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 September 30, 2003
| ¨ | TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE EXCHANGE ACT |
For the transition period from to
Commission file number 333-86516
R J LENDING, INC.
(Exact name of small business issuer as specified in its charter)
Florida
(State or other jurisdiction of incorporation or organization)
75-2996764
(I.R.S. Employer Identification Number)
1717 Second Street, Suite D, Sarasota, Florida 34236
(Address of principal executive office)
941/364-9915
(Issuer’s telephone number)
Not Applicable
(Former name, former address and former fiscal year, if changed since last report)
APPLICABLE ONLY TO CORPORATE ISSUERS
State the number of shares outstanding of each of the issuer’s classes of common equity, as of the latest practicable date:
Title of Class | Number of Shares Outstanding On xxxx, 2003 | |
First Series Preferred Stock, $.01 par value | 22,592 | |
Second Series Convertible Preferred Stock, $01 par value | 740,800 | |
Common Stock, $.01 par value | 740,800 |
Transitional Small Business Disclosure Format: Yes¨ Nox
RJ LENDING, INC.
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FINANCIAL STATEMENTS | ||
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November 7, 2003
BOARD OF DIRECTORS
RJ Lending, Inc.
Sarasota, Florida
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
We have reviewed the accompanying statement of financial condition of RJ Lending, Inc. as of September 30, 2003, the related statements of income, stockholders’ equity, and cash flows for the nine-month periods ended September 30, 2003 and 2002 and the related statement of stockholders’ equity for the nine-month period ended September 30, 2003 and the year ended December 31, 2003 in accordance with Statements on Standards for Accounting and Review Services issued by the American Institute of Certified Public Accountants. All information included in these financial statements is the representation of the management of RJ Lending, Inc.
A review consists principally of inquiries of Company personnel and analytical procedures applied to financial data. It is substantially less in scope than an audit in accordance with auditing standards generally accepted in the United States of America, the objective of which is the expression of an opinion regarding the financial statements taken as a whole. Accordingly, we do not express such an opinion.
Based on our reviews, we are not aware of any material modifications that should be made to the accompanying financial statements in order for them to be in conformity with accounting principles generally accepted in the United States of America.
In accordance with United States Securities and Exchange Commission Regulation S-X, footnotes have been omitted in these interim financial statements, as footnote disclosure would substantially duplicate the disclosure contained in the audited financial statements for the year ending December 31, 2002. These financial statements should be read in conjunction with the December 31, 2002 financial statements.
Certified Public Accountants
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RJ LENDING, INC.
STATEMENT OF FINANCIAL CONDITION
September 30, 2003
ASSETS | |||
CURRENT ASSETS | |||
Cash | $ | 224,933 | |
Interest and fees receivable | 117,522 | ||
Mortgages, current, net of unfunded mortgage proceeds of $102,078 and net of loss reserves of $4,001 | 2,445,899 | ||
TOTAL CURRENT ASSETS | 2,788,354 | ||
OTHER ASSETS | |||
Furniture and equipment, net | 31,023 | ||
Software, net | 38,835 | ||
Other real estate owned | 134,409 | ||
Mortgages, long-term, net of loss reserves of $11,567 | 193,044 | ||
Deferred costs, net | 24,595 | ||
Syndication costs, net | 205,070 | ||
TOTAL OTHER ASSETS | 626,976 | ||
INVESTMENT IN LIMITED LIABILITY COMPANIES | 338,559 | ||
TOTAL ASSETS | $ | 3,753,889 | |
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LIABILITIES AND STOCKHOLDERS’ EQUITY | ||||
CURRENT LIABILITIES | ||||
Accounts payable and accrued expenses | $ | 12,213 | ||
Investor pass-through | 260,019 | |||
Notes payable, current portion | 790,000 | |||
Notes payable, related parties | 1,229,277 | |||
Lines of credit | 487,081 | |||
TOTAL CURRENT LIABILITIES | 2,778,590 | |||
NOTES PAYABLE, LONG-TERM PORTION | 643,000 | |||
TOTAL LIABILITIES | 3,421,590 | |||
STOCKHOLDERS’ EQUITY | ||||
Preferred stock, $0.01 par value, 10,000,000 shares authorized: | ||||
First series, $0.16 cumulative voting stock, 22,592 shares issued and outstanding | 226 | |||
Second series, $0.08 cumulative voting, convertible stock, 740,800 shares issued and outstanding, convertible to one share common for one share of preferred | 7,408 | |||
Common stock, $0.01 par value, 40,000,000 shares authorized, 740,800 shares issued and outstanding | 7,408 | |||
Additional paid-in capital | 514,958 | |||
Retained deficit | (197,701 | ) | ||
TOTAL STOCKHOLDERS’ EQUITY | 332,299 | |||
TOTAL LIABILITIES AND EQUITY | $ | 3,753,889 | ||
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RJ LENDING, INC.
| Nine-months ended September 30, | ||||||||
| 2003 | 2002 | |||||||
REVENUES | ||||||||
Mortgage interest and fees | $ | 418,866 | $ | 374,155 | ||||
EXPENSES | ||||||||
Advertising | 18,873 | |||||||
Depreciation and amortization | 17,373 | 6,891 | ||||||
Distributions to managers | 6,464 | |||||||
General and administrative | 58,131 | 44,757 | ||||||
Interest | 211,984 | 164,224 | ||||||
Loan servicing | 4,834 | 2,518 | ||||||
Professional fees | 28,600 | 13,548 | ||||||
Salaries and benefits | 183,551 | 97,420 | ||||||
TOTAL EXPENSES | 523,346 | 335,822 | ||||||
(LOSS) INCOME BEFORE INCOME TAXES | (104,480 | ) | 38,333 | |||||
BENEFIT (PROVISION) FOR INCOME TAXES | 5,500 | (7,308 | ) | |||||
NET (LOSS) INCOME | $ | (98,980 | ) | $ | 31,025 | |||
NET LOSS PER SHARE, after adjustment for preferred stock dividends of $48,600 and $47,700, respectively | $ | (0.20 | ) | $ | (0.02 | ) | ||
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RJ LENDING, INC.
STATEMENT OF STOCKHOLDERS’ EQUITY
September 30, 2003
| First Series Preferred Stock | Second Series Preferred Stock | Common Stock | Additional Paid-In Capital | Retained Deficit | Members’ Equity | Total | ||||||||||||||||||
STOCKHOLDERS’ EQUITY, | ||||||||||||||||||||||||
January 1, 2002 | $ | — | $ | — | $ | — | $ | — | $ | — | $ | 500,000 | $ | 500,000 | ||||||||||
Issuance of stock | 226 | 7,408 | 7,408 | 514,958 | — | (500,000 | ) | 30,000 | ||||||||||||||||
Net income | — | — | — | — | 28,739 | — | 28,739 | |||||||||||||||||
Distributions to shareholders | (15,260 | ) | (15,260 | ) | ||||||||||||||||||||
Dividends on preferred stock | — | — | — | — | (63,600 | ) | — | (63,600 | ) | |||||||||||||||
STOCKHOLDERS’ EQUITY, | ||||||||||||||||||||||||
December 31, 2002 | 226 | 7,408 | 7,408 | 514,958 | (50,121 | ) | — | 479,879 | ||||||||||||||||
Net loss | (98,980 | ) | (98,980 | ) | ||||||||||||||||||||
Dividends on preferred stock | (48,600 | ) | (48,600 | ) | ||||||||||||||||||||
STOCKHOLDERS’ EQUITY, | ||||||||||||||||||||||||
September 30, 2003 | $ | 226 | $ | 7,408 | $ | 7,408 | $ | 514,958 | $ | (197,701 | ) | $ | $ | 332,299 | ||||||||||
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RJ LENDING, INC.
| Nine-months ended September 30, | ||||||||
| 2003 | 2002 | |||||||
CASH FLOWS FROM OPERATING ACTIVITIES | ||||||||
Net (loss) income | $ | (98,980 | ) | $ | 31,025 | |||
Adjustments to reconcile net (loss) income to net cash provided (used) by operating activities: | ||||||||
Depreciation expense | 7,249 | |||||||
Amortization expense | 10,124 | |||||||
Amortization of debt issuance costs | 28,001 | |||||||
Increase in interest receivable | (67,954 | ) | (7,033 | ) | ||||
Decrease in deferred tax liability | (3,424 | ) | ||||||
Decrease in due from related parties | 4,907 | |||||||
Decrease in interest payable | (13,722 | ) | ||||||
Increase (decrease) in accrued expenses | 2,220 | (37,335 | ) | |||||
NET CASH USED BY OPERATING ACTIVITIES | (122,764 | ) | (22,158 | ) | ||||
CASH FLOWS FROM INVESTING ACTIVITIES | ||||||||
Increase (decrease) in investor pass-through | 257,209 | (3,705 | ) | |||||
Payments for syndication costs | (164,256 | ) | (35,959 | ) | ||||
Payments for deferred costs | (26,316 | ) | ||||||
Decrease (increase) in mortgages owned, net | 30,743 | (127,714 | ) | |||||
Purchase of property and equipment | (11,546 | ) | (34,757 | ) | ||||
Purchase of software | (14,343 | ) | ||||||
Purchases of real estate held for investment purposes | (389,800 | ) | ||||||
Proceeds from sale of real estate held for investment purposes | 346,500 | (113,044 | ) | |||||
Other real estate owned, net | (49,792 | ) | ||||||
NET CASH PROVIDED (USED) BY INVESTING ACTIVITIES | 4,715 | (341,495 | ) | |||||
CASH FLOWS FROM FINANCING ACTIVITIES | ||||||||
Issuance of notes payable | 838,000 | 879,000 | ||||||
Principal payments on notes payable | (470,000 | ) | (512,048 | ) | ||||
Principal payments on line of credit | (10,000 | ) | ||||||
Distributions to members | (9,160 | ) | ||||||
Dividends paid | (71,891 | ) | (47,700 | ) | ||||
NET CASH PROVIDED BY FINANCING ACTIVITIES | 286,109 | 310,092 | ||||||
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| Nine-months ended September 30, | |||||||
| 2003 | 2002 | ||||||
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS | 168,060 | (53,561 | ) | ||||
CASH AND CASH EQUIVALENTS, beginning of period | 56,873 | 50,540 | |||||
CASH AND CASH EQUIVALENTS (BANK OVERDRAFT), end of period | $ | 224,933 | $ | (3,021 | ) | ||
Supplemental data: Interest paid | $ | 183,983 | $ | 177,946 | |||
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RJ LENDING, INC.
NOTE TO THE FINANCIAL STATEMENTS
NINE-MONTHS ENDED SEPTEMBER 30, 2003 AND 2002
Comparative Statements
Effective February 1, 2002, RJ Lending, Inc. acquired all assets and liabilities of R&J Warehouse Lending, LLC. As such, balances for the period ended September 30, 2002 include one month’s operations of R&J Warehouse Lending, LLC.
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MANAGEMENT’S DISCUSSION AND ANALYSIS OF PLAN OF OPERATION.
In General
Effective February 14, 2003, our registration statement with the SEC was declared effective and we became a reporting company under the provisions of section 15(d) of the Securities Exchange Act of 1934, as amended.
During the nine months ended September 30, 2003, we continued to conduct the lending business described in our Prospectus. In our lending operations, we continue to make loans of relatively short duration secured by first or second liens which encumber collateral real estate. While our business has been somewhat concentrated in the southwest coast of Florida, we have made loans and have portfolio loans outstanding securities by properties located in other geographic locations.
How we Account for the Loans in our Portfolio
Set forth below is information concerning our loan portfolio and statistical data relating thereto. Such information reflects the value attributable to the loans constituting our loan portfolio at September 30, 2003 and at September 30, 2002 with comparative loan portfolio information at September 30, 2003.
In our lending business, we originate loans and purchase loans which have been originated by others. In our financial statements, loans originated by us are valued at the unpaid principal balance. Purchased loans are valued at our cost of acquisition less principal payments received. In our financial statements we separately categorize the current and long-term portion of our portfolio loans. We also deduct from such portfolio loan amounts any unfunded reserves (the amount of any loan committed by us but which is yet to be disbursed) and appropriate loss reserves.
Certain of the financial and statistical data presented herein utilize loan principal balances without taking into account whether such loans were originated by us or purchased and without adjustment for unfunded reserves or any loss reserves. Where such treatment is utilized in such financial and statistical data, it is noted.
Income Taxes
As a corporate entity, our income is subject to federal corporate income tax at applicable rates (expected to be 15%). As a corporation subject to federal corporate income tax, we are required to accrue all items of income for each tax reporting period (the twelve months beginning January 1, 2003 through the twelve months ending December 31, 2003) from which we may deduct our accrued operating expenses, including interest accrued on our then-outstanding secured notes. Dividends declared with respect to our then-outstanding first and second series preferred stock and our common stock are not deductible expenses for tax calculation purposes. After taking into account any applicable credits, loss carry forward and other adjustments to our net income, such will be subject to tax at the applicable Code rate. We
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will also be subject to Florida corporate income tax at an effective rate of 5.5%. Provisions for such tax will then be made reducing net income available for dividend and other purposes.
Results of Operations, Nine months Ended September 30, 2003 and 2002
For the nine months ended September 30, 2003, RJ Lending, Inc. generated mortgage interest and fees of $418,866 compared to $374,155 for the nine months ended September 30, 2002, an increase of $44,711. We recognize loans fee revenue when loans are funded by us. We generally hold the related loans for a very short period of time. We believe that recognizing the loan fee revenue at the time the loans are funded approximates the revenue that would be recognized if the loan fees were capitalized and amortized into revenue.
At September 30, 2003, we reflected loans of $2,638,943 compared to $2,484,016 at September 30, 2002 net of unfunded and loss reserves. This is an increase of $154,927. (However, this does not take into consideration investments in two limited liability companies totaling $338,559 described below. This investment has the same characteristics as interim loans but is a venture rather than a loan. From the standpoint of demand it is considered the same.)Loan demand has consistently exceeded our supply of loan funds since inception as a result of a greater awareness of the loan services which we offer on the part of our existing and new loan customers. As our source of funds increased during the nine months ended September 30, 2003 compared to the nine months ended September 30, 2002, we were able to fund a greater number of loans. Our source of funds is explained in Liquidity and Capital Resources below.
Our income during both of such nine months was comprised primarily of mortgage interest and fees. Despite an increase in this category we experienced a net operating loss in the amount of ($98,980) for the nine months ended September 30, 2003 compared to a net profit of $31,025 for the nine months ended September 30, 2002. This was the result of significantly increased operating expense for the nine months ended September 30, 2003 being $523,346 compared to $335,822 for the nine months ended September 30, 2002. The increased expenses were primarily the result of staffing increases in anticipation of future growth and interest expense related to the acquisition of additional debt for loan originations. The loss was expected and was funded from shareholder equity. The categories with the greatest increases are discussed below:
General and administrative expenses were $58,131 for the nine months ended September 30, 2003 compared to $44,757 for the nine months ended September 30, 2002, an increase of $13,374.
For the nine months ended September 30, 2003, we experienced interest expense of $211,984 as compared to $164,224 for the nine months ended September 30, 2002, an increase of $47,760. This resulted primarily from the increase in borrowed funds during the same period which were used to fund new loans. The increase is explained in Liquidity and Capital Resources below.
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Salaries and benefits increased to $183,551 for the nine months ended September 30, 2003 from $97,420 for the nine months ended September 30, 2002, an increase of $86,131. During the past year four new employee positions were created and filled to handle loan servicing and general administration. All employee salaries are paid bi-weekly and are subject to withholding.
As a result of our public offering of our Secured Promissory Notes, certain limitations are imposed on our ability to source additional capital from out existing note holders. These notes, which carried higher rates and shorter maturities than our Secured Promissory Notes now being sold to the public, provided the initial capital that funded the company up to the effective date of the Prospectus relating to the public offering. The primary purpose of the public offering is to raise funds at a lower cost and in greater amounts than those raised prior to our becoming public. Any additional funds will be invested in new loans which will increase revenues and offset increased general and administrative expenses. Funds raised under the Public offering totaled $643,000 for the nine months ended September 30, 2003.
We anticipate that until such time as we are able to raise additional funds through the sale of our Common Stock or Secured Promissory Notes that we will operate at a loss. As funds are raised and invested in new mortgages the loss will decline relative to the amount of funds raised. In the event that we are unable to raise sufficient capital through our offering, we will reduce staff as necessary until we return to profitability.
Liquidity and Capital Resources
The sources of liquidity and capital for RJ Lending, Inc. are and have been constituted by the capital contributions of the company’s shareholders, loans made by shareholders, lines of credit utilizing banks which were also provided by related parties, unsecured notes payable to non-related parties and funds raised through the sale of our secured promissory notes. At September 30, 2003 the capital contributions made by the holders of our Second Series Preferred Stock were $500,000. The table below reflects the various note obligations and credit arrangements between related and non-related parties.
| September 30, 2003 | September 30, 2002 | |||||
Notes payable: non-related parties | $ | 790,000 | $ | 992,500 | ||
Notes payable: related parties | 1,229,277 | 987,777 | ||||
Notes payable: Secured Promissory | 643,000 | 0 | ||||
Lines of credit: related parties | 487,081 | 296,781 | ||||
Total | $ | 3,149,358 | $ | 2,277,058 | ||
Such indebtedness reflects an increase of $872,300 from September 30, 2002 to September 30, 2003.
All of such credit arrangements are generally serviced by the payment of interest on a monthly basis at various rates of interest ranging from 10.00—10.25%. All of the notes have maturities in 2003
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but may be renewed. The item identifies as lines of credit—related parties refers to an arrangement that we have as a result of the establishment of lines of credit by certain of our shareholders with First National Bank of Florida. The aggregate amount of these lines of credit is $500,000 and we may access these lines of credit for funds for use in our lending business. The interest expense incurred in the utilization of these lines of credit is the prime rate as charged by First National Bank of Florida, from time to time, plus an average of 80 basis points. The lines of credit are evidenced by promissory notes existing between First National Bank of Florida and the borrowers and are for a period of 12 months with annual renewals permitted.
At September 30, 2003, RJ Lending, Inc. was not in violation of any of the various loan terms. The lines of credit, to the extent not fully utilized, remain available to us.
At September 30, 2003, we have not made any material commitment for any capital expenditures. The only commitments in place with those loan commitments made in connection with then pending loan applications.
Loan Portfolio Composition
RJ Lending invests in loans which we categorize in the following manner: a)interim loans (first mortgage loans with terms of six months or less and involving the renovation of a property,) b)warehouse loans (first or second mortgage loans with terms greater than six months on properties requiring no renovation) and c) second mortgage loans (loans purchased from our interim and warehouse loan customers to end users on completed properties with terms of 12 months or longer.)
Our loan portfolio composition can change and usually does as a result of the comparative demand for the type of lending and financing services that we provide. We are unable to predict which of our loan types and services will be applied for by our existing and new borrowers although the primary (and preferred) types of loans resulting from our primary referral sources are interim loans.
The table below sets forth our loan portfolio composition at September 30, 2003 and 2002 and the percent of increase or decrease. This table does not take into consideration investments in two limited liability companies described below totaling $338,559. These investments have the same characteristics as interim loans but are ventures rather than loans. From the standpoint of demand, they are considered the same.
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| For the nine month sending | ||||||||
September 30, 2003 | September 30, 2002 | |||||||
Type of Loan | Balance | Balance | % +/- | |||||
Interim Loans | $ | 1,874,156 | $ | 1,388,834 | +34.94 | |||
Warehouse Loans | 503,895 | 700,563 | -17.55 | |||||
Second Mortgages | 260,892 | 394,619 | -52.57 | |||||
Total | $ | 2,638,943 | $ | 2,484,016 | + 6.24 | |||
Investment in Limited Liability Companies.
Through the period ended September 30, 2003, we effected investments in two limited liability companies in the amount of $338,559. Such investments were made in two limited liability companies where we act as one of the members and two of our lending referral sources act as the other member. In that regard, Tager Properties is a Managing Member of one of the limited liability companies and Sharp Properties is a Managing Member of the second limited liability company. These two limited liability companies hold the funds provided by us and utilize same in the renovation of existing residential real estate properties. Initial results indicate that returns on these investments equal or exceed the yields achievable for conventional interim loans. Therefore we will continue participating in these ventures as long as they achieve comparable results.
Other Real Estate Owned (ORE)
As of September 30, 2003 the Company owned two pieces of foreclosed real estate: one parcel containing two duplex dwellings in Wildwood, Florida and a single family home in St. Louis, Missouri. The former was an interim loan originated by the Company while the latter was collateral for a loan purchased by the company.
RJ Lending completed the renovation of the Wildwood parcel and at the end of the reporting period was under contract to sell the property. As part of this transaction the company contracted to purchase an adjacent property and sell both parcels as a package deal to a local investor, resulting in a break-even return of our investment. The sale was affected subsequent to the end of the reporting period and the 12/31/03 financial statements will reflect the complete transaction. At the time the loan went into default it was placed on non-accrual status and no adjustments to income are necessary.
Negotiations to sell the St. Louis property, which is in a deteriorated condition, have been unsuccessful and we are contemplating three options: renovate and sell the property under our ownership, create a joint venture with a local renovator, or sell the property at a possible loss. Our current investment basis in the property is $10,000 and any loss would be minimal. Management has not reserved for any losses because the potential to recoup its investment is equally likely.
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Business Trends or Uncertainties.
We view the ongoing demand for the type of loans and lending services we provide as a “niche” or “boutique” lending business. We believe the growth in our lending business has been influenced by the more restrictive credit policies adopted by banks and other lenders regarding this aspect of mortgage lending. While there are numerous competing private investors that provide mortgage financing few focus exclusively on renovation lending. Our continued emphasis on this type of lending backed by a professional support staff has resulted in high customer retention and interest from new customers.
The business of residential home renovation continues to gain popularity and has increased substantially over the past year. Presently we are unable to meet loan demand from existing customers and are limited in the amount of funds we can make available to new customers. The specialized nature of renovation lending has tended to limit the amount of competition within this niche and we do not anticipate substantial new competition from institutional or private lenders which would significantly reduce the demand for our products and services.
Summary
Since our inception in October 1999, our lending business has shown continued growth in terms of demand. The primary factor controlling the volume of our lending business has been the limited availability of low-cost funds with which to make loans.
We continue to raise capital though the sale of our Secured Promissory Notes and Common Stock to the general public. Our mortgage investments continue to perform as anticipated and our operating loss can be primarily attributed to a staffing level sufficient to manage the operations of the company when fully subscribed.
We anticipate that the continued sale of our Securities will provide the capital needed to invest in additional mortgage loans which will in turn produce revenues sufficient to return the company to profitability.
PART II
OTHER INFORMATION
During the nine months ended September 30, 2003 we obtained a license permitting us to function in Florida as a Licensed Mortgage Lender as defined and regulated by Section 494 of the Florida Statutes.
Following the signature portion of this Report, there is a certification by John F. Kurz the Executive Vice President of the registrant. During the nine months ended September 30, 2003, there were not significant changes in internal controls or in other factors
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that could significantly affect internal control subsequent to the date of the most recent evaluation, as referred to in the Certification.
As of a date within 90 days of the filing date of this quarterly report, the registrant has evaluated the effectiveness of the registrant’s disclosure, controls and procedures and believes such controls and procedures to be effective based upon such evaluation.
SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
RJ LENDING, INC. | ||||||
| /s/ John F. Kurz | ||||||
| Date: November 14, 2003 | John F. Kurz Executive Vice President | |||||
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