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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Fiscal Year Ended Commission File No. 001-12629
September 28, 2001 ----------
OLYMPIC CASCADE FINANCIAL CORPORATION
(Exact Name of Registrant as specified in its charter)
DELAWARE 36-4128138
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
875 North Michigan Avenue, Suite 1560, Chicago, IL 60611
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (312) 751-8833
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Securities registered pursuant to Section 12(b) of the Act: None
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Securities registered pursuant to Section 12(g) of the Act:
Common stock $.02 par value
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(Title of class)
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
----- ------
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K of this chapter is not contained herein, and will not be
contained, to the best of Registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-K
or any amendment to this Form 10-K.
Yes No X
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As of December 18, 2001, 1,622,331 shares of the Company's common stock were
held by non-affiliates, having an aggregate market value of $1,946,797. The
number of common shares outstanding as of December 18, 2001 was 2,236,449.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Company's Proxy Statement filed with the Securities and Exchange
Commission ("SEC") in connection with the Company's Annual Meeting of
Shareholders to be held on March 12, 2002 (the "Company's 2002 Proxy Statement")
are incorporated by reference into Part III hereof.
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PART I
Item 1 - BUSINESS
(a) General
Except for historical information contained herein, this Report contains certain
forward-looking information that involves risks and uncertainties that could
cause results to differ materially, including changing market conditions and
other risks detailed in this Annual Report on Form 10-K and other documents
filed by the Company with the Securities and Exchange Commission from time to
time.
Olympic Cascade Financial Corporation, a Delaware corporation organized in 1997
("Olympic" or the "Company"), is a financial services organization operating
through its three wholly-owned subsidiaries, National Securities Corporation, a
Washington corporation organized in 1947 ("National"), WestAmerica Investment
Group, a California corporation organized in 1974 ("WestAmerica"), and
Canterbury Securities Corporation ("Canterbury"), an Illinois corporation
organized in 1998. Olympic is committed to establishing a significant presence
in the financial services industry by providing financing options for emerging,
small and middle capitalization companies both in the United States and abroad
through research, financial advisory services and sales, and investment banking
services for both public offerings and private placements, and providing retail
brokerage, institutional trading and trade clearance operations.
In December 2001, the Company executed definitive agreements with respect to a
series of transactions under which new investors have obtained a significant
ownership in Olympic by way of making up to a $1.5 million investment in Olympic
and by purchasing a portion of the shares held by Steven A. Rothstein and
family, the largest shareholder and the Company's Chairman and Chief Executive
Officer (the "Investment Transaction"). The investors include an affiliate of
Sands Brothers & Company, a New York Stock Exchange ("NYSE") member firm, and
Mark Goldwasser, the current President of Olympic. As part of this transaction,
note holders of the Company's January 2004 Promissory Notes exchanged one half
of their notes for equity securities in the Company. In connection with this
transaction, Steven A. Rothstein and Robert H. Daskal have agreed to terminate
their employment agreements in exchange for consulting agreements with the
Company. Messrs. Steven B. Sands and Martin S. Sands will assume the offices of
Co-Chairman, and Mr. Goldwasser will become Chief Executive Officer upon Mr.
Rothstein's resignation.
In August 2001, the Company entered into an agreement with First Clearing
Corporation ("First Clearing"), an affiliate of First Union Securities, Inc.,
under which First Clearing will provide clearing and related services for
National (the "Clearing Agreement"). The Clearing Agreement will expand the
products and services capabilities for National's retail and institutional
business, enable National to consolidate its existing clearing operations and
reduce fixed overhead associated with its self-clearing activities.
The conversion to First Clearing began in December 2001. In connection with the
Clearing Agreement, the Company entered into a ten-year promissory note with
First Clearing under which the Company immediately borrowed $1,000,000. The
funds were contributed by the Company to National, and are being used as a
deposit to secure National's performance under the Clearing Agreement. The
Clearing Agreement also provides for another $1,000,000 loan to be extended to
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(a) General (Continued)
the Company at completion of the conversion, subject to certain conditions that
are expected to be satisfied upon closing of the Investment Transaction.
Additional borrowings are available to the Company upon the attainment by
National of certain volume and profitability goals, none of which have been met
as of the date of filing of this Form 10-K. Borrowings under the promissory
notes are forgivable based on certain business performance and trading volumes
of the Company over the life of the loan.
National conducts a national securities brokerage business through its main
office and second largest sales office in Seattle, Washington and in 57 other
offices located in 19 states. National also operates in several international
cities. Its business includes securities brokerage for individual and
institutional clients, market-making trading activities, asset management and
corporate finance services. Additionally, National has a significant retail and
trading presence in New York City with corporate finance transactions
originating in Chicago, Illinois. The majority of National's transactions with
the public involve solicited trades.
In December 2001, WestAmerica voluntarily withdrew its membership with the NASD
and ceased conducting business as a broker-dealer. WestAmerica intends to file
for Chapter 7 Bankruptcy protection in accordance with the U.S. Bankruptcy Code.
WestAmerica, based in Scottsdale, Arizona, was a registered securities
broker-dealer providing primarily retail brokerage operations. The majority of
WestAmerica's transactions with the public involved solicited trades.
In June 2000, the Company acquired all of the outstanding stock of Canterbury, a
Chicago, Illinois based broker-dealer formerly engaging in private placement
transactions. Canterbury has no retail customer accounts and since acquisition
has had no activity. In the event that the Investment Transaction is
consummated, the Company has agreed to sell Canterbury for its book value to Mr.
Rothstein.
As of September 28, 2001, the Company and its subsidiaries had approximately 175
employees and 335 independent contractors. Of these totals, approximately 410
were registered representatives. As a result of the slowdown in the financial
markets and the Company's recent change from self-clearing to clearing with
First Clearing, the Company has scaled back its employee staff. As of December
2001, the Company had approximately 130 employees. Persons who have entered into
independent contractor agreements are not considered employees for purposes of
determining the Company's obligations for federal and state withholding,
unemployment and social security taxes. The Company's independent contractor
arrangements conform with accepted industry practice, and therefore, the Company
does not believe there is a material risk of an adverse determination from the
tax authorities which would have a significant effect on the Company's ability
to recruit and retain investment executives, or on the Company's current
operations and financial results of operations. No employees are covered by
collective bargaining agreements, and the Company believes its relations are
good with both its employees and independent contractors.
-3-
(a) General (Continued)
The Company is engaged in a highly competitive business. With respect to one or
more aspects of its business, its competitors include member organizations of
the New York Stock Exchange, Inc. and other registered securities exchanges in
the United States and Canada, and members of the National Association of
Securities Dealers, Inc. ("NASD"). Many of these organizations have
substantially greater personnel and financial resources and more sales offices
than the Company. Discount brokerage firms affiliated with commercial banks
provide additional competition, as well as companies that provide electronic
on-line trading. In many instances, the Company is also competing directly for
customer funds with investment opportunities offered by real estate, insurance,
banking, and savings and loans industries. For a further discussion of risks
facing the Company please see the section below entitled, "Risk Factors."
The Company's business plan includes the growth of its retail and institutional
brokerage business. Due to a slowdown in the financial markets, the Company has
scaled back certain business activities, including: proprietary trading,
market-making trading, and online investing services. Management believes that
consolidation within the industry is inevitable. Concerns attributable to the
weakened market and increased competition help explain the increasing number of
acquisition opportunities continuously introduced to the Company. The Company is
focused on maximizing the profitability of its existing operations, while it
continues to seek additional selective strategic acquisitions.
In October 2000, the Company opened a significant branch office of National in
New York City. This office specializes in broker-to-broker fixed income
transactions and equity market making activities. In February 2001, National
expanded these market-making trade activities. By July 2001, National made
markets in approximately 2,000 securities, comprised mainly of equities traded
on the NASDAQ and OTC Bulletin Board. As a result of the losses attributable to
a slow-down in the broader market, National has curtailed these market-making
trading activities. As of December 2001, National makes markets in approximately
300 securities.
(b) Financial Information about Industry Segments
For a more detailed analysis of our results by segment see Item 7, "Management
Discussion and Analysis of Financial Condition and Results of Operation."
(c) Brokerage Services
Brokerage services to retail clients are provided through the Company's sales
force of investment executives at National and, until December 2001, at
WestAmerica.
National Securities Corporation
National is registered as a broker-dealer with the Securities and Exchange
Commission ("SEC") and licensed in 50 states, the District of Columbia and
Puerto Rico. National is also a member of the NASD, the Municipal Securities
Rulemaking Board ("MSRB") and the Securities Investor Protection Corporation
("SIPC").
-4-
(c) Brokerage Services (Continued)
National's goal is to meet the needs of its investment executives and their
clients. To foster individual service, flexibility and efficiency, and to reduce
fixed costs, investment executives at National act as independent contractors
responsible for providing their own office facilities, sales assistants,
telephone and quote service, supplies and other items of overhead. Investment
executives are given broad discretion to structure their own practices and to
specialize in different areas of the securities market subject to supervisory
procedures. In addition, investment executives have direct access to research
materials, management, traders, and all levels of support personnel.
It is not National's policy to recommend particular securities to customers.
Recommendations to customers are determined by individual investment executives
based upon their own research and analysis, and subject to applicable NASD
customer suitability standards. Most investment executives perform fundamental
(as opposed to technical) analysis. Solicitations may be by telephone, seminars
or newsletters. Investment executives may request trading to acquire an
inventory position to facilitate sales to customers (subject to the investment
executive's own risk). Supervisory personnel review trading activity from
inventory positions to ensure compliance with applicable standards of conduct.
Salespersons in the brokerage industry are traditionally compensated on the
basis of set percentages of total commissions and mark-ups generated. Most
brokerage firms bear substantially all of the costs of maintaining their sales
forces, including providing office space, sales assistants, telephone service
and supplies. The average commission paid to the salespersons in the brokerage
industry generally ranges from 30% to 50% of total commissions generated.
Since National requires most of its investment executives to absorb their own
overhead and expenses, it is able to pay an average of approximately 75% of
commissions and mark-ups generated by the investment executive. This arrangement
also reduces fixed costs and lowers the risk of operational losses for
non-production.
National's operations include execution of orders, processing of transactions,
receipt, identification and delivery of funds and securities, custody of
customer securities, internal financial controls and compliance with regulatory
and legal requirements.
National's data processing is supplied by an independent vendor on a
time-sharing basis to process orders, reports, confirmations and statements as
well as to maintain the general ledger, files of customers, and other market
data. National utilizes other computer software, which is used for investment
executive payroll and telephone cost allocation, including word processing and
other office applications.
In the fiscal year 2001, National cleared approximately 60% of its own
securities transactions and posted its books and records daily, with the
remaining 40% of the transactions clearing through Bear Stearns Securities
Corporation, US Clearing Corporation and Pershing. In August 2001, the Company
entered into an agreement with First Clearing, an affiliate of First Union
Securities, Inc., under which First Clearing will provide clearing and related
services for National. The Clearing Agreement will expand the products and
services capabilities for National's retail and institutional business, enable
National to
-5-
(c) Brokerage Services (Continued)
consolidate its existing clearing operations and reduce fixed overhead
associated with its self-clearing activities. The conversion to First Clearing
began in December 2001.
Periodic reviews of controls are conducted, and administrative and operations
personnel meet frequently with management to review operating conditions.
Operations personnel monitor compliance with applicable laws, rules and
regulations.
WestAmerica Investment Group
In December 2001, WestAmerica voluntarily withdrew its membership with the NASD
and ceased conducting business as a broker-dealer. WestAmerica intends to file
for Chapter 7 Bankruptcy protection in accordance with the U.S. Bankruptcy Code.
Until December 2001, WestAmerica was registered as a broker-dealer with the SEC
and licensed in 44 states, Puerto Rico and the District of Columbia. WestAmerica
was also a member of the NASD, the MSRB and the SIPC. WestAmerica offered
traditional securities brokerage and financial planning business and fee-based
investment management business to its retail clients.
Unlike National, the majority of WestAmerica's investment executives were
employees. As such, the average commission payout was approximately 20-30% lower
than National's commission payout of approximately 75%. Since the commission
payout was much lower, WestAmerica provided office space, equipment, supplies
and other resources for its investment executives. Recently, WestAmerica
experienced operating losses. In addition to these losses, WestAmerica had
arbitration losses that exceeded its net capital.
Canterbury Securities Corporation
Canterbury is a registered as a broker-dealer with the SEC and is licensed in
Illinois. Canterbury is a member of the NASD, the MSRB and the SIPC. Canterbury
formerly engaged in private placement transactions. Canterbury has no retail
customer accounts and, therefore, operates pursuant to the exemptive provisions
of SEC Rule 15c3-3(k)(2)(i). Since acquisition in June 2000, Canterbury has had
no activity. Upon consummation of the Investment Transaction the Company has
agreed to sell Canterbury for its book value to Mr. Rothstein. Canterbury was
acquired for cash of $30,000 and the issuance of five-year warrants to acquire
5,000 unregistered shares of common stock of the Company at a price of $6.375
per share.
(d) Investment Banking
National provides corporate finance and investment banking services, including
underwriting the sale of securities to the public and arranging for the private
placement of securities with investors. National's corporate finance operations
provide a broad range of financial and corporate advisory services, including
mergers and acquisitions, project financing, capital structure and specific
financing opportunities. In the past, National has underwritten both equity
securities and convertible corporate bonds as initial or secondary public
offerings.
-6-
(d) Investment Banking (Continued)
National's corporate finance department is headquartered in Chicago, Illinois.
This office includes investment executives, investment bankers and employees.
The office and the corporate finance department are under the direction of the
Company's Chairman, Steven A. Rothstein.
(e) Principal and Agency Transactions
The Company buys and maintains inventories in equity securities as a
"market-maker" for sale of those securities to other dealers and to customers
through National. The Company also maintains inventories in corporate and
municipal debt securities for sale to customers.
At National, a staff of four traders in its New York office, six traders and
assistants in its Seattle headquarters, and three traders and assistants in its
Spokane, Washington office, manage an inventory of securities and conduct
market-making activities. As of September 28, 2001, National made a market in
more than 1,500 equity securities, the majority of which were quoted on the
NASDAQ stock market and the OTC Bulletin Board. This includes companies for
which National managed or co-managed a public offering. During the fiscal year
ended 2001, through its recently opened New York branch, the Company
substantially increased the number of securities for which it makes a market.
However, due to the slow-down in the financial markets these activities were
substantially reduced. As of December 2001, National makes markets in
approximately 300 securities.
The Company's trading departments require a commitment of capital. Most
principal transactions place the Company's capital at risk. Profits and losses
are dependent upon the skill of the traders, price movements, trading activity
and the size of inventories.
Because the Company's trading activities occasionally may involve speculative
and thinly capitalized stocks, including stabilizing the market for securities
which it has underwritten, the Company imposes position limits to reduce its
potential for loss.
In executing customer orders to buy or sell a security in which the Company
makes a market, the Company may sell to or purchase from customers at a price
that is substantially equal to the current inter-dealer market price plus or
minus a mark-up or mark-down. The Company may also act as agent and execute a
customer's purchase or sale order with another broker-dealer market-maker at the
best inter-dealer market price available and charge a commission. The Company
believes its mark-ups, mark-downs and commissions are competitive based on the
services it provides to its customers.
In executing customer orders to buy or sell listed and over-the-counter
securities in which it does not make a market, the Company generally acts as
agent and charges commissions which the Company believes are competitive, based
on the services the Company provides to its customers. The Company may receive
rebates for the order flow of the securities for which it does not make a
market.
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(f) Online trading
In May 2001, the Company closed the operations of NSCdirect (a division of
National), which provided online investing services for its customers. NSCdirect
began trading in April 2000 and was serviced out of Seattle, Washington. The
heavily competitive online trading marketplace coupled with the expenses of
running such division proved to be an unprofitable business for the Company. By
discontinuing its operation the Company was better able to direct its resources
to other ventures.
(g) Supervision
The Securities Exchange Act of 1934, as amended, and the NASD Conduct Rules
require the Company's subsidiaries to supervise the activities of its investment
executives. As part of providing such supervision, the subsidiaries maintain an
Operations and Procedures Manual. Compliance personnel conduct inspections of
branch offices no less frequently than annually to review compliance with the
Company's procedures. A registered principal provides continuous supervision at
each of the Company's larger offices. The other offices (averaging two
investment executives per office) are not required by NASD rules to have a
registered principal on site and are therefore supervised by registered
principals of the subsidiaries. Compliance reviews each customer trade to ensure
compliance with the NASD Conduct Rules including mark-up guidelines.
In May 2001, without admitting or denying the alleged violations, National
accepted and consented to the entry of the following findings by NASD
Regulation: At various times in 1999 and 2000, the firm violated NASD Conduct
Rules 2860(b)(5); Rule 3360; Rule 3370; Rule 2110 and 3010; and SEC Rule
11Ac1-4. The firm was censured and fined $35,000 in a settlement dated May 21,
2001.
(h) Venture Capital
In March 2001, the Company had its initial closing of Robotic Ventures Fund I,
L.P., a venture capital fund dedicated to investing in companies engaged in the
business of robotics and artificial intelligence. As of September 2001, the fund
raised a total of $5.2 million, $265,000 of which was capital directly invested
by the Company into the fund. The Company serves as the managing member of
Robotic Ventures Group LLC, the general partner of the fund. As the managing
member of the fund's general partner, the Company is entitled to the 2%
management fee paid by the fund. Additionally, the Company owns 24.5% of the
fund's general partner, which is entitled to 20% of the profits generated by the
fund after the investors receive the return of their invested capital.
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RISK FACTORS
The risks described below are not the only ones facing us. Additional risks not
presently known to us or that we currently believe are immaterial may also
impair our business operations. Our business, financial condition or results of
operation could be materially adversely affected by any of these risks.
The Private Securities Litigation Reform Act of 1995 provides a safe harbor for
forward-looking statements. This Report may contain certain statements of a
forward-looking nature relating to future events or future business performance.
Any such statements that refer to the Company's estimated or anticipated future
results or other non-historical facts are forward-looking and reflect the
Company's current perspective of existing trends and information. These
statements involve risks and uncertainties that cannot be predicted or
quantified and, consequently, actual results may differ materially from those
expressed or implied by such forward-looking statements. Such risks and
uncertainties include the risks and uncertainties detailed below. Any
forward-looking statements contained in or incorporated into this Report speak
only as of the date of this Report. The Company undertakes no obligation to
update publicly any forward-looking statement, whether as a result of new
information, future events or otherwise
Operating results have resulted in reporting losses.
We have reported losses of approximately $7.9 million over the past four
quarters, and there is no assurance that we will be profitable in the near term.
Our losses are primarily attributable to the recent market slow-down and
volatility. We anticipate that with increased revenues we will return to
profitability; however, there can be no assurance that revenues will increase
and profitability will return.
In order for the Company to have the opportunity for future success and
profitability, we must successfully obtain additional financing, either through
borrowings, additional public offerings or some type of business combination
(e.g., merger, buyout, etc.). The Company actively pursued a variety of funding
sources, and entered into the Investment Transaction in order to address the
capital requirements of the Company. If the Company continues to experience
operating losses, additional financing will be necessary, and there can be no
assurance that we will be successful in such pursuits. In addition, any issuance
of new securities to raise capital may cause the dilution of shares held by
current shareholders.
Changing economic, political and market conditions may result in decreased
revenues and may increase our cost of doing business. The securities industry is
subject to a variety of uncertainties, including: declines in price level and
volume of transactions; losses resulting from the trading or underwriting of
securities; volatility of domestic and international financial, bond and stock
markets, as demonstrated by recent disruptions in the financial markets;
extensive government regulation; litigation; intense competition; and the
failure of third parties to meet commitments. Other items affecting the
securities industry include increased consolidation, increased use of
technology, increased use of discount and online electronic brokerage services,
and increased regulation. These items in particular could result in our facing
increased competition from larger broker-dealers, a need for increased
investment in technology, or potential loss of customers or reduction in
commission income. There can be no assurance that these trends or future changes
will not have a material adverse effect on our business, financial condition,
results of operations or cash flows.
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Risk Factors
(Continued)
Market fluctuations may reduce our revenues and profitability. Our revenue and
profitability may be adversely affected by declines in the volume of securities
transactions and in market liquidity. Additionally, our profitability may be
adversely affected by losses from the trading or underwriting of securities or
failure of third parties to meet commitments. National acts as a market maker in
publicly traded common stocks. In market making transactions, we undertake the
risk of price changes or being unable to resell the common stock we hold or
being unable to purchase the common stock we have sold. These risks are
heightened by the illiquidity of many of the common stocks we trade and/or make
a market. Any losses from our trading activities, including as a result of
unauthorized trading by our employees, could have a material adverse effect on
our business, financial condition, results of operations or cash flows.
Lower securities price levels may also result in a reduced volume of
transactions, as well as losses from declines in the market value of common
stocks held for trading purposes. During periods of declining volume and
revenue, our profitability would be adversely affected. Declines in market
values of common stocks and the failure of issuers and third parties to perform
their obligations can result in illiquid markets in which we may incur losses in
our principal trading and market-making activities.
Competition with larger financial firms may have a negative effect on our
business.
We compete directly with national and regional full-service broker-dealers and a
broad range of other financial service firms, including banks and insurance
companies. Competition has increased as smaller securities firms have either
ceased doing business or have been acquired by or merged into other firms.
Mergers and acquisitions have increased competition from these firms, many of
which have significantly greater financial, technical, marketing and other
resources than we have. Many of these firms offer their customers more products
and research than currently offered by us. These competitors may be able to
respond more quickly to new or changing opportunities, technologies and client
requirements. We also face competition from companies offering discount and/or
electronic brokerage services, including brokerage services provided over the
Internet, which we are currently not offering and do not intend to offer in the
foreseeable future. These competitors may have lower costs or provide more
services, and may offer their customers more favorable commissions, fees or
other terms than those offered by us. To the extent that issuers and purchasers
of securities transact business without the assistance of us, our operating
results could be adversely affected.
We are currently subject to extensive securities regulation and the failure to
comply with these regulations could subject us to penalties or sanctions. The
securities industry and our business is subject to extensive regulation by the
SEC, state securities regulators and other governmental regulatory authorities.
We are also regulated by industry self-regulatory organizations, including the
National Association of Securities Dealers, Inc. and the Municipal Securities
Rulemaking Board. We are a registered broker-dealer with the SEC and member
firms of the NASD.
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Risk Factors (Continued)
Broker-dealers are subject to regulation which cover all aspects of the
securities business, including: sales methods and supervision, trading practices
among broker-dealers, use and safekeeping of customers' funds and securities,
capital structure of securities firms, record keeping, and the conduct of
directors, officers and employees. The regulatory environment is also subject to
change.
Compliance with many of the regulations applicable to us involves a number of
risks, particularly in areas where applicable regulations may be subject to
varying interpretation. These regulations often serve to limit our activities,
including through net capital, customer protection and market conduct
requirements. If we are found to have violated an applicable regulation,
administrative or judicial proceedings may be initiated against us that may
result in a censure, fine, civil penalties, issuance of cease-and-desist orders,
the deregistration or suspension of our broker-dealer activities, the suspension
or disqualification of our officers or employees, or other adverse consequences.
The imposition of any of these or other penalties could have a material adverse
effect on our operating results and financial condition.
We rely on clearing brokers and termination of the agreements with these
clearing brokers could disrupt our business. We recently changed from a
self-clearing system to using clearing brokers to process our securities
transactions and maintain customer accounts on a fee basis for us. The clearing
brokers also provide billing services, extend credit and provide for control and
receipt, custody and delivery of securities. Our broker-dealers depend on the
operational capacity and ability of the clearing brokers for the orderly
processing of transactions. In addition, by engaging the processing services of
a clearing firm, we are exempt from some capital reserve requirements and other
regulatory requirements imposed by federal and state securities laws. If the
clearing agreements are terminated for any reason, we would be forced to find
alternative clearing firms. We cannot assure you that we would be able to find
an alternative clearing firm on acceptable terms to them or at all.
We permit our clients to purchase securities on a margin basis or sell
securities short, which means that the clearing firm extends credit to the
client secured by cash and securities in the client's account. During periods of
volatile markets, the value of the collateral held by the clearing brokers could
fall below the amount borrowed by the client. If margin requirements are not
sufficient to cover losses, the clearing brokers sell or buy securities at
prevailing market prices, and may incur losses to satisfy client obligations. We
have agreed to indemnify the clearing brokers for losses they incur while
extending credit to our clients.
Credit risk exposes us to losses caused by financial or other problems
experienced by third parties. We are exposed to the risk that third parties that
owe us money, securities or other assets will not perform their obligations.
These parties include: trading counterparts, customers, clearing agents,
exchanges, clearing houses, and other financial intermediaries as well as
issuers whose securities we hold. These parties may default on their obligations
owed to us due to bankruptcy, lack of liquidity, operational failure or other
reasons. This risk may arise, for example, from: holding securities of third
parties, executing securities trades that fail to settle at the required time
-11-
Risk Factors (Continued)
due to non-delivery by the counterparty or systems failure by clearing agents,
exchanges, clearing houses or other financial intermediaries, and extending
credit to clients through bridge or margin loans or other arrangements.
Significant failures by third parties to perform their obligations owed to us
could adversely affect our revenues and perhaps our ability to borrow in the
credit markets.
Adverse results of current litigation and potential securities law liability
would result in financial losses and divert management's attention to business.
Many aspects of our business involve substantial risks of liability. There has
been an increase in litigation and arbitration within the securities industry in
recent years, including class action suits seeking substantial damages. We are
subject to potential claims by dissatisfied customers, including claims alleging
they were damaged by improper sales practices such as unauthorized trading, sale
of unsuitable securities, use of false or misleading statements in the sale of
securities, mismanagement and breach of fiduciary duty. National may be liable
for the unauthorized acts of its retail brokers if it fails to adequately
supervise their conduct. As an underwriter, we may be subject to substantial
potential liability under federal and state law and court decisions, including
liability for material misstatements and omissions in securities offerings. We
may be required to contribute to a settlement, defense costs or a final judgment
in legal proceedings or arbitrations involving a past underwriting and in
actions that may arise in the future. We carry "Errors and Omissions" insurance
to protect against arbitrations, however, the policy is limited in items and
amounts covered and there can be no assurance that it will cover a complaint.
The adverse resolution of any legal proceedings involving us could have a
material adverse effect on our business, financial condition, results of
operations or cash flows.
Item 2 - PROPERTIES
The Company owns no real property. Its corporate headquarters are shared with
National in leased space in Chicago, Illinois and Seattle, Washington.
Additionally, the Company leases office space in Boca Raton, Florida, and
through its subsidiaries the Company leases office space in Marietta, Georgia,
Scottsdale, Arizona, New York, New York, and Spokane, Washington. The branch
offices, which are run by independent contractors, are leased by those
contractors.
Leases expire at various times through May 2008. The Company believes the rent
at each of its locations is at current market rates. At current production
levels, the Company believes its leased space is suitable and adequate, however,
increased activity could require additional space to be leased.
-12-
Item 3 - LEGAL PROCEEDINGS
1. The Maxal Trust, et al. v. National Securities Corporation et al.,
------------------------------------------------------------------
United States District Court, Central District of California, Case No.
CV-97-4392 ABC (Shx). See disclosure in the Company's Form 10-Q for the
quarter ended December 31, 1998 and Form 10-K for the fiscal year ended
September 24, 1999.
On February 16, 1999, the District Court dismissed the plaintiffs'
remaining claims against National in their entirety and granted
National's motion for summary judgment. A final judgment was issued by
the court on April 26, 1999. The plaintiffs filed a notice of appeal on
May 4, 1999. The United States Court of Appeals for the Ninth Circuit
affirmed the District Court's dismissal on December 20, 2000.
2. Complete Management, Inc.- National was named, together with others,
as a defendant in several class action lawsuits filed against Complete
Management, Inc. in the United States District Court for the Southern
District of New York, Case No. 99 Civ. 1454 (NRB). These actions were
initially commenced on February 25, 1999 and are the subject of a
consolidated amended complaint dated March 15, 2000. As to National,
the consolidated complaint alleges violations of Section 11 of the
Securities Act of 1933, 15 U.S.C.ss.77k, in connection with National's
role as underwriter in a June 1996 securities offering for Complete
Management, and in connection with National's role as a co-underwriter
in a December 1996 securities offering for Complete Management.
Plaintiffs allege that the registration statements and prospectuses
filed in connection with the securities offerings in June and December
1996 contained false and misleading statements or omitted facts
necessary to make statements not misleading.
On or about June 2, 2000, National, along with the other defendants,
moved to dismiss the action on the grounds that plaintiffs' complaint
is defective, that plaintiffs are barred by the statute of limitations,
and plaintiffs are unable to establish their claims as a matter of law.
On March 30, 2001, the court denied defendants' various motions to
dismiss. On May 17, 2001, National submitted its answer to the
complaint in which it set forth its defenses, including, among others,
that much of the class cannot trace their stock to offerings in which
National was involved and that National conducted appropriate due
diligence.
After an initial round of document disclosure, on or about November 28,
2001, plaintiffs filed a motion to certify the class. National will
contest class certification and diligently pursue its defenses.
The Company is a defendant in various other arbitrations and administrative
proceedings, lawsuits and claims, which in the aggregate seek general and
punitive damages approximating $9,500,000. These matters arise out of the normal
course of business.
-13-
Item 4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
There were no matters submitted to a vote of security holders in the fourth
quarter of fiscal year ended September 28, 2001.
Item 4(A)- EXECUTIVE OFFICERS OF REGISTRANT
The following sets forth the names, ages and positions of all executive officers
of the Company as of December 1, 2001 (see also discussion of executive officers
in Item 1(a)):
Steven A. Rothstein 51 Chairman and Chief Executive Officer
Chairman and Chief Executive Officer of National
Director of Canterbury
Mark A. Goldwasser 43 President
Vice Chairman of National
Robert H. Daskal 60 Senior Vice President, Chief Financial Officer,
Treasurer and Secretary
Secretary of National
Director of WestAmerica
Director of Canterbury
Michael A. Bresner 57 President of National
Craig M. Gould 31 Vice-Chairman of Technology
Managing Director of National
PART II
Item 5 - MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED
STOCKHOLDER MATTERS
The Company's common stock trades on the American Stock Exchange and the Chicago
Stock Exchange. The Company's common stock trades using the symbol OLY. As of
September 28, 2001, the Company had approximately 1,000 shareholders, including
those shareholders holding stock in street name and trust accounts.
Delaware law authorizes the Board of Directors to declare and pay dividends with
respect to the Company's common stock either out of its surplus (as defined in
the Delaware Corporation Law) or, in case there is no such surplus, out of its
net profits for the fiscal year in which the dividend is declared and/or the
preceding fiscal year; provided, however, that no dividend may be paid out of
net profits unless the Company's capital exceeds the aggregate amount
represented by the issued and outstanding stock of all classes having a
-14-
preference in the distribution of assets. Prior to the issuance of the preferred
stock in the Investment Transaction, no shareholder held preferential rights in
liquidation. The Company has never declared a cash dividend and does not
presently foresee declaring one in the coming fiscal year.
High and low closing bid quotations from September 25, 1999 to September 28,
2001 have been obtained from the American Stock Exchange. The range of market
prices for each quarter of fiscal years ended September 29, 2000 and September
28, 2001 are as follows:
Period High Low
September 25, 1999/December 31, 1999 $8.50 $3.13
January 1, 2000/March 31, 2000 $13.56 $5.63
April 1, 2000/June 30, 2000 $8.50 $5.75
July 1, 2000/September 29, 2000 $8.06 $5.13
September 30, 2000/December 31, 2000 $5.875 $2.6875
January 1, 2001/March 31, 2001 $4.875 $3.0625
April 1, 2001/June 30, 2001 $3.38 $2.50
July 1, 2001/September 28, 2001 $5.20 $2.00
The closing bid price of the Company's common stock on December 18, 2001, as
reported on The American Stock Exchange, was $1.20 per share.
Item 6 - SELECTED FINANCIAL DATA
Set forth below is the historical financial data with respect to the Company for
the fiscal years ended 2001, 2000, 1999, 1998 and 1997. This information has
been derived from, and should be read in conjunction with, the audited financial
statements, which appear elsewhere in this report. The financial data for the
fiscal years ended 2001, 2000, 1999, 1998 and 1997 have been restated to reflect
the discontinued operations of the Company's subsidiary, WestAmerica. All
information is expressed in thousands of dollars except per share information.
Fiscal Year
----------------------------------------------------------------------
2001 2000 1999 1998 1997
----------------------------------------------------------------------
Net revenues $ 50,224 $56,213 $ 39,477 $ 44,782 $38,978
Net income (loss) from continuing
operations before extraordinary items (7,338) 1,356 8 (4,686) 75
Net income (loss) per common share (3.33) 0.64 0.01 (3.13) 0.05
Total assets 77,599 92,696 86,113 72,566 63,260
Long-term obligations 3,000 608 2,150 2,770 -
Stockholders' equity 622 8,039 4,039 2,948 7,604
Cash dividends - - - - -
-15-
Item 7 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The Private Securities Litigation Reform Act of 1995 provides a safe harbor for
forward-looking statements. This Report may contain certain statements of a
forward-looking nature relating to future events or future business performance.
Any such statements that refer to the Company's estimated or anticipated future
results or other non-historical facts are forward-looking and reflect the
Company's current perspective of existing trends and information. These
statements involve risks and uncertainties that cannot be predicted or
quantified and, consequently, actual results may differ materially from those
expressed or implied by such forward-looking statements. Such risks and
uncertainties include, among others, risks and uncertainties detailed in Item 1
above. Any forward-looking statements contained in or incorporated into this
Report speak only as of the date of this Report. The Company undertakes no
obligation to update publicly any forward-looking statement, whether as a result
of new information, future events or otherwise.
Results of Operations
The results discussed below have been restated to reflect a discontinuation of
operations for the Company's subsidiary, WestAmerica.
Fiscal Year 2001 Compared with Fiscal Year 2000
The Company's fiscal year 2001 resulted in a decrease in revenues and an overall
net loss compared with net income in the same period of fiscal 2000. The
decrease in revenues is due to the continued slumping securities markets, which
significantly affected commission revenues. As a result, the Company reported a
net loss from continuing operations before extraordinary item of $7,338,000
compared with net income from continuing operations of $1,356,000 for the fiscal
year 2000.
Revenues from continuing operations decreased $5,989,000, or 11%, in the fiscal
year 2001 to $50,224,000 from $56,213,000 in the fiscal year 2000. This decrease
is due mainly to the weaker overall securities market compared with the
securities market during the fiscal year 2000. The percentage mix of commission
revenue and net dealer inventory gains changed, mainly due to National's New
York office, which focuses on principal mark-ups and mark-downs as well as
agency trading of fixed income products, OTC and listed equities to various
institutional clients, proprietary trading and market-making activities.
Commission revenue decreased $3,847,000, or 16%, to $19,761,000 from $23,608,000
during the fiscal year 2001 compared with the fiscal year 2000. The decrease in
revenues is due to the continued slumping securities markets.
Net dealer inventory gains, which includes profits on proprietary trading,
market making activities and customer mark-ups and mark downs, decreased
$818,000, or 4%, to $19,132,000 from $19,950,000 during the fiscal year 2001
compared with the fiscal year 2000.
-16-
Results of Operations (Continued)
Fiscal Year 2001 Compared with Fiscal Year 2000 (continued)
Investment banking revenue decreased $1,318,000, or 56%, to $1,020,000 from
$2,338,000 in the fiscal year 2001 compared with the fiscal year 2000. The
Company did not manage a public underwriting in fiscal years 2001 or 2000. The
decrease in revenues is attributed to a general slow-down in the broader capital
markets. During the fiscal years 2001 and 2000, investment banking revenue was
generated primarily from the completion of private placement transactions and
advisory fees.
Other revenue, consisting of asset management fees and miscellaneous transaction
fees and trading fees, increased $1,854,000, or 115%, to $3,469,000 from
$1,615,000 during the fiscal year 2001 compared to the fiscal year 2000. The
increase in other revenue was due mainly to an increase in fee based accounts at
National.
Although total revenues decreased 11%, total expenses increased by $3,120,000,
or 6%, to $57,644,000 in the fiscal year 2001 from $54,524,000 in the fiscal
year 2000.
Commission expense decreased $4,841,000, or 15%, to $28,448,000 in the fiscal
year 2001 from $33,289,000 in fiscal year 2000 due to the decrease in commission
revenue from which commission expense is paid. Employee compensation expense
increased $2,379,000, or 37%, to $8,726,000 in fiscal year 2001 from $6,347,000
in the fiscal year 2000. The increase in employee compensation is a result of
the expansion into principal and agency transactions at National's New York
office. In April 2001, management took a 10% reduction in salaries. In July
2001, management further reduced salaries by 10%. In October 2001, all
management salaries were temporarily reduced to $75,000. Overall, combined
commissions and employee compensation as a percentage of revenue increased
slightly to 74% from 71% in the fiscal year 2001 and 2000, respectively.
As expected, based on the expansion in New York, expenses relating to occupancy,
communications, and other all increased. Occupancy expense, consisting mainly of
rent, office supplies and depreciation increased $1,148,000, or 35%, to
$4,415,000 from $3,267,000. Communications expense increased $2,230,000 to
$3,340,000 or 201% from $1,110,000. Other expenses increased $151,000 or 7% to
$2,344,000 in 2001 from $2,193,000 in 2000.
Taxes, licenses and registration decreased $35,000, or 4%, to $763,000 from
$798,000. Professional fees increased $569,000, or 41%, to $1,945,000 from
$1,376,000.
Interest expense decreased $1,359,000, or 29%, to $3,361,000 from $4,720,000. A
decrease in customer deposits on which the Company pays interest, coupled with a
decrease in interest rates during fiscal 2001, account for the decrease in
interest expense. The 29% decrease in interest expense correlates directly to
the interest income from customer margin debt, which decreased $1,688,000, or
23%, during the same period from $7,438,000 in fiscal 2000 to $5,750,000 in
fiscal 2001.
Overall, diluted losses from continuing operations were $3.33 per share as
compared to diluted earnings from continuing operations of $.64 per share for
the fiscal years 2001 and 2000, respectively.
-17-
Results of Discontinued Operations
Fiscal Year 2001 Compared with Fiscal Year 2000
In December 2001, WestAmerica voluntarily withdrew its membership with the NASD
and ceased conducting business as a broker-dealer. Until December 2001,
WestAmerica was registered as a broker-dealer with the SEC and licensed in 44
states, Puerto Rico and the District of Columbia. WestAmerica, offered
traditional securities brokerage and financial planning business and fee-based
investment management business to its retail clients. Recently WestAmerica
experienced operating losses. In addition to these losses, WestAmerica had
arbitration losses that exceeded its net capital.
WestAmerica's fiscal year 2001 resulted in a decrease in revenues and an overall
net loss compared with net income in the same period of fiscal 2000. Total
revenues decreased $2,441,000, or 53%, to $2,155,000 in 2001 from $4,596,000 in
2000. The decrease in revenues is due to the continued slumping securities
markets, which significantly affected commission revenues. As a result of the
operating losses and losses from arbitrations, WestAmerica reported a net loss
of $1,002,000 in fiscal year 2001 compared with net income of $200,000 for the
fiscal year 2000.
Results of Operations
Fiscal Year 2000 Compared with Fiscal Year 1999
The Company's fiscal year 2000 resulted in significant increase in revenues and
net income as compared with the fiscal year 1999. The increase in revenues was
due to growth in the retail brokerage and dealer operations combined with strong
markets in the first half of fiscal 2000. Overall, the Company reported net
income of $1,356,000 in the fiscal year 2000 compared with net income of $8,000
in the fiscal year 1999.
Revenues increased $16,736,000, or 42%, in the fiscal year 2000 to $56,213,000
from $39,477,000 in the fiscal year 1999 and expenses increased $15,051,000, or
38%, to $54,524,000 in the fiscal year 2000 from $39,473,000 in the fiscal year
1999. Revenues increased primarily due to the increase in commissions and net
dealer inventory gains based on the strength of the market in the first half of
the fiscal year.
Commission revenue increased $2,883,000, or 14%, to $23,608,000 from $20,725,000
during the fiscal year 2000 compared with the fiscal year 1999. This increase
was due to the strength of the markets in the first half of the fiscal year
2000.
Net dealer inventory gains, which includes profits on proprietary trading,
market making activities and customer mark-ups and mark downs, increased
$10,893,000, or 120%, to $19,950,000 from $9,057,000 during the fiscal year 2000
compared with the fiscal year 1999. This increase is due to National's London
office dramatically increasing its business and the strength of the markets
during the first half of the fiscal year.
Investment banking revenue decreased $121,000, or 5%, to $2,338,000 from
$2,459,000 in the fiscal year 1999. The Company did not manage a public
underwriting in fiscal years 2000 or 1999. During the fiscal year 2000 and the
fiscal year 1999, investment banking revenue was generated primarily from the
completion of private placement transactions and advisory fees.
-18-
Results of Operations (Continued)
Fiscal Year 2000 Compared with Fiscal Year 1999 (Continued)
Other revenue, consisting of asset management fees and revenue from market
making trade order flow, increased $795,000, or 97%, to $1,615,000 from $820,000
during the fiscal year 2000 compared to the fiscal year 1999. The increase in
other revenue was due mainly to an increase in asset management fees received
through National Asset Management, a subsidiary of National.
Concurrent with the overall increase in revenues, total expenses increased
$15,051,000, or 38%, to $54,524,000 from $39,473,000 in the fiscal year 1999.
This increase in expenses was anticipated due to increases in revenues, and
thereby an increase in commission expense and employee compensation.
Commission expense increased $9,487,000, or 40%, to $33,289,000 from $23,802,000
due to the increase in commission revenue, and net dealer inventory gains from
which commission expense is paid. Employee compensation expense increased
$1,872,000, or 42%, to $6,347,000 from $4,475,000 in the fiscal year 1999. In
September 1998, certain members of management of the Company received temporary
reductions in compensation, ranging from 10% to 62%. These reductions were
reinstated in full prior to the first quarter of fiscal 2000. Overall, combined
commissions and employee compensation as a percentage of revenue decreased
slightly to 71% from 72% in the fiscal year 2000 and 1999, respectively.
As anticipated, with the overall increase in revenue expenses regarding
occupancy, taxes, licenses and registration and other have increased from the
fiscal year 1999 to the fiscal year 2000. Occupancy expense, consisting mainly
of rent, office supplies and depreciation increased $1,093,000, or 50%, to
$3,267,000 from $2,174,000. This increase relates mainly to increased rent,
depreciation and computer services. Rent increased approximately $320,000 at
National due to a new office lease signed in July 1999 at a higher rate per
square foot, as well as office space added for NSCdirect. Additionally, with the
addition of NSCdirect, computer services and depreciation increased
approximately $665,000, due to costs for additional equipment and computer
services such as web hosting, off-site server maintenance and other costs
associated with online trade execution and online account access. Additionally,
included in the increase in computer services are increased costs from
National's third party data processing company. These charges are calculated on
a cost per trade basis and as overall trade volume increased in the first half
of the fiscal year 2000, computer services increased.
Taxes, licenses and registration increased $722,000, or 950%, to $798,000 from
$76,000. This increase was due primarily to National receiving a refund of prior
years' business operating taxes totaling $330,000 in the fiscal year 1999.
Additionally, with the increased revenue in fiscal 2000 business operating
taxes, which are a revenue based tax, increased.
Other expenses increased $1,047,000, or 91%, to $2,193,000 from $1,146,000
during the fiscal year 2000 and 1999, respectively. In the fiscal year 2000, the
Company incurred travel and moving expenses totaling $818,000, an increase of
approximately $263,000 from the prior fiscal year 1999. Also, the Company
incurred additional employment agency fees totaling $83,000 as the Company hired
more people to accommodate growth. Professional fees decreased $518,000, or 27%,
to $1,376,000 from $1,894,000. This decrease is due to the Company resolving
several of its lawsuits during the previous
-19-
Results of Operations (Continued)
Fiscal Year 2000 Compared with Fiscal Year 1999 (continued)
fiscal year. Finally, customer write-offs and bad debt expense increased
approximately $492,000 from the fiscal year 1999.
Interest expense increased $958,000, or 25%, to $4,720,000 from $3,762,000. The
main reason for this increase is the increase in customer deposits, on which the
Company pays interest and the accelerated accretion of interest on original
issue discount notes, which were repaid during the second quarter of fiscal
2000. Original issue discount interest for the nine months totaled $232,000. The
remaining interest expense increase was due to the increase in customer deposits
of $7.0 million during the fiscal year 2000. This increase was more than offset
by increased interest income from customer margin debt, which increased by $16.2
million during the fiscal year 2000. Interest income increased $1,891,000, or
34%, to $7,438,000 from $5,547,000 during the fiscal year 2000 as compared with
the fiscal year 1999.
Overall, diluted earnings were $0.64 per share as compared with $0.01 per share
for the fiscal years 2000 and 1999, respectively.
Results of Discontinued Operations
Fiscal Year 2000 Compared with Fiscal Year 1999
WestAmerica's fiscal year 2000 resulted in an increase in revenues and net
income compared with the same period of fiscal 1999. Total revenues increased
$731,000, or 19%, to $4,596,000 in 2000 from $3,865,000 in 2000. The increase in
revenues was due to a growth in retail brokerage business and stronger markets
during the first half of the year. WestAmerica's net income increased $90,000,
or 82%, to $200,000 in fiscal year 2000 compared with net income of $110,000 for
the fiscal year 2000.
Liquidity and Capital Resources
As with most financial services firms, substantial portions of the Company's
assets are liquid, consisting mainly of cash or assets readily convertible into
cash. These assets are financed primarily by National's interest bearing and
non-interest bearing customer credit balances, other payables and equity
capital. Occasionally, National utilizes short-term bank financing to supplement
its ability to meet day-to-day operating cash requirements. Such financing has
been used to maximize cash flow and is regularly repaid. Until January 2001,
National had a $3,000,000 revolving secured credit facility with Bank of
America. In January 2001, National entered into a $5,000,000 secured line of
credit with American National Bank and Trust Company of Chicago, that is
guaranteed by the Company. As of September 28, 2001 $3,500,000 was outstanding
on the line of credit, and as of December 28, 2001 $1,500,000 remained
outstanding. The line of credit that was utilized to support National's self
clearing activity will expire on December 31, 2001 and will not be renewed.
Borrowings bear interest at the "call money rate" plus 1%. Interest is payable
monthly. These borrowings are short-term and generally do not extend beyond a
few days. Additionally, National may borrow up to 70% of the market value of
eligible securities pledged through an unrelated broker-dealer.
-20-
Liquidity and Capital Resources (Continued)
Subsequent to the fiscal year end 2001, National entered into a Forbearance
Agreement with American National Bank based on an event of default according to
the original credit agreement. The Forbearance Agreement amended the line of
credit to $4,000,000. Additionally, Steven A. Rothstein and Mark Goldwasser each
signed a Guaranty unconditionally guaranteeing certain indebtedness of the
Company to American National Bank. These guarantees effectively terminated in
December 2001.
National, as a registered broker-dealer, is subject to the SEC's Uniform Net
Capital Rule 15c3-1, which requires the maintenance of minimum net capital.
National has elected to use the alternative standard method permitted by the
rule. This requires that National maintain minimum net capital equal to the
greater of $250,000 or 2% of aggregate debit items. At September 28, 2001,
National's net capital exceeded the requirement by $1,604,000.
WestAmerica, as a formerly registered broker-dealer, was also subject to the
SEC's Net Capital Rule 15c3-1, which, under the standard method, required that
WestAmerica maintain minimum net capital equal to the greater of $100,000 or 6
2/3% of aggregate indebtedness. At September 28, 2001, WestAmerica's did not
satisfy the net capital requirement. In October 2001, WestAmerica became a
$5,000 broker-dealer. In December 2001, WestAmerica voluntarily withdrew its
membership with the NASD and ceased to conduct business as a broker-dealer.
WestAmerica intends to file for Chapter 7 Bankruptcy protection in accordance
with the U.S. Bankruptcy Code. WestAmerica has been operated as a separate legal
entity, and although the Company does not believe it will have any ongoing
liability for any unpaid obligations of WestAmerica, there can be no assurances
that creditors of WestAmerica will not seek recovery of their claims from the
Company.
Canterbury, as a registered broker-dealer, is also subject to the SEC's Net
Capital Rule 15c3-1, which, under the standard method, requires that Canterbury
maintain minimum net capital equal to $5,000. At September 28, 2001,
Canterbury's net capital exceeded the requirement by $2,800.
Advances, dividend payments and other equity withdrawals from its subsidiaries
are restricted by the regulations of the SEC and other regulatory agencies.
These regulatory restrictions may limit the amounts that these subsidiaries may
dividend or advance to Olympic.
The objective of liquidity management is to ensure that the Company has ready
access to sufficient funds to meet commitments, fund deposit withdrawals and
efficiently provide for the credit needs of customers.
As a result of the losses throughout fiscal year 2001, notably those of the
fourth quarter, attributable in part to the unprecedented events in September
2001, the Company concluded that existing capital would not be sufficient to
satisfy existing operations. The Company has explored various transactions to
finance the Company's operations.
-21-
Liquidity and Capital Resources (Continued)
In December 2001, the Company executed definitive agreements with investors,
including Mark Goldwasser, the Company's President, and an affiliate of Sands
Brothers & Company, an NYSE member firm, to invest $1,072,500 into the Company
and place another $500,000 in escrow to be drawn upon over the next seven
months, if necessary. The Company issued to the investors Series A Preferred
Stock that converts into shares of the Company's common stock at $1.50 per
share.
To further strengthen the capital position of the Company as part of the
Investment Transaction, two unrelated individual noteholders holding $2.0
million of the company's debt will convert one-half of that debt into the same
class of Series A preferred stock. The noteholders will also have 100,000 of
their existing warrants to acquire up to 200,000 shares repriced from an
exercise price of $5.00 per share to $1.75 per share.
In August 2001, the Company entered into an agreement with First Clearing, an
affiliate of First Union Securities, Inc., under which First Clearing will
provide clearing and related services for National. The Clearing Agreement will
expand the products and services capabilities for National's retail and
institutional business, enable National to consolidate its existing clearing
operations and reduce fixed overhead associated with its self-clearing
activities.
The conversion to First Clearing began in December 2001. In connection with the
Clearing Agreement, the Company entered into a ten-year $6,000,000 promissory
note with First Clearing under which the Company immediately borrowed
$1,000,000. The funds were contributed by the Company to National, and are being
used as a deposit to secure National's performance under the Clearing Agreement.
The amount of the note that is repayable on each anniversary date is the
principal and interest then outstanding divided by the remaining life of the
note. The Clearing Agreement also provides for another $1,000,000 loan to be
extended to the Company at completion of the conversion, subject to certain
conditions that are expected to be satisfied upon closing of the Investment
Transaction.
In connection with the Clearing Agreement, National will terminate its clearing
relationship with US Clearing. Upon termination of the agreement and transfer of
all customer and proprietary accounts, National is entitled to the return of its
$1,000,000 clearing deposit.
Additional borrowings are available to the Company upon the attainment by
National of certain volume and profitability goals, none of which have been met
as of the date of filing of this Form 10-K. Borrowings under the promissory
notes are forgivable based on certain business performance and trading volumes
of the Company over the life of the loan.
As of the fiscal year ended September 28, 2001, total assets were $77,599,000
compared to total assets of $92,696,000 as of the fiscal year September 29,
2000, which represents a 16% decrease in total assets for the 12-month period.
There will be a material decrease in the Company's assets in fiscal year 2002
due to the change in the Company's clearing arrangements. Customer assets that
are included in the current fiscal year 2001 balance sheet will no longer be
accounted for on the Company's books. These assets will be held at First
Clearing as part of the clearing arrangement.
-22-
Inflation
The Company believes that the effect of inflation on its assets, consisting of
cash, securities, office equipment, leasehold improvements and computers has not
been significant.
New Accounting Standards
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-interest 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 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. As of September 28, 2001, the
Company had no unamortized goodwill.
In August 2001, the FASB issued Statements of Financial No. 144 ("SFAS 144"),
"accounting of the Impairment 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 Operation-Reporting the Effects of Disposal of a
Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring
Events and Transactions". 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 will have
on its financial position or results of operations in future periods.
-23-
ITEM 7A - QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company's primary market risk arises from the fact that it engages in
proprietary trading and makes dealer markets in equity securities. Accordingly,
the Company may be required to 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, foreign
exchange rates, equity prices and other political factors. The Company is not
subject to direct market risk due to changes in foreign exchange rates. However,
the Company is subject to market risk as a result of changes in interest rates
and equity prices, which are affected by global economic conditions. The Company
manages its exposure to market risk by limiting its net long or short positions.
Trading and inventory accounts are monitored daily by management and the Company
has instituted position limits.
Credit risk represents the amount of accounting loss the Company could incur if
counterparties to its proprietary transactions fail to perform and the value of
any collateral proves inadequate. Although credit risk relating to various
financing activities is reduced by the industry practice of obtaining and
maintaining collateral, the Company maintains more stringent requirements to
further reduce its exposure. The Company monitors its exposure to counterparty
risk on a daily basis by using credit exposure information and monitoring
collateral values. The Company maintains a credit committee, which reviews
margin requirements for large or concentrated accounts and sets higher
requirements or requires a reduction of either the level of margin debt or
investment in high-risk securities or, in some cases, requiring the transfer of
the account to another broker-dealer.
The Company monitors its market and credit risks daily through internal control
procedures designed to identify and evaluate the various risks to which the
Company is exposed. There can be no assurance, however, that the Company's risk
management procedures and internal controls will prevent losses from occurring
as a result of such risks.
The following table shows the quoted market values of the Company's securities
owned ("long"), securities sold but not yet purchased ("short") and net
positions as of September 28, 2001:
Long Short Net
----------- ----------- -------------
Equity Positions $977,000 $689,000 $288,000 (long)
Municipal Bonds $154,000 $103,000 $ 51,000 (long)
Item 8 - FINANCIAL STATEMENTS
See Part IV, Item 14(a)(1) for a list of financial statements filed as part of
this Report.
-24-
Item 9 - CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
There were no matters submitted to a vote of security holders in the fourth
quarter of fiscal year ended September 28, 2001.
PART III
Item 10 - DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS,
COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT
The information required by this Item will be included in the Company's 2002
Proxy Statement and is incorporated herein by reference.
Item 11 - EXECUTIVE COMPENSATION
The information required by this Item will be included in the Company's 2002
Proxy Statement and is incorporated herein by reference.
Item 12 - SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this Item will be included in the Company's 2002
Proxy Statement and is incorporated herein by reference.
Item 13 - CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this Item will be included in the Company's 2002
Proxy Statement and is incorporated herein by reference.
Item 14 - EXHIBITS AND REPORTS ON FORM 8-K
(a) The following financial statements are included in Part II, Item 8:
1. Financial Statements
Independent Auditors' Report F-1
Consolidated Financial Statements
Statements of Financial Condition, September 28, 2001
and September 29, 2000 F-2
Statements of Operations, Years
ended September 28, 2001, September 29, 2000 and
September 24, 1999 F-3
Statements of Changes in Stockholders' Equity, Years
ended September 28, 2001, September 29, 2000 and
September 24, 1999 F-4
Statements of Cash Flows, Years ended September 28,
2001, September 29, 2000 and September 24, 1999 F-5
Notes to Consolidated Financial Statements F-6
-25-
2. Financial Statement Schedules
Schedules not listed above have been omitted because they are not
applicable or have been included in footnotes to the consolidated
financial statements.
(b) Reports on Form 8-K
No Reports on Form 8-K were filed during the fourth quarter ended
September 28, 2001.
(c) Exhibits
See Exhibit Index.
-26-
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities and
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
OLYMPIC CASCADE FINANCIAL CORPORATION
(Registrant)
Date: December 28, 2001 By: /s/Steven A. Rothstein
------------------------ ---------------------------------------
Steven A. Rothstein, Chairman and
Chief Executive Officer
Date: December 28, 2001 By: /s/Robert H. Daskal
------------------------ ---------------------------------------
Robert H. Daskal, Senior Vice President,
Chief Financial Officer, Treasurer
and Secretary
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the registrant and
in the capacities and on the dates indicated.
Date: December 28, 2001 By: /s/Steven A. Rothstein
------------------------ ----------------------------------------
Steven A. Rothstein, Chairman and
Chief Executive Officer
Date: December 28, 2001 By: /s/Gary A. Rosenberg
------------------------ ----------------------------------------
Gary A. Rosenberg, Director
Date: December 28, 2001 By: /s/James C. Holcomb, Jr.
--------------------- ----------------------------------------
James C. Holcomb, Jr., Director
Date: December 28, 2001 By: /s/D.S. Patel
--------------------- ----------------------------------------
D.S. Patel, Director
-27-
EXHIBIT INDEX
3.1 Certificate of Incorporation, as amended, previously filed as
Exhibit 3.4 to Form 10-Q in May 2001and hereby incorporated by
reference.
3.2 The Company's Bylaws, as amended, previously filed as Exhibit 3.5
to Form 10-Q in May 2001, and hereby incorporated by reference.
10.1 Office lease, Chicago, Illinois, previously filed as Exhibit
10.27 to Form 10-K in December 1996 and hereby incorporated by
reference.
10.2 Office lease, Spokane, Washington, previously filed as Exhibit
10.28 to Form 10-K in December 1996 and hereby incorporated by
reference.
10.3 Amended office lease, Chicago, Illinois, previously filed as
Exhibit 10.29 to Form 10-K in December 1996 and hereby
incorporated by reference.
10.4 Purchase agreement between shareholders of Friend and the
Company, previously filed as Exhibit 10.30 to Form 10-K in
December 1997 and hereby incorporated by reference.
10.5 Purchase agreement between shareholders of WestAmerica and
the Company, previously filed as Exhibit 10.31 to Form 10-K in
December 1997 and hereby incorporated by reference.
10.6 Purchase agreement between shareholders of Travis and the
Company, previously filed as Exhibit 10.32 to Form 10-K in
December 1997 and hereby incorporated by reference.
10.7 Borrowing agreement between Seattle-First National Bank and
the Company, previously filed as Exhibit 10.33 to Form 10-K in
December 1998 and hereby incorporated by reference.
10.8 Note payable agreement, previously filed as Exhibit 10.34 to Form
10-K in December 1998 and hereby incorporated by reference.
10.9 Note payable agreement, previously filed as Exhibit 10.35 to Form
10-K in December 1998 and hereby incorporated by reference.
10.10 Note payable agreement, previously filed as Exhibit 10.36 to Form
10-K in December 1998 and hereby incorporated by reference.
10.11 Sales agreement between Friend and the Company, previously filed
as Exhibit 10.37 to Form 10-K in December 1998 and hereby
incorporated by reference.
10.12 1996 Stock Option Plan, previously filed as Exhibit 4.1 to Form
S-8 in February 1999 and hereby incorporated by reference.
10.13 1997 Stock Option Plan, previously filed as Exhibit 4.2 to Form
S-8 in February 1999 and hereby incorporated by reference.
10.14 1999 Stock Option Plan, previously filed as Exhibit 4.3 to
Form S-8 in February 1999 and hereby incorporated by reference.
10.15* Employment contract dated July 1999, previously filed as Exhibit
10.15 to Form 10-K in December 1999 and hereby incorporated
by reference.
10.16* Employment contract dated July 1999 previously filed as Exhibit
10.16 to Form 10-K in December 1999 and hereby incorporated by
reference.
10.17* Employment contract dated July 1999 previously filed as Exhibit
10.17 to Form 10-K in December 1999 and hereby incorporated by
reference.
10.18* Employment contract dated July 1999 previously filed as Exhibit
10.18 to Form 10-K in December 1999 and hereby incorporated by
reference.
10.19* Employment contract dated July 1999 previously filed as Exhibit
10.19 to Form 10-K in December 1999 and hereby incorporated by
reference.
-28-
10.20 Office lease, Seattle, Washington previously filed as Exhibit
10.20 to Form 10-K in December 1999 and hereby incorporated by
reference.
10.21 2000 Stock Option Plan, previously filed as Exhibit 4.1 to Form
S-8 in June 2000 and hereby incorporated by reference.
10.22* Employment contract dated June 2000 previously filed as Exhibit
10.21 to Form 10-Q in August 2000 and hereby incorporated by
reference.
10.23 Form of Note payable agreement dated January 2001, previously
filed as Exhibit 10.23 to Form 10-Q in May 2001 and hereby
incorporated by reference.
10.24 Secured Demand Note dated February 2001, previously filed as
Exhibit 10.24 to Form 10-Q in May 2001 and hereby incorporated by
reference.
10.25 Loan and security agreement dated January 2001, previously filed
as Exhibit 10.25 to Form 10-Q in February 2001 and hereby
incorporated by reference.
10.26 2001 Stock Option Plan, previously included in the Proxy
Statement-Schedule 14A filed in January 2001 and hereby
incorporated by reference.
10.27 Audit committee charter, previously filed as Exhibit 10.22 to
Form 10-Q in August 2000 and hereby incorporated by reference.
10.28 Clearing Agreement.
10.29 First Amendment to Clearing Agreement.
11. Computation of Earnings per Share.
16.1 Change in Certifying Accountant, previously filed to Form
8-K in August 1998 and hereby incorporated by reference.
21. Subsidiaries of Registrant.
23.1 Consent of Feldman Sherb Erhlich & Co., P.C., previously filed
to Forms S-8 in February 1999 and June 2000 and Forms S-3 in May
1999 and June 1999 and hereby incorporated by reference.
23.2 Consent of Moss Adams LLP, previously filed to Forms S-8 in
February 1999 and June 2000 and Forms S-3 in May 1999 and June
1999 and hereby incorporated by reference.
23.3 Consent of Camhy Karlinsky & Stein LLP, previously filed to Form
S-8 in February 1999 and Forms S-3 in May 1999 and June 1999 and
hereby incorporated by reference.
23.4 Consent of D'Ancona & Pflaum LLC, previously filed to Forms S-8
in June 2000 and June 2001 and hereby incorporated by reference.
24. Power of Attorney, previously filed to Forms S-3 in May 1999 and
June 1999.
*Compensatory agreements
-29-
INDEPENDENT AUDITORS' REPORT
To the Stockholders and
Board of Directors
Olympic Cascade Financial Corporation
We have audited the accompanying consolidated statements of financial condition
of Olympic Cascade Financial Corporation and Subsidiaries as of September 28,
2001 and September 29, 2000 and the related consolidated statements of
operations, changes in stockholders' equity, and cash flows for the years ended
September 28, 2001, September 29, 2000 and September 24, 1999. These
consolidated 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 Olympic Cascade
Financial Corporation and Subsidiaries as of September 28, 2001 and September
29, 2000, and the results of their operations and their cash flows for the years
ended September 28, 2001, September 29, 2000 and September 24, 1999 in
conformity with accounting principles generally accepted in the United States of
America.
/s/Feldman Sherb & Co., P.C.
Feldman Sherb & Co., P.C.
Certified Public Accountants
December 26, 2001
New York, New York
F-1
OLYMPIC CASCADE FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
ASSETS
September 28, September 29,
2001 2000
-------------- ----------------
CASH, subject to immediate withdrawal $ 585,000 $ 2,694,000
CASH, CASH EQUIVALENTS AND SECURITIES 37,188,000 29,517,000
DEPOSITS 4,654,000 1,792,000
RECEIVABLES
Customers 29,755,000 54,243,000
Brokers and dealers 669,000 1,702,000
Other 836,000 394,000
SECURITIES HELD FOR RESALE, at market 1,131,000 373,000
FIXED ASSETS, net 841,000 1,089,000
GOODWILL, net - 74,000
OTHER ASSETS 1,940,000 301,000
NET ASSETS OF DISCONTINUED OPERATIONS - 517,000
-------------- ----------------
$ 77,599,000 $ 92,696,000
============== ================
LIABILITIES AND STOCKHOLDERS' EQUITY
BANK OVERDRAFT $ 1,556,000 $ -
BANK LINE OF CREDIT 3,500,000 -
PAYABLES
Customers 54,511,000 74,183,000
Brokers and dealers 10,020,000 5,329,000
SECURITIES SOLD, BUT NOT YET
PURCHASED, at market 792,000 192,000
ACCOUNTS PAYABLE, ACCRUED
EXPENSES AND OTHER LIABILITIES 1,963,000 3,499,000
INCOME TAX PAYABLE - 258,000
CAPITAL LEASE PAYABLE 300,000 582,000
NOTES PAYABLE 4,035,000 614,000
NET LIABILITIES FROM DISCONTINUED OPERATIONS 300,000 -
-------------- ----------------
76,977,000 84,657,000
-------------- ----------------
CONTINGENCIES
STOCKHOLDERS' EQUITY
Preferred stock, $.01 par value, 100,000
shares authorized, none issued and
outstanding - -
Common stock, $.02 par value, 6,000,000
shares authorized, 2,236,449 and 2,153,846
issued and outstanding, respectively 45,000 43,000
Additional paid-in capital 9,313,000 8,810,000
Deficit (8,736,000) (814,000)
-------------- ----------------
622,000 8,039,000
-------------- ----------------
$ 77,599,000 $ 92,696,000
============== ================
See notes to consolidated financial statements.
F-2
OLYMPIC CASCADE FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
Years Ended
------------------------------------------------
September 28, September 29, September 24,
------------- ------------- --------------
2001 2000 1999
------------- ------------- --------------
REVENUES
Commissions $ 19,761,000 $ 23,608,000 $ 20,725,000
Net dealer inventory gains 19,132,000 19,950,000 9,057,000
Investment banking revenue 1,020,000 2,338,000 2,459,000
Interest and dividends 5,750,000 7,438,000 5,547,000
Transfer fees and clearance
services 1,092,000 1,264,000 869,000
Other 3,469,000 1,615,000 820,000
------------- -------------- -------------
50,224,000 56,213,000 39,477,000
------------- -------------- -------------
EXPENSES
Commissions 28,448,000 33,289,000 23,802,000
Employee compensation and
related expenses 8,726,000 6,347,000 4,475,000
Occupancy and equipment costs 4,415,000 3,267,000 2,174,000
Interest 3,361,000 4,720,000 3,762,000
Clearance fees 4,302,000 1,424,000 1,230,000
Communications 3,340,000 1,110,000 914,000
Taxes, licenses, registration 763,000 798,000 76,000
Professional fees 1,945,000 1,376,000 1,894,000
Other 2,344,000 2,193,000 1,146,000
------------- ------------- -------------
57,644,000 54,524,000 39,473,000
------------- ------------- -------------
Income (loss) from continuing
operations before income taxes
and extraordinary item (7,420,000) 1,689,000 4,000
Income tax (expense) benefit 82,000 (333,000) 4,000
------------- ------------- -------------
Income (loss) from continuing
operations before
extraordinary item (7,338,000) 1,356,000 8,000
Income (loss) from discontinued
operations, net of tax (1,002,000) 200,000 110,000
------------- ------------- -------------
Income (loss) before
extraordinary item (8,340,000) 1,556,000 118,000
Income from extraordinary
item - gain from
extinguishment of debt,
net of taxes 418,000 - -
------------- ------------- -------------
NET INCOME (LOSS) $ (7,922,000) $ 1,556,000 $ 118,000
============= ============= =============
EARNINGS (LOSS) PER COMMON SHARE
Earnings (Loss) Per Share
from continuing operations
Basic Earnings (Loss)
Per Share $ (3.33) $ 0.70 $ 0.01
============= ============= =============
Diluted Earnings (Loss)
Per Share $ (3.33) $ 0.64 $ 0.01
============= ============= =============
Earnings (Loss) Per Share
from discontinued operations
Basic Earnings Per Share $ (0.45) $ 0.10 $ 0.07
============= ============= =============
Diluted Earnings Per Share $ (0.45) $ 0.09 $ 0.07
============= ============= =============
Earnings Per Share from
extraordinary item
Basic Earnings Per Share $ 0.19 $ - $ -
============= ============= =============
Diluted Earnings Per Share $ 0.19 $ - $ -
============= ============= =============
Earnings (Loss) Per Share
Basic Earnings (Loss)
Per Share $ (3.59) $ 0.80 $ 0.08
============= ============= =============
Diluted Earnings (Loss)
Per Share $ (3.59) $ 0.73 $ 0.08
============= ============= =============
WEIGHTED AVERAGE COMMON SHARES
OUTSTANDING FOR THE PERIOD-BASIC 2,207,101 1,947,572 1,563,499
============= ============= =============
WEIGHTED AVERAGE COMMON SHARES
OUTSTANDING FOR THE PERIOD-DILUTED 2,207,101 2,124,751 1,563,499
============= ============= =============
See notes to consolidated financial statements.
F-3
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
YEARS ENDED SEPTEMBER 28, 2001, SEPTEMBER 29, 2000 AND SEPTEMBER 24, 1999
Common Stock Additional
--------------------- Paid-In
Shares Amount Capital Deficit Total
---------- --------- ----------- ------------ -----------
BALANCE, September 25, 1998 1,463,007 $ 29,000 $ 5,407,000 $ (2,488,000) $ 2,948,000
Exercise of stock options 82,613 2,000 297,000 - 299,000
Exercise of stock warrants 5,000 - 20,000 - 20,000
Issuance of common stock
and warrants in lawsuit
settlement and payment of
expenses 145,000 3,000 618,000 - 621,000
Options issued to consultants - - 38,000 - 38,000
Treasury stock (1,025) - (5,000) - (5,000)
Net income - - - 118,000 118,000
---------- --------- ----------- ------------ -----------
BALANCE, September 24, 1999 1,694,595 34,000 6,375,000 (2,370,000) 4,039,000
Exercise of stock options 144,063 3,000 744,000 - 747,000
Exercise of stock warrants 315,188 6,000 1,589,000 - 1,595,000
Options issued to consultants - - 82,000 - 82,000
Warrants issuance in connection
with acquisition - - 20,000 - 20,000
Net income - - - 1,556,000 1,556,000
---------- --------- ----------- ------------ -----------
BALANCE, September 29, 2000 2,153,846 43,000 8,810,000 (814,000) 8,039,000
Exercise of stock options 73,603 2,000 273,000 - 275,000
Options issued to consultants - - 105,000 - 105,000
Issuance of restricted stock 9,000 - 25,000 - 25,000
Original issue discount - - 100,000 - 100,000
Net loss - - - (7,922,000) (7,922,000)
---------- --------- ----------- ------------ -----------
BALANCE, September 28, 2001 2,236,449 $ 45,000 $ 9,313,000 $ (8,736,000) $ 622,000
========== ========= =========== ============ ===========
See notes to consolidated financial statements.
F-4
OLYMPIC CASCADE FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years Ended
------------------------------------------------
September 28, September 29, September 24,
------------- ------------- --------------
2001 2000 1999
------------- ------------- --------------
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss) $ (7,922,000) $ 1,556,000 $ 118,000
Adjustments to reconcile net
income (loss) to net
cash (used in) provided by
operating activities
Depreciation and amortization 632,000 498,000 408,000
Issuance of common stock in
lawsuit settlement - - 501,000
Issuance of common stock in
payment of expenses - - 120,000
Compensation related to issuance
of stock options 105,000 82,000 38,000
Loss (gain) on sale of subsidiaries - - (5,000)
Deferred income tax benefit 50,000 (76,000) (2,000)
(Gain) on extraordinary item -
extinguisment of debt (418,000) - -
Net assets (liabilities) of
discontinued operations 817,000 (188,000) (252,000)
Changes in assets and liabilities
Cash, cash equivalents and
securities (7,671,000) 11,899,000 (14,068,000)
Deposits (2,862,000) (113,000) 345,000
Receivables 25,079,000 (14,983,000) (153,000)
Income taxes receivable (payable) (258,000) 258,000 654,000
Securities held for resale (758,000) (75,000) (63,000)
Other assets (1,689,000) 120,000 (211,000)
Customer and broker payables (14,981,000) 4,773,000 12,477,000
Securities sold, but not yet
purchased 600,000 53,000 66,000
Accounts payable, accrued expenses,
and other liabilities (982,000) 84,000 876,000
------------- ------------- --------------
Net cash (used in) provided by
operating activities (10,258,000) 3,888,000 849,000
------------- ------------- --------------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of fixed assets (806,000) (413,000) (276,000)
Purchase of goodwill - (30,000) -
------------- ------------- --------------
Cash used in investing activities (806,000) (443,000) (276,000)
------------- ------------- --------------
CASH FLOWS FROM FINANCING ACTIVITIES
Borrowings (payments) on line of
credit 3,500,000 (2,100,000) (600,000)
Proceeds from notes payable 4,000,000 - -
Repayment of notes payable (61,000) (1,034,000) (300,000)
Payments on capital lease (340,000) (340,000) (348,000)
Issuance of restricted stock 25,000 - -
Increase in cash overdraft 1,556,000 - -
Exercise of stock options 275,000 744,000 319,000
Exercise of stock warrants - 1,595,000 -
------------- ------------- --------------
Net cash provided by (used in)
financing activities 8,955,000 (1,135,000) (929,000)
------------- ------------- --------------
(DECREASE) INCREASE IN CASH (2,109,000) 2,310,000 (356,000)
CASH BALANCE
Beginning of the year 2,694,000 384,000 551,000
------------- ------------- --------------
End of the year $ 585,000 $ 2,694,000 $ 195,000
============= ============= ==============
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash paid during the period for
Interest $ 3,317,000 $ 4,714,000 $ 3,727,000
============= ============= ==============
Income taxes $ 323,000 $ - $ -
============= ============= ==============
SUPPLEMENTAL DISCLOSURES OF NONCASH INVESTING AND
FINANCING ACTIVITIES
Warrants issued as a discount
on notes payable $ 100,000 $ - $ -
============= ============= ==============
Redemption and retirement of
common stock $ - $ - $ 5,000
============= ============= ==============
Warrants issued as part of
acquisition $ - $ 20,000 $ -
============= ============= ==============
See notes to consolidated financial statements.
F-5
OLYMPIC CASCADE FINANCIAL CORPORATION
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 28, 2001, SEPTEMBER 29, 2000 AND SEPTEMBER 24, 1999
-------------------------------------------------------------
1. ORGANIZATION:
Olympic Cascade Financial Corporation ("Olympic" or the "Company") is a
diversified financial services organization, operating through its three wholly
owned subsidiaries, National Securities Corporation ("National"), WestAmerica
Investment Group ("WestAmerica") and Canterbury Securities Corporation
("Canterbury"). The Company's business includes securities brokerage for
individual and institutional clients, market- making trading activities, asset
management and corporate finance services.
In June 1997, the Company acquired all of the outstanding stock of WestAmerica,
a Scottsdale, Arizona based broker-dealer specializing in retail brokerage
services.
In December 2001, WestAmerica voluntarily withdrew its membership with the NASD
and ceased conducting business as a broker-dealer. WestAmerica intends to file
for Chapter 7 Bankruptcy protection in accordance with the U.S. Bankruptcy Code.
Accordingly, the accompanying financial statements of WestAmerica have been
reclassified as discontinued operations for all periods presented.
In June 2000, the Company acquired all of the outstanding stock of Canterbury,
an Illinois based broker-dealer focusing on private placement of securities.
Canterbury was acquired for $30,000 in cash plus the issuance of warrants to
purchase 5,000 shares of the common stock of the Company at an exercise price of
$6.375 per share. Canterbury had no activity since its acquisition.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
-------------------------------------------
a. Principles of Consolidation - The consolidated financial
statements include the accounts of Olympic and its wholly owned
subsidiaries. All significant intercompany accounts and transactions
have been eliminated.
b. Estimates - The preparation of the 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, 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.
c. Accounting Method - Customer security transactions and the
related commission income and expense are recorded on a settlement
date basis. The Company's financial condition and results of
operations using the settlement date basis are not materially
different from that of the trade date basis. Revenue from consulting
services and investment banking activities is recognized as the
services are performed.
F-6
d. Fixed Assets - Fixed assets are stated at cost. Depreciation
is calculated using the straight line method based on the estimated
useful lives of the related assets, which range from three to five
years.
e. Fiscal Year - The Company has a fifty-two or fifty-three week year,
ending on the last Friday in September.
f. Cash and Cash Equivalents - For purposes of the statement of
cash flows, the Company defines cash as cash subject to immediate
withdrawal. Cash, cash equivalents and securities as discussed in
Note 4 are not considered a change in cash for this purpose.
g. Income Taxes - The Company recognizes deferred tax assets and
liabilities based on the difference between the financial statements
carrying amounts and the tax basis of assets and liabilities, using
the effective tax rates in the years in which the differences are
expected to reverse. A valuation allowance related to deferred tax
assets is also recorded when it is probable that some or all of the
deferred tax asset will not be realized.
h. Fair Value of Financial Instruments - Substantially all of the
Company's financial statements are carried at fair value. Assets,
including cash, cash equivalents and securities, deposits, certain
receivables, securities held for resale and other assets, are
carried at fair value or contracted amounts which approximate fair
value. Similarly, liabilities, including certain payables,
securities sold but not yet purchased and notes payable are carried
at fair value or contracted amounts approximating fair value.
i. Earnings (Loss) per Share - Basic earnings (loss) per
common share is based upon the net income (loss) for the year
divided by the weighted average number of common shares outstanding
during the year. Diluted earnings (loss) per common share assumes
that all common stock equivalents have been converted to common
shares using the treasury stock method.
j. Impairment of Long-Lived Assets - The Company reviews long-lived
assets for impairment whenever circumstances and situations change
such that there is an indication that the carrying amounts may not be
recovered. At September 28, 2001 the Company believes that there has
been no impairment of its long-lived assets.
k Stock Based Compensation - The Company accounts for stock transactions
in accordance with APB Opinion No. 25, "Accounting for Stock Issued to
Employees." In accordance with Statement of Financial Standards No.
123, "Accounting for Stock Based Compensation" the Company has adopted
the pro forma disclosure requirements of Statement No. 123.
F-7
l. Concentrations of Credit Risk - The Company is actively involved in
securities brokerage, distribution, trading and underwriting. These
and other related services are provided on a national basis to a large
and diversified group of clients and customers, including
corporations, governments, financial institutions and individual
investors. The Company's exposure to credit risk associated with the
non-performance by these customers and counterparties in fulfilling
their contractual obligations can be directly impacted by volatile or
illiquid trading markets which may impair the ability of customers and
counterparties to satisfy their obligations to the Company.
Substantially all of the securities held for the exclusive benefit of
customers, pursuant to SEC Rule 15c3-3, consist of issues by the U.S.
Government or federal agencies. The Company's most significant
counterparty concentrations are other brokers and dealers, commercial
banks, institutional clients and other financial institutions. This
concentration arises in the normal course of the Company's business.
Additionally, the Company maintains deposits at financial institutions
which at times, may exceed the $100,000 federally insured limit.
m. 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-interest 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
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. As of
September 28, 2001, the Company had no unamortized goodwill.
In August 2001, the FASB issued Statements of Financial No. 144 ("SFAS
144"), "accounting of the Impairment 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
Operation-Reporting the Effects of Disposal of a Segment of a
Business, and Extraordinary, Unusual and Infrequently Occurring Events
and Transactions". 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
F-8
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 will have on its financial position or
results of operations in future periods.
3. SIGNIFICANT AGREEMENTS AND TRANSACTIONS
a. CLEARING AGREEMENTS
In August 2001, National entered into a ten-year agreement with First
Clearing Corporation ("FCC"), an affiliate of First Union Securities,
Inc., under which FCC will provide clearing and other related services
for National. The conversion to FCC began in December 2001.
In connection with the clearing agreement, Olympic entered into a
ten-year $6,000,000 promissory note agreement whereby FCC shall make
advances to Olympic in varying amounts according to the terms of the
agreement. The amount of the note that is repayable on each
anniversary date is the principal and accrued interest then
outstanding divided by the remaining life of the note. However, the
note agreement provides for the forgiveness of the amount payable
based on certain business performance and trading volumes over the
life of the loan. The loan requires that the Company maintain a
shareholders' equity of no less than $2,000,000. Upon the execution of
the aforementioned clearing agreement, Olympic received an initial
advance of $1,000,000, which was then used to make a refundable
deposit as required by the clearing agreement. Olympic can request the
second advance of $1,000,000 upon the completion of the conversion
from a self-clearing firm to a fully-disclosed firm and the conversion
of its clearing with US Clearing ("USC") and provided that the
stockholders' equity of Olympic is equal to or greater than
$2,000,000. The agreement also requires the payment of a termination
fee ranging from $2,000,000 to $400,000 if terminated within years one
through six of the agreement. Olympic has pledged its shares of stock
of National to secure the aforementioned note.
In connection with the above agreement, in November 2001, the Company
notified USC of its intention to terminate its clearing relationship.
Upon termination of the agreement and transfer of all customer and
proprietary accounts, National is entitled to a return of its
$1,000,000 clearing deposit.
b. EQUITY TRANSACTIONS
(i) On December 14, 2001, Olympic, an unaffiliated company and the
President of Olympic (collectively, the "Purchaser") entered into
a securities purchase agreement for 10,725 shares of Series A
convertible preferred stock ("Preferred Stock") of Olympic at
$100 per share, convertible into common stock at a price of $1.50
per share. In addition, the Purchaser will maintain on deposit in
an escrow account for seven months an additional $500,000, which
can be drawn upon under certain circumstances. If such amounts
are utilized, the Company will issue additional shares of
Preferred Stock as payment.
F-9
(ii) Concurrent with the closing of the above transaction, the current
Chief Executive Officer and Chief Financial Officer of Olympic
will terminate their employment agreements with the Company and
simultaneously enter into consulting agreements of eighteen and
twenty-seven months, respectively, at a monthly consideration of
$10,000 for each consultant. In addition, the Chief Executive
Officer has also been given the option to purchase all of the
shares of stock of Canterbury for approximately $11,000. Such
officer has also agreed to sell 285,000 shares owned by the
officer and his family to the aforementioned unaffiliated
company.
(iii) Also, on December 14, 2001, Olympic executed a securities
exchange agreement with the holders of Olympic's $2,000,000
promissory note holders, whereby $1,000,000 of such notes will be
exchanged as payment for the issuance of 10,000 shares of Series
A convertible preferred stock at $100 per share. In addition,
100,000 of the warrants issued pursuant to the original loan
transaction will be repriced from an exercise price of $5.00 per
share to $1.75 per share. agreement with the holders of Olympic'
$2,000,000 promissory note holders, whereby $1,000,000 of such
notes will be exchanged as payment for the issuance of 10,000
shares of Series A convertible preferred stock at $100 per share.
In addition, 100,000 of the warrants issued pursuan to the
original loan transaction will be repriced from an exercise price
of $5.00 per share to $1.75 per share.
The aforementioned transactions in Note 3b are scheduled to close
simultaneously with each other and the filing of Olympic's Form 10-K
for the fiscal year ended September 28, 2001.
4. DISCONTINUED OPERATIONS
The following is a summary of the Company's discontinued operations:
Net (liabilities) assets of discontinued operations:
September 28, 2001 September 29, 2000
-------------------------- ------------------
Assets:
Cash $ 145,000 $ 326,000
Marketable securities - 3,000
Accounts receivable, net 92,000 292,000
Fixed assets, net - 23,000
Other assets - 92,000
Liabilities:
Payable to brokers 37,000 105,000
Accounts payable and
accrued expenses 452,000 114,000
Bank line of credit 48,000 -
------------------------ -----------------
Net (liabilities) assets of
discontinue operations $ (300,000) $ 517,000
======================= =================
F-10
Results of Operations:
Years Ended
-------------------------------------------------------------------------------
September 28, 2001 September 29, 2000 September 24, 1999
---------------------- ---------------------- ----------------------
Revenues $ 2,134,000 $ 4,596,000 $ 3,884,000
----------------------- ---------------------- ----------------------
Income (loss) from
operations (915,000) 200,000 110,000
Loss on disposal (87,000) - -
----------------------- ---------------------- ----------------------
Total income (loss)
from discontinued
operations $ (1,002,000) $ 200,000 $ 110,000
======================= ====================== ======================
5. CASH, CASH EQUIVALENTS AND SECURITIES
Cash, cash equivalents, and securities have been segregated in special reserve
bank accounts for the exclusive benefit of customers under Rule 15c3-3 of the
Securities and Exchange Commission and consist of:
September 28, September 29,
2001 2000
--------------------- ---------------------
United States Government
obligations and reverse repurchase
agreements $ 37,103,000 $ 29,512,000
Cash 85,000 5,000
--------------------- ---------------------
$ 37,188,000 $ 29,517,000
===================== =====================
The United States Government obligations mature at various dates through January
2029 and are stated at current market values. The reverse repurchase agreements
are carried at cost, which approximates market value. The Company purchases
these obligations at fixed, variable and adjustable interest rates in order to
reduce exposure to interest rate changes.
6. CUSTOMER RECEIVABLES AND PAYABLES
The Company seeks to protect itself from the risks associated with customer
activities by requiring customers to maintain margin collateral in compliance
with regulatory and its own internal guidelines, which are more stringent than
regulatory margin requirements. Margin levels are monitored daily and additional
collateral must be deposited as required. Where customers cannot meet collateral
requirements, the Company will liquidate underlying financial instruments
sufficient to bring the accounts in compliance.
Exposure to credit risk is affected by the markets for financial instruments,
which can be volatile and may impair the ability of clients to satisfy their
obligations to the Company. Credit limits are established and closely monitored
for customers and broker-dealers engaged in transactions deemed to be
credit-sensitive.
F-11
Included in amounts payable to customers are balances in accounts of officers
and directors totaling $111,000 at September 28, 2001 and $204,000 at September
29, 2000.
7. BROKER-DEALER RECEIVABLES AND PAYABLES
Amounts receivable from and payable to brokers and dealers include:
September 28, September 29,
2001 2000
---------------------- ----------------------
Due from clearing organization $ 46,000 $ 461,000
Deposits paid for securities borrowed 16,000 179,000
Securities failed to deliver 607,000 1,062,000
---------------------- ----------------------
Total receivable $ 669,000 $ 1,702,000
====================== ======================
Due to clearing organization $ 8,680,000 $ 4,499,000
Securities failed to receive 1,340,000 830,000
---------------------- ----------------------
Total payable $ 10,020,000 $ 5,329,000
====================== ======================
Securities borrowed are recorded at the amount of cash collateral advanced or
received. The Company monitors the market value of securities borrowed and
loaned on a daily basis and obtains additional collateral from counterparties as
necessary.
The Company has receivables and payables for financial instruments sold to and
purchased from broker-dealers. The Company is exposed to risk of loss from the
inability of broker- dealers to pay for purchases or to deliver financial
instruments sold, in which case the Company would have to sell or purchase the
financial instruments at prevailing market prices.
8. SECURITIES HELD FOR RESALE
Securities held for resale and securities sold, but not yet purchased consist of
the following:
September 28, 2001 September 29, 2000
------------------------------------- ----------------------------------------
Securities Sold , But Securities Sold, But
Held For Not Yet Held For Not Yet
Resale Purchased Resale Purchased
---------------- ----------------- ----------------- -------------------
Corporate
stocks $ 977,000 $ 689,000 $ 367,000 $ 192,000
U.S.
Government
obligations 154,000 103,000 6,000 -
---------------- ----------------- ----------------- -------------------
$ 1,131,000 $ 792,000 $ 373,000 $ 192,000
================ ================= ================= ===================
F-12
Securities held for resale and securities sold, but not yet purchased are
recorded at fair value. Fair value is generally based upon quoted market prices.
If quoted market prices are not available, or if liquidating the Company's
position is reasonably expected to impact market prices, fair value is
determined based upon other relevant factors, including dealer price quotations,
price activity of similar instruments and pricing models. Pricing models
consider the time value and volatility factors underlying the financial
instruments and other economic measurements.
Securities sold, but not yet purchased commit the Company to deliver specified
securities at predetermined prices. The transactions may result in market risk
since, to satisfy the obligation, the Company must acquire the securities at
market prices, which may exceed the values reflected on the Consolidated
Statement of Financial Condition.
9. FIXED ASSETS
Fixed assets consist of the following:
September 28, September 29,
2001 2000
-------------------- ----------------------
Office machines $ 336,000 $ 446,000
Furniture and fixtures 631,000 588,000
Interactive fixed assets 56,000 56,000
Phone system 151,000 151,000
Electronic equipment 1,389,000 1,045,000
Leasehold improvements 169,000 151,000
Assets under capital leases 1,180,000 1,180,000
-------------------- ----------------------
3,912,000 3,617,000
Less accumulated depreciation and
amortization 3,071,000 2,528,000
-------------------- ----------------------
$ 841,000 $ 1,089,000
==================== ======================
In April 1998 and June 1998, the Company entered into sale and leaseback
agreements with an outside funding company. As part of the agreement the Company
sold certain fixed assets to the funding company for $930,000 and $250,000 in
April and June, respectively, and agreed to lease these assets back over a
forty-eight month period. The Company recorded no gain or loss and has
recorded this transaction as a capital lease.
F-13
The following is a schedule of assets under capital leases:
Office machines $ 180,000
Furniture and fixtures 512,000
Electronic equipment 352,000
Leasehold improvements 136,000
-------------------
1,180,000
Less accumulated depreciation and amortization 899,000
-------------------
$ 281,000
===================
The future minimum lease payments under these capital leases together with the
present value of the net minimum lease payments as of September 28, 2001 are as
follows:
Total minimum lease payments (due in fiscal year 281,000
ended September 27, 2002)
Less: Amount representing taxes 14,000
----------------
Net minimum lease payments 267,000
Less: Amount representing interest 11,000
----------------
Present value of net minimum lease payments $ 256,000
================
10. LINE OF CREDIT
--------------
In January 2001, National consummated a new secured revolving line of credit of
$5,000,000 with American National Bank. As a result of a default of certain
financial covenants, on November 8, 2001 National entered into a forbearance
agreement through December 21, 2001, including an agreement to amend the line of
credit to $4,000,000. Borrowings bear interest at the call money rate plus 1%,
which was 5.25% at September 28, 2001. Interest is payable monthly. The line is
secured by certain assets of National, excluding items prohibited from being
pledged and assets set forth by the U.S. Securities and Exchange Commission
("SEC"). At September 28, 2001, National had $3,500,000 outstanding under the
line of credit. Such amount was reduced to $1,500,000 as of December 26, 2001.
F-14
11. NOTES PAYABLE
-------------
In November 1997, the Company executed two promissory notes totaling $925,000.
The notes bore interest at 6% and 8% with the principal to be repaid in 24
monthly installments commencing on December 31, 2000. In connection with the
notes, warrants for the purchase of 126,000 shares at an exercise price of $5.36
per share of the Company's common stock were issued. The warrants were valued at
$120,000 and were recorded as a discount to the notes. During the year ended
September 29, 2000, the Company satisfied one the above notes which had a
remaining balance of $425,000 with the proceeds from the exercise of 78,750
warrants. At September 29, 2000, the balance on the remaining note was $455,000.
During the year ended September 28, 2001, the Company settled the remaining note
for $52,000. At the time of the settlement, the outstanding balance, including
accrued interest, totaled $470,000. The gain of $418,000 has been recorded as an
extraordinary item.
In January 1998, the Company executed a promissory note for $1,000,000. This
note bears interest at 8% and the principal is to be repaid in 24 monthly
installments commencing on December 31, 2000. In connection with the note,
warrants for the purchase of 157,500 shares at an exercise price of $5.34 per
share of the Company's common stock were issued. The warrants were valued at
$157,500 and were recorded as a discount to the note. During the year ended
September 29, 2000, the Company prepaid $841,000 of the note with the proceeds
from the exercise of 157,500 warrants, leaving a balance of $159,000. As of
September 28, 2001, the remaining balance was $113,000.
In January 2001, the Company executed two promissory notes for $1,000,000 each.
These notes bear interest at 9% with interest paid quarterly. The principal of
each note matures in January 2004. In connection with each note, warrants were
issued for the purchase of 100,000 shares of the Company's common stock at an
exercise price of $5.00 per share. The warrants, which expire on the maturity
date, have been valued at $50,000 each, and have been recorded as a discount to
the respective notes. As of September 28, 2001, the unamortized discount was
$39,000 on each note. As discussed in Note 3b(iii), the holders of such notes
are each in the process of converting $500,000 into the Company's Series A
convertible preferred stock.
In February 2001, National executed a secured demand note collateral agreement
with an employee of the Company, to borrow securities as collateral to be
pledged, as needed, through an unrelated broker-dealer, which have a borrowing
value totaling $1,000,000. This note bears interest at 5% and is paid monthly.
The demand note matures in February 2004.
As discussed in Note 3a, in August 2001, the Company was advanced $1,000,000,
payable over the term of the agreement with FCC. The note bears interest at the
lender's prime rate and is payable over the life of the agreement.
F-15
The following is a schedule by years of debt maturity as of September
28, 2001:
Fiscal year ended
2002 $ 197,000
2003 116,000
2004 3,100,000
2005 100,000
2006 100,000
Thereafter 500,000
------------------
4,113,000
Less: discount on notes 78,000
------------------
$ 4,035,000
==================
12. INCOME TAXES
------------
The income tax (provision) benefit consists of:
Years Ended
-----------------------------------------------------------------------
September 28, September 29, September 24,
2001 2000 1999
------------------- ------------------ ---------------------
Current federal
income tax (provision)
benefit $ 82,000 $ (367,000) $ 8,000
Deferred federal
income tax - 79,000 -
Current state
income tax - (45,000) (4,000)
------------------- ------------------ ---------------------
$ 82,000 $ (333,000) $ 4,000
=================== ================== =====================
F-16
The income tax (provision) benefit related to income (loss) from continuing
operations before income taxes and extraordinary items varies from the federal
statutory rate as follows:
Years Ended
--------------------- --------------------- ---------------------
September 28, September 29, September 24,
2001 2000 1999
Statutory federal
rate $ 2,523,000 $ (574,000) $ (39,000)
State income
taxes, net of
federal income
tax benefit - (95,000) (4,000)
Losses for
which no benefit
is provided (2,441,000) - -
Tax benefit of
net operating
losses - 642,000 47,000
Other - (306,000) -
--------------------- --------------------- ---------------------
$ 82,000 $ (333,000) $ 4,000
===================== ===================== =====================
Significant components of the Company's deferred tax assets which are included
in other assets in the accompanying financial statements are as follows:
September 28, September 29,
2001 2000
-------------------- ---------------------
Net operating losses $ 2,893,000 $ -
Difference in depreciation
and reserves for employee
advances - 117,000
-------------------- ---------------------
Total 2,893,000 117,000
Valuation allowance (2,893,000) -
-------------------- ---------------------
Total deferred tax asset $ - $ 117,000
==================== =====================
F-17
At September 28, 2001, the Company has available unused net operating
loss carryovers of approximately $7,400,000 that may be applied
against future taxable income and expires in 2021. The Company has a
deferred tax asset arising from such net operating loss carryforwards
and has recorded a valuation allowance for the full amount of such
deferred tax asset since the likelihood of realization of the tax
benefits cannot be determined.
13. COMMITMENTS
Employment Agreements - During fiscal 1999 the Company entered into
employment agreements with five executive officers. Four of such
agreements are for a term of three years expiring in June 2002 at an
annual salary aggregating $960,000. The agreements provide for payment
of one year's salary upon severance of employment by the Company and of
two years salary if the Company or executive elects to terminate
employment after the occurrence of a change in control of the Company,
as defined. The other agreement is for a term of four years expiring in
June 2003 at an annual salary of $350,000 plus incentive compensation,
as defined, not to exceed $50,000. Such agreement provides for the same
compensation terms in the event of termination of employment. As
discussed in Note 3b(ii), two of the aforementioned agreements are
being terminated and replaced with consulting agreements.
During fiscal 2000 the Company entered into an employment agreement
with an executive officer. The term of the agreement is three years
expiring in June 2003 with an annual salary of $400,000 and immediately
vested options to acquire 150,000 shares of the Company's common stock
at an exercise price of $7.25 per share. The agreement provides for
payment of one year's salary upon severance of employment by the
Company.
Leases - As of September 28, 2001, the Company is committed under
operating leases for future minimum lease payments as follows:
Fiscal Year Ending
2002 $ 2,659,000
2003 1,837,000
2004 1,363,400
2005 1,208,000
2006 1,058,000
Thereafter 1,134,000
------------------
$ 9,259,000
==================
Rental expense for operating leases for the years ended September 28,
2001, September 29, 2000 and September 24, 1999 was $1,889,000,
$1,541,000, and $933,000, respectively.
F-18
In addition, in February 2001, WestAmerica entered into a 7-year lease
commitment at an annual rate of $216,000 for years 2001 and 2002,
$225,000 for years 2003 and 2004, and $234,000 for the remainder of the
lease.
Underwritings - During fiscal 2001, the Company participated in
underwriting securities for private placements, initial and secondary
public offerings. At September 28, 2001, the Company has no outstanding
commitments relating to underwriting transactions.
14. CONTINGENCIES
The Company has been named, together with others, as a defendant in a
consolidated class action lawsuit filed against Complete Management,
Inc. No specific amount of damages has been sought against the Company
in the complaint. In June 2000, the Company filed to dismiss this
action. In March 2001, the United States District Court for the
Southern District of New York denied the Company's motion to dismiss.
In May 2001, the Company submitted its answer to the complaint in which
it set forth its defenses. In November 2001, plaintiffs filed a motion
to certify the class. The Company will contest class certification and
diligently pursue its defenses.
The Company is a defendant in various other arbitrations and
administrative proceedings, lawsuits and claims which in the aggregate
seek general and punitive damages of approximately $9,500,000,
including one arbitration case seeking from $500,000 to $5,000,000,
plus punitive damages. These matters arise out of the normal course of
business. The Company intends to vigorously defend itself in these
actions.
15. STOCKHOLDERS' EQUITY
Stock Options - The Company's stock option plans provide for the
granting of stock options to certain key employees, directors and
investment executives. Generally, options outstanding under the
Company's stock option plan are granted at prices equal to or above the
market value of the stock on the date of grant, vest either immediately
or ratably over up to five years, and expire five years subsequent to
award.
The Company applies APB Opinion No. 25 and related Interpretations in
accounting for its plans. SFAS Statement No. 123 "Accounting for
Stock-Based Compensation" ("SFAS 123") was issued by the Financial
Accounting Standards Board and, if fully adopted, changes the methods
for recognition of cost on plans similar to those of the Company. Had
compensation cost for the Company's stock option plans been determined
base upon the fair value at the grant date for awards under these plans
consistent with the methodology prescribed under SFAS 123, the
Company's net income and earnings per share would have been reduced by
approximately $535,000 or $.24 per share in 2001, $1,696,000 or $.80
per share in 2000, $705,000, or $.45 per share in 1999. The fair value
of the options granted during 2001, 2000 and 1999 is estimated at
$818,000, $1,696,000, and $946,000, respectively, on the date of grant
using the Black-Scholes option-pricing model with the following
assumptions:
F-19
2001 2000 1999
----------------- ---------------- ----------------
Volatility 96.00% 106.00% 144.00%
Risk-free interest rate 5.00% 6.25% 5.00%
Expected life 5 years 5 years 5 years
A summary of the status of the Company's stock options and warrants
outstanding is presented below:
Stock Options Under Plan
Weighted
Average
Price
Authorized Granted Available Per Share
------------------- ---------------- --------------- --------------
Balance,
September 25, 1998 1,020,454 766,278 254,176 $ 4.84
Creation of new plan 500,000 - 500,000
Granted - 425,000 (425,000)
Exercised (82,613) (82,613) - 3.62
Forfeitures (40,643) (40,643) -
------------------- ---------------- ---------------
Balance,
September 24, 1999 1,397,198 1,068,522 328,676 4.65
Creation of new plan 500,000 - 500,000
Granted - 383,600 (383,600)
Exercised (139,063) (139,063) - 4.14
Forfeitures (75,918) (75,918) -
------------------- ---------------- ---------------
Balance,
September 29, 2000 1,682,217 1,237,141 445,076 5.41
Granted - 294,500 (294,500)
Exercised (73,603) (73,603) - 3.73
Forfeitures (186,530) (186,530) -
------------------- ---------------- ---------------
Balance,
September 28, 2001 1,422,084 1,271,508 150,576 5.66
=================== ================ ===============
The following table summarizes information about stock options outstanding at
September 28, 2001.
F-20
Options Outstanding Options Exercisable
- --------------------------------------------------------------------------------- ----------------------------------
Weighted Weighted Weighted
Range of Average Average Average
Exercise Number Remaining Exercise Number Exercise
Prices Outstanding Contract Life Prices Exercisable Prices
- ---------------- ----------------- ---------------- --------------- ---------------- ---------------
$3.56-3.88 150,700 3.78 $ 3.77 132,925 $ 3.60
$4.00-4.69 284,038 2.08 4.29 245,288 4.32
$5.36-5.75 370,856 2.79 5.61 155,856 5.42
$6.13-6.75 85,500 3.94 6.27 70,125 6.13
$7.12-7.50 338,914 2.32 7.23 338,914 7.23
$8.00-8.50 41,500 3.58 8.26 37,167 8.21
----------------- ----------------
1,271,508 980,275
================= ================
Warrants
Weighted Average
Exercise
Shares Price Exercisable
--------------- ------------------- --------------
Outstanding at September
25, 1998 348,113 $ 5.22 348,113
==============
Granted 50,000 4.00
Exercised (315,188) 5.06
---------------
Outstanding at
September 25, 1999 82,925 5.09 82,925
==============
Granted 5,000 6.38
---------------
Outstanding at
September 29, 2000 87,925 5.17 87,925
==============
Granted 375,000 4.87
---------------
Outstanding at
September 28, 2001 462,925 4.92 462,925
=============== ==============
The following table summarizes information about warrants outstanding at
September 28, 2001
F-21
Warrants Outstanding Warrants Exercisable
----------------------------------------------------------- -------------------------------------
Weighted Weighted Weighted
Average Average Average
Range of Number Remaining Exercise Number Exercise
Exercise Prices Outstanding Contract Life Prices Exercisable Prices
- ----------------- ----------------- ------------------ -------------- ---------------- ---------------
$3.00 25,000 2.75 $ 3.00 25,000 $ 3.00
$4.00-4.76 35,675 0.81 4.70 35,675 4.70
$5.00-5.36 397,250 2.00 5.04 397,250 5.04
$6.38 5,000 3.75 6.38 5,000 6.38
----------------- ----------------
462,925 462,925
================= ================
16. NET CAPITAL REQUIREMENTS
National, as a registered broker-dealer is subject to the SEC's Uniform
Net Capital Rule 15c3-1, which requires the maintenance of minimum net
capital. National has elected to use the alternative standard method
permitted by the rule. This requires that National maintain minimum net
capital equal to the greater of $1,000,000 or 2% of aggregate debit
items. At September 28, 2001, National's net capital exceeded the
requirement by $881,000
WestAmerica, as a registered broker-dealer is also subject to the SEC's
Net Capital Rule 15c3-1, which, under the standard method, requires
that each company maintain minimum net capital equal to the greater of
$100,000 or 6 2/3% of aggregate indebtedness. At September 28, 2001,
WestAmerica did not satisfy the net capital requirement.
Canterbury is also subject to the Securities and Exchange Commission=s
Uniform Net Capital Rule 15c3-1, which requires the maintenance of
minimum net capital. Canterbury must meet a minimum capital requirement
of $5,000. As of September 28, 2001, Canterbury was in compliance with
the minimum capital requirement.
Advances, dividend payments and other equity withdrawals from its
subsidiaries are restricted by the regulations of the SEC, and other
regulatory agencies. These regulatory restrictions may limit the
amounts that these subsidiaries may dividend or advance to the Company.
17. EMPLOYEE BENEFITS
The Company's subsidiaries have defined 401(k) profit sharing plans
which cover substantially all of their employees. Under the terms of
the plans, employees can elect to defer up to 25% of eligible
compensation, subject to certain limitations, by making voluntary
contributions to their respective plans. Each company's annual
contributions are made at the discretion of the respective Board of
Directors. During the fiscal years September 28, 2001, September 29,
2000 and September 24, 1999, the Company made no such contributions.
F-22
18. FINANCIAL INFORMATION - OLYMPIC CASCADE FINANCIAL CORPORATION
Olympic was formed on February 6, 1997. The following Olympic (parent
company only) financial information should be read in conjunction with
the other notes to the consolidated financial statements.
F-23
OLYMPIC CASCADE FINANCIAL CORPORATION
AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 28, 2001 AND SEPTEMBER 29, 2000 AND SEPTEMBER 24, 1999
(CONTINUED)
NOTE 18- FINANCIAL INFORMATION - OLYMPIC
The following Olympic (parent company only) financial information should be read
in conjuction with notes to the consolidated financial statements.
STATEMENTS OF FINANCIAL CONDITION
ASSETS
September 28, September 29,
2001 2000
----------------- ------------------
Cash, subject to immediate withdrawal $ 43,000 $ 31,000
Receivable from subsidiaries - 567,000
Other receivables 12,000 41,000
Capital lease 281,000 546,000
Investment in subsidiaries 3,521,000 8,219,000
Other assets 501,000 122,000
----------------- ------------------
$ 4,358,000 $ 9,526,000
================= ==================
LIABILITIES AND STOCKHOLDERS' EQUITY
Accounts payable, accrued expenses and other liabilities $ 138,000 $ 291,000
Payable to subsidiaries 263,000 -
Capital lease payable 300,000 582,000
Note payable 3,035,000 614,000
----------------- ------------------
3,736,000 1,487,000
----------------- ------------------
Stockholders' equity 622,000 8,039,000
----------------- ------------------
$ 4,358,000 $ 9,526,000
================= ==================
F-24
OLYMPIC CASCADE FINANCIAL CORPORATION
AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 28, 2001, SEPTEMBER 29, 2000, AND SEPTEMBER 24, 1999
(CONTINUED)
NOTE 18 - FINANCIAL INFORMATION - OLYMPIC (CONTINUED)
STATEMENTS OF OPERATIONS
Fiscal Year Ended
--------------------------------------------------------------
September 28, 2001 September 29, 2000 September 24, 1999
--------------------- ------------------- ------------------
Operating expenses $ (1,111,000) $ (1,164,000) $ (624,000)
Other income(expense)
Interest and other income 3,000 60,000 20,000
Gain (loss) on investment in subsidiaries (6,230,000) 2,460,000 607,000
Gain (loss) on sale of investments - - 5,000
--------------------- ------------------- ------------------
Net income (loss) before income tax (7,338,000) 1,356,000 8,000
Income tax benefit - - -
Discontinued operations, net of tax (1,002,000) 200,000 110,000
Extraordinary item, net of tax 418,000 - -
--------------------- ------------------- ------------------
Net income (loss) before income tax $ (7,922,000) $ 1,556,000 $ 118,000
===================== =================== ==================
STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
Common Stock Additional
---------------------------------- Paid-In
Shares Amount Capital Deficit Total
--------------- ----------------- ----------------- ----------------- -----------
BALANCE, September 25, 1998 1,463,007 $ 29,000 $ 9,183,000 $ (6,264,000) $ 2,948,000
--------------- ----------------- ----------------- ----------------- -----------
Exercise Stock Options 82,613 2,000 297,000 - 299,000
Exercise of Stock Warrants 5,000 - 20,000 - 20,000
Treasury stock (1,025) - (5,000) - (5,000)
Issuance of Common Stock in
legal settlements
and payment of services 145,000 3,000 498,000 - 501,000
Warrants issued in conjunction
with legal settlements - 120,000 - 120,000
Options issued to consultants - - 38,000 - 38,000
Net Income - - 118,000 118,000
--------------- ----------------- ----------------- ----------------- -----------
BALANCE, September 24, 1999 1,694,595 34,000 10,151,000 (6,146,000) 4,039,000
Exercise Stock Options 144,063 3,000 744,000 - 747,000
Exercise of Stock Warrants 315,188 6,000 1,589,000 - 1,595,000
Options issued to consultants - - 82,000 - 82,000
Warrants issuance in connection
with acquisition - - 20,000 - 20,000
Net Income - - - 1,556,000 1,556,000
--------------- ----------------- ----------------- ----------------- -----------
BALANCE, September 29, 2000 2,153,846 43,000 12,586,000 (4,590,000) 8,039,000
Exercise Stock Options 73,603 2,000 273,000 - 275,000
Issuance of restricted stock to
former employee 9,000 - 25,000 - 25,000
Options issued to consultants - - 105,000 - 105,000
Original discount on notes payable - - 100,000 - 100,000
Net loss - - - (7,922,000) (7,922,000)
--------------- ----------------- ----------------- ----------------- -----------
BALANCE, September 28, 2001 2,236,449 $ 45,000 $ 13,089,000 $ (12,512,000) $ 622,000
=============== ================= ================= ================= ===========
F-25
OLYMPIC CASCADE FINANCIAL CORPORATION
AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 28, 2001, SEPTEMBER 29, 2000 AND SEPTEMBER 24, 1999
(CONTINUED)
NOTE 18- FINANCIAL INFORMATION - OLYMPIC (CONTINUED)
STATEMENTS OF CASH FLOWS
Fiscal Year Ended
-----------------------------------------------------------
September 28, 2001 September 29, 2000 September 24, 1999
------------------ ------------------ ------------------
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss) $ (7,922,000) $ 1,556,000 $ 118,000
Adjustments to reconcile net income to net
cash from operating activities
Loss on investment in subsidiaries 8,204,000 (1,602,000) 232,000
Loss (gain) on sale of subsidiaries - - (5,000)
(Gain) on extraordinary item-extinguisment of debt (418,000)
Issuance of common stock in lawsuit settlement - - 501,000
Issuance of common stock in payment of expenses - - 120,000
Compensation related to issuance of stock options 105,000 82,000 38,000
Depreciation and amortization 339,000 290,000 285,000
Changes in assets and liabilities (123,000) (388,000) (720,000)
-------------- --------------- ------------------
185,000 (62,000) 569,000
-------------- --------------- ------------------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of goodwill - (30,000) -
Capital contributions to subsidiaries (3,072,000) (860,000) (233,000)
-------------- --------------- ------------------
(3,072,000) (890,000) (233,000)
-------------- --------------- ------------------
CASH FLOWS FROM FINANCING ACTIVITIES
Exercise of stock options 275,000 747,000 319,000
Proceeds from notes payable 3,000,000 - -
Exercise of stock warrants - 1,595,000 -
Issuance of common stock 25,000 - -
Payments on capital lease (340,000) (340,000) (348,000)
Payments on notes payable (61,000) (1,034,000) (300,000)
-------------- --------------- ------------------
2,899,000 968,000 (329,000)
-------------- --------------- ------------------
12,000 16,000 7,000
CASH BALANCE
Beginning of year 31,000 15,000 8,000
-------------- --------------- ------------------
End of year $ 43,000 $ 31,000 $ 15,000
============== =============== ==================
F-26