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 29, 2000 ----------
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
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
---------------------------
(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.
YES X No
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As of December 11, 2000, 1,622,531 shares of the Company's common stock were
held by non-affiliates, having an aggregate market value of $6,490,124. The
number of common shares outstanding as of December 11, 2000 was 2,163,846.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Company's Proxy Statement filed with the Securities and Exchange
Commission ("SEC") in connection with the Company's Annual Meeting of
Shareholders to be held on March 12, 2001 (the "Company's 2001 Proxy Statement")
are incorporated by reference into Part III hereof.
PART I
ITEM 1 - BUSINESS
(A) GENERAL
EXCEPT FOR HISTORICAL INFORMATION CONTAINED HEREIN, THIS REPORT CONTAINS CERTAIN
FORWARD-LOOKING INFORMATION THAT INVOLVES RISKS AND UNCERTAINTIES THAT COULD
CAUSE RESULTS TO DIFFER MATERIALLY, INCLUDING CHANGING MARKET CONDITIONS AND
OTHER RISKS DETAILED IN THIS ANNUAL REPORT ON FORM 10-K AND OTHER DOCUMENTS
FILED BY THE COMPANY WITH THE SECURITIES AND EXCHANGE COMMISSION FROM TIME TO
TIME.
Olympic Cascade Financial Corporation, a Delaware corporation organized in 1997
("Olympic" or the "Company"), is a financial services organization, operating
through its three wholly-owned subsidiaries, National Securities Corporation, a
Washington corporation organized in 1947 ("National"), WestAmerica Investment
Group, a California corporation organized in 1974 ("WestAmerica") and Canterbury
Securities Corporation ("Canterbury"), an Illinois corporation organized in
1998. Olympic is committed to establishing a significant presence in the
financial services industry by providing financing options for emerging, small
and middle capitalization companies both in the United States and abroad through
research, financial advisory services and sales, and investment banking services
for both public offerings and private placements, and providing retail
brokerage, institutional trading and trade clearance operations.
In June 2000, the Company acquired all of the outstanding stock of Canterbury, a
Chicago, Illinois based broker-dealer specializing in private placement
transactions. Canterbury was acquired for cash of $30,000 and the issuance of
five-year warrants to acquire 5,000 unregistered shares of common stock of the
Company at a price of $6.375 per share.
National conducts a national securities brokerage business through its main
office in Seattle, Washington and in 62 other offices located in 20 states.
Additionally, National operates in several international cities. Its business
includes securities brokerage for individual and institutional clients,
market-making trading activities, asset management and corporate finance
services. National's operations, and its largest sales office, is located in
Seattle, Washington. Additionally, National has a significant retail and trading
presence in New York City with corporate finance transactions originating in
Chicago, Illinois. The majority of National's transactions with the public
involve solicited trades.
WestAmerica, based in Scottsdale, Arizona, is a registered securities
broker-dealer providing primarily retail brokerage operations. The majority of
WestAmerica's transactions with the public involve solicited trades.
As of September 29, 2000, the Company and its subsidiaries had approximately 120
employees and 310 independent contractors. Of these totals, approximately 350
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
2
(A)
GENERAL (Continued)
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 is engaged in a highly competitive business. With respect to one or
more aspects of its business, its competitors include member organizations of
the New York Stock Exchange, Inc. and other registered securities exchanges in
the United States and Canada, and members of the National Association of
Securities Dealers, Inc. ("NASD"). Many of these organizations have
substantially greater personnel and financial resources and more sales offices
than the Company. Discount brokerage firms affiliated with commercial banks
provide additional competition, as well as companies that provide electronic
on-line trading. In many instances, the Company is also competing directly for
customer funds with investment opportunities offered by real estate, insurance,
banking, and savings and loans industries.
The Company's business plan includes the growth of its retail and institutional
brokerage business, increased fixed income and proprietary trading, increased
market-making trading, and online investing services. Management believes that
consolidation within the industry is inevitable. Concerns attributable to the
weakened market and increased competition help explain the increasing number of
acquisition opportunities continuously introduced to the Company. The Company is
focused on maximizing the profitability of its existing operations, while it
continues to seek additional selective strategic acquisitions.
In October 2000, the Company opened a significant branch office of National in
New York City. This office specializes in principal mark-ups and mark-downs as
well as agency trading of fixed income products, OTC and Listed equities to
various institutional clients. Additionally, this office has proprietary trading
of Listed equities and retail brokers. In the future this branch may expand into
market-making trade activities. This type of expansion would require additional
capital at National.
(B) FINANCIAL INFORMATION ABOUT INDUSTRY SEGMENTS
For a more detailed analysis of our results by segment see Item 7, "Management
Discussion and Analysis of Financial Condition and Results of Operation."
3
(C) BROKERAGE SERVICES
Brokerage services to retail clients are provided through the Company's sales
force of investment executives at National and WestAmerica.
NATIONAL SECURITIES CORPORATION
National is registered as a broker-dealer with the Securities and Exchange
Commission ("SEC") and licensed in 50 states, the District of Columbia and
Puerto Rico. National is also a member of the NASD, the Municipal Securities
Rulemaking Board ("MSRB") and the Securities Investor Protection Corporation
("SIPC"). During the fiscal year National sold its Chicago Stock Exchange (CHX)
membership.
National is organized to meet the needs of its investment executives and their
clients. To foster individual service, flexibility and efficiency, and to reduce
fixed costs, investment executives at National act as independent contractors
responsible for providing their own office facilities, sales assistants,
telephone and quote service, supplies and other items of overhead. Investment
executives are given broad discretion to structure their own practices and to
specialize in different areas of the securities market subject to supervisory
procedures. In addition, investment executives have direct access to research
materials, management, traders, and all levels of support personnel.
It is not National's policy to recommend particular securities to customers.
Recommendations to customers are determined by individual investment executives
based upon their own research and analysis, and subject to applicable NASD
customer suitability standards. Most investment executives perform fundamental
(as opposed to technical) analysis. Solicitations may be by telephone, seminars
or newsletters. Investment executives may request trading to acquire an
inventory position to facilitate sales to customers (subject to the investment
executive's own risk). Supervisory personnel review trading activity from
inventory positions to ensure compliance with applicable standards of conduct.
Salespersons in the brokerage industry are traditionally compensated on the
basis of set percentages of total commissions and mark-ups generated. Most
brokerage firms bear substantially all of the costs of maintaining their sales
forces, including providing office space, sales assistants, telephone service
and supplies. The average commission paid to the salespersons in the brokerage
industry generally ranges from 30% to 50% of total commissions generated.
Since National requires most of its investment executives to absorb their own
overhead and expenses, it is able to pay an average of 70% of commissions and
mark-ups generated by the investment executive. This arrangement also reduces
fixed costs and lowers the risk of operational losses for non-production.
National's operations include execution of orders, processing of transactions,
receipt, identification and delivery of funds and securities, custody of
customer securities, internal financial controls and compliance with regulatory
and legal requirements.
4
(C) BROKERAGE SERVICES (Continued)
National's data processing is supplied by an independent vendor on a
time-sharing basis to process orders, reports, confirmations and statements as
well as to maintain the general ledger, files of customers, and other market
data. National utilizes other computer software, which is used for investment
executive payroll and telephone cost allocation, including word processing and
other office applications.
National clears approximately 90% of its own securities transactions and posts
its books and records daily, with the remaining 10% of the transactions clearing
through Bear Stearns Securities Corporation and Pershing. Periodic reviews of
controls are conducted, and administrative and operations personnel meet
frequently with management to review operating conditions. Operations personnel
monitor compliance with applicable laws, rules and regulations.
WESTAMERICA INVESTMENT GROUP
WestAmerica is registered as a broker-dealer with the SEC and is licensed in 39
states and the District of Columbia. WestAmerica is also a member of the NASD,
the MSRB and the SIPC. WestAmerica, offers traditional securities brokerage and
financial planning business and fee-based investment management business to its
retail clients.
Unlike National, the majority of WestAmerica's investment executives are
employees. As such the average commission payout is approximately 20-30% lower
than National's commission payout of approximately 70%. Since the commission
payout is much lower, WestAmerica provides office space, equipment, supplies and
other resources for its investment executives.
WestAmerica operates pursuant to the exemptive provisions of SEC Rule
15c3-3(k)(2)(ii) and clears all transactions with and for customers on a fully
disclosed basis. WestAmerica has a clearing arrangement with Correspondent
Services Corporation ("CSC"), a wholly-owned subsidiary of PaineWebber
Incorporated. CSC provides WestAmerica with back office support, transaction
processing services on all principal national securities exchanges and access to
many other financial services and products. This agreement with CSC allows
WestAmerica to offer a range of products and services that is generally offered
only by firms that are larger or have more capital.
CANTERBURY SECURITIES CORPORATION
Canterbury is a registered as a broker-dealer with the SEC and is licensed in
Illinois. Canterbury is a member of the NASD, the MSRB and the SIPC. Canterbury
specializes in private placement transactions. Canterbury has no retail customer
accounts and therefore operates pursuant to the exemptive provisions of SEC Rule
15c3-3(k)(2)(i). Since acquisition, Canterbury has had no activity.
5
(D) INVESTMENT BANKING
National provides corporate finance and investment banking services, including
underwriting the sale of securities to the public and arranging for the private
placement of securities with investors. National has expanded its corporate
finance operations to provide a broader range of financial and corporate
advisory services, including mergers and acquisitions, project financing,
capital structure and specific financing opportunities. National has
underwritten both equity securities and convertible corporate bonds as initial
or secondary public offerings.
National will manage, underwrite and sell shares of each underwriting. National
collects fees from the underwriting proceeds for providing these services,
including non-accountable expenses. Additionally, National participates as an
underwriter in the syndicate group of other underwritings, which it does not
manage. All of these activities require a substantial commitment of capital and
expose National to additional risk. Accordingly, National maintains a commitment
committee that reviews every proposed underwriting and must approve each
underwriting in order for it to proceed. Additionally, such activities are
periodically reviewed by members of the Board of Directors.
National's corporate finance department is headquartered in Chicago, Illinois.
This office includes investment executives, investment bankers and employees.
The office and the corporate finance department are under the direction of the
Company's Chairman, Steven A. Rothstein.
WestAmerica is approved by the NASD to engage in underwriting and has
participated as an underwriter.
(E) PRINCIPAL AND AGENCY TRANSACTIONS
The Company buys and maintains inventories in equity securities as a
"market-maker" for sale of those securities to other dealers and to customers
through National. The Company also maintains inventories in corporate and
municipal debt securities for sale to customers.
At National, a staff of six traders and assistants in its Seattle headquarters,
and three traders and assistants in its Spokane, Washington office, manage an
inventory of securities, and conduct market-making activities. As of September
29, 2000, National made a market in approximately 100 equity securities, the
majority of which were quoted on the NASDAQ stock market. This includes
companies for which National managed or co-managed a public offering.
Additionally, through its recently opened New York branch, the Company intends
to substantially increase the number of securities for which it makes a market,
and thereby increase this business in the coming year.
The Company's trading departments require a substantial commitment of capital.
6
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.
(E) PRINCIPAL AND AGENCY TRANSACTIONS (Continued)
Because the Company's trading activities occasionally may involve speculative
and thinly capitalized stocks, including stabilizing the market for securities
which it has underwritten, the Company imposes position limits to reduce its
potential for loss.
In executing customer orders to buy or sell a security in which the Company
makes a market, the Company may sell to or purchase from customers at a price,
which is substantially equal to the current inter-dealer market price plus or
minus a mark-up or mark-down. The Company may also act as agent and execute a
customer's purchase or sale order with another broker-dealer market-maker at the
best inter-dealer market price available and charge a commission. The Company
believes its mark-ups, mark-downs and commissions are competitive based on the
services it provides to its customers.
In executing customer orders to buy or sell listed and over-the-counter
securities in which it does not make a market, the Company generally acts as
agent and charges commissions which the Company believes are competitive, based
on the services the Company provides to its customers. The Company may receive
rebates for the order flow of the securities for which it does not make a
market.
(F) ONLINE TRADING
The Company through NSCdirect (a division of National), provides online
investing services for its customers. NSCdirect began trading in April 2000 and
is serviced out of Seattle, Washington. The Company has various third party
vendor agreements, which provide development, and hosting of the website. The
website is located at www.nscdirect.com.
(G) SUPERVISION
The Securities Exchange Act of 1934, as amended, and the NASD Conduct Rules
require the Company's subsidiaries to supervise the activities of its investment
executives. As part of providing such supervision, the subsidiaries maintain an
Operations and Procedures Manual. Compliance personnel conduct inspections of
branch offices no less frequently than annually to review compliance with the
Company's procedures. A registered principal provides continuous supervision at
each of the Company's larger offices. The other offices (averaging two
investment executives per office) are not required by NASD rules to have a
registered principal on site and are therefore supervised by registered
principals of the subsidiaries. Compliance reviews each customer trade to ensure
compliance with the NASD Conduct Rules including mark-up guidelines.
7
ITEM 2 - PROPERTIES
The Company owns no real property. Its corporate headquarters are shared with
National in leased space in Chicago, Illinois and Seattle, Washington.
Additionally, through its subsidiaries, the Company leases office space in
Marietta, Georgia, Scottsdale, Arizona and Spokane, Washington. The branch
offices, which are run by independent contractors, are leased by those
contractors. In October, 2000 the Company opened an office in New York, New York
and will be leasing space for that office.
Leases expire at various times through July 2009. The Company believes the rent
at each of its locations is at current market rates. At current production
levels, the Company believes its leased space is suitable and adequate, however,
increased activity could require additional space to be leased.
ITEM 3 - LEGAL PROCEEDINGS
1. THE MAXAL TRUST, ET AL. V. NATIONAL SECURITIES CORPORATION ET AL., United
States District Court, Central District of California, Case No. CV-97-4392
ABC (Shx). See disclosure in the Company's Form 10-Q for the quarter ended
December 31, 1998 and Form 10-K for the fiscal year ended September 24,
1999.
On February 16, 1999, the District Court dismissed the plaintiffs'
remaining claims against National in their entirety and granted National's
motion for summary judgment. A final judgment was issued by the court on
April 26, 1999. The plaintiffs filed a notice of appeal on May 4, 1999 and
oral arguments were heard on December 6, 2000.
2. COMPLETE MANAGEMENT, INC. National has been named together with others as a
defendant in a consolidated class action lawsuit filed against Complete
Management, Inc. No specific amount of damages has been sought against
National in the complaint. In June 2000, National filed to dismiss this
action.
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 $3,600,000. The Company believes that the
resolution of these matters will not have a material adverse effect. 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 29, 2000.
8
ITEM 4(A)- EXECUTIVE OFFICERS OF REGISTRANT
The following sets forth the names, ages and positions of all executive officers
of the Company:
Steven A. Rothstein 50 Chairman and Chief Executive Officer
Chairman and Chief Executive Officer of National
Director of WestAmerica
Director of Canterbury
Mark A. Goldwasser 42 President
Managing Director of National
Robert H. Daskal 59 Senior Vice President
Chief Financial Officer
Treasurer and Secretary
Secretary of National
Director of WestAmerica
Director of Canterbury
Michael A. Bresner 56 President of National
David M. Williams 31 Corporate Controller and Chief Accounting Officer
Chief Operating Officer of National
Craig M. Gould 30 Vice-Chairman of Technology
Managing Director of National
PART II
ITEM 5 - MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED
STOCKHOLDER MATTERS
On September 7, 2000 the Company's common stock stopped trading on the NASDQ
Small Cap and began trading on The American Stock Exchange. Additionally, the
Company's common stock trades on The Chicago Stock Exchange. The Company's
common stock trades using the symbol OLY. As of September 29, 2000, 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
9
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. As of this time, no shareholder holds
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 26, 1998 to September
29, 2000 have been obtained from NASDAQ and The American Stock Exchange. The
range of market prices for each quarter of fiscal years ended September 24, 1999
and September 29, 2000 are as follows:
PERIOD HIGH LOW
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September 26, 1998/December 31, 1998 $4.00 $0.88
January 1, 1999/March 26, 1999 $8.97 $1.25
March 27, 1999/June 25, 1999 $6.38 $2.31
June 26, 1999/September 24, 1999 $5.19 $2.75
September 25, 1999/December 31, 1999 $8.50 $3.13
January 1, 2000/March 31, 2000 $13.56 $5.63
April 1, 2000/June 30, 2000 $8.50 $5.75
July 1, 2000/September 29, 2000 $8.06 $5.13
The closing bid price of the Company's common stock on December 11, 2000, as
reported on the American Stock Exchange, was $4.00 per share.
ITEM 6 - SELECTED FINANCIAL DATA
Set forth below is the historical financial data with respect to the Company for
the fiscal years ended 2000, 1999, 1998, 1997, and 1996 . This information has
been derived from, and should be read in conjunction with, the audited financial
statements, which appear elsewhere in this report. All information is expressed
in thousands of dollars except per share information.
Fiscal Year
2000 1999 1998 1997 1996
Net revenues $60,809 $43,330 $45,694 $39,994 $34,899
Net income (loss) after tax 1,556 118 (4,666) 101 1,735
Net income (loss) per common share 0.73 0.08 (3.12) 0.07 1.66
Total assets 92,915 86,697 73,116 63,774 57,955
Long-term obligations 608 2,150 2,770 - -
Stockholders' equity 8,039 4,039 2,948 7,604 5,316
Cash dividends - - - - -
10
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 THE
COMPANY'S REGISTRATION STATEMENT ON FORM S-3 (REGISTRATION NO. 333-80247), FILED
WITH THE SECURITIES AND EXCHANGE COMMISSION ON JUNE 9, 1999 AND THE COMPANY'S
OTHER SECURITIES AND EXCHANGE COMMISSION FILINGS, INCLUDING THE COMPANY'S ANNUAL
REPORTS ON FORM 10-K AND QUARTERLY REPORTS ON FORM 10-Q. ANY FORWARD-LOOKING
STATEMENTS CONTAINED IN OR INCORPORATED INTO THIS REPORT SPEAK ONLY AS OF THE
DATE OF THIS REPORT. THE COMPANY UNDERTAKES NO OBLIGATION TO UPDATE PUBLICLY ANY
FORWARD-LOOKING STATEMENT, WHETHER AS A RESULT OF NEW INFORMATION, FUTURE EVENTS
OR OTHERWISE.
RESULTS OF OPERATIONS
FISCAL YEAR 2000 COMPARED WITH FISCAL YEAR 1999
The Company's fiscal year 2000 resulted in significant increase in revenues and
net income as compared with the fiscal year 1999. The increase in revenues was
due to growth in the retail brokerage and dealer operations combined with strong
markets in the first half of fiscal 2000. Overall, the Company reported net
income of $1,556,000 in the fiscal year 2000 compared with net income of
$118,000 in the fiscal year 1999.
Revenues increased $17,479,000 or 40% in the fiscal year 2000 to $60,809,000
from $43,330,000 in the fiscal year 1999 and expenses increased $15,678,000 or
36% to $58,894,000 in the fiscal year 2000 from $43,216,000 in the fiscal year
1999. Revenues increased primarily due to the increase in commissions and net
dealer inventory gains based on the strength of the market in the first half of
the fiscal year.
Net dealer inventory gains, which includes profits on proprietary trading,
market making activities and customer mark-ups and mark downs, increased
$10,893,000, or 120%, to $19,950,000 from $9,057,000 during the fiscal year 2000
compared with the fiscal year 1999. This increase is due to National's London
office dramatically increasing its business and the strength of the markets
during the first half of the fiscal year.
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Commission revenue increased $3,329,000 or 14% to $27,894,000 from $24,565,000
during the fiscal year 2000 compared with the fiscal year 1999. This increase
was due to the strength of the markets in the first half of the fiscal year
2000.
RESULTS OF OPERATIONS (continued)
FISCAL YEAR 2000 COMPARED WITH FISCAL YEAR 1999 (continued)
Investment banking revenue increased $80,000 or 3% to $2,539,000 from $2,459,000
in the fiscal year 1999. The Company did not manage a public underwriting in
fiscal years 2000 or 1999. During the fiscal year 2000 and the fiscal year 1999,
investment banking revenue was generated primarily from the completion of
private placement transactions and advisory fees.
Other revenue, consisting of asset management fees and revenue from market
making trade order flow, increased $797,000, or 97%, to $1,620,000 from $823,000
during the fiscal year 2000 compared to the fiscal year 1999. The increase in
other revenue was due mainly to an increase in asset management fees received
through National Asset Management, a subsidiary of National.
Concurrent with the overall increase in revenues, total expenses increased
$15,678,000, or 36%, to $58,894,000 from $43,216,000 in the fiscal year 1999.
This increase in expenses was anticipated due to increases in revenues, and
thereby an increase in commission expense and employee compensation.
Commission expense increased $9,935,000, or 39%, to $35,670,000 from $25,735,000
due to the increase in commission revenue, and net dealer inventory gains from
which commission expense is paid. Employee compensation expense increased
$1,939,000, or 40%, to $6,821,000 from $4,882,000 in the fiscal year 1999. In
September 1998, certain members of management of the Company received temporary
reductions in compensation, ranging from 10% to 62%. These reductions were
reinstated in full prior to the first quarter of fiscal 2000. Overall, combined
commissions and employee compensation as a percentage of revenue decreased
slightly to 69.9% from 70.7% in the fiscal year 2000 and 1999, respectively.
As anticipated, with the overall increase in revenue expenses regarding
occupancy, taxes, licenses and registration and other have increased from the
fiscal year 1999 to the fiscal year 2000. Occupancy expense, consisting mainly
of rent, office supplies and depreciation increased $1,088,000, or 43%, to
$3,636,000 from $2,548,000. This increase relates mainly to increased rent,
depreciation and computer services. Rent increased approximately $320,000 at
National due to a new office lease signed in July 1999 at a higher rate per
square foot, as well as office space added for NSCdirect. Additionally, with the
addition of NSCdirect, computer services and depreciation increased
approximately $665,000, due to costs for additional equipment and computer
services such as web hosting, off-site server maintenance and other costs
associated with online trade execution and online account access. Additionally,
included in the increase in computer services are increased costs from
National's third party data processing company. These charges are calculated on
a cost per trade basis and as overall trade volume increased in the first half
of the fiscal year 2000, computer services increased.
12
RESULTS OF OPERATIONS (continued)
FISCAL YEAR 2000 COMPARED WITH FISCAL YEAR 1999 (continued)
Taxes, licenses and registration increased $721,000, or 680%, to $827,000 from
$106,000. This increase was due primarily to National receiving a refund of
prior years' business operating taxes totaling $330,000 in the fiscal year 1999.
Additionally, with the increased revenue in fiscal 2000 business operating
taxes, which are a revenue based tax, increased.
Other expenses increased $1,025,000, or 78%, to $2,344,000 from $1,319,000
during the fiscal year 2000 and 1999, respectively. In the fiscal year 2000, the
Company incurred travel and moving expenses totaling $818,000, an increase of
approximately $263,000 from the prior fiscal year 1999. Also, the Company
incurred additional employment agency fees totaling $83,000 as the Company hired
more people to accommodate growth. Finally, customer write-offs and bad debt
expense increased approximately $492,000 from the fiscal year 1999.
Interest expense increased $956,000, or 25%, to $4,720,000 from $3,764,000. The
main reason for this increase is the increase in customer deposits, on which the
Company pays interest and the accelerated accretion of interest on original
issue discount notes, which were repaid during the second quarter of fiscal
2000. Original issue discount interest for the nine months totaled $232,000. The
remaining interest expense increase was due to the increase in customer deposits
of $7.0 million during the fiscal year 2000. This increase was more than offset
by increased interest income from customer margin debt, which increased by $16.2
million during the fiscal year 2000. Interest income increased $1,985,000, or
36%, to $7,542,000 from $5,557,000 during the fiscal year 2000 as compared with
the fiscal year 1999.
Professional fees decreased $380,000, or 19%, to $1,576,000 from $1,956,000.
This decrease is due to the Company resolving several of its lawsuits during the
previous fiscal year.
Overall, diluted earnings were $0.73 per share as compared with $0.08 per share
for the fiscal years 2000 and 1999, respectively.
FISCAL YEAR 1999 COMPARED WITH FISCAL YEAR 1998
The Company's fiscal year 1999 resulted in net income of $118,000 or $.08 per
share diluted as compared to a net loss of $4,666,000 or $3.12 per share diluted
for fiscal year 1998. The Company's fiscal year 1999 resulted in decreases in
both revenues and expenses compared with the fiscal year 1998. These decreases
were primarily due to the sale of two subsidiaries, L.H. Friend, Weinress,
Franksen & Presson, Inc. ("Friend") and Travis Capital, Inc. ("Travis"), as the
Company continued its focus on retail operations, resulting in an increase in
13
retail commissions and net dealer inventory gains.
RESULTS OF OPERATIONS (continued)
FISCAL YEAR 1999 COMPARED WITH FISCAL YEAR 1998 (continued)
Revenues decreased $2,364,000 or 5% in the fiscal year 1999 to $43,330,000 from
$45,694,000 in the fiscal year 1998 and expenses decreased $7,768,000 or 15% to
$43,216,000 in the fiscal year 1999 from $50,984,000 in the fiscal year 1998.
Exclusive of Friend and Travis, revenues increased $5,174,000 or 14% from
$38,156,000 to $43,330,000 and expenses increased less than 1% or $407,000 in
the fiscal year 1999 from the fiscal year 1998.
Revenues decreased primarily due to the decrease in underwriting revenue as the
weak capital markets for initial public offerings by emerging growth companies
continued. For the fiscal year 1999, underwriting revenue decreased $8,267,000
or 77% to $2,459,000 from $10,726,000 in the fiscal year 1998. National
participated in four private placements raising $13 million in gross proceeds in
the fiscal year 1999. In the fiscal year 1998, National, through the management
of two underwritings and co-management of one underwriting with Friend, as well
as three successful private placements, generated $5,177,000 of underwriting
revenue. Friend managed its first underwriting during the first nine months of
fiscal 1998 and participated in several other underwritings and private
placements, generating $5,460,000 of underwriting revenue. Exclusive of Friend
and Travis, underwriting revenue decreased $2,718,000 or 25% in the fiscal year
1999 compared with the fiscal year 1998.
Net dealer inventory gains increased $3,545,000, or 64%, to $9,057,000 from
$5,512,000 during the fiscal year 1999 compared with the fiscal year 1998.
Exclusive of Friend and Travis, net dealer inventory gains increased $4,397,000
or 80%. This increase is due to National's London office dramatically increasing
its business and the strength of the markets the past twelve months.
Although overall revenue decreased during the fiscal year 1999, commission
revenue increased $929,000, or 4%, to $24,565,000 from $23,636,000. Exclusive of
Friend and Travis, commission revenue increased $2,013,000, or 9%, during the
fiscal year 1999. This increase is due to favorable market conditions and the
addition of registered representatives.
Concurrent with the overall decrease in revenues, total expenses decreased
$7,768,000, or 15%, to $43,216,000 from $50,984,000 in the fiscal year 1998.
This decrease in expenses was anticipated due to decreases in revenues, and the
Company's efforts to reduce overhead costs. The most significant decreases were
salary expense, occupancy and other.
Salaries decreased $3,864,000, or 44%, to $4,882,000 from $8,746,000. Friend and
Travis had combined salary expense of $3,251,000 in the fiscal year 1998. The
remaining decrease in salary expense was $613,000 or 7% in the fiscal year 1999,
14
as management incurred salary reductions in an effort to reduce overhead
expenses. With the increased commission revenue and net dealer inventory gains,
overall commission expense increased $690,000 or 3% from $25,045,000 in the
fiscal year 1998 to $25,735,000 in the fiscal year 1999.
RESULTS OF OPERATIONS (continued)
FISCAL YEAR 1999 COMPARED WITH FISCAL YEAR 1998 (continued)
Exclusive of Friend and Travis, commission expense increased $3,698,000 in the
fiscal year 1999 from the fiscal year 1998. Overall, combined commissions and
salaries as a percentage of revenue decreased 3% to 71% from 74% in the fiscal
year 1999 and 1998, respectively.
As anticipated, with the sale of Friend and Travis expenses regarding
communications, occupancy, taxes, licenses and registration and other have
decreased from the fiscal year 1998 to the fiscal year 1999. Communications
expenses, mainly telephone, telequote and mailing decreased $789,000, or 41%, to
$1,133,000 from $1,922,000. Friend and Travis had combined communications
expenses of $344,000 in fiscal 1998. Occupancy expense, consisting mainly of
rent, office supplies and depreciation decreased $1,188,000, or 32%, to
$2,548,000 from $3,736,000. This decrease relates to the sale of the two
subsidiaries as well as National closing a branch office in New York and
subletting excess office space in Chicago. Taxes, licenses and registration
decreased $514,000, or 83%, to $106,000 from $620,000. This decrease was due
primarily to National receiving a refund of prior years' business operating
taxes totaling $330,000.
Finally, other expenses decreased $3,810,000, or 74%, to $1,319,000 from
$5,129,000 during the fiscal year 1999 and 1998, respectively. The largest
component of this decrease, totaling $2,521,000, relates to the write-down of
certain receivables and investments, including those relating to the disposition
of the two subsidiaries. Additionally, the other expenses relating to the sale
of the two subsidiaries and closure of a branch office in New York contributed
another $987,000 to this decrease.
Moving expenses and amortization combined were $300,000 more in the fiscal year
1998 compared with the fiscal year 1999. Amortization decreased due to the write
off of goodwill related to the sale of the two subsidiaries and the amortization
of a prepaid asset at WestAmerica that was recorded during fiscal 1997 as part
of the purchase price.
Interest expense, clearing fees and professional fees increased during the
fiscal year 1999 as compared with the fiscal year 1998. Interest expense
increased $924,000, or 33%, to $3,764,000 from $2,840,000. The main reason for
this increase is the increase in customer deposits, on which the Company pays
interest, and the interest on debt incurred in fiscal 1998. Interest expense was
offset by increased interest revenue of $1,177,000, or 27%, to $5,557,000 from
$4,380,000.
Clearing fees actually increased $208,000, or 13%, to $1,773,000 from
$1,565,000. Exclusive of Friend, clearing fees increased $589,000 due to the
increased volume of transactions including the London office of National.
15
RESULTS OF OPERATIONS (continued)
FISCAL YEAR 1999 COMPARED WITH FISCAL YEAR 1998 (continued)
Professional fees increased $575,000, or 42%, to $1,956,000 from $1,381,000.
After adjusting for professional fees paid at Friend and Travis, professional
fees increased $654,000, or 47%, during the fiscal year 1999 compared with the
fiscal year 1998 due to increased litigation that was substantially resolved
during the fiscal year 1999. Included in professional fees is $524,000 relating
to the settlement of three lawsuits during the fiscal year 1999, only $75,000 of
which represented a cash payment.
LIQUIDITY AND CAPITAL RESOURCES
As with most financial services firms, substantial portions of the Company's
assets are liquid, consisting mainly of cash or assets readily convertible into
cash. These assets are financed primarily by National's interest bearing and
non-interest bearing customer credit balances, other payables and equity
capital. Occasionally, National utilizes short-term bank financing to supplement
its ability to meet day-to-day operating cash requirements. Such financing has
been used to maximize cash flow and is regularly repaid. National has a
$3,000,000 revolving secured credit facility with Bank of America. These
borrowings are short-term and generally do not extend beyond a few days. At
September 29, 2000, National had no borrowings outstanding on this line.
Additionally, National may borrow up to 70% of the market value of eligible
securities pledged through an unrelated broker-dealer.
National, as a registered broker-dealer, is subject to the SEC's Uniform Net
Capital Rule 15c3-1, which requires the maintenance of minimum net capital.
National has elected to use the alternative standard method permitted by the
rule. This requires that National maintain minimum net capital equal to the
greater of $250,000 or 2% of aggregate debit items. At September 29, 2000,
National's net capital exceeded the requirement by $4,575,000.
WestAmerica, as a registered broker-dealer, is also subject to the SEC's Net
Capital Rule 15c3-1, which, under the standard method, requires that WestAmerica
maintain minimum net capital equal to the greater of $100,000 or 6 2/3% of
aggregate indebtedness. At September 30, 2000, WestAmerica's net capital
exceeded the requirement by $193,000.
Canterbury, as a registered broker-dealer, is also subject to the SEC's Net
Capital Rule 15c3-1, which, under the standard method, requires that Canterbury
maintain minimum net capital equal to $5,000. At September 29, 2000,
Canterbury's net capital exceeded the requirement by $3,877.
Advances, dividend payments and other equity withdrawals from its subsidiaries
are restricted by the regulations of the SEC, and other regulatory agencies.
These regulatory restrictions may limit the amounts that these subsidiaries may
dividend or advance to Olympic.
16
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.
The Company believes its internally generated liquidity, together with access to
external capital and debt resources, is sufficient to satisfy existing
operations. However, as the Company expands its operations, including the
expansion of its market making activities, or acquires other businesses, the
Company will require additional capital.
As of the fiscal year ended September 29, 2000, total assets were $92,915,000
compared to total assets of $86,697,000 as of the fiscal year September 24,
1999, which represents a 7% increase in total assets for the 12-month period. As
of fiscal year ended September 24, 1999, total assets were $86,697,000, compared
to total assets of $73,116,000 as of September 25, 1998, which represents a 19%
increase in total assets for the 12-month period.
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. Whereas inflation has not had a materially adverse impact on
the costs or the operations of the Company, inflation does have an effect on the
Company's business. Increases in inflation rates may be accompanied by increases
in interest rates, which may adversely affect short-term stock prices and,
thereby, adversely affect the Company's performance. However, in an inflationary
environment other corporate financing activities may become more readily
pursued, such as financial advisory services. It is therefore difficult to
predict the net impact of inflation on the Company.
NEW ACCOUNTING STANDARDS
In June 1997, the FASB issued SFAS Nos. 130 and 131. SFAS No. 130 establishes
standards for reporting and display of comprehensive income and its components.
SFAS No. 131 establishes standards for reporting about operating segments,
products and services, geographic areas, and major customers. The standards
become effective for fiscal years beginning after December 15, 1997. Management
adopted these standards in the year ended September 24, 1999.
In June 1999, the FASB issued SFAS NO. 133 which establishes standards for
accounting and reporting derivative instruments, including certain derivative
instruments embedded in other contracts, (collectively referred to as
derivatives) and for hedging activities. Management adopted these standards in
the year ended September 24, 1999.
17
ITEM 7A - QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company's primary market risk arises from the fact that it engages in
proprietary trading and makes dealer markets in equity securities. Accordingly,
the Company may be required to maintain certain amounts of inventories in order
to facilitate customer order flow. The Company may incur losses as a result of
price movements in these inventories due to changes in interest rates, foreign
exchange rates, equity prices and other political factors. The Company is not
subject to direct market risk due to changes in foreign exchange rates. However,
the Company is subject to market risk as a result of changes in interest rates
and equity prices, which are affected by global economic conditions. The Company
manages its exposure to market risk by limiting its net long or short positions.
Trading and inventory accounts are monitored daily by management and the Company
has instituted position limits.
Credit risk represents the amount of accounting loss the Company could incur if
counterparties to its proprietary transactions fail to perform and the value of
any collateral proves inadequate. Although credit risk relating to various
financing activities is reduced by the industry practice of obtaining and
maintaining collateral, the Company maintains more stringent requirements to
further reduce its exposure. The Company monitors its exposure to counterparty
risk on a daily basis by using credit exposure information and monitoring
collateral values. The Company maintains a credit committee, which reviews
margin requirements for large or concentrated accounts and sets higher
requirements or requires a reduction of either the level of margin debt or
investment in high-risk securities or, in some cases, requiring the transfer of
the account to another broker-dealer.
The Company monitors its market and credit risks daily through internal control
procedures designed to identify and evaluate the various risks to which the
Company is exposed. There can be no assurance, however, that the Company's risk
management procedures and internal controls will prevent losses from occurring
as a result of such risks.
The following table shows the quoted market values of the Company's securities
owned ("long"), securities sold but not yet purchased ("short") and net
positions as of September 29, 2000:
LONG SHORT NET
Corporate stocks $370,000 $192,000 $178,000 (long)
Stock options $ 6,000 $ - $ 6,000 (long)
ITEM 8 - FINANCIAL STATEMENTS
18
See part IV, Item 14(a)(1) for a list of financial statements filed as part of
this Report.
ITEM 9 - CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
There were no matters submitted to a vote of security holders in the fourth
quarter of fiscal year ended September 29, 2000.
PART III
ITEM 10 - DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL
PERSONS, COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT
The information required by this item will be included in the Company's 2001
Proxy Statement and is incorporated herein by reference.
ITEM 11 - EXECUTIVE COMPENSATION
The information required by this item will be included in the Company's 2001
Proxy Statement and is incorporated herein by reference.
ITEM 12 - SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT
The information required by this item will be included in the Company's 2001
Proxy Statement and is incorporated herein by reference.
ITEM 13 - CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this item will be included in the Company's 2001
Proxy Statement and is incorporated herein by reference.
ITEM 14 - EXHIBITS AND REPORTS ON FORM 8-K
(a) The following financial statements are included in Part II Item 8:
1. FINANCIAL STATEMENTS
Independent Auditors' Report
Consolidated Financial Statements
Statements of Financial Condition, September 29, 2000
and September 24, 1999
Statements of Operations, Years Ended September 29,
2000, September 24, 1999 and September 25, 1998
Statements of Changes in Stockholders' Equity, Years
ended September 29, 2000, September 24, 1999 and
September 25, 1998
19
Statements of Cash Flows, Years ended September 29,
2000, September 24, 1999 and September 25, 1998
Notes to Consolidated Financial Statements
2. FINANCIAL STATEMENT SCHEDULES
Schedules not listed above have been omitted because they
are not applicable or have been included in footnotes to the
consolidated financial statements.
(B) REPORTS ON FORM 8-K
No Reports on Form 8-K were filed during the fourth quarter ended
September 29, 2000.
(C) EXHIBITS
See Exhibit Index
20
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities and
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
OLYMPIC CASCADE FINANCIAL CORPORATION
(Registrant)
DATE: DECEMBER 20, 2000 BY: /S/STEVEN A. ROTHSTEIN
------------------------ ---------------------------------
Steven A. Rothstein, Chairman and
Chief Executive Officer
DATE: DECEMBER 20, 2000 BY: /S/ROBERT H. DASKAL
------------------------ ---------------------------------
Robert H. Daskal, Senior Vice President,
Chief Financial Officer, Treasurer and
Secretary
DATE: DECEMBER 20, 2000 BY: /S/DAVID M. WILLIAMS
------------------------ ------------------------------------
David M. Williams
Chief Accounting Officer and
Corporate Controller
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the registrant and
in the capacities and on the dates indicated.
DATE: DECEMBER 20, 2000 BY: /S/STEVEN A. ROTHSTEIN
------------------------ ---------------------------------
Steven A. Rothstein, Chairman and
Chief Executive Officer
DATE: DECEMBER 20, 2000 BY: /S/GARY A. ROSENBERG
------------------------ ---------------------------------
Gary A. Rosenberg, Director
DATE: DECEMBER 20, 2000 BY: /S/JAMES C. HOLCOMB, JR.
--------------------------- ---------------------------------
James C. Holcomb, Jr., Director
DATE: DECEMBER 20, 2000 BY: /S/D.S. PATEL
--------------------------- ---------------------------------
D.S. Patel, Director
21
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 29,
2000 and September 24, 1999 and the related consolidated statements of
operations, changes in stockholders' equity, and cash flows for the years then
ended September 29, 2000, September 24, 1999 and September 25, 1998. 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 generally accepted auditing
standards. 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 provides a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Olympic Cascade
Financial Corporation and Subsidiaries as of September 29, 2000 and September
24, 1999, and the results of their operations and their cash flows for the years
ended September 29, 2000, September 24, 1999 and September 25, 1998 in
conformity with generally accepted accounting principles.
/S/Feldman Sherb & Co., P.C.
Feldman Sherb & Co., P.C.
Certified Public Accountants
New York, New York
December 1, 2000
F-1
OLYMPIC CASCADE FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
September 29, September 24,
2000 1999
----------------- -----------------
ASSETS
CASH, subject to immediate withdrawal $ 3,020,000 $ 384,000
CASH, CASH EQUIVALENTS AND SECURITIES 29,517,000 41,416,000
DEPOSITS 1,792,000 1,679,000
RECEIVABLES:
Customers 54,243,000 38,038,000
Brokers and dealers 1,994,000 2,342,000
Other 394,000 976,000
SECURITIES HELD FOR RESALE, at market 376,000 298,000
FIXED ASSETS, net 1,112,000 1,176,000
GOODWILL, net 74,000 45,000
OTHER ASSETS 393,000 343,000
----------------- -----------------
$ 92,915,000 $ 86,697,000
================= =================
LIABILITIES AND STOCKHOLDERS' EQUITY
PAYABLES:
Customers $ 74,183,000 $ 67,158,000
Brokers and dealers 5,329,000 7,581,000
SECURITIES SOLD, BUT NOT YET PURCHASED, at market 192,000 139,000
ACCOUNTS PAYABLE, ACCRUED EXPENSES AND
OTHER LIABILITIES 3,976,000 3,167,000
REVOLVING CREDIT LINE - 2,100,000
NOTES PAYABLE 614,000 1,648,000
CAPITAL LEASE PAYABLE 582,000 865,000
---------------- ----------------
84,876,000 82,658,000
----------------- -----------------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY:
Preferred stock, $.01 par value, 100,000 shares
authorized, none issued and outstanding - -
Common stock, $.02 par value, 6,000,000 shares
authorized, 2,153,846 and 1,694,595 shares
issued and outstanding 43,000 34,000
Additional paid-in capital 8,810,000 6,375,000
Accumulated Deficit (814,000) (2,370,000)
----------------- -----------------
8,039,000 4,039,000
----------------- -----------------
$ 92,915,000 $ 86,697,000
================= =================
See notes to consolidated financial statements.
F-2
OLYMPIC CASCADE FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
Years Ended
-------------------------------------------
September 29, September 24, September 25,
2000 1999 1998
------------ ----------- -------------
REVENUES:
Commissions $ 27,894,000 $ 24,565,000 $ 23,636,000
Net dealer inventory gains 19,950,000 9,057,000 5,512,000
Underwriting 2,539,000 2,459,000 10,726,000
Interest and dividends 7,542,000 5,557,000 4,380,000
Transfer fees and clearance services 1,264,000 869,000 735,000
Other 1,620,000 823,000 705,000
------------ ----------- -------------
60,809,000 43,330,000 45,694,000
------------ ----------- -------------
EXPENSES:
Commissions 35,670,000 25,735,000 25,045,000
Employee compensation and
related expenses 6,821,000 4,882,000 8,746,000
Occupancy and equipment costs 3,636,000 2,548,000 3,736,000
Interest 4,720,000 3,764,000 2,840,000
Clearance fees 2,035,000 1,773,000 1,565,000
Communications 1,265,000 1,133,000 1,922,000
Taxes, licenses, registration 827,000 106,000 620,000
Professional fees 1,576,000 1,956,000 1,381,000
Other operating expenses 2,344,000 1,319,000 5,129,000
------------ ----------- -------------
58,894,000 43,216,000 50,984,000
------------ ----------- -------------
INCOME (LOSS) BEFORE INCOME TAXES 1,915,000 114,000 (5,290,000)
(PROVISION) BENEFIT FOR INCOME TAXES (359,000) 4,000 624,000
------------ ----------- -------------
NET INCOME (LOSS) $ 1,556,000 $ 118,000 $ (4,666,000)
============ =========== =============
EARNINGS (LOSS) PER SHARE OF COMMON STOCK
Basic $ 0.80 $ 0.08 $ (3.12)
============ =========== =============
Diluted $ 0.73 $ 0.08 $ (3.12)
============ =========== =============
WEIGHTED AVERAGE NUMBER OF COMMON SHARES
Basic 1,947,572 1,563,499 1,496,634
============ =========== =============
Diluted 2,124,751 1,563,499 1,496,634
============ =========== =============
See notes to consolidated financial statements.
F-3
OLYMPIC CASCADE FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
YEARS ENDED SEPTEMBER 29, 2000, SEPTEMBER 24, 1999 AND
SEPTEMBER 25, 1998
Common Stock Additional Retained
--------------------------- Paid-In Earnings
Shares Amount Capital (Deficit) Total
----------- ------------ ------------ ------------ ---------------
BALANCE, September 26, 1997 1,444,205 $ 29,000 $ 5,045,000 $ 2,530,000 $ 7,604,000
Exercise of stock options 2,012 - 8,000 - 8,000
Stock dividends 72,299 1,000 351,000 (352,000) -
Original issue discount - - 307,000 - 307,000
Treasury stock (55,509) (1,000) (304,000) - (305,000)
Net loss - - - (4,666,000) (4,666,000)
------------ ---------- ------------- ----------- ---------------
BALANCE, September 25, 1998 1,463,007 29,000 5,407,000 (2,488,000) 2,948,000
Exercise of stock options 82,613 2,000 297,000 - 299,000
Exercise of stock warrants 5,000 - 20,000 - 20,000
Issuance of common stock and warrants
in lawsuit settlement and payment of expenses 145,000 3,000 618,000 - 621,000
Options issued to consultants - - 38,000 - 38,000
Treasury stock (1,025) - (5,000) - (5,000)
Net income - - - 118,000 118,000
------------ ---------- ------------- ----------- ---------------
BALANCE, September 24, 1999 1,694,595 34,000 6,375,000 (2,370,000) 4,039,000
Exercise of stock options, including
$150,000 income tax benefit 144,063 3,000 744,000 747,000
Exercise of stock warrants 315,188 6,000 1,589,000 1,595,000
Options issued to consultants 82,000 82,000
Warrants issuance in connection with acquisition 20,000 20,000
Net income 1,556,000 1,556,000
------------ ---------- ------------- ----------- ---------------
BALANCE, September 29, 2000 2,153,846 $ 43,000 $ 8,810,000 $ (814,000) $ 8,039,000
============ ========== ============= ============ ===============
See notes to consolidated financial statements.
F-4
OLYMPIC CASCADE FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years Ended
------------------------------------------------------------
September 29, September 24, September 25,
2000 1999 1998
------------------ ------------------ -----------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ 1,556,000 $ 118,000 $ (4,666,000)
Adjustments to reconcile net income (loss) to net cash
provided by (used in) operating activities
Depreciation and amortization 498,000 408,000 716,000
Issuance of common stock in lawsuit settlement - 501,000 -
Issuance of common stock in payment of expenses - 120,000 -
Compensation related to issuance of stock options 82,000 38,000 -
Loss (gain) on sale of subsidiaries - (5,000) 1,114,000
Loss on disposal of fixed assets - - -
Deferred income tax (76,000) (2,000) 6,000
Changes in assets and liabilities:
Decrease (increase) in cash, cash equivalents and securities 11,899,000 (14,068,000) 3,586,000
(Increase) decrease in deposits (113,000) 345,000 (732,000)
Increase in receivables (15,275,000) (535,000) (16,379,000
Decrease (increase) in federal income tax receivable 258,000 654,000 (57,000)
(Increase) decrease in securities held for resale (78,000) (63,000) 1,831,000
Increase(decrease) in other assets 26,000 (211,000) (413,000)
Increase in payables 4,773,000 12,477,000 11,682,000
Increase (decrease) in securities sold, but not yet purchased 53,000 66,000 (974,000)
Increase (decrease) in accounts payable, accrued expenses
and other liabilities 758,000 1,195,000 (320,000)
------------------ ------------------ -----------------
NET CASH PROVIDED(USED IN) BY OPERATING ACTIVITIES 4,361,000 1,038,000 (4,606,000)
------------------ ------------------ -----------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of fixed assets (413,000) (276,000) (371,000)
Sale of fixed assets - - 124,000
Purchase of subsidiary (30,000) - -
Proceeds from sale of subsidiary - - 500,000
------------------ ------------------ -----------------
NET CASH (USED IN) PROVIDED BY INVESTING ACTIVITIES (443,000) (276,000) 253,000
------------------ ------------------ -----------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Excercise of stock warrants 1,595,000 - -
Exercise of stock options 597,000 319,000 8,000
Borrowings (repayments) on line of credit (2,100,000) (600,000) 2,700,000
Proceeds from notes payable - - 1,925,000
Payments on capital lease (340,000) (348,000) (108,000)
Payments on notes payable (1,034,000) (300,000) (600,000)
------------------ ------------------ -----------------
NET CASH (USED IN) PROVIDED BY FINANCING ACTIVITIES (1,282,000) (929,000) 3,925,000
------------------ ------------------ -----------------
INCREASE (DECREASE) IN CASH 2,636,000 (167,000) (428,000)
CASH, beginning of year 384,000 551,000 979,000
------------------ ------------------ -----------------
CASH, end of year $ 3,020,000 $ 384,000 $ 551,000
================== ================== =================
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION Cash paid during the year for:
Interest $ 4,714,000 $ 3,727,000 $ 2,783,000
================== ================== =================
Income taxes $ - $ - $ -
================== ================== =================
SUPPLEMENTAL DISCLOSURES OF NONCASH INVESTING AND
FINANCING ACTIVITIES
Warrants issued in connection with acquisition $ 20,000 $ - $ -
================== ================== =================
Tax effect of stock options exercised $ 150,000 $ - $ -
================== ================== =================
Warrants issued as a discount on notes payable $ - $ - $ 307,000
================== ================== =================
Redemption and retirement of capital stock $ - $ 5,000 $ 305,000
================== ================== =================
Assets under capital lease $ - $ - $ 1,180,000
================== ================== =================
See notes to consolidatd financial statements.
F-5
OLYMPIC CASCADE FINANCIAL CORPORATION
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 29, 2000, SEPTEMBER 24, 1999 AND SEPTEMBER 25, 1998
-------------------------------------------------------------
1. ORGANIZATION:
OLYMPIC CASCADE FINANCIAL CORPORATION ("OLYMPIC" OR THE "COMPANY") is a
diversified financial services organization, operating through its three
wholly owned subsidiaries, National Securities Corporation ("National"),
WestAmerica Investment Group ("WestAmerica") and Canterbury Securities
Corporation ("Canterbury"). Olympic provides financing options for
emerging, small and middle capitalization companies through institutional
research and sales and investment banking services for both public
offerings and private placements, and also provides retail brokerage and
trade clearance operations.
During the year ended September 25, 1998, the Company sold its interests in
both L.H. Friend, Weinress, Frankson & Presson, Inc. ("Friend") and Travis
Capital, Inc. ("Travis").
During the year ended September 29, 2000, the Company acquired all of the
outstanding the stock of Canterbury. Canterbury had no activity since its
acquisition.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
a. PRINCIPLES OF CONSOLIDATION - The consolidated financial statements
include the accounts of Olympic and its wholly owned subsidiaries. All
significant intercompany accounts and transactions have been eliminated.
b. ESTIMATES - The preparation of the financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities, disclosure of contingent assets and liabilities at the date of
the financial statements, and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those
estimates.
c. ACCOUNTING METHOD - Customer security transactions and the related
commission income and expense are recorded on a settlement date basis. The
Company's financial condition and results of operations using the
settlement date basis are not materially different from that of the trade
date basis. Revenue from consulting services and investment banking
activities is recognized as the services are performed.
d. FIXED ASSETS - Fixed assets are stated at cost. Depreciation is
calculated using the straight line method based on the estimated useful
lives of the related assets, which range from three to five years.
F-6
e. FISCAL YEAR - The Company has a fifty-two or fifty-three week year,
ending on the last Friday in September.
f. CASH AND CASH EQUIVALENTS - For purposes of the statement of cash flows,
the Company defines cash as cash subject to immediate withdrawal. Cash,
cash equivalents and securities as discussed in Note 4 are not considered a
change in cash for this purpose.
g. INCOME TAXES - The Company recognizes deferred tax assets and
liabilities based on the difference between the financial statements
carrying amounts and the tax basis of assets and liabilities, using the
effective tax rates in the years in which the differences are expected to
reverse. A valuation allowance related to deferred tax assets is also
recorded when it is probable that some or all of the deferred tax asset
will not be realized.
h. FAIR VALUE OF FINANCIAL INSTRUMENTS - Substantially all of the Company's
financial statements are carried at fair value. Assets, including cash,
cash equivalents and securities, deposits, certain receivables, securities
held for resale and other assets, are carried at fair value or contracted
amounts which approximate fair value. Similarly, liabilities, including
certain payables, securities sold but not yet purchased and notes payable
are carried at fair value or contracted amounts approximating fair value.
I. EARNINGS (LOSS) PER SHARE - Basic earnings (loss) per common share is
based upon the net income (loss) for the year divided by the weighted
average number of common shares outstanding during the year. Diluted
earnings (loss) per common share assumes that all common stock equivalents
have been converted to common shares using the treasury stock method.
j. IMPAIRMENT OF LONG-LIVED ASSETS - The Company reviews long-lived assets
for impairment whenever circumstances and situations change such that there
is an indication that the carrying amounts may not be recovered. At
September 29, 2000 the Company believes that there has been no impairment
of its long-lived assets.
k. STOCK BASED COMPENSATION - The Company accounts for stock transactions
in accordance with APB Opinion No. 25, "Accounting for Stock Issued to
Employees". In accordance with Statement of Financial Standards No. 123,
"Accounting for Stock Based Compensation" the Company has adopted the pro
forma disclosure requirements of Statement No. 123.
F-7
l. CONCENTRATIONS OF CREDIT RISK - The Company is actively involved in
securities underwriting, brokerage, distribution and trading. These and
other related services are provided on a national basis to a large and
diversified group of clients and customers, including corporations,
governments, financial institutions and individual investors. The Company's
exposure to credit risk associated with the non-performance by these
customers and counterparties in fulfilling their contractual obligations
can be directly impacted by volatile or illiquid trading markets which may
impair the ability of customers and counterparties to satisfy their
obligations to the Company.
Substantially all of the securities held for the exclusive benefit of
customers, pursuant to SEC Rule 15c3-3, consist of issues by the U.S.
Government or federal agencies. The Company's most significant counterparty
concentrations are other brokers and dealers, commercial banks,
institutional clients and other financial institutions. This concentration
arises in the normal course of the Company's business.
Additionally, the Company maintains deposits at financial institutions
which at times, may exceed the $100,000 federally insured limit.
3. CORPORATE RESTRUCTURING AND ACQUISITIONS AND DISPOSALS
ACQUISITIONS - In June 1997, the Company acquired all of the outstanding
stock of WestAmerica, a Scottsdale, Arizona based broker-dealer
specializing in retail brokerage services. WestAmerica was acquired for
$443,000 in cash and an agreement that provides for the payment of bonus
compensation to certain brokers. The Company recorded this transaction
under the purchase method of accounting and recorded goodwill of $83,000
for the purchase price and direct costs in excess of the net fair value of
the assets acquired.
Effective January 1, 1998, the Company sold its investment in Travis to
Travis & Company, a Salt Lake City, Utah based broker-dealer focusing on
private placement of securities for emerging and middle market companies in
the U.S. and internationally which it had acquired in June 1999 in exchange
for 20,000 unregistered shares of the Company's common stock valued at
$90,000. Travis was sold in exchange for a note of $281,000. The Company
wrote off unamortized goodwill of $40,000, recorded a gain of approximately
$97,000 and subsequent to the sale recorded a corresponding allowance on
the note receivable of $215,000. The Company collected approximately
$66,000 and received 1,025 shares of the Company's common stock.
Effective August 31, 1998, the Company sold its investment in Friend, a
Southern California based broker dealer acquired in March 1997, to an
investment group led by the subsidiary's management in exchange for
$500,000 and the redemption of 55,509 shares of the Company's common stock
issued in the purchase. The Company wrote off goodwill and receivables of
approximately $1,334,000. The Company recorded a loss on the transaction of
approximately $900,000.
F-8
In June 2000, the Company acquired all of the outstanding stock of
Canterbury, an Illinois based broker-dealer focusing on private placement
of securities. Canterbury was acquired for $30,000 in cash plus the
issuance of warrant to purchase 5,000 shares of the common stock of the
Company at an excercise price of $6.375 per share. The Company recorded
this transaction under the purchase method of accounting and recorded
goodwill of $50,000.
The operating results of these acquired companies are included in the
consolidated statement of operations from their respective acquisition
dates through their dates of disposition. Goodwill resulting from the
WestAmerica and Canterbury acquisitions are being amortized over five
years.
4. CASH, CASH EQUIVALENTS AND SECURITIES
Cash, cash equivalents, and securities have been segregated in special
reserve bank accounts for the exclusive benefit of customers under Rule
15c3-3 of the Securities and Exchange Commission and consist of:
September 29, September 24,
2000 1999
---------------- ------------------
United States Government
obligations $ 29,512,000 $ 40,521,000
Cash 5,000 895,000
---------------- ------------------
$ 29,517,000 $ 41,416,000
================ ==================
The United States Government obligations mature at various dates through
January 2029 and are stated at current market values. The reverse
repurchase agreements are carried at cost, which approximates market value.
The Company purchases these obligations at fixed, variable and adjustable
interest rates in order to reduce exposure to interest rate changes.
5. CUSTOMER RECEIVABLES AND PAYABLES
The Company seeks to protect itself from the risks associated with customer
activities by requiring customers to maintain margin collateral in
compliance with regulatory and its own internal guidelines, which are more
stringent than regulatory margin requirements. Margin levels are monitored
daily and additional collateral must be deposited as required. Where
customers cannot meet collateral requirements, the Company will liquidate
underlying financial instruments sufficient to bring the accounts in
compliance.
Exposure to credit risk is affected by the markets for financial
instruments, which can be volatile and may impair the ability of clients to
satisfy their obligations to the Company.
F-9
Credit limits are established and closely monitored for customers and
broker-dealers engaged in transactions deemed to be credit-sensitive.
Included in amounts payable to customers are balances in accounts of
officers and directors totaling $204,000 at September 29, 2000 and $109,000
at September 24, 1999 respectively.
6. BROKER-DEALER RECEIVABLES AND PAYABLES
Amounts receivable from and payable to brokers and dealers include:
September 29, September 24,
2000 1999
---------------- -------------------
Due from clearing organization $ 461,000 $ 1,231,000
Deposits paid for securities borrowed 179,000 720,000
Commissions receivable 292,000 327,000
Interest and dividends - 5,000
Securities failed to deliver 1,062,000 59,000
---------------- ------------------
Total receivable $ 1,994,000 $ 2,342,000
================ ==================
Due to clearing organization $ 4,499,000 $ 6,819,000
Securities failed to receive 830,000 762,000
---------------- ------------------
Total payable $ 5,329,000 $ 7,581,000
================ ==================
Securities borrowed are recorded at the amount of cash collateral advanced
or received. The Company monitors the market value of securities borrowed
and loaned on a daily basis and obtains additional collateral from
counterparties as necessary.
The Company has receivables and payables for financial instruments sold to
and purchased from broker-dealers. The Company is exposed to risk of loss
from the inability of broker-dealers to pay for purchases or to deliver
financial instruments sold, in which case the Company would have to sell or
purchase the financial instruments at prevailing market prices.
F-10
7. SECURITIES HELD FOR RESALE
Securities held for resale and securities sold, but not yet purchased
consist of the following:
September 29, 2000 September 24, 1999
---------------------------------- ------------------------
Securities Sold , But Securities Sold, But
Held For Resale Not Yet Held For Not Yet
Purchased Resale Purchased
---------------- --------------- ---------- ----------
Corporate stocks $ 370,000 $ 192,000 $ 294,000 $ 134,000
U.S. Government
obligations 6,000 - - -
Stock options - - 4,000 5,000
------------- ---------- ----------- ------------
$ 376,000 $ 192,000 $ 298,000 $ 139,000
============= ========== =========== ============
Securities held for resale and securities sold, but not yet purchased are
recorded at fair value. Fair value is generally based upon quoted market
prices. If quoted market prices are not available, or if liquidating the
Company's position is reasonably expected to impact market prices, fair
value is determined based upon other relevant factors, including dealer
price quotations, price activity of similar instruments and pricing models.
Pricing models consider the time value and volatility factors underlying
the financial instruments and other economic measurements.
Securities sold, but not yet purchased commit the Company to deliver
specified securities at predetermined prices. The transactions may result
in market risk since, to satisfy the obligation, the Company must acquire
the securities at market prices, which may exceed the values reflected on
the Consolidated Statement of Financial Condition.
F-11
8. FIXED ASSETS
Fixed assets, at cost, consist of the following:
September 29, 2000 September 24, 1999
------------------ ------------------
Office machines $ 446,000 $ 320,000
Furniture and fixtures 629,000 561,000
Interactive fixed assets 56,000 -
Phone system 151,000 -
Electronic equipment 1,155,000 383,000
Leasehold improvements 169,000 935,000
Assets under capital leases 1,180,000 1,180,000
----------------- ------------------
3,786,000 3,379,000
Less accumulated depreciation and
amortization 2,674,000 2,203,000
----------------- ------------------
$ 1,112,000 $ 1,176,000
================= ==================
In April 1998 and June 1998, the Company entered into sale and leaseback
agreements with an outside funding company. As part of the agreement the
Company sold certain fixed assets to the funding company for $930,000 and
$250,000 in April and June, respectively, and agreed to lease these assets
back over a forty-eight month period. The Company recorded no gain or loss
and has recorded this transaction as a capital lease.
The following is a schedule of assets under capital leases:
Office machines $ 180,000
Furniture and fixtures 512,000
Electronic equipment 352,000
Leasehold improvements 136,000
------------------
1,180,000
Less accumulated depreciation and amortization (634,000)
------------------
$ 546,000
==================
F-12
The following is a schedule by years of future minimum lease payments under
these capital leases together with the present value of the net minimum
lease payments as of September 29, 2000:
Fiscal year ended
2001 $ 340,000
2002 357,000
----------------
Total minimum lease payments 697,000
Less: Amount representing taxes 39,000
----------------
Net minimum lease payments 658,000
Less amount representing interest 76,000
----------------
Present value of net minimum lease payments $ 582,000
================
9. LINE OF CREDIT
National has an unsecured line of credit of up to $3,000,000. The line is
subject to renewal in January 2001. Borrowings bear interest at the bank's
prime rate which was 9.50% at September 29, 2000. Interest is payable
monthly. At September 29, 2000, the Company had no outstanding borrowings
under the line of credit.
10. NOTES PAYABLE
In November 1997, the Company executed two promissory notes totaling
$925,000. The notes bear interest at 6% and 8% with the principal to be
repaid in 24 monthly installments commencing on December 31, 2000. In
connection with the notes, warrants for the purchase of 126,000 shares at
an exercise price of $5.36 per share of the Company's common stock were
issued. The warrants were valued at $120,000 and were recorded as a
discount to the notes. During the year ended September 29, 2000, the
Company satisfied one the above notes which had a remaining balance of
$425,000 with the proceeds from the exercise of 78,750 warrants.
In January 1998, the Company executed a promissory note for $1,000,000.
This note bears interest at 8% and the principal is to be repaid in 24
monthly installments commencing on December 31, 2000. In connection with
the note, warrants for the purchase of 157,500 shares at an exercise price
of $5.34 per share of the Company's common stock were issued. The warrants
were valued at $157,500 and were recorded as a discount to the note. During
the year ended September 29, 2000, the Company prepaid $841,000 of the note
with the proceeds from the exercise of 157,500 warrants.
F-13
The following is a schedule by years of debt maturity as of September 29,
2000:
Fiscal year ended
2001 $ 275,000
2002 330,000
2003 55,000
----------------
660,000
Less: discount on notes (46,000)
----------------
$ 614,000
================
11. FEDERAL INCOME TAX
The income tax (provision) benefit consists of:
Years Ended
----------------------------------------------------------
September 29, September 24, September 25,
2000 1999 1998
------------------ ----------------- --------------
Current federal
income tax $ (392,000) $ 8,000 $ 626,000
Deferred federal
income tax 79,000 - (2,000)
Current state
income tax (46,000) 4,000 -
----------------- ---------------- --------------
$ (359,000) $ 4,000 $ 624,000
================= ================ ==============
F-14
The income tax (provision) benefit varies from the federal statutory rate
as follows:
Years Ended
----------------------------------------------------------
September 29, 2000 September 24, 1999 September 25, 1998
------------------ ------------------- -------------------
Statutory federal
rate $ (651,000) $ (39,000) $ 1,852,000
State income taxes,
net of federal
income tax benefit (96,000) (4,000) -
Losses for which no
benefit is provided - - (1,230,000)
Tax benefit of net
operating losses 642,000 47,000 -
Other (254,000) - 2,000
---------------- ------------------ -----------------
$ (359,000) $ 4,000 $ 624,000
================ ================== =================
Significant components of the Company's deferred tax assets which are
included in other assets in the accompanying financial statements are as
follows:
September 29, September 24,
2000 1999
--------------- -------------------
Net Operating losses $ - $ 578,000
Difference in depreciation and
reserves for employee advances 117,000 125,000
--------------- --------------------
Total 117,000 703,000
Valuation allowance - (662,000)
--------------- -------------------
Total deferred tax asset $ 117,000 $ 41,000
=============== ====================
F-15
12. COMMITMENTS
EMPLOYMENT AGREEMENTS - During fiscal 1999 the Company entered into
employment agreements with five executive officers. Four of such agreements
are for a term of three years expiring in June 2002 at an annual salary
aggregating $960,000. The agreements provide for payment of one year's
salary upon severance of employment by the Company and of two years salary
if the Company or executive elects to terminate employment after the
occurrence of a change in control of the Company, as defined. The other
agreement is for a term of four years expiring in June 2003 at an annual
salary of $350,000 plus incentive compensation, as defined, not to exceed
$50,000. Such agreement provides for the same compensation terms in the
event of termination of employment.
During fiscal 2000 the Company entered into an employment agreement with an
executive officer. The term of the agreement is three years expiring in
June 2003 with an annual salary of $400,000 and immediately vested options
to acquire 150,000 shares of the Company's common stock at an exercise
price of $7.25 per share. The agreement provides for payment of one year's
salary upon severance of employment by the Company.
LEASES - As of September 29, 2000, the Company is committed under operating
leases for future minimum lease payments as follows:
FISCAL YEAR ENDING
2001 $ 1,345,000
2002 1,065,000
2003 849,000
2004 602,000
-----------------
$ 3,861,000
=================
Rental expense for operating leases for the years ended September 29, 2000,
September 24, 1999 and September 25, 1998 was $1,541,000, $933,000 and
$1,661,000, respectively.
UNDERWRITINGS - During fiscal 2000, the Company participated in
underwriting securities for private placements, initial and secondary
public offerings. At September 29, 2000, the Company has no outstanding
commitments relating to underwriting transactions.
F-16
13. CONTINGENCIES
In June 1997, a Trust and three individuals, commenced a lawsuit against
Olympic and National. The action against Olympic was subsequently
dismissed. The plaintiffs alleged the defendants' failure to purchase
securities from them constitutes, among other things, breach of contract,
securities rule violations and fraud. In February 1999, the District Court
dismissed plaintiffs' claims against National in their entirety and granted
National's motion for summary judgement. A final judgement was issued by
the court in April 1999. The plaintiffs filed a notice of appeal in May
1999 and oral arguments were heard on December 6, 2000.
The Company has been named together with others as a defendant in a
consolidated lawsuit filed against an unrelated third party in 1999. No
specific amounts of damages has been sought against the Company in the
complaint. In June 2000, the Company filed to dismiss the above action.
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 $3,600,000. These matters arise out of the
normal course of business.
The Company intends to vigorously defend itself in these actions, and in
any event, does not believe these actions singularly or combined would have
a material adverse effect on the Company's financial statements or business
operations.
14. STOCKHOLDERS' EQUITY
STOCK OPTIONS - The Company's stock option plans provide for the granting
of stock options to certain key employees, directors and investment
executives. Generally, options outstanding under the Company's stock option
plan are granted at prices equal to or above the market value of the stock
on the date of grant, vest either immediately or ratably over up to five
years, and expire five years subsequent to award.
The Company applies APB Opinion No. 25 and related Interpretations in
accounting for its plans. FASB Statement No. 123 "Accounting for
Stock-Based Compensation" ("SFAS 123") was issued by the FASB and, if fully
adopted, changes the methods for recognition of cost on plans similar to
those of the Company. Had compensation cost for the Company's stock option
plans been determined base upon the fair value at the grant date for awards
under these plans consistent with the methodology prescribed under SFAS
123, the Company's net income and earnings per share would have been
reduced by approximately $1,696,000 $.80 per share in 2000, $705,000, or
$.45 per share in 1999, $761,000, or $0.50 per share in 1998. The fair
value of the options granted during 2000, 1999 and 1998 is estimated at
$1,696,000, $946,000 and $1,153,000, respectively, on the date of grant
using the Black-Scholes option-pricing model with the following
assumptions:
F-17
2000 1999 1998
-------------- ------------ --------------
Volatility 106.00% 144.00% 63.87%
Risk-free interest rate 6.25% 5.00% 6.17%
Expected life 5 years 5 years 5 years
A summary of the status of the Company's stock options is presented below:
Weighted
Average
Price
Authorized Granted Available Per Share
------------------ -------------- -------------- -------------
Balance,
September 26, 1997 1,183,806 781,130 402,676 $ 4.88
Creation of new plan - 148,500 (148,500)
Granted (2,012) (2,012) - $ 3.73
Exercised (161,640) (161,340) -
------------------ -------------- --------------
Balance,
September 25, 1998 1,020,454 766,278 254,176 $ 4.84
Creation of new plan 500,000 - 500,000 -
Granted - 425,500 (425,500) 4.35
Exercised (82,613) (82,613) - $ 3.62
Forfeitures (40,643) (40,643) - $ -
------------------ -------------- --------------
Balance,
September 24, 1999 1,397,198 1,068,522 328,676 $ 4.65
Creation of new plan 500,000 - 500,000 -
Granted - 383,600 (383,600) $ 6.82
Exercised (139,063) (139,063) - $ 4.14
Forfeitures (75,918) (75,918) - $ -
------------------ -------------- --------------
Balance,
September 29, 2000 1,682,217 1,237,141 445,076 $ 5.41
================== ============== ==============
F-18
The following table summarizes information about stock options outstanding at
September 29, 2000:
Options Outstanding Options Exercisable
------------------------------------------------------ ---------------------------------
Weighted Weighted Weighted
Range of Average Average Average
Exercise Prices Number Remaining Exercise Number Exercise
Outstanding Contract Life Prices Exercisable Prices
- ------------------ ---------------- ---------------- ------------ ---------------- ------------
$3.39-3.81 252,833 1.42 $ 3.59 227,633 $ 3.60
$4.00-4.69 341,538 3.12 $ 4.32 256,779 $ 4.32
$5.36-5.64 164,356 2.12 $ 5.42 149,497 $ 5.42
$6.13-6.75 95,000 4.88 $ 6.32 65,000 $ 6.13
$7.12-7.50 338,914 3.28 $ 7.23 338,914 $ 7.23
$8.00-8.50 44,500 4.50 $ 8.28 35,000 $ 8.21
---------------- ----------------
1,237,141 1,072,823
================ ================
15. NET CAPITAL REQUIREMENTS
National, as a registered broker-dealer is subject to the SEC's Uniform Net
Capital Rule 15c3-1, which requires the maintenance of minimum net capital.
National has elected to use the alternative standard method permitted by
the rule. This requires that National maintain minimum net capital equal to
the greater of $250,000 or 2% of aggregate debit items. At September 29,
2000, National's net capital exceeded the requirement by $4,575,000.
WestAmerica, as a registered broker-dealer is also subject to the SEC's Net
Capital Rule 15c3-1, which, under the standard method, requires that each
company maintain minimum net capital equal to the greater of $100,000 or 6
2/3% of aggregate indebtedness. At September 29, 2000, WestAmerica's net
capital exceeded the requirement by $193,000.
F-19
Canterbury is also subject to the Securities and Exchange Commission's
Uniform Net Capital Rule 15c3-1, which requires the maintenance of minimum
net capital. Canterbury must meet a minimum capital requirement of $5,000.
As of September 29, 2000, Canterbury was in compliance with the minimum
capital requirement.
Advances, dividend payments and other equity withdrawals from its
subsidiaries are restricted by the regulations of the SEC, and other
regulatory agencies. These regulatory restrictions may limit the amounts
that these subsidiaries may dividend or advance to the Company.
16. EMPLOYEE BENEFITS
The Company's subsidiaries have defined 401(k) profit sharing plans which
cover substantially all of their employees. Under the terms of the plans,
employees can elect to defer up to 25% of eligible compensation, subject to
certain limitations, by making voluntary contributions to their respective
plans. Each company's annual contributions are made at the discretion of
the respective Board of Directors. During the fiscal years September 29,
2000, September 24, 1999 and September 25, 1998, the Company made no such
contributions.
17. FINANCIAL INFORMATION - OLYMPIC CASCADE FINANCIAL CORPORATION
Olympic was formed on February 6, 1997. The following Olympic (parent
company only) financial information should be read in conjunction with the
other notes to the consolidated financial statements.
F-20
OLYMPIC CASCADE FINANCIAL CORPORATION
STATEMENTS OF FINANCIAL CONDITION
ASSETS
September 29, September 24,
2000 1999
------------------ ------------------
Cash, subject to immediate withdrawal $ 31,000 $ 15,000
Receivable from subsidiaries 567,000 197,000
Other receivables 41,000 50,000
Capital leases 546,000 812,000
Investment in subsidiaries 8,219,000 5,757,000
Other assets 122,000 87,000
------------------ ------------------
$ 9,526,000 $ 6,918,000
================== ==================
LIABILITIES AND STOCKHOLDERS' EQUITY
Accounts payable, accrued expenses and other liabilities $ 291,000 $ 110,000
Payable to subsidiaries - 256,000
Capital lease payable 582,000 865,000
Note payable 614,000 1,648,000
------------------ ------------------
1,487,000 2,879,000
------------------ ------------------
Stockholders' equity 8,039,000 4,039,000
------------------ ------------------
$ 9,526,000 $ 6,918,000
================== ==================
F-21
OLYMPIC CASCADE FINANCIAL CORPORATION
STATEMENTS OF OPERATIONS
Years Ended
--------------------------------------------------------------------
September 29, 2000 September 24, 1999 September 25, 1998
--------------------- ---------------------- --------------------
Operating expenses $ (1,164,000) $ (624,000) $ (2,609,000)
--------------------- ---------------------- --------------------
Other income (expenses)
Interest and other income 60,000 20,000 151,000
Gain on investment in subsidiaries(net of income taxes) 2,660,000 717,000 (1,094,000)
Gain on sale of investments - 5,000 (1,114,000)
--------------------- --------------------- -------------------
Net income $ 1,556,000 $ 118,000 $ (4,666,000)
===================== ===================== ===================
F-22
OLYMPIC CASCADE FINANCIAL CORPORATION
STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
Additional
Common Stock Paid-In Accumulated
Shares Amount Capital Deficit Total
----------- ------------ ------------ -------------- ----------------
BALANCE, September 26, 1997 1,444,205 $ 29,000 $ 8,821,000 $ (1,246,000) $ 7,604,000
Exercise of stock options, including
income tax benefit 2,012 - 8,000 - 8,000
Stock dividends 72,299 1,000 351,000 (352,000) 0
Stock redemption (55,509) (1,000) (304,000) - (305,000)
Original discount on notes payable - - 307,000 - 307,000
Net loss - - - (4,666,000) (4,666,000)
---------- ----------- ---------------- ---------------- --------------
BALANCE, September 25, 1998 1,463,007 29,000 9,183,000 (6,264,000 2,948,000
---------- ----------- ---------------- ---------------- --------------
Exercise of stock options 82,613 2,000 297,000 0 299,000
Exercise of stock warrants 5,000 0 20,000 0 20,000
Treasury stock (1,025) 0 (5,000) 0 (5,000)
Issuance of common stock in legal settlements
and payment of services 145,000 3,000 498,000 0 501,000
Warrants issued in conjunction with legal settlements - 0 120,000 0 120,000
Options issued to consultants - 0 38,000 0 38,000
Net income - 0 0 118,000 118,000
------------ ------------ ---------------- ---------------- --------------
BALANCE, September 24, 1999 1,694,595 34,000 10,151,000 (6,146,000) 4,039,000
------------ ------------ ---------------- ---------------- --------------
Exercise of stock options, including
$150,000 income tax benefit 144,063 3,000 744,000 747,000
Exercise of stock warrants 315,188 6,000 1,589,000 1,595,000
Options issued to consultants 82,000 82,000
Warrants issuance in connection with acquisition 20,000 20,000
Net income 1,556,000 1,556,000
----------- ------------ ---------------- ---------------- --------------
Balance, September 29, 2000 2,153,846 $ 43,000 $ 12,586,000 $ (4,590,000) $ 8,039,000
=========== ============ ================ ================ ==============
F-23
OLYMPIC CASCADE FINANCIAL CORPORATION
STATEMENTS OF CASH FLOWS
Years Ended
--------------------------------------------------------------------------
September 29, 2000 September 24, 1999 September 25, 1998
------------------- ----------------------- ----------------------
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 1,556,000 $ 118,000 $ (4,666,000)
Adjustments to reconcile net income to net cash
provided by (used in) from operating activities
Gain on foreign currency translation - - -
Loss on investment in subsidiaries (1,602,000) 232,000 1,094,000
Gain (loss) on sale of subsidiaries - (5,000) 1,114,000
Issuance of common stock in lawsuit settlement - 501,000 -
Issuance of common stock in payment of expenses - 120,000 -
Compensation related to issuance of stock options 82,000 38,000 -
Depreciation and amortization 290,000 285,000 169,000
Changes in assets and liabilities (238,000) (720,000) 1,196,000
---------------- ----------------- ----------------------
NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES 88,000 569,000 (1,093,000)
---------------- ----------------- ----------------------
CASH FLOWS FROM INVESTING ACTIVITIES
Acquisition of subsidiaries (30,000) - -
Capital contributions to subsidiaries (860,000) (233,000) (135,000)
---------------- ----------------- ----------------------
NET CASH USED IN INVESTING ACTIVITIES (890,000) (233,000) (135,000)
---------------- ------------------ ----------------------
CASH FLOWS FROM FINANCING ACTIVITIES
Exercise of stock options 597,000 319,000 8,000
Proceeds from notes payable - - 1,925,000
Exercise of stock warrants 1,595,000
Payments on capital lease (340,000) (348,000) (108,000)
Payments on note payable (1,034,000) (300,000) (600,000)
---------------- ---------------- ----------------------
NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES 818,000 (329,000) 1,225,000
---------------- ---------------- ----------------------
NET INCREASE IN CASH 16,000 7,000 (3,000)
CASH BALANCE
Beginning of year 15,000 8,000 11,000
---------------- ---------------- ----------------------
End of year $ 31,000 $ 15,000 $ 8,000
================ ================ ======================
F-24
EXHIBIT INDEX
3.1 Certificate of Incorporation, previously filed on Form S-4 in
November 1996 and hereby incorporated by reference.
3.2 The Company's Bylaws, previously filed on Form S-4 in November
1996 and hereby incorporated by reference.
3.3 The Company's Amended and Restated Bylaws
10.1 Office lease, Chicago, Illinois, previously filed as Exhibit
10.27 to Form 10-K in December 1996 and hereby incorporated by
reference.
10.2 Office lease, Spokane, Washington, previously filed as Exhibit
10.28 to Form 10-K in December 1996 and hereby incorporated by
reference.
10.3 Amended office lease, Chicago, Illinois, previously filed as
Exhibit 10.29 to Form 10-K in December 1996 and hereby
incorporated by reference.
10.4 Purchase agreement between shareholders of Friend and the
Company, previously filed as Exhibit 10.30 to Form 10-K in
December 1997 and hereby incorporated by reference.
10.5 Purchase agreement between shareholders of WestAmerica and the
Company, previously filed as Exhibit 10.31 to Form 10-K in
December 1997 and hereby incorporated by reference.
10.6 Purchase agreement between shareholders of Travis and the
Company, previously filed as Exhibit 10.32 to Form 10-K in
December 1997 and hereby incorporated by reference.
10.7 Borrowing agreement between Seattle-First National Bank and the
Company, previously filed as Exhibit 10.33 to Form 10-K in
December 1998 and hereby incorporated by reference.
10.8 Note payable agreement, previously filed as Exhibit 10.34 to Form
10-K in December 1998 and hereby incorporated by reference.
10.9 Note payable agreement, previously filed as Exhibit 10.35 to Form
10-K in December 1998 and hereby incorporated by reference.
10.10 Note payable agreement, previously filed as Exhibit 10.36 to Form
10-K in December 1998 and hereby incorporated by reference.
10.11 Sales agreement between Friend and the Company, previously filed
as Exhibit 10.37 to Form 10-K in December 1998 and hereby
incorporated by reference.
10.12 1996 Stock Option Plan, previously filed as Exhibit 4.1 to Form
S-8 in February 1999 and hereby incorporated by reference.
10.13 1997 Stock Option Plan, previously filed as Exhibit 4.2 to Form
S-8 in February 1999 and hereby incorporated by reference.
10.14 1999 Stock Option Plan, previously filed as Exhibit 4.3 to Form
S-8 in February 1999 and hereby incorporated by reference.
22
10.15* Employment contract dated July 1999, previously filed as Exhibit
10.15 to Form 10-K in December 1999 and hereby incorporated by
reference.
10.16* Employment contract dated July 1999 previously filed as Exhibit
10.16 to Form 10-K in December 1999 and hereby incorporated by
reference.
10.17* Employment contract dated July 1999 previously filed as Exhibit
10.17 to Form 10-K in December 1999 and hereby incorporated by
reference.
10.18* Employment contract dated July 1999 previously filed as Exhibit
10.18 to Form 10-K in December 1999 and hereby incorporated by
reference.
10.19* Employment contract dated July 1999 previously filed as Exhibit
10.19 to Form 10-K in December 1999 and hereby incorporated by
reference.
10.20 Office lease, Seattle, Washington previously filed as Exhibit
10.20 to Form 10-K in December 1999 and hereby incorporated by
reference.
10.21 2000 Stock Option Plan, previously filed as Exhibit 4.1 to Form
S-8 in June 2000 and hereby incorporated by reference.
10.22* Employment contract dated June 2000.
11. Computation of Earnings per Share.
16.1 Change in Certifying Accountant, previously filed to Form 8-K in
August 1998 and hereby incorporated by reference.
21. Subsidiaries of Registrant.
23.1 Consent of Feldman Sherb Erhlich & Co., P.C., previously filed to
Forms S-8 in February 1999 and June 2000 and Forms S-3 in May
1999 and June 1999 and hereby incorporated by reference.
23.2 Consent of Moss Adams LLP, previously filed to Forms S-8 in
February 1999 and June 2000 and Forms S-3 in May 1999 and June
1999 and hereby incorporated by reference.
23.3 Consent of Camhy Karlinsky & Stein LLP, previously filed to Form
S-8 in February 1999 and Forms S-3 in May 1999 and June 1999 and
hereby incorporated by reference.
23.4 Consent of D'Ancona & Pflaum LLC, previously filed to Form S-8 in
June 2000 and hereby incorporated by reference.
24. Power of Attorney, previously filed to Forms S-3 in May 1999 and
June 1999.
27. Financial Data Schedule.
*Compensatory agreements
23