-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, EI30Ip2oTF9wLU0YUkwyefKlAe/+dOJKqRPu2epBPoEwkD49j44MBKGfwMZH3VLF 5/qEfVUB0CpIOwPqBbrWYg== 0001019056-03-000101.txt : 20030211 0001019056-03-000101.hdr.sgml : 20030211 20030211170856 ACCESSION NUMBER: 0001019056-03-000101 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 4 CONFORMED PERIOD OF REPORT: 20021231 FILED AS OF DATE: 20030211 FILER: COMPANY DATA: COMPANY CONFORMED NAME: STRATEGIC CAPITAL RESOURCES INC CENTRAL INDEX KEY: 0001009416 STANDARD INDUSTRIAL CLASSIFICATION: REAL ESTATE DEALERS (FOR THEIR OWN ACCOUNT) [6532] IRS NUMBER: 113289981 STATE OF INCORPORATION: DE FISCAL YEAR END: 0630 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 000-28168 FILM NUMBER: 03550769 BUSINESS ADDRESS: STREET 1: 7900 GLADES RD. STREET 2: SUITE 610 CITY: BOCA RATON STATE: FL ZIP: 33434 BUSINESS PHONE: 5615580165 MAIL ADDRESS: STREET 1: 7900 GLADES RD. STREET 2: SUITE 610 CITY: BOCA RATON STATE: FL ZIP: 33434 FORMER COMPANY: FORMER CONFORMED NAME: JJFN SERVICES INC DATE OF NAME CHANGE: 19960301 10-Q 1 strategic_10q.txt FORM 10-Q 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). 21 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 EX-99 3 ex99_1.txt EXHIBIT 99.1 STRATEGIC CAPITAL RESOURCES, INC. AND SUBSIDIARIES PART II - OTHER INFORMATION Exhibit 99.1 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: February 11, 2003 25 EX-99.2 4 ex99_2.txt EXHIBIT 99.2 STRATEGIC CAPITAL RESOURCES, INC. AND SUBSIDIARIES Exhibit 99.2 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: February 11, 2003 26 EX-99.3 5 ex99_3.txt EXHIBIT 99.3 STRATEGIC CAPITAL RESOURCES, INC. AND SUBSIDIARIES Exhibit 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 In connection with the Quarterly Report on Form 10-Q of Strategic Capital Resources, Inc., a Delaware Corporation (the "Company") for the quarterly period ended December 31, 2002 as filed with the Securities and Exchange Commission on the date hereof (the "Report"), David Miller, as Chief Executive Officer of the Company, and Cary Greenberg, as Chief Financial Officer of the Company, each hereby certifies, pursuant to 18 U.S.C. Sec. 1350, as adopted pursuant to Sec. 906 of the Sarbanes-Oxley Act of 2002, that, to the best of his knowledge: 1. The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and 2. The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. /s/ DAVID MILLER ----------------------------------------- Name: David Miller Title: Chief Executive Officer Date: February 11, 2003 /s/ CARY GREENBERG ----------------------------------------- Name: Cary Greenberg Title: Chief Financial Officer Date: February 11, 2003 This certification accompanies the Report pursuant to Sec. 906 of the Sarbanes-Oxley Act of 2002 and shall not, except to the extend required by the Sarbanes-Oxley Act of 2002, be deemed filed by the Company for purposes of Section 18 of the Securities Exchange Act of 1934, as amended. 27 -----END PRIVACY-ENHANCED MESSAGE-----