-----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, IZp68PqjxbkX4re4GTCzseGx+qo907g689ebyE6BhdFcB17w0xrnUX2RFAU5MZVs lpM6sQSFRuErdHmZCziIow== 0001019056-03-000522.txt : 20030613 0001019056-03-000522.hdr.sgml : 20030613 20030613123841 ACCESSION NUMBER: 0001019056-03-000522 CONFORMED SUBMISSION TYPE: 10-K/A PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 20020630 FILED AS OF DATE: 20030613 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-K/A SEC ACT: 1934 Act SEC FILE NUMBER: 000-28168 FILM NUMBER: 03743268 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-K/A 1 strategic_10ka.txt FORM 10-K/A U.S. SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-K /A1 [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended June 30, 2002 [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period ________________ to _________________ Commission file number: 0-28168 STRATEGIC CAPITAL RESOURCES, INC. ------------------------------------------------------ (Exact name of registrant as specified in its charter) Delaware 11-3289981 - ------------------------------- ------------------- (State or other jurisdiction of (I.R.S Employer incorporation or organization) Identification No.) 7900 Glades Road, Suite 610, Boca Raton, Florida 33434 ------------------------------------------------------ (Address of principal executive office) (561) 558-0165 ------------------------------- (Registrant's telephone number) Securities registered pursuant to Section 12(b) of the Act: None Securities registered pursuant to Section 12(g) of the Act: Common Stock, $.001 par value Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months, and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ] Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of the Registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [ ] Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Act). Yes [ ] No [X] The aggregate market value of the Registrant's outstanding Common Stock held by non-affiliates of the Registrant on December 19, 2002, was $ -0-. There were 77,192 shares of Common Stock outstanding as of December 19, 2002. DOCUMENTS INCORPORATED BY REFERENCE Form 8-K, dated May 30, 2002, Form 8-K, dated June 30, 2002 and Form 8-K, dated December 16, 2002 are hereby incorporated by reference into Part II and Part III of this Form 10-K as if set forth. PRIVATE SECURITIES LITIGATION REFORM ACT SAFE HARBOR STATEMENT This Annual Report on Form 10-K contains certain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995, and may be identified by the use of such words as "believe," "expect," "anticipate," "should," "planned," "estimated" and "potential." Examples of forward- looking statements include, but are not limited to, estimates with respect to our financial condition, results of operations and business that are subject to various factors which could cause actual results to differ materially from these estimates. These factors include, but are not limited to, general economic conditions, changes in interest rates, ability to continue insurance coverage, real estate values, and competition; changes in accounting principals, policies, or guidelines; changes in legislation or regulation; and other economic, competitive, governmental, regulatory, and technological factors that may affect our operations, pricing, products and services. 2 TABLE OF CONTENTS FORM 10-K/A1 ANNUAL REPORT OF STRATEGIC CAPITAL RESOURCES, INC. PAGE Facing Page Index PART I Item 1. Business.........................................................4 Item 2. Properties......................................................10 Item 3. Legal Proceedings...............................................10 Item 4. Submission of Matters to a Vote of Security Holders.............12 PART II Item 5. Market for the Registrant's Common Equity and Related Stockholder Matters..................................12 Item 6. Selected Financial Data.........................................14 Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations..........................15 Item 7A. Quantitative and Qualitative Disclosures About Market Risk......23 Item 8. Financial Statements and Supplementary Data.............F-1 - F-22 Item 9. Changes in and Disagreements With Accountants on Accounting and Financial Disclosure.......................25 Item 9B. Compliance With Section 16(a) of the Exchange Act...............25 PART III Item 10. Directors and Executive Officers of the Registrant..............25 Item 11. Executive Compensation..........................................27 Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters..............................28 Item 13. Certain Relationships and Related Transactions..................29 PART IV Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K......................................30 SIGNATURES....................................................................31 3 PART I As used in this Form 10-K, "we", "us" and "our" refer to Strategic Capital Resources, Inc. and our consolidated subsidiaries, depending on the context. ITEM 1. BUSINESS We are a Delaware corporation organized in 1995. We provide specialized financing for major homebuilders and real estate developers. These arrangements may take several forms including direct financing leases, option agreements, or management agreements. Such agreements may represent off-balance sheet transactions of our customers and clients. We are engaged in such arrangements in three lines of business, consisting of one reportable segment, all with major homebuilders and real estate developers throughout the United States: Fully furnished model homes Residential real estate acquisition and development Multi-family residential property We have formed several wholly owned, special purpose subsidiaries for the exclusive purpose of acquiring specific properties, which subsidiaries perform no other functions other than to manage the activities and operations directly related to its specific purpose. The special purpose subsidiary is structured in a way that its sole activity is the specific project. We control the activities and retain the risks and rewards of our ownership of such subsidiaries. We also guarantee the debt of each subsidiary. We do not have off-balance sheet arrangements with our special-purpose entities or special-purpose entities owned by others. We consolidate all of our special-purpose entities. MODEL HOME PROGRAM We purchase and leaseback fully furnished model homes complete with options and upgrades to major publicly traded homebuilders ("clients"). The model homes are leased pursuant to a triple net lease where the lessee is obligated to pay all maintenance, taxes, insurance and other applicable costs, including, but not limited to, utilities and homeowner association assessments. These arrangements terminate only upon the sale of the model homes. In this regard, we have entered into net listing agreements with real estate brokerage affiliates of those clients with whom we enter into the leaseback arrangement. These agreements provide for commissions and incentives, which are negotiated on a per transaction basis. The sale price may not be less than the original purchase price, unless the client elects to pay any deficiencies at the closing. All of our clients are required to provide a surety bond, letter of credit or equivalent financial instrument in order to insure their performance of their obligations. These financial instruments provided by our clients have historically ranged from 5% to 110% of our purchase price of the model homes. In many cases, we have obtained various forms of insurance, which effectively serve as credit enhancements. The insurance instrument insures the timely performance of our client of its obligations under the relevant agreements. In the event of default by our client, the insurer has an obligation to continue to make the payments up to the penal sum of the bond. All such insurance has been obtained from major domestic insurance companies rated "A" through "AAA" by major credit rating agencies. Also see residual value insurance discussion in the residential real estate acquisition and development section that follows. In the event that any and all of the providers are unwilling to pay a claim we would have to bear the cost of litigation to collect the claim and not have the use of the funds for our operations until the litigation and potential appeals are resolved in our favor. In the event that any or all of the providers are unable to pay a claim we are subject to that credit risk. We evaluate the financial condition of the provider prior to our acceptance of the credit enhancement but cannot protect ourselves against downgrades by rating agencies or future losses by the providers. 4 The intent of these arrangements is to reduce our cost of funds and to increase the amounts borrowed, thereby increasing our profitability and leverage. Since inception, we have purchased a total of 463 model homes at an aggregate purchase price in excess of $102,000,000. The following is a breakdown of model homes which we have purchased and the purchase price by state at June 30, 2002, and June 30, 2001: June 30, 2002 June 30, 2001 ------------------------- ------------------------- State No. of Homes Amount No. of Homes Amount - --------------- ------------ ----------- ------------ ----------- Arizona 1 $ 134,650 7 $ 764,356 California 25 6,703,315 44 11,669,315 Florida 0 -- 3 836,403 Iowa 8 1,259,335 15 2,622,695 Minnesota 1 226,040 7 1,683,505 Nevada 4 469,960 13 1,667,790 New Jersey 20 5,028,087 29 8,079,198 New York 1 254,000 3 883,291 North Carolina 5 1,155,778 7 1,648,741 Pennsylvania 1 250,000 8 1,851,686 Texas 2 659,000 9 2,299,900 Utah 0 -- 3 496,097 -- ----------- --- ----------- TOTAL 68 $16,140,165 148 $34,502,977 == =========== === =========== The following is a summary by state of our model home purchases and sales since inception, as well as our inventory at June 30, 2002. Model Home Number of Model Number of Model Inventory State Homes Purchased Homes Sold at June 30, 2002 - -------------- --------------- --------------- ---------------- Arizona 19 18 1 California 62 37 25 Colorado 22 22 0 Georgia 5 5 0 Florida 107 107 0 Iowa 15 7 8 Minnesota 21 20 1 Nevada 13 9 4 New Jersey 111 91 20 New York 9 8 1 North Carolina 12 7 5 Pennsylvania 31 30 1 Texas 25 23 2 Utah 5 5 0 Virginia 6 6 0 --- --- --- TOTAL 463 395 68 === === === 5 The following chart summarizes our model home purchases and sales by state since inception, as well as the current model home inventory at June 30, 2002: Model Home Cost of Model Cost of Model Inventory State Homes Purchased Homes Sold at June 30, 2002 - --------------- --------------- ------------- --------------- Arizona $ 2,124,640 $ 1,989,990 $ 134,650 California 16,267,394 9,564,079 6,703,315 Colorado 4,715,463 4,715,463 -- Georgia 1,576,755 1,576,755 -- Florida 20,086,710 20,086,710 -- Iowa 2,622,695 1,363,360 1,259,335 Minnesota 4,852,110 4,626,070 226,040 Nevada 1,667,790 1,197,830 469,960 New Jersey 28,335,475 23,307,388 5,028,087 New York 3,301,435 3,047,435 254,000 North Carolina 2,758,255 1,602,477 1,155,778 Pennsylvania 7,191,197 6,941,197 250,000 Texas 5,060,757 4,401,757 659,000 Utah 837,726 837,726 -- Virginia 1,495,847 1,495,847 -- ------------ ----------- ----------- TOTAL $102,894,249 $86,754,084 $16,140,165 ============ =========== =========== The following is a breakdown of model home lease revenues by state for fiscal years ended June 30, 2002, 2001, and 2000: Lease Revenue Lease Revenue Lease Revenue Year Ended Year Ended Year Ended State 06/30/2002 06/30/2001 06/30/2000 - --------------- ---------- ---------- ---------- Arizona $ 45,387 $ 132,499 $ 180,455 California 1,218,504 1,529,366 1,304,561 Colorado -- -- 81,126 Florida 53,050 102,954 246,035 Iowa 169,880 290,065 -- Minnesota 82,458 356,362 19,744 Nevada 154,749 200,135 183,914 New Jersey 657,938 1,085,792 1,572,944 New York 66,264 110,837 247,714 North Carolina 182,794 204,057 156,520 Pennsylvania 100,577 331,163 491,788 Texas 177,663 407,561 287,196 Utah 29,335 59,532 70,359 ---------- ---------- ---------- TOTAL $2,938,599 $4,810,323 $4,842,346 ========== ========== ========== 6 MODEL HOME PROGRAM SUBSEQUENT EVENTS From July 1, 2002 through December 19, 2002, we sold nine model homes at an aggregate sales price of $1,988,690. These model homes were acquired at an aggregate cost of $1,863,685. In addition, we have contracts pending on eight model homes at an aggregate sales price of $1,933,456, which were acquired at an aggregate cost of $1,649,446. RESIDENTIAL REAL ESTATE ACQUISITION AND DEVELOPMENT We purchase parcels of residential real estate from non-affiliated third parties. These parcels are selected by homebuilders with whom we have established a business relationship. The parcels of land may require additional government approvals or entitlements and development work or consist of finished lots. If development work is required, the homebuilder enters into a fixed price development agreement to develop the parcels of land for us, and in all cases, is required to provide completion bonds for some or all work by a surety company acceptable to us. The Company enters into these transactions with funding from banks and these loans are secured by specific assets of the Company. As development occurs, the Company retains ownership of the developed real estate. We approve draw requests paid to the developer under the development agreements, fund them ourselves or have our banks fund. If we fund the draws, the banks reimburse us upon request. An exclusive option to purchase agreement is entered into with the homebuilder simultaneously with the land acquisition. The interest rate relating to the option is negotiated with each client. It is based on the credit of the client, estimated duration and size of the project and interest rates in effect at the time. The interest rate on the option is a fixed percentage, is non-refundable, is payable monthly in advance by the homebuilder and is fully earned. The interest income is calculated by applying the fixed percentage to the Company's net investment in the real estate (cost of the land plus development cost incurred less options exercised by the homebuilder). Our financing agreements with our lenders may call for a fixed interest rate or variable rate. These factors are all considered during negotiations to maintain the Company's profit margins. Each time the homebuilder exercises their option to purchase the residential real estate there is a formal real estate closing and title passes to the homebuilder. If the homebuilder fails to exercise their options to purchase the real estate, the Company has the right to sell the real estate to another party and there is no refund of the interest received. In addition, the Company has the right to draw against the developer's letter of credit or performance bond. Since the option sales price of the real estate to the homebuilder is equal to the Company's cost of the land plus costs to develop, there typically is no gain or loss on the sale of the residential real estate. The terms and conditions of each transaction are project specific (interest rate on the option, term, takedown schedule, etc.). We grant our clients an option to acquire finished lots in staged takedowns. In consideration for the option we receive a deposit in the form of a performance bond or a letter of credit equal to 20% or less of the total purchase price as well as an option maintenance fee which is payable monthly in advance. The option fees are fully earned when paid and non-refundable. The client has the right to terminate their obligations under the option agreements by foregoing the deposit, paying for the finished lots exercised and any other penalties provided for in the agreements. We have legal title to these assets. If the client terminated the agreements we have the risk of a decline in the market value of the property. Residual Value Insurance (RVI) is obtained to insure 80% -100% of the acquisition cost of the model homes as well as 80% -100% of the fully developed cost of the residential real estate. In some cases, the RVI covers the cash flow (interest income on direct financing model home arrangements, interest relating to the option on the residential real estate and other homebuilder contractual obligations to the Company). The premiums are paid annually in advance and are non-refundable and not proratable. They are a percentage of the insured value. We understand that the premiums are based on numerous factors such as perceived risk, allocation of statutory capital, and availability of similar coverage by other insurance companies and the feasibility of different financial models. Insurance companies writing RVI have suffered severe losses on automobiles, aircraft, aircraft engines and various other assets/properties. This has affected the pricing and availability of such coverage. During the year ended June 30, 2002, we entered into three (3) Acquisition, Development and Sale of Residential Real Estate Agreements in California (2) and New Jersey (1). The following is a summary of the project costs by project number: Remaining Project Purchase Development Costs Total Costs Development Total Number Price Paid to Date Paid to Date Work Project Costs - ------- ----------- ------------ ------------ ----------- ------------- 1 $20,546,010 $ -- $ 20,546,010 $ 3,085,749 $ 23,631,759 2 1,680,925 989,489 2,670,414 185,220 2,855,634 3 2,539,458 2,174,460 4,713,918 -- 4,713,918 4 3,554,591 1,965,374 5,519,965 347,835 5,867,800 5 8,083,084 3,629,757 11,712,841 977,901 12,690,742 6 6,762,000 -- 6,762,000 -- 6,762,000 7 11,800,000 3,312,379 15,112,379 4,245,432 19,357,811 8 11,736,233 -- 11,736,233 5,093,099 16,829,332 9 7,680,468 18,930,561 26,611,029 9,142,987 35,754,016 ----------- ----------- ------------ ----------- ------------ TOTAL $74,382,769 $31,002,020 $105,384,789 $23,078,223 $128,463,012 =========== =========== ============ =========== ============ 7 The following is a summary of total costs paid to date, sales of finished lots and our residential real estate balance at June 30, 2002: Project Total Costs Sale of Balance at Number Paid to Date Finished Lots June 30, 2002 Location - ------- ------------ ------------- ------------- ------------------- 1 $ 20,546,010 $ 7,097,320 $13,448,690 California 2 2,670,414 1,241,579 1,428,835 Arizona 3 4,713,918 4,713,918 -- Utah 4 5,519,965 4,746,984 772,981 Nevada 5 11,712,841 5,703,720 6,009,121 Nevada 6 6,762,000 6,762,000 -- California 7 15,112,379 1,640,492 11,736,233 New Jersey 8 11,736,233 -- 13,471,887 California 9 26,611,029 11,458,234 15,152,795 California ------------ ----------- ----------- TOTAL $105,384,789 $43,364,246 $62,020,542 ============ =========== =========== The following is a breakdown of interest income relating to the option on residential real estate acquisition and development by state: Year Ended June 30, ------------------------- State 2002 2001 ------------- ---------- ---------- Arizona $ 209,961 $ 146,417 California 4,270,960 2,453,415 Nevada 1,210,232 454,122 New Jersey 1,288,196 -- Utah 127,503 210,645 ---------- ---------- Total $7,106,852 $3,264,599 ========== ========== RESIDENTIAL REAL ESTATE ACQUISITION AND DEVELOPMENT SUBSEQUENT EVENTS The following is a summary of development costs paid and sales of finished lots from July 1, 2002, through December 19, 2002: Project Development Sales of Number Costs Paid Finished Lots ------- ---------- ------------- 1 $2,604,559 $ 9,154,945 2 131,674 595,958 3 -- 772,981 4 565,835 2,281,493 5 629,122 3,609,078 6 1,332,966 -- 7 2,260,625 7,861,078 ---------- ----------- TOTAL $7,524,781 $24,275,533 ========== =========== MULTI-FAMILY RESIDENTIAL PROPERTY On July 15, 1999, we purchased a 288 unit multi-family residential property in Jacksonville, Florida, for a purchase price of $10,227,999. The purchase price was paid as follows: Assumption of existing first mortgage $ 4,927,999 New loan 5,300,000 ----------- Total Purchase Price $10,227,999 =========== 8 At the time of purchase, the Company entered into a five-year management agreement with a non-affiliated independent management company. The management company is responsible for the operation of the property, retains all income from the property and is responsible for any losses. The Company receives a monthly fee comprised of the sum of the debt service to cover the assumed existing first mortgage ($43,365) plus required escrows for real estate taxes, property insurance and repair reserve, plus a 12% annual return on the $5,300,000 new loan. The escrow portion is variable based on changes in estimated expenses. The Company's profit on the transaction arises from the difference between the 12% return and interest expense paid by the Company on its $5,300,000 loan. The management company receives the benefit of the property appreciation, rent and occupancy increases. The annual return is 11% for the first two years, 12% for year three and 13% for years four and five. The average return over the term of the agreement is 12%. The management company has an option to purchase the property any time during the last four years of the agreement at an amount equal to the balance of the first mortgage plus an interest adjustment of $121,527, representing the difference between the 11% paid and the 12% due us, bearing interest of 12% since August 25, 2001, plus $5,300,000. If they fail to exercise the option, the management company is required to pay a balloon payment of $5,300,000 at the end of the five years. A performance bond, issued by an insurance company rated "AAA" by Moody's and Standard & Poors, in the amount of $8,335,000 has been obtained and paid for by the management company to insure the payment and performance of the management company. The performance bond insures the monthly payments by the management company and the $5,300,000 balloon payment at the end of the agreement. The Company accounts for the multi-family residential property as a direct financing arrangement, in accordance with the provisions of Statement of Financial Accounting Standards ("SFAS") No. 13, Accounting for Leases, because the agreement contains a bargain purchase option. In May 2003, after consultation with the Securities and Exchange Commission, the Company's management discovered that it had not properly accounted for the implicit interest rate in the agreement and has accounted for the prior period adjustment as a correction of error in the consolidated financial statements included in Item 8. SFAS No. 13 dictates the following accounting treatment for this transaction: (1) Using the actual purchase price of $10,227,999, the bargain purchase option at the end of five (5) years of $4,330,902 and the minimum lease payments, an implicit interest rate of 10.295% is derived utilizing present value tables; (2) the implicit interest rate is then applied to the purchase price and an interest income stream is generated for the five (5) years; (3) the implicit amount is compared to the cash amount received (net of executory payments for taxes and insurances); (4) since the cash received is greater than the implicit interest, the excess is recorded as a reduction to the net investment in the consolidated balance sheets in Item 8 of this Form 10-K/A1, resulting in a net investment of $10,010,585 and $10,116,600 at June 30, 2002 and 2000, respectively. The reduction to the net investment also results in an increase in a deferred tax asset, since the reduction is being recognized for book purposes and not for tax purposes. The table below reflects the change to the results previously reported.
Implicit Interest Reduction to Blended Deferred Net Decrease Fiscal Year Cash Received Income Net Investment Tax Rate Tax Benefit To Earnings - --------------- ------------- ------------ -------------- ------------ ----------- ----------- 6/30/2000 $ 1,103,386 $ 1,050,539 $ 52,847 40.0% $ 21,140 $ 31,707 6/30/2001 1,103,386 1,044,834 58,552 40.0% 23,421 35,131 6/30/2002 1,143,136 1,037,121 106,015 40.0% 42,406 63,609 ------------- ------------ -------------- ----------- ----------- Total $ 3,349,908 $ 3,132,494 $ 217,414 $ 86,967 $ 130,447 ============= ============ ============== =========== ===========
REVENUE CONCENTRATIONS - ---------------------- Since 2000, three of our major clients have represented a significant portion of our total revenues. Of our total revenues, one of these clients represents 57% of our revenues during 2002, 52% in 2001, and 57% in 2000. A second client represented 23% in 2002, 15% in 2001, and 22% of our revenues in 2000. A third client represented 11% of our total revenue in 2001. COMPETITION AND MARKET FACTORS We are subject to all the general risks associated with financing and investing in real estate, such as adverse changes in general or local economic conditions, changes in the supply of or demand for similar or competing properties in an area, changes in interest rates and operating expenses, changes in market rental rates, changes in and compliance with accounting issues relating to off-balance sheet financing, inability to procure residual value insurance polices, inability to lease properties upon the termination or expiration of existing leases, the renewal of existing leases, and the inability to collect payments from clients. Our business operates in a highly competitive environment. The financial services industry consists of a large number of companies, including banks, pension funds, insurance companies, finance companies, leasing companies, and real estate investment trusts, most of which are larger and have greater financial resources than we do. There can be no assurance that we will be able to raise sufficient capital through borrowings, or the issuance of debt and equity securities, to achieve our investment objectives. EMPLOYEES At December 19, 2002, we employed seven (7) full-time employees, which included executive, financial, sales and administrative personnel. Our employees are not represented by unions or subject to any collective bargaining agreements. Management considers the relationship with its employees to be excellent. In addition, from time to time, we retain outside professional and expert consultants to assist us with our business plan. At December 19, 2002, we had one outside consultant, our corporate and securities counsel, who is performing additional consulting services for us separate from his legal services and whom we have retained on a month-to-month basis. We are dependent on the efforts of our executive officers, key employees and directors. We have an employment contract with only one person. There can be no assurance that we will be able to recruit additional personnel with equivalent experience in the event of our loss of their services. 9 ITEM 2. PROPERTIES Our corporate office is located at 7900 Glades Road, Suite 610, Boca Raton, Florida 33434, where we lease 2,216 square feet of executive office space pursuant to a five (5) year written lease expiring March 2007, at an annual lease rate of $68,539 during 2002 (approximately $5,700 per month). Our annual lease rate will be $65,062 in 2003. We moved to this location in January 2002, when our prior lease at 2500 Military Trail North, Suite 260, Boca Raton, Florida 33431, expired. We believe that our current facility is adequate for our current and planned level of operations. We own additional properties more fully described in Item 1, above. INSURANCE We have comprehensive insurance including liability, fire, flood, extended coverage personal injury and rental loss insurance with respect to our properties. We believe that such insurance provides adequate coverage. ITEM 3. 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 moneys 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, 2001 and 2000, we took impairment charges of $1,100,000 for the 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. Also, we filed suit against BankAtlantic Bancorp., 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. 10 During May 2000, we, along with FPE Funding, LLC ("FPE"), 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 a 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 we are vigorously defending the counterclaim. As such, there is no accrual in the accompanying consolidated balance sheets. 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 at June 30, 2002 for this matter. As of December 19, 2002 we are not 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 consolidated financial statements. 11 ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS During June 2002, a majority of our shareholders by consent approved a reverse stock split, whereby one (1) share of our Common Stock was issued in exchange for every two hundred (200) shares of Common Stock issued and outstanding on the record date. An applicable Information Statement was filed with the Securities and Exchange Commission and disseminated to our shareholders. PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS Until November 20, 2002, our Common Stock was traded on the OTC Bulletin Board under the symbol "SCPI." Our trading symbol was changed from "JJFN" to the current symbol on the effective date of the reverse stock split referenced above in Item 4. Because this report was filed late, our common stock was delisted from trading on the OTC Bulletin Board. Upon information and belief, as of the date of this report, our Common Stock does not trade. We intend to cause an application to be filed to reinstate our common stock for trading on the OTC Bulletin Board subsequent to the filing of this report and our quarterly report on Form 10-Q for the three month period ended September 30, 2002. While no assurances can be provided, we believe trading of our common stock will be reinstated on the OTC Bulletin Board in the near future. The following table sets forth, for the periods indicated, the high closing bid price and low closing asked price for our Common Stock as reported by the OTC Bulletin Board during the two year period prior to July 1, 2002. All current and historical figures to our Common Stock have been adjusted to reflect our reverse stock split (200 to 1). Year Ended June 30, ---------------------------------------------------------- 2002 2001 2000 ---------------- ---------------- ---------------- Quarter High Low High Low High Low Ended Bid Asked Bid Asked Bid Asked - ------------ ------ ------ ------ ------ ------ ------ September 30 -- -- $40.00 $36.00 $60.00 $50.00 December 31 -- -- $28.00 $24.00 $50.00 $48.00 March 31 $34.00 $24.00 $26.00 $24.00 -- -- June 30 $51.00 $ 3.00 $38.00 $30.00 -- -- As of December 19, 2002, there is no bid or asked price applicable to our Common Stock, as our Common Stock does not publicly trade as of the date hereof. The last sale price of our Common Stock as reported on the OTC Bulletin Board, which took place on November 13, 2002, was $10.00. As of June 30, 2002, there were approximately 557 shareholders of record, not including those persons who held their shares in "street name." We have not paid any cash dividends on our Common Stock and do not anticipate paying any in the foreseeable future. We intend to continue our present policy of retaining earnings for investment in our operations. 12 On November 2, 1995, we sold 400,000 shares of our 6% Participating Convertible Preferred Stock for $1,000,000 in cash. Each share was originally convertible into one share of our Common Stock at $2.50 per share commencing in December 1996. Dividends are declared on the basis of a 50% participation in the rental revenue stream up to $60,000 per year. At June 30, 2001, we had 400,000 shares of 6% Participating Convertible Preferred Stock issued and outstanding. We had not paid any distributions on this Preferred Stock since July 1996, as a result of a dispute between two unaffiliated parties who were entitled to dividends. In July 1998, David Miller, our Chairman, acquired all of these shares of Convertible Preferred Stock. At December 30, 1998, we owed $130,000 in unpaid distributions. In October 1998, we began paying distributions to Mr. Miller at the rate of $10,000 per month, which brought us current on preferred distributions in November 2000. During June 2002, these 400,000 shares of Convertible Preferred Stock were redeemed for $500,000 in cash and a note for $500,000. The note bears 6% interest, payable monthly. $250,000 is due July 1, 2003 and the balance is due July 1, 2004. On April 8, 2002, our Board of Directors voted to authorize and recommend that our shareholders approve a reverse stock split, whereby one (1) share of our common stock would be issued for every two hundred (200) shares outstanding on the established record date of April 8, 2002. Messrs. Miller and Wilson, two of our directors, abstained from voting due to a perceived potential conflict of interest arising out of these directors holding warrants to purchase shares of our Common Stock. This reverse stock split was approved in June 2002 by those of our shareholders representing a majority of the shares of Common Stock then outstanding pursuant to the laws of the State of Delaware. 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 (approx. $0.17 per warrant). SUBSEQUENT EVENT 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 the approval of 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. 13 ITEM 6. SELECTED FINANCIAL DATA The selected financial data presented below for the years ended June 30, 2002, 2001, 2000, 1999, and 1998 have been derived from our audited consolidated financial statements. This data should be read in conjunction with "Management's Discussion and Analysis of Financial Condition and Results of Operations" and the consolidated financial statements and related notes thereto included elsewhere in this Report. As more fully described in Note 1 to our audited consolidated financial statements included in "Part II, Item 8, Financial Statements and Supplemental Data" below, errors resulting in a net understatement of previously reported interest expense for the years ended June 30, 2001, 2000, 1999 and 1998 were discovered by our management during 2002. In addition, during 2003, management discovered an error in its accounting for the multi-family property resulting in an overstatement of interest income and income tax expense for the years ended June 30, 2002, 2001 and 2000. Accordingly, our consolidated balance sheets and our statement of operations and stockholders' equity for the years presented below have been restated to reflect corrections to previously reported amounts. SELECTED FINANCIAL DATA (In thousands, except per share data)
June 30, ------------------------------------------------------- 2002 2001 2000 1999 1998 -------- -------- -------- -------- -------- (Restated) (Restated) (Restated) (Restated) (Restated) Income Statement Data: Revenues and Other Income Interest income on direct financing arrangements: Model homes $ 2,939 $ 4,810 $ 4,842 $ 4,664 $ 3,545 Residential real estate 7,107 3,265 -- -- 9 Multi-family residential property 819 954 949 -- -- Gain on sale of model home properties under direct financing arrangements 394 377 324 226 37 Interest and other income 81 136 324 127 129 -------- -------- -------- -------- -------- Total Revenues and Other Income 11,340 9,542 6,439 5,017 3,720 -------- -------- -------- -------- -------- Costs and Operating Expenses Interest and financing costs to financial institutions 4,957 5,598 3,836 2,697 2,037 Interest and financing costs to stockholders 214 387 348 559 471 Depreciation and amortization 1,547 931 665 509 470 Corporate selling, general and administrative 2,564 1,536 1,554 1,434 1,148 Impairment charge 91 1,000 100 -- -- -------- -------- -------- -------- -------- Total Costs and Operating Expenses 9,373 9,452 6,503 5,199 4,126 -------- -------- -------- -------- -------- Income (loss) before income tax benefit (expense) 1,967 90 (64) (182) (406) Income tax benefit (expense) (1,079) (71) (46) (80) 10 -------- -------- -------- -------- -------- Net income (loss) 888 19 (110) (262) (396) Preferred stock distributions 55 85 120 90 -- -------- -------- -------- -------- -------- Income (loss) applicable to common stockholders $ 833 $ (66) $ (230) $ (352) $ (396) ======== ======== ======== ======== ======== Per Share Data: Basic: Net income (loss) $ 10.79 $ (.85) $ (2.90) $ (3.23) $ (4.66) Weighted average number of common shares outstanding 77 78 79 81 85 Assuming Dilution: Net income (loss) $ 10.73 $ (.85) $ (2.90) $ (3.23) $ (4.66) Weighted average number of common shares outstanding 78 78 79 95 85
14
June 30, ------------------------------------------------------- 2002 2001 2000 1999 1998 -------- -------- -------- -------- -------- (Restated) (Restated) (Restated) (Restated) (Restated) Balance Sheet Data: Total assets $ 90,667 $ 94,887 $ 56,114 $ 37,159 $ 40,824 Mortgages and notes payable $ 77,592 $ 83,351 $ 46,541 $ 27,958 $ 31,538 Other liabilities $ 4,674 $ 3,067 $ 1,192 $ 765 $ 685 Stockholders' equity $ 8,401 $ 8,469 $ 8,381 $ 8,436 $ 8,601
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS RESULTS OF OPERATIONS A summary of our operating results, including our subsidiaries for the fiscal years ended June 30, 2002, June 30, 2001, and June 30, 2000 are presented below. As more fully described in Note 1 to our audited consolidated financial statements included in "Part II, Item 8, Financial Statements and Supplemental Data" below, errors resulting in a net understatement of previously reported interest expense for the years ended June 30, 2001 and 2000 was discovered by our management during 2002 and in 2003 management discovered an error in its accounting for the multi-family residential property resulting in an overstatement of interest income and income tax expense for the years ended June 30, 2002, 2001 and 2000. Accordingly, our consolidated balance sheets as of June 30, 2002 and 2001 and our statements of operations, stockholders' equity and cash flows for the years ended June 30, 2002, 2001 and 2000 have been restated to reflect corrections to previously reported amounts.
Years Ended June 30, -------------------------------------------------------------- 2002 2001 2000 (Restated) (Restated) (Restated) ------------------ ------------------ ------------------ Revenues and Other Income: Interest income on direct financing arrangements: Model homes $ 2,939 26% $ 4,810 51% $ 4,842 75% Residential real estate 7,107 63% 3,265 34% -- -- Multi-family residential property 819 7% 954 10% 949 15% Gain on sale of model home properties under direct financing arrangements 394 3% 377 4% 324 5% Interest and other income 81 1% 136 1% 324 5% --------- ------ --------- ------ --------- ------ Total revenues and Other Income 11,340 100% 9,542 100% 6,439 100% Costs and operating expenses: Interest and financing costs to financial institutions 4,957 44% 5,598 59% 3,836 60% Interest and financing costs to stockholders 214 2% 387 4% 348 5% Depreciation and amortization 1,547 14% 931 10% 665 10% Corporate selling, general and administrative 2,564 23% 1,536 16% 1,554 24% Impairment charge 91 -- 1,000 10% 100 1% --------- ------ --------- ------ --------- ------ Total costs and operating expenses 9,373 83% 9,452 99% 6,503 101%
15
Years Ended June 30, --------------------------------------------------------------- 2001 2000 2002 (Restated) (Restated) ------------------ ------------------ ------------------- Income (loss) before income tax expense 1,967 17% 90 1% (64) (1)% Income tax expense 1,079 9% 71 1% 46 -- % --------- ------ --------- ------ --------- ------ Net income (loss) $ 888 7% $ 19 --% $ (110) (1)% ========= ====== ========= ====== ========= ======
Comparison of Year Ended June 30, 2002 to Year Ended June 30, 2001. Interest income on model home direct financing arrangements for the year ended June 30, 2002, decreased $1,871,724 (39%) compared to the prior year period. The decreased revenue was primarily attributable to the interest income on the decreased number of model home direct financing arrangements. The direct financing arrangement balance, which amounted to $16,140,165 at June 30, 2002, compared to $34,502,977 at June 30, 2001. As of December 19, 2002, our portfolio of model homes is decreasing as a result of continued sales of these homes. We did not acquire any model homes during fiscal year 2002. Unless we are able to acquire additional inventory of model homes in the future our revenues from this business will decrease. We are currently negotiating with various builders to purchase additional model homes and expect to acquire the model homes in the near future. Interest income relating to the options on residential real estate direct financing arrangements increased $3,842,253 (118%) from $3,264,599 for the year ended June 30, 2001 to $7,106,852 for the year ended June 30, 2002. The increase is attributable to the increase in residential real estate from $44,524,990 at June 30, 2001 to $62,020,542 at June 30, 2002. Interest income on the multi-family residential property direct financing arrangement decreased $134,493 (14%) from $953,965 for the year ended June 30, 2001, to $819,472 for the year ended June 30, 2002. The decrease was the result of the implicit interest rate adjustment which reduced actual interest income under the arrangement. Also see Item 8 in this Form 10-K/A1, footnote 2(B) to the consolidated financial statements. Gain on sale of model home properties under direct financing arrangements represents the gain resulting from the sales of our model homes. The increase of $16,467 (4%) from $377,392 from the year ended June 30, 2001 to $393,859 for the year ended June 30, 2002 is primarily attributable to the increase in the number of model homes sold. During the year ended June 30, 2002, we sold 80 model homes at an average price of $248,480, compared to 69 model homes at an average price of $260,101 for the prior year. Sales of residential real estate increased by $40,530,642 for the year ended June 30, 2002 from $1,416,802 for the eyar ended June 30, 2001, to $41,947,444 for the year ended June 30, 2002. Since the residential real estate transactions are direct financing arrangements, the sales revenue and cost of sales have been netted in the consolidated statements of operations in Item 8 of this Form 10-K/A1. The sales revenue and cost of sales are typically the same amount. The strong housing market has resulted in our customers exercising their options at a rapid pace. The Company's residential real estate agreements have three distinct phases: 1. Acquisition of undeveloped property 2. Development of land and infrastructure 3. Sale of finished lots. During the acquisition and development phases, funds are being invested and revenue is being recognized as option income on residential real estate. As the lots are developed and our customers exercise their option to purchase the completed lots, sales are recognized. These transactions are direct financing arrangements. The option sales price is comprised of the acquisition cost of the land plus all contracted development work. The contract stipulates that the land will be purchased by the homebuilder at the contracted completed cost and therefore there is no gain or loss on the sale. As the land development nears completion, more lots are needed by the builder to build new homes. Over the life of the project, the Company recognizes increasing interest income on the option during development and when development slows down, increased sales and decreased interest income result. 16 Interest and financing costs to financial institutions decreased $640,857 (11%) for the year ended June 30, 2002, compared to the prior year period, primarily due to the decrease in loans utilized to purchase additional assets and lower interest rates. Residual Value Insurance (RVI) indemnifies an insured against a loss that might occur if the proceeds of the sale of a properly maintained asset are less than that asset's insured residual value at a specific point in time. It protects against a decline in the market value of the property. If we are unwilling or unable to obtain such insurance coverage, our cost of funds might increase. Some of the Company's lenders consider the insurance as a credit enhancement to the loan. Lack of the coverage will result in the Company being required to increase the amount of down payment (equity/investment) in a transaction and may have to pay a higher interest rate for the borrowed funds. In a typical transaction we were required to invest 5% of our own cash in the transaction with RVI coverage. Without RVI coverage, we will be required to invest 10%-15% of our own cash in the transaction (i.e. original loan amount $10 million - with RVI we would be required to invest 5% or $500,000 - without RVI we would be required to invest an additional 5%-10% or $500,000 to $1,000,000 instead of $500,000). This will result in a decrease in loan-to value ratios in our financing and we assume the risk of loss if the property is sold below our original acquisition cost. RVI is obtained to insure 80% to 100% of the acquisition cost of the model homes as well as 80% to 100% of the fully developed cost of the residential real estate. In some cases, RVI even covers the cash flow - i.e. interest income on direct financing of model home arrangements and interest relating to the options on the residential real estate (this includes related homebuilder contractual obligations to the Company). The premiums are paid annually in advance by the Company and are non-refundable and not pro-ratable. They represent a percentage of the insured value. We understand that the premiums are based on numerous factors such as - perceived risk, allocation of statuary capital, and availability of similar coverage by other insurance companies and the feasibility of different financial models. Insurance companies providing RVI coverage have suffered severe losses on automobiles, aircraft, aircraft engines and various other assets/properties. The losses reflected poor underwriting performance. The mandatory recognition by the insurance carriers of prior period reserve deficiencies as well as deteriorating investment results have resulted in higher premiums and fewer providers. As a result, some insurance companies have ceased providing RVI coverage primarily due to large "shock" losses which have caused both weaker and stronger insurance companies to retrench or withdraw from the market place leaving a limited number of insurance companies that are willing to provide such coverage. As a result of the limited number of insurance companies willing to provide the RVI coverage, the existing providers are able to increase their pricing for such coverage. In addition, due to the significant losses by these insurance companies in other segments, coverage terms and conditions have been more restrictive and the lack of competition and capacity has hampered the availability and significantly increased the pricing for such coverage. Cost of reinsurance coverage available to the primary insurers has dramatically increased due to the catastrophic losses associated with September 11, asbestos claims, class action lawsuits and adverse trends in other lines. 17 Further downgrades by the rating agencies of property and casualty insurance companies have led to their diminished presence in the commercial and specialty lines business segments and continue to result in increased premiums. This has adversely affected coverage pricing and availability. The inability to obtain cost effective RVI insurance on future projects could affect the cost of funds from the lending institutions we work with as the coverage is considered a credit enhancement. In addition, the coverage gives the Company added security in the event a homebuilder does not fulfill its contractual obligations to the Company. In the event that any and all of the providers are unwilling to pay a claim, we would have to bear the cost of litigation to collect the claim and not have the use of the funds for our operations until the litigation and potential appeals are resolved in our favor. In the event that any or all of the providers are unable to pay a claim, we are subject to that credit risk. We evaluate the financial condition of the provider prior to our acceptance of the credit enhancement but can not protect ourselves against downgrades by rating agencies or future losses by the providers. Depreciation and amortization expense increased $616,194 (66%) from $930,942 for the year ended June 30, 2001, to $1,547,136 for the year ended June 30, 2002. The increase was due to the write off of deferred financing costs upon the sale of model homes. The net investment in model homes under direct financing arrangements decreased $18,362,812 (53%) from $34,502,977 at June 30, 2001 to $16,140,165 at June 30, 2002. Interest and financing costs to stockholders represents interest resulting from the actual interest rate on the stockholder loans and the fair value of warrants issued with the stockholder loans that is also accounted for as additional interest expense. The total interest expense decreased by $173,056 (45%) for the year ended June 30, 2002, due to a reduction in the interest related to the outstanding warrants. Warrants from prior years expired and additional warrants were not issued. For the year ended June 30, 2002, non-cash interest expense related to the warrants and interest expense related to the actual interest rate on the loans amounted to $98,668 and $115,362, respectively. For the year ended June 30, 2001, non-cash interest expense from the warrants and interest expense from the actual interest rate on the loans amounted to $269,142 and $117,944, respectively. Corporate selling, general and administrative costs increased $1,028,224 (a 67% increase) from $1,536,118 for the year ended June 30, 2001, to $2,564,342 for the year ended June 30, 2002. These costs increased as a result of our re-audit of three years of financial statements, retention of experts to advise us on various accounting issues related to outstanding warrants and our reverse stock split (which issues are discussed above under "Part II, Item 5"), our retaining additional legal counsel and consultants applicable to the aforesaid issues, consulting fees of $70,470 paid during this period, termination fees pursuant to a settlement agreement between us and our former chief financial officer of $72,550, professional fees of $143,500 and moving costs of $35,697. Corporate selling, general and administrative costs as a percentage of total revenue increased compared to the prior year period by 7%. Impairment charges decreased $908,878 (91%) from $1,000,000 for the year ended June 30, 2001 to $91,122 for the year ended June 30, 2002. During 2001, the Company recorded an impairment charge of $1,000,000 against a promissory note that originated from the sale of the net assets of Iron Eagle Contracting and Mechanical, Inc. in 1997. For the year ended June 30, 2002, the Company recorded an impairment charge of $91,122 against a commitment fee receivable from Dylan Tire Industries, LLC. Also see Item 8 in this Form 10-K/A1, footnote 4 to the consolidated financial statements. Net income for the year ended June 30, 2002, was $887,730, compared to net income of $18,660 for the prior year period, an increase of $869,070 (4,657%). Net income as a percentage of total revenue increased due to the larger impairment charge recognized in our prior fiscal year. 18 Comparison of Year Ended June 30, 2001 to Year Ended June 30, 2000. Interest income on model home direct financing arrangements decreased an immaterial amount from June 30, 2000 to June 30, 2001 due to the asset balances of model homes remaining consistent at June 30, 2001 and 2000. Interest income relating to the options on residential real estate increased from -0- for the year ended June 30, 2000 to $3,264,599 for the year ended June 30, 2001. The Company did not have any residential real estate in 2000. Gain on sale of model home properties under direct financing arrangements increased $53,582 (17%) from $323,810 for the year ended June 30, 2000 to $377,392 for the year ended June 30, 2001. During the year ended June 30, 2001, we sold 69 model homes at an average price of $260,131, compared to 76 model homes at an average price of $257,255 for the year ended June 30, 2000. Sales of residential real estate increased from -0- for the year ended June 30, 2000 to $1,416,802 for the year ended June 30, 2001. The Company did not have any residential real estate during 2000. Also see comparison of residential real estate sales for the years ended June 30, 2002 and June 30, 2001. Interest and financing costs to financial institutions increased $1,761,432 (or 46%) for the year ended June 30, 2001 compared to the prior year period, primarily due to the increase in loans utilized to purchase additional model homes and residential real estate. Interest and financing costs to stockholders increased $39,206 (or 11%) due to additional borrowings from stockholders and new warrants being issued. Also see interest and financing costs to stockholders discussion for June 30, 2002 to June 30, 2001. For the year ended June 30, 2000, non-cash interest expense related to the warrants and interest expense related to the actual interest rate on the loans amounted to $235,660 and $112,220, respectively. Corporate selling, general and administrative costs decreased $17,822 (a 1% decrease), from $1,553,940 for the year ended June 30, 2000, to $1,536,118 for the year ended June 30, 2001. Net income for the year ended June 30, 2001 was $18,660, compared to a net loss of ($110,413) for the prior year period. LIQUIDITY AND CAPITAL RESOURCES Funding for our operations has been provided by cash flow from operations, secured bank loans/financing as well as loans from our stockholders. Our uses for cash during the year ended June 30, 2002, were for revenue producing asset acquisitions, interest, operating expenses, and redemption of Preferred Stock. We provided for our cash requirements from borrowings, the sale of model homes and residential real estate and other revenues. At June 30, 2002, we had approximately $21 million of unused, committed credit facilities available to us under existing revolving loan agreements, which is restricted for the use to acquire model homes and residential real estate in accordance with the terms of those agreements. These facilities expire through August 2003. We received a commitment for $15,700,000 from a new financial institution which will also be restricted to acquire residential real estate. The loan will bear interest based on 30 day LIBOR plus a premium. It is our policy not to incur costs from activation of new credit facilities unless and until needed. We believe that these sources of cash are sufficient to finance our working capital requirements and other needs for the next twelve months. However, as part of our ongoing business, we have constant discussions with financial institutions for increased credit facilities and with investment bankers and other financial institutions regarding private or public placement of our debt or equity securities. We constantly review financing availability in the capital markets. However, there are no definitive agreements in place for us to obtain any additional financing and no assurances can be provided that we will undertake any such action in the immediate future. At June 30, 2002, we had notes payable in the amount of $1,909,200 due to stockholders , which arose from advances they have made to us. The notes are payable on demand and accrue interest at 9%, which interest is paid monthly. Interest related to the 9% coupon on stockholder notes payable totaled $115,361, $109,543 and $112,220 for the years ended June 30, 2002, 2001 and 2000, respectively. Additionally, we incurred non-cash interest expense relating to the issuance of warrants with the stockholder loan amounting to $98,668, $269,142 and $235,660 for the years ended June 30, 2002, 2001 and 2000, respectively. At June 30, 2002 and 2001, stockholder loans outstanding were $1,909,200 and $1,223,100, respectively. 19 COMMON STOCK REPURCHASE PROGRAM During 2000, the Company implemented a common stock repurchase program. As of June 30, 2002, 10,368 (post reverse split) shares had been repurchased under this program at a cost of $457,999 or $44.17 per share, adjusted for our reverse stock split. We did not purchase any shares during our fiscal year ended June 30, 2002, and we do not anticipate implementing a new repurchase program. We are currently evaluating a tender offer for fractional and odd lot shares to reduce our costs but there are no assurances that we will undertake this activity in the near future, or at all. IMPAIRMENT CHARGE In March 2000, we set up a loss reserve of $100,000 against the promissory note, and have taken the remaining $1,000,000 non-cash charge during the year ended June 30, 2001 to write the carrying value of the note to 0. The amount of the write down was determined by evaluating the underlying value of the collateral and the difficulty anticipated in efforts to realize the value of such collateral securing the Note. We also evaluated cost of recovery, ongoing litigation costs, and other economic conditions and trends in making our determination. Actual losses could differ from our current estimate and will be reflected as adjustments in future financial statements. See "Part I, Item 3, Legal Proceedings" and "Item 8, Financial Statements and Supplementary Data." CASH FLOWS Year Ended June 30, 2002 Net cash provided by operating activities totaled $3,494,802 and was comprised of net income of $887,730, plus net adjustments for non-cash items of $1,885,711 plus a net change in other operating assets and liabilities of $721,361. Net cash used in investing activities of $3,910,102 was comprised of investments in direct financing leases of $11,469,091, offset by $7,558,989 in proceeds from sales of direct financing leases. Net cash used in financing activities totaled $2,769,924 and was comprised of net repayments of stockholders loans of $50,000, plus deferred financing costs of $1,705,208, plus purchase of treasury stock of $500,000, principal payments on mortgage payable of $459,716 and preferred distributions of $55,000. Year Ended June 30, 2001 Net cash provided by operating activities totaled $1,861,971 and was comprised of net income of $18,660 plus net adjustments for non-cash items of $1,857,819, less a net change in other operating assets and liabilities of $14,508. Net cash provided by investing activities of $2,624,384 was comprised of investment in capital expenditures of $9,513, $1,983,897 in proceeds from sales of direct financing leases, and proceeds from note receivable of $650,000. Net cash used in financing activities of $1,951,264 was comprised of proceeds from mortgage payable of $416,645 plus net proceeds from stockholders loans of $81,680, offset by deferred financing costs of $948,012, plus purchases of treasury stock of $114,823, principle payments on mortgage payable of $1,301,754 and preferred distributions of $85,000. Year Ended June 30, 2000 Net cash provided by operating activities totaled $704,196 and was comprised of a net loss of $110,413, plus net adjustments for non-cash items of $708,308, plus a net change in other operating assets and liabilities of $106,301. Net cash provided by investing activities of $1,946,390 was comprised of investments in direct financing leases of $586,183 plus capital expenditures of $3,933, offset by $3,186,506 in proceeds from sales of direct financing leases, proceeds from note receivable of $350,000 less a loan advance of $1,000,000. Net cash used in financing activities of $1,889,757 was comprised of principal payments on mortgages payable of $958,886, plus repayments of stockholders loans of $183,987, plus deferred financing costs of $566,494, plus purchases of treasury stock of $60,390, and preferred distributions of $120,000. SEGMENT REPORTING Segment Reporting - Statement of Financial Accounting Standards No. 131 ("FAS 131") "Disclosures about Segments of an Enterprise and Related Information" established standards for the manner in which public enterprises report information about operating segments. We have determined that our operations primarily involve one reportable segment, real estate financing arrangements. NEW ACCOUNTING PRONOUNCEMENTS The Financial Accounting Standards Board has recently issued several new Statements of Financial Accounting Standards ("SFAS"). Statement No. 141, "Business Combinations" supersedes Accounting Principles Board ("APB") Opinion No. 16 and various related pronouncements. Pursuant to the new guidance in Statement No. 141, all business combinations must be accounted for under the purchase method of accounting; the pooling-of-interests method is no longer permitted. SFAS 141 also establishes new rules concerning the recognition of goodwill and other intangible assets arising in a purchase business combination and requires disclosure of more information concerning a business combination in the period in which it is completed. This statement is generally effective for business combinations initiated on or after July 1, 2001. Statement No. 142, "Goodwill and Other Intangible Assets" supercedes APB Opinion 17 and related interpretations. Statement No. 142 establishes new rules on accounting for the acquisition of intangible assets not acquired in a business combination and the manner in which goodwill and all other intangibles should be accounted for subsequent to their initial recognition in a business combination accounted for under SFAS No. 141. Under SFAS No. 142, intangible assets should be recorded at fair value. Intangible assets with finite useful lives should be amortized over such period and those with indefinite lives should not be amortized. All intangible assets being amortized as well as those that are not, are both subject to review for potential impairment under SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed of". SFAS No. 142 also requires that goodwill arising in a business combination should not be amortized but is subject to impairment testing at the reporting unit level to which the goodwill was assigned to at the date of the business combination. 20 SFAS No. 142 is effective for the fiscal years beginning after December 15, 2001 and must be applied as of the beginning of such year to all goodwill and other intangible assets that have already been recorded in the balance sheet as of the first day in which SFAS No. 142 is initially applied, regardless of when such assets were acquired. Goodwill acquired in a business combination whose acquisition date is on or after July 1, 2001, should not be amortized, but should be reviewed for impairment pursuant to SFAS No. 121, even though SFAS No. 142 has not yet been adopted. However, previously acquired goodwill should continue to be amortized until SFAS No. 142 is first adopted. Statement No. 143 "Accounting for Asset Retirement Obligations" establishes standards for the initial measurement and subsequent accounting for obligations associated with the sale, abandonment, or other type of disposal of long-lived tangible assets arising from the acquisition, construction, or development and/or normal operation of such assets. SFAS No. 143 is effective for the fiscal years beginning after June 15, 2002, with earlier application encouraged. In August 2001, the FASB issued SFAS 144, "Accounting for the Impairment or Disposal of Long-Lived Assets". This statement addresses financial accounting and reporting for the impairment or disposal of long-lived assets and supercedes FASB Statement No. 121, "Accounting for the Impairment of Long- Lived Assets and for Long-Lived Assets to be Disposed Of". The provisions of the statement are effective for financial statements issued for the fiscal years beginning after December 15, 2001. In April 2002, the FASB issued SFAS 145, Rescission of FASB Statements No. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical Corrections. SFAS 145 rescinds the provisions of SFAS No. 4 that requires companies to classify certain gains and losses from debt extinguishments as extraordinary items, eliminates the provisions of SFAS No. 44 regarding transition to the Motor Carrier Act of 1980 and amends the provisions of SFAS No. 13 to require that certain lease modifications be treated as sale leaseback transactions. The provisions of SFAS 145 related to classification of debt extinguishments are effective for fiscal years beginning after May 15, 2002. Earlier application is encouraged. In July 2002, the FASB issued SFAS No. 146, "Accounting for Restructuring Costs." SFAS 146 applies to costs associated with an exit activity (including restructuring) or with a disposal of long-lived assets. Those activities can include eliminating or reducing product lines, terminating employees and contracts and relocating plant facilities or personnel. Under SFAS 146, we will record a liability for a cost associated with an exit or disposal activity when that liability is incurred and can be measured at fair value. SFAS 146 will require us to disclose information about our exit and disposal activities, the related costs, and changes in those costs in the notes to the interim and annual financial statements that include the period in which an exit activity is initiated and in any subsequent period until the activity is completed. SFAS 146 is effective prospectively for exit or disposal activities initiated after December 31, 2002, with earlier adoption encouraged. Under SFAS 146, a company cannot restate its previously issued financial statements and the new statement grandfathers the accounting for liabilities that a company had previously recorded under Emerging Issues Task Force Issue 94-3. The adoption of these pronouncements is not expected to have a material effect on our consolidated financial statements. CRITICAL ACCOUNTING POLICIES AND ESTIMATES We have identified critical accounting policies that, as a result of judgments, uncertainties, uniqueness and complexities of the underlying accounting standards and operation involved, could result in material changes to our consolidated financial position or results of operations under different conditions or using different assumptions. The most critical accounting policies and estimates are: > Estimated allowance for uncollectible accounts receivable; > Estimate of the fair value of warrants issued in connection with stockholder loans; > Estimates regarding ongoing litigation; > Estimates of the fair value of financial instruments; > Revenue recognition in accordance with SFAS No. 13, Accounting for Leases; Details regarding our use of these policies and the related estimates are described in the accompanying consolidated financial statements as of June 30, 2002 and 2001 and for the years ended June 30, 2002, 2001 and 2000. During the year ended June 30, 2002, there have been no material changes to our critical accounting policies that impacted our consolidated financial condition or results of operations other than the correction of errors as discussed in footnote 1(Q) to our consolidated financial statements. 21 TRENDS During our fiscal year ended June 30, 2002, our operations continued to accelerate. For the fiscal year ended June 30, 2002, total purchases of revenue producing assets were in excess of $59 million, compared to approximately $54 million for the year ended June 30, 2001. Monthly revenue from direct financing arrangements (model homes and residential real estate) outstanding at June 30, 2002, 2001, and 2000 were $955,000, $912,000, and $521,000, respectively. During our fiscal year ending June 30, 2003, we expect to continue to focus on improving our profitability and returns on our invested capital. It is anticipated that demand for our specialty financial services will continue to develop during 2003, as our clients continue to desire to maintain their financial ratios. Further, our financial services allow our clients the ability to maximize financial leverage while reducing their applicable risks. We anticipate that continued strong demand in the housing industry, along with favorable interest rate spreads, should allow us to continue our growth. While no assurances can be provided, we believe that favorable demographics should prevent a significant downturn. In this regard, a recent study performed by the Joint Center for Housing Studies of Harvard University included projections suggesting that the number of owners will rise by an average of 1.1 million annually over the next two decades. Much of this growth reflects the dramatic rise in the foreign-born population since the 1970's with the pickup in Latin American and Asian immigration. Today, over one in ten U.S. residents is foreign-born. The housing outlook remains bright with about 1.2 million households expected to form each year through 2020. Reflecting the growing immigrant and minority populations, Joint Center projections suggest that homeowners will account for the lion's share of household growth, rising in number from just over 70 million in 2000 to 92.3 million by 2020. Producing housing for the burgeoning number of U.S. households, together with meeting baby-boomer demand for vacation and retirement homes and replacing units lost from the stock, calls for average annual construction of 1.7 million new homes and apartments in the decades ahead. Add to this the enormous investment required to maintain and upgrade the existing inventory of homes and it is clear to us that housing will remain a key driver of the economy for the foreseeable future. INFLATION Inflation has not had a significant impact on the results of operations and is not anticipated to have a significant negative impact in the foreseeable future. Although increases in the rate of inflation may tend to increase interest rates which may increase our cost of borrowed funds, we attempt to pass the increases through to our customers through increased charges. The potential adverse impact of inflation on our lease operations is further mitigated by requiring clients to pay all operating expenses, including but not limited to real property taxes, insurance and utilities. However, there is no assurance that inflation will not have a material adverse impact on our future results of operation. DEFLATION Deflation is a persistent fall in the general price level of goods and services. Deflation is dangerous, however, more so even than inflation, when it reflects a sharp slump in demand, excess capacity and a shrinking money supply. Runaway deflation of this sort can be much more damaging than runaway inflation, because it creates a vicious spiral that is hard to escape. The expectation that prices will be lower tomorrow may encourage consumers to delay purchases, depressing demand and forcing firms to cut prices by even more. Falling prices also inflate the real burden of debt (that is, increase real interest rates) causing bankruptcy and bank failure. This makes deflation particularly dangerous for economies that have large amounts of corporate debt. Most serious of all, deflation can make monetary policy ineffective; nominal interest rates cannot be negative, so real rates can get stuck too high. 22 ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK We are exposed to changes in interest rates primarily as a result of our floating rate debt arrangements, which 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. A hypothetical 100 basis point adverse move (increase) in interest rates along the entire interest rate curve would adversely affect our annual interest cost by approximately $775,000. RISK FACTORS Our business is subject to numerous risk factors, which should be considered in evaluating our Company and our financial outlook, including the following: There are risks due to recent events, including increased insurance risk, perceived risk of travel and adverse changes in economic conditions, which could negatively affect our business. Due in large part to the terrorist activities of September 11, 2001, and other recent events, we believe that insurance and surety companies are re-examining many aspects of their business, and may take actions including increasing premiums, requiring higher self-insured retentions and deductibles, requiring additional collateral on surety bonds, reducing limits, restricting coverages, imposing exclusions, such as sabotage and terrorism, and refusing to underwrite certain risks and classes of business. Any increased premiums, mandated exclusions, change in limits, coverages, terms and conditions or reductions in the amounts of bonding capacity available may adversely affect our ability to obtain appropriate insurance coverages at reasonable costs, which could have a material adverse effect on our business. Terrorist attacks or acts of war may seriously harm our business. Terrorist attacks or acts of war may cause damage or disruption to our Company, our employees, our facilities and our customers, which could impact our revenues, costs and expenses, and financial condition. The terrorist attacks that took place in the United States on September 11, 2001, were unprecedented. The potential for future terrorist attacks has created many economic and political uncertainties, some of which may have additional material adverse affects on our business, results of operations, and financial condition. The FASB has issued an Exposure Draft "Consolidation of Certain Special Purpose Entities" ("SPE's"), a proposed Interpretation of Accounting Research Bulletin (ARB) No. 51, "Consolidated Financial Statements" that establishes accounting guidance for consolidation of SPE's. 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. There are appraisal risks. Real estate appraisals are only estimates of property values based on a professional's opinion and may not be accurate predictors of the actual amount that we would receive from a property sale. If an appraisal is too high, the property's value could go down upon reappraisal or if the property is sold for a lower price than the appraisal. An appraisal does not guarantee the value of a property. We may need additional funds for the growth and development of our business. If we are unable to obtain these funds, we may not be able to expand our business as planned and this could adversely affect our results of operations and future growth. There is a risk of change of economic conditions in the homebuilding industry. The homebuilding industry historically has been cyclical and is affected significantly by adverse changes in general and local economic conditions, such as: - - employment levels; - - population growth; - - consumer confidence and stability of income levels; - - availability of financing for land acquisitions, construction and permanent mortgages; - - interest rates; - - inventory levels of both new and existing homes; - - supply of rental properties; - - conditions in the housing resale market. 23 There is a current crisis in the United States involving investor confidence due to financial statement fraud and restatement of other issuer financial statements. In response to a stream of business scandals that have decreased investor confidence, landmark corporate and accounting reform legislation has been passed by the US Congress this summer, including creation of the Public Company Accounting Oversight Board. Regulators are continuing the process of reworking accounting issues and policies that previously have been open to interpretation. We have not, nor do we believe that our clients have engaged in overly aggressive accounting strategies. 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. We also consider residual value insurance to be a risk factor. See RVI discussion in Item 7, Management's Discussion and Analysis of Financial Condition and Results of Operations. Our operations are dependant on the continued efforts of our officers and executive management. Our ability to attract and retain business is significantly affected by relationships and the quality of service rendered. The loss of those key officers and members of executive management may cause a significant disruption to our business. Additionally, the loss of such key personnel could materially adversely affect our operations, including our ability to establish and maintain client relationships. 24 ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA STRATEGIC CAPITAL RESOURCES, INC. AND SUBSIDIARIES CONSOLIDATED FINANCIAL STATEMENTS AS OF JUNE 30, 2002 AND 2001 STRATEGIC CAPITAL RESOURCES, INC. AND SUBSIDIARIES CONTENTS PAGE F-2 INDEPENDENT AUDITORS' REPORT PAGE F-3 CONSOLIDATED BALANCE SHEETS AS OF JUNE 30, 2002 AND 2001 PAGE F-4 CONSOLIDATED STATEMENTS OF OPERATIONS FOR THE YEARS ENDED JUNE 30, 2002, 2001 AND 2000 PAGES F-5 - F-6 CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY FOR THE YEARS ENDED JUNE 30, 2002, 2001 AND 2000 PAGE F-7 CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE YEARS ENDED JUNE 30, 2002, 2001 AND 2000 PAGES F-8 - F-22 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS JUNE 30, 2002, 2001 AND 2000 F-1 INDEPENDENT AUDITORS' REPORT The Board of Directors Strategic Capital Resources, Inc. and Subsidiaries Boca Raton, Florida We have audited the accompanying consolidated balance sheets of Strategic Capital Resources, Inc. and subsidiaries as of June 30, 2002 and 2001 and the related consolidated statements of operations, stockholders' equity, and cash flows for the years ended June 30, 2002, 2001 and 2000. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the consolidated financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. As more fully described in Note 1 of the notes to the consolidated financial statements, errors resulting in a net understatement of previously reported interest expense for the years ended June 30, 2001 and 2000 and an overstatement of interest income and income tax expense for the years ended June 30, 2002, 2001 and 2000 were discovered by management of the Company during 2002 and 2003. Accordingly, the consolidated balance sheets as of June 30, 2002 and 2001 and the statements of operations, stockholders' equity and cash flows for the years ended June 30, 2002, 2001 and 2000 have been restated to reflect corrections to previously reported amounts. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of Strategic Capital Resources, Inc. and subsidiaries as of June 30, 2002 and 2001 and the results of their consolidated operations and their consolidated cash flows for the years ended June 30, 2002, 2001 and 2000, in conformity with accounting principles generally accepted in the United States of America. Weinberg & Company, P.A. Certified Public Accountants Boca Raton, Florida November 27, 2002, except for Note 12 which is as of December 19, 2002 and Note 1(Q) which is as of May 9, 2003 F-2 STRATEGIC CAPITAL RESOURCES, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS AS OF JUNE 30, 2002 AND 2001 ----------------------------
ASSETS ------ 2002 2001 (As Restated) (As Restated) ------------ ------------ REVENUE PRODUCING ASSETS Net investment in direct financing arrangements: Model homes $ 16,140,165 $ 34,502,977 Residential real estate 62,020,542 44,524,990 Multi-family residential property 10,010,585 10,116,600 ------------ ------------ Total Revenue Producing Assets 88,171,292 89,144,567 ------------ ------------ OTHER ASSETS Cash and cash equivalents 801,415 3,986,639 Deferred charges, net 848,466 673,382 Deferred income taxes 86,967 328,561 Other 758,923 754,519 ------------ ------------ Total Other Assets 2,495,771 5,743,101 ------------ ------------ TOTAL ASSETS $ 90,667,063 $ 94,887,668 - ------------ ============ ============ LIABILITIES AND STOCKHOLDERS' EQUITY ------------------------------------ LIABILITIES Mortgages and notes payable $ 77,592,476 $ 83,351,379 Accounts payable and accrued expenses 1,739,401 1,055,764 Unearned income 173,038 368,003 Current income taxes 237,093 -- Deferred income taxes 615,035 420,000 Stockholder loans 1,909,200 1,223,100 ------------ ------------ Total Liabilities 82,266,243 86,418,246 ------------ ------------ COMMITMENTS AND CONTINGENCIES STOCKHOLDERS' EQUITY Convertible preferred stock, $.01 par value, 5,000,000 shares authorized, 400,000 shares issued and outstanding in 2001 -- 4,000 Common stock, $.001 par value, 25,000,000 shares authorized, 87,560 shares issued and 77,192 shares outstanding in 2002, 87,560 shares issued and 77,192 shares outstanding in 2001 88 88 Additional paid-in capital 8,847,616 9,744,948 Treasury stock, 10,368 shares at cost (457,999) (457,999) Retained earnings (deficit) 11,115 (821,615) ------------ ------------ TOTAL STOCKHOLDERS' EQUITY 8,400,820 8,469,422 ------------ ------------ TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 90,667,063 $ 94,887,668 - ------------------------------------------ ============ ============
See notes to consolidated financial statements F-3 STRATEGIC CAPITAL RESOURCES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS FOR THE YEARS ENDED JUNE 30, 2002, 2001 AND 2000 ------------------------------------------------
2002 2001 2000 (As Restated) (As Restated) (As Restated) ----------- ----------- ----------- REVENUES AND OTHER INCOME Interest income on direct financing arrangements: Model homes $ 2,938,599 $ 4,810,323 $ 4,842,346 Residential real estate 7,106,852 3,264,599 -- Multi-family residential property 819,472 953,965 948,702 Gain on sale of model home properties under direct financing arrangements 393,859 377,392 323,810 Interest and other income 81,470 135,798 323,620 ----------- ----------- ----------- Total Revenues and Other Income 11,340,252 9,542,077 6,438,478 ----------- ----------- ----------- COSTS AND OPERATING EXPENSES Interest and financing costs to financial institutions 4,956,835 5,597,692 3,836,260 Interest and financing costs to stockholders 214,030 387,086 347,880 Depreciation and amortization 1,547,136 930,942 664,751 Corporate selling, general and administrative 2,564,342 1,536,118 1,553,940 Impairment charge 91,122 1,000,000 100,000 ----------- ----------- ----------- Total Costs and Operating Expenses 9,373,465 9,451,838 6,502,831 ----------- ----------- ----------- INCOME (LOSS) BEFORE INCOME TAX EXPENSE 1,966,787 90,239 (64,353) INCOME TAX EXPENSE 1,079,057 71,579 46,060 ----------- ----------- ----------- NET INCOME (LOSS) 887,730 18,660 (110,413) PREFERRED STOCK DISTRIBUTIONS 55,000 85,000 120,000 ----------- ----------- ----------- INCOME (LOSS) APPLICABLE TO COMMON STOCKHOLDERS $ 832,730 $ (66,340) $ (230,413) =========== =========== =========== EARNINGS PER SHARE DATA: Basic earnings (loss) per share $ 10.79 $ (.85) $ (2.90) =========== =========== =========== Diluted earnings (loss) per share $ 10.73 $ (.85) $ (2.90) =========== =========== ===========
See notes to consolidated financial statements F-4 STRATEGIC CAPITAL RESOURCES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY FOR THE YEARS ENDED JUNE 30, 2002, 2001 AND 2000 ------------------------------------------------
Preferred Stock Common Stock Additional Treasury Stock Retained ------------------------ ------------------------ Paid-In ------------------------- Earnings Shares Amount Shares Amount Capital Shares Amount (Deficit) Total ----------- ----------- ----------- ----------- ----------- ----------- ----------- ----------- ----------- Balance, July 1, 1999, as previously reported 400,000 $ 4,000 85,060 $ 85 $ 8,363,479 (5,541) $ (282,786) $ 351,308 $ 8,436,086 Prior period adjustment to account for financing warrants -- -- -- -- 876,170 -- -- (876,170) -- ----------- ----------- ----------- ----------- ----------- ----------- ----------- ----------- ----------- Balance, July 1, 1999 (as restated) 400,000 4,000 85,060 85 9,239,649 (5,541) (282,786) (524,862) 8,436,086 Treasury stock purchased -- -- -- -- -- (1,211) (60,390) -- (60,390) Preferred distributions -- -- -- -- -- -- -- (120,000) (120,000) Issuance of financing warrants -- -- -- -- 235,660 -- -- -- 235,660 Net loss (as restated) -- -- -- -- -- -- -- (110,413) (110,413) ----------- ----------- ----------- ----------- ----------- ----------- ----------- ----------- ----------- Balance, June 30, 2000 (as restated) 400,000 4,000 85,060 85 9,475,309 (6,752) (343,176) (755,275) 8,380,943 Treasury stock purchased -- -- -- -- -- (3,616) (114,823) -- (114,823) Financing warrants exercised -- -- 2,500 3 497 -- -- -- 500 Preferred distributions -- -- -- -- -- -- -- (85,000) (85,000) Issuance of financing warrants -- -- -- -- 269,142 -- -- -- 269,142 Net income (as restated) -- -- -- -- -- -- -- 18,660 18,660 ----------- ----------- ----------- ----------- ----------- ----------- ----------- ----------- -----------
See notes to consolidated financial statements F-5 STRATEGIC CAPITAL RESOURCES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY FOR THE YEARS ENDED JUNE 30, 2002, 2001 AND 2000 ------------------------------------------------
Preferred Stock Common Stock Additional Treasury Stock Retained ------------------------ ------------------------ Paid-In ------------------------ Earnings Shares Amount Shares Amount Capital Shares Amount (Deficit) Total ----------- ----------- ----------- ----------- ----------- ----------- ----------- ----------- ----------- Balance, June 30, 2001 (as restated) 400,000 4,000 87,560 88 9,744,948 (10,368) (457,999) (821,615) 8,469,422 Preferred distributions -- -- -- -- -- -- -- (55,000) (55,000) Preferred stock redemption (400,000) (4,000) -- -- (996,000) -- -- -- (1,000,000) Issuance of financing warrants -- -- -- -- 98,668 -- -- -- 98,668 Net income (as restated) -- -- -- -- -- -- -- 887,730 887,730 ----------- ----------- ----------- ----------- ----------- ----------- ----------- ----------- ----------- BALANCE, JUNE 30, 2002 (AS RESTATED) -- $ -- 87,560 $ 88 $ 8,847,616 $ (10,368) $ (457,999) $ 11,115 $ 8,400,820 =========== =========== =========== =========== =========== =========== =========== =========== ===========
See notes to consolidated financial statements F-6 STRATEGIC CAPITAL RESOURCES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE YEARS ENDED JUNE 30, 2002, 2001 AND 2000 ------------------------------------------------
2002 2001 2000 (As Restated) (As Restated) (As Restated) ------------ ------------ ------------ CASH FLOWS FROM OPERATING ACTIVITIES: Net income (loss) $ 887,730 $ 18,660 $ (110,413) ------------ ------------ ------------ Adjustments to reconcile net income (loss) to net cash provided by operating activities: Amortization expense 1,530,124 912,191 647,300 Depreciation expense 17,012 18,751 17,451 Deferred income taxes 436,629 (23,421) (21,140) Gain on sale of model home properties under direct financing arrangements (393,859) (377,396) (323,810) Impairment charge 91,122 1,000,000 100,000 Interest expense from issuances of warrants 98,668 269,142 235,660 Multi-family residential property interest expense 106,015 58,552 52,847 Changes in operating assets and liabilities: (Increase) in other assets (4,404) (418,554) (241,746) Increase (decrease) in current income taxes 237,093 36,000 (9,800) Increase in accounts payable and accrued expenses 683,637 356,897 169,236 Increase (decrease) in unearned income (194,965) 11,149 188,611 ------------ ------------ ------------ Total adjustments 2,607,072 1,843,311 814,609 ------------ ------------ ------------ Net Cash Provided By Operating Activities 3,494,802 1,861,971 704,196 ------------ ------------ ------------ CASH FLOWS FROM INVESTING ACTIVITIES: Increase in investment in properties under direct financing arrangements: Model homes -- -- (586,183) Residential real estate (11,469,091) -- -- Proceeds from sale of properties under direct financing arrangements: Model homes 1,878,105 1,913,058 3,186,506 Residential real estate 5,680,884 70,839 -- Loan advance -- -- (1,000,000) Proceeds from note receivable -- 650,000 350,000 Capital expenditures -- (9,513) (3,933) ------------ ------------ ------------ Net Cash (Used In) Provided By Investing Activities (3,910,102) (2,624,384) 1,946,390 ------------ ------------ ------------ CASH FLOWS FROM FINANCING ACTIVITIES: Proceeds from mortgages and notes payable -- 416,645 -- Principal payments on mortgages payable (459,716) (1,301,754) (958,886) Deferred finance charges (1,705,208) (948,012) (566,494) Proceeds from stockholder loans 435,000 353,680 -- Repayments of stockholder loans (485,000) (272,000) (183,987) Preferred distributions (55,000) (85,000) (120,000) Redemption of preferred stock (500,000) -- -- Purchase of treasury stock -- (114,823) (60,390) ------------ ------------ ------------ Net Cash Used In Financing Activities (2,769,924) (1,951,264) (1,889,757) ------------ ------------ ------------ NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS (3,185,224) 2,535,091 760,829 CASH AND CASH EQUIVALENTS - BEGINNING 3,986,639 1,451,548 690,719 ------------ ------------ ------------ CASH AND CASH EQUIVALENTS - ENDING $ 801,415 $ 3,986,639 $ 1,451,548 - ---------------------------------- ============ ============ ============
See notes to consolidated financial statements F-7 STRATEGIC CAPITAL RESOURCES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS JUNE 30, 2002, 2001 AND 2000 ---------------------------- NOTE 1 DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - ----------------------------------------------------------------------------- (A) Description of Business - --------------------------- Strategic Capital Resources, Inc. and Subsidiaries (the "Company") provides specialized financing for major homebuilders and real estate developers ("clients") throughout the United States. These arrangements may take several forms which include direct financing leases, option agreements, or management agreements. Such arrangements may represent off-balance sheet transactions for the Company's clients. The Company is engaged in such arrangements in three lines of business, consisting of one reportable segment, all with major homebuilders and real estate developers throughout the United States (See Note 2(A) and (B)): 1) Fully furnished model homes. 2) Residential real estate acquisition and development. 3) Multi-family residential property. (B) Basis of Presentation - ------------------------- This summary of significant accounting policies of the Company is presented to assist in understanding the consolidated financial statements. The consolidated financial statements and notes are representations of the Company's management, which is responsible for their integrity and objectivity. These accounting policies conform to accounting principles generally accepted in the United States of America and have been consistently applied in the preparation of the consolidated financial statements. (C) Principles of Consolidation - ------------------------------- The accompanying consolidated financial statements include the accounts of Strategic Capital Resources, Inc. and of its wholly owned subsidiaries, including special purpose subsidiaries. Intercompany transactions have been eliminated in consolidation. (D) Special Purpose Subsidiaries - -------------------------------- The Company has several wholly owned special purpose subsidiaries, all of which are consolidated. They were 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. (E) Special Purpose Entities - ---------------------------- The Company does not have off-balance sheet arrangements with special purpose entities. (F) 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 the financial statements, and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. (G) Fair Value of Financial Instruments - --------------------------------------- The carrying value of all financial instruments, including debt, accounts payable and accrued expenses, cash and temporary cash investments, approximates their fair value at year-end due to the relatively short duration of such instruments. (H) Segment Reporting - --------------------- The Company determined that its operations involve one reportable segment, real estate financing arrangements. F-8 STRATEGIC CAPITAL RESOURCES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS JUNE 30, 2002, 2001 AND 2000 ---------------------------- (I) Concentration of Credit Risk - -------------------------------- Financial instruments, which potentially subject the Company to concentration of credit risk, consist principally of cash and a customer receivable included in other assets, described below. At June 30, 2002 and 2001, the Company had cash balances with two banks, which were, in the aggregate, $154,279 and $3,184,000 respectively, in excess of the $100,000 limit insured by the Federal Deposit Insurance Corporation for each bank. Based on credit analysis of the financial institutions with which it does business, the Company believes it is not exposed to any significant credit risk on cash. A client owes the Company $668,000 for past due lease payments, real estate taxes, other operating costs under the leases, model home resale deficiencies as well as un-reimbursed costs and expenses. The receivable is included in other assets in the accompanying consolidated balance sheets. The client filed Chapter 11 bankruptcy reorganization in May 2002. The receivable is covered by surety bonds, other insurance, as well as a claim on the assets of the client. The Company has commenced the process of filing proofs of claim, making appropriate motions and taking other actions in the Bankruptcy Court to recover and receive lease payments, real estate taxes and other operating costs under the leases in addition to the outstanding balances. Management believes that the Company has sufficient insurance coverage and surety bonds to fully cover the amount due. Also See Note 2(A)). (J) Depreciation - ---------------- Office furniture and equipment (included in other assets) are carried at cost and are depreciated on the straight-line method over five years. At June 30, 2002, office furniture and equipment were fully depreciated. (K) Treasury Stock - ------------------ Treasury stock is recorded at cost. Issuance of treasury shares is accounted for on a first-in, first-out basis. Differences between the cost of treasury shares and the re-issuance proceeds are charged to additional paid-in capital, if reissued. No shares have been reissued. (L) New Accounting Pronouncements - --------------------------------- The Financial Accounting Standards Board ("FASB") has recently issued several new Statements of Financial Accounting Standards ("SFAS"). Statement No. 141, "Business Combinations" supersedes Accounting Principles Board ("APB") Opinion No. 16 and various related pronouncements. Pursuant to the new guidance in Statement No. 141, all business combinations must be accounted for under the purchase method of accounting; the pooling-of-interests method is no longer permitted. SFAS 141 also establishes new rules concerning the recognition of goodwill and other intangible assets arising in a purchase business combination and requires disclosure of more information concerning a business combination in the period in which it is completed. This statement is generally effective for business combinations initiated on or after July 1, 2001. Statement No. 142, "Goodwill and Other Intangible Assets" supercedes APB Opinion 17 and related interpretations. Statement No. 142 establishes new rules on accounting for the acquisition of intangible assets acquired in a business combination and the manner in which goodwill and all other intangibles should be accounted for subsequent to their initial recognition in a business combination accounted for under SFAS No. 141. Under SFAS No. 142, intangible assets should be recorded at fair value. Intangible assets with finite useful lives should be amortized over such period and those with indefinite lives should not be amortized. All intangible assets being amortized as well as those that are not, are both subject to review for potential impairment under SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed of". SFAS No. 142 also requires that goodwill arising in a business combination should not be amortized but is subject to impairment testing at the reporting unit level to which the goodwill was assigned to at the date of the business combination. SFAS No. 142 is effective for the fiscal years beginning after December 15, 2001 and must be applied as of the beginning of such year to all goodwill and other intangible assets that have already been recorded in the balance sheet as of the first day in which SFAS No. 142 is initially applied, regardless of when such assets were acquired. Goodwill acquired in a business combination whose acquisition date is on or after July 1, 2001, should not be amortized, but should be reviewed for impairment pursuant to SFAS No. 121, even though SFAS No. 142 has not yet been adopted. However, previously acquired goodwill should continue to be amortized until SFAS No. 142 is first adopted. Statement No. 143 "Accounting for Asset Retirement Obligations" establishes standards for the initial measurement and subsequent accounting for obligations associated with the sale, abandonment, or other type of disposal of long-lived tangible assets arising from the acquisition, construction, or development and/or normal operation of such assets. SFAS No. 143 is effective for the fiscal years beginning after June 15, 2002, with earlier application encouraged. F-9 STRATEGIC CAPITAL RESOURCES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS JUNE 30, 2002, 2001 AND 2000 ---------------------------- In August 2001, the FASB issued SFAS 144, "Accounting for the Impairment or Disposal of Long-Lived Assets". This statement addresses financial accounting and reporting for the impairment or disposal of long-lived assets and supercedes FASB Statement No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of". The provisions of the statement are effective for financial statements issued for the fiscal years beginning after December 15, 2001. In April 2002, the FASB issued SFAS 145, Rescission of FASB Statements No. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical Corrections. SFAS 145 rescinds the provisions of SFAS No. 4 that requires companies to classify certain gains and losses from debt extinguishments as extraordinary items, eliminates the provisions of SFAS No. 44 regarding transition to the Motor Carrier Act of 1980 and amends the provisions of SFAS No. 13 to require that certain lease modifications be treated as sale leaseback transactions. The provisions of SFAS 145 related to classification of debt extinguishments are effective for fiscal years beginning after May 15, 2002. Earlier application is encouraged. In July 2002, the FASB issued SFAS No. 146, "Accounting for Restructuring Costs." SFAS 146 applies to costs associated with an exit activity (including restructuring) or with a disposal of long-lived assets. Those activities can include eliminating or reducing product lines, terminating employees and contracts and relocating plant facilities or personnel. Under SFAS 146, the Company will record a liability for a cost associated with an exit or disposal activity when that liability is incurred and can be measured at fair value. SFAS 146 will require the Company to disclose information about its exit and disposal activities, the related costs, and changes in those costs in the notes to the interim and annual financial statements that include the period in which an exit activity is initiated and in any subsequent period until the activity is completed. SFAS 146 is effective prospectively for exit or disposal activities initiated after December 31, 2002, with earlier adoption encouraged. Under SFAS 146, a company cannot restate its previously issued financial statements and the new statement grandfathers the accounting for liabilities that a company had previously recorded under Emerging Issues Task Force Issue 94-3. The adoption of these pronouncements is not expected to have a material effect on our consolidated financial statements. (M) Cash and Cash Equivalents - ----------------------------- For financial statement presentation purposes, the Company considers all highly liquid investments with an original maturity of three months or less to be cash equivalents. (N) Revenue Recognition and Concentration - ----------------------------------------- The Company accounts for its model homes and residential real estate development financing arrangements under the direct financing method of accounting prescribed under SFAS No. 13, Accounting for Leases. Under the direct financing method of accounting, the assets are recorded as an investment in direct financing 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. Gain on sale of model home properties under direct financing arrangements is recorded at the time each model home property sale is closed and when title and possession have been transferred to the buyer. Since the residential real estate transactions are financing arrangements in the form of purchase options, the Company recognizes the related interest income monthly. There is no gain from the sales of this real estate because the sales price equals the Company's cost. For the years ended June 30, 2002, 2001 and 2000, the Company sold $41,947,444, $1,416,802 and $0, respectively. The Company accounts for its multi-family residential property arrangement as a direct financing arrangement. Interest income is recorded, as earned over the term of the agreement. Also see Note 2(B). Since 2000, three of our major clients have represented a significant potion of our total revenues. Of our total revenues, one of these clients represents 57% of our revenues during 2002, 52% in 2001, and 57% in 2000. A second client represented 23% in 2002, 15% in 2001, and 22% of our revenues in 2000. A third client represented 11% of our total revenue in 2001. (O) Earnings Per Common Share - ----------------------------- Basic earnings per common share is computed by dividing the net income applicable to common stock stockholders by the weighted average number of shares of common stock outstanding during the period. Diluted earnings per share is computed by dividing net income by the weighted average number of common shares including the dilutive effect of common share equivalents then outstanding. F-10 STRATEGIC CAPITAL RESOURCES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS JUNE 30, 2002, 2001 AND 2000 ---------------------------- In 2002, the Board of Directors and a majority of the Company's stockholders approved a 200 for 1 reverse stock split of the outstanding shares of the Company's common stock, effective June 13, 2002. The Company's capital structure, weighted average common shares and earnings per share have been restated for all years presented to give retroactive effect to the reverse stock split. The following is the calculation of basic and diluted earnings per share for the years ended June 30, 2002, 2001 and 2000:
For the Year Ended June 30, -------------------------------------------- 2002 2001 2000 (As Restated) (As Restated) (As Restated) ------------ ------------ ------------ Earnings: Net income (loss) $ 887,730 $ 18,660 $ (110,413) Dividends on preferred shares (55,000) (85,000) (120,000) ------------ ------------ ------------ Income (loss) applicable to common stockholders $ 832,730 $ (66,340) $ (230,413) ============ ============ ============ Basic: Income (loss) applicable to common stockholders $ 832,730 $ (66,340) $ (230,413) ============ ============ ============ Weighted average shares outstanding during the year 77,192 78,009 79,363 ============ ============ ============ Basic earnings (loss) per share $ 10.79 $ (.85) $ (2.90) ============ ============ ============ Diluted: Income (loss) applicable to common stockholders $ 832,730 $ (66,340) $ (230,413) ============ ============ ============ Weighted average shares outstanding during the year 77,192 78,009 79,363 Effect of dilutive securities: Stock options 293 -- -- Warrants 110 -- -- ------------ ------------ ------------ Diluted weighted average shares outstanding 77,595 78,009 79,363 ============ ============ ============ Diluted earnings (loss) per share $ 10.73 $ (.85) $ (2.90) ============ ============ ============
Additionally, the Company's 400,000 shares of preferred stock were convertible into 400,000 shares of pre-split common stock at $2.50 per share. Such conversion has not been assumed for the years ended June 30, 2001 or 2000, since the effect on loss per share would be anti-dilutive. The preferred shares were redeemed during the year ended June 30, 2002 (See Note 8). (P) Reclassifications - --------------------- Certain amounts have been reclassified in prior years to conform to the current year's presentation. Specifically, the proceeds from the sale of model homes under direct financing arrangements and the related costs have been reported as a net gain on the sale of model home properties under direct financing arrangements in the consolidated statements of operations. In addition, sales of residential real estate under direct financing arrangements and the related costs which are typically the same amount are no longer reported as operating revenue and operating expense. The multi-family operating expenses (property taxes, insurance and repairs) have been netted against the multi-family residential property interest income on direct financing arrangements. F-11 STRATEGIC CAPITAL RESOURCES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS JUNE 30, 2002, 2001 AND 2000 ---------------------------- (Q) Restatement of Consolidated Financial Statements Resulting from the Correction of Errors - ----------------------------------------------------------------------- The accompanying consolidated balance sheets as of June 30, 2002 and 2001 and the consolidated statements of operations, stockholders' equity and cash flows for the years ended June 30, 2002, 2001 and 2000 have been restated to correct errors resulting in the net understatement of interest expense and additional paid-in capital and the overstatement of interest income and income tax expense. One of the errors resulted from the Company not recording the effects of detachable warrants issued with stockholder debt. Also see Notes 7 and 8(C). The effect of the error was to increase non-cash interest expense and decrease net income by $269,142 and $235,660 for 2001 and 2000, respectively. The effect of the error was to also increase additional paid-in capital by $1,380,972 at June 30, 2001. The second error resulted from the Company's over-accrual of interest expense at June 30, 2001. The effect of the error was to decrease interest expense and increase net income by $98,395 for 2001. The effect of the error was to also increase retained earnings and decrease accrued expenses by $98,395 at June 30, 2001. Additionally in May 2003, after consultation with the Securities and Exchange Commission, the Company's management discovered that it had not properly accounted for the implicit interest rate in the multi-family residential property agreement. As a result of the correction, interest income decreased by $106,015, $58,552 and $52,847 for the years ended June 30, 2002, 2001 and 2000, respectively. Additionally, income tax expense was reduced by $42,406, $23,421 and $21,140 for the years ended June 30, 2002, 2001 and 2000, respectively. The adjustment to interest income also resulted in a decrease to the net investment in the multi-family residential property by $106,015 and $111,399 at June 30, 2002 and 2001, respectively. The net effect of the errors on income (loss) per share was to reduce previously reported earnings per share of $11.61, $.01 and $.00 for the years ended June 30, 2002, 2001 and 2000, respectively to an income (loss) per share of $10.79, $(.85) and $(2.90), respectively. The retained earnings (deficit), additional paid-in capital, the net investment in multi-family residential property and the deferred tax asset in the June 30, 2002 and 2001 consolidated balance sheets, and the net income (loss), interest income and income tax expense in the consolidated statements of operations, stockholders' equity and cash flows for the years ended June 30, 2002, 2001 and 2000 have been restated for the effects of the adjustments resulting from the correction of the errors. NOTE 2 DIRECT FINANCING ARRANGEMENTS - ------------------------------------ (A) Model Home Program - ---------------------- The Company has entered into a series of direct financing arrangements with various major homebuilders and real estate developers that provide for monthly payments, which are negotiated on a per transaction basis and are designed to cover our debt service as well as to provide us positive cash flow. The monthly payments are recorded to interest income on direct financing arrangements in the accompanying consolidated statements of operations. In addition, under the terms of the agreements, all expenses arising during the term of the agreement are paid by the client including, but not limited to, utilities, homeowner association assessments, maintenance, insurance and real estate taxes. The arrangements terminate only upon the sale of the model homes. In connection therewith, the Company has entered into net listing agreements with the real estate brokerage affiliates of some of the clients. Such agreements provide for commissions and incentives, which are negotiated on a per transaction basis. The sales price may not be less than the original purchase price unless the client elects to pay any deficiency at the closing. All clients are required to provide a surety bond, letter of credit or equivalent financial instrument in order to insure their performance of their obligations. The financial instruments provided by clients have historically ranged from 5% to 110% of the Company's purchase price of the model homes. Residual Value Insurance (RVI) is obtained to insure 80% -100% of the acquisition cost of the model homes. In some cases, the RVI covers the interest income derived from such direct financing arrangements and other homebuilder contractual obligations to the Company. The premiums are paid annually in advance and are non-refundable and not proratable. They are a percentage of the insured value. F-12 STRATEGIC CAPITAL RESOURCES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS JUNE 30, 2002, 2001 AND 2000 ---------------------------- All such insurance has been obtained from major domestic based insurance companies rated "A" through "AAA" by major credit rating agencies. The intent of these arrangements is to reduce the cost of funds, and to increase the amounts borrowed, thereby increasing profitability and leverage. The Company accounts for its model home transactions under the provisions of SFAS 13, Accounting for Leases. Since the Company has RVI for the model home transactions, the homes are considered direct financing arrangements rather than operating leases. Approximately 35% of the Company's interest income on model home direct financing arrangements was derived from two homebuilders for the year ended June 30, 2002. (B) Multi-Family Residential Property - ------------------------------------- On July 15, 1999, we purchased a 288 unit multi-family residential property in Jacksonville, Florida, for a purchase price of $10,227,999. The purchase price was paid as follows: Assumption of existing first mortgage $ 4,927,999 New loan 5,300,000 --------------- Total Purchase Price $ 10,227,999 =============== At the time of purchase, the Company entered into a five-year management agreement with a non-affiliated independent management company. The management company is responsible for the operation of the property, retains all income from the property and is responsible for any losses. The Company receives a monthly fee comprised of the sum of the debt service to cover the assumed existing first mortgage ($43,365) plus required escrows for real estate taxes, property insurance and repair reserve, plus a 12% annual return on the $5,300,000 new loan. The escrow portion is variable based on changes in estimated expenses. The multi-family operating expenses (property taxes, insurance and repairs) have been netted against the multi-family interest income in the accompanying consolidated statements of operations. The Company's profit on the transaction arises from the difference between the 12% return and interest expense paid by the Company on its $5,300,000 loan. The management company receives the benefit of the property appreciation, rent and occupancy increases. The annual return is 11% for the first two years, 12% for year three and 13% for years four and five. The average return over the term of the agreement is 12%. The management company has an option to purchase the property any time during the last four years of the agreement at an amount equal to the balance of the first mortgage plus an interest adjustment of $121,527, representing the difference between the 11% paid and the 12% due us, bearing interest of 12% since August 25, 2001, plus $5,300,000. If they fail to exercise the option, the management company is required to pay a balloon payment of $5,300,000 at the end of the five years. A performance bond, issued by an insurance company rated "AAA" by Moody's and Standard & Poors, in the amount of $8,335,000 has been obtained and paid for by the management company to insure the payment and performance of the management company. The performance bond insures the monthly payments by the management company and the $5,300,000 balloon payment at the end of the agreement. The Company accounts for the multi-family residential property as a direct financing arrangement, in accordance with the provisions of Statement of Financial Accounting Standards ("SFAS") No. 13, Accounting for Leases, because the agreement contains a bargain purchase option. In May 2003, after consultation with the Securities and Exchange Commission, the Company's management discovered that it had not properly accounted for the implicit interest rate in the agreement and has accounted for the prior period adjustment as a correction of error in the accompanying consolidated financial statements. Also see Note 1(Q). SFAS No. 13 dictates the following accounting treatment for this transaction: (1) Using the actual purchase price of $10,227,999, the bargain purchase option at the end of five (5) years of $4,330,902 and the minimum lease payments, an implicit interest rate of 10.295% is derived utilizing present value tables; (2) the implicit interest rate is then applied to the purchase price and an interest income stream is generated for the five (5) years; (3) the implicit amount is compared to the cash amount received (net of executory payments for taxes and insurances); (4) since the cash received is greater than the implicit interest, the excess is recorded as a reduction to the net investment in the accompanying consolidated balance sheets, resulting in a net investment of $10,010,585 and $10,116,600 at June 30, 2002 and 2001, respectively. The reduction to the net investment also results in an increase in a deferred tax asset, since the reduction is being recognized for book purposes and not for tax purposes. F-13 STRATEGIC CAPITAL RESOURCES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS JUNE 30, 2002, 2001 AND 2000 ---------------------------- The table below reflects the change to the results previously reported.
Implicit Reduction Fiscal Interest to Net Blended Deferred Net Decrease Year Cash Received Income Investment Tax Rate Tax Benefit To Earnings ----------- ------------- ------------- ------------ ----------- ----------- ------------- 6/30/2000 $ 1,103,386 $ 1,050,539 $ 52,847 40.0% $ 21,140 $ 31,707 6/30/2001 1,103,386 1,044,834 58,552 40.0% 23,421 35,131 6/30/2002 1,143,136 1,037,121 106,015 40.0% 42,406 63,609 ------------- ------------- ------------ ----------- ------------- Total $ 3,349,908 $ 3,132,494 $ 217,414 $ 86,967 $ 130,447 ============= ============= ============ =========== =============
(C) Residential Real Estate Acquisition and Development Arrangements The Company purchases parcels of residential real estate selected by homebuilders from third parties. The parcels of land may require entitlement and development or consist of finished lots. The Company simultaneously enters into a fixed price development agreement to develop the parcels of land and in all cases the Company requires the developer to provide completion bonds for some or all work by a surety company acceptable to the Company. The Company enters into these transactions with funding from banks and these loans are secured by specific assets of the Company. As development occurs, the Company retains ownership of the developed real estate. The Company approves draw requests paid to the developer under the development agreements. The Company or their banks fund the draw. If the Company funds the draws, the banks reimburse the Company upon request. An exclusive option to purchase agreement is entered into with the homebuilder simultaneously with the land acquisition and development contract. The terms and conditions of each transaction are project-specific (interest rate on the option, term, takedown schedule, etc.) The interest rate on the option is negotiated with each client. It is based on the credit of the client, estimated duration and size of the project and interest rates in effect at the time. The interest rate on the option is a fixed percentage, is non-refundable, is payable monthly in advance by the homebuilder and is fully earned. The interest rate on the option is calculated by applying the fixed percentage to the Company's net investment in the real estate (cost of the land plus development cost incurred less options exercised by the homebuilder). Our financing agreements with our lenders may call for a fixed interest rate or variable rate. These factors are all considered during negotiations to maintain the Company's profit margins. Each time the homebuilder exercises their option to purchase the residential real estate there is a formal real estate closing and title passes to the homebuilder. If the homebuilder fails to exercise their options to purchase the real estate, the Company has the right to sell the real estate to another party and there is no refund of the interest received. In addition, the Company has the right to draw against the developer's letter of credit or performance bond. Since the option sales price of the real estate to the homebuilder is equal to the Company's cost of the land plus costs to develop, there typically is no gain or loss on the sale of the residential real estate. We grant our clients an option to acquire finished lots in staged takedowns. In consideration for the option we receive a deposit in the form of a performance bond or a letter of credit equal to 20% or less of the total purchase price as well as an option maintenance fee which is payable monthly in advance. The option fees are fully earned when paid and non-refundable. The client has the right to terminate their obligations under the option agreements by foregoing the deposit, paying for the finished lots exercised and any other penalties provided for in the agreements. We have legal title to these assets. If the client terminated the agreements we have the risk of a decline in the market value of the property. RVI is obtained to insure 80% -100% of the fully developed cost of the residential real estate. In some cases, the RVI covers the option income derived from such development arrangements and other homebuilder contractual obligations to the Company. The premiums are paid annually in advance and are non-refundable and not proratable. They are a percentage of the insured value. Approximately 90% of the interest income relating to the options on residential real estate was derived from two homebuilders for the year ended June 30, 2002. NOTE 3 NET INVESTMENT IN DIRECT FINANCING ARRANGEMENTS - ------------------------------------------------------ The components of the net investment in direct financing arrangements are as follows: June 30, ------------------------- 2002 2001 ----------- ----------- Gross investment in direct financing arrangements $88,171,292 $89,144,567 Less: unearned income 173,038 368,003 ----------- ----------- Total net investment in direct financing arrangements $87,998,254 $88,776,564 =========== =========== F-14 STRATEGIC CAPITAL RESOURCES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS JUNE 30, 2002, 2001 AND 2000 ---------------------------- NOTE 4 IMPAIRMENT CHARGES - ------------------------- During the year ended June 30, 1997, the Company disposed of its construction subsidiary, Iron Eagle Contracting and Mechanical, Inc. ("IECM"). Under the terms of the agreement, the Company sold the net assets of IECM for a note in the amount of $1,312,500. The note bears interest at the prime rate plus 1%. Interest 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, the Company filed a lawsuit against Monarch, and its subsidiaries, IECM and Tahoe Realty Corp., as well as two of its officers and other individuals, in the Supreme Court of the State of New York, County of Queens. The action asserts seven separate causes of action arising out of a default in payment of the remaining $1,100,000 balance due under the promissory note evidencing moneys due to the Company from Monarch as a result of its purchase of IECM from the Company. The Court granted the Company's motion for summary judgment during March 2000 against Monarch in the sum of $1,100,000 plus interest from January 1, 1999, a judgment of possession of all collateral pledged by Monarch and judgment that the Company is the rightful owner and entitled to immediate possession of the collateral, impressing a trust on said collateral, declaring defendants to be trustees of said collateral and directing said trustees to deliver such collateral to the Company. 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. Management has pursued the action appropriately and aggressively since its inception. While it is difficult to predict the outcome of any litigation, there are no counterclaims asserted against the Company and there does not appear to be a range of potential loss to the Company. During the years ended June 30, 2001 and 2000, the Company took impairment charges of $1,000,000 and $100,000, respectively 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. During May 2000, we, along with FPE Funding, LLC ("FPE") 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 the Company. The basis of the claim is that the Company allegedly failed to honor its commitment to lend for the acquisition of a manufacturing facility, resulting in damages to the defendants/counter-plaintiffs, who borrowed the money directly from the Company's lender at allegedly a greater cost and who allegedly had to pay a greater price for the facility as a result of the alleged delay in the closing. The Company believes the counterclaim is without merit and will vigorously defend itself. As such, there is no accrual in the accompanying consolidated balance sheets. The Company's claims were substantially dismissed by the lower court and affirmed by the appellate court. The Company has appealed to the Tennessee Supreme Court and have additional claims that have not as yet been filed pending the appeal outcome. The company 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, the Company has impaired the entire balance. For the year ended June 30, 2002, the Company recorded an impairment charge for the receivable amounting to $91,122. NOTE 5 DEFERRED CHARGES - ----------------------- Deferred charges consist of the following: June 30, -------------------------- 2002 2001 -------- -------- Deferred finance charges $848,466 $611,222 Deferred offering costs -- 62,160 -------- -------- $848,466 $673,382 ======== ======== F-15 STRATEGIC CAPITAL RESOURCES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS JUNE 30, 2002, 2001 AND 2000 ---------------------------- Deferred finance charges are carried at cost. Amortization is provided on the straight-line method over the lives of the loans to which the deferred finance charges relate. Amortization expense of deferred finance charges was $1,530,124 for the year ended June 30, 2002, $901,591 for the year ended June 30, 2001 and $635,186 for the year ended June 30, 2000. NOTE 6 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 June 30, 2002. The maturity dates range from one to fifteen years. During December 2001, the Company consolidated its $15,000,000 and $45,000,000 revolving credit facility into one commercial revolving line of credit totaling a maximum loan amount of $60,000,000 which expires August 2003. The interest rate is a thirty-day LIBOR based floating rate plus a premium and a floor. In addition to the mortgages being secured by specific properties, all loans are secured by specific leases and related security bonds and/or residual value insurance policies. At June 30, 2002, maturities of mortgages and notes payable are as follows: Year ending June 30, 2003 $ 8,608,912 Year ending June 30, 2004 60,582,454 Year ending June 30, 2005 4,450,752 Year ending June 30, 2006 212,509 Year ending June 30, 2007 230,055 Thereafter 3,507,794 ------------- $ 77,592,476 ============= NOTE 7 STOCKHOLDER LOANS PAYABLE - -------------------------------- Stockholder loans payable arose from advances various stockholders made to the Company. The loans are payable on demand, bearing interest at 9%, which is payable monthly. Interest on stockholder loans payable totaled $115,361 for the year ended June 30, 2002, $109,653 for the year ended June 30, 2001, and $112,220 for the year ended June 30, 2000. Management believes that the loans from stockholders were made on equal or better terms than were available elsewhere. During the years ended June 30, 2002, 2001, and 2000, the Company issued a total of 5,366, 7,460, and 5,730 detachable warrants, respectively, to stockholders who had made loans to the Company. The Company does not believe that the detachable warrants are embedded derivatives under the provisions of SFAS 133, Accounting for Derivative Instruments and Hedging Activities, and therefore accounted for the detachable warrants in accordance with APB No. 14, Accounting for Convertible Debt and Debt Issued with Stock Purchase Warrants. In accordance with APB 14, the Company apportioned fair value (see below) to the warrants using the Black-Scholes pricing model. Fair value was determined using the closing market prices of the Company's common stock on the grant date. The fair value of the warrants on the date of grant was treated as additional interest expense in the year of grant since the stockholder loans are due on demand. In the past, the Company did not account for the grants of the warrants. The Company is currently accounting for the warrants as a correction of an error in the accompanying consolidated financial statements (See Note 1(Q)). The additional non-cash interest expense resulting from the accounting for the warrants amounted to $98,668, $269,142 and $235,660 for the years ended June 30, 2002, 2001 and 2000, respectively. A note for $500,000 was issued to a stockholder in partial payment for redemption of the convertible preferred stock. The note bears interest of 6% payable monthly; $250,000 is due July 1, 2003 and $250,000 on July 1, 2004. (See Note 8(A)). NOTE 8 STOCKHOLDERS' EQUITY - --------------------------- (A) Convertible Preferred Stock - ------------------------------- At June 30, 2001, the Company had 400,000 shares of its 6%, $.01 par value participating convertible preferred stock outstanding. During June 2002, the 400,000 outstanding shares of preferred stock were redeemed for $1,000,000 ($2.50 per share), the original sales price amount received on issuance. A note for $500,000 was issued and a cash payment of $500,000 was paid to the preferred stockholders (See Note 7). F-16 STRATEGIC CAPITAL RESOURCES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS JUNE 30, 2002, 2001 AND 2000 ---------------------------- As of June 30, 2002, there are no unpaid distributions in arrears. (B) Common Stock - ---------------- During April 2002, the Board of Directors and a majority of the Company's stockholders approved a 200 for 1 reverse stock split of the outstanding shares of the Company's common stock. The reverse stock split became effective in June 2002. The Company's capital structure, weighted average common shares and earnings per share have been restated for all years presented to give retroactive effect to the reverse stock split. The trading symbol was changed from JJFN to SCPI on the effective date of the reverse stock split. (C) Warrants - ------------ The following is a summary of warrant transactions during the years ended June 30, 2002, 2001 and 2000 (also See Note 7): Number of Shares of Common Stock Weighted Underlying Average Warrants Exercise Price --------------- --------------- Outstanding at July 1, 1999 27,930 $ 46.51 Issued 5,730 $ 47.95 Expired (5,130) $ 30.34 --------------- Outstanding at June 30, 2000 28,530 $ 49.71 Issued 7,460 $ 34.86 Exercised (2,500) $ 0.20 Expired (10,505) $ 53.74 --------------- Outstanding at June 30, 2001 22,985 $ 48.43 Issued 5,366 $ 31.43 Cancelled/Expired (10,146) $ 58.73 --------------- Exercisable and outstanding at June 30, 2002 18,205 $ 37.68 =============== (D) Stock Option Plans - ---------------------- The Company has established Equity Incentive Plans (the "Plans") to attract and retain key employees, to provide an incentive for them to achieve long-range performance goals and to enable them to participate in the long-term growth of the Company. Under the terms of the Plans, the Company may award Incentive Stock Options which are intended to qualify under Section 422A of the Internal Revenue Code. All such options may be exercised during a four-year period commencing one year from the date of the option grant and terminating five years from date of issuance. The following is a summary of option transactions during the years ended June 30, 2002, 2001 and 2000: Number of Weighted Average Shares Exercise Price -------------- --------------- Outstanding at July 1, 1999 16,875 $ 52.00 Granted - November 1999 3,875 $ 58.00 Cancelled / Expired (2,250) 56.00 -------------- Outstanding at June 30, 2000 18,500 $ 52.00 Granted - December 2000 3,750 $ 32.00 Cancelled / Expired (1,500) $ 60.00 -------------- Outstanding at June 30, 2001 20,750 $ 52.00 Granted - October 2001 3,000 $ 26.00 Cancelled / Expired (11,250) $ 44.00 -------------- Exercisable and outstanding at June 30, 2002 12,500 $ 46.00 ============== F-17 STRATEGIC CAPITAL RESOURCES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS JUNE 30, 2002, 2001 AND 2000 ---------------------------- The Company accounts for stock-based compensation in accordance with Accounting Principles Board Opinion No. 25 ("APB 25"), Accounting for Stock Issued to Employees. Under APB 25, the Company does not recognize compensation expense for stock options granted under the plans as the options are granted at exercise prices equal to, or greater than, the market price of the Company's common stock at the date of grant. If the Company were to issue options at less than the market price, the Company would then recognize compensation expense in an amount equal to the excess of the market value of the underlying stock over the exercise price of the stock option. No pro forma disclosures have been presented since, in the opinion of management, the effect of the application of such provision is immaterial to the consolidated financial statements for the years ended June 30, 2002, 2001 and 2000. (E) Common Stock Repurchase Program - ----------------------------------- During 2000, the Company implemented a common stock repurchase program. As of June 30, 2002, 10,368 (post reverse split) shares had been repurchased under this program at a cost of $457,999 or $44.17 per share, adjusted for our reverse stock split. We did not purchase any shares during our fiscal year ended June 30, 2002, and we do not anticipate implementing as new repurchase program. We are currently evaluating a tender offer for fractional and odd lot shares to reduce our costs but there are no assurances that we will undertake this activity in the near future or at all. NOTE 9 INCOME TAXES - ------------------- The Company's effective tax rates for the years ended June 30, 2002, 2001 and 2000 were 54.9%, 79.3% and 71.6%, respectively. The provision for income taxes for each of the three years ended June 30 was as follows: For the Year Ended June 30, -------------------------------------- 2002 2001 2000 ---------- ---------- ---------- Current: Federal $ 433,250 $ -- $ -- State 209,213 -- -- Deferred: Federal 337,955 51,593 32,432 State 98,639 19,986 13,628 ---------- ---------- ---------- Total provision for income taxes $1,079,057 $ 71,579 $ 46,060 ========== ========== ========== Deferred income taxes arise from temporary differences in reporting assets and liabilities for income tax and financial accounting purposes. These temporary differences primarily resulted from net operating losses and from depreciating model homes for tax purposes only. F-18 STRATEGIC CAPITAL RESOURCES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS JUNE 30, 2002, 2001 AND 2000 ---------------------------- The components of the deferred income tax assets and liabilities are as follows:
2002 2001 ---------------------------- --------------------------- Deferred Tax Deferred Tax Deferred Tax Deferred Tax Assets Liabilities Assets Liabilities ------------ ------------ ------------ ------------ Deferred income taxes, current: Operating loss and credit carryforwards $ -- $ -- $ 284,000 $ -- Prepaid and deferred charges -- 235,152 -- -- Implicit interest for multi-family property 86,967 -- -- -- ------------ ------------ ------------ ------------ Total Current 86,967 235,152 284,000 -- ------------ ------------ ------------ ------------ Net Current 86,967 235,152 284,000 -- ------------ ------------ ------------ ------------ Deferred income taxes, non-current: Accumulated depreciation -- 379,883 -- 420,000 Interest from issuances of warrants 591,856 -- 469,527 -- Implicit interest for multi-family property -- -- 44,561 -- Operating loss and credit carryforwards -- -- -- -- ------------ ------------ ------------ ------------ Total Long-Term 591,856 379,883 514,088 420,000 Valuation allowance (591,856) -- 469,527 -- ------------ ------------ ------------ ------------ Net Long-Term -- 379,883 44,561 420,000 ------------ ------------ ------------ ------------ Net Deferred Tax Assets/Liabilities $ 86,967 $ 615,035 $ 328,561 $ 420,000 ============ ============ ============ ============
In assessing the realizability of deferred tax assets, management considers whether it is more likely than not that some portion or all of the deferred tax assets will not be realized. The valuation allowance at June 30, 2002 and 2001 is related to deferred tax assets on interest expense from issuances of warrants. The warrants must be exercised in order to generate sufficient future taxable income to realize the deferred tax assets. Management believes it is more likely than not that these warrants will never be exercised. The following is a reconciliation of the federal statutory income tax amount on income to the provision for income taxes:
For the Year Ended June 30, ----------------------------------------- 2002 2001 2000 ----------- ----------- ----------- Federal statutory income tax (benefit) at 34% $ 668,708 $ 30,681 $ (21,880) State tax cost, net of federal tax benefit 253,065 91,440 89,602 Depreciation - current (295,136) (404,753) (399,412) Gain on sales 399,538 190,680 237,000 Gain on future sales - net of depreciation (40,000) 95,876 (2,300) Bad debt allowance -- (40,000) 40,000 Interest from issuances of warrants 39,466 107,655 94,264 Other 53,416 -- 9,286 Net operating loss -- -- (500) ----------- ----------- ----------- Total provision for income taxes $ 1,079,057 $ 71,579 $ 46,060 =========== =========== ===========
NOTE 10 SUPPLEMENTAL CASH FLOW INFORMATION - ------------------------------------------ The Company's non-cash investing and financing activities were as follows: During the years ended June 30, 2002, 2001, and 2000, the Company acquired revenue producing assets at a cost of $59,442,998, $53,776,277, and $35,953,868, respectively. Such purchases were financed as follows: F-19 STRATEGIC CAPITAL RESOURCES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS JUNE 30, 2002, 2001 AND 2000 ----------------------------
For the Year Ended June 30, -------------------------------------------- 2002 2001 2000 ------------ ------------ ------------ Revenue producing assets $ 59,442,998 $ 53,776,277 $ 35,953,868 Bank borrowings (47,973,907) (53,776,277) (35,367,685) ------------ ------------ ------------ Investment in revenue producing assets $ 11,469,091 $ -- $ 586,183 ============ ============ ============
During the years ended June 30, 2002, 2001 and 2000, the Company sold revenue producing assets and also paid down the related debt. The sales and related debt pay down are as follows:
Model Home Sales For the Year Ended June 30, ---------------- -------------------------------------------- 2002 2001 2000 ------------ ------------ ------------ Model home sales proceeds $ 18,828,378 $ 15,506,805 $ 19,901,534 Debt payments (16,950,273) (13,593,747) (16,715,028) ------------ ------------ ------------ Net proceeds $ 1,878,105 $ 1,913,058 $ 3,186,506 ============ ============ ============ Residential Real Estate Sales For the Year Ended June 30, ----------------------------- -------------------------------------------- 2002 2001 2000 ------------ ------------ ------------ Residential real estate sales proceeds $ 41,947,444 $ 1,416,802 $ -- Debt payments (36,266,560) (1,345,963) (--) ------------ ------------ ------------ Net proceeds $ 5,680,884 $ 70,839 $ -- ============ ============ ============
Interest paid totaled $5,072,185, $5,360,997, and $3,836,804 during the years ended June 30, 2002, 2001 and 2000, respectively. Income taxes paid totaled $405,000, $35,000 and $18,000 during the years ended June 30, 2002, 2001 and 2000, respectively. 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 =========== NOTE 11 COMMITMENTS AND CONTINGENCIES - ------------------------------------- (A) Lease Agreement - ------------------- The Company leases its office space under a non-cancelable operating lease for a five-year term ending in March 2007. Rent expense for the years ended June 30, 2002, 2001 and 2000, was $68,539, $85,972, and $75,015 respectively. The following is a schedule of future minimum lease payments: Year Ending: ------------ June 30, 2003 $ 65,062 June 30, 2004 66,780 June 30, 2005 68,566 June 30, 2006 70,424 June 30, 2007 50,555 ----------- $ 321,387 =========== (B) Employment Agreements - ------------------------- Effective July 29, 1997, the Board of Directors elected the Company's principal stockholder to the position of Chairman of the Board and entered into a ten-year employment agreement with the stockholder. Effective January 1, 1998, the employment agreement provides for annual compensation of $225,000 with 10% annual increases during the second through tenth years. During June 2002, the Board of Directors extended this employment agreement for an additional five years with the same terms and conditions. F-20 STRATEGIC CAPITAL RESOURCES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS JUNE 30, 2002, 2001 AND 2000 ---------------------------- (C) Qualified Retirement Plans - ------------------------------ During the year ended June 30, 2002, the Company instituted a Profit Sharing Plan. No contributions have been made or accrued for this plan for the year ended June 30, 2002. Effective January 1, 2000, the Company instituted a savings plan, which qualifies under Section 401(k) of the Internal Revenue Code. Participating employees may contribute up to 25% of their pre-tax salary, but not more than statutory limits. The Company contributes 3% of a participant's earnings, which totaled $31,846, $28,880, and $12,654 for the years ended June 30, 2002, 2001 and 2000, respectively. (D) Compensation Plan - --------------------- The Company's compensation plan rewards all employees for their contribution to achievement of Company goals. The program establishes a targeted award based upon the level and role for each eligible participant. At this time, the Company has not incurred any expenses relating to this compensation plan. (E) Financing Activities - ------------------------ At June 30, 2002, the Company had approximately $21 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. Subsequent to year-end, 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. As a part of its ongoing business, the Company is in constant discussion with financial institutions for credit facilities, as well as private or public placements of its debt or equity securities. An offering or private placement of senior notes with warrants, convertible preferred stock or similar type of security is currently being evaluated. It is the Company's policy not to incur costs from activation of credit facilities unless and until needed. (F) Legal Proceedings - --------------------- BankAtlantic Bankcorp, Inc. 15th Judicial Circuit Court, Palm beach County, Florida Case No. CL 98-11662-AG The Company filed suit against BankAtlantic Bancorp., 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 the Company's program. This matter is in the early stages of discovery. Since this represents a potential contingent gain for the Company, there are no receivable amounts recorded in the accompanying consolidated balance sheets. Star Insurance Company v. Strategic Capital Resources, Inc. 15th Judicial Court, Palm beach County, Florida Case No. CL 00-433 AD This is an action on an indemnity bond. Discovery commenced, but is not completed. Mediation, which was conducted on August 13, 2002, has been adjourned. Plaintiff has not been vigorously prosecuting this action. Defendant will 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. The Company is 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 at June 30, 2002 for this matter. F-21 STRATEGIC CAPITAL RESOURCES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS JUNE 30, 2002, 2001 AND 2000 ---------------------------- 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 business properties, other than routine litigation arising in the ordinary course of business. NOTE 12 SUBSEQUENT EVENTS - ------------------------- (A) Model Home Program - ---------------------- From July 1, 2002 through December 19, 2002, the Company sold nine model homes, underlying the direct financing leases at an aggregate sales price of $1,988,690. These models were acquired at an aggregate cost of $1,863,685. The Company also has contracts pending on eight model homes at an aggregate sales price of $1,933,456, which were acquired at an aggregate cost of $1,649,446. (B) Residential Real Estate Acquisition and Development - ------------------------------------------------------- From July 1, 2002 through December 19, 2002 , the Company paid development costs in the amount of approximately $7,524,781 and had sales of finished lots in the amount of approximately $24,275,533. (C) Amendment to Warrant Agreements - ----------------------------------- The agreements for the detachable warrants issued in connection with loans from stockholders included a provision that the number of shares exercisable and the exercise price were not to be affected by reverse splits. On December 12, 2002, with the approval of the warrant holders and the Board of Directors, the Company amended the warrant agreements effective as of the date of the reverse split (June 13, 2002), to have the number of shares and exercise prices be effectuated by the reverse stock split. As such, all disclosures relating to the warrants and diluted earnings per share in the accompanying consolidated financial statements and footnotes have been restated to reflect the amendment (See Notes 7 and 8(C)). As a result of the warrants being affected by the reverse stock split, the number of outstanding warrants was decreased from 3,641,000 to 18,205 and the weighted average exercise price of the warrants increased from $.19 to $37.68. F-22 ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE Effective October 11, 2002, our independent accountants, Citrin Cooperman & Company, LLP ("Citrin"), resigned. Thereafter, on October 14, 2002, our Board of Directors, on the recommendation of our Audit Committee, retained the firm of Weinberg & Company, P.A. to audit our financial statements for our fiscal years ended June 30, 2002, 2001 and 2000. We are uncertain as to whether there were any disagreements with Citrin on any matters of accounting principles or practices, financial statement disclosure, or auditing scope or procedure, which disagreements, if not resolved to the satisfaction of Citrin, would have caused Citrin to make a reference to the subject matter on the disagreements in connection with its report, or whether there existed a disagreement relating to interpretation of law. In this regard, we filed various reports on Form 8-K, including a Form 8-K on or about October 24, 2002, which explain the various issues involved in this matter. Readers are urged to review this aforesaid report. All of our Form 8-K reports are incorporated herein by reference as if set forth. ITEM 9B. COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT Section 16(a) of the Securities Exchange Act of 1934 requires our officers, directors and person who own more than 10% of our Common Stock to file reports of ownership and changes in ownership with the Securities and Exchange Commission. All of the aforesaid persons are required by SEC regulation to furnish us with copies of all Section 16(a) forms they file. In June 2002, certain of our officers, including David Miller, our Chairman and Scott Miller, our Vice President, did exercise an aggregate of 1,430,000 warrants for an aggregate exercise price of $236,100 (approx. $0.17 per warrant). They filed Form 4's with the SEC relevant thereto in July 2002, which filings were late. Thereafter, as discussed in "Part II, Item 5" above, in December 2002, this warrant exercise was rescinded by the mutual consent of the warrant holders and our Company. The warrant holders, including Messrs. David and Scott Miller, filed Form 4's with the SEC, advising of this rescission. These forms were filed late. However, we did file a report on Form 8-K in a timely manner with the SEC, advising of the rescission of the warrant exercise. We are unaware of any other matters not in compliance with Section 16(a). PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT As of December 19, 2002, our officers and directors and their respective positions with our Company were as follows: Name Age Position ---- --- -------- David Miller 57 President, CEO and Chairman of the Board Cary Greenberg 59 Treasurer, Chief Financial Officer and Chief Accounting Officer Samuel G. Weiss 53 Secretary, Director Scott Miller 27 Vice President, Assistant Secretary Ralph Wilson 73 Director John H. Roach, Jr. 61 Director David Miller is the father of Scott Miller. There are no other family relationships amongst our management. 25 RESUMES David Miller was appointed Chairman of the Board on July 29, 1997. On December 1, 2000, Mr. Miller was elected President and Chief Executive Officer. Prior to that time, Mr. Miller had been engaged as a consultant to the Company since its organization. Prior, from 1992 through 1997, he was a strategic consultant to several companies, including Antares Resources Corporation and Priority Capital Corporation. Since 1994, Mr. Miller has served as Chairman of the Board of Lite 'N Low, Inc., a holding company no longer actively engaged in business. Mr. Miller is currently Chairman of Priority Capital Corp. Mr. Miller devotes substantially all of his time to the business of the Company. Cary Greenberg was appointed Treasurer, Chief Accounting Officer and Chief Financial Officer in April 2002. Prior to joining our Company, from January 1998 through February 2001, Mr. Greenberg was a consultant to Mobile Computer Training, Inc., Fort Lauderdale, FL, a privately held educational software company. From January 1998 through February 2001, Mr. Greenberg was Chief Financial Officer of Sunvest Resorts, Inc., Hollywood, FL, a publicly held real estate company. From July 1996 through January 1998, he was also Chief Financial Officer for Central Press, Inc., Pompano, FL, a subsidiary of Wallace Computer Systems, Inc., a publicly held printing company. Mr. Greenberg received a Bachelor of Science degree in accounting from C.W. Post University in 1973. Mr. Greenberg devotes substantially all of his time to our business. Samuel G. Weiss, Secretary and Director, has been our Secretary since our organization. Effective May 1997, Mr. Weiss was interim President and served in that capacity until January 1, 1999. Since 1974, Mr. Weiss has been engaged in the practice of law in the State of New York. Mr. Weiss also served as Secretary, General Counsel, and Director of Antares Resources Corporation from June 1993 to December 1996. Mr. Weiss devotes only such time as is necessary to our business. Scott Miller, Vice President and Assistant Secretary, was appointed to his positions with us in September 2000. Prior to joining our Company, Mr. Miller earned a Master's Degree in mediation and arbitration from Nova Southeastern University. He received a Bachelor of Arts degree in English from Hofstra University in 1997. He devotes substantially all of his time to our business. Ralph Wilson, Director, has held this position since our organization. From October 1990 through February 1995, Mr. Wilson was President of Antares Resources Corporation and served as a Director of Antares from December 1994 to December 1996. In addition, since 1971, Mr. Wilson has been a principal officer of Comet Electronics Corp., a privately owned manufacturer of subassemblies in Farmingdale, New York. Mr. Wilson devotes only such time as is necessary to our business. John H. Roach, Jr. was elected a Director of our Company in December 1998. Since January 2002, he has been self employed as a financial consultant to various private companies and individuals. From May 2000 through December 2001, he was a Senior Client Advisor for J.P. Morgan Private Bank. Prior thereto, from 1998 to 2000 he was Senior Managing Director for Reliance National. From 1995 to 1997, he was Senior Managing Director, Client Management and Marketing for American International Group, AIG Risk Finance. From 1992 to 1995, he was Vice Chairman and Senior Managing Director for Geneva Companies, Geneva Financial Corporation. From 1964 to 1992, he was Managing Director, Head of Corporate Finance Client Management and Loan Products for Chemical Bank. Mr. Roach devotes only such time as is necessary to our business. 26 ITEM 11. EXECUTIVE COMPENSATION The following table reflects all forms of compensation for services rendered to us for the fiscal years ended June 30, 2002, 2001, and 2000 of our Chief Executive Officer and one other member of management who received aggregate compensation of $100,000 during our prior three years. No other member of our management received compensation in excess of $100,000 during our fiscal year ended June 30, 2002.
SUMMARY COMPENSATION TABLE ANNUAL COMPENSATION LONG TERM COMPENSATION ----------------------------- ------------------------------- Awards Payouts ---------------------- ------- Other Securities Annual Restricted Underlying All Other Name and Compen Stock Options/ LTIP Compen- Principal Position Year Salary Bonus sation Award(s) SAR's (2) Payouts sation (3) -------------------- ---- --------- ----------- ------ ---------- ---------- ------- ---------- David Miller, 2002 $371,127 $132,355(1) (1) $ 0 -- N/A $ 5,100 Chairman of the Board, 2001 $308,115 $ 59,319(1) (1) $ 0 200,000 N/A $12,836 President, Chief Executive 2000 $291,098 $ 50,262(1) (1) $ 0 200,000 N/A $ 4,037 Officer and Director John Kushay, (4) 2002 $191,469 -- -- $ 0 -- N/A -- Treasurer, Chief Financial 2001 $115,617 $ 11,011(1) (1) $ 0 100,000 N/A $ 4,661 Officer, Vice President 2000 $107,030 $ 16,362(1) (1) $ 0 100,000 N/A $ 1,067 and Director
- ------------------------------------- (1) Includes prerequisites and other personal benefits unless the aggregate amount is less than either $50,000 or 10% of the total of annual salary and bonus reported for the named executive officer. (2) We do not have a stock appreciation right ("SAR") program. (3) Represents contributions made by us to our 401(k) plan and auto allowances. (4) Mr. Kushay resigned his positions with us in April 2002. 27 EMPLOYMENT AGREEMENT On July 29, 1997, our Board of Directors provided our Chairman, David Miller, with a ten year employment agreement which became effective January 1, 1998. This agreement provides for annual compensation of $225,000, with 10% annual increases which began in 1999 and continue through the balance of the term of the agreement. During 2002, our Board extended this agreement for an additional five years with the same terms and conditions. STOCK OPTION PLAN/OPTIONS AND WARRANTS In June 2001, a majority of our shareholders approved by consent our "2001 Stock Option Plan" (the "Plan"). This Plan provides for the grant of incentive and non-qualified stock options that may be issued to key employees, non-employee directors, independent contractors and others and we have reserved 12,500 shares of our Common Stock for issuance under the Plan. The options are to be granted for a term of not more than five (5) years and other terms and conditions that are usual and customary. As of the date of this report, options to purchase all of the 12,500 shares reserved for issuance under this Plan had previously been issued, but in December 2002, all of these options were cancelled with the consent of the holders thereof. The purpose of the Plan is to aid us in retaining the services of executive and key employees and in attracting new management personnel when needed for future operations and growth, and to offer such personnel additional incentive to put forth maximum efforts for the success of our business and opportunities to obtain or increase proprietary interest and, thereby, to have an opportunity to share in our success. In addition, at June 30, 2002, there were additional options issued and outstanding to purchase an aggregate of 7,250 shares of our Common Stock. In December 2002, all of these options were cancelled with the consent of the holders thereof. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS The following tables sets forth certain information regarding ownership of our Common Stock as of December 19, 2002, by (i) each person known to us to own beneficially more than 5% of our Common Stock, (ii) each officer and director of our Company; and (iii) all directors and officers as a group. Unless otherwise indicated, each person listed on the tables has sole voting and investment power as to the shares shown. Amount and Nature of Name and Address of Beneficial Owner Beneficial Ownership Percent of Class(1) - ------------------------------------ -------------------- ------------------ Directors and Officers: David Miller 33,354(2) 43.2% 3565 NW 61st Circle Boca Raton, Florida 33496 Scott Miller 6,600 8.6% 3565 NW 61st Circle Boca Raton, Florida 33496 Samuel G. Weiss 770 1.0% 265 Sunrise Hwy, Su. 30 Rockville Center, New York 11570 Ralph Wilson 787 1.0% 7 Ensign Lane Massapequa, New York 11758 All Officers and Directors as a Group 41,511 53.8% (5 persons) - ---------------------------- (1) Does not include Treasury Shares. (2) Includes 5,250 of shares owned by Lite 'N Low, Inc. and 7,750 of shares owned by Priority Capital Corp. 28 Amount and Nature of Name and Address of Beneficial Owner Beneficial Ownership Percent of Class(1) - ------------------------------------ -------------------- ------------------ Other 5% Shareholders: Libo Fineberg, Trustee (1) 6,250 8.1% Helen Miller Irrevocable Trust 3500 Gateway Drive Pompano Beach, Florida 33069 Rita Miller (2) 6,600 7.6% 3565 NW 61st Circle Boca Raton, Florida 33496 (1) David Miller direct beneficiary. No voting power. David Miller disclaims any beneficial ownership. (2) Wife of David Miller - sole voting power and ownership. David Miller disclaims any beneficial ownership. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS We have various notes payable to members of our management. These loans arose from advances various stockholders made to us. The notes are payable on demand, bearing interest at 9%, which is payable monthly. Interest on stockholder notes payable totaled $115,361 for the year ended June 30, 2002, $109,653 for the year ended June 30, 2001, and $112,220 for the year ended June 30, 2000. Our management believes that the loans from stockholders were made on equal or better terms than were available elsewhere. During the years ended June 30, 2002, 2001, and 2000, we issued a total of 5,366, 7,460, and 5,730 detachable warrants, respectively, to these stockholders. These warrants have subsequently been terminated. In accordance with APB 14, we apportioned fair value to the warrants using the Black-Scholes pricing model. Fair value was determined using the closing market prices of our common stock on the grant date. The fair value of the warrants on the date of grant was treated as additional interest expense in the year of grant since the stockholder loans are due on demand. In the past, we did not account for the grants of the warrants. We are currently accounting for the warrants as a correction of an error in our accompanying consolidated financial statements. The additional non-cash interest expense resulting from the accounting for the warrants amounted to $98,668, $269,142 and $235,660 for the years ended June 30, 2002, 2001 and 2000, respectively. See "Part II, Item 5" above and "Part II, Item 8, Financial Statements and Supplementary Data" and the notes thereto for a more detailed description of these obligation and events applicable thereto. In June 2002, we also issued a note for $500,000 to our Chairman, David Miller, in partial payment for our redemption of our convertible preferred stock. The note bears interest of 6% payable monthly. $250,000 is due July 1, 2003 and $250,000 is due on July 1, 2004. See "Part II, Item 8, Financial Statements and Supplementary Data" and Note 8(A) thereto. We have been advised by Weinberg & Company, P.A., that neither the firm nor any of its associates has any relationships with us or our subsidiaries other than the usual relationship that exists between certified public accountants and clients. Audit Fees: An aggregate of $125,196 was billed for professional services rendered for the audit of our annual financial statements for the fiscal year ended June 30, 2002. Weinberg & Company, P.A. was retained as our independent auditor subsequent to the filing of our last report on Form 10-Q filed during the fiscal year ended June 30, 2002 and as a result, we did not incur any charges relevant thereto. Financial Information Systems Design and Implementation Fee: Weinberg & Company, P.A.. did not render professional services to us relating to financial information systems design and implementation during our 2002 fiscal year. 29 PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K (a) 1. Financial Statements: Reference is made to the index set forth in "Item 8, Financial Statements and Supplementary Data" of this Annual Report on Form 10-K. 2. Exhibits: The following exhibits are filed as part of this Annual Report on Form 10-K. Incorporated by Reference to Registration Exhibit No. Statement 333-1842 Description - ----------- -------------------------------- --------------------------------- 3.1 X Certificate of Incorporation, as amended to date 3.2 X By-laws, as amended to date Incorporated by Reference to Form 10-K for Exhibit No. Fiscal Year Ended June 30, 1998 Description - ----------- ------------------------------- --------------------------------- 10.12 X Employment Contract with David Miller dated as of January 1, 1998. Incorporated by Reference to Form 10-K for Exhibit No. Fiscal Year Ended June 30, 1997 Description - ----------- ------------------------------- --------------------------------- 10.14 X Incentive Stock Plan Exhibit No. Filed Herewith Description - ----------- ------------------------------- --------------------------------- 21.1 X List of Company subsidiaries. 99.1 X Certification of Financial Statements in Accordance with Sarbanes-Oxley Act of 2002. (b) Reports on Form 8-K On or about May 30, 2002, we filed a report on Form 8-K, advising of the authorization of our pending reverse stock split effective June 17, 2002 and matters ancillary thereto. Subsequent to June 30, 2002, we filed two (2) reports on Form 8-K, including those reports dated October 11, 2002, 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 the financial statements included in this report. This Form 8-K also included a lengthy narrative on the events and circumstances surrounding the resignation of Citrin Cooperman & Company, LLP. On or about December 16, 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. For a more detailed description of these matters see "Part II, Item 8, Financial Statements and Supplementary Data" and Notes thereto. 30 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this Report to be signed on its behalf by the undersigned, thereunto duly authorized, on December 23, 2002. STRATEGIC CAPITAL RESOURCES, INC. By: /s/ DAVID MILLER ------------------------------------------ David Miller, President, CEO, and Chairman of the Board By: /s/ CARY GREENBERG ------------------------------------------ Cary Greenberg, Treasurer, Chief Financial Officer and Chief Accounting Officer Pursuant to the requirements of the Securities Exchange Act of 1934, this Report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated. /s/ DAVID MILLER Dated: June 12, 2003 - ----------------------------------- David Miller, Director /s/ SAMUEL G. WEISS Dated: June 12, 2003 - ----------------------------------- Samuel G. Weiss, Director /s/ RALPH WILSON Dated: June 12, 2003 - ----------------------------------- Ralph Wilson, Director /s/ JOHN H. ROACH, JR. Dated: June 12, 2003 - ----------------------------------- John H. Roach, Jr., Director 31 CERTIFICATIONS We, David Miller and Cary Greenberg, certify that: 1. We have reviewed this annual report on Form 10-K of Strategic Capital Resources, Inc.; 2. Based on our knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary in order 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 annual report; 3. Based on our knowledge, the financial statements, and other financial information included in this annual 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 annual report; 4. We are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the Registrant and have; a. designed such disclosure controls and procedures to ensure that material information relating to the Registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this annual report is being prepared; b. evaluated the effectiveness of the Registrant's disclosure controls and procedures as of a date within ninety (90) days of the filing date of this annual report (the "Evaluation Date"); and c. presented in this annual report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; 5. We have disclosed, based on our most recent evaluation, to the Registrant's auditors and the Audit Committee of the Registrant's Board of Directors (or persons performing the equivalent function): a. all significant deficiencies in the design or operation of internal controls which could adversely affect the Registrant's ability to record, process, summarize and report financial data and have identified for the Registrant's auditors any material weakness in internal controls; and b. any fraud, whether or not material, that involves management or other employees who have a significant role in the Company's internal controls; and 6. We have indicated in this annual report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. Dated: June 12, 2003 /s/ DAVID MILLER ----------------------------------- Chief Executive Officer Dated: June 12, 2003 /s/ CARY GREENBERG ----------------------------------- Chief Financial Officer 32 EX-21 3 ex21_1.txt EXHIBIT 21.1 EXHIBIT 21.1 - ------------ LIST OF REGISTRANTS' SUBSIDIARIES Subsidiary Name State of Incorporation JJFN Holdings, Inc. Delaware Model Funding I, LLC Delaware Model Funding II, LLC Delaware LLC Oak Hills Limited Partnership Florida EX-99 4 ex99_1.txt EXHIBIT 99.1 EXHIBIT 99.1 - ------------ CERTIFICATION PURSUANT TO 18 USC, SECTION 1350, AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 In connection with the annual report of Strategic Capital Resources, Inc. (the "Company") on Form 10-K for the fiscal year ended June 30, 2002, as filed with the Securities and Exchange Commission (the "Report"), we, David Miller, the Chief Executive Officer, and Cary Greenberg, the Chief Financial Officer of the Company, certify, pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (18 U.S.C. Section 1350), that to the best of our 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. Dated: June 12, 2003 /s/ DAVID MILLER ------------------------------------- Chief Executive Officer Dated: June 12, 2003 /s/ CARY GREENBERG ------------------------------------- Chief Financial Officer -----END PRIVACY-ENHANCED MESSAGE-----