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 30, 2003
OLYMPIC CASCADE FINANCIAL CORPORATION
(Exact Name of Registrant as specified in its charter)
Delaware 36-4128138
(State or other jurisdiction of (I.R.S.Employer
incorporation or organization) Identification No.)
875 North Michigan Avenue, Suite 1560, Chicago, IL
60611 (Address, including zip code, of principal executive offices)
Registrant's telephone number, including area code: (312) 751-8833
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act: Common -Stock $.02
par value
(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. |_|
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Exchange Act Rule 12b-2). YES |X| NO |_|
As of December 22, 2003, the aggregate market value of voting and non-voting
common equity held by non-affiliates of the registrant, based on the closing
sales price for the registrant's common stock, as reported by The American Stock
Exchange was approximately $4,580,000 (calculated by excluding shares owned
beneficially by directors and officers). As of December 22, 2003 there were
3,367,558 shares of the registrant's common stock outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Company's Proxy Statement filed with the Securities and Exchange
Commission (the "SEC") in connection with the Company's Annual Meeting of
Shareholders to be held on or about March 16, 2004 (the "Company's 2004 Proxy
Statement") are incorporated by reference into Part III hereof.
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PART I
Item 1. BUSINESS
Statements made in this report that relate to future plans, events, financial
results or performance are forward-looking statements as defined under the
Private Securities Litigation Reform Act of 1995. These statements are based
upon current information and expectations. Actual results may differ materially
from those anticipated as a result of certain risks and uncertainties. For
details concerning these and other risks and uncertainties, see Part I, Item 1,
"Risk Factors" of this report, as well as the Company's other periodic reports
on Forms 10-K, 10-Q and 8-K subsequently filed with the SEC from time to time.
Readers are cautioned not to place undue reliance on these forward-looking
statements, which speak only as of the date hereof. The Company undertakes no
obligation to republish revised forward-looking statements to reflect events or
circumstances after the date hereof or to reflect the occurrence of
unanticipated events.
General
Olympic Cascade Financial Corporation, a Delaware corporation organized in 1996
("Olympic" or the "Company"), is a financial services organization operating
through its wholly owned subsidiary, National Securities Corporation, a
Washington corporation organized in 1947 ("National"). National conducts a
national securities brokerage business through its main offices in Seattle,
Washington and New York, New York, as well as 53 other branch offices located
throughout the country. National's business includes securities brokerage for
individual and institutional clients, market-making trading activities, asset
management and corporate finance services.
National provides a broad range of securities brokerage and investment services
to a diverse retail and institutional clientele, as well as corporate finance
and investment banking services to corporations and businesses. National's
brokers operate as independent contractors. A registered representative who
becomes an affiliate of National establishes his own office and is responsible
for the payment of all expenses associated with the operation of such office,
including rent, utilities, furniture, equipment, stock quotation machines and
general office supplies. In return, the registered representative is entitled to
retain a higher percentage of the commissions generated by his sales than a
registered representative at a traditional employee-based brokerage firm. This
arrangement allows National to operate with a reduced amount of fixed costs and
lowers the risk of operational losses for non-production.
Significant Developments
In fiscal year 2002, the Company completed a series of transactions under which
certain new investors (collectively, the "Investors") obtained a significant
ownership in the Company through a $1,572,500 investment in the Company and by
purchasing a majority of shares held by Steven A. Rothstein and family, the
former Chairman, Chief Executive Officer and principal shareholder of the
Company (the "Investment Transaction"). The Investors included Triage Partners
LLC ("Triage"), an affiliate of Sands Brothers & Co., Ltd., a NASD firm, and One
Clark LLC ("One Clark"), an affiliate of Mark Goldwasser, the current Chief
Executive Officer and President of the Company. The Investors purchased an
aggregate of $1,572,500 of shares of the Company's Series A Convertible
Preferred Stock, $.01 par value per share (the "Series A Preferred Stock") from
the Company, which is convertible into shares of the Company's common stock,
$.02 par value per share (the "Common Stock") at a price of $1.50 per share. The
Company incurred $100,000 of legal costs related to these capital transactions.
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In connection with the Investment Transaction, Triage also purchased 285,000
shares of Common Stock from Mr. Rothstein and his affiliates at a price of $1.50
per share. In addition, Mr. Rothstein and his affiliates granted Triage a
three-year voting proxy on the balance of their Common Stock (274,660 shares)
expiring on December 28, 2004.
Concurrent with the Investment Transaction, two unrelated individual noteholders
holding $2.0 million of the Company's debt converted one-half of their debt into
the same class of Series A Preferred Stock that was sold in the Investment
Transaction. The noteholders also had 100,000 of their 200,000 warrants to
acquire shares of common stock repriced from an exercise price of $5.00 per
share to $1.75 per share. The two noteholders have agreed to extend the maturity
date on the remaining $1.0 million from January 25, 2004 to July 31, 2005.
Effective February 1, 2004, the interest rate on the notes will be increased to
12% from 9% per annum. Additionally, the other 100,000 warrants to acquire
shares of common stock will be repriced from an exercise price of $5.00 per
share to $1.25 per share, and the expiration date for all 200,000 warrants will
be extended to July 31, 2005.
In the fourth quarter of fiscal year 2002, the Company raised an aggregate of
$210,000 pursuant to the sale of Series A Preferred Stock (on the same terms and
conditions as the equity sold to the Investors) to Mr. Rothstein.
In February 2001, National executed a $1.0 million secured demand note
collateral agreement with Mr. Peter Rettman, an employee of National and
Director of the Company, to borrow securities that can be used by the Company
for collateral agreements. The note bears interest at 5% per annum that is paid
monthly, and matures on February 1, 2004. The note holder also received a
warrant to purchase 75,000 share of the Company's Common Stock at a price of
$5.00 per share that expires on February 1, 2004. In November 2003, National and
the note holder agreed that upon maturity, the $1.0 million note will be
replaced with a note in a principal amount equal to at least $500,000 that will
mature on February 28, 2005. Additionally, upon completion of the note
replacement, the warrant will be repriced to $1.25 per share and will expire on
July 31, 2005.
In the first quarter of fiscal year 2003, the Company consummated a private
placement of its securities (the "Private Offering") to a limited number of
accredited investors pursuant to Rule 501 of Regulation D under the 1933
Securities Act, as amended (the "Securities Act"). Each unit in the Private
Offering sold for $0.65 and consisted of one share of the Company's Common Stock
and one three-year warrant to purchase one share of the Company's Common Stock
at a per share price of $1.25 (the "Warrants"). Net proceeds of $554,500 closed
in the first quarter of fiscal year 2003, and the Company correspondingly issued
1,016,186 shares of Common Stock and 1,016,186 Warrants. In January 2003, the
Company issued 76,923 shares of Common Stock and a three-year warrant to
purchase 76,923 shares of Common Stock at $1.25 per share to Seyfarth Shaw LLP
(formerly D'Ancona & Pflaum LLC), as payment of $50,000 of legal fees that were
accrued as of September 30, 2002. The Warrants issued in connection with the
Private Offering and the Warrants issued to Seyfarth Shaw LLP have been included
along with the proceeds of the shares of Common Stock issued as additional
paid-in capital.
In March 2003, the Company filed a Registration Statement on Form S-3 under the
Securities Act for the resale of the shares of Common Stock and the shares of
Common Stock issuable upon exercise of the Warrants. In October 2003, the
Company filed a Form RW withdrawing the filing of the Registration Statement on
Form S-3. Currently the Company is eligible to file a Registration Statement on
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Form S-3, and management believes it will file such registration statement in
the near term, that will include the shares of Common Stock and the shares of
Common Stock issuable upon exercise of the Warrants issued in the Private
Offering.
In August 2001, the Company entered into an agreement with First Clearing
Corporation ("First Clearing"), a wholly owned subsidiary of Wachovia
Corporation, under which First Clearing provides clearing and related services
for National (the "Clearing Agreement"). The Clearing Agreement expands the
products and services capabilities for National's retail and institutional
business, and enables National to consolidate its existing clearing operations
and to reduce the fixed overhead associated with its self-clearing activities.
The conversion to First Clearing began in December 2001 and was completed in
March 2002. In connection with the Clearing Agreement, the Company executed a
ten-year promissory note in favor of 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 provided for another
$1,000,000 loan that was extended to the Company upon substantial completion of
the conversion on December 31, 2001, which funds were also contributed by the
Company to National. 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, in excess of the amount forgiven. Principal and
interest under the promissory note are forgivable based on achieving certain
business performance and trading volumes of the Company over the life of the
loan that the Company has satisfied through fiscal year 2003.
In connection with the Clearing Agreement, additional borrowings were available
to the Company upon the attainment by National of certain volume and
profitability goals. In finalizing the conversion, a dispute arose among the
Company, US Clearing (one of its former clearing firms) and First Clearing,
regarding the responsibility for debit balances in certain trading accounts. The
three parties agreed to share the debit balance write-offs equally. The
Company's share of this settlement, $548,000, was advanced to the Company by
First Clearing and added to the existing promissory note. As part of the
settlement, the minimum level of stockholders' equity the Company is required to
maintain under the promissory note was reduced from $2,000,000 to $1,000,000 and
no further borrowings became available under the promissory note, as amended.
Additionally, National received its clearing deposit, net of miscellaneous
expenses, of $975,000 from US Clearing, and subsequently terminated its clearing
agreement with US Clearing.
In the first quarter of fiscal year 2003, First Clearing loaned the Company an
additional $375,000 in the form of clearing fee rebates. The loan is due to be
repaid in January 2004. Additionally, First Clearing has waived its
stockholders' equity covenant as of September 30, 2003 and December 31, 2003.
In December 2003, the Company engaged in various discussions with the NASD
relating to the Security Agreement between National and First Clearing, and its
effect on the computation of National's net capital. As a result of these
discussions, on December 15, 2003, the Company and First Clearing agreed in
principle to the following: (1) National's clearing deposit was reduced from
$1,000,000 to $500,000, (2) the excess $500,000 was paid to First Clearing to
reduce the Company's outstanding loan balance on its promissory note and (3) the
Security Agreement between National and First Clearing was terminated.
Furthermore, First Clearing has waived payment of the $375,000 that was due to
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be paid in January 2004. Additionally, the Company is engaged in discussions and
negotiations with First Clearing regarding the clearing relationship, and
payment of the remaining outstanding balance on the promissory note.
Financial Information about Industry Segments
The Company realized approximately 92% of its total revenues in fiscal year 2003
from brokerage services, principal and agency transactions, and investment
banking. Brokerage services, that consists of retail brokerage commissions,
represents 68% of total revenues, principal and agency transactions, that
consists of net dealer inventory gains, represents 23% of total revenues, and
investment banking, that consists of corporate finance commissions and fees,
represents 1% of total revenues. For a more detailed analysis of our results by
segment, see Item 7, "Management Discussion and Analysis of Financial Condition
and Results of Operation."
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 Investment Group ("WestAmerica").
National Securities Corporation
National is registered as a broker-dealer with the SEC and is licensed in 50
states, the District of Columbia and Puerto Rico. National is also a member of
the National Association of Securities Dealers, Inc. ("NASD"), the Municipal
Securities Rulemaking Board ("MSRB") and the Securities Investor Protection
Corporation ("SIPC").
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.
The brokerage services provided by the investment executives at National include
execution of purchases and sales of stocks, bonds, mutual funds, annuities and
various other securities for individual and institutional customers. In fiscal
year 2003, stocks represent approximately 67% of the Company's business, bonds
represent approximately 27% of the Company's business, and mutual funds and
annuities make up the remaining 6% of the Company's business. The percentage of
each type of business varies over time as the investment preferences of the
Company's customers change based on market conditions.
It is not National's normal policy to recommend particular securities to
customers. Recommendations to customers are determined by individual investment
executives based upon their own research and analysis, 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
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from inventory positions to ensure compliance with applicable standards of
conduct.
Investment executives 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 investment executives 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 pays a higher percentage of the net commissions and
mark-ups generated by its investment executives, as compared to traditional
investment executives in the brokerage industry. 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,
internal financial controls and compliance with regulatory and legal
requirements.
As a result of the slowdown in the financial markets and the Company's change
from a self-clearing brokerage firm to an introducing brokerage firm, the
Company has scaled back its employee staff. As of September 30, 2003, the
Company had approximately 94 employees and 289 independent contractors. Of these
totals, approximately 343 were registered representatives. 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 that 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.
The Company's business plan includes the growth of its retail and institutional
brokerage business. In response to the slowdown in the financial markets that
continued through the second quarter of fiscal year 2003, the Company 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 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 LLC. In August 2001, the
Company entered into an agreement with First Clearing, a wholly owned subsidiary
of Wachovia Corporation, under which First Clearing provides clearing and
related services for National. In December 2001, the Company commenced clearing
with First Clearing. The Clearing Agreement significantly expands the products
and services capabilities for National's retail and institutional business by
providing National's registered representatives with access to information from
First Clearing, including various daily market analysis reports, equity research
reports, software to analyze customer portfolios, as well as asset management
products and various other equity, debt and mutual fund offerings. Additionally,
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the Clearing Agreement enables National to consolidate its existing clearing
operations and reduces fixed overhead associated with its self-clearing
activities.
Periodic reviews of controls are conducted, and administrative and operations
personnel meet frequently with management to review operating conditions.
Compliance and operations personnel monitor compliance with applicable laws,
rules and regulations.
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 NYSE and other registered securities exchanges in the United States and
Canada, and members of the 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 "Risk Factors."
WestAmerica Investment Group
In December 2001, the Company's former subsidiary, WestAmerica, voluntarily
withdrew its membership with the NASD and ceased conducting business as a
broker-dealer, and filed 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. WestAmerica had been operating as a separate legal entity, and the
Company believes it will not have any ongoing liability for any unpaid
obligations of WestAmerica.
Canterbury Securities Corporation
The Company's former subsidiary, Canterbury Securities Corporation
("Canterbury") was registered as a broker-dealer with the SEC and was licensed
in Illinois. Canterbury was acquired in June 2000 for cash of $30,000 and the
issuance of five-year warrants to acquire 5,000 shares of common stock of the
Company at a price of $6.375 per share. Canterbury was a member of the NASD, the
MSRB and the SIPC. Canterbury formerly engaged in private placement
transactions. Canterbury had no retail customer accounts and operated pursuant
to the exemptive provisions of SEC Rule 15c3-3(k)(2)(i). Since its acquisition,
Canterbury had no activity. In May 2002, pursuant to an agreement made
simultaneous with the Investment Transaction, the Company sold Canterbury for
its book value to Steven A. Rothstein, the former Chairman, Chief Executive
Officer and principal shareholder of the Company.
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 may also maintain inventories in corporate,
government and municipal debt securities for sale to customers.
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In October 2000, the Company opened a branch office of National in New York
City. This office specializes in broker-to-broker fixed income transactions and
equity market making activities. At National, a staff of 21 traders and six
assistants in its New York and Seattle offices manage an inventory of securities
and conduct market-making activities. In February 2001, National expanded its
New York 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 subsequently reduced its market-making trading
activities during fiscal year 2002. As of September 2003, National makes markets
in approximately 550 securities. This includes companies for which National
managed or co-managed a public offering.
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. Since 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 an
agent and charges commissions that the Company believes are competitive, based
on the services the Company provides to its customers.
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. National has also underwritten both equity securities
and convertible corporate bonds as initial or secondary public offerings.
Supervision
The Securities Exchange Act of 1934, as amended (the "Exchange Act"), and the
NASD Conduct Rules require the Company's subsidiary to supervise the activities
of its investment executives. As part of providing such supervision, National
maintains Written Supervisory Procedures and a Compliance Manual. Compliance
personnel conduct inspections of branch offices periodically 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 National. Designated principals review customer
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trades 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.
In May 2002, 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 2001, the firm violated SEC Rule 17-A-4, SEC
Rule 17-A-3, NASD Rule 3010, NASD Rule 3110, and NASD rule 6620(A). The firm was
censured and fined $7,500 in a settlement dated May 2, 2002.
In July 2002, 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 2000 and 2001, the firm violated NASD Conduct
Rule 11870. The firm was censured and fined $1,000 in a settlement dated July
2002.
In September 2002, 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 2001, the firm violated NASD Conduct Rules 2110,
Rule 6240(a)(3), and Rule S6240(b)(3). The firm was censured and fined $7,500 in
a settlement dated September 27, 2002.
In July 2003, 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 2001, the firm violated SEC Rule 11Ac1-4. The
firm was censured and fined $7,500 in a settlement dated July 24, 2003.
In September 2003, without admitting or denying the alleged violations, National
accepted and consented to the entry of the following findings by the Florida
Office of Financial Regulation: at various times in 2001 and 2002, the firm
violated certain record keeping rules. The firm agreed to update its Written
Supervisory Procedures, and the firm was fined $15,000 in a final administrative
order dated September 5, 2003.
Venture Capital
In March 2001, the Company had its initial closing of Robotic Ventures Fund I,
L.P. (the "Fund"), a venture capital fund dedicated to investing in companies
engaged in the business of robotics and artificial intelligence. The Fund raised
a total of $5.2 million, $265,000 of which was capital directly invested by the
Company into the Fund, representing a 5.1% limited partnership interest in 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 a 2% management fee paid by the Fund.
Additionally, the Company invested $1,000, and owns a 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, representing a
4.9% indirect interest in the profits of the Fund. The Company keeps the books
and records of the Fund and oversees the Fund's investments. From time to time,
employees of National will work with and advise the Fund's investee companies on
its business plan, capital structure and future goals. The Company has not been
compensated or engaged to provide any management or advisory services to the
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investee companies. In February 2002, due to a dramatic slowdown in the
technology venture markets, the Fund returned a majority of the uninvested
capital to the investors, representing approximately 50% of the funds raised,
and no further management fees are to be paid.
The carrying amount of the Company's investment in the Fund was $107,000 and
$136,000 at September 30, 2003 and September 30, 2002, respectively. The
Company's investment in the Fund is accounted for in accordance with the equity
method of accounting. The Company recognized a loss on this investment of
$29,000 and $434 during fiscal years 2003 and 2002, respectively. During the
formation of the Fund, the Company incurred various start-up expenses that were
subsequently reimbursed by the Fund.
RISK FACTORS
The financial statements contained in this report and the related discussion
describe and analyze the Company's financial performance and condition for the
periods indicated. For the most part, this information is historical. The
Company's prior results, however, are not necessarily indicative of the
Company's future performance or financial condition. The Company therefore has
included the following discussion of certain factors that could affect the
Company's future performance or financial condition. These factors could cause
the Company's future performance or financial condition to differ materially
from its prior performance or financial condition or from management's
expectations or estimates of the Company's future performance or financial
condition. These factors, among others, should be considered in assessing the
Company's future prospects and prior to making an investment decision with
respect to the Company's stock. 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.
Operating results have resulted in reporting losses; Additional financing may be
required.
Although the Company was profitable in the third quarter of fiscal year 2003, it
has reported losses of approximately $843,000, $3.4 million and $7.9 million in
fiscal years 2003, 2002 and 2001, respectively. There is no assurance that the
Company will be profitable in the near term. The Company's losses are primarily
attributable to the market slow-down and volatility. The Company anticipates
that with the improved market conditions and increased revenues it may again
become profitable, however, there can be no assurance that current levels of
revenue will continue and profitability will ever be realized.
In order for the Company to have the opportunity for future success and
profitability, it periodically may need to obtain additional financing, either
through borrowings, public offerings, private offerings, or some type of
business combination (e.g., merger, buyout, etc.). The Company has actively
pursued a variety of funding sources, and has entered into the Investment
Transaction and Private Offering 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 it will be
successful in such pursuits. The issuance of new securities to raise capital
will cause the dilution of shares held by current stockholders.
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The Company's Common Stock may be subject to "low price stock" rules, limiting
the market for the Company's Common Stock.
If the Company's Common Stock becomes subject to the SEC's penny stock rules,
broker-dealers may experience difficulty in completing customer transactions and
trading activity in the Company's securities may be adversely affected. If at
any time the Company has net tangible assets of $5,000,000 or less and the
Company's Common Stock has a market price per share of less than $5.00,
transactions in the Company's Common Stock may be subject to the "penny stock"
rules promulgated under the Exchange Act. Under these rules, broker-dealers who
recommend such securities to persons other than institutional accredited
investors:
o must make a special written suitability determination for the
purchaser;
o receive the purchaser's written agreement to a transaction prior to
sale;
o provide the purchaser with risk disclosure documents which identify
certain risks associated with investing in "penny stocks" and which
describe the market for these "penny stocks" as well as a
purchaser's legal remedies; and
o obtain a signed and dated acknowledgment from the purchaser
demonstrating that the purchaser has actually received the required
risk disclosure document before a transaction in a "penny stock" can
be completed.
If the Company's Common Stock becomes subject to these rules, broker-dealers may
find it difficult to effectuate customer transactions and trading activity in
the Company's securities may be adversely affected. As a result, the market
price of the Company's securities may be depressed, and stockholders may find it
more difficult to sell the Company's securities.
The Company's business is affected by market fluctuations, liquidity and
volatility.
The Company's revenue and profitability may be adversely affected by market
fluctuations, market liquidity and declines in the volume of securities
transactions. National acts as a market maker in publicly traded common stocks.
In market making transactions, the Company undertakes the risk of price changes
or being unable to resell the common stock the Company holds or being unable to
purchase the common stock the Company has sold. These risks are heightened by
the illiquidity of many of the common stocks the Company trades and/or makes a
market. Any losses from the Company's trading activities could have a material
adverse effect on its business, financial condition, results of operations or
cash flows. In addition, the Company maintains trading positions that can be
adversely affected by the level of volatility in the financial markets.
The Company's business could be adversely affected by a breakdown in the
financial markets.
As a securities broker-dealer, National's business is materially affected by
conditions in the financial markets and economic conditions generally, both in
the United States and elsewhere around the world. Many factors or events could
lead to a breakdown in the financial markets including war, terrorism, natural
catastrophes and other types of disasters. These types of events could cause
people to begin to lose confidence in the financial markets and their ability to
function effectively. If the financial markets are unable to effectively prepare
-11-
for these types of events and ease public concern over their ability to
function, the Company's revenues are likely to decline and the Company's
operations will be adversely affected.
Market fluctuations may reduce the Company's revenues and profitability.
The Company's revenue and profitability may be adversely affected by declines in
the volume of securities transactions and in market liquidity. Additionally, the
Company's 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, the Company undertakes the risk of price changes or being
unable to resell the common stock it holds or being unable to purchase the
common stock it has sold. These risks are heightened by the illiquidity of many
of the common stocks the Company trades and/or makes a market. Any losses from
the Company trading activities, including as a result of unauthorized trading by
the Company's employees, could have a material adverse effect on the Company's
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, the Company's 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 the Company
may incur losses in its principal trading and market-making activities.
Competition with larger financial firms may have a negative effect on the
Company's business.
The Company competes 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 the Company has. Many of these firms offer their
customers more products and research than currently offered by the Company.
These competitors may be able to respond more quickly to new or changing
opportunities, technologies and client requirements. The Company also faces
competition from companies offering discount and/or electronic brokerage
services, including brokerage services provided over the Internet, which the
Company is currently not offering and does 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 the Company. To the extent that issuers and
purchasers of securities transact business without the assistance of the
Company, the Company's operating results could be adversely affected.
The failure to meet the listing criteria of The American Stock Exchange may
result in the delisting of the Company's Common Stock.
The Company's Common Stock is listed on The American Stock Exchange (the
"AMEX"). The AMEX has certain guidelines under which it considers removing
securities from listing on the AMEX. In February 2003, the Company received a
letter from the AMEX indicating that it was not in compliance with certain
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listing standards relating to (1) shareholders' equity of less than $2.0 million
and losses from continuing operations and/or net losses in two out of our three
most recent fiscal years, and (2) the requirement to have and maintain an audit
committee comprised of at least three independent directors. The Company
submitted a plan to the AMEX indicating compliance with item (1) above within a
maximum of 18 months, and that the Company was actively seeking another
independent director to satisfy item (2) above. In May 2003, the AMEX notified
the Company that it had accepted its plan of compliance and granted the Company
an extension of time to August 5, 2004 to satisfy the financial standards
requirement, and an extension of time to July 28, 2003 to comply with the
independent audit committee requirement. The Company satisfied the requirement
to have and maintain an audit committee comprised of at least three independent
directors in July 2003. In the event that the Company fails to comply with the
listing standards, or the AMEX determines that the compliance program is not
satisfactory, the Company's common stock may be removed from the AMEX and could
trade on the OTC Bulletin Board or in the "pink sheets" maintained by the
National Quotation Bureau, Inc. Such alternatives are generally considered to be
less efficient markets, and the Company's stock price, as well as the liquidity
of the Company's Common Stock, may be adversely impacted as a result.
The Company is currently subject to extensive securities regulation and the
failure to comply with these regulations could subject the Company to penalties
or sanctions.
The securities industry and the Company's business are subject to extensive
regulation by the SEC, state securities regulators and other governmental
regulatory authorities. The Company is also regulated by industry
self-regulatory organizations, including the NASD and the MSRB. The company is a
registered broker-dealer with the SEC and member firms of the NASD.
Broker-dealers are subject to regulations 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 the Company involves a
number of risks, particularly in areas where applicable regulations may be
subject to varying interpretation. These regulations often serve to limit the
Company's activities, including through net capital, customer protection and
market conduct requirements. If the Company is found to have violated an
applicable regulation, administrative or judicial proceedings may be initiated
against the Company that may result in a censure, fine, civil penalties,
issuance of cease-and-desist orders, the deregistration or suspension of the
Company's broker-dealer activities, the suspension or disqualification of the
Company's officers or employees, or other adverse consequences. The imposition
of any of these or other penalties could have a material adverse effect on the
Company's operating results and financial condition.
The Company relies on clearing brokers and an unilateral termination of the
agreements with these clearing brokers could disrupt the Company's business.
The Company changed from a self-clearing brokerage firm to an introducing
brokerage firm, using third party clearing brokers to process its securities
transactions and maintain customer accounts on a fee basis for the Company. The
clearing brokers also provide billing services, extend credit and provide for
-13-
control and receipt, custody and delivery of securities. The Company's
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, the Company is exempt from some capital
reserve requirements and other regulatory requirements imposed by federal and
state securities laws. If the clearing agreements are unilaterally terminated
for any reason, the Company would be forced to find alternative clearing firms
without adequate time to negotiate the terms of a new clearing agreement and
without adequate time to plan for such change. There can be no assurance that if
there were a unilateral termination of its clearing agreement that the Company
would be able to find an alternative clearing firm on acceptable terms to them
or at all.
The Company permits its 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.
The Company's has agreed to indemnify the clearing brokers for losses they incur
while extending credit to the Company's clients.
Credit risk exposes the Company to losses caused by financial or other problems
experienced by third parties.
The Company is exposed to the risk that third parties that owe it 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
the Company holds. These parties may default on their obligations owed to the
Company 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
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 the
Company could adversely affect the Company's revenues and perhaps the Company's
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 the Company's 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. The Company is 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, the Company
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. The Company 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
-14-
future. National carries "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 the Company could have a material adverse
effect on the Company's business, financial condition, results of operations or
cash flows.
The Company depends on key personnel.
The Company depends on the continued services of its management team,
particularly Mark Goldwasser, the Company's President and Chief Executive
Officer, as well as its ability to hire additional members of management, and to
retain and motivate its other officers and key employees. In November 2001, Mr.
Goldwasser voluntarily terminated his employment agreement with the Company in
exchange for a profit participation in National's branch office in New York
City. Subsequently, in July 2003 the compensation committee of the Company and
Mr. Goldwasser agreed to terminate his profit participation in National's branch
office in New York City in exchange for an annual salary of $300,000. The
Company's future success also depends on its continuing ability to attract and
retain highly qualified personnel.
The price of the Company's Common Stock is volatile.
The price of the Company's Common Stock has fluctuated substantially. (See Part
II, Item 5). The market price of the Company's Common Stock may be highly
volatile as a result of factors specific to the Company and the securities
markets in general. Factors affecting volatility may include variations in the
Company's annual or quarterly financial results or those of its competitors;
conditions in the economy in general; and changes in applicable laws or
regulations, or their judicial or administrative interpretations affecting the
Company or its subsidiary or the securities industry. In addition, volatility of
the market price of the Company's Common Stock is further affected by its thinly
traded nature.
Item 2. PROPERTIES
The Company owns no real property. Its corporate headquarters are shared with
National in leased space in Chicago, Illinois and New York, New York. The
Company leases office space in Boca Raton, Florida and Princeton, New Jersey,
and through its subsidiary, the Company leases office space in Chicago, New
York, Seattle, Washington and Los Angeles, California. Independent contractors
individually lease the branch offices that are operated by those independent
contractors.
Leases expire at various times through June 2012. The Company believes the rent
at each of its locations is at current market rates. At current production
levels, the Company believes that certain of its leased space in Chicago and New
York is excessive, and has sublet a portion of this excess space to third
parties.
Item 3. LEGAL PROCEEDINGS
1. 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). Plaintiffs in the class
action sought approximately $80.0 million from all named parties. In June
-15-
2000, National filed a motion to dismiss this action. In March 2001, the
United States District Court for the Southern District of New York denied
National's motion to dismiss. In May 2001, National submitted its answer
to the complaint in which it set forth its defenses. In November 2001,
plaintiffs filed a motion to certify the class. Plaintiffs thereafter
withdrew their motion and the case was referred to mediation. The
mediation process resulted in a global settlement of the matter. During
the fiscal year ended September 30, 2003, National settled its portion of
this litigation for $100,000, which was paid by its insurance company.
2. Fastpoint - In June 2002, National was named, together with others, as a
defendant in a class action lawsuit relating to a series of private
placements of securities in Fastpoint Communications, Inc. in the Superior
Court for the State of California for the County of San Diego, Case No GIC
791372. In August 2002, the plaintiffs filed an amended complaint alleging
violations of state statutory and common law as well as of Section 12 of
the Securities Act of 1933, 15 U.S.C.ss. 77l. Plaintiffs are seeking
approximately $14.0 million, but no specific amount of damages has been
sought against National in the complaint. The complaint asserts claims in
connection with National's role as placement agent in a series of private
placements of securities in Fastpoint. Plaintiffs allege that the private
placement memoranda contained false and misleading statements or omitted
facts necessary to make statements not misleading. Subsequently, National
filed its answer. The Company believes it has meritorious defenses and
intends to vigorously contest class certification and defend this action,
although the ultimate outcome of the matter cannot be determined at this
time. Accordingly, the Company is unable to predict the outcome of this
matter, and no adjustments have been made in the consolidated financial
statements in response to this matter.
3. Gould - In April 2002, a former executive officer of the Company, Craig M.
Gould, commenced an action against the Company, in the matter Gould vs.
Olympic Cascade Financial Corporation, et al., NASD No. 02-03542. Mr.
Gould is claiming a breach of his employment contract, and is seeking
approximately $850,000 in damages. The arbitration commenced in July 2003,
and continued in December 2003. The Company believes it has meritorious
defenses and intends to vigorously defend this action, although the
ultimate outcome of the matter cannot be determined at this time. Since
the Company is unable to predict the outcome of this matter, no
adjustments have been made in the consolidated financial statements in
response to this matter.
The Company is also a defendant in various other arbitrations and administrative
proceedings, lawsuits and claims, seeking damages aggregating approximately $3.0
million (exclusive of specified punitive damages of approximately $4.0 million,
unspecified punitive damages related to certain claims and expected insurance
coverage). The Company has filed a counterclaim for approximately $200,000 in
one such proceeding. These matters arise out of the normal course of business.
The Company intends to vigorously defend itself in these actions, however the
ultimate outcome of these matters cannot be determined at this time. The amount
related to such matters that are reasonably estimable and which has been accrued
at September 30, 2003 and 2002, is $366,000 and $343,000, respectively.
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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 30, 2003.
PART II
Item 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS
The Company's Common Stock trades under the symbol "OLY" on the AMEX and the
Chicago Stock Exchange. As of September 30, 2003, the Company had approximately
1,000 shareholders, including those shareholders holding stock in street name
and trust accounts.
Delaware law authorizes the Company's 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 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.
Item 12 of Part III contains information concerning securities authorized for
issuance under our equity compensation plans.
The high and low sales prices for the Company's Common Stock for the period
September 29, 2001 to September 30, 2003, as listed on the AMEX, are as follows:
Period High Low
- ------ ---- ---
September 29, 2001/December 31, 2001 $2.73 $1.10
January 1, 2002/March 31, 2002 $1.65 $0.55
April 1, 2002/June 30, 2002 $0.95 $0.59
July 1, 2002/September 30, 2002 $0.90 $0.57
October 1, 2002/December 31, 2002 $0.60 $0.25
January 1, 2003/March 31, 2003 $0.45 $0.25
April 1, 2003/June 30, 2003 $1.00 $0.20
July 1, 2003/September 30, 2003 $1.73 $0.85
The closing price of the Company's Common Stock on December 22, 2003, as
reported on the AMEX, was $1.51 per share.
-17-
Item 6. SELECTED FINANCIAL DATA
Set forth below is the historical financial data with respect to the Company for
the fiscal years ended 2003, 2002, 2001, 2000 and 1999. 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 2002, 2001, 2000 and 1999 have been restated to reflect the
discontinued operations of the Company's former subsidiary, WestAmerica. The
information for the fiscal year 2002 has been revised to reflect the cumulative
dividends on the Company's preferred stock. All information is expressed in
thousands of dollars except for per share information.
2003 2002 2001 2000 1999
-------------------------------------------------------------------
Net revenues $ 50,158 $ 42,002 $ 50,224 $ 56,213 $ 39,477
Net income (loss) from continuing
operations before extraordinary items (843) (3,745) (7,338) 1,356 8
Preferred stock dividends (250) (168) -- -- --
Net income (loss) per common share
from continuing operations (0.34) (1.73) (3.33) 0.64 0.01
Total assets 8,735 7,948 77,599 92,696 86,113
Long-term obligations 1,536 3,969 3,000 608 2,150
Stockholders' equity (deficit) (329) (91) 622 8,039 4,039
Cash dividends -- -- -- -- --
REMAINDER OF PAGE INTENTIONALLY LEFT BLANK
-18-
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.
Critical Accounting Estimates
The SEC recently issued proposed guidance for disclosure of critical accounting
estimates. The SEC defines "critical accounting estimates" as those that require
application of management's most difficult, subjective or complex judgments,
often as a result of the need to make estimates about the effects of matters
that are inherently uncertain and may change in subsequent periods. In fiscal
years 2003 and 2002, the Company estimated the collectability of receivables due
from its registered representatives. These receivables are derived from debts
owed to the Company and from money advanced to the registered representatives
that may be forgiven over time based on the representatives affiliation with,
and production at, National. The Company also estimated the amount of reserves
necessary to cover existing contingencies.
Results of Operations
Reclassification of Revenues. The revenues generated from principal trades to
institutions for which the Company receives commission revenues previously
classified as net dealer inventory gains and other revenues in the fiscal year
ended September 28, 2001 have been reclassified as commission revenues to
conform with the presentation used in the September 30, 2002 and September 30,
2003 financial statements, without affecting previously reported net losses.
The results discussed below for the fiscal year ended September 28, 2001 have
been restated to reflect a discontinuation of operations for the Company's
former subsidiary, WestAmerica.
Fiscal Year 2003 Compared with Fiscal Year 2002
The Company's fiscal year 2003 resulted in an increase in revenues and a
comparatively lesser increase in expenses compared with fiscal year 2002. The
increase in revenues is primarily due to the improved securities markets in the
second six months of fiscal year 2003 compared to a year ago. As a result of
losses incurred primarily in the first six months of fiscal year 2003, the
Company reported a net loss from continuing operations before income taxes of
$843,000 compared with a net loss from continuing operations before income taxes
of $3,825,000 for fiscal year 2002, an improvement of $2,982,000. The decrease
in net loss is a result of the increase in revenues combined with management's
efforts to reduce the fixed costs associated with its business.
-19-
Total revenues from continuing operations increased $8,156,000, or 19%, in
fiscal year 2003 to $50,158,000 from $42,002,000 in fiscal year 2002. This
increase is mainly due to the improved securities markets in the second six
months of fiscal year 2003 compared to fiscal year 2002. The number of
commission tickets generated, and the charge per ticket affects commission
revenue and net dealer inventory gains. During fiscal year 2003, trading volume
increased by approximately 18%, compared to fiscal year 2002. Commission revenue
increased $6,050,000, or 21%, to $34,218,000 from $28,168,000 during fiscal year
2003 compared with fiscal year 2002. Net dealer inventory gains, which includes
profits on proprietary trading, market making activities and customer mark-ups
and mark-downs, increased $1,322,000, or 13%, to $11,564,000 from $10,242,000
during fiscal year 2003 compared with fiscal year 2002. During fiscal year 2003,
revenues from proprietary trading increased $1,089,000, or 12% to $10,249,000
from $9,160,000 in fiscal year 2002; revenues from market making activities
increased $224,000, or 25%, to $1,115,000 from $891,000 in fiscal year 2002; and
revenues from customer mark-ups and mark-downs increased $9,000, or 4%, to
$200,000 from $191,000 in fiscal year 2002. The increase in commission revenue
and net dealer inventory gains is due to the improved securities markets in the
second six months of fiscal year 2003.
Investment banking revenue increased $172,000, or 68%, to $425,000 from $253,000
in fiscal year 2003 compared with fiscal year 2002. The increase in investment
banking revenues is primarily attributed to the Company's completing a private
placement in the third quarter of fiscal year 2003. Interest and dividend income
decreased $224,000 or 14%, to $1,416,000 from $1,640,000 in fiscal year 2003
compared with fiscal year 2002. The decrease in interest income is attributable
to a decrease in the amount of customer debits in National's customers' accounts
during most of fiscal year 2003, and a decrease in interest rates from the prior
year. Transfer fees increased $507,000, or 38%, to $1,850,000 in fiscal year
2003 from $1,343,000 in fiscal year 2002. The increase is due to an increase in
transaction volume associated with the Company's retail brokerage business.
Other revenue, consisting of asset management fees and miscellaneous transaction
fees and trading fees, increased $329,000, or 92%, to $685,000 from $356,000
during fiscal year 2003 compared to fiscal year 2002. The increase is primarily
due to increased transaction fees and trading fees.
In comparison with the 19% increase in total revenues, total expenses increased
$5,174,000 or 11%, to $51,001,000 for fiscal year 2003 compared to $45,827,000
in fiscal year 2002. The increase in total expenses is a result of greater
commission expenses directly associated with commission revenues, as well as a
$441,000 increase in its reserve for uncollectible accounts on its other
receivables. The increase in total expenses was minimized by management's
efforts to streamline its operations and reduce fixed expenses associated with
its salaried employees, communication and occupancy expenses.
Commission expense, which includes expenses related to commission revenue, net
dealer inventory gains and investment banking, increased $8,230,000, or 31%, to
$34,583,000 in fiscal year 2003 from $26,353,000 in fiscal year 2002. Commission
expense related to commission revenue increased $6,745,000, or 33%, to
$26,931,000 in fiscal year 2003 from $20,186,000 in fiscal year 2002; commission
expense related to net dealer inventory gains increased $1,347,000, or 23%, to
$7,312,000 in fiscal year 2003 from $5,965,000 in fiscal year 2002; and
commission expense related to investment banking increased $138,000, or 68%, to
$340,000 in fiscal year 2003 from $202,000 in fiscal year 2002. All categories
-20-
of commission expense as a percentage of the related revenues were relatively
consistent between fiscal year 2003 and fiscal year 2002.
Employee compensation expense decreased $1,070,000, or 21%, to $4,021,000 in
fiscal year 2003 from $5,091,000 in fiscal year 2002. This decrease is due to
management's ongoing efforts to reduce its fixed costs associated with salaried
employees. Overall, combined commission and employee compensation expense, as a
percentage of revenue increased slightly to 77% from 75% in fiscal years 2003
and 2002, respectively.
Clearing fees decreased $1,527,000, or 36%, to $2,714,000 in fiscal year 2003
from $4,241,000 in fiscal year 2002. Although there was an increase in trading
volume, clearing fees decreased due to a change in the number of lower priced
tickets from the prior period, and a one time clearing charge of $548,000
incurred in fiscal year 2002. Communication expenses decreased $173,000 or 6% to
$2,693,000 from $2,866,000 in fiscal year 2003 compared to fiscal year 2002. The
decrease is due to a reduction in voice and data charges. Occupancy costs
decreased $622,000, or 18%, to $2,891,000 from $3,513,000. The decrease in
occupancy expense is due to the Company's renegotiating certain long-term office
leases, and finding subtenants to occupy unused space. Professional fees
increased $433,000, or 40%, to $1,526,000 from $1,093,000 in fiscal year 2003
compared to fiscal year 2002. The increase in professional fees is due to an
increase in the legal fees relating to various lawsuits and arbitrations.
Interest expense decreased $318,000, or 62%, to $193,000 from $511,000 in fiscal
year 2003 compared to fiscal year 2002. The decrease is primarily due to the
Company's change from a self-clearing brokerage firm to an introducing brokerage
firm during the first quarter of fiscal year 2002, and a decrease in interest
rates in 2003 from 2002. Taxes, licenses and registration decreased $4,000, or
1%, to $407,000 from $411,000 in fiscal year 2003 compared to fiscal year 2002.
Other expenses increased $225,000 or 13% to $1,973,000 from $1,748,000 in fiscal
year 2003 compared to fiscal year 2002. The increase in other expenses is due to
the Company's increase of its reserve for uncollectible accounts on its other
receivables related to registered representatives formerly associated with
National, by $441,000 during fiscal year 2003, as compared to $209,000 in fiscal
year 2002.
The Company reported a loss from continuing operations before income taxes of
$843,000 in fiscal year 2003 compared to a loss from continuing operations
before income taxes of $3,825,000 for fiscal year 2002.
In the first quarter of fiscal year 2002, the Company recorded a gain of
$300,000 from discontinued operations related to the write-off of WestAmerica's
net liabilities. Overall, the diluted loss attributable to common stockholders
in fiscal year 2003 was $1,093,000, or $.34 per common share, as compared to the
diluted loss attributable to common stockholders of $3,613,000, or $1.60 per
common share in fiscal year 2002. The net loss attributable to common
stockholders for fiscal years 2003 and 2002 reflects $250,000 and $168,000 of
cumulative but unpaid preferred stock dividends, respectively, on the Company's
Preferred Stock issued during fiscal year 2002.
Fiscal Year 2002 Compared with Fiscal Year 2001
The Company's fiscal year 2002 resulted in a decrease in revenues and a
corresponding greater decrease in expenses compared with fiscal year 2001. The
decrease in revenues is primarily due to the continued slumping securities
-21-
markets, decreased net dealer inventory gains and lower interest income. As a
result, for fiscal year 2002 the Company reported a net loss from continuing
operations before income taxes and extraordinary item of $3,825,000 compared
with a net loss from continuing operations before income taxes and extraordinary
item of $7,420,000 for fiscal year 2001. The decrease in net loss is a result of
management's efforts to reduce the fixed costs associated with its salaried
employees, communication expenses, occupancy costs and other expenses.
Total revenues from continuing operations decreased $8,222,000, or 16%, in
fiscal year 2002 to $42,002,000 from $50,224,000 in fiscal year 2001. This
decrease is mainly due to the weaker overall securities market compared with the
securities market during fiscal year 2001. The number of commission tickets
generated, and the charge per ticket affects commission revenue and net dealer
inventory gains. During fiscal year 2002 compared to fiscal year 2001, trading
volume decreased by approximately 3%. Commission revenue decreased $484,000, or
2%, to $28,168,000 from $28,652,000 during fiscal year 2002 compared with fiscal
year 2001. The decrease is due to the weaker securities markets and decreased
trading volume. Net dealer inventory gains, which includes profits on
proprietary trading, market making activities and customer mark-ups and
mark-downs, decreased $1,819,000, or 15%, to $10,242,000 from $12,061,000 during
fiscal year 2002 compared with fiscal year 2001. During fiscal year 2002,
revenues from proprietary trading decreased $2,198,000, or 19% to $9,190,000
from $11,358,000 in fiscal year 2001; revenues from market making activities
increased $504,000, or 130%, to $891,000 from $387,000 in fiscal year 2001; and
revenues from customer mark-ups and mark-downs decreased $125,000, or 40%, to
$191,000 from $316,000 in fiscal year 2001. Although the weaker securities
markets and decreased trading volume created an overall reduction in revenues,
the increase in revenues from market making activities reflects the Company's
higher level of market making activity during most of fiscal year 2002.
Interest and dividend income decreased $4,110,000 or 71%, to $1,640,000 from
$5,750,000 in fiscal year 2002 compared with fiscal year 2001. This decrease is
partially offset by the corresponding decrease in interest expense, which
decreased $2,850,000, or 85%, to $511,000 from $3,361,000 in fiscal year 2002
compared to fiscal year 2001. The decrease in both interest income and interest
expense is attributable to a decrease in the amount of customer credits and
customer debits at National due to the conversion of its clearing business in
December 2001, and a decrease in interest rates from 2001 to 2002.
Investment banking revenue decreased $767,000, or 75%, to $253,000 from
$1,020,000 in fiscal year 2002 compared with fiscal year 2001. The Company did
not manage a public underwriting in fiscal years 2002 or 2001. The decrease in
revenues is attributed to a general slow-down in the broader capital markets.
During fiscal years 2002 and 2001, 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, decreased $1,293,000, or 78%, to $356,000
from $1,649,000 during fiscal year 2002 compared to fiscal year 2001. The
decrease is due to a decline in asset management fees, a decrease in service
fees on IRA accounts that are now collected by First Clearing rather than the
Company, and fewer order flow rebates from other broker-dealers.
In comparison with the 16% decrease in total revenues, total expenses decreased
$11,817,000 or 21%, to $45,827,000 for fiscal year 2002 compared to $57,644,000
in fiscal year 2001. The decrease in total expenses is a result of management's
efforts to streamline its operations and reduce costs. During fiscal year 2002,
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the Company has consolidated certain of its operations to its New York offices,
eliminated redundancies in various departments, renegotiated long-term leases
and curtailed miscellaneous costs.
Commission expense, which includes expenses related to commission revenue, net
dealer inventory gains and investment banking, decreased $2,095,000, or 7%, to
$26,353,000 in fiscal year 2002 from $28,448,000 in fiscal year 2001. Commission
expense related to commission revenue was virtually unchanged at $20,186,000 in
fiscal year 2002 compared to $20,148,000 in fiscal year 2001; commission expense
related to net dealer inventory gains decreased $1,519,000, or 20%, to
$5,965,000 in fiscal year 2002 from $7,484,000 in fiscal year 2001; and
commission expense related to investment banking decreased $614,000, or 68%, to
$202,000 in fiscal year 2002 from $816,000 in fiscal year 2001. All categories
of commission expense as a percentage of the related revenues were relatively
consistent between fiscal year 2002 and fiscal year 2001.
Employee compensation expense decreased $3,635,000, or 42%, to $5,091,000 in
fiscal year 2002 from $8,726,000 in fiscal year 2001. This significant decrease
is due to a reduction in senior management salaries and a reduction in staff
made possible by clearing through First Clearing, as opposed to self-clearing.
Overall, combined commissions and employee compensation as a percentage of
revenue increased slightly to 75% from 74% in fiscal years 2002 and 2001,
respectively.
Clearing fees decreased $61,000, or 1%, to $4,241,000 in fiscal year 2002 from
$4,302,000 in fiscal year 2001. The decrease in clearing expenses would have
been greater, absent a dispute that occurred during the second quarter of fiscal
year 2002 while finalizing National's clearance conversion to First Clearing.
This dispute arose among the Company, US Clearing (one of its former clearing
firms) and First Clearing relating to the responsibility for debit balances in
certain trading accounts. The three parties agreed to share the expense equally,
resulting in a one-time charge of $548,000 in the second quarter.
As a result of cost cutting efforts, communication, occupancy, professional fees
and other expenses all decreased during fiscal year 2002 compared to fiscal year
2001. Communication expenses decreased $474,000 or 14% to $2,866,000 from
$3,340,000 in fiscal year 2002 compared to fiscal year 2001. This decrease is a
result of management's eliminating redundancies in the communication systems
that existed prior to 2002. Occupancy costs decreased $902,000, or 20%, to
$3,513,000 from $4,415,000. The decrease in occupancy expense is due to the
Company's renegotiating long-term office leases and finding subtenants to occupy
unused space. Professional fees decreased $852,000, or 44%, to $1,093,000 from
$1,945,000 in fiscal year 2002 compared to fiscal year 2001. The decrease in
professional fees is due to a reduction in both the number and amount of legal
consultations used in operating our business. Other expenses decreased $596,000
or 25% to $1,748,000 from $2,344,000 in fiscal year 2002 compared to fiscal year
2001. This decrease in other expenses is attributable to management's efforts to
reduce travel, entertainment and miscellaneous expenses.
Interest expense decreased $2,850,000, or 85%, to $511,000 from $3,361,000 in
fiscal year 2002 compared to fiscal year 2001. The decrease in interest expense
is attributable to a decrease in the amount of customer credits and customer
debits at National due to the conversion of its clearing business in December
2001, and a decrease in interest rates from 2002 to 2001. Taxes, licenses and
registration decreased $352,000, or 46%, to $411,000 from $763,000 in fiscal
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year 2002 compared to fiscal year 2001. The decrease is due to a decrease in
state taxes based on commission revenues and a decrease in the number of
employees for whom the Company pays state registration fees.
Overall, the diluted loss from continuing operations in fiscal year 2002 was
$1.73 per common share, as compared to the diluted loss from continuing
operations of $3.33 per common share in fiscal year 2001. The net loss
attributable to common stockholders for fiscal year 2002 reflects $168,000 of
cumulative but unpaid preferred stock dividends on the Company's Preferred Stock
issued during fiscal year 2002.
Results of Discontinued Operations
Fiscal Year 2002 Compared with Fiscal Year 2001
In December 2001, WestAmerica voluntarily withdrew its membership with the NASD,
ceased conducting business as a broker-dealer, and filed 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,
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.
In the first quarter of fiscal year 2002, the Company recorded a gain of
$300,000 from discontinued operations related to the write-off of WestAmerica's
net liabilities. The loss reported in fiscal year 2001 reflected the loss from
operations of the Company's WestAmerica subsidiary. In the first quarter of
fiscal year 2002, WestAmerica filed for Chapter 7 Bankruptcy protection in
accordance with the U.S. Bankruptcy Code. This filing eliminated the risk of
loss for the liabilities in excess of assets, and accordingly, that amount was
reversed and reflected as income in the first quarter of fiscal year 2002. The
Company did not guarantee any of the obligations of WestAmerica, a distinct
legal entity. Consequently, the Company believes that it has no liability to
creditors of WestAmerica. As of December 18, 2002, no creditors of WestAmerica
have sought recovery from the Company. During fiscal year 2001, West America had
total revenues of $2,155,000, and a net loss of $1,002,000.
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. Through December 2001, while acting as a self-clearing firm, National's
interest bearing and non-interest bearing customer credit balances, other
payables and equity capital primarily financed these assets. National utilized
short-term bank financing to supplement its ability to meet day-to-day operating
cash requirements. Such financing was used to maximize cash flow and was
regularly repaid. In January 2001, National entered into a $5,000,000 secured
line of credit with American National Bank and Trust Company of Chicago that was
guaranteed by the Company. The line of credit has been fully repaid and expired
on December 31, 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
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greater of $250,000 or a specified amount per security based on the bid price of
each security for which National is a market maker. On December 12, 2003, the
Company was advised by the NASD that, pursuant to National's pledge of its
assets as security for loans to the Company from First Clearing (such loans
aggregated $2,131,000 as of September 30, 2003), National was not in compliance
with its net capital requirements. Accordingly, at September 30, 2003, National
reported an excess net capital deficiency of $829,000. This compliance
requirement was corrected on December 15, 2003, upon termination of the security
agreement with First Clearing.
In December 2001, WestAmerica voluntarily withdrew its membership with the NASD,
ceased conducting business as a broker-dealer, and filed 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 believes
it will not 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.
Advances, dividend payments and other equity withdrawals from the Company's
subsidiary are restricted by the regulations of the SEC and other regulatory
agencies. These regulatory restrictions may limit the amounts that a subsidiary
may dividend or advance to the Company.
The Company extends unsecured credit in the normal course of business to its
brokers. The determination of the amount of uncollectible accounts is based on
the amount of credit extended and the length of time each receivable has been
outstanding, as it relates to each individual broker. The allowance for doubtful
accounts increased by $441,000 in fiscal year 2003, reflecting the amount of
loss that can be reasonably estimated by management.
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 explored various transactions to
finance the Company's operations. In December 2001, the Company completed a
series of transactions (the "Investment Transaction") that are more fully
described in Part 1. The Company continued to incur operating losses throughout
fiscal year 2002, and as a result, the Company believed that its then existing
capital was not sufficient to satisfy its current level of operations.
Accordingly, the Company pursued additional sources of capital from various
potential investors. In the fourth quarter of fiscal year 2002, the Company
completed $210,000 of investments in the form of Series A Preferred Stock and
continued to seek additional investments.
In the first quarter of fiscal year 2003, the Company consummated a private
placement of its securities to a limited number of accredited investors pursuant
to Rule 501 of Regulation D under the Securities Act (the "Private Offering").
Each unit in the Private Offering sold for $0.65 and consisted of one share of
the Company's Common Stock and one three-year warrant to purchase one share of
the Company's Common Stock at a per share price of $1.25 (the "Warrants"). Net
proceeds of $554,500 closed in the first quarter of fiscal year 2003, and the
Company correspondingly issued 1,016,186 shares of Common Stock and 1,016,186
Warrants. In January 2003, the Company issued 76,923 shares of Common Stock and
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a three-year warrant to purchase 76,923 shares of Common Stock at $1.25 per
share to Seyfarth Shaw, as payment of $50,000 of legal fees that were accrued as
of September 30, 2002. The Warrants issued in connection with the Private
Offering and the Warrants issued to Seyfarth Shaw have been included along with
the proceeds of the shares of Common Stock issued as additional paid-in capital.
In March 2003, the Company filed a Registration Statement on Form S-3 under the
Securities Act for the resale of the shares of Common Stock and the shares of
Common Stock issuable upon exercise of the Warrants. In October 2003, the
Company filed a Form RW withdrawing the filing of the Registration Statement on
Form S-3. Currently the Company is eligible to file a Registration Statement on
Form S-3, and management believes it will file such statement in the near term,
that will include the shares of Common Stock and the shares of Common Stock
issuable upon exercise of the Warrants issued in the Private Offering.
In August 2001, the Company entered into an agreement with First Clearing under
which First Clearing provides clearing and related services for National. The
Clearing Agreement expands the products and services capabilities for National's
retail and institutional business, and enables National to consolidate its
existing clearing operations and reduce the fixed overhead associated with its
self-clearing activities.
The conversion to First Clearing began in December 2001 and was completed in
March 2002. It is standard business practice in the brokerage industry for
clearing firms to provide financial support to correspondent clearing firms. As
such, in connection with the Clearing Agreement, the Company executed a ten-year
promissory note in favor of 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 provided for another $1,000,000 loan that
was extended to the Company upon substantial completion of the conversion on
December 31, 2001 that was also contributed to National. The amount of the note
that is repayable on each anniversary date is the principal, and interest if
any, then outstanding divided by the remaining life of the note. Borrowings
under the promissory note are forgivable annually based on achieving certain
business performance and trading volumes of the Company over the life of the
loan. The Company would need to generate approximately 250,000 tickets per year
over the ten-year term of the note to satisfy the trading volume requirement,
which has been satisfied through fiscal year 2003.
In connection with the Clearing Agreement, additional borrowings were available
to the Company upon the attainment by National of certain volume and
profitability goals. In finalizing the conversion, a dispute arose among the
Company, US Clearing (one of its former clearing firms) and First Clearing,
regarding the responsibility for debit balances in certain trading accounts. The
three parties agreed to share the expense equally. The Company's share of this
settlement, $548,000, was advanced to the Company by First Clearing and added to
the existing promissory note. As part of the settlement, the minimum level of
stockholders' equity the Company is required to maintain under the promissory
note was reduced from $2,000,000 to $1,000,000 and no further borrowings are
available under the promissory note, as amended. Additionally, National received
its clearing deposit, net of miscellaneous expenses, of $975,000 from US
Clearing. National terminated its clearing agreement with US Clearing.
In the first quarter of fiscal year 2003, First Clearing loaned the Company an
additional $375,000 in the form of clearing fee rebates. The loan was due to be
repaid in January 2004. Additionally, First Clearing has waived its
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stockholders' equity covenant as of September 30, 2003 and December 31, 2003.
In December 2003, the Company engaged in various discussions with the NASD
relating to the Security Agreement between National and First Clearing, and its
effect on the computation of National's net capital. As a result of these
discussions, on December 15, 2003, the Company and First Clearing agreed in
principle to the following: (1) National's clearing deposit was reduced from
$1,000,000 to $500,000, (2) the excess $500,000 was paid to First Clearing to
reduce the Company's outstanding loan balance on its promissory note and (3) the
Security Agreement between National and First Clearing was terminated.
Furthermore, First Clearing has waived payment of the $375,000 that was due to
be paid in January 2004. Additionally, the Company is engaged in discussions and
negotiations with First Clearing regarding the clearing relationship, and
payment of the remaining outstanding balance on the promissory note.
In November 2003, National and the holder of the $1.0 million secured demand
note that matures on February 1, 2004, agreed that the note will be replaced
with a note in a principal amount equal to at least $500,000 that will mature on
February 28, 2005. Additionally, two noteholders have agreed to extend the
maturity date on $1.0 million of notes from January 25, 2004 to July 31, 2005,
and effective February 1, 2004, the interest rate will be increased to 12% from
9% per annum.
The Company believes that with the improved market conditions and the Company's
increased volume of business experienced during the third and fourth quarters of
fiscal year 2003, and the first quarter of fiscal year 2004, and the
continuation of such improved market conditions, funds will be sufficient to
maintain its current level of business activities during fiscal year 2004.
Additionally, the Company has recently commenced efforts to raise additional
capital in order to strengthen its existing capital. If current market
conditions do not continue, the Company would need to consider curtailing
certain of its business activities, further reducing its fixed overhead costs
and/or seek additional sources of financing.
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 November 2002, the FASB issued Interpretation ("FIN") No. 45, "Guarantor's
Accounting and Disclosure Requirements for Guarantees, Including Indirect
Guarantees of Indebtedness of Others." FIN No. 45 requires a company, at the
time it issues a guarantee, to recognize an initial liability for the fair value
of obligations assumed under the guarantee and elaborates on existing disclosure
requirements related to guarantees and warranties. The initial recognition
requirements of FIN No. 45 are effective for guarantees issued or modified after
December 31, 2002. The Company's adoption of the recognition requirements of FIN
No. 45 did not have any effect on its consolidated financial position or results
of operations.
In January 2003, the FASB issued Interpretation 46, Consolidation of Variable
Interest Entities. In general, a variable interest entity is a corporation,
partnership, trust, or any other legal structure used for business purposes that
either (a) does not have equity investors with voting rights or (b) has equity
-27-
investors that do not provide sufficient financial resources for the entity to
support its activities. Interpretation 46 requires a variable interest entity to
be consolidated by a company if that company is subject to a majority of the
risk of loss from the variable interest entity's activities or entitled to
receive a majority of the entity's residual returns or both. The consolidation
requirements of Interpretation 46 apply immediately to variable interest
entities created after January 31, 2003. The consolidation requirements apply to
older entities in the first fiscal year or interim period beginning after June
15, 2003. Certain of the disclosure requirements apply in all financial
statements issued after January 31, 2003, regardless of when the variable
interest entity was established. The adoption of FASB Interpretation 46 is not
expected to have an impact on the Company's financial statements.
In May 2003, the FASB issued SFAS No. 150, "Accounting for Certain Financial
Instruments with Characteristics of both Liabilities and Equity" which is
effective for financial instruments entered into or modified after May 31, 2003,
and otherwise is effective at the beginning of the first interim period
beginning after June 15, 2003. This Statement establishes standards for how an
issuer classifies and measures certain financial instruments with
characteristics of both liabilities and equity. It requires that an issuer
classify a financial instrument that is within its scope as a liability. The
Company is still evaluating the effect of this pronouncement on its consolidated
financial statements.
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
-28-
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
held for resale and securities sold, but not yet purchased as of September 30,
2003:
Securities held Securities sold, but
for resale not yet purchased
--------------- --------------------
Corporate stocks $ 238,000 $ 63,000
Corporate bonds 21,000 5,000
Government obligations 115,000 48,000
------------ ------------
$ 374,000 $ 116,000
============ ============
Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
See Part IV, Item 14(a)(1) for a list of financial statements filed as part of
this Report.
REMAINDER OF PAGE INTENTIONALLY LEFT BLANK
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Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
The Company filed a Report on Form 8-K dated May 5, 2003 reporting a change in
its independent public accountants to Marcum & Kliegman LLP from Grassi & Co.,
CPAs, P.C. The Company filed a Report on Form 8-K dated October 9, 2003
reporting a change in its independent public accountants attributable to the
merger of Feldman Sherb & Co., P.C. with Grassi & Co., CPAs, P.C. on April 17,
2002. There were no disagreements with accountants on accounting and financial
disclosure for the fiscal year ended September 30, 2003.
Item 9A. CONTROLS AND PROCEDURES
Evaluation of disclosure controls and procedures. Based on the evaluation of the
Company's disclosure controls and procedures (as defined in the Exchange Act
Rules 13a-15(e) and 15d-15(e)) required by the Exchange Act Rules 13a-15(b) or
15d-15(b), the Company's Chief Executive Officer and Acting Chief Financial
Officer have concluded that, as of the end of the period covered by this report,
the Company's disclosure controls and procedures were effective.
Changes in internal controls. There were no significant changes in the Company's
internal controls or in other factors that could significantly affect those
controls subsequent to the date of our evaluation.
PART III
Item 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Code of Ethics. The Company has adopted a written Code of Ethics (the "Code of
Ethics") that applies to its Chief Executive Officer and Acting Chief Financial
Officer. A copy of the Code of Ethics is available on the National website at
www.nationalsecurities.com, and print copies are available to any shareholder
that requests a copy. Any amendment to the Code of Ethics or any waiver of the
Code of Ethics will be disclosed on the National website promptly following the
date of such amendment or waiver.
The other information required by this Item will be included in the Company's
2004 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 2004
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 2004
Proxy Statement and is incorporated herein by reference.
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Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this Item will be included in the Company's 2004
Proxy Statement and is incorporated herein by reference.
Item 14. PRINCIPAL ACCOUNTING FEES AND SERVICES
The information required by this Item will be included in the Company's 2004
Proxy Statement and is incorporated herein by reference.
Item 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) The following financial statements are included in Part II, Item 8:
1. Financial Statements
Independent Auditors' Reports
Consolidated Financial Statements
Statements of Financial Condition, September 30, 2003
and September 30, 2002 Statements of Operations, Years
ended September 30, 2003, September 30, 2002 and
September 28, 2001
Statement of Changes in Stockholders' Equity (Deficit),
Years ended September 30, 2003, September 30, 2002
and September 28, 2001
Statements of Cash Flows, Years ended September 30,
2003, September 30, 2002 and September 28, 2001
Notes to Consolidated Financial Statements
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 30, 2003.
(c) Exhibits
See Exhibit Index.
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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 29, 2003 By: /s/Mark Goldwasser
----------------------------------------
Mark Goldwasser
President, Director and Chief Executive
Officer
Date: December 29, 2003 By: /s/Robert H. Daskal
----------------------------------------
Robert H. Daskal,
Acting Chief Financial Officer
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 29, 2003 By: /s/Steven B. Sands
-----------------------------------------
Steven B. Sands, Co-Chairman
Date: December 29, 2003 By: /s/Martin S. Sands
-----------------------------------------
Martin S. Sands, Co-Chairman
Date: December 29, 2003 By: /s/Mark Goldwasser
-----------------------------------------
Mark Goldwasser,
President, Director and Chief Executive
Officer
Date: December 29, 2003 By: /s/Norman J. Kurlan
-----------------------------------------
Norman J. Kurlan, Director
Date: December 29, 2003 By: /s/Gary A. Rosenberg
-----------------------------------------
Gary A. Rosenberg, Director
Date: December 29, 2003 By: /s/Robert J. Rosan
---------------------------------------
Robert J. Rosan, Director
Date: December 29, 2003 By: /s/Peter Rettman
---------------------------------------
Peter Rettman, Director
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EXHIBIT INDEX
3.1 Certificate of Incorporation, as amended, previously filed as Exhibit
3.4 to Form 10-Q in May 2002 and hereby incorporated by reference.
3.2 The Company's Bylaws, as amended, previously filed as Exhibit 3.3 to
Form 10-Q in February 2002, and hereby incorporated by reference.
3.3 The Company's By-Laws, as amended and restated on December 12, 2001.
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.
-33-
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, previously filed as Exhibit 10.28 to Form 10-K in
December 2001 and hereby incorporated by reference.
10.29 First Amendment to Clearing Agreement, previously filed as Exhibit
10.29 to Form 10-K in December 2001 and hereby incorporated by
reference.
10.30 Purchase Agreement by and among Olympic Cascade Financial Corporation,
Mark Goldwasser and Triage Partners, LLC dated as of December 14, 2001,
previously filed as Exhibit 10.30 to Form 8-K in January 2002 and
hereby incorporated by reference.
10.31 Stock Purchase Agreement between Steven A. Rothstein, certain other
persons or entities and Triage Partners, LLC dated as of December 14,
2001, previously filed as Exhibit 10.31 to Form 8-K in January 2002 and
hereby incorporated by reference.
10.32 Securities Exchange Agreement by and among Olympic Cascade Financial
Corporation, Gregory P. Kusnick, Karen Jo Gustafson, Gregory C. Lowney
and Maryanne K. Snyder dated as of December 14, 2001, previously filed
as Exhibit 10.32 to Form 8-K in January 2002 and hereby incorporated by
reference.
10.33 Escrow Agreement by and made among Olympic Cascade Financial
Corporation, Mark Goldwasser, Triage Partners, LLC and National
Securities Corporation dated as of December 28, 2001, previously filed
as Exhibit 10.33 to Form 8-K in January 2002 and hereby incorporated by
reference.
10.34 Second Amendment to Clearing Agreement, previously filed as Exhibit
10.34 to Form 10-Q in February 2002 and hereby incorporated by
reference.
10.35 Form of Warrant issued in December 2002.
14. The Code of Ethics.
16.1 Change in Certifying Accountant, previously filed in Form 8-K in August
1998 and hereby incorporated by reference.
16.2 Investment Transaction, previously filed in Form 8-K in January 2002
and hereby incorporated by reference.
16.3 Resignation of Director, previously filed in Form 8-K in April 2002 and
hereby incorporated by reference.
16.4 Change in its Independent Public Accountants, previously filed in Form
8-K in May 2003 and hereby incorporated by reference.
16.5 Change in its Independent Public Accountants, previously filed in Form
8-K in October 2003 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
31.1 Chief Executive Officer's Certificate pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.
31.2 Acting Chief Financial Officer's Certificate pursuant to Section 302 of
the Sarbanes- Oxley Act of 2002.
32.1 Chief Executive Officer's Certificate pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
32.2 Acting Chief Financial Officer's Certificate pursuant to Section 906 of
the Sarbanes- Oxley Act of 2002.
*Compensatory agreements
-34-
INDEPENDENT AUDITORS' REPORT
To the Stockholders and
Board of Directors
Olympic Cascade Financial Corporation
We have audited the accompanying consolidated statement of financial condition
of Olympic Cascade Financial Corporation and Subsidiary as of September 30,
2003, and the related consolidated statements of operations, changes in
stockholders' deficit and cash flows for the year then ended. These consolidated
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audit.
We conducted our audit 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 audit provides a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Olympic Cascade
Financial Corporation and Subsidiary as of September 30, 2003 and the
consolidated results of their operations and their cash flows for the year then
ended, in conformity with accounting principles generally accepted in the United
States of America.
/s/ Marcum & Kliegman LLP
- ------------------------------------
Marcum & Kliegman LLP
Certified Public Accountants
December 3, 2003
(except with respect to the matter
discussed in Note 21, as to which
the date is December 15, 2003)
New York, New York
F-1
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 Subsidiary as of
September 30, 2002 and the related consolidated statements of operations,
changes in stockholders' deficit, and cash flows for the year then ended. 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 audit.
We conducted our audit 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 audit provides a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present
fairly, in all material respects, the consolidated financial position of Olympic
Cascade Financial Corporation and Subsidiary as of September 30, 2002, and the
consolidated results of their operations and their cash flows for the year ended
September 30, 2002 in conformity with accounting principles generally accepted
in the United States of America.
/s/ Grassi & Co. CPAs, P.C.
----------------------------
Grassi & Co., CPAs, P.C.
Certified Public Accountants
December 18, 2002
New York, New York
F-2
INDEPENDENT AUDITORS' REPORT
To the Stockholders and
Board of Directors
Olympic Cascade Financial Corporation
We have audited the accompanying consolidated statements of operations,
changes in stockholders' equity, and cash flows of Olympic Cascade Financial
Corporation and Subsidiaries for the year ended September 28, 2001. These
consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audit.
We conducted our audit 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 audit provides a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present
fairly, in all material respects, the consolidated results of operations and
cash flows of Olympic Cascade Financial Corporation and Subsidiaries for the
year ended September 28, 2001 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-3
OLYMPIC CASCADE FINANCIAL CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
ASSETS
September 30, September 30,
2003 2002
------------ ------------
CASH $ 451,000 $ 325,000
CASH, restricted -- 309,000
DEPOSITS WITH CLEARING ORGANIZATIONS 1,041,000 1,489,000
RECEIVABLES FROM BROKER-DEALERS AND CLEARING ORGANIZATIONS 3,724,000 1,269,000
OTHER RECEIVABLES, net of reserve for uncollectible accounts of $650,000 and
$209,000 at September 30, 2003 and 2002, respectively 709,000 1,155,000
ADVANCES TO REGISTERED REPRESENTATIVES 644,000 799,000
SECURITIES HELD FOR RESALE, at market 374,000 606,000
FIXED ASSETS, net 247,000 369,000
SECURED DEMAND NOTE 1,000,000 1,000,000
OTHER ASSETS 545,000 627,000
------------ ------------
TOTAL ASSETS $ 8,735,000 $ 7,948,000
============ ============
LIABILITIES AND STOCKHOLDERS' DEFICIT
BANK OVERDRAFT $ -- $ 408,000
PAYABLE TO BROKER-DEALERS AND CLEARING ORGANIZATIONS 258,000 490,000
SECURITIES SOLD, BUT NOT YET PURCHASED, at market 116,000 105,000
ACCOUNTS PAYABLE, ACCRUED EXPENSES AND OTHER LIABILITIES 4,520,000 2,821,000
NOTES PAYABLE 3,170,000 3,215,000
------------ ------------
TOTAL LIABILITIES 8,064,000 7,039,000
------------ ------------
SUBORDINATED BORROWINGS 1,000,000 1,000,000
------------ ------------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' DEFICIT
Preferred stock, $.01 par value, 100,000 shares authorized; designated
Series A 9% cumulative convertible preferred stock, 30,000 shares
authorized; 27,825
shares issued and outstanding (liquidation preference: $2,782,500) -- --
Common stock, $.02 par value, 60,000,000 shares authorized, 3,367,558 and
2,274,449 issued and outstanding, at September 30, 2003 and 2002, respectively 67,000 45,000
Additional paid-in capital 12,628,000 12,045,000
Accumulated deficit (13,024,000) (12,181,000)
------------ ------------
TOTAL STOCKHOLDERS' DEFICIT (329,000) (91,000)
------------ ------------
TOTAL LIABILITIES AND STOCKHOLDERS' DEFICIT $ 8,735,000 $ 7,948,000
============ ============
See notes to consolidated financial statements.
F-4
OLYMPIC CASCADE FINANCIAL CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
Years Ended
----------------------------------------------------------------
September 30, 2003 September 30, 2002 September 28, 2001
------------------ ------------------ ------------------
REVENUES
Commissions $ 34,218,000 $ 28,168,000 $ 28,652,000
Net dealer inventory gains 11,564,000 10,242,000 12,061,000
Investment banking 425,000 253,000 1,020,000
Interest and dividends 1,416,000 1,640,000 5,750,000
Transfer fees and clearance services 1,850,000 1,343,000 1,092,000
Other 685,000 356,000 1,649,000
-------------- -------------- --------------
50,158,000 42,002,000 50,224,000
-------------- -------------- --------------
EXPENSES
Commissions 34,583,000 26,353,000 28,448,000
Employee compensation and related expenses 4,021,000 5,091,000 8,726,000
Occupancy and equipment costs 2,891,000 3,513,000 4,415,000
Interest 193,000 511,000 3,361,000
Clearance fees 2,714,000 4,241,000 4,302,000
Communications 2,693,000 2,866,000 3,340,000
Taxes, licenses, registration 407,000 411,000 763,000
Professional fees 1,526,000 1,093,000 1,945,000
Other 1,973,000 1,748,000 2,344,000
-------------- -------------- --------------
51,001,000 45,827,000 57,644,000
-------------- -------------- --------------
Loss from continuing operations before
income taxes and extraordinary item (843,000) (3,825,000) (7,420,000)
Income tax benefit -- 80,000 82,000
-------------- -------------- --------------
Loss from continuing operations before
extraordinary item (843,000) (3,745,000) (7,338,000)
-------------- -------------- --------------
Income (loss) from discontinued operations, net of tax:
Loss from operations -- -- (915,000)
Gain (loss) on disposal -- 300,000 (87,000)
-------------- -------------- --------------
Income (loss) from discontinued operations -- 300,000 (1,002,000)
-------------- -------------- --------------
Income from extraordinary item- gain from
extinguishment of debt, net of tax -- -- 418,000
-------------- -------------- --------------
Net loss (843,000) (3,445,000) (7,922,000)
Preferred stock dividends (250,000) (168,000) --
-------------- -------------- --------------
Net loss attributable to common stockholders $ (1,093,000) $ (3,613,000) $ (7,922,000)
============== ============== ==============
INCOME (LOSS) PER COMMON SHARE
Basic and diluted:
Loss from continuing operations $ (0.34) $ (1.73) $ (3.33)
Income (loss) from discontinued operations -- 0.13 (0.45)
Extraordinary gain -- -- 0.19
-------------- -------------- --------------
Net loss $ (0.34) $ (1.60) $ (3.59)
============== ============== ==============
Weighted average number of shares outstanding:
Basic and diluted 3,175,315 2,255,449 2,207,101
============== ============== ==============
See notes to consolidated financial statements.
F-5
OLYMPIC CASCADE FINANCIAL CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY (DEFICIT)
SEPTEMBER 30, 2003, SEPTEMBER 30, 2002 AND SEPTEMBER 28, 2001
Preferred Stock Common Stock Additional
-------------------------- -------------------------- Paid-In
Shares Amount Shares Amount Capital Deficit Total
------------ ------------ ------------ ------------ ------------ ------------ ------------
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 common
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
Issuance of restricted common
stock in exchange of note -- -- 38,000 -- 49,000 -- 49,000
Issuance of preferred stock 17,825 -- -- -- 1,683,000 -- 1,683,000
Issuance of preferred stock in
exchange of notes 10,000 -- -- -- 1,000,000 -- 1,000,000
Net loss -- -- -- -- -- (3,445,000) (3,445,000)
------------ ------------ ------------ ------------ ------------ ------------ ------------
BALANCE, September 30, 2002 27,825 -- 2,274,449 45,000 12,045,000 (12,181,000) (91,000)
Issuance of restricted common
stock: -- --
From private placement 1,016,186 21,000 533,000 554,000
Payment of legal fees 76,923 1,000 50,000 51,000
Net loss -- -- -- -- -- (843,000) (843,000)
------------ ------------ ------------ ------------ ------------ ------------ ------------
BALANCE, September 30, 2003 27,825 $ -- 3,367,558 $ 67,000 $ 12,628,000 $(13,024,000) $ (329,000)
============ ============ ============ ============ ============ ============ ============
See notes to consolidated financial statements.
F-6
OLYMPIC CASCADE FINANCIAL CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years ended
----------------------------------------------------------
September 30, 2003 September 30, 2002 September 28, 2001
------------------ ------------------ ------------------
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss $ (843,000) $ (3,445,000) $ (7,922,000)
Adjustments to reconcile net loss to net
cash provided by (used in) operating activities
Depreciation and amortization 217,000 566,000 632,000
Compensation related to issuance of stock options -- -- 105,000
Deferred income tax benefit -- -- 50,000
Gain on extraordinary item-extinguishment of debt -- -- (418,000)
Amortization of note discount 33,000 33,000 23,000
Provision for doubtful accounts 441,000 209,000 --
Forgiveness of loan (453,000) (339,000) --
Write-down of limited partnership investment 29,000 -- --
Change in net assets (liabilities) of discontinued operations -- (300,000) 817,000
Changes in assets and liabilities
Cash, cash equivalents and securities -- 37,188,000 (7,671,000)
Restricted cash 309,000 16,000 (325,000)
Deposits with clearing organizations 448,000 3,165,000 (2,862,000)
Receivables from broker-dealers, clearing organizations and others (2,295,000) 27,828,000 25,079,000
Income taxes payable -- -- (258,000)
Securities held for resale, at market 232,000 525,000 (758,000)
Other assets 53,000 313,000 (1,689,000)
Payables 1,892,000 (63,183,000) (15,963,000)
Securities sold, but not yet purchased, at market 11,000 (687,000) 600,000
------------ ------------ ------------
Net cash provided by (used in) operating activities 74,000 1,889,000 (10,560,000)
------------ ------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of fixed assets (94,000) (94,000) (806,000)
------------ ------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES
Borrowings (payments) on line of credit -- (3,500,000) 3,500,000
Proceeds from notes payable -- 1,548,000 4,000,000
Payment of notes payable -- (13,000) (84,000)
Payments on capital lease -- (300,000) (340,000)
Issuance of restricted stock -- -- 25,000
Increase (decrease) in cash overdraft (408,000) (1,148,000) 1,556,000
Net proceeds from issuance of preferred stock -- 1,683,000 --
Net proceeds from issuance of common stock and warrants 554,000 -- --
Exercise of stock options -- -- 275,000
------------ ------------ ------------
Net cash provided by (used in) financing activities 146,000 (1,730,000) 8,932,000
------------ ------------ ------------
NET INCREASE (DECREASE) IN CASH 126,000 65,000 (2,434,000)
CASH BALANCE
Beginning of the year 325,000 260,000 2,694,000
------------ ------------ ------------
End of the year $ 451,000 $ 325,000 $ 260,000
============ ============ ============
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION Cash paid during
the year for:
Interest $ 193,000 $ 535,000 $ 3,317,000
============ ============ ============
Income taxes $ -- $ 12,000 $ 323,000
============ ============ ============
SUPPLEMENTAL DISCLOSURES OF NONCASH INVESTING AND
FINANCING ACTIVITIES
Exchange of notes payable for preferred stock $ -- $ 1,000,000 $ --
============ ============ ============
Exchange of notes payable for common stock $ -- $ 49,000 $ --
============ ============ ============
Exchange of accounts payable for common stock $ 51,000 $ -- $ --
============ ============ ============
Conversion of accounts payable to loan payable $ 375,000 $ -- $ --
============ ============ ============
Warrants issued as a discount on notes payable $ -- $ -- $ 100,000
============ ============ ============
Forgiveness of loan $ 453,000 $ 339,000 $ --
============ ============ ============
See notes to consolidated financial statements.
F-7
OLYMPIC CASCADE FINANCIAL CORPORATION
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2003, SEPTEMBER 30, 2002 AND SEPTEMBER 28, 2001
1. ORGANIZATION
Olympic Cascade Financial Corporation ("Olympic" or the "Company") is a
diversified financial services organization, operating through its
wholly owned subsidiary, National Securities Corporation ("National").
The Company's business includes securities brokerage for individual and
institutional clients, market-making trading activities, asset
management and corporate finance services. National is an introducing
broker and clears all transactions through a clearing organization on a
fully disclosed basis.
In June 1997, the Company acquired all of the outstanding stock of
WestAmerica Investment Group ("WestAmerica"), a Scottsdale, Arizona
based broker-dealer specializing in retail brokerage services. In
December 2001, WestAmerica voluntarily withdrew its membership with the
NASD, ceased conducting business as a broker-dealer and filed 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 Securities Corporation ("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. In May 2002, pursuant to an agreement made simultaneous
with the Investment Transaction (see Note 3b), the Company sold
Canterbury for its book value of $11,000 to Mr. Steven A. Rothstein,
the former Chief Executive Officer of the Company.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
a. Principles of Consolidation - The consolidated financial
statements include the accounts of Olympic and its wholly
owned subsidiary. All significant intercompany accounts and
transactions have been eliminated in consolidation.
b. Estimates - The preparation of financial statements in
conformity with accounting principles generally accepted in
the United States of America requires management to make
estimates and assumptions that affect the reported amounts of
assets and liabilities, disclosure of contingent assets and
F-8
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. Revenue Recognition - Customer security transactions and the
related commission income and expense are recorded as of the
trade date. Investment banking revenues include gains, losses,
and fees, net of syndicate expenses, arising from securities
offerings in which the Company acts as an underwriter or
agent. Investment banking revenues also include fees earned
from providing financial advisory services. Investment banking
management fees are recorded on the offering date, sales
concessions on the settlement date, and underwriting fees at
the time the underwriting is completed and the income is
reasonably determinable. Customers who are financing their
transaction on margin, are charged interest. The Company's
margin requirements are in accordance with the terms and
conditions mandated by First Clearing Corporation ("FCC"), its
clearing firm. The interest is billed on the average daily
balance of the margin account.
Net dealer inventory gains result from securities transactions
entered into for the account and risk of the Company. Net
dealer inventory gains are recorded on a trade date basis.
Transfer fees are charged for each customer's security
transaction, and are recognized as of the trade date.
Investment advisory fees are account management fees for high
net worth clients, and are billed quarterly and recognized as
earned.
d. Fixed Assets - Fixed assets are recorded at cost. Depreciation
is calculated using the straight-line method based on the
estimated useful lives of the related assets, which range from
five to seven years. Leasehold improvements are amortized
using the straight-line method over the shorter of the
estimated useful lives of the assets or the terms of the
leases. When assets are retired or otherwise disposed of, the
costs and related accumulated depreciation or amortization are
removed from the accounts and any gain or loss on disposal is
recognized.
e. Fiscal Year - In fiscal year 2002, the Company changed its
fiscal year from a 52-53 week fiscal year ending on the last
Friday in September, to a fiscal year ending on September 30.
f. 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
F-9
allowance related to deferred tax assets is also recorded when
it is more likely than not that some or all of the deferred
tax asset will not be realized.
g. Investment in Limited Partnership - The Company accounts for
its investment in the limited partnership in accordance with
the equity method of accounting. Such asset has been included
in other assets in the accompanying consolidated statements of
financial condition.
h. Fair Value of Financial Instruments - The carrying amounts
reported in the balance sheet for cash, receivables, accounts
payable, accrued expenses and other liabilities approximates
fair value based on the short-term maturity of these
instruments.
i. 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 30, 2003,
the Company believes that there has been no impairment of its
long-lived assets.
j. Income (Loss) per Common Share - Basic income (loss) per share
is computed on the basis of the weighted average number of
common shares outstanding. Diluted income (loss) per share is
computed on the basis of the weighted average number of common
shares outstanding plus the potential dilution that could
occur if securities or other contracts to issue common shares
were exercised or converted. Stock options and warrants, and
conversion of the cumulative convertible preferred stock, were
excluded from the diluted loss per share computation for the
fiscal years ended September 30, 2003 and 2002, and September
28, 2001, since the Company incurred losses for these years
and the inclusion of such securities would be antidilutive.
Income (loss) per common share for the year ended September
30, 2002 has been revised to reflect cumulative dividends on
preferred stock.
k. Stock Based Compensation - During fiscal year 2003, the
Company adopted Statement of Financial Accounting Standard
("SFAS") No. 148, "Accounting for Stock-Based Compensation -
Transition and Disclosure." This statement amended SFAS No.
123, "Accounting for Stock-Based Compensation." As permitted
under SFAS No. 123, the Company continues to apply the
Accounting Principles Board Opinion No. 25, "Accounting for
Stock Issued to Employees."
F-10
Fiscal Years Ended
----------------------------------------------------
September 30, September 30, September 28,
2003 2002 2001
----------------------------------------------------
Net loss attributable to common stockholders - as reported $ (1,093,000) $ (3,613,000) $ (7,922,000)
Stock-based employee compensation cost determined
under fair value method, net of tax effects (36,000) (50,000) (535,000)
----------------------------------------------------
Net loss attributable to common stockholders - pro forma $ (1,129,000) $ (3,663,000) $ (8,457,000)
====================================================
Loss per share
Basic and diluted loss per share:
Net loss attributable to common stockholders - as reported $ (0.34) $ (1.60) $ (3.59)
Per share stock-based employee compensation cost
determined under fair value method, net of tax effects (0.01) (0.02) (0.24)
----------------------------------------------------
Net loss attributable to common stockholders - pro forma $ (0.35) $ (1.62) $ (3.83)
====================================================
The Black-Scholes option valuation model was used to estimate
the fair value of the options granted during the fiscal years
ended September 30, 2003 and 2002, and September 28, 2001. The
model includes subjective input assumptions that can
materially affect the fair value estimates. The model was
developed for use in estimating the fair value of traded
options that have no vesting restrictions and that are fully
transferable. For example, the expected volatility is
estimated based on the most recent historical period of time
equal to the weighted average life of the options granted.
Options issued under the Company's option plans have
characteristics that differ from traded options. In
management's opinion, this valuation model does not
necessarily provide a reliable single measure of the fair
value of its employee stock options. Principal assumptions
used in applying the Black-Scholes model along with the
results from the model were as follows:
Fiscal Years Ended
----------------------------------------------
September 30, September 30, September 28,
2003 2002 2001
----------------------------------------------
Assumptions:
Risk-free interest rate 4.01% 5.7% 5.0%
Expected life, in years 5.0 5.0 5.0
Expected volatility 311% 286% 96%
Results:
Fair value of options granted $ 0.52 $ 0.02 $ 0.24
F-11
l. Concentrations of Credit Risk - The Company is engaged in
trading and a broad range of securities brokerage and
investment services to a diverse retail and institutional
clientele, as well as corporate finance and investment banking
services to corporations and businesses. Counterparties to the
Company's business activities include broker-dealers and
clearing organizations, banks and other financial
institutions. The Company uses clearing brokers to process
transactions and maintain customer accounts on a fee basis for
the Company. The Company uses one clearing broker for
substantially all of its business. The Company permits the
clearing firms to extend credit to its clientele secured by
cash and securities in the client's account. The Company's
exposure to credit risk associated with the non-performance by
its 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. The Company has agreed to indemnify the clearing
brokers for losses they incur while extending credit to the
Company's clients. It is the Company's policy to review, as
necessary, the credit standing of its customers and each
counterparty. Amounts due from customers that are considered
uncollectible are charged back to the Company by the clearing
broker when such amounts become determinable. Such amounts are
then charged to the broker initiating the transaction and are
included in other receivables in the accompanying consolidated
statements of financial condition.
The Company maintains cash with major financial institutions.
The Federal Deposit Insurance Corporation ("FDIC") insures up
to $100,000 at each institution. At times such amounts may
exceed the FDIC limits. At September 30, 2003 the uninsured
cash bank balance was $202,000. The Company believes it is not
exposed to any significant credit risks for cash.
m. Other Receivables - The Company extends unsecured credit in
the normal course of business to its brokers. The
determination of the amount of uncollectible accounts is based
on the amount of credit extended and the length of time each
receivable has been outstanding, as it relates to each
individual broker. The allowance for doubtful accounts
reflects the amount of loss that can be reasonably estimated
by management, and is included in other expenses in the
accompanying consolidated statements of operations.
n. Advances to Registered Representatives - Advances are given to
certain registered representatives as an incentive for their
affiliation with National. The representative signs an
independent contractor agreement with National for a specified
term. The advance is then amortized on a straight-line basis
F-12
over the amount of time the representative is obligated to be
affiliated with National, and is included in commissions
expense in the accompanying consolidated statements of
operations. In the event the representative's affiliation with
National terminates prior to the fulfillment of their
contract, the representative is required to repay the
unamortized balance.
o. Other Assets - Other assets consist of the investment in
venture capital fund, pre-paid expenses and lease deposits.
p. Recent Accounting Pronouncements - In November 2002, the FASB
issued Interpretation ("FIN") No. 45, "Guarantor's Accounting
and Disclosure Requirements for Guarantees, Including Indirect
Guarantees of Indebtedness of Others." FIN No. 45 requires a
company, at the time it issues a guarantee, to recognize an
initial liability for the fair value of obligations assumed
under the guarantee and elaborates on existing disclosure
requirements related to guarantees and warranties. The initial
recognition requirements of FIN No. 45 are effective for
guarantees issued or modified after December 31, 2002. The
Company's adoption of the recognition requirements of FIN No.
45 did not have any effect on its consolidated financial
position or results of operations.
In January 2003, the FASB issued Interpretation 46,
Consolidation of Variable Interest Entities. In general, a
variable interest entity is a corporation, partnership, trust,
or any other legal structure used for business purposes that
either (a) does not have equity investors with voting rights
or (b) has equity investors that do not provide sufficient
financial resources for the entity to support its activities.
Interpretation 46 requires a variable interest entity to be
consolidated by a company if that company is subject to a
majority of the risk of loss from the variable interest
entity's activities or entitled to receive a majority of the
entity's residual returns or both. The consolidation
requirements of Interpretation 46 apply immediately to
variable interest entities created after January 31, 2003. The
consolidation requirements apply to older entities in the
first fiscal year or interim period beginning after June 15,
2003. Certain of the disclosure requirements apply in all
financial statements issued after January 31, 2003, regardless
of when the variable interest entity was established. The
adoption of FASB Interpretation 46 is not expected to have an
impact on the Company's consolidated financial statements.
In May 2003, the FASB issued SFAS No. 150, "Accounting for
Certain Financial Instruments with Characteristics of both
Liabilities and Equity" which is effective for financial
instruments entered into or modified after May 31, 2003, and
otherwise is effective at the beginning of the first interim
F-13
period beginning after June 15, 2003. This Statement
establishes standards for how an issuer classifies and
measures certain financial instruments with characteristics of
both liabilities and equity. It requires that an issuer
classify a financial instrument that is within its scope as a
liability. The adoption of SFAS No. 150 is not expected to
have an impact on the Company's consolidated financial
statements.
q. Reclassification of Revenues - The revenues generated from
principal trades to institutions for which the Company
receives commission revenues, previously classified as net
dealer inventory gains and other revenues in prior years, have
been reclassified in the September 28, 2001 consolidated
financial statements as commission revenues to conform with
the presentation used in the September 30, 2002 and September
30, 2003 consolidated financial statements without affecting
the previously reported net losses.
r. Management's Liquidity Plans - The market conditions
experienced during fiscal years 2001 and 2002, and the first
half of fiscal year 2003, have resulted in continuing
operating losses and a reduction in the stockholders' equity
of the Company. Accordingly, the Company pursued additional
sources of capital from various potential investors. In the
fourth quarter of fiscal year 2002, the Company received
$210,000 from the sale of Series A Preferred Stock and
continued to seek additional funds.
In the first quarter of fiscal year 2003, the Company
consummated a private placement of its securities to a limited
number of accredited investors pursuant to Rule 501 of
Regulation D under the Securities Act. Net proceeds of
$554,500 closed in the first quarter of fiscal year 2003.
Additionally, in the first quarter of fiscal year 2003, FCC
loaned the Company $375,000 in the form of clearing fee
rebates.
In November 2003, National and the holder of the $1.0 million
secured demand note that matures on February 1, 2004, agreed
that the note will be replaced with a note in a principal
amount equal to at least $500,000 that will mature on February
28, 2005. Additionally, two noteholders have agreed to extend
the maturity date on $1.0 million of notes from January 25,
2004 to July 31, 2005, and effective February 1, 2004, the
interest rate will be increased to 12% from 9% per annum.
In December 2003, National's clearing deposit with FCC was
reduced from $1,000,000 to $500,000, the excess $500,000 was
paid to FCC to reduce the Company's outstanding loan balance
on its promissory note, and FCC forgave the $375,000 loan that
was due to be repaid in January 2004.
F-14
The Company believes that with the improved market conditions
and the Company's increased volume of business experienced
during the third and fourth quarters of fiscal year 2003, and
the first quarter of fiscal year 2004, and the continuation of
such improved market conditions, funds will be sufficient to
maintain its current level of business activities during
fiscal year 2004. Additionally, the Company has recently
commenced efforts to raise additional capital in order to
strengthen its existing capital. If current market conditions
do not continue, the Company would need to consider curtailing
certain of its business activities, further reducing its fixed
overhead costs and/or seek additional sources of financing.
3. SIGNIFICANT AGREEMENTS AND TRANSACTIONS
a. CLEARING AGREEMENTS
In August 2001, National entered into a ten-year agreement
with FCC, a wholly-owned subsidiary of Wachovia Corporation,
under which FCC provides clearing and other related services
for National. The conversion to FCC began in December 2001 and
was completed in March 2002.
As part of the clearing agreement, FCC has agreed to execute
orders, prepare and mail order confirmations to National's
customers, prepare and mail monthly statements to National's
customers, and provide various other clearing and execution
related services. National pays FCC fees for the services it
performs in accordance with standard industry practices. FCC
maintains possession and control of National's customer funds
and securities in accordance with the broker-dealer financial
responsibility rules promulgated under the Securities Exchange
Act of 1934, as amended, and other applicable laws, rules or
regulations. National's customers maintain control of and
receive the benefits from their customer accounts. National's
registered representatives receive the commissions generated
by transactions on the customer accounts. The customer is
responsible for any and all losses for transactions on their
account. National, however, has indemnified FCC for debts owed
by customers from transactions in their accounts.
In connection with the Clearing Agreement, the Company entered
into a ten-year promissory note with FCC 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 provided for another
$1,000,000 loan that was extended to the Company upon
substantial completion of the conversion on December 31, 2001
F-15
that the Company also contributed to National. The amount of
the note that is repayable on each anniversary date is the
principal, and interest if any, then outstanding divided by
the remaining life of the note. Principal and interest under
the promissory note are forgivable annually based on certain
business performance and trading volumes of the Company. The
Company would need to generate, on average, approximately
250,000 tickets per year over the ten-year term of the note to
satisfy the trading volume requirement, which has been
satisfied through fiscal year 2003. Based on actual tickets, a
total of $453,000 and $339,000 were forgiven in fiscal years
2003 and 2002, respectively, which has been recorded as a
reduction in clearing fees expense in the accompanying
consolidated statements of operations.
In connection with the Clearing Agreement, additional
borrowings were available to the Company upon the attainment
by National of certain volume and profitability goals. In
finalizing the conversion, a dispute arose among the Company,
US Clearing (one of its former clearing firms) and FCC,
regarding the responsibility for debit balances in certain
trading accounts. The three parties agreed to share the
expense equally. The Company's share of this settlement,
$548,000, was advanced to the Company by FCC and added to the
existing promissory note. As part of the settlement, the
minimum level of stockholders' equity the Company is required
to maintain under the promissory note was reduced from
$2,000,000 to $1,000,000 and no further borrowings are
available under the promissory note, as amended. Additionally,
National received its clearing deposit, net of miscellaneous
expenses, of $975,000 from US Clearing. National terminated
its clearing agreement with US Clearing.
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 addition, substantially all of the assets of National were
collateralized for the aforementioned loan.
During the year ended September 30, 2003, FCC loaned the
Company an additional $375,000 in the form of clearing fee
rebates that the Company simultaneously contributed to
National. The loan is due to be repaid in January 2004.
Additionally, FCC has waived its stockholders' equity covenant
as of September 30, 2003 and December 31, 2003.
See Note 21, "Subsequent Events" regarding matters concerning
the Company and FCC.
F-16
b. EQUITY TRANSACTIONS
(i) During fiscal year 2002, a company affiliated with
the President of Olympic and an unaffiliated company
(collectively, the "Investors") obtained a
significant ownership in the Company (the "Investment
Transaction") through purchasing 15,725 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.
(ii) Concurrent with the closing of the above transaction,
the then current Chief Executive Officer and Chief
Financial Officer of Olympic terminated their
employment agreements with the Company and
simultaneously entered 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 was also
given the option to purchase all of the shares of
stock of Canterbury for its book value of
approximately $11,000, which closed in May 2002. Such
officer also sold 285,000 shares of the Company's
common stock owned by the officer and his family to
the aforementioned unaffiliated company.
(iii) Also, in December 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 were 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 were repriced from an
exercise price of $5.00 per share to $1.75 per share.
No effect was given to the repriced Warrants, as the
Company's Common Stock was selling at prices below
$1.75 per share. The two noteholders have agreed to
extend the maturity date on the remaining $1,000,000
from January 25, 2004 to July 31, 2005. Effective
February 1, 2004, the interest rate on the notes will
be increased to 12% from 9% per annum. Additionally,
the other 100,000 warrants to acquire shares of
common stock will be repriced from an exercise price
of $5.00 per share to $1.25 per share, and the
expiration date for all 200,000 warrants will be
extended to July 31, 2005.
(iv) In the fourth quarter of fiscal 2002, the former
Chief Executive Officer of the Company invested
$210,000 in the Company by purchasing 2,100 shares of
the Preferred Stock at $100 per share.
F-17
(v) In the first quarter of fiscal year 2003, the Company
consummated a private placement of its securities to
a limited number of accredited investors pursuant to
Rule 501 of Regulation D under the Securities Act
(the "Private Offering"). Each unit in the Private
Offering sold for $0.65 and consisted of one share of
the Company's common stock and one three-year warrant
to purchase one share of the Company's common stock
at a per share price of $1.25. Net proceeds of
$554,500 were received in the first quarter of fiscal
year 2003, and the Company correspondingly issued
1,016,186 shares of restricted common stock and
1,016,186 warrants. In January 2003, the Company
issued 76,923 shares of common stock and a three-year
warrant to purchase 76,923 shares of common stock at
$1.25 per share to Seyfarth Shaw LLP (formerly
D'Ancona & Pflaum LLC), as payment of approximately
$51,000 of legal fees that were accrued as of
September 30, 2002. The warrants issued in connection
with the Private Offering and the warrants issued to
Seyfarth Shaw have been included along with the
proceeds of the shares of common stock issued as
additional paid-in capital.
In March 2003, the Company filed a Registration
Statement on Form S-3 under the Securities Act for
the resale of the shares of common stock and the
shares of common stock issuable upon exercise of the
warrants. In October 2003, the Company filed a Form
RW withdrawing the filing of the Registration
Statement on Form S-3. Currently the Company is
eligible to file a Registration Statement on Form
S-3, and management believes it will file such
statement in the near term, that will include the
shares of common stock and the shares of common stock
issuable upon exercise of the warrants issued in the
Private Offering.
4. DISCONTINUED OPERATIONS
In the first quarter of fiscal year 2002, WestAmerica filed for Chapter
7 Bankruptcy protection in accordance with the U.S. Bankruptcy Code.
This filing eliminated the risk of loss for the liabilities in excess
of assets, and accordingly, that amount was reversed and reflected as
income in the first quarter of fiscal year 2002. The Company did not
guarantee any of the obligations of WestAmerica, a distinct legal
entity. Consequently, the Company believes that it has no liability to
creditors of WestAmerica. As of December 3, 2003, no creditors of
WestAmerica have sought recovery from the Company, and the Company has
been advised by legal counsel that the bankruptcy case has been
completed.
F-18
The following is a summary of the Company's discontinued operations:
September 30, 2002 September 28, 2001
------------------ ------------------
Revenues $ -- $ 2,134,000
----------- -----------
Loss from operations -- (915,000)
Gain (loss) on disposal 300,000 (87,000)
----------- -----------
Income (loss) from discontinued
operations $ 300,000 $(1,002,000)
=========== ===========
5. RESTRICTED CASH
The Company maintained an escrow account on behalf of a customer in
which National acted as its underwriter. Funds were wired at the
direction of the customer. The restricted cash balance was $309,000 as
of September 30, 2002. During the year ended September 30, 2003, the
Company disbursed the remaining balance in such account.
6. BROKER-DEALERS AND CLEARING ORGANIZATIONS RECEIVABLES AND PAYABLES
At September 30, 2003 and 2002 the amounts receivable of $3,724,000 and
$1,269,000, respectively, from brokers and dealers represent amounts
due for fees and commissions. At September 30, 2003 and 2002, the
amounts payable to broker dealers and clearing organization of $258,000
and $490,000, respectively, represent amounts payable for inventory
purchases on behalf of the Company and its customers.
7. OTHER RECEIVABLES
An analysis of other receivables, and the reserve for uncollectible
accounts on such receivables for the fiscal years ended September 30,
2002 and 2003 is as follows:
Other Net
Receivables Reserve Receivables
------------ ------------ -----------
Balance, September 28, 2001 $ 349,000 $ -- $ 349,000
Additions 1,015,000 1,015,000
Provision (209,000) (209,000)
-----------------------------------------
Balance, September 30, 2002 1,364,000 (209,000) 1,155,000
Additions 17,000 17,000
Collections (22,000) (22,000)
Provision (441,000) (441,000)
-----------------------------------------
Balance, September 30, 2003 $ 1,359,000 $ (650,000) $ 709,000
=========================================
F-19
8. ADVANCES TO REGISTERED REPRESENTATIVES
An analysis of advances to registered representatives for fiscal years
ended September 30, 2002 and 2003 is as follows:
Balance, September 28, 2001 $ 487,000
Advances 896,000
Amortization of advances (584,000)
------------
Balance, September 30, 2002 799,000
Advances 555,000
Amortization of advances (710,000)
------------
Balance, September 30, 2003 $ 644,000
============
9. SECURITIES HELD FOR RESALE AND SECURITIES SOLD, BUT NOT YET PURCHASED,
AT MARKET
The following table shows the quoted market values of the Company's
securities held for resale and securities sold, but not yet purchased
as of September 30, 2003 and 2002, respectively:
September 30, 2003 September 30, 2002
------------------ ------------------
Securities Securities
Securities sold, but not Securities sold, but not
held for resale yet purchased held for resale yet purchased
------------ ------------ ------------ ------------
Corporate stocks $ 238,000 $ 63,000 $ 576,000 $ 29,000
Corporate bonds 21,000 5,000 -- --
Government obligations
115,000 48,000 30,000 76,000
------------ ------------ ------------ ------------
$ 374,000 $ 116,000 $ 606,000 $ 105,000
============ ============ ============ ============
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 statements of financial condition.
F-20
10. FIXED ASSETS
Fixed assets as of September 30, 2003 and 2002, respectively, consist
of the following:
September 30, 2003 September 30, 2002
------------------ ------------------
Office machines $ 99,000 $ 338,000
Furniture and fixtures 183,000 672,000
Interactive fixed assets 56,000 56,000
Phone system 15,000 159,000
Electronic equipment 683,000 1,431,000
Leasehold improvements 166,000 170,000
----------- -----------
1,202,000 2,826,000
Less accumulated depreciation and
amortization (955,000) (2,457,000)
----------- -----------
Fixed assets - net $ 247,000 $ 369,000
=========== ===========
During the year ended September 30, 2003, the Company wrote off
approximately $1,718,000 of retired and fully depreciated fixed assets.
Depreciation and amortization expense for the years ended September 30,
2003, 2002 and September 28, 2001 was $217,000, $566,000 and $632,000,
respectively.
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. These leases expired in fiscal year 2002.
11. OTHER ASSETS
Other assets as of September 30, 2003 and 2002, respectively, consist
of the following:
September 30, 2003 September 30, 2002
-------------------- ---------------------
Investment in limited partnership $ 107,000 $ 136,000
Pre-paid expenses 362,000 415,000
Deposits 76,000 76,000
----------- -----------
Total $ 545,000 $ 627,000
=========== ===========
F-21
12. LINE OF CREDIT
In January 2001, National consummated a revolving line of credit of
$5,000,000, amended to $4,000,000 on November 8, 2001, with American
National Bank. Interest was payable monthly. The line was 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"). As a result of default of certain financial
covenants, on November 8, 2001, National entered into a forbearance
agreement expiring December 21, 2001, at which time any outstanding
balance was due to be paid and the line of credit terminated. During
the year ended September 30, 2002 the Company repaid the outstanding
balance of $3,500,000.
13. NOTES PAYABLE
In November 1997, the Company executed two promissory notes totaling
$925,000, one of which was settled during the year ended September 29,
2000. 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 fiscal
year ended September 28, 2001.
In January 1998, the Company executed a promissory note for $1,000,000.
This note bears interest at 8% per annum 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 March 2002,
the $49,000 balance of this note was repaid by the issuance of 38,000
shares of common stock of the Company.
In January 2001, the Company executed two promissory notes for
$1,000,000 each. These notes bear interest at 9% per annum 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 30, 2003 and 2002,
the aggregate unamortized discount was $11,000 and $44,000,
respectively. As discussed in Note 3b(iii), the holders of such notes
executed a securities exchange agreement, whereby $1,000,000 of such
notes were 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 were repriced from an exercise price of $5.00 per share to
F-22
$1.75 per share. As discussed in Note 3b(iii), the two noteholders have
agreed to extend the maturity date on the remaining $1,000,000 to July
31, 2005.
As discussed in Note 3a, the Company has received loans from FCC,
payable over the life of the agreement, and is forgivable based upon
the Company attaining certain trading volumes. The note bears interest
at the lender's prime rate, which was 4.0% and 4.75% per annum as of
September 30, 2003 and 2002, respectively. The note balance outstanding
and loan activity is as follows:
Balance, September 28, 2001 $ 1,000,000
Additional borrowings 1,548,000
Amount forgiven (339,000)
-----------
Balance, September 30, 2002 2,209,000
Amount Forgiven (453,000)
-----------
Balance, September 30, 2003 $ 1,756,000
===========
The following table summarizes notes payable at September 30, 2003 and
2002, respectively:
September 30, September 30,
2003 2002
---------- ----------
Note payable to FCC $1,756,000 $2,209,000
Notes payable to noteholders
(net of discount of $11,000 and
$44,000, respectively) 989,000 956,000
Loan from FCC 375,000 --
Loan from former officer 50,000 50,000
---------- ----------
$3,170,000 $3,215,000
========== ==========
The following is a schedule by years of debt maturity as of September
30, 2003:
Fiscal year ending
2004 $1,645,000
2005 220,000
2006 220,000
2007 220,000
2008 220,000
Thereafter 656,000
----------
3,181,000
Less: discount on notes 11,000
----------
$3,170,000
==========
F-23
14. SECURED DEMAND NOTE
On February 1, 2001, National entered into a secured demand note
collateral agreement with an employee of National and Director of the
Company, to borrow securities that can be used by the Company for
collateral agreements. These securities have been initially pledged
through an unrelated broker-dealer, and have a borrowing value totaling
$1,000,000. This note bears interest at 5% per annum, paid monthly, and
matures on February 1, 2004. Certain of the securities have been
pledged as collateral for a security deposit for an office lease and
two letters of credit, in the amounts of $249,000, $125,000 and
$38,000, respectively, executed by the Company on behalf of National.
No amounts have been drawn on these letters of credit. In November
2003, National and the note holder agreed that upon maturity, the
$1,000,000 note will be replaced with a note with a principal amount
equal to at least $500,000 that will mature on February 28, 2005.
15. INCOME TAXES
The income tax (provision) benefit consists of:
Fiscal Years Ended
---------------------------------------------
September 30, September 30, September 28,
2003 2002 2001
----------- ----------- -----------
Current federal
income tax benefit
$ -- $ 90,000 $ 82,000
Current state
income tax provision -- (10,000) --
----------- ----------- -----------
$ -- $ 80,000 $ 82,000
=========== =========== ===========
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 30, September 30, September 28,
2003 2002 2001
----------- ----------- -----------
Statutory
federal rate $ 287,000 $ 1,287,000 $ 2,523,000
State income taxes
net of federal
income tax benefit 27,000 124,000 --
Losses for which no
benefit is provided (314,000) (1,331,000) (2,441,000)
----------- ----------- -----------
$ -- $ 80,000 $ 82,000
=========== =========== ===========
F-24
Significant components of the Company's deferred tax assets that are
included in other assets in the accompanying financial statements are
as follows:
September 30, September 30,
2003 2002
----------- -----------
Net operating loss
carryforwards $ 4,114,000 $ 3,436,000
Reserves for uncollectible
receivables 254,000
107,000
Other temporary differences 10,000 --
----------- -----------
Total deferred tax asset 4,378,000 3,543,000
Valuation allowance (4,378,000) (3,543,000)
----------- -----------
Deferred tax asset $ -- $ --
=========== ===========
At September 30, 2003, the Company has available unused net operating
loss carryovers of approximately $11.0 million that may be applied
against future taxable income and expires at various dates through
2023, subject to certain limitations. 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. The valuation allowance for deferred tax asset increased by
$835,000 and $650,000 during the fiscal years ended September 30, 2003
and 2002, respectively.
16. COMMITMENTS
Employment Agreements - During fiscal years 1999 and 2000, the Company
entered into employment agreements with six executive officers that in
total provided for annual salaries aggregating $1,710,000. Pursuant to
the Investment Transaction, four of these agreements were terminated in
fiscal year 2002. One of these agreements was modified in conjunction
with the Investment Transaction. The final agreement is the subject of
a dispute (see Note 17).
Leases - As of September 30, 2003, the Company leases office space and
equipment in various states expiring at various dates through 2012 and
is committed under operating leases for future minimum lease payments
as follows:
F-25
Fiscal Year Ending
2004 $ 1,756,000
2005 1,616,000
2006 1,501,000
2007 1,479,000
2008 1,423,000
Thereafter 2,150,000
------------
$ 9,925,000
============
In February 2003, in connection with the signing of a lease extension
in the New York office, the Company was given a deferral of rent
totaling $360,000, over twelve months, commencing with the March 2003
rent payment. Such deferral, accruing interest at 6.25% per annum, is
to be repaid in monthly installments of approximately $19,000 starting
in September 2006.
Rental expense under all operating leases for the years ended September
30, 2003, September 30, 2002 and September 28, 2001 was $2,029,000,
$2,404,000 and $1,889,000, respectively.
Underwritings - During fiscal 2003, the Company participated in
underwriting securities for private placements, initial and secondary
public offerings. At September 30, 2003, the Company has no outstanding
commitments relating to underwriting transactions.
17. CONTINGENCIES
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.
Plaintiffs in the class action sought approximately $80.0 million from
all named parties. In June 2000, National filed a motion to dismiss
this action. In March 2001, the United States District Court for the
Southern District of New York denied National's motion to dismiss. In
May 2001, National submitted its answer to the complaint in which it
set forth its defenses. In November 2001, the plaintiffs filed a motion
to certify the class. Plaintiffs thereafter withdrew their motion and
the case was referred to mediation. The mediation process resulted in a
global settlement of the matter. During the fiscal year ended September
30, 2003, National settled its portion of this litigation for $100,000,
which was paid by its insurance company.
A former executive officer of the Company, Craig M. Gould, has
commenced an arbitration proceeding against the Company claiming a
breach of his employment contract, and seeking approximately $850,000
in damages. The arbitration commenced in July 2003, and continued in
December 2003. The Company believes it has meritorious defenses and
intends to vigorously defend this action, although the ultimate outcome
of the matter cannot be determined at this time. Since the Company is
F-26
unable to predict the outcome of this matter, no adjustments have been
made in the consolidated financial statements in response to this
matter.
In June 2002, National was named, together with others as a defendant
in a class action lawsuit relating to a series of private placements of
securities in Fastpoint Communications, Inc. in the Superior Court for
the State of California for the County of San Diego. In August 2002,
the plaintiffs filed an amended complaint alleging violations of state
statutory and common law, as well as Section 12 of the Securities Act
of 1933. Plaintiffs are seeking approximately $14.0 million, but no
specific amount of damages has been sought against National in the
complaint. The complaint asserts claims in connection with National's
role as placement agent in a series of private placements of securities
in Fastpoint. Plaintiffs allege that the private placement memoranda
contained false and misleading statements or omitted facts necessary to
make statements not misleading. National filed its answer, and believes
it has meritorious defenses and intends to vigorously contest class
certification and defend this action, although the ultimate outcome of
the matter cannot be determined at this time. Accordingly, the Company
is unable to predict the outcome of this matter, and no adjustments
have been made in the consolidated financial statements in response to
this matter.
The Company is also a defendant in various other arbitrations and
administrative proceedings, lawsuits and claims seeking damages
aggregating approximately $3.0 million (exclusive of specified punitive
damages of approximately $4.0 million, unspecified punitive damages
related to certain claims and expected insurance coverage). The Company
has filed a counterclaim for approximately $200,000 in one such
proceeding. These matters arise out of the normal course of business.
The Company intends to vigorously defend itself in these actions,
however the ultimate outcome of these matters cannot be determined at
this time. The amount related to such matters that are reasonably
estimable and which has been accrued at September 30, 2003 and 2002, is
$366,000 and $343,000, respectively.
18. STOCKHOLDERS' EQUITY
Shares Authorized - During the year ended September 30, 2002, the
Company increased its authorized number of shares of Common Stock from
6,000,000 to 60,000,000.
Cumulative Dividends on Convertible Preferred Stock - The holders of
the Series A Cumulative Convertible Preferred Stock are to receive
dividends on a quarterly basis at a rate of 9% per annum, per share.
Such dividends are cumulative and accrue whether or not declared by the
Company's Board of Directors, but are payable only when, as and if
declared by the Company's Board of Directors. The amount of accumulated
F-27
dividends on the Company's 27,825 issued and outstanding shares of
preferred stock was $418,000 and $168,000 at September 30, 2003 and
2002, respectively.
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.
A summary of the status of the Company's stock options and warrants
outstanding is presented below.
The following tables summarize information about stock options
outstanding at September 30, 2003.
Stock Options Under Plan
- ------------------------------------
Weighted
Average Price
Authorized Outstanding Available Per Share
---------------- --------------- ---------------- ----------------
Balance, September 29, 2000 1,682,217 1,237,141 445,076 $ 5.41
Creation of new plan 1,000,000 -- 1,000,000
Granted -- 294,500 (294,500)
Exercised (73,603) (73,603) -- 3.73
Forfeitures (186,530) (186,530) --
---------------- --------------- ----------------
Balance, September 28, 2001 2,422,084 1,271,508 1,150,576 5.66
Granted -- 117,500 (117,500)
Exercised -- -- --
Forfeitures (430,584) (543,640) 113,056
---------------- --------------- ----------------
Balance, September 30, 2002 1,991,500 845,368 1,146,132 5.08
Granted -- 30,000 (30,000)
Exercised -- -- --
Forfeitures -- (471,218) 471,218
---------------- --------------- ----------------
Balance, September 30, 2003 1,991,500 404,150 1,587,350 4.97
================ =============== ================
F-28
Options Outstanding Options Exercisable
------------------------------------------------------ ---------------------------------
Weighted
Average Weighted Weighted
Range of Remaining Average Average
Exercise Prices Number Contractual Exercise Number Exercise
Outstanding Life Prices Exercisable Prices
- ----------------- ---------------- --------------- ------------- --------------- --------------
$0.40-$2.00 120,000 3.69 $ 1.43 86,250 $ 1.24
$3.80-$3.88 28,900 2.14 3.85 27,925 3.86
$4.00-$4.69 29,000 0.47 4.24 29,000 4.24
$5.38-$5.75 15,000 1.96 5.50 12,500 5.53
$6.13-$7.25 180,000 1.73 7.06 180,000 7.06
$7.50-$8.50 31,250 1.49 7.98 31,250 7.98
---------------- ---------------
404,150 366,925
================ ===============
The following tables summarize information about warrants outstanding at
September 30, 2003.
Warrants
- --------
Weighted Average
Exercise
Shares Price Exercisable
-------------- ------------------- --------------
Outstanding at
September 29, 2000 87,925 $ 5.17 87,925
==============
Granted 375,000 3.35
--------------
Outstanding at
September 28, 2001 462,925 3.69 462,925
==============
Granted 5,000 5.00
Expired 4.76
(33,075)
--------------
Outstanding at
September 30, 2002 434,850 3.63 434,850
==============
Granted 1,296,347 1.20
Expired 5.36
(47,250)
--------------
Outstanding at
September 30, 2003 1,683,947 1.71 1,683,947
============== ==============
F-29
Warrants Outstanding and Exercisable
--------------------------------------------------------
Weighted Weighted
Average Average
Exercise Number Remaining Exercise
Prices Outstanding Contractual Life Prices
- ------------ ---------------- ------------------ -------------
$0.65 101,619 2.23 $ 0.65
$1.25 1,194,728 2.23 1.25
$1.75 175,000 0.32 1.75
$3.00 25,000 0.74 3.00
$4.00 2,600 0.65 4.00
$5.00 180,000 0.41 5.00
$6.38 5,000 1.75 6.38
----------------
1,683,947
================
19. 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 $250,000 or a
specified amount per security based on the bid price of each security
for which National is a market maker. On December 12, 2003, the Company
was advised by the NASD that, pursuant to National's pledge of its
assets as security for loans to the Company from FCC (such loans
aggregated $2,131,000 as of September 30, 2003), National was not in
compliance with its net capital requirements. Accordingly, at September
30, 2003, National reported an excess net capital deficiency of
$829,000. This compliance requirement was corrected on December 15,
2003, upon termination of the security agreement with FCC.
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 a subsidiary may dividend or advance to the Company.
20. EMPLOYEE BENEFITS
The Company's subsidiary has a defined 401(k) profit sharing plan (the
"Plan") that covers substantially all of its employees. Under the terms
of the Plan, employees can elect to defer up to 25% of eligible
compensation, subject to certain limitations, by making voluntary
contributions to the Plan. The Company's annual contributions are made
at the discretion of the Board of Directors. During the fiscal years
September 30, 2003, September 30, 2002 and September 28, 2001, the
Company made no contributions to the Plan.
F-30
21. SUBSEQUENT EVENTS
In December 2003, the Company engaged in various discussions with the
NASD relating to the Security Agreement between National and FCC, and
its effect on the computation of National's net capital. As a result of
these discussions, on December 15, 2003, the Company and FCC agreed in
principle to the following amendments to the clearing arrangement:
National's clearing deposit has been reduced from $1,000,000 to
$500,000; the excess $500,000 was paid to FCC to reduce the Company's
outstanding loan balance on its promissory note; and the Security
Agreement between National and FCC has been terminated. Furthermore,
FCC has waived payment of $375,000 that was due to be paid in January
2004. Additionally, the Company is engaged in discussions and
negotiations with FCC regarding the clearing relationship, and payment
of the remaining outstanding balance on the promissory note.
F-31
22. UNAUDITED QUARTERLY DATA
Selected Quarterly Financial Data
(Dollars in thousands, except per share data)
December March June September
31, 2001 31, 2002 30, 2002 30, 2002
--------------------------------------------------------
Revenues $ 12,287 $ 10,970 $ 9,829 $ 8,916
=======================================================
Net loss from continuing operations $ (734) $ (1,064) $ (574) $ (1,373)
Income from discontinued operations, net of tax 300 -- -- --
--------------------------------------------------------
Net loss (434) (1,064) (574) (1,373)
Preferred stock dividends (2) (48) (57) (61)
--------------------------------------------------------
Net loss attributable to common stockholders $ (436) $ (1,112) $ (631) $ (1,434)
=======================================================
Loss per common share from continuing operations $ (0.32) $ (0.50) $ (0.28) $ (0.63)
Income per share from discontinued operations 0.13 -- -- --
--------------------------------------------------------
Loss per common share $ (0.19) $ (0.50) $ (0.28) $ (0.63)
=======================================================
December March June September
31, 2002 31, 2003 30, 2003 30, 2003
--------------------------------------------------------
Revenues $ 10,593 $ 9,393 $ 15,075 $ 15,097
=======================================================
Net income (loss) $ (159) $ (591) $ 363 $ (456)
Preferred stock dividends (63) (62) (62) (63)
--------------------------------------------------------
Net income (loss) attributable
to common stockholders $ (222) $ (653) $ 301 $ (519)
=======================================================
Income (loss) per common share - Basic $ (0.08) $ (0.20) $ 0.09 $ (0.15)
=======================================================
Income (loss) per common share - Diluted $ (0.08) $ (0.20) $ 0.07 $ (0.15)
=======================================================
During the quarter ended December 31, 2001, the Company recorded a gain of
$300,000 from discontinued operations related to the previous write off of
$300,000 of net liabilities of WestAmerica Investment Group, its former
subsidiary, pursuant to the former subsidiary's Chapter VII bankruptcy filing.
F-32
23. FINANCIAL INFORMATION - OLYMPIC CASCADE FINANCIAL CORPORATION
Olympic was organized in 1996, and began operations 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.
STATEMENTS OF FINANCIAL CONDITION
ASSETS
September 30, September 30,
2003 2002
----------- -----------
Cash $ 23,000 $ 1,000
Investment in subsidiary 2,839,000 2,955,000
Other assets 214,000 329,000
----------- -----------
$ 3,076,000 $ 3,285,000
=========== ===========
LIABILITIES AND STOCKHOLDERS' DEFICIT
Accounts payable, accrued expenses
and other liabilities $ 235,000 $ 161,000
Notes payable 3,170,000 3,215,000
----------- -----------
3,405,000 3,376,000
Stockholders' deficit (329,000) (91,000)
----------- -----------
$ 3,076,000 $ 3,285,000
=========== ===========
F-33
NOTE 23 - FINANCIAL INFORMATION - OLYMPIC (CONTINUED)
STATEMENTS OF OPERATIONS
Years ended
--------------------------------------------------
September 30, September 30, September 28,
2003 2002 2001
----------- ----------- -----------
Operating expenses $ (651,000) $ (597,000) $(1,111,000)
Other income (expense)
Interest and other income -- 91,000 3,000
Loss on investment in subsidiaries (192,000) (3,239,000) (6,230,000)
----------- ----------- -----------
Net loss before income tax (843,000) (3,745,000) (7,338,000)
Discontinued operations, net of tax -- 300,000 (1,002,000)
Extraordinary item, net of tax -- -- 418,000
----------- ----------- -----------
Net loss before income tax $ (843,000) $(3,445,000) $(7,922,000)
=========== =========== ===========
STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY (DEFICIT)
Preferred Stock Common Stock Additional
------------------------- ------------------------- Paid-In
Shares Amount Shares Amount Capital Deficit Total
------------ ------------ ------------ ------------ ------------ ------------ ------------
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 employees -- -- 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
Issuance of restricted common
stock in exchange of note -- -- 38,000 -- 49,000 -- 49,000
Issuance of preferred stock 17,825 -- -- -- 1,683,000 -- 1,683,000
Issuance of preferred stock in
exchange of notes 10,000 -- -- -- 1,000,000 -- 1,000,000
Net loss -- -- -- -- -- (3,445,000) (3,445,000)
------------ ------------ ------------ ------------ ------------ ------------ ------------
BALANCE, September 30, 2002 27,825 -- 2,274,449 45,000 15,821,000 (15,957,000) (91,000)
Issuance of restricted common
stock:
From private placement -- -- 1,016,186 21,000 533,000 -- 554,000
Payment of legal fees -- -- 76,923 1,000 50,000 -- 51,000
Net loss -- -- -- -- -- (843,000) (843,000)
------------ ------------ ------------ ------------ ------------ ------------ ------------
BALANCE, September 30, 2003 27,825 $ -- 3,367,558 $ 67,000 $ 16,404,000 $(16,800,000) $ (329,000)
============ ============ ============ ============ ============ ============ ============
F-34
NOTE 23- FINANCIAL INFORMATION - OLYMPIC (CONTINUED)
STATEMENTS OF CASH FLOWS
Years ended
---------------------------------------------------------------
September 30, 2003 September 30, 2002 September 28, 2001
------------------ ------------------ ------------------
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss $ (843,000) $(3,445,000) $(7,922,000)
Adjustments to reconcile net loss to net
cash provided by (used in) operating activities
Loss on investment in subsidiaries 191,000 3,114,000 8,204,000
Gain on extraordinary item-extinguishment of debt -- -- (418,000)
Compensation related to issuance of stock options -- -- 105,000
Amortization of note discount 33,000 33,000 23,000
Forgiveness of loan (453,000) (339,000) --
Write-down of limited partnership investment 29,000 -- --
Depreciation and amortization -- 238,000 339,000
Changes in assets and liabilities 210,000 (107,000) (146,000)
----------- ----------- -----------
Net cash provided by (used in) operating activities (833,000) (506,000) 185,000
----------- ----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES
(Capital contributions to) advances from
subsidiary - net 301,000 (2,486,000) (3,072,000)
----------- ----------- -----------
Net cash provided by (used in) investing activities 301,000 (2,486,000) (3,072,000)
----------- ----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES
Exercise of stock options -- -- 275,000
Proceeds from notes payable -- 1,548,000 3,000,000
Issuance of common stock 554,000 -- 25,000
Issuance of preferred -- 1,683,000 --
Payments on capital lease -- (281,000) (340,000)
Payments on notes payable -- -- (61,000)
----------- ----------- -----------
Net cash provided by financing activities 554,000 2,950,000 2,899,000
----------- ----------- -----------
NET (DECREASE) INCREASE IN CASH 22,000 (42,000) 12,000
CASH BALANCE
Beginning of year 1,000 43,000 31,000
----------- ----------- -----------
End of year $ 23,000 $ 1,000 $ 43,000
=========== =========== ===========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION Cash paid
during the year for:
Interest $ 127,832 $ 179,454 $ 125,278
=========== =========== ===========
Income taxes $ -- $ 12,000 $ 323,000
=========== =========== ===========
SUPPLEMENTAL DISCLOSURES OF NONCASH INVESTING AND
FINANCING ACTIVITIES
Exchange of notes payable for preferred stock $ -- $ 1,000,000 $ --
=========== =========== ===========
Exchange of notes payable for common stock $ -- $ 49,000 $ --
=========== =========== ===========
Conversion of accounts payable to loan payable $ 375,000 $ -- $ --
=========== =========== ===========
Warrants issued as a discount on notes payable $ -- $ -- $ 100,000
=========== =========== ===========
Forgiveness of loan $ 453,000 $ 339,000 $ --
=========== =========== ===========
Exchange of accounts payable for common stock $ 51,000 $ -- $ --
=========== =========== ===========
F-35