<PAGE> 1
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 March 31, 1998
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or
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(D) OF THE EXCHANGE ACT
For the transition period from to
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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)
Delaware 13-3617377
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
419 Crossville Road Suite 204 Roswell, Georgia 30075
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(Address of principal executive offices) (Zip Code)
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
As of March 31, 1998, 416,726 shares of common stock of the Registrant were
outstanding.
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INDEX
RESOURCE CAPITAL GROUP, INC.
<TABLE>
<CAPTION>
Page
Number
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<S> <C>
Part I. Financial Information
Item 1. Consolidated Financial Statements (Unaudited)
Consolidated Balance Sheet - March 31, 1998
and December 31, 1997 3
Consolidated Statement of Operations - For the
Three Months Ended March 31, 1998 and 1997 4
Consolidated Statement of Cash Flows - For the
Three Months Ended March 31, 1998 and 1997 5
Notes to Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis or
Plan of Operation 8
Part II. Other Information
Item 6. Exhibits and Reports on Form 8-K 12
</TABLE>
2
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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)
ASSETS
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
1998 1997
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<S> <C> <C>
Cash and cash equivalents 711,153 $ 673,725
Investment in marketable equity securities-at market 25,000 22,063
Deposit on property acquisition 200,000
Investments in and receivables from partnerships 2,895,189 2,841,452
Real and personal property, at cost
Land 1,771,010 1,437,426
Buildings and improvements 3,849,335 2,937,581
Furniture and equipment 191,161 164,482
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5,811,506 4,539,489
Less accumulated depreciation (195,952) (163,294)
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5,615,554 4,376,195
Deferred charges-net of accumulated amortization 132,691 114,270
Other assets 165,035 130,136
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$ 9,544,622 $ 8,357,841
============= ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities
Note payable $ 63,931 $ 85,258
Accounts payable 47,797 16,110
Accrued expenses
Interest 30,484 22,620
Payroll 24,755 84,405
Professional fees 14,250 41,000
Property taxes 33,817 19,534
Other 40,766 17,132
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144,072 184,691
Security deposits 43,604 34,262
Mortgages payable 4,187,900 2,972,354
Deferred tax liability 167,570 171,237
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Total Liabilities 4,654,874 3,463,912
Stockholders' equity
Common stock - authorized 1,000,000 shares
$.01 par value per share, issued 508,608 shares 5,086 5,086
Additional paid-in capital 4,607,494 4,607,494
Retained earnings 401,506 408,624
Treasury stock, at cost, 91,882 shares (131,712) (131,712)
Unrealized gain on investment 7,374 4,437
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Total Stockholders' Equity 4,889,748 4,893,929
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$ 9,544,622 $ 8,357,841
============= ============
</TABLE>
See notes to consolidated financial statements
3
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b) Consolidated Statement of Operations
RESOURCE CAPITAL GROUP, INC.
CONSOLIDATED STATEMENT OF OPERATIONS
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended
March 31,
--------------------------
1998 1997
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<S> <C> <C>
Income
Rental operations $ 218,437 $ 444,134
Interest - affiliated entity 53,145 53,145
Equity in earnings (loss) of
unconsolidated partnerships 11,526 12,613
Management fees - affiliated entity 39,168 15,000
Interest - investments 10,193 2,108
Gain on sale of marketable equity securities 18,521
Other income 3,709 419
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Total Income 336,178 545,940
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Expenses
Rental operations 45,767 211,407
General and administrative 163,636 130,733
Interest 80,469 138,506
Depreciation and amortization 57,091 71,964
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Total Expenses 346,963 552,610
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(Loss) before minority share of (income) (10,785) (6,670)
Minority share of (income) (4,279)
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(Loss) before income taxes (10,785) (10,949)
Benefit of income taxes 3,667 3,723
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Net (loss) $ (7,118) $ (7,226)
========== ==========
Basic earnings (loss) per share $ (0.02) $ (0.02)
========== ==========
Weighted average shares outstanding 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>
THREE MONTHS ENDED
MARCH 31,
--------------------------
1998 1997
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<S> <C> <C>
Cash flows from operating activities
Net (loss) $ (7,118) $ (7,226)
Adjustments to reconcile net (loss) to net
cash provided (used) by operating activites
Depreciation and amortization 57,091 71,964
Equity in (earnings) loss of unconsolidated partnerships (11,526) (12,613)
Minority share of income (loss) 4,279
Provision for deferred income taxes (3,667) (3,723)
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 (56,517) 200,986
Accounts payable 31,687 7,342
Accrued expenses (40,619) (88,191)
Security deposit 9,342 (7,719)
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Net cash provided (used) by operating activities (21,327) 171,268
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Cash flows from investing activities
Additions to real and personal property (9,850) (33,185)
Deposits receivable 200,000 (66,750)
Purchase of subsidiaries (1,262,167)
Repayments from (advances to) affiliated entity, net (63,447) 5,000
Receipt from sale of marketable equity securities 89,024
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Net cash (used) by investing activities (1,135,464) (5,911)
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Cash flows from financing activities
Repayment of mortgage payable (836,479)
Proceeds of mortgages payable 2,070,000
Mortgage amortization payments (17,975) (20,936)
Payments on note payable (21,327) (17,248)
Contribution from minority interest 50
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Net cash provided (used) by financing activities 1,194,219 (38,134)
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Net increase in cash and cash equivalents 37,428 127,223
Cash and cash equivalents at beginning of period 673,725 298,655
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Cash and cash equivalents at end of period $ 711,153 $ 425,878
========== ==========
</TABLE>
See notes to consolidated financial statements
5
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RESOURCE CAPITAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 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 months ended March 31, 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 on 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,
(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. 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 Acquisition of properties
In February 1998 920 Holcomb Bridge, LLC ( Holcomb) was formed and capitalized
with a $280,000 cash contribution, which was funded by
6
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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. 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.
In May, 1998 the Company submitted an earnest money deposit in the amount of
$25,000 for the purchase of the Montclair I Building for $1,175,000. This
property is located in Birmingham, Alabama and consists of a 22,248 square foot
office building.
Note 4 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 from the calculation.
Note 5 Investments in and receivables from partnerships
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
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 is currently negotiating with the mortgage holder to acquire their
mortgage at a discount. If the Company is unsuccessful in its attempt to acquire
the note, management may decide to dispose of its interest in Meadow.
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.
If management decides to dispose of this holding, it intends to establish a
reserve account for this liability. The Company's current cash balances are more
than sufficient to create this reserve.
7
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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 March 31, 1998, the Company had cash reserves of $711,153. 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 three months ended March 31, 1998 the Company received $74,381 in
interest income from MLP. During the same period advances to MLP increased by
$63,447 to help it finance major capital improvements to its Rolling Hills
property. MLP plans to continue to make major capital improvements to its
remaining property, Aspen Walk Apartments, in an attempt to maximize the resale
value of the property.
The ultimate realization of the Company's investment in and receivable from MLP
is dependent on the future operations and/or sale of the MLP properties. In
April 1998 MLP sold Rolling Hills Apartments for a sales price of $7,544,000.
The Company received approximately $2,300,000 in proceeds from the sale, with
the repayment of the $1,657,947 note receivable from MLP and the repayment of a
portion of the advances receivable from MLP.
The operating properties 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 and other fast growing metropolitan areas in
the southeast.
In this regard, the Company has developed a concept it calls "Smart Space". The
"Smart Space" concept includes the subdividing, upgrading, and prefinishing
office space into 500 to 2500 square foot ready to occupy suites. The upgraded
suites generally command higher rental rates because they generally include the
addition of
8
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private interior bathrooms, mini kitchens, sheetrock ceilings, recessed
lighting, crown moldings, chair rails, upgraded carpets and finishes in
traditional colors. The concept also includes individually metering each suite
for utilities with the tenants generally paying for their own utilities and
janitorial services.
The Company acquires buildings for the purpose of converting them to "Smart
Space" suites. Early results indicate that the Company can operate "Smart Space"
buildings more profitably than conventional office buildings. Conceptually, once
space has been converted to a "Smart Space" unit the Company will not be
required to move walls or reconfigure the space again cutting down on turnover
time and saving on build-out expenses which historically have been the largest
costs of operating office buildings. In addition, leases are generally written
with the tenants paying for their own utilities and janitorial expenses further
reducing the costs to operate the properties. All buildings are managed, leased
and maintained from a central off site location.
As a result of the Company's recent 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 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 buildings
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. 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.
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.
In May 1998, the Company submitted an earnest money deposit in the amount of
$25,000 for the purchase of a 22,248 square foot office building located in
Birmingham, Alabama for $1,175,000 in an all
9
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cash transaction. Proceeds from the sale of Rolling Hills Apartments by MLP will
be utilized to close this transaction.
For the three months ended March 31, 1998 the Company utilized $21,327 for
operations and received $1,194,219 from the net proceeds of mortgages payable
and utilized $1,135,464 principally for the acquisition of Holcomb for a net
increase in cash of $37,428 for the period.
Results of Operations
After expenses related to the transition mentioned above, for the three months
ended March 31, 1998 the Company realized a net loss of $7,118 compared to a net
loss of $7,226 for the same period in 1997.
Total revenue for the three months ended March 31, 1998 was $336,178 versus
$545,940 in 1997. Rental income decreased primarily due to the Carriage House
and Compass Pointe sale in May 1997. The Company recognized a gain of $18,521
from the sale of marketable equity securities for the three months ended March
31, 1997. Management fee income increased $24,168 due to the September 1997
acquisition of Hunter Management Company.
Total expenses for the three months ended March 31, 1998 were $346,963 compared
to $552,610 for the same period in 1997. This decrease in expenses was the
result, in part, of the May 1997 disposition of Carriage House and Compass
Pointe Apartments. Rental operating expenses decreased by $165,640 as a result
of this disposition.
General and administrative expenses for the three months ended March 31, 1998 of
$163,636 increased $32,903 from the same period last year. The increase is
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 $57,091 for the three months ended March 31,
1998 decreased $14,873 from the same period in 1997 primarily due to the
dispositions mentioned above.
Interest expense decreased $58,037 for the three months ended March 31, 1998 as
compared to the corresponding period in 1997 due to the mortgages repaid on the
May 1997 disposition of Carriage House and Compass Pointe Apartments.
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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.
11
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PART II OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
27 Financial Data Schedule
(b) Reports on Form 8-K
None
12
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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: May 14, 1998
13
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> MAR-31-1998
<EXCHANGE-RATE> 1
<CASH> 711,153
<SECURITIES> 25,000
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 0
<PP&E> 5,811,506
<DEPRECIATION> 195,952
<TOTAL-ASSETS> 9,544,622
<CURRENT-LIABILITIES> 0
<BONDS> 4,187,900
0
0
<COMMON> 5,086
<OTHER-SE> 4,884,662
<TOTAL-LIABILITY-AND-EQUITY> 9,544,622
<SALES> 0
<TOTAL-REVENUES> 336,178
<CGS> 0
<TOTAL-COSTS> 45,767
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 80,469
<INCOME-PRETAX> (10,785)
<INCOME-TAX> (3,667)
<INCOME-CONTINUING> (7,118)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (7,118)
<EPS-PRIMARY> (.02)
<EPS-DILUTED> 0
</TABLE>
