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, 2002
OLYMPIC CASCADE FINANCIAL CORPORATION
(Exact Name of Registrant as specified in its charter)
DELAWARE 36-4128138
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
875 North Michigan Avenue, Suite 1560, Chicago, IL 60611
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (312) 751-8833
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Securities registered pursuant to Section 12(b) of the Act: None
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Securities registered pursuant to Section 12(g) of the Act:
Common stock $.02 par value
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(Title of class)
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
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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 No X
As of December 19, 2002, 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 $1,145,397 (calculated by excluding shares owned
beneficially by directors and officers). As of December 19, 2002 there were
3,159,865 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 ("SEC") in connection with the Company's Annual Meeting of
Shareholders to be held on March 13, 2003 (the "Company's 2003 Proxy Statement")
are incorporated by reference into Part III hereof.
1
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 Securities and Exchange
Commission 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.
(a) 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 City, as well as 56 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.
(b) 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 New York Stock
Exchange ("NYSE") member 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 Series A
Preferred Stock from the Company, which is convertible into Common Stock at a
price of $1.50 per share. The Company incurred $100,000 of legal costs related
to these capital transactions. 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).
2
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.
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 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"). Gross
proceeds of $575,520 closed in the first quarter of fiscal year 2003, and the
Company correspondingly issued 885,416 shares of Common Stock and 885,416
Warrants. The maximum amount to be raised in the Private Offering is $2.0
million (3,076,924 shares of Common Stock and 3,076,924 Warrants). The Company
has agreed to file a Registration Statement 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, on or before March 3, 2003, and use its
commercially reasonable efforts to cause such registration statement to become
effective as promptly as possible and to maintain the effectiveness of such
registration. National is acting as the placement agent on a best efforts basis
for 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 that the Company also contributed 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. Borrowings 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 2002.
3
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 required to be maintained
by the Company 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. 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 is due to be
repaid in January 2004. Additionally, First Clearing has waived the
stockholders' equity covenant as of September 30, 2002 and December 31, 2002.
The minimum level of stockholders' equity required to be maintained will be
$500,000 as of March 31, 2003 and $1,000,000 as of June 30, 2003.
(c) Financial Information about Industry Segments
For a more detailed analysis of our results by segment see Item 7, "Management
Discussion and Analysis of Financial Condition and Results of Operation."
(d) 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 Securities and Exchange
Commission ("SEC") and 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.
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, and subject to applicable
NASD customer suitability standards. Most investment executives perform
fundamental (as opposed to technical) analysis. Solicitations may be by
telephone, seminars or newsletters. Investment executives may request trading to
acquire an inventory position to facilitate sales to customers (subject to the
investment executive's own risk). Supervisory personnel review trading activity
from inventory positions to ensure compliance with applicable standards of
conduct.
4
Salespersons in the brokerage industry are traditionally compensated on the
basis of set percentages of total commissions and mark-ups generated. Most
brokerage firms bear substantially all of the costs of maintaining their sales
forces, including providing office space, sales assistants, telephone service
and supplies. The average commission paid to the salespersons in the brokerage
industry generally ranges from 30% to 50% of total commissions generated.
Since National requires most of its investment executives to absorb their own
overhead and expenses, it is able to pay an average of approximately 65% of net
commissions and mark-ups generated by investment executives. 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 self-clearing to clearing with First Clearing, the Company has scaled back
its employee staff. As of September 30, 2002, the Company had approximately 113
employees and 269 independent contractors. Of these totals, approximately 335
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
which would have a significant effect on the Company's ability to recruit and
retain investment executives, or on the Company's current operations and
financial results of operations. No employees are covered by collective
bargaining agreements, and the Company believes its relations are good with both
its employees and independent contractors.
The Company's business plan includes the growth of its retail and institutional
brokerage business. In response to the slowdown in the financial markets, the
Company has scaled back certain business activities, including: proprietary
trading, market-making trading, and online investing services. Management
believes that consolidation within the industry is inevitable. Concerns
attributable to the weakened market and increased competition help explain the
increasing number of acquisition opportunities continuously introduced to the
Company. The Company is focused on maximizing the profitability of its existing
operations, while it continues to seek additional selective strategic
acquisitions.
In the fiscal year 2001, National cleared approximately 60% of its own
securities transactions and posted its books and records daily, with the
remaining 40% of the transactions clearing through Bear Stearns Securities
Corporation, US Clearing Corporation and Pershing. In August 2001, the Company
entered into an agreement with First Clearing, 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, enables
National to consolidate its existing clearing operations and reduces fixed
overhead associated with its self-clearing activities.
5
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 New York Stock Exchange, Inc. 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 the section below entitled,
"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 a 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 unregistered 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 Mr. Rothstein.
(e) 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.
6
(f) 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.
In October 2000, the Company opened a significant branch office of National in
New York City. This office specializes in broker-to-broker fixed income
transactions and equity market making activities. At National, a staff of 10
traders and 2 assistants in its New York, Seattle and Spokane 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
2002, National makes markets in approximately 300 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
agent and charges commissions that the Company believes are competitive, based
on the services the Company provides to its customers. The Company may receive
rebates for the order flow of the securities for which it does not make a
market.
(g) Online trading
In May 2001, the Company closed the operations of NSCdirect (a division of
National), that provided online investing services for its customers. NSCdirect
began trading in April 2000 and was serviced out of Seattle, Washington. The
heavily competitive online trading marketplace coupled with the expenses of
running such division proved to be an unprofitable business for the Company. By
discontinuing its operation the Company was better able to direct its resources
to other ventures.
7
(h) Supervision
The Securities Exchange Act of 1934, as amended, and the NASD Conduct Rules
require the Company's subsidiaries to supervise the activities of its investment
executives. As part of providing such supervision, National maintains an
Operations and Procedures Manual. Compliance personnel conduct inspections of
branch offices no less frequently than annually to review compliance with the
Company's procedures. A registered principal provides continuous supervision at
each of the Company's larger offices. The other offices (averaging two
investment executives per office) are not required by NASD rules to have a
registered principal on site and are therefore supervised by registered
principals of the subsidiary. Compliance reviews each customer trade to ensure
compliance with the NASD Conduct Rules including mark-up guidelines.
In May 2001, without admitting or denying the alleged violations, National
accepted and consented to the entry of the following findings by NASD
Regulation: At various times in 1999 and 2000, the firm violated NASD Conduct
Rules 2860(b)(5); Rule 3360; Rule 3370; Rule 2110 and 3010; and SEC Rule
11Ac1-4. The firm was censured and fined $35,000 in a settlement dated May 21,
2001.
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.
(i) Venture Capital
In March 2001, the Company had its initial closing of Robotic Ventures Fund I,
L.P., a venture capital fund dedicated to investing in companies engaged in the
business of robotics and artificial intelligence. The fund raised a total of
$5.2 million, $265,000 of which was capital directly invested by the Company
into the fund. The Company serves as the managing member of Robotic Ventures
Group LLC, the general partner of the fund. As the managing member of the fund's
general partner, the Company is entitled to the 2% management fee paid by the
fund. Additionally, the Company owns 24.5% of the fund's general partner, which
is entitled to 20% of the profits generated by the fund after the investors
receive the return of their invested capital. 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.
8
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.
The Company has reported losses of approximately $3.4 million in fiscal year
2002 and losses of approximately $7.9 million in fiscal year 2001. There is no
assurance that the Company will be profitable in the near term. The Company's
losses are primarily attributable to the recent market slow-down and volatility.
The Company anticipates that with increased revenues it will return to
profitability; however, there can be no assurance that revenues will increase
and profitability will return.
In order for the Company to have the opportunity for future success and
profitability, it must successfully 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, including, without
limitation, the sale of the maximum amount pursuant to the Private Offering,
will cause the dilution of shares held by current shareholders.
Changing economic, political and market conditions may result in decreased
revenues and may increase the Company's cost of doing business.
The securities industry is subject to a variety of uncertainties, including:
declines in price level and volume of transactions; losses resulting from the
trading or underwriting of securities; volatility of domestic and international
financial, bond and stock markets, as demonstrated by recent disruptions in the
financial markets; extensive government regulation; litigation; intense
competition; and the failure of third parties to meet commitments. Other items
affecting the securities industry include increased consolidation, increased use
of technology, increased use of discount and online electronic brokerage
services, and increased regulation. These items in particular could result in
the Company facing increased competition from larger broker-dealers, a need for
increased investment in technology, or potential loss of customers or reduction
in commission income. There can be no assurance that these trends or future
changes will not have a material adverse effect on the Company's business,
financial condition, results of operations or cash flows.
9
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 AMEX. The AMEX has certain
guidelines under which it considers removing securities from listing on the
AMEX. The Company cannot provide any assurance that its Common Stock will remain
listed on AMEX or that it will not be delisted at some later time. In the event
of a delisting of the Common Stock from the AMEX, you may find it more difficult
to trade in the Common Stock or to obtain accurate, current information
concerning market prices for the Common Stock.
10
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 termination of the agreements with
these clearing brokers could disrupt the Company's business.
The Company recently changed from a self-clearing system to using 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 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
terminated for any reason, the Company would be forced to find alternative
clearing firms. The Company cannot assure you that it 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.
11
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
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, as well as
its ability to hire additional members of management, and to retain and motivate
the Company's other officers and key employees. 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.
12
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 through its subsidiary
the Company leases office space in Chicago, New York, Milwaukee, Wisconsin,
Seattle and Spokane, Washington and Los Angeles, California. The branch offices
that are operated by independent contractors are leased by those contractors.
Leases expire at various times through September 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). These actions were initially commenced on February 25, 1999
and are the subject of a consolidated amended complaint dated March
15, 2000. As to National, the consolidated complaint alleges
violations of Section 11 of the Securities Act of 1933, 15 U.S.C.ss.
77k, in connection with National's role as underwriter in a June
1996 securities offering for Complete Management, and in
connection with National's role as a co-underwriter in a December
1996 securities offering for Complete Management. Plaintiffs
allege that the registration statements and prospectuses filed in
connection with the securities offerings in June and December 1996
contained false and misleading statements or omitted facts necessary to
make statements not misleading.
On or about June 2, 2000, National, along with the other defendants,
moved to dismiss the action on the grounds that plaintiffs' complaint
is defective, that plaintiffs are barred by the statute of limitations,
and plaintiffs are unable to establish their claims as a matter of law.
On March 30, 2001, the court denied defendants' various motions to
dismiss. On May 17, 2001, National submitted its answer to the
complaint in which it set forth its defenses, including, among others,
that much of the class cannot trace their stock to offerings in which
National was involved and that National conducted appropriate due
diligence.
13
After an initial round of document disclosure, on or about November 28,
2001, plaintiffs filed a motion to certify the class. Plaintiffs
thereafter withdrew their motion and the case was referred to
mediation. The mediation process is moving toward a global settlement
of the matter. Should the matter not be settled, the Company will
pursue its defenses.
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. The Amended Complaint alleges
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. 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. No specific amount of damages has
been sought against the Company in the complaint.
In November 2002, National filed a demurrer seeking a dismissal of the
Fastpoint action. No decision has been rendered. 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.
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 $575,000 in damages. 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.
The Company is a defendant in various other arbitrations and administrative
proceedings, lawsuits and claims, which in the aggregate seek general and
punitive damages approximating $4.2 million. These matters arise out of the
normal course of business.
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, 2002.
Item 4(A)- EXECUTIVE OFFICERS OF REGISTRANT
The following sets forth the names, ages and positions of all executive officers
of the Company as of December 19, 2002:
Steven B. Sands 43 Co-Chairman
Martin S. Sands 41 Co-Chairman
Mark A. Goldwasser 44 President and Chief Executive Officer
Chairman and Chief Executive Officer of
National
14
Robert H. Daskal 61 Acting Chief Financial Officer and
Acting Secretary
Michael A. Bresner 58 President of National
PART II
Item 5 - MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED
STOCKHOLDER MATTERS
The Company's common stock trades on The American Stock Exchange and the Chicago
Stock Exchange. The Company's common stock trades using the symbol OLY. As of
September 30, 2002, the Company had approximately 1,000 shareholders, including
those shareholders holding stock in street name and trust accounts.
Delaware law authorizes the Board of Directors to declare and pay dividends with
respect to the Company's common stock either out of its surplus (as defined in
the Delaware Corporation Law) or, in case there is no such surplus, out of its
net profits for the fiscal year in which the dividend is declared and/or the
preceding fiscal year; provided, however, that no dividend may be paid out of
net profits unless the Company's capital exceeds the aggregate amount
represented by the issued and outstanding stock of all classes having a
preference in the distribution of assets. Prior to the issuance of the preferred
stock in the Investment Transaction, no shareholder held preferential rights in
liquidation. The Company has never declared a cash dividend and does not
presently foresee declaring one in the coming fiscal year.
High and low closing bid quotations from September 30, 2000 to September 30,
2002 have been obtained from The American Stock Exchange. The range of market
prices for each quarter of fiscal years ended September 28, 2001 and September
30, 2002 are as follows:
Period High Low
September 30, 2000/December 31, 2000 $5.875 $2.6875
January 1, 2001/March 31, 2001 $4.875 $3.0625
April 1, 2001/June 30, 2001 $3.38 $2.50
July 1, 2001/September 28, 2001 $5.20 $2.00
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
The closing bid price of the Company's common stock on December 19, 2002, as
reported on The American Stock Exchange, was $0.45 per share.
15
Item 6 - SELECTED FINANCIAL DATA
Set forth below is the historical financial data with respect to the Company for
the fiscal years ended 2002, 2001, 2000, 1999 and 1998. 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, 1999 and 1998 have been restated to reflect
the discontinued operations of the Company's subsidiary, WestAmerica. All
information is expressed in thousands of dollars except per share information.
Fiscal Year
---------------------------------------------------------------------------------
2002 2001 2000 1999 1998
---------------------------------------------------------------------------------
Net revenues $ 42,002 $ 50,224 $ 56,213 $ 39,477 $ 44,782
Net income (loss) from continuing
operations before extraordinary items (3,745) (7,338) 1,356 8 (4,686)
Net income (loss) per common share (1.66) (3.33) 0.64 0.01 (3.13)
Total assets 7,948 77,599 92,696 86,113 72,566
Long-term obligations 3,969 3,000 608 2,150 2,770
Stockholders' equity (91) 622 8,039 4,039 2,948
Cash dividends - - - - -
REMAINDER OF PAGE INTENTIONALLY LEFT BLANK
16
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 Securities and Exchange Commission (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 year 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 - Certain revenues classified as net dealer
inventory gains and other revenues in prior years have been reclassified as
commission revenues to conform with the presentation used in the September 30,
2002 financial statements.
The results discussed below have been restated to reflect a discontinuation of
operations for the Company's subsidiary, WestAmerica.
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
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.
17
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 due mainly to the weaker overall securities market compared with the
securities market during fiscal year 2001. 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. The decrease is due to
the continual slumping securities markets and decreased trading volume, as well
as a reduction in the Company's market making activities.
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 2002 to 2001.
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 FCC 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 2002. The decrease in total expenses is a result of management's
efforts to streamline its operations and reduce costs. During fiscal year 2002,
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. 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.
18
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. 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
$1.66 per share, as compared to the diluted loss from continuing operations of
$3.33 per share in fiscal year 2001.
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. During fiscal year 2001, West America had total revenues of
$2,155,000, and a net loss of $1,002,000.
19
Fiscal Year 2001 Compared with Fiscal Year 2000
The Company's fiscal year 2001 resulted in a decrease in revenues and an overall
net loss compared with net income in the same period of fiscal year 2000. The
decrease in revenues is due to the continued slumping securities markets, which
significantly affected commission revenues. As a result, the Company reported a
net loss from continuing operations before extraordinary item of $7,338,000
compared with net income from continuing operations of $1,356,000 for fiscal
year 2000.
Revenues from continuing operations decreased $5,989,000, or 11%, in fiscal year
2001 to $50,224,000 from $56,213,000 in fiscal year 2000. This decrease is due
mainly to the weaker overall securities market compared with the securities
market during fiscal year 2000. The percentage mix of commission revenue and net
dealer inventory gains changed, mainly due to National's New York office, which
focuses on principal mark-ups and mark-downs as well as agency trading of fixed
income products, OTC and listed equities to various institutional clients,
proprietary trading and market-making activities.
Commission revenue decreased $5,283,000, or 16%, to $28,652,000 from $33,935,000
during fiscal year 2001 compared with fiscal year 2000. The decrease in revenues
is due to the continued slumping securities markets.
Net dealer inventory gains, which includes profits on proprietary trading,
market making activities and customer mark-ups and mark downs, increased
$2,438,000, or 25%, to $12,061,000 from $9,623,000 during fiscal year 2001
compared with fiscal year 2000. The increase in net dealer inventory gains is a
result of the Company's opening a branch in New York City to expand its market
making efforts.
Investment banking revenue decreased $1,318,000, or 56%, to $1,020,000 from
$2,338,000 in fiscal year 2001 compared with fiscal year 2000. The Company did
not manage a public underwriting in fiscal years 2001 or 2000. The decrease in
revenues is attributed to a general slow-down in the broader capital markets.
During fiscal years 2001 and 2000, investment banking revenue was generated
primarily from the completion of private placement transactions and advisory
fees.
Other revenue, consisting of asset management fees and miscellaneous transaction
fees and trading fees, increased $34,000, or 2%, to $1,649,000 from $1,615,000
during fiscal year 2001 compared to fiscal year 2000. The increase in other
revenue was due mainly to an increase in fee based accounts at National.
Although total revenues decreased 11%, total expenses increased by $3,120,000,
or 6%, to $57,644,000 in fiscal year 2001 from $54,524,000 in fiscal year 2000.
Commission expense decreased $4,841,000, or 15%, to $28,448,000 in fiscal year
2001 from $33,289,000 in fiscal year 2000 due to the decrease in commission
revenue from which commission expense is paid. Employee compensation expense
increased $2,379,000, or 37%, to $8,726,000 in fiscal year 2001 from $6,347,000
in fiscal year 2000. The increase in employee compensation is a result of the
expansion into principal and agency transactions at National's New York office.
In April 2001, management took a 10% reduction in salaries. In July 2001,
management further reduced salaries by 10%. In October 2001, all management
salaries were temporarily reduced to $75,000. Overall, combined commissions and
employee compensation as a percentage of revenue increased slightly to 74% from
71% in fiscal years 2001 and 2000, respectively.
20
As expected, based on the expansion in New York, expenses relating to occupancy,
communications, and other all increased. Occupancy expense, consisting mainly of
rent, office supplies and depreciation increased $1,148,000, or 35%, to
$4,415,000 from $3,267,000. Communications expense increased $2,230,000 to
$3,340,000 or 201% from $1,110,000. Other expenses increased $151,000 or 7% to
$2,344,000 in 2001 from $2,193,000 in 2000.
Taxes, licenses and registration decreased $35,000, or 4%, to $763,000 from
$798,000. Professional fees increased $569,000, or 41%, to $1,945,000 from
$1,376,000.
Interest expense decreased $1,359,000, or 29%, to $3,361,000 from $4,720,000. A
decrease in customer deposits on which the Company pays interest, coupled with a
decrease in interest rates during fiscal 2001, account for the decrease in
interest expense. The 29% decrease in interest expense correlates directly to
the interest income from customer margin debt, which decreased $1,688,000, or
23%, during the same period from $7,438,000 in fiscal year 2000 to $5,750,000 in
fiscal year 2001.
Overall, diluted losses from continuing operations were $3.33 per share as
compared to diluted earnings from continuing operations of $.64 per share for
fiscal years 2001 and 2000, respectively.
Results of Discontinued Operations
Fiscal Year 2001 Compared with Fiscal Year 2000
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.
WestAmerica's fiscal year 2001 resulted in a decrease in revenues and an overall
net loss compared with net income in the same period of fiscal year 2000. Total
revenues decreased $2,441,000, or 53%, to $2,155,000 in fiscal year 2001 from
$4,596,000 in fiscal year 2000. The decrease in revenues is due to the continued
slumping securities markets, which significantly affected commission revenues.
As a result of the operating losses and losses from arbitrations, WestAmerica
reported a net loss of $1,002,000 in fiscal year 2001 compared with net income
of $200,000 for fiscal year 2000.
21
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, these assets
were financed primarily by National's interest bearing and non-interest bearing
customer credit balances, other payables and equity capital. 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. Until January 2001, National had a $3,000,000 revolving
secured credit facility with Bank of America. In January 2001, National entered
into a $5,000,000 secured line of credit with American National Bank and Trust
Company of Chicago, that was guaranteed by the Company. The line of credit was
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
greater of $250,000 or a specified amount per security based on the bid price of
each security for which the Company is a market maker. At September 30, 2002,
National's net capital exceeded the requirement by $1,050,000.
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 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 is
continuing to seek additional investments.
22
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"). Gross
proceeds of $575,520 closed in the first quarter of fiscal year 2003, and the
Company correspondingly issued 885,416 shares of Common Stock and 885,416
Warrants. The maximum amount to be raised in the Private Offering is $2.0
million (3,076,924 shares of Common Stock and 3,076,924 Warrants). The Company
has agreed to file a Registration Statement 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, on or before March 3, 2003, and use its
commercially reasonable efforts to cause such registration statement to become
effective as promptly as possible and to maintain the effectiveness of such
registration. National is acting as the placement agent on a best efforts basis
for 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. 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 then outstanding divided by the remaining life of the note.
Borrowings 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 2002.
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 required to be maintained by the Company 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 is due to be
repaid in January 2004. Additionally, First Clearing has waived the
stockholders' equity covenant as of September 30, 2002 and December 31, 2002.
The minimum level of stockholders' equity required to be maintained will be
$500,000 as of March 31, 2003 and $1,000,000 as of June 30, 2003.
23
The Company believes that given the improved market conditions experienced
during the first quarter of fiscal year 2003, the continuation of such improved
market conditions, and the proceeds and expected proceeds from its
capital-raising activities, funds will be sufficient to maintain its current
level of business activities during fiscal year 2003. 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.
As of the fiscal year ended September 30, 2002, total assets were $7.9 million
compared to total assets of $77.6 million as of the fiscal year September 28,
2001. This material decrease in the Company's assets in fiscal year 2002 is due
to the change in the Company's clearing arrangements. Customer assets that were
included in the fiscal year 2001 balance sheet are no longer accounted for on
the Company's books. These assets are now held at First Clearing as part of the
clearing arrangement.
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 April 2002, the FASB issued SFAS No. 145, "Rescission of FASB Statement
No. 4, 44 and 64, Amendment of FASB Statement No. 13, and Technical
Corrections." The rescission of SFAS No. 4, "Reporting Gains and Losses
from Extinguishments," and SFAS No. 64, "Extinguishments of Debt made to
Satisfy Sinking Fund Requirements," which amended SFAS No. 4 will affect
income statement classification of gains and losses from extinguishment of
debt. SFAS No. 4 requires that gains and losses from extinguishment of debt
be classified as an extraordinary item, if material. Under SFAS No. 145,
extinguishment of debt is now considered a risk management strategy by
the reporting enterprise and the FASB does not believe it should be considered
extraordinary under the criteria in APB Opinion No. 30, "Reporting the Results
of Operations-Reporting the Effects of Disposal of a Segment of a Business,
and Extraordinary, Unusual and Infrequently Occurring Events and
Transactions," unless the debt extinguishment meets the unusual in nature and
infrequency of occurrence criteria in APB Opinion No. 30. SFAS No. 145 will
be effective for fiscal years beginning after May 15, 2002. Upon
adoption, extinguishments of debt shall be classified under the criteria in
APB Opinion No. 30.
24
In June 2002, the FASB issued SFAS No. 146, "Accounting for Costs Associated
with Exit or Disposal Activities." SFAS No. 146 addresses financial accounting
and reporting for costs associated with exit or disposal activities and
nullified Emerging Issues Task Force Issue No. 94-3, "Liability Recognition for
Certain Employee Termination Benefits and Other Costs to Exit an Activity
(including Certain Costs Incurred in a Restructuring)." SFAS No. 146 requires
that a liability for a cost associated with an exit or disposal activity be
recognized when the liability is incurred. A fundamental conclusion reached by
the FASB in this statement is that an entity's commitment to a plan, by itself,
does not create a present obligation to others that meets the definition of a
liability. SFAS No. 146 also establishes that fair value is the objective for
initial measurement of the liability. The provisions of this statement are
effective for exit or disposal activities that are initiated after December 31,
2002, with early application encouraged. The Company has not yet determined the
impact of SFAS No.146 on its financial position and results of operations, if
any.
ITEM 7A - QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company's primary market risk arises from the fact that it engages in
proprietary trading and makes dealer markets in equity securities. Accordingly,
the Company may be required to maintain certain amounts of inventories in order
to facilitate customer order flow. The Company may incur losses as a result of
price movements in these inventories due to changes in interest rates, foreign
exchange rates, equity prices and other political factors. The Company is not
subject to direct market risk due to changes in foreign exchange rates. However,
the Company is subject to market risk as a result of changes in interest rates
and equity prices, which are affected by global economic conditions. The Company
manages its exposure to market risk by limiting its net long or short positions.
Trading and inventory accounts are monitored daily by management and the Company
has instituted position limits.
Credit risk represents the amount of accounting loss the Company could incur if
counterparties to its proprietary transactions fail to perform and the value of
any collateral proves inadequate. Although credit risk relating to various
financing activities is reduced by the industry practice of obtaining and
maintaining collateral, the Company maintains more stringent requirements to
further reduce its exposure. The Company monitors its exposure to counterparty
risk on a daily basis by using credit exposure information and monitoring
collateral values. The Company maintains a credit committee, which reviews
margin requirements for large or concentrated accounts and sets higher
requirements or requires a reduction of either the level of margin debt or
investment in high-risk securities or, in some cases, requiring the transfer of
the account to another broker-dealer.
The Company monitors its market and credit risks daily through internal control
procedures designed to identify and evaluate the various risks to which the
Company is exposed. There can be no assurance, however, that the Company's risk
management procedures and internal controls will prevent losses from occurring
as a result of such risks.
25
The following table shows the quoted market values of the Company's securities
owned ("long"), securities sold but not yet purchased ("short") and net
positions as of September 30, 2002:
Long Short Net
---------- ---------- --------------
Corporate Stocks $576,000 $29,000 $547,000 (long)
Government Obligations $30,000 $76,000 $46,000 (short)
Item 8 - FINANCIAL STATEMENTS
See Part IV, Item 15(a)(1) for a list of financial statements filed as part of
this Report.
REMAINDER OF PAGE INTENTIONALLY LEFT BLANK
26
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-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 Subsidiaries as of
September 28, 2001 and the related consolidated statements of operations,
changes in stockholders' equity, and cash flows for the years ended
September 28, 2001 and September 29, 2000. These consolidated financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based
on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States of America. Those standards require that we
plan and perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures
in the financial statements. An audit also includes assessing the
accounting principles used and significant estimates made by management, as
well as evaluating the overall financial statement presentation. We believe
that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of Olympic
Cascade Financial Corporation and Subsidiaries as of September 28, 2001,
and the consolidated results of their operations and their cash flows for
the years ended September 28, 2001 and September 29, 2000 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-2
OLYMPIC CASCADE FINANCIAL CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
ASSETS
September 30, September 28,
2002 2001
-------------- ----------------
CASH, subject to immediate withdrawal $ 325,000 $ 260,000
CASH, restricted 309,000 325,000
CASH, CASH EQUIVALENTS AND SECURITIES - 37,188,000
DEPOSITS 1,489,000 4,654,000
RECEIVABLES
Customers - 29,755,000
Broker-dealers and clearing organizations 1,269,000 669,000
Other, net of reserve for uncollectible accounts of $209,000 1,155,000 349,000
ADVANCES TO REGISTERED REPRESENTATIVES 799,000 487,000
SECURITIES HELD FOR RESALE, at market 606,000 1,131,000
FIXED ASSETS, net 369,000 841,000
OTHER ASSETS 1,627,000 1,940,000
-------------- ----------------
$ 7,948,000 $ 77,599,000
============== ================
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
BANK OVERDRAFT $ 408,000 $ 1,556,000
BANK LINE OF CREDIT - 3,500,000
PAYABLES
Customers - 54,511,000
Broker-dealers and clearing organizations 490,000 10,020,000
SECURITIES SOLD, BUT NOT YET PURCHASED, at market 105,000 792,000
ACCOUNTS PAYABLE, ACCRUED EXPENSES AND OTHER LIABILITIES 2,821,000 1,963,000
CAPITAL LEASE PAYABLE - 300,000
NOTE PAYABLE - RELATED PARTY 1,000,000 1,000,000
NOTES PAYABLE 3,215,000 3,035,000
NET LIABILITIES FROM DISCONTINUED OPERATIONS - 300,000
-------------- ----------------
8,039,000 76,977,000
-------------- ----------------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY (DEFICIT)
Preferred stock, $.01 par value, 100,000 shares authorized, 27,825
issued and outstanding in 2002 - -
Common stock, $.02 par value, 60,000,000 shares authorized, 2,274,449
and 2,236,449 issued and outstanding, respectively 45,000 45,000
Additional paid-in capital 12,045,000 9,313,000
Deficit (12,181,000) (8,736,000)
-------------- ----------------
(91,000) 622,000
-------------- ----------------
$ 7,948,000 $ 77,599,000
============== ================
See notes to consolidated financial statements.
F-3
OLYMPIC CASCADE FINANCIAL CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
Years Ended
------------------------------------------------------------------
September 30, 2002 September 28, 2001 September 29, 2000
------------------- ------------------- --------------------
REVENUES
Commissions $ 28,168,000 $ 28,652,000 $ 33,935,000
Net dealer inventory gains 10,242,000 12,061,000 9,623,000
Investment banking revenue 253,000 1,020,000 2,338,000
Interest and dividends 1,640,000 5,750,000 7,438,000
Transfer fees and clearance services 1,343,000 1,092,000 1,264,000
Other 356,000 1,649,000 1,615,000
------------------- ------------------- --------------------
42,002,000 50,224,000 56,213,000
------------------- ------------------- --------------------
EXPENSES
Commissions 26,353,000 28,448,000 33,289,000
Employee compensation and related expenses 5,091,000 8,726,000 6,347,000
Occupancy and equipment costs 3,513,000 4,415,000 3,267,000
Interest 511,000 3,361,000 4,720,000
Clearance fees 4,241,000 4,302,000 1,424,000
Communications 2,866,000 3,340,000 1,110,000
Taxes, licenses, registration 411,000 763,000 798,000
Professional fees 1,093,000 1,945,000 1,376,000
Other 1,748,000 2,344,000 2,193,000
------------------- ------------------- --------------------
45,827,000 57,644,000 54,524,000
------------------- ------------------- --------------------
Income (loss) from continuing operations before
income taxes and extraordinary item (3,825,000) (7,420,000) 1,689,000
Income tax (expense) benefit 80,000 82,000 (333,000)
------------------- ------------------- --------------------
Income (loss) from continuing operations before
extraordinary item (3,745,000) (7,338,000) 1,356,000
------------------- ------------------- --------------------
Income (loss) from discontinued operations, net
of tax 300,000 (1,002,000) 200,000
Income from extraordinary item- gain from
extinguishment of debt, net of taxes - 418,000 -
------------------- ------------------- --------------------
NET INCOME (LOSS) $ (3,445,000) $ (7,922,000) $ 1,556,000
=================== =================== ====================
INCOME (LOSS) PER COMMON SHARE
Basic:
Income (loss) from continuing operations $ (1.66) $ (3.33) $ 0.70
Income (loss) from discontinued operations 0.13 (0.45) 0.10
Extraordinary gain - 0.19 -
------------------- ------------------- --------------------
Net income (loss) $ (1.53) $ (3.59) $ 0.80
=================== =================== ====================
Diluted:
Income (loss) from continuing operations $ (1.66) $ (3.33) $ 0.64
Income (loss) from discontinued operations 0.13 (0.45) 0.09
Extraordinary gain - 0.19 -
------------------- ------------------- --------------------
Net income (loss) $ (1.53) $ (3.59) $ 0.73
=================== =================== ====================
Weighted average number of shares outstanding:
Basic 2,255,449 2,207,101 1,947,572
=================== =================== ====================
Diluted 2,255,449 2,207,101 2,124,751
=================== =================== ====================
See notes to consolidated financial statements.
F-4
OLYMPIC CASCADE FINANCIAL CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY (DEFICIT)
SEPTEMBER 30, 2002, SEPTEMBER 28, 2001 AND SEPTEMBER 29, 2000
Preferred Stock Common Stock Additional
----------------------- ---------------------- Paid-In
Shares Amount Shares Amount Capital Deficit Total
----------- ---------- ---------- ---------- ----------- ------------ ----------
BALANCE, September 24, 1999 - $ - 1,694,595 $ 34,000 $ 6,375,000 $ (2,370,000) $ 4,039,000
Exercise of stock options - - 144,063 3,000 744,000 - 747,000
Exercise of stock warrants - - 315,188 6,000 1,589,000 - 1,595,000
Options issued to consultants - - - - 82,000 - 82,000
Warrants issued in connection
with acquisition - - - - 20,000 - 20,000
Net income - - - - - 1,556,000 1,556,000
----------- ---------- ---------- ---------- ----------- ----------- ----------
BALANCE, September 29, 2000 - - 2,153,846 43,000 8,810,000 (814,000) 8,039,000
Exercise of stock options - - 73,603 2,000 273,000 - 275,000
Options issued to consultants - - - - 105,000 - 105,000
Issuance of restricted 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 restricted preferred
stock 17,825 - - - 1,683,000 - 1,683,000
Issuance of restricted 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)
=========== ========== ========== ========== =========== =========== ==========
See notes to consolidated financial statements.
F-5
OLYMPIC CASCADE FINANCIAL CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years Ended
---------------------------------------------------------------
September 30, 2002 September 28, 2001 September 29, 2000
--------------------- ------------------- ------------------
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss) $ (3,445,000) $ (7,922,000) $ 1,556,000
Adjustments to reconcile net income (loss) to net
cash provided by (used in) operating activities
Depreciation and amortization 566,000 632,000 498,000
Compensation related to issuance of stock options - 105,000 82,000
Deferred income tax benefit - 50,000 (76,000)
Gain on extraordinary item-extinguishment of debt - (418,000) -
Change in net assets (liabilities) of discontinued
operations (300,000) 817,000 (188,000)
Changes in assets and liabilities
Cash, cash equivalents and securities 37,188,000 (7,671,000) 11,899,000
Restricted cash 16,000 (325,000) -
Deposits 3,165,000 (2,862,000) (113,000)
Receivables 28,037,000 25,079,000 (14,983,000)
Income taxes receivable (payable) - (258,000) 258,000
Securities held for resale 525,000 (758,000) (75,000)
Other assets 313,000 (1,689,000) 120,000
Payables (63,183,000) (15,963,000) 4,857,000
Securities sold, but not yet purchased (687,000) 600,000 53,000
------------------ ------------------ ------------------
Net cash provided by (used in) operating activities 2,195,000 (10,583,000) 3,888,000
------------------ ------------------ ------------------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of fixed assets (94,000) (806,000) (413,000)
Purchase of goodwill - - (30,000)
------------------ ------------------ ------------------
Net cash used in investing activities (94,000) (806,000) (443,000)
------------------ ------------------ ------------------
CASH FLOWS FROM FINANCING ACTIVITIES
Borrowings (payments) on line of credit (3,500,000) 3,500,000 (2,100,000)
Proceeds from notes payable 1,548,000 4,000,000 -
Repayment of notes payable (319,000) (61,000) (1,034,000)
Payments on capital lease (300,000) (340,000) (340,000)
Issuance of restricted stock - 25,000 -
Increase (decrease) in cash overdraft (1,148,000) 1,556,000 -
Net proceeds from issuance of preferred stock 1,683,000 - -
Exercise of stock options - 275,000 744,000
Exercise of stock warrants - - 1,595,000
------------------ ------------------ ------------------
Net cash provided by (used in) financing activities (2,036,000) 8,955,000 (1,135,000)
------------------ ------------------ ------------------
NET INCREASE (DECREASE) IN CASH 65,000 (2,434,000) 2,310,000
CASH BALANCE
Beginning of the year 260,000 2,694,000 384,000
------------------ ------------------ ------------------
End of the year $ 325,000 $ 260,000 $ 2,694,000
================== ================== ==================
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash paid during the year for
Interest $ 535,000 $ 3,317,000 $ 4,714,000
================== ================== ==================
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 $ - $ -
================== ================== ==================
Warrants issued as a discount on notes payable $ - $ 100,000 $ -
================== ================== ==================
Warrants issued as part of acquisition $ - $ - $ 20,000
================== ================== ==================
F-6
OLYMPIC CASCADE FINANCIAL CORPORATION
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2002, SEPTEMBER 28, 2001 AND SEPTEMBER 29, 2000
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.
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.
b. Estimates - The preparation of the financial statements in
conformity with accounting principles generally accepted
in the United States requires management to make estimates
and assumptions that affect the reported amounts of assets
and liabilities, disclosure of contingent assets and
liabilities at the date of the financial statements, and
the reporting amounts of revenues and expenses during the
reporting period. Actual results could differ from those
estimates.
F-7
c. Accounting Method - Customer security transactions and the
related commission income and expense are recorded as of
the trade date.
d. Fixed Assets - Fixed assets are recorded at cost.
Depreciation is calculated using the straight-line method
based on the estimated useful life of the related assets,
which range from three to five years. 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 currently.
e. Fiscal Year - During the year, 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. Cash and Cash Equivalents - For purposes of the statement
of cash flows, the Company defines cash as cash subject to
immediate withdrawal.
g. Income Taxes - The Company recognizes deferred tax assets
and liabilities based on the difference between the
financial statements carrying amounts and the tax basis of
assets and liabilities, using the effective tax rates in
the years in which the differences are expected to
reverse. A valuation allowance related to deferred tax
assets is also recorded when it is probable that some or
all of the deferred tax asset will not be realized.
h. Fair Value of Financial Instruments - 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. Earnings (Loss) per Share - Basic earnings (loss) per
common share is based upon the net income (loss) for the
year divided by the weighted average number of common
shares outstanding during the year. Dilute