RESOURCE CAPITAL GROUP INC, 10KSB40, 1999-03-31

RESOURCE CAPITAL GROUP INC
10KSB40, 1999-03-31
REAL ESTATE

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<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-KSB
(Mark One)

[X] ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934 (FEE REQUIRED)

For the fiscal year ended December 31, 1998
or

[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934 (NO FEE REQUIRED)

For the transition period ......... to .........

Commission file number 0-20272

RESOURCE CAPITAL GROUP, INC.
(Name of Small Business Issuer in its Charter)

DELAWARE 13-3617377
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)

419 Crossville Road
Suite 204
Roswell, Georgia 30075
(Address of Principal Executive Offices) (Zip Code)

(770) 649-7000
Issuer's Telephone Number, Including Area Code

Securities registered under Section 12(b) of the Exchange Act:

None

Securities registered under Section 12(g) of the Exchange Act:

Common Stock, par value $.01 per share
(Title of Class)

Check whether the issuer (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act of 1934 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.
Yes X No

Check if there is no disclosure of delinquent filers in response to
Item 405 of Regulation S-B contained in this form, and no disclosure will be
contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-KSB
or any amendment to this Form 10-KSB. [X]

State issuer's revenues for its most recent fiscal year.
$2,287,418

State the aggregate market value of the voting stock held by
non-affiliates of the registrant. The aggregate market value shall be computed
by reference to the price at which the stock was sold, or the average bid and
asked prices of such stock, as of December 31, 1998.

Not applicable

(APPLICABLE ONLY TO CORPORATE REGISTRANTS)

State the number of shares outstanding of each of the issuer's classes
of common equity, as of December 31, 1998.

Common stock, par value $.01 per share 404,939 shares

<PAGE> 2

TABLE OF CONTENTS

<TABLE>
<CAPTION>
PAGE
<S> <C> <C> <C>
PART I
Item 1. Description of Business 1

Item 2. Description of Properties 3

Item 3. Legal Proceedings 7

Item 4. Submission of Matters to a Vote of 7
Security Holders

PART II

Item 5. Market for Common Equity and Related 7
Stockholder Matters

Item 6. Management's Discussion and Analysis or 7
Plan of Operation

Item 7. Financial Statements 11

Item 8. Changes in and Disagreements with 11
Accountants on Accounting and
Financial Disclosure

PART III

Item 9. Directors, Executive Officers, Promoters 11
and Control Persons; Compliance with
Section 16(a) of the Exchange Act

Item 10. Executive Compensation 13

Item 11. Security Ownership of Certain Beneficial 14
Owners and Management

Item 12. Certain Relationships and Related 15
Transactions

PART IV

Item 13. Exhibits and Reports on Form 8-K 15

Signatures 18
</TABLE>

<PAGE> 3

Part I

ITEM 1. DESCRIPTION OF BUSINESS

General

Resource Capital Group, Inc. (the Company), was organized as a Delaware
corporation in November, 1990 to become successor in interest to AGS Properties
(AGS) and assumed various general and limited partnership interest of AGS. In
1991 the Company acquired the 1% general partner interest and a 27.55% limited
partner interest in AGS Partners MLP, L.P. (MLP). MLP's remaining asset at
December 31, 1998 is an apartment complex in Oklahoma City, Oklahoma.

The Company also assumed AGS' 2.55% general partnership interest and
43.10% limited partnership interest in AGS Meadow Oaks Associates (Meadow) which
owns an apartment complex in Kansas City, Kansas.

The Company's business is to acquire, own, operate and dispose of
income producing real property investments. The Company's investments at
December 31, 1998 include the following:

8050 ROSWELL ASSOCIATES LLC (8050 ROSWELL), acquired in 1995 and owns a
9,000 square foot office building in Fulton County, Georgia.

419 CROSSVILLE ASSOCIATES LLC (CROSSVILLE), acquired in 1995 and owns a
19,000 square foot office building in Fulton County, Georgia.

COLONIAL PARK COMMONS LLC (COLONIAL), acquired in 1996 and owns a
18,387 square foot office building in Fulton County, Georgia.

MEGGAN LOT LLC (MEGGAN), AND HEIDE LOT LLC (HEIDE), acquired in 1996
and owns unimproved land surrounding the Colonial property in Fulton
County, Georgia. (a)

8046 ROSWELL ROAD LLC (8046 ROSWELL), acquired in 1997 and owns an
8,000 square foot office building in Fulton County, Georgia.

WOODSTOCK OFFICE I, LLC (WOODSTOCK), acquired in 1997 and owns a 11,250
square foot office building in Cherokee County, Georgia.

HUNTER MANAGEMENT COMPANY (HUNTER), acquired in 1997 and owns the
minority interest in various subsidiaries of the Company.

<PAGE> 4

Additionally, Hunter manages the properties owned by the Company's
subsidiaries.

920 HOLCOMB BRIDGE LLC (HOLCOMB BRIDGE), acquired in 1998 and owns a
14,400 square foot office building in Fulton County, Georgia.

RCGI OAKMONT LLC (OAKMONT), acquired in 1998 and owns a 20,000 square
foot office building in Jefferson County, Alabama.

RCGI MONTCLAIR I, LLC (MONTCLAIR), acquired in 1998 and owns a 22,248
square foot office building in Jefferson County, Alabama.

(a) During 1998, the unimproved land owned by Meggan and a portion
of the land owned by Colonial was contributed to Heide and the
Company commenced construction of a 10,400 square foot office
building on the land.

The Company is actively seeking new real estate acquisitions and
investments. Although the Company is currently in negotiations it is not
committed to make any other real property acquisitions. However, the Company is
evaluating various potential property acquisitions and is engaging in
discussions with sellers regarding the purchase of properties for the Company.
Purchase agreements are subject to various terms and conditions, including
receipt of satisfactory closing documentation. There can be no assurance that
all of the terms and conditions of any agreement will be satisfied and therefore
it is possible that certain investments will not be acquired.

Other Business Factors

The business of the Company is not seasonal and the Company does no
foreign or export business.

Personnel

As of December 31, 1998, the Company had eight employees. The Company
has contracted with Vincam Human Resources, Inc. (Vincam) to provide
professional employer and administrative services to the Company and to the
properties. Vincam is the employer of record for tax reporting purposes and
provides various benefits to the employees including life, medical, dental and
vision insurance coverage, 401K benefits, worker's compensation insurance
coverage and other services. One of the Company's staff is employed on a
part-time basis. The employees are not represented by a collective bargaining
unit.

Offices

The Company's headquarters are located at 419 Crossville Road, Suite
204, Roswell, Georgia 30075 where the Company leases approximately 1,300 square
feet of space from Crossville.

<PAGE> 5

ITEM 2. DESCRIPTION OF PROPERTIES

The Company's office is located at 419 Crossville Road, Suite 204,
Roswell, Georgia, 30075 where the Company leases approximately 1,300 square feet
of space from Crossville.

In February 1998 the Company purchased a 100% interest in Holcomb
Bridge. Holcomb Bridge owns a 14,400 square foot office building located in
Roswell, Fulton County, Georgia. Holcomb Bridge leases office space to various
tenants at rates ranging from $14 to $18 per square foot and terms ranging from
1 to 3 years. At December 31, 1998 the property was 100% occupied with 1998
rental revenue since acquisition of $197,147. The gross potential rent for the
building based on December 1998 rents is $231,434 annually. The 1998 real estate
taxes on this property totaled $20,075.

In July 1998 the Company purchased a 100% interest in Oakmont. Oakmont
owns a 20,000 square foot office building located in Birmingham, Jefferson
County, Alabama. Oakmont leases office space to various tenants at rates ranging
from $11.50 to $12.55 per square foot and terms ranging from 1 to 6 years. At
December 31, 1998 the property was 100% occupied with 1998 rental revenue since
acquisition of $89,580. The gross potential rent for the building based on
December 1998 rents is $212,265 annually. The 1998 real estate taxes on this
property totaled $9,477.

In July 1998 the Company purchased a 100% interest in Montclair.
Montclair owns a 22,248 square foot office building located in Birmingham,
Jefferson County, Alabama. Montclair leases office space to various tenants at
rates ranging from $10.50 to $13.25 per square foot and terms ranging from 1 to
4 years. At December 31, 1998 the property was 89% occupied with 1998 rental
revenue since acquisition of $92,267. The gross potential rent for the building
based on December 1998 rents is $244,452 annually. The 1998 real estate taxes on
this property totaled $15,257.

In June 1997 the Company purchased a 100% interest in Woodstock.
Woodstock owns and is currently renovating a 11,250 square foot office building
located in Woodstock, Cherokee County, Georgia. Woodstock leases office space to
various tenants at rates ranging from $12.00 to $15.04 per square foot and terms
ranging from 1 to 4 years. At December 31, 1998 the property was 95% occupied
with 1998 rental revenue of $101,642. The gross potential rent for the building
based on December 1998 rents is $150,234 annually. The 1997 real estate taxes on
this property totaled $10,953.

In June 1997 the Company purchased a 100% interest in 8046 Roswell.
8046 Roswell owns an 8,000 square foot office building located in Atlanta,
Fulton County, Georgia. 8046 Roswell leases office space to various tenants at
rates ranging from $14.25 to $16 per square foot and terms ranging from 1 to 5
years. At December

<PAGE> 6

31, 1998 the property was 100% occupied with 1998 rental revenue of $113,222.
The gross potential rent for the building based on December 1998 rents is
$121,332 annually. The 1998 real estate taxes on this property totaled $10,102.

In September 1997 the Company acquired all of the outstanding shares of
stock in Hunter in exchange for 10,000 shares of the Company's common stock.
Hunter owns the minority interest in 8050 Roswell, Crossville, Colonial, Heide
and Meggan and manages various properties owned by the Company's subsidiaries.
Hunter's office is located at 419 Crossville Road, Suite 203, Roswell Georgia
30075 where it leases approximately 1,200 square feet of space from Crossville.

In September 1996, the Company and Hunter purchased a 100% interest in
Colonial. Colonial owns a 18,387 square foot office building located in Roswell,
Fulton County, Georgia. Colonial leases office space to various tenants at rates
ranging from $11.66 to $15.50 per square foot and terms ranging from 1 to 4
years. At December 31, 1998 the property was 100% occupied with 1998 rental
revenue of $247,735. The gross potential rent for the building based on December
1998 rents is $243,283 annually. The 1998 real estate taxes on this property
totaled $13,617.

In 1996, the Company and Hunter purchased a 100% interest in Meggan and
Heide. Meggan and Heide own developmental lots totaling .8 acres adjoining the
Colonial property. The 1998 real estate taxes on these lots totaled $3,591.

In 1995, the Company and Hunter purchased a 100% interest in 8050
Roswell. 8050 Roswell owns a 9,000 square foot office building located in
Atlanta, Fulton County, Georgia. Roswell entered into a five year lease of the
entire building to a single tenant for $88,500 annually with the tenant being
responsible for all electricity and fuel bills. The 1998 real estate taxes on
this property totaled $6,708.

In 1995, the Company and Hunter purchased a 100% interest in
Crossville. Crossville owns a 19,000 square foot office building located in
Roswell, Fulton County, Georgia. Crossville leases office space to various
tenants at rates ranging from $12.75 to $16.00 per square foot and terms ranging
from 1 years to 4 years. At December 31, 1998 the property was 100% occupied
with annual rental revenue of $248,610. Of this amount, $31,520 was paid to
Crossville by the Company and Hunter and was eliminated from rental revenue upon
consolidation. The gross potential rent for the building, if based on December
1998 rents is $274,199 annually. The 1998 real estate taxes on this property
totaled $13,677.

The Company has obtained adequate insurance coverage for all properties
acquired.

<PAGE> 7

Mortgages Payable

The mortgages payable by the Company secured by the properties mentioned
above as of December 31, 1998 consists of the following:

<TABLE>
<S> <C>
8050 Roswell - The mortgage payable bears
interest at 9.53% per annum and matures in
July 2010. The terms of the mortgage require
that monthly payments of $3,766 be applied
first to interest and the balance to
reduction of principal. Interest on this
loan adjusts every five years and is
computed at 325 basis points over the
average yield on U.S. Treasury securities,
as defined. $ 316,548

Colonial - The mortgage payable bears
interest at 9.375% per annum and matures in
October 2006. The terms of the mortgage
require monthly payments of $7,276 be
applied first to interest with the balance
to reduction of principal. Interest on this
loan adjusts every five years and is
computed at 300 basis points over the
average yield on U.S. Treasury securities,
as defined. 755,165

8046 Roswell - The mortgage payable bears
interest at 8.00% per annum and matures on
June 1, 2009. The terms of the mortgage
require monthly payments of $5,175 be
applied first to interest and the balance to
reduction of principal. Interest on this
loan adjusts on June 1, 2002 and is computed
at 300 basis points over the average yield
on U.S. Treasury securities, as defined. 437,997

Woodstock - The mortgage payable bears
interest at 9.31% per annum and matures in
December 2017. The terms of the mortgage
require monthly payments of $5,243 be
applied first to interest with the balance
to reduction of principal. Interest on this
loan adjusts every five years, commencing on
December 1, 2002 and is computed at 300
basis points over the average yield on U.S.
Treasury securities, as defined. 560,528
</TABLE>

<PAGE> 8

<TABLE>
<S> <C>
Holcomb Bridge - The mortgage payable bears
interest at 8.5% per annum and matures in
March 2018. The terms of the mortgage
require the monthly payments of $8,418 be
applied first to interest and the balance to
reduction of principal. Interest on this
loan adjusts every five years commencing on
March 1, 2003 and is computed at 275 basis
points over the average yield on U.S.
Treasury securities, as defined. The
mortgage may be called by the lender in
March 2003. 955,977

Montclair - The mortgage payable bears
interest at 7.14% per annum and matures in
January 2019. Commencing in February 1999,
the terms of the mortgage require that
monthly payments of $7,367 be applied first
to interest and the balance to reduction of
principal. Interest on this loan adjusts
every five years commencing on January 1,
2004 and is computed at 275 basis points
over the average yield on U.S. Treasury
securities, as defined. The mortgage may be
called by the lender in January 2004. 940,000

Oakmont - The mortgage payable bears
interest at 7.14% per annum and matures in
January 2019. Commencing in February 1999,
the terms of the mortgage require that
monthly payments of $6,348 be applied first
to interest and the balance to reduction of
principal. Interest on this loan adjusts
every five years commencing on January 1,
2004 and is computed at 275 basis points
over the average yield of U.S. Treasury
securities, as defined. The mortgage may be
called by the lender in January 2004. 810,000
------------
$ 5,859,857
============

</TABLE>

A schedule of future amortization payments, excluding the callable provision in
the Holcomb Bridge mortgage at December 31, 1998 follows:

<TABLE>
<CAPTION>
<S> <C>
1999 $ 150,448
2000 166,847
2001 181,096
2002 196,577
2003 213,396
Thereafter 4,951,493
----------
$5,859,857
==========
</TABLE>

A majority of the mortgage notes payable have been guaranteed by the Company.

<PAGE> 9

ITEM 3. LEGAL PROCEEDINGS

The Company is not aware of any material pending or threatened legal
proceedings against the Company or its officers and directors.

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

There were no matters submitted to a vote of security holders during
1998.
PART II

ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS

On September 1, 1991 the Common Stock originally issued to the public,
was valued at $10 per share (denominated value).

Although the Company anticipates that it will request listing as soon
as permissible and practicable, the Company shares are not currently traded on
the NASDAQ Over-the-Counter Market.

As of December 31, 1998, there were 679 record holders of the Company's
Common Stock and 404,939 shares outstanding. At December 31, 1998, there was no
established broker-dealer price quotation for the Company's Common Stock. There
are currently no market-makers for the Company's Common Stock.

ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION

Liquidity and Capital Resources

The Company's liquidity is based on its cash reserves, real estate
operating income, its ability to obtain mortgage financing, its ability to sell
and refinance its real estate investments, plus the interest income and loan
repayments received on its notes receivable from MLP. These funds are used to
pay the Company's normal operating expenses and fund new acquisitions.

As of December 31, 1998, the Company had cash reserves of $2,212,570.
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.

In April 1998, MLP sold the Rolling Hills Apartments for $7,544,000. As
a result, the Company received $531,823 in interest income as well as
$1,861,394 in principal reductions on amounts due from MLP.

MLP plans to sell its remaining property, Aspen Walk Apartments, as
soon as practicable. In this regard, MLP has entered into a sales contract for
Aspen Walk Apartments for a sales price of $2,675,000. The Company expects to
receive approximately

<PAGE> 10

$1,550,000 in proceeds from the sale, including the repayment of the $325,554
note receivable and related interest income from MLP and the repayment of
advances and final cash distributions from MLP. The sale is expected to close in
April, 1999. However no assurance can be given that the sale will be completed.

The operating property of the MLP and the property owned by AGS Meadow
Oaks Associates 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 partnership 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 general partner obligations.

In February 1998, 920 Holcomb Bridge LLC (Holcomb) was formed and
capitalized with a $280,000 capital contribution, which was funded by the
Company for a 100% interest. Holcomb acquired a 14,400 square foot office
building in Roswell, Fulton County, Georgia for $1,250,000 which was partially
funded with a $970,000 mortgage payable.

In July 1998, the Company formed Oakmont and Montclair with capital
contributions of $1,014,880 and $1,182,271 respectively for a 100% interest in
each. Oakmont and Montclair simultaneously acquired 20,000 and 22,248
respectively square foot office buildings located in Birmingham, Jefferson
County, Alabama for $1,009,000 and $1,175,000 respectively. Subsequent to the
purchase of the office buildings, Oakmont and Montclair obtained mortgages
payable on each of the properties in the amount of $810,000 and $940,000
respectively.

The Company's business plan includes completing 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 "Smart
Space". The "Smart Space" concept involves the subdividing, upgrading, and
prefinishing of 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 private interior bathrooms, mini kitchens,
sheetrock ceilings, recessed lighting, crown moldings, chair rails, upgraded
carpets and finishes in traditional colors. 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 acquires buildings for the purpose of converting them to
"Smart Space" suites. Results indicate that the Company can operate "Smart
Space" buildings more profitably than

<PAGE> 11

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 eliminating build-out
expenses which historically have been the largest costs of operating office
buildings. The Company is planning the construction of new "Smart Space"
buildings in well located areas because the conversion period of existing
buildings is long (3 to 5 years), the costs high ($18 to $35 per foot) and
management attention is intensive. The Company has begun the construction of a
10,400 square foot "Smart Space" office building on the Heide and Meggan lots
adjoining the Colonial Park property. The Company already owns the land and
expects to finance all of the development costs with a $900,000 construction
mini- permanent loan.

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 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. The
proceeds from 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 additional funds. As a result, management believes the
Company will be able to expand without seeking financing other than conventional
mortgages for at least the next two years.

Based on 1999 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 1998, the Company generated $492,088 in cash from operations and
received $1,694,070 in cash from financing activities, principally from the net
proceeds of mortgage activities. Investing activities utilized $647,313 in cash
principally for the purchase of subsidiaries of $2,300,684 net of cash received
from MLP in the amount of $1,861,394. As a result, the Company generated a net
increase in cash of $1,538,845 for the year.

Results of Operations

For the year ended December 31, 1998, the Company realized net income
of $368,235 compared to net income of $134,795 in 1997. Total revenue in 1998
was $2,287,418 versus $2,041,621 in 1997. This increase in revenue was primarily
due to an increase in the equity in earnings of the Company's partnership
investment in MLP as a result of the April 1998 gain on sale of Rolling Hills
Apartments by MLP.

<PAGE> 12

Total expenses for the year ended December 31, 1998 were $1,629,092
compared to $1,791,774 in 1997. The decrease in expenses was the result, in part
of the 1997 accelerated amortization of certain loan costs in the amount of
approximately $196,000.

General and administrative expenses of $741,246 increased $164,543 over
the 1997 level. This increase includes expenses attributable to the September
1997 acquisition of Hunter, increased Keyman and directors insurance and
increased legal, professional and other expenses.

Depreciation and amortization of $203,420 decreased $168,606 from 1997
primarily due to the 1997 accelerated amortization of certain loan costs in the
amount of approximately $196,000 as mentioned above.

Interest expense increased $11,394 in 1998 due to the mortgages
obtained on the 1998 acquisitions.

Year 2000 Conversion

Many currently installed computer systems and software products are
dependent upon internal calendars coded to accept only two digit entries in the
date code field. These date code fields will need to accept four digit entries
to distinguish 21st century dates from 20th century dates. As a result, our
computer systems and software may need to be upgraded to comply with Year 2000
requirements. Otherwise, system failures or miscalculations leading to
disruptions in our operations could occur. The Company has taken actions to
address this potential problem, including the identification of any
non-compliant processes or systems and the implementation of corrective
measures. We expect to replace certain software and hardware with non-compliant
codes with software and hardware that is compliant by September 1999.

We are currently in the process of selecting a new software package in
our corporate office, and certain hardware which the manufacturers have
represented as being Year 2000 compliant, and we believe it will be implemented
by September 1999. We estimate the cost of the new software and hardware,
including implementation and data conversion costs, to be approximately $25,000.
Our other software is generally certified as Year 2000 compliant or is not
considered critical to our operations.

Other than the cost of the new software and hardware to be implemented
in our corporate office, we have spent only nominal amounts on the Year 2000
issue, and we do not expect any significant future expenditures. Although we
believe our cost estimates to be accurate, we cannot assure you that these costs
will not increase or that the proposed solutions will be installed on schedule
by the date estimated.

We have addressed the Year 2000 preparedness of our critical suppliers
and major customers and related electronic data

<PAGE> 13

interfaces with these third parties. We began in 1998, and are continuing our
efforts, to contact critical suppliers and larger customers to determine whether
they are, or will be, compliant by the Year 2000. Based on our evaluation and
testing, these third parties are, or are expected to be, compliant by the Year
2000. However, we will continue to monitor the situation and we will formulate
contingency plans to resolve customer-related issues that may arise. At this
time we cannot estimate the impact that noncompliant suppliers and customers may
have on us or our level of operations in the Year 2000. At present, we have not
developed contingency plans, but we will determine whether to develop such plans
when our assessment is completed.

Inflation

Inflation in the future may increase rental revenues as well as
operating expenses, all in accordance with general market trends.

ITEM 7. FINANCIAL STATEMENTS

See Index to Consolidated Financial Statements on Page F-1 of Item 7 of
Form 10-KSB for financial statements.

ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE

There have been no changes in or reported disagreements with the
accountants on any matter of accounting principles, practices or financial
statement disclosure.

Part III

ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL
PERSONS; COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT

The principal officers and directors of the Company are:

<TABLE>
<CAPTION>
Name Age Office
---- --- ------
<S> <C> <C>
Albert G. Schmerge, III 54 Chairman of the Board,
Chief Executive Officer,
President and Director

Norman F. Swanton 60 Secretary and Director

Martin D. Newman 60 Director

Rodney Knowles, III 53 Director
</TABLE>

All Directors are elected to three year terms.

<PAGE> 14

Albert G. Schmerge III

Prior to the formation of the Company, Mr. Schmerge was the sole
general partner and Chief Executive Officer of AGS Properties. Mr. Schmerge
began specializing in real estate investments and acquisitions in 1970. He
combined several family owned and related businesses and co-founded AGS
Properties in 1974 which operated in the acquisition, management and operation
of many large real estate properties, primarily apartments, located throughout
the United States. In addition, his experience includes syndication, mortgage
financing and refinancing, construction, operations/management and purchase and
sales of income and investment properties.

Mr. Schmerge earned a Bachelor of Science degree from Villanova
University, and a Masters of Business Administration from Iona Graduate School
of Business. After several years in the electronics and satellite industry he
entered the financial planning and real estate investment business with his
father in 1968.

Mr. Schmerge has been the President and CEO of the Company since 1991.
Just prior to the formation of the Company, he was a general partner of AGS
Properties, a well known and highly respected real estate owner/operator and had
acted as the general partner as it grew in the 1970's and 1980's to participate
and control more than 70 real estate partnerships and entities over the years.
In his capacity as General Partner he was responsible for the acquisition,
formation, financial structuring, financing and sale of several hundred million
dollars worth of real estate, primarily suburban apartment developments and
suburban office properties.

Norman F. Swanton

Mr. Swanton currently serves as Chairman of the Board and Chief
Executive Officer of Warren Resources, Inc. which engages in the acquisition and
development of existing oil properties. From 1989 to 1992, Mr. Swanton also
served as President and Investment Manager of Harbor View Horizons Corp., which
engaged in equity options trading. From October 1986 to June 1989, Mr. Swanton
was also an independent financial advisor managing investment funds for his own
account and outside investors.

Mr. Swanton received a B.A. Degree from Long Island University in 1962
and attended Bernard Baruch Graduate School of Business PH.D. Program in
Accountancy and Finance.

Martin D. Newman

Mr. Newman currently is a partner in the law firm of Fromme, Schwartz,
Newman & Cornicello LLP. His law expertise includes many aspects of real estate,
corporate representation of public and private companies, particularly those
engaged in the ownership, operation and management of real estate and securities

<PAGE> 15

representation of public, private and not-for profit entities generally as
issuer's counsel, in connection with private placements and public offerings,
including such matters arising under the Securities Exchange Act of 1934,
periodic reporting requirements under said Act and other compliance matters.
Previously, Mr. Newman was with the law firms of Ballon, Stoll, Bader and
Nadler, PC and Wien Malkin & Bettex. He was also with the law firm of Chadbourne
& Parke from 1968 to 1977 and a staff attorney with the U.S. Securities and
Exchange Commission from 1963 to 1967.

Mr Newman received a B.A. Degree from the University of Michigan in
1960 and a JD from Harvard Law School in 1963.

Rodney Knowles, III

Mr. Knowles currently is the Chairman and CEO of Alpha-Omega Advisors,
Inc., a private investment advisory company based in Atlanta, Georgia
specializing in publicly traded bank stocks. Mr. Knowles served as Managing
Director of the Atlanta Committee for the Olympic Games in 1996 and was
Chairman, President and CEO of Chattahoochee Bank in Georgia until its
acquisition by BankSouth in 1994. Mr. Knowles brings to the Company over 25
years of experience in the financial services industry.

ITEM 10. EXECUTIVE COMPENSATION

In 1996, the Company amended the employment agreement and extended the
term to June 30, 1999 with Albert G. Schmerge III, the Chairman of the Board,
Chief Executive Officer, President and Director of the Company. The amended
agreement calls for an annual base salary of $250,000 plus an annual bonus equal
to 10% of the Company's net income in excess of a 10% return on shareholder
equity. Salaries earned by Mr. Schmerge during 1998 amounted to $250,000.

Outside Director Compensation

The non-salaried outside directors of the Company, Mr. Norman F.
Swanton, Mr. Martin D. Newman and Mr. Rodney Knowles III receive a stipend of
$750 for each Board of Directors meeting attended. It is anticipated that the
Board will hold four regular meetings each year. The Board appointed an audit
committee and a compensation committee, which is comprised of the Outside
Directors.

In 1997 the Company issued 4,115 common stock purchase warrants to Mr.
Norman F. Swanton and 4,115 common stock purchase warrants to Mr. Martin D.
Newman which was each equal to a 1% capitalization of the Company. In 1999 the
Company issued 4,132 common stock purchase warrants to Mr. Rodney Knowles III
which was equal to a 1% capitalization of the Company. Each warrant allows the
purchase of one share of the Company's common stock at a price of $1 per share.
The warrants were all exercised in 1999.

<PAGE> 16

Mr. Swanton is also paid a consultant fee for financial consulting
services rendered to the Company at the rate of $20,000 per year pursuant to a
consulting agreement terminable at will by the Company.

Officer Compensation

Effective July 1, 1996, the Company amended the employment agreement
and extended the term to June 30, 1999 with Albert G. Schmerge III. The amended
agreement calls for an annual base salary of $250,000 plus an annual bonus equal
to 10% of the Company's net income in excess of a 10% return on shareholder
equity.

The employment agreement also provided for Mr. Schmerge to continue to
participate in employee benefit plans consisting of life and medical insurance
plans.

ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
AND MANAGEMENT

(a) As of December 31, 1998, two persons owned of record or were known
by the Company to own beneficially more than five percent (5%) of the Common
Stock then outstanding.

(b) The following table sets forth certain information with respect to
the beneficial ownership (determined in accordance with Securities and Exchange
Commission Rule 13d-3 under the Securities Exchange Act of 1934) of the
Company's Common Stock by each person known to the Company to beneficially own
more than 5% of the Company's outstanding Common Stock, by each director of the
Company and by all officers and directors as a group.

<TABLE>
<CAPTION>
Name and Address of Amount of Percent
Beneficial Owner Beneficial Ownership of Class
------------------- -------------------- --------
<S> <C> <C>
Albert G. Schmerge III (1) 48,000 11.5025%
Norman F. Swanton (2) 5,615(7) 1.3456%
Cullen Associates (3) 31,808 7.6223%
Judith F. Schmerge,
as Trustee (4) 3,533 0.8466%
Martin D. Newman (5) 5,128(7) 1.2288%
Rodney Knowles III (6) 4,132(7) 0.9902%
Officers and Directors
as a Group (three people) 62,875(7) 15.0671%
</TABLE>

--------------------

(FOOTNOTES)

(1) Mr. Schmerge is an Officer and Director of the Company.
(2) Mr. Swanton is an Officer and Director of the Company.
(3) A partnership owned by the estate of Albert G. Schmerge III's father and
his family.
(4) A grantor trust having as its trustee Judith F. Schmerge, the wife of
Albert G. Schmerge, III, the Chairman & President

<PAGE> 17

of the Company, and as its beneficiaries, Judith F. Schmerge and her
children.
(5) Mr. Newman is a Director of the Company.
(6) Mr. Knowles is a Director of the Company.
(7) Includes 12,362 common stock purchase warrants issued to the outside
directors as a group in 1997 and 1999. Each warrant allows the purchase of
one share of the Company's common stock at a price of $1 per share. The
warrants were all exercised in 1999.

(c) There are no other arrangements which may at a subsequent date
result in a compensatory change in control of the Company.

ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

Reference is made to the Notes to Consolidated Financial Statements
contained in this report for various transactions between the Company and its
affiliates.

(a) No management person is indebted to the Company.

(b) There have been no significant transactions with promoters.

Part IV

ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K

(a) The following documents are filed as part of this report:

(1)(2) The consolidated financial statements indicated in Item
7, "Financial Statements".

An annual report will be sent to the Shareholders subsequent to this
filing and the Company will furnish copies of such report to the Commission at
that time.

(b) Exhibits

The following is a complete list of Exhibits filed as part of the Form
10-KSB Annual Report. Exhibit numbers correspond to the numbers in the Exhibit
Table of Item 601(a) of Regulation S-B, which are incorporated herein:

<TABLE>
<S> <C> <C>
(2)(a) Second Amended Joint Disclosure Statement with respect *
to Plans of Reorganization of AGS Northbrook Associates, AGS
Properties and Related Debtors.

(b) First Amended Plan of Reorganization of Birchwood Associates *
dated February 27, 1991.
</TABLE>

* The exhibit was previously included with the Form 10 filed in June, 1992.

<PAGE> 18

<TABLE>
<S> <C> <C>
(c) First Amended Plan of Reorganization of AGS Aspen Walk *
Associates dated February 27, 1991.

(d) First Amended Plan of Reorganization of AGS Rolling Hills *
Associates dated February 27, 1991

(e) First Amended Plan of Reorganization of AGS Jackson *
Associates dated February 27, 1991.

(f) First Amended Plan of Reorganization of AGS Southern Lights *
Associates dated February 27, 1991.

(g) First Amended Plan of Reorganization of AGS Fountain Lake *
Associates dated February 27, 1991.

(h) Confirmation Order dated June 12, 1991 by Chief United *
States Bankruptcy Judge Burton Lifland.

(i) Second Amended Plan of Reorganization of AGS Fountains *
Associates dated January, 1992.

(j) Confirmation Order dated March 10, 1992 by Chief United *
States Bankruptcy Judge Burton Lifland.

(3) Articles of Incorporation and By-laws. *

(a) Certificate of Correction to Certificate of Amendment to *
Certificate of Incorporation of Resource Capital Group, Inc.

(4) Form of certificate representing Common Stock of the Issuer. *

(10) (a) Amended and Restated Agreement of Limited Partnership of AGS *
Partners MLP, L.P. dated September 1, 1991.

(b) Stock Option Agreement dated as of July 1, 1991 between *
Resource Capital Group, Inc. and Mr. Norman F. Swanton, a
Director of the Company.
</TABLE>

* The exhibit was previously included with the Form 10 filed in June, 1992.

<PAGE> 19

<TABLE>
<S> <C> <C> <C>
(c) Consulting Agreement dated July 1, 1991, between Resource *
Capital Group, Inc. and Norman F. Swanton, a Director of the
Company.

(d) Employment Agreement, dated as of July 1, 1991 between the *
Issuer and Albert G. Schmerge, III, the Issuer's Chairman,
President, Chief Executive Officer and Director.

(e) Minutes of Board of Directors meeting January 15, 1993. *

(f) Letter Agreement dated August 16, 1993 between Resource *
Capital Group, Inc. and Household Commercial Realty, Inc.
including Assignment of Deed of Trust.

(g) Settlement Agreement dated November 23, 1993 between Resource *
Capital Group, Inc. and Eastrich Multiple Investor Fund, L.P.

(h) Operating agreement dated April 25, 1995 for 8050 Roswell *
Associates, LLC a Georgia Limited Liability Company

(i) Operating agreement dated November 8, 1995 for 419 *
Crossville Associates, LLC a Georgia limited liability
Company.

27.1) Financial Data Schedule (SEC Use Only)

28) (a) Report on Form 8-K filed February 7, 1995 regarding the *
sale of Birches and Foxfire Apartments by AGS Partners MLP,
L.P.

(b) Report on Form 8-K originally filed on November 21, 1995 and *
amended on January 23, 1996 regarding the purchase of a 75%
interest in 419 Crossville Associates, LLC in November, 1995

* The exhibit was previously included with the Form 10 filed in June 1992
or the Form-KSB filed in 1993, 1994, 1995, 1996 or 1997.

<PAGE> 20

SIGNATURES

In accordance with Section 13 or 15 (d) 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.

By: /s/ Albert G. Schmerge III

Albert G. Schmerge III,
Chairman of the Board, Chief
Executive Officer, President
and Director

Date: March 29, 1999

In accordance with the Exchange Act, this report has been signed below by the
following persons on behalf of the Registrant and in the capacities and on the
dates indicated.

<TABLE>
<CAPTION>
Signature Title Date
<S> <C> <C>
/s/Albert G. Schmerge III Chairman of the Board, March 29, 1999
- ------------------------- Chief Executive Officer,
Albert G. Schmerge III President and Director

/s/Norman F. Swanton Secretary-Treasurer March 29, 1999
- ------------------------- and Director
Norman F. Swanton

/s/Martin D. Newman Director March 29, 1999
- -------------------------
Martin D. Newman
</TABLE>

18
<PAGE> 21
RESOURCE CAPITAL GROUP, INC.

Consolidated Financial Statements
for year ended
December 31, 1998

<PAGE> 22

Item 7. Consolidated Financial Statements

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

<TABLE>
<CAPTION>
Page
<S> <C>
Independent Auditor's Report F-2

Consolidated Balance Sheet F-3

Consolidated Statement of Operations F-4

Consolidated Statement of Stockholders' Equity F-5

Consolidated Statement of Cash Flows F-6

Notes to Consolidated Financial Statements F-7
</TABLE>

F-1

<PAGE> 23

Independent Auditor's Report

To the Board of Directors
Resource Capital Group, Inc.

We have audited the accompanying consolidated balance sheet of Resource Capital
Group, Inc. and Subsidiaries as of December 31, 1998, and the related
consolidated statements of operations, stockholders' equity and cash flows for
each of the two years in the period ended December 31, 1998. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.

We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Resource Capital
Group, Inc. and Subsidiaries at December 31, 1998, and the results of its
operations and its cash flows for each of the two years in the period ended
December 31, 1998 in conformity with generally accepted accounting principles.

PANNELL KERR FORSTER PC

New York, NY
February 12, 1999, except for note 9 as
to which the date is March 22, 1999

F-2

<PAGE> 24

RESOURCE CAPITAL GROUP, INC.

Consolidated Balance Sheet
December 31, 1998

<TABLE>
<CAPTION>
Assets
<S> <C> <C>
Cash and cash equivalents (note 2) $ 2,212,570

Investment in marketable equity securities (note 2) 19,635

Investments in and receivables from partnerships (notes 2 and 3) 1,352,941

Real and personal property, at cost (notes 1, 2, 4, 5 and 8)
Land $ 2,254,005
Buildings and improvements 5,611,061
Furniture and equipment 311,784
Construction in progress 102,218
----------------
8,279,068
Less accumulated depreciation (333,269) 7,945,799
----------------

Deferred mortgage costs - net of accumulated amortization of
$18,195 (note 2) 160,065

Other assets 128,392
----------------
$ 11,819,402
----------------

Liabilities and Stockholders' Equity

Liabilities
Accounts payable $ 44,082
Accrued expenses
Interest $ 29,778
Payroll 78,770
Professional fees 48,000
Income taxes 170,594
Other 35,486 362,628
----------------

Security deposits and other 86,210
Mortgages payable (note 5) 5,859,857
Deferred tax liability (note 7) 265,824
----------------
Total liabilities 6,618,601

Commitments and contingencies (notes 5 and 8)

Stockholders' equity
Common stock - $.01 par value per share, authorized
1,000,000 shares, issued 508,608 shares (note 6) 5,086
Additional paid-in capital 4,607,494
Retained earnings 776,859
Unrealized gain on investment (note 2) 2,009
Treasury stock, at cost, (note 6) (190,647) 5,200,801
---------------- ----------------
$ 11,819,402
----------------
</TABLE>

See notes to consolidated financial statements

F-3

<PAGE> 25

RESOURCE CAPITAL GROUP, INC.

Consolidated Statement of Operations

<TABLE>
<CAPTION>
Year Ended
December 31
------------------------------

1998 1997
---------- ----------
<S> <C> <C>

Income
Rental operations (notes 1, 4 and 8) $1,147,183 $1,105,287
Equity in earnings of unconsolidated partnerships - net (note 3) 543,310 64,986
Management fees - affiliated entity (note 8) 84,188 91,593
Interest - affiliated entity (note 3) 379,987 212,581
Gain on sale of real property (note 4) 60,872 525,779
Interest and other income 71,878 41,395
---------- ----------

Total income 2,287,418 2,041,621
---------- ----------

Expenses
Rental operations (notes 1 and 4) 326,633 496,646
General and administrative 741,246 576,703
Interest (note 5) 357,793 346,399
Depreciation and amortization (note 2) 203,420 372,026
---------- ----------

Total expenses 1,629,092 1,791,774
---------- ----------

Income before minority share of income 658,326 249,847

Minority share of income (note 2) - 15,586
---------- ----------

Income before provision for income taxes 658,326 234,261

Provision for income taxes (note 7) 290,091 99,466
---------- ----------

Net income $ 368,235 $ 134,795
---------- ----------

Earnings per share (note 2)
Basic earnings per share $ .89 $ .33
---------- ----------

Dilutive earnings per share $ .88 $ .33
---------- ----------
</TABLE>

See notes to consolidated financial statements

F-4

<PAGE> 26

RESOURCE CAPITAL GROUP, INC.

Consolidated Statement of Stockholders' Equity
For Years Ended December 31, 1998 and 1997

<TABLE>
<CAPTION>
Unrealized
Additional Gain Total
Common Paid-in Retained (Loss) on Treasury Stockholders'
Stock Capital Earnings Investment Stock Equity
------ ---------- -------- ---------- ---------- -------------
<S> <C> <C> <C> <C> <C> <C>

Balance, December 31, 1996 $4,986 $4,459,034 $273,829 $16,247 $(131,712) $4,622,384

Net income for year ended December 31, 1997 - - 134,795 - - 134,795

Issuance of warrants (note 6) - 24,690 - - - 24,690

Issuance of common stock (note 6) 100 123,770 - - - 123,870

Change in unrealized gain on investment - - - (11,810) - (11,810)
------ ---------- -------- -------- --------- ----------

Balance, December 31, 1997 5,086 4,607,494 408,624 4,437 (131,712) 4,893,929

Net income for year ended December 31, 1998 - - 368,235 - - 368,235

Treasury stock acquired (note 6) - - - - (58,935) (58,935)

Change in unrealized gain on investment - - - (2,428) - (2,428)
------ ---------- -------- -------- --------- ----------

Balance, December 31, 1998 $5,086 $4,607,494 $776,859 $ 2,009 $(190,647) $5,200,801
------ ---------- -------- -------- --------- ----------

</TABLE>

See notes to consolidated financial statements

F-5

<PAGE> 27

RESOURCE CAPITAL GROUP, INC.

Consolidated Statement of Cash Flows

<TABLE>
<CAPTION>
Year Ended
December 31
------------------------------

1998 1997
----------- -----------
<S> <C> <C>
Cash flows from operating activities
Net income $ 368,235 $ 134,795
Adjustments to reconcile net income to net cash provided
by operating activities
Depreciation and amortization 203,420 372,026
Equity in earnings (loss) of unconsolidated partnerships (372,883) 33,317
Minority share of income - 15,586
Provision for deferred income taxes 94,587 89,630
Gain on sale of real property (60,872) (525,779)
Issuance of stock warrants - 24,690
Gain on sale of marketable equity securities - (18,521)
Changes in certain other accounts, net of acquisitions
Deferred costs and other assets 1,744 211,650
Accounts payable 27,972 (43,574)
Accrued expenses 182,122 (34,661)
Security deposits and other 47,763 (37,089)
----------- -----------
Net cash provided by operating activities 492,088 222,070
----------- -----------

Cash flows from investing activities
Net repayments from (advances to) investees 1,861,394 (155,451)
Proceeds from sale of real property 62,584 4,866,684
Additions to real and personal property (210,257) (133,284)
Construction in progress costs (60,350) (41,868)
Purchase of subsidiaries (2,300,684) (938,417)
Proceeds from sale of marketable equity securities - 89,024
Deposit on purchase of property - (200,000)
----------- -----------
Net cash provided (used) by investing activities (647,313) 3,486,688
----------- -----------

Cash flows from financing activities
Repayment of mortgages payable (836,480) (3,704,657)
Proceeds from mortgages payable 2,850,000 570,000
Note amortization payments (85,258) (70,570)
Mortgage amortization payments (96,017) (81,141)
Purchase of treasury stock (58,935) -
Deferred mortgage costs (79,240) (47,320)
----------- -----------
Net cash provided (used) by financing activities 1,694,070 (3,333,688)
----------- -----------
Net increase in cash and cash equivalents 1,538,845 375,070
Cash and cash equivalents at beginning of year 673,725 298,655
----------- -----------
Cash and cash equivalents at end of year $ 2,212,570 $ 673,725
----------- -----------

Supplemental disclosures of cash flow information
Cash paid during the year for interest $ 351,732 $ 370,022
----------- -----------
Cash paid during the year for income taxes $ 43,361 $ 17,267
----------- -----------

Details of purchases of subsidiaries
Working capital $ - $ (116,952)
Real and personal property (3,470,684) (1,422,250)
Mortgages payable 970,000 476,915
----------- -----------
(2,500,684) (1,062,287)
----------- -----------

Consideration given for purchases of majority interest in subsidiaries
Cash 2,500,684 938,417
Common stock - 123,870
----------- -----------
$ 2,500,684 $ 1,062,287
----------- -----------
</TABLE>

See notes to consolidated financial statements

F-6

<PAGE> 28

RESOURCE CAPITAL GROUP, INC.

Notes to Consolidated Financial Statements
December 31, 1998

Note 1 - Organization and description of business

Resource Capital Group, Inc. (the Company) was organized as a Delaware
Corporation in November 1990 to become successor in interest of AGS Properties
(AGS) and assumed various general and limited partnership interest of AGS.

As of December 31, 1998, the Company's investments include:

AGS PARTNERS MLP, LP (MLP), acquired from AGS in 1991 and owns an
apartment complex in Oklahoma City, Oklahoma (see note 3).

AGS MEADOW OAKS ASSOCIATES (MEADOW), acquired from AGS in 1991 and owns
an apartment complex in Kansas City, Kansas (see note 3).

8050 ROSWELL ASSOCIATES LLC (8050 ROSWELL), acquired in 1995 and owns
an office complex in Fulton County, Georgia.

419 CROSSVILLE ASSOCIATES LLC (CROSSVILLE), acquired in 1995 and owns
an office complex in Fulton County, Georgia.

COLONIAL PARK COMMONS LLC (COLONIAL), acquired in 1996 and owns an
office complex in Fulton County, Georgia.

MEGGAN LOT LLC (MEGGAN), AND HEIDE LOT LLC (HEIDE), acquired in 1996
and owns unimproved land surrounding the Colonial property in Fulton
County, Georgia (a).

8046 ROSWELL ROAD LLC (8046 ROSWELL), acquired in 1997 and owns an
office complex in Fulton County, Georgia.

WOODSTOCK OFFICE I, LLC (WOODSTOCK), acquired in 1997 and owns an
office complex in Cherokee County, Georgia.

HUNTER MANAGEMENT COMPANY (HUNTER), acquired in 1997 and owns the
minority interest in various investees of the Company. Additionally,
Hunter manages the properties owned by the Company's subsidiaries.

RCGI OAKMONT LLC (OAKMONT), acquired in 1998 and owns an office complex
in Jefferson County, Alabama.

RCGI MONTCLAIR I, LLC (MONTCLAIR), acquired in 1998 and owns an office
complex in Jefferson County, Alabama.

920 HOLCOMB BRIDGE LLC (HOLCOMB BRIDGE), acquired in 1998 and owns an
office complex in Fulton County, Georgia.

(a) During 1998, the unimproved land owned by Meggan and a portion
of the land owned by Colonial was contributed to Heide and the
Company commenced construction of an office complex (see note
8e).

F-7

<PAGE> 29

Note 2 - Significant accounting policies

Basis of accounting

The consolidated financial statements include the accounts of the Company and
its wholly owned subsidiaries, 8050 Roswell, Crossville, Colonial, Meggan,
Heide, 8046 Roswell, Woodstock, Hunter, Oakmont, Montclair and Holcomb Bridge.
All intercompany transactions and balances have been eliminated in
consolidation.

Prior to the acquisition of Hunter in September 1997, the Company recorded a
minority interest representing Hunters' share of the operations of certain
subsidiaries.

The Company's general and limited partnership interests in both MLP and Meadow
are accounted for under the equity method.

In 1997 the properties owned by AGS Carriage House Associates (Carriage) and AGS
Compass Point Associates (Compass) were sold and these Partnerships were
dissolved. The Company had included the operations of these Partnerships in the
consolidated financial statements through the date of disposition (see note 4.)

Use of estimates

The consolidated financial statements of the Company are prepared in conformity
with generally accepted accounting principles, which require management to make
estimates and assumptions that effect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting period. The most significant area which requires the use of
management's estimates relate to the determination of the carrying value of the
Company's equity investments in partnerships. Actual results could differ from
those estimates.

Long-lived assets

Management evaluates the Company's long-lived assets, which consist primarily of
its investments in real and personal property, for impairment based on the
recoverability of their carrying amounts. When it is probable that undiscounted
cash flows will not be sufficient to recover the carrying amount of a specific
property, the assets will be written down to its fair value. No such write-downs
were required in 1998 and 1997.

Disclosure about fair value of financial instruments

The carrying amount of the Company's cash and cash equivalents, receivables and
mortgages and notes payable is a reasonable approximation of fair value.

Depreciation and amortization

Depreciation of real and personal property is being provided on straight-line
and accelerated methods over estimated service lives ranging from 5 to 39 years.
Depreciation expense for the years ended December 31, 1998 and 1997 amounted to
$169,975 and $169,306, respectively.

F-8

<PAGE> 30

RESOURCE CAPITAL GROUP, INC.

Notes to Consolidated Financial Statements (continued)
December 31, 1998

Deferred mortgage costs are being amortized on a straight-line basis over the
term of the respective mortgages. As a result of the refinancing of Crossville's
mortgage during 1998 and the sale of Carriage and Compass during 1997, deferred
mortgage costs in the amount of $22,554 in 1998 and $197,153 in 1997, have been
fully amortized and reflected in the consolidated statement of operations.

Income taxes

Deferred tax assets and liabilities are recognized for both the expected future
tax impact of differences between the financial statement and tax basis of
assets and liabilities, and for the expected future tax benefit to be derived
from tax loss and tax credit carryforwards. Deferred tax assets are reflected at
their likely realizable amount.

Cash and cash equivalents

For purposes of reporting cash flows, cash and cash equivalents includes cash on
hand and in banks and money market funds which are available for current
operations. Substantially, all of the Company's cash and cash equivalents are
maintained in a money market account on deposit with one bank. The Company has
not experienced any losses on its cash deposits.

Earnings per share

The Company follows the provisions of the Financial Accounting Standards Board
Statement No. 128 (SFAS 128), Earnings per Share. The following table sets forth
the computation of basic and diluted earnings per share:

<TABLE>
<CAPTION>
Year Ended
December 31
------------------------
1998 1997
-------- ---------
<S> <C> <C>
Numerator used for both basic and diluted
earnings per share $368,235 $134,795
-------- --------
Denominator for basic earnings per share
Weighted average shares outstanding 413,780 410,060
-------- --------

Denominator for dilutive earnings per share
Denominator for basic earnings per share 413,780 410,060
Effect of dilutive securities - warrants 6,584 2,572
-------- --------

420,364 412,632
-------- --------

Basic earnings per share $ .89 $ .33
-------- --------

Dilutive earnings per share $ .88 $ .33
-------- --------
</TABLE>

F-9

<PAGE> 31

RESOURCE CAPITAL GROUP, INC.

Notes to Consolidated Financial Statements (continued)
December 31, 1998

Investment in marketable equity securities

The Company's investment in marketable equity securities are classified as
available for sale and accordingly are stated at fair value with the related
unrealized gains and losses included as a separate component of stockholders'
equity. The cost of the Company's available-for-sale securities is $17,626.
Realized gains and losses on the sale of these investments are derived using the
weighted average method for determining cost.

Reporting comprehensive income

In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 130 (SFAS 130) "Reporting Comprehensive
Income". SFAS 130 requires a company to report comprehensive income and its
components in a full set of financial statements. Comprehensive income is the
change in equity during a period from transactions and other events and
circumstances from nonowner sources, such as unrealized gains (losses) on
available-for-sale securities. The Company has not reported the income resulting
from unrealized gains (losses) on available for sale securities as comprehensive
income as the effects are not material to the consolidated financial statements.
Accordingly, there is no material difference between the Company's net income
reported and the comprehensive income for SFAS 130.

Investments in partnerships

The Company uses the equity method of accounting for its partnership interests
in MLP and Meadow, whereby the original costs are adjusted by the Company's
share of the undistributed earnings or losses of these entities. Since the
Company is responsible as general partner for obligations of these entities,
losses recorded under the equity method, related to the Company's investment as
general partner, could exceed the cost of the Company's general partnership
investment. Since, as a limited partner, the Company is not responsible for the
obligations of these entities in excess of its investments, the costs of such
limited partnership investments, plus advances, will not be reduced below zero
for losses related to such limited partnership interests. Management evaluates
the realization of its investment in partnerships on a quarterly basis and
provides for valuation allowances as needed.

The equity in earnings (loss) of MLP is adjusted annually to eliminate
transactions with the Company.

Note 3 - Investment in and receivables from partnerships

The balance at December 31, 1998 is summarized as follows:

<TABLE>
<S> <C>
Note receivable from MLP (a) $ 325,554
Accrued interest receivable on MLP note (a) 4,069
Advances receivable from partnerships 1,014,000
Investment in partnerships (b) 9,318
----------

Net $1,352,941
----------
</TABLE>

F-10

<PAGE> 32

RESOURCE CAPITAL GROUP, INC.

Notes to Consolidated Financial Statements (continued)
December 31, 1998

(a) In connection with the formation of both the Company and MLP, MLP
issued various subordinated promissory notes to the Company which are
secured mortgages and deeds of trust and require monthly payments of
interest only at the rate of 15% per annum. The notes also require the
payment of additional interest on the sale or refinancing of the
mortgaged property equal to a thirty-five percent participation in the
net proceeds as defined.

In April 1998, MLP completed the sale of the Rolling Hills Apartments.
As a result MLP was able to repay the Company's $1,657,947 note
receivable from MLP and $400,093 of additional interest expense
resulting from the thirty-five percent participation in the net sale
proceeds. At December 31, 1998 the only remaining note receivable from
MLP relates to the Aspen Walk property which is currently being
marketed for sale. Interest and additional interest earned on these
notes amounted to $531,823 and $297,524 in 1998 and 1997, respectively.
Such interest income is reflected in the accompanying statement of
operations net of the Companys' equity interest in MLP.

(b) As discussed in note 2, the Company's policy is to reflect its
investments in unconsolidated partnerships on the equity method. The
following is a summary of the Company's investments in (accountability
to) Partnerships as of December 31, 1998:

<TABLE>
<S> <C>
MLP
1% General partnership interest and
27.55% Limited partnership interest (1) $ 84,488

Meadow
2.55% General partnership interest and
43.10% Limited partnership interest (2) (75,170)
--------
$ 9,318
--------
</TABLE>

Equity in earnings (loss) of unconsolidated Partnership investments,
net of valuation allowances, for the years ended December 31, 1998 and
1997 are as follows:

<TABLE>
<CAPTION>
1998 1997
--------- --------
<S> <C> <C>
MLP (1) $ 379,325 $(28,211)
Meadow (2) (6,442) (5,106)
--------- --------
Sub-total 372,883 (33,317)
Elimination of interest on notes payable
and management fees to the Company 170,427 98,303
--------- --------
Total $ 543,310 $ 64,986
--------- --------
</TABLE>

(1) In February 1999, MLP entered into a contract for the sale of
the Aspen Walk property for $2,675,000. The contract is
subject to the purchasers further inspection of the property
and is not expected to close until April 1999. As of December
31, 1998, the Company has provided a valuation allowance on
its investment in MLP of $1,123,456 to reflect its estimated
net realizable value based upon calculating its share of the
remaining cash to be distributed by MLP in 1999.

F-11

<PAGE> 33

RESOURCE CAPITAL GROUP, INC.

Notes to Consolidated Financial Statements (continued)
December 31, 1998

(2) As discussed in note 2, the Company does not reflect its
equity in losses of limited partnership interest when such
losses are in excess of the Company's investment and advances.
Unrecorded losses in Meadow aggregated $1,277,419 at December
31, 1998 (see note 9).

Summarized financial information of the Company's investments in
unconsolidated partnerships as of and for the year ended December 31,
1998 are as follows:

<TABLE>
<CAPTION>
MLP Meadow
----------- -----------
<S> <C> <C>

Real and personal property - net $ 787,081 $ 2,552,520
Other assets 143,584 656,004
----------- -----------

Total assets 930,665 3,208,524
----------- -----------

Mortgages and accrued interest payable 845,407 8,955,081
Notes payable, accrued interest and advances
to Resource Capital Group, Inc. 1,343,623 -
Other liabilities 52,721 219,094
----------- -----------

Total liabilities 2,241,751 9,174,175
----------- -----------

Equity (deficit) (1,311,086) (5,965,651)
----------- -----------

Revenues 6,986,111 1,609,724
----------- -----------

Net income (loss) $ 5,263,680 $ (252,623)
----------- -----------
</TABLE>

The partners, including the Company, are not personally liable for the
mortgages encumbering the real property. Both Partnerships are expected
to be dissolved in 1999.

Note 4 - Property acquisitions and dispositions

1998 Acquisitions

In February 1998, Holcomb Bridge was formed and capitalized with a $273,692
contribution. Holcomb Bridge simultaneously acquired a 14,400 square foot office
complex located in Fulton County, Georgia for $1,250,000. The purchase was
financed in part, with a $970,000 mortgage payable on the property.

In July 1998, the Company formed Oakmont and Montclair with capital
contributions of $1,014,880 and $1,182,271, respectively. Oakmont and Montclair
simultaneously acquired 20,000 and 22,248, respectively, square foot office
complexes located in Jefferson County, Alabama, for $1,009,000 and $1,175,000,
respectively. Subsequent to the purchase of the office complexes, Oakmont and
Montclair obtained mortgages payable on each of the properties amounting to
$810,000 and $940,000, respectively.

F-12

<PAGE> 34

RESOURCE CAPITAL GROUP, INC.

Notes to Consolidated Financial Statements (continued)
December 31, 1998

1998 Dispositions

During 1998, the Company sold a small portion of the Woodstock land to the State
of Georgia for $62,584. As a result, the Company realized a gain on sale in the
amount of $60,872.

1997 Acquisitions

In June 1997, the Company formed Woodstock (see note 1) with a $600,000 capital
contribution. Woodstock simultaneously acquired an 11,250 square foot office
complex located in Cherokee County, Georgia for $600,000. Subsequent to the
purchase of the office complex, Woodstock obtained a $570,000 mortgage payable
on the property.

In June 1997, the Company acquired a 100% interest in 8046 Roswell from Hunter
(see note 1) in exchange for $323,000 in cash and the assumption of a $476,915
mortgage payable. 8046 Roswell owns an 8,000 square foot office complex in
Fulton County, Georgia.

In September 1997, the Company acquired all of the outstanding shares of stock
in Hunter (see note 1) in exchange for 10,000 shares of the Company's common
stock in a business combination accounted for under the purchase method. Hunter
has a minority interest in and, manages various properties owned by the
Company's subsidiaries. The net assets of Hunter were acquired at their net book
value of $123,870, which approximated their fair value.

1997 Dispositions

In May 1997, the properties owned by Carriage and Compass, entities in which the
Company held a 99% interest, were sold for $4,866,684. As a result of these
sales the Company realized a gain in the amount of $525,779. Operating results
of these entities, exclusive of the $525,779 gain, included in the accompanying
1997 statement of operations are as follows:

<TABLE>
<S> <C>
Income from rental operations $ 468,257
----------

Expenses
Rental operations 297,336
Interest 134,192
Depreciation and amortization 269,007
----------

$ 700,535
----------
</TABLE>

The following summarized unaudited pro forma results of operations for the year
ended December 31, 1998 assume each of the three 1998 acquisitions occurred on
January 1, 1998

<TABLE>
<S> <C>
Total income $2,591,520

Net income $ 489,565

Basic earnings per share $ 1.18

Dilutive earnings per share $ 1.16
</TABLE>

F-13

<PAGE> 35

RESOURCE CAPITAL GROUP, INC.

Notes to Consolidated Financial Statements (continued)
December 31, 1998

Note 5 - Mortgages payable

The mortgages payable as of December 31, 1998 consist of the following:

<TABLE>
<S> <C>
8050 Roswell - The mortgage payable bears interest at
9.53% per annum and matures in July 2010. The terms of
the mortgage require that monthly payments of $3,766 be
applied first to interest and the balance to reduction of
principal. Interest on this loan adjusts every five years,
commencing on July 1, 2000 and is computed as 325 basis
points over the average yield on U.S. Treasury securities, as
defined. $ 316,548

Crossville - In January 1998 Crossville refinanced its
mortgage payable and increased the principal balance to
$1,100,000. The new mortgage payable bears interest at
7.75% per annum and matures in February 2008. The
terms of the new mortgage require that monthly payments
of $8,693 be applied first to interest with the balance to
reduction of principal. Prior to January 1998, the
Company's mortgage required payments of $8,821 be
applied first to interest at 8.8% per annum with the balance
to reduction of principal. 1,083,642

Colonial - The mortgage payable bears interest at 9.375%
per annum and matures in October 2006. The terms of the
mortgage require that monthly payments of $7,276 be
applied first to interest with the balance to reduction of
principal. Interest on this loan adjusts on October 1, 2001
and is computed as 300 basis points over the average yield
on U.S. Treasury securities, as defined. 755,165

8046 Roswell - The mortgage payable bears interest at
8.00% per annum and matures on June 1, 2009. The terms
of the mortgage require that monthly payments of $5,175
be applied first to interest and the balance to reduction of
principal. Interest on this loan adjusts on June 1, 2002 and
is computed as 300 basis points over the average yield on
U.S. Treasury securities, as defined. 437,997
</TABLE>

F-14

<PAGE> 36

RESOURCE CAPITAL GROUP, INC.

Notes to Consolidated Financial Statements (continued)
December 31, 1998

<TABLE>
<S> <C>
Woodstock - The mortgage payable bears interest at 9.31%
per annum and matures in December 2017. The terms of
the mortgage require that monthly payments of $5,243 be
applied first to interest with the balance to reduction of
principal. Interest on this loan adjusts every five years,
commencing on December 1, 2002 and is computed as
300 basis points over the average yield on U.S. Treasury
securities, as defined. $ 560,528

Holcomb Bridge - The mortgage payable bears interest at
8.5% per annum and matures in March 2018. The terms of
the mortgage require that monthly payments of $8,418 be
applied first to interest and the balance to reduction of
principal. Interest on this loan adjusts every five years
commencing on March 1, 2003 and is computed as 275
basis points over the average yield on U.S. Treasury
securities, as defined. The mortgage may be called by the
lender in March 2003. 955,977

Montclair - The mortgage payable bears interest at 7.14%
per annum and matures in January 2019. Commencing in
February 1999, the terms of the mortgage require that
monthly payments of $7,367 be applied first to interest and
the balance to reduction of principal. Interest on this loan
adjusts every five years commencing on January 1, 2004
and is computed as 275 basis points over the average yield
on U.S. Treasury securities, as defined. The mortgage may
be called by the lender in January 2004. 940,000

Oakmont - The mortgage payable bears interest at 7.14%
per annum and matures in January 2019. Commencing in
February 1999, the terms of the mortgage require that
monthly payments of $6,348 be applied first to interest and
the balance to reduction of principal. Interest on this loan
adjusts every five years commencing on January 1, 2004
and is computed as 275 basis points over the average yield
on U.S. Treasury securities, as defined. The mortgage may 810,000
be called by the lender in January 2004. ----------
$5,859,857
----------
</TABLE>

F-15

<PAGE> 37

RESOURCE CAPITAL GROUP, INC.

Notes to Consolidated Financial Statements (continued)
December 31, 1998

A schedule of future amortization payments, excluding the callable provision in
the Holcomb Bridge mortgage, at December 31, 1998 follows:

<TABLE>
<S> <C>
1999 $ 150,448
2000 166,847
2001 181,096
2002 196,577
2003 213,396
Thereafter 4,951,493
----------

$5,859,857
----------
</TABLE>

A majority of the mortgage notes payable have been guaranteed by the Company.

Note 6 - Stockholders' equity

Common stock

At December 31, 1998, the Company has issued 508,608 shares of its common stock.
During 1997, the Company issued 10,000 shares of common stock in exchange for
all of the common stock in Hunter (see notes 1 and 4). The net assets of Hunter
amounted to $123,870, of which $123,770 was allocated to additional paid-in
capital with the remaining $100 being allocated to common stock at par value.

Warrants

During 1997, the Company issued 8,230 common stock purchase warrants valued at
$24,690 to two members of the Board of Directors. Each warrant allows the
purchase of one share of the Company's common stock at a price of $1 per share.
The warrants are exercisable until July 31, 2001. At December 31, 1998, none of
these warrants have been exercised (see note 9).

Treasury stock

During 1998, the Company acquired as treasury stock 11,787 shares for $58,935.
At December 31, 1998, the Company has 103,669 shares of treasury stock.

Note 7 - Income taxes

The provision for income taxes for the years ended December 31, 1998 and 1997 is
as follows:

<TABLE>
<CAPTION>
1998 1997
-------- -------
<S> <C> <C>
Current
Federal $158,093 $ 569
State 37,411 9,267
-------- -------

195,504 9,836
-------- -------

Deferred 94,587 89,630
-------- -------

$290,091 $99,466
-------- -------
</TABLE>

F-16

<PAGE> 38

RESOURCE CAPITAL GROUP, INC.

Notes to Consolidated Financial Statements (continued)
December 31, 1998

The difference between the total tax provision and that obtained by applying the
statutory rate is as follows:

Tax provision at statutory rate $223,831 $79,649
State taxes and other 66,260 19,817
-------- -------

Provision for income taxes $290,091 $99,466
-------- -------
</TABLE>

A summary of the net deferred income tax (liability) by source at December 31,
1998 is as follows:

<TABLE>
<S> <C>
Deferred tax asset
Incentive stock compensation $ 19,720
Tax credit carryforward 50,000
Stock warrants 8,395
---------

Total 78,115
Deferred tax liability
Basis in Partnership investments (343,939)
---------

Net deferred tax (liability) $(265,824)
---------
</TABLE>

At December 31, 1998, the Company has fully utilized all available net operating
loss carryforwards.

Note 8 - Commitments

a. Employment agreement

The Company has an employment agreement with its President which expires on June
30, 1999. The agreement calls for an annual base salary of $250,000 plus an
annual bonus based on the Company's net income, as defined.

b. Management agreements

The real estate operations of the Company's subsidiaries and equity investees
are managed by Hunter (see note 1) under an agreement which provides for fees
equal to 5% of revenue as defined. Expenses incurred by the Company's
subsidiaries for management fees prior to the Companys' acquisition of Hunter
amounted to $45,929 in 1997 and are included in rental operations expense in the
accompanying consolidated statement of operations. Fees earned and expenses
incurred for Hunter's management charges subsequent to it being acquired by the
Company eliminate in consolidation. Management fee income for the year ended
December 31, 1998 represents fees earned by Hunter from managing MLP and Meadow,
net of the Company's respective equity interest in those Partnerships.

F-17

<PAGE> 39

RESOURCE CAPITAL GROUP, INC.

Notes to Consolidated Financial Statements (continued)
December 31, 1998

c. Operating leases

8050 Roswell, Crossville, Colonial, 8046 Roswell, Woodstock, Oakmont, Montclair
and Holcomb Bridge, each lease their office space under operating lease
agreements expiring in various years through 2004. Future minimum annual rents
to be received under operating leases currently in effect are as follows:

<TABLE>
<S> <C>
1999 $1,314,826
2000 893,674
2001 589,459
2002 231,585
2003 61,756
Thereafter 33,756
----------

$3,125,056
----------
</TABLE>

d. Consulting fees

The Company has entered into a consulting agreement with a member of its Board
of Directors which provides for annual fees of $20,000.

e. Construction of an office complex

During 1998, the Company entered into a contract for the construction of the
office complex on its Heide property for $792,326. As of December 31, 1998, work
in the amount of $50,754 has been completed on this project and is included as
part of construction in progress in the accompanying financial statements. In
connection with this project, the Company received a commitment on a
construction loan in the amount of $900,000, but not to exceed 75% of total
development cost. The loan will mature sixty months from the date of closing and
will require interest only payments for the first twelve months at the lender's
base rate plus 1%. From the thirteenth month until maturity, monthly principal
and interest payments based on a 20-year amortization will be required and
interest will be fixed at the five year Treasury Constant Maturity plus 275
basis points with a floor of 8%. At December 31, 1998 no amount have been drawn
under this facility.

Note 9 - Subsequent events

a. Disposition of Meadow property

The Company has a 2.55 percent general partner interest and a 43.10 percent
limited partner interest in the Meadow Partnership. Management determined that
the revenue to be derived from the Meadow property operations would not be
sufficient to continue to operate the property on a profitable basis.
Accordingly, on March 22, 1999, Meadow deeded its real and personal property to
a third party in exchange for a nominal sum, and also received a release of all
liabilities relating to the mortgage from the first mortgage holder. As a result
of this transaction and the anticipated liquidation of the Meadow Partnership,
the Company expects to realize a taxable gain of approximately $1.4 million in
1999.

F-18

<PAGE> 40

RESOURCE CAPITAL GROUP, INC.

Notes to Consolidated Financial Statements (continued)
December 31, 1998

b. Warrants

In January 1999 the Company issued, to one of its directors, warrants to
purchase 4,132 shares of common stock for $1 per share. These warrants along
with previously issued warrants to purchase 8,230 shares of the Company's common
stock for $1 per share, were exercised in February 1999.

c. Dividends

In January 1999, the Board of Directors approved a cash dividend of $1 per share
payable in March 1999.

F-19

<ARTICLE> 5
<MULTIPLIER> 1
<CURRENCY> U.S. DOLLARS

<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> DEC-31-1998
<EXCHANGE-RATE> 1
<CASH> 2,212,570
<SECURITIES> 19,635
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 0
<PP&E> 8,279,068
<DEPRECIATION> 333,269
<TOTAL-ASSETS> 11,819,402
<CURRENT-LIABILITIES> 0
<BONDS> 5,859,857
0
0
<COMMON> 5,086
<OTHER-SE> 5,195,715
<TOTAL-LIABILITY-AND-EQUITY> 11,819,402
<SALES> 0
<TOTAL-REVENUES> 2,287,418
<CGS> 0
<TOTAL-COSTS> 326,633
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 357,793
<INCOME-PRETAX> 658,326
<INCOME-TAX> 290,091
<INCOME-CONTINUING> 368,235
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 368,235
<EPS-PRIMARY> .89
<EPS-DILUTED> 0

</TABLE>