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 - -------
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.
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 - ------------------
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
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 - ---------------------
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 - -------------------------------------
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 - ---------------------
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 - ------------------------------
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.
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 - ----------
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:
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:
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
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:
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:
ITEM 5: MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
MARKET INFORMATION - ------------------
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.
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.
COMPANY DIVIDEND POLICY DISCLOSURE - ----------------------------------
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 - ------------------------------------------------------------------
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.
ITEM 6:
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.
- -------------------- (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.
ITEM 7:
ITEM 7: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
OVERVIEW OF CONTINUING OPERATIONS (DOLLARS IN THOUSANDS) - --------------------------------------------------------
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.
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 - ---------------------
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.
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.
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.
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.
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.
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
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
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.
ITEM 7A:
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)
- ------------- (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:
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
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
OAK RIDGE CAPITAL GROUP, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS September 30,
(Dollars in thousands)
See accompanying notes.
OAK RIDGE CAPITAL GROUP, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS Years ended September 30,
(Dollars in thousands, except per share amounts)
See accompanying notes.
OAK RIDGE CAPITAL GROUP, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY Years ended September 30, 2002, 2001 and 2000
(Dollars in thousands)
See accompanying notes.
OAK RIDGE CAPITAL GROUP, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY - CONTINUED Years ended September 30, 2002, 2001, and 2000
(Dollars in thousands)
See accompanying notes.
OAK RIDGE CAPITAL GROUP, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS Years ended September 30,
(Dollars in thousands)
See accompanying notes.
OAK RIDGE CAPITAL GROUP, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS - CONTINUED Years ended September 30,
(Dollars in thousands)
See accompanying notes.
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.
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.
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.
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:
The following shows the amounts used in computing loss per common share from continuing operations for the years ended September 30:
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.
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:
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.
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:
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.
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:
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:
Construction in progress includes homes under contract of approximately $2,416 and $4,671 at September 30, 2002 and 2001, respectively.
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:
NOTE D - INVESTMENTS
The following is a summary of investments carried on the equity method as of September 30:
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.
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 ======== ========
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:
NOTE F - ACCOUNTS AND NOTES RECEIVABLE
Accounts and notes receivable include the following at September 30:
NOTE G - PROPERTY AND EQUIPMENT
Property and equipment consisted of the following at September 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)
NOTE H - DEBT
Debt consisted of the following at September 30:
(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.
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:
NOTE I - INCOME TAXES
Income tax expense (benefit) on loss from continuing operations consists of the following for the years ended September 30:
The Company's effective income tax rate on loss from continuing operations differed from the federal statutory rate of 34% as follows:
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.
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.
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:
(1) Excludes effects of redemption benefit associated with redemption of Series A and B preferred stock.
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:
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)
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.
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.
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.
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.
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:
The following information applies to options outstanding and exercisable at September 30, 2002:
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.
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.
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:
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.
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.
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.
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.
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 ======
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 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.
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.
ITEM 9:
ITEM 9: CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE.
None
PART III
ITEM 10:
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.
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
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
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:
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
(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.
(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
- -------------- (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.
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
- ------------ (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.
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
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.
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]
* $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
ITEM 12:
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.
- -------------- * 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.
ITEM 13:
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:
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.
PART IV
ITEM 15:
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)
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:
(1) Uncollectible Accounts written off, net of Recoveries
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.
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
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