10-Q/A 1 strategic_1qa2.txt 10-Q/A - AMENDMENT NO. 2 UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, DC 20549 FORM 10-Q/A2 [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended September 30, 2002 [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 Commission File No. 0-28168 Strategic Capital Resources, Inc. --------------------------------- (Exact name of Registrant as specified in its charter) Delaware 11-3289981 ------------------------------- ------------------------------------ (State or other jurisdiction of (IRS Employer Identification Number) incorporation or organization) 7900 Glades Road, Suite 610, Boca Raton, Florida 33434 ------------------------------------------------------ (Address of principal executive office) (561) 558-0165 -------------- (Registrant's Telephone Number, Including Area Code) Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Sections 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding twelve months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ] Indicate by check mark whether the registrant is an accelerated filer (as described in Rule 12-b of the Exchange Act) Yes [ ] No [X] Indicate the number of shares outstanding of each of the issuer's classes of common stock as of the latest practicable date. The number of shares of common stock, part value $.001 per share, outstanding as of January 2, 2003 was 77,192. STRATEGIC CAPITAL RESOURCES, INC. AND SUBSIDIARIES INDEX Part I FINANCIAL INFORMATION Item 1. Financial Statements Page Number Condensed Consolidated Balance Sheets as of 3 September 30, 2002 (unaudited) and June 30, 2002 Condensed Consolidated Statements of Income 4 for the three months ended September 30, 2002 and 2001 (unaudited) Condensed Consolidated Statements of Cash Flows for 5 the three months ended September 30, 2002 and 2001 (unaudited) Notes to Condensed Consolidated Financial Statements 6-18 (unaudited) Item 2. Management's Discussion and Analysis of Financial 19-26 Condition and Results of Operations Item 3. Quantitative and Qualitative Disclosures About 26 Market Risk Item 4. Controls and Procedures 26 Part II. OTHER INFORMATION 27-29 SIGNATURES AND CERTIFICATIONS 30-33 2 STRATEGIC CAPITAL RESOURCES, INC. PART I. - FINANCIAL INFORMATION Item 1 - Financial Statements

See accompanying Notes to Condensed Consolidated Financial Statements 3

See accompanying Notes to Condensed Consolidated Financial Statements 4

See accompanying Notes to Condensed Consolidated Financial Statements 5 STRATEGIC CAPITAL RESOURCES, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS September 30, 2002 (Unaudited) Note 1. DESCRIPTION OF BUSINESS Description of Business ----------------------- The Company provides specialized financing for major homebuilders and real estate clients throughout the United States. The 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 and has been engaged in such arrangements in three product lines of business, consisting of one reportable segment: 1. Purchase and lease of fully furnished model homes complete with options and upgrades 2. Residential real estate acquisition and development 3. Multi-family residential property (sold March 2003) Note 2. BASIS OF PRESENTATION Interim Presentation -------------------- The accompanying condensed consolidated financial statements have been prepared in conformity with the instructions to Form 10-Q and Article 10, Rule 10-01 of Regulation S-X for interim financial statements. Accordingly, they do not include all the information and footnote disclosures normally included in financial statements presented in accordance with accounting principles generally accepted in the United States have been omitted from the accompanying condensed consolidated financial statements. The Company's management believes the disclosures made are adequate to make the information presented not misleading. The condensed consolidated balance sheet information as of June 30, 2002 was derived from the audited consolidated financial statements included in the Company's Annual Report Form 10-K/A1. The condensed consolidated financial statements included as part of this Form 10-Q filing should be read in conjunction with that report. The accompanying unaudited condensed consolidated financial statements reflect all adjustments, consisting primarily of normal recurring items that, in the opinion of the management of the Company, are considered necessary for a fair presentation of the consolidated financial position, results from operations and cash flows for the periods presented. Results of operations achieved through September 30, 2002 are not necessarily indicative of those which may be achieved for the year ending June 30, 2003. 6 All references in the condensed consolidated financial statements to common shares, share prices, per share amounts and stock plans have been retroactively restated for the two hundred-for-one reverse stock split effective June, 2002 Note 3. SUMMARY OF SIGINIFICANT ACCOUNTING POLICIES Principles of Consolidation --------------------------- The accompanying condensed consolidated financial statements include the accounts of Strategic Capital Resources, Inc. and its wholly owned subsidiaries, which include special purpose subsidiaries. Intercompany transactions have been eliminated in consolidation. Special Purpose/Variable Interest Entities ------------------------------------------ The Company has several wholly owned special purpose subsidiaries, all of which are consolidated. They have been formed for the exclusive purpose of acquiring specific properties and perform no functions other than to manage a specific project. A special purpose subsidiary is an entity structured in a way that its sole activity is the specific project. Special Purpose/Variable Interest Entities/Off Balance Sheet Arrangements ------------------------------------------------------------------------- The Company does not have off-balance sheet arrangements with special purpose entities, variable interest entities or any other entities. Use of Estimates ---------------- The preparation of condensed consolidated 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 condensed consolidated financial statements, and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. 7 Fair Value of Financial Instruments ----------------------------------- The carrying value of all financial instruments, including cash and cash equivalent, debt, accounts payable and accrued expenses, approximates their fair value at the end of the reporting period due to the relatively short term nature of these instruments. Revenue Recognition ------------------- The Company accounts for its model homes and residential real estate development financing arrangements under the direct financing method of accounting prescribed under Statement of Financial Accounting Standards ("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 payment 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 considered financing arrangements, the Company recognizes the related interest income monthly. There is no gain from the sale of this real estate because the sales price equals the Company's cost. For the quarter ended September 30, 2002 and 2001, the Company sold $10,269,970 and $2,048,448 of residential real estate, respectively. See Item 2, Management's Discussion, Analysis of Financial Condition and Results of Operations. Interest income on model home direct financing arrangements is recognized monthly, when earned and in accordance with the agreements. The Company accounts for its multi-family residential property arrangement as a direct financing arrangements. Interest income is recorded, as earned over the term of the agreement. See Note 5 and Item 2, Management's Discussion, Analysis of Financial Condition and Results of Operations. We believe that the Company's revenue recognition policies are appropriate to reflect the substance of the underlying transactions. Reclassifications ----------------- Certain prior year amounts and account descriptions have been reclassified in the condensed consolidated financial statements and the related notes to conform to the 2002 presentation. 8 Sales of residential real estate sold 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 sales of residential real estate are now disclosed in Note 3 and in Item 2, Management's Discussion, Analysis of Financial Condition and Results of Operations. The multi-family operating expenses (property taxes, insurance and repairs) have been netted against the multi-family interest income in the accompanying condensed consolidated statements of income. See Note 5 and Management's Discussion, Analysis of Financial Condition and Results of Operations. The proceeds from the sale of model homes under direct financing arrangements and the related costs have been reported as a net gain or loss in the condensed consolidated statements of income. SEC Consultation/Prior Period Restatements ------------------------------------------ The Company has consulted with the Securities and Exchange Commission and requested guidance with regard to accounting issues relating to the issuance of warrants in conjunction with stockholder loans in addition to the proper classification of its assets as well as the recording of certain sales and cost of sales of the related asset dispositions. These consultations included the proper timing of revenue and expense recognition versus cash flow recognition for accounting purposes. The accompanying condensed consolidated balance sheet as of September 30, 2002 and the condensed consolidated statements of income and cash flows for the three months ended September 30, 2002 have been restated to correct errors resulting in the net overstatement of interest income and income tax expense. The proceeds from the sale of model homes under direct financing arrangements and the related costs have been reported as a net gain in the condensed consolidated statements of income. Revenue and cost of sales have previously been recorded at the time each home or finished lot was closed and title and possession was transferred to the buyer as well as the receipt of "good collected funds" by us. Under direct finance accounting arrangements we now only record the net gain or loss on the sale. Sales of residential real estate sold under direct financing arrangements and the related costs which have been the same amount are no longer reported as operating revenue and operating expense. The sales of residential real estate are now disclosed in management's discussion and analysis and Note 3. 9 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 $31,717 and $15,600 for the three months ended September 30, 2002 and 2001, respectively. Income tax expense was reduced by $12,687 and $6,240, respectively. The adjustment to interest income also resulted in a decrease to the net investment in the multi-family residential property by $249,131 at September 30, 2002. The net investment is $9,978,868 at September 30, 2002. The deferred tax asset at September 30, 2002 is $99,653. The aggregate net effect of the correction of the errors was to reduce previously reported net income of $218,127 and $444,549 for the three months ended September 30, 2002 and 2001 to net income of $199,097 and $435,189, respectively. The aggregate net effect of the correction of the errors on income per share was to reduce previously reported earnings per share of $2.76 and $5.56 for the three months ended September 30, 2002 and 2001 to income per share of $2.51 and $5.44, respectively. The retained earnings, additional paid-in capital, the net investment in multi family residential property and the deferred tax asset in the September 30, 2002 condensed consolidated balance sheet, and the net income, interest income and income tax expense in the condensed consolidated statements of income and cash flows for the three months ended September 30, 2002 have been restated for the effect of the adjustments resulting from the correction of the errors. The conclusions reached with the Securities and Exchange Commission have been incorporated into this filing. Additionally as a result of the conclusions reached, the Company amended its annual report on Form 10-K for its fiscal year ended June 30, 2002 and is amending its Form 10-Q for the quarter ended September 30, 2002 and the six months ended December 31, 2002. The Company has been advised by the Securities and Exchange Commission that it will be performing a "cover to cover" review of its amended Form 10-K for the fiscal year ended June 30, 2002 as well as other filings. The Securities and Exchange Commission may have additional comments that require additional amendments to our filings. We have not been advised when the "cover to cover" review will be completed. 10 Note 4. NET INVESTMENT IN DIRECT FINANCING ARRANGEMENTS The components of the net investment in direct financing arrangements at September 30, 2002 and June 30, 2002 are as follows: September 30, June 30, 2002 2002 (As Restated) (As Restated) ------------ ------------ Total minimum payments receivable $ 83,293,399 $ 88,344,330 Less: Unearned income 176,539 173,038 ------------ ------------ Net investment in direct financing leases $ 83,116,860 $ 88,171,292 ============ ============ Note 5. MULTI-FAMILY RESIDENTIAL PROPERTY The asset described below was sold March, 2003. 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 ============ 11 At the time of purchase, the Company entered into a five year management agreement with a non affiliated independent management company. The management company was responsible for the operation of the property, retained all income from the property and was responsible for any losses. The Company received 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 was variable based on changes in estimated expenses. The multi-family operating expenses (property taxes, insurance and repairs) were netted against the multi-family interest income in the accompanying condensed consolidated statements of income. The Company's profit on the transaction is the difference between the 12% return and interest expense paid by the Company on its $5,300,000 loan. The management company received the benefit of the property appreciation, rent and occupancy increases. The annual return was 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 was 12%. The management company had 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 failed to exercise the option, the management company was 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 was obtained and paid for by the management company to insure the payment and performance of the management company. The performance bond insured the monthly payments by the management company and the $5,300,000 balloon payment at the end of the Management Agreement. The Company accounted for the multi-family residential property as a direct financing arrangement, in accordance with the provisions of SFAS No. 13, Accounting for Leases, because the agreement contained 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 condensed consolidated financial statements (see Note 3). SFAS No. 13 dictates the following accounting treatment for this transaction: (1) Using the actual purchase price of $10,227,999, the projected bargain purchase option at the end of five (5) years of $9,630,902 and the minimum lease payments, an implicit interest rate of 10.295% was derived utilizing present value tables; (2) the implicit interest rate was then applied to the purchase price and an interest income stream was generated for the five (5) years; (3) the calculated amount was compared to the actual cash amount received (net of executory payments for taxes and insurances); (4) since the actual interest was greater than the implicit interest the actual interest was adjusted, resulting in a non-cash interest expense charge in each of the fiscal years commencing with June 30, 2000. Additionally, the net investment in the multi-family direct financing arrangement in the condensed consolidated balance sheet was decreased by the adjustment in (4) above resulting in a net investment in the multi-family residential property of $9,978,868 at September 30, 2002. The adjustment also results in an increase in deferred tax asset, since the adjustment is being recognized for book purposes and not for tax purposes. 12 The table below reflects the change to the results previously reported.

The effect on the condensed consolidated statement of income for the three months ended September 30, 2002 and 2001was to reduce interest income by $31,717 and $15,600, respectively (See Note 3 - SEC Consultation/Prior Period Adjustments). In March 2003, the management company exercised its option to purchase the property. The sales price of $9,895,920 was the sum of $5,300,000, the unpaid interest adjustment of $146,896 ($121,527 plus accrued interest), and the balance of the first mortgage of $4,384,570 plus closing adjustments of $64,454. The company received cash at closing of $902,961 which was net of the outstanding balance of the original $5,300,000 loan. Due to the reduction of the balance sheet value of the asset by the non-cash interest expense, a gain on the sale of $281,670 was recorded for the three months ended March 31, 2003. Note 4. COMMITMENTS AND CONTINGENCIES A. Financing Activities -------------------- At September 30, 2002, the Company had approximately $27 million of unused, committed credit facilities available under existing revolving loan agreements, which may be utilized to acquire revenue producing real estate assets. Such credit facilities expire through August 2003. During September 2002, the Company received a commitment for a $15.7 million credit facility. The interest rate is based on a 30-day LIBOR rate plus a premium. This facility expires May 2005. As a part of its ongoing business, the Company is in discussion with financial institutions for new credit facilities, as well as private or public placements of its debt or equity securities. The possible offering or private placement of senior notes with warrants, convertible preferred stock or similar type of security is constantly being evaluated. It is the Company's policy not to incur costs from activation of credit facilities unless and until needed. We make preliminary commitments to acquire revenue producing assets and to enter into various types of purchase and leaseback transactions as well as financing arrangements. We disclose these commitments as part of our routine reporting. Such preliminary commitments are subject to routine changes in size, dollar amounts and closing time, prior to finalization. Such changes arise from a variety of factors, including changes in client needs, economic conditions, and completion of due diligence and financing agreements. 13 B. Legal Proceedings ----------------- During the year ended June 30, 1997, we disposed of our construction subsidiary, Iron Eagle Contracting and Mechanical, Inc. ("IECM"). Under the terms of the agreement, we sold the net assets of IECM for a note in the amount of $1,312,500. The note bore interest at the prime rate plus 1%. Interest was payable in monthly installments. The note was secured by all assets of IECM's parent company, Monarch Investment Properties, Inc. ("Monarch"), which was formerly known as Iron Holdings Corp., and by all of the issued and outstanding shares of IECM. During June 1999, we filed a lawsuit against Monarch, and its subsidiaries, IECM and Tahoe Realty Corp., as well as two of its officers and other individuals, in the Supreme Court of the State of New York, County of Queens. The action asserts seven separate causes of action arising out of a default in payment of the remaining $1,100,000 balance due under the promissory note evidencing monies due to us from Monarch as a result of its purchase of IECM from us. The Court granted our motion for summary judgment during March 2000 against Monarch in the sum of $1,100,000 plus interest from January 1, 1999, a judgment of possession of all collateral pledged by Monarch and judgment that we are the rightful owner and entitled to immediate possession of the collateral, impressing a trust on said collateral, declaring defendants to be trustees of said collateral and directing said trustees to deliver such collateral to us. A decision of the Appellate Division limited the extent of the corporate defendant's liability and the thrust of the action is against the guarantors. The action is now in the discovery stage. While it is difficult to predict the outcome of any litigation, there are no counterclaims asserted against us and there does not appear to be a range of potential loss to us. During the years ended June 30, 2001 and 2000, we 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. Also, we filed suit against BankAtlantic Bankcorp, Inc. and BankAtlantic, a federal savings bank, in the Circuit court of the 15th Judicial Circuit in and for Palm Beach County, Florida, by complaint dated December 30, 1998. The complaint charges a breach of fiduciary duty and seeks unspecified damages in that the defendant undertook to act as agent or broker in connection with obtaining a $200 million loan facility relating to a sale and lease back program for a major, publicly-traded national builder. Rather than complete the financing transaction, the complaint alleges economic opportunity was usurped by defendant and entered into an agreement directly with the builder, utilizing, inter alia, the terms of our program. This matter is in the early stages of discovery. Since this represents a potential contingent gain for us, there are no receivable amounts recorded in the accompanying condensed consolidated balance sheets. 14 During May 2000, we, along with FPE Funding, LLC, filed a complaint entitled "In the case of Strategic Capital Resources, Inc. and FPE Funding, LLC v. Dylan Tire Industries, LLC, Dylan Custom Mixing, LLC; Mid-American Machine and Equipment, LLC f/k/a Mid-American Tire and Machine, LLC; GMAC Commercial Credit, LLC: Robert C. Liddon, Trustee, Mary Aronov, Trustee; David Feingold; John Tindal; Brett Morehouse, Johnny Guy; Shan Sutherland; and Pirelli Tire LLC," Chancery Court for Davidson County, Tennessee, Case No. 00-1296-III, against the referenced defendants alleging, among other things, breach of contract, fraud, and civil conspiracy, arising from the breach of a sale and leaseback commitment for which we procured funding and under which FPE was to be the owner/lessor of a manufacturing facility. The defendants/counter-plaintiffs, Dylan Tire Industries, LLC, Mid-American Machine and Equipment, LLC and Dylan Custom Mixing, LLC have filed a counterclaim, seeking unspecified consequential damages "estimated to exceed $500,000" for alleged breach of a loan commitment issued by us. The basis of the claim is that we allegedly failed to honor our commitment to lend for the acquisition of a manufacturing facility, resulting in damages to the defendants/counter-plaintiffs, who borrowed the money directly from our lender at allegedly greater cost and who allegedly had to pay a greater price for the facility as a result of the alleged delay in the closing. We believe the counterclaim is without merit and are vigorously defending. As such, there is no accrual in the accompanying condensed 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. Star Insurance Company v. Strategic Capital Resources, Inc., 15th Judicial Court, Palm Beach County, Florida, Case No. CL 00-433 AD, 15 The Company resolved the Star Insurance Company action. Based on mediation, the case was settled for $250,000 in January 2003. This amount was previously accrued as a corporate expense in the quarter ended September 30, 2002. The lawsuit against the Company was far in excess of $2,500,000. The Company and its counsel were convinced that our defense was very strong but decided to settle the suit in order to avoid the uncertainty of a jury verdict as well as the expenses of the inevitable appeals that would follow. The mediator pointed out that our cost to defend the lawsuit and appeals would exceed the $250,000 settlement. On January 15, 2003, we wire transferred $250,000 to Star Insurance Company's attorney trust account in full settlement of this litigation. The receipt of the funds was acknowledged. We have not received the executed settlement agreement as of April 30, 2003 and demanded the return of our funds by May 1, 2003. Star Insurance Company faxed back an executed settlement agreement on May 1, 2003. We filed a motion with the court to have the $250,000 settlement payment returned to us and Star Insurance Company then made a motion to compel settlement. A decision is anticipated this calendar year. Strategic Capital Resources, Inc. vs. Citrin Cooperman& Company, LLP, Horton & Company, LLP and Edward Horton, United State District Court, Southern District of Florida, Case No. 03-80249-CIV-HURLEY. We filed suit against our former auditors. In our Complaint we allege among other things that the defendants neglected and breached their duty to us by failing to complete an audit which was necessary for us to file our Form 10-K for the fiscal year ended June 30, 2002, timely, failed to disclose that its principal independent accountant (Edward C. Horton) and his former firm (Horton & Company, LLC) as well as others at Citrin Cooperman & Company, LLP had been temporarily denied the privilege of appearing or practicing before the Securities and Exchange Commission as an accountant, failed to obtain authorization to practice accountancy in the State of Florida as well as other acts of malpractice and abuse of duty. The litigation is in its early stages and therefore, an outcome is not predictable at this time. We are not presently involved in any other material litigation other than previously disclosed nor, to our knowledge, are any other material litigation threatened against us or any of our properties, other than routine litigation arising in the ordinary course of business. Note 5. MORTGAGES AND NOTES PAYABLE Mortgages and notes payable are collateralized by first mortgages on specific properties. Interest is payable monthly in arrears at interest rates ranging from 4.75% to 8.75% as of September 30, 2002. The maturity dates range from one (1) to fifteen (15) years. In addition to the mortgages being secured by specific properties, all loans are secured by specific lease and related security bonds and/or residual value insurance policies. 16 Note 6. SUPPLEMENTAL CASH FLOW INFORMATION The Company's non-cash investing and financing activities were as follows: Three Months Three Months Ended Ended September 30, September 30, Model Home and Residential Real Estate Sales 2002 2001 -------------------------------------------- ------------ ------------ Sales proceeds $ 10,420,519 $ 5,898,379 Debt payments (9,584,286) (5,526,714) ------------ ------------ Net proceeds $ 836,233 $ 371,665 ============ ============ Investment in Residential Real Estate ------------------------------------- Investment $ 5,381,904 $ 13,893,109 Related debt (4,681,678) (9,827,338) ------------ ------------ Net investment $ 700,226 $ 4,065,771 ============ ============ Interest paid to financial institutions totaled $1,054,074 during the three months ended September 30, 2002 and $1,384,081 for the three months ended September 30, 2001. Interest paid to stockholders totaled $34,634 during the three months ended September 30, 2002 and $27,873 for the three months ended September 30, 2001. Income taxes paid totaled $326,558 during the three months ended September 30, 2002, and $8,175 during the three months ended September 30, 2001. Note 7. EARNINGS PER SHARE Basic and diluted earnings per share are calculated as follows: Three Months Ended September 30, 2002 2001 (As Restated) (As Restated) ---------- ---------- Earnings: Net income $199,097 $435,189 Dividends on preferred shares 5,000 15,000 -------- -------- Income applicable to common shareholders $194,097 $420,189 ======== ======== Basic: Income applicable to common shareholders $194,097 $420,189 Weighted average shares outstanding during the period 77,192 77,192 ======== ======== Basic $ 2.51 $ 5.44 ======== ======== Diluted: Income applicable to common shareholders $194,097 $420,189 Weighted average shares outstanding during the period 77,192 77,192 Effect of dilutive securities: Stock options 0 533 Warrants 0 1,340 -------- -------- Diluted weighted common shares outstanding 77,192 79,065 ======== ======== Diluted $ 2.51 $ 5.31 ======== ======== 17 Note 8. SUBSEQUENT EVENTS A. Model Home Program From October 1, 2002 through January 6, 2003, the Company sold twelve (12) model homes underlying the direct financing leases at an aggregate sales price of $3,045,936. These models were acquired at an aggregate costs of $2,649,965. The Company also has contracts pending on nine (9) model homes at an aggregate sale price of $2,832,740 and costs of $2,369,035. B. Residential Real Estate Land Banking From October 1, 2002 through January 6, 2003, the Company paid development costs in the amount of $2,226,968 and had sales of finished lots in the amount of $14,661,760. 18 Item 2. Management's Discussion, Analysis of Financial Condition and Results of Operations Disclosure Regarding Forward-Looking Statements This Quarterly Report on Form 10-Q contains "forward-looking statements" within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. Discussions containing forward-looking statements may be found in the material set forth in the section "Management's Discussion and Analysis of Financial Condition and Results of Operations". These statements concern expectations, beliefs, projections, future plans and strategies, anticipated events or trends and similar expressions concerning matters that are not historical facts. Specifically, this Quarterly Report contains forward-looking statements regarding: 1. our estimate that we have adequate financial resources to meet our current working capital needs for the foreseeable future; 2. the impact of inflation on our future results of operations; and 3. our ability to pass through to our customers in the form of increased prices any increases in our costs. These forward-looking statements reflect our current views about future events and are subject to risks, uncertainties and assumptions. We wish to caution readers that certain important factors may have affected and could in the future affect our actual results and could cause actual results to differ significantly from those expressed in any forward-looking statement. The most important factors that could prevent us from achieving our goals, and cause the assumptions underlying forward-looking statements and the actual results to differ materially from those expressed in or implied by those forward-looking statements include, but are not limited to, the following: 1. our significant level of debt; 2. our ability to borrow or otherwise finance our business in the future; 3. our ability to locate customers in need of our services; 4. economic or other business conditions that affect the desire or ability of our customers to build new homes in markets in which we conduct our business; 5. a decline in the demand for housing; 6. a decline in the value of the land and model home inventories we maintain; 7. an increase in interest rates; 8. our ability to successfully dispose of developed properties, model homes, or undeveloped land or lots at expected prices and within anticipated time frames; 9. our ability to compete in our existing and future markets; and 10. an increase or change in governmental regulations. 19 OVERVIEW We are a Delaware corporation organized in 1995. Our principal operations consist of the following product lines consisting of one (1) business segment: 1. The purchase and lease of fully furnished model homes complete with options and upgrades. 2. Residential real estate acquisition and development. 3. Multi-family residential property (sold March 2003). The Company derives its income by acquiring revenue producing assets and entering into agreements for direct financing or operating leases. During the three months ended September 30, 2002, revenue producing assets totaling $10,420,520 were sold. For the three months ended September 30 2002 and 2001, the Company had sales of residential real estate amounting to $10,269,970 and $2,048,448 respectively. Sales of residential real estate sold 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 sales of residential real estate are now disclosed in Note 3, Revenue Recognition as well as Item 2, Management's Discussion, Analysis of Financial Condition and Results of Operations. RESULTS OF OPERATIONS Comparison of Three Months Ended September 30, 2002 to Three Months ended September 30, 2001 A summary of operating results for the three months ended September 30, 2002 and 2001 are presented below. Three Months Ended September 30 --------------------------- 2002 2001 (As Restated) (As restated) ------------ ------------ Revenues and other income: $ 2,493,834 $ 2,795,020 ------------ ------------ Costs and operating expenses: Interest and financing costs 1,088,438 1,411,954 Depreciation and amortization 355,901 361,259 Corporate selling, general and administrative 448,085 402,858 Impairment Charge 250,000 -- ------------ ------------ Total costs and operating expenses 2,142,424 2,176,071 ------------ ------------ Income before income taxes 351,410 618,949 Income tax expense 152,313 183,760 ------------ ------------ Net income $ 199,097 $ 435,189 ============ ============ 20 Revenues and other income for the three months ended September 30, 2002 decreased $301,186 compared to the prior year period. The decrease was due to the reduction in the amount of revenue producing assets. For the three months ended September 30, 2002 and 2001, the Company had sales of revenue producing assets of $10,420,519 and $5,898,379, respectively. This decrease resulted in $158,540 less interest income on direct financing arrangements. Gain on sales of model home properties also decreased by $124,170. Costs and operating expenses decreased by $33,647 for the three months ended September 30, 2002 compared to the prior year period. Interest expense decreased $323,516 due to lower interest rates on floating rate loans and reduced balances. Corporate selling, general and administrative increased by $45,227. Consulting fees accounted for $22,000 of this increase. The settlement with Star Insurance of $250,000 also increased the cost and operating expenses. The effective tax rate increased from 30% to 43% due to the decrease in available net operating loss carry forwards. Net income for the three months ended September 30, 2002 decreased by $236,092. The majority of this decrease was due to the Star Insurance settlement of $250,000 as mentioned above. Model Homes under Direct Financing Arrangements We purchase and leaseback fully furnished model homes complete with options and upgrades to major publicly traded homebuilders. The model homes are leased pursuant to a triple-net lease where the lessee is obligated to pay all maintenance, taxes, insurance, etc., in addition to the required lease payment. We try to develop new programs on a continuing basis to satisfy customer needs and changing economic conditions. Since inception, we have purchased a total of 463 model homes at an aggregate purchase price in excess of $102,000,000. The following is a breakdown of model homes and their purchase price by state under direct financing arrangements: September 30, 2002 September 30, 2001 ------------------ ------------------ State Number Amount Number Amount of Homes of Homes -------------- ----------- ----------- ----------- ----------- Arizona -- -- 2 $ 248,665 California 25 $ 6,703,315 44 11,669,315 Florida -- -- 1 472,917 Iowa 8 1,259,335 13 2,247,025 Minnesota 1 226,040 6 1,443,935 Nevada 4 469,960 13 1,667,790 New Jersey 20 5,028,087 25 7,006,755 New York 1 254,000 3 883,291 North Carolina 5 1,155,778 6 1,497,891 Pennsylvania 1 250,000 5 1,196,424 Texas 2 659,000 9 2,299,900 Utah -- -- 3 496,097 ----------- ----------- ----------- ----------- Total 67 $16,005,515 130 $31,130,005 =========== =========== =========== =========== 21 The following is a breakdown of interest income on model homes under direct financing arrangements by state: Three Months Ended September 30, State 2002 2001 ------------------------------ -------- -------- California $200,275 $350,079 Florida 0 22,784 Iowa 23,613 55,188 Minnesota 4,238 36,557 Nevada 0 20,278 New Jersey 141,436 217,734 New York 7,620 25,712 North Carolina 34,673 49,010 Pennsylvania 5,222 42,138 Texas 19,770 68,996 -------- -------- Total $436,847 $888,476 ======== ======== 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.). 22 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 forfeiting 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. We are required to market the property. Residual Value Insurance has been obtained to mitigate this risk however the insurance company provider of this coverage may be unwilling or unable to pay a claim filed. The following is a summary of our residential real estate projects:

23 The Company had sales of finished lots as follows: Three Months Three Months 9/30/2002 9/30/2001 ------------ ------------ Sales $ 10,269,970 $ 2,048,448 Cost of sales $ 10,269,970 $ 2,048,448 Net gain or loss $ 0 $ 0 ============ ============ The following is a breakdown of interest income on residential real estate by state: Three Months Ended September 30, State 2002 2001 ------------------------------ ---------- ---------- California $1,212,835 $ 913,692 Arizona 43,492 61,497 Nevada 137,419 398,874 New Jersey 419,989 73,752 Utah 0 63,641 ---------- ---------- Total $1,813,735 $1,511,456 ========== ========== Residual Value Insurance 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. 24 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. Liquidity and Capital Resources Funding for our operations has been provided by cash flow from operations secured bank loans as well as loans from our stockholders. Our uses for cash during the three months ended September 30, 2002 were for revenue producing asset acquisitions, interest payments to banks and operating expenses. We provided for our cash requirements from borrowings, the sale of direct financing leases and other revenues. We believe that these sources of cash are sufficient to finance our working capital requirement and other needs for the next twelve (12) months. In order to acquire larger asset acquisitions, additional capital and/or credit enhancement may be needed to meet the equity requirements imposed by our financing sources. 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 future results of operations. 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 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. We can not determine the impact if any of deflation on our future operations at this time. 25 Interest Rate Risk The primary market risk facing us is interest rate risk on our current and future variable rate mortgage loans which are based on a base rate plus a negotiated premium. To date, we have not hedged interest rate risk but continually evaluate interest rate swaps and other financial instruments to mitigate this risk. While we have benefited from the overall reduction in interest rates, there is no assurance that such benefits will continue. If interest rates increase, it will have a negative impact on margins. Item 3 -- Quantitative and Qualitative Disclosures about Market Risk We are exposed to changes in interest rates primarily as a result of our floating rate debt arrangements, which include borrowings under lines of credit. These lines, along with cash flow from operations, are used to maintain liquidity and fund business operations. The nature and amount of our debt may vary as a result of business requirements, market conditions and other factors. It has not been necessary for us to use derivative instruments to adjust our interest rate risk profile, although we continuously evaluate the need for interest rate caps, swaps, and other interest rate-related derivative contracts, to mitigate this risk. We have attempted to comply with the Sarbanes-Oxley Act of 2002. The Securities and Exchange Commission implemented Section 302 of the Sarbanes-Oxley Act of 2002 (the "Act") effective August 29, 2002. Provisions of the Act apply to all public reporting companies who file reports with the Securities and Exchange Commission. In addition to certification by the Chief Executive Officer and Chief Financial Officer as to the accuracy and completeness of financial statements contained in filed reports, other restrictions and requirements are part of the Act. The consensus of the AICPA and public filers is that additional clarification will be needed to fully comply with the Act. Item 4 -- Controls and Procedures During the 90-day period prior to the filing of this report, management, including the Company's President & Chief Executive Officer and Chief Financial Officer evaluated the effectiveness of the design and operation of the Corporation's disclosure controls and procedures. Based upon, and as of the date of that evaluation, the President & Chief Executive Officer and Chief Financial Officer concluded that the disclosure controls and procedures were effective, in all material respects, to ensure that information required to be disclosed in the reports the Company files and submits under the Exchange Act is recorded, processed, summarized and reported as and when required. There have been no significant changes in the Company's internal controls or in other factors, which could significantly affect internal controls subsequent to the date the Company carried out its evaluation. There were no significant deficiencies or material weaknesses identified in the evaluation and, therefore, no corrective actions were taken. 26 PART II - OTHER INFORMATION Item 1. CURRENT LEGAL DEVELOPMENTS Strategic Capital Resources, Inc. and FPE Funding, LLC v. Dylan Tire Industries, LLC, et al. On January 2, 2003, the Company was advised that the Tennessee Supreme Court denied our request for appeal without an opinion (which is standard procedure). We are currently analyzing our options. 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. Star Insurance Company v. Strategic Capital Resources, Inc., 15th Judicial Court, Palm Beach County, Florida, Case No. CL 00-433 AD, The Company resolved the Star Insurance Company action. Based on mediation, the case was settled for $250,000 in January 2003. This amount was previously accrued as a corporate expense in the quarter ended September 30, 2002. The lawsuit against the Company was far in excess of $2,500,000. The Company and its counsel were convinced that our defense was very strong but decided to settle the suit in order to avoid the uncertainty of a jury verdict as well as the expenses of the inevitable appeals that would follow. The mediator pointed out that our cost to defend the lawsuit and appeals would exceed the $250,000 settlement. On January 15, 2003, we wire transferred $250,000 to Star Insurance Company's attorney trust account in full settlement of this litigation. The receipt of the funds was acknowledged. We have not received the executed settlement agreement as of April 30, 2003 and demanded the return of our funds by May 1, 2003. Star Insurance Company faxed back an executed settlement agreement on May 1, 2003. We filed a motion with the court to have the $250,000 settlement payment returned to us and Star Insurance Company then made a motion to compel settlement. A decision is anticipated this calendar year. Strategic Capital Resources, Inc. vs. Citrin Cooperman& Company, LLP, Horton & Company, LLP and Edward Horton, United State District Court, Southern District of Florida, Case No. 03-80249-CIV-HURLEY. We filed suit against our former auditors. In our Complaint we allege among other things that the defendants neglected and breached their duty to us by failing to complete an audit which was necessary for us to file our Form 10-K for the fiscal year ended June 30, 2002, timely, failed to disclose that its principal independent accountant (Edward C. Horton) and his former firm (Horton & Company, LLC) as well as others at Citrin Cooperman & Company, LLP had been temporarily denied the privilege of appearing or practicing before the Securities and Exchange Commission as an accountant, failed to obtain authorization to practice accountancy in the State of Florida as well as other acts of malpractice and abuse of duty. The litigation is in its early stages and therefore, an outcome is not predictable at this time. 27 We are not presently involved in any other material litigation other than previously disclosed nor, to our knowledge, are any other material litigation threatened against us or any of our properties, other than routine litigation arising in the ordinary course of business. Item 2. CHANGES IN SECURITIES Most of our previously outstanding warrants to purchase shares of our Common Stock had been issued to Mr. Miller, our Chairman, in connection with loans that had been extended to us by Mr. Miller and another member of our management from time to time since our inception. The loans represented funds that were necessary to conclude transactions in the ordinary course of our business, but were unavailable from other sources. According to the terms of these warrants, in the event of a transaction that resulted in a reduction of the number of outstanding shares of our Common Stock, including a reverse stock split, there would be no proportionate adjustment in the number of shares issuable upon exercise of the warrants or in the exercise price thereof. The warrants had exercise prices that ranged from $.13 to $.47. In June 2002, an aggregate of 1,430,000 warrants were exercised for an aggregate exercise price of $236,100 (approximately $.17 per warrant). In December 2002, the warrant exercise discussed above was rescinded by the mutual consent of the former warrant holders and our Company. This rescission was necessary due to what we believe to be inaccurate advice provided to us by our former independent accountants, who failed to advise of various negative tax consequences to the warrant holder, and more importantly, significant negative impact to our income statement relating to the fact that the applicable warrant agreement contained the provisions discussed above. In addition, also in December 2002, pursuant to our Board of Directors and the warrant holders, the relevant warrant agreements were amended to negate the provisions specifying that they are not affected by any reverse stock split, effective as of the date of our reverse stock split. As a result, the 8,797,114 previously outstanding warrants have been reduced to 38,856 pursuant to the 200:1 reverse stock split previously undertaken. The exercise prices have also been adjusted pursuant to the reverse stock split, resulting in exercise prices ranging from $24 to $94 per warrant. This amendment was also necessary as a result of incorrect advice provided by our prior independent accountants. 28 Item 3. DEFAULTS UPON SENIOR SECURITIES - None. Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS - None Item 5. OTHER INFORMATION - Not applicable Item 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits 99.1 Certification of Financial Statements in accordance with Sarbanes-Oxley Act (b) Reports on Form 8-K. We did not file any reports on Form 8-K during the three month period ended September 30, 2002. Subsequent to September 30, 2002, we filed two reports on Form 8-K, including the following: 1. During October 2002, we filed a report on Form 8-K, wherein we advised of the resignation of Citrin Cooperman & Company, LLP as our independent auditor and the retention of Weinberg & Company, P.A. as our independent auditor who audited our financial statements for our fiscal years ended June 30, 2002, 2001 and 2000. This Form 8-K also included a lengthy narrative on the events and circumstances surrounding the resignation of Citrin Cooperman & Company, LLP. 2. During December 2002, we filed a report on Form 8-K, advising of various changes to the accounting treatment we had historically attributed to the sales of our model homes, as well as the accounting treatment applicable to our amending certain warrant agreements relating to our outstanding warrants. 29 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. Strategic Capital Resources, Inc. (Registrant) By: /s/ DAVID MILLER ------------------------------------- David Miller Chief Executive Officer Date: June 24, 2003 30

STRATEGIC CAPITAL RESOURCES INC 10-Q/A