Cost of direct financing leases sold 24,931,729 9,699,018
Depreciation and amortization 665,507 725,376
Corporate 1,159,631 860,772
----------- -----------
Total operating expenses 29,096,729 14,181,050
----------- -----------
Operating Income 865,068 1,404,102
Income tax expense 372,000 450,000
----------- -----------
Net income 493,068 954,102
Preferred stock distributions 5,000 30,000
----------- -----------
Income applicable to common shareholders $ 488,068 $ 924,102
=========== ===========
Comparison of Six Months Ended December 31, 2002 to Six Months
ended December 31, 2001.
Revenue for the six months ended December 31, 2002 increased
$14,376,645 (or 92%) compared to the prior year period. The increased revenue
was primarily attributable to the sale of residential real estate which amounted
to $24,931,729 for the period, compared to $9,699,018 for the prior year period.
16
STRATEGIC CAPITAL RESOURCES, INC. AND SUBSIDIARIES
Interest expense decreased $655,464 (or 24%) during the six months
ended December 31, 2002, compared to the prior year period, primarily due to
reduced borrowing costs on floating rate loans and reduced balances due to
decrease in revenue producing assets.
Corporate costs increased $298,859 (a 35% increase) from $860,772 for
the six months ended December 31, 2001, to $1,159,631 for the six months ended
December 31, 2002. The Star Insurance settlement accounted for $250,000 of that
increase.
Net income for the six months ended December 31, 2002 was $488,068
compared to $924,102 for the prior year period, a decrease of $436,034. The
decrease in net income was primarily attributable to a decrease of $640,693 in
interest income on direct financing arrangements.
As previously discussed, the effective rate of income tax increased
from 34% to 43% due to a decrease in net operating loss carryforwards available
to offset current income.
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 and accounting issues.
From inception to December 31, 2002, 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:
17
STRATEGIC CAPITAL RESOURCES, INC. AND SUBSIDIARIES
December 31, 2002 December 31, 2001
----------------- -----------------
STATE UNITS AMOUNT UNITS AMOUNT
----- ----- ------ ----- ------
Arizona 0 $ 0 1 $ 134,650
California 18 5,547,460 40 10,916,315
Florida 0 0 1 472,917
Iowa 7 1,053,335 13 2,247,025
Minnesota 1 226,040 4 912,185
Nevada 4 469,960 9 1,145,910
New Jersey 19 4,748.222 20 5,028,087
New York 1 254,000 2 555,357
North Carolina 4 808,463 6 1,497,891
Pennsylvania 1 250,000 2 487,619
Texas 1 279,000 5 1,330,000
Utah 0 0 2 316,383
----------- ----------- ----------- -----------
56 $13,636,480 105 $25,044,339
=========== =========== =========== ===========
The following is a breakdown of interest income on model home direct
financing leases by state:
Three Months Ended Six Months Ended
December 31, December 31,
------------ ------------
STATE 2002 2001 2002 2001
----- ---------- ---------- ---------- ----------
California $ 192,601 $ 337,735 $ 392,875 $ 697,833
Florida 0 14,188 0 36,971
Iowa 19,436 53,367 43,050 108,554
Minnesota 4,144 30,431 8,382 66,988
Nevada 0 29,218 0 49,497
New Jersey 131,939 164,985 273,375 382,701
New York 7,620 19,846 15,240 45,558
North Carolina 30,853 44,937 65,526 93,946
Pennsylvania 7,500 19,737 12,722 61,875
Texas 8,615 48,031 28,385 117,028
---------- ---------- ---------- ----------
$ 402,708 $ 762,475 $ 839,555 $1,660,951
========== ========== ========== ==========
Acquisition, Development and Landbanking
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
18
STRATEGIC CAPITAL RESOURCES, INC. AND SUBSIDIARIES
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.
The following is a summary of our residential real estate projects:
Development Sale of
Date Property Purchase Costs Paid Finished Balance
Acquired Location Price to 12/31/02 Lots 12/31/02
- ---------- ----------- ----------- ----------- ----------- -----------
8/31/2000 California $20,546,010 $ 2,604,559 $16,252,265 $ 6,898,304
11/15/2000 Arizona 1,680,925 1,121,163 1,837,538 964,550
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 3,658,293 7,985,213 4,293,463
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 5,905,765 9,835,736
1/24/2002 California 11,736,233 1,332,906 0 13,069,139
3/28/2002 California 7,680,468 21,191,246 19,319,312 9,552,402
----------- ----------- ----------- -----------
$74,526,132 $38,383,438 $68,295,976 $44,613,594
=========== =========== =========== ===========
Liquidity and Capital Resources
Our uses for cash during the six months ended December 31 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 for the next twelve
(12) months. In order to acquire larger asset acquisitions, additional capital
and/or credit enhancement may be needed to meet the equity requirements imposed
by our lenders.
19
STRATEGIC CAPITAL RESOURCES, INC. AND SUBSIDIARIES
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 will have a negative impact on margins.
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.
20
STRATEGIC CAPITAL RESOURCES, INC. AND SUBSIDIARIES
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
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.
Not Applicable
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).
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STRATEGIC CAPITAL RESOURCES, INC. AND SUBSIDIARIES
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 43,986 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. The
outstanding warrants as of December 31, 2002 is 18,205.
At the same time, it was decided by the Board and stock option holders
that it will be in the best interest of the Company to cancel the outstanding
stock options. At June 30, 2002 there were 12,500 outstanding options. The
weighted average exercise price was $46.00. The Board is currently in the
discussion stage as to how to compensate the holders of the cancelled warrants
and options.
Item 3.
DEFAULTS UPON SENIOR SECURITIES
None.
Item 4.
SUBMISSION OF MATTERS TO A
VOTE OF SECURITY HOLDERS -
None
22
STRATEGIC CAPITAL RESOURCES, INC. AND SUBSIDIARIES
Item 5.
OTHER INFORMATION
Not applicable
Item 6.
EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
99.1 CERTIFICATION OF THE CHIEF EXECUTIVE OFFICER
99.2 CERTIFICATION OF THE CHIEF FINANCIAL OFFICER
99.3 Certification of CEO and CFO Pursuant to 18 U.S.C. Section
1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002
(b) Reports on Form 8-K.
We filed two (2) reports on Form 8-K during the three month period
ended December 31, 2002. The Form 8-K filed on October 24, 2002 contained
information related to the change in our Certifying Accountants.
The Form 8-K filed on December 16, 2002 contained information regarding
a determination by the Securities and Exchange Commission as to the accounting
presentation of our model home sales and the treatment of warrants issued as
consideration for stockholder loans.
On February 5, 2003, we filed a Current Report on Form 8-K, which
included a press release dated February 4, 2003, announcing our earnings for the
first quarter ended September 30, 2002.
23
STRATEGIC CAPITAL RESOURCES, INC. AND SUBSIDIARIES
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: February 11, 2003
24