U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the fiscal year ended June 30, 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. [ ]
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 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 Risks.....21
Item 8. Financial Statements and Supplementary Data.....................23
Item 9. Changes in and Disagreements With Accountants
on Accounting and Financial Disclosure.......................52
Item 9B. Compliance With Section 16(a) of the Exchange Act...............52
PART III
Item 10. Directors and Executive Officers of the Registrant..............52
Item 11. Executive Compensation..........................................54
Item 12. Security Ownership of Certain Beneficial Owners and Management..55
Item 13. Certain Relationships and Related Transactions..................56
PART IV
Item 14. Exhibits, Financial Statement Schedules
and Reports on Form 8-K......................................57
SIGNATURES....................................................................59
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. The arrangements
may take several forms including operating leases, option agreements, or
management agreements. We account for all such agreements as direct financing
arrangements. Such agreements may represent off-balance sheet transactions of
our customers and clients. We are engaged in such financing arrangements in
three lines of business, consisting of one reportable segment, all with major
homebuilders and real estate developers throughout the United States:
Model home programs
Residential real estate land banking
Multi-family residential and other real estate
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.
MODEL HOME PROGRAMS
We purchase and leaseback fully furnished model homes complete with options and
upgrades to major publicly traded homebuilders. The model homes are leased
pursuant to a triple net lease where the lessee is obligated to pay all
maintenance, taxes, insurance 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 cash closing
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 assess the 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 agreement. 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.
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 the date of this Report, 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 LAND BANKING
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. We also purchase residential real estate
owned by the homebuilders and lease it back to them on a triple-net basis. The
parcels of land are acquired at the lower of appraised value or contract price.
The parcels of land may require additional government approvals or entitlements
and development work or consist of finished lots. If development work is
required, the homebuilder enters into a fixed price development agreement to
develop the parcels of land for us, and in some cases, is required to provide
completion bonds for some or all work by a surety company acceptable to us.
Reimbursement for development work performed is typically paid monthly. A lease
and exclusive option to purchase agreement are entered into with the homebuilder
simultaneously with the land acquisition. The terms and conditions of each
transaction are project specific (lease rate, term, option deposit, takedown
schedule, etc.). Insurance coverage is obtained to insure the prompt payment and
performance of the homebuilder, as well as the fully developed value of the real
estate acquired.
During the year ended June 30, 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
=========== =========== ============ =========== ============
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:
7
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 on residential real estate land
banking 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 LAND BANKING SUBSEQUENT EVENTS
The following is a summary of development costs paid and sales of finished lots
from July 1, 2002, through the date of this Report.
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 AND OTHER REAL ESTATE
On July 15, 1999, we purchased a 288 unit multi-family residential property in
Jacksonville, Florida, for a purchase price of $10,227,999. The purchase price
was paid as follows:
8
Assumption of existing first mortgage $ 4,927,999
New loan 5,300,000
-----------
Total Purchase Price $10,227,999
===========
Simultaneous with the purchase, we entered into an operation, maintenance, and
management agreement, which provides for payment of a minimum income stream per
month. The agreement also requires the management company to purchase the
property at the end of five years. Their performance under the agreement is
insured by an insurance company rated "AAA" by Standard & Poor's.
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 customer
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 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.
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.
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 to us separate from his legal services and whom
we have retained on a month to month basis.
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, 2002, 2001 and 2000, we took impairment charges
for the remaining $1,000,000 balance on the promissory note. The amount of the
write-down was determined by evaluating the underlying value of the collateral,
the cost of recovery, ongoing litigation costs and the difficulty in realizing
the collateral securing the promissory note. Actual losses could differ from our
current estimate and will be reflected as adjustments in future financial
statements.
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
10
December 30, 1998. The complaint charges a breach of fiduciary duty and seeks
unspecified damages in that the defendant undertook to act as agent or broker in
connection with obtaining a $200 million loan facility relating to a sale and
lease back program for a major, publicly-traded national builder. Rather than
complete the financing transaction, the complaint alleges economic opportunity
was usurped by defendant and entered into an agreement directly with the
builder, utilizing, inter alia, the terms of our program. This matter is in the
early stages of discovery. Since this represents a potential contingent gain for
us, there are no receivable amounts recorded in the accompanying consolidated
balance sheets.
During May 2000, we, along with FPE Funding, LLC , filed a complaint entitled
"In the case of Strategic Capital Resources, Inc. and FPE Funding, LLC v. Dylan
Tire Industries, LLC, Dylan Custom Mixing, LLC; Mid-American Machine and
Equipment, LLC f/k/a Mid-American Tire and Machine, LLC; GMAC Commercial Credit,
LLC; Robert C. Liddon, Trustee; Mary Aronov, Trustee; David Feingold; John
Tindal; Brett Morehouse; Johnny Guy; Shan Sutherland; and Pirelli Tire LLC,"
Chancery Court for Davidson County, Tennessee, Case No. 00-1296-III, against the
referenced defendants alleging, among other things, breach of contract, fraud,
and civil conspiracy, arising from the breach of a sale and leaseback commitment
for which we procured funding and under which FPE was to be the owner/lessor of
a manufacturing facility.
The defendants/counter-plaintiffs, Dylan Tire Industries, LLC, Mid-American
Machine and Equipment, LLC and Dylan Custom Mixing, LLC have filed a
counterclaim, seeking unspecified consequential damages "estimated to exceed
$500,000" for alleged breach of a loan commitment issued by us. The basis of the
claim is that we allegedly failed to honor our commitment to lend for the
acquisition of a manufacturing facility, resulting in damages to the
defendants/counter-plaintiffs, who borrowed the money directly from ours lender
at allegedly greater cost and who allegedly had to pay a greater price for the
facility as a result of the alleged delay in the closing. We believe the
counterclaim is without merit and are vigorously defend itself. 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 for
this matter.
We are not presently involved in any other material litigation nor, to our
knowledge, is any other material litigation threatened against us or any of our
properties, other than routine litigation arising in the ordinary course of
business. See Notes to 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. 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 the date of this report, 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 subsequently approved 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 has also be 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 and 2000 was discovered by
our management during 2002. 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,
-------------------------------------------------------
2000 2001 2000 1999 1998
-------- -------- -------- -------- --------
(Restated) (Restated) (Restated) (Restated)
Income Statement Data:
Revenues $ 53,878 $ 11,383 $ 6,846 $ 26,287 $ 21,303
-------- -------- -------- -------- --------
Expenses 51,714 10,234 6,757 26,469 21,709
Impairment charge 91 1,000 100 -- --
-------- -------- --------
Operating expenses 51,805 11,234 6,857 26,469 21,709
-------- -------- -------- -------- --------
Income (loss) from continuing operations
Before income tax benefit (expense) 2073 149 (11) (182) (406)
Income tax expense 1121 (95) (67) (80) 10
-------- -------- -------- -------- --------
Net income (loss) 951 54 (79) (262) (396)
Preferred stock distributions 55 85 120 90 --
-------- -------- -------- -------- --------
Income (loss) applicable to
common shareholders $ 896 $ (31) $ (199) $ (352) $ (396)
======== ======== ======== ======== ========
Per Share Data:
Basic:
Net income (loss) $ 11.61 $ (.40) $ (2.50) $ (3.23) $ (4.66)
Weighted average number of common
shares outstanding 78 78 79 81 85
Assuming Dilution:
Net income (loss) $ 11.55 $ (.40) $ (2.50) $ (3.23) $ (4.66)
Weighted average number of common
shares outstanding 78 78 79 95 85
14
June 30,
-------------------------------------------------------
2000 2001 2000 1999 1998
-------- -------- -------- -------- --------
(Restated) (Restated) (Restated) (Restated)
Balance Sheet Data:
Total assets $ 90,798 $ 94,954 $ 56,146 $ 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 $ 8,531 $ 8,536 $ 8,413 $ 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. Accordingly, our consolidated balance sheets as of
June 30, 2001 and our statement of operations, stockholders' equity and cash
flows for the years ended June 30, 2001 and 2000 have been restated to reflect
corrections to previously reported amounts.
Years Ended June 30,
-----------------------------------------------
2001 2000
2002 (Restated) (Restated)
------------- -------------- --------------
Revenues:
Interest income on direct financing arrangements:
Model homes $ 2,939 5% $ 4,810 42% $ 4,842 70%
Residential real estate 7,107 13% 3,265 29% -- --
Multi-family residential 1,409 3% 1,378 12% 1,356 20%
Sale of direct financing arrangements:
Model homes - net 394 1% 377 3% 324 5%
Residential real estate 41,947 78% 1,417 12% -- --
Other income 81 -- 136 2% 324 5%
------- --- ------- --- ------- ---
Total revenues 53,877 100% 11,383 100% 6,846 100%
Costs and expenses:
Interest and financing costs 5,171 10% 5,985 52% 4,184 62%
Multi-family operating 484 1% 365 3% 355 5%
Cost of direct financing arrangements sold:
Residential real estate 41,947 77% 1,417 13% -- --
Depreciation and amortization 1,547 3% 931 8% 665 10%
Corporate 2,564 5% 1,536 14% 1,554 23%
Impairment charge 91 -- 1,000 9% 100 --
------- --- ------- --- ------- ---
Total costs and expenses 51,804 96% 11,234 99% 6,858 100%
15
Years Ended June 30,
-----------------------------------------------
2001 2000
2002 (Restated) (Restated)
------------- -------------- --------------
Income (loss) before income tax expense 2,073 4% 149 1% (12) --
Income tax expense 1,121 2% 95 1% 67 1%
------- --- ------- --- ------- ---
Net income (loss) $ 952 2% $ 54 1% $ (79) (1%)
======= === ======= === ======= ===
Comparison of Year Ended June 30, 2002 to Year Ended June 30, 2001.
Interest income on direct financing arrangements for the year ended June 30,
2002, increased $2,001,688 (21%) compared to the prior year period. The
increased revenue was primarily attributable to the interest income on the
increased number of residential real estate arrangements, which amounted to
$7,106,852 for the period, compared to $3,264,599 for the prior year period,
offset by a decrease in interest income on model homes of $1,871,724.
Sale of direct financing arrangements increased $40,547,109 (2260%) for the year
ended June 30, 2002, compared to the prior year period. 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 period,
resulting in increased revenue. The balance of $41,947,444 was from residential
real estate. Relevant to our model home activities, as of the date of this
report our portfolio of model homes is decreasing as a result of continued sales
of these homes. 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 same in the near future.
Interest expense decreased $813,913 (14%) during the year ended June 30, 2002,
compared to the prior year period, primarily due to the decrease in loans
utilized to purchase additional assets under direct financing arrangements and
lower interest rates.
Corporate 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 costs as a percentage of
total revenue decreased compared to the prior year period by 9%.
Net income for the year ended June 30, 2002, was $951,339, compared to net
income of $53,791 for the prior year period, an increase of $897,548 (1669%).
Net income as a percentage of total revenue increased due to the larger
impairment charge recognized in our prior fiscal year.
Comparison of Year Ended June 30, 2001 to Year Ended June 30, 2000.
Interest income on direct financing leases for the year ended June 30, 2001
increased $3,254,518 (or 53%) compared to the prior year period. The increased
revenue was primarily attributable to the interest
16
income on the residential real estate leases, which amounted to $3,264,599 for
the period. We did not generate income from this source during 2000.
Sale of direct financing leases increased $1,470,384 (or 454%) for the year
ended June 30, 2001, compared to the prior year period. During the year ended
June 30, 2001, we sold 69 model homes at an average price of $260,131, compared
to 76 model homes at an average price of $257,255 for the prior year period,
resulting in the decreased revenue.
Interest expense increased $1,800,638 (or 43%) during the year ended June 30,
2001 compared to the prior year period, primarily due to the increase in loans
utilized to purchase additional assets under direct financing leases.
Corporate costs decreased $17,822 (a 1% decrease), from $1,553,940 for the year
ended June 30, 2000, to $1,536,118 for the year ended June 30, 2001. Corporate
costs as a percentage of total revenue was consistent with the prior year
period.
Net income for the year ended June 30, 2001 was $53,791, compared to a net loss
of ($78,706) for the prior year period.
LIQUIDITY AND CAPITAL RESOURCES
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 direct financing arrangements 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 may be utilized to acquire model
homes and residential real estate land banking 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. The loan will bear
interest based on 30 day LIBOR plus a premium. It is our policy not to incur
costs from activation of our 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 had constant discussions with financial institutions
for increased credit facilities and with investment bankers 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
members of our management, 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.
17
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 (approximately $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 2001, we took a pre-tax non-cash charge for the impairment of the remaining
$1,000,000 balance on a Promissory Note, effectively writing down the carrying
value of the Note to $0. In March 2000, we set up a loss reserve of $100,000
against the Note, and have taken the remaining $1,000,000 charge during the year
ended June 30, 2001. 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
Net cash provided by operating activities totaled $3,494,802, comprised of net
income of $951,339, plus net adjustments for non-cash items of $1,822,102, plus
a net change in other operating assets and liabilities of $721,361. Net cash
used in investing activities comprised investment in direct financing
arrangements of $7,900,478, offset by $9,233,393 in proceeds from sale of direct
financing arrangements.
Net cash provided by financing activities comprised proceeds from mortgages
payable of $11,191,370, less repayment from stockholder loans of $50,000, offset
by deferred financing costs of $1,649,038, purchase of preferred stock of
$500,000, principal payments on mortgages payable of $16,950,273 and preferred
distributions of $55,000.
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, direct 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
18
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.
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.
The adoption of these pronouncements is not expected to have a material effect
on our consolidated financial statements.
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. We do not believe the adoption of this standard will have a material
impact on our consolidated financial statements.
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
19
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. We do not believe the
adoption of this statement will have a material impact on our consolidated
financial statements.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
We have identified critical accounting policies that, as a result of judgements,
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(O) to our consolidated financial statements.
TRENDS
During our fiscal year ended June 30, 2002, our operations continued to
accelerate at a rapid pace. For the fiscal year ended June 30, 2002, total
purchases of revenue producing assets were in excess of $53 million, compared to
approximately $11 million for the year ended June 30, 2001. Monthly revenue from
direct financing arrangements 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.
20
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.
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
21
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 December 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; and
- conditions in the housing resale market.
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 shook
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 and continuing the process of
reworking accounting issues and
22
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.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
23
STRATEGIC CAPITAL RESOURCES, INC.
AND SUBSIDIARIES
CONSOLIDATED FINANCIAL STATEMENTS
AS OF JUNE 30, 2002 AND 2001
24
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 INCOME FOR THE YEARS ENDED JUNE 30,
2002, 2001 AND 2000
PAGES F - 5 - CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY FOR THE YEARS
F - 6 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 - NOTES TO CONSOLIDATED FINANCIAL STATEMENTS JUNE 30, 2002, 2001
F - 27 AND 2000
F - 1
25
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 was discovered by
management of the Company during 2002. Accordingly, the consolidated balance
sheets as of June 30, 2001 and the statements of operations, stockholders'
equity and cash flows for the years ended June 30, 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.
s/Weinberg & Company, P.A.
Weinberg & Company, P.A.
Certified Public Accountants
Boca Raton, Florida
November 27, 2002
F - 2
26
STRATEGIC CAPITAL RESOURCES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
JUNE 30, 2002 AND 2001
ASSETS
------
2001
2002 (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 properties 10,227,999 10,227,999
----------- -----------
Total Revenue Producing Assets 88,388,706 89,255,966
----------- -----------
OTHER ASSETS
Cash and cash equivalents 801,415 3,986,639
Deferred charges, net 848,466 673,382
Deferred income taxes - 284,000
Other 758,923 754,519
----------- -----------
Total Other Assets 2,408,804 5,698,540
----------- -----------
TOTAL ASSETS $90,797,510 $94,954,506
- ------------ =========== ===========
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
----------- -----------
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) 141,562 (754,777)
----------- -----------
TOTAL STOCKHOLDERS' EQUITY 8,531,267 8,536,260
----------- -----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $90,797,510 $94,954,506
- ------------------------------------------ =========== ===========
See notes to consolidated financial statements
F - 3
27
STRATEGIC CAPITAL RESOURCES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED JUNE 30, 2002, 2001 AND 2000
2001 2000
2002 (As Restated) (As Restated)
------------ ------------ ------------
REVENUES
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 1,409,372 1,378,213 1,356,271
Sales of direct financing arrangements:
Model homes, net 393,859 377,392 323,810
Residential real estate 41,947,444 1,416,802 -
Interest and other income 81,470 135,798 323,620
------------ ------------ ------------
Total Revenues 53,877,596 11,383,127 6,846,047
------------ ------------ ------------
OPERATING EXPENSES
Interest and financing costs 5,170,865 5,984,778 4,184,140
Multi-family residential 483,885 365,696 354,722
Cost of residential real estate sold 41,947,444 1,416,802 -
Depreciation and amortization 1,547,136 930,942 664,751
Corporate 2,564,342 1,536,118 1,553,940
Impairment charge 91,122 1,000,000 100,000
------------ ------------ ------------
Total Operating Expenses 51,804,794 11,234,336 6,857,553
------------ ------------ ------------
INCOME (LOSS) BEFORE INCOME TAX EXPENSE 2,072,802 148,791 (11,506)
INCOME TAX EXPENSE 1,121,463 95,000 67,200
------------ ------------ ------------
NET INCOME (LOSS) 951,339 53,791 (78,706)
PREFERRED STOCK DISTRIBUTIONS 55,000 85,000 120,000
------------ ------------ ------------
INCOME APPLICABLE TO COMMON SHAREHOLDERS $ 896,339 $ (31,209) $ (198,706)
============ ============ ============
EARNINGS PER SHARE DATA:
Basic earnings (loss) per share $ 11.61 $ (.40) $ (2.50)
============ ============ ============
Diluted earnings (loss) per share $ 11.55 $ (.40) $ (2.50)
============ ============ ============
See notes to consolidated financial statements
F - 4
28
STRATEGIC CAPITAL RESOURCES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED JUNE 30, 2002, 2001 AND 2000
Additional Retained
Preferred Stock Common Stock Paid - In Treasury Stock 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) - - - - - - - (78,706) (78,706)
------- ------ ------ ------ ---------- ------- --------- -------- ----------
Balance, June 30, 2000
(as restated) 400,000 4,000 85,060 85 9,475,309 (6,752) (343,176) (723,568) 8,412,650
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) - - - - - - - 53,791 53,791
------- ------ ------ ------ ---------- ------- --------- -------- ----------
See notes to consolidated financial statements
F - 5
29
Additional Retained
Preferred Stock Common Stock Paid - In Treasury Stock 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) (754,777) 8,536,260
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 - - - - - - - 951,339 951,339
------- ------ ------ ------ ---------- ------- --------- -------- ----------
BALANCE, JUNE 30, 2002 - $ - 87,560 $ 88 $8,847,616 (10,368) $(457,999) $141,562 $8,531,267
- ---------------------- ======= ====== ====== ====== ========== ======= ========= ======== ==========
See notes to consolidated financial statements
F - 6
30
STRATEGIC CAPITAL RESOURCES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED JUNE 30, 2002, 2001 AND 2000
2002 2001 2000
------------ ------------ ------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ 951,339 $ 53,791 $ (78,706)
------------ ------------ ------------
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 479,035 - -
Gain on sale of direct financing arrangements, model homes net (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
Changes in operating assets and liabilities:
(Increase) decrease in other assets (4,404) (418,554) (241,746)
Increase (decrease) in current income taxes 237,093 36,000 (9,800)
Increase (decrease) 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 2,543,463 1,808,180 782,902
------------ ------------ ------------
Net Cash Provided By Operating Activities 3,494,802 1,861,971 704,196
------------ ------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Investment in direct financing arrangements:
Model homes - (482,500) (5,105,645)
Residential real estate (7,900,478) (4,874,095) -
Proceeds from the direct financing arrangements:
Model homes 1,878,105 1,913,058 3,186,506
Residential real estate 7,355,288 70,839 -
Loan advance - - (1,000,000)
Proceeds from note receivable - 650,000 350,000
Capital expenditures - (9,513) (3,933)
------------ ------------ ------------
Net Cash Provided By (Used In) Investing Activities 1,332,915 (2,732,211) (2,573,072)
------------ ------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from mortgages and notes payable 11,191,370 5,773,240 4,519,462
Principal payments on mortgages payable (16,950,273) (1,301,754) (958,886)
Deferred finance charges (1,649,038) (948,012) (566,494)
Proceeds from (repayment of) stockholder loans (50,000) 81,680 (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) Provided By Financing Activities (8,012,941) 3,405,331 2,629,705
------------ ------------ ------------
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
31
STRATEGIC CAPITAL RESOURCES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2002, 2001 AND 2000
----------------------------
NOTE 1 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
throughout the Untied States. The arrangements may take several forms which
include operating leases, option agreements, or management agreements. The
Company accounts for all such agreements as direct financing arrangements.
Such arrangements may represent off-balance sheet transactions for the
Company's customers.
The Company is engaged in such financing arrangements in three lines of
business, consisting of one reportable segment, 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 land banking.
3) Multi-family residential and other real estate.
(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.
F-8
32
STRATEGIC CAPITAL RESOURCES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2002, 2001 AND 2000
----------------------------
(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 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 long-term and
short-term debt, cash and temporary cash investments, approximates their
fair value at year-end.
(H) Segment Reporting
---------------------
The Company determined that its operations involve one reportable segment,
direct financing arrangements.
(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 customer 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 customer
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/customer. 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)).
F-9
33
STRATEGIC CAPITAL RESOURCES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2002, 2001 AND 2000
----------------------------
(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 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.
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,
F-10
34
STRATEGIC CAPITAL RESOURCES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2002, 2001 AND 2000
----------------------------
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.
The adoption of these pronouncements is not expected to have a material
effect on our consolidated financial statements.
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. The
Company does not believe the adoption of this standard will have a material
impact the consolidated financial statements.
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
F-11
35
STRATEGIC CAPITAL RESOURCES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2002, 2001 AND 2000
----------------------------
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 Company does not believe the
adoption of this statement will have a material impact on the 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
-----------------------
The Company accounts for all of its financing arrangements under the direct
financing method of accounting prescribed under SFAS No. 13, Accounting for
Leases.
Under the direct finance method of accounting, the assets are recorded as
an investment in direct finance arrangements and represent the minimum net
payments receivable, including third-party guaranteed residuals, plus the
un-guaranteed residual value of the assets, if any, less unearned income.
Sales and cost of direct financing arrangements are recorded at the time
each property sale is closed and when title and possession has been
transferred to the buyer.
(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.
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:
F-12
36
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
-------- -------- ---------
Earnings:
Net income (loss) $951,339 $ 53,791 $ (78,706)
Dividends on preferred shares (55,000) (85,000) (120,000)
-------- -------- ---------
Income (loss) applicable to common stockholders $896,339 $(31,209) $(198,706)
======== ======== =========
Basic:
Income (loss) applicable to common stockholders $896,339 $(31,209) $(198,706)
======== ======== =========
Weighted average shares outstanding during the
year 77,192 78,009 79,363
======== ======== =========
Basic earnings (loss) per share $ 11.61 $ (.40) $ (2.50)
======== ======== =========
Diluted:
Income (loss) applicable to common stockholders $896,339 $(31,209) $(198,706)
======== ======== =========
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 $ 11.55 $ (.40) $ (2.50)
======== ======== =========
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