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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB
(Mark One)
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT
OF 1934
For the quarterly period ended June 30, 1998
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or
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(D) OF THE EXCHANGE ACT
For the transition period from ____________ to _____________
Commission File Number 0-20272
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RESOURCE CAPITAL GROUP, INC.
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(Exact name of small business issuer as specified in its charter)
<TABLE>
<S> <C>
Delaware 13-3617377
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(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
</TABLE>
<TABLE>
<S> <C>
419 Crossville Road, Suite 204 Roswell, GA 30075
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(Address of principal executive offices) (Zip Code)
</TABLE>
770-649-7000
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(Issuer's telephone number, including area code)
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(Former name, former address and former fiscal year, if changed since last
report)
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15 (d) of the Exchange Act during the past 12 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.
X Yes [ ] No
APPLICABLE ONLY TO CORPORATE ISSUERS:
As of June 30, 1998, 416,726 shares of common stock of the Registrant were
outstanding.
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INDEX
RESOURCE CAPITAL GROUP, INC.
<TABLE>
<CAPTION>
Part I. Financial Information Page
Number
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<S> <C> <C>
Item 1. Consolidated Financial Statements (Unaudited)
Consolidated Balance Sheet - June 30, 1998
and December 31, 1997 3
Consolidated Statement of Operations - For the
Three Months and Six Months Ended June 30,
1998 and 1997 4
Consolidated Statement of Cash Flows - For the
Six Months Ended June 30, 1998 and 1997 5
Notes to Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis or
Plan of Operation 9
Part II. Other Information
Item 6. Exhibits and Reports on Form 8-K 13
</TABLE>
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PART I - FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements
a) Consolidated Balance Sheet
RESOURCE CAPITAL GROUP, INC.
CONSOLIDATED BALANCE SHEET
(Unaudited)
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
1998 1997
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<S> <C> <C>
ASSETS
Cash and cash equivalents $ 2,861,282 $ 673,725
Investment in marketable equity securities-at market 23,406 22,063
Deposit on property acquisition 50,000 200,000
Investments in and receivables from partnerships 1,172,434 2,841,452
Real and personal property, at cost
Land 1,774,332 1,437,426
Buildings and improvements 3,881,809 2,937,581
Furniture and equipment 198,496 164,482
------------ ------------
5,854,637 4,539,489
Less accumulated depreciation (232,681) (163,294)
------------ ------------
5,621,956 4,376,195
Deferred charges-net of accumulated amortization 130,650 114,270
Other assets 149,592 130,136
------------ ------------
$ 10,009,320 $ 8,357,841
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities
Note payable $ 42,282 $ 85,258
Accounts payable 53,966 16,110
Accrued expenses
Interest 30,375 22,620
Payroll 19,472 84,405
Professional fees 25,500 41,000
Taxes 176,770 19,534
Other 12,212 17,132
------------ ------------
264,329 184,691
Security deposits 46,009 34,262
Mortgages payable 4,161,852 2,972,354
Deferred tax liability 207,142 171,237
------------ ------------
Total Liabilities 4,775,580 3,463,912
Commitments and contingencies
Stockholders' equity
Common stock - authorized 1,000,000 shares
$.01 par value per share, issued 508,608 shares 5,086 5,086
Additional paid-in capital 4,607,494 4,607,494
Retained earnings 747,092 408,624
Treasury stock, at cost, 91,882 shares (131,712) (131,712)
Unrealized gain on investment 5,780 4,437
------------ ------------
Total Stockholders' Equity 5,233,740 4,893,929
------------ ------------
$ 10,009,320 $ 8,357,841
============ ============
</TABLE>
See notes to consolidated financial statements
3
<PAGE> 4
b) Consolidated Statement of Operations
RESOURCE CAPITAL GROUP, INC.
CONSOLIDATED STATEMENT OF OPERATIONS
(Unaudited)
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
--------------------------- -------------------------------
1998 1997 1998 1997
--------- --------- ----------- -----------
<S> <C> <C> <C> <C>
Income
Rental operations $ 241,204 $ 291,245 $ 459,641 $ 735,379
Interest - affiliated entity 309,397 53,146 362,542 106,291
Equity in earnings of
unconsolidated partnerships 321,855 25,272 333,381 37,885
Management fees - affiliated entity 27,488 13,000 66,656 28,000
Interest - investments 26,932 6,952 37,125 9,060
Gain on sale of marketable equity securities 18,521
Gain on sale of property 525,779 525,779
Other income 3,007 3,091 6,716 3,510
--------- --------- ----------- -----------
Total Income 929,883 918,485 1,266,061 1,464,425
--------- --------- ----------- -----------
Expenses
Rental operations 66,754 158,941 112,521 370,348
General and administrative 210,054 137,682 373,690 268,415
Interest 89,788 90,769 170,257 229,275
Depreciation and amortization 39,671 238,721 96,762 310,685
--------- --------- ----------- -----------
Total Expenses 406,267 626,113 753,230 1,178,723
--------- --------- ----------- -----------
Income before minority share of income 523,616 292,372 512,831 285,702
Minority share of income (8,152) (12,431)
--------- --------- ----------- -----------
Income before income taxes 523,616 284,220 512,831 273,271
Provision for income taxes (178,030) (96,635) (174,363) (92,912)
--------- --------- ----------- -----------
Net income $ 345,586 $ 187,585 $ 338,468 $ 180,359
========= ========= =========== ===========
Basic earnings per share $ .83 $ .46 $ .81 $ .44
========= ========= =========== ===========
Weighted average shares outstanding 416,726 406,726 416,726 406,726
========= ========= =========== ===========
</TABLE>
See notes to consolidated financial statements
4
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b) Consolidated Statement of Cash Flows
RESOURCE CAPITAL GROUP, INC.
Consolidated Statement of Cash Flows
(Unaudited)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30,
------------------------------------
1998 1997
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<S> <C> <C>
Cash flows from operating activities
Net Income $ 338,468 $ 180,359
Adjustments to reconcile net income to net
cash provided by operating activities
Depreciation and amortization 96,762 310,685
Equity in earnings of unconsolidated partnerships (333,381) (37,885)
Gain on sale of property (525,779)
Minority share of income 12,431
Provision for deferred income taxes 35,905 23,445
Gain on sale of marketable equity securities (18,521)
Issuance of stock warrants 24,690
Changes in certain other accounts
Deferred charges and other assets 95,532 271,487
Accounts payable 37,856 (39,710)
Accrued expenses 79,638 (87,139)
Security deposits 11,747 (42,103)
----------- -----------
Net cash provided by operating activities 362,527 71,960
----------- -----------
Cash flows from investing activities
Additions to real and personal property (52,981) (85,529)
Proceeds from sale of property 4,866,684
Purchase of subsidiaries (1,262,167) (938,417)
Proceeds from mortgage note receivable 1,657,947
Repayments from affiliated entity, net 185,709 15,000
Receipt from sale of marketable securities 89,024
Deposit on property purchase 150,000
----------- -----------
Net cash provided by investing activities 678,508 3,946,762
----------- -----------
Cash flows from financing activities
Payments on mortgage payable (880,502) (3,744,849)
Proceeds of mortgage payable 2,070,000
Receipt from minority interest 50
Payments on note payable (42,976) (34,757)
Distribution to minority interest (10,500)
----------- -----------
Net cash provided (used) by financing activities 1,146,522 (3,790,056)
----------- -----------
Net increase in cash and cash equivalents 2,187,557 228,666
Cash and cash equivalents at beginning of period 673,725 298,655
----------- -----------
Cash and cash equivalents at end of period $ 2,861,282 $ 527,321
=========== ===========
</TABLE>
See notes to consolidated financial statements
5
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RESOURCE CAPITAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1998
(UNAUDITED)
Note 1 Basis of Presentation
The accompanying unaudited consolidated financial statements of Resource Capital
Group, Inc. have been prepared in accordance with generally accepted accounting
principles for interim financial information and with the instructions to Form
10-QSB and Item 310 (b) of Regulation S-B. Accordingly, they do not include all
of the information and footnotes required by generally accepted accounting
principles for complete financial statements. In the opinion of the management
of Resource Capital Group, Inc., all adjustments (consisting of normal recurring
accruals) considered necessary for a fair presentation have been included.
Operating results for the three and six month periods ended June 30, 1998, are
not necessarily indicative of the results that may be expected for the fiscal
year ending December 31, 1998. For further information, refer to the financial
statements and footnotes thereto included in the Company's annual report of Form
10-KSB for the fiscal year ended December 31, 1997.
Note 2 Summary of significant accounting policies
Principals of Consolidation
The consolidated financial statements of Resource Capital Group, Inc. have been
prepared in accordance with generally accepted accounting principles and reflect
the policies detailed below.
The consolidated financial statements of the Company include the accounts of
Resource Capital Group, Inc. and its subsidiaries: 8050 Roswell Associates, LLC,
6
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(Roswell); 419 Crossville Associates, LLC (Crossville); Colonial Park Commons
LLC, (Colonial); Heide Lot, LLC (Heide); Meggan Lot, LLC (Meggan); 8046 Roswell
Road, LLC (8046); Woodstock Office One, LLC (Woodstock); 920 Holcomb Bridge, LLC
(Holcomb) and Hunter Management Company (Hunter). Where subsidiaries were
acquired or disposed of during the period the operating results are included
from the date of acquisition or the date of sale. All intercompany transactions
and balances have been eliminated in consolidation.
Note 3 Investments in and receivables from partnerships The balances are
summarized as follows:
<TABLE>
<CAPTION>
June 30, December 31,
1998 1997
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<S> <C> <C>
Notes receivable from MLP $ 325,554 $ 1,983,501
Accrued interest receivable from MLP 4,069 24,794
Advances receivable from MLP 1,032,146 1,197,130
Accountability to partnerships 10,665 (163,973)
----------- -----------
1,372,434 3,041,452
Valuation allowance (200,000) (200,000)
----------- -----------
$ 1,172,434 $ 2,841,452
=========== ===========
</TABLE>
In April 1998 MLP sold the Rolling Hills Apartments for a sales price of
$7,544,000. The Company received approximately $2,300,000 in proceeds from the
sale including the principal balance of the $1,657,947 note receivable from MLP,
interest income on the note and the repayment of a portion of the advances to
MLP.
The Company owns a 2.55% general partner interest and a 43.10% limited partner
interest in AGS Meadow Oaks Associates (Meadow) which owns a 345 unit apartment
property located in Kansas City, Kansas.
Management has determined that its interest in Meadow is of little or no value.
The Company has discussed purchasing the first mortgage and note from the
current mortgage holder for approximately $4,200,000. If the lender is unwilling
to sell the note for a reasonable amount, the Company intends to dispose of its
interest in the property. Management believes the value of the property is
between $4,000,000 and $4,500,000 and the total amount owed by Meadow on a
non-recourse basis to the lender is approximately $8,660,000.
7
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At December 31, 1997 the Company's tax basis in Meadow is a negative $1,168,000.
Therefore, if the Company disposes of its interest in Meadow it anticipates that
it will result in a substantial tax liability to the Company. The Company's
current cash balances are more than sufficient to cover this liability.
Note 4 Acquisition of properties
In February 1998, 920 Holcomb Bridge, LLC (Holcomb) was formed and capitalized
with a $280,000 contribution, $200,000 cash was placed in escrow in 1997 and
$80,000 was paid at closing, for a one hundred percent interest in Holcomb.
Holcomb acquired a 14,500 square foot office building located in Roswell, Fulton
County, Georgia for $1,250,000 which was partially funded with a $970,000
mortgage payable. The mortgage bears interest at 8.5% per annum and matures in
March 2018. The terms of the mortgage require monthly payments of $8,418 be
applied first to interest with the balance to reduction of principal.
Note 5 Subsequent event - property acquisitions
On July 31, 1998 RCGI Montclair I, LLC (Montclair) was formed and capitalized
with a $1,175,000 cash contribution which was funded by the Company for a one
hundred percent interest. Montclair acquired a 22,248 square foot office
building located in Birmingham, Alabama for $1,175,000 in cash of which $25,000
was escrowed by the Company as of June 30, 1998. The Company intends to place a
mortgage on the property as soon as practicable.
On July 31, 1998 RCGI Oakmont, LLC (Oakmont) was formed and capitalized with a
$1,009,000 cash contribution which was funded by the Company for a one hundred
percent interest. Oakmont acquired a 20,000 square foot office building located
in Birmingham, Alabama for $1,009,000 in cash of which $25,000 was escrowed by
the Company as of June 30, 1998. The Company intends to place a mortgage on the
property as soon as practicable.
Note 6 Earnings per share
Net earnings per share of Common Stock is computed by dividing net earnings by
the weighted average number of shares outstanding. The dilutive effect of stock
warrants is not significant and is therefore excluded form the calculation.
8
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
Liquidity and Capital Resources
The Company's liquidity is based primarily on its cash reserves, real estate
operating and investment income, its ability to obtain mortgage financing and
the interest income and loan repayments received on its notes receivable from
AGS Partners MLP, L.P. (MLP). These funds are used to pay the Company's normal
operating expenses and fund new acquisitions.
As of June 30, 1998, the Company had cash reserves of $2,861,282. The Company's
cash reserves and current level of income are sufficient to meet the Company's
current level of operating expenses on an ongoing basis.
For the six months ended June 30, 1998 the Company received $507,407 in interest
income form MLP. During the same period advances to MLP decreased by $185,709
and the Company was repaid the $1,657,947 note receivable from MLP. MLP paid
these amounts to the Company as a result of its sale in April 1998 of Rolling
Hills Apartments for a sales price of $7,544,000. MLP plans to continue to make
major capital improvements to its remaining property, Aspen Walk Apartments, in
an attempt to maximize the value of the property and intends to sell it as soon
as practicable. The ultimate realization of the Company's investment in and
receivable from MLP is dependent on the future operations and/or sale of the
Aspen Walk Apartments.
The operating property of the MLP and the various other real estate partnerships
in which the Company is the general partner are financed with non-recourse debt.
The Company is not liable for the principal or interest on the mortgages and the
other assets of the partnerships are more than adequate to satisfy other
recourse liabilities. Therefore, the Company's liquidity should not be adversely
affected by these general partner obligations.
The Company's business plan includes accelerating its transition from
investments in mortgage receivables and apartment buildings into the ownership
and operation of small properties, primarily suburban office buildings
concentrated in Atlanta, Georgia, Birmingham, Alabama and other fast growing
metropolitan areas in the southeast.
In this regard, the Company has developed a concept it calls ("TurnKey") or
"Smart Space". The TurnKey concept includes the subdividing, upgrading and
prefinishing of office space in small, well located buildings into 500 to 2500
square foot ready to
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occupy suites. The upgraded suites generally command higher rental rates because
they generally include the addition of private interior bathrooms, mini
kitchens, sheetrock ceilings, recessed lighting, crown moldings, chair rails,
upgraded carpets and upgraded finishes. Expenses are lower because the concept
includes reducing common areas and individually metering each suite for tenant
paid utilities and installing individual HVAC units and controls. Plus the
tenant selects and pays for their own level of janitorial services with third
party contractors.
The Company is presently acquiring buildings for the purpose of converting them
to TurnKey suites. Results indicate that the Company can operate TurnKey
buildings more profitably than its conventional office buildings. Conceptually,
once space has been converted to a TurnKey unit the Company will not be required
to move walls or reconfigure the space again, cutting down on turnover time and
eliminating build-out expenses which historically have been the largest costs of
operating office buildings. The Company is exploring the construction of new
TurnKey buildings because the conversion period of existing buildings is long (3
to 5 years), the cost high ($18 to $25 per foot) and management attention is
intensive.
As a result of the Company's success in this niche market, mortgage financing
has been offered to the Company from various sources including a small insurance
company and local and regional banks. With mortgage financing available the
Company intends to continue to expand into other neighboring southeast markets.
The Company expects to be able to fund the expansion of its holdings in this
direction by a combination of mortgage financing and internal funding. It
believes it will be able to expand without seeking financing other than
conventional mortgages for at least the next two years. The proceeds from the
repayment of the Company's investments in mortgage receivables from MLP and the
disposition of its general and limited partner interests in apartment building
is expected to provide the balance of the funds.
In February 1998, 920 Holcomb Bridge, LLC (Holcomb) was formed and capitalized
with a $280,000 cash contribution, which was funded by the Company for a one
hundred percent interest. Holcomb acquired a 14,500 square foot office building
located in Roswell, Fulton County, Georgia for $1,250,000 which was partially
funded with a $970,000 mortgage payable.
On July 31, 1998 the Company purchased a 22,248 square foot office building
located in Birmingham, Alabama for $1,175,000 in an all cash transaction.
Additionally on July 31, 1998 the Company also purchased a 20,000 square foot
office building
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located in Birmingham, Alabama for $1,009,000 in an all cash transaction.
Payments made to the Company by MLP from the sale of Rolling Hills Apartments
were utilized to close these transactions. The Company intends to place
mortgages on these properties as soon as practicable.
Based on 1998 and future budgets and recent property valuations it appears the
Company's real estate investments should produce future operating cash flows and
future resale values for the Company.
For the six months ended June 30, 1998 the Company generated $362,527 in cash
from operations and received $1,146,522 in cash principally from the net
proceeds of mortgages payable. In addition investing activities generated
$678,508 in cash principally from the proceeds of the note receivable from MLP
resulting in a net increase in cash of $2,187,557 for the period.
Results of Operations
The Company's business plan includes continuing its transition from an asset
base consisting primarily of mortgage receivables from MLP and general and
limited partner interests in apartment buildings located throughout the country,
into small properties, primarily suburban office buildings, located in Atlanta,
Georgia, Birmingham, Alabama and other fast growing metropolitan areas in the
southeast that are easily accessible from Atlanta. Despite the expenses
associated with this transition, for the three months ended June 30, 1998, the
Company recognized net income of $345,586 compared to net income of $187,585 for
the corresponding period in 1997. For the six months ended June 30, 1998, the
Company recognized net income of $338,468 compared to net income of $180,359 for
the corresponding period in 1997.
Total revenue for the three months ended June 30, 1998 was $929,883 versus
$918,485 for the same period in 1997. This increase in revenue in 1998 was
caused substantially by the MLP sale of Rolling Hills Apartments and the
recognition of the Company's share of the income. Total revenue for the six
months ended June 30, 1998 was $1,266,061 verses $1,464,425 for the same period
in 1997. This decrease in revenue was primarily the result of the May 1997 sale
of Carriage House and Compass Pointe Apartments and the resulting decrease in
rental operating income associated with these two properties.
Total expenses for the three months ended June 30, 1998 were $406,267 compared
to $626,113 for the same period in 1997. The decrease in expenses was the
result, in
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part, of the 1997 amortization of the remaining loan costs in the amount of
approximately $194,000 for the Carriage and Compass mortgages and the rental
operating expenses incurred by the Carriage and Compass properties. Total
expenses for the six months ended June 30, 1998 were $753,230 compared to
$1,178,723 for the same period in 1997.
General and administrative expenses for the three months ended June 30, 1998 of
$210,054 increased $72,372 from the same period last year. General and
administrative expenses of $373,690 for the six months ended June 30, 1998
increased $105,275 over the same period in 1997. The increases are attributable
to the September 1997 acquisition of Hunter, increased Keyman and directors
insurance and increased legal, professional and other expenses relating to the
Company's disposition of its apartments and other investments.
Depreciation and amortization of $39,671 for the three months ended June 30,
1998 decreased $199,050 over the same period in 1997 due primarily to the May,
1997 sale of the Carriage and Compass properties and the resulting amortization
of the remaining loan costs of approximately $194,000. Depreciation and
amortization of $96,762 for the six months ended June 30, 1998 decreased
$213,923 over the same period in 1997 for the same reason.
Interest expense decreased $981 for the three months ended June 30, 1998 as
compared to the corresponding period in 1997. Interest expense of $170,257 for
the six months ended June 30, 1998 decreased $59,018 over the same period in
1997 due to the mortgages repaid on the May 1997 disposition of Carriage House
and Compass Pointe Apartments.
Year 2000 Conversion
The Company does not believe that the year 2000 conversion will have a material
adverse effect on the Company's operations.
Inflation
Inflation in the future may increase rental revenues as well as operating
expenses, all in accordance with general market trends.
12
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PART II OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
27 Financial Data schedule (for SEC use only)
(b) Reports on Form 8-K
None
13
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SIGNATURES
In accordance with the requirements of the Securities Exchange Act of 1934, the
Registrant caused this Report to be signed on its behalf by the undersigned,
thereunto duly authorized.
Resource Capital Group, Inc.
(Registrant)
By: /s/ Albert G. Schmerge III
-----------------------------
Albert G. Schmerge III
President, CEO and
Chairman of the Board
Date: August 13, 1998
14
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1
<CURRENCY> US DOLLARS
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> JUN-30-1998
<EXCHANGE-RATE> 1
<CASH> 2,861,282
<SECURITIES> 23,406
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 0
<PP&E> 5,854,637
<DEPRECIATION> 232,681
<TOTAL-ASSETS> 10,009,320
<CURRENT-LIABILITIES> 0
<BONDS> 4,161,852
0
0
<COMMON> 5,086
<OTHER-SE> 5,228,654
<TOTAL-LIABILITY-AND-EQUITY> 10,009,320
<SALES> 0
<TOTAL-REVENUES> 1,266,061
<CGS> 0
<TOTAL-COSTS> 112,521
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 170,257
<INCOME-PRETAX> 512,831
<INCOME-TAX> 174,363
<INCOME-CONTINUING> 338,468
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 338,468
<EPS-PRIMARY> .81
<EPS-DILUTED> 0
</TABLE>
