UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Fiscal Year Ended Commission File No. 001-12629
September 30, 2002
OLYMPIC CASCADE FINANCIAL CORPORATION
(Exact Name of Registrant as specified in its charter)
DELAWARE 36-4128138
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
875 North Michigan Avenue, Suite 1560, Chicago, IL 60611
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (312) 751-8833
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Securities registered pursuant to Section 12(b) of the Act: None
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Securities registered pursuant to Section 12(g) of the Act:
Common stock $.02 par value
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(Title of class)
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
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Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K of this chapter is not contained herein, and will not be
contained, to the best of Registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-K
or any amendment to this Form 10-K.
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Exchange Act Rule 12b-2).
Yes No X
As of December 19, 2002, the aggregate market value of voting and non-voting
common equity held by non-affiliates of the registrant, based on the closing
sales price for the registrant's common stock, as reported by The American Stock
Exchange was approximately $1,145,397 (calculated by excluding shares owned
beneficially by directors and officers). As of December 19, 2002 there were
3,159,865 shares of the registrant's common stock outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Company's Proxy Statement filed with the Securities and Exchange
Commission ("SEC") in connection with the Company's Annual Meeting of
Shareholders to be held on March 13, 2003 (the "Company's 2003 Proxy Statement")
are incorporated by reference into Part III hereof.
1
PART I
Item 1 - BUSINESS
Statements made in this report that relate to future plans, events, financial
results or performance are forward-looking statements as defined under the
Private Securities Litigation Reform Act of 1995. These statements are based
upon current information and expectations. Actual results may differ materially
from those anticipated as a result of certain risks and uncertainties. For
details concerning these and other risks and uncertainties, see Part I, Item 1,
"Risk Factors" of this report, as well as the Company's other periodic reports
on Forms 10-K, 10-Q and 8-K subsequently filed with the Securities and Exchange
Commission from time to time. Readers are cautioned not to place undue reliance
on these forward-looking statements, which speak only as of the date hereof. The
Company undertakes no obligation to republish revised forward-looking statements
to reflect events or circumstances after the date hereof or to reflect the
occurrence of unanticipated events.
(a) General
Olympic Cascade Financial Corporation, a Delaware corporation organized in 1996
("Olympic" or the "Company"), is a financial services organization operating
through its wholly-owned subsidiary, National Securities Corporation, a
Washington corporation organized in 1947 ("National"). National conducts a
national securities brokerage business through its main offices in Seattle,
Washington and New York City, as well as 56 other branch offices located
throughout the country. National's business includes securities brokerage for
individual and institutional clients, market-making trading activities, asset
management and corporate finance services.
National provides a broad range of securities brokerage and investment services
to a diverse retail and institutional clientele, as well as corporate finance
and investment banking services to corporations and businesses. National's
brokers operate as independent contractors. A registered representative who
becomes an affiliate of National establishes his own office and is responsible
for the payment of all expenses associated with the operation of such office,
including rent, utilities, furniture, equipment, stock quotation machines and
general office supplies. In return, the registered representative is entitled to
retain a higher percentage of the commissions generated by his sales than a
registered representative at a traditional employee-based brokerage firm. This
arrangement allows National to operate with a reduced amount of fixed costs and
lowers the risk of operational losses for non-production.
(b) Significant Developments
In fiscal year 2002, the Company completed a series of transactions under which
certain new investors (collectively, the "Investors") obtained a significant
ownership in the Company through a $1,572,500 investment in the Company and by
purchasing a majority of shares held by Steven A. Rothstein and family, the
former Chairman, Chief Executive Officer and principal shareholder of the
Company (the "Investment Transaction"). The Investors included Triage Partners
LLC ("Triage"), an affiliate of Sands Brothers & Co., Ltd., a New York Stock
Exchange ("NYSE") member firm, and One Clark LLC ("One Clark"), an affiliate of
Mark Goldwasser, the current Chief Executive Officer and President of the
Company. The Investors purchased an aggregate of $1,572,500 of Series A
Preferred Stock from the Company, which is convertible into Common Stock at a
price of $1.50 per share. The Company incurred $100,000 of legal costs related
to these capital transactions. In connection with the Investment Transaction,
Triage also purchased 285,000 shares of Common Stock from Mr. Rothstein and his
affiliates at a price of $1.50 per share. In addition, Mr. Rothstein and his
affiliates granted Triage a three-year voting proxy on the balance of their
Common Stock (274,660 shares).
2
Concurrent with the Investment Transaction, two unrelated individual noteholders
holding $2.0 million of the Company's debt converted one-half of their debt into
the same class of Series A Preferred Stock that was sold in the Investment
Transaction. The noteholders also had 100,000 of their 200,000 warrants to
acquire shares of common stock repriced from an exercise price of $5.00 per
share to $1.75 per share.
In the fourth quarter of fiscal year 2002, the Company raised an aggregate of
$210,000 pursuant to the sale of Series A Preferred Stock (on the same terms and
conditions as the equity sold to the Investors) to Mr. Rothstein.
In the first quarter of fiscal year 2003, the Company consummated a private
placement of its securities to a limited number of accredited investors pursuant
to Rule 501 of Regulation D under the Securities Act (the "Private Offering").
Each unit in the Private Offering sold for $0.65 and consisted of one share of
the Company's Common Stock and one three-year warrant to purchase one share of
the Company's Common Stock at a per share price of $1.25 (the "Warrants"). Gross
proceeds of $575,520 closed in the first quarter of fiscal year 2003, and the
Company correspondingly issued 885,416 shares of Common Stock and 885,416
Warrants. The maximum amount to be raised in the Private Offering is $2.0
million (3,076,924 shares of Common Stock and 3,076,924 Warrants). The Company
has agreed to file a Registration Statement under the Securities Act for the
resale of the shares of Common Stock and the shares of Common Stock issuable
upon exercise of the Warrants, on or before March 3, 2003, and use its
commercially reasonable efforts to cause such registration statement to become
effective as promptly as possible and to maintain the effectiveness of such
registration. National is acting as the placement agent on a best efforts basis
for the Private Offering.
In August 2001, the Company entered into an agreement with First Clearing
Corporation ("First Clearing"), a wholly owned subsidiary of Wachovia
Corporation, under which First Clearing provides clearing and related services
for National (the "Clearing Agreement"). The Clearing Agreement expands the
products and services capabilities for National's retail and institutional
business, and enables National to consolidate its existing clearing operations
and to reduce the fixed overhead associated with its self-clearing activities.
The conversion to First Clearing began in December 2001 and was completed in
March 2002. In connection with the Clearing Agreement, the Company executed a
ten-year promissory note in favor of First Clearing under which the Company
immediately borrowed $1,000,000. The funds were contributed by the Company to
National, and are being used as a deposit to secure National's performance under
the Clearing Agreement. The Clearing Agreement also provided for another
$1,000,000 loan that was extended to the Company upon substantial completion of
the conversion on December 31, 2001 that the Company also contributed to
National. The amount of the note that is repayable on each anniversary date is
the principal and interest then outstanding divided by the remaining life of the
note. Borrowings under the promissory note are forgivable based on achieving
certain business performance and trading volumes of the Company over the life of
the loan, that the Company has satisfied through fiscal year 2002.
3
In connection with the Clearing Agreement, additional borrowings were available
to the Company upon the attainment by National of certain volume and
profitability goals. In finalizing the conversion, a dispute arose among the
Company, US Clearing (one of its former clearing firms) and First Clearing,
regarding the responsibility for debit balances in certain trading accounts. The
three parties agreed to share the debit balance write-offs equally. The
Company's share of this settlement, $548,000, was advanced to the Company by
First Clearing and added to the existing promissory note. As part of the
settlement, the minimum level of stockholders' equity required to be maintained
by the Company under the promissory note was reduced from $2,000,000 to
$1,000,000 and no further borrowings became available under the promissory note,
as amended. Additionally, National received its clearing deposit, net of
miscellaneous expenses, of $975,000 from US Clearing. National terminated its
clearing agreement with US Clearing.
In the first quarter of fiscal year 2003, First Clearing loaned the Company an
additional $375,000 in the form of clearing fee rebates. The loan is due to be
repaid in January 2004. Additionally, First Clearing has waived the
stockholders' equity covenant as of September 30, 2002 and December 31, 2002.
The minimum level of stockholders' equity required to be maintained will be
$500,000 as of March 31, 2003 and $1,000,000 as of June 30, 2003.
(c) Financial Information about Industry Segments
For a more detailed analysis of our results by segment see Item 7, "Management
Discussion and Analysis of Financial Condition and Results of Operation."
(d) Brokerage Services
Brokerage services to retail clients are provided through the Company's sales
force of investment executives at National and, until December 2001, at
WestAmerica Investment Group ("WestAmerica").
National Securities Corporation
National is registered as a broker-dealer with the Securities and Exchange
Commission ("SEC") and licensed in 50 states, the District of Columbia and
Puerto Rico. National is also a member of the National Association of Securities
Dealers, Inc. ("NASD"), the Municipal Securities Rulemaking Board ("MSRB") and
the Securities Investor Protection Corporation ("SIPC").
National's goal is to meet the needs of its investment executives and their
clients. To foster individual service, flexibility and efficiency, and to reduce
fixed costs, investment executives at National act as independent contractors
responsible for providing their own office facilities, sales assistants,
telephone and quote service, supplies and other items of overhead. Investment
executives are given broad discretion to structure their own practices and to
specialize in different areas of the securities market subject to supervisory
procedures. In addition, investment executives have direct access to research
materials, management, traders, and all levels of support personnel.
It is not National's normal policy to recommend particular securities to
customers. Recommendations to customers are determined by individual investment
executives based upon their own research and analysis, and subject to applicable
NASD customer suitability standards. Most investment executives perform
fundamental (as opposed to technical) analysis. Solicitations may be by
telephone, seminars or newsletters. Investment executives may request trading to
acquire an inventory position to facilitate sales to customers (subject to the
investment executive's own risk). Supervisory personnel review trading activity
from inventory positions to ensure compliance with applicable standards of
conduct.
4
Salespersons in the brokerage industry are traditionally compensated on the
basis of set percentages of total commissions and mark-ups generated. Most
brokerage firms bear substantially all of the costs of maintaining their sales
forces, including providing office space, sales assistants, telephone service
and supplies. The average commission paid to the salespersons in the brokerage
industry generally ranges from 30% to 50% of total commissions generated.
Since National requires most of its investment executives to absorb their own
overhead and expenses, it is able to pay an average of approximately 65% of net
commissions and mark-ups generated by investment executives. This arrangement
also reduces fixed costs and lowers the risk of operational losses for
non-production. National's operations include execution of orders, processing of
transactions, internal financial controls and compliance with regulatory and
legal requirements.
As a result of the slowdown in the financial markets and the Company's change
from self-clearing to clearing with First Clearing, the Company has scaled back
its employee staff. As of September 30, 2002, the Company had approximately 113
employees and 269 independent contractors. Of these totals, approximately 335
were registered representatives. Persons who have entered into independent
contractor agreements are not considered employees for purposes of determining
the Company's obligations for federal and state withholding, unemployment and
social security taxes. The Company's independent contractor arrangements conform
with accepted industry practice, and therefore, the Company does not believe
there is a material risk of an adverse determination from the tax authorities
which would have a significant effect on the Company's ability to recruit and
retain investment executives, or on the Company's current operations and
financial results of operations. No employees are covered by collective
bargaining agreements, and the Company believes its relations are good with both
its employees and independent contractors.
The Company's business plan includes the growth of its retail and institutional
brokerage business. In response to the slowdown in the financial markets, the
Company has scaled back certain business activities, including: proprietary
trading, market-making trading, and online investing services. Management
believes that consolidation within the industry is inevitable. Concerns
attributable to the weakened market and increased competition help explain the
increasing number of acquisition opportunities continuously introduced to the
Company. The Company is focused on maximizing the profitability of its existing
operations, while it continues to seek additional selective strategic
acquisitions.
In the fiscal year 2001, National cleared approximately 60% of its own
securities transactions and posted its books and records daily, with the
remaining 40% of the transactions clearing through Bear Stearns Securities
Corporation, US Clearing Corporation and Pershing. In August 2001, the Company
entered into an agreement with First Clearing, a wholly owned subsidiary of
Wachovia Corporation, under which First Clearing provides clearing and related
services for National. In December 2001, the Company commenced clearing with
First Clearing. The Clearing Agreement significantly expands the products and
services capabilities for National's retail and institutional business, enables
National to consolidate its existing clearing operations and reduces fixed
overhead associated with its self-clearing activities.
5
Periodic reviews of controls are conducted, and administrative and operations
personnel meet frequently with management to review operating conditions.
Compliance and operations personnel monitor compliance with applicable laws,
rules and regulations.
The Company is engaged in a highly competitive business. With respect to one or
more aspects of its business, its competitors include member organizations of
the New York Stock Exchange, Inc. and other registered securities exchanges in
the United States and Canada, and members of the NASD. Many of these
organizations have substantially greater personnel and financial resources and
more sales offices than the Company. Discount brokerage firms affiliated with
commercial banks provide additional competition, as well as companies that
provide electronic on-line trading. In many instances, the Company is also
competing directly for customer funds with investment opportunities offered by
real estate, insurance, banking, and savings and loans industries. For a further
discussion of risks facing the Company please see the section below entitled,
"Risk Factors."
WestAmerica Investment Group
In December 2001, the Company's former subsidiary, WestAmerica, voluntarily
withdrew its membership with the NASD and ceased conducting business as a
broker-dealer, and filed for Chapter 7 Bankruptcy protection in accordance with
the U.S. Bankruptcy Code. Until December 2001, WestAmerica was registered as a
broker-dealer with the SEC and licensed in 44 states, Puerto Rico and the
District of Columbia. WestAmerica was also a member of the NASD, the MSRB and
the SIPC. WestAmerica offered traditional securities brokerage and financial
planning business and fee-based investment management business to its retail
clients. WestAmerica had been operating as a separate legal entity, and the
Company believes it will not have any ongoing liability for any unpaid
obligations of WestAmerica.
Canterbury Securities Corporation
The Company's former subsidiary, Canterbury Securities Corporation
("Canterbury") was a registered as a broker-dealer with the SEC and was licensed
in Illinois. Canterbury was acquired in June 2000 for cash of $30,000 and the
issuance of five-year warrants to acquire 5,000 unregistered shares of common
stock of the Company at a price of $6.375 per share. Canterbury was a member of
the NASD, the MSRB and the SIPC. Canterbury formerly engaged in private
placement transactions. Canterbury had no retail customer accounts and operated
pursuant to the exemptive provisions of SEC Rule 15c3-3(k)(2)(i). Since its
acquisition, Canterbury had no activity. In May 2002, pursuant to an agreement
made simultaneous with the Investment Transaction, the Company sold Canterbury
for its book value to Mr. Rothstein.
(e) Investment Banking
National provides corporate finance and investment banking services, including
underwriting the sale of securities to the public and arranging for the private
placement of securities with investors. National's corporate finance operations
provide a broad range of financial and corporate advisory services, including
mergers and acquisitions, project financing, capital structure and specific
financing opportunities. National has also underwritten both equity securities
and convertible corporate bonds as initial or secondary public offerings.
6
(f) Principal and Agency Transactions
The Company buys and maintains inventories in equity securities as a
"market-maker" for sale of those securities to other dealers and to customers
through National. The Company may also maintain inventories in corporate,
government and municipal debt securities for sale to customers.
In October 2000, the Company opened a significant branch office of National in
New York City. This office specializes in broker-to-broker fixed income
transactions and equity market making activities. At National, a staff of 10
traders and 2 assistants in its New York, Seattle and Spokane offices, manage an
inventory of securities and conduct market-making activities. In February 2001,
National expanded its New York market-making trade activities. By July 2001,
National made markets in approximately 2,000 securities, comprised mainly of
equities traded on the NASDAQ and OTC Bulletin Board. As a result of the losses
attributable to a slow-down in the broader market, National subsequently reduced
its market-making trading activities during fiscal year 2002. As of September
2002, National makes markets in approximately 300 securities. This includes
companies for which National managed or co-managed a public offering.
The Company's trading departments require a commitment of capital. Most
principal transactions place the Company's capital at risk. Profits and losses
are dependent upon the skill of the traders, price movements, trading activity
and the size of inventories. Since the Company's trading activities occasionally
may involve speculative and thinly capitalized stocks, including stabilizing the
market for securities which it has underwritten, the Company imposes position
limits to reduce its potential for loss.
In executing customer orders to buy or sell a security in which the Company
makes a market, the Company may sell to, or purchase from, customers at a price
that is substantially equal to the current inter-dealer market price plus or
minus a mark-up or mark-down. The Company may also act as agent and execute a
customer's purchase or sale order with another broker-dealer market-maker at the
best inter-dealer market price available and charge a commission. The Company
believes its mark-ups, mark-downs and commissions are competitive based on the
services it provides to its customers.
In executing customer orders to buy or sell listed and over-the-counter
securities in which it does not make a market, the Company generally acts as
agent and charges commissions that the Company believes are competitive, based
on the services the Company provides to its customers. The Company may receive
rebates for the order flow of the securities for which it does not make a
market.
(g) Online trading
In May 2001, the Company closed the operations of NSCdirect (a division of
National), that provided online investing services for its customers. NSCdirect
began trading in April 2000 and was serviced out of Seattle, Washington. The
heavily competitive online trading marketplace coupled with the expenses of
running such division proved to be an unprofitable business for the Company. By
discontinuing its operation the Company was better able to direct its resources
to other ventures.
7
(h) Supervision
The Securities Exchange Act of 1934, as amended, and the NASD Conduct Rules
require the Company's subsidiaries to supervise the activities of its investment
executives. As part of providing such supervision, National maintains an
Operations and Procedures Manual. Compliance personnel conduct inspections of
branch offices no less frequently than annually to review compliance with the
Company's procedures. A registered principal provides continuous supervision at
each of the Company's larger offices. The other offices (averaging two
investment executives per office) are not required by NASD rules to have a
registered principal on site and are therefore supervised by registered
principals of the subsidiary. Compliance reviews each customer trade to ensure
compliance with the NASD Conduct Rules including mark-up guidelines.
In May 2001, without admitting or denying the alleged violations, National
accepted and consented to the entry of the following findings by NASD
Regulation: At various times in 1999 and 2000, the firm violated NASD Conduct
Rules 2860(b)(5); Rule 3360; Rule 3370; Rule 2110 and 3010; and SEC Rule
11Ac1-4. The firm was censured and fined $35,000 in a settlement dated May 21,
2001.
In May 2002, without admitting or denying the alleged violations, National
accepted and consented to the entry of the following findings by NASD
Regulation: At various times in 2001, the firm violated SEC Rule 17-A-4, SEC
Rule 17-A-3, NASD Rule 3010, NASD Rule 3110, and NASD rule 6620(A). The firm was
censured and fined $7,500 in a settlement dated May 2, 2002.
In July 2002, without admitting or denying the alleged violations, National
accepted and consented to the entry of the following findings by NASD
Regulation: At various times in 2000 and 2001, the firm violated NASD Conduct
Rule 11870. The firm was censured and fined $1,000 in a settlement dated July
2002.
In September 2002, without admitting or denying the alleged violations, National
accepted and consented to the entry of the following findings by NASD
Regulation: At various times in 2001, the firm violated NASD Conduct Rules 2110,
Rule 6240(a)(3), and Rule S6240(b)(3). The firm was censured and fined $7,500 in
a settlement dated September 27, 2002.
(i) Venture Capital
In March 2001, the Company had its initial closing of Robotic Ventures Fund I,
L.P., a venture capital fund dedicated to investing in companies engaged in the
business of robotics and artificial intelligence. The fund raised a total of
$5.2 million, $265,000 of which was capital directly invested by the Company
into the fund. The Company serves as the managing member of Robotic Ventures
Group LLC, the general partner of the fund. As the managing member of the fund's
general partner, the Company is entitled to the 2% management fee paid by the
fund. Additionally, the Company owns 24.5% of the fund's general partner, which
is entitled to 20% of the profits generated by the fund after the investors
receive the return of their invested capital. In February 2002, due to a
dramatic slowdown in the technology venture markets, the fund returned a
majority of the uninvested capital to the investors, representing approximately
50% of the funds raised, and no further management fees are to be paid.
8
RISK FACTORS
The financial statements contained in this report and the related discussion
describe and analyze the Company's financial performance and condition for the
periods indicated. For the most part, this information is historical. The
Company's prior results, however, are not necessarily indicative of the
Company's future performance or financial condition. The Company therefore has
included the following discussion of certain factors that could affect the
Company's future performance or financial condition. These factors could cause
the Company's future performance or financial condition to differ materially
from its prior performance or financial condition or from management's
expectations or estimates of the Company's future performance or financial
condition. These factors, among others, should be considered in assessing the
Company's future prospects and prior to making an investment decision with
respect to the Company's stock. The risks described below are not the only ones
facing us. Additional risks not presently known to us or that we currently
believe are immaterial may also impair our business operations.
Operating results have resulted in reporting losses; Additional financing may be
required.
The Company has reported losses of approximately $3.4 million in fiscal year
2002 and losses of approximately $7.9 million in fiscal year 2001. There is no
assurance that the Company will be profitable in the near term. The Company's
losses are primarily attributable to the recent market slow-down and volatility.
The Company anticipates that with increased revenues it will return to
profitability; however, there can be no assurance that revenues will increase
and profitability will return.
In order for the Company to have the opportunity for future success and
profitability, it must successfully obtain additional financing, either through
borrowings, public offerings, private offerings, or some type of business
combination (e.g., merger, buyout, etc.). The Company has actively pursued a
variety of funding sources, and has entered into the Investment Transaction and
Private Offering in order to address the capital requirements of the Company. If
the Company continues to experience operating losses, additional financing will
be necessary, and there can be no assurance that it will be successful in such
pursuits. The issuance of new securities to raise capital, including, without
limitation, the sale of the maximum amount pursuant to the Private Offering,
will cause the dilution of shares held by current shareholders.
Changing economic, political and market conditions may result in decreased
revenues and may increase the Company's cost of doing business.
The securities industry is subject to a variety of uncertainties, including:
declines in price level and volume of transactions; losses resulting from the
trading or underwriting of securities; volatility of domestic and international
financial, bond and stock markets, as demonstrated by recent disruptions in the
financial markets; extensive government regulation; litigation; intense
competition; and the failure of third parties to meet commitments. Other items
affecting the securities industry include increased consolidation, increased use
of technology, increased use of discount and online electronic brokerage
services, and increased regulation. These items in particular could result in
the Company facing increased competition from larger broker-dealers, a need for
increased investment in technology, or potential loss of customers or reduction
in commission income. There can be no assurance that these trends or future
changes will not have a material adverse effect on the Company's business,
financial condition, results of operations or cash flows.
9
Market fluctuations may reduce the Company's revenues and profitability.
The Company's revenue and profitability may be adversely affected by declines in
the volume of securities transactions and in market liquidity. Additionally, the
Company's profitability may be adversely affected by losses from the trading or
underwriting of securities or failure of third parties to meet commitments.
National acts as a market maker in publicly traded common stocks. In market
making transactions, the Company undertakes the risk of price changes or being
unable to resell the common stock it holds or being unable to purchase the
common stock it has sold. These risks are heightened by the illiquidity of many
of the common stocks the Company trades and/or makes a market. Any losses from
the Company trading activities, including as a result of unauthorized trading by
the Company's employees, could have a material adverse effect on the Company's
business, financial condition, results of operations or cash flows.
Lower securities price levels may also result in a reduced volume of
transactions, as well as losses from declines in the market value of common
stocks held for trading purposes. During periods of declining volume and
revenue, the Company's profitability would be adversely affected. Declines in
market values of common stocks and the failure of issuers and third parties to
perform their obligations can result in illiquid markets in which the Company
may incur losses in its principal trading and market-making activities.
Competition with larger financial firms may have a negative effect on the
Company's business.
The Company competes directly with national and regional full-service
broker-dealers and a broad range of other financial service firms, including
banks and insurance companies. Competition has increased as smaller securities
firms have either ceased doing business or have been acquired by or merged into
other firms. Mergers and acquisitions have increased competition from these
firms, many of which have significantly greater financial, technical, marketing
and other resources than the Company has. Many of these firms offer their
customers more products and research than currently offered by the Company.
These competitors may be able to respond more quickly to new or changing
opportunities, technologies and client requirements. The Company also faces
competition from companies offering discount and/or electronic brokerage
services, including brokerage services provided over the Internet, which the
Company is currently not offering and does not intend to offer in the
foreseeable future. These competitors may have lower costs or provide more
services, and may offer their customers more favorable commissions, fees or
other terms than those offered by the Company. To the extent that issuers and
purchasers of securities transact business without the assistance of the
Company, the Company's operating results could be adversely affected.
The failure to meet the listing criteria of the American Stock Exchange may
result in the delisting of the Company's Common Stock.
The Company's Common Stock is listed on the AMEX. The AMEX has certain
guidelines under which it considers removing securities from listing on the
AMEX. The Company cannot provide any assurance that its Common Stock will remain
listed on AMEX or that it will not be delisted at some later time. In the event
of a delisting of the Common Stock from the AMEX, you may find it more difficult
to trade in the Common Stock or to obtain accurate, current information
concerning market prices for the Common Stock.
10
The Company is currently subject to extensive securities regulation and the
failure to comply with these regulations could subject the Company to penalties
or sanctions.
The securities industry and the Company's business are subject to extensive
regulation by the SEC, state securities regulators and other governmental
regulatory authorities. The Company is also regulated by industry
self-regulatory organizations, including the NASD and the MSRB. The company is a
registered broker-dealer with the SEC and member firms of the NASD.
Broker-dealers are subject to regulations which cover all aspects of the
securities business, including: sales methods and supervision, trading practices
among broker-dealers, use and safekeeping of customers' funds and securities,
capital structure of securities firms, record keeping, and the conduct of
directors, officers and employees. The regulatory environment is also subject to
change.
Compliance with many of the regulations applicable to the Company involves a
number of risks, particularly in areas where applicable regulations may be
subject to varying interpretation. These regulations often serve to limit the
Company's activities, including through net capital, customer protection and
market conduct requirements. If the Company is found to have violated an
applicable regulation, administrative or judicial proceedings may be initiated
against the Company that may result in a censure, fine, civil penalties,
issuance of cease-and-desist orders, the deregistration or suspension of the
Company's broker-dealer activities, the suspension or disqualification of the
Company's officers or employees, or other adverse consequences. The imposition
of any of these or other penalties could have a material adverse effect on the
Company's operating results and financial condition.
The Company relies on clearing brokers and termination of the agreements with
these clearing brokers could disrupt the Company's business.
The Company recently changed from a self-clearing system to using clearing
brokers to process its securities transactions and maintain customer accounts on
a fee basis for the Company. The clearing brokers also provide billing services,
extend credit and provide for control and receipt, custody and delivery of
securities. The Company's broker-dealers depend on the operational capacity and
ability of the clearing brokers for the orderly processing of transactions. In
addition, by engaging the processing services of a clearing firm, the Company is
exempt from some capital reserve requirements and other regulatory requirements
imposed by federal and state securities laws. If the clearing agreements are
terminated for any reason, the Company would be forced to find alternative
clearing firms. The Company cannot assure you that it would be able to find an
alternative clearing firm on acceptable terms to them or at all.
The Company permits its clients to purchase securities on a margin basis or sell
securities short, which means that the clearing firm extends credit to the
client secured by cash and securities in the client's account. During periods of
volatile markets, the value of the collateral held by the clearing brokers could
fall below the amount borrowed by the client. If margin requirements are not
sufficient to cover losses, the clearing brokers sell or buy securities at
prevailing market prices, and may incur losses to satisfy client obligations.
The Company's has agreed to indemnify the clearing brokers for losses they incur
while extending credit to the Company's clients.
11
Credit risk exposes the Company to losses caused by financial or other problems
experienced by third parties.
The Company is exposed to the risk that third parties that owe it money,
securities or other assets will not perform their obligations. These parties
include: trading counterparts, customers, clearing agents, exchanges, clearing
houses, and other financial intermediaries as well as issuers whose securities
the Company holds. These parties may default on their obligations owed to the
Company due to bankruptcy, lack of liquidity, operational failure or other
reasons. This risk may arise, for example, from holding securities of third
parties, executing securities trades that fail to settle at the required time
due to non-delivery by the counterparty or systems failure by clearing agents,
exchanges, clearing houses or other financial intermediaries, and extending
credit to clients through bridge or margin loans or other arrangements.
Significant failures by third parties to perform their obligations owed to the
Company could adversely affect the Company's revenues and perhaps the Company's
ability to borrow in the credit markets.
Adverse results of current litigation and potential securities law liability
would result in financial losses and divert management's attention to business.
Many aspects of the Company's business involve substantial risks of liability.
There has been an increase in litigation and arbitration within the securities
industry in recent years, including class action suits seeking substantial
damages. The Company is subject to potential claims by dissatisfied customers,
including claims alleging they were damaged by improper sales practices such as
unauthorized trading, sale of unsuitable securities, use of false or misleading
statements in the sale of securities, mismanagement and breach of fiduciary
duty. National may be liable for the unauthorized acts of its retail brokers if
it fails to adequately supervise their conduct. As an underwriter, the Company
may be subject to substantial potential liability under federal and state law
and court decisions, including liability for material misstatements and
omissions in securities offerings. The Company may be required to contribute to
a settlement, defense costs or a final judgment in legal proceedings or
arbitrations involving a past underwriting and in actions that may arise in the
future. National carries "Errors and Omissions" insurance to protect against
arbitrations; however, the policy is limited in items and amounts covered and
there can be no assurance that it will cover a complaint. The adverse resolution
of any legal proceedings involving the Company could have a material adverse
effect on the Company's business, financial condition, results of operations or
cash flows.
The Company depends on key personnel.
The Company depends on the continued services of its management team, as well as
its ability to hire additional members of management, and to retain and motivate
the Company's other officers and key employees. The Company's future success
also depends on its continuing ability to attract and retain highly qualified
personnel.
The price of the Company's Common Stock is volatile.
12
The price of the Company's Common Stock has fluctuated substantially. (See "Part
II, Item 5). The market price of the Company's Common Stock may be highly
volatile as a result of factors specific to the Company and the securities
markets in general. Factors affecting volatility may include variations in the
Company's annual or quarterly financial results or those of its competitors;
conditions in the economy in general; and changes in applicable laws or
regulations, or their judicial or administrative interpretations affecting the
Company or its subsidiary or the securities industry. In addition, volatility of
the market price of the Company's Common Stock is further affected by its thinly
traded nature.
Item 2 - PROPERTIES
The Company owns no real property. Its corporate headquarters are shared with
National in leased space in Chicago, Illinois and New York, New York. The
Company leases office space in Boca Raton, Florida, and through its subsidiary
the Company leases office space in Chicago, New York, Milwaukee, Wisconsin,
Seattle and Spokane, Washington and Los Angeles, California. The branch offices
that are operated by independent contractors are leased by those contractors.
Leases expire at various times through September 2012. The Company believes the
rent at each of its locations is at current market rates. At current production
levels, the Company believes that certain of its leased space in Chicago and New
York is excessive, and has sublet a portion of this excess space to third
parties.
Item 3 - LEGAL PROCEEDINGS
1. Complete Management, Inc. - National was named, together with
others, as a defendant in several class action lawsuits filed
against Complete Management, Inc. in the United States District
Court for the Southern District of New York, Case No. 99 Civ. 1454
(NRB). These actions were initially commenced on February 25, 1999
and are the subject of a consolidated amended complaint dated March
15, 2000. As to National, the consolidated complaint alleges
violations of Section 11 of the Securities Act of 1933, 15 U.S.C.ss.
77k, in connection with National's role as underwriter in a June
1996 securities offering for Complete Management, and in
connection with National's role as a co-underwriter in a December
1996 securities offering for Complete Management. Plaintiffs
allege that the registration statements and prospectuses filed in
connection with the securities offerings in June and December 1996
contained false and misleading statements or omitted facts necessary to
make statements not misleading.
On or about June 2, 2000, National, along with the other defendants,
moved to dismiss the action on the grounds that plaintiffs' complaint
is defective, that plaintiffs are barred by the statute of limitations,
and plaintiffs are unable to establish their claims as a matter of law.
On March 30, 2001, the court denied defendants' various motions to
dismiss. On May 17, 2001, National submitted its answer to the
complaint in which it set forth its defenses, including, among others,
that much of the class cannot trace their stock to offerings in which
National was involved and that National conducted appropriate due
diligence.
13
After an initial round of document disclosure, on or about November 28,
2001, plaintiffs filed a motion to certify the class. Plaintiffs
thereafter withdrew their motion and the case was referred to
mediation. The mediation process is moving toward a global settlement
of the matter. Should the matter not be settled, the Company will
pursue its defenses.
2. Fastpoint - In June 2002, National was named, together with
others, as a defendant in a class action lawsuit relating to a series
of private placements of securities in Fastpoint Communications, Inc.
in the Superior Court for the State of California for the County of
San Diego, Case No GIC 791372. In August 2002, the plaintiffs
filed an amended complaint. The Amended Complaint alleges
violations of state statutory and common law as well as of Section 12
of the Securities Act of 1933, 15 U.S.C.ss. 77l. The complaint
asserts claims in connection with National's role as placement
agent in a series of private placements of securities in Fastpoint.
Plaintiffs allege that the private placement memoranda contained
false and misleading statements or omitted facts necessary to
make statements not misleading. No specific amount of damages has
been sought against the Company in the complaint.
In November 2002, National filed a demurrer seeking a dismissal of the
Fastpoint action. No decision has been rendered. The Company believes
it has meritorious defenses and intends to vigorously contest class
certification and defend this action, although the ultimate outcome of
the matter cannot be determined at this time.
3. Gould - In April 2002, a former executive officer of the Company, Craig
M. Gould, commenced an action against the Company, in the matter Gould
vs. Olympic Cascade Financial Corporation, et al., NASD No. 02-03542.
Mr. Gould is claiming a breach of his employment contract, and is
seeking approximately $575,000 in damages. The Company believes it has
meritorious defenses and intends to vigorously defend this action,
although the ultimate outcome of the matter cannot be determined at
this time.
The Company is a defendant in various other arbitrations and administrative
proceedings, lawsuits and claims, which in the aggregate seek general and
punitive damages approximating $4.2 million. These matters arise out of the
normal course of business.
Item 4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
There were no matters submitted to a vote of security holders in the fourth
quarter of fiscal year ended September 30, 2002.
Item 4(A)- EXECUTIVE OFFICERS OF REGISTRANT
The following sets forth the names, ages and positions of all executive officers
of the Company as of December 19, 2002:
Steven B. Sands 43 Co-Chairman
Martin S. Sands 41 Co-Chairman
Mark A. Goldwasser 44 President and Chief Executive Officer
Chairman and Chief Executive Officer of
National
14
Robert H. Daskal 61 Acting Chief Financial Officer and
Acting Secretary
Michael A. Bresner 58 President of National
PART II
Item 5 - MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED
STOCKHOLDER MATTERS
The Company's common stock trades on The American Stock Exchange and the Chicago
Stock Exchange. The Company's common stock trades using the symbol OLY. As of
September 30, 2002, the Company had approximately 1,000 shareholders, including
those shareholders holding stock in street name and trust accounts.
Delaware law authorizes the Board of Directors to declare and pay dividends with
respect to the Company's common stock either out of its surplus (as defined in
the Delaware Corporation Law) or, in case there is no such surplus, out of its
net profits for the fiscal year in which the dividend is declared and/or the
preceding fiscal year; provided, however, that no dividend may be paid out of
net profits unless the Company's capital exceeds the aggregate amount
represented by the issued and outstanding stock of all classes having a
preference in the distribution of assets. Prior to the issuance of the preferred
stock in the Investment Transaction, no shareholder held preferential rights in
liquidation. The Company has never declared a cash dividend and does not
presently foresee declaring one in the coming fiscal year.
High and low closing bid quotations from September 30, 2000 to September 30,
2002 have been obtained from The American Stock Exchange. The range of market
prices for each quarter of fiscal years ended September 28, 2001 and September
30, 2002 are as follows:
Period High Low
September 30, 2000/December 31, 2000 $5.875 $2.6875
January 1, 2001/March 31, 2001 $4.875 $3.0625
April 1, 2001/June 30, 2001 $3.38 $2.50
July 1, 2001/September 28, 2001 $5.20 $2.00
September 29, 2001/December 31, 2001 $2.73 $1.10
January 1, 2002/March 31, 2002 $1.65 $0.55
April 1, 2002/June 30, 2002 $0.95 $0.59
July 1, 2002/September 30, 2002 $0.90 $0.57
The closing bid price of the Company's common stock on December 19, 2002, as
reported on The American Stock Exchange, was $0.45 per share.
15
Item 6 - SELECTED FINANCIAL DATA
Set forth below is the historical financial data with respect to the Company for
the fiscal years ended 2002, 2001, 2000, 1999 and 1998. This information has
been derived from, and should be read in conjunction with, the audited financial
statements, which appear elsewhere in this report. The financial data for the
fiscal years ended 2002, 2001, 2000, 1999 and 1998 have been restated to reflect
the discontinued operations of the Company's subsidiary, WestAmerica. All
information is expressed in thousands of dollars except per share information.
Fiscal Year
---------------------------------------------------------------------------------
2002 2001 2000 1999 1998
---------------------------------------------------------------------------------
Net revenues $ 42,002 $ 50,224 $ 56,213 $ 39,477 $ 44,782
Net income (loss) from continuing
operations before extraordinary items (3,745) (7,338) 1,356 8 (4,686)
Net income (loss) per common share (1.66) (3.33) 0.64 0.01 (3.13)
Total assets 7,948 77,599 92,696 86,113 72,566
Long-term obligations 3,969 3,000 608 2,150 2,770
Stockholders' equity (91) 622 8,039 4,039 2,948
Cash dividends - - - - -
REMAINDER OF PAGE INTENTIONALLY LEFT BLANK
16
Item 7 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The Private Securities Litigation Reform Act of 1995 provides a safe harbor for
forward-looking statements. This Report may contain certain statements of a
forward-looking nature relating to future events or future business performance.
Any such statements that refer to the Company's estimated or anticipated future
results or other non-historical facts are forward-looking and reflect the
Company's current perspective of existing trends and information. These
statements involve risks and uncertainties that cannot be predicted or
quantified and, consequently, actual results may differ materially from those
expressed or implied by such forward-looking statements. Such risks and
uncertainties include, among others, risks and uncertainties detailed in Item 1
above. Any forward-looking statements contained in or incorporated into this
Report speak only as of the date of this Report. The Company undertakes no
obligation to update publicly any forward-looking statement, whether as a result
of new information, future events or otherwise.
Critical Accounting Estimates
The Securities and Exchange Commission (SEC) recently issued proposed guidance
for disclosure of critical accounting estimates. The SEC defines "critical
accounting estimates" as those that require application of management's most
difficult, subjective or complex judgments, often as a result of the need to
make estimates about the effects of matters that are inherently uncertain and
may change in subsequent periods. In fiscal year 2002, the Company estimated the
collectability of receivables due from its registered representatives. These
receivables are derived from debts owed to the Company and from money advanced
to the registered representatives that may be forgiven over time based on the
representatives affiliation with, and production at, National. The Company also
estimated the amount of reserves necessary to cover existing contingencies.
Results of Operations
Reclassification of Revenues - Certain revenues classified as net dealer
inventory gains and other revenues in prior years have been reclassified as
commission revenues to conform with the presentation used in the September 30,
2002 financial statements.
The results discussed below have been restated to reflect a discontinuation of
operations for the Company's subsidiary, WestAmerica.
Fiscal Year 2002 Compared with Fiscal Year 2001
The Company's fiscal year 2002 resulted in a decrease in revenues and a
corresponding greater decrease in expenses compared with fiscal year 2001. The
decrease in revenues is primarily due to the continued slumping securities
markets, decreased net dealer inventory gains and lower interest income. As a
result, for fiscal year 2002 the Company reported a net loss from continuing
operations before income taxes and extraordinary item of $3,825,000 compared
with a net loss from continuing operations before income taxes and extraordinary
item of $7,420,000 for fiscal year 2001. The decrease in net loss is a result of
management's efforts to reduce the fixed costs associated with its salaried
employees, communication expenses, occupancy costs and other expenses.
17
Total revenues from continuing operations decreased $8,222,000, or 16%, in
fiscal year 2002 to $42,002,000 from $50,224,000 in fiscal year 2001. This
decrease is due mainly to the weaker overall securities market compared with the
securities market during fiscal year 2001. Commission revenue decreased
$484,000, or 2%, to $28,168,000 from $28,652,000 during fiscal year 2002
compared with fiscal year 2001. The decrease is due to the weaker securities
markets and decreased trading volume. Net dealer inventory gains, which includes
profits on proprietary trading, market making activities and customer mark-ups
and mark downs, decreased $1,819,000, or 15%, to $10,242,000 from $12,061,000
during fiscal year 2002 compared with fiscal year 2001. The decrease is due to
the continual slumping securities markets and decreased trading volume, as well
as a reduction in the Company's market making activities.
Interest and dividend income decreased $4,110,000 or 71%, to $1,640,000 from
$5,750,000 in fiscal year 2002 compared with fiscal year 2001. This decrease is
partially offset by the corresponding decrease in interest expense, which
decreased $2,850,000, or 85%, to $511,000 from $3,361,000 in fiscal year 2002
compared to fiscal year 2001. The decrease in both interest income and interest
expense is attributable to a decrease in the amount of customer credits and
customer debits at National due to the conversion of its clearing business in
December 2001, and a decrease in interest rates from 2002 to 2001.
Investment banking revenue decreased $767,000, or 75%, to $253,000 from
$1,020,000 in fiscal year 2002 compared with fiscal year 2001. The Company did
not manage a public underwriting in fiscal years 2002 or 2001. The decrease in
revenues is attributed to a general slow-down in the broader capital markets.
During fiscal years 2002 and 2001, investment banking revenue was generated
primarily from the completion of private placement transactions and advisory
fees. Other revenue, consisting of asset management fees and miscellaneous
transaction fees and trading fees, decreased $1,293,000, or 78%, to $356,000
from $1,649,000 during fiscal year 2002 compared to fiscal year 2001. The
decrease is due to a decline in asset management fees, a decrease in service
fees on IRA accounts that are now collected by FCC rather than the Company, and
fewer order flow rebates from other broker-dealers.
In comparison with the 16% decrease in total revenues, total expenses decreased
$11,817,000 or 21%, to $45,827,000 for fiscal year 2002 compared to $57,644,000
in fiscal year 2002. The decrease in total expenses is a result of management's
efforts to streamline its operations and reduce costs. During fiscal year 2002,
the Company has consolidated certain of its operations to its New York offices,
eliminated redundancies in various departments, renegotiated long-term leases
and curtailed miscellaneous costs.
Commission expense, which includes expenses related to commission revenue, net
dealer inventory gains and investment banking, decreased $2,095,000, or 7%, to
$26,353,000 in fiscal year 2002 from $28,448,000 in fiscal year 2001. Employee
compensation expense decreased $3,635,000, or 42%, to $5,091,000 in fiscal year
2002 from $8,726,000 in fiscal year 2001. This significant decrease is due to a
reduction in senior management salaries and a reduction in staff made possible
by clearing through First Clearing, as opposed to self-clearing. Overall,
combined commissions and employee compensation as a percentage of revenue
increased slightly to 75% from 74% in fiscal years 2002 and 2001, respectively.
18
Clearing fees decreased $61,000, or 1%, to $4,241,000 in fiscal year 2002 from
$4,302,000 in fiscal year 2001. The decrease in clearing expenses would have
been greater, absent a dispute that occurred during the second quarter of fiscal
year 2002 while finalizing National's clearance conversion to First Clearing.
This dispute arose among the Company, US Clearing (one of its former clearing
firms) and First Clearing relating to the responsibility for debit balances in
certain trading accounts. The three parties agreed to share the expense equally,
resulting in a one time charge of $548,000 in the second quarter.
As a result of cost cutting efforts, communication, occupancy, professional fees
and other expenses all decreased during fiscal year 2002 compared to fiscal year
2001. Communication expenses decreased $474,000 or 14% to $2,866,000 from
$3,340,000 in fiscal year 2002 compared to fiscal year 2001. This decrease is a
result of management's eliminating redundancies in the communication systems
that existed prior to 2002. Occupancy costs decreased $902,000, or 20%, to
$3,513,000 from $4,415,000. The decrease in occupancy expense is due to the
Company's renegotiating long-term office leases and finding subtenants to occupy
unused space. Professional fees decreased $852,000, or 44%, to $1,093,000 from
$1,945,000 in fiscal year 2002 compared to fiscal year 2001. The decrease in
professional fees is due to a reduction in both the number and amount of legal
consultations used in operating our business. Other expenses decreased $596,000
or 25% to $1,748,000 from $2,344,000 in fiscal year 2002 compared to fiscal year
2001. This decrease in other expenses is attributable to management's efforts to
reduce travel, entertainment and miscellaneous expenses.
Interest expense decreased $2,850,000, or 85%, to $511,000 from $3,361,000 in
fiscal year 2002 compared to fiscal year 2001. The decrease in interest expense
is attributable to a decrease in the amount of customer credits and customer
debits at National due to the conversion of its clearing business in December
2001, and a decrease in interest rates from 2002 to 2001. Taxes, licenses and
registration decreased $352,000, or 46%, to $411,000 from $763,000. The decrease
is due to a decrease in state taxes based on commission revenues and a decrease
in the number of employees for whom the Company pays state registration fees.
Overall, the diluted loss from continuing operations in fiscal year 2002 was
$1.66 per share, as compared to the diluted loss from continuing operations of
$3.33 per share in fiscal year 2001.
Results of Discontinued Operations
Fiscal Year 2002 Compared with Fiscal Year 2001
In December 2001, WestAmerica voluntarily withdrew its membership with the NASD,
ceased conducting business as a broker-dealer, and filed for Chapter 7
bankruptcy protection in accordance with the U.S. Bankruptcy Code. Until
December 2001, WestAmerica was registered as a broker-dealer with the SEC and
licensed in 44 states, Puerto Rico and the District of Columbia. WestAmerica,
offered traditional securities brokerage and financial planning business and
fee-based investment management business to its retail clients. Recently
WestAmerica experienced operating losses. In addition to these losses,
WestAmerica had arbitration losses that exceeded its net capital.
In the first quarter of fiscal year 2002, the Company recorded a gain of
$300,000 from discontinued operations related to the write-off of WestAmerica's
net liabilities. During fiscal year 2001, West America had total revenues of
$2,155,000, and a net loss of $1,002,000.
19
Fiscal Year 2001 Compared with Fiscal Year 2000
The Company's fiscal year 2001 resulted in a decrease in revenues and an overall
net loss compared with net income in the same period of fiscal year 2000. The
decrease in revenues is due to the continued slumping securities markets, which
significantly affected commission revenues. As a result, the Company reported a
net loss from continuing operations before extraordinary item of $7,338,000
compared with net income from continuing operations of $1,356,000 for fiscal
year 2000.
Revenues from continuing operations decreased $5,989,000, or 11%, in fiscal year
2001 to $50,224,000 from $56,213,000 in fiscal year 2000. This decrease is due
mainly to the weaker overall securities market compared with the securities
market during fiscal year 2000. The percentage mix of commission revenue and net
dealer inventory gains changed, mainly due to National's New York office, which
focuses on principal mark-ups and mark-downs as well as agency trading of fixed
income products, OTC and listed equities to various institutional clients,
proprietary trading and market-making activities.
Commission revenue decreased $5,283,000, or 16%, to $28,652,000 from $33,935,000
during fiscal year 2001 compared with fiscal year 2000. The decrease in revenues
is due to the continued slumping securities markets.
Net dealer inventory gains, which includes profits on proprietary trading,
market making activities and customer mark-ups and mark downs, increased
$2,438,000, or 25%, to $12,061,000 from $9,623,000 during fiscal year 2001
compared with fiscal year 2000. The increase in net dealer inventory gains is a
result of the Company's opening a branch in New York City to expand its market
making efforts.
Investment banking revenue decreased $1,318,000, or 56%, to $1,020,000 from
$2,338,000 in fiscal year 2001 compared with fiscal year 2000. The Company did
not manage a public underwriting in fiscal years 2001 or 2000. The decrease in
revenues is attributed to a general slow-down in the broader capital markets.
During fiscal years 2001 and 2000, investment banking revenue was generated
primarily from the completion of private placement transactions and advisory
fees.
Other revenue, consisting of asset management fees and miscellaneous transaction
fees and trading fees, increased $34,000, or 2%, to $1,649,000 from $1,615,000
during fiscal year 2001 compared to fiscal year 2000. The increase in other
revenue was due mainly to an increase in fee based accounts at National.
Although total revenues decreased 11%, total expenses increased by $3,120,000,
or 6%, to $57,644,000 in fiscal year 2001 from $54,524,000 in fiscal year 2000.
Commission expense decreased $4,841,000, or 15%, to $28,448,000 in fiscal year
2001 from $33,289,000 in fiscal year 2000 due to the decrease in commission
revenue from which commission expense is paid. Employee compensation expense
increased $2,379,000, or 37%, to $8,726,000 in fiscal year 2001 from $6,347,000
in fiscal year 2000. The increase in employee compensation is a result of the
expansion into principal and agency transactions at National's New York office.
In April 2001, management took a 10% reduction in salaries. In July 2001,
management further reduced salaries by 10%. In October 2001, all management
salaries were temporarily reduced to $75,000. Overall, combined commissions and
employee compensation as a percentage of revenue increased slightly to 74% from
71% in fiscal years 2001 and 2000, respectively.
20
As expected, based on the expansion in New York, expenses relating to occupancy,
communications, and other all increased. Occupancy expense, consisting mainly of
rent, office supplies and depreciation increased $1,148,000, or 35%, to
$4,415,000 from $3,267,000. Communications expense increased $2,230,000 to
$3,340,000 or 201% from $1,110,000. Other expenses increased $151,000 or 7% to
$2,344,000 in 2001 from $2,193,000 in 2000.
Taxes, licenses and registration decreased $35,000, or 4%, to $763,000 from
$798,000. Professional fees increased $569,000, or 41%, to $1,945,000 from
$1,376,000.
Interest expense decreased $1,359,000, or 29%, to $3,361,000 from $4,720,000. A
decrease in customer deposits on which the Company pays interest, coupled with a
decrease in interest rates during fiscal 2001, account for the decrease in
interest expense. The 29% decrease in interest expense correlates directly to
the interest income from customer margin debt, which decreased $1,688,000, or
23%, during the same period from $7,438,000 in fiscal year 2000 to $5,750,000 in
fiscal year 2001.
Overall, diluted losses from continuing operations were $3.33 per share as
compared to diluted earnings from continuing operations of $.64 per share for
fiscal years 2001 and 2000, respectively.
Results of Discontinued Operations
Fiscal Year 2001 Compared with Fiscal Year 2000
In December 2001, WestAmerica voluntarily withdrew its membership with the NASD,
ceased conducting business as a broker-dealer, and filed for Chapter 7
bankruptcy protection in accordance with the U.S. Bankruptcy Code. Until
December 2001, WestAmerica was registered as a broker-dealer with the SEC and
licensed in 44 states, Puerto Rico and the District of Columbia. WestAmerica,
offered traditional securities brokerage and financial planning business and
fee-based investment management business to its retail clients. Recently
WestAmerica experienced operating losses. In addition to these losses,
WestAmerica had arbitration losses that exceeded its net capital.
WestAmerica's fiscal year 2001 resulted in a decrease in revenues and an overall
net loss compared with net income in the same period of fiscal year 2000. Total
revenues decreased $2,441,000, or 53%, to $2,155,000 in fiscal year 2001 from
$4,596,000 in fiscal year 2000. The decrease in revenues is due to the continued
slumping securities markets, which significantly affected commission revenues.
As a result of the operating losses and losses from arbitrations, WestAmerica
reported a net loss of $1,002,000 in fiscal year 2001 compared with net income
of $200,000 for fiscal year 2000.
21
Liquidity and Capital Resources
As with most financial services firms, substantial portions of the Company's
assets are liquid, consisting mainly of cash or assets readily convertible into
cash. Through December 2001, while acting as a self-clearing firm, these assets
were financed primarily by National's interest bearing and non-interest bearing
customer credit balances, other payables and equity capital. National utilized
short-term bank financing to supplement its ability to meet day-to-day operating
cash requirements. Such financing was used to maximize cash flow and was
regularly repaid. Until January 2001, National had a $3,000,000 revolving
secured credit facility with Bank of America. In January 2001, National entered
into a $5,000,000 secured line of credit with American National Bank and Trust
Company of Chicago, that was guaranteed by the Company. The line of credit was
fully repaid and expired on December 31, 2001.
National, as a registered broker-dealer, is subject to the SEC's Uniform Net
Capital Rule 15c3-1, which requires the maintenance of minimum net capital.
National has elected to use the alternative standard method permitted by the
rule. This requires that National maintain minimum net capital equal to the
greater of $250,000 or a specified amount per security based on the bid price of
each security for which the Company is a market maker. At September 30, 2002,
National's net capital exceeded the requirement by $1,050,000.
In December 2001, WestAmerica voluntarily withdrew its membership with the
NASD, ceased conducting business as a broker-dealer, and filed for Chapter 7
Bankruptcy protection in accordance with the U.S. Bankruptcy Code. WestAmerica
has been operated as a separate legal entity, and although the Company believes
it will not have any ongoing liability for any unpaid obligations of
WestAmerica, there can be no assurances that creditors of WestAmerica will not
seek recovery of their claims from the Company.
Advances, dividend payments and other equity withdrawals from the Company's
subsidiary are restricted by the regulations of the SEC and other regulatory
agencies. These regulatory restrictions may limit the amounts that a subsidiary
may dividend or advance to the Company.
The objective of liquidity management is to ensure that the Company has ready
access to sufficient funds to meet commitments, fund deposit withdrawals and
efficiently provide for the credit needs of customers.
As a result of the losses throughout fiscal year 2001, notably those of the
fourth quarter, attributable in part to the unprecedented events in September
2001, the Company concluded that existing capital would not be sufficient to
satisfy existing operations. The Company explored various transactions to
finance the Company's operations. In December 2001, the Company completed a
series of transactions (the "Investment Transaction") that are more fully
described in Part 1. The Company continued to incur operating losses throughout
fiscal year 2002, and as a result, the Company believed that its then existing
capital was not sufficient to satisfy its current level of operations.
Accordingly, the Company pursued additional sources of capital from various
potential investors. In the fourth quarter of fiscal year 2002, the Company
completed $210,000 of investments in the form of Series A Preferred Stock and is
continuing to seek additional investments.
22
In the first quarter of fiscal year 2003, the Company consummated a private
placement of its securities to a limited number of accredited investors pursuant
to Rule 501 of Regulation D under the Securities Act (the "Private Offering").
Each unit in the Private Offering sold for $0.65 and consisted of one share of
the Company's Common Stock and one three-year warrant to purchase one share of
the Company's Common Stock at a per share price of $1.25 (the "Warrants"). Gross
proceeds of $575,520 closed in the first quarter of fiscal year 2003, and the
Company correspondingly issued 885,416 shares of Common Stock and 885,416
Warrants. The maximum amount to be raised in the Private Offering is $2.0
million (3,076,924 shares of Common Stock and 3,076,924 Warrants). The Company
has agreed to file a Registration Statement under the Securities Act for the
resale of the shares of Common Stock and the shares of Common Stock issuable
upon exercise of the Warrants, on or before March 3, 2003, and use its
commercially reasonable efforts to cause such registration statement to become
effective as promptly as possible and to maintain the effectiveness of such
registration. National is acting as the placement agent on a best efforts basis
for the Private Offering.
In August 2001, the Company entered into an agreement with First Clearing under
which First Clearing provides clearing and related services for National. The
Clearing Agreement expands the products and services capabilities for National's
retail and institutional business, and enables National to consolidate its
existing clearing operations and reduce the fixed overhead associated with its
self-clearing activities.
The conversion to First Clearing began in December 2001 and was completed in
March 2002. In connection with the Clearing Agreement, the Company executed a
ten-year promissory note in favor of First Clearing under which the Company
immediately borrowed $1,000,000. The funds were contributed by the Company to
National, and are being used as a deposit to secure National's performance under
the Clearing Agreement. The Clearing Agreement also provided for another
$1,000,000 loan that was extended to the Company upon substantial completion of
the conversion on December 31, 2001 that was also contributed to National. The
amount of the note that is repayable on each anniversary date is the principal
and interest then outstanding divided by the remaining life of the note.
Borrowings under the promissory note are forgivable based on achieving certain
business performance and trading volumes of the Company over the life of the
loan, that the Company has satisfied through fiscal year 2002.
In connection with the Clearing Agreement, additional borrowings were available
to the Company upon the attainment by National of certain volume and
profitability goals. In finalizing the conversion, a dispute arose among the
Company, US Clearing (one of its former clearing firms) and First Clearing,
regarding the responsibility for debit balances in certain trading accounts. The
three parties agreed to share the expense equally. The Company's share of this
settlement, $548,000, was advanced to the Company by First Clearing and added to
the existing promissory note. As part of the settlement, the minimum level of
stockholders' equity required to be maintained by the Company under the
promissory note was reduced from $2,000,000 to $1,000,000 and no further
borrowings are available under the promissory note, as amended. Additionally,
National received its clearing deposit, net of miscellaneous expenses, of
$975,000 from US Clearing. National terminated its clearing agreement with US
Clearing.
In the first quarter of fiscal year 2003, First Clearing loaned the Company an
additional $375,000 in the form of clearing fee rebates. The loan is due to be
repaid in January 2004. Additionally, First Clearing has waived the
stockholders' equity covenant as of September 30, 2002 and December 31, 2002.
The minimum level of stockholders' equity required to be maintained will be
$500,000 as of March 31, 2003 and $1,000,000 as of June 30, 2003.
23
The Company believes that given the improved market conditions experienced
during the first quarter of fiscal year 2003, the continuation of such improved
market conditions, and the proceeds and expected proceeds from its
capital-raising activities, funds will be sufficient to maintain its current
level of business activities during fiscal year 2003. If current market
conditions do not continue, the Company would need to consider curtailing
certain of its business activities, further reducing its fixed overhead costs
and/or seek additional sources of financing.
As of the fiscal year ended September 30, 2002, total assets were $7.9 million
compared to total assets of $77.6 million as of the fiscal year September 28,
2001. This material decrease in the Company's assets in fiscal year 2002 is due
to the change in the Company's clearing arrangements. Customer assets that were
included in the fiscal year 2001 balance sheet are no longer accounted for on
the Company's books. These assets are now held at First Clearing as part of the
clearing arrangement.
Inflation
The Company believes that the effect of inflation on its assets, consisting of
cash, securities, office equipment, leasehold improvements and computers has not
been significant.
New Accounting Standards
In April 2002, the FASB issued SFAS No. 145, "Rescission of FASB Statement
No. 4, 44 and 64, Amendment of FASB Statement No. 13, and Technical
Corrections." The rescission of SFAS No. 4, "Reporting Gains and Losses
from Extinguishments," and SFAS No. 64, "Extinguishments of Debt made to
Satisfy Sinking Fund Requirements," which amended SFAS No. 4 will affect
income statement classification of gains and losses from extinguishment of
debt. SFAS No. 4 requires that gains and losses from extinguishment of debt
be classified as an extraordinary item, if material. Under SFAS No. 145,
extinguishment of debt is now considered a risk management strategy by
the reporting enterprise and the FASB does not believe it should be considered
extraordinary under the criteria in APB Opinion No. 30, "Reporting the Results
of Operations-Reporting the Effects of Disposal of a Segment of a Business,
and Extraordinary, Unusual and Infrequently Occurring Events and
Transactions," unless the debt extinguishment meets the unusual in nature and
infrequency of occurrence criteria in APB Opinion No. 30. SFAS No. 145 will
be effective for fiscal years beginning after May 15, 2002. Upon
adoption, extinguishments of debt shall be classified under the criteria in
APB Opinion No. 30.
24
In June 2002, the FASB issued SFAS No. 146, "Accounting for Costs Associated
with Exit or Disposal Activities." SFAS No. 146 addresses financial accounting
and reporting for costs associated with exit or disposal activities and
nullified Emerging Issues Task Force Issue No. 94-3, "Liability Recognition for
Certain Employee Termination Benefits and Other Costs to Exit an Activity
(including Certain Costs Incurred in a Restructuring)." SFAS No. 146 requires
that a liability for a cost associated with an exit or disposal activity be
recognized when the liability is incurred. A fundamental conclusion reached by
the FASB in this statement is that an entity's commitment to a plan, by itself,
does not create a present obligation to others that meets the definition of a
liability. SFAS No. 146 also establishes that fair value is the objective for
initial measurement of the liability. The provisions of this statement are
effective for exit or disposal activities that are initiated after December 31,
2002, with early application encouraged. The Company has not yet determined the
impact of SFAS No.146 on its financial position and results of operations, if
any.
ITEM 7A - QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company's primary market risk arises from the fact that it engages in
proprietary trading and makes dealer markets in equity securities. Accordingly,
the Company may be required to maintain certain amounts of inventories in order
to facilitate customer order flow. The Company may incur losses as a result of
price movements in these inventories due to changes in interest rates, foreign
exchange rates, equity prices and other political factors. The Company is not
subject to direct market risk due to changes in foreign exchange rates. However,
the Company is subject to market risk as a result of changes in interest rates
and equity prices, which are affected by global economic conditions. The Company
manages its exposure to market risk by limiting its net long or short positions.
Trading and inventory accounts are monitored daily by management and the Company
has instituted position limits.
Credit risk represents the amount of accounting loss the Company could incur if
counterparties to its proprietary transactions fail to perform and the value of
any collateral proves inadequate. Although credit risk relating to various
financing activities is reduced by the industry practice of obtaining and
maintaining collateral, the Company maintains more stringent requirements to
further reduce its exposure. The Company monitors its exposure to counterparty
risk on a daily basis by using credit exposure information and monitoring
collateral values. The Company maintains a credit committee, which reviews
margin requirements for large or concentrated accounts and sets higher
requirements or requires a reduction of either the level of margin debt or
investment in high-risk securities or, in some cases, requiring the transfer of
the account to another broker-dealer.
The Company monitors its market and credit risks daily through internal control
procedures designed to identify and evaluate the various risks to which the
Company is exposed. There can be no assurance, however, that the Company's risk
management procedures and internal controls will prevent losses from occurring
as a result of such risks.
25
The following table shows the quoted market values of the Company's securities
owned ("long"), securities sold but not yet purchased ("short") and net
positions as of September 30, 2002:
Long Short Net
---------- ---------- --------------
Corporate Stocks $576,000 $29,000 $547,000 (long)
Government Obligations $30,000 $76,000 $46,000 (short)
Item 8 - FINANCIAL STATEMENTS
See Part IV, Item 15(a)(1) for a list of financial statements filed as part of
this Report.
REMAINDER OF PAGE INTENTIONALLY LEFT BLANK
26
INDEPENDENT AUDITORS' REPORT
To the Stockholders and
Board of Directors
Olympic Cascade Financial Corporation
We have audited the accompanying consolidated statements of financial
condition of Olympic Cascade Financial Corporation and Subsidiary as of
September 30, 2002 and the related consolidated statements of operations,
changes in stockholders' deficit, and cash flows for the year then ended.
These consolidated financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audit.
We conducted our audit in accordance with auditing standards generally
accepted in the United States of America. Those standards require that we
plan and perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures
in the financial statements. An audit also includes assessing the
accounting principles used and significant estimates made by management, as
well as evaluating the overall financial statement presentation. We believe
that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of Olympic
Cascade Financial Corporation and Subsidiary as of September 30, 2002, and
the consolidated results of their operations and their cash flows for the
year ended September 30, 2002 in conformity with accounting principles
generally accepted in the United States of America.
/s/Grassi & Co. CPAs, P.C.
Grassi & Co., CPAs, P.C.
Certified Public Accountants
December 18, 2002
New York, New York
F-1
INDEPENDENT AUDITORS' REPORT
To the Stockholders and
Board of Directors
Olympic Cascade Financial Corporation
We have audited the accompanying consolidated statements of financial
condition of Olympic Cascade Financial Corporation and Subsidiaries as of
September 28, 2001 and the related consolidated statements of operations,
changes in stockholders' equity, and cash flows for the years ended
September 28, 2001 and September 29, 2000. These consolidated financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based
on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States of America. Those standards require that we
plan and perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures
in the financial statements. An audit also includes assessing the
accounting principles used and significant estimates made by management, as
well as evaluating the overall financial statement presentation. We believe
that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of Olympic
Cascade Financial Corporation and Subsidiaries as of September 28, 2001,
and the consolidated results of their operations and their cash flows for
the years ended September 28, 2001 and September 29, 2000 in conformity
with accounting principles generally accepted in the United States of
America.
/s/ Feldman Sherb & Co., P.C.
Feldman Sherb & Co. P.C.
Certified Public Accountants
December 26, 2001
New York, New York
F-2
OLYMPIC CASCADE FINANCIAL CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
ASSETS
September 30, September 28,
2002 2001
-------------- ----------------
CASH, subject to immediate withdrawal $ 325,000 $ 260,000
CASH, restricted 309,000 325,000
CASH, CASH EQUIVALENTS AND SECURITIES - 37,188,000
DEPOSITS 1,489,000 4,654,000
RECEIVABLES
Customers - 29,755,000
Broker-dealers and clearing organizations 1,269,000 669,000
Other, net of reserve for uncollectible accounts of $209,000 1,155,000 349,000
ADVANCES TO REGISTERED REPRESENTATIVES 799,000 487,000
SECURITIES HELD FOR RESALE, at market 606,000 1,131,000
FIXED ASSETS, net 369,000 841,000
OTHER ASSETS 1,627,000 1,940,000
-------------- ----------------
$ 7,948,000 $ 77,599,000
============== ================
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
BANK OVERDRAFT $ 408,000 $ 1,556,000
BANK LINE OF CREDIT - 3,500,000
PAYABLES
Customers - 54,511,000
Broker-dealers and clearing organizations 490,000 10,020,000
SECURITIES SOLD, BUT NOT YET PURCHASED, at market 105,000 792,000
ACCOUNTS PAYABLE, ACCRUED EXPENSES AND OTHER LIABILITIES 2,821,000 1,963,000
CAPITAL LEASE PAYABLE - 300,000
NOTE PAYABLE - RELATED PARTY 1,000,000 1,000,000
NOTES PAYABLE 3,215,000 3,035,000
NET LIABILITIES FROM DISCONTINUED OPERATIONS - 300,000
-------------- ----------------
8,039,000 76,977,000
-------------- ----------------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY (DEFICIT)
Preferred stock, $.01 par value, 100,000 shares authorized, 27,825
issued and outstanding in 2002 - -
Common stock, $.02 par value, 60,000,000 shares authorized, 2,274,449
and 2,236,449 issued and outstanding, respectively 45,000 45,000
Additional paid-in capital 12,045,000 9,313,000
Deficit (12,181,000) (8,736,000)
-------------- ----------------
(91,000) 622,000
-------------- ----------------
$ 7,948,000 $ 77,599,000
============== ================
See notes to consolidated financial statements.
F-3
OLYMPIC CASCADE FINANCIAL CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
Years Ended
------------------------------------------------------------------
September 30, 2002 September 28, 2001 September 29, 2000
------------------- ------------------- --------------------
REVENUES
Commissions $ 28,168,000 $ 28,652,000 $ 33,935,000
Net dealer inventory gains 10,242,000 12,061,000 9,623,000
Investment banking revenue 253,000 1,020,000 2,338,000
Interest and dividends 1,640,000 5,750,000 7,438,000
Transfer fees and clearance services 1,343,000 1,092,000 1,264,000
Other 356,000 1,649,000 1,615,000
------------------- ------------------- --------------------
42,002,000 50,224,000 56,213,000
------------------- ------------------- --------------------
EXPENSES
Commissions 26,353,000 28,448,000 33,289,000
Employee compensation and related expenses 5,091,000 8,726,000 6,347,000
Occupancy and equipment costs 3,513,000 4,415,000 3,267,000
Interest 511,000 3,361,000 4,720,000
Clearance fees 4,241,000 4,302,000 1,424,000
Communications 2,866,000 3,340,000 1,110,000
Taxes, licenses, registration 411,000 763,000 798,000
Professional fees 1,093,000 1,945,000 1,376,000
Other 1,748,000 2,344,000 2,193,000
------------------- ------------------- --------------------
45,827,000 57,644,000 54,524,000
------------------- ------------------- --------------------
Income (loss) from continuing operations before
income taxes and extraordinary item (3,825,000) (7,420,000) 1,689,000
Income tax (expense) benefit 80,000 82,000 (333,000)
------------------- ------------------- --------------------
Income (loss) from continuing operations before
extraordinary item (3,745,000) (7,338,000) 1,356,000
------------------- ------------------- --------------------
Income (loss) from discontinued operations, net
of tax 300,000 (1,002,000) 200,000
Income from extraordinary item- gain from
extinguishment of debt, net of taxes - 418,000 -
------------------- ------------------- --------------------
NET INCOME (LOSS) $ (3,445,000) $ (7,922,000) $ 1,556,000
=================== =================== ====================
INCOME (LOSS) PER COMMON SHARE
Basic:
Income (loss) from continuing operations $ (1.66) $ (3.33) $ 0.70
Income (loss) from discontinued operations 0.13 (0.45) 0.10
Extraordinary gain - 0.19 -
------------------- ------------------- --------------------
Net income (loss) $ (1.53) $ (3.59) $ 0.80
=================== =================== ====================
Diluted:
Income (loss) from continuing operations $ (1.66) $ (3.33) $ 0.64
Income (loss) from discontinued operations 0.13 (0.45) 0.09
Extraordinary gain - 0.19 -
------------------- ------------------- --------------------
Net income (loss) $ (1.53) $ (3.59) $ 0.73
=================== =================== ====================
Weighted average number of shares outstanding:
Basic 2,255,449 2,207,101 1,947,572
=================== =================== ====================
Diluted 2,255,449 2,207,101 2,124,751
=================== =================== ====================
See notes to consolidated financial statements.
F-4
OLYMPIC CASCADE FINANCIAL CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY (DEFICIT)
SEPTEMBER 30, 2002, SEPTEMBER 28, 2001 AND SEPTEMBER 29, 2000
Preferred Stock Common Stock Additional
----------------------- ---------------------- Paid-In
Shares Amount Shares Amount Capital Deficit Total
----------- ---------- ---------- ---------- ----------- ------------ ----------
BALANCE, September 24, 1999 - $ - 1,694,595 $ 34,000 $ 6,375,000 $ (2,370,000) $ 4,039,000
Exercise of stock options - - 144,063 3,000 744,000 - 747,000
Exercise of stock warrants - - 315,188 6,000 1,589,000 - 1,595,000
Options issued to consultants - - - - 82,000 - 82,000
Warrants issued in connection
with acquisition - - - - 20,000 - 20,000
Net income - - - - - 1,556,000 1,556,000
----------- ---------- ---------- ---------- ----------- ----------- ----------
BALANCE, September 29, 2000 - - 2,153,846 43,000 8,810,000 (814,000) 8,039,000
Exercise of stock options - - 73,603 2,000 273,000 - 275,000
Options issued to consultants - - - - 105,000 - 105,000
Issuance of restricted common stock - - 9,000 - 25,000 - 25,000
Original issue discount - - - - 100,000 - 100,000
Net loss - - - - - (7,922,000) (7,922,000)
----------- ---------- ---------- ---------- ----------- ----------- ----------
BALANCE, September 28, 2001 - - 2,236,449 45,000 9,313,000 (8,736,000) 622,000
Issuance of restricted common stock
in exchange of note - - 38,000 - 49,000 - 49,000
Issuance of restricted preferred
stock 17,825 - - - 1,683,000 - 1,683,000
Issuance of restricted preferred
stock in exchange of notes 10,000 - - - 1,000,000 - 1,000,000
Net loss - - - - - (3,445,000) (3,445,000)
----------- ---------- ---------- ---------- ----------- ----------- ----------
BALANCE, September 30, 2002 27,825 $ - 2,274,449 $ 45,000 $12,045,000 $(12,181,000) $ (91,000)
=========== ========== ========== ========== =========== =========== ==========
See notes to consolidated financial statements.
F-5
OLYMPIC CASCADE FINANCIAL CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years Ended
---------------------------------------------------------------
September 30, 2002 September 28, 2001 September 29, 2000
--------------------- ------------------- ------------------
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss) $ (3,445,000) $ (7,922,000) $ 1,556,000
Adjustments to reconcile net income (loss) to net
cash provided by (used in) operating activities
Depreciation and amortization 566,000 632,000 498,000
Compensation related to issuance of stock options - 105,000 82,000
Deferred income tax benefit - 50,000 (76,000)
Gain on extraordinary item-extinguishment of debt - (418,000) -
Change in net assets (liabilities) of discontinued
operations (300,000) 817,000 (188,000)
Changes in assets and liabilities
Cash, cash equivalents and securities 37,188,000 (7,671,000) 11,899,000
Restricted cash 16,000 (325,000) -
Deposits 3,165,000 (2,862,000) (113,000)
Receivables 28,037,000 25,079,000 (14,983,000)
Income taxes receivable (payable) - (258,000) 258,000
Securities held for resale 525,000 (758,000) (75,000)
Other assets 313,000 (1,689,000) 120,000
Payables (63,183,000) (15,963,000) 4,857,000
Securities sold, but not yet purchased (687,000) 600,000 53,000
------------------ ------------------ ------------------
Net cash provided by (used in) operating activities 2,195,000 (10,583,000) 3,888,000
------------------ ------------------ ------------------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of fixed assets (94,000) (806,000) (413,000)
Purchase of goodwill - - (30,000)
------------------ ------------------ ------------------
Net cash used in investing activities (94,000) (806,000) (443,000)
------------------ ------------------ ------------------
CASH FLOWS FROM FINANCING ACTIVITIES
Borrowings (payments) on line of credit (3,500,000) 3,500,000 (2,100,000)
Proceeds from notes payable 1,548,000 4,000,000 -
Repayment of notes payable (319,000) (61,000) (1,034,000)
Payments on capital lease (300,000) (340,000) (340,000)
Issuance of restricted stock - 25,000 -
Increase (decrease) in cash overdraft (1,148,000) 1,556,000 -
Net proceeds from issuance of preferred stock 1,683,000 - -
Exercise of stock options - 275,000 744,000
Exercise of stock warrants - - 1,595,000
------------------ ------------------ ------------------
Net cash provided by (used in) financing activities (2,036,000) 8,955,000 (1,135,000)
------------------ ------------------ ------------------
NET INCREASE (DECREASE) IN CASH 65,000 (2,434,000) 2,310,000
CASH BALANCE
Beginning of the year 260,000 2,694,000 384,000
------------------ ------------------ ------------------
End of the year $ 325,000 $ 260,000 $ 2,694,000
================== ================== ==================
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash paid during the year for
Interest $ 535,000 $ 3,317,000 $ 4,714,000
================== ================== ==================
Income taxes $ 12,000 $ 323,000 $ -
================== ================== ==================
SUPPLEMENTAL DISCLOSURES OF NONCASH INVESTING AND
FINANCING ACTIVITIES
Exchange of notes payable for preferred stock $ 1,000,000 $ - $ -
================== ================== ==================
Exchange of notes payable for common stock $ 49,000 $ - $ -
================== ================== ==================
Warrants issued as a discount on notes payable $ - $ 100,000 $ -
================== ================== ==================
Warrants issued as part of acquisition $ - $ - $ 20,000
================== ================== ==================
F-6
OLYMPIC CASCADE FINANCIAL CORPORATION
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2002, SEPTEMBER 28, 2001 AND SEPTEMBER 29, 2000
1. ORGANIZATION
Olympic Cascade Financial Corporation ("Olympic" or the "Company") is
a diversified financial services organization, operating through its
wholly-owned subsidiary, National Securities Corporation ("National").
The Company's business includes securities brokerage for individual
and institutional clients, market-making trading activities, asset
management and corporate finance services.
In June 1997, the Company acquired all of the outstanding stock of
WestAmerica Investment Group ("WestAmerica"), a Scottsdale, Arizona
based broker-dealer specializing in retail brokerage services. In
December 2001, WestAmerica voluntarily withdrew its membership with
the NASD, ceased conducting business as a broker-dealer and filed for
Chapter 7 Bankruptcy protection in accordance with the U.S. Bankruptcy
Code. Accordingly, the accompanying financial statements of
WestAmerica have been reclassified as discontinued operations for all
periods presented.
In June 2000, the Company acquired all of the outstanding stock of
Canterbury Securities Corporation ("Canterbury"), an Illinois based
broker-dealer focusing on private placement of securities. Canterbury
was acquired for $30,000 in cash plus the issuance of warrants to
purchase 5,000 shares of the common stock of the Company at an
exercise price of $6.375 per share. Canterbury had no activity since
its acquisition. In May 2002, pursuant to an agreement made
simultaneous with the Investment Transaction (see Note 3b), the
Company sold Canterbury for its book value of $11,000 to Mr. Steven A.
Rothstein, the former Chief Executive Officer of the Company.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
a. Principles of Consolidation - The consolidated financial
statements include the accounts of Olympic and its
wholly-owned subsidiary. All significant intercompany
accounts and transactions have been eliminated.
b. Estimates - The preparation of the financial statements in
conformity with accounting principles generally accepted
in the United States requires management to make estimates
and assumptions that affect the reported amounts of assets
and liabilities, disclosure of contingent assets and
liabilities at the date of the financial statements, and
the reporting amounts of revenues and expenses during the
reporting period. Actual results could differ from those
estimates.
F-7
c. Accounting Method - Customer security transactions and the
related commission income and expense are recorded as of
the trade date.
d. Fixed Assets - Fixed assets are recorded at cost.
Depreciation is calculated using the straight-line method
based on the estimated useful life of the related assets,
which range from three to five years. When assets are
retired or otherwise disposed of, the costs and related
accumulated depreciation or amortization are removed from
the accounts and any gain or loss on disposal is
recognized currently.
e. Fiscal Year - During the year, the Company changed its
fiscal year from a 52-53 week fiscal year ending on the
last Friday in September, to a fiscal year ending on
September 30.
f. Cash and Cash Equivalents - For purposes of the statement
of cash flows, the Company defines cash as cash subject to
immediate withdrawal.
g. Income Taxes - The Company recognizes deferred tax assets
and liabilities based on the difference between the
financial statements carrying amounts and the tax basis of
assets and liabilities, using the effective tax rates in
the years in which the differences are expected to
reverse. A valuation allowance related to deferred tax
assets is also recorded when it is probable that some or
all of the deferred tax asset will not be realized.
h. Fair Value of Financial Instruments - The carrying amounts
reported in the balance sheet for cash, receivables,
accounts payable, accrued expenses and other liabilities
approximates fair value based on the short-term maturity
of these instruments.
i. Earnings (Loss) per Share - Basic earnings (loss) per
common share is based upon the net income (loss) for the
year divided by the weighted average number of common
shares outstanding during the year. 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 30, 2002 the Company believes that there has
been no impairment of its long-lived assets.
F-8
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.
l. Concentrations of Credit Risk - The Company is engaged
in trading and a broad range of securities brokerage
and investment services to a diverse retail and
institutional clientele, as well as corporate finance
and investment banking services to corporations and
businesses. Counterparties to the Company's business
activities include broker-dealers and clearing
organizations, banks and other financial institutions.
The Company uses clearing brokers to process
transactions and maintain customer accounts on a fee
basis for the Company. The Company uses one clearing
broker for more then 90% of their business. The Company
permits the clearing firms to extend credit to their
clientele secured by cash and securities in the client's
account. The Company's exposure to credit risk
associated with the non-performance by their customers
and counterparties in fulfilling their contractual
obligations can be directly impacted by volatile or
illiquid trading markets, which may impair the ability
of customers and counterparties to satisfy their
obligations to the Company. The Company has agreed to
indemnify the clearing brokers for losses they incur
while extending credit to the Company's clients. It is
the Company's policy to review, as necessary, the credit
standing of their customers and each counterparty.
The Company maintains cash and cash equivalents with major
financial institutions. Cash is insured by the Federal
Deposit Insurance Corporation ("FDIC") up to $100,000 at
each institution. At times such amounts may exceed the
FDIC limits. At September 30, 2002 the uninsured cash and
restricted cash bank balances were $226,000 and $209,000,
respectively. The Company believes it is not exposed to
any significant credit risks for cash.
m. Other Receivables - The Company extends unsecured credit
in the normal course of business to its brokers. The
allowance for doubtful accounts reflects management's
opinion of amounts, which may ultimately become
uncollectible.
n. Recent Accounting Pronouncements - In April 2002, the
FASB issued SFAS No. 145, "Rescission of FASB Statement
No. 4, 44 and 64, Amendment of FASB Statement No. 13,
and Technical Corrections." The rescission of SFAS
No. 4, "Reporting Gains and Losses from Extinguishments,"
and SFAS No. 64, "Extinguishments of Debt Made to
Satisfy Sinking Fund Requirements," which amended
SFAS No. 4 will affect income statement classification
of gains and losses from extinguishment of debt. SFAS
No. 4 requires that gains and losses from
F-9
extinguishment of debt be classified as an extraordinary
item, if material. Under SFAS No. 145, extinguishment
of debt is now considered a risk management strategy by
the reporting enterprise and the FASB does not believe
it should be considered extraordinary under the
criteria in APB Opinion No. 30, "Reporting the Results
of Operations-Reporting the Effects of Disposal of a
Segment of a Business, and Extraordinary, Unusual
and Infrequently Occurring Events and Transactions,"
unless the debt extinguishment meets the unusual in
nature and infrequency of occurrence criteria in APB
Opinion No. 30. SFAS No. 145 will be effective for
fiscal years beginning after May 15, 2002. Upon
adoption, extinguishments of debt shall be classified
under the criteria in APB Opinion No. 30.
In June 2002, the FASB issued SFAS No. 146, "Accounting
for Costs Associated with Exit or Disposal Activities."
SFAS No. 146 addresses financial accounting and reporting
for costs associated with exit or disposal activities and
nullified Emerging Issues Task Force Issue No. 94-3,
"Liability Recognition for Certain Employee Termination
Benefits and Other Costs to Exit an Activity (including
Certain Costs Incurred in a Restructuring)." SFAS No. 146
requires that a liability for a cost associated with an
exit or disposal activity be recognized when the liability
is incurred. A fundamental conclusion reached by the FASB
in this statement is that an entity's commitment to a
plan, by itself, does not create a present obligation to
others that meets the definition of a liability. SFAS No.
146 also establishes that fair value is the objective for
initial measurement of the liability. The provisions of
this statement are effective for exit or disposal
activities that are initiated after December 31, 2002,
with early application encouraged. The Company has not yet
determined the impact of SFAS No.146 on its financial
position and results of operations, if any.
o. Reclassification of Revenues - Certain revenues previously
classified as net dealer inventory gains and other
revenues in prior years have been reclassified as
commission revenues to conform with the presentation used
in the September 30, 2002 financial statements.
3. SIGNIFICANT AGREEMENTS AND TRANSACTIONS
a. CLEARING AGREEMENTS
In August 2001, National entered into a ten-year agreement
with First Clearing Corporation ("FCC"), a wholly-owned
subsidiary of Wachovia Corporation, under which FCC
provides clearing and other related services for National.
The conversion to FCC began in December 2001 and was
completed in March 2002.
F-10
In connection with the Clearing Agreement, the Company
entered into a ten-year promissory note with FCC under
which the Company immediately borrowed $1,000,000. The
funds were contributed by the Company to National, and are
being used as a deposit to secure National's performance
under the Clearing Agreement. The Clearing Agreement also
provided for another $1,000,000 loan that was extended to
the Company upon substantial completion of the conversion
on December 31, 2001 that the Company also contributed to
National. The amount of the note that is repayable on each
anniversary date is the principal and interest then
outstanding divided by the remaining life of the note.
Borrowings under the promissory note are forgivable based
on certain business performance and trading volumes of the
Company over the life of the loan, that the Company has
satisfied through fiscal year 2002. A total of $339,000
was amortized in fiscal year 2002.
In connection with the Clearing Agreement, additional
borrowings were available to the Company upon the
attainment by National of certain volume and profitability
goals. In finalizing the conversion, a dispute arose among
the Company, US Clearing (one of its former clearing
firms) and FCC, regarding the responsibility for debit
balances in certain trading accounts. The three parties
agreed to share the expense equally. The Company's share
of this settlement, $548,000, was advanced to the Company
by FCC and added to the existing promissory note. As part
of the settlement, the minimum level of stockholders'
equity required to be maintained by the Company under the
promissory note was reduced from $2,000,000 to $1,000,000
and no further borrowings are available under the
promissory note, as amended. Additionally, National
received its clearing deposit, net of miscellaneous
expenses, of $975,000 from US Clearing. National
terminated its clearing agreement with US Clearing.
In the first quarter of fiscal year 2003, First Clearing
loaned the Company an additional $375,000 in the form of
clearing fee rebates, that the Company contributed to
National. The loan is due to be repaid in January 2004.
Additionally, First Clearing has waived the stockholders'
equity covenant as of September 30, 2002 and December 31,
2002. The minimum level of stockholders' equity required
to be maintained will be $500,000 as of March 31, 2003 and
$1,000,000 as of June 30, 2003.
The agreement also requires the payment of a termination
fee ranging from $2,000,000 to $400,000 if terminated
within years one through six of the agreement. Olympic has
pledged its shares of stock of National to secure the
aforementioned note.
F-11
b. EQUITY TRANSACTIONS
(i) During fiscal year 2002, the President of Olympic
and an unaffiliated company (collectively, the
"Investors") obtained a significant ownership in
the Company (the "Investment Transaction") through
purchasing 15,725 shares of Series A convertible
preferred stock ("Preferred Stock") of Olympic at
$100 per share, convertible into common stock at a
price of $1.50 per share.
(ii) Concurrent with the closing of the above
transaction, the then current Chief Executive
Officer and Chief Financial Officer of Olympic
terminated their employment agreements with the
Company and simultaneously entered into consulting
agreements of eighteen and twenty-seven months,
respectively, at a monthly consideration of
$10,000 for each consultant. In addition, the
Chief Executive Officer was also given the
option to purchase all of the shares of stock of
Canterbury for its book value of approximately
$11,000, which closed in May 2002. Such officer
also sold 285,000 shares owned by the
officer and his family to the aforementioned
unaffiliated company.
(iii)Also, in December 2001, Olympic executed a
securities exchange agreement with the holders of
Olympic's $2,000,000 promissory note holders,
whereby $1,000,000 of such notes were exchanged as
payment for the issuance of 10,000 shares of Series
A convertible preferred stock at $100 per share. In
addition, 100,000 of the warrants issued pursuant
to the original loan transaction were repriced from
an exercise price of $5.00 per share to $1.75 per
share.
(iv) In the fourth quarter of fiscal 2002, the former
Chief Executive Officer of the Company invested
$210,000 in the Company by purchasing 2,100 shares
of the Preferred Stock at $100 per share.
(v) In the first quarter of fiscal year 2003, the
Company consummated a private placement of its
securities to a limited number of accredited
investors pursuant to Rule 501 of Regulation D
under the Securities Act (the "Private Offering").
Each unit in the Private Offering sold for $0.65
and consisted of one share of the Company's Common
Stock and one three-year warrant to purchase one
share of the Company's Common Stock at a per share
price of $1.25 (the "Warrants"). Net proceeds of
$478,000 were received in the first quarter of
fiscal year 2003,
F-12
and the Company correspondingly issued 885,416
shares of restricted Common Stock and 885,416
Warrants. The maximum amount to be raised in the
Private Offering is $2.0 million (3,076,924
shares of Common Stock and 3,076,924 Warrants).
The Company has agreed to file a Registration
Statement under the Securities Act for the
resale of the shares of Common Stock and the
shares of Common Stock issuable upon exercise of
the Warrants, on or before March 3, 2003,
and use its commercially reasonable efforts to
cause such registration statement to become
effective as promptly as possible and to maintain
the effectiveness of such registration. National
is acting as the placement agent on a best efforts
basis for the Private Offering.
4. DISCONTINUED OPERATIONS
The following is a summary of the Company's discontinued operations:
Net liabilities of discontinued operations:
September 28, 2001
------------------------
Assets:
Cash $ 145,000
Marketable securities -
Accounts receivable, net 92,000
Fixed assets, net -
Other assets -
Liabilities:
Payable to brokers 37,000
Accounts payable and
Accrued expenses 452,000
Bank line of credit 48,000
-----------------------
Net liabilities of discontinued
operations $ 300,000
=======================
Results of operations:
Years Ended
------------------------------------------------------------------------
September 30, 2002 September 28, 2001 September 29, 2000
---------------------- --------------------- ---------------------
Revenues $ - $ 2,134,000 $ 4,596,000
Income (loss) from
operations - (915,000) 200,000
Gain (loss) on
disposal 300,000 (87,000) -
---------------------- --------------------- ---------------------
Total income (loss)
from discontinued
operations $ 300,000 $ (1,002,000) $ 200,000
====================== ===================== =====================
5. CASH, CASH EQUIVALENTS AND SECURITIES
As discussed in Note 3a, in August 2001, National entered into an
agreement with FCC in which FCC provides clearing and other related
services for the Company. In accordance with this agreement, all
customer receivables and payables have been transferred to FCC. As
such, the Company no longer maintains cash, cash equivalents and
securities that were segregated in special reserve bank accounts for
the exclusive benefit of customers under Rule 15c3-3 of the Securities
and Exchange Commission.
F-13
6. RESTRICTED CASH
The Company maintains an escrow account on behalf of a customer in
which National acted as its underwriter. Funds are wired at the
direction of the customer. As of September 30, 2002, the balance in the
account is $309,000. Additionally, the opening cash balance in the
statement of cash flows has been adjusted for the reclassification of
$325,000 of restricted cash in order to conform to the current year's
presentation. The balance for restricted cash was $309,000 and
$325,000, as of September 30, 2002 and September 28, 2001,
respectively.
7. BROKER-DEALER AND CLEARING ORGANIZATIONS RECEIVABLES AND PAYABLES
At September 30, 2002 amounts receivable from and payable to brokers
and dealers include fees and commissions, and principal securities
purchased on margin, respectively.
In addition, an analysis of the reserve for other receivables is as
follows:
Balance at Charged to Balance at
September 28, 2001 costs and expenses September 30, 2002
- -------------------------------------------------------------------------------
$ - $ 209,000 $ 209,000
======================= ========================= =====================
F-14
8. SECURITIES HELD FOR RESALE AND SECURITIES SOLD, BUT NOT YET PURCHASED
Securities held for resale and securities sold, but not yet purchased
include:
September 30, 2002 September 28, 2001
-------------------------------------- ---------------------------------------
Securities Securities
Held For Sold, But Not Held For Sold, But Not
Resale Yet Purchased Resale Yet Purchased
--------------- ----------------- ---------------- ------------------
Corporate stocks $ 576,000 $ 29,000 $ 977,000 $ 689,000
Government
obligations 30,000 76,000 154,000 103,000
--------------- ----------------- ---------------- ------------------
$ 606,000 $ 105,000 $ 1,131,000 $ 792,000
=============== ================= ================ ==================
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-15
9. FIXED ASSETS
Fixed assets consist of the following:
September 30, 2002 September 28, 2001
-------------------- ---------------------
Office machines $ 338,000 $ 336,000
Furniture and fixtures 672,000 631,000
Interactive fixed assets 56,000 56,000
Phone system 159,000 151,000
Electronic equipment 1,431,000 1,389,000
Leasehold improvements 170,000 169,000
Assets under capital leases - 1,180,000
-------------------- ---------------------
2,826,000 3,912,000
Less accumulated depreciation and
amortization (2,457,000) (3,071,000)
-------------------- ---------------------
Fixed assets - net $ 369,000 $ 841,000
==================== =====================
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. These leases expired in fiscal year 2002.
10. LINE OF CREDIT
In January 2001, National consummated a revolving line of credit of
$5,000,000, amended to $4,000,000 on November 8, 2001, with American
National Bank. Interest was payable monthly. The line was secured by
certain assets of National, excluding items prohibited from being
pledged and assets set forth by the U.S. Securities and Exchange
Commission ("SEC"). As a result of default of certain financial
covenants, on November 8, 2001, National entered into a forbearance
agreement expiring December 21, 2001, at which time any outstanding
balance was due to be paid and the line of credit terminated. During
the year ended September 30, 2002 the Company repaid the outstanding
balance of $3,500,000.
11. NOTES PAYABLE
In November 1997, the Company executed two promissory notes totaling
$925,000. The notes bore interest at 6% and 8% with the principal to be
repaid in 24 monthly installments commencing on December 31, 2000. In
connection with the notes, warrants for the purchase of 126,000 shares
at an exercise price of $5.36 per share of the Company's common stock
were issued. The warrants were valued at $120,000 and were recorded as
a discount to the notes. During the year ended September 29, 2000, the
Company satisfied one the above notes which had a remaining balance of
$425,000 with the proceeds from the exercise of 78,750 warrants. At
September 29, 2000, the balance on the remaining note was $455,000.
During the year ended September 28, 2001, the Company settled the
remaining note for $52,000. At the time of the settlement, the
outstanding balance, including accrued interest, totaled $470,000. The
gain of $418,000 has been recorded as an extraordinary item in fiscal
year ended September 28, 2001.
F-16
In January 1998, the Company executed a promissory note for $1,000,000.
This note bears interest at 8% and the principal is to be repaid in 24
monthly installments commencing on December 31, 2000. In connection
with the note, warrants for the purchase of 157,500 shares at an
exercise price of $5.34 per share of the Company's common stock were
issued. The warrants were valued at $157,500 and were recorded as a
discount to the note. During the year ended September 29, 2000, the
Company prepaid $841,000 of the note with the proceeds from the
exercise of 157,500 warrants, leaving a balance of $159,000. As of
September 28, 2001, the remaining balance was $113,000. In March 2002,
the $49,000 balance of this note was repaid by the issuance of 38,000
shares of common stock of the Company.
In January 2001, the Company executed two promissory notes for
$1,000,000 each. These notes bear interest at 9% with interest paid
quarterly. The principal of each note matures in January 2004. In
connection with each note, warrants were issued for the purchase of
100,000 shares of the Company's common stock at an exercise price of
$5.00 per share. The warrants, which expire on the maturity date, have
been valued at $50,000 each, and have been recorded as a discount to
the respective notes. As of September 30, 2002, the unamortized
discount was $22,000 on each note. As discussed in Note 3b(iii), the
holders of such notes executed a securities exchange agreement, whereby
$1,000,000 of such notes were exchanged as payment for the issuance of
10,000 shares of Series A convertible preferred stock at $100 per
share. In addition, 100,000 of the warrants issued pursuant to the
original loan transaction were repriced from an exercise price of $5.00
per share to $1.75 per share.
As discussed in Note 3a, the Company has received a total of $2,548,000
in advances from FCC, that is payable over the life of the agreement.
The note bears interest at the lender's prime rate. The balance
outstanding at September 30, 2002 was $2,209,000.
F-17
The following is a schedule by years of debt maturity as of September
30, 2002:
Fiscal year ending
2003 $ 246,000
2004 1,296,000
2005 246,000
2006 246,000
2007 246,000
Thereafter 979,000
-----------------
3,259,000
Less: discount on notes 44,000
-----------------
$ 3,215,000
=================
12. NOTE PAYABLE - RELATED PARTY
In February 2001, National executed a secured demand note collateral
agreement with an employee of National and a Director of the Company,
to borrow securities that can be used by the Company for collateral
agreements. These securities have been initially pledged through an
unrelated broker-dealer, and have a borrowing value totaling
$1,000,000. The note bears interest at 5%, that is paid monthly, and
matures on February 1, 2004. Certain of the securities have been
pledged as collateral for three letters of credit, in the amounts of
$249,000, $125,000 and $38,000, executed by the Company on behalf of
National. No amounts have been drawn on these letters of credit. The
securities have been included in other assets in the accompanying
Consolidated Statement of Financial Condition.
13. INCOME TAXES
The income tax (provision) benefit consists of:
Years Ended
------------------------------------------------------------------
September 30, September 28, September 29,
2002 2001 2000
------------------- ------------------- --------------------
Current federal
Income tax (provision)
benefit $ 90,000 $ 82,000 $ (367,000)
Deferred federal
income tax - - 79,000
Current state
income tax (10,000) - (45,000)
------------------- ------------------- --------------------
$ 80,000 $ 82,000 $ (333,000)
=================== =================== ====================
The income tax (provision) benefit related to income (loss) from
continuing operations before income taxes and extraordinary items
varies from the federal statutory rate as follows:
F-18
Years Ended
--------------------------------------------------------------------------
September 30, 2002 September 28, 2001 September 29, 2000
-------------------- --------------------- --------------------
Statutory
federal rate $ 1,287,000 $ 2,523,000 $ (574,000)
State income
taxes, net of
federal income
tax benefit 124,000 - (95,000)
Losses for
which no
benefit is
provided (1,331,000) (2,441,000) -
Tax benefit of
net operating
losses - - 642,000
Other - - (306,000)
-------------------- ----------------------- --------------------
$ 80,000 $ 82,000 $ (333,000)
==================== ======================= ====================
Significant components of the Company's deferred tax assets which are
included in other assets in the accompanying financial statements are
as follows:
September 30, September 28,
2002 2001
------------------- -------------------
Net operating losses $ 3,436,000 $ 2,893,000
Reserve for uncollectable
receivables and nondeductible
expense accruals 107,000 -
------------------- -------------------
Total 3,543,000 2,893,000
Valuation allowance (3,543,000) (2,893,000)
------------------- -------------------
Total deferred tax asset $ - $ -
=================== ===================
At September 30, 2002, the Company has available unused net operating
loss carryovers of approximately $10.1 million that may be applied
against future taxable income and expires through 2022. The Company
has a deferred tax asset arising from such net operating loss
carryforwards and has recorded a valuation allowance for the full
amount of such deferred tax asset since the likelihood of realization
of the tax benefits cannot be determined.
F-19
14. COMMITMENTS
Employment Agreements - During fiscal years 1999 and 2000, the
Company entered into employment agreements with six executive
officers that in total provided for annual salaries aggregating
$1,710,000. Pursuant to the Investment Transaction, four of these
agreements were terminated in fiscal year 2002. One of these
agreements was modified in conjunction with the Investment Transaction.
The final agreement is the subject of a dispute (see Note 15).
Leases - As of September 30, 2002, the Company is committed under
operating leases for future minimum lease payments as follows:
Fiscal Year Ending
2003 $ 2,075,000
2004 2,073,000
2005 2,134,000
2006 2,031,000
2007 2,036,000
Thereafter 3,476,000
-----------------
$ 13,825,000
=================
Rental expense under all operating leases for the years ended
September 30, 2002, September 28, 2001 and September 29, 2000 was
$2,404,000, $1,889,000, and $1,541,000, respectively.
Underwritings - During fiscal 2002, the Company participated in
underwriting securities for private placements, initial and secondary
public offerings. At September 30, 2002, the Company has no
outstanding commitments relating to underwriting transactions.
15. CONTINGENCIES
The Company has been named, together with others, as a defendant in a
consolidated class action lawsuit filed against Complete Management,
Inc. No specific amount of damages has been sought against the
Company in the complaint. In June 2000, the Company filed to dismiss
this action. In March 2001, the United States District Court for the
Southern District of New York denied the Company's motion to dismiss.
In May 2001, the Company submitted its answer to the complaint in
which it set forth its defenses. In November 2001, plaintiffs filed a
motion to certify the class. Plaintiffs thereafter withdrew their
motion and the case was referred to mediation. The mediation process
is moving toward a global settlement of the matter. Should the matter
not be settled, the Company will pursue its defenses.
F-20
A former executive officer of the company, Craig M. Gould, has
commenced an arbitration proceeding against the Company claiming a
breach of his employment contract, and seeking approximately $575,000
in damages. The Company believes it has meritorious defenses and
intends to vigorously defend this action, although the ultimate
outcome of the matter cannot be determined at this time.
In June 2002, the Company was named, together with others as a
defendant in a class action lawsuit relating to a series of private
placements of securities in Fastpoint Communications, Inc. in the
Superior Court for the State of California for the County of San
Diego. In August 2002, the plaintiffs filed an amended complaint
alleging violations of state statutory and common law, as well as
Section 12 of the Securities Act of 1933. No specific amount of
damages has been sought against the Company in the complaint. In
November 2002, the Company filed a demurrer seeking a dismissal of
the action. No decision has been rendered. The Company believes it
has meritorious defenses and intends to vigorously contest class
certification and defend this action, although the ultimate outcome
of the matter cannot be determined at this time.
The Company is a defendant in various other arbitrations and
administrative proceedings, lawsuits and claims which in the aggregate
seek general and punitive damages of approximately $4,200,000. These
matters arise out of the normal course of business. The Company intends
to vigorously defend itself in these actions.
16. STOCKHOLDERS' EQUITY
Shares Authorized - During the year ended September 30, 2002 the
Company increased its authorized number of shares of Common Stock
from 6,000,000 to 60,000,000.
Stock Options - The Company's stock option plans provide for the
granting of stock options to certain key employees, directors and
investment executives. Generally, options outstanding under the
Company's stock option plan are granted at prices equal to or above
the market value of the stock on the date of grant, vest either
immediately or ratably over up to five years, and expire five years
subsequent to award.
The Company applies APB Opinion No. 25 and related Interpretations in
accounting for its plans. SFAS Statement No. 123 "Accounting for
Stock-Based Compensation" ("SFAS 123") was issued by the Financial
Accounting Standards Board and, if fully adopted, changes the methods
for recognition of cost on plans similar to those of the Company. Had
compensation cost for the Company's stock option plans been
determined based 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
F-21
been reduced by approximately $50,000 or $.02 per share in 2002,
$535,000 or $.24 per share in 2001, and $1,696,000 or $.80 per share
in 2000. The fair value of the options granted during 2002, 2001 and
2000 is estimated at $135,000, $818,000 and $1,696,000, respectively,
on the date of grant using the Black-Scholes option-pricing model
with the following assumptions:
2002 2001 2000
---------------- --------------- ----------------
Volatility 286% 96% 106%
Risk-free interest rate 5.7% 5.0% 6.25%
Expected life 5 years 5 years 5 years
A summary of the status of the Company's stock options and warrants
outstanding is presented below:
Stock Options Under Plan
- ------------------------------------
Weighted
Average Price
Authorized Granted Available Per Share
---------------- --------------- ---------------- ----------------
Balance, September 24, 1999 1,397,198 1,068,522 328,676 $ 4.65
Creation of new plan 500,000 - 500,000
Granted - 383,600 (383,600)
Exercised (139,063) (139,063) - 4.14
Forfeitures (75,918) (75,918) -
---------------- --------------- ----------------
Balance, September 29, 2000 1,682,217 1,237,141 445,076 5.41
Creation of new plan 1,000,000 - 1,000,000
Granted - 294,500 (294,500)
Exercised (73,603) (73,603) - 3.73
Forfeitures (186,530) (186,530) -
---------------- --------------- ----------------
Balance, September 28, 2001 2,422,084 1,271,508 1,150,576 5.66
Granted - 117,500 (117,500)
Exercised - - -
Forfeitures (543,640) (543,640) -
---------------- --------------- ----------------
Balance, September 30, 2002 1,878,444 845,368 1,033,076 5.08
================ =============== ================
F-22
The following table summarizes information about stock options outstanding at
September 30, 2002.
Options Outstanding Options Exercisable
-------------------------------------------------------- ---------------------------------
Weighted Weighted Weighted
Range of Average Average Average
Exercise Number Remaining Exercise Number Exercise
Prices Outstanding Contract Life Prices Exercisable Prices
--------------- ---------------- --------------- ------------- --------------- --------------
$0.72-2.00 107,500 4.38 $ 1.76 55,000 $ 1.53
$3.56-3.88 103,900 2.65 3.75 100,450 3.74
$4.00-4.69 157,000 0.93 4.22 151,500 4.20
$5.36-5.75 249,468 2.68 5.69 176,768 5.68
$6.13-7.25 190,000 2.74 7.01 190,000 7.01
$7.50-8.50 37,500 2.21 7.90 37,500 7.90
---------------- ---------------
845,368 711,218
================ ===============
Warrants
Weighted
Average
Exercise
Shares Price Exercisable
-------------- ------------------- --------------
Outstanding at
September 24, 1999 82,925 $ 5.09 82,925
==============
Granted 5,000 6.38
--------------
Outstanding at
September 29, 2000 87,925 5.17 87,925
==============
Granted 375,000 3.35
--------------
Outstanding at
September 28, 2001 462,925 3.69 462,925
==============
Granted 5,000 5.00
Expired (33,075) 4.76
--------------
Outstanding at
September 30, 2002 434,850 3.63 434,850
============== ==============
F-23
The following table summarizes information about warrants outstanding at
September 30, 2002.
Warrants Outstanding Warrants Exercisable
------------------------------------------------------- ---------------------------------
Weighted Weighted Weighted
Range of Average Average Average
Exercise Prices Number Remaining Exercise Number Exercise
Outstanding Contract Life Prices Exercisable Prices
----------------- ---------------- ------------------ ------------- --------------- -------------
$1.75 175,000 1.32 $ 1.75 175,000 $ 1.75
$3.00 25,000 1.74 3.00 25,000 3.00
$4.00 2,600 1.65 4.00 2,600 4.00
$5.00 180,000 1.04 5.00 180,000 5.00
$5.36 47,250 0.17 5.36 47,250 5.36
$6.38 5,000 2.75 6.38 5,000 6.38
---------------- ---------------
434,850 434,850
================ ===============
17. NET CAPITAL REQUIREMENTS
National, as a registered broker-dealer, is subject to the SEC's
Uniform Net Capital Rule 15c3-1, which requires the maintenance of
minimum net capital. National has elected to use the alternative
standard method permitted by the rule. This requires that National
maintain minimum net capital equal to the greater of $250,000 or a
specified amount per security based on the bid price of each security
for which the Company is a market maker. At September 30, 2002,
National's net capital exceeded the requirement by $1,050,000.
Advances, dividend payments and other equity withdrawals from its
subsidiaries are restricted by the regulations of the SEC, and other
regulatory agencies. These regulatory restrictions may limit the
amounts that a subsidiary may dividend or advance to the Company.
18. EMPLOYEE BENEFITS
The Company's subsidiary has a defined 401(k) profit sharing plan
that covers substantially all of its employees. Under the terms of
the plan, employees can elect to defer up to 25% of eligible
compensation, subject to certain limitations, by making voluntary
contributions to the plan. The Company's annual contributions are
made at the discretion of the Board of Directors. During the fiscal
years September 30, 2002, September 28, 2001 and September 29, 2000,
the Company made no such contributions.
F-24
19. UNAUDITED QUARTERLY DATA
Selected Quarterly Financial Data
(Dollars in thousands, except per share data)
Dec. 31, Mar. 30, Jun. 29, Sep. 28,
2000 2001 2001 2001
---------------------------------------------------------
Revenues $ 13,798 $ 15,286 $ 11,473 $ 9,667
=========================================================
Net Loss $ (672) $ (521) $ (1,963) $(4,766)
=========================================================
Loss per common share $ (0.31) $ (0.24) $ (0.88) $ (2.16)
=========================================================
Dec. 31, Mar. 31, Jun. 30, Sep. 30,
2001 2002 2002 2002
---------------------------------------------------------
Revenues $ 12,287 $ 10,970 $ 9,829 $ 8,916
=========================================================
Net Loss $ (434) $ (1,064) $ (574) $ (1,373)
=========================================================
Loss per common share $ (0.19) $ (0.48) $ (0.25) $ (0.61)
=========================================================
F-25
20. FINANCIAL INFORMATION - OLYMPIC CASCADE FINANCIAL CORPORATION
Olympic was organized in 1996, and began operations on February 6,
1997. The following Olympic (parent company only) financial
information should be read in conjunction with the other notes to the
consolidated financial statements.
STATEMENTS OF FINANCIAL CONDITION
ASSETS
September 30, September 28,
2002 2001
-------------------- --------------------
Cash, subject to immediate withdrawal $ 1,000 $ 43,000
Other receivables - 12,000
Capital lease - 281,000
Investment in subsidiaries 2,955,000 3,521,000
Other assets 329,000 501,000
-------------------- --------------------
$ 3,285,000 $ 4,358,000
==================== ====================
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Accounts payable, accrued expenses and other liabilities $ 161,000 $ 138,000
Payable to subsidiaries - 263,000
Capital lease payable - 300,000
Note payable 3,215,000 3,035,000
-------------------- --------------------
3,376,000 3,736,000
Stockholders' equity (deficit) (91,000) 622,000
-------------------- --------------------
$ 3,285,000 $ 4,358,000
==================== ====================
F-26
NOTE 20 - FINANCIAL INFORMATION - OLYMPIC (CONTINUED)
STATEMENTS OF OPERATIONS
Fiscal Year Ended
----------------------------------
September 30, September 28, September 29,
2002 2001 2000
------------ ------------- -------------
Operating expenses $ (597,000) $ (1,111,000) $ (1,164,000)
Other income(expense)
Interest and other income 91,000 3,000 60,000
Gain (loss) on investment in subsidiaries (3,239,000) (6,230,000) 2,460,000
------------ ------------- -------------
Net income (loss) before income tax (3,745,000) (7,338,000) 1,356,000
Discontinued operations, net of tax 300,000 (1,002,000) 200,000
Extraordinary item, net of tax - 418,000 -
------------ ------------- -------------
Net income (loss) before income tax $(3,445,000) $ (7,922,000) $ 1,556,000
============ ============= =============
STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY (DEFICIT)
Preferred Stock Common Stock Additional
---------------------- ---------------------- Paid-In
Shares Amount Shares Amount Capital Deficit Total
--------- ---------- ---------- ---------- ---------- ---------- ----------
BALANCE, September 24, 1999 - $ - 1,694,595 $ 34,000 $10,151,000 $ (6,146,000) $4,039,000
Exercise Stock Options - - 144,063 3,000 744,000 - 747,000
Exercise of Stock Warrants - - 315,188 6,000 1,589,000 - 1,595,000
Options issued to consultants - - - - 82,000 - 82,000
Warrants issued in connection
with acquisiton - - - - 20,000 - 20,000
Net Income - - - - - 1,556,000 1,556,000
--------- ---------- ---------- ---------- ----------- ----------- ----------
BALANCE, September 29, 2000 - - 2,153,846 43,000 12,586,000 (4,590,000) 8,039,000
Exercise Stock Options - - 73,603 2,000 273,000 - 275,000
Issuance of restricted stock to
former employees - - 9,000 - 25,000 - 25,000
Options issued to consultants - - - - 105,000 - 105,000
Original discount on notes payable - - - - 100,000 - 100,000
Net loss - - - - - (7,922,000) (7,922,000)
--------- ---------- ---------- ---------- ----------- ----------- -----------
BALANCE, September 28, 2001 - - 2,236,449 45,000 13,089,000 (12,512,000) $ 622,000
Issuance of restricted common stock
in exchange of note - - 38,000 - 49,000 - 49,000
Issuance of restricted preferred
stock 17,825 - - - 1,683,000 - 1,683,000
Issuance of restricted preferred
stock in exchange of notes 10,000 - - - 1,000,000 - 1,000,000
Net loss - - - - - (3,445,000) (3,445,000)
--------- ---------- ---------- ---------- ----------- ----------- ----------
BALANCE, September 30, 2002 27,825 $ - 2,274,449 $ 45,000 $15,821,000 $(15,957,000 $ (91,000)
========= ========== ========== ========== =========== =========== ==========
F-27
NOTE 20- FINANCIAL INFORMATION - OLYMPIC (CONTINUED)
STATEMENTS OF CASH FLOWS
Fiscal Year Ended
-------------------------------------------------------------
September 30, 2002 September 28, 2001 September 29, 2000
------------------- ------------------- ------------------
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss) $ (3,445,000) $ (7,922,000) $ 1,556,000
Adjustments to reconcile net income (loss) to net
cash provided by (used in) operating activities
Loss on investment in subsidiaries 3,114,000 8,204,000 (1,602,000)
(Gain) on extraordinary item-extinguishment
of debt - (418,000) -
Compensation related to issuance of stock
options - 105,000 82,000
Depreciation and amortization 238,000 339,000 290,000
Changes in assets and liabilities (94,000) (123,000) (388,000)
------------------ ------------------ ------------------
Net cash provided by (used in) operating activities (187,000) 185,000 (62,000)
------------------ ------------------ ------------------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of goodwill - - (30,000)
Capital contributions to subsidiary (2,486,000) (3,072,000) (860,000)
------------------ ------------------ ------------------
Net cash used in investing activities (2,486,000) (3,072,000) (890,000)
------------------ ------------------ ------------------
CASH FLOWS FROM FINANCING ACTIVITIES
Exercise of stock options - 275,000 747,000
Proceeds from notes payable 1,548,000 3,000,000 -
Exercise of stock warrants - - 1,595,000
Issuance of common stock - 25,000 -
Issuance of preferred 1,683,000 - -
Payments on capital lease (281,000) (340,000) (340,000)
Payments on notes payable (319,000) (61,000) (1,034,000)
------------------ ------------------ ------------------
Net cash provided by financing activities 2,631,000 2,899,000 968,000
------------------ ------------------ ------------------
NET (DECREASE) INCREASE IN CASH (42,000) 12,000 16,000
CASH BALANCE
Beginning of year 43,000 31,000 15,000
------------------ ------------------ ------------------
End of year $ 1,000 $ 43,000 $ 31,000
================== ================== ==================
F-28
Item 9 - CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
There were no changes in or disagreements with accountants on accounting and
financial disclosure for the fiscal year ended September 30, 2002.
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 2003
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 2003
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 2003
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 2003
Proxy Statement and is incorporated herein by reference.
Item 14 - CONTROLS AND PROCEDURES
Within 90 days prior to the date of this report, we carried out an evaluation,
under the supervision and with the participation of our principal executive
officer and principal financial officer, of the effectiveness of the design and
operation of our "disclosure controls and procedures" (as defined in the
Securities Exchange Act of 1934 Rules 13a-14(c) and 15(d)- 14(c). Based on this
evaluation, our principal executive officer and principal financial officer
concluded that our disclosure controls and procedures are effective in timely
alerting them to material information required to be included in our periodic
SEC reports.
In addition, we reviewed our internal controls, and there have been no
significant changes in our internal controls or in other factors that could
significantly affect those controls subsequent to the date of our evaluation.
27
Item 15 - 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 30, 2002
and September 28, 2001
Statements of Operations, Years ended September 30, 2002,
September 28, 2001 and September 29, 2000
Statements of Changes in Stockholders' Equity, Years
ended September 30, 2002, September 28, 2001 and
September 29, 2000
Statements of Cash Flows, Years ended September 30, 2002,
September 28, 2001 and September 29, 2000
Notes to Consolidated Financial Statements
2. Financial Statement Schedules
Schedules not listed above have been omitted because they
are not applicable or have been included in footnotes to the
consolidated financial statements.
(b) Reports on Form 8-K
No Reports on Form 8-K were filed during the fourth quarter ended
September 30, 2002.
(c) Exhibits
See Exhibit Index.
REMAINDER OF PAGE INTENTIONALLY LEFT BLANK
28
CERTIFICATION
I, Mark Goldwasser, certify that:
1) I have reviewed this annual report on Form 10-K of Olympic Cascade Financial
Corporation;
2) Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this annual
report;
3) Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this annual report;
4) The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated subsidiaries,
is made known to us by others within those entities, particularly during the
period in which this annual report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this annual
report (the "Evaluation Date"); and
c) presented in this annual report our conclusions about the effectiveness of
the disclosure controls and procedures based on our evaluation as of the
Evaluation Date;
5) The registrant's other certifying officer and I have disclosed, based on our
most recent evaluation, to the registrant's auditors and the audit committee of
registrant's board of directors (or persons performing the equivalent function);
a) all significant deficiencies in the design or operations of internal controls
which could adversely affect the registrant's ability to record, process,
summarize and report financial data and have identified for the registrant's
auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal controls; and
6) The registrant's other certifying officer and I have indicated in this annual
report whether or not there were significant changes in internal controls or in
other factors that could significantly affect internal controls subsequent to
the date of our most recent evaluation, including any corrective actions with
regard to significant deficiencies and material weaknesses.
/s/ Mark Goldwasser
Mark Goldwasser
Chief Executive Officer
December 23, 2002
29
CERTIFICATION
I, Robert H. Daskal, certify that:
1) I have reviewed this annual report on Form 10-K of Olympic Cascade Financial
Corporation;
2) Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this annual
report;
3) Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this annual report;
4) The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated subsidiaries,
is made known to us by others within those entities, particularly during the
period in which this annual report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this annual
report (the "Evaluation Date"); and
c) presented in this annual report our conclusions about the effectiveness of
the disclosure controls and procedures based on our evaluation as of the
Evaluation Date;
5) The registrant's other certifying officer and I have disclosed, based on our
most recent evaluation, to the registrant's auditors and the auditcommittee of
registrant's board of directors (or persons performing the equivalent function);
a) all significant deficiencies in the design or operations of internal controls
which could adversely affect the registrant's ability to record, process,
summarize and report financial data and have identified for the registrant's
auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal controls; and
6) The registrant's other certifying officer and I have indicated in this annual
report whether or not there were significant changes in internal controls or in
other factors that could significantly affect internal controls subsequent to
the date of our most recent evaluation, including any corrective actions with
regard to significant deficiencies and material weaknesses.
/s/ Robert H. Daskal
Robert H. Daskal
Acting Chief Financial Officer
December 23, 2002
30
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 23, 2002 By: /s/Mark Goldwasser
------------------------ -------------------------------------
Mark Goldwasser
President and Chief Executive Officer
Date: December 23, 2002 By: /s/Robert H. Daskal
------------------------ -------------------------------------
Robert H. Daskal,
Acting Chief Financial Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the registrant and
in the capacities and on the dates indicated.
Date: December 23, 2002 By: /s/Steven B. Sands
------------------------ -------------------------------------
Steven B. Sands, Co-Chairman
Date: December 23, 2002 By: /s/Martin S. Sands
------------------------ -------------------------------------
Martin S. Sands, Co-Chairman
Date: December 23, 2002 By: /s/Mark Goldwasser
------------------------ -------------------------------------
Mark Goldwasser,
President and Chief Executive Officer
Date: December 23, 2002 By: /s/Gary A. Rosenberg
------------------------ -------------------------------------
Gary A. Rosenberg, Director
Date: December 23, 2002 By: /s/Robert J. Rosan
------------------------ -----------------------------------
Robert J. Rosan, Director
Date: December 23, 2002 By: /s/Peter Rettman
------------------------ -----------------------------------
Peter Rettman, Director
31
EXHIBIT INDEX
3.1 Certificate of Incorporation, as amended, previously filed as
Exhibit 3.4 to Form 10-Q in May 2002 and hereby incorporated by
reference.
3.2 The Company's Bylaws, as amended, previously filed as Exhibit
3.3 to Form 10-Q in February 2002, and hereby incorporated by
reference.
3.3 The Company's By-Laws, as amended and restated on December 12,
2001.
10.1 Office lease, Chicago, Illinois, previously filed as Exhibit
10.27 to Form 10-K in December 1996 and hereby incorporated by
reference.
10.2 Office lease, Spokane, Washington, previously filed as Exhibit
10.28 to Form 10-K in December 1996 and hereby incorporated by
reference.
10.3 Amended office lease, Chicago, Illinois, previously filed as
Exhibit 10.29 to Form 10-K in December 1996 and hereby
incorporated by reference.
10.4 Purchase agreement between shareholders of Friend and the Company,
previously filed as Exhibit 10.30 to Form 10-K in December 1997
and hereby incorporated by reference.
10.5 Purchase agreement between shareholders of WestAmerica and the
Company, previously filed as Exhibit 10.31 to Form 10-K in
December 1997 and hereby incorporated by reference.
10.6 Purchase agreement between shareholders of Travis and the Company,
previously filed as Exhibit 10.32 to Form 10-K in December 1997
and hereby incorporated by reference.
10.7 Borrowing agreement between Seattle-First National Bank and the
Company, previously filed as Exhibit 10.33 to Form 10-K in
December 1998 and hereby incorporated by reference.
10.8 Note payable agreement, previously filed as Exhibit 10.34 to
Form 10-K in December 1998 and hereby incorporated by reference.
10.9 Note payable agreement, previously filed as Exhibit 10.35 to
Form 10-K in December 1998 and hereby incorporated by reference.
10.10 Note payable agreement, previously filed as Exhibit 10.36 to
Form 10-K in December 1998 and hereby incorporated by reference.
10.11 Sales agreement between Friend and the Company, previously
filed as Exhibit 10.37 to Form 10-K in December 1998 and hereby
incorporated by reference.
10.12 1996 Stock Option Plan, previously filed as Exhibit 4.1 to
Form S-8 in February 1999 and hereby incorporated by
reference.
10.13 1997 Stock Option Plan, previously filed as Exhibit 4.2 to
Form S-8 in February 1999 and hereby incorporated by
reference.
10.14 1999 Stock Option Plan, previously filed as Exhibit 4.3 to
Form S-8 in February 1999 and hereby incorporated by
reference.
10.15* Employment contract dated July 1999, previously filed as Exhibit
10.15 to Form 10-K in December 1999 and hereby incorporated by
reference.
10.16* Employment contract dated July 1999 previously filed as Exhibit
10.16 to Form 10-K in December 1999 and hereby incorporated by
reference.
10.17* Employment contract dated July 1999 previously filed as Exhibit
10.17 to Form 10-K in December 1999 and hereby incorporated by
reference.
10.18* Employment contract dated July 1999 previously filed as Exhibit
10.18 to Form 10-K in December 1999 and hereby incorporated by
reference.
10.19* Employment contract dated July 1999 previously filed as Exhibit
10.19 to Form 10-K in December 1999 and hereby incorporated by
reference.
32
10.20 Office lease, Seattle, Washington previously filed as Exhibit
10.20 to Form 10-K in December 1999 and hereby incorporated by
reference.
10.21 2000 Stock Option Plan, previously filed as Exhibit 4.1 to Form
S-8 in June 2000 and hereby incorporated by reference.
10.22* Employment contract dated June 2000, previously filed as
Exhibit 10.21 to Form 10-Q in August 2000 and hereby incorporated
by reference.
10.23 Form of Note payable agreement dated January 2001, previously
filed as Exhibit 10.23 to Form 10-Q in May 2001 and hereby
incorporated by reference.
10.24 Secured Demand Note dated February 2001, previously filed as
Exhibit 10.24 to Form 10-Q in May 2001 and hereby incorporated by
reference.
10.25 Loan and security agreement dated January 2001, previously
filed as Exhibit 10.25 to Form 10-Q in February 2001 and hereby
incorporated by reference.
10.26 2001 Stock Option Plan, previously included in the Proxy Statement
-Schedule 14A filed in January 2001 and hereby incorporated by
reference.
10.27 Audit committee charter, previously filed as Exhibit 10.22 to
Form 10-Q in August 2000 and hereby incorporated by reference.
10.28 Clearing Agreement, previously filed as Exhibit 10.28 to Form
10-K in December 2001 and hereby incorporated by reference.
10.29 First Amendment to Clearing Agreement, previously filed as
Exhibit 10.29 to Form 10-K in December 2001 and hereby
incorporated by reference.
10.30 Purchase Agreement by and among Olympic Cascade Financial
Corporation, Mark Goldwasser and Triage Partners, LLC dated as of
December 14, 2001, previously filed as Exhibit 10.30 to Form 8-K
in January 2002 and hereby incorporated by reference.
10.31 Stock Purchase Agreement between Steven A. Rothstein, certain
other persons or entities and Triage Partners, LLC dated as of
December 14, 2001, previously filed as Exhibit 10.31 to Form 8-K
in January 2002 and hereby incorporated by reference.
10.32 Securities Exchange Agreement by and among Olympic Cascade
Financial Corporation, Gregory P. Kusnick, Karen Jo Gustafson,
Gregory C. Lowney and Maryanne K. Snyder dated as of December 14,
2001, previously filed as Exhibit 10.32 to Form 8-K in January
2002 and hereby incorporated by reference.
10.33 Escrow Agreement by and made among Olympic Cascade Financial
Corporation, Mark Goldwasser, Triage Partners, LLC and National
Securities Corporation dated as of December 28, 2001, previously
filed as Exhibit 10.33 to Form 8-K in January 2002 and hereby
incorporated by reference.
10.34 Second Amendment to Clearing Agreement, previously filed as
Exhibit 10.34 to Form 10-Q in February 2002 and hereby
incorporated by reference.
10.35 Form of Warrant issued in December 2002.
11. Computation of Earnings per Share.
16.1 Change in Certifying Accountant, previously filed in Form 8-K in
August 1998 and hereby incorporated by reference.
16.2 Investment Transaction, previously filed in Form 8-K in January
2002 and hereby incorporated by reference.
16.3 Resignation of Director, previously filed in Form 8-K in April
2002 and hereby incorporated by reference.
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.
33
23.2 Consent of Moss Adams LLP, previously filed to Forms S-8 in
February 1999 and June 2000 and Forms S-3 in May 1999 and June
1999 and hereby incorporated by reference.
23.3 Consent of Camhy Karlinsky & Stein LLP, previously filed to Form
S-8 in February 1999 and Forms S-3 in May 1999 and June 1999 and
hereby incorporated by reference.
23.4 Consent of D'Ancona & Pflaum LLC, previously filed to Forms S-8 in
June 2000 and June 2001 and hereby incorporated by reference.
24. Power of Attorney, previously filed to Forms S-3 in May 1999 and
June 1999
99.1 Certification of Chief Executive Officer pursuant to 18 U.S.C.
Section 1350, as adopted pursuant to Section 906 of the Sarbanes-
Oxley Act of 2002.
99.2 Certification of Chief Financial Officer pursuant to 18 U.S.C.
Section 1350, as adopted pursuant to Section 906 of the Sarbanes-
Oxley Act of 2002.
*Compensatory agreements
REMAINDER OF PAGE INTENTIONALLY LEFT BLANK
34
THIS WARRANT AND THE SHARES OF COMMON STOCK WHICH MAY BE PURCHASED UPON THE
EXERCISE OF THIS WARRANT HAVE BEEN ACQUIRED SOLELY FOR INVESTMENT AND HAVE NOT
BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE "ACT"), OR ANY
STATE SECURITIES LAWS. SUCH SECURITIES MAY NOT BE SOLD, OFFERED FOR SALE,
PLEDGED OR HYPOTHECATED IN THE ABSENCE OF SUCH REGISTRATION OR AN OPINION OF
COUNSEL SATISFACTORY TO THE COMPANY AND ITS COUNSEL THAT SUCH SALE, OFFER,
PLEDGE OR HYPOTHECATION IS EXEMPT FROM THE REGISTRATION AND PROSPECTUS DELIVERY
REQUIREMENTS OF THE ACT AND OF ANY APPLICABLE STATE SECURITIES LAWS UNLESS SOLD
PURSUANT TO RULE 144 OF THE ACT.
October ___, 2002
OLYMPIC CASCADE FINANCIAL CORPORATION
COMMON STOCK PURCHASE WARRANT
THIS CERTIFIES THAT, for value received, HOLDER, is entitled, upon
the terms and subject to the conditions hereinafter set forth, at such times
after the date hereof as are set forth below, to acquire from Olympic Cascade
Financial Corporation, a Delaware corporation (the "Company"), in whole or, from
time to time, in part, up to SHARES fully paid and nonassessable shares of
Common Stock, $.02 par value, of the Company (the "Warrant Shares") at a
purchase price per share (the "Exercise Price") of $1.25. Such number of shares,
type of security and Exercise Price are subject to adjustment as provided
herein, and all references to "Warrant Shares" and "Exercise Price" herein shall
be deemed to include any such adjustment or series of adjustments. This Warrant
is granted by the Company to the Holder pursuant to that certain Subscription
Agreement dated October 17, 2002 by and among the Company and the Holder (the
"Subscription Agreement") and that certain Confidential Private Placement
Memorandum dated October 17, 2002 (The "Memorandum").
1. Term.
(a) Commencement of Exercisability. The Warrant is exercisable, in whole
or in part, at any time and from time to time from the date hereof through the
Expiration Date (as defined in Section 1(b) below), subject to Section 4 below.
(b) Termination and Expiration. If not earlier exercised, the Warrant
shall expire on the third anniversary of the date of the Final Closing (as
defined in the Memorandum) (the "Expiration Date"), subject to Section 4 below.
2. Method of Exercise; Payment; Issuance of New Warrant. Subject to Section
1 hereof, exercise of this Warrant shall be made, in whole or in part, by the
surrender of this Warrant (with the notice of exercise form attached hereto as
Exhibit A duly executed) at the principal office of the Company and by the
payment to the Company of an amount equal to the Exercise Price multiplied by
35
the number of Warrant Shares being purchased, which amount may be paid in cash
or by check. In the event of any exercise of the rights represented by this
Warrant, certificates for the Warrant Shares so purchased shall be delivered to
the Holder hereof within a reasonable time and, unless this Warrant has been
fully exercised or expired, a new Warrant representing that portion of the
Warrant Shares, if any, with respect to which this Warrant shall not then have
been exercised, shall also be issued to the Holder within such reasonable time.
3. Stock Fully Paid; Reservation of Warrant Shares. All of the Warrant
Shares issuable upon the exercise of the rights represented by this Warrant
will, upon issuance and receipt of the Exercise Price therefor, be fully paid
and nonassessable, and free from all taxes, liens and charges with respect to
the issue thereof. During the period within which the rights represented by this
Warrant may be exercised, the Company shall at all times have authorized and
reserved for issuance a sufficient number of shares of Common Stock to provide
for the exercise of the rights represented by this Warrant.
4. Adjustment of Exercise Price and Number of Shares of Warrant Shares.
Subject to the provisions of Section 2 hereof, the number and kind of securities
purchasable upon the exercise of this Warrant and the Exercise Price therefor
shall be subject to adjustment, from time to time, upon the occurrence of
certain events, as follows:
(a) In the event the Company shall at any time following the date hereof
subdivide the outstanding shares of Common Stock, or shall issue a stock
dividend on its outstanding Common Stock, the number of shares of Common Stock
issuable upon exercise of this Warrant immediately prior to such subdivision or
to the issuance of such stock dividend shall be proportionately increased, and
the Exercise Price shall be proportionately decreased; and in the event the
Company shall at any time following the date hereof combine the outstanding
shares of Common Stock, the number of shares of Common Stock issuable upon
exercise of this Warrant immediately prior to such combination shall be
proportionately decreased, and the Exercise Price shall be proportionately
increased, effective at the close of business on the date of such subdivision,
stock dividend or combination, as the case may be.
(b) If the Company is, following the date hereof, recapitalized through
the subdivision or combination of its outstanding shares of Common Stock into a
larger or smaller number of shares, the number of shares of Common Stock for
which this Warrant may be exercised shall be increased or reduced in the same
proportion as the increase or decrease in the outstanding shares of Common Stock
and the then applicable Exercise Price shall be adjusted by multiplying by a
fraction with a numerator equal to the number of shares of Common Stock
purchasable upon exercise hereof immediately prior to such subdivision or
combination and the denominator of which shall be the number of shares of Common
Stock purchasable immediately following such subdivision or combination.
(c) Subject to Section 1 hereof, in the event of any consolidation or
merger of the Company with another entity in a bona fide transaction (i.e., not
a mere recapitalization, reincorporation for the purpose of changing corporate
domicile, or similar transaction), at any time prior to the Expiration Date, the
Holder shall have the right upon exercise of this Warrant, to receive the same
kind and number of Warrant Shares and other securities, cash or other property
as would have been distributed to the Holder had the Holder exercised this
Warrant immediately prior to such consolidation or merger. Notwithstanding the
foregoing, in the event that the per share consideration price paid in the bona
fide transaction is lower than the then effective Exercise Price, this Warrant
shall expire without value upon consummation of the bona fide transaction.
36
5. Fractional Shares. No fractional shares of Common Stock will be issued
in connection with any exercise hereunder, but in lieu thereof, the Company
shall make a cash payment therefor upon the basis of the Exercise Price then in
effect.
6. Transfer, Assignment or Loss of Warrant and Warrant Shares.
(a) This Warrant and the Warrant Shares to be issued or issuable upon
exercise of this Warrant, may not be assigned or transferred except as provided
in this Section 6 and in accordance with and subject to the provisions of the
Securities Act of 1933, as amended, and the Rules and Regulations promulgated
thereunder (said Act and such Rules and Regulations being hereinafter
collectively referred to as the "Act"). Upon exercise of this Warrant, the
holder hereof shall confirm in writing, in the form of Exhibit B, that the
shares of Common Stock so purchased are being acquired for investment and not
with a view toward distribution or resale. Any purported transfer or assignment
made other than in accordance with this Section 6 shall be null and void and of
no force and effect.
(b) Any assignment permitted hereunder shall be made by surrender of
this Warrant to the Company at its principal office with the Assignment Form
attached hereto as Exhibit C duly executed. In such event the Company shall,
upon payment by the Holder of any issuance or transfer tax incurred or to be
incurred by the Company with respect to such transfer, execute and deliver a new
Warrant in the name of the assignee named in such instrument of assignment and
this Warrant shall promptly be canceled. This Warrant may be divided or combined
with other warrants which carry the same rights upon presentation thereof at the
principal office of the Company together with a written notice signed by the
Holder thereof, specifying the names and denominations in which new warrants are
to be issued. Upon any partial transfer, the Company will sign, issue and
deliver to the Holder a new Warrant with respect to any portion not so
transferred.
(c) Upon receipt by the Company of evidence satisfactory to it of the
loss, theft, destruction or mutilation of this Warrant (provided that an
affidavit of the Holder shall be satisfactory for such purpose), and of
indemnity satisfactory to it (provided that if the Holder is the original Holder
of this Warrant, its own indemnification agreement shall under all circumstances
be satisfactory, and no bond shall be required), and upon surrender and
cancellation of this Warrant, if mutilated, the Company will execute and deliver
a new Warrant of like tenor and date and any such lost, stolen, or destroyed
Warrant shall thereupon become void.
(d) In order to ensure compliance with the restrictions referred to
herein, the Company may issue appropriate "stop transfer" instructions to its
transfer agent.
(e) The Company shall not be required (i) to transfer on its books the
Warrant or any Warrant Shares that have been sold or otherwise transferred in
violation of any of the provisions of this Warrant or (ii) to treat as owner of
such Warrant Shares or to accord the right to vote or pay dividends to an
purchaser or other transferee to whom such Warrant Shares shall have been so
transferred.
37
7. Representations and Covenants of the Holder. The Holder represents that
this Warrant and any Warrant Shares issued or issuable upon exercise of this
Warrant, to be received will be acquired for investment for its own account, not
as a nominee or agent, and not with a view to the sale or distribution of any
part thereof, and that it has no present intention of selling, granting any
participation in or otherwise distributing the same. Such Holder understands and
acknowledges that the offering of this Warrant, and any issuance of Common Stock
on conversion thereof, will not be registered under the Securities Act on the
ground that the sale provided for in this Agreement and the issuance of
securities hereunder is exempt from registration pursuant to Section 4(2) of the
Act, and that the Company's reliance on such exemption is predicated on the
Holder's representations set forth herein. Such Holder represents that it is
experienced in evaluating companies such as the Company, is able to fend for
itself in investments such as this one, and has such knowledge and experience in
financial and business matters that it is capable of evaluating the merits and
risks of its prospective investment in the Company.
8. Rights of Stockholders. No holder of this Warrant shall be entitled, as
a Warrant holder, to vote or receive dividends or be deemed the holder of Common
Stock or any other securities of the Company which may at any time be issuable
on the exercise hereof for any purpose, nor shall anything contained herein be
construed to confer upon the holder of this Warrant, as such, any of the rights
of a stockholder of the Company or any right to vote for the election of
directors or upon any matter submitted to stockholders at any meeting thereof,
or to give or withhold consent to any corporate action (whether upon any
recapitalization, issuance of stock, reclassification of stock, change of par
value or change of stock to no par value, consolidation, merger, conveyance, or
otherwise) or to receive notice of meetings, or to receive dividends or
subscription rights or otherwise until the Warrant shall have been exercised and
the Warrant Shares purchasable upon the exercise hereof shall have become
deliverable, as provided herein.
9. Registration Rights. The shares of Common Stock obtained upon exercise
of this Warrant shall have the registration rights set forth in the Registration
Rights Agreement dated October , 2002 and the term "Registrable Securities" as
defined in such Registration Rights Agreement shall include the Common Stock
obtained upon exercise of this Warrant.
10. Notices, Etc. All notices and other communications from the Company to
the Holder shall be mailed by first class registered or certified mail, postage
prepaid, at such address as may have been furnished to the Company in writing by
the Holder.
11. Governing Law, Headings. This Warrant shall be construed and enforced
in accordance with and governed by the laws of the State of New York. The
headings in this Warrant are for purposes of reference only, and shall not limit
or otherwise affect any of the terms hereof.
38
"COMPANY"
OLYMPIC CASCADE FINANCIAL CORPORATION
By:
----------------------------------------------------
Name: Mark Goldwasser
Title: Chief Executive Officer
[Signature Page to Investor Warrant]
39
EXHIBIT A
NOTICE OF EXERCISE
TO: OLYMPIC CASCADE FINANCIAL CORPORATION
(i) The undersigned hereby elects to purchase ___________
shares of Common Stock pursuant to the terms of the attached Warrant, and
tenders herewith payment of the purchase price of such Common Stock in full.
(ii) Please issue a certificate or certificates
representing said Common Stock in the name of the undersigned or in such other
name as is specified below:
Name:
Address:
(iii) The undersigned hereby represents and warrants that
the aforesaid shares of Common Stock are being acquired for the account of the
undersigned for investment and not with a view to, or, for resale in connection
with the distribution thereof, and that the undersigned has no present intention
of distributing or reselling such shares.
By:
--------------------------------------------------
Name:
------------------------------------------------
Title:
-----------------------------------------------
Date:
------------------------------------------------
40
EXHIBIT B
INVESTMENT REPRESENTATION STATEMENT
PURCHASER:
COMPANY: OLYMPIC CASCADE FINANCIAL CORPORATION
SECURITY: COMMON STOCK
AMOUNT:
DATE:
In connection with the purchase of the above-listed securities (the
"Securities"), I, the Purchaser, represent to the Company the following:
(a) I am aware of the Company's business affairs and financial
condition, and have acquired sufficient information about the Company to reach
an informed and knowledgeable decision to acquire the Securities. I am
purchasing these Securities for my own account for investment purposes only and
not with a view to, or for the resale in connection with, any "distribution"
thereof for purposes of the Securities Act of 1933 ("Securities Act").
(b) I understand that the Securities have not been registered under the
Securities Act in reliance upon a specific exemption therefrom, which exemption
depends upon, among other things, the bona fide nature of my investment intent
as expressed herein. In this connection, I understand that, in the view of the
Securities and Exchange Commission ("SEC"), the statutory basis for such
exemption may be unavailable if my representation was predicated solely upon a
present intention to hold these Securities for the minimum capital gains period
specified under tax statutes, for a deferred sale, for or until an increase or
decrease in the market price of the Securities, or for a period of one year or
any other fixed period in the future.
(c) I further understand that the Securities must be held for at least
one (1) year under Rule 144 promulgated under the Securities Act, unless
subsequently registered under the Securities Act or unless an exemption from
registration is otherwise available. Moreover, I understand that the Company is
under no obligation to register the Securities except as set forth in the
Registration Rights Agreement. In addition, I understand that the certificate
evidencing the Securities will be imprinted with a legend which prohibits the
transfer of the Securities unless they are registered or such registration is
not required in the opinion of counsel for the Company.
(d) I am aware of the provisions of Rule 144, promulgated under the
Securities Act, which, in substance, permits limited public resale of
"restricted securities" acquired, directly or indirectly, from the issuer
thereof (or from an affiliate of such issuer), in a non-public offering subject
to the satisfaction of certain conditions.
(e) I am aware that the Securities involve a high degree of risk and
that I may suffer a total loss of my investment. I have been provided with the
Company's periodic reports filed with the Securities and Exchange Commission
under the Securities Exchange Act of 1934, as amended (the "34 Act Filings"),
including the Company's most recently filed Annual Report on Form 10-K and
Quarterly Report on Form 10-Q. I have read the information in such reports,
including the information under the caption "Risk Factors" contained in the
Company's 34 Act Reports.
41
(f) I further understand that in the event all of the requirements of
Rule 144 are not satisfied, registration under the Securities Act, compliance
with Regulation A, or some other registration exemption will be required; and
that, notwithstanding the fact that Rule 144 is not exclusive, the Staff of the
SEC has expressed its opinion that persons proposing to sell private placement
securities other than in a registered offering and otherwise than pursuant to
Rule 144 will have a substantial burden of proof in establishing that an
exemption from registration is available for such offers or sales, and that such
persons and their respective brokers who participate in such transactions do so
at their own risk.
-------------------------------
Name of Purchaser
-------------------------------
Signature of Authorized Signatory
-------------------------------
Print Name and Title
-------------------------------
Date
42
EXHIBIT C
ASSIGNMENT FORM
FOR VALUE RECEIVED, _______________________________ hereby sells,
assigns and transfers unto ____________________________________________ (Name
and Address) the right to purchase Warrant Shares represented by this Warrant to
the extent of ___________ shares and does hereby irrevocably constitute and
appoint ____________________________ __________________, attorney, to transfer
the same on the books of the Company with full power of substitution in the
premises.
Dated:
----------------,------
By:
----------------------------------------------
Name:
--------------------------------------------
Title:
-------------------------------------------
43
EXHIBIT 11
OLYMPIC CASCADE FINANCIAL CORPORATION
COMPUTATION OF EARNINGS PER SHARE
Years Ended
------------------------------------------------------------
September 30, September 28, September 29,
2002 2001 2000
---------------- ---------------- ----------------
Net Income (Loss) from continuing operations
before income taxes and extraordinary item $ (3,745,000) $ (7,338,000) $ 1,356,000
Income (Loss) from discontinued operations 300,000 (1,002,000) 200,000
Income from extraordinary item - 418,000 -
---------------- ---------------- ----------------
Net Income (Loss) $ (3,445,000) $ (7,922,000) $ 1,556,000
================ ================ ================
Earnings (Loss) Per Share from continuing operations
before income taxes and extraordinary item
Basic Earnings (Loss) Per Share $ (1.66) $ (3.33) $ 0.70
================ ================ ================
Diluted Earnings (Loss) Per Share $ (1.66) $ (3.33) $ 0.64
================ ================ ================
Earnings (Loss) Per Share from discontinued operations
Basic Earnings Per Share $ 0.13 $ (0.45) $ 0.10
================ ================ ================
Diluted Earnings Per Share $ 0.13 $ (0.45) $ 0.09
================ ================ ================
Earnings Per Share of extraordinary item
Basic Earnings Per Share $ - $ 0.19 $ -
================ ================ ================
Diluted Earnings Per Share $ - $ 0.19 $ -
================ ================ ================
Earnings (Loss) Per Share
Basic Earnings (Loss) Per Share $ (1.53) $ (3.59) $ 0.80
================ ================ ================
Diluted Earnings (Loss) Per Share $ (1.53) $ (3.59) $ 0.73
================ ================ ================
Weighted Average Common Shares
Outstanding - Basic for the period 2,255,449 2,207,101 1,947,572
Add common equivalent shares upon
exercise of stock options - - 177,179
---------------- ---------------- ----------------
Weighted Average Common Shares
Outstanding - Diluted for the period 2,255,449 2,207,101 2,124,751
================ ================ ================
44
EXHIBIT 21
OLYMPIC CASCADE FINANCIAL CORPORATION
Subsidiaries of the Registrant
September 30, 2002
Percentage
of Voting
State of Securities
Subsidiary Name Incorporation Owned
National Securities Corporation Washington 100%
Robotic Ventures Group LLC Delaware 24.5%
REMAINDER OF PAGE INTENTIONALLY LEFT BLANK
45
Exhibit 99.1
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Annual Report of Olympic Cascade Financial
Corporation (the "Company") on Form 10-K for the fiscal year ended September 30,
2002 as filed with the Securities and Exchange Commission on the date hereof
(the "Report"), I, Mark Goldwasser, Chief Executive Officer of the Company,
certify, pursuant to 18 U.S.C. ss. 1350, as adopted pursuant to ss. 906 of the
Sarbanes-Oxley Act of 2002, that, to my knowledge:
(1) The Report fully complies with the requirements of section
13(a) or 15(d) of the Securities Exchange Act of 1934, as
amended; and
(2) The information contained in the Report fairly presents, in
all material respects, the financial condition and results
of operations of the Company.
/s/Mark Goldwasser
Mark Goldwasser
Chief Executive Officer
December 23, 2002
46
Exhibit 99.2
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Annual Report of Olympic Cascade Financial
Corporation (the "Company") on Form 10-K for the fiscal year ended September 30,
2002 as filed with the Securities and Exchange Commission on the date hereof
(the "Report"), I, Robert H. Daskal, Acting Chief Financial Officer of the
Company, certify, pursuant to 18 U.S.C. ss. 1350, as adopted pursuant to ss. 906
of the Sarbanes-Oxley Act of 2002, that, to my knowledge:
(1) The Report fully complies with the requirements of
section 13(a) or 15(d) of the Securities Exchange Act
of 1934, as amended; and
(2) The information contained in the Report fairly presents, in
all material respects, the financial condition and results
of operations of the Company.
/s/Robert H. Daskal
Robert H. Daskal
Acting Chief Financial Officer
December 23, 2002
47