UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-KSB
Annual Report Pursuant to Section 13 or 15 (d)
of the Securities Exchange Act of 1934
For the Fiscal Year Ended January 31, 2002
Commission File Number 001-15733
Sutter Holding Company, Inc.
(Exact Name of Registrant as Specified in Charter)
Delaware 59-2651232
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(State or other jurisdiction of (I.R.S. Employer ID. Number)
incorporation or organization)
150 Post Street, Suite 405
San Francisco, CA 94108
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (415) 788-1441
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Securities registered pursuant to Section 12 (b) of the Act:
None
Securities registered pursuant to Section 12 (g) of the Act:
Common Stock, par value $.0001 per share
(Title of Class)
Check whether the issuer (1) has filed all reports required to be filed
by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the Registrant was required
to file such reports) , and (2) has been subject to such filing requirements for
the past ninety (90) days. Yes X No
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Check if there is no disclosure of delinquent filers in response to
Item 405 of Regulation S-B contained in this form, and if no disclosure will be
contained, to the best of Registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form
10-KSB. X
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Issuer's revenues for the most recent fiscal year were $25,000
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The aggregate market value of the voting stock held by non-affiliates
of the Registrant was approximately $243,444.50 on May 9, 2002 based upon the
latest published average bid price of $.26 at the close of the market on May 9,
2002, the most recently available bid date for the Registrant's Common Stock.
The actual number of shares outstanding of the Registrant's common
stock on May 9, 2002 was 2,150,000.
DOCUMENTS INCORPORATED BY REFERENCE: See Exhibit Index
Transitional Small Business Disclosure Format (check one):
Yes No X
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PART I
FORWARD-LOOKING STATEMENTS
This Annual Report on Form 10-KSB contains certain forward-looking
statements and information relating to Sutter Holding Company, Inc., formerly
known as Shochet Holdings, Inc. ("we", "us" or the "Company") that are based on
the beliefs of its management as well as assumptions made by and information
currently available to its management. When used in this Annual Report, the
words "anticipate," "believe", estimate", expect", "intend", "plan" and similar
expressions, as they relate to the Company or its management, are intended to
identify forward-looking statements. These statements reflect management's
current view about our proposed business operations are subject to certain
risks, uncertainties and assumptions, including among others: (i) a general
economic downturn; (ii) a general lack of interest in engaging in a transaction
with a public registered company, (iii) federal or state securities laws or
regulations that have an adverse effect on trading in "penny stocks" and other
risks and uncertainties. Should any of these risks of uncertainties materialize,
or should underlying assumptions prove incorrect, actual results may vary
materially from those described in this Annual Report as anticipated, estimated
or expected.
ITEM 1. DESCRIPTION OF BUSINESS
Overview
We discontinued substantially all of our business operations through
the sale of substantially all of our brokerage assets in August 2001. Our
current business plan is to acquire an interest in a business or businesses
which have significant growth potential. We will not restrict our search to any
specific industry or geographical location and we may participate in a business
venture of virtually any kind or nature. Our discussion of our proposed business
plan is purposefully general and is not mean to restrict our ability to enter
into any type of business transaction which our directors deem to be in the best
interest of our company.
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History
We were incorporated in Delaware in July 1999 under the name Shochet
Holdings, Inc. From July 1999 through August 31, 2001, we provided full service,
discount brokerage and related non-proprietary financial services and products
such as financial planning, insurance and annuities, through our wholly-owned
subsidiaries: (1) Shochet Securities, Inc. ("Shochet Securities or "SSI"), (2)
Shochet Investment Advisors Corp. and (3) Shochet Mortgage Corp. SSI previously
operated six branch offices in Florida.
In March 2000, we completed an initial public offering of 1,045,000
shares of our common stock. These securities were listed on the Nasdaq SmallCap
Market System under the symbol SHOC from March 2000 until November 2001. We
raised net proceeds of $7,900,000 through this offering.
On August 31, 2001, we sold substantially all of our assets comprising
our securities brokerage business, including retail and institutional accounts
(collectively, the "Brokerage Assets"), to Blue Stone Capital Corp.
("Bluestone") and BlueStone Holding Corp. ("BHC"). On November 7, 2001, the
Company, SSI, BlueStone, BHC and Stands Brothers & Co., Ltd. ("Sands") entered
into an agreement ("November 2001 Agreement") which served to amend and
supplement the August 2001 Agreement, including certain terms of consideration
payable to us and allowed for the transfer of the Brokerage Assets from
BlueStone to Sands.
On March 28, 2002, there was a change in control of our company when
our majority shareholder, Firebrand Financial Group, Inc. ("Firebrand") sold
1,213,675 shares, or approximately 56.45% of its common stock to Sutter
Opportunity Fund 2, LLC. ("Sutter Fund"). The purchase agreement also provided
that executive officers and directors selected by Sutter would serve as our
officers and on our Board of Directors
On April 9, 2002, we changed our name from Shochet Holdings Corp. to
Sutter Holding Company, Inc.
Current Business Plan
Our current business plan is to acquire an interest in a business or
businesses which have significant growth potential. We will not restrict our
search to any specific business, industry or geographical location and we may
participate in a business venture of virtually any kind or nature. Our
discussion of our proposed business is purposefully general and is not meant to
restrict our ability to enter into any type of business transaction which our
directors deem to be in the best interest of our company.
We have not chosen the particular business in which we will engage and
have not conducted any market studies with respect to any business or industry
for you to evaluate the possible merits or risks of the target business or the
particular industries in which we may
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ultimately operate. To the extent we enter into a business combination with a
financially unstable company or an entity in its early stage of development or
growth, including entities without established records of sales or earnings, we
will become subject to numerous risks inherent in this business and operations
of financially unstable and early stage or potential emerging growth companies.
In addition, to the extent that we effect a business combination with
an entity in an industry characterized by a high level or risk, we will become
subject to the currently unascertainable risks of that industry. An extremely
high level of risk frequently characterizes certain industries that experiences
rapid growth. In addition, although we will endeavor to evaluate the risks
inherent in a particular industry or target business, we cannot assure you that
we will properly ascertain or assess all of the significant risk factors.
In particular, we believe that companies may be interested in engaging
in a business combination with us because of the perceived advantages associated
with a publicly registered corporation. Some of these perceived benefits may
include:
*providing liquidity for incentive stock options or similar benefits
for key employees,
*providing liquidity for all shareholders (subject to restrictions of
applicable federal and state securities statutes),
*the opportunity to have the status of a public company, without
incurring the cost and time required to conduct an initial public
offering, and.
*making it easier to obtain additional equity financing that may be
sought.
Acquisition Structure
In implementing a structure for a particular business acquisition, we
may become a party to a merger, consolidation, reorganization, joint venture, or
license agreement with another corporation or entity. The transaction may also
be structured as an acquisition of substantially all the assets of another
company or as a purchase of all of the outstanding stock of a corporation. On
the consummation of a transaction, it is possible that our present management
and shareholders may no longer be in control.
We intend to use our available cash, common stock, preferred stock,
debt or a combination of these to effect a business combination. While we cannot
predict the actual terms of a transaction, it may be expected that the parties
to the business transaction will find it desirable to avoid the creation of a
taxable event and thereby structure the acquisition as a so-called `tax-free"
reorganization.
With respect to any merger, acquisition or business combination,
negotiations with target company management are expected to focus on the
percentage of our company that the target company shareholders will acquire in
the business transaction. Depending upon, among other things, the target
company's assets and liabilities, our shareholders may hold a substantially
smaller percentage ownership interest following any merger, acquisition or
business
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combination. Any merger, acquisition or business venture effected by us may have
a significant dilutive effect on the percentage of shares held by our then
existing shareholders.
Competition
We encounter intense competition in our search for potential business
opportunities. There are many established venture capital firms, leveraged-buy
out firms, angel investors and investment bankers that have significantly
greater financial and personnel resources and technical expertise than we do. In
view of our limited resources, we expect to be at a significant competitive
disadvantage compared to our competitors.
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Employees
As of May 1, 2002, the Company had three employees. Arnold Roseman is
our Chief Financial Officer and Robert Dixon and William Knuff are our Co-Chief
Executive Officers. Neither Mr. Dixon nor Mr. Knuff has received any
compensation from the Company to date.
ITEM 2. DESCRIPTION OF PROPERTY
We are currently leasing 395 square feet of office space at 433 Plaza
Real, Suite 275, Boca Raton, Florida from Mizner Business Center Corp. The lease
is for a period of six months and expires on June 30, 2002. Our rent is $1,617
per month. After this lease expires, we plan on moving our corporate
headquarters to 150 Post Street, Suite 405, San Francisco, California.
ITEM 3. LEGAL PROCEEDINGS
At the present time, we are a party to certain litigation matters which
are routine and incidental to our previous brokerage operations. If resolved
unfavorably, we do not believe that any of these matters will have a material
adverse effect on our operations. However, recently, one party has threatened
litigation, which may be material to our company.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
No matters were submitted during the fourth quarter of the calendar
year covered by this report.
PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Market Information
Our common stock began trading on the Nasdaq SmallCap Market System
under the symbol "SHOC" on March 15, 2000. There was no trading market for our
securities before our initial public offering. In November 2001, we were
delisted from the Nasdaq SmallCap Market and listed on the OTC Bulletin Board.
Effective as of May 1, 202, we changed our trading symbol to "SRHO."
The following table sets forth high and low sales price for our common
stock during fiscal 2002 and 2001, as reported by Commodity Systems, Inc. These
quotations represent prices between dealers and does not reflect retail mark-ups
or markdowns or commissions.
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Period High Low
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February 1, 2001 - April 30, 2001 . $ 2.38 $ 1.06
May 1, 2001 - July 31, 2001 ....... $ 1.49 $ .63
August 1, 2000 - October 31, 2000 . $ .95 $ .53
November 1, 2001 - January 31, 2002 $ .65 $ .22
March 15, 2000 - April 30, 2000 ... $ 9.50 $ 2.50
May 1, 2000 - July 31, 2000 ....... $ 3.25 $ 1.81
August 1, 2000 - October 31, 2000 . $ 3.25 $ 1.31
November 1, 2000 - January 31, 2000 $ 2.75 $ 1.38
Holders
As of May 1, 2002, we had 12 holders of record of our common stock. We
believe there are in excess of 700 beneficial owners of our stock.
Dividend Policy
We have never paid cash dividends on our common stock. Payment of
dividends will be within the sole discretion of the Company's Board of Directors
and will depend, among other factors, upon earnings, capital requirements and
the operating and financial condition of the Company. At the present time, the
Company's anticipated financial capital requirements are such that it intends to
follow a policy of retaining earnings in order to finance the development of its
business.
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
Results of Operation
The following discussion and analysis should be read in conjunction
with the consolidated financial statements of the Company and related footnotes
of the Company.
Discontinued Operations
On August 31, 2001, we consummated an Asset Sale, whereby we
transferred our Brokerage Assets to BlueStone. Additionally, we agreed that
BlueStone would be permitted (but not obligated) to offer employment to some or
all of our personnel. In connection with the August 2001 Agreement, we
transferred and assigned to BlueStone all of our rights, title and interest to
all of the trademarks, tradenames, service marks and copyrights owned and used
by our company. Additionally, we were entitled to sublease or assign to
BlueStone all of our rights,
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title and interest to all properties where our company operates or conducts
retail and institutional brokerage business. In connection with the August 2001
Agreement, we also transferred or assigned to BlueStone substantially all of our
furniture, fixtures and equipment. In connection with the asset sale, the name
of Shochet Securities, Inc., our former subsidiary, was changed to SSI
Securities, Inc. ("SSI").
As consideration for the Asset Sale, under the August 2001 Agreement,
BlueStone was obligated to pay us a monthly cash fee (the "Fee") equal to eight
percent (8%) of gross revenue, as defined. Additionally, we were issued 100,000
common shares of BHC and BlueStone assumed our obligation under a $500,000
principal amount subordinated note that was owed to our majority shareholder.
BlueStone also agreed to assume any obligation that we had under a clearing
agreement with Salomon Brothers Holding Company, Inc. and to indemnify and hold
harmless the Company from any liability under or arising out of that agreement.
As of October 31, 2001, we valued our investment in the 100,000 common shares of
BHC at fair market value, which amounted to $40,000 or $.40 per share and is
included in other assets.
Subsequent to October 31, 2001, we and SSI entered into the November
2001 Agreement with BlueStone, BHC and Sands, which amended and supplemented the
August 2001 Agreement and allowed for the subsequent transfer of the Brokerage
Assets from BlueStone to Sands. Under the November 2001 Agreement, we
relinquished our rights to receive the Fee in exchange for an aggregate and
immediate cash payment of $314,000. In addition, the parties further agreed that
certain lease obligations of SSI relating to former branch offices of SSI
previously intended to be transferred to BlueStone would be assumed by Sands.
Current Business Plan
Our current business plan is primarily to serve as a vehicle for the
acquisition of a target business that we believe will have significant growth
potential. We intend to use our available cash, capital stock, debt or a
combination of these to effect a business combination with a company that
desires to establish a public trading market for its securities while avoiding
what it may deem to be adverse consequences of undertaking a public offering
itself, such as time delays, significant expense, loss of voting control and
other burdens including significant professional fees. The business combination
may be with a financially stable, mature company or a company that is
financially unstable or in its early stages of development or growth.
In seeking to attain our business objective, excepting the brokerage
and related industries, we may focus on brokerage services or investment banking
related businesses, but will not restrict our search to any particular industry.
We may investigate businesses of essentially any kind or nature and participate
in any type of business that may, in our management's opinion, meet our business
objectives. We emphasize that the description in this report of our business
objectives is extremely general and is not meant to restrict the discretion of
our management to search for and enter into potential business opportunities. We
have not chosen the particular
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business in which we will engage and have not conducted any market studies with
respect to any business or industry for you to evaluate the possible merits or
risks of the target business or the particular industry in which we may
ultimately operate.
RESULTS OF OPERATIONS
During August 2001, we discontinued substantially all of our business
operations except for the maintenance of our corporate existence and the search
for potential merger/acquisition candidates. Our plan is to either obtain
capital required to resume business operations or to acquire complimentary
businesses in exchange for shares of our common stock. However, no assurances
can be provided that such business plan can be attained.
Year ended January 31, 2002 compared to year ended January 31, 2001
Revenues
Investment banking revenues for the year ended January 31, 2001 were
$289,000 versus none for the year ended January 31, 2002. During the year ended
January 31, 2001, we participated in the underwriting of our Company's initial
public offering.
Interest income for the year ended January 31, 2002 decreased 86% to
$25,000 as compared to interest income of $181,000 for the year ended January
31, 2001. This decrease is due to our decreased cash position in interest
producing bank accounts, and lower market interest rates.
Operating Expenses
Operating expenses were $685,000 for the year ended January 31, 2002 as
compared to $305,000 for the year ended January 31, 2001. During the year ended
January 31, 2002, we incurred professional fees and consulting fees related to
the sale of our net assets amounting to approximately $290,000.
Losses from discontinued operations were $5,287,000 for the year ended
January 31, 2002 as compared to a loss from discontinued operations of
$3,240,000 for the year ended January 31, 2001.
No additional meaningful comparisons can be made for the year ended
January 31, 2002 as compared to the year ended January 31, 2001.
As a result of the above, we reported a net loss of $5,947,000 for the
year ended January 31, 2002 as compared to a net loss of $3,075,000 for the year
ended January 31, 2001.
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LIQUIDITY AND CAPITAL RESOURCES
Substantially all of our assets at January 31, 2002 are highly liquid,
consisting of cash and cash equivalents. As of January 31, 2002, we had cash and
cash equivalents equal to $1,164,000.
During the year ended January 31, 2002, cash used in operating
activities was $730,000 as compared to cash used in operating activities of
$6,606,000 for the year ended January 31, 2001. The primary reason for the
decrease in cash used in operating activities was the sale of securities
purchased under an agreement to resell during the year ended January 31, 2002 of
$3,043,000 compared to the purchase of securities purchased under an agreement
to resell during the year ended January 31, 2001. Additionally, during the year
ended January 31, 2001, we had a $1,000,000 repayment of liabilities
subordinated to the claims of general creditors, which is included in net asset
from discontinued operations.
Cash provided by financing activities during the year ended January 31,
2002 was $0 as compared to cash provided by financing activities of $7,926,000
for the year ended January 31, 2001. We received $7,926,000 from the sale of
common stock during the year ended January 31, 2001.
Currently, we lease office facilities under noncancelable operating
leases. Certain leases have renewal options and clauses for escalation and
operating cost adjustments. As further discussed in Consolidated Financial
Statements, the Company subleased or assigned to Bluestone or Sands all of the
Company's rights, title and interest under specific leases, as defined in the
November 2001 Agreement. Sands and Bluestone assumed the Company's obligation to
pay the monthly rental payments under each respective lease. At January 31,
2002, future minimum rental commitments under such leases were approximately
$1,200,000 in the aggregate. Although, we are making every effort to negotiate
out of our existing lease obligations, there can be no assurances that we will
be successful in these efforts.
The Company has been made aware that neither Bluestone nor Sands has
made any rental payments under these leases as required under the August 2001
Agreement and the November 2001 Agreement. Accordingly, the Company believes it
is likely that litigation may be commenced by the landlords against the Company.
The Company intends to assert its rights for indemnification for liability under
these leases against BlueStone and Sands and to pursue other available remedies.
Our overall capital and funding needs are continually reviewed to
ensure that our capital base can support the estimated needs of our business
units. These reviews take into account business needs as well as regulatory
capital requirements. Based upon these reviews, we believe that our capital
structure is adequate for current operations and reasonably foreseeable future
needs.
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Due to our intent to remain a shell corporation until a merger or
acquisition is identified, it is anticipated that our cash requirements will be
minimal, and that all necessary capital, to the extent required, will be
satisfied by our cash from operations and any cash from investments. We do not
anticipated that we will have to raise capital in the next twelve months. We
also not expect to acquire any plant or significant equipment.
Risk Factors
We have a history of losses and our past performance is not reflective of our
future performance
We have incurred substantial losses over the last few years and have an
accumulated deficit of approximately $9,574,000 as of January 31, 2002. As a
result of the sale of substantially all of our brokerage operations in August
2001, we no longer have any operating history on which you can judge our future
operating performance. Our historical results of operations are not useful as a
basis for predicting our future operating results. We are not certain if our new
business plan will be successful.
We may have significant contingent liabilities relating to certain leases for
our former office facilities
We leased certain office facilities under noncancelable operating
leases. In connection with the sale of substantially all of our brokerage assets
in August and November 2001, Sands and BlueStone agreed to assume our
obligations to pay the monthly rental payments under each of these respective
leases. At January 31, 2002, the future minimum rental commitments under such
leases were approximately $1.2 million in the aggregate. Although we are trying
to negotiate out of these lease obligations, there can be no assurances that we
will be successful. We have been made aware that neither Bluestone nor Sands has
made any rental payments under these leases as required under the August 2001
Agreement and the November 2001 Agreement. As such the Company believes that
litigation may be commenced by the landlords against the Company. We intend to
assert our rights for indemnification for liability under these leases against
BlueStone and Sands and to pursue other available remedies. If we are
unsuccessful in our efforts to obtain indemnification from BlueStone and Sands,
these obligations will have a material adverse effect on our results of
operations and financial condition.
Our future success depends upon our ability to enter into a profitable
acquisition, merger or other business combination and we cannot assure you that
we will be able to enter into such transactions or that such transactions will
be profitable.
We do not expect to generate operating revenues until we complete an
acquisition, merger or other type of business combination. We can not assure you
that we will be able to locate target companies with whom we can engage in
business combinations. There is intense
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competition in the venture capital and mergers and acquisition market. Even if
we do complete a business combination, we may not be able to operate on a
profitable basis and the combined business entity may not be successful.
Since we have not currently selected a particular industry or target business
with which to complete a business combination, you may not be able to ascertain
the merits or risk of the industry or business in which we may ultimately
operate
We have not selected any particular industry or any target business on
which to concentrate our search for a business combination. Accordingly, there
is no current basis for prospective investors to evaluate the possible merits or
risks of the particular industry or the target business in which we may
ultimately operate. To the extent we complete a business combination with a
financially unstable company or otherwise developmental entity, we may be
affected by numerous risks inherent in the business operations of such entities.
If we complete a business combination with an entity in an industry
characterized by a high level of risk, we may be affected by the currently
unascertainable risks of the industry. Although our management will endeavor to
evaluate the risks inherent in a particular industry or target business, we
cannot assure you that we will be able to properly identify or assess all of the
significant risk factors.
We may issue shares of our common stock and/or preferred stock to complete a
business combination, which would reduce the equity interest of our existing
shareholders
Our Certificate of Incorporation authorizes the issuance of up to15
million shares of our common stock. As of May 9, 2002, we have 2,150,000 shares
issued and outstanding. We also have an aggregate of 122,000 options issued and
outstanding as of May 9, 2002. As such, our Board of Directors has the power,
without shareholder approval to issue up to 12,728,000 shares of our common
stock. Although we have no commitments as of May 9, 2002, to issue any
securities, we may issue a substantial number of additional shares of our common
stock or preferred stock, or a combination of common and preferred stock, to
complete a business combination. Any issuances of additional securities, may
-significantly reduce your equity interest in our company,
-result in substantial dilution to our current shareholders
-result in a change of control of the company,
-adversely affect prevailing market prices for our common stock.
We may be unable to obtain additional financing, if required, to complete a
business combination or to fund the operations and growth of the target business
We may seek additional financing to complete a business combination or
to fund the operations and growth of a target business. We cannot assure you
that such financing will be available on acceptable terms, if at all. To the
extent that such additional financing proves to be unavailable when needed to
complete a particular business combination, we would, in all
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likelihood, be compelled to restructure the transaction or abandon that
particular business combination and seek an alternative. In addition, our
failure to secure additional financing could have a material adverse effect on
the continued development and growth of our business.
There is a limited market for our stock and we cannot assure you that a more
significant market will develop
Our common stock is currently listed on the OTC Bulletin Board under
the symbol "SRHO." There has been limited trading volume in our stock during the
past two fiscal years, We cannot predict the extent to which investor interest
in the company will lead to the development of a trading market or how liquid
the trading market will become. If an active trading market does not develop or
is not sustained, it may be difficult for you to sell your shares at a price
that is attractive to you. As a result, an investment in our common shares may
be totally illiquid and investors may not be able to sell their shares in a
timely manner or at prices they consider attractive.
As of May 1, 2002, our stock is a penny stock and sales are subject to
additional market disclosures
As of May 1, 2002, or stock is a "penny stock" as that term is
generally defined in the Securities Exchange Act of 1934 as equity securities
with a price of less than $5.00 per share. Our shares are subject to rules that
impose sales practice and disclosure requirements on broker-dealers who engage
in certain transactions involving a penny stock. However, if our net tangible
assets increase or our share price increases to over $5.00 per share, we will no
longer be subject to the penny stock rules.
Under the penny stock regulations, a broker-dealer selling a penny
stock to anyone other than an established customer or "accredited investor" must
make a special suitability determination regarding the purchaser and must
receive the purchaser's written consent to the transaction prior to the sale,
unless the broker-dealer is otherwise exempt. Generally, an individual with a
net worth in excess of $1,000,000 or annual income exceeding $200,000
individually or $300,000 together with his or her spouse is considered an
accredited investor. In addition, under the penny stock regulations the
broker-dealer is required to:
-deliver, prior to any transaction involving a penny stock, a
disclosure schedule prepared by the Securities and Exchange Commission
relating to the penny stock market, unless the broker-dealer or the
transaction is otherwise exempt;
-Disclose commission payable to the broker-dealer and its registered
representatives and current bid and offer quotations for the
securities;
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-Send monthly statements disclosing recent price information pertaining
to the penny stock held in a customer's accounts, the account's value
and information regarding the limited market in penny stocks;
-Make a special written determination that the penny stock is a
suitable investment for the purchaser and receive the purchaser's
written agreement to the transaction, prior to conducing any penny
stock transaction in the customer's account;
Because of these regulations, broker-dealers may encounter difficulties in their
attempt to sell shares of our common stock, which may affect the ability of
selling shareholders or other holders to sell their shares in the secondary
market and have the effect of reducing the level of trading activity in the
secondary market. Moreover, our shares may only be sold or transferred by our
shareholders in those jurisdictions in which an exemption for such "secondary
trading" exists or in which the shares may have been registered.
A large percentage of our stock is owned by our two directors
Our two directors beneficially own 1,213,675 shares or approximately
56.45% of our outstanding common stock. These shareholders could, if they were
to act together, affect the outcome of other shareholder votes, which could,
among other things, affect elections of directors, delay or prevent a change in
control or other transactions that be might be beneficial to you as a
shareholder.
ITEM 7. FINANCIAL STATEMENTS
Independent Auditors' Report ............... F-1
Balance Sheet .............................. F-2
Statement of Operations .................... F-3
Statement of Changes in Shareholders' Equity F-4
Statements of Cash Flows ................... F-5
Notes to Financial Statements .............. F-6
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
On September 14, 2001, we dismissed KPMG Peat Marwick ("KPMG"), as our
independent accountants. Our decision to change accountants was approved by our
Board of Directors. KPMG was not notified of this decision until October 2, 2001
and KPMG did not conduct a review our quarterly consolidated financial
information in our Form 10-QSB for the quarter ended July 31, 2001. KPMG's
report on our financial statements for the years ended January 31, 2001 and
2000, did not contain an adverse opinion or disclaimer of opinion, nor were they
qualified or modified as to uncertainty, audit scope or accounting principles.
During
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our fiscal year ended January 31, 2001, and the subsequent interim period
through October 2, 2001, there were no disagreements with KPMG on any matters of
accounting principles or practices, financial statement disclosure or auditing
scope or procedure, which, if not resolved to the satisfaction of KPMG would
have caused it to make reference to the subject matter of the disagreement in
connection with its report on these financial statements for those periods.
Effective as of September 14 2001, we engaged the firm of Fedman Sherb
& Co., P.C. ("FS") as independent accountants for our fiscal year ending January
31, 2001, subject to FS's due diligence review. FS was also engaged effective as
of September 14, 2001 to perform a review of the quarterly consolidated
financial information included in our Form 10-QSB for the quarter ended January
31, 2002. We did not consult with FS regarding the application of accounting
principles to a specific transaction or the type of audit opinion that might be
rendered on our financial statements, and no written or oral advice was provided
by FS that was a factor considered by us in reaching our decision as to the
accounting, auditing or financial reporting issues.
PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS
Officers, Directors and Significant Employees as of March 28, 2002
As of March 28, 2002, our directors, executive officers and significant
employees together with their ages and a brief description of their backgrounds,
are as follows:
Name Age Position
---- --- --------
Robert E. Dixon 31 Co-Chief Executive Officer and Director
William G. Knuff, III 34 Co-Chief Executive Officer and Director
Arnold Roseman 54 Chief Financial Officer
ROBERT E. DIXON was nominated to serve as a director of ours and our
co-chief executive officer effective as of March 28, 2002. Since 1998, Mr. Dixon
has served as the managing member of the investment firm of Sutter Capital
Management LLC. Sutter Capital is the manager of Sutter Opportunity Fund 2, LLC.
Prior to 1998, Mr. Dixon was attending business school.
WILLIAM G. KNUFF, III was nominated to serve as a director of ours and
our co-chief executive officer effective as of March 28, 2002. Since August
2001, Mr. Knuff has acted as a managing director of Sutter Capital Management
LLC. Mr. Knuff has also acted as a consultant to RegalRetreats, LLC, an online
luxury property registry, since he co-founded it in May 2000 as
14
well as to GainsKeeper, Inc., a provider of automated financial tools and
services for the investment community, since May 1999. From August 1998 until
joining Sutter Capital Management LLC, he worked as a senior associate in
investment banking at Robertson Stephens, Inc. Prior to 1998, Mr. Knuff was
attending business school.
ARNOLD I. ROSEMAN has served as our chief financial officer since June
2001 and chief financial officer of Shochet Securities since March 2000. From
March 1999 to February 2000, Mr. Roseman served as director of compliance of
First Colonial Securities Group, a broker-dealer located in Boca Raton, Florida.
From February 1994 to October 1998, Mr. Roseman served as compliance director
for Biltmore Securities, Inc. From 1983 to 1993, Mr. Roseman served as senior
vice president and chief financial officer of First Institutional Securities. In
addition, from 1973 to 1976, Mr. Roseman was employed by the National
Association of Securities Dealers as a senior examiner and performed special
projects for Nasdaq in Washington DC. Mr. Roseman received his B.A. - Finance
(cum laude) from Franklin Pierce College.
Director Compensation
Directors serve until the next annual meeting of shareholders or until
their successors are elected and qualified. Officers serve at the discretion of
the Board of Directors. Directors receive no additional compensation for
services rendered as members of the Company's Board of Directors.
Officers, Directors and Significant Employees prior to March 28, 2002
Prior to the change of control on March 28, 2002, the following persons
served as our officers, directors and key employees during fiscal 2001:
Name Age Position
---- --- --------
Roger N. Gladstone 48 Chief Executive Officer
David F. Greenberg 54 President & Chief Operating Officer
John P. Margaritis 51 Director
Arnold I. Roseman 54 Chief Financial Officer
ROGER N. GLADSTONE served as our chairman and chief executive officer
from November 1999 through March 28, 2002. He has also served as an executive
officer of our subsidiary, Shochet Securities, Inc. since November 1995. Mr.
Gladstone has served as vice chairman of the board of directors of Firebrand
Financial Group since June 1999 and as a director of that company since January
1987. From 1987 to June 1999, he served as president of Firebrand Financial
Group.
15
DAVID F. GREENBERG has served as our president, chief operating officer
and a director from November 1999 through March 28, 2002. He has also served as
chief operating officer of Shochet Securities from November 1995 through March
28, 2002. Mr. Greenberg has served as president of SSI Securities since June
1999. Mr. Greenberg was employed by GKN Securities Corp., a broker dealer and
wholly owned subsidiary of Firebrand Financial Group, from 1991 to July 1999,
initially as director of compliance and then as branch manager of its New York
office. In January 1996, he became GKN's senior vice president and director of
operations and risk management, in which capacity he served until January 2000.
From 1985 to 1986, Mr. Greenberg served as president and chief executive officer
of First New York Discount Corp., a broker-dealer, which he founded. From 1978
to 1985, Mr. Greenberg served in several capacities, including as director of
compliance and branch liaison manager and general securities and options
principal for US Clearing Corp. Mr. Greenberg also serves as a member of
Securities Industry Association - Discount Brokerage Committee Year 2000.
JOHN P. MARGARITIS served as a director from February 2000 through
March 28, 2002. He has also served as a director of Firebrand Financial Group
since August 1996. Mr. Margaritis served as president and chief executive
officer of Firebrand Financial Group from December 1999 until December 2001 and
as chairman of Firebrand Financial Group from December 2000 until December 2001.
Mr. Margaritis has served as a consultant to Firebrand Financial Group since
January 2002. From September 1998 to December 1999, Mr. Margaritis served as
president and chief executive officer of The Hawthorn Group New York, an
international public relations firm. From June 1997 until September 1998, Mr.
Margaritis served as chief executive officer of Margaritis & Associates, a
public relations consulting firm.
NASDR MATTER. In August 1997, GKN Securities and certain of its
executive officers, senior managers or former and present brokers, including
Roger Gladstone and David Greenberg, reached settlements with the NASDR
resolving an NASDR investigation concerning alleged excessive mark-ups on
warrants for seven companies underwritten by GKN Securities and for which it
made a market during the period from December 1993 through April 1996. This
settlement was entered into without admitting or denying the NASDR's
allegations. Under the settlement, GKN Securities consented to sanctions
including censure, the payment of restitution, interest and fines of $1,723,000
and engaged an independent consultant to review GKN Securities' policies,
practices and procedures relating to the fair pricing and commissions charged to
customers and related to supervisory and compliance policies and structure and
agreed to implement the recommendations of the independent consultant. Roger
Gladstone consented to a censure, a $50,000 fine and a suspension from
association in a capacity with any member of the NASD for 30 days. David
Greenberg consented to a $15,000 fine and to a suspension from any supervisory
position with any member of the NASD for 10 days.
Compliance with Section 16(a) of the Securities Exchange Act of 1934
Based solely on review of Form 3's and Form 4's furnished to the
Company, we believe that all of our officers, directors and 10% shareholders
have complied with all applicable Section 16(a) requirements during fiscal 2001.
16
ITEM 10. EXECUTIVE COMPENSATION
The table below sets forth the aggregate compensation paid to our chief
executive officer and all other executive officers that received compensation
greater than $100,000 for the fiscal year ended January 31, 2002 (collectively,
the "Named Executive Officers"). With respect to the Named Executive Officers,
the Summary Compensation Table provides compensation information for services
rendered to us during the fiscal years ended January 31, 2001 and 2002,
respectively.
17
SUMMARY COMPENSATION TABLE
-------------------------------------------------------------------------------------------------------
LONG TERM
COMPENSATION
ANNUAL COMPENSATION AWARDS
-------------------------------------------------------------------
NAME AND OTHER ANNUAL SECURITIES UNDERLYING
PRINCIPAL YEAR SALARY($) COMPENSATION ($) OPTIONS/SARS (#)
POSITION
-------------------------------------------------------------------------------------------------------
ROGER N. GLADSTONE
Chief Executive
Officer 2002 120,000 --- ---
2001 120,000 75,159.30(1) 36,000
-------------------------------------------------------------------------------------------------------
DAVID GREENBERG
President 2002 150,000 --- ---
2001 150,000 22,964.87(1) 36,000
------------------------------------------------------------------------------------------------------
(1) Represents brokerage commissions earned by these individuals.
Employment Arrangements
During fiscal 2002, we had employment agreements with Roger Gladstone
and David Greenberg. However, in connection with the change of control of our
company in March 2002, these employment agreements were terminated.
Option Grants
We did not grant any stock options to the Named Executive Officers
during the fiscal year ended January 31, 2002.
Fiscal Year end Option Values
The following table sets forth the fiscal year-end option values of
outstanding options at January 31, 2002, and the dollar value of unexercised,
in-the-money options for the Named Executive Officers. There were no stock
options exercised by any of the Named Executive Officers during the fiscal year
ended January 31, 2002.
18
Number of Securities Underlying Value of Unexercised
In-the-Money
Unexercised Options at Fiscal Year End at Fiscal Year End
Name Exercisable/Unexercisable Exercisable/Unexercisable
---- ------------------------- ------------------------
Roger N. Gladstone 12,000/24,000 0
David F. Greenberg 12,000/24,000 0
1999 Performance Equity Plan
In November 1999, our board of directors adopted our 1999 Performance
Equity Plan. Our stockholders approved the plan in December 1999. This plan
authorizes the granting of awards of up to 350,000 shares of common stock to our
key employees, officers, directors and consultants. Awards consist of stock
options (both nonqualified options and options intended to qualify as incentive
stock options under Section 422 of the Internal Revenue Code of 1986),
restricted stock awards, deferred stock awards, stock appreciation rights and
other stock-based awards, as described in the plan. The plan is administered by
our board of directors which determines the persons to whom awards will be
granted, the number of awards to be granted and the specific terms of each
grant, including their vesting schedule, subject to the provisions of the plan.
The plan will terminate at such time as no further awards may be granted and all
awards granted under the plan are no longer outstanding. However, incentive
options may only be granted until December 1, 2009.
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth information as of May 1, 2002, with
respect to the number of shares of common stock beneficially owned by (i) each
director of the Company, (ii) all directors and officers of the Company as a
group and (iii) each shareholder known by us to be a beneficial owner of more
than 5% of any class of our voting securities as of April 15, 2002. Except as
indicated below, the address for each beneficial owner is c/o Sutter Capital
Management, LLC, 150 Post Street, Suite 320, San Francisco, CA 94108. As of
April 15, 2002, we had 2,150,000 shares of our common stock issued and
outstanding.
Name of Individuals or Number Amount and Nature of
of Persons in Group Beneficial Ownership Percentage of Class
-----------------------------------------------------------------------------------------------------------
Sutter Opportunity Fund 2, LLC 1,213,675 56.45%
Robert E. Dixon 1,213,675(1) 56.45%
William G. Knuff, III 0 0
All Executive Officers and
Directors as a Group ( 2 persons) 56.45%
19
--------------------------
(1) Represents 1,213,675 shares of common stock to be held by Sutter Opportunity
Fund 2, LLC. Mr. Dixon is the principal owner and manager of Sutter Capital
Management, LLC, the manager of Sutter Opportunity Fund 2, LLC.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
We, Shochet Securities and Firebrand Financial Group and affiliates of
Firebrand Financial Group engaged in a variety of transactions between and among
each other in the ordinary course of our businesses. We have not retained an
independent third party to evaluate transactions with Firebrand Financial Group
and its affiliates and there has been no independent committee of the board of
directors to evaluate these transactions. The terms and conditions of these
transactions, including fees or other amounts paid by us connection with these
transactions, were agreed upon by all parties. We believe that each of these
affiliated transactions were no less favorable than those that could have been
obtained on an arms-length basis from an unaffiliated party.
On August 31, 2001, we completed the transactions contemplated by an
agreement, dated August 1, 2001 and supplemented and amended on August 31, 2001
and November 7, 2001, with Shochet Securities, BlueStone Capital Corp. and
BlueStone Holding Corp. Pursuant to the agreement, Shochet Securities sold and
transferred to BlueStone the substantial majority of its securities brokerage
accounts, registered representatives and employees and other tangible and
intangible assets. The agreement also provided that BlueStone would assume an
fully pay at the closing of the transaction Shochet's obligations with respect
to a $500,000 principal subordinated note due in August 2001 issued by Shochet
to Firebrand Financial Group. Following this transaction, Shochet Securities
filed a Form BDW to relinquish its license as a broker-dealer and is no longer
an operating subsidiary of ours.
In connection with this transaction, we entered into an inter-company
services agreement with Shochet Securities and Firebrand Financial Group, dated
as of August 1, 2001. Under the services agreement, Firebrand Financial Group
provided us and Shochet Securities with services in connection with the
negotiation and consummation of the agreement; Firebrand Financial Group would
assist Shochet Securities in the subsequent wind-down of its operations for a
period not to exceed three-months from the date of the closing of the
transaction; and Firebrand Financial Group would provide us and Shochet
Securities with use of office space and other administrative and back-office
services. As consideration for these services, during the fiscal year ended
January 31, 2002, we paid to Firebrand Financial Group or accrued (and will
subsequently pay such accrual during this fiscal year) a total of $119,109. This
inter-company services agreement was terminated upon completion of the
transaction under the purchase agreement between Firebrand Financial Group and
the Sutter Fund.
20
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K
A. Exhibits
1.1 Form of Underwriting Agreement (incorporated by reference to Exhibit 1.1 in
the Company's Registration Statement on Form SB-2 filed on February 23, 2000).
2.1 Agreement dated as of August 1, 2001, among Shochet Holding Corp., Shochet
Securities, Inc., BlueStone Capital Corp. And HealthStar Corp. (incorporated by
reference as Exhibit 10.1 in the Company's Current Report on Form 8-K dated
August 31, 2001 filed with the SEC on September 14, 2001).
2.2 Supplement and Amendment dated August 31, 2001 (incorporated by reference as
Exhibit 10.2 in the Company's Current Report on Form 8-K dated August 31, 2001
filed with the SEC on September 14, 2001).
2.3 Form of Inter-Company Services Agreement, dated as of August 1, 2001, by and
among Shochet Holding Corp., Shochet Securities, Inc. and Firebrand Financial
Group, Inc. (incorporated by reference to Exhibit 10.3 in the Company's Current
Report on Form 8-K dated August 31, 2001 filed with the SEC on September 14,
2001).
2.4 Agreement dated as of November 7, 2001 among Shochet Holding Corp., SSI
Securities Corp., Bluestone Capital Corp., BlueStone Holding Corp. And Sands
Brothers & Co., Ltd. (incorporated by reference as Exhibit 10.4 in the Company's
Amended Current Report on Form 8-K dated August 1, 2001 filed with the SEC on
November 14, 2001).
3.1 Certificate of Incorporation of Shochet Holdings Corp. (incorporated by
reference as Exhibit 3.1 in the Company's Registration Statement on Form SB-2
filed with the SEC on February 23, 2000.
3.2 Certificate of Amendment of Shochet Holdings Corp. (incorporated by
reference as Exhibit 3.2 in the Company's Registration Statement on Form SB-2
filed on February 23, 2000).
3.3 Certificate of Amendment of Shochet Holdings Corp. (incorporated by
reference as Exhibit 3.2 in the Company's Registration Statement on Form SB-2,
filed on February 23, 2000).
3.4 Bylaws of Shochet Holding Corp. (incorporated by reference as Exhibit 3.2(a)
in the Company's Registration Statement on Form SB-2, filed on February 23,
2000).
3.5 Amendment No. 1 to Bylaws of Shochet Holding Corp. (incorporated by
reference as Exhibit 3.3 in the Company's Registration Statement on Form SB-2,
filed on February 23, 2000).
10.1 1999 Performance Equity Plan (incorporated by reference as Exhibit 10.1 in
the Company's Registration Statement on Form SB-2, filed on February 23, 2000).
21.1 List of Subsidiaries
21
B. Reports on Form 8-K
On October 2, 2001, we filed a Report on Form 8-K dated September 14,
2001 reporting information contained in Item 4 - Change in Registrant's
Certifying Accountant.
On October 10, 2001, we filed an amendment to a Report on Form 8-K
dated October 2, 2001 reporting information contained in Item 4 - Change in
Registrant's Certifying Accountant.
On October 18, 2001, we filed an amendment to a Report on Form 8-K
dated October 2, 2001 reporting information contained in Item 4- Change in
Registrant's Certifying Accountant.
On November 14, 2001, we filed an amendment to a Report on Form 8-K
dated August 31, 2001 reporting information contained in Item 2 - Acquisition or
Disposition of Assets and Item 7 - Financial Statements and Exhibits, which
contained pro forma financial statements of our company, with respect to the
sale and transfer to BlueStone of our Brokerage Assets. We filed an unaudited
pro forma balance sheet as of July 31, 2001, an unaudited pro forma statement of
operations for the six months ended July 31, 2001 and for the year ended January
31, 2001.
C. Exhibits
Exhibits required by Section 601 of Regulation SB (see (A) above)
SIGNATURES
Pursuant to the requirements of Section 13 or Section 15(d) of the
Securities and Exchange Act of 1934, the Company has duly caused this report to
be signed on its behalf by the undersigned, thereunto duly authorized, on this
14th day of May, 2002.
/s/ Robert Dixon
----------------
Robert Dixon
Co-Chief Executive Officer
(Principal Executive Officer and
Principal Financial Officer)
In accordance with the Exchange Act, this Report on Form 10-KSB has
been signed by the following persons on behalf of the Company in the capacities
and on the dates indicated.
Signature Title Date
/s/Robert Dixon Co-Chief Executive Officer May 15, 2002
--------------- And Director
/s/ William G. Knuff, III Co-Chief Executive Officer May 15, 2002
------------------------- and Director
22
SUTTER HOLDING COMPANY, INC. AND SUBSIDIARIES
(Formerly Shochet Holdings, Inc.)
CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED JANUARY 31, 2002 AND 2001
CONTENTS
Report of Independent Certified Public Accountants...........................F-2
Consolidated Financial Statements:
Consolidated Balance Sheet...............................................F-3
Consolidated Statements of Operations....................................F-4
Consolidated Statement of Stockholders' Equity...........................F-5
Consolidated Statements of Cash Flows....................................F-6
Notes to Consolidated Financial Statements...........................F-7 to F-14
F-1
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
To the Board of Directors and Stockholders of
Sutter Holding Company Inc.
We have audited the accompanying consolidated balance sheet of Sutter Holding
Company Inc. and Subsidiaries (formerly Shochet Holding Corp.) as of January 31,
2002 and the related consolidated statements of operations, stockholders' equity
and cash flows for the two years ended January 31, 2002 and 2001. These
consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
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 consolidated
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 Sutter Holding
Company Inc. and Subsidiaries (formerly Shochet Holding Corp.) as of January 31,
2002 and the results of their operations and their cash flows for the two years
ended January 31, 2002 and 2001, in conformity with generally accepted
accounting principles in the United States of America.
The accompanying financial statements have been prepared assuming that Sutter
Holding Company (formerly Shochet Holding Corp.) will continue as a going
concern. As more fully described in Note 3, the Company has incurred recurring
operating losses and will have to obtain additional capital to sustain
operations. These conditions raise substantial doubt about the Company's ability
to continue as a going concern. Management's plans in regard to these matters
are also described in Note 3. The financial statements do not include any
adjustments to reflect the possible effects on the recoverability and
classification of assets or the amounts and classification of liabilities that
may result from the outcome of this uncertainty.
Feldman Sherb & Co., P.C.
Certified Public Accountants
New York, New York
April 29, 2002
F-2
SUTTER HOLDING COMPANY AND SUBSIDIARIES
(Formerly Shochet Holdings Corp.)
CONSOLIDATED BALANCE SHEET
January 31, 2002
ASSETS:
Cash and cash equivalents ................................... $ 1,164,000
Notes receivable from officers and employees, net ........... 10,000
Other assets ................................................ 4,000
------------
Total Assets ........................................... $ 1,178,000
============
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES:
Accounts payable and accrued expenses ....................... $ 746,000
Notes payable ............................................... 66,000
------------
Total Current Liabilities .............................. 812,000
------------
STOCKHOLDERS' EQUITY:
Preferred stock ($.0001 par value; 1,000,000 shares
authorized no shares issued and outstanding) ............ -
Common stock ($.0001 par value; 15,000,000 shares
authorized; 2,245,000 shares issued and outstanding) .... -
Treasury stock ............................................. (238,000)
Loans to officers and employees ........................... (18,000)
Additional paid-in capital ................................. 10,196,000
Accumulated deficit ........................................ (9,574,000)
------------
Total Stockholders' Equity ............................. 366,000
------------
Total Liabilities and Stockholders' Equity ............. $ 1,178,000
============
The accompanying notes are an integral part of
these consolidated financial statements.
F-3
SUTTER HOLDING COMPANY AND SUBSIDIARIES
(Formerly Shochet Holdings Corp.)
CONSOLIDATED STATEMENTS OF OPERATIONS
For the Year
Ended January 31,
----------------------------
2002 2001
----------- -----------
REVENUES:
Investment banking ........................ $ - $ 289,000
Interest .................................. 25,000 181,000
----------- -----------
Total Revenues ..................... 25,000 470,000
----------- -----------
OPERATING EXPENSES:
Compensation and benefits ................. 52,000 -
Professional fees ......................... 364,000 222,000
Other expenses ............................ 269,000 83,000
----------- -----------
Total Operating Expenses ............. 685,000 305,000
----------- -----------
Income (loss) from continuing operations ..... (660,000) 165,000
DISCONTINUED OPERATIONS:
Loss from discontinued operations ........ (5,287,000) (3,240,000)
----------- -----------
NET LOSS ..................................... $(5,947,000) $(3,075,000)
=========== ===========
Basic and diluted loss per common share:
Income (loss) from continuing operations ... $ (0.29) $ 0.07
Loss from discontinued operations .......... (2.36) (1.44)
----------- -----------
Net loss per common share .................. $ (1.09) $ (0.33)
=========== ===========
Weighted Shares used in calculations:
Basic and diluted .......................... 2,245,000 2,245,000
=========== ===========
The accompanying notes are an integral part of
these consolidated financial statements.
F-4
SUTTER HOLDING COMPANY AND SUBSIDIARIES
(Formerly Shochet Holdings Corp.)
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY For the Years ended
January 31, 2002 and 2001
Loans to
Common Stock Officers Additional
------------------ Treasury and Paid-in Accumulated
Shares Amount Stock Employees Capital Deficit Total
--------- ------- --------- --------- ----------- ----------- -----------
Balance at January 31, 2000 ......... 1,200,000 $ - $ - $ - $ 2,270,000 $ (552,000) $ 1,718,000
Net proceeds sale of common stock 1,045,000 - - - 7,926,000 - 7,926,000
Purchase of treasury stock ....... - - (122,000) - - - (122,000)
Loans to officers and employees
for the purchase of common stock - - - (166,000) - - (166,000)
Net loss ......................... - - - - - (3,075,000) (3,075,000)
--------- ------- --------- --------- ----------- ----------- -----------
Balance at January 31, 2001 ......... 2,245,000 - (122,000) (166,000) 10,196,000 (3,627,000) 6,281,000
Purchase of treasury stock ....... - - (116,000) - - - (116,000)
Repayment of loans to officers
and employees for the
purchase of common stock ....... - - - 148,000 - - 148,000
Net loss ......................... - - - - - (5,947,000) (5,947,000)
--------- ------- --------- --------- ----------- ----------- -----------
Balance at January 31,2002 .......... 2,245,000 $ - $(238,000) $ (18,000) $10,196,000 $(9,574,000) $ 366,000
========= ======= ========= ========= =========== =========== ===========
The accompanying notes are an integral part of
these consolidated financial statements.
F-5
SUTTER HOLDING COMPANY AND SUBSIDIARIES
(formerly Shochet Holdings Corp.)
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Year Ended January 31,
------------------------------
2002 2001
------------ ------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Income (loss) from continuing operations ..................... $ (660,000) $ 165,000
Adjustments to reconcile net (loss) income to net cash flows
provided by (used) in operating activities:
(Increase) decrease operating assets:
Securities purchased under agreement to resell ........ 3,043,000 (3,043,000)
Notes receivable from officers and employees, net ..... 22,000 (288,000)
Deferred IPO costs, net ............................... - 301,000
Other assets .......................................... 73,000 138,000
Increase (decrease) in operating liabilities:
Note payable related party ................................... (103,000) -
Accounts payable and accrued expenses ................. 746,000 (60,000)
----------- -----------
Net cash provided by (used in ) continuing operating activities 3,121,000 (2,787,000)
----------- -----------
Loss from discontinued operations ............................ (5,287,000) (3,240,000)
Adjustments to reconcile net loss to net cash flows
used in discontinued operations:
Net increase in net assets from discontinued operartions 1,436,000 (579,000)
----------- -----------
Net cash used in discontinued operating activities ............ (3,851,000) (3,819,000)
----------- -----------
Net cash used in operating activities ......................... (730,000) (6,606,000)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from sale of common stock ........................... - 7,926,000
----------- -----------
Net cash provided by financing activities ........................ - 7,926,000
----------- -----------
Net increase (decrease) in cash and cash equivalents ............. (730,000) 1,320,000
Cash and cash equivalents - beginning of year .................... 1,894,000 574,000
----------- -----------
Cash and cash equivalents - end of year .......................... $ 1,164,000 $ 1,894,000
=========== ===========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the year for:
Interest ...................................................... $ - $ 51,000
=========== ===========
Income Taxes .................................................. $ - $ -
=========== ===========
Treasury stock received for note receivable ...................... $ 32,000 $ 288,000
=========== ===========
The accompanying notes are an integral part of
these consolidated financial statements.
F-6
SUTTER HOLDING COMPANY INC. AND SUBSIDIARIES
(Formerly Shochet Holding Corp.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
January 31, 2002
NOTE 1 - ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The Company
The consolidated financial statements include the activities of Shochet Holding
Company Corp. ("Shochet"), Shochet Investment Adviser Corp., Shochet Mortgage
Corp. and SSI Securities Corp. (formerly Shochet Securities Inc. and referred to
herein as "SSI"), Shochet's broker-dealer subsidiary. The foregoing entities are
referred to herein collectively as the "Company". Through SSI, the Company was
engaged primarily in providing full service discount brokerage services through
six branch offices, all of which are in Florida.
On August 31, 2001, the Company transferred ("Asset Sale") substantially all of
the assets comprising its securities brokerage business, including retail and
institutional accounts (collectively, the "Brokerage Assets"), to BlueStone
Capital Corp. ("BlueStone"). The Asset Sale was made under the terms of an
agreement by and among the Company, SSI, BlueStone and BlueStone's parent
company, BlueStone Holding Corp. (formerly HealthStar and referred to herein as
"BHC"), dated August 1, 2001 and amended on August 31, 2001 ("August 2001
Agreement"). On November 7, 2001, the Company, SSI, BlueStone, BHC and Sands
Brothers & Co., Ltd. ("Sands") entered into an agreement ("November 2001
Agreement) which served to amend and supplement the August 2001 Agreement,
including certain terms of consideration payable to the Company, and allowed for
the transfer of the Brokerage Assets from BlueStone to Sands. Accordingly, the
financial position, results of operations and cash flows of SSI, have been
separately presented as discontinued operations, and eliminated from the
continuing operations amounts in the accompanying consolidated financial
statements and notes thereto.
On March 28, 2002, there was a change in control of the Company when our
majority shareholder, Firebrand Financial Group, Inc. ("Firebrand") sold
1,213,675 shares, or approximately 56.4% of its common stock to Sutter
Opportunity Fund 2 LLC. ("Sutter Fund"). On April 9, 2002, the Company changed
its name from Shochet Holdings Corp. to Sutter Holding Company, Inc ("Sutter").
Basis of Presentation
The consolidated statements include the accounts of Sutter and its wholly and
partially owned subsidiaries. All significant inter-company balances and
transactions have been eliminated.
F-7
SUTTER HOLDING COMPANY INC. AND SUBSIDIARIES
(Formerly Shochet Holding Corp.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
January 31, 2002
NOTE 1 - ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Use of Estimates
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates. Cash and Cash Equivalents
The Company considers all highly liquid debt instruments with original
maturities of three months or less to be cash equivalents. Cash equivalents
include investments in money market accounts.
Concentration of Credit Risk
Credit losses, if any, has been provided for in the financial statements based
on management's expectations. The Company's accounts receivable are subject to
potential concentrations of credit risk. The Company does not believe that it is
subject tom any unusual or significant risks, in the normal course of business.
Property and Equipment
Property and equipment is recorded at cost. Depreciation is calculated on a
straight-line basis over the estimated useful lives of the assets, which range
from three to five years.
Fair Value of Financial Instruments
The Company's financial instruments consists principally of cash and cash
equivalents, accounts receivable, accounts payable and accrued liabilities. The
carrying amounts of such financial instruments as reflected in the balance sheet
approximate their estimated fair value as of January 31, 2002. The estimated
fair value is not necessarily indicative of the amounts the Company could
realize in a current market exchange or of future earnings or cash flows.
Securities Transactions
Securities transactions and the related revenue and expenses, including
commission revenue and expenses, are recorded on a trade-date basis. Securities
owned and securities sold, not yet purchased consist primarily of equities and
are stated at quoted market values. Unrealized gains and losses are included in
other revenue.
F-8
SUTTER HOLDING COMPANY INC. AND SUBSIDIARIES
(Formerly Shochet Holding Corp.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
January 31, 2002
NOTE 1 - ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Income Taxes
The Company accounts for income taxes pursuant to the provisions of Statement of
Financial Accounting Standards (SFAS) No.109, "Accounting for Income Taxes,"
which requires, among other things, a liability approach to calculating deferred
income taxes. The asset and liability approach requires the recognition of
deferred tax liabilities and assets for the expected future tax consequences of
temporary differences between the carrying amounts and the tax bases of assets
and liabilities. The Company has had losses since inception and accordingly has
not provided for income taxes. Realization of the benefits related to the net
operating loss carry forwards may be limited in any one year due to IRS Code
Section 382, change of ownership rules.
Net Loss per Common Share
The Company uses the provisions Statement of Financial Accounting Standard No
128, "Earnings per share". This statement requires that the Company report basic
and diluted earnings (loss) per share for all periods reported. Basic net income
(loss) per share is computed by dividing net income (loss) by the weighted
average number of common shares outstanding for the period. Diluted net income
(loss) per share is computed by dividing net income (loss) by the weighted
average number of common shares outstanding for the period, adjusted for the
dilutive effect of common stock equivalents, consisting of the stock and
warrants using the treasury stock method.
For the period presented, dilutive net loss per share was the same as basic net
loss per share since the inclusion of stock options and warrants would be
anti-dilutive. In the event that the Company was to report net income in the
future periods, these stock options and warrants could have a dilutive effect on
future per share calculations in those periods.
Long-Lived Assets
In accordance with SFAS No. 121 "Accounting for Impairment of Long-Lived Assets
and for Long-Lived Assets to be Disposed of," the Company includes as a
component of income from continuing operations before taxes on income, the
impairment loss on assets to be held and losses on assets expected to be
disposed of.
Stock Based Compensation
SFAS No. 123, "Accounting for Stock Based Compensation," establishes a fair
value method for accounting for stock-based compensation plans either through
recognition or disclosure. The Company did not adopt, for employee options the
fair value based method but instead discloses the pro forma effects of the
calculation required by the statement.
F-9
SUTTER HOLDING COMPANY INC. AND SUBSIDIARIES
(Formerly Shochet Holding Corp.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
January 31, 2002
NOTE 1 - ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Preferred Stock
The Board of Directors is authorized to issue shares of preferred stock and to
determine the dividend, liquidation, conversion and redemption, and other
rights, preferences and limitations of such shares without any further vote or
action of the shareholders. Accordingly, the Board of Directors has the power,
without shareholder approval, to issue preferred stock with dividend,
liquidation, conversion, voting, or other rights, which could negatively affect
the voting power or, other rights of the holders of the Common Stock.
Recent Accounting Pronouncements
In July 2001, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards ("SFAS") No. 141 "Business Combinations" and SFAS
No. 142 "Goodwill and Intangible Assets ("SFAS No. 142"). SFAS No. 141 requires
that all business combinations initiated after June 30, 2001 be accounted for
using the purchase method of accounting and prohibits the use of the
pooling-of-interests method for such transactions. SFAS No. 142 applies to all
goodwill and intangible assets acquired in a business combination. Under the new
standard, all goodwill, including goodwill acquired before initial application
of the standard, should not be amortized but should be tested for impairment at
least annually at the reporting level, as defined in the standard. Intangible
assets other than goodwill should be amortized over their useful lives and
reviewed for impairment in accordance with SFAS no. 121. The new standard is
effective for fiscal years beginning after December 15, 2001. The Company must
adopt this standard on January 1, 2002. As of January 31, 2002, the Company had
no unamortized goodwill.
In August 2001, the FASB issued Statement of Financial Accounting Standards No.
144 ("SFAS 144"), "accounting for the Impairment or Disposal of Long-lived
Assets". SFAS 144 superceded Statement of Financial Accounting Standards No.
121, "accounting for the Impairment of Long-lived Assets and 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 Transaction". SFAS 144 also amends
Accounting Research Bulletin No. 51, "Consolidated Financial Statements," to
eliminate the exception to consolidation for a subsidiary for which control is
likely to be temporary. The provision of SFAS 144 will be effective for fiscal
years beginning after December 15, 2001. The Company has not yet determined the
effect SFAS 144 will have on its financial position or results of operations in
future periods.
NOTE 2 - DISCONTINUED OPERATIONS
On August 31, 2001, the Company consummated the Asset Sale, whereby it
transferred the Brokerage Assets to BlueStone. In connection with the August
2001 Agreement, the Company transferred and assigned to BlueStone all rights,
title and interest to all of the trademarks, tradenames, service marks and
copyrights owned and used by the Company. Additionally, the Company was entitled
to sublease or assign to BlueStone all of the Company's rights, title and
interest to all properties where the Company operates or conducts retail and
institutional brokerage business. In connection with the August 2001 Agreement,
the Company also transferred or assigned to BlueStone substantially all of its
furniture, fixtures and equipment.
F-10
SUTTER HOLDING COMPANY INC. AND SUBSIDIARIES
(Formerly Shochet Holding Corp.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
January 31, 2002
NOTE 2 - DISCONTINUED OPERATIONS (Continued)
As consideration for the sale of the Brokerage Assets to BlueStone under the
August 2001 Agreement, BlueStone was obligated to pay to the Company a monthly
cash fee (the "Fee") equal to eight percent (8%) of gross revenue, as defined.
Additionally, the Company was issued 100,000 common shares of BHC and BlueStone
assumed the Company's obligation under a $500,000 principal amount subordinated
note that was owed to the Company's majority shareholder. BlueStone also agreed
to assume any obligation that the Company had under a "Clearing Agreement" with
Salomon Brothers Holding Company, Inc. and to indemnify and hold harmless the
Company from any liability under or arising out of that agreement.
Subsequent to October 31, 2001, the Company and SSI entered into the November
2001 Agreement with BlueStone, BHC and Sands, which amended and supplemented the
August 2001 Agreement and allowed for the subsequent transfer of the Brokerage
Assets from BlueStone to Sands. Under the November 2001 Agreement, the Company
relinquished its right to receive the Fee in exchange for an aggregate and
immediate cash payment of $314,000. In addition, the parties further agreed that
certain lease obligations of SSI relating to former branch offices of SSI
previously intended to be transferred to BlueStone would be assumed by Sands.
The financial position, results of operations and cash flows of SSI, have been
separately presented as discontinued operations, and eliminated from the
continuing operations amounts in the accompanying consolidated financial
statements.
NOTE 3 - GOING CONCERN
The consolidated financial statements have been prepared assuming that the
Company will continue as a going concern. The Company has suffered losses from
operations of $9,574,000 since inception and has discontinued substantially all
of its operating activities. The Asset Sale was a significant transaction and
its impact on the Company's future results is uncertain as of the date of the
consolidated financial statements. The Company plans to seek the acquisition of
complimentary and/or other businesses and assets. However, there can be no
assurance that the Company will be able to attract capital as may be required to
fund such acquisitions or other operations on reasonable terms and/or to
identify and acquire attractive businesses and related assets.
NOTE 4 - NOTE PAYABLE
During December 2000, the Company entered into a promissory note agreement with
a former shareholder. As of January 31, 2002, the amount outstanding under the
note was $65,659. The note requires monthly principal payments of $6,000 until
December 20, 2002.
F-11
SUTTER HOLDING COMPANY INC. AND SUBSIDIARIES
(Formerly Shochet Holding Corp.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
January 31, 2002
NOTE 5 - INCOME TAXES
As of January 31, 2002, the Company has available unused net operating loss
("NOL") carryovers of approximately $9,300,000 that may be applied against
future taxable income and expire at various times thru January 31, 2022. The
Company believes that an "Ownership Change" occurred within the meaning of
Section 382 of the IRS Code.
Under the ownership change, the amount of income that may be offset each year by
NOL carryforwards is generally limited to an amount determined by multiplying
the fair market value of the Company's outstanding equity just prior to the
ownership change by the federal long-term tax-exempt rate published by the IRS.
As result of net losses, since inception, and Section 382 limitations, the
Company has fully reserved the tax benefit of these losses because the
likelihood of realization of the tax benefits cannot be determined.
2002
-----------
Deferred Tax asset:
Net operating loss carryforward $ 3,997,000
Valuation allowance ........... (3,997,000)
-----------
Net deferred tax asset ........ $ -
===========
NOTE 6 - STOCKHOLDERS' EQUITY
Common Stock
During December 2000, Shochet Securities entered into note agreements with
several officers and employees amounting to $166,000 to be used for the purchase
of the Company's common stock. These advances are classified as loans to
officers and employees and are reflected as a reduction of capital. The notes
bear interest at 6 percent per annum and are due during December 2002. During
the year ended January 31, 2002, the Company converted $148,000 of Loans to
officers and employees and resulted in an increase of $116,000 in treasury
stock. Included in treasury stock are 20,000 shares of the Company's common
stock with a fair value of $238,000 held by the Company at January 31, 2002
Stock Options and Warrants
FFGI Compensation Plans
(a) Employee Incentive Plan
The Company participated in FFGI's 1991 Employee Incentive Plan (the "FFGI
Plan"), which provided for the issuance of stock, stock options and other stock
purchase rights to executive officers, other key employees, and consultants.
FFGI may grant options for up to five million shares of common stock under the
FFGI Plan. The options may qualify as incentive stock options under Section 433
of the Internal Revenue Code of 1986 (the "Code"), as amended. The exercise
price of each option granted under the FFGI Plan is determined by FFGI's Board
of Directors at the time of grant. Under the Code, the exercise price of
incentive stock options must be at least equal to the fair market value of
FFGI's stock on the date of grant.
F-12
SUTTER HOLDING COMPANY INC. AND SUBSIDIARIES
(Formerly Shochet Holding Corp.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
January 31, 2002
NOTE 6 - STOCKHOLDERS' EQUITY (Continued)
Stock Options and Warrants - Continued
The exercise price of nonqualified options must be at least equal to 65 percent
of the fair market value of FFGI's stock on the date of grant. The vesting
period is at least one year for all grants and incentive stock options have
maximum terms of 10 years and nonqualified options have maximum terms of 13
years. At January 31, 2002, there were 369,000 stock options outstanding to
employees of the Company. Each option has an exercise price significantly above
the market value of the underlying stock at January 31, 2002.
(b) Stock Award Plan
The Company participates in FFGI's 1996 Incentive Compensation Plan, which
provides for a portion of annual incentive awards payable to executive
management and business unit managers to be made in restricted shares of FFGI's
common stock. All awards are subject to a minimum three-year vesting period. The
maximum number of shares, which may be awarded under the plan, is one million.
As of January 31, 2002, less than 72,000 shares had been awarded to two prior
shareholders of the Company. The Company recognized no compensation expense for
stock awards under this plan.
Compensation Plan
(a) Stock Option Plan
The Company adopted a Performance Equity Plan (the "Plan"), which provides for
the issuance of stock, stock options, appreciation rights, stock reload options
and other stock-based awards to officers, other key employees and consultants of
the Company and its subsidiaries. The Company may grant options for up to
350,000 shares of common stock. The options may qualify as incentive stock
options under Section 422 of the Internal Revenue Code of 1986 (the "Code"), as
amended. Under the code, the exercise price of each option granted under the
Plan is determined by the Company's board of directors at the time of grant. The
exercise price for incentive stock options must be at least equal to the fair
market value of the Company's stock on the date of grant. The vesting period is
at least one year for all grants. At January 31, 2002, there were 234,000 stock
options outstanding. Each option has a maximum contractual life of 10 years from
the date of grant. All options commence vesting on the one-year anniversary date
of grant and vest in three annual, equal installments. Each option has an
exercise price above the market value of the underlying stock at January 31,
2002. The Company has adopted the disclosure-only provisions of SFAS 123.
Accordingly, no compensation cost has been recognized for stock options granted
under the Plan. Had compensation cost for the Plan been determined based on the
fair value at the grant dates for stock option awards under the Plan consistent
with the method of SFAS 123, the Company would have recorded an additional
compensation expense for the year ended January 31, 2001 of $308,000.
F-13
SUTTER HOLDING COMPANY INC. AND SUBSIDIARIES
(Formerly Shochet Holding Corp.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
January 31, 2002
NOTE 6 - STOCKHOLDERS' EQUITY (Continued)
Compensation Plan
(b) Non-employee Stock Compensation
During the year ended January 31, 2001, the Company granted 50,000 stock options
to the Company's spokesman. The fair value of the options, was estimated to be
$87,500 on the date of grant using the Black-Scholes option-pricing model with
the following assumptions: dividend yield of 0 percent, expected volatility of
169 percent, risk-free interest rate of 6.42 percent, and expected life of five
years. The Company recorded the fair value of these options as an expense on
October 24, 2001, the vesting date.
NOTE 7 - COMMITMENTS AND CONTINGENCIES
Operating Leases
The Company currently leases office facilities for its operations on a six-month
noncancelable lease expiring on June 30, 2002. As of January 31, 2002, the
Company's primary office facility was located in Boca Raton, Florida.
The Company leased office facilities under noncancelable operating leases.
Certain leases have renewal options and clauses for escalation and operating
cost adjustments. The Company agreed to sublease or assign to Bluestone or Sands
all of the Company's rights, title and interest under specific leases, as
defined in the August 2001 Agreement and November 2001 Agreement. Sands and
Bluestone has assumed the Company's obligation to pay the monthly rental
payments under each respective lease. At January 31, 2002, future minimum rental
commitments under such leases were approximately $1,200,000 in the aggregate.
Although, the Company is seeking to negotiate out of its existing lease
obligations, there can be no assurance that it will be successful. The Company
has been made aware that neither Bluestone nor Sands has made any rental
payments under these leases as required under the August 2001 Agreement and the
November 2001 Agreement. Accordingly, the Company believes it is likely that
litigation may be commenced by the landlords against the Company. The Company
intends to assert its rights for indemnification for liability under these
leases against BlueStone and Sands and to pursue other available remedies. As of
January 31, 2002, the Company has accrued approximately $415,000 to offset any
contingency arising from operating leases.
Litigation
The Company is a defendant in several separate lawsuits filed as a result of
securities activities in the ordinary course of business. The Company believes
the suits are completely without merit and intends to vigorously defend its
position and thus has not made an accrual at year-end.
F-14