UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
(Mark One)
|X| ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED SEPTEMBER 30, 2002
OR
|_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from ______ to ______
Commission File Number: 0-27552
OAK RIDGE CAPITAL GROUP, INC.
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(Exact name of Registrant as specified in its charter)
Minnesota 85-0316176
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
701 Xenia Avenue South, Suite 130
Golden Valley, Minnesota 55416
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(Address of principal executive offices) (Zip code)
Registrant's telephone number, including area code: (763)923-2266
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
No Par Value Common Stock
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(Title of Class)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 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 |_|
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not 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-K or any amendment to this
Form 10-K. |_|
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act). Yes |_| No |X|
The number of shares of the Registrant's common stock outstanding as of January
13, 2003 was approximately 4,843,000 and the aggregate market value of the
Registrant's common stock held by non-affiliates was approximately
$1,980,287.53.
DOCUMENTS INCORPORATED BY REFERENCE
None
2
TABLE OF CONTENTS
Page
PART I
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ITEM 1. BUSINESS 4
General 4
Operating Strategy 5
Financial Information 6
Inventory Acquisition and Development 6
Internet Developments 6
Competition and Market Factors 6
Work Force 7
ITEM 2. PROPERTIES 7
ITEM 3. LEGAL PROCEEDINGS 7
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS 8
PART II
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ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS 8
ITEM 6. SELECTED FINANCIAL DATA 10
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS 11
Overview of Continuing Operations 11
Business Combinations 12
Results of Continuing Operations by Segment 13
Discontinued Operations 15
Critical Accounting Policies 16
Accounting Estimate on Uncompleted Construction Project 16
Goodwill 17
Recently Issued Accounting Pronouncements 17
Liquidity and Capital Resources 18
Impact of Inflation 19
Subsequent Events 19
Forward Looking Statements 19
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT
MARKET RISK 20
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA 20
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE 56
PART III
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ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT 56
ITEM 11. EXECUTIVE COMPENSATION 58
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT 64
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS 65
ITEM 14. CONTROLS AND PROCEDURES 65
PART IV
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ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS
ON FORM 8-K 66
SIGNATURES 68
3
PART I
ITEM 1: BUSINESS.
Oak Ridge Capital Group, Inc. was originally incorporated in 1983 under the name
of Realco, Inc. and under the laws of the State of New Mexico. On June 7, 2002,
Realco, Inc. changed its state of incorporation to Minnesota and changed its
name to Oak Ridge Capital Group, Inc. The Company and its subsidiaries are
hereinafter sometimes referred to as the "Registrant" or the "Company".
The Company's principal executive offices are located at 701 Xenia Avenue South,
Suite 130, Golden Valley, Minnesota 55416 and its telephone number at that
location is (763) 923-2266.
GENERAL
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The Company is an integrated real estate and financial services company, which
provides a wide range of products and services to customers primarily within the
Albuquerque, New Mexico and Minneapolis, Minnesota metropolitan areas. The
Company's operations are grouped into four principal segments - residential
construction and land development, commercial real estate brokerage services,
financial services and commercial construction.
In June 2001, the Company sold its residential real estate brokerage operations.
Such brokerage operations operated under a franchise from Prudential Real Estate
Affiliates, Inc. in Albuquerque, New Mexico and Phoenix, Arizona. This sale is
reflected as discontinued operations and the Company's Financial Statements,
Selected Financial Data and corresponding portions of Management's Discussion
and Analysis of Financial Condition and Results of Operations have been restated
where necessary.
On December 20, 2002, the Company sold its homebuilding subsidiary, Charter
Building and Development Corp. Charter was responsible for the construction
operations of the residential construction and land development segment.
Subsequent to September 30, 2002, management has decided to terminate the
operations of the commercial construction segment. Management expects to
complete termination during the second quarter of fiscal 2003. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations -
Subsequent Events."
RESIDENTIAL CONSTRUCTION AND LAND DEVELOPMENT SEGMENT:
Residential construction is performed by Charter Building & Development, Corp.
("Charter"), an Albuquerque based subsidiary, and Success Venture, a 50% owned
joint venture. Operations can be described as that of a general contractor,
whereby the majority of construction labor and materials needs are subcontracted
to third parties. Residential construction is performed in the Albuquerque
metropolitan area and at September 30, 2002, backlog totaled 34 homes under
contract with an indicated value of $6,000,000, as compared to 80 homes under
contract with an indicated value of $13,000,000 at September 30, 2001.
The Company is also in the business of acquiring vacant land for the purpose of
subdividing and developing such land into residential homesites. These
activities are performed by Realco Land Development Division, an unincorporated
division of the Company, in the Albuquerque metropolitan area. The homesites
developed by this division are used internally by Charter or sold to third
parties.
COMMERCIAL REAL ESTATE BROKERAGE SERVICES SEGMENT:
Commercial brokerage operations consist primarily of providing marketing
services to buyers, sellers, lessors and lessees of commercial real estate.
These operations also include commercial property management and business
brokerage to a lesser extent. These services are collectively performed by First
Commercial Real Estate Services, Inc. (First Commercial), an Albuquerque based
subsidiary.
4
FINANCIAL SERVICES SEGMENT:
The Company provides financial services through certain wholly owned
subsidiaries, as well as the parent company.
The operations of PHS, Inc. (PHS) consist of a 49.99% partnership interest in
PHS Mortgage Company, a full service residential mortgage banker. This
partnership received the majority of its business from referrals from the
Company's residential brokerage operations. As such brokerage operations were
sold in June 2001, the volume of business generated by PHS has decreased
substantially. The future success of PHS is dependent upon securing a substitute
source of referrals.
Equity Securities Investments, Inc. (ESI) was acquired in March 2001 and is a
Minneapolis based broker and dealer of securities. It is management's intent to
continue to grow this line of business and offer other complementary financial
services. Current growth opportunities being explored are recruiting of brokers
to existing offices, start-up offices and acquisitions of existing brokerages.
ESI opened a small brokerage office in Scottsdale, Arizona in August 2001.
Financial services have also included residential construction lending and home
site acquisition and development lending. These financing activities were
performed under participation agreements with Albuquerque based financial
institutions or private investors. Such activities are no longer a significant
portion of Company operations.
Prior to 2001, the Company conducted limited financial services through its 10%
equity position in Miller & Schroeder, Inc., an underwriter of debt securities
which ceased operations in July 2001.
COMMERCIAL CONSTRUCTION SEGMENT:
Realco Construction, Inc., previously known as Amity, Inc., is the Company's
Albuquerque based general contractor specializing in commercial construction.
Commercial construction projects consist primarily of tenant improvements,
ground-up construction of small commercial buildings and commercial remodels.
With the acquisition of certain net assets and business operations of TI
Construction, Inc. (TI) in August 1999, the Company strengthened its multi-state
presence and acquired an expertise in the construction of veterinary facilities.
At September 30, 2002, the Company had a backlog of commercial construction
projects of $419,000 as compared to $3,800,000 in 2001. In 2001 the commercial
construction segment had just received a $3,300,000 medical center renovation
project that was considered in the 2001 backlog amount. In 2002, there was no
such project.
OPERATING STRATEGY
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Since the completion of the Company's Initial Public Offering in February 1996,
it has been the Company's intention to cross-market services between the primary
business segments.
During the first half of fiscal 2000, management determined that the Company's
best growth opportunities exist in the financial services industry. As a result
of this determination, the Company completed the acquisition of ESI, a
Minneapolis based broker and dealer in securities in March 2001 to broaden its
financial services capabilities.
During Fiscal 2003 it is management's intent to focus on the core financial
services business and develop Oak Ridge Capital Group as a boutique investment
banking firm headquartered in Minnesota, with regional offices in Arizona and
New Mexico. The firm is engaged in a range of investment banking activities
which include:
Private placement of equity or debt
Initial public offerings
Merger and acquisitions
Investment Advisory projects
5
Oak Ridge Capital Group, primarily through ESI has and will continue to work on
both emerging growth and established industrial companies in a wide range of
industries including:
Health Care
Technology
Industrial / manufacturing
Hospitality - restaurants / gaming /entertainment
Consumer retail
FINANCIAL INFORMATION
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Financial information about the Company's business segments can be found in Note
L to the consolidated financial statements presented in Item 8 of this Form 10-K
and is incorporated herein by reference.
INVENTORY ACQUISITION AND DEVELOPMENT
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The Company's Residential Construction and Land Development and Commercial
Construction segments are the only operations with significant inventory needs.
Such inventory needs consist of homesites, building materials and labor.
Residential homesites are acquired either by the purchase of developed lots from
third parties or by the purchase of a parcel of undeveloped land which the
Company develops. The Company has also entered into joint venture agreements
with other builders and developers to acquire undeveloped parcels of land for
development into homesites. At September 30, 2002, the Company owned or
controlled through a combination of unencumbered ownership, debt financing and
purchase agreements 101 developed homesites (as compared to 189 in 2001) within
the Albuquerque, New Mexico metropolitan area. Such homesites are utilized by
Charter's homebuilding operations and may also be sold to other homebuilders and
individuals.
Acquisition of residential homesites is funded through the use of available cash
of the Company or through secured loans with various financial institutions.
Financing is typically provided on such terms and conditions which are customary
in the marketplace. In some instances, the Company may also secure subordinate
debt on land inventory to reduce the loan to value position assumed by the
financial institutions, without using internal working capital. Such subordinate
debt is typically arranged by the Company's Financial Services Segment, and is
participated out to high net worth individuals.
As the Company uses subcontractors to provide skilled labor and materials for
the majority of its operations, construction inventory purchases consist
primarily of payments to such subcontractors. Inventory purchases are funded
through construction draws from financial institutions under credit agreements
or from progress billings to property owners. The Company's credit agreements
typically provide pre-established lending guidelines which determine interest
rates, available balances and repayment terms. These credit agreements are
provided on such terms and conditions which are customary in the marketplace.
INTERNET DEVELOPMENTS
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As part of the Company's focus to maximize opportunities and growth potential,
the Company has established an internet presence. Specifically, the Company's
Residential Construction and Land Development Segment has established a website
which provides the Company's background and credentials, the Company's most
popular floor plans, information on subdivisions where the Company is currently
building and contact information. The Company's Commercial Real Estate Brokerage
Services Segment maintains a website which provides Company background and
credentials, property listings, information on the local market and contact
information.
COMPETITION AND MARKET FACTORS
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The business in which the Company is engaged is highly competitive. Many of the
Company's competitors have nationwide operations or are affiliated with national
franchising organizations. As such, a number of the Company's competitors have
greater financial resources. It is for that reason that the Company continues to
pursue strategic alliances with other companies.
6
The real estate and financial services industries, and therefore, the Company's
operations, can be cyclical and are affected by consumer confidence levels,
prevailing economic and market conditions and interest rates. Other factors
affecting business include increases in construction costs, increases in costs
associated with home ownership such as interest rates and property taxes,
changes in consumer preferences and demographic trends.
WORK FORCE
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As of September 30, 2002, the Company's work force totaled 99 people, including
92 employees and 7 commercial real estate sales associates. Management of the
Company believes that its relations with its personnel are satisfactory and none
of its employees are represented by a union.
The Company's real estate sales associates are independent contractors. As
independent contractors, such personnel are paid by commission only on the basis
of closed sales transactions.
The Company's construction operations normally hire independent subcontractors
to provide the skilled labor needed for construction projects.
ITEM 2: PROPERTIES.
The Company leases its executive offices in Minneapolis. The Company's former
executive offices in Albuquerque which are used for operations management are
leased to the Company by James A. Arias, the Company's former President, who is
a part owner of the building. This lease arrangement is considered a below
market lease as to terms and square foot cost when compared to other leases
currently in effect within the building.
Certain of the Company's operating subsidiaries occupy facilities totaling
39,000 square feet in Albuquerque, New Mexico with monthly rentals totaling
$35,350 under operating leases expiring at various dates through July 2009. The
Company's securities brokerage operations occupy facilities totaling 17,000
square feet in Minneapolis, Minnesota as well as a recently opened office
totaling 1,700 square feet in Scottsdale, Arizona with monthly rental of $3,000
under an operating lease expiring August 2003.
Management believes all facilities are in adequate condition for their intended
use and will not require substantial improvements through fiscal 2003.
As a result of discontinued operations, the Company vacated an office totaling
37,100 square feet with monthly rental costs of $37,100 under an operating lease
which can be terminated in August 2007. Such facilities are currently sublet
under an agreement for $23,000 per month, which includes certain contingent
rentals. The sublease expired in May 2002; however the sublease has been
extended through April 2003. Beginning in May 2003 the space will be vacant;
First Commercial has been awarded the contract to lease the facility for May
2003 occupancy. The likelihood of finding a tenant by May 2003 is unknown at
this time. Obligations relating to other facilities associated with discontinued
operations were assumed by the purchasers.
ITEM 3: LEGAL PROCEEDINGS.
In December 2001, the Company was named as a defendant in a lawsuit in the
District Court for Hennepin County, Minnesota. The plaintiffs are certain
institutional and individual customers of Miller & Schroeder Financial, Inc., a
broker-dealer ("MSF"). The lawsuit was commenced against MSF, Miller &
Schroeder, Inc., the parent corporation of MSF ("MSI"), and certain officers,
directors and shareholders of MSI who are alleged to be controlling persons of
MSI and MSF. The Company is a shareholder of MSI. James A. Arias, the Company's
former Chief Executive Officer, is also named as a defendant. Mr. Arias served
as a director of MSI during the period covered by the plaintiff's complaint. The
plaintiffs, on their own behalf and on behalf of a class of investors they seek
to represent, are seeking rescission or compensatory damages with respect to
debentures issued by United Homes, Inc. and purchased by the plaintiffs from or
through MSF. The plaintiffs assert numerous claims against MSF and the other
7
defendants including claims based on negligence, negligent misrepresentation,
common law fraud, and violations of the Minnesota Securities Act, the Minnesota
Consumer Fraud Act, the U.S. Securities Act of 1933, and the Minnesota Uniform
Fraudulent Transfer Act. In January 2002, the Company and Mr. Arias filed a
motion to dismiss the lawsuit with respect to them. A hearing on the motion to
dismiss the lawsuit was held in March 2002; the outcome of this motion was a
partial dismissal of claims however, the remaining complaint items are still
under the courts consideration. As of January 13, 2003, the remaining complaint
items have not as yet been dismissed. If they are not dismissed, the Company and
Mr. Arias intend to defend the lawsuit vigorously. At present, the Company is
unable to predict the outcome of this litigation or any exposure to loss.
The Company is engaged in various other legal proceedings incidental to its
normal business activities. Management of the Company does not believe that the
outcome of each such proceeding or all of them combined will have a material
adverse effect on the Company's operations or financial position.
ITEM 4: SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
No matters were submitted during the fourth quarter of the 2002 fiscal year to a
vote of security holders, through the solicitation of proxies or otherwise.
PART II
ITEM 5: MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
MARKET INFORMATION
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The Company's common stock was traded on the NASDAQ National Market under the
symbol "RLCO". In June 2002 in connection with the Company's reincorporation and
name change to Oak Ridge Capital Group, Inc. the NASDAQ National Market symbol
was changed to "ORCG". The following table sets forth for the periods indicated,
the high and low sales prices as reported.
Fiscal 2002 Fiscal 2001
----------------------------- --------------------------
High Low High Low
------------ ------------ ---------- ------------
First Quarter 2.250 1.650 3.000 1.313
Second Quarter 1.870 1.352 2.625 1.688
Third Quarter 1.800 0.550 2.500 1.250
Fourth Quarter 1.850 0.150 2.300 1.090
On December 10, 2002, the Company received a NASDAQ Staff Determination
Notification that the Company had failed to maintain a minimum market value of
publicly held shares ("MVPHS") of $5,000,000 over the previous 30 consecutive
trading days, and, as a result, did not comply with Markeplace Rule 4450(e)(1).
The Staff Determination Notification also noted that the Company had not
complied with the minimum $1.00 bid price requirement set forth in Marketplace
Rule 4450(a)(5). Because of these two non-compliance items the Company's
securities are subject to delisting from the NASDAQ National Market. The Company
has requested a hearing before a NASDAQ Listing Qualifications Panel to review
the Staff Determination. There can be no assurance the Panel will grant the
Company's request for continued listing.
APPROXIMATE NUMBER OF HOLDERS OF COMMON STOCK
- ---------------------------------------------
As of January 13, 2003, there were approximately 70 holders of record of the
Company's common stock.
8
COMPANY DIVIDEND POLICY DISCLOSURE
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The Company has not paid any dividends on its Common Stock since its initial
public offering in February 1996 and expects that for the foreseeable future it
will follow a policy of retaining any earnings in order to finance the continued
development of its business. Payment of dividends is within the discretion of
the Board of Directors and will depend upon the earnings, capital requirements
and operating and financial condition of the Company, among other factors.
SECURITIES AUTHORIZED FOR ISSUANCE UNDER EQUITY COMPENSATION PLANS
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The following table sets forth information as of September 30, 2002, with
respect to common stock issuable under the Company's compensation plans and
arrangements.
Number of securities
remaining available for
Number of securities to Weighted-average future issuance under
be issued upon exercise exercise price of equity compensation plans
of outstanding options, outstanding options, (excluding securities
Plan Category warrants and rights warrants and rights reflected in column (a))
- ------------- ------------------- ------------------- ------------------------
(a) (b) (c)
Equity compensation plans approved
by security holders: 630,000 $2.01 620,000
Equity compensation plans not
approved by security holders: 5,000 $2.50 0
Total 635,000 $2.01 620,000
9
ITEM 6: SELECTED FINANCIAL DATA.
The tables below summarize certain consolidated financial data of the Company,
which reflects discontinued operations related to its June 2, 2001 sale of the
residential real estate brokerage operations.
Years ended September 30,
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2002 2001 2000 1999 1998
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(In thousands, except per share amounts)
(a) (b) (c)
Operating revenues from continuing
operations $ 31,330 $ 20,960 $ 28,661 $ 24,292 $ 14,214
Earnings (loss) from continuing
operations (2,038) (2,917) (13) 561 (710)
Earnings (loss) from continuing
operations per common share -
basic and diluted (.41) (.27) (.04) .20 (.30)
Total assets 14,249 20,457 23,531 27,677 28,368
Debt 4,381 8,333 8,959 12,011 15,565
Cash dividends declared per common
share -- -- -- -- --
- --------------------
(a) The 2001 results were affected by the acquisition of Equity Securities
Investments, Inc. on March 1, 2001.
(b) The 2000 results were affected by the acquisition of Financial Services
Group, Inc. on June 1, 2000.
(c) The 1999 results were affected by the acquisition of TI Construction, Inc.
on August 1, 1999.
10
ITEM 7: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
OVERVIEW OF CONTINUING OPERATIONS (DOLLARS IN THOUSANDS)
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FISCAL 2002 VS. 2001
The results of consolidated continuing operations were a pre-tax loss of $2,097
in 2002 compared to a pre-tax loss of $3,182 in 2001. The loss size between 2002
and 2001 was reduced by $1,144 because in 2001 the Company took a one-time
impairment charge of $1,210 in the financial services segment for the Company's
investment in MSI MSI ceased operations in 2001. Another segment contributing to
the loss change was commercial construction which lost $827 in 2002 compared to
$631 in 2001.
The operating results of these segments are discussed in more detail below.
Operating revenues increased $10,370 or 49% to $31,330 in 2002. The change
occurred with three segments reporting revenue increases offset by one segment
reporting decreased revenues. The segments with the largest dollar increases
were in the residential construction and land development segment which showed a
$7,503 increase in homebuilding to $18,090 or 71% increase over 2001; the
related land development sales increase of $412 to $2,312. The securities
brokerage subsidiary showed a 133% increase or $2,547 over 2001 to close out
2002 at $4,461 of revenues. The increase was due to the fact that in 2001 this
segment had been purchased six months into the 2001 fiscal year (March 2001)
resulting in only six months of revenue compared to twelve full months in 2002.
Selling, general and administrative expenses increased $1,706 or 42% to $5,805
in 2002; the increase was due to many factors including a $390 increase in the
liability related to the sub-lease income shortfall versus the lease obligation
for a facility no longer used in operations, an increase in the Company's
Directors and Officers liability insurance, and increased staffing costs in the
securities brokerage operation which is building future infrastructure. Also,
the acquisition of ESI in 2001 had only six months of expense compared to a full
twelve months in 2002.
Other significant items affecting results of operations include an impairment of
$1,210 recorded on the Company's investment in MSI in 2001, which ceased
operations in 2001 and sold its net operating assets in a transaction resulting
in no net proceeds available for distribution to shareholders.
The Company recognized other comprehensive income of $89 in 2002 as a result of
net unrealized gains on available for sale securities as compared to other
comprehensive losses of $619 on net unrealized losses on available for sale
securities in 2001. Other comprehensive income (loss) is a component of equity
and is not recognized in the statement of operations until the sale of the
underlying securities. Comprehensive income (loss) fluctuated substantially
between the periods as a result of significant changes in quoted market prices
on thinly-traded common stocks in public companies which the Company owns as a
result of its venture capital operations several years ago.
The Company recognized a redemption benefit on the conversion of Series A and
Series B preferred stock of $2,180 in 2001, which is presented as a negative
preferred stock dividend requirement in the Consolidated 2001 Statement of
Operations to arrive at net loss applicable to common shares.
The Company's effective income tax rate differs from statutory rates primarily
due to changes in the valuation allowance for deferred income taxes.
FISCAL 2001 VS. 2000
The results of consolidated continuing operations were a pre-tax loss of $3,182
in 2001 compared to a pre-tax loss of $44 in 2000. The additional loss of $3,138
is primarily attributable to the financial services segment which realized a
pre-tax loss of $2,737 in 2001 compared to a pre-tax loss of $123 in 2000 and
the commercial construction segment recognizing a pre-tax loss of $631 in 2001
compared to a pre-tax loss of $184 in 2000. The operating results of these
segments are discussed in more detail below.
11
Operating revenues decreased $7,701 or 27% to $20,960 in 2001. Such decline is
primarily the result of a $10,637 or 39% decrease in construction and developed
lot sales as offset by a $1,022 or 69% increase in real estate brokerage
commissions and fees and $1,914 in securities brokerage commissions and fees
resulting from the 2001 acquisition of ESI. Cost of revenues decreased $6,806 or
27% to $18,221 in 2001, which is proportionate to the decrease in operating
revenues.
Selling, general and administrative expenses increased $751 or 22% to $4,099 in
2001. Of this increase, $618 is the result of the 2001 acquisition of ESI.
Other significant items affecting results of operations include an impairment of
$1,210 recorded on the Company's investment in MSI, which ceased operations in
2001 and sold its net operating assets in a transaction resulting in no net
proceeds available for distribution to shareholders.
The Company recognized an other comprehensive loss of $619 in 2001 as a result
of net unrealized losses on available for sale securities as compared to other
comprehensive income of $757 on net unrealized gains on available for sale
securities in 2000. Other comprehensive income (loss) is a component of equity
and is not recognized in the statement of operations until the sale of the
underlying securities. Comprehensive income (loss) fluctuated substantially
between the periods as a result of significant changes in quoted market prices
on thinly-traded common stocks in public companies which the Company owns as a
result of its venture capital operations several years ago.
The Company recognized a redemption benefit on the conversion of Series A and
Series B preferred stock of $2,180 in 2001, which is presented as a negative
preferred stock dividend requirement in the Consolidated Statement of Operations
to arrive at net loss applicable to common shares.
The Company's effective income tax rate differs from statutory rates primarily
due to changes in the valuation allowance for deferred income taxes.
BUSINESS COMBINATIONS
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The Company's growth has been achieved primarily through acquisitions,
subsequent to its public offering in 1996. Following is a brief description of
such acquisitions and terms affecting continuing operations.
In fiscal 1996, the Company acquired the outstanding stock of Amity, Inc., an
Albuquerque based commercial construction contractor for 24,297 shares of Series
D Preferred Stock of the Company. Additionally, the Company acquired a 49.99%
partnership interest for $63 in PHS Mortgage Company, which originates and sells
residential mortgages.
In fiscal 1997, the Company purchased the net assets and business of First
Commercial Real Estate Services, Inc. (an Albuquerque based commercial real
estate brokerage company) for a cash payment of $265.
In fiscal 1999, the Company acquired certain net assets and the business of TI.
The acquisition of this commercial contractor, which specializes in veterinary
clinics, was made through the issuance of 67,000 shares of Company common stock
held in treasury.
In fiscal 2000, the Company acquired the outstanding common stock of Financial
Services Group, Inc. (FSG) for 680,000 common shares of Realco. The primary
assets of FSG consisted of 650,000 common shares of Realco, which were cancelled
upon delivery. This acquisition resulted in an additional financial services
entity within the Realco structure. FSG was previously under the control of
James A. Arias, Realco's former President and Chief Executive Officer.
In fiscal 2001, the Company acquired all the outstanding stock of ESI, a
Minneapolis based broker and dealer in securities for 484,000 shares of newly
issued Series D Preferred Stock, which was converted to approximately 1,452,000
shares of Company common stock upon shareholder approval in November 2001. This
transaction broadened the Company's focus on financial services.
12
RESULTS OF CONTINUING OPERATIONS BY SEGMENT (DOLLARS IN THOUSANDS)
- ------------------------------------------------------------------
Based upon the various lines of business in which the Company is engaged, it has
defined the following operating segments for purpose of financial accounting and
reporting: Residential Construction and Land Development, Commercial Real Estate
Brokerage, Financial Services and Commercial Construction.
The Company primarily operates within the Albuquerque, New Mexico and
Minneapolis, Minnesota metropolitan areas.
RESIDENTIAL CONSTRUCTION AND LAND DEVELOPMENT SEGMENT:
FISCAL 2002 VS. 2001
Residential construction and land sales increased $7,914 or 63% to $20,402 in
2002. This increase in sales, and realized higher gross margins resulted in
$1,145 in additional gross profits over 2001. The sales increase is a function
of more homes sold in 2002 than in 2001, higher gross margins realized over 2001
and a generally overall good housing market for the region.
Residential construction sales of $18,090 represent a 71% increase over 2001.
This increase resulted from strong production in the first, second and third
quarters, as offset by a fourth quarter decrease. Gross profit margins on such
sales increased from 10% to 11% in 2002, yielding gross profits of $2,030 as
compared to $1,066 in 2001.
Sales of developed lots increased $412 or 22% to $2,312 in 2002. This increase
is largely attributable to the sale of three estate-sized lots which totaled
$510. Such lots represent a portion of the five lots received for the assignment
of a partnership interest as reported in prior filings. Gross profit margins on
lot sales remained constant at approximately 25%, resulting in gross profits of
$585 in 2002.
FISCAL 2001 VS. 2000
This segment realized pre-tax earnings of $370 in 2001 as compared to $465 in
2000. While earnings were relatively comparable between the periods, there were
significant fluctuations in certain revenue and expense items.
Residential construction sales decreased $7,685 or 42% to $10,587 in 2001 as a
result of fewer homes being contracted in early 2001, as well as certain sales
being made under a joint venture arrangement whereby the Company only records
equity earnings, not gross sales. The decrease in gross profits was limited to
$528 or 33% to $1,066 in 2001 as a result of profit margins increasing from 8.7%
to 10.0%. Such increase is attributable to selling certain model and speculative
homes at discounts in 2000.
Sales of developed lots decreased $1,048 or 36% to $1,900 which is directly
related to the decline in construction sales.
Profits on lots sold to Charter, either directly by a subsidiary or by a joint
venture, are eliminated in consolidation of this segment until the lot is
removed from Charter's inventory. Such profits totaled $353 at September 30,
2001 as compared to $148 at September 30, 2000.
Net equity earnings of investees of $135 were recognized in 2001 as compared to
a loss of $29 in 2000 which relates to the Company's 50% interest in a home
building joint venture. This venture generated earnings in 2001 as the
underlying subdivision was a start-up in the prior year. Interest and other
income increased $82 to $236 as a result of additional construction management
fees earned by the Company. The majority of these construction management fees
relate to services provided to the aforementioned joint venture.
Selling, general and administrative expenses decreased $251 or 20% to $990. Such
decrease is management's reaction to a temporary decline in sales activity.
Interest expense decreased $291 or 40% as a result of scheduled debt reduction
payments associated primarily with lot inventory financing agreements.
13
COMMERCIAL REAL ESTATE BROKERAGE SEGMENT:
FISCAL 2002 VS. 2001
This segment recognized pre-tax earnings of $21 in 2002 as compared to pre-tax
earnings of $110 in 2001. Brokerage commissions and fees decreased $513 or 20%
to $1,987. The decrease in revenues is a function of general economic conditions
which were stagnant in fiscal 2002 and the fact that the number of large
transactions closed by the Company in 2002 was less than those closed in 2001.
Selling, general and administrative expenses decreased $119 or 14% to $709 in
2002.
FISCAL 2001 VS. 2000
This segment recognized pre-tax earnings of $110 in 2001 as compared to a
pre-tax loss of $111 in 2000. Brokerage commissions and fees increased $1,022 or
69% to $2,503 resulting in an increase in company dollar of $327 or 52% to $954.
The increase in revenues is a function of an increased agent count, as well as
closing several large transactions during the year. The percentage increase in
company dollar was less than the percentage increase in brokerage commissions as
agents retain a greater percentage of the commission as productivity increases.
Selling, general and administrative expenses increased $128 or 18% to $828 in
2001 as a result of incurring a full year's operating expenses in the Las Cruces
office and the expanded Albuquerque office.
FINANCIAL SERVICES SEGMENT:
FISCAL 2002 VS. 2001
This segment, which includes certain unallocated operating expenses of the
parent company, realized a pre-tax loss of $2,548 in 2002 as compared to pre-tax
loss of $2,737 in 2001. The losses are attributable to several factors. The most
significant of which is an impairment charge of $1,210 in 2001 relating to the
Company's investment in MSI, which ceased operations in 2001 and sold its net
operating assets in a transaction resulting in no net proceeds available for
distribution to shareholders. Additionally, ESI had a total loss of $1,031 in
2002; $831 from operations and $200 from a goodwill impairment charge. Other
significant items affecting operations are discussed in more detail below.
Net equity earnings of PHS from its partnership interest in a mortgage banker
totaled $139 for 2002 as compared to $217 in 2001. This decline is attributable
to the sale of the residential brokerage operations, which was the primary
source of financing activities for this mortgage banker. The continued success
of PHS is dependent upon securing an alternative source of business.
Net equity earnings of other investees decreased $67 to a loss of $25 in 2002 as
a result of non-recurring transactions in the prior year.
Interest expense decreased from $648 to $337 in 2002 as a result of amortization
of debt discount of $26 associated with subordinated debt financing, as reduced
by interest savings associated with scheduled debt reductions. The operations of
ESI resulted in a pre-tax loss of $1,031 in 2002 compared to a pre-tax loss of
$518 in 2001. Anticipated revenues from a large private placement did not
materialize at the beginning of fourth quarter; the result, revenues ended the
year at $4,461, approximately $1,000 below management forecast. The prevailing
malaise affecting the financial markets resulted in fewer underwriting
opportunities and higher than anticipated selling, general and administrative
expense of $1,339. Management with the Board's concurrence has set the Company's
strategic direction for ESI to become a merchant banking enterprise; this
strategic direction of the Company requires front end infrastructure expense
which was spent in 2002. The $1,031 loss includes approximately $600 of one time
expenses incurred in attempts to expand operations and $200 for a goodwill
impairment charge. As a result of recently improved conditions in the securities
market, management anticipates profitable operations for this subsidiary in
upcoming periods.
14
FISCAL 2001 VS. 2000
This segment, which includes certain unallocated operating expenses of the
parent company, realized a pre-tax loss of $2,737 in 2001 as compared to pre-tax
earnings of $123 in 2000. This decline in earnings is attributable to several
factors. The most significant of which is an impairment charge of $1,210
relating to the Company's investment in MSI, which ceased operations in 2001 and
sold its net operating assets in a transaction resulting in no net proceeds
available for distribution to shareholders. Additionally, a pre-tax loss of $518
resulted from operations of ESI, which was acquired in March 2001. Other
significant items affecting operations are discussed in more detail below.
Net equity earnings of PHS from its partnership interest in a mortgage banker
totaled $217 for 2001 as compared to $254 in 2000. This decline is attributable
to the sale of the residential brokerage operations, which was the primary
source of financing activities for this mortgage banker. The continued success
of PHS is dependent upon securing an alternative source of business.
Net equity earnings of other investees decreased $133 to $41 in 2001 as a result
of non-recurring transactions in the prior year.
Interest expense increased from $484 to $648 in 2001 as a result of amortization
of debt discount of $185 associated with interim financing, as reduced by
interest savings associated with scheduled debt reductions.
Other significant items affecting earnings were net gains on sales of available
for sale securities of $118 in 2000 as compared to net losses of $203 in 2001.
The operations of ESI resulted in a pre-tax loss of $518. Such loss in
attributable to lower than anticipated revenues of $1,914 for the period as a
result of market conditions limiting the securities underwriting opportunities
and higher than anticipated selling, general and administrative expenses of $618
which is a result of additional costs incurred in attempts to expand operations.
COMMERCIAL CONSTRUCTION SEGMENT:
FISCAL 2002 VS. 2001
This segment realized a pre-tax loss of $827 in 2002 as compared to $631 in
2001. This loss increase was primarily due to contracts with lower gross profit
margins and increases in overhead costs.
FISCAL 2001 VS. 2000
This segment realized a pre-tax loss of $631 in 2001 as compared to $184 in
2000. The additional loss is primarily the result of $488 or 77% decline in
gross profits on construction sales. The reduction in gross profits is
attributable to a $1,905 or 32% decrease in construction sales, and a decrease
in profit margins to 3.7% in 2001 from 10.7% in 2000. Sales decreased due to
fewer large construction projects in 2001, which resulted in a comparable
decrease in gross profits. However, gross profits and profit margins were
further reduced by an $184 accrual of an estimated loss on a contract in process
at September 30, 2001 as well as cost overruns on some projects during the year.
Operating expenses were comparable between the periods.
DISCONTINUED OPERATIONS
- -----------------------
In June 2001, the Company sold its residential real estate brokerage operations
in two separate transactions. Such brokerage operations operated under a
franchise from Prudential Real Estate Affiliates, Inc. in Albuquerque, New
Mexico and Phoenix, Arizona. The disposal of the Company's residential brokerage
operations has been accounted for as discontinued operations.
15
Net proceeds from the sale of the residential brokerage operations totaled
$4,101, resulting in a loss on disposal of $137 after income tax expense of
$815. A loss of $705 relating to remaining costs in a leased office facility was
also accrued in connection with this disposition of operations and is a
component of the loss on disposal. The effective income tax rate on this
disposal was affected by non-deductible goodwill. In addition, discontinued
operations resulted in after tax losses of $713 and $921 for the years ended
September 30, 2001 and 2000.
Certain other financial information about these discontinued operations can be
found in Note S to the consolidated financial statements presented in Item 8 of
this Form 10-K.
CRITICAL ACCOUNTING POLICIES
- ----------------------------
Accounting Estimate of Liability for Facility Lease Obligation
- --------------------------------------------------------------
As described in Note S, the Company sold its residential brokerage operations,
resulting in a leased office facility no longer being used for operating
purposes.
Minimum future rental payments under this operating lease, which can be
terminated in August 2007, are as follows:
Year ending September 30
2003 $ 445
2004 445
2005 445
2006 445
2007 408
---------
$ 2,188
=========
This facility is sublet under an agreement expiring in April 2003, which
provides for rental payments based upon a percentage of tenant revenues. Rental
receipts were $287 in 2002.
In connection with this facility, the Company recorded an estimated loss of $705
during 2001 as a component of loss on disposal of discontinued operations
relating to its remaining costs in the facility, including leasehold
improvements and remaining rental payments, reduced by sublease income. On an
ongoing basis, the Company recognizes a liability for the remaining rental
payments, reduced by sublease income. This liability totaled $736 and $620 at
September 30, 2002 and 2001, respectively, and is included in accounts payable
and accrued liabilities. Sublease income has been estimated based on the
existing sublease and on management's estimate of probable future sublease
income which is predicated on current economic conditions. Adverse changes in
economic conditions could negatively affect management's estimate of probable
future sublease income which could result in the Company recognizing additional
losses on this facility. During 2002, the Company recognized an additional loss
of $390 due primarily to changes in estimated sublease income.
ACCOUNTING ESTIMATE ON UNCOMPLETED CONSTRUCTION PROJECT
- -------------------------------------------------------
Revenues from significant commercial construction contracts are recognized on
the percentage-of-completion method; accordingly, income is recognized in the
ratio that costs incurred bear to estimated total costs. The aggregate of costs
incurred and income recognized on uncompleted contracts in excess of related
billings is shown as an asset, and the aggregate billings on uncompleted
contracts in excess of related costs incurred and income recognized is shown as
a liability. Certain short-term smaller commercial construction contracts are
accounted for on the completed-contract method, which does not vary
significantly from the percentage-of-completion basis of accounting. Contract
costs include all direct material, subcontractor, supplies, and labor costs and
those indirect costs relating to contract performance. Provisions for estimated
losses on uncompleted contracts are made in the period in which such losses are
determined. Changes in job performance, job conditions, estimated profitability,
and final contract settlements may result in revisions to cost and income and
are recognized in the period in which the revisions are determined.
16
The Company currently is the general contractor for a $3.5 million medical
center renovation project. The project is behind schedule and the contract
provides for financial penalties if the project is not completed on time. The
project delays have been for various reasons, some that were under Realco
Construction control, some that were not. The project is currently scheduled for
completion in February 2003. If additional delays should occur the owner of the
project has the right to seek damages for the delay. As of this filing, the
project is expected to be completed by the deadline. The Company has the right
to "put down" to respective subs any costs which the Company may incur as a
result of inadequate or non-timely performance by the sub-contractor. The
Company, if penalized, will use that remedy to contain the project costs. The
Company currently estimates that the project will be minimally profitable.
GOODWILL
- --------
During 2001 and 2000, goodwill was amortized using the straight-line method over
15 to 20 years and the Company assessed the recoverability of goodwill by
determining whether the amortization of the asset balance over its remaining
life could be recovered through the undiscounted future operating cash flows of
the acquired operation. The amount of impairment, if any, was measured based on
projected discounted future operating cash flows. Effective October 1, 2001, the
Company adopted SFAS No. 141, Business Combinations, and SFAS No. 142, Goodwill
and Other Intangible Assets. Major provisions of these statements are as
follows: all business combinations initiated after June 30, 2001 must use the
purchase method of accounting; the pooling-of-interest method of accounting is
prohibited except for transactions initiated before July 1, 2001; intangible
assets acquired in a business combination must be recorded separately from
goodwill if they arise from contractual or other legal rights or are separable
from the acquired entity and can be sold, transferred, licensed, rented, or
exchanged, either individually or as a part of a related contract, asset, or
liability; goodwill and intangible assets with indefinite lives are not
amortized but are tested for impairment at least annually, except in certain
circumstances, and whenever there is an impairment indicator; all acquired
goodwill must be assigned to reporting units for purposes of impairment testing
and segment reporting.
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
- -----------------------------------------
In June 2001, Financial Accounting Standards Board (FASB) issued Statement of
Financial Accounting Standards (SFAS) No. 143, "Accounting for Asset Retirement
Obligations". SFAS No. 143 requires entities to record the fair value of a
liability for an asset retirement obligation in the period in which it is
incurred and a corresponding increase in the carrying amount of the related
long-lived asset. Subsequently, the asset retirement cost should be allocated to
expense using a systematic and rational method. SFAS No. 143 is effective for
fiscal years beginning after June 15, 2002. The Company does not expect SFAS No.
143 to have a material effect on its consolidated financial position or results
of operations.
In August 2001, FASB issued SFAS No. 144 "Accounting for the Impairment or
Disposal of Long-Lived Assets". SFAS No. 144 supersedes SFAS No. 121 "Accounting
for the Impairment of Long-Lived Assets and Long-Lived Assets to Be Disposed Of"
and the accounting and reporting provisions of Accounting Principles Board
Opinion No. 30, "Reporting the Results of Operations-Reporting the Effects of
Disposal of a Segment of a Business, and Extraordinary, Unusual and Infrequently
Occurring Events and Transactions" for the disposal of a segment of a business.
SFAS No. 144 retains the fundamental provisions of SFAS No. 121 and expands the
reporting of discontinued operations to include all components of an entity with
operations that can be distinguished from the rest of the entity and that will
be eliminated from the ongoing operations of the entity in a disposal
transaction. SFAS No. 144 is effective for the Company for fiscal year beginning
October 1, 2002. The Company expects that the sale of Charter (see Note W) will
be reported in accordance with SFAS No. 144.
In April 2002, the FASB issued SFAS No. 145, "Rescission of FASB Statements No.
4, 44, and 64, Amendment of FASB Statement No. 13, and Technical Corrections".
This Statement rescinds SFAS No. 4, "Reporting Gains and Losses from
Extinguishment of Debt", and an amendment of that Statement, SFAS No. 64,
"Extinguishments of Debt Made to Satisfy Sinking-Fund Requirements." This
Statement also rescinds SFAS No. 44, "Accounting for Intangible Assets of Motor
Carriers". This Statement amends SFAS No. 13, "Accounting for Leases", to
eliminate an inconsistency between the required accounting for sale-leaseback
transactions and the required accounting for certain lease modifications that
have economic effects that are similar to sale-leaseback transactions. This
Statement
17
also amends other existing authoritative pronouncements to make various
technical corrections, clarify meanings, or describe their applicability under
changed corrections. The Company does not expect SFAS No. 145 to have a material
effect on its consolidated financial position or results of operations.
In June 2002, FASB issued SFAS No. 146, "Accounting for Costs Associated with
Exit or Disposal Activities". This Statement addresses financial accounting and
reporting for costs associated with exit or disposal activities and nullifies
Emerging Issues Task Force (EITF) Issues No. 94-3 "Liability Recognition for
Certain Employee Termination Benefits and Other Costs to Exit an Activity
(including Certain Costs Incurred in a Restructuring)". The Statement is
effective for exit or disposal activities initiated after December 31, 2002 with
early application encouraged. The Company estimates that the new standard will
not have a material effect on its consolidated financial statements but is still
in the evaluation process.
LIQUIDITY AND CAPITAL RESOURCES
- -------------------------------
At September 30, 2002, the Company is in violation of certain covenants relating
to the subordinated sinking fund notes. Therefore, the trustee or noteholders
have the right to deliver a Notice of Default to the Company. If Notice of
Default is delivered and the violation is not cured within 30 days, the notes
may be declared due and payable immediately.
The Company has continued to make the scheduled debt service payments on the
subordinated sinking fund notes and the principal balance of these notes was
reduced by $800 to $1,750 in December 2002. If these obligations were declared
immediately due and payable the Company's cash position and working capital
would be adversely affected. If demand payment is required, management believes
it will be able to satisfy the obligation and maintain adequate working capital
for the Company's operations over the ensuing twelve months as follows:
1. Utilization of existing cash reserves.
2. Sale of assets and operating subsidiaries not in strategic plan
3. Utilization of expected positive cash flow provided by operations.
4. Reducing operating expenses and other expenditures.
5. Securing funds from other lenders as may become available.
The Company's working capital consists primarily of cash, accounts receivable,
and borrowings under construction advances and notes payable collateralized by
inventory. Projections of future cash requirements are affected by numerous
factors, including but not limited to, changes in customer receipts, consumer
industry trends, sales volume, operating cost fluctuations, acquisitions of
existing businesses and unplanned capital spending.
Cash and cash equivalents decreased $1,674 or 47% to $1,873 at September 30,
2002. The cash decrease is due to cash used in financing activities of $3,980 of
which construction advance payoffs of $2,948 plus debt service payments of
$1,232 comprise the largest uses of cash. Investing activities utilized $274 of
which $124 was capital expenditures. As offsets to these uses of cash,
operations provided $2,580 of cash flow. Sales of homes (inventory reduction on
cash flow statement) provided $4,987. An additional $652 was provided by
depreciation, amortization and impairment. These amounts were offset by the
losses from continuing operations of $2,038.
Accounts receivable increased to $2,099 or 98% requiring the use of cash of $889
during the year ended September 30, 2002. This increase was caused by the
construction and homebuilding segments; construction can fluctuate significantly
at times, depending upon current projects. The Company embarks on prompt and
timely payment to its sub-contractors to insure dependability of service.
There were no material changes in borrowings under construction advances and
notes payable collateralized by inventory. Such borrowings are typically under
separate construction loans for each home constructed with the underlying home
pledged as collateral.
The ability of the Company to expand its business in recent years has been due
in part to the addition of working capital from the public securities offering.
The Company intends to continue to apply its capital resources to expand
18
its business by establishing or acquiring complementary operations with emphasis
in boutique investment banking opportunities. It is expected that future cash
needs will be financed by a combination of cash flows from land sales, and
investment banking activities. If needed, other financing or capital raising
arrangements may become available to the Company based on results of the
investment banking activities..
The Company does not have any material commitments for capital expenditures for
fiscal 2003.
IMPACT OF INFLATION
- -------------------
The Company's business is significantly affected by general economic conditions,
particularly by inflation and its generally associated adverse effect on
interest rates and the securities market.
SUBSEQUENT EVENTS
- -----------------
On December 20, 2002, the Company sold its homebuilding subsidiary, Charter
Building and Development Corp. (Charter), to a private investor group which
includes certain current employees and stockholders and former officers of the
Company. Charter was responsible for the construction operations of the
residential construction and land development segment. The Company will continue
its land development operations. The selling price was $3,129, consisting of the
following:
Cash funded by the private investor group $ 800
Cash funded by Charter, including additional draws
on construction and development lines of credit 1,200
Promissory note collateralized by Charter's common stock 1,129
------
$3,129
======
A current stockholder and former officer was responsible for brokering the deal
between the Company and the private investor group and received a $120 fee upon
completion of the sale.
The Company will continue as guarantor of Charter's construction and development
lines of credit. Management believes that no significant gain or loss will
result from the sale. Revenues of Charter were $18,344, $11,546, and $18,431 for
2002, 2001 and 2000, respectively.
Subsequent to September 30, 2002, management began evaluating the Company's
commercial construction segment due to continuing operating losses. As a result
of this evaluation, management has decided to terminate the operations of the
commercial construction segment. Management expects to complete termination
during the second quarter of fiscal 2003, but does not anticipate any
significant costs or losses associated with this termination.
FORWARD LOOKING STATEMENTS
- --------------------------
Forward-looking statements in this report, including without limitation,
statements relating to the Company's plans, strategies, objectives,
expectations, intentions, and adequacy of resources, are made pursuant to the
safe harbor provisions of the Private Securities Litigations Reform Act of 1995.
Investors are cautioned that such forward-looking statements involve risks and
uncertainties including without limitation, the following: (i) the Company's
plans, strategies, objectives, expectations, and intentions are subject to
change at any time at the discretion of the Company; (ii) the Company's plans
and results of operations will be affected by the Company's ability to manage
its growth and inventory; and (iii) other risks and uncertainties indicated from
time to time in the Company's filings with the Securities and Exchange
Commission.
19
ITEM 7A: QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
The Company's primary market risk arises from its available for sale securities
and its operations as a broker and dealer of securities, as it engages in
proprietary trading and makes dealer markets in equity securities. Accordingly,
the Company may maintain certain amounts of inventories in order to facilitate
customer order flow. The Company may incur losses as a result of price movements
in these inventories due to changes in interest rates, equity market pricing and
other general economic factors over which it has no control. The Company manages
its exposure to market risk by limiting its net long or short positions.
Position limits are instituted for trading and inventory accounts and are
monitored by management on an ongoing basis. The Company is also exposed to
market risk as a result of providing credit to customers with margin accounts.
The collateral maintained to support customer margin loans is subject to the
factors described above. Management monitors such customers' credit standing on
an ongoing basis.
The following table shows the values of the Company's securities owned ("long")
and securities sold but not yet purchased ("short") positions as of September
30, 2002: (1)
Securities owned:
Trading securities - corporate equities $ 187
Investment securities - corporate equities and non-marketable securities 19
Available for sale securities 451
-----
$ 657
=====
Securities sold but not yet purchased - corporate equities $ 19
=====
- -------------
(1) Securities owned and securities sold but not yet purchased that are
readily marketable are carried at quoted market values. Trading and
investment securities not readily marketable are carried at fair market
value as determined by management.
The Company's primary exposure to interest rate risk arises from interest
earning assets held primarily for investment purposes and for deposits at
clearing organizations and NASD reserve requirements. The Company mitigates this
risk by holding high-grade government obligations with short-term maturities.
ITEM 8: FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
- ------------------------------------------
Report of Independent Certified Public Accountants...........................21
Consolidated Balance Sheets as of September 30, 2002 and 2001................22
Consolidated Statements of Operations for the Years Ended
September 30, 2002, 2001 and 2000............................................23
Consolidated Statement of Stockholders' Equity for the Years Ended
September 30, 2002, 2001 and 2000............................................24
Consolidated Statements of Cash Flows for the Years Ended
September 30, 2002, 2001 and 2000............................................26
Notes to Consolidated Financial Statements...................................28
20
Report of Independent Certified Public Accountants
--------------------------------------------------
Board of Directors and Stockholders
Oak Ridge Capital Group, Inc.
We have audited the accompanying consolidated balance sheets of Oak Ridge
Capital Group, Inc. (formerly, Realco, Inc.) and Subsidiaries, as of September
30, 2002 and 2001, and the related consolidated statements of operations,
stockholders' equity, and cash flows for each of the three years in the period
ended September 30, 2002. 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 auditing standards generally accepted
in the United States of America. 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 Oak Ridge Capital
Group, Inc. and Subsidiaries, as of September 30, 2002 and 2001, and the results
of their operations and their cash flows for each of the three years in the
period ended September 30, 2002, in conformity with accounting principles
generally accepted in the United States of America.
As discussed in Note A11 to the consolidated financial statements, the Company
changed its method of accounting for goodwill in 2002.
We have also audited Schedule II - Valuation And Qualifying Accounts for each of
the three years in the period ended September 30, 2002. In our opinion, this
schedule, when considered in relation to the basic financial statements taken as
a whole, presents fairly, in all material respects, the information therein.
GRANT THORNTON LLP
Oklahoma City, Oklahoma
January 10, 2003
21
OAK RIDGE CAPITAL GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
September 30,
(Dollars in thousands)
2002 2001
-------- --------
ASSETS
Cash and cash equivalents $ 1,873 $ 3,547
Restricted cash 341 481
Available for sale securities 451 307
Securities owned 206 443
Accounts receivable, net 2,099 1,060
Costs and estimated earnings in excess of billings on
uncompleted contracts 38 12
Inventories 5,848 10,835
Property & equipment - at cost, net 535 580
Investments - equity method 728 472
Goodwill 1,352 1,618
Other assets 778 1,102
-------- --------
$ 14,249 $ 20,457
======== ========
LIABILITIES
Notes payable $ 2,736 $ 3,740
Construction advances and notes payable, collateralized by
inventories 1,645 4,593
Accounts payable and accrued liabilities 3,080 3,410
Billings in excess of cost and estimated earnings on
uncompleted contracts 204 41
Escrow funds held for others 341 481
-------- --------
8,006 12,265
STOCKHOLDERS' EQUITY
Preferred stock - authorized, 500,000 shares Series D;
issued and outstanding, none in 2002 and 484,000 shares
in 2001, stated at liquidation value -- 2,087
Common stock - no par value; authorized, 50,000,000
shares; issued 4,843,023 shares in 2002 and 3,388,642
shares in 2001 13,165 11,078
Accumulated deficit (7,147) (5,109)
Accumulated other comprehensive income 227 138
-------- --------
6,245 8,194
Less common stock held in treasury - at cost, 700 shares 2 2
-------- --------
6,243 8,192
-------- --------
$ 14,249 $ 20,457
======== ========
See accompanying notes.
22
OAK RIDGE CAPITAL GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
Years ended September 30,
(Dollars in thousands, except per share amounts)
2002 2001 2000
----------- ----------- -----------
REVENUES
Real estate brokerage commissions and fees $ 1,987 $ 2,503 $ 1,481
Securities brokerage commissions and fees 4,461 1,914 --
Construction sales 22,570 14,643 24,232
Sales of developed lots 2,312 1,900 2,948
Equity in net earnings of investees 344 394 400
Interest and other, net 920 539 385
----------- ----------- -----------
32,594 21,893 29,446
COSTS AND EXPENSES
Cost of real estate brokerage revenue 1,201 1,549 854
Cost of securities brokerage revenue 4,392 1,746 --
Cost of construction sales 20,551 13,429 22,001
Cost of developed lots sold 1,727 1,497 2,172
Selling, general, administrative and other 5,805 4,099 3,348
Depreciation and amortization 386 404 290
Impairment of goodwill 266 -- --
Interest 363 803 825
Loss on investments -- 1,548 --
----------- ----------- -----------
34,691 25,075 29,490
----------- ----------- -----------
Loss from continuing operations before income taxes (2,097) (3,182) (44)
INCOME TAX BENEFIT (59) (265) (31)
----------- ----------- -----------
LOSS FROM CONTINUING OPERATIONS (2,038) (2,917) (13)
DISCONTINUED OPERATIONS
Loss from discontinued operations, net of income taxes -- (713) (921)
Loss on disposal of discontinued operations,
net of income taxes -- (137) --
----------- ----------- -----------
NET LOSS (2,038) (3,767) (934)
PREFERRED STOCK DIVIDEND REQUIREMENT
(REDEMPTION BENEFIT) - NET (154) (2,027) 112
----------- ----------- -----------
NET LOSS APPLICABLE TO COMMON SHARES $ (1,884) $ (1,740) $ (1,046)
=========== =========== ===========
BASIC AND DILUTED LOSS PER COMMON SHARE
Loss per common share from continuing operations $ (.41) $ (.27) $ (.04)
=========== =========== ===========
Loss per common share $ (.41) $ (.53) $ (.36)
=========== =========== ===========
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING 4,642,356 3,279,607 2,900,015
----------- ----------- -----------
See accompanying notes.
23
OAK RIDGE CAPITAL GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
Years ended September 30, 2002, 2001 and 2000
(Dollars in thousands)
Series A Series B
preferred preferred Series D
stock 6% stock 3% preferred Common
cumulative cumulative stock stock
------------ ------------ ------------ ------------
Balance at October 1, 1999 $ 799 $ 2,129 $ -- $ 7,909
Purchase of common stock for treasury -- -- -- --
Issuance of treasury stock -- -- -- (8)
Issuance of common stock in acquisition -- -- -- 1,445
Cancellation of common stock acquired -- -- -- (1,381)
Comprehensive loss
Net loss -- -- -- --
Other comprehensive income
Unrealized gain on investments, net -- -- -- --
Comprehensive loss
------------ ------------ ------------ ------------
Balance at September 30, 2000 799 2,129 -- 7,965
Conversion of Series A and Series B
preferred stock (799) (2,129) -- 2,928
Issuance of Series D preferred stock in
acquisition -- -- 2,087 --
Issuance of warrants -- -- -- 185
Comprehensive loss
Net loss -- -- -- --
Other comprehensive income -- -- -- --
Unrealized loss on investments, net -- -- -- --
Comprehensive loss
------------ ------------ ------------ ------------
Balance at September 30, 2001 -- -- 2,087 11,078
Conversion of Series D preferred stock -- -- (2,087) 2,087
Comprehensive loss
Net loss -- -- -- --
Other comprehensive income
Unrealized gain on investments, net -- -- -- --
Comprehensive loss
------------ ------------ ------------ ------------
Balance at September 30, 2002 $ -- $ -- $ -- $ 13,165
============ ============ ============ ============
See accompanying notes.
24
OAK RIDGE CAPITAL GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY - CONTINUED
Years ended September 30, 2002, 2001, and 2000
(Dollars in thousands)
Accumulated
other
Accumulated Treasury comprehensive
deficit stock income Total
------------ ------------ ------------ ------------
Balance at October 1, 1999 $ (408) $ (31) $ -- $ 10,398
Purchase of common stock for treasury -- (12) -- (12)
Issuance of treasury stock -- 41 -- 33
Issuance of common stock in acquisition -- -- -- 1,445
Cancellation of common stock acquired -- -- -- (1,381)
Comprehensive loss
Net loss (934) -- -- (934)
Other comprehensive income
Unrealized gain on investments, net -- -- 757 757
------------
Comprehensive loss (177)
------------ ------------ ------------ ------------
Balance at September 30, 2000 (1,342) (2) 757 10,306
Conversion of Series A and Series B
preferred stock -- -- -- --
Issuance of Series D preferred stock in
acquisition -- -- -- 2,087
Issuance of warrants -- -- -- 185
Comprehensive loss
Net loss (3,767) -- -- (3,767)
Other comprehensive income
Unrealized loss on investments, net -- -- (619) (619)
------------
Comprehensive loss (4,386)
------------ ------------ ------------ ------------
Balance at September 30,2001 (5,109) (2) 138 8,192
Conversion of Series D preferred stock -- -- -- --
Comprehensive income
Net loss (2,038) -- -- (2,038)
Other comprehensive income
Unrealized gain on investments, net -- -- 89 89
------------
Comprehensive loss (1,949)
------------ ------------ ------------ ------------
Balance at September 30, 2002 $ (7,147) $ (2) $ 227 $ 6,243
============ ============ ============ ============
See accompanying notes.
25
OAK RIDGE CAPITAL GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years ended September 30,
(Dollars in thousands)
2002 2001 2000
-------- -------- --------
Cash flows from operating activities
Loss from continuing operations $ (2,038) $ (2,917) $ (13)
Adjustments to reconcile loss from continuing
operations to net cash provided by (used in)
continuing operations-
Depreciation and amortization 386 404 290
Impairment of goodwill 266 -- --
Accretion of discount on notes payable 26 219 42
Net distributions in excess of earnings of
investees (earnings in excess of distributions) (256) 320 (197)
Loss ( gain) on sale of available for sale
securities 7 203 (118)
Gain on sale of property and equipment (1) -- --
Provision for deferred income taxes (59) (284) (31)
Impairment of cost method investment -- 1,210 --
Change in operating assets and liabilities, net of
effects from business acquisitions and
discontinued operations-
Decrease (increase) in restricted cash 140 (212) (7)
Decrease (increase) in securities owned 237 13 --
Decrease (increase) in accounts receivables (889) 1,657 (801)
Decrease (increase) in inventories 4,987 (373) 4,600
Change in net billings related to costs and
estimated earnings on uncompleted contracts 137 (46) 557
Decrease in other assets 107 247 9
Decrease in accounts payable and accrued
liabilities (330) (676) (831)
(Decrease) increase in escrow funds held for
others (140) 212 7
-------- -------- --------
Net cash provided by (used in) continuing
operations 2,580 (23) 3,507
Net cash used in discontinued operations -- (758) (925)
-------- -------- --------
Net cash provided by (used in) operating
activities 2,580 (781) 2,582
See accompanying notes.
26
OAK RIDGE CAPITAL GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS - CONTINUED
Years ended September 30,
(Dollars in thousands)
2002 2001 2000
-------- -------- --------
Cash flows from investing activities
Purchases of property and equipment (124) (296) (420)
Proceeds from sale of property and equipment 1 -- 271
Payments for businesses acquired -- (256) (853)
Advances on notes receivable (150) -- (157)
Receipts on notes receivable -- 35 272
Purchase of securities available for sale (146) (123) (995)
Proceeds from securities available for sale 145 159 1,007
Cash acquired in business acquisitions -- 178 47
Proceeds from sale of discontinued operations -- 4,101 --
-------- -------- --------
Net cash provided by (used in) investing
activities (274) 3,798 (828)
Cash flows from financing activities
Construction advances and notes payable, net (2,948) 98 (2,402)
Payments on revolving and other debt (1,232) (2,344) (1,198)
Proceeds from borrowings under revolving and other
debt 200 900 13
Issuance of treasury stock -- -- 33
Purchase of treasury stock -- -- (12)
-------- -------- --------
Net cash used in financing activities (3,980) (1,346) (3,566)
-------- -------- --------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (1,674) 1,671 (1,812)
Cash and cash equivalents at beginning of year 3,547 1,876 3,688
-------- -------- --------
Cash and cash equivalents at end of year $ 1,873 $ 3,547 $ 1,876
======== ======== ========
Cash paid during the year for:
- -----------------------------
Income taxes $ -- $ 19 $ --
Interest (net of amount capitalized) 360 816 902
See accompanying notes.
27
OAK RIDGE CAPITAL GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS - CONTINUED
Years ended September 30, 2002, 2001, and 2000
(Dollars in thousands)
Noncash financing and investing activities:
- -------------------------------------------
In March 2001, the Company acquired all the outstanding stock of Equity
Securities Investments, Inc. in exchange for 484,000 shares of Series D
preferred stock. In connection with this acquisition, liabilities were assumed
as follows:
Fair value of assets acquired, including cash of $178 $ 2,372
Series D preferred stock issued (2,087)
-------
Liabilities assumed $ 285
=======
In 2000, the Company sold an office building for $165 which was leased back
under market rental rates. Consideration received consisted of $135 in cash and
a vacant lot valued at $130 as reduced by a liability assumed of $100. The
resulting gain on sale of $42 is being amortized over the lease term.
In 2000, the Company purchased certain net assets and the real estate brokerage
business of Farnsworth Realty & Management Company for $381. In connection with
the purchase, liabilities were assumed as follows:
Fair value of assets acquired, including an office building $ 410
Cash paid (250)
Issuance of note payable (131)
-------
Liabilities assumed $ 29
=======
In 2000, the Company acquired all the outstanding stock of Financial Services
Group, Inc. in exchange for 680,000 shares of Company common stock. In
connection with this acquisition, liabilities were assumed as follows:
Fair value of assets acquired, including 650,000
shares of Realco common stock which were
cancelled and cash of $47 $ 1,546
Stock issued (1,445)
-------
Liabilities assumed $ 101
=======
See accompanying notes.
28
OAK RIDGE CAPITAL GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2002, 2001, and 2000
(Dollars in thousands, except per share amounts)
NOTE A - NATURE OF OPERATIONS AND SUMMARY OF ACCOUNTING POLICIES
Oak Ridge Capital Group, Inc. was originally incorporated in 1983 under the name
of Realco, Inc. and under the laws of the state of New Mexico. On June 7, 2002,
Realco changed its state of incorporation to Minnesota and changed it name to
Oak Ridge Capital Group, Inc.
Oak Ridge Capital Group, Inc. and Subsidiaries (the Company) has operations
which include single-family home construction, land development, commercial
construction, commercial real estate brokerage services, and financial services.
Its operations and customers are primarily in the vicinity of Albuquerque, New
Mexico and Minneapolis, Minnesota.
On June 2, 2001, the Company sold its residential brokerage operations. Such
brokerage operations operated under a franchise from Prudential Real Estate
Affiliates, Inc. in Albuquerque, New Mexico and Phoenix, Arizona. The financial
data related to these operations is accounted for as a discontinued operation
for all periods presented.
The Company's accounting policies reflect industry practices and conform to
accounting principles generally accepted in the United States of America. The
more significant policies are briefly discussed below.
1. Principles of Consolidation
The consolidated financial statements include the accounts of Oak Ridge Capital
Group, Inc. and its wholly owned subsidiaries. All material intercompany
accounts and transactions have been eliminated in consolidation.
2. Revenue and Expense Recognition
The Company constructs single-family homes of short building duration for which
minimal deposits are generally required from the buyer. Revenue is recognized
upon closing. Estimated warranty costs are provided at the time of sale.
Revenues from significant commercial construction contracts are recognized on
the percentage-of-completion method; accordingly, income is recognized in the
ratio that costs incurred bear to estimated total costs. The aggregate of costs
incurred and income recognized on uncompleted contracts in excess of related
billings is shown as an asset, and the aggregate billings on uncompleted
contracts in excess of related costs incurred and income recognized is shown as
a liability. Certain short-term smaller commercial construction contracts are
accounted for on the completed-contract method, which does not vary
significantly from the percentage-of-completion basis of accounting. Contract
costs include all direct material, subcontractor, supplies, and labor costs and
those indirect costs relating to contract performance. Provisions for estimated
losses on uncompleted contracts are made in the period in which such losses are
determined. Changes in job performance, job conditions, estimated profitability,
and final contract settlements may result in revisions to cost and income and
are recognized in the period in which the revisions are determined.
Brokerage commissions and fees earned from real estate brokerage services are
recognized at the time of closing on the underlying real estate sales contracts.
Securities transactions with customers and the related commission income and
expense are recorded on a settlement-date basis, generally the third business
day following the transaction. The impact of unsettled transactions on
securities owned, securities sold but not yet purchased, and income net of
related expenses is not material.
29
OAK RIDGE CAPITAL GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2002, 2001, and 2000
(Dollars in thousands, except per share amounts)
Underwriting fees are recorded at the time underwriting is completed and the
income is readily determinable. Underwriting fees totaled approximately $2,025
and $381 for the years ended September 30, 2002 and 2001, respectively.
3. Cash, Cash Equivalents, and Restricted Cash
The Company considers money market accounts and all highly liquid debt
instruments purchased with a maturity of three months or less to be cash
equivalents. The Company maintains its cash and cash equivalents in accounts
which may not be federally insured. The Company has not experienced any losses
in such accounts and believes it is not exposed to any significant credit risk.
In the ordinary course of operations, the Company collects and holds in escrow
funds associated with real estate contract deposits, construction sales contract
deposits, and other escrowed funds. These balances are reflected as restricted
cash with a corresponding liability.
4. Available-for-sale securities
Available-for-sale securities consist of equity securities which are stated at
fair value with net unrealized gains or losses recorded as accumulated other
comprehensive income (loss) in stockholder's equity. Realized gains and losses
are included in earnings and are derived using the specific identification
method for determining cost. Gross gains of $5 and $126 for 2002 and 2000,
respectively, and gross losses of $12, $203, and $8 for 2002, 2001, and 2000,
respectively, were realized.
5. Accounts Receivable
The Company reviews accounts receivable for collectibility and provides reserves
on specific accounts based upon whether the Company believes that the collection
of a specific account is questionable.
The Company provides credit to its customers under ordinary trade terms.
Construction sales receivable are generally collateralized by the real estate.
6. Inventories
Inventories are carried at the lower of cost or estimated net realizable value
and include all acquisition costs, direct labor and benefits, project interest,
materials unique to or installed in the project, subcontractor cost, and a
proportional overhead allocation charge.
7. Property and Equipment
Depreciation is provided in amounts sufficient to relate the cost of depreciable
assets to operations over their estimated service lives of three to ten years
using straight-line and accelerated methods.
Impairment losses are recorded on long-lived assets used in operations when
indicators of impairment are present and the undiscounted cash flows estimated
to be generated by these assets are less than the assets' carrying amount.
30
OAK RIDGE CAPITAL GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2002, 2001, and 2000
(Dollars in thousands, except per share amounts)
8. Income Taxes
The Company calculates income taxes in accordance with the provisions of
Statement of Financial Accounting Standards (SFAS) No. 109, Accounting for
Income Taxes, which requires the use of the liability method of accounting for
deferred income taxes. Deferred income taxes are provided on temporary
differences between the tax basis of an asset or liability and its reported
amount in the consolidated financial statements that will result in taxable or
deductible amounts in future years. Deferred income tax assets or liabilities
are determined by applying the presently enacted tax rates and laws.
The Company and its subsidiaries file consolidated income tax returns.
9. Loss Per Common Share
Loss per common share is calculated based on the weighted average number of
shares outstanding during the year. Potential common shares relating to
convertible preferred stock, warrants, and options were excluded from the
computation of diluted loss per share because they are antidilutive as follows:
2002 2001 2000
--------- --------- ---------
Series A preferred stock -- -- 114,241
Series B preferred stock -- -- 337,838
Series D preferred stock -- 1,452,000 --
Warrants 795,000 790,000 850,000
Options 630,000 185,000 205,000
The following shows the amounts used in computing loss per common share from
continuing operations for the years ended September 30:
2002 2001 2000
-------- -------- --------
Loss from continuing operations $ (2,038) $ (2,917) $ (13)
Less preferred stock dividend requirement
(redemption benefit) (154) (2,027) 112
-------- -------- --------
Loss from continuing operations applicable to common
shares $ (1,884) $ (890) $ (125)
======== ======== ========
10. Investments
Investments in affiliated companies and joint ventures owned 20% to 50% or which
the Company is able to exercise significant influence over operations are
accounted for on the equity method. Accordingly, the consolidated statements of
operations include the Company's share of the affiliated entities' net operating
results.
Investments in affiliated companies without readily determinable fair values,
owned 20% or less, and where the Company does not exercise significant influence
over operations are accounted for on the cost method.
31
OAK RIDGE CAPITAL GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2002, 2001, and 2000
(Dollars in thousands, except per share amounts)
11. Goodwill
During 2001 and 2000, goodwill was amortized using the straight-line method over
15 to 20 years and the Company assessed the recoverability of goodwill by
determining whether the amortization of the asset balance over its remaining
life could be recovered through the undiscounted future operating cash flows of
the acquired operation. The amount of impairment, if any, was measured based on
projected discounted future operating cash flows. Effective October 1, 2001, the
Company adopted SFAS No. 141, Business Combinations, and SFAS No. 142, Goodwill
and Other Intangible Assets. Major provisions of these statements are as
follows: all business combinations initiated after June 30, 2001 must use the
purchase method of accounting; the pooling-of-interest method of accounting is
prohibited except for transactions initiated before July 1, 2001; intangible
assets acquired in a business combination must be recorded separately from
goodwill if they arise from contractual or other legal rights or are separable
from the acquired entity and can be sold, transferred, licensed, rented, or
exchanged, either individually or as a part of a related contract, asset, or
liability; goodwill and intangible assets with indefinite lives are not
amortized but are tested for impairment at least annually, except in certain
circumstances, and whenever there is an impairment indicator; all acquired
goodwill must be assigned to reporting units for purposes of impairment testing
and segment reporting.
The following reconciles reported net loss and related per share amounts to
amounts that would have been presented exclusive of amortization expense
recognized for goodwill that is no longer being amortized:
Years ended September 30,
---------------------------------------
2002 2001 2000
--------- --------- ---------
Reported net loss $ (2,038) $ (3,767) $ (934)
Goodwill amortization -- 182 148
--------- --------- ---------
Adjusted net loss $ (2,038) $ (3,585) $ (786)
========= ========= =========
Net loss per share - basic and diluted
Reported net loss $ (.41) $ (.53) $ (.36)
Goodwill amortization -- .05 .05
--------- --------- ---------
Adjusted net loss $ (.41) $ (.48) $ (.31)
========= ========= =========
The Company evaluated its goodwill as of the adoption of SFAS No. 142 on October
1, 2001 and determined that there were no indicators of impairment since the
estimated fair value of applicable reporting units was in excess of the net book
value of the reporting unit as of October 1, 2001. The Company obtained a
valuation from an independent third-party appraiser. Valuation techniques
included discounted cash flows and market comparables.
The Company updated its analysis of goodwill impairment as of September 30, 2002
and determined that there was an indicator of impairment of its recorded
goodwill; accordingly, the Company completed the second phase of impairment
testing. Based on the impairment test, the Company recognized an impairment of
approximately $266 as of September 30, 2002 to reduce the carrying value of
goodwill to the implied fair value.
32
OAK RIDGE CAPITAL GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2002, 2001, and 2000
(Dollars in thousands, except per share amounts)
The impairment was required because economic conditions at the time of testing
(including continued operating losses in certain subsidiaries) reduced the
estimated future expected performance of the reporting units. Under SFAS No.
142, an impairment adjustment recognized after adoption is required to be
recognized as an operating expense.
The changes in the carrying amount of goodwill for the year ended September 30,
2002 are as follows:
Financial Real Estate
Services Brokerage Residential Commercial
Segment Segment Construction Construction Total
------------- ------------- ------------- ------------- -------------
Balances as of October 1, 2001 $ 1,337 $ 45 $ 170 $ 66 $ 1,618
Impairment losses (200) -- -- (66) (266)
------------- ------------- ------------- ------------- -------------
Balances as of September 30, 2002 $ 1,137 $ 45 $ 170 $ -- $ 1,352
============= ============= ============= ============= =============
12. Use of Estimates
The preparation of financial statements in conformity with accounting principles
generally accepted in the United States of America requires management to make
estimates and assumptions that affect certain reported amounts and disclosures;
accordingly, actual results could differ from those estimates.
13. Stock Options
The Company applies APB Opinion 25 and related interpretations in accounting for
its employee stock options. Accordingly, compensation expense is only recognized
for grants of employee stock options which include an exercise price less than
the market price of the stock at the date of the grant.
14. Advertising Costs
The Company expenses the cost of advertising the first time advertising takes
place. Advertising expense for continuing operations for the years ended
September 30, 2002, 2001, and 2000 was approximately $261, $281, and $381,
respectively.
33
OAK RIDGE CAPITAL GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2002, 2001, and 2000
(Dollars in thousands, except per share amounts)
15. Other Comprehensive Income
Accumulated other comprehensive income consists solely of net unrealized
investment gains (losses). Unrealized gain (loss) on investments consists of the
following for the years ended September 30:
2002 2001 2000
------ ------ ------
Unrealized gain (loss) on investments arising during
the period $ 82 $ (822) $ 875
Less reclassification adjustment for gains (losses)
included in net earnings (loss) (7) (203) 118
------ ------ ------
Unrealized gain (loss) on investments, net of income
taxes of $59, $413, and $505, respectively $ 89 $ (619) $ 757
====== ====== ======
NOTE B - INVENTORIES
During the years ended September 30, 2002, 2001, and 2000, the Company incurred
and capitalized interest costs of approximately $187, $304, and $379,
respectively. Capitalized interest costs charged to cost of construction sales
were approximately $269, $215, and $382 for the years ended September 30, 2002,
2001, and 2000, respectively.
Inventories consist of the following as of September 30:
2002 2001
-------- --------
Land and improvements under development $ 2,282 $ 4,406
Construction in progress, including homes substantially completed
and held-for-sale 3,047 5,642
Model homes 519 787
-------- --------
$ 5,848 $ 10,835
======== ========
Construction in progress includes homes under contract of approximately $2,416
and $4,671 at September 30, 2002 and 2001, respectively.
34
OAK RIDGE CAPITAL GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2002, 2001, and 2000
(Dollars in thousands, except per share amounts)
NOTE C - COSTS AND BILLINGS ON UNCOMPLETED CONTRACTS
The following is a summary of significant commercial construction contracts
accounted for on the percentage-of-completion method as of September 30:
2002 2001
-------- --------
Costs incurred on uncompleted contracts $ 2,429 $ 575
Estimated (loss) earnings 58 (170)
-------- --------
2,487 405
Less billings to date 2,653 618
-------- --------
(166) (213)
======== ========
Included in the accompanying consolidated balance sheets under the
following captions:
Costs and estimated earnings in excess of billings on uncompleted
contracts $ 38 $ 12
Billings in excess of costs and estimated earnings on uncompleted
contracts (204) (41)
Accounts payable and accrued liabilities - provision for losses on
uncompleted contracts -- (184)
-------- --------
$ (166) $ (213)
======== ========
NOTE D - INVESTMENTS
The following is a summary of investments carried on the equity method as of
September 30:
2002 2001
-------- --------
PHS Mortgage, 49.99% limited partner interest $ 272 $ 132
Success Venture, 50% interest 378 249
Other 78 91
-------- --------
$ 728 $ 472
======== ========
The Company has a 9% investment in Miller & Schroeder, Inc. (MSI), which has
been accounted for on the cost method. In July 2001, the shareholders of MSI
voted to accept a proposal to sell the operations and substantially all of the
assets of MSI to an employee group. MSI informed its shareholders that based
upon the terms of this proposal, it is likely that no assets will be available
for distribution to the shareholders. As a result, the Company fully impaired
its investment in MSI during 2001, through a charge to operations of $1,210
which is reflected in loss on investments in the accompanying financial
statements.
35
OAK RIDGE CAPITAL GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2002, 2001, and 2000
(Dollars in thousands, except per share amounts)
The Company has participated in certain land development and residential
construction projects under separate joint venture agreements. The Company's
liability is joint and several for such joint ventures and its 50% share in the
operations is reported on the equity method in the accompanying financial
statements.
Summarized financial information of certain investments carried on the equity
method is as follows:
As of and for the year ended September 30, 2002
-----------------------------------------------
PHS Success
Mortgage Ventures
-------- --------
Cash $ 1,054 $ 176
Other assets 93 1,475
-------- --------
$ 1,147 $ 1,651
======== ========
Liabilities $ 228 $ 894
Equity 919 757
-------- --------
$ 1,147 $ 1,651
======== ========
Revenue earned $ 991 $ 5,677
======== ========
Net earnings $ 279 $ 407
======== ========
As of and for the year ended September 30, 2001
-----------------------------------------------
PHS Success
Mortgage Ventures
-------- --------
Cash $ 12 $ 26
Other assets 1,107 2,227
-------- --------
$ 1,119 $ 2,253
======== ========
Liabilities $ 484 $ 1,755
Equity 635 498
-------- --------
$ 1,119 $ 2,253
======== ========
Revenue earned $ 1,211 $ 3,247
======== ========
Net earnings $ 447 $ 233
======== ========
36
OAK RIDGE CAPITAL GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2002, 2001, and 2000
(Dollars in thousands, except per share amounts)
NOTE E - SECURITIES OWNED AND SOLD, NOT YET PURCHASED
Marketable securities owned and sold, not yet purchased, consist of trading and
investment securities carried at quoted market values. Trading and investment
securities not readily marketable are carried at fair value as determined by
management. Securities sold, not yet purchased, are included in accounts payable
and accrued liabilities in the accompanying financial statements. Unrealized
gains and losses are included in operations. The securities are as follows at
September 30:
2002 2001
------ ------
Securities owned:
Trading securities - corporate equities $ 187 $ 366
Investment securities - corporate equities and nonmarketable
securities 19 77
------ ------
$ 206 $ 443
====== ======
Securities sold, not yet purchased $ 19 $ 18
====== ======
NOTE F - ACCOUNTS AND NOTES RECEIVABLE
Accounts and notes receivable include the following at September 30:
2002 2001
------ ------
Brokerage commissions and fees receivable $ 13 $ 37
Construction sales receivable 1,391 685
Receivable from clearing organization 411 189
Other advances and receivables 298 287
------ ------
2,113 1,198
Less allowance for doubtful accounts 14 138
------ ------
$2,099 $1,060
====== ======
NOTE G - PROPERTY AND EQUIPMENT
Property and equipment consisted of the following at September 30:
2002 2001
------ ------
Office equipment, furniture, and fixtures $1,322 $1,553
Leasehold improvements 57 71
Automobiles and equipment 217 185
------ ------
1,596 1,809
Less accumulated depreciation and amortization 1,061 1,229
------ ------
$ 535 $ 580
====== ======
37
OAK RIDGE CAPITAL GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2002, 2001, and 2000
(Dollars in thousands, except per share amounts)
NOTE H - DEBT
Debt consisted of the following at September 30:
2002 2001
------ ------
Subordinated sinking fund notes, 9.5% interest payable annually,
principal payable at various dates through December 2003 (less
$18 and $45 unamortized discount at September 30, 2002 and 2001,
respectively, based on imputed interest rate of 10.5%) (A) $2,532 $3,305
Construction and development advances; collateralized by inventories
(A)(B) 1,545 4,195
Notes payable; collateralized by inventories -- 398
Note payable to Wells Fargo Bank; collateralized by investee common
stock owned by the Company -- 214
Subordinated notes payable to related party, 8% and 10% interest,
due November 2002 and June 2002, respectively 200 200
Other notes payable 104 21
------ ------
$4,381 $8,333
====== ======
(A) Subordinated sinking fund notes, certain construction and development
advances and certain notes payable are subject to various covenants, some
of which include minimum net worth requirements, cash flow coverage
requirements, limitations on dividends, and limitations on debt.
(B) Construction and development advances collateralized by inventories
include amounts outstanding under construction loan agreements with three
lenders and buyer-financed loans. Such advances are payable upon the
earlier of closing or twelve months. Each home to be built requires a
separate loan agreement with interest ranging from prime to prime plus 1%.
The prime lending rate was 4.75% and 6% at September 30, 2002 and 2001,
respectively.
At September 30, 2002, the Company is in violation of certain covenants relating
to the subordinated sinking fund notes. Therefore, the trustee or noteholders
have the right to deliver a Notice of Default to the Company. If Notice of
Default is delivered and the violation is not cured within 30 days, the notes
may be declared due and payable immediately.
38
OAK RIDGE CAPITAL GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2002, 2001, and 2000
(Dollars in thousands, except per share amounts)
The Company has continued to make the scheduled debt service payments on the
subordinated sinking fund notes and the principal balance of these notes was
reduced to $1,750 in December 2002. Management believes if these obligations
were declared immediately due and payable the Company's cash position and
working capital would be adversely affected but the Company would be able to
satisfy the obligations and maintain adequate working capital for the Company's
operations for a reasonable period of time.
Aggregate future maturities of debt, reflecting the subordinated sinking fund
notes as maturing in 2003, are as follows at September 30, 2002:
Year ending September 30:
2003 $4,399
Less amount representing discount on debt 18
------
$4,381
======
NOTE I - INCOME TAXES
Income tax expense (benefit) on loss from continuing operations consists of the
following for the years ended September 30:
2002 2001 2000
------ ------ ------
Current $ -- $ 19 $ --
Deferred (59) (284) (31)
------ ------ ------
$ (59) $ (265) $ (31)
====== ====== ======
The Company's effective income tax rate on loss from continuing operations
differed from the federal statutory rate of 34% as follows:
2002 2001 2000
------ ------- ------
Income taxes at federal statutory rate $ (713) $(1,082) $ (15)
Increase (decrease) in valuation allowance 928 938 (51)
Nondeductible expenses 124 53 24
State income taxes at statutory rate (126) (191) (2)
Adjustment of estimated income tax liability of
prior year (272) 8 10
Other -- 9 3
------ ------- ------
Total tax provision $ (59) $ (265) $ (31)
====== ======= ======
39
OAK RIDGE CAPITAL GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2002, 2001 and 2000
(Dollars in thousands, except per share amounts)
Components of deferred taxes are as follows at September 30:
2002 2001
-------- --------
Assets
Accrued liabilities $ 482 499
Investments 105 530
Tax loss carryforward 1,740 394
Contributions carryforward 20 --
Valuation allowance (2,026) (1,098)
-------- --------
$ 321 $ 325
======== ========
Liabilities
Investments $ 271 $ 260
Property and equipment 50 65
-------- --------
$ 321 $ 325
======== ========
A valuation allowance for deferred tax assets is required when it is more likely
than not that some portion or all of the deferred tax assets will not be
realized. The valuation allowance increased (decreased) $928, $938 and $(51) for
the years ended September 30, 2002, 2001 and 2000, respectively.
At September 30, 2002, the Company has net operating loss carryforwards for tax
purposes of approximately $4,350 which will begin to expire in 2019.
NOTE J - LEASES
The Company leases certain office facilities and equipment used in its
operations under operating leases expiring at various dates through 2009 and
provides for payments as follows:
Year ending September 30:
2003 $ 636
2004 503
2005 325
2006 230
2007 54
Thereafter 99
--------
$ 1,847
========
Certain facilities are subleased under leases which expire in 2004. Total future
minimum sublease rentals amount to $457 at September 30, 2002.
40
OAK RIDGE CAPITAL GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2002, 2001, and 2000
(Dollars in thousands, except per share amounts)
Rental expense from continuing operations for the years ended September 30 is as
follows:
2002 2001 2000
------ ------ ------
Minimum rentals $ 658 $ 432 $ 164
Sublease rentals (9) (9) (5)
------ ------ ------
$ 649 $ 423 $ 159
====== ====== ======
Certain leases relating to rental expense of approximately $12, $6, and $130 for
the years ended September 30, 2002, 2001, and 2000, respectively, are with
related parties.
As described in Note T, the Company sold its residential brokerage operations
during 2001, resulting in a leased office facility no longer being used for
operating purposes. Minimum future rental payments under this operating lease,
which can be terminated in August 2007, are as follows:
Year ending September 30
2003 $ 445
2004 445
2005 445
2006 445
2007 408
-------
$ 2,188
=======
This facility is sublet under an agreement expiring in April 2003. Rental
receipts were $287 in 2002 and $70 in 2001.
In connection with this facility, the Company recorded an estimated loss of $705
during 2001 as a component of loss on disposal of discontinued operations
relating to its remaining costs in the facility, including leasehold
improvements and remaining rental payments, reduced by sublease income. On an
ongoing basis, the Company recognizes a liability for the remaining rental
payments, reduced by sublease income. This liability totaled $736 and $620 at
September 30, 2002 and 2001, respectively, and is included in the accompanying
balance sheets as accounts payable and accrued liabilities. Sublease income has
been estimated based on the existing sublease and on management's estimate of
probable future sublease income which is predicated on current economic
conditions. Adverse changes in economic conditions could negatively affect
management's estimate of probable future sublease income which could result in
the Company recognizing additional losses on this facility. During 2002, the
Company recognized an additional loss of $390 due primarily to changes in
estimated sublease income.
41
OAK RIDGE CAPITAL GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2002, 2001, and 2000
(Dollars in thousands, except per share amounts)
NOTE K - BUSINESS COMBINATIONS
Effective March 1, 2001, the Company acquired all the outstanding stock of
Equity Securities Investments, Inc. (ESI) in exchange for 484,000 shares of
newly created Series D preferred stock. The total cost of the acquisition,
$2,087, was based on the fair value of the Company's common stock into which the
Series D preferred stock was convertible. ESI is primarily engaged in a single
line of business as a securities broker-dealer.
The Company acquired certain net assets and the residential brokerage operations
of Farnsworth Realty & Management Company (Farnsworth) effective January 1,
2000. The acquisition included a cash payment of $250, a note payable of up to
$150, and the assumption of $29 in liabilities. These net assets and brokerage
operations were subsequently sold. See Note T.
The Company acquired Financial Services Group, Inc. (FSG), a financial services
company controlled by the Company's former President and Chief Executive
Officer, effective June 1, 2000. This acquisition was made through the issuance
of 680,000 shares of Company common stock. Assets acquired included 650,000
shares of Company common stock which were immediately cancelled.
These business combinations have been accounted for using the purchase method of
accounting and the accompanying consolidated financial statements include the
operations of these entities subsequent to the date of acquisition. Initial
goodwill was approximately $1,508.
During the years ended September 30, 2001 and 2000, contingent payments of $256
and $552, respectively, were made for past acquisitions which related to
discontinued operations. See Note T.
The following summarized pro forma unaudited information assumes the acquisition
of FSG and ESI occurred on October 1, 1999:
Years ended September 30,
-------------------------
2001 2000
---------- ----------
Revenues from continuing operations $ 23,463 $ 32,662
========== ==========
Earnings (loss) from continuing operations $ (3,296) $ (145)
========== ==========
Basic and diluted earnings (loss) from continuing operations per
common share(1) $ (.97) $ (.12)
========== ==========
(1) Excludes effects of redemption benefit associated with redemption of
Series A and B preferred stock.
42
OAK RIDGE CAPITAL GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2002, 2001, and 2000
(Dollars in thousands, except per share amounts)
NOTE L - SEGMENT INFORMATION
The Company operates in the following segments: residential construction and
land development, commercial real estate broker, financial services, and
commercial construction. Information concerning the Company's business segments
as of and for the years ended September 30 is as follows:
2002 2001 2000
-------- -------- --------
Revenues
Residential construction and land development $ 20,402 $ 12,487 $ 21,220
Commercial real estate broker 1,987 2,503 1,481
Financial services 5,118 2,432 642
Commercial construction 4,480 4,056 5,960
Interest and other
Sales to unaffiliated customers 607 415 143
Intersegment sales 228 582 731
Eliminations (228) (582) (731)
-------- -------- --------
Total $ 32,594 $ 21,893 $ 29,446
======== ======== ========
Operating profit (loss)
Residential construction and land development $ 1,699 $ 448 $ 1,130
Commercial real estate broker (112) 169 (72)
Financial services (1,418) (2,067) (186)
Commercial construction (794) (608) (155)
Depreciation, amortization, and impairment (652) (404) (290)
Interest and other (820) (720) (471)
-------- -------- --------
Total $ (2,097) $ (3,182) $ (44)
======== ======== ========
43
OAK RIDGE CAPITAL GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2002, 2001, and 2000
(Dollars in thousands, except per share amounts)
2002 2001 2000
-------- -------- --------
Assets
Residential construction and land development $ 8,791 $ 12,976 $ 12,924
Commercial real estate broker 325 270 367
Financial services 2,361 2,469 1,980
Commercial construction 821 557 1,073
-------- -------- --------
Identifiable assets 12,298 16,272 16,344
Equity investments 31 92 361
Corporate assets 1,920 4,093 4,451
Net assets of discontinued operations -- -- 2,375
-------- -------- --------
Total $ 14,249 $ 20,457 $ 23,531
======== ======== ========
Depreciation, amortization, and impairment
Residential construction and land development $ 69 $ 78 $ 100
Commercial real estate broker 40 58 51
Financial services 227 135 --
Commercial construction 34 23 25
Other 282 110 114
-------- -------- --------
Total $ 652 $ 404 $ 290
======== ======== ========
Capital expenditures
Residential construction and land development $ 54 $ 35 $ 34
Commercial real estate broker 5 10 67
Financial services 25 53 --
Commercial construction 40 36 29
Discontinued operations -- 139 284
Other -- 23 6
-------- -------- --------
Total $ 124 $ 296 $ 420
======== ======== ========
Operating profit consists of total revenues, less costs and expenses, including
interest expense allocated to the financial services segment, but do not include
unallocated interest expense, other income, net equity in earnings of certain
investees, loss on sale of equipment, or income taxes. Identifiable assets are
those assets used in the Company's operations in each area. Other assets include
cash and cash equivalents, available for sale securities, certain investments
accounted for under the equity and cost method, and capitalized debt issuance
costs.
44
OAK RIDGE CAPITAL GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2002, 2001, and 2000
(Dollars in thousands, except per share amounts)
NOTE M - COMMITMENTS AND CONTINGENCIES
In December 2001, the Company was named as a defendant in a lawsuit in the
District Court for Hennepin County, Minnesota. The plaintiffs are certain
institutional and individual customers of Miller & Schroeder Financial, Inc.
(MSF), a broker-dealer. The lawsuit was commenced against MSF, Miller &
Schroeder, Inc. (MSI), the parent corporation of MSF, and certain officers,
directors, and shareholders of MSI who are alleged to be controlling persons of
MSI and MSF. The Company is a shareholder of MSI. James A. Arias, the Company's
former Chief Executive Officer, is also named as a defendant. Mr. Arias served
as a director of MSI during the period covered by the plaintiffs' complaint. The
plaintiffs, on their own behalf and on behalf of a class of investors they seek
to represent, are seeking rescission or compensatory damages with respect to
debentures issued by United Homes, Inc. and purchased by the plaintiffs from or
through MSF. The plaintiffs assert numerous claims against MSF and the other
defendants, including claims based on negligence, negligent misrepresentation,
common law fraud, and violations of the Minnesota Securities Act, the Minnesota
Consumer Fraud Act, the U.S. Securities Act of 1933, and the Minnesota Uniform
Fraudulent Transfer Act. In January 2002, the Company and Mr. Arias filed a
motion to dismiss the lawsuit with respect to them. A hearing on the motion to
dismiss the lawsuit was held on March 2002; the outcome of this motion was a
partial dismissal of claims however, the remaining complaint items are still
under the courts consideration. As of January 10, 2003, the remaining complaint
items have not as yet been dismissed. If they are not dismissed, the Company and
Mr. Arias intend to defend the lawsuit vigorously. At present, the Company is
unable to predict the outcome of this litigation or any exposure to loss the
Company may ultimately incur.
The Company is engaged in other legal proceedings incidental to its normal
business activities. Management of the Company does not believe that the outcome
of each such proceeding or all of them combined will have a material adverse
effect on the Company or its consolidated financial position or operations.
In connection with the Company's acquisition of ESI, the Company entered into
three-year employment agreements with two executive officers. The agreements
provide that each will receive an annual salary of $150 per year. If the Company
terminates either officer without "cause" (as defined in their employment
agreements), or if either officer terminates his employment for "good reason"
(as defined in their employment agreements), then such officer will receive
severance payments equal to his base salary for the remainder of the term of his
employment agreement and will also be entitled to continue his medical insurance
coverage for himself and his family at the Company's expense.
The Company has an employment agreement with its chief financial officer which
provides, among other things, a 15-month term of employment which will
automatically renew unless terminated, annual base salary of $120 plus a
discretionary performance bonus and a percentage incentive compensation (based
on efforts contributed to obtaining gross fees), and annual awards of options to
purchase shares of common stock. Additionally, severance payments of four months
salary and 12 months salary will be made if employment is terminated by the
Company without cause or in connections with a change in control, respectively.
The Company has an employment agreement with its chief operating officer which
continues until December 31, 2004 unless terminated upon death, disability, or
for cause. The agreement provides for a monthly salary of $20, commissions on
sales, and options and warrants to purchase shares of common stock. If the
Company terminates employment without cause or for change of control, the
Company will continue the employee's salary for 12 months.
The Company has a consulting/employment and non-compete agreement with a former
officer through March 31, 2005 that provides for an annual fee of $80. The
Company may terminate the agreement for cause which ceases all payments or
without cause which obligates the Company to continue the payments as provided.
45
OAK RIDGE CAPITAL GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2002, 2001, and 2000
(Dollars in thousands, except per share amounts)
NOTE N - STOCK AND WARRANTS
In December 2000, all outstanding Series A and Series B preferred stock of the
Company was redeemed in a negotiated transaction for 464,804 shares of common
stock. The excess carrying value of the preferred stock, including cumulative
undeclared dividends, over the fair value of the common stock given was
approximately $2,180, which is reflected as a redemption benefit in the
consolidated statement of operations for the year ended September 30, 2001. Each
Series A preferred share was entitled to one shareholder vote and dividends when
declared and paid at a 6% cumulative rate. Each Series B preferred share was
entitled to one shareholder vote and dividends when declared and paid at a 3%
cumulative rate. Series A and B preferred shares were entitled to a liquidation
preference of $10 per share.
The 484,000 shares of Series D preferred stock issued in March 2001 were
converted to 1,452,000 shares of common stock in November 2001 as a result of
shareholder approval. In connection with this conversion, preferred stock
dividends in arrears of $211 at the date of conversion were waived by the
shareholders. The elimination of these dividends, net of dividends incurred, is
reflected as a negative return on preferred stock for determining loss
applicable to common shares in the consolidated statement of operations for the
year ended September 30, 2002. Each share of Series D preferred stock was
entitled to one shareholder vote, a liquidation preference of $4.3125, and cash
dividends at a rate of $.135 per quarter when declared and paid.
As a result of its past public offering of certain debt and equity securities,
850,000 warrants to purchase Company common stock at $8.40 per share were
issued. These warrants became immediately exercisable upon closing of the
offering and were originally scheduled to expire February 1, 2001. In December
2000, the Board of Directors approved a modification to the 690,000 detachable
warrants associated with the debt offering, which extended the expiration to
February 1, 2003. Additionally, in April 2001, the Board of Directors approved a
change in the exercise price of the outstanding warrants of the Company from
$8.40 per share to $4.20 per share. At September 30, 2002, these 690,000
warrants remain outstanding. No modifications were made to the 160,000 warrants
issued to the underwriter; as such, these warrants expired on February 1, 2001.
In connection with a debt financing arrangement in December 2000, the Company
issued 100,000 detachable, unregistered warrants to purchase common stock at
$1.80 per share. These warrants became immediately exercisable upon closing of
the related loan and expire December 14, 2005. The estimated fair value of the
warrants, $185, was recorded as a discount on debt. Amortization of this
discount was charged to operations in 2001 as the loan was repaid in full prior
to September 30, 2001.
During 2000 the Company amended its articles of incorporation to increase the
authorized common shares to 50,000,000.
46
OAK RIDGE CAPITAL GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2002, 2001, and 2000
(Dollars in thousands, except per share amounts)
NOTE O - STOCK OPTIONS
The Company has an employee incentive stock plan for certain key employees.
Options currently outstanding under the plan are exercisable one year from the
date of the grant or upon grant and expire five years after the date of the
grant. These options are exercisable at not less than the market value of the
Company's stock on the date of the grant. Accordingly, no compensation cost has
been recognized for these options. Had compensation cost for these options been
determined based on the fair value of the options at the grant dates consistent
with the method of Statement of Financial Accounting Standards (SFAS) No. 123,
"Accounting for Stock-Based Compensation", the Company's net loss and loss per
common share would have been the following pro forma amounts for the years ended
September 30:
2002 2001 2000
-------- -------- --------
Net loss
As reported $ (2,038) $ (3,767) $ (934)
Pro forma (2,509) (3,860) (1,002)
Loss per share
As reported $ (.41) $ (.53) $ (.36)
Pro forma (.51) (.56) (.38)
The fair value of each option grant is estimated on the date of the grant using
the Black-Scholes options-pricing model with the following weighted-average
assumptions used for grants in 2002, 2001, and 2000, respectively; dividend
yield was estimated to remain at zero for all years; expected volatility of 86%
for 2002, 66% for 2001, and 60% for 2000; risk-free interest rates of 2.95%, 5%,
and 6.7%, respectively; and an expected life of five years for all years.
The Black-Scholes options valuation model was developed for use in estimating
the fair value of traded options which have no vesting restrictions and are
fully transferable. In addition, option valuation models require the input of
highly subjective assumptions, including the expected stock price volatility.
Because the Company's employee stock options have characteristics significantly
different from those of traded options, and because changes in the subjective
input assumptions can materially affect the fair value estimate, in management's
opinion, the existing models do not necessarily provide a reliable single
measure of the fair value of its employee stock options.
47
OAK RIDGE CAPITAL GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2002, 2001, and 2000
(Dollars in thousands, except per share amounts)
A summary of the status of the Company's fixed stock options as of September 30
and changes during the years then ended is presented below:
2002 2001 2000
-------------------- --------------------- ---------------------
Weighted Weighted Weighted
Number average Number average Number average
of exercise of exercise of exercise
Shares price Shares price Shares price
-------- -------- -------- -------- -------- --------
Outstanding at beginning of
year 185,000 $ 3.02 205,000 $ 3.09 195,000 $ 3.21
Granted 445,000 1.58 65,000 3.00 25,000 2.40
Forfeited -- -- (85,000) 3.17 (15,000) 3.45
-------- -------- --------
Outstanding at end of year 630,000 $ 2.01 185,000 $ 3.02 205,000 $ 3.09
======== ======== ========
Options exercisable at year
end 630,000 $ 2.01 120,000 $ 3.04 180,000 $ 3.19
Weighted-average fair value
of options granted during
year $ .98 $ 1.39 $ 1.01
The following information applies to options outstanding and exercisable at
September 30, 2002:
Weighted
average Weighted
Number remaining average
outstanding contractual life exercise price
----------- ---------------- --------------
Range of exercise prices
$1.46 to $1.80 425,000 4.64 $ 1.54
$2.40 to $3.45 205,000 3.43 $ 2.97
During 2001, the Company extended the expiration of certain key employees'
options to February 28, 2006. At the modification date the intrinsic value of
the affected options was nominal and no compensation cost was recognized.
The Company records proceeds from the exercise of stock options, plus income tax
benefits, if any, as additions to common stock.
48
OAK RIDGE CAPITAL GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2002, 2001, and 2000
(Dollars in thousands, except per share amounts)
NOTE P - NET CAPITAL REQUIREMENTS OF SUBSIDIARY
The Company's securities broker-dealer subsidiary is subject to the Securities
and Exchange Commission's (the Commission) Uniform Net Capital Rule (SEC rule
15c3-1), which requires the maintenance of minimum net capital and requires that
the ratio of aggregate indebtedness to net capital, both as defined, shall not
exceed 15 to 1 (and the rule of the "applicable" exchange also provides that
equity capital may not be withdrawn or cash dividends paid if the resulting net
capital ratio would exceed 10 to 1). At September 30, 2002, the subsidiary had
net capital of $361, which was $111 in excess of its required net capital of
$250. The subsidiary's net capital ratio was 0.65 to 1. The subsidiary is exempt
from Rule 15c3-3 of the Commission. Therefore, the subsidiary is not required to
make periodic computations of reserve requirements for the exclusive benefit of
customers.
Currently, the subsidiary does not generate enough revenue to support its cost
structure. Management has made certain changes to improve its operations,
including eliminating certain benefits, hiring more commission-based employees,
and reducing certain commission rates. If this does not result in reaching
positive cash flow from operations and income, Oak Ridge Capital Group, Inc. may
need to provide financial support. In addition, two officers have agreed to
provide funding to the subsidiary in the form of cash advances or subordinated
loans through December 31, 2003, if necessary.
NOTE Q - FINANCIAL INSTRUMENTS
The following table includes various estimated fair value information which
pertains to the Company's financial instruments and does not purport to
represent the aggregate net fair value of the Company. The carrying amounts in
the table below are the amounts at which the financial instruments are reported
in the consolidated financial statements.
Except securities owned, all of the Company's financial instruments are held for
purposes other than trading.
The following methods and assumptions were used to estimate the fair value of
each class of financial instruments for which it is practicable to estimate that
value:
1. Cash, Cash Equivalents, and Restricted Cash - The carrying amount
approximates fair value because of the short maturity and highly liquid
nature of those instruments.
2. Available For Sale Securities and Securities Owned - Fair values of
marketable securities are based on quoted market prices. Fair values of
securities not readily marketable are estimated by management.
3. Fixed Rate Debt - The discounted amount of future cash flows using the
Company's current incremental rate of borrowings for similar liabilities
is used to estimate fair value.
4. Floating Rate Debt - The carrying amount approximates fair value because
interest rates adjust to market rates.
49
OAK RIDGE CAPITAL GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2002, 2001, and 2000
(Dollars in thousands, except per share amounts)
The carrying amounts and estimated fair values of the Company's financial
instruments are as follows:
2002 2001
------------------------- -------------------------
Carrying Estimated Carrying Estimated
Amount Fair value amount fair value
---------- ---------- ---------- ----------
Financial assets
Cash, cash equivalents, and
restricted cash $ 2,214 $ 2,214 $ 4,028 $ 4,028
Available for sale securities 451 451 307 307
Securities owned 206 206 443 443
Financial liabilities
Fixed rate debt (2,732) (2,817) (3,772) (3,869)
Floating rate debt (1,649) (1,649) (4,561) (4,561)
NOTE R - FINANCIAL INSTRUMENTS WITH OFF-BALANCE-SHEET RISK
In the normal course of business, ESI's customer activities involve the
execution, settlement, and financing of various customer securities and options
transactions. These activities may expose ESI to off-balance-sheet risk in the
event the customer is unable to fulfill its contracted obligations. ESI clears
all transactions for its customers on a fully disclosed basis with a clearing
firm that carries all customer accounts and maintains related records.
Nonetheless, ESI is liable to the clearing firm for the transactions of its
customers. These activities may expose ESI to off-balance-sheet risk in the
event the counterparty is unable to fulfill its contractual obligations.
Customer securities transactions are recorded on a settlement-date basis, which
is generally three business days after the trade date. ESI is therefore exposed
to risk of loss on these transactions in the event of the customer's or broker's
inability to meet the terms of their contracts, in which case ESI may have to
purchase or sell financial instruments at prevailing market prices. The impact
of unsettled transactions on securities owned, securities sold but not yet
purchased, and income net of related expenses is not material.
ESI's customer securities activities are transacted on either a cash or margin
basis. ESI seeks to control the risks associated with its customer market
activities by requiring customers to maintain margin collateral in compliance
with regulatory and internal guidelines. ESI monitors required margin levels
daily and, pursuant to such guidelines, requires that customers deposit
additional collateral, or reduce margin positions, when necessary.
ESI carries securities sold but not yet purchased (short sales) at market value
for financial statement purposes. Due to market fluctuations, the amount
necessary to acquire and deliver securities sold but not yet purchased may
become greater than the obligation already recorded on the financial statements.
50
OAK RIDGE CAPITAL GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2002, 2001, and 2000
(Dollars in thousands, except per share amounts)
NOTE S - DISCONTINUED OPERATIONS
On June 2, 2001, the Company sold its residential real estate brokerage
operations in two separate transactions. Such brokerage operations operated
under a franchisee from Prudential Real Estate Affiliates, Inc. in Albuquerque,
New Mexico and Phoenix, Arizona. Net proceeds from the sale totaled $4,101.
The disposal of the Company's residential brokerage operations has been
accounted for as discontinued operations and, accordingly, the related operating
results are segregated and reported as discontinued operations in the
accompanying consolidated statements of operations and cash flows for all
periods presented.
Information relating to the discontinued operations of the Company's residential
brokerage operations for the years ended September 30 is as follows:
2001 2000
-------- --------
Revenues $ 18,905 $ 26,561
======== ========
Loss from operations before income taxes $ (830) $ (1,278)
Income tax benefit (117) (357)
-------- --------
Loss from discontinued operations $ (713) $ (921)
======== ========
Loss per common share from discontinued
operations - basic and diluted $ (.22) $ (.32)
======== ========
Gain on disposal before income taxes $ 678
Income tax expense (815)
--------
Loss on disposal $ (137)
========
Loss per common share on disposal of
discontinued operations - basic and diluted $ (.04)
========
NOTE T - RELATED PARTY TRANSACTIONS
In 2000, the independent directors of the Company approved an arrangement
whereby an executive officer was permitted to build up to ten speculative homes
personally in conjunction with Charter Building & Development Corp. (Charter),
the Company's residential construction subsidiary. Such homes were constructed
and marketed as Charter homes under a fee arrangement providing for Charter to
receive 5% of direct construction costs as a construction management fee and 1%
as warranty reserve. Additionally, the Company retains sales commissions on such
homes. As a result of this arrangement, revenues of $122, $145, and $191 were
recognized by the Company for the years ended September 30, 2002, 2001, and
2000, respectively, which consisted of sales of developed lots and fee revenue.
At September 30, 2001, ESI owed an executive officer $400 under advance and
subordinated loan arrangements for working capital advances. During 2002, the
$400 was repaid and $200 was received on another subordinated loan.
51
OAK RIDGE CAPITAL GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2002, 2001, and 2000
(Dollars in thousands, except per share amounts)
NOTE U - RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
In June 2001, Financial Accounting Standards Board (FASB) issued Statement of
Financial Accounting Standards (SFAS) No. 143, "Accounting for Asset Retirement
Obligations". SFAS No. 143 requires entities to record the fair value of a
liability for an asset retirement obligation in the period in which it is
incurred and a corresponding increase in the carrying amount of the related
long-lived asset. Subsequently, the asset retirement cost should be allocated to
expense using a systematic and rational method. SFAS No. 143 is effective for
fiscal years beginning after June 15, 2002. The Company does not expect SFAS No.
143 to have a material effect on its consolidated financial position or results
of operations.
In August 2001, FASB issued SFAS No. 144 "Accounting for the Impairment or
Disposal of Long-Lived Assets". SFAS No. 144 supersedes SFAS No. 121 "Accounting
for the Impairment of Long-Lived Assets and Long-Lived Assets to Be Disposed Of"
and the accounting and reporting provisions of Accounting Principles Board
Opinion No. 30, "Reporting the Results of Operations-Reporting the Effects of
Disposal of a Segment of a Business, and Extraordinary, Unusual and Infrequently
Occurring Events and Transactions" for the disposal of a segment of a business.
SFAS No. 144 retains the fundamental provisions of SFAS No. 121 and expands the
reporting of discontinued operations to include all components of an entity with
operations that can be distinguished from the rest of the entity and that will
be eliminated from the ongoing operations of the entity in a disposal
transaction. SFAS No. 144 is effective for the Company for fiscal year beginning
October 1, 2002. The Company expects that the sale of Charter (see Note W) will
be reported in accordance with SFAS No. 144.
In April 2002, the FASB issued SFAS No. 145, "Rescission of FASB Statements No.
4, 44, and 64, Amendment of FASB Statement No. 13, and Technical Corrections".
This Statement rescinds SFAS No. 4, "Reporting Gains and Losses from
Extinguishment of Debt", and an amendment of that Statement, SFAS No. 64,
"Extinguishments of Debt Made to Satisfy Sinking-Fund Requirements." This
Statement also rescinds SFAS No. 44, "Accounting for Intangible Assets of Motor
Carriers". This Statement amends SFAS No. 13, "Accounting for Leases", to
eliminate an inconsistency between the required accounting for sale-leaseback
transactions and the required accounting for certain lease modifications that
have economic effects that are similar to sale-leaseback transactions. This
Statement also amends other existing authoritative pronouncements to make
various technical corrections, clarify meanings, or describe their applicability
under changed corrections. The Company does not expect SFAS No. 145 to have a
material effect on its consolidated financial position or results of operations.
In June 2002, FASB issued SFAS No. 146, "Accounting for Costs Associated with
Exit or Disposal Activities". This Statement addresses financial accounting and
reporting for costs associated with exit or disposal activities and nullifies
Emerging Issues Task Force (EITF) Issues No. 94-3 "Liability Recognition for
Certain Employee Termination Benefits and Other Costs to Exit an Activity
(including Certain Costs Incurred in a Restructuring)". The Statement is
effective for exit or disposal activities initiated after December 31, 2002 with
early application encouraged. The Company estimates that the new standard will
not have a material effect on its consolidated financial statements but is still
in the evaluation process.
52
OAK RIDGE CAPITAL GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2002, 2001, and 2000
(Dollars in thousands, except per share amounts)
NOTE V - QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)
The following is a summary of the quarterly results of operations for years
ended September 30, 2002 and 2001. The financial data relating to the
residential brokerage operations is accounted for as discontinued operations for
all periods presented.
2002
-----------------------------------------------------------
Three months ended
December 31 March 31 June 30 September 30
------------ ------------ ------------ ------------
Revenues $ 9,594 $ 10,044 $ 6,310 $ 6,646
Costs and expenses 9,397 9,817 6,852 8,625
------------ ------------ ------------ ------------
Earnings (loss) from continuing
operations before income taxes 197 227 (542) (1,979)
Income tax expense (benefit) 25 (60) 88 (112)
------------ ------------ ------------ ------------
Net earnings (loss) $ 172 $ 287 $ (630) $ (1,867)
============ ============ ============ ============
Basic earnings (loss) per common
share $ .08 $ .06 $ (.13) $ (.39)
============ ============ ============ ============
Diluted earnings (loss) per common
share $ .04 $ .06 $ (.13) $ (.39)
============ ============ ============ ============
Earnings (loss) per share is computed independently for each of the quarters
presented; therefore, the sum of the quarterly earnings (loss) per share does
not necessarily equal the total for the year.
The Company made certain adjustments in the fourth quarter resulting from
changes in estimates that were material to the results of the quarter. These
adjustments, after applicable income tax reductions, increased net loss as
follows:
Additional loss on leased facility (note J) $ 390
Impairment of goodwill 266
Change in estimated profitability of uncompleted contract 300
------
$ 956
======
53
OAK RIDGE CAPITAL GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2002, 2001, and 2000
(Dollars in thousands, except per share amounts)
2001
------------------------------------------------------------
Three months ended
December 31 March 31 June 30 September 30
------------ ------------ ------------ ------------
Revenues $ 5,806 $ 5,142 $ 5,602 $ 5,343
Costs and expenses 5,886 5,354 7,181 6,654
------------ ------------ ------------ ------------
Loss from continuing operations
before income taxes (80) (212) (1,579) (1,311)
Income tax expense (benefit) 299 126 (575)* (115)
------------ ------------ ------------ ------------
Net loss from continuing
operations (379) (338) (1,004) (1,196)
Discontinued operations
Loss from discontinued
operations, net of income taxes (494) (140) (79)
Loss on disposal of discontinued
operations, net of income taxes -- -- (137)*
------------ ------------ ------------ ------------
Net loss $ (873) $ (478) $ (1,220) $ (1,196)
============ ============ ============ ============
Basic and diluted earnings (loss)
per common share $ .44 $ (.16) $ (.38) $ (.35)
============ ============ ============ ============
* The income tax benefit relating to continuing operations and the loss on
disposal of discontinued operations, net of income taxes, differs from
amounts previously reported in the Company's quarterly report because of a
revision of the income tax allocation.
NOTE W - SUBSEQUENT EVENTS
On December 20, 2002, the Company sold its homebuilding subsidiary, Charter
Building and Development Corp. (Charter), to a private investor group which
includes certain current employees and stockholders and former officers of the
Company. Charter was responsible for the construction operations of the
residential construction and land development segment. The Company will continue
its land development operations. The selling price was $3,129, consisting of the
following:
Cash funded by the private investor group $ 800
Cash funded by Charter, including additional draws
on construction and development lines of credit 1,200
Promissory note collateralized by Charter's common stock 1,129
------
$3,129
======
A current stockholder and former officer was responsible for brokering the deal
between the Company and the private investor group and received a $120 fee upon
completion of the sale.
54
OAK RIDGE CAPITAL GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2002, 2001, and 2000
(Dollars in thousands, except per share amounts)
The Company will continue as guarantor of Charter's construction and development
lines of credit. Management believes that no significant gain or loss will
result from the sale. Revenues of Charter were $18,344, $11,546, and $18,431 for
2002, 2001 and 2000, respectively.
Subsequent to September 30, 2002, management began evaluating the Company's
commercial construction segment due to continuing operating losses. As a result
of this evaluation, management has decided to terminate the operations of the
commercial construction segment. Management expects to complete termination
during the second quarter of fiscal 2003, but does not anticipate any
significant costs or losses associated with this termination.
55
ITEM 9: CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
None
PART III
ITEM 10: DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
The following table and Background Experience set forth information with respect
to the Directors and certain Executive Officers. Such information was furnished
to the Company by such persons.
DIRECTOR
NAME AGE POSITIONS WITH COMPANY SINCE
- ---- --- ---------------------- -----
James A. Arias 64 Former President and Chief Executive Officer of 1983
Realco and Director (Resigned 3/31/2002)
Laurence S. Zipkin 62 Director, Chairman of the Board and Vice President 2001
Vice President of Equity Securities Investments,
Inc., a subsidiary of the Company
Edward S. Adams 39 Director, Vice President; Chief Executive Officer 2001
and President of Equity Securities Investments,
Inc., a subsidiary of the Company
Alan R. Woinski 36 Director 2001
Marc H. Kozberg 41 Chief Operating Officer (Effective 10/01/2002) --
James A. Coryea II 51 Chief Financial Officer (Effective 04/01/2002) --
BUSINESS EXPERIENCE
- -------------------
JAMES A. ARIAS served as Realco's former President, Chief Executive Officer and
a Director since its formation in September 1983. On March 31, 2001 he resigned
from both the Board and as the Chief Executive Officer of Realco. Mr. Arias
entered into a three year consulting contract with the company to assist the
Company in this transitional period. From 1975 to September of 1983, he was a
partner of James Bentley & Associates, a financial consulting and real estate
syndication firm in Albuquerque, New Mexico, which was merged into and became a
division of Financial Services Group, Inc., a New Mexico corporation, of which
Mr. Arias was the President and a controlling shareholder. On June 1, 2000, Oak
Ridge Capital Group, Inc. (formerly Realco) acquired Financial Services Group in
an exchange of shares. Since 1984, Mr. Arias has served as Manager of Masters
Coverage Corp., N.M., an insurance broker in Albuquerque, New Mexico, which
during the 1999 fiscal year became a 49.99% subsidiary of Realco. From June 1995
until March 2000, he has served as interim sole director of Arinco Computer
Systems Inc., a publicly traded New Mexico corporation which underwent a reverse
merger transaction in March 2000 and now operates as Change Technology Partners,
Inc., a publicly traded Delaware corporation.
LAURENCE S. ZIPKIN was elected to Oak Ridge Capital Group, Inc. Board in March
2001. Mr. Zipkin has been a shareholder and Vice President of Equity Securities
Investments, Inc. ("Equity") and its predecessor since 1987. Equity, a
Minneapolis based broker dealer and a member of the National Association of
Security Dealers, was acquired by Oak Ridge Capital Group, Inc. (formerly
Realco) in March 2001 and became a wholly-owned subsidiary of Realco. Prior to
joining Equity, Mr. Zipkin was a principal in Flower City, a chain of retail
stores throughout the Midwest. He sold his interest in 1987 when he began his
association with Equity. Mr. Zipkin is also the President
56
and Chairman of the Board of Southwest Capital Corp., a public company. Mr.
Zipkin attended the University of Pennsylvania at the Wharton School of Finance.
EDWARD S. ADAMS was elected to Realco's Board in March 2001. He has been the
Chief Executive Officer, President and Treasurer of Equity since December 1999.
Equity became a wholly-owned subsidiary of Realco in March 2001. Mr. Adams is
also a director of VirtualFund.com, Inc., a Minnesota public company. In
addition to his duties at Equity, Mr. Adams is the Howard E. Buhse Professor of
Finance and Law at the University of Minnesota Law School where he specializes
in commercial, corporate and securities law. Mr. Adams earned his B.A. degree,
magna cum laude, from Knox College, where he was a member of Phi Beta Kappa. In
the fall of 1984, he studied at the University of Freiburg in West Germany as a
European Studies and NATO Conference Scholar. Mr. Adams received his J.D.
degree, cum laude, from the University of Chicago Law School in 1988, where he
was Managing Editor of the University of Chicago Law Review. Following
graduation, Mr. Adams clerked for Judge J. Harvie Wilkinson III of the United
States Court of Appeals for the Fourth Circuit. In 1997, Mr. Adams earned his
M.B.A. with the highest honors from the Carlson School of Management at the
University of Minnesota. He practiced law with Latham & Watkins in Chicago
before joining the University of Minnesota Law School faculty in 1993. Mr. Adams
was a Visiting Professor at Albany Law School of Union University. He is the
author of sixteen books and over thirty law review articles in the areas of
corporate finance, corporations, securities and commercial law.
ALAN R. WOINSKI was elected to Oak Ridge Capital Group, Inc. (formerly Realco)
Board in November 2001. Mr. Woinski is the President, Chief Financial Officer
and a Director of Casino Journal Publishing Group, Inc., a Nevada public
company, since 1998. Prior to that he was the Chief Executive Officer and
Chairman of Gaming Venture Corp., U.S.A., which was acquired by Casino Journal
Publishing Group, Inc. in April 1998. Casino Journal Publishing Group is a
publisher of consumer publications focusing on the gambling industry. Mr.
Woinski also served as the Vice President of A&E Printing Co. from 1986 until
1994 and as the President from 1994 until joining Gaming Venture Corp. in 1995.
>From 1992 until 1995, Mr. Woinski served as the President of Lucky Management
Corp., an investment advisory firm that held interests in a variety of
businesses, including printing and real estate. Mr. Woinski represented Lucky
Management Corp. as advisor to the Monitrend Gaming and Leisure Mutual Fund from
October 1993 until December 1994 and was the Portfolio Manager of the High
Rollers Investment Partnership from December 1992 until October 1993.
MARC H. KOZBERG was appointed to Oak Ridge Capital Group, Inc senior management
as Chief Operating Officer effective October 1, 2002. Mr. Kozberg joined the
firm in 2001 as President of Equity Securities Advisors, Inc., an affiliate of
Equity Securities, Inc., that provides portfolio and investment management
services. Mr. Kozberg is also a director of Cone Mills Corporation. Mr. Kozberg
has worked as a private client portfolio advisor specializing in deep value
investing since 1985, and has been one of the top-producing private clients
asset managers in the Minneapolis/St. Paul area for over 10 years. Most
recently, Mr. Kozberg served as President of Dougherty Value Advisors, General
Partner of the Summit Capital Appreciation Fund L.P., and Senior Vice President
of Investments of Dougherty Summit Securities. Mr. Kozberg has also lead several
proactive investor groups that have acquired significant equity positions in
deep value opportunities (over $200 million dollars invested) including many 5%
or 13-D filings in several high profile publicly traded and private companies
such as Norstan, Inc. (NASDAQ: NRRD), BMC Industries, Inc. (NYSE:BMM), Cone
Mills Corporation (NYSE: COE), Borden Chemicals and Plastics (NYSE: BCU) and
Neovision (private). Mr. Kozberg has also established significant equity
positions for himself and clients in excess of $100 million in companies such as
Laboratory Corporation of America, Humana, Ivax, and LTV. Mr. Kozberg received a
BS degree from the University of Minnesota with a concentration in finance.
JAMES A. CORYEA II was appointed to Oak Ridge Capital Group, Inc. senior
management as Chief Financial Officer effective April 1, 2002. Mr. Coryea has
over 29 years of professional corporate operating and financial experience with
a particular emphasis on distribution and retail entities. Prior to joining the
Company, most recently, Mr. Coryea was Chief Financial Officer of UroMetrics,
Inc., a medical device company specializing in "cutting edge" technology in the
women's health area.. In the 29 years of experience, the last 22 years Mr.
Coryea has held the position of Chief Financial Officer in both public and
private emerging growth companies. Prior to his corporate experience, he spent
six years with the international public accounting firms of Arthur Andersen and
PriceWaterhouseCoopers and on corporate staff of Dayton-Hudson Corporation He
has been the Chief Financial Officer of Brown Photo Company (now Ritz Camera) a
national photographic retailer , Schaak Electronics, a $100 Million + national
consumer electronics chain, BioTrol, a hazardous waste management company and
57
Wizardworks-Braun Media Services, specializing in computer software and related
services. Mr. Coryea received his BS degree, cum laude, in Accounting and
Finance from Siena College located in upstate New York. Mr. Coryea is a
Certified Public Accountant and a member of the American Institute of Certified
Public Accountants.
FAMILY RELATIONSHIPS
- --------------------
None of the Directors or Executive Officers of the Company is related (as first
cousins or closer) by blood, marriage or adoption.
SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
- -------------------------------------------------------
Section 16(a) of the Securities Exchange Act of 1934 requires the Company's
directors and executive officers to file with the Securities and Exchange
Commission reports of ownership and changes in ownership of the Company's Common
Stock, and the Company is required to identify any of those persons who fail to
file such reports on a timely basis. To the Company's knowledge, all such
persons filed in a timely manner all such reports for fiscal year 2002.
ITEM 11: EXECUTIVE COMPENSATION.
The following table sets forth certain information regarding compensation earned
or awarded to the Company's executive officers during the Company's last three
completed fiscal years ended September 30, 2002, 2001 and 2000. No other
executive officer of the Company received compensation in excess of $100,000
during each of the three years ended September 30, 2002.
SUMMARY COMPENSATION TABLE
Long-Term
Compensation
Annual ------------
Compensation No. of Securities
Name and Fiscal --------------------- Underlying All Other
Principal Position Year Salary ($) Bonus ($) Options (#) Compensation ($)(1)
- ------------------ ---- ---------- --------- ----------- -------------------
Laurence S. Zipkin(2) 2002 $ 150,000 $ -- 100,000 $ 512,116
Chairman and Chief 2001 $ 87,500 -- --
Operating Officer
Edward S. Adams(3) 2002 $ 150,000 $ -- 100,000 $ 391,218
Chief Executive Officer 2001 87,500 -- -- --
James A. Arias(4) 2002 $ 55,350 $ -- 25,000 $296,284(4)
Chairman and Chief 2001 107,550 100,000 -- 1,500
Executive Officer and 2000 98,900 4,000 -- 1,500
President
James A. Coryea II 2002 $ 60,000 $ -- 25,000 --
Chief Financial Officer
(1) All other compensation represents brokerage commissions, investment
banking fees, private placement fees and non-accountable expense
allowances earned by the respective individual. The formula for revenue
sharing is based on a pre-determined formula approved by the Board. In
2002 through Equity Securities, a wholly-owned subsidiary of the Company,
$4,975,000 of revenue was received from which the formulas were applied.
58
(2) Mr.Zipkin became Chairman of the Board of Directors and Chief Operating
Officer in January 2002.Effective October 1, 2002Mr. Zipkin resigned his
position as Chief Operating Officer but retained the Chairman of the Board
position; Marc H. Kozberg was named Chief Operating Officer on October 1,
2002.
(3) Mr. Adams became Vice President of Oak Ridge Capital Group, Inc. (formerly
Realco, Inc.) in April 2001 and President and Chief Executive Officer in
April 2002.Also, Denise Adams, the wife of Edward Adams provided marketing
and internet consulting services to Oak Ridge Capital Group in 2002. She
has been paid $26,500 during the fiscal years ended 2002.None of this
compensation paid or furnished to Mrs. Adams is included in the totals of
the compensation paid to Mr. Adams.
(4) Mr. Arias resigned as a Director, President and Chief Executive Officer of
Oak Ridge Capital Group, Inc on March 31, 2002. Prior to his resignation,
Oak Ridge Capital Group, Inc. (formerly Realco, Inc.)paid Mr. Arias a
monthly base salary which increased annually at the rate of 6% per annum
as a cost of living adjustment. In addition, Mr. Arias was to be paid an
allowable bonus equal to 10% of pre-tax earnings in excess of $400,000
during any fiscal year. Mr. Arias received a non-cash bonus of $100,000 in
2000 which was accrued by Financial Services Group, Inc. prior to its
acquisition by Realco in 2000. Such accrued bonus was satisfied with
certain assets of Financial Services Group, Inc. which existed at the date
of acquisition. Mr. Arias entered into a three year consulting contract
with the Company effective April 1, 2002 whereby Mr. Arias is to receive
$120,000 per year to consult with the Company on various operational
items. The contract also provides that the life insurance carried by the
Company continue at the Company's expense until the contract is completed
at which time the insurance contract will be assigned to Mr. Arias or his
benefactors. In fiscal year ending September 30, 2002, Mr. Arias received
$169,300 on this contract. Subsequent to year-end September 30, 2002, Mr.
Arias under a separate brokerage contract received $ 126,984 as a brokers
commission for the sale of the Company's wholly-owned homebuilding
subsidiary, Charter Building and Development Corp; the subsidiarywas sold
in a stock sale on December 20, 2002.
OPTION GRANTS
- -------------
During 2002 the Company granted certain of its directors and executive officers
options under its Key Employee Incentive Stock Option Plan as follows:
OPTION GRANTS IN FISCAL 2002
Number of Percent of Total
Securities Options Granted
Underlying Options Employees Exercise Price Expiration
Name Granted (#)(1) In 2002 Per Share ($) Date Grant Date Present Value(2)
- ---- ------------------ ----------- ------------- --------- ---------------------------
Laurence S. Zipkin 100,000 32.2% $1.46 06-07-12 $69,500
Edward S. Adams 100,000 32.2% $1.46 06-07-12 $69,500
James A. Coryea II 25,000 8.1% $1.46 06-07-12 $17,400
- --------------
(1) The options are fully vested at the date of grant.
(2) The fair value of the option grant is estimated on the date of the grant
using the Black-Scholes option pricing model, with the following weighted
average assumptions: dividend yield rate of zero, expected volatility of
66%, risk free interest rate of 5% and an expected life of five years.
59
OPTION EXERCISES AND YEAR END VALUES
- ------------------------------------
The following table summarizes the exercises of options by the Named Executives
in fiscal 2002 and the value of options held at September 30, 2002 by the Named
Executives. There were no options exercised by the Named Executives during the
fiscal year ended September 30, 2002.
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR
AND YEAR-END OPTION VALUES
Number of Securities
Underlying Value of Unexercised
Unexercised Options at In-the-Money Options at
September 30, 2002 (1) September 30, 2001 (1)
Shares Acquired Value ----------------------------- ----------------------------
Name On Exercise (#) Realized ($) Exercisable Unexercisable Exercisable Unexercisable
- ---- --------------- ------------ ----------- --------------- ----------- --------------
Laurence S. Zipkin -- -- 100,000 -- -- --
Edward S. Adams -- -- 100,000 -- -- --
James A. Arias -- -- 25,000 -- -- --
James A. Coryea II -- -- 25,000 -- -- --
- ------------
(1) At September 30, 2002, none of the options were in the money.
EMPLOYMENT AGREEMENTS
- ---------------------
In connection with the Company's acquisition of ESI, the Company entered into
three-year employment agreements with each of Messrs. Zipkin and Adams. The
agreements provide that each will receive an annual salary of $150,000 per year.
If the Company terminates either Mr. Zipkin or Mr. Adams without "cause" (as
defined in their employment agreements), or if either Mr. Zipkin or Mr. Adams
terminates his employment for "good reason" (as defined in their employment
agreements), then such person shall receive severance payments equal to his base
salary for the remainder of the term of his employment agreement and will also
be entitled to continue his medical insurance coverage for himself and his
family at the Company's expense.
Prior to his resignation, the Company had an employment agreement with Mr. Arias
which provided that Mr. Arias receive a monthly base salary which increased
annually at the rate of 6% per annum as a cost of living adjustment. In
addition, Mr. Arias was to be paid an allowable bonus equal to 10% of pre-tax
earnings in excess of $400,000 during any fiscal year. After his resignation
effective April 1, 2002, Mr. Arias entered into a three year consulting contract
with the Company whereby Mr. Arias is to receive $120,000 per year to consult
with the Company on various operational items. The contract also provides that
the life insurance carried by the Company continue at the Company's expense
until the contract is completed at which time the insurance contract will be
assigned to Mr. Arias or his benefactors.
The Company has an employment agreement with Mr. Coryea which provides, among
other things, a 15-month term of employment which will automatically renew
unless terminated, annual base salary of $120 plus a discretionary performance
bonus and a percentage incentive compensation (based on efforts contributed to
obtaining gross fees), and annual awards of options to purchase shares of common
stock.Additionally, severance payments of four months salary and 12 months
salary will be made if employment is terminated by the Company without cause or
in connection with a change in control, respectively.
The Company has an employment agreement with Mr. Kozberg which continues until
December 31, 2004 unless terminated upon death, disability, or for cause.The
agreement provides for a monthly salary of $20,000, commissions on sales, and
options and warrants to purchase shares of common stock.If the Company
terminates employment without cause or for change of control, the Company will
continue the employee's salary for 12 months.
60
COMPENSATION OF DIRECTORS
- -------------------------
All Non-Officer Directors are paid a fee of $1,000 per Board meeting and the
Company reimburses each Director for all out of pocket expenses incurred to
attend meetings. Also, the Directors are granted options to purchase Company
common stock from time to time under its 1997 Key Employee Incentive Stock
Option Plan. In 2002, the Company incurred $3,000 in Director Fees and granted
stock options for an aggregate of 35,000 shares to its non-officer directors.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
- -----------------------------------------------------------
Currently, the entire Board of Directors serves as the Compensation Committee.
There are no interlocking relationships between our compensation committee or
executive officers and the board of directors, compensation committee or the
executive officers of any other Company. Executive officers of the Company who
serves on the Compensation Committee abstain from voting on compensation matters
affecting his compensation.
REPORT OF THE BOARD OF DIRECTORS
ON EXECUTIVE COMPENSATION
The Board of Directors administers the Company's executive compensation program
by reviewing and approving the base salaries, bonuses, stock options and other
compensation of the executive officers of the Company. The Board of Directors
also prescribes, amends, and rescinds rules relating to the Company's 1997
Employee Incentive Stock Plan (the "Plan"), grants options and other awards
under the Plan and interprets the Plan.
The Company's executive compensation policies are designed to attract and retain
executives capable of leading the Company in the real estate and financial
services marketplaces and to motivate such executives to maximize profitability
and shareholder value. The Board of Directors has designed the Company's
Executive Performance Plan with three principal components to achieve this
objective: base salary; annual cash incentives; and long-term incentive
compensation in the form of stock options. Stock options are typically awarded
by the Board of Directors based on each officer's individual performance and
achievements, and the recommendations of management. In fiscal 2002, executive
officers were eligible to receive grants of stock options under the Plan.
From 1983 to his resignation in 2002, James A. Arias, as Chief Executive
Officer, had been provided with an annual increase in his base salary of 6% per
annum as a cost of living adjustment. During fiscal 2002, Mr. Arias received a
salary of $55,350. Mr. Arias did not receive a cash bonus for fiscal 2002.In
connection with the Company's acquisition of ESI, the Company entered into a
three-year employment agreement with Edward S. Adams on February 28, 2001.During
fiscal 2002, Mr.Adams received a base salary of $150,000 to serve as Chief
Executive Officer.Mr. Adams did not receive a cash bonus for fiscal 2002.
The foregoing report shall not be deemed incorporated by reference by any
general statement incorporating by reference this proxy statement into any
filing under the Securities Act of 1933 (the "1933 Act") or the Securities
Exchange Act of 1934 (the "1934 Act"), except to the extent that the Company
specifically incorporates this information by reference, and shall not otherwise
be deemed filed under the 1933 Act or the 1934 Act.
THE BOARD OF DIRECTORS
Laurence S. Zipkin
Edward S. Adams
Alan R. Woinski
61
PRICE PERFORMANCE GRAPH
- -----------------------
The following graph compares the total cumulative return of the Company's Common
Stock with the S&P Small Cap 600 Index, the S&P Services (Commercial and
Consumer) Index and the S&P Homebuilding Index.The total cumulative return for
each period is based on the investment of $100 on September 30, 1997, assuming
compounded daily returns and the reinvestment of all dividends.
S&P Services
Company S&P (Commercial S&P
Common Small Cap 600 and Consumer) Homebuilding
Stock Index Index Index
----- ----- ----- -----
September 30, 1997 100 100 100 100
September 30, 1998 54 81 63 112
September 30, 1999 64 96 69 94
September 30, 2000 43 119 57 118
September 30, 2001 55 106 71 121
September 30, 2002 7 104 69 176
62
COMPARISON OF 5 YEAR CUMULATIVE TOTAL RETURN*
AMONG OAK RIDGE CAPITAL GROUP, INC., THE S & P SMALLCAP 600 INDEX,
THE S & P HOMEBUILDING INDEX
AND S & P DIVERSIFIED COMMERCIAL SERVICES INDEX
[PLOT POINTS GRAPH]
CUMULATIVE TOTAL RETURN
------------------------------------------------------------------
9/97 9/98 9/99 9/00 9/01 9/02
OAK RIDGE CAPITAL GROUP, INC. 100.00 54.21 63.55 43.45 55.33 7.48
S & P SMALLCAP 600 100.00 81.33 95.59 118.70 106.10 104.20
S & P HOMEBUILDING 100.00 112.05 94.08 118.46 120.55 175.80
S & P DIVERSIFIED COMMERCIAL SERVICES 100.00 62.72 69.47 56.62 71.08 69.23
* $100 INVESTED ON 9/30/97 IN STOCK OR INDEX-INCLUDING REINVESTMENT OF
DIVIDENDS. FISCAL YEAR ENDING SEPTEMBER 30.
COPYRIGHT (C), 2002 STANDARD & POOR'S, A DIVISION OF THE MCGRAW-HILL COMPANIES,
INC. ALL RIGHTS RESERVED. www.researchdatagroup.com/S&P.htm
63
ITEM 12: SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
The following table sets forth certain information regarding beneficial
ownership ofOak Ridge Capital Group, Inc. Voting Shares as of January 13, 2003
by (a) each person known to Oak Ridge Capital Group, Inc. to beneficially own
more than five percent (5%) of the Voting Shares, (b) each director of Oak Ridge
Capital Group, Inc., (c) each named executive officer in Item 11 (d) all
directors, nominees and executive officers of Oak Ridge Capital Group, Inc. as a
group.
Except as otherwise indicated below, to the knowledge of the Company, each
shareholder has sole voting and investment power over the shares beneficially
owned, except to the extent authority is shared by spouses under applicable law.
NUMBER OF SHARES
BENEFICIALLY PERCENT OF
NAME AND ADDRESS OWNED (1) VOTING SHARES
- ---------------- --------- -------------
Laurence S. Zipkin 1,335,222 26.5%
701 Xenia Ave. S, Suite 130
Minneapolis, Minnesota 55416
Edward S. Adams 556,428 11.3%
701 Xenia Ave. S, Suite 130
Minneapolis, Minnesota 55416
Bill E. Hooten (2) 429,704 8.9%
1650 University Blvd. NE, Suite 5-100
Albuquerque, New Mexico 87102
Joseph Zerger Revocable Trust 340,000 7.0%
1550 East Oakland Blvd.
Fort Lauderdale, FL 33334
James A. Arias 239,200 4.9%
Alan R. Woinski 10,000 *
James A. Coryea II 25,000 *
All directors and executive officers as a group (5 persons) 2,076,650 39%
- --------------
* Less than 1%
(1) Includes the following number of shares that could be purchased under
stock options or warrants exercisable within 60 days of January 13,
2003:Mr. Zipkin, 195,000 shares; Mr. Adams, 100,000 shares; Mr. Arias,
25,000 shares; Mr. Woinski, 10,000 shares; Mr. Coryea, 25,000 shares; and
all directors, nominees and executive officers as a group, 480,000 shares.
(2) Includes 337,871 shares held in a revocable trust of which he and his wife
are trustees and 91,833 shares held in an individual retirement account.
64
ITEM 13: CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
In 2000, the Independent Directors of the Company approved an arrangement
whereby Mr. Bill E. Hooten was permitted to build up to ten speculative homes
personally in conjunction with Charter, the Company's residential construction
subsidiary.Such homes were constructed and marketed as Charter homes under a fee
arrangement providing for Charter to receive 5% of direct construction costs as
a construction management fee and 1% as warranty reserve.Additionally, the
Company retains sales commissions on such homes.
While the Company foregoes its normal gross profit on homes under this
arrangement, as offset by the aforementioned fees, this program was deemed to be
in the Company's best interests due to existing debt reduction requirements on
certain lot inventory and lot purchase commitments, which may not be met based
upon the Company's current levels of construction activity.This arrangement
allows the Company to better meet such takedown requirements without assuming
the additional risk associated with committing additional working capital to
speculative homes.As a result of this arrangement, revenues of $122, $145 and
$191 were recognized by the Company for the years ended September 30, 2002 and
2001 and 2000, respectively, which consisted of sales of developed lots and fees
revenue.
ESI owes Laurence S. Zipkin $200,000 under a subordinated loan agreement for
working capital advances that bears interest at 8% and is due November 30,
2002.As of January 13, 2003 this note has been paid back to Mr. Zipkin
withaccrued interest.
Any future transactions with officers, directors or 5% beneficial shareholders
are intended to be on terms no less favorable to the Company or its affiliates
than could be obtained from unaffiliated third parties and will be approved by a
majority of the independent outside members of the Company's Board of Directors
who do not have an interest in the transaction.
ITEM 14: CONTROLS AND PROCEDURES
(a) Evaluation of disclosure controls and procedures. The term "disclosure
controls and procedures" is defined in Rules 13a-14(c) and 15d-14(c) of
the Securities Exchange Act of 1934 ("Exchange Act"). These rules refer to
the controls and other procedures of a company that are designed to ensure
that information required to be disclosed by the company in the reports
that it files under the Exchange Act is recorded, processed, summarized
and reported within the required time periods.The Company's Chief
Executive Officer and Chief Financial Officer have evaluated the
effectiveness of the Company's disclosure controls and procedures as of a
date within 90 days before the filing of this annual report (the
"Evaluation Date"), and have concluded that, as of the Evaluation Date,
such controls and procedures were effective at ensuring that required
information will be disclosed in the Company's reports filed under the
Exchange Act.
(b) Changes in internal controls. There were no significant changes in the
Company's internal controls or in other factors that could significantly
affect these controls subsequent to the Evaluation Date.
65
PART IV
ITEM 15: EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K.
(a) Documents filed as part of this report:
(1) The financial statements filed as part of this report are included
in Item 8.
(2) The financial statement schedule required to be filed as part of
this report consists of Schedule II Valuation and Qualifying
Accounts appearing at the end of this Item.
(3) The following exhibits are filed as part of or incorporated by
reference into this report:
EXHIBIT
NUMBER
------
2.1 Agreement and Plan of Merger dated as of February 28, 2001, among
Equity Securities Investments, Inc., Realco, Inc. and ESI
Acquisition Sub, Inc. (incorporated by reference to Exhibit 2.1 to
the Company's Form 8K/A filed on March 16, 2001)
3.1 Articles of Incorporation, as amended (incorporated by reference to
Exhibits 3.1, 3.2 and 3.3 to the Company's Registration Statement on
Form S-B2 (Registration Statement No. 33-98740-D))
3.2 Certificate of Designation of Relative Rights and Preferences of
Series "D" Preferred Shares of Realco, Inc. (incorporated by
reference to Exhibit 4.1 to the Company's Form 8K/A filed on March
16, 2001)
3.3 Bylaws, as amended (incorporated by reference to Exhibit 3.4 to the
Company's Registration Statement on Form S-B2 (Registration
Statement No. 33-98740-D))
4.1 Form of Warrant Agreement (incorporated by reference to Exhibit 4.5
to the Company's Registration Statement on Form S-B2 (Registration
Statement No. 33-98740-D))
4.2 Form of Indenture associated with 9.5% Subordinated Promissory Notes
Due December 15, 2003 (incorporated by reference to Exhibit 4.6 to
the Company's Registration Statement on Form S-B2 (Registration
Statement No. 33-98740-D))
10.1* Realco, Inc. 1997 Employee Incentive Stock Plan, as amended
(incorporated by reference to Exhibit 99 to the Company's Schedule
14A, Preliminary Proxy Materials, filed on August 13, 2001)
10.2* Employment Agreement dated February 28, 2001, between the Company
and Laurence S. Zipkin (incorporated by reference to Exhibit 10.2 to
the Company's Annual Report on Form 10-K for the year ended
September 30, 2001)
10.3* Employment Agreement dated February 28, 2001, between the Company
and Edward S. Adams (incorporated by reference to Exhibit 10.2 to
the Company's Annual Report on Form 10-K for the year ended
September 30, 2001)
10.4* Employment Letter dated April 1, 2002 between Realco, Inc. and
James A. Coryea II (filed herewith)
10.5* Employment Agreement dated July 18, 2001 by and among Equity
Securities Investments, Inc., Realco, Inc. and Marc H. Kozberg (with
amendment entered into as of December 10, 2001) (filed herewith)
66
21.1 Subsidiaries of the Registrant (incorporated by reference to Exhibit
21.1 to the Company's Annual Report on Form 10-K for the year ended
September 30, 2001)
99.1 Certification Pursuant to 18 U.S.C., Section 1350 as Adopted
Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 by the
Chief Executive Officer (filed herewith)
99.2 Certification Pursuant to 18 U.S.C., Section 1350 as Adopted
Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 by the
Chief Financial Officer (filed herewith)
* Management contract or compensatory plan.
(b) Reports on Form 8-K:
NONE were filed during the quarter ending September 30, 2002.
(c) The exhibits listed under Item (15)(a)(3) are filed herewith or
incorporated by reference.
(d) Financial statement schedules:
(1) The financial statement schedule listed under Item 15(a)(2) is
filed herewith.
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS:
Balance At Charged to Deductions Balance At
Beginning of Costs And - describe End of
Period Expenses (1) Period
------------ ------------ ------------ ------------
(Dollars in thousands)
Year ended September 30, 2002:
Allowance for doubtful accounts $138 $ 66 $190 $ 14
Year ended September 30, 2001:
Allowance for doubtful accounts $ 63 $177 $102 $ 138
Construction inventory impairment 65 -- 65 --
Year ending September 30, 2000
Construction inventory impairment $180 $ -- $115 $ 65
Allowance for doubtful accounts 25 46 8 63
(1) Uncollectible Accounts written off, net of Recoveries
67
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
OAK RIDGE CAPITAL GROUP, INC.
Date: January 14, 2003 By: /s/ EDWARD S. ADAMS
-----------------------------------------
Edward S. Adams, Chief Executive Officer
(Principal Executive Officer)
Date: January 14, 2003 By: /s/ JAMES A. CORYEA II
-----------------------------------------
James A. Coryea II, Chief Financial Officer
(Principal Financial Officer)
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons in behalf of the Registrant and
in the capacities and on the dates indicated.
Signature Title Date
- --------- ----- ----
/s/ LAURENCE S. ZIPKIN Chairman of the Board January 14, 2003
- ---------------------------
Laurence S. Zipkin
/s/ EDWARD S. ADAMS Chief Executive Officer January 14, 2003
- --------------------------- and Director
Edward S. Adams
/s/ JAMES A. CORYEA II Chief Financial Officer January 14, 2003
- ---------------------------
James A. Coryea II
/s/ MARC H. KOZBERG Chief Operating Officer January 14, 2003
- ---------------------------
Marc H. Kozberg
/s/ ALAN R. WOINSKI Director January 14, 2003
- ---------------------------
Alan R. Woinski
68
CERTIFICATION UNDER SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
I, Edward S. Adams, the Chief Executive Officer, hereby certify that:
1. I have reviewed this annual report on Form 10-K of Oak Ridge Capital
Group, Inc.;
2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this annual report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of
the registrant as of, and for, the periods presented in this annual
report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and
have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within
those entities, particularly during the period in which this annual
report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date
of this annual report (the "Evaluation Date"); and
c) presented in this annual report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent functions):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal controls; and
6. The registrant's other certifying officers and I have indicated in this
annual report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and
material weaknesses.
/s/ Edward S. Adams
-----------------------------------------
Edward S. Adams
Chief Executive Officer
Dated: January 14, 2003
69
CERTIFICATION UNDER SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
I, James A. Coryea II, the Chief Financial Officer, hereby certify that:
1. I have reviewed this annual report on Form 10-K of Oak Ridge Capital
Group, Inc.;
2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this annual report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of
the registrant as of, and for, the periods presented in this annual
report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and
have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within
those entities, particularly during the period in which this annual
report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date
of this annual report (the "Evaluation Date"); and
c) presented in this annual report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent functions):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal controls; and
6. The registrant's other certifying officers and I have indicated in this
annual report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and
material weaknesses.
/s/ James A. Coryea II
-----------------------------------------------
James A. Coryea II
Chief Financial Officer
Dated: January 14, 2003
70