U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2003
[ ] 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.
- --------------------------------------------------------------------------------
(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, MN 55416
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(Address of principal executive offices) (Zip code)
(763) 923-2266
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(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by the 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 whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act). Yes [ ] No [X]
As of May 30, 2003 the Company had 4,842,323 shares outstanding of its no par
value common stock, the Company's only class of common stock.
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
OAK RIDGE CAPITAL GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands)
March 31,
2003 September 30,
(unaudited) 2002
-------- --------
ASSETS
Cash and cash equivalents $ 1,831 $ 1,873
Restricted cash -- 341
Available for sale securities 1,104 451
Securities owned 19 206
Accounts and notes receivable, net 1,531 2,099
Costs and estimated earnings in excess of
billings on uncompleted contracts -- 38
Inventories 1,366 5,848
Property & equipment - at cost, net 193 535
Investments - equity method 126 728
Goodwill 1,137 1,352
Other assets 651 778
-------- --------
$ 7,958 $ 14,249
======== ========
LIABILITIES
Notes payable $ 1,904 $ 2,736
Construction advances and notes payable,
collateralized by inventories 451 1,645
Accounts payable and accrued liabilities 1,446 3,080
Billings in excess of cost and estimated
earnings on uncompleted contracts 196 204
Escrow funds held for others -- 341
-------- --------
3,997 8,006
STOCKHOLDERS' EQUITY
Preferred stock - authorized, 500,000 shares
Series D - issued and outstanding, none -- --
Common stock - no par value; authorized,
50,000,000 shares; issued 4,843,023 shares 13,165 13,165
Accumulated deficit (9,318) (7,147)
Accumulated other comprehensive income 116 227
-------- --------
3,963 6,245
Less common stock held in treasury - at cost,
700 shares 2 2
-------- --------
3,961 6,243
-------- --------
$ 7,958 $ 14,249
======== ========
See accompanying notes.
2
OAK RIDGE CAPITAL GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
Three months ended March 31,
(Dollars in thousands, except per share amounts)
(Unaudited)
2003 2002
------- -------
REVENUES
Securities brokerage commissions and fees $ 739 $ 813
Sales of developed lots 539 664
Equity in net earnings of investees (2) 30
Interest and other, net 139 108
------- -------
1,415 1,615
COSTS AND EXPENSES
Cost of securities brokerage revenue 784 816
Cost of developed lots sold 433 496
Selling, general, administrative and other 690 614
Depreciation and amortization 71 8
Interest 115 78
Loss on sale of note receivable 362 --
------- -------
2,455 2,012
------- -------
Loss from continuing operations before income taxes (1,040) (397)
INCOME TAX EXPENSE (BENEFIT) 68 (60)
------- -------
LOSS FROM CONTINUING OPERATIONS (1,108) (337)
DISCONTINUED OPERATIONS
Earnings (loss) from discontinued operations, net of income taxes (274) 624
Loss on disposal of discontinued operations, net of income taxes (160) --
------- -------
NET EARNINGS (LOSS) $(1,542) $ 287
======= =======
EARNINGS (LOSS) PER COMMON SHARE
Loss per common share from continuing operations - basic $ (.23) $ (.07)
======= =======
Net earnings (loss) per common share - basic $ (.32) $ .06
======= =======
Loss per common share from continuing operations - diluted $ (.23) $ (.07)
======= =======
Net earnings (loss) per common share - diluted $ (.32) $ .06
======= =======
See accompanying notes.
3
OAK RIDGE CAPITAL GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
Six months ended March 31, 2003
(Dollars in thousands, except per share amounts)
(Unaudited)
2003 2002
------- -------
REVENUES
Securities brokerage commissions and fees $ 1,400 $ 2,592
Sales of developed lots 1,224 1,362
Equity in net earnings of investees 43 55
Interest and other, net 736 248
------- -------
3,403 4,257
COSTS AND EXPENSES
Cost of securities brokerage revenue 1,529 2,306
Cost of developed lots sold 909 1,033
Selling, general, administrative and other 1,393 1,330
Depreciation and amortization 141 99
Interest 241 190
Loss on sale of note receivable 362 --
------- -------
4,575 4,958
------- -------
Loss from continuing operations before income taxes (1,172) (701)
INCOME TAX EXPENSE (BENEFIT) 75 (35)
------- -------
LOSS FROM CONTINUING OPERATIONS (1,247) (666)
DISCONTINUED OPERATIONS
Earnings (loss) from discontinued operations, net of income taxes (723) 1,125
Loss on disposal of discontinued operations, net of income taxes (201) --
------- -------
NET EARNINGS (LOSS) (2,171) 459
PREFERRED STOCK DIVIDEND REQUIREMENT
(NEGATIVE RETURN) - NET -- (154)
------- -------
NET EARNINGS (LOSS) APPLICABLE TO COMMON SHARES $(2,171) $ 613
======= =======
EARNINGS (LOSS) PER COMMON SHARE
Loss per common share from continuing operations - basic $ (.26) $ (.12)
======= =======
Net earnings (loss) per common share - basic $ (.45) $ .14
======= =======
Loss per common share from continuing operations - diluted $ (.26) $ (.14)
======= =======
Net earnings (loss) per common share - diluted $ (.45) $ .09
======= =======
See accompanying notes.
4
OAK RIDGE CAPITAL GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Six months ended March 31
(Dollars in thousands)
(Unaudited)
2003 2002
------- -------
CASH FLOWS FROM OPERATING ACTIVITIES
Net earnings (loss) $(2,171) $ 459
ADJUSTMENTS TO RECONCILE NET EARNINGS (LOSS) TO NET CASH PROVIDED BY
(USED IN) OPERATIONS-
Depreciation and amortization 175 173
Accretion of discount on notes payable 9 --
Net distributions in excess of earnings of investees (earnings in
excess of distributions) 118 (246)
Provision for deferred income taxes 75 (35)
Realized gain on available for sale securities (92) (1)
Deferred gain (32) --
Loss on sale of businesses 202 --
Loss on sale of note receivable 362 --
CHANGE IN OPERATING ASSETS AND LIABILITIES, NET OF EFFECTS FROM
BUSINESS SOLD-
Increase (decrease) in restricted cash (20) 266
Decrease in securities owned 187 296
Increase in receivables (218) (1,049)
Decrease in inventories 904 3,691
Change in net billings related to costs and estimated earnings on
uncompleted contracts 30 (251)
(Increase) decrease in other assets (58) 73
Decrease (increase) in escrow funds held for others 20 (266)
Decrease in accounts payable and accrued liabilities (615) (520)
------- -------
Net cash provided by (used in) operating activities (1,124) 2,590
CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of property and equipment (12) (90)
Proceeds from sale of note receivable 800 --
Purchase of available for sale securities (5,869) --
Proceeds from available for sale securities 5,122 15
Net proceeds from sale of businesses 1,895 --
------- -------
Net cash provided by (used in) investing activities 1,936 (75)
CASH FLOWS FROM FINANCING ACTIVITIES
Construction advances and notes, net (13) (2,637)
Proceeds from borrowings under revolving and long-term debt 162 --
Payments of long term debt (1,003) (814)
------- -------
Net cash used in financing activities (854) (3,451)
------- -------
NET DECREASE IN CASH AND CASH EQUIVALENTS (42) (936)
Cash and cash equivalents at beginning of period 1,873 3,547
------- -------
Cash and cash equivalents at end of period $ 1,831 $ 2,611
======= =======
See accompanying notes.
5
OAK RIDGE CAPITAL GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2003
NOTE A - BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements of Oak Ridge
Capital Group, Inc. (formerly known as Realco, Inc.) and its wholly owned
subsidiaries (the "Company") have been prepared in accordance with accounting
principles generally accepted in the United States of America for interim
financial information and with the instructions of Form 10-Q and Article 10 of
Regulation S-X. Accordingly, they do not include all of the information and
footnotes required by accounting principles generally accepted in the United
States of America for complete financial statements. In the opinion of
management, all adjustments (consisting of normal recurring accruals) considered
necessary for a fair presentation have been included. Operating results for the
periods ended March 31, 2003 are not necessarily indicative of the results that
may be expected for the fiscal year ending September 30, 2003. For further
information refer to the financial statements and footnotes included in the
Company's annual report on Form 10-K for the year ended September 30, 2002.
THE DIRECTION OF THE COMPANY
On June 10, 2002, the Company changed its state of incorporation from New Mexico
to Minnesota and changed its name from Realco, Inc. to Oak Ridge Capital Group,
Inc., pursuant to a re-incorporation proposal approved by the Company's
shareholders on June 7, 2002. On January 13, 2003, the Board of Directors
appointed Marc H. Kozberg Chief Executive Officer to explore and evaluate
alternatives which have the greatest potential to enhance shareholder value. The
initial plan is to redirect the company's assets currently employed in real
estate and construction to a full service financial services firm.
The Plan calls for the liquidation of all under utilized, non-performing assets
to redeploy the proceeds to fund the growth of the financial services operation.
In light of the redirection, Equity Securities, Inc., the wholly owned
securities brokerage subsidiary of the Company, formally changed its name
(effective April 1, 2003) to Oak Ridge Financial Services, Inc. The newly
renamed subsidiary will become the cornerstone to carryforward the redirected
emphasis of the Company; its initial objective is to continue to recruit both
securities brokers and investment banking executives to carryforward the long
range strategy to become a full service brokerage firm and investment banking
company.
SALES OF ASSETS AND SUBSIDIARIES
HOMEBUILDING SUBSIDIARY SOLD
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 selling price was
$3,095,000 which was later amended by $317,000 to reflect the subsidiaries 50%
interest in a land joint venture. The revised purchase price was $3,412,000 of
which $2,250,000 was in cash and the balance in a seven (7) year note receivable
for $1,162,000. The financial data related to these operations is accounted for
as discontinued operations for all periods presented.
On March 21, 2003 the note receivable was sold without warranty and without
recourse for $800,000. Management approved the sale to enhance the Company's
cash position in order to meet debt service requirements later in the year. The
Company recognized a $362,000 loss on the sale of the note.
6
OAK RIDGE CAPITAL GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
March 31, 2003
COMMERCIAL CONSTRUCTION OPERATIONS SOLD AND TERMINATED
In October 2002, management began evaluating the viability of the commercial
construction subsidiary due to continuing operating losses. As a result of this
evaluation, management decided to terminate the operations of the commercial
construction segment. Management expected the termination of operations to be
substantially complete by the end of the second quarter of fiscal 2003; the
termination is substantially complete.
As part of the termination process, on March 1, 2003, the Company sold the
cabinet shop division to a private investor group which includes certain current
employees and stockholders of the Company. The selling price was $129,000 plus
the assumption of certain liabilities and a building lease. The Company recorded
a loss on the sale of $101,000. The financial data related to these operations
is accounted for as discontinued operations for all periods presented.
COMMERCIAL REAL ESTATE BROKERAGE SOLD
On January 1, 2003, the Company sold its commercial real estate brokerage
operation, First Commercial Real Estate Services, Inc. (FCRES) to a private
investor group which includes certain current employees and stockholders and a
former officer of the Company. The selling price was $160,000 of which $115,000
was cash funded from the private investor group and a $45,000 note
collateralized by FCRES common stock. A $ 26,000 loss on the sale was recorded.
The financial data related to this operation is accounted for as discontinued
operations for all periods presented.
MORTGAGE BANKING JOINT VENTURE
On March 10, 2003, the Company liquidated its 50% interest in a joint venture
residential home mortgage company. Upon liquidation the Company received
$125,000 in cash; a $42,000 receivable still remains. No gain or loss on
liquidation was recorded.
7
OAK RIDGE CAPITAL GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
March 31, 2003
1. Principles of Consolidation:
The consolidated financial statements include the accounts of Oak Ridge
Financial Group, Inc. and its wholly owned subsidiaries. All material
intercompany accounts and transactions have been eliminated in consolidation.
2. Income Taxes:
The Company's effective income tax rate for the periods ended March 31, 2003 and
2002 differs from the federal statutory rate due to changes in the valuation
allowance for deferred tax assets.
3. Earnings (Loss) Per Common Share:
The following shows the amounts used in computing earnings (loss) per common
share for the three and six months ended March 31:
Three Months Six Months
Ending March 31 Ending March 31
----------------------------- -----------------------------
2003 2002 2003 2002
----------- ----------- ----------- -----------
Loss from continuing operations $(1,108,000) $ (337,000) $(1,247,000) $ (666,000)
Preferred stock - (dividends) negative return -- -- -- 154,000
----------- ----------- ----------- -----------
Loss from continuing operations applicable to
common shares used for basic earnings
per share $(1,108,000) $ (337,000) $(1,247,000) $ (512,000)
Effect of dilutive convertible preferred stock -- -- -- (154,000)
----------- ----------- ----------- -----------
Loss from continuing operations applicable to
common shares used for diluted earnings
per share $(1,108,000) $ (337,000) $(1,247,000) $ (666,000)
=========== =========== =========== ===========
Weighted average number of common shares
outstanding used for basic earnings per share 4,842,323 4,839,942 4,842,323 4,361,261
Effect of dilutive convertible preferred stock -- -- -- 478,681
----------- ----------- ----------- -----------
Weighted average number of common shares
outstanding used for diluted earnings
per share 4,842,323 4,839,942 4,842,323 4,839,942
=========== =========== =========== ===========
Potential common shares relating to 690,000 warrants and 1,079,500 stock options
were excluded from the computation of diluted loss per share because they are
antidilutive.
8
OAK RIDGE CAPITAL GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
March 31, 2003
4. Employee Stock Based Compensation:
The Company has an employee incentive stock plan for certain key employees and
is required to comply with the recently issued FASB 148 related to stock-based
compensation and its related disclosures; such disclosures are now required as
part of the company's accounting policies. Under the Plan, options currently
outstanding 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 earnings (loss) and earnings (loss) per common
share would have been the following pro forma amounts for the three and six
months ended March 31, 2003:
Three Months Six Months
Ending March 31 Ending March 31
---------------------------- ----------------------------
2003 2002 2003 2002
------------ ------------ ------------ ------------
Net Earnings (Loss)
As Reported $ (1,542,000) $ 287,000 $ (2,171,000) $ 459,000
Total stock-based employee com-
pensation expense determined
under fair value method 234,000 -- 234,000 16,000
------------ ------------ ------------ ------------
Pro forma Net Earnings (Loss) $ (1,776,000) $ 287,000 $ (2,405,000) $ 443,000
============ ============ ============ ============
Earnings (Loss) per share
As reported - basic $ (.32) $ .06 $ (.45) $ .11
Pro forma - basic $ (.37) $ .06 $ (.48) $ .10
As reported - diluted $ (.32) $ .06 $ (.45) $ .09
Pro forma - diluted $ (.37) $ .06 $ (.48) $ .09
On January 13, 2003, the Board of Directors granted key employees options to
acquire 449,500 shares of the Company's stock at a $0.55 per share exercise
price. The Company has reserved a total of 1,250,000 shares for issuance under
the Employee Incentive Stock Option Plan. Prior to this grant, 620,000 shares
were available for grant; after this grant, 170,500 shares remain reserved for
grants in the future.
On January 24, 2003 the Board of Directors approved the reduction of the current
exercise price of its outstanding registered warrants to $2.00, from the current
exercise price of $4.20 and simultaneously extended the maturity date of the
warrants to February 1, 2005. The warrants were to expire on February 6, 2003.
All terms and conditions associated with the outstanding registered warrants
will remain unchanged, including the right of the Company to call the warrants
upon thirty days notice, at a price of $0.01 per warrant, should the common
shares of the Company trade at 25% above the $2.00 strike point ($2.50 per
share) for ten consecutive trading days.
9
OAK RIDGE CAPITAL GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
March 31, 2003
Note B - Debt:
At March 31, 2003, the Company was in violation of the minimum net worth
covenant and the debt limitation covenant relating to its subordinated sinking
fund notes with a principal balance of $1,738,000. Therefore, the trustee or
note holders 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. Management believes if this obligation was
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.
Note C - Comprehensive Earnings (Loss):
Other comprehensive earnings (losses) consist primarily of net unrealized
investment gains and losses, net of income tax effects. Total comprehensive
earnings (losses) for the periods ending March 31 are as follow:
2003 2002
------------ ------------
Three Months ending March 31 $ (1,643,000) $ 377,000
Six Months ending March 31 $ (2,283,000) $ 511,000
Note D - Stockholders' Equity:
On December 20, 2001, the Company issued 1,452,000 shares of its Common Stock
upon the conversion of 484,000 shares of its Series "D" Preferred Stock. The
Series "D" Preferred Stock was issued on March 1, 2001, pursuant to the terms of
a merger in which the Company acquired Equity Securities Investments, Inc.
("ESI"). The Series "D" Preferred Stock was not initially convertible into
Common Stock. However, the terms of the Series "D" Preferred Stock provided that
each share would automatically be converted into three shares of Common Stock if
the shareholders of the Company approved such conversion, and that the
conversion, if approved, would occur automatically on the twenty-first (21st)
day following the date on which the shareholders approved the conversion. The
Company agreed in the merger agreement to ask its shareholders to approve the
conversion and, at the Annual Meeting of Shareholders of the Company held on
November 29, 2001, the shareholders voted upon and approved the conversion of
the Series "D" Preferred Stock into Common Stock. In connection with this
conversion, Preferred Stock dividends in arrears of $211,000 at the date of
conversion were waived by the shareholders. The elimination of these dividends,
net of dividends incurred during the quarter ended December 31, 2001 is
reflected as a negative return on preferred stock for determining earnings
applicable to common shares in the statement of operations for the six months
ended March 31, 2002.
10
OAK RIDGE CAPITAL GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
March 31, 2003
Note E - Segment Information:
The Company operates in the following segments: real estate land development and
financial services. Information concerning the Company's continuing business
segments for the periods ended March 31 is as follows:
Three Months Ended March 31 2003 2002
--------------------------- ----------- -----------
Revenues
Residential land development $ 539,000 $ 664,000
Financial services 739,000 813,000
Interest and other 137,000 138,000
----------- -----------
Total $ 1,415,000 $ 1,615,000
=========== ===========
Earnings (loss) from continuing operations before taxes
Residential land development $ 96,000 $ 161,000
Financial services (890,000) (422,000)
Unallocated general corporate expenses (246,000) (136,000)
----------- -----------
Loss from continuing operations before income taxes $(1,040,000) $ (397,000)
=========== ===========
Six Months Ended March 31 2003 2002
------------------------- ----------- -----------
Revenues
Residential land development $ 1,224,000 $ 1,362,000
Financial services 1,400,000 2,592,000
Interest and other 779,000 303,000
----------- -----------
Total $ 3,403,000 $ 4,257,000
=========== ===========
Earnings (loss) from continuing operations before taxes
Residential land development $ 263,000 $ 314,000
Financial services (953,000) (571,000)
Unallocated general corporate expenses (482,000) (444,000)
----------- -----------
Loss from continuing operations before income taxes $(1,172,000) $ (701,000)
=========== ===========
11
OAK RIDGE CAPITAL GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
March 31, 2003
Note F - Recent Accounting Pronouncements:
Variable Interest Entities
In January 2003, the FASB issued FASB Interpretation 46 (FIN 46), CONSOLIDATION
OF VARIABLE INTEREST ENTITIES, FIN 46 clarifies the application of Accounting
Research Bulletin 51, Consolidated Financial Statements, for certain entities
that do not have sufficient equity at risk for the entity to finance its
activities without additional subordinated financial support from other parties
or in which equity investors do not have the characteristics of a controlling
financial interest ("variable interest entities').
Variable interest entities within the scope of FIN 46 will be required to be
consolidated by their primary beneficiary. The primary beneficiary of a variable
interest entity is determined to be the party that absorbs a majority of the
entity's expected losses, receives a majority of its expected returns, or both.
FIN 46 applies immediately to variable interest entities created after January
31, 2003, and to variable interest entities in which an enterprise obtains an
interest after that date. It applies in the first fiscal year or interim period
beginning after June 15, 2003, to variable interest entities in which an
enterprise holds a variable interest that it acquired before February 1,2003.
The Company is in the process of determining what impact, if any, the adoption
of the provisions of FIN 46 will have upon its financial condition or results of
operations. Certain transition disclosures required by FIN 46 in all financial
statements initially issued after January 31, 2003 follows.
The Company's wholly owned subsidiary Financial Services Group, Inc. is a
fifty-percent joint venture partner on a land development project, Oxbow North,
whose sole purpose is to purchase land along the Rio Grande river in
Albuquerque, New Mexico and develop the land into 169 home sites to be sold. It
is reasonably possible that the joint venture will meet the conditions to be
considered a variable interest entity (VIE). The joint venture assets consist of
raw land recorded at $2.9 million plus development costs incurred or to be
incurred of approximately $5.5 million.
The joint venture related available financing consists of $5 million of secured
debt and $2.4 million of subordinated debt. On March 31, 2003 the subordinated
debt outstanding was $2,400,000 and the secured bank debt was $1,944,000. The
secured bank debt is to be paid down as lots are completed and sold and any
unpaid balances are due September 30, 2004.
The Company has guaranteed $5 million of the joint venture's debt which would be
the Company's maximum loss exposure as a result of its interest in the joint
venture. The Company currently does not consolidate the joint venture because it
is not required to under current accounting standards; however, it is reasonably
possible that it will be required to consolidate the joint venture beginning
July 1, 2003.
12
OAK RIDGE CAPITAL GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
March 31, 2003
Note G - Contingencies:
In connection with the Company's disposition of its residential brokerage
operations, a leased office facility is no longer being used for operating
purposes. This facility and furnishings are sublet under an agreement expiring
in August 2003. In connection with the disposition, the Company recorded an
estimated loss relating to its remaining costs in the facility, furnishings and
improvements, including leasehold improvements and remaining rental payments,
reduced by sublease income. 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 and its furnishings. This liability totaled $598,000 and
$736,000 at March 31, 2003 and September 30, 2002, respectively.
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
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 May 30, 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.
Note H - Discontinued Operations:
Residential Construction Subsidiary -Charter Building & Construction Company
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. Subsequently, the above
sale was amended to include the Company's fifty-percent (50%) interest in a land
development joint venture called "Success Ventures".
13
OAK RIDGE CAPITAL GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
March 31, 2003
The selling price was originally $3,095,000 and amended to $3,412,000 consisting
of the following:
Charter Success Total
---------- ---------- ----------
Cash funded by the private investor group $ 800,000 $ 250,000 $1,050,000
Cash funded by Charter, including additional draws
on construction and development lines of credit 1,200,000 -- 1,200,000
Promissory note collateralized by
Charter's common stock 1,095,000 67,000 1,162,000
---------- ---------- ----------
$3,095,000 $ 317,000 $3,412,000
========== ========== ==========
A current stockholder and former officer was responsible for brokering the deal
between the Company and the private investor group and received a $128,000 fee
upon completion of the sale. The Company continues to be a guarantor on the
former subsidiary's construction and development lines of credit based on the
homes in inventory at November 30, 2002. These guarantees will terminate upon
renewal of each line by the respective financial institution. The Company
recognized a $75,000 loss on this disposal in the prior quarter.
On March 21, 2003 the note receivable of $1,162,000 was sold for $800,000 and
the Company recorded a $362,000 loss on the sale. The note was sold to enhance
the Company's liquidity to meet debt service requirements later in the year.
The disposal of the Company's homebuilding construction 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
homebuilding construction operations for the three months ended March 31 is as
follows:
Three Months Three Months
Ended March 31, Ended March 31,
2003 2002
------------ ----------
Revenues $ -- $6,261,000
============ ==========
Earnings from operations before income taxes $ -- $ 539,000
Income tax benefit -- --
------------ ----------
Earnings from discontinued operations $ -- $ 539,000
============ ==========
Earnings (loss) per common share information relating to these discontinued
operations is as follows for the three months ended March 31:
2003 2002
------------ ----------
Earnings per common share from discontinued
operations - basic $ -- $ .11
============ ==========
Earnings per common share from discontinued
operations - diluted $ -- $ .11
============ ==========
14
OAK RIDGE CAPITAL GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
March 31, 2003
Information relating to the discontinued operations of the Company's
homebuilding construction operations for the six months ended March 31 is as
follows:
Six Months Six Months
Ended March Ended March
31, 2003 31, 2002
----------- -----------
Revenues $ 1,635,000 $12,183,000
=========== ===========
Earnings (Loss) from operations before
income taxes $ (85,000) $ 1,136,000
Income tax benefit -- --
----------- -----------
Earnings (Loss) from discontinued
operations $ (85,000) $ 1,136,000
=========== ===========
Earnings (loss) per common share information relating to these discontinued
operations is as follows for the six months ended March 31:
2003 2002
----------- -----------
Earnings (Loss) per common share from
Discontinued operations - basic $ (.02) $ .26
=========== ===========
Earnings (Loss) per common share from
Discontinued operations - diluted $ (.02) $ .23
=========== ===========
Termination of Commercial Construction Segment
- ----------------------------------------------
In October 2002, management decided to terminate the operations of the
commercial construction segment and related subsidiary due to its continuing
operating losses. Management expected the termination of operations to be
completed during the second quarter of fiscal 2003 and termination is
substantially complete. Management has provided for any additional costs of this
termination that may be required to be recognized pursuant to the provisions of
recently issued SFAS 146.
The subsidiary is the general contractor for a $3.5 million medical center
renovation project in southern New Mexico. The contract provided for financial
penalties if the project was not completed on time. The project was delayed for
various reasons, some that were under the subsidiary's control, and some that
were not. The project was deemed "substantially complete" on April 15, 2003,
five months after the scheduled completion date. The owner has the contractual
right to seek damages for costs incurred caused by the delay. The owner has
proposed settlement for around $200,000 and has been recorded in the financial
statements.
15
OAK RIDGE CAPITAL GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
March 31, 2003
The subsidiary has the right to "put down" to respective sub-contractors any
costs which the subsidiary may incur as a result of inadequate or non-timely
performance by the sub-contractor. The subsidiary is currently seeking that
remedy from three of its sub-contractors. The Company expects the project to
show minimal losses when completed providing sub-contractor puts are realized.
Information relating to the discontinued operations of the Company's commercial
construction operations for the three months ended March 31 is as follows:
Three Months Three Months
Ended March Ended March
31, 2003 31, 2002
---------- ----------
Revenues $ 87,000 $1,535,000
========== ==========
Earnings (Loss) from operations before income
taxes $ (274,000) $ 10,000
Income tax benefit -- --
---------- ----------
Earnings (Loss) from discontinued operations $ (274,000) $ 10,000
========== ==========
Earnings (loss) per common share information relating to these discontinued
operations is as follows for the three months ended March 31:
2003 2002
---------- ----------
Earnings (Loss) per common share from
Discontinued operations - basic $ (.06) $ --
========== ==========
Earnings (Loss) per common share from
Discontinued operations - diluted $ (.06) $ --
========== ==========
Information relating to the discontinued operations of the Company's commercial
construction operations for the six months ended March 31 is as follows:
Six Months Six Months
Ended March Ended March
31, 2003 31, 2002
---------- ----------
Revenues $ 593,000 $2,386,000
========== ==========
Earnings (Loss) from operations before income
taxes $ (642,000) $ 42,000
Income tax benefit -- --
---------- ----------
Earnings (Loss) from discontinued operations $ (642,000) $ 42,000
========== ==========
16
OAK RIDGE CAPITAL GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
March 31, 2003
Earnings (loss) per common share information relating to these discontinued
operations is as follows for the six months ended March 31:
2003 2002
---------- ----------
Earnings (Loss) per common share from
Discontinued operations - basic $ (.13) $ .01
========== ==========
Earnings (Loss) per common share from
Discontinued operations - diluted $ (.13) $ .01
========== ==========
Sale of First Commercial Real Estate Services, Inc.
- ---------------------------------------------------
On February 7, 2003, the Company entered into a Stock Sale Agreement effective
January 1, 2003 with FCRES, Inc., a newly formed New Mexico corporation,
pursuant to which FCRES, Inc. agreed to purchase all the common stock of the
Company's commercial real estate brokerage subsidiary. The owners of the newly
formed corporation include certain current employees and stockholders of the
Company. Under the terms of the Agreement, the selling price was $160,000
consisting of $115,000 in cash and a promissory note of $45,000, collateralized
by First Commercial Real Estate Services, Inc. common stock.
A current stockholder and former officer was responsible for brokering the deal
between the Company and private investor group and received a $8,000 fee upon
closing of the sale. A loss of $26,000 was recorded on the sale.
Information relating to the discontinued operations of the Company's commercial
real estate operations for the three months ended March 31 is as follows:
Three Months Three Months
Ended March Ended March
31, 2003 31, 2002
-------- --------
Revenues $ -- $633,000
======== ========
Earnings from operations before income taxes $ -- $ 74,000
Income tax benefit -- --
-------- --------
Earnings from discontinued operations $ -- $ 74,000
======== ========
17
OAK RIDGE CAPITAL GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
March 31, 2003
Earnings (loss) per common share information relating to these discontinued
operations is as follows for the three months ended March 31:
2003 2002
--------- ---------
Earnings per common share from Discontinued
operations - basic $ -- $ .02
========= =========
Earnings per common share from Discontinued
operations - diluted $ -- $ .02
========= =========
Information relating to the discontinued operations of the Company's commercial
real estate operations for the six months ended March 31 is as follows:
Six Months Six Months
Ended March Ended March
31, 2003 31, 2002
--------- ---------
Revenues $ 481,000 $ 812,000
========= =========
Earnings (Loss) from operations before income
taxes $ 5,000 $ (54,000)
Income tax benefit -- --
--------- ---------
Earnings (Loss) from discontinued operations $ 5,000 $ (54,000)
========= =========
Earnings (loss) per common share information relating to these discontinued
operations is as follows for the six months ended March 31:
2003 2002
--------- ---------
Loss per common share from Discontinued
operations - basic $ -- $ (.01)
========= =========
Loss per common share from Discontinued
operations - diluted $ -- $ (.01)
========= =========
18
OAK RIDGE CAPITAL GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
March 31, 2003
Note I - Guarantees:
The Company is guarantor on certain construction and development lines of credit
related to Charter with outstanding balances at December 31, 2002 and March 31,
2003 of $1,100,000 and $843,000, respectively. The maximum potential amount of
future payments under the guarantees is approximately $2,600,000. These
guarantees were required in the normal course of transacting residential
homebuilding and are collateralized by both the home and the lot on which the
home is built. The financial institutions require a separate individual note for
each home built which is paid off when the home closes and requires pay down on
lot lines of credit as lots are transferred to construction lines of credit. On
November 30, 2002, the residential homebuilding subsidiary was sold to outside
investors; one of the terms and conditions of the sale was the Company would
continue its then existing guarantees. The guarantee amount will be declining
each month as the homes are sold and the construction advances are paid off or
as lots are transferred to construction lines of credit. Based on the inventory
in place at the time of sale of the subsidiary and the normal time required to
build a home (about 90 days), the guarantees required as part of the sale are
expected to terminate by the end of fiscal 2003.
The Company is also guarantor of a bank line of credit on a land development
joint venture (Oxbow North) in which the Company is a fifty-percent owner. The
venture is a 169 homesite project with a bank line of credit of $5,000,000 of
which $2,280,000 was outstanding at March 31, 2003. The bank debt is to be paid
down as lots are completed and sold. If not otherwise paid, the bank debt is due
September 30, 2004.
19
ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Overview of Consolidated Continuing Operations
- ----------------------------------------------
Based upon the various lines of business in which the Company is engaged, it has
defined the following operating segments for purposes of financial accounting
and reporting:
Land Development Segment (previously known as Residential Construction and
Land Development Segment) Financial Services Segment which includes
unallocated corporate expenses
The Company implemented a Plan in the first quarter of 2003 where most real
estate related assets were liquidated. The Plan called for the outright sale of
subsidiaries and the shut down of other unprofitable operations. The Company
essentially has executed the Plan with an end result of a "newly directed"
company with
1) land development activities with 35 owned homesites for sale and a 50%
joint venture interest in a 169 homesite development in Albuquerque,
NM.
2) the operations of Oak Ridge Financial Services, Inc. a wholly owned
subsidiary securities broker-dealer and investment banking firm
located in Minneapolis, MN.
The following discussions are based on the resulting "continuing operations"
which no longer includes Charter, the residential homebuilding subsidiary,
Realco Construction, Inc., the commercial construction subsidiary, Success
Ventures, a 50% ownership interest in a land development joint venture, First
Commercial Real Estate Services, Inc., a commercial real estate brokerage
service and PHS, Inc., a 50% partnership interest in a mortgage banking
business.
Consolidated Continuing Operations for the Three Months Ending March 31, 2003
- -----------------------------------------------------------------------------
The Company experienced a consolidated pre-tax quarterly loss of $1,040,000 from
continuing operations compared to a pre-tax loss of $397,000 for the same period
in fiscal 2002. $362,000 of the 2003 loss was due to the sale of a seven year
note receivable of $1,162,000 for $800,000 to enhance liquidity. Consolidated
revenues decreased $200,000 or 12% to $1,415,000 from $1,615,000 in the same
quarter a year ago. $74,000 of the decrease is from securities brokerage
commissions which was the result of poor financial market conditions in the
quarter. $125,000 of the revenue decline is due to lot sales drop which is a
function of timing of housing starts; in 2002 there were more housing starts
than in 2003.
Consolidated selling, general and administrative expenses from the continuing
segment reported an overall $76,000 increase to $690,000 or 11% compared to
$614,000 a year ago on a comparable basis. The increase occurred because the
Financial Services segment continues to build its infrastructure for the future
which is offset by management containing any unnecessary costs.
The quarter reported a consolidated income tax expense of $68,000 due to a
change in valuation allowance in the period. In the comparable quarter in 2002,
a $60,000 benefit was recorded attributable to net operating losses.
Consolidated Continuing Operations for the Six Months Ending March 31, 2003
- ---------------------------------------------------------------------------
The Company experienced a consolidated pre-tax loss of $1,172,000 from
continuing operations for the six months ended March 31, 2003, compared to a
pre-tax loss of $701,000 for the same period in fiscal 2002. Consolidated
revenues decreased $854,000 or 20% to $3,403,000 from $4,257,000 in the same
quarter a year ago. $1,192,000 of the decrease is attributable to the securities
brokerage segment not having investment banking income in 2003 that it had in
2002. $138,000 of the revenue decline is due to fewer lot sales in 2003 compared
to 2002; lots sales are a function of timing of housing starts. Interest and
other income increased $488,000 to $736,000. The increase is due primarily
because $175,000 was earned by the Company for arranging financing for a land
development joint venture.
20
Consolidated selling, general and administrative expenses from the continuing
segments showed a $63,000 increase to $1,393,000 from $1,330,00 in the same six
month period a year ago. Like the quarter, the increase occurred because the
Financial Services segment continues to build its infrastructure for the future
offset by management containing any unnecessary costs.
The six month period reported a consolidated income tax expense of $75,000,
again, due to a change in valuation allowance in the period. In the comparable
six month period in 2002, a $35,000 benefit was recorded attributable to net
operating losses.
Segment Results of Operations for the Quarter ended March 31, 2003
- ------------------------------------------------------------------
LAND DEVELOPMENT SEGMENT ( PREVIOUSLY KNOWN AS RESIDENTIAL CONSTRUCTION AND LAND
DEVELOPMENT SEGMENT):
The residential construction operations were sold effective November 30, 2002.
The two months of activity generated $1,635,000 of revenues and an operating
loss of $85,000; these amounts are reported as Discontinued Operations. This
segment now only includes land development activities consisting of the
acquisition of raw land for development into residential home sites, which are
sold to Charter or to other builders. Such land development projects may be
performed under joint venture agreements or entirely by the Company. Profits on
lots sold to Charter, either directly, by a subsidiary or by a joint venture,
were eliminated in consolidation until the lot was removed from Charter's
inventory. As a result of the sale of Charter's stock to an outside investment
group, $231,000 of deferred gain was recognized.
For the Quarter Ended March 31, 2003
- ------------------------------------
This segment experienced pre-tax earnings of $96,000 for the quarter ended March
31, 2003 on lot sales of $539,000 compared to pre-tax earnings of $161,000 on
$664,000 of lot sales for the same three month period in the previous year. For
comparison purposes, this quarter in 2002 was one of the best quarters in the
history of the Company for housing starts and related lot sales.
Lot sales decreased $125,000 or 19% to $539,000 from $664,000 in the 2002
quarter. The lot sales decreases were a direct result of market conditions in
the Albuquerque, NM market for housing starts.
Selling, general and administrative expenses for land development is minimal. In
2003 it was $8,000 compared to $6,000 in 2002.
For the Six Months Ended March 31, 2003
- ---------------------------------------
This segment experienced pre-tax earnings of $263,000 for the six months ended
March 31, 2003 on lot sales of $1,224,000 compared to pre-tax earnings of
$314,000 on $1,362,000 for the same period in 2002. Lot sales by dollar volume
were relatively flat for the six month period showing only a $138,000 decrease
between years. In 2003 fewer lot units were sold and at lower prices. In 2003,
to improve its liquidity position, management decided to reduce lot prices to
induce customers to buy lots earlier and generate more immediate cash flow to
the Company.
Selling, general and administrative expenses for this segment was approximately
$50,000 compared to $23,000 last year for the comparable period. There was no
one significant factor that accounted for the increase.
FINANCIAL SERVICES SEGMENT:
- ---------------------------
The financial services segment consists primarily of the operations of the
Company's wholly-owned subsidiary, Oak Ridge Financial Services, Inc., which
changed its name from Equity Securities, Inc. effective April 1, 2003.
Oak Ridge Financial Services, Inc. is a Minneapolis based securities broker
dealer and investment banking firm, which was acquired effective March 1, 2001
through the issuance of 484,000 shares of Series D preferred stock. On December
20, 2001, the holders of the 484,000 shares of series D preferred stock
exchanged their shares under the
21
terms of the conversion provision of the stock, into 1,452,000 shares of common
stock of the Company. This acquisition is a key component of the Company's plan
to expand its financial services operations. The Company is currently
identifying and evaluating other growth opportunities to complement this
segment.
For the Quarter Ended March 31, 2003
- ------------------------------------
The Financial Services segment realized a pre-tax loss of $890,000 for the
quarter ended March 31, 2003 as compared to a pre-tax loss of $422,000 in the
same period in fiscal 2002. $362,000 of the quarterly loss was due to the sale
of a $1,162,000 seven year note receivable for $800,000 to enhance liquidity.
The securities brokerage and investment banking subsidiary incurred a pre-tax
loss of $349,000 for the quarter ended March 31, 2003 compared to a pre-tax loss
of $254,000 for the same quarter ended 2002. Revenues from commissions decreased
$74,000 to $739,000 compared to $813,000 in 2002. The revenue decrease is a
direct result of fewer brokers working and poor financial market conditions.
Likewise, in 2003, the subsidiary had only one investment banking engagement
deriving revenue compared to three in 2002.
Selling, general and administrative expenses decreased $43,000 or 8% to $511,000
compared to $554,000 in 2002. The decrease is due to a concerted effort by
management to contain expense growth and eliminate any unnecessary operational
costs while trying to build a financial services infrastructure to go forward.
For the Six-Months Ended March 31, 2003
- ---------------------------------------
The Financial Services segment realized pre-tax loss of $953,000 for the
six-months ended March 31, 2003 as compared to a pre-tax loss of $571,000 in the
same period in fiscal 2002. Like the quarter, $362,000 of the six months loss
was due to the sale of a $1,162,000 seven year note receivable for $800,000 to
enhance liquidity.
Oak Ridge Financial Services, Inc. incurred a pre-tax loss of $382,000 in the
six-months ended March 31, 2003 as compared to a pre-tax loss of $327,000 for
the same period in fiscal 2002. Revenues from commissions in the securities
brokerage and investment banking decreased $1,192,000 or 46% from $2,592,000 in
2002 compared to $1,400,000 in 2003. The revenue decline between the periods is
a timing function as to when investment banking engagements close. In 2002, two
investment banking projects generating over $900,000 of revenue closed in the
first quarter of 2002; in comparison, there were no significant investment
banking projects completed in the same period in 2003.
Selling, general and administrative expenses decreased $136,000 or 12% to
$963,000 from $1,099,000. The decrease is due to a concerted effort by
management to contain all overhead expenses to operational efficiencies.
LIQUIDITY AND CAPITAL RESOURCES
- -------------------------------
At March 31, 2003, the Company was in violation of the minimum net worth and
debt limitation covenants relating to its subordinated sinking fund notes with a
principal balance of $1,738,000. The Trustee or note holders 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 thirty days, the notes may be declared due
and payable immediately. However, 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
operations for a reasonable period of time.
This would be done by the:
1. Utilization of existing cash reserves.
2. Establish new lines of credit related to land development activities
using the land as collateral.
3. Reducing operating expenses and other cash expenditures.
Overall for the six months ended March 31, 2003 the cash flow statement
reflected an overall $42,000 decrease in cash position to $1,831,000 compared to
a cash position of $1,873,000 on September 30, 2002. The breakdown of
22
cash flow components for the six months indicate $1,124,000 was used in
operating activities, $854,000 was utilized in financing activities, primarily
$1,003,000 in debt service on the subordinated notes and payoffs of construction
lines. These utilizations were partially offset by $1,936,000 of cash inflow
from investing activities, including $1,895,000 from the sale of assets and
businesses, and $800,000 for the sale of a note receivable offset by $747,000 of
net purchases of available for sale securities.
In comparison to the same six month period a year ago, the Company cash flow
statement reflected cash utilization of $936,000. The components of this
include: $2,590,000 was provided from operations, $90,000 was used for capital
expenditures, $814,000 was used for reduction of long term debt and $2,637,000
used for paybacks of construction notes and advances.
The Company intends to apply its capital resources to expand its financial
services operations. This expansion will be generated from within or by
acquiring complementary operations. In conjunction with that effort, the Company
is also reducing its outstanding debt. Management is currently focused on the
$1,738,000 of subordinated debentures scheduled to mature at December 31, 2003.
It is expected that future cash needs will be financed by a combination of cash
flows from operations, advances under land development lines, and, if needed,
other financing arrangements. The Company does not have any material commitments
for capital expenditures for fiscal 2003.
The Company's projection of future cash requirements is affected by numerous
factors, including but not limited to, financial market conditions, changes in
customer receipts, consumer industry trends, sales volume, operating cost
fluctuations, acquisitions of existing businesses and unplanned capital
spending.
COMPETITION AND MARKET FACTORS
- ------------------------------
The business in which the Company is engaged is highly competitive. Many of the
Company's competitors have nationwide operations. 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.
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 conditions and interest rates. Other factors affecting
business include increases in construction costs, increases in costs associated
with home ownership such as interest rates, property taxes, and changes in
consumer preferences and demographic trends.
FORWARD LOOKING STATEMENTS
- --------------------------
Investors are cautioned that certain statements contained in this document are
"forward-looking statements" within the meaning of the Private Securities
Litigation Reform Act of 1995 (the Act). Statements which are predictive in
nature or which depend upon or refer to future events or conditions constitute
forward-looking statements. In addition, any statements concerning future
financial performance, ongoing business strategies or prospects, and possible
future Company actions, which may be provided by management are also
forward-looking statements as defined by the Act. Forward-looking statements are
based on current expectations and projections about future events and are
subject to risks, uncertainties, assumptions, and economic and market conditions
in the real estate and financial services industry, among other things.
Actual events and results may differ materially from those expressed or
forecasted in the forward-looking statements made by the Company or Company
management due to a number of factors. Important factors that could cause such
differences include but are not limited to, changes in general economic
conditions either nationally or in regions in where the Company operates or may
commence operations, employment growth or unemployment rates, availability and
costs of land and homebuilding materials, labor costs, interest rates,
prevailing rates for sales associate commissions, industry competition and
regulatory developments.
23
ITEM 3: QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
There have not been any material changes in the sources and effects of the
Company's market risk since September 30, 2002.
ITEM 4: CONTROLS AND PROCEDURES
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 quarterly
report (the "Evaluation Date"). Such officers 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, but were not effective at ensuring that such disclosure will be
timely. The principal factor affecting the timeliness of disclosure was
inadequate staffing in the Company's finance and accounting area. The Company's
Board of Directors is evaluating the Company's staffing needs.
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.
24
PART II: OTHER INFORMATION
ITEM 1. 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
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 May 30, 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.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
On January 24, 2003 the Board of Directors approved the reduction of the current
exercise price of its outstanding registered warrants to $2.00, from the current
exercise price of $4.20 and simultaneously extended the maturity date of the
warrants to February 1, 2005. The warrants were to expire on February 6, 2003.
All terms and conditions associated with the outstanding registered warrants
will remain unchanged, including the right of the Company to call the warrants
upon thirty days notice, at a price of $0.01 per warrant, should the common
shares of the Company trade at 25% above the $2.00 strike point ($2.50 per
share) for ten consecutive trading days.
ITEM 3. DEFAULTS IN SENIOR SECURITIES
The Company is in violation of certain covenants relating to the subordinated
sinking fund notes. Therefore, the trustee or note holders 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
$1,738,000 is due in December 2003.
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 for a reasonable
period by:
1. Utilization of existing cash reserves.
2. Sell or otherwise dispose of nonessential assets.
3. Use 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.
25
ITEM 4. SUBMISSIONS OF MATTERS TO A VOTE OF SECURITIES HOLDERS
NONE
ITEM 5. OTHER INFORMATION
Board Changes
- -------------
On April 30, 2003 Alan R. Woinski resigned as a Board Member for personal
reasons. No disagreements exist between Mr. Woinski and the Company relating to
operations, policies or practices which led to this resignation.
Management Changes
- ------------------
On January 13, 2003, the Board of Directors of Oak Ridge Capital Group, Inc.
named Edward S. Adams as Vice Chairman of the Board of Oak Ridge Capital Group,
Inc. and Marc H. Kozberg assumed the position of Chief Executive Officer. Since
October 1, 2002 Mr. Kozberg was the Chief Operating Officer of the Company and
prior to that date was President and Chief Executive Officer of Equity
Securities Advisors, Inc., an operating division of the Company's wholly-owned
subsidiary, ESI.
NASDAQ Delisting
- ----------------
On December 10, 2002 the Company received a Nasdaq Staff Determination
Notification that the Company has 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 Marketplace Rule 4450(e)(1).
In addition, the Staff also cited the Company has not complied with the minimum
$1.00 bid price as set forth in Marketplace Rule 4450(a)(5) requirement(s).
Because of these two non-compliance items the Company's securities are,
therefore, subject to delisting from the NASDAQ National Market. The Company
requested a hearing before a Nasdaq Listing Qualifications Panel to review the
Staff Determination. The hearing was held on January 23, 2003. The Company
received a formal notice on February 20, 2003 that the Panel made a decision to
formally delist the Company's securities effective at the open of business on
Monday, February 24, 2003; all the legal formalities of delisting the Company
from NASDAQ National Markets have been completed.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
Exhibit 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 Chief Executive Officer
Exhibit 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 Chief Financial Officer
(b) Reports on Form 8-K:
The Company filed a Report on Form 8-K on February 12, 2003 regarding the
Amended Sale for Charter with Pro-Forma Financial Statements and the
termination of operations of the Company's construction subsidiary, Realco
Construction, Inc.
26
SIGNATURES
Pursuant to the requirements 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: May 30, 2003 /s/ Marc H. Kozberg
------------------------------------------
Marc H. Kozberg, Chief Executive Officer
Date: May 30, 2003 /s/ James A. Coryea II
----------------------------------
James A. Coryea II, Chief Financial Officer
27
CERTIFICATION UNDER SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
I, Marc H. Kozberg, the Chief Executive Officer, hereby certify that:
1. I have reviewed this quarterly report on Form 10-Q of Oak Ridge Capital
Group, Inc.;
2. Based on my knowledge, this quarterly 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 quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly 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
quarterly 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 quarterly 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
quarterly report (the "Evaluation Date"); and
c) presented in this quarterly 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
quarterly 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/ Marc H. Kozberg
---------------------------------
Marc H. Kozberg
Chief Executive Officer
Dated: May 30, 2003
28
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 quarterly report on Form 10-Q of Oak Ridge Capital
Group, Inc.;
2. Based on my knowledge, this quarterly 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 quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly 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
quarterly 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 quarterly 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
quarterly report (the "Evaluation Date"); and
c) presented in this quarterly 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
quarterly 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: May 30, 2003
29