<PAGE>
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 25, 1998
OLYMPIC CASCADE FINANCIAL CORPORATION
(Exact Name of Registrant as specified in its charter)
DELAWARE 36-4128138
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
875 North Michigan Avenue, Suite 1560, Chicago, IL 60611
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (312) 751-8333
Securities registered pursuant to Section 12(b) of the Act:
None
Securities registered pursuant to Section 12(g) of the Act:
Common stock $.02 par value
(Title of class)
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days.
Yes X No
--- ---
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K (229.405) of this chapter is not contained herein, and
will not be contained, to the best of Registrant's knowledge, in definitive
proxy or information statements incorporated by reference in Part III of this
Form 10-K or any amendment to this Form 10-K.
Yes X No
--- ---
As of December 8, 1998, 1,106,612 shares of the Company's common stock were
held by non-affiliates, having an aggregate market value of $ 1,245,000.
Number of common shares outstanding as of December 8, 1998 was 1,463,007 at a
par value of $.02.
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PART I
ITEM 1 - BUSINESS
GENERAL
EXCEPT FOR HISTORICAL INFORMATION CONTAINED HEREIN, THE MATTERS DISCUSSED IN
THIS REPORT CONTAIN CERTAIN FORWARD-LOOKING INFORMATION THAT INVOLVE RISKS
AND UNCERTAINTIES THAT COULD CAUSE RESULTS TO DIFFER MATERIALLY, INCLUDING
CHANGING MARKET CONDITIONS AND OTHER RISKS DETAILED IN THIS ANNUAL REPORT OR
FORM 10-K AND OTHER DOCUMENTS FILED BY THE COMPANY WITH THE SECURITIES AND
EXCHANGE COMMISSION FROM TIME TO TIME.
Olympic Cascade Financial Corporation ("Olympic" or the "Company") is a
financial services organization, operating through its two wholly owned
subsidiaries, National Securities Corporation ("National"), and WestAmerica
Investment Group ("WestAmerica"). Olympic is committed to establishing a
significant presence in the financial services industry by providing
financing options for emerging, small and middle capitalization companies
through research, financial advisory services and sales and investment
banking services for both public offerings and private placements, and also
provides retail brokerage and trade clearance operations.
In November 1996, the shareholders of National approved a restructuring
whereby, National's shareholders exchanged their shares on a one-for-one
basis for shares of Olympic resulting in National becoming a wholly owned
subsidiary of Olympic. This restructuring became effective in February 1997,
accordingly, Olympic is the successor Registrant to National.
In June 1997, the Company acquired all of the outstanding stock of
WestAmerica, a Scottsdale, Arizona based broker-dealer specializing in retail
brokerage services. WestAmerica was acquired for $443,000 in cash and an
agreement that provided for the payment of bonus compensation to certain
brokers.
During fiscal year 1998, the Company redirected its focus on retail
operations by divesting its ownership in two of its subsidiaries, L.H.
Friend, Weinress, Franksen & Presson, Inc. ("Friend") and Travis Capital,
Inc. ("Travis"). The Company had acquired each subsidiary in fiscal year 1997.
National conducts a national securities brokerage business through its main
office in Seattle, Washington and in 38 other offices located in 18 states.
Its business includes securities brokerage for individual and institutional
clients, market-making trading activities, asset management and corporate
finance services. National concentrates upon retail brokerage with an
emphasis on personalized service. National's operations, and its largest
sales office, is located in Seattle, Washington. The majority of National's
transactions with the public involve solicited trades and approximately 70%
of these involve sales of securities to customers.
WestAmerica, based in Scottsdale, Arizona is a registered securities
broker-dealer providing primarily retail brokerage operations. The majority
of WestAmerica's transactions with the public involve solicited trades.
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ITEM 1 - BUSINESS (CONTINUED)
GENERAL (Continued)
The Company's business plan is to achieve growth of its retail brokerage
business through the acquisition and roll-up of complementary businesses.
Management believes that consolidation within the industry is inevitable.
Concerns attributable to the strength of the 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.
BROKERAGE SERVICES
Brokerage services to retail clients are provided through the Company's sales
force of investment executives at National and WestAmerica.
NATIONAL SECURITIES CORPORATION
National is registered as a broker-dealer with the Securities and Exchange
Commission ("SEC") and licensed in 50 states, the District of Columbia and
Puerto Rico. National is also a member of the National Association of
Securities Dealers, Inc. ("NASD"), the Municipal Securities Rulemaking Board
("MSRB") the Securities Investor Protection Corporation ("SIPC"), and the
Chicago Stock Exchange ("CSE").
National is organized to meet the needs of its investment executives and
their clients. To foster individual service, flexibility and efficiency, and
to reduce fixed costs, investment executives at National act as independent
contractors responsible for providing their own office facilities, sales
assistants, telephone service, supplies and other items of overhead.
Investment executives are given broad discretion to structure their own
practices and to specialize in different areas of the securities market
subject to supervisory procedures. In addition, investment executives have
direct access to research materials, management, traders, and all levels of
support personnel.
It is not National's policy to recommend particular securities to customers.
Recommendations to customers are determined by individual investment
executives based upon their own research and analysis, and subject to
applicable NASD customer suitability standards. Most investment executives
perform fundamental (as opposed to technical) analysis. Solicitations may be
by telephone, seminars or newsletters. Investment executives may request
trading to acquire an inventory position to facilitate sales to customers
(subject to the investment executive's own risk). Supervisory personnel
review trading activity from inventory positions to ensure compliance with
applicable standards of conduct.
Salespersons in the brokerage industry are traditionally compensated on the
basis of set percentages of total commissions and mark-ups generated. Most
brokerage firms bear substantially all of the costs of maintaining their
sales forces, including providing office space, sales assistants, telephone
service and supplies. The average commission paid to the salespersons in the
brokerage industry generally ranges from 30% to 40% of total commissions
generated.
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ITEM 1 - BUSINESS (CONTINUED)
BROKERAGE SERVICES (Continued)
Since National requires most of its investment executives to absorb their own
overhead and expenses, it is able to pay an average of 70% of commissions and
mark-ups generated by the investment executive. This arrangement also reduces
fixed costs and lowers the risk of operational losses for non-production.
National's operations include execution of orders, processing of
transactions, receipt, identification and delivery of funds and securities,
custody of customer securities, internal financial controls and compliance
with regulatory and legal requirements.
National's data processing is supplied by an independent vendor on a
time-sharing basis to process orders, reports, confirmations and statements
as well as to maintain the general ledger and files of customers, and other
market data. National owns other computers, which are used for investment
executive payroll and telephone cost allocation, including word processing
and other office applications. In the first quarter of fiscal 1999, the
Company negotiated an agreement to upgrade its processing system with a new
vendor. The Company anticipates that this conversion will be completed and
fully operational during the third quarter of fiscal 1999.
National clears approximately 90% of its own securities transactions and
posts its books and records daily, with the remaining 10% of the transactions
clearing through Bear Stearns Securities Corporation. Periodic reviews of
controls are conducted, and administrative and operations personnel meet
frequently with management to review operating conditions. Operations
personnel monitor compliance with applicable laws, rules and regulations.
WESTAMERICA INVESTMENT GROUP
WestAmerica is registered as a broker-dealer with the SEC and licensed in 36
states and the District of Columbia. WestAmerica is also a member of the
NASD, the MSRB and the SIPC. WestAmerica, offers traditional securities
brokerage and financial planning business and fee based investment management
business to its retail clients.
Unlike National, the majority of WestAmerica's investment executives are
employees. As such the average commission payout is approximately 20-30%
lower than National's commission payout of approximately 70%. Since the
commission payout is much lower WestAmerica provides office space, equipment,
supplies and other resources for its investment executives.
WestAmerica operates pursuant to the exemptive provisions of SEC Rule
15c3-3(k)(2)(ii) and clears all transactions with and for customers on a
fully disclosed basis.
WestAmerica has a clearing arrangement with Correspondent Services
Corporation ("CSC"), a wholly owned subsidiary of PaineWebber Incorporated.
CSC provides WestAmerica with back office support, transaction processing
services on all principal national securities exchanges and access to many
other financial services and products. This agreement with CSC allows
WestAmerica to offer a range of products and services that is generally
offered only by firms that are larger or have more capital.
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ITEM 1 - BUSINESS (CONTINUED)
INVESTMENT BANKING
National provides corporate finance and investment banking services,
including underwriting the sale of securities to the public and arranging for
the private placement of securities with investors. National has expanded its
corporate finance operations to provide a broader range of financial and
corporate advisory services, including mergers and acquisitions, project
financing, capital structure and specific financing opportunities. National
has underwritten both equity securities and convertible corporate bonds as
initial or secondary public offerings.
National will manage, underwrite and sell shares of each underwriting.
National collects fees from the underwriting proceeds for providing these
services, including non-accountable expenses. Additionally, National
participates as an underwriter in the syndicate group of other underwritings,
which it does not manage. All of these activities require a substantial
commitment of capital and expose National to additional risk. Accordingly,
National maintains a commitment committee that reviews every proposed
underwriting and must approve each underwriting in order for it to proceed.
Additionally, such activities are periodically reviewed by members of the
Board of Directors.
National's corporate finance department is headquartered in Chicago,
Illinois. This office includes investment executives, investment bankers and
employees. The office and the corporate finance department are under the
direction of the Company's Chairman Steven A. Rothstein.
In fiscal 1998, WestAmerica was approved to engage in underwriting by the
NASD, and participated as an underwriter of one public offering.
PRINCIPAL AND AGENCY TRANSACTIONS
The Company buys and maintains inventories in equity securities as a
"market-maker" for sale of those securities to other dealers and to customers
through National. The Company also maintains inventories in corporate and
municipal debt securities for sale to customers.
At National a staff of six traders and assistants at its Seattle
headquarters, and two traders and assistants in its Spokane, Washington
office, manage an inventory of securities, and conduct market-making
activities. As of September 25, 1998, National made a market in approximately
140 equity securities, the majority of which are quoted on the NASDAQ system.
This includes all companies for which National managed or co-managed a public
offering.
The Company's trading departments require a substantial 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
movement, trading activity and the size of inventories. Because the Company's
trading activities occasionally may involve speculative and thinly
capitalized stock, including stabilizing the market for securities which it
has underwritten, the Company imposes position limits to reduce its potential
for loss.
5
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ITEM 1 - BUSINESS (CONTINUED)
PRINCIPAL AND AGENCY TRANSACTIONS (Continued)
In executing customer orders to buy or sell a security in which the Company
makes a market, the Company may sell or purchase from customers at a price,
which is substantially equal to the current inter-dealer market price plus or
minus a mark-up or mark-down. The Company may also act as agent and execute a
customer's purchase or sale order with another broker-dealer market-maker at
the best inter-dealer market price available and charge a commission. The
Company's mark-ups, mark-downs and commissions are competitive based on the
services it provides to its customers.
In executing customers' orders to buy or sell listed and over-the-counter
securities in which it does not make a market, the Company generally acts as
agent and charges commissions which the Company believes are competitive
based on the services the Company provides to its customers.
SUPERVISION
The Securities Exchange Act of 1934, as amended, and the NASD Conduct Rules
require the Company's subsidiaries to supervise the activities of its
investment executives. As part of providing such supervision, the
subsidiaries maintain an Operations and Procedures Manual. Compliance
personnel conduct inspections of branch offices no less frequently than
annually to review compliance with the Company's procedures. A registered
principal provides continuous supervision at each of the Company's larger
offices. The other offices (averaging two investment executives per office)
are not required by NASD rules to have a registered principal on site and are
therefore supervised by registered principals of the subsidiaries. Traders
and other personnel review each investment executive's order tickets to
ensure compliance with the NASD Conduct Rules including mark-up guidelines.
EMPLOYEES
As of September 25, 1998, the Company and its subsidiaries had approximately
100 employees and 250 independent contractors. Of these totals, approximately
300 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.
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ITEM 1 - BUSINESS (CONTINUED)
COMPETITION
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, which 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.
ITEM 2 - PROPERTIES
The Company owns no real property. Its corporate headquarters are shared with
National in leased space in Chicago, Illinois and Seattle, Washington.
Additionally, through its subsidiaries, the Company leases office space in
Marietta, Georgia, Scottsdale, Arizona and Spokane, Washington. The branch
offices, which are run by independent contractors are leased by those
contractors.
Leases expire at various times through October 2003. The Company believes the
rent at each of its locations is at current market rates. At current
production levels, the Company believes its leased space is suitable and
adequate, however, increased activity could require additional space to be
leased.
ITEM 3 - LEGAL PROCEEDINGS
1. THE MAXAL TRUST, ET AL. V. NATIONAL SECURITIES CORPORATION ET AL., United
States District Court, Central District of California, Case No. CV-97-4392
ABC (Shx). In April 1997, the plaintiffs brought an action against the
Company and its subsidiary National, alleging that National breached an
agreement to purchase their shares of Interact Medical Technologies Corp.
("Interact"). The plaintiffs alleged claims under section 10(b) of the
Securities Exchange Act of 1934 and SEC Rule 10b-5 promulgated thereunder,
for common law fraud and misrepresentation, for breach of express and
implied contract, and for negligence, and are seeking damages in excess of
$4 million.
The Company and National moved to dismiss the plaintiffs' claims on various
grounds, and the plaintiffs moved for partial summary judgment on their
claims of breach of contract. In late October 1997 the Court (i) dismissed
all of plaintiffs' claims against the Company; (ii) dismissed plaintiffs'
Securities law claims against National; and (iii) denied plaintiffs'
motion. Consequently, the case is proceeding against National on theories
of common law fraud, misrepresentation, breach of contract and negligence.
National denies all liability to the plaintiffs and believes it has
meritorious defenses to plaintiffs' claims. National presently intends to
continue its vigorous defense of this action.
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ITEM 3 - LEGAL PROCEEDINGS (CONTINUED)
2. MAYNARD MALL REALTY TRUST V. NATIONAL SECURITIES CORPORATION, ET AL.,
United States District Court, Western District of Washington, Case No.
97-CV-00967. In May 1997, the plaintiff brought an action against the
Company, its subsidiary National, and several officers and directors of the
Company and National, originally alleging fraud, breach of fiduciary duties
and state securities law violations in connection with the share exchange
between the Company and National (the "Share Exchange") and otherwise. The
plaintiff, prosecuting the case both individually and derivatively, seeks
monetary damages, corporate dissolution of the Company and National,
recission of the Share Exchange, and the fair value of its shares in an
appraisal proceeding. In an amended pleading, plaintiff dropped all
allegations of fraud and the claim for recission of the Share Exchange, and
alleged that the defendants breached fiduciary duties by, among other
things, secretly receiving excessive and otherwise inappropriate overrides
and other compensation, and that defendants traded in the Company's stock
with knowledge of material, non-public information. The second amended
complaint also alleges that the proxy statement underlying the Share
Exchange wrongly failed to disclose that shareholders' rights would be
governed by Delaware, and not Washington law, and that the plaintiff was
wrongly denied access to the Company's books and records.
In March 1998, the parties engaged in mediation resulting in the plantiff
dismissing the lawsuit without prejudice and National agreeing to enter
into binding arbitration to determine the fair value of the plantiff's
shares. The arbitration is expected to take place within the next several
months.
3. CASULL ARMS CORPORATION V. NATIONAL SECURITIES CORP. AND ROBERT A. SHUEY,
III, United States District Court, District of Wyoming, 97CV-229B. In
September 1997, plaintiff served National with a complaint alleging that
National and a former National representative, Robert A. Shuey, III,
breached a contract and committed various torts by failing to perform an
alleged promise to raise capital for plaintiff through an initial public
offering of stock. The plaintiff sought not less than $8.5 million in
actual damages and not less than $42.5 million in punitive damages. In
November 1997, all claims against National were dismissed without
prejudice. This complaint was re-filed in the same court in August 1998.
National believes it has meritorious defenses to plaintiff's claims.
National presently intends to vigorously contest liability, and in
September 1998 filed a motion to dismiss all counts of the complaint.
4. THERMOENERGY CORPORATION V. NATIONAL SECURITIES CORPORATION, ET AL., United
States District Court, Eastern District of Arkansas, Docket No.
LR-C-98.657. This action was commenced in October 1998 against the Company,
National and an officer of the Company relating to purported attempts to
underwrite a public offering on behalf of the plantiff. The plantiff
alleges that in the course of the ultimately unsuccessful efforts to
complete an initial public offering, National breached the terms of two
letters of intent, breached fiduciary duties to the plaintiff and engaged
in both intentional and negligent misrepresentation. The complaint also
seeks relief based on a quasi-contractual theory of "promissory estoppel."
The plaintiff seeks $650,000 in compensatory damages, plus an unspecified
amount of punitive damages.
The Company denies all liability to the plaintiff and believes it has
meritorious defenses to plaintiff's claims. The Company presently intends
to continue its vigorous defense of this action.
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ITEM 4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Company held its annual meeting of shareholders on June 22, 1998. The
shareholders elected for the ensuing year all of the nominees for the Board
of Directors, approved the amended Certificate of Incorporation decreasing
the number of authorized shares of Common Stock from 10,000,000 to 6,000,000
and decreasing the number of authorized shares of Preferred Stock from
1,000,000 to 100,000 and ratified the appointment of Moss Adams LLP as
independent accountants for the fiscal year ending September 25, 1998.
PART II
ITEM 5 - MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED
STOCKHOLDER MATTERS
The Company's initial public offering of its common stock was completed in
September 1986. From the initial offering to June 22, 1987, the Company's
common stock was traded over-the-counter and was not quoted on the National
Association of Securities Dealers Automated Quotation System ("NASDAQ").
Effective June 23, 1987, the Company's common stock became eligible to list
on NASDAQ. The Company's common stock trades on The NASDAQ SmallCap Market
and The Chicago Stock Exchange using the symbol NATS and OLY, respectively.
As of September 25, 1998, the Company had more than 500 shareholders,
including those shareholders holding stock in street name and trust accounts.
Currently, there are four market makers in the Company's stock, including
National.
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. As of this time,
no shareholder holds preferential rights in liquidation. The Company has
never declared a cash dividend, and does not presently foresee declaring one
in the coming fiscal year. The Company did, however, declare 5% stock
dividends for all shareholders of record on June 4, 1996, September 5, 1996,
January 27, 1997, May 20, 1997, August 29, 1997 and December 8, 1997.
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ITEM 5 - MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED
STOCKHOLDER MATTERS (CONTINUED)
High and low bid quotations from September 28, 1996 to September 25, 1998
have been obtained from NASDAQ. The range of market prices for each quarter
of fiscal years ended September 25, 1998 and September 26, 1997 are as
follows:
<TABLE>
<CAPTION>
Period High Low
- ------ ---- ---
<S> <C> <C>
September 27, 1997/December 31, 1997 $6.75 $4.37
January 1, 1998/March 27, 1998 $4.75 $3.88
March 28, 1998/June 26, 1998 $4.88 $3.75
June 27, 1998/September 25, 1998 $3.88 $1.38
September 28, 1996/December 31, 1996 $8.75 $7.00
January 1, 1997/March 27, 1997 $9.50 $6.50
March 28, 1997/June 27, 1997 $8.25 $4.75
June 28, 1997/September 26, 1997 $6.50 $4.75
</TABLE>
The closing bid of the Company's common stock on December 8, 1998 as reported
on the NASDAQ Small Cap Market was $1.13 per share.
ITEM 6 - SELECTED FINANCIAL DATA
Set forth below is the historical financial data with respect to the Company
for the fiscal years ended 1998, 1997, 1996, 1995 and 1994. This information
has been derived from, and should be read in conjunction with, the audited
financial statements, which appear elsewhere in this report. All information
is expressed in thousands of dollars except per share information.
<TABLE>
<CAPTION>
Fiscal Year
---------------------------------------------------------------------------
1998 1997 1996 1995 1994
----------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
Net revenues $ 45,694 $ 39,994 $ 34,899 $ 14,275 $ 11,487
Net income (loss) after tax (4,666) 101 1,735 257 510
Net income (loss) per common share (3.12) 0.07 1.66 0.30 0.61
Total assets 73,116 63,774 57,955 41,891 18,627
Long-term obligations 2,770 -- -- -- --
Stockholders' equity 2,948 7,604 5,316 3,180 2,509
Cash dividends -- -- -- -- --
</TABLE>
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ITEM 7 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
FISCAL YEAR 1998 COMPARED WITH FISCAL YEAR 1997
EXCEPT FOR HISTORICAL INFORMATION CONTAINED HEREIN, THE MATTERS DISCUSSED IN
THIS REPORT CONTAIN CERTAIN FORWARD-LOOKING INFORMATION THAT INVOLVE RISKS
AND UNCERTAINTIES THAT COULD CAUSE RESULTS TO DIFFER MATERIALLY, INCLUDING
CHANGING MARKET CONDITIONS AND OTHER RISKS DETAILED IN THIS ANNUAL REPORT OR
FORM 10-K AND OTHER DOCUMENTS FILED BY THE COMPANY WITH THE SECURITIES AND
EXCHANGE COMMISSION FROM TIME TO TIME.
The Company's business plan is to achieve growth of its retail brokerage
business through the acquisition and roll-up of complementary businesses.
Management believes that consolidation within the industry is inevitable.
Concerns attributable to the strength of the 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.
During fiscal year 1998, the Company redirected its focus on retail
operations by divesting its ownership in two of its subsidiaries, L.H.
Friend, Weinress, Franksen & Presson, Inc. ("Friend") and Travis Capital,
Inc. ("Travis"). The Company had acquired each subsidiary in fiscal year 1997.
In July 1998, the Company reported that it was in negotiation to purchase
certain assets of a former brokerage firm for approximately 250,000 shares of
common stock. Although the Company ultimately concluded not to consummate the
transaction, certain brokers of this former brokerage firm did join National
and approximately 20 of these brokers are currently registered with National.
The Company's fiscal year 1998 resulted in a net loss of $4,666,000 or $3.12
per share diluted as compared to net income of $101,000 or $.07 per share
diluted for fiscal year 1997. Revenues increased 14% in fiscal 1998 to
$45,694,000 from $39,994,000 in fiscal 1997; however, expenses increased 28%
in fiscal 1998 to $50,984,000 from $39,800,000 in fiscal 1997. This increase
in expenses is due to additional costs relating to the increased level of
operations, operating losses at the two former subsidiaries, losses related
to the sale of these subsidiaries, closure of two branch offices and the
write-down and write-off of certain receivables and investments.
The Company's fiscal 1998 results were impacted by the write down of certain
receivables and investments, totaling $2.5 million, including those relating
to the disposition of the two subsidiaries. Additionally, the Company
incurred operating losses of $950,000 relating to the two subsidiaries that
were incurred prior to their respective dispositions and losses relating to
two closed branch offices.
The Company recognizes deferred tax assets and liabilities based on the
difference between the financial statement 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, based on the weight of
available evidence, it is more likely than not that some or all of the
deferred tax asset will not be realized. The Company recorded a valuation
allowance of $1.0 million in fiscal 1998.
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ITEM 7 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONTINUED)
RESULTS OF OPERATIONS (Continued)
FISCAL YEAR 1998 COMPARED WITH FISCAL YEAR 1997 (Continued)
In November 1996, the shareholders of National approved a restructuring
whereby; National shareholders exchanged their shares on a one-for-one basis
for shares of Olympic resulting in National becoming a wholly owned
subsidiary of Olympic.
In March 1997, the Company acquired Friend; a Southern California based
broker-dealer specializing in investment banking, institutional brokerage,
research and trading activities for middle market companies. Effective August
31, 1998, the Company sold its investment in Friend to an investment group
led by the subsidiary's management in exchange for $500,000 and the
redemption of 55,509 shares of the Company's common stock issued in the
purchase. The Company wrote-off goodwill and receivables of approximately
$1,334,000. The Company recorded a loss on the transaction of approximately
$900,000.
In June 1997, the Company completed the acquisition of WestAmerica; a
Scottsdale, Arizona based broker-dealer specializing in retail brokerage
services.
In July 1997, the Company acquired Travis; a Salt Lake City, Utah based
broker-dealer focusing on private placement of securities of emerging and
middle market companies. Effective January 1, 1998, the Company sold its
investment in Travis to Travis & Company in exchange for a note receivable of
$281,000. The Company wrote-off unamortized goodwill of $40,000, recorded a
gain of approximately $97,000 and has recorded a corresponding allowance on
the note receivable of $216,000. Under the terms of the note, the Company has
collected approximately $65,000, through September 25, 1998.
During fiscal year 1998 the Company through National closed two large branch
offices in Melville, New York and in Southern California which it had opened
the previous year. In addition to operational losses from these offices,
management felt the type of business these offices produced, were different
than its core business. Due to weakness in corporate finance activities and
the decline in the stock market during the summer of 1998, management has
restructured back to its core retail brokerage business and significantly
reduced fixed overhead costs.
During fiscal year 1998 commission revenue increased $6,140,000 or 35% to
$23,636,000 from $17,496,000 in 1997. National and WestAmerica were primarily
responsible for the increase in commission revenue. Inventory gains increased
$730,000 or 15% to $5,512,000 from $4,782,000. This increase was entirely due
to an increase at National of $915,000, which was greater than the total
consolidated increase.
Underwriting revenue decreased $2,111,000 or 16% to $10,726,000 in 1998 from
$12,837,000 in 1997. National's underwriting revenue decrease of $5,129,000
to $5,178,000 in 1998 from $10,306,000 in 1997 was partially offset by
Friend's increase of $3,008,000 to $5,460,000 in 1998 from $2,452,000 in
1997. In 1998, the Company managed four underwritings that totaled
approximately $64 million of gross proceeds raised, compared with eight
underwritings in 1997 that totaled approximately $161 million of gross
proceeds raised.
12
<PAGE>
ITEM 7 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONTINUED)
RESULTS OF OPERATIONS (Continued)
FISCAL YEAR 1998 COMPARED WITH FISCAL YEAR 1997 (Continued)
The decrease in underwritings is due primarily to the weakened capital
markets from November 1997 through the 1998 fiscal year end. During that
period, the Company managed only one underwriting. Additionally, in December
1997, National terminated its relationship with Ray Dirks Research, a New
York branch office. This negatively impacted National's underwriting revenues
and net income in fiscal 1998.
The overall increase in expenses was due in large part to increases in
revenues. The largest components of expense are (i) commission expense (ii)
salaries and benefits expense and (iii) other. Commission expense and
salaries and benefits expense varies directly with securities related
revenues. In fiscal 1998 these expenses totaled $33,791,000 or a 19% increase
from $28,381,000 in 1997. Commission expense increased $3,028,000 or 14% in
1998 from $22,017,000 in 1997 to $25,045,000. Commission expense as a
percentage of commission related revenues (commissions, inventory gains and
underwriting fees), was approximately 63% in both 1998 and 1997. Conversely,
employee compensation and benefits increased $2,382,000 or 37% to $8,746,000
in 1998 from $6,364,000 in 1997 because certain commission salespeople with a
lower payout also receive salaries, as well as the increase in management,
operating and administrative salaries for Olympic and the additional
subsidiaries. The additional salaries for Olympic and the newly acquired
subsidiaries totaled approximately $4,430,000 in 1998 an increase of
$2,298,000 from $2,132,000 in fiscal 1997.
Interest expense increased $575,000 in 1998, or 25% to $2,840,000 from
$2,265,000 in 1997, primarily because of increased customer deposits, on
which the Company pays interest and the interest on debt incurred during
fiscal 1998. This expense was offset by the increased interest income of
$605,000, or 16% to $4,380,000 from $3,775,000. The Company realized record
levels of net interest income (interest income less interest expense) of
$1,540,000 in 1998, a 2% increase from the prior record levels reached a year
earlier. The Company earns the majority of this interest through National
from its investments in U.S. Government obligations and U.S. Government
agency obligations and interest received on customer margin debits. National
earns a spread between what it pays customers on free credit balances and
what it earns investing these balances. As a result of this spread, as the
overall customer debits and credits increase, the Company is able to earn
more interest income.
With the additional subsidiaries the Company has acquired, and the additional
branch offices opened by National during the year, communications and
occupancy expenses increased $1,233,000 or 28% to $5,658,000 in fiscal 1998
from $4,426,000 in fiscal 1997.
Clearing expenses increased $600,000 or 62% in 1998. These increases are
attributable to Friend and WestAmerica, which combined, accounted for a
$467,000 increase to $821,000 in fiscal 1998 compared with $354,000 of
clearing expenses in fiscal 1997.
13
<PAGE>
ITEM 7 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONTINUED)
RESULTS OF OPERATIONS (Continued)
FISCAL YEAR 1998 COMPARED WITH FISCAL YEAR 1997 (Continued)
Finally, other expenses increased $2,829,000 or 123% to $5,129,000 in 1998
from $2,300,000 in 1997. The largest component of this increase totaling
$2,521,000, relates to the write-down of certain receivables and investments,
including those relating to the disposition of the two subsidiaries.
Total other expenses for WestAmerica and Friend, combined, were $820,000 in
1998 compared with $465,000 in 1997. This increase of $355,000 was due to 12
months and 11 months of operations for WestAmerica and Friend in fiscal 1998,
compared with 4 months and 7 months of operations in fiscal 1997,
respectively. Additionally, other expenses (net of write-downs and losses on
dispositions) for Olympic increased $237,000 or 56% to $662,000 in 1998 from
$425,000 in 1997.
The Company's financial success is greatly influenced by the strength of the
securities markets. During fiscal 1998, the capital markets for initial
public offerings weakened substantially causing a noticeable decrease in the
Company's underwriting revenues and profitability. While management is
optimistic that the capital markets will ultimately improve, the timing of
such improvement is uncertain, and continued weakness or a further downturn
in these markets would have an adverse effect on future profitability.
Management has taken significant steps to reduce the Company's overhead to
protect the Company from future excessive losses. Management believes during
a downturn there will be an opportunity to acquire additional sources of
production at a reasonable cost. Management believes that overhead reductions
it has made during the last fiscal year will allow the Company to operate
during further weak market conditions, and make future acquisitions that
would be accretive to future earnings.
FISCAL YEAR 1997 COMPARED WITH FISCAL YEAR 1996
The Company's fiscal year 1997 resulted in net income of $101,000 or $.07 per
share fully diluted as compared with net income of $1,735,000 or $1.66 per
share fully diluted for 1996. Revenues increased 15% in 1997 to $39,994,000
from $34,899,000 in 1996; however, expenses increased nearly 23% during the
same period. This increase in expenses is due to additional costs relating to
the increased level of operations and certain non-recurring, non-operating
expenses incurred relating to the corporate restructuring, the acquisition of
three broker-dealers, the addition of two significant branch offices, and
continued growth in brokerage operations.
National added two significant branch offices in 1997. In March, National
opened a branch office in Melville, New York and in April, National opened a
branch office in Southern California. These two branches added approximately
60 registered representatives.
Due to these events the Company incurred non-recurring, non-operating
expenses of approximately $900,000 during the year. These expenditures were a
necessary element of management's goal to establish a significant market
presence in retail and institutional trading and to provide financing options
for small and mid-sized companies.
14
<PAGE>
ITEM 7 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONTINUED)
RESULTS OF OPERATIONS (Continued)
FISCAL YEAR 1997 COMPARED WITH FISCAL YEAR 1996 (Continued)
Due to these events the Company incurred non-recurring, non-operating
expenses of approximately $900,000 during the year. These expenditures were a
necessary element of management's goal to establish a significant market
presence in retail and institutional trading and to provide financing options
for small and mid-sized companies.
During fiscal year 1997 commission revenue increased $3,006,000 or 21% to
$17,496,000 from $14,490,000 in 1996. National, Friend and WestAmerica were
equally responsible for the increase in commission revenue. Inventory gains
increased $1,531,000 or 47% to $4,782,000 from $3,251,000. This increase was
primarily due to the acquisition of Friend, which accounted for $1,072,000 of
the gain.
Underwriting revenue decreased $354,000 or 3% to $12,837,000 in 1997 from
$13,191,000 in 1996. National's underwriting revenue decrease of $2,885,000
to $10,306,000 in 1997 from $13,191,000 in 1996 was substantially offset by
Friend's $2,452,000 of underwriting revenue. Although National managed eight
underwritings in 1997, which totaled approximately $161 million of gross
proceeds raised, whereas in 1996 National managed 12 underwritings, which
totaled approximately $150 million of gross proceeds raised, net underwriting
revenues decreased due to lower percentage payouts for commissions and fees
in 1997 compared to 1996.
The overall increase in expenses was due in large part to increases in
revenues. The two largest components of expense are (i) commission expense
and (ii) salaries and benefits expense, both of which vary directly with
securities related revenue. In the 1997 these expenses totaled $28,381,000 or
a 12% increase from $25,436,000 in 1996. Commission expense increased
$781,000 or 4% in 1997 from $21,236,000 in 1996 to $22,017,000. Commission
expense as a percentage of commission related revenues (commissions,
inventory gains and underwriting fees), was approximately 63% in 1997 down
from approximately 69% in 1996. This is primarily due to the acquisition of
Friend and WestAmerica, which have a lower commission payout than National.
Conversely, employee compensation and benefits increased $2,164,000 or 52% to
$6,364,000 in 1997 from $4,200,000 in 1996 because certain commission
salespeople with a lower payout also receive salaries, as well as the
increase in management, operating and administrative salaries for Olympic and
the additional subsidiaries. The additional salaries for Olympic and the
newly acquired subsidiaries totaled approximately $2,132,000 in 1997.
15
<PAGE>
ITEM 7 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONTINUED)
RESULTS OF OPERATIONS (Continued)
FISCAL YEAR 1997 COMPARED WITH FISCAL YEAR 1996 (Continued)
Interest expense increased $459,000 in 1997, or 25% to $2,265,000 from
$1,806,000, primarily because of increased customer deposits, on which the
Company pays interest. However, this expense was more than offset by the
increased interest income of $854,000, or 29% to $3,775,000 from $2,921,000.
The Company realized record levels of net interest income (interest income
less interest expense) of $1,510,000 in 1997, a 35% increase from the prior
record levels reached a year earlier. The Company earns the majority of this
interest through National from its investments in U.S. Government obligations
and U.S. Government agency obligations and interest received on customer
margin debits. National earns a spread between what it pays customers on free
credit balances and what it earns investing these balances. As a result of
this spread, as the overall customer debits and credits increase, the Company
is able to earn more interest income.
With the additional subsidiaries the Company has acquired, and the additional
branch offices opened by National during the year, communications and
occupancy expenses have increased $1,974,000 or 81% to $4,426,000 in 1997
from $2,452,000 in 1996.
Clearing expenses increased $279,000 or 41% in 1997. These increases were
attributable to Friend and WestAmerica, which combined, accounted for
$354,000 of clearing expenses, offset by a decrease in National's clearing
expenses of $75,000.
Finally, other expenses increased $1,351,000 or 142% to $2,300,000 in 1997
from $949,000 in 1996. The largest components include an increase in travel
of $630,000, an increase in printing of $100,000 and an increase in insurance
of $190,000. These increases were attributable to the Company's growth.
LIQUIDITY AND CAPITAL RESOURCES
As with most financial firms, substantial portions of the Company's assets
are liquid, consisting mainly of cash or assets readily convertible into
cash. These assets are financed primarily by National's interest bearing and
non-interest bearing customer credit balances, other payables and equity
capital. Occasionally, National utilizes short-term bank financing to
supplement its ability to meet day-to-day operating cash requirements. Such
financing has been used to maximize cash flow and is regularly repaid.
National has a $3,000,000 revolving unsecured credit facility with Seafirst
Bank and may borrow up to 70% of the market value of eligible securities
pledged through an unrelated broker-dealer. These borrowings are short-term
and have not extended beyond a few days. At September 25, 1998 borrowings
outstanding were $2,700,000. This balance was repaid within three business
days.
In November 1997, the Company executed two promissory notes totaling
$925,000. The notes bear interest at 6% and 8% with the principal to be
repaid in 24 monthly installments commencing on December 31, 2000. In
connection with the notes, warrants for the purchase of 126,000 shares at an
exercise price of $5.36 per share of the Company's common stock were issued.
The warrants were valued at $120,000 and have been recorded as a discount to
the notes.
16
<PAGE>
ITEM 7 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONTINUED)
LIQUIDITY AND CAPITAL RESOURCES (Continued)
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 have been recorded as a discount to the note.
In July 1998, the Company renegotiated the term on a note payable to a bank
with an original principal amount of $900,000. Under the original agreement
the note was to be repaid in monthly installments of $150,000 of principal
plus interest from May through October 1998. The revised agreement calls for
repayment in monthly installments of $75,000 of principal plus interest from
August 1998 through January 1999. The principal balance owing on the note at
September 25, 1998 was $300,000.
National, as a registered broker-dealer is subject to the SEC's Uniform Net
Capital Rule 15c3-1, which requires the maintenance of minimum net capital.
National has elected to use the alternative standard method permitted by the
rule. This requires that National maintain minimum net capital equal to the
greater of $250,000 or 2% of aggregate debit items. At September 25, 1998,
National's net capital exceeded the requirement by $1,991,000.
WestAmerica, as a registered broker-dealer is also subject to the SEC's Net
Capital Rule 15c3-1, which, under the standard method, requires that
WestAmerica maintain minimum net capital equal to the greater of $100,000 or
6 2/3% of aggregate indebtedness. At September 30, 1998, WestAmerica's net
capital exceeded the requirement by $138,000.
Advances, dividend payments and other equity withdrawals from National or
WestAmerica are restricted by the regulations of the SEC, and other
regulatory agencies. These regulatory restrictions may limit the amounts that
these subsidiaries may dividend or advance to Olympic.
As of fiscal year ended September 25, 1998, total assets were $73,116,000
compared to total assets of $63,774,000 as of fiscal year September 26, 1997,
which represents a 15% increase in total assets for the 12-month period. As
of fiscal year ended September 26, 1997, total assets were $63,774,000,
compared to total assets of $57,955,000 as of September 27, 1996, which
represents a 10% increase in total assets for the 12-month period.
The objective of liquidity management is to ensure the Company has ready
access to sufficient funds to meet commitments, fund deposit withdrawals and
efficiently provide for the credit needs of customers. Historically, cash
flow from operations and earnings contribute significantly to liquidity.
Unlike WestAmerica, National requires its investment executives to be
responsible for substantially all of the overhead expenses associated with
their sales efforts, including their office furniture, sales assistants,
telephone service and supplies.
17
<PAGE>
ITEM 7 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONTINUED)
LIQUIDITY AND CAPITAL RESOURCES (Continued)
The Company believes its internally generated liquidity, together with access
to external capital and debt resources will be sufficient to satisfy existing
operations. However, if the Company continues to expand its operations and
acquire other businesses the Company will require additional capital.
The Company believes its internally generated liquidity, together with access
to external capital and debt resources will be sufficient to satisfy existing
operations. However, if the Company continues to expand its operations and
acquire other businesses the Company will require additional capital.
INFLATION
The Company believes that the effect of inflation on its assets, consisting
of cash, securities, office equipment, leasehold improvements and computers
has not been significant.
Whereas inflation has not had a materially adverse impact on the costs or the
operations of the Company, inflation does have an effect on the Company's
business. Increases in inflation rates may be accompanied by increases in
interest rates, which may adversely affect short-term stock prices and,
thereby, adversely affect the Company's performance. Additionally, as
inflation increases the effect on corporate finance activities may change. If
interest rates rise the demand for underwritings may decrease, however, other
corporate financing activities may become more readily pursued, such as
financial advisory services. It is, therefore, difficult to predict the net
impact of inflation on the Company.
NEW ACCOUNTING STANDARDS
In February 1997, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards (SFAS) No. 128. The new standard
replaces primary and fully diluted earnings per share with basic and diluted
earnings per share. SFAS No. 128 was adopted by the Company in the year
ending September 25, 1998. The 1997, 1996, 1995 and 1994 earnings per share
data have been restated in order to conform to the requirements of SFAS
No. 128.
In June 1997, the FASB issued SFAS Nos. 130 and 131. SFAS No. 130 establishes
standards for reporting and display of comprehensive income and its
components. SFAS No. 131 establishes standards for reporting about operating
segments, products and services, geographic areas, and major customers. The
standards become effective for fiscal years beginning after December 15,
1997. Management plans to adopt these standards in the year ending September
24, 1999. Management believes that the provisions of SFAS Nos. 130 and 131
will not have a material effect on its financial condition or reported
results of operations.
18
<PAGE>
ITEM 7 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONTINUED)
IMPACT OF THE YEAR 2000 ISSUE
The Year 2000 Issue is the result of computer programs being written using
two digits rather than four to define the applicable year. Any of the
Company's computer programs that have date-sensitive software may recognize a
date using "00" as the year 1900 rather than the year 2000. This could result
in a system failure or miscalculation causing disruptions of operations,
including, among other things, a temporary inability to process transactions,
send invoices, or engage in similar normal business activities. The Year 2000
problem has the potential to impact the entire securities industry due to the
flow of information moving from exchanges to trading partners on a real-time
basis from computer system to computer system.
The Company defines a system as Year 2000 compliant as one capable of correct
identification, manipulation and calculation when processing data during the
year change from December 31, 1999 to January 1, 2000.
The Company is addressing the Year 2000 issue in the following manners.
Internally, the Company has prepared an inventory of all Information
Technology ("IT") and non-IT systems, critical to operations. The Company has
begun testing all of its internal IT systems and has concluded that not all
systems are compliant under the above definition. The Company has determined
the remedies necessary to achieve Year 2000 compliance. The Company has
retained an outside consulting firm, Washington Web Site Services, which
works on site and will continue working with the Company, at a minimum, until
all IT systems are Year 2000 compliant. Based on the most recent evaluation,
the Company will need to primarily upgrade software to its existing systems;
the addition of hardware will not be significant.
The majority of the Company's trade processing information is handled through
a third party vendor. In the first quarter of fiscal 1999, the Company
negotiated an agreement to change to BETA Systems, Inc. from its prior
vendor. The Company anticipates that this conversion will be completed and
fully operational during the third quarter of fiscal 1999. As part of this
agreement, BETA Systems, Inc. has represented to the Company that they will
be Year 2000 compliant. Additionally, the Company has initiated formal
communications with all other significant data processing and
telecommunications vendors to determine the extent to which the Company is
vulnerable to those third parties failure to remediate their own Year 2000
Issue. These vendors have represented to the Company they will be compliant
with the requirements of the year 2000.
Based on a most recent assessment, the Company has determined that material
costs and resources will not be required to modify or replace significant
portions of its software so that its computer systems will properly utilize
dates beyond December 31, 1999. To date, the Company has spent less than
$50,000 and estimates it will spend less than $100,000 in total regarding the
Year 2000 issue.
The costs of the project and the date on which the Company plans to complete
the Year 2000 modifications are based on management's best estimates, which
were derived utilizing numerous assumptions of future events including the
continued availability of certain resources, third party modification plans
and other factors. However, even if the Company's systems and the Company's
significant vendors are compliant, the potential impact of the Year 2000
problem on the securities industry as a whole could be material, as virtually
every aspect of the sales of securities and processing of transactions will
be affected. Due to the size of the problem facing the securities industry
and the interdependent nature of the business, the Company may be materially
adversely affected by this issue.
19
<PAGE>
ITEM 8 - FINANCIAL STATEMENTS
See part IV, Item 14(a)(1) for a list of financial statements filed as part
of this report.
20
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Stockholders and
Board of Directors
Olympic Cascade Financial Corporation
We have audited the accompanying consolidated statement of financial
condition of Olympic Cascade Financial Corporation and subsidiaries as of
September 25, 1998 and the related consolidated statements of operations,
changes in stockholders equity, 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 generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements.
An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audit provides a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Olympic
Cascade Financial Corporation and subsidiaries as of September 25, 1998, and
the results of their operations and their cash flows for the year then ended
in conformity with generally accepted accounting principles.
/s/ Feldman, Sherb, Ehrlich & Co., P.C.
Feldman, Sherb, Ehrlich & Co., P.C.
Certified Public Accountants
New York, New York
December 9, 1998
F-1
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Stockholders and
Board of Directors
Olympic Cascade Financial Corporation
We have audited the accompanying consolidated statement of financial
condition of Olympic Cascade Financial Corporation and subsidiaries as of
September 26, 1997 and the related consolidated statements of operations,
changes in stockholders' equity, and cash flows for each of the years in the
two-year period ended September 26, 1997. These consolidated financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based
on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements.
An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Olympic
Cascade Financial Corporation and subsidiaries as of September 26, 1997 and
the results of its consolidated operations and cash flows for each of the
years in the two-year period ended September 26, 1997, in conformity with
generally accepted accounting principles.
/s/ Moss Adams LLP
-------------------------
Seattle, Washington
November 14, 1997
F-1A
<PAGE>
OLYMPIC CASCADE FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
<TABLE>
<CAPTION>
SEPTEMBER 25, SEPTEMBER 26,
1998 1997
-------------- -------------
<S> <C> <C>
ASSETS
CASH, subject to immediate withdrawal $ 551,000 $ 979,000
CASH, CASH EQUIVALENTS AND SECURITIES 27,348,000 30,934,000
DEPOSITS 2,024,000 1,292,000
RECEIVABLES:
Customers 39,680,000 22,114,000
Brokers and dealers 826,000 1,847,000
Other 315,000 481,000
Refundable federal income tax 654,000 597,000
SECURITIES HELD FOR RESALE, at market 235,000 2,066,000
FIXED ASSETS, net 1,292,000 1,528,000
GOODWILL, net 61,000 1,391,000
OTHER ASSETS 130,000 545,000
-------------- ---------------
$ 73,116,000 $ 63,774,000
============== ===============
LIABILITIES AND STOCKHOLDERS' EQUITY
PAYABLES:
Customers $ 60,548,000 $ 48,828,000
Brokers and dealers 1,714,000 1,752,000
SECURITIES SOLD, BUT NOT YET PURCHASED, at market 73,000 1,047,000
ACCOUNTS PAYABLE, ACCRUED EXPENSES AND
OTHER LIABILITIES 2,073,000 3,634,000
REVOLVING CREDIT LINE 2,700,000 -
NOTES PAYABLE 1,948,000 909,000
CAPITAL LEASE PAYABLE 1,112,000 -
-------------- ---------------
70,168,000 56,170,000
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY:
Preferred stock, $.01 par value, 100,000 shares authorized,
none issued and outstanding - -
Common stock, $.02 par value, 6,000,000 shares authorized,
1,463,007 and 1,444,205 shares issued and outstanding 29,000 29,000
Additional paid-in capital 5,407,000 5,045,000
Retained earnings (Deficit) (2,488,000) 2,530,000
-------------- ---------------
2,948,000 7,604,000
-------------- ---------------
$ 73,116,000 $ 63,774,000
============== ===============
</TABLE>
See notes to financial statements.
F-2
<PAGE>
OLYMPIC CASCADE FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
FOR THE YEARS ENDED
---------------------------------------------------
SEPTEMBER 25, SEPTEMBER 26, SEPTEMBER 27,
1998 1997 1996
--------------- --------------- --------------
<S> <C> <C> <C>
REVENUES:
Commissions 23,636,000 17,496,000 14,490,000
Net dealer inventory gains 5,512,000 4,782,000 3,251,000
Underwriting 10,726,000 12,837,000 13,191,000
Interest and dividends 4,380,000 3,775,000 2,921,000
Transfer fees and clearance services 735,000 620,000 576,000
Other 705,000 484,000 470,000
--------------- --------------- --------------
45,694,000 39,994,000 34,899,000
--------------- --------------- --------------
EXPENSES:
Commissions 25,045,000 22,017,000 21,236,000
Employee compensation and related expenses 8,746,000 6,364,000 4,200,000
Occupancy and equipment costs 3,736,000 2,927,000 1,730,000
Interest 2,840,000 2,265,000 1,806,000
Clearance fees 1,565,000 965,000 686,000
Communications 1,922,000 1,499,000 722,000
Taxes, licenses, registration 620,000 874,000 609,000
Professional fees 1,381,000 589,000 418,000
Other operating expenses 5,129,000 2,300,000 949,000
--------------- --------------- --------------
50,984,000 39,800,000 32,356,000
--------------- --------------- --------------
INCOME (LOSS) BEFORE INCOME TAXES (5,290,000) 194,000 2,543,000
BENEFIT (PROVISION) FOR INCOME TAXES 624,000 (93,000) (808,000)
--------------- --------------- --------------
NET INCOME (LOSS) $ (4,666,000) $ 101,000 $ 1,735,000
=============== =============== ==============
EARNINGS (LOSS) PER SHARE OF COMMON STOCK
Basic $ (3.12) 0.08 1.86
=============== =============== ==============
Diluted $ (3.12) 0.07 1.66
=============== =============== ==============
</TABLE>
See notes to financial statements.
F-3
<PAGE>
OLYMPIC CASCADE FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
YEARS ENDED SEPTEMBER 25, 1998, SEPTEMBER 26, 1997 AND
SEPTEMBER 27, 1996
<TABLE>
<CAPTION>
Common Stock Additional
------------------------------ Paid-In Retained
Shares Amount Capital Earnings Total
------------- ------------- ------------- ------------- -------------
<S> <C> <C> <C>
BALANCE, September 29, 1995 676,938 $ 14,000 $ 918,000 $ 2,248,000 $ 3,180,000
Issuance of common stock
related to transfer of registered
representatives and customer
accounts including $90,000
income tax benefit 60,000 1,000 299,000 300,000
Exercise of stock options, including
$26,000 income tax benefit 32,586 - 101,000 - 101,000
Stock dividends 75,724 2,000 507,000 (509,000) -
Net income - - - 1,735,000 1,735,000
------------- ------------- ------------- ------------- -------------
BALANCE, September 27, 1996 845,248 17,000 1,825,000 3,474,000 5,316,000
Exercise of stock options, including
$78,000 income tax benefit 153,978 3,000 719,000 - 722,000
Stock dividends 174,979 4,000 1,041,000 (1,045,000) -
Common stock issuance in
connection with acquisitions 270,000 5,000 1,460,000 - 1,465,000
Net income - - - 101,000 101,000
------------- ------------- ------------- ------------- -------------
BALANCE, September 26, 1997 1,444,205 29,000 5,045,000 2,530,000 7,604,000
Exercise of stock options 2,012 8,000 8,000
Stock dividends 72,299 1,000 351,000 (352,000) -
Original issue discount - - 307,000 307,000
Treasury stock (55,509) (1,000) (304,000) (305,000)
Net loss - - - (4,666,000) (4,666,000)
------------- ------------- ------------- ------------- -------------
BALANCE, September 25, 1998 1,463,007 $ 29,000 $ 5,407,000 $ (2,488,000) $ 2,948,000
============= ============= ============= ============= =============
</TABLE>
See notes to financial statements.
F-4
<PAGE>
OLYMPIC CASCADE FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
For the Years Ended
--------------------------------------------------
September 25, September 26, September 27,
1998 1997 1996
-------------- -------------- ---------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ (4,666,000) $ 101,000 $ 1,735,000
Adjustments to reconcile net income (loss) to net cash from
operating activities
Depreciation and amortization 716,000 498,000 390,000
Loss on sale of subsidiaries 1,114,000 - -
Loss on disposal of fixed assets - 2,000 -
Deferred income tax benefit 6,000 (45,000) -
Gain on foreign currency translation - (43,000) -
Changes in assets and liabilities:
Decrease (increase) in cash, cash equivalents and securities 3,586,000 2,071,000 (7,611,000)
Decrease (increase) in deposits (732,000) (515,000) (598,000)
Decrease (increase) in receivables (16,379,000) (6,900,000) (2,910,000)
Decrease (increase) in federal income tax receivable (57,000) (948,000) 585,000
Decrease (increase) securities held for resale 1,831,000 1,350,000 (2,538,000)
Decrease (increase) in other assets (413,000) (439,000) 42,000
Increase (decrease) in payables 11,682,000 2,105,000 10,986,000
Increase (decrease) in securities sold, but not yet purchased (974,000) (290,000) 1,142,000
Increase (decrease) in accounts payable, accrued expenses
and other liabilities (320,000) 1,181,000 1,476,000
-------------- -------------- ---------------
(4,606,000) (1,872,000) 2,699,000
-------------- -------------- ---------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of fixed assets (371,000) (1,313,000) (251,000)
Sale of fixed assets 124,000 - -
Purchase of goodwill - (83,000) -
Proceeds from sale of subsidiary 500,000 - -
-------------- -------------- ---------------
253,000 (1,396,000) (251,000)
-------------- -------------- ---------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Issuance of common stock - 724,000
Exercise of stock options 8,000 644,000 75,000
Borrowings on line of credit 2,700,000 - -
Proceeds from notes payable 1,925,000 1,805,000 -
Payments on capital lease (108,000) - -
Payments on notes payable (600,000) (1,653,000) -
-------------- -------------- ---------------
3,925,000 1,520,000 75,000
-------------- -------------- ---------------
INCREASE (DECREASE) IN CASH (428,000) (1,748,000) 2,523,000
CASH, beginning of year 979,000 2,727,000 204,000
-------------- -------------- ---------------
CASH, end of year $ 551,000 $ 979,000 $ 2,727,000
============== ============== ===============
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash paid during the year for:
Interest $ (2,783,000) $ 2,265,000 $ 1,806,000
============== ============== ===============
Income taxes $ - $ 1,117,000 $ 223,000
============== ============== ===============
SUPPLEMENTAL DISCLOSURES OF NONCASH INVESTING AND
FINANCING ACTIVITIES
Deferred cost and issuable common stock $ - $ - $ 210,000
============== ============== ===============
Tax effect of common stock issued and stock options
exercised $ - $ 78,000 $ 116,000
Redemption and retirement of capital stock (305,000) - -
============== ============== ===============
Warrants issued as a discount on notes payable $ 307,000 $ - $
============== ============== ===============
Assets under capital lease $ 1,180,000 $ - $ -
============== ============== ===============
Acquisitions of subsidiaries:
Fair value of assets acquired - 1,596,000 -
Liabilities assumed - 855,000 -
============== ============== ===============
Common stock issued $ - $ 741,000 $ -
============== ============== ===============
</TABLE>
See notes to financial statements.
F-5
<PAGE>
OLYMPIC CASCADE FINANCIAL CORPORATION
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 26, 1998, SEPTEMBER 27, 1997 AND SEPTEMBER 29, 1996
1. ORGANIZATION:
Olympic Cascade Financial Corporation ("Olympic") is a financial services
organization, operating through its two wholly owned subsidiaries, National
Securities Corporation ("National") and WestAmerica Investment Group
("WestAmerica") (collectively the "Company"). Olympic is committed to
establishing a significant presence in the financial services industry by
providing financing options for emerging, small and middle capitalization
companies through research, financial advisory services and investment
banking services for both public offerings and private placements, and also
provides retail brokerage and trade clearance operations.
During the year ended September 25, 1998, the Company sold its interests in
both L.H. Friend, Weinress, Frankson & Presson, Inc. ("Friend") and Travis
Capital, Inc. ("Travis").
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
a. PRINCIPLES OF CONSOLIDATION - The consolidated financial statements
include the accounts of Olympic and its wholly owned subsidiaries. All
significant intercompany accounts and transactions have been eliminated.
b. ESTIMATES - The preparation of the financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities, disclosure of contingent assets and liabilities at the date of
the financial statements, and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those
estimates.
c. ACCOUNTING METHOD - Customer security transactions and the related
commission income and expense are recorded on a settlement date basis. The
Company's financial condition and results of operations using the
settlement date basis are not materially different from that of the trade
date basis. Revenue from consulting services and investment banking
activities is recognized as the services are performed.
d. FIXED ASSETS - Fixed assets are stated at cost. Depreciation is
calculated using the straight line method based on the estimated useful
lives of the related assets, which range from three to five years.
F-6
<PAGE>
e. FISCAL YEAR - The Company has a fifty-two or fifty-three week year,
ending on the last Friday in September.
f. CASH AND CASH EQUIVALENTS - For purposes of the statement of cash
flows, the Company defines cash as cash subject to immediate withdrawal.
Cash, cash equivalents and securities as discussed in Note 4 are not
considered a change in cash for this purpose.
g. INCOME TAXES - The Company recognizes deferred tax assets and
liabilities based on the difference between the financial statement
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, based on the weight of available evidence, it is more
likely than not that some or all of the deferred tax asset will not be
realized.
h. FAIR VALUE OF FINANCIAL INSTRUMENTS - Substantially all of the
Company's financial statements are carried at fair value. Assets,
including cash, cash equivalents and securities, deposits, certain
receivables, securities held for resale and other assets, are carried at
fair value or contracted amounts which approximate fair value. Similarly,
liabilities, including certain payables, securities sold but not yet
purchased and notes payable are carried at fair value or contracted
amounts approximating fair value.
i. EARNINGS (LOSS) PER SHARE - Basic earnings (loss) per common share
is based upon the net income (loss) for the year divided by the weighted
average number of common shares outstanding during the year. For the
fiscal years ended 1998, 1997 and 1996, the number of shares used in the
basic earnings (loss) per share calculation were 1,496,634, 1,195,403
and 933,069, respectively. Diluted earnings (loss) per common share
assumes that all common stock equivalents have been converted to common
shares using the treasury stock method at the beginning of the year. For
the fiscal years ended 1998, 1997 and 1996, the number of shares used in
the diluted earnings (loss) per share calculation was 1,496,634, 1,425,119
and 1,047,831, respectively. All shares used in the basic and diluted
calculations have been restated to show the effect of the stock
dividends as described in Note 14. The Company adopted Statement of
Financial Accounting Standards (SFAS) No. 128 "Earnings per Share" in the
first quarter of fiscal 1998. The 1997 and 1996 earnings per share data
have been restated in order to conform to the requirements of SFAS No.128.
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 25, 1998 the Company believes that there has been
no impairment of its long-lived assets.
k. STOCK BASED COMPENSATION - The Company accounts for stock
transactions in accordance with APB No. 25, "Accounting for Stock Issued
to Employees". The Company adopted Statement of Financial Standards No.
123, "Accounting for Stock Based Compensation" by disclosing the pro forma
requirements of Statement No. 123.
F-7
<PAGE>
l. CONCENTRATIONS OF CREDIT RISK - The Company is actively involved in
securities underwriting, brokerage, distribution and trading. These and
other related services are provided on a national basis to a large and
diversified group of clients and customers, including corporations,
governments, financial institutions and individual investors. The
Company's exposure to credit risk associated with the non-performance by
these customers and counterparties in fulfilling their contractual
obligations can be directly impacted by volatile or illiquid trading
markets which may impair the ability of customers and counterparties to
satisfy their obligations to the Company.
Substantially all of the securities held for the exclusive benefit of
customers, pursuant to SEC Rule 15c3-3, consist of issues by the U.S.
Government or federal agencies. The Company's most significant
counterparty concentrations are other brokers and dealers, commercial
banks, institutional clients and other financial institutions. This
concentration arises in the normal course of the Company's business.
3. CORPORATE RESTRUCTURING AND ACQUISITIONS AND DISPOSALS
CORPORATE RESTRUCTURING - In November 1996, the Company's stockholders
approved a restructuring whereby National's stockholders exchanged their
shares of common stock on a one-for-one basis for shares of common stock
of the Company resulting in National becoming a wholly owned subsidiary
of the Company. The restructuring became effective in February 1997 and
was accounted for as a pooling of interests.
ACQUISITIONS - In March 1997, the Company acquired all of the
outstanding stock of Friend, a Southern California based broker-dealer,
specializing in investment banking, institutional brokerage, research and
trading activities for middle market companies. Friend was acquired in
exchange for 250,000 unregistered shares of the Company's common stock
valued at $1,375,000 and $1,000,000 in cash. The Company recorded this
transaction under the purchase method of accounting and has recorded
goodwill of $1,300,000 for the purchase price and direct costs in excess
of the net fair value of the assets acquired.
Effective August 31, 1998, the Company sold its investment in Friend to
an investment group led by the subsidiary's management in exchange for
$500,000 and the redemption of 55,509 shares of the Company's common
stock issued in the purchase. The Company wrote off goodwill and
receivables of approximately $1,334,000. The Company recorded a loss on
the transaction of approximately $900,000.
In June 1997, the Company acquired all of the outstanding stock of
WestAmerica, a Scottsdale, Arizona based broker-dealer specializing in
retail brokerage services. WestAmerica was acquired for $443,000 in cash
and an agreement that provides for the payment of bonus compensation to
certain brokers. The Company recorded this transaction under the
purchase method of accounting and has recorded goodwill of $83,000 for
the purchase price and direct costs in excess of the net fair value of
the assets acquired.
F-8
<PAGE>
In July 1997, the Company acquired all of the outstanding stock of Travis,
a Salt Lake City, Utah based broker-dealer focusing on private placement of
securities for emerging and middle market companies in the U.S. and
internationally. Travis was acquired in exchange for 20,000 unregistered
shares of the Company's common stock valued at $90,000. The Company
recorded this transaction under the purchase method of accounting and has
recorded goodwill of $45,000 for the purchase price and direct costs in
excess of the net fair value of the assets acquired.
Effective January 1, 1998, the Company sold its investment in Travis to
Travis & Company in exchange for a note receivable of $281,000 which is
included in other assets. The Company wrote off unamortized goodwill of
$40,000, recorded a gain of approximately $97,000 and has, subsequent to
the sale, recorded a corresponding allowance on the note receivable of
$216,000. Under the terms of the note, the Company has collected
approximately $65,000, through September 25, 1998.
The operating results of these acquired companies are included in the
consolidated statement of income from their respective acquisition dates
through their dates of disposition. Goodwill resulting from the WestAmerica
acquisition is being amortized over five years.
4. CASH, CASH EQUIVALENTS AND SECURITIES
Cash, cash equivalents, and securities have been segregated in special
reserve bank accounts for the exclusive benefit of customers under Rule
15c3-3 of the Securities and Exchange Commission and consist of:
<TABLE>
<CAPTION>
September 25, September 26,
1998 1997
--------------------------- -------------------------
<S> <C> <C>
United States Government obligations $ 24,547,000 $ 29,158,000
Reverse repurchase agreement 2,530,000 1,770,000
Cash 271,000 6,000
--------------------------- -------------------------
$ 27,348,000 $ 30,934,000
=========================== =========================
</TABLE>
The United States Government and agencies obligations mature at various
dates through February 2027 and are stated at current market values. The
reverse repurchase agreements are carried at cost, which approximates
market value. The Company purchases these obligations at fixed, variable
and adjustable interest rates in order to reduce exposure to interest rate
changes.
F-9
<PAGE>
5. CUSTOMER RECEIVABLES AND PAYABLES
The Company seeks to protect itself from the risks associated with customer
activities by requiring customers to maintain margin collateral in
compliance with regulatory and its own internal guidelines, which are more
stringent than regulatory margin requirements. Margin levels are monitored
daily and additional collateral must be deposited as required. Where
customers cannot meet collateral requirements, the Company will liquidate
underlying financial instruments sufficient to bring the accounts in
compliance.
Exposure to credit risk is affected by the markets for financial
instruments, which can be volatile and may impair the ability of clients to
satisfy their obligations to the Company. Credit limits are established and
closely monitored for customers and broker-dealers engaged in transactions
deemed to be credit-sensitive.
Included in the amounts payable to customers are balances in accounts of
officers and directors totaling $466,000 at September 25, 1998 and $659,000
at September 26, 1997 respectively.
6. BROKER-DEALER RECEIVABLES AND PAYABLES
Amounts receivable from and payable to brokers and dealers include:
<TABLE>
<CAPTION>
September 25, September 26,
1998 1997
-------------------------- --------------------------
<S> <C> <C>
Due from clearing organization $ 314,000 $ 708,000
Deposits paid for securities borrowed 99,000 588,000
Commissions receivable 278,000 470,000
Securities failed to deliver 135,000 81,000
-------------------------- --------------------------
Total receivable $ 826,000 $ 1,847,000
========================== ==========================
Due to clearing organization $ 1,345,000 $ 1,518,000
Securities failed to receivable 369,000 234,000
-------------------------- --------------------------
Total payable $ 1,714,000 $ 1,752,000
========================== ==========================
</TABLE>
Securities borrowed are recorded at the amount of cash collateral advanced
or received. The Company monitors the market value of securities borrowed
and loaned on a daily basis and obtains additional collateral from
counterparties as necessary.
The Company has receivables and payables for financial instruments sold to
and purchased from broker-dealers. The Company is exposed to risk of loss
from the inability of broker-dealers to pay for purchases or to deliver
financial instruments sold, in which case the Company would have to sell or
purchase the financial instruments at prevailing market prices.
F-10
<PAGE>
7. SECURITIES HELD FOR RESALE
Securities held for resale and securities sold, but not yet purchased
consist of the following:
<TABLE>
<CAPTION>
September 25, 1998 September 26, 1997
---------------------------------------------- ----------------------------------------------
Securities Sold, But Securities Sold, But
Held For Not Yet Held For Not Yet
Resale Purchased Resale Purchased
--------------------- -------------------- -------------------- ---------------------
<S> <C> <C> <C> <C>
Corporate
stocks $ 230,000 $ 46,000 $ 1,990,000 $ 1,047,000
U.S.
Government
obligations - 27,000 71,000 -
Corporate
obligations 5,000 - 5,000 -
--------------------- -------------------- -------------------- ---------------------
$ 235,000 $ 73,000 $ 2,066,000 $ 1,047,000
===================== ==================== ==================== =====================
</TABLE>
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 in
the Consolidated Statements of Financial Condition.
F-11
<PAGE>
8. FIXED ASSETS
Fixed assets, at cost, consist of the following:
<TABLE>
<CAPTION>
September 25, September 26,
1998 1997
------------------------ --------------------------
<S> <C> <C>
Office machines $ 274,000 $ 427,000
Furniture and fixtures 679,000 1,542,000
Electronic equipment 916,000 1,333,000
Leasehold improvements 55,000 212,000
Capital lease 1,180,000 -
------------------------ --------------------------
3,104,000 3,514,000
Less accumulated depreciation and
amortization 1,812,000 1,986,000
------------------------ --------------------------
$ 1,292,000 $ 1,528,000
======================== ==========================
</TABLE>
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 48 month period. The Company recorded no gain or loss and has
recorded this transaction as a capital lease.
The following is a schedule of assets under capital lease:
<TABLE>
<S> <C>
Office machines $ 180,000
Furniture and fixtures 512,000
Electronic equipment 352,000
Leasehold improvements 136,000
-------------
1,180,000
Less accumulated depreciation and amortization 102,000
-------------
$ 1,078,000
=============
</TABLE>
F-12
<PAGE>
The following is a schedule by years of future minimum lease payments under
these capital leases together with the present value of the net minimum
lease payments as of September 25, 1998:
<TABLE>
<S> <C>
Fiscal year ended
1999 $ 340,000
2000 340,000
2001 340,000
2002 357,000
-----------
Total minimum lease payments 1,377,000
Less: Amount representing taxes 85,000
-----------
Net minimum lease payments 1,292,000
Less amount representing interest 180,000
-----------
Present value of net minimum lease payments $ 1,112,000
===========
</TABLE>
9. LINE OF CREDIT
National has an unsecured line of credit of up to $3,000,000. The line is
subject to renewal in March 1999. Borrowings bear interest at the bank's
prime rate. Interest is payable monthly. These borrowings are short-term
and have not extended beyond a few days. Although at times National has not
satisfied and may not in the future satisfy a minor loan covenant, the bank
has continued to provide all necessary borrowings. At September 25, 1998,
the Company has $2,700,000 in outstanding borrowings on the line of credit.
10. NOTES PAYABLE
In November 1997, the Company executed two promissory notes totaling
$925,000. The notes bear interest at 6% and 8% with the principal to be
repaid in 24 monthly installments commencing on December 31, 2000. In
connection with the notes, warrants for the purchase of 126,000 shares at
an exercise price of $5.36 per share of the Company's common stock were
issued. The warrants were valued at $120,000 and have been recorded as a
discount to the notes.
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
F-13
<PAGE>
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 have been recorded as a discount to the note.
In July 1998, the Company renegotiated the term on a note payable to a bank
with an original principal amount of $900,000. Under the original agreement
the note was to be repaid in monthly installments of $150,000 of principal
plus interest from May through October 1998. The revised agreement calls
for repayment in monthly installments of $75,000 of principal plus interest
from August 1998 through January 1999. The principal balance owing on the
note at September 25, 1998 was $300,000.
The following is a schedule by years of debt maturity as of September 25,
1998:
<TABLE>
<S> <C>
Fiscal year ended
1999 $ 300,000
2000 --
2001 802,000
2002 963,000
2003 160,000
-------------
2,225,000
Less: discount on notes (227,000)
-------------
$ 1,948,000
=============
</TABLE>
11. FEDERAL INCOME TAX
The income tax benefit (provision) consists of:
<TABLE>
<CAPTION>
For the Years Ended
---------------------------------------------------
September 25, September 26, September 27,
1998 1997 1996
-------------- --------------- ----------------
<S> <C> <C> <C>
Current federal
income tax $ 626,000 $ (56,000) $(808,000)
Deferred federal
income tax (2,000) 45,000 --
Current state
income tax -- (82,000) --
---------- ---------- ----------
$ 624,000 $ (93,000) $(808,000)
========== ========== ==========
</TABLE>
F-14
<PAGE>
The income tax provision varies from the federal statutory rate as
follows:
<TABLE>
<CAPTION>
September 25, September 26, September 27,
1998 1997 1996
-------------- --------------- ---------------
<S> <C> <C> <C>
Statutory
federal rate $ 1,852,000 $ (66,000) $ (865,000)
State income
taxes, net of
federal income
tax benefit (54,000)
Losses for
which no benefit
is provided (1,230,000) --
Other 2,000 27,000 57,000
-------------- --------------- ---------------
$ 624,000 $ (93,000) $ (808,000)
============== =============== ===============
</TABLE>
The Company has net operating loss (NOL) carryforwards for Federal
income tax purposes of approximately $3,000,000, substantially all of
which expires in 2018.
Significant components of the Company's deferred tax assets are as
follows at September 25, 1998 and September 26, 1997:
<TABLE>
<CAPTION>
1998 1997
------------ -----------
<S> <C> <C>
Net Operating losses $ 1,017,000 $ 34,000
Other 41,000 11,000
------------ -----------
Total 1,058,000 45,000
Valuation allowance (1,017,000) --
------------ -----------
Total deferred tax asset $ 41,000 $ 45,000
============ ===========
</TABLE>
There were no deferred tax assets or liabilities at September 27, 1996.
F-15
<PAGE>
12. COMMITMENTS
As of September 25, 1998, the Company is committed under operating leases
to future minimum lease payments as follows:
<TABLE>
<CAPTION>
Fiscal Year Ending
------------------
<S> <C>
1999 $ 628,000
2000 608,000
2001 519,000
2002 355,000
2003 278,000
------------
$ 2,388,000
============
</TABLE>
Rental expense for operating leases for the years ended September 25, 1998,
September 26, 1997 and September 27, 1996 was $1,661,000, $1,113,000 and
$672,000, respectively.
UNDERWRITINGS - During fiscal 1998, the Company participated in
underwriting securities for private placements, initial and secondary
public offerings. At September 25, 1998, the Company has no outstanding
commitments relating to underwriting transactions.
13. CONTINGENCIES
In May 1997, a minority stockholder of the Company commenced a lawsuit
alleging that the Company, and certain present and former officers and
directors breached their fiduciary duties to the plaintiff and that the
proxy statement by which the Company's merger was affected was materially
false and misleading. In March, 1998, the parties engaged in mediation, the
plaintiff dismissed the lawsuit with prejudice, the parties agreed to enter
into a binding arbitration agreement and commenced to determine the fair
value of the plaintiff's shares. The arbitration of this matter is still
pending.
In April 1997, a Trust and three individuals, commenced an action against
the Company. The plaintiffs allege the defendants' failure to purchase
securities from them constitutes, among other things, breach of contract,
securities rule violations and fraud. They seek unspecified compensatory
and punitive damages and specific performance of their alleged agreements.
In September 1997, a corporation served the Company with a complaint
alleging that the Company and a former representative breached a contract
and committed various torts by failing to perform an alleged promise to
raise capital for the plaintiff through an initial public offering of
stock. The plaintiff sought not less than $8.5 million in actual damages
and not less than $42.5 million in punitive damages. On November 3, 1997,
the plaintiff voluntarily
F-16
<PAGE>
dismissed the complaint without prejudice but refiled the same complaint
in August 1998. The Company has filed a motion to dismiss all counts of
the complaint.
The Company was named as a Respondent in an arbitration brought before the
NASD Regulation, Inc., by a broker-dealer in securities. The broker-dealer
claimed that the Company and nine former registered agents spread
"scurrilous and defamatory rumors" and that they did so with
misappropriated customer lists. The claimant was seeking at least
$1,000,000 in general and punitive damages. This arbitration matter has
been dismissed.
In October 1998, a corporation commenced an action against the Company
claiming that during the unsuccessful effort to complete an initial public
offering of the plaintiff's stock the Company breached the terms of two
letters of intent concerning the offering, breached their fiduciary duties,
and engaged in both intentional and negligent misrepresentation.
Compensatory damages of $650,000 are being sought in this matter as well as
an unspecified amount of punitive damages.
The Company is a defendant in various other arbitrations and administrative
proceedings, lawsuits and claims which in the aggregate seek general and
punitive damage approximating $440,000. These matters arise out of the
normal course of business.
The Company intends to vigorously defend itself in these actions, and in
any event, does not believe these actions singularly or combined would have
a material adverse effect on the Company's financial statements or business
operations.
14. STOCKHOLDER'S EQUITY
STOCK OPTIONS - The Company's stock option plans provide for the granting
of stock options to certain key employees, directors and investment
executives. Generally, options outstanding under the Company's stock option
plan are granted at prices equal to or above the market value of the stock
on the date of grant, vest either immediately or ratably over up to five
years, and expire five years subsequent to award.
The Company applies APB Opinion No. 25 and related Interpretations in
accounting for its plans. FASB Statement No. 123 "Accounting for
Stock-Based Compensation" ("SFAS 123") was issued by the FASB and, if fully
adopted, changes the methods for recognition of cost on plans similar to
those of the Company. Had compensation cost for the Company's stock option
plans been determined 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 diluted earnings per share would
have been reduced by approximately $761,000, or $0.51 per share in 1998,
$779,000, or
F-17
<PAGE>
$0.54 per share in 1997, $282,000, or $0.33 per share in 1996.
The fair value of the options granted during 1998, 1997 and 1996 is
estimated as $1,153,000, $960,000 and $620,000, respectively, on the
date of grant using the Black-Scholes option-pricing model with the
following assumptions:
<TABLE>
<CAPTION>
1998 1997 1996
-------- -------- --------
<S> <C> <C> <C>
Volatility 63.87% 63.39% 63.64%
Risk-free interest rate 6.17% 6.31% 6.77%
Expected life 5 years 5 years 5 years
</TABLE>
A summary of the status of the Company's stock options is presented
below:
<TABLE>
<CAPTION>
Weighted
Average
Price
Authorized Granted Available Per Share
------------- ------------- -------------- ------------
<S> <C> <C> <C> <C>
Balance,
September 29, 1995 441,800 370,459 71,341 $ 2.84
Creation of new plan 405,169 -- 405,169
Granted -- 308,221 (308,221) $ 3.88
Exercised (39,612) (39,612) -- $ 1.90
--------- -------- ---------
Balance,
September 27, 1996 807,357 639,068 168,289 $ 3.60
Creation of new plan 538,126 -- 538,126
Granted -- 303,739 (303,739) $ 5.79
Exercised (161,677) (161,677) -- $ 3.41
--------- -------- ---------
Balance,
September 26, 1997 1,183,806 781,130 402,876 $ 4.64
Granted -- 148,500 (148,500)
Exercised (2,012) (2,012) -- $ 3.54
Forfeitures (161,340) (161,340) -- $ --
--------- -------- ---------
Balance,
September 25, 1998 1,020,454 766,278 254,176
========= ======== =========
</TABLE>
F-18
<PAGE>
The following table summarizes information about stock options outstanding
at September 25, 1998:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
----------------------------------------------- -------------------------------
Weighted Weighted Weighted
Range of Average Average Average
Exercise Number Remaining Exercise Number Exercise
Prices Outstanding Cont. Life Prices Exercisable Prices
--------------- -------------- ------------- ------------- --------------- ------------
<S> <C> <C> <C> <C> <C>
$3.39-3.73 333,330 2.36 $ 3.60 329,980 $ 3.59
$4.13-4.53 91,538 4.22 $ 4.20 79,134 $ 4.15
$5.44-5.64 190,920 3.76 $ 5.54 171,809 $ 5.54
$7.12 150,490 3.38 $ 7.12 150,490 $ 7.12
--------- ---------
766,278 731,413
========= =========
</TABLE>
STOCK WARRANTS - During 1997, the Company issued 33,075 stock warrants
with an exercise price of $4.76 per share expiring five years from the
award date to the lender. The warrants were valued at $20,000, net of
tax benefit, which has been recorded as a discount on the note
payable. Such note was paid in 1998 and, accordingly, the discount was
amortized to operations.
In addition, stock warrants were issued in conjunction with notes
issued by the Company in November 1997 and January 1998 (See Note 10).
STOCK DIVIDENDS - On December 22, 1997, the Company declared a 5%
stock dividend to all common shareholders. The stock dividend
increased the number of issued and outstanding shares by 72,299.
During fiscal year 1997, the Company declared three 5% stock dividends
to all common stockholders. The stock dividends were issued on January
27, 1997, May 30, 1997 and September 10, 1997. The stock dividends in
1997 increased the number of issued and outstanding shares by 174,979.
During fiscal year 1996, the Company declared two 5% stock dividends
to all common stockholders. The stock dividends were issued on June 4,
1996 and September 16, 1996. The stock dividends in 1996 increased the
number of issued and outstanding shares by 75,724. All references in
the accompanying financial statements to the number of stock options
and warrants, and earnings per share have been restated to reflect the
dividends.
F-19
<PAGE>
15. NET CAPITAL REQUIREMENTS
National, as a registered broker-dealer is subject to the SEC's Uniform Net
Capital Rule 15c3-1, which requires the maintenance of minimum net capital.
National has elected to use the alternative standard method permitted by
the rule. This requires that National maintain minimum net capital equal to
the greater of $250,000 or 2% of aggregate debit items. At September 25,
1998, National's net capital exceeded the requirement by $1,991,000.
WestAmerica, as registered broker-dealers are also subject to the SEC's Net
Capital Rule 15c3-1, which, under the standard method, requires that each
company maintain minimum net capital equal to the greater of $100,000 or
6 2/3% of aggregate indebtedness. At September 25, 1998, WestAmerica's net
capital exceeded the requirement by $138,000.
Advances, dividend payments and other equity withdrawals from National or
WestAmerica are restricted by the regulations of the SEC, and other
regulatory agencies. These regulatory restrictions may limit the amounts
that these subsidiaries may dividend or advance to the Company.
16. EMPLOYEE BENEFITS
The Company's subsidiaries have defined 401(k) profit sharing plans which
cover substantially all of their employees. Under the terms of the plans,
employees can elect to defer up to 25% of eligible compensation, subject to
certain limitations, by making voluntary contributions to their respective
plans. Each company's annual contributions are made at the discretion of
the respective Board of Directors. During the fiscal years September 25,
1998 and September 27, 1996, the Company made no such contributions. During
fiscal year September 26, 1997, the Company charged $53,000 to operations
in connection with the plans.
17. FOURTH QUARTER ADJUSTMENTS (UNAUDITED)
Fourth quarter 1998 adjustments included write-downs of receivables of
$935,000, losses from the sale of subsidiaries of $1,114,000 and the
write-off of other assets of $473,000.
18. FINANCIAL INFORMATION - OLYMPIC
Olympic was formed February 6, 1997. The following Olympic (parent company
only) financial information should be read in conjunction with the other
notes to the consolidated financial statements:
F-20
<PAGE>
STATEMENTS OF FINANCIAL CONDITION
ASSETS
<TABLE>
<CAPTION>
September 25, 1998 September 26, 1997
------------------ ------------------
<S> <C> <C>
Cash, subject to immediate withdrawal $ 8,000 $ 11,000
Receivables from subsidiaries 14,000 545,000
Other receivables 53,000 --
Capital lease 1,078,000 --
Investment in subsidiaries 5,355,000 9,134,000
Other asset 30,000 68,000
------------------ ------------------
$6,538,000 $9,758,000
------------------ ------------------
------------------ ------------------
LIABILITIES AND STOCKHOLDER'S EQUITY
Accounts Payable, accrued expenses, and $ 271,000 $ 68,000
other liabilities
Payable to subsidiaries 259,000 1,177,000
Capital lease payable 1,112,000 --
Note payable 1,948,000 909,000
------------------ ------------------
3,590,000 2,154,000
------------------ ------------------
Stockholder's equity 2,948,000 7,604,000
------------------ ------------------
$6,538,000 $9,758,000
------------------ ------------------
------------------ ------------------
</TABLE>
F-21
<PAGE>
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Period from
February 6, 1997
Fiscal Year Ended (Inception) to
September 25, 1998 September 26, 1997
------------------ ------------------
<S> <C> <C>
Operating expenses $(2,609,000) $(696,000)
Other income (expenses)
Gain on foreign currency translation -- 43,000
Interest and other income 151,000 --
Loss on investment in subsidiaries (1,094,000) (159,000)
Loss on sale of investments (1,114,000) --
------------------ ------------------
Loss before income tax (4,666,000) (812,000)
Income tax benefit -- 270,000
------------------ ------------------
Net loss $(4,666,000) $(542,000)
------------------ ------------------
------------------ ------------------
</TABLE>
F-22
<PAGE>
STATEMENT OF CHANGES IN STOCKHOLDER'S EQUITY
<TABLE>
<CAPTION>
Common Stock Additional
-------------------- Paid-in Retained
Shares Amount Capital Earnings Total
--------- ------- ---------- ----------- -----------
<S> <C> <C> <C> <C> <C>
FORMATION, February 6, 1997
Common stock issued in 1,203,930 $24,000 $7,648,000 $ -- $ 7,672,000
connection with acquisitions
Exercise of stock options, 109,175 2,000 472,000 -- 474,000
including $25,000 income
tax benefit
Stock dividends 131,100 3,000 701,000 (704,000) --
Net loss -- -- -- (542,000) (542,000)
--------- ------- ---------- ----------- -----------
BALANCE, September 26, 1997 1,444,205 $29,000 $8,821,000 $(1,246,000) $ 7,604,000
--------- ------- ---------- ----------- -----------
Exercise of stock options 2,012 -- 8,000 -- 8,000
Stock dividend 72,299 1,000 351,000 (352,000) --
Stock redemption (55,509) (1,000) (304,000) -- (305,000)
Original discount on notes -- -- 307,000 -- 307,000
payable
Net loss -- -- -- (4,666,000) (4,666,000)
--------- ------- ---------- ----------- -----------
BALANCE, September 25, 1998 1,463,007 $29,000 $9,183,000 $(6,264,000)* $ 2,948,000
--------- ------- ---------- ----------- -----------
--------- ------- ---------- ----------- -----------
</TABLE>
* Addtional paid-in-capital and retained earnings for the parent company differ
from consolidated amounts due to accounting for the merger with National using
the pooling of interests method in the consolidated financial statements.
F-23
<PAGE>
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Period from
February 6, 1997
Fiscal Year Ended (Inception) to
September 25, 1998 September 26, 1997
------------------ ------------------
<S> <C> <C>
CASH FLOW FROM OPERATING ACTIVITIES
Net loss $(4,666,000) $ (542,000)
Adjustments to reconcile net income to net cash
Gain on foreign currency translation -- (43,000)
Loss on investment in subsidiaries 1,094,000 159,000
Loss on sale of subsidiaries 1,114,000 --
Depreciation and amortization 169,000 --
Changes in assets and liabilities 1,196,000 632,000
------------------ ------------------
(1,093,000) 206,000
------------------ ------------------
CASH FLOW FROM INVESTING ACTIVITIES
Acquisition of subsidiaries -- (443,000)
Capital contributions to subsidiaries (135,000) (1,177,000)
------------------ ------------------
(135,000) (1,620,000)
------------------ ------------------
CASH FLOW FROM FINANCING OPERATIONS
Exercise of stock options 8,000 474,000
Proceeds from notes payable 1,925,000 1,805,000
Payments on capital lease (108,000) --
Payments on notes payable (600,000) (854,000)
------------------ ------------------
1,225,000 1,425,000
------------------ ------------------
NET CHANGE IN CASH (3,000) 11,000
CASH BALANCE
Beginning of year 11,000 --
------------------ ------------------
End of year $ 8,000 $ 11,000
------------------ ------------------
------------------ ------------------
</TABLE>
F-24
<PAGE>
ITEM 9 - CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE
On August 26, 1998 Moss Adams LLP resigned as principal accountant to audit
the Registrant's financial statements.
The reports of Moss Adams LLP on the Registrant's financial statements for
the fiscal years ended September 26, 1997 and September 27, 1996 did not
contain an adverse opinion or a disclaimer of opinion, or a qualification or
modification as to uncertainty, audit scope or accounting principles.
In connection with its audits for the Registrant's two most recent fiscal
years and through August 26, 1998 there were no disagreements with
Moss Adams LLP on any matter of accounting principles or practices, financial
statement disclosure, or auditing scope or procedure.
During the Registrant's two most recent fiscal years and through August 26,
1998 there have been no reportable events.
The Registrant engaged Feldman Sherb Ehrlich & Co., P.C. as its independent
accountant as of August 31, 1998. During the Registrant's two most recent
fiscal years, and through August 31, 1998, the Registrant did not consult
with Feldman Sherb Ehrlich & Co., P.C. as to either the application of
accounting principles to a specified transaction, either completed or
proposed or the type of audit opinion that might be rendered on the
Registrant's financial statements and the Registrant did not consult with
Feldman Sherb Ehrlich & Co., P.C. as to any matter that was either the
subject of a disagreement or reportable event.
21
<PAGE>
PART III
ITEM 10 - DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL
PERSONS, COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT
The following sets forth the names and ages of all directors and executive
officers of the Company, all positions and offices held with the Company by
such persons, and the principal occupations of each during the past five
years.
Steven A. Rothstein 48 Chaiman, Chief Executive Officer and President
Chairman and Chief Executive Officer of National
Director of WestAmerica
Mr. Rothstein has served as Chairman of the Board of Directors and Chief
Executive Officer of the Company since its inception in February 1997. He
became a member of the Board of National in May 1995 and was appointed
Chairman on August 1, 1995. From 1979 through 1989, Mr. Rothstein was a
registered representative, and Limited Partner at Bear Stearns & Co., Inc. in
Chicago, Illinois and Los Angeles, California. From 1989 to 1992, Mr. Rothstein
was a Senior Vice President in the Chicago office of Oppenheimer and
Company, Inc. In December 1992 he joined Rodman and Renshaw, Inc., a
Chicago-based broker-dealer serving as Managing Director, and joined
H.J. Meyers, Inc. in Beverly Hills, California, a New York Stock Exchange
member firm in March 1994. He resigned from H.J. Meyers and Company in March
1995 to associate with National. Mr. Rothstein is a 1972 graduate of Brown
University, Providence, Rhode Island. Presently, Mr. Rothstein is a board
member of Gateway Data Sciences, Inc., Shampan, Lamport Holdings Limited,
SigmaTron International, Inc. and Vita Food Products, Inc.
Robert I. Kollack 52 Director and Vice Chairman
Director of National
Mr. Kollack has served as a Director of the Company since its inception in
February, 1997. He was elected to the Board and was appointed Chief Executive
Officer of National in August 1987. He served in those capacities until
February, 1997, when he was appointed Vice-Chairman. From February 1981 to
August 1987, Mr. Kollack acted as President and a Director of National. He
joined National as an investment executive in 1972. From 1968 to 1972, he was
an investment executive for Foster & Marshall, Inc., which at that time was a
Seattle-based brokerage firm.
22
<PAGE>
ITEM 10 - DIRECTORS AND EXECUTIVE OFFICERS (CONTINUED)
<TABLE>
<S> <C> <C>
Gary A. Rosenberg 58 Director
Mr. Rosenberg has served as a Director of the Company since its inception in
February, 1997., and served as its President from August, 1997 until April,
1998. He was appointed to the Board of National in December, 1996. Mr.
Rosenberg was Chairman and CEO of UDC Homes, Inc. (and its predecessors) from
1968 to 1994, and the Chairman (non-management) from 1994 to 1996. UDC Homes,
Inc. filed a petition for relief under Chapter 11 of the Bankruptcy Code in
May, 1995. Presently, Mr. Rosenberg is Chairman, Chief Executive Officer and
Director of Canterbury Development Corporation, a family held company with
financial, technology, entertainment and real estate interests. He is also a
Director and Chairman of Dimyon Multimedia, Ltd., an Israeli multimedia and
software company; Chairman and Director of the Rosenberg Foundation; Founder
and Chairman of the Real Estate Research Center; member of the Board at the
J. L. Kellogg Graduate School of Management at Northwestern University; and a
Trustee of St. Norbert College. Mr. Rosenberg received his B.S. and M.B.A.
from Northwestern University and his J.D. from the University of Wisconsin.
James C. Holcomb, Jr. 47 Director
Since 1982, Mr. Holcomb has been employed by Holcomb Investment Company, a
Texas General Partnership. Holcomb Investment Company is a family-owned
investment vehicle, privately investing in predominantly oil and gas
exploration and development. Mr. Holcomb also is a private investor in
wholesale distribution and manufacturing companies, and is often actively
involved in the management of the companies in which investments are made.
Mr. Holcomb received his A.B. in 1972 from Brown University, and his J.D. in
1975 from the University of Texas School of Law.
D.S. Patel 56 Director
Since 1987 to the present Mr. Patel has worked as Chairman of the Board of
Directors, President and Chief Executive Officer of Circuit Systems, Inc., a
publicly-traded manufacturer of printed circuit boards. Mr. Patel is also
presently a Director of SigmaTron International, Inc., a publicly-traded
electronics contract manufacturer, a position he has had since 1994.
EXECUTIVE OFFICERS
Robert H. Daskal 57 Senior Vice President, Chief Financial Officer, Treasurer and
Secretary
Director of WestAmerica
</TABLE>
23
<PAGE>
ITEM 10 - DIRECTORS AND EXECUTIVE OFFICERS (CONTINUED)
<TABLE>
<S> <C> <C>
Mr. Daskal has served as Senior Vice President, Chief Financial Officer and
Treasurer of the Company since its inception in February, 1997. From 1994 to
1997 Mr. Daskal was a Director, Executive Vice President and Chief Financial
Officer of Inco Homes Corporation, and from 1985 to 1994 he was a Director,
Executive Vice President-Finance and Chief Financial Officer of UDC Homes,
Inc. (and its predecessors). UDC Homes, Inc. filed a petition for relief
under Chapter 11 of the Bankruptcy Code in May, 1995. Mr. Daskal, a former
Tax Partner with Arthur Andersen & Co., became a CPA in Illinois in 1967. He
received his B.B.A. and J.D. from the University of Michigan in Ann Arbor.
Mr. Daskal is presently a director of Inco Homes Corporation.
Michael A. Bresner 54 Senior Vice President and Chief Operating Officer
President and Chief Operating Officer of National
Mr. Bresner became Senior Vice President and Chief Operating Officer of the
Company in January, 1998. In August 1998, he was named President and Chief
Operating Officer of National Securities. Prior to joining the Company, Mr.
Bresner worked as Managing Director of H.J. Meyers, Inc., a position he held
since 1990. Additionally, Mr. Bresner served as Directing Editor of the Value
Line Special Situations Service.
</TABLE>
DIRECTOR COMPENSATION
To date, no director of the Company has received any cash compensation for
serving on the Board. The Company does not anticipate paying inside directors
any cash compensation in the future. Outside directors (i.e., directors who
are not also officers or employees of the Company or of a subsidiary) are
paid $1,000 per meeting attended in person, and $500 per meeting attended by
phone. Outside directors shall also be granted options to purchase 5,000
shares of the Company's common stock each year of their tenure, options,
which fully vest six months after the date of issuance. The Company shall
reimburse all directors for expenses incurred traveling to and from board
meetings.
INDEMNIFICATION OF DIRECTORS AND OFFICERS
The Company's bylaws provide that the Company shall indemnify and advance the
expenses of individual directors, officers, employees and agents against
costs, judgments and other financial liability resulting from any action
alleged to have been taken or omitted by such individual. The bylaws permit
such indemnification if, among other things, the proposed indemnity acted in
good faith with reasonable belief that the conduct was in, or at least not
opposed to, the best interests of the Company, and in the case of a criminal
proceeding, with a reasonable belief that the conduct was not unlawful. The
Company has obtained insurance on behalf of any person who is or was a
director, officer or employee or agent of the Company or is or was serving at
the request of the Company as an officer, employee, or agent of another
corporation, partnership, joint venture, trust other enterprise or employee
benefit plan, against any liability arising out of that person's status as
such, whether or not the Company would have the power to indemnify that
person against such liability.
24
<PAGE>
ITEM 11 - EXECUTIVE COMPENSATION
EXECUTIVE COMPENSATION
The following table sets forth the cash compensation paid by the Company to
each of its most highly compensated officers (the "Named Executive Officers")
during the fiscal years ended 1998, 1997 and 1996:
<TABLE>
<CAPTION>
Long-Term
Annual Compensation Compensation
---------------------------------------------------------- Securities
Year Other Underlying
Name and Capacity Ended Salary Bonus Compensation * Options
- ----------------------- ------------ ---------------- --------------- --------------- ------------------
<S> <C> <C> <C> <C> <C>
Steven A. Rothstein 1998 $ 225,000 $ 287,000 $ 453,000 ** $ --
Chairman, Chief 1997 $ 24,000 $ 32,000 $ 1,364,000 ** $ --
Executive Officer and President 1996 $ 24,000 $ 194,000 $ 1,775,000 ** $ --
Robert I. Kollack 1998 $ 150,000 $ -- $ 275,000 $ --
Director and Vice Chairman 1997 $ 150,000 $ 32,000 $ 497,000 $ --
1996 $ 150,000 $ 193,000 $ 495,000 $ --
Robert H. Daskal 1998 $ 170,000 $ 35,000 $ -- $ --
Senior Vice President, 1997 $ 82,000 $ -- $ -- $ --
Chief Financial Officer,
Treasurer and Secretary
Michael A. Bresner 1998 $ 205,000 $ 75,000 $ -- $ --
Senior Vice President and
Chief Operating Officer
</TABLE>
* Amounts relate to commissions earned in the normal course of business, fees
received for Corporate Finance services and profit from the sale during the
year of the Company's stock obtained through the exercise of stock options.
** This compensation paid to Mr. Rothstein by the Company represents a
percentage of business generated or supervised by Mr. Rothstein as follows:
he is paid 50% of the commission generated on retail trades (compared to the
70% typically paid to National Securities' brokers), and 70% of the
compensation collected by the firm (including warrants) on corporate finance
transactions which he introduces and executes. Mr. Rothstein also collects an
override on fees collected from all other corporate finance transactions as
well as on business he creates for the firm.
25
<PAGE>
ITEM 11 - EXECUTIVE COMPENSATION (CONTINUED)
In April, 1998, the Company and Mr. Rothstein agreed upon terms for a new
employment agreement pursuant to which the Company will pay him as follows:
$480,000 annual salary, 50% of the commission generated on retail trades
(compared to the 70% typically paid to National Securities' brokers), and a
calculable bonus based upon the Company's consolidated income before tax.
In September 1998, as part of the efforts to reduce overhead costs,
management of the Company (exclusive of WestAmerica) received a temporary
reduction in compensation ranging from 10% to 62%.
The Company has granted options to certain officers, directors, employees and
investment executives. The options granted during the last fiscal year
(adjusted for stock dividends) to the Named Executive Officers are as follows:
<TABLE>
<CAPTION>
Option Grants in Last Fiscal Year
--------------------------------------------------------------------------------------
Potential Realized Value
Number of % of Total at Assumed Annual Rates
Securities Options of Stock Price Appreciation
Underlying Granted to for Option Term
Options Employees Exercise Expiration ----------------------------
Name Granted in Fiscal Price Date 5% 10%
Year
- ------------- ------------ ------------ ------------ ------------- ------------ --------------
<S> <C> <C> <C> <C> <C> <C>
Steven A. Rothstein 36,750 24.75% $ 5.36 11/11/02 $ 67,000 $ 120,000
Michael A. Bresner 75,000 50.50% $ 4.13 02/04/03 $ 85,000 $ 189,000
</TABLE>
The options exercised by the Named Executive Officers, and the fiscal year and
value of unexercised options, are as follows:
<TABLE>
<CAPTION>
Aggregated Option Exercises in Last Fiscal Year and Fiscal Year End Option Values
----------------------------------------------------------------------------------------
Number of Securities Value of Unexercised
Underlying Unexercised In-the-Money Options
Shares Options at Fiscal Year End at Fiscal Year End
Acquired Value -------------------------------- ---------------------------
Name on Exercise Realized Exercisable Unexercisable Exercisable Unexercisable
- ------------- ------------ --------- ---------------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Steven A. Rothstein - - 323,209 - - -
Robert I. Kollack - - 71,270 - - -
Robert H. Daskal - - 22,601 - - -
Michael A. Bresner - - 75,000 - - -
</TABLE>
26
<PAGE>
ITEM 11 - EXECUTIVE COMPENSATION (CONTINUED)
The Company has employment agreements with the four Named Executive Officers.
None of the Named Executive Officers may be terminated against his will
without a finding of fraud, theft or defalcation. The agreements generally
provide that the officers will devote their entire time and attention to the
business of the Company, will refrain during employment and for a period of
one year thereafter from competing with the Company, and will not disclose
confidential or trade secret information belonging to the Company. Of the
four agreements, Mr. Daskal's, Mr. Rothstein's and Mr. Bresner's provide for
a cash severance payment. Mr. Rothstein's severance payment is contingent
upon National's net capital, as defined under the SEC's Uniform Net Capital
Rule 15c3-1, exceeds $3,500,000 after honoring the severance obligation.
COMPENSATION COMMITTEE
In lieu of a formal compensation committee, the Company's board of directors,
listed under Item 10 - Directors, Executive Officers, Promoters and Control
Persons, Compliance with Section 16(a) of the Exchange Act, determine
executive officer compensation.
The Company believes the compensation paid to its executive officers is
competitive with companies within its industry that are comparable in size
and by companies outside the industry with which the Company competes for
executive talent.
COMPARISON OF FIVE-YEAR CUMULATIVE TOTAL RETURN
The following compares cumulative total stockholder return on the Company's
common stock with the cumulative total stockholder return on the common
equity of the companies in the NASDAQ U.S. Index and the NASDAQ Financial
Index (the "Peer Group") for the period from October 1, 1993 to September 25,
1998.
<TABLE>
<CAPTION>
Olympic NASDAQ
Measurement Period Cascade NASDAQ Financial
(Fiscal Year Covered) Financial U.S. Index Index
--------------------- --------- ---------- ---------
<S> <C> <C> <C>
1993 100.00 100.00 100.00
1994 131.64 98.60 98.32
1995 141.77 136.20 134.56
1996 390.76 161.61 158.66
1997 271.41 221.85 218.28
1998 128.92 226.38 218.18
</TABLE>
The above assumes a $100 investment on October 1, 1993, in each of Olympic
Cascade Financial Corporation Common Stock, NASDAQ U.S. Index and the NASDAQ
Financial Index (the "Peer Group"), and further assumes the reinvestment of all
dividends.
27
<PAGE>
ITEM 12 - SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT
CERTAIN BENEFICIAL OWNERS
The following information is furnished as of December 8, 1998, as to any person
who the Company knows to be the beneficial owner of more than 5% of the
Company's common stock:
<TABLE>
<CAPTION>
Amount of
Name/Address of Beneficial Percent
Title of Class Beneficial Owner Ownership(1) of Class
---------------- ---------------------------------- ------------- --------
<S> <C> <C> <C>
Common stock Steven A. Rothstein 627,455(2) 35.13%
2737 Illinois Road
Wilmette, IL 60091
Common stock Darren Friend 124,032(3) 8.43%
2 Barrenger Court
Newport Beach, CA 92660
Common stock Marshall S. Geller 123,240(3) 8.38%
11100 Santa Monica Blvd, Ste 970
Los Angeles, CA 90025
Common stock Gary A. Rosenberg 122,194(4) 7.70%
1427 North State Pkwy.
Chicago, IL 60610
Common stock Maynard Mall Realty Trust 76,578 5.23%
95 Main Street
Maynard, MA 01754
</TABLE>
(1) All securities are beneficially owned directly by the persons listed in the
table (except as otherwise indicated).
(2) Includes 27,550 shares owned by direct family members, 49,210 shares owned
by retirement plans and 323,209 shares of vested unexercised stock options.
(3) Includes 16,538 shares of vested unexercised warrants to purchase common
stock owned by Geller & Friend Capital Partners whereby Mrs. Friend and Mr.
Geller are each 50% partners. Accordingly, each are allocated 8,269 shares.
Also includes shares subject to a Voting Agreement expiring in August 1999
and requiring these shares be voted in favor of director nominees proposed
by the Company's Board of Directors.
(4) Includes 122,194 shares of vested unexercised stock options.
28
<PAGE>
ITEM 12 - SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT (CONTINUED)
MANAGEMENT
The following information is furnished as of December 8, 1998 as to each
class of equity securities of the Company beneficially owned by all directors
and officers of the Company as a group.
<TABLE>
<CAPTION>
Amount of
Beneficial Percent
Name and Title of Beneficial Owner Ownership of Class
- ------------------------------------------------------ ---------- --------
<S> <C> <C>
Steven A. Rothstein - Chairman, Chief Executive Officer
and President 627,455(1) 35.13%
Robert I. Kollack - Director and Vice Chairman 71,270(2) 4.65%
Gary A. Rosenberg - Director 122,194(2) 7.70%
James C. Holcomb, Jr. - Director 6,703 _
Robert H. Daskal - Senior Vice President, Chief Financial
Officer, Treasurer and Secretary 22,601(2) 1.52%
Michael A. Bresner - Senior Vice President and Chief
Operating Officer 75,000(2) 4.88%
All officers and directors of the Company as a group (six persons) 925,223(3) 44.54%
</TABLE>
(1) Includes 27,550 shares owned by direct family members, 49,210 shares owned
by retirement plans and 323,209 shares of vested unexercised stock options.
(2) Includes only shares of vested unexercised stock options.
(3) Includes 614,274 shares of vested unexercised stock options.
ITEM 13 - CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
During the fiscal year 1998 the Company advanced certain monies to Steven A.
Rothstein, its Chairman, Chief Executive Officer and President. The largest
aggregate amount outstanding to the Company during the fiscal year was
approximately $185,000. At September 25, 1998 the balance outstanding was
approximately $54,000. The Company has not charged Mr. Rothstein interest on
these advances.
29
<PAGE>
PART IV
ITEM 14 - EXHIBITS AND REPORTS ON FORM 8-K
(a) The following financial statements are included in Part II Item 8:
1. FINANCIAL STATEMENTS
Independent Auditors' Report
Consolidated Financial Statements
Financial Condition, September 25, 1998 and
September 26, 1997
Operations, Years Ended September 25, 1998,
September 26, 1997 and September 27, 1996
Changes in Stockholders' Equity, Years ended
September 25, 1998, September 26, 1997 and
September 27, 1996
Cash Flows, Years ended September 25, 1998,
September 26, 1997 and September 27, 1996
Notes to 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
Report on Form 8-K is included in Part II Item 9
(c) EXHIBITS
See Exhibit Index
30
<PAGE>
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)
<TABLE>
<S> <C>
Date: December 17, 1998 By: Steven A. Rothstein
------------------------ --------------------
Steven A. Rothstein, Chairman,
Chief Executive Officer and President
Date: December 17, 1998 By: Robert H. Daskal
------------------------ ------------------
Robert H. Daskal, Senior Vice President,
Chief Financial Officer, Treasurer
and Secretary
</TABLE>
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.
<TABLE>
<S> <C>
Date: December 17, 1998 By: Steven A. Rothstein
------------------------ ---------------------
Steven A. Rothstein, Chairman,
Chief Executive Officer and President
Date: December 17, 1998 By: Robert I. Kollack
------------------------ -------------------
Robert I. Kollack, Director
Date: December 17, 1998 By: Gary A. Rosenberg
------------------------ -------------------
Gary A. Rosenberg, Director
Date: December 17, 1998 By: James C. Holcomb, Jr.
--------------------------- ----------------------
James C. Holcomb, Jr., Director
Date: December 17, 1998 By: D.S. Patel
--------------------------- -----------
D.S. Patel, Director
</TABLE>
31
<PAGE>
EXHIBIT INDEX
<TABLE>
<S> <C>
3.1* The Company's Articles of Incorporation
3.2* The Company's Bylaws
3.3* Amendment to the Articles of Incorporation dated February 25, 1992
5.1* Opinion of legal counsel
10.1* Line of credit arrangements between the Company and Seattle-First Bank
dated May 1, 1989
10.2* Lease agreement between the Company and 1001 Fourth Avenue Associates
dated January 31, 1989
10.3* Lease agreement between the Company and Sixth Colonial Property
Investments, Inc. dated May 1, 1989
10.4* Lease agreement between the Company and United States Leasing
Corporation dated December 28, 1988
10.5* Agreement between the Company and Computer Research, Inc. dated
December 5, 1988
10.6* Agreement between the Company and Midwest Clearing Corporation dated
May 13, 198
10.7* Agreement between the Company and Jeffrey Pritchard dated November 20,
1990
10.8* Secured demand note collateral agreement between Mary Judith Block and
the Company dated August 25, 1989
10.9* Secured demand note collateral agreement between Howard W. Jones Jr.
and the Company dated July 25, 1989
10.10* Secured demand note collateral agreement between Robert I. Kollack and
the Company dated July 25, 1989
10.11* Secured demand note collateral agreement between Jeffrey J. Pritchard
and the Company dated August 2, 1989
10.12* Master repurchase agreement between Seattle-First National Bank and the
Company
10.13* Secured demand note collateral agreement between Block Foundation, Inc.
and the Company dated September 20, 1991
10.14* Secured demand note collateral agreement between Esther I. Block and
the Company dated September 24, 1991
10.15* Extension of secured demand note collateral agreement between Block
Foundation, Inc. and the Company dated October 22, 1992
10.16* Extension of secured demand note collateral agreement between Esther I.
Block and the Company dated October 22, 1992
10.17* Lease agreement between the Company and Tucker Leasing - Capital
Corporation dated July 31, 1992
10.18* Agreement with G.R. Stuart
10.19* Contract dated March 15, 1995 10.20* Contract dated May 22, 1995
10.21* Contract dated October 27, 1995 10.22* Contract dated October 15, 1996
10.23* National Asset Management Articles of Incorporation
10.24* National Asset Management Bylaws
10.25* SeaFirst Bank amended line of credit
</TABLE>
32
<PAGE>
<TABLE>
<S> <C>
10.26* Olympic Cascade Financial Corporation S-4 filing
10.27* Office lease, Chicago, Illinois
10.28* Office lease, Spokane Washington
10.29* Amended office lease, Chicago, Illinois
10.30* Purchase agreement between shareholders of Friend and the Company
10.31* Purchase agreement between shareholders of WestAmerica and the Company
10.32* Purchase agreement between shareholders of Travis and the Company
10.33* Borrowing agreement between Seattle-First National Bank and the Company
10.34* Note payable agreement
10.35* Note payable agreement
10.36 Note payable agreement
10.37 Sales agreement between Friend and the Company
11. Computation of Earnings per Share
16.1* Change in Certifying Accountant
21. Subsidiaries of Registrant
27. Financial Data Schedule
</TABLE>
*Previously filed.
33
<PAGE>
EXHIBIT 10.36
THIS WARRANT AND ANY SHARES ISSUABLE UPON THE EXERCISE OF THIS WARRANT HAVE
NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE "ACT"),
NOR UNDER ANY STATE SECURITIES LAW AND SUCH SECURITIES MAY NOT BE PLEDGED,
SOLD, ASSIGNED, HYPOTHECATED, OR OTHERWISE TRANSFERRED UNTIL (1) A
REGISTRATION STATEMENT WITH RESPECT THERETO IS EFFECTIVE UNDER THE ACT AND
ANY APPLICABLE STATE SECURITIES LAW OR (2) THE COMPANY RECEIVES AN OPINION OF
COUNSEL TO THE COMPANY OR COUNSEL TO THE HOLDER OF SUCH SECURITIES, WHICH
COUNSEL AND OPINION ARE REASONABLY SATISFACTORY TO THE COMPANY, THAT SUCH
SECURITIES MAY BE PLEDGED, SOLD, ASSIGNED, HYPOTHECATED, OR TRANSFERRED
WITHOUT AN EFFECTIVE REGISTRATION STATEMENT UNDER THE ACT AND APPLICABLE
STATE SECURITIES LAWS.
THE TRANSFER OF THIS WARRANT AND THE SHARES ISSUABLE UPON THE EXERCISE HEREOF
IS RESTRICTED AS DESCRIBED HEREIN.
OLYMPIC CASCADE FINANCIAL CORPORATION
WARRANT FOR THE PURCHASE OF SHARES OF COMMON STOCK,
$.02 PAR VALUE PER SHARE
<PAGE>
No. 4
THIS CERTIFIES that, for $1575 and other good and valuable
consideration, the receipt and sufficiency of which are hereby acknowledged,
LVE, LLC (the "Holder"), is entitled to subscribe for and purchase from
Olympic Cascade Financial Corporation, a Delaware corporation (the
"Company"), upon the terms and conditions set forth herein, at any time or
from time to time, during the period commencing on the date hereof (January
26, 1998) and expiring at 5:00 p.m. on November 31, 2002 (the "Exercise
Period"), 157,500 shares of the Company's common stock, $.02 par value per
share ("the Common Stock"), at a price (the "Exercise Price") per share of
Common Stock equal to $5.34. As used herein, the term "this Warrant" shall
mean and include this Warrant and any Warrant or Warrants hereafter issued as
a consequence of the exercise or transfer of this Warrant in whole or in
part. This Warrant is issued to the original Holder in connection with the
loan by Holder to the Company of $1,000,000. As used herein, the term
"Holder" shall include any transferee to whom this Warrant has been
transferred in accordance with the terms hereof.
The number of shares of Common Stock issuable upon exercise of the
Warrants (the "Warrant Shares") and the Exercise Price may be adjusted from
time to time as hereinafter set forth.
1. Subject to the provisions of Section 2, this Warrant may be exercised
during the Exercise Period, as to the whole or any lesser number of whole
Warrant Shares, by transmission by telecopy of the Election to Exercise,
followed within three (3) business days by the surrender of this Warrant (with
the Election to Exercise attached hereto duly executed) to the Company at its
office at 1001 Fourth Avenue, Suite 2200, Seattle, Washington 98154, or at such
other place as is designated in writing by the Company, together with a
certified or bank cashier's check payable to the order of the Company in an
amount equal to the product of the Exercise Price and the number of Warrant
Shares for which this Warrant is being exercised (the "Aggregate Exercise
Price"). Alternatively, this Warrant may be exercised in the manner set forth
in the preceding sentence by surrendering this Warrant in exchange for the
number of Warrant Shares equal to the product of (x) the number of shares of
Common Stock as to which this Warrant is being exercised, multiplied by (y) a
fraction, the numerator of which is the Market Price (as defined below) of the
shares of Common Stock minus the Exercise Price of the shares of Common Stock
and the denominator of which is the Market Price per share of Common Stock.
Solely for the purposes of this Section 1 Market Price shall be calculated
either (i) on the date on which the form of election attached hereto is deemed
to have been sent to the Company pursuant to this Section 1 ("Notice Date") or
(ii) as the average of the Market Price for each of the five trading days
immediately preceding the Notice Date, whichever of (i) or (ii) results in a
greater Market Price. As used herein, the phrase "Market Price" at any date
shall be deemed to be the last reported sale price, or, in case no such reported
sale takes place
-2-
<PAGE>
on such day, the average of the last reported sale prices for the last three
(3) trading days, in either case as officially reported by the principal
securities exchange on which the Common Stock is listed or admitted to
trading, or, if the Common Stock is not listed or admittedto trading on any
national securities exchange, the average closing sale price as furnished by
the NASD through The Nasdaq Stock Market, Inc. ("Nasdaq") or similar
organization if Nasdaq is no longer reporting such information, or if the
Common Stock is not quoted on Nasdaq, as determined in good faith by
resolution of the Board of Directors of the Company, based on the best
information available to it.
2.
3. Upon each exercise of the Holder's rights to purchase Warrant Shares,
the Holder shall be deemed to be the holder of record of the Warrant Shares
issuable upon such exercise, notwithstanding that the transfer books of the
Company shall then be closed or certificates representing such Warrant Shares
shall not then have been actually delivered to the Holder. Within five (5)
business days after each such exercise of this Warrant and receipt by the
Company of this Warrant, the Election to Exercise and the Aggregate Exercise
Price, the Company shall issue and deliver to the Holder a certificate or
certificates for the Warrant Shares issuable upon such exercise, registered in
the name of the Holder or its designee. If this Warrant should be exercised in
part only, the Company shall, upon surrender of this Warrant for cancellation,
execute and deliver a new Warrant evidencing the right of the Holder to purchase
the balance of the Warrant Shares (or portions thereof) subject to purchase
hereunder.
4.
5. Any Warrants issued upon the transfer or exercise in part of this
Warrant shall be numbered and shall be registered in a warrant register (the
"Warrant Register") as they are issued. The Company shall be entitled to treat
the registered holder of any Warrant on the Warrant Register as the owner in
fact thereof for all purposes and shall not be bound to recognize any equitable
or other claim to or interest in such Warrant on the part of any other person,
and shall not be liable for any registration of transfer of Warrants which are
registered or to be registered in the name of a fiduciary or the nominee of a
fiduciary unless made with the actual knowledge of the general counsel of the
Company that a fiduciary or nominee is committing a breach of trust in
requesting such registration of transfer. In all cases of transfer by an
attorney, executor, administrator, guardian, or other legal representative, duly
authenticated evidence of his or its authority shall be produced. Upon any
registration of transfer, the Company shall deliver a new Warrant or Warrants to
the person entitled thereto. This Warrant may be exchanged, at the option of
the Holder thereof, for another Warrant, or other Warrants of different
denominations, of like tenor and representing in the aggregate the right to
purchase a like number of Warrant Shares (or portions thereof), upon surrender
to the Company or its duly authorized agent. Notwithstanding anything contained
herein to the contrary, the Company shall have no obligation to cause Warrants
to be transferred on its books to any person if, in the opinion of counsel to
the Company, such transfer does not comply with the provisions of the Act and
the rules and regulations thereunder.
-3-
<PAGE>
6.
7. The Company shall at all times reserve and keep available out of its
authorized and unissued Common Stock, solely for the purpose of providing for
the exercise of the rights to purchase all Warrant Shares granted pursuant to
the Warrants, such number of shares of Common Stock as shall, from time to time,
be sufficient therefor. The Company covenants that all shares of Common Stock
issuable upon exercise of this Warrant, upon receipt by the Company of the full
Exercise Price therefor, shall be validly issued, fully paid, nonassessable, and
free of preemptive rights.
8.
9. The Exercise Price in effect at any time and the number and kind of
securities purchasable upon the exercise of this Warrant shall be subject to
adjustment from time to time upon the happening of certain events as follows:
10.
(a) In case the Company shall (i) declare a dividend or make a
distribution on its outstanding shares of Common Stock, in each case, in shares
of Common Stock, (ii) subdivide or reclassify its outstanding shares of Common
Stock into a greater number of shares, or (iii) combine or reclassify its
outstanding shares of Common Stock into a smaller number of shares, the Exercise
Price in effect at the time of the record date for such dividend or distribution
or of the effective date of such subdivision, combination or reclassification
shall be adjusted so that it shall equal the price determined by multiplying the
Exercise Price by a fraction, the denominator of which shall be the number of
shares of Common Stock outstanding after giving effect to such action, and the
numerator of which shall be the number of shares of Common Stock outstanding
immediately prior to such action. Such adjustment shall be made successively
whenever any event listed above shall occur.
(b)
(c) In the event that the Company shall sell or issue at any time
after the date of issuance of this Warrant and prior to its termination, shares
of Common Stock at a consideration per share less than the Exercise Price, then
the Exercise Price shall be adjusted to a new Exercise Price (calculated to the
nearest cent) determined by dividing:
(d)
(i) an amount equal to (A) the total number of shares of
Common Stock outstanding on the date of issuance of this
Warrant multiplied by the Exercise Price in effect on the
date of issuance of this Warrant (subject, however, to
adjustment in the manner set forth in this Section 5), plus
(B) the aggregate of the amount of all consideration, if
any, received by the Company for the issuance or sale of
shares of Common Stock since the date of issuance of this
Warrant, by
(ii) the total number of shares of Common Stock outstanding
immediately after such issuance or sale.
-4-
<PAGE>
In no event shall any such adjustment be made pursuant to this Section 5(b)
if it would increase the Exercise Price in effect immediately prior to such
adjustment. Upon each adjustment of the Exercise Price pursuant to this
Section 5(b), the holder of this Warrant shall thereafter be entitled to
purchase, at the Exercise Price resulting from such adjustment, the number of
Warrant Shares obtained by multiplying the Exercise Price in effect
immediately prior to such adjustment by the number of Warrant Shares
purchasable pursuant hereto immediately prior to such adjustment, and
dividing the product thereof by the Exercise Price resulting from such
adjustment. In addition, in no event shall the issuance of shares of Common
Stock pursuant to options and/or warrants which are outstanding as of the
date of the issuance of this Warrant trigger the dilution provisions of this
Section 5(b).
(a) Upon each adjustment of the Exercise Price pursuant to the
provisions of this Section 5, the number of Warrant Shares issuable upon the
exercise at the adjusted Exercise Price of each Warrant shall be adjusted to the
nearest number of whole shares of Common Stock by multiplying a number equal to
the Exercise Price in effect immediately prior to such adjustment by the number
of Warrant Shares issuable upon exercise of this Warrant immediately prior to
such adjustment and dividing the product so obtained by the adjusted Exercise
Price.
(b)
(c) For the purpose of this Warrant, the term "Common Stock" shall
mean (i) the class of stock designated as Common Stock in the Articles of
Incorporation of the Company as amended as of the date hereof, or (ii) any other
class of stock resulting from successive changes or reclassifications of such
Common Stock consisting solely of changes in par value, or from par value to no
par value, or from no par value to par value.
(d)
(e) In case of any consolidation of the Company with, or merger of
the Company into, another corporation (other than a consolidation or merger
which does not result in any reclassification or change of the outstanding
Common Stock), the corporation formed by such consolidation or merger shall
execute and deliver to the Holder a supplemental warrant agreement providing
that the Holder of this Warrant shall have the right thereafter (until the
expiration of such Warrant) to receive, upon exercise of such Warrant, the kind
and amount of shares of stock and other securities and property receivable upon
such consolidation or merger by a holder of the number of shares of Common Stock
for which such Warrant might have been exercised immediately prior to such
consolidation, merger, sale or transfer. Such supplemental warrant agreement
shall provide for adjustments which shall be identical to the adjustments
provided in this Section 5. The above provision of this subsection shall
similarly apply to successive consolidations or mergers.
(f)
(g) No adjustment in the number of Warrant Shares shall be required
if such adjustment is less than one; PROVIDED, HOWEVER, that any adjustments
which by reason of this
-5-
<PAGE>
Section 5(f) are not required to be made shall be carried forward and taken
into account in any subsequent adjustment. All calculations under this
Section 5 shall be made to the nearest one-thousandth of a share.
(h)
(i) In any case in which this Section 5 shall require that an
adjustment in the number of Warrant Shares be made effective as of a record
date for a specified event, the Company may elect to defer, until the
occurrence of such event, issuing to the Holder, if the Holder exercised this
Warrant after the record date, the Warrant Shares, if any, issuable upon such
exercise over and above the Warrant Shares, if any, issuable upon such
exercise prior to such adjustment; PROVIDED, HOWEVER, that the Company shall
deliver to the Holder a due bill or other appropriate instrument evidencing
the Holder's right to receive such additional Warrant Shares upon the
occurrence of the event requiring such adjustment.
(j) Whenever there shall be an adjustment as provided in this
Section 5, the Company shall promptly cause written notice thereof to be sent
by certified mail, postage prepaid, to the Holder, at its address as it shall
appear in the Warrant Register, which notice shall be accompanied by an
officer's certificate setting forth the number of Warrant Shares issuable
upon the exercise of this Warrant if such Warrant were exercisable on the
date of such notice, and setting forth a brief statement of the facts
requiring such adjustment and the computation thereof, which officer's
certificate shall be conclusive evidence of the correctness of any such
adjustment absent manifest error.
(k)
2. In case at any time the Company shall propose
3.
(a) to pay any dividend or make any distribution on shares of
Common Stock in shares of Common Stock or make any other distribution (other
than regularly scheduled cash dividends which are not in a greater amount per
share than the most recent such cash dividend) to all holders of Common
Stock; or
(b)
(c) to issue any rights, warrants, or other securities to all
holders of Common Stock entitling them to purchase any additional shares of
Common Stock or any other rights, warrants, or other securities; or
(d)
(e) to effect any reclassification or change of outstanding shares
of Common Stock, or any consolidation or merger, described in Section 7; or
(f)
(g) to effect any liquidation, dissolution, or winding-up of the
Company,
(h)
(i) then, and in any one or more of such cases, the Company shall give
written notice thereof, by registered mail, postage prepaid, to the Holder at
the Holder's address as it shall appear in the Warrant Register, mailed at
least 15 days prior to (i) the date as of which the holders of record of
shares of Common Stock to be entitled to receive any such dividend,
distribution,
-6-
<PAGE>
rights, warrants, or other securities are to be determined, or (ii) the date
on which any such reclassification, change of outstanding shares of Common
Stock, consolidation, merger, liquidation, dissolution, or winding-up is
expected to become effective, and the date as of which it is expected that
holders of record of shares of Common Stock shall be entitled to exchange
their shares for securities or other property, if any, deliverable upon such
reclassification, change of outstanding shares, consolidation, merger, sale,
lease, conveyance of property, liquidation, dissolution, or winding-up.
(j)
4. The issuance of any shares or other securities upon the exercise of
this Warrant, and the delivery of certificates or other instruments
representing such shares or other securities, shall be made without charge to
the Holder for any tax or other charge in respect of such issuance, other
than applicable transfer taxes. The Company shall not, however, be required
to pay any tax which may be payable in respect of any transfer involved in
the issue and delivery of any certificate in a name other than that of the
Holder and the Company shall not be required to issue or deliver any such
certificate unless and until the person or persons requesting the issue
thereof shall have paid to the Company the amount of such tax or shall have
established to the satisfaction of the Company that such tax has been paid.
5.
6. (a) If, at any time during the Exercise Period, the Company
proposes to register any of its securities under the Act (other than on a
Form S-4 or a Form S-8 or successor form thereto) it will give written notice
by registered mail, at least thirty (30) days prior to the filing of each
such registration statement, to the Holders of this Warrant or the Warrant
Shares of its intention to do so. If any of the Holders of this Warrant or
the Warrant Shares notify the Company within twenty (20) days after mailing
of any such notice of its or their desire to include any such securities in
such proposed registration statement, the Company shall afford such Holders
the opportunity to have any such Warrant Shares registered under such
registration statement. In the event that the managing underwriter for said
offering advises the Company in writing that in its opinion the number of
securities requested to be included in such registration exceeds the number
which can be sold in such offering without causing a diminution in the
offering price or otherwise adversely affecting the offering, the Company
will include in such registration (a) FIRST, the securities the Company
proposes to sell, (b) SECOND, the securities held by entities that made have
demand registration rights, (c) THIRD, the Warrant Shares requested to be
included in such registration which in the opinion of such underwriter can be
sold, PRO RATA among those persons having registration rights similar those
set forth in this Section 8 who requested such registration, and (d) FOURTH,
other securities requested to be included in such registration.
Notwithstanding the provisions of this Section 8, the Company shall have the
right at any time after it shall have given written notice pursuant to this
SECTION 9.2 (irrespective of whether a written request for inclusion of any
such securities shall have been made) to elect not to file any such proposed
registration statement or to withdraw the same after the filing but prior to
the effective date thereof.
-7-
<PAGE>
(b) At any time during the one (1) year period commencing on the
date of the issuance of this Warrant, the Holder shall have the right,
exercisable by written notice to the Company, to have the Company prepare and
file with the Securities and Exchange Commission, on one occasion, a
registration statement and such other documents, including a prospectus, as
may be necessary in the opinion of both counsel for the Company and counsel
for the Holder, in order to comply with the provisions of the Act, so as to
permit a public offering and sale by the Holder. The Company shall use its
commercially reasonable efforts to have such registration statement filed
with and declared effective by the Commission within one hundred twenty (120)
days of receipt of the notice from the Holder.
1. Unless registered as contemplated by Section 8 hereof, the Warrant
Shares issued upon exercise of the Warrants shall be subject to a stop
transfer order and the certificate or certificates evidencing such Warrant
Shares shall bear the following legend:
"THE SHARES REPRESENTED BY THIS CERTIFICATE HAVE BEEN NOT
REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED. SUCH
SHARES MAY NOT BE OFFERED OR SOLD EXCEPT PURSUANT TO AN EFFECTIVE
REGISTRATION STATEMENT UNDER SUCH ACT, OR AN EXEMPTION FROM
REGISTRATION UNDER SUCH ACT. SUCH SHARES ARE SUBJECT TO CERTAIN
RESTRICTIONS ON TRANSFER CONTAINED IN A WARRANT, DATED JANUARY
26, 1998, A COPY OF WHICH IS ON FILE WITH THE SECRETARY OF THE
COMPANY."
1. Upon receipt of evidence satisfactory to the Company of the loss,
theft, destruction, or mutilation of any Warrant (and upon surrender of any
Warrant if mutilated), and upon reimbursement of the Company's reasonable
incidental expenses and, if reasonably requested, an indemnity reasonably
acceptable to the Company, the Company shall execute and deliver to the
Holder thereof a new Warrant of like date, tenor, and denomination.
2.
3. The Holder of any Warrant shall not have, solely on account of such
status, any rights of a stockholder of the Company, either at law or in equity,
or to any notice of meetings of stockholders or of any other proceedings of the
Company, except as provided in this Warrant.
4.
5.
-8-
<PAGE>
6. This Warrant shall be construed in accordance with the laws of the
State of Delaware applicable to contracts made and performed within such
State, without regard to principles of conflicts of law.
7.
Dated: January 26, 1998
OLYMPIC CASCADE FINANCIAL CORPORATION
By:
Name: Steven A. Rothstein
Title: Chairman
-9-
<PAGE>
FORM OF ASSIGNMENT
(To be executed by the registered holder if such holder desires to transfer
the attached Warrant.)
FOR VALUE RECEIVED, _______________________________________________
hereby sells, assigns, and transfers unto __________________ a Warrant to
purchase __________ shares of Common Stock, $.02 par value per share, of
Olympic Cascade Financial Corporation (the "Company"), together with all
right, title, and interest therein, and does hereby irrevocably constitute
and appoint __________________________________ attorney to transfer such
Warrant on the books of the Company, with full power of substitution.
Dated: _________________________________
Signature ______________________
Signature Guaranteed:
NOTICE
The signature on the foregoing Assignment must correspond to the
name as written upon the face of this Warrant in every particular, without
alteration or enlargement or any change whatsoever.
-10-
<PAGE>
To: Olympic Cascade Financial Corporation
1001 Fourth Avenue
Suite 2200
Seattle, Washington 98154
ELECTION TO EXERCISE
The undersigned hereby exercises his or its rights to purchase _______
Warrant Shares covered by the within Warrant and tenders payment herewith
[in the amount of $_________] [in the form of ________ number of Warrant
Shares] in accordance with the terms thereof, certifies that he owns this
Warrant free and clear of any and all claims, liens and/or encumbrances and
requests that certificates for such securities be issued in the name of,
and delivered to:
(Print Name, Address and Social Security
or Tax Identification Number)
and, if such number of Warrant Shares shall not be all the Warrant Shares
covered by the within Warrant, that a new Warrant for the balance of the
Warrant Shares covered by the within Warrant be registered in the name of,
and delivered to, the undersigned at the address stated below.
Dated: ___________________ Name
(Print)
Address:
(Signature)
-11-
<PAGE>
EXHIBIT 10.36A
PROMISSORY NOTE
$1,000,000 Seattle, Washington
January 26, 1998
FOR VALUE RECEIVED, the undersigned, Olympic Cascade Financial
Corporation, a Delaware corporation having an address at 1001 Fourth Avenue,
Suite 2200, Seattle, Washington, 98154, ("Maker"), promises to pay to the
order of LVE, LLC, a New York limited liability company ("Payee") at c/o
Douglas Elliman Gibbons & Ives, 575 Madison Avenue, New York, New York 10022,
or at such other place as Payee may from time to time designate by written
notice to Maker, in lawful money of the United States, the sum of One Million
Dollars ($1,000,000), plus interest from the date of this Note on the unpaid
balance. All principal and interest is to be paid as set forth below. Maker
further agrees as follows:
SECTION 1. INTEREST RATE.
(a) Interest shall accrue at a rate equal to eight percent (8%) per
annum.
(b) Interest shall be computed on the basis of a year of 360 days for
the actual number of days elapsed. After maturity (whether by acceleration
or otherwise, and before as well as after judgment), all unpaid principal and
interest shall bear interest until it is paid at
<PAGE>
five percent (5%) in excess of the rate otherwise applicable to the unpaid
balance under this Note.
SECTION 2. PAYMENTS.
1. Principal shall be due and payable in twenty-four equal
installments (each a "Principal Payment") commencing on December 31, 2000 and
continuing on the last day of each month (each a "Principal Payment Date")
through November 30, 2002 ("Maturity") unless Maker makes demand as set forth
pursuant to Section 2(c) below.
(a) During the first three years of this Note accrued interest shall
be payable in arrears on a quarterly calendar basis commencing March 30,
1998. Thereafter, accrued interest shall be paid on each Principal Payment
Date.
(b) If Maker completes one or more public offerings or private
placements of debt or equity securities, having gross proceeds in the
aggregate of at least $5,000,000 (a "Financing") Maker shall give notice to
Payee within five (5) days of the closing of such Financing. Payee shall
have twenty-five (25) days from receipt of such notice to demand that the
principal and all accrued interest under this Note be then due and payable.
(c) Maker shall have the right to prepay this Note in full or in part
at any time without penalty.
SECTION 3. DEFAULT.
It shall be an event of default ("Event of Default"), and the
entire unpaid principal of this Note, together with accrued interest, shall
become immediately due and payable, at the election of Payee, upon the
occurrence of any of the following events:
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(a) any failure on the part of Maker to make any payment when due,
whether by acceleration or otherwise, and the continuation of such failure
for a period of five (5) business days thereafter;
(b) any failure on the part of Maker to keep or perform any of the
material provisions (other than payment) of this Note or any amendment
thereof, which failure is not cured within ten (10) days;
(c) any failure on the part of Maker to pay any material debt within
sixty (60) days of its due date (except where contested in good faith);
(d) Maker shall commence (or take any action for the purpose of
commencing) any proceeding under any bankruptcy, reorganization, arrangement,
readjustment of debt, moratorium or similar law or statute;
(e) a proceeding shall be commenced against Maker under any bankruptcy,
reorganization, arrangement, readjustment of debt, moratorium or similar law or
statute and relief is ordered against it, or the proceeding is controverted but
is not dismissed within sixty (60) days after the commencement thereof;
(f) Maker consents to or suffers the appointment of a receiver,
trustee or custodian to any substantial part of its assets that is not
vacated within thirty (30) days;
(g) Maker consents to or suffers an attachment, garnishment,
execution or other legal process against any of its assets that is not
released within thirty (30) days;
SECTION 4. SUBORDINATION.
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This note shall be subordinated to Maker's loan agreement with
Seafirst Bank, dated September 16, 1997, in the principal amount of $900,000
(the "Seafirst Loan"); provided, however, that Maker may make all payments of
interest and principal hereunder if no event of default under the Seafirst
Loan has occurred and is continuing at the time of such payments. Maker
shall not incur any other indebtedness which is senior to this Note without
the prior written consent of the Payee.
SECTION 5. JURISDICTION.
Maker irrevocably submits to the exclusive jurisdiction of the
courts of the State of New York, and of any federal court located in the
State of New York, in connection with any action or proceeding arising out of
or relating to, or a breach of, this Note. Maker agrees that such court may
award reasonable legal fees and expenses to the prevailing party.
SECTION 6. WAIVERS.
1. Maker waives demand, presentment, protest, notice of protest, notice
of dishonor, and all other notices or demands of any kind or nature with respect
to this Note.
(a) Maker agrees that a waiver of rights under this Note shall not be
deemed to be made by Payee unless such waiver shall be in writing, duly
signed by Payee, and each such waiver, if any, shall apply only with respect
to the specific instance involved and shall in no way impair the rights of
Payee or the obligations of Maker in any other respect at any other time.
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(b) Maker agrees that in the event Payee demands or accepts partial
payment of this Note, such demand or acceptance shall not be deemed to
constitute a waiver of any right to demand the entire unpaid balance of this
Note at any time in accordance with the terms of this Note.
(c) Maker agrees and acknowledges that Payee may disclose to any
other Obligor confidential information relating to this Note, and waives, to
the full extent permitted by law, any right to privacy or similar right under
federal or state laws which Maker may have with respect to such disclosures.
(d) In any action or proceeding arising out of or relating to this
Note, Maker waives (to the full extent permitted by law) all right to a trial
by jury or to plead as a defense any statute of limitations or any other
similar law or equitable doctrine.
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SECTION 7. COLLECTION COSTS.
Maker will upon demand pay to Payee the amount of any and all
reasonable costs and expenses, including, without limitation, the reasonable
fees and disbursements of its counsel (whether or not suit is instituted) and
of any experts and agents, which Payee may incur in connection with the
following: (i) the enforcement of this Note; and (ii) the enforcement of
payment of all obligations of Maker by any action or participation in, or in
connection with, a case or proceeding under Chapters 7, 11, or 13 of the
Bankruptcy Code, or any successor statute thereto.
SECTION 8. ASSIGNMENT OF NOTE.
Maker may not assign or transfer this Note or any of its
obligations under this Note in any manner whatsoever (including, without
limitation, by the consolidation or merger of Maker, if a corporation, with
or into another corporation) without the prior written consent of Payee. The
Note may be assigned at any time by Payee. Maker agrees not to assert
against any assignee of this Note any claim or defense which Maker may have
against any assignor of this Note.
SECTION 9. MISCELLANEOUS.
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1. This Note may be altered only by prior written agreement signed
by the party against whom enforcement of any waiver, change, modification, or
discharge is sought. This Note may not be modified by an oral agreement,
even if supported by new consideration.
(a) This Note shall be governed by, and construed in accordance with,
the laws of the State of New York, without giving effect to such
jurisdiction's principles of conflict of laws.
(b) Subject to Section 8, the covenants, terms, and conditions
contained in this Note apply to and bind the heirs, successors, executors,
administrators and assigns of the parties.
(c) This Note constitute a final written expression of all the terms
of the agreement between the parties regarding the subject matter hereof, are
a complete and exclusive statement of those terms, and supersede all prior
and contemporaneous agreements, understandings, and representations between
the parties. If any provision or any word, term, clause, or other part of
any provision of this Note shall be invalid for any reason, the same shall be
ineffective, but the remainder of this Note shall not be affected and shall
remain in full force and effect.
(d) The singular includes the plural. If more than one Maker executes
this Note, the term "Maker" shall be deemed to refer to each of the undersigned
Makers as well as to all of them, and their obligations and agreements under
this Note shall be joint and several. If any of the undersigned is a married
person, recourse may be had against his or her separate
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property for all of his or her obligations under this Note. The term
"Obligor" shall be deemed to refer to each Maker, endorser, guarantor, or
surety of this Note as well as to all of them. The term "Payee" shall
include the initial party to whom payment is designated to be made and, in
the event of an assignment of this Note, the successor assignee or assignees,
and, as to each successive additional assignment, such successor assignee or
assignees.
(e) All notices, consents, or other communications provided for in
this Note or otherwise required by law shall be in writing and may be given
to or made upon the respective parties at the addresses set forth in the
preamble hereof. Such addresses may be changed by notice given as provided
in this subsection. Notices shall be effective upon the date of receipt;
provided, however, that a notice (other than a notice of a changed address)
sent by certified or registered U.S. mail, with postage prepaid, shall be
presumed received not later than three (3) business days following the date
of sending.
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(f)
(g) Time is of the essence under this Note.
IN WITNESS WHEREOF, Maker has executed this Note effective as of the
date first set forth above.
OLYMPIC CASCADE FINANCIAL CORPORATION
By:_____________________________________
Steven A. Rothstein
Chairman
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EXHIBIT 10.37
STOCK PURCHASE AGREEMENT
between
OLYMPIC CASCADE FINANCIAL CORPORATION
and
LHF HOLDCO, LLC
Dated: as of August 31, 1998
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STOCK PURCHASE AGREEMENT
This STOCK PURCHASE AGREEMENT (this "Agreement") dated as of August 31,
1998, is entered into by and among Olympic Cascade Financial Corporation, a
Delaware corporation ("Olympic") and LHF HoldCo, LLC, a California limited
liability company ("Purchaser").
RECITALS
WHEREAS, Olympic a holding company with wholly owned subsidiaries who
are broker-dealers duly registered with the Securities and Exchange
Commission (the "SEC") and are members in good standing with the National
Association of Securities Dealers, Inc. (the "NASD") engaged in the general
securities business;
WHEREAS, L.H. Friend, Weinress, Frankson & Presson, Inc., a California
corporation ("LHF") is a broker-dealer duly registered with the SEC and is a
member in good standing with the NASD engaged in the general securities
business;
WHEREAS, pursuant to that certain Exchange Agreement and Plan of
Reorganization (the "Exchange Agreement") executed by and among Olympic, LHF
and shareholders of LHF (the "Exchange Shareholders") on February 12, 1997,
Olympic acquired all of the issued and outstanding shares of capital stock of
LHF;
WHEREAS, Olympic desires to sell and transfer to Purchaser, and
Purchaser desires to purchase from Olympic all of the issued and outstanding
shares of capital stock of LHF on the terms and provisions hereof; and
WHEREAS, Purchaser desires to transfer to Olympic, and Olympic desires
to acquire from Purchaser, 55,503 shares of issued and outstanding capital
stock of Olympic on the terms and provisions hereof.
NOW, THEREFORE, in consideration of the mutual covenants and
undertakings contained herein, and other good and valuable consideration, the
receipt and sufficiency of which are hereby acknowledged, and subject to and
on the terms and conditions herein set forth, the parties hereto agree as
follows:
ARTICLE I
PURCHASE AND SALE OF STOCK OF LHF
1.1 SALE AND TRANSFER OF STOCK OF LHF. Subject to the terms and
conditions herein stated and in reliance upon the representations and
warranties herein set forth, at the Closing (as hereinafter defined in
Section 1.4), Olympic agrees to transfer, convey, assign and deliver to
Purchaser all of the shares of capital stock of LHF (collectively, the "LHF
Shares"), free and clear of all liens, claims, encumbrances, pledges,
options, security interests and any other adverse interests. On the Closing
Date, Olympic shall deliver to Purchaser all certificates representing the
LHF Shares duly endorsed or accompanied by a stock power duly executed in
form for transfer, which LHF Shares shall be duly authorized, fully paid and
non-assessable.
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1.2 CONSIDERATION FROM PURCHASER.
1.2.1 OLYMPIC SHARES. In consideration of Olympic's sale of the
LHF Shares to Purchaser, Purchaser covenants and agrees to deliver to Olympic
at Closing, 55,503 shares of Olympic's capital stock owned by Purchaser
(collectively, the "Olympic Shares"), free and clear of all liens, claims,
encumbrances, pledges, options, security interests and any other adverse
interests. On the Closing Date, Purchaser shall deliver to Olympic all
certificates representing the Olympic Shares duly endorsed or accompanied by
a stock power duly executed in form for transfer, which Olympic Shares shall
be duly authorized, fully paid and non-assessable.
1.2.2 ADDITIONAL CONSIDERATION.
(a) For the period of one (1) year after Closing,
Purchaser will provide Olympic real time access to all of the LHF
research to be distributed to a central entity. Olympic shall pay all
costs and expenses incurred by Purchaser associated with document
production, handling, copying and shipping in providing such access to
Olympic, in excess of twenty-four sets of such research materials.
(b) For the period of one (1) year after Closing,
Purchaser agrees to utilize Caravelle Travel for LHF's business travel
needs, provided that Caravelle Travel is the lowest cost provider of any
business travel contemplated by LHF and Caravelle Travel provides
services of a quality comparative to other travel agents. In return for
utilizing Caravelle Travel, Purchaser shall be entitled to receive, on a
pro rata basis calculated on LHF's utilization of Caravelle Travel,
those travel benefits and advantages distributed by Caravelle Travel to
Olympic based on LHF's utilization of Caravelle Travel.
(c) In further consideration for the sale of the LHF
Shares, Purchaser shall transfer, convey and assign to Olympic,
Purchaser's right, title and interest in and to certain assets as
specifically set forth on Exhibit A.
(d) For as long as Olympic remains party to the real
property lease governing that certain office space located at 3333
Michelson Drive, Suite 650, Irvine, CA 92612, Purchaser grants Olympic a
three (3%) percent equity ownership in Purchaser (and any
successor-in-interest of Purchaser) (the "HoldCo Shares") as of the
Closing Date.
1.3 CONSIDERATION FROM OLYMPIC. In further consideration of
Purchaser's transfer of the Olympic Shares to Olympic, Olympic covenants and
agrees to terminate and discharge any and all outstanding liabilities due and
owing to Olympic by LHF at Closing.
1.4 CLOSING. The closing of the transactions contemplated by this
Agreement (the "Closing") shall take place on August 31, 1998 or at such time
and place agreed upon by the parties hereto at the offices of Stradling Yocca
Carlson & Rauth, 660 Newport Center Drive, Suite 1600, Newport Beach,
California, on the first business day following the satisfaction or waiver of
all conditions to the obligations of the parties to consummate the
transactions contemplated hereby, or at such other time and date as the
parties hereto shall by written instrument designate, but in no event later
than September 15, 1998. Such time and date are herein referred to as the
"Closing Date."
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ARTICLE II
TRANSACTIONS PRECEDING THE CLOSING
2.1 TRANSFER OF ASSETS. Immediately prior to Closing, LHF shall
transfer as a distribution $500,000 by wire transfer to Olympic.
2.2 RELEASE AND ASSIGNMENT OF INDEMNIFICATION RIGHTS. Immediately
prior to Closing, Olympic hereby assigns, grants, conveys, transfers and
delivers to Purchaser Olympic's right to indemnification for the Exchange
Shareholder's surviving representations, warranties, covenants and agreements
as set forth in Sections 2.1, 2.3, 2.12 and 3.1 of the Exchange Agreement, a
copy of which is attached hereto as EXHIBIT B.
ARTICLE III
REPRESENTATIONS OF OLYMPIC
Olympic hereby represents and warrants to Purchaser that the
representations and warranties set forth below are true and accurate in all
material respects as of the date when made except as affected by the
transactions contemplated by this Agreement.
3.1 ORGANIZATION AND AUTHORITY OF OLYMPIC. Olympic (i) is a
corporation duly organized, validly existing and in good standing under the
laws of the State of Delaware, (ii) has all requisite corporate power and
authority to carry on its business as it is now being conducted, and (iii)
has taken all corporate action necessary in order to execute, deliver and
perform its obligations under this Agreement. This Agreement has been duly
executed and delivered by the Company and is a legal, valid and binding
obligation of the Company, enforceable in accordance with its terms, subject
to bankruptcy, insolvency, reorganization, moratorium and similar laws of
general applicability relating to or affecting creditors' rights and to
general equity principles.
3.2 NO CONFLICTS AND QUALIFICATION.
3.2.1 IN GENERAL. The execution, delivery and performance of
this Agreement by Olympic does not, and the consummation by Olympic of the
transactions contemplated hereby will not, constitute or result in (i) a
breach or violation of, or a default under, the certificate of incorporation
or bylaws of Olympic, (ii) a breach of, a default under, the acceleration of
any obligations or the creation of a lien, pledge, security interest or other
encumbrance on the assets of Olympic (with or without notice, lapse of time
or both) pursuant to, any contracts binding upon Olympic, or any change in
the rights or obligations of any party thereunder, or (iii) a violation of
any applicable law or governmental or non-governmental permit or license to
which Olympic is subject, except, in the case of clause (ii) or (iii) above,
for any breach, violation, default, acceleration, creation or change that,
individually or in the aggregate, is not reasonably likely to materially
delay or impair the ability of Olympic to consummate the transactions
contemplated by this Agreement. Olympic is duly qualified or licensed to do
business and is in good standing in each jurisdiction in which the conduct of
its business or the ownership or leasing of its assets makes such
qualification or licensing necessary, other than in jurisdictions where the
failure to be qualified or licensed, individually or in the aggregate, is not
reasonably likely to have a material adverse effect on the financial,
condition, assets, or results of operations of Olympic, taken as a whole.
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3.2.2 INVESTOR RIGHTS AGREEMENT. Prior to or commensurate with
the execution, delivery and performance of this Agreement, Olympic fulfilled
all obligations and requirements under Sections 8 and 9 of the Investor
Rights Agreement (as defined below) to sell the LHF Shares to Purchaser. The
Investor Rights Agreement is acknowledge to have been executed by Olympic in
conjunction with the Exchange Agreement; a copy of the Investor Rights
Agreement is attached hereto as EXHIBIT C.
3.2.3 OLYMPIC SHARES. Olympic's purchase of the Olympic Shares
from Purchaser will not, constitute or result in (i) a breach or violation
of, or a default under, the certificate of incorporation or bylaws of
Olympic, or (ii) a violation of any applicable law or governmental or
non-governmental permit or license to which Olympic is subject.
3.3 ORGANIZATION AND CAPITALIZATION OF LHF. LHF (i) is a corporation
duly organized, validly existing and in good standing under the laws of the
State of California, and (ii) has all requisite corporate power and authority
to carry on its business as it is now being conducted. The authorized
capital stock of LHF consists of 100,000 shares of common stock, no par
value, of which 18,250 shares are issued and outstanding. The LHF Shares
constitute one hundred percent (100%) of the issued and outstanding shares of
stock of all classes of LHF. All outstanding shares have been duly authorized
and validly issued and are fully paid and non-assessable.
3.4 OWNERSHIP OF LHF SHARES. Olympic owns all of the issued and
outstanding capital stock of LHF. There are no preemptive rights or other
outstanding rights, options, warrants, conversion rights, stock appreciation
rights, redemption rights, agreements, arrangements or commitments to issue
or sell any shares or any securities of LHF or obligations convertible or
exchangeable into or exercisable for, or giving any Person (as defined below)
the right to subscribe for or acquire any securities of LHF, and no
securities or obligations evidencing such rights are authorized, issued or
outstanding.
3.5 GOVERNING CORPORATE DOCUMENTS OF LHF. Since the Closing of the
Exchange Agreement, Olympic has not caused LHF to amend its articles of
incorporation or bylaws, nor has any Certificate of Amendment of Articles of
Incorporation been filed with the Secretary of State of California on behalf
of LHF.
3.6 FINANCIAL STATEMENTS AND NO MATERIAL CHANGES. Olympic has had
furnished to it from LHF copies of the statement of financial condition of
LHF as at July 31, 1998 (the "Balance Sheet") and the related statements of
income, changes in shareholders' equity, changes in liabilities subordinated
to the claims of general creditors, and cash flows for the ten (10) months
ended July 31, 1998 (the "Financial Statements"). Since July 31, 1998 (the
"Balance Sheet Date"), Olympic is not aware of any material adverse change in
the assets, liabilities, business, condition (financial or otherwise), or the
results of operations of LHF, except as contemplated by this Agreement.
3.7 NO CHANGES SINCE THE BALANCE SHEET DATE. Since the Balance Sheet
Date (a) except as specifically stated on SCHEDULE 3.14 or contemplated by
this Agreement, Olympic acknowledges and represents that it has not caused
LHF to (i) incur any liability or obligation of any nature (whether accrued,
absolute, contingent or otherwise), except in the ordinary course of
business, (ii) permitted any of the material assets of LHF (the "Assets") to
be subjected to any mortgage, pledge, lien, security interest, encumbrance,
restriction or
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charge of any kind, (iii) sold, transferred or otherwise disposed of any of
the Assets except in the ordinary course of business, (iv) made any
commitment for any capital expenditure, except in the ordinary course of
business, (v) written down the value of any work in process except
write-downs in the ordinary course of business, none of which, individually
or in the aggregate, is material to LHF, (vi) granted any increase in the
rate of wages, salaries, bonuses or other remuneration of any employee who
after giving effect to such increase or prior thereto receives compensation
at an annual rate of Fifty Thousand Dollars ($50,000) or more, (vii) made any
change in any method of accounting or auditing practice, (viii) otherwise
conducted its business or entered into any transaction, except in the usual
and ordinary manner and in the ordinary course of its business, (ix) amended
or terminated any agreement which is material to the business of LHF, (x)
renewed, extended or modified any lease of real property, or except in the
ordinary course of business, any lease of personal property, or (xi) agreed,
whether or not in writing, to do any of the foregoing, and (b) there has been
no material adverse change in the assets, liabilities, business, condition
(financial or otherwise), or the results of operations of LHF.
3.8 BOOKS AND RECORDS. Olympic acknowledges and represents that to the
extent that it keeps the accounts, books, ledgers and official and other
records material to the business of LHF, all such accounts, books, ledgers
and official and other records have been properly and accurately kept and
completed in all material respects, and there are no material inaccuracies or
discrepancies of any kind contained or reflected therein.
3.9 TITLE TO PROPERTIES: ENCUMBRANCES. Olympic makes no claim on nor
has Olympic granted any other party an interest in any Assets of LHF other
than the distribution provided for in Section 2.1 and the interests described
in Exhibit A.
3.10 LEASES. Olympic has no knowledge of any real property leases and
equipment leases to which LHF is a party (as sublessee, lessee or lessor),
except as set forth on SCHEDULE 3.10. As to those leases on SCHEDULE 3.10 to
which Olympic is a party, Olympic has no knowledge that each lease is not in
full force and effect; that all rents and additional rents due to date on
each such lease have not been paid, or that any waiver, indulgence or
postponement of the lessee' s or sublessee's obligations thereunder has been
granted by the lessor. Olympic has no knowledge that any consent of any
party to any leases listed on SCHEDULE 3.10 is required to consummate this
Agreement.
3.11 CONTRACTS. Olympic has neither caused nor is aware that LHF is a
party to or bound by (a) any agreement, contract or commitment relating to
any bonus, deferred compensation, pension, profit sharing, stock option,
employee stock purchase, retirement or other employee benefit plan, (b) any
agreement, indenture or other instrument which contains restrictions with
respect to payment of dividends or any other distribution in respect of its
capital stock, (c) any agreement, contract or commitment relating to capital
expenditures, (d) any loan or advance to, or investment in, any other person
or entity or any agreement, contract or commitment relating to the making of
any such loan advance or investment, (e) any guarantee or other contingent
liability in respect of any indebtedness or obligation of any other person or
entity (other than the endorsement of negotiable instruments for collection
in the ordinary course of business), (f) any management service, employment,
consulting or any other similar type of contract, (g) any agreement, contract
or commitment which involves Fifty Thousand Dollars ($50,000) or more and is
not cancelable without penalty within thirty
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(30) days, (h) any agreement with any officer or director of LHF, or (i) any
contract with Olympic as shareholder.
3.12 LITIGATION. Olympic has not received notice of any action, suit,
proceeding at law or in equity by any person, or any arbitration or any
administrative or other proceeding by or before any governmental or other
instrumentality or agency, pending or threatened, against or affecting LHF,
or its officers, directors, employees, registered representatives or
registered principals, or any of its properties or rights, which, if
adversely determined would have a material adverse effect on the assets,
liabilities, business, condition (financial or otherwise), or the results of
operations of LHF. Olympic knows of no judgment, order or decree entered in
any lawsuit or proceeding to which LHF is subject.
3.13 TAX MATTERS.
3.13.1 For the period commencing on March 1, 1997 through the
Closing, Olympic acknowledges and represents that (i) all Tax Returns that
are required to be filed by or with respect to LHF or to Olympic as it
relates to LHF have been duly filed, or, where not so filed, are covered
under an extension that has been obtained therefor, (ii) all such Tax Returns
are true, complete and correct, (iii) all Taxes due and payable by LHF or
Olympic as it relates to LHF have been paid in full, (iv) none of the Tax
Returns referred to in this Section 3.13 have been examined by the IRS or the
appropriate state, local or foreign taxing authority, (v) all deficiencies
asserted or assessments made as a result of such examinations have been paid
in full, (vi) no issues that have been raised by the relevant taxing
authority in connection with the examination of any of the Tax Returns
referred to in clause (i) are currently pending, (vii) no waivers of statutes
of limitation have been given by or requested with respect to any Taxes of
LHF or Olympic as it relates to LHF, (viii) there is no claim or assessment
threatened against LHF or Olympic as it relates to LHF, (ix) LHF or Olympic
as it relates to LHF have withheld and timely paid to the appropriate taxing
authority the required amounts in compliance with all tax withholding
provisions of applicable federal, state, local and foreign laws (including,
without limitation, income, social security and employment tax withholding),
(x) neither LHF nor Olympic as it relates to LHF have made any payments, and
is not a party to any agreement that could obligate it to make any payments
that would not be deductible, in whole or in part, under Section 280G or
162(m) of the Code, and (xi) LHF is not part of an affiliated group (within
the meaning Section 1504(a) of the Code) other than one in which Olympic is
the common parent.
3.13.2 The term "Tax" or collectively "Taxes" means (i) any and
all federal, state and local taxes, assessments and other governmental
charges, duties, impositions and liabilities, including taxes based upon or
measured by gross receipts, income, profits, franchise and excise taxes,
together with all interest, penalties and additions imposed with respect to
such amounts; (ii) any liability for the payment of any amounts of the type
described in clause (i) as a result of being a member of an affiliated,
consolidated, combined or unitary group for any period; and (iii) any
liability for the payment of any amounts of the type described in clause (i)
or (ii) as a result of any obligations under any agreements or arrangements
with any other person with respect to such amounts and including any
liability for taxes of a predecessor entity.
3.13.3 The term "Tax Return" shall mean any return, declaration,
report, claim for refund, or information return or statement relating to
Taxes, including any schedule or attachment thereto, and including any
amendment thereof.
3.14 LIABILITIES. Except as set forth on SCHEDULE 3.14 and the Balance
Sheet, Olympic knows of no outstanding claims, liabilities or indebtedness,
contingent or otherwise of LHF, other than (i) liabilities incurred
subsequent to the Balance Sheet Date in the
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ordinary course of business not involving borrowing by LHF and which are
consistent with past practice and, individually or in the aggregate, are not
material to the business, operations, properties, or condition (financial or
otherwise) of LHF, (ii) liabilities set forth on any schedule hereto or which
are not required to be set forth on any schedule hereto because such
liabilities are specifically excluded from disclosure on the schedules
provided for by the provisions of this Agreement, or (iii) any other
liabilities provided for in this Agreement.
3.15 INTELLECTUAL PROPERTIES. SCHEDULE 3.15 contains a list of trade
names, trademarks, copyrights, service marks, trademark registrations and
applications (including those which are pending), service mark registrations
and applications, copyright registrations and applications (whether pending
or abandoned), described to Olympic by LHF as owned or used by LHF in the
operation of its business (collectively, the "Intellectual Property").
Olympic claims no interest in such Intellectual Property.
3.16 COMPLIANCE WITH LAWS. Olympic has no reason to believe that LHF is
not in compliance in any material respects with all applicable laws,
regulations, orders, judgments and decrees ("Requirements of Law"). LHF (i)
has not been charged with, (ii) is not under any investigation with respect
to, and (iii) has not been threatened with, any charge concerning any
violation of any Requirements of Law.
3.17 INVESTMENT INTENT. The HoldCo Shares being acquired by Olympic
hereunder are being acquired for such Olympic's own account and not with a
view to, or for resale in connection with, any distribution other than
resales made in compliance with the registration and prospectus delivery
requirements of Securities Act of 1933, as amended (the "Act"). Olympic
understands that the HoldCo Shares have not been registered under the Act by
reason of available exemptions from the registration and prospectus delivery
requirements of the Act, that such HoldCo Shares must be held indefinitely
unless such HoldCo Shares are registered under the Act or until any transfer
is exempt from registration, and that reliance of the Purchaser upon these
exemptions is predicated in part upon these representations and warranties by
Olympic.
3.18 QUALIFICATION AS AN INVESTOR.
3.18.1 Olympic hereby represents and warrants that Olympic has the
requisite knowledge and experience in financial and business matters to
assess the relative merits and risks of investment in the HoldCo Shares.
3.18.2 Olympic has received certain information concerning the
HoldCo Shares and has had the opportunity to obtain additional information as
desired in order to evaluate the merits and risks of holding the HoldCo
Shares, and is able to bear the economic risk and lack of liquidity inherent
in holding the HoldCo Shares. Furthermore, Olympic has had the full
opportunity to discuss with the Purchaser all material aspects of an
investment in the HoldCo Shares, including the opportunity to ask, and to
receive answers to Olympic's full satisfaction, regarding such questions as
Olympic has deemed necessary to evaluate Olympic's opportunity to invest.
8
<PAGE>
ARTICLE IV
REPRESENTATIONS OF PURCHASER
Purchaser hereby represents and warrants to Olympic that the
representations and warranties set forth below are true and accurate in all
material respects as of the date when made except as affected by the
transactions contemplated by this Agreement.
4.1 ORGANIZATION AND AUTHORITY OF PURCHASER. Purchaser (i) is a
limited liability company duly organized, validly existing and in good
standing under the laws of the State of California, (ii) has all requisite
corporate power and authority to carry on its business as it is now being
conducted, and (iii) has taken all action necessary in order to execute,
deliver and perform its obligations under this Agreement. This Agreement has
been duly executed and delivered by the Purchaser and is a legal, valid and
binding obligation of the Purchaser, enforceable in accordance with its
terms, subject to bankruptcy, insolvency, fraudulent transfer,
reorganization, moratorium and similar laws of general applicability relating
to or affecting creditors' rights and to general equity principles.
4.2 NO CONFLICTS AND QUALIFICATION. The execution, delivery and
performance of this Agreement by Purchaser does not, and the consummation by
Purchaser of the transactions contemplated hereby will not, constitute or
result in (i) a breach or violation of, or a default under, the articles of
organization or operating agreement of Purchaser, (ii) a breach of, a default
under, the acceleration of any obligations or the creation of a lien, pledge,
security interest or other encumbrance on the assets of Purchaser (with or
without notice, lapse of time or both) pursuant to, any contracts binding
upon Purchaser, or any change in the rights or obligations of any party
thereunder, or (iii) a violation of any applicable law or governmental or
non-governmental permit or license to which Purchaser is subject, except, in
the case of clause (ii) or (iii) above, for any breach, violation, default,
acceleration, creation or change that, individually or in the aggregate, is
not reasonably likely to materially delay or impair the ability of Purchaser
to consummate the transactions contemplated by this Agreement. Purchaser
duly qualified or licensed to do business and is in good standing in each
jurisdiction in which the conduct of its business or the ownership or leasing
of its assets makes such qualification or licensing necessary, other than in
jurisdictions where the failure to be qualified or licensed, individually or
in the aggregate, is not reasonably likely to have a material adverse effect
on the financial, condition, assets, or results of operations of Purchaser,
taken as a whole.
4.3 OWNERSHIP OF OLYMPIC SHARES. Purchaser is the record and
beneficial owner of the Olympic Shares specified in Section 1.2.1, free and
clear of all liens, encumbrances, restrictions and claims of every kind other
than claims of Olympic under the Investors Rights Agreement. Purchaser has
necessary corporate power and authority to enter into this Agreement and has
full legal right, power and authority to transfer and convey the Olympic
Shares pursuant to this Agreement; the delivery by Purchaser of the Olympic
Shares pursuant to this Agreement will transfer to Olympic Purchaser's valid
title thereto, free and clear of all liens, encumbrances, restrictions and
claims of every kind.
4.4 INVESTMENT INTENT. The LHF Shares being acquired by Purchaser
hereunder are being acquired for such Purchaser's own account and not with a
view to, or for resale in connection with, any distribution other than
resales made in compliance with the registration and prospectus delivery
requirements of Securities Act of 1933, as amended (the "Act"). The
9
<PAGE>
Purchaser understands that the LHF Shares have not been registered under the
Act by reason of available exemptions from the registration and prospectus
delivery requirements of the Act, that such LHF Shares must be held
indefinitely unless such LHF Shares are registered under the Act or until any
transfer is exempt from registration, and that reliance of LHF upon these
exemptions is predicated in part upon these representations and warranties by
the Purchaser.
4.5 QUALIFICATION AS AN INVESTOR.
4.5.1 Purchaser hereby represents and warrants that the Purchaser
has the requisite knowledge and experience in financial and business matters
to assess the relative merits and risks of investment in the LHF Shares.
4.5.2 Purchaser has received certain information concerning LHF
and has had the opportunity to obtain additional information as desired in
order to evaluate the merits and risks of holding the LHF Shares, and is able
to bear the economic risk and lack of liquidity inherent in holding the LHF
Shares. Furthermore, Purchaser has had the full opportunity to discuss with
LHF all material aspects of an investment in the LHF Shares, including the
opportunity to ask, and to receive answers to Purchaser's full satisfaction,
regarding such questions as Purchaser has deemed necessary to evaluate
Purchaser's opportunity to invest.
4.6 LEGEND. Purchaser acknowledges that the following legend has been
placed on certificates for the LHF Shares delivered by Olympic:
"THESE SECURITIES HAVE NOT BEEN REGISTERED UNDER THE
SECURITIES ACT OF 1933, AS AMENDED, OR ANY STATE SECURITIES
LAWS. THEY MAY NOT BE SOLD OR OFFERED FOR SALE EXCEPT
PURSUANT TO AN EFFECTIVE REGISTRATION STATEMENT AS TO THE
SECURITIES UNDER SAID ACT AND ANY APPLICABLE STATE
SECURITIES LAW OR AN OPINION OF COUNSEL REASONABLY
SATISFACTORY TO OLYMPIC CASCADE FINANCIAL CORPORATION THAT
SUCH REGISTRATION IS NOT REQUIRED."
4.7 SCOPE OF BUSINESS. Purchaser hereby represents and warrants to
Olympic that the deals listed on EXHIBIT A are a complete and accurate
description of those clients with whom LHF has entered into a contract and
whose financing is in progress as of the Closing Date (the "Deals"). The
dates listed on EXHIBIT A are Purchaser's best estimate of each Deal's
closing date. Purchaser does not guaranty or warrant that any Deal will close
or the date listed or at all.
4.8 CERTAIN WARRANTS GRANTED. Purchaser hereby acknowledges that
certain warrants will be granted to Olympic with respect to the prospective
and pending Deals listed in EXHIBIT A, if such Deals shall be consummated.
10
<PAGE>
4.9 UNRECORDED ASSETS. Purchaser hereby represents and warrants that
to the Purchaser's knowledge there are no unrecorded assets not reflected on
the July 31, 1998 Balance Sheet.
4.10 WARRANT RIGHTS TO OLYMPIC. Purchaser hereby acknowledges and
represents that the warrants listed on EXHIBIT D are a complete and accurate
description of those warrants to which Olympic is entitled and has the right
of assignment. Purchaser further acknowledges that certain warrants in the
Audio Book Club, Inc., Home Security International, Inc. and Riviera Tool
Company transactions will be directly granted to Olympic, or its affiliates,
and to certain other individuals.
ARTICLE V
CONDITIONS TO PURCHASER'S OBLIGATIONS
The obligation of Purchaser to consummate the transactions contemplated
herein shall be subject to the fulfillment, at or prior to the Closing, of
all of the conditions set forth below in this Article V. Purchaser may, by
written notice, waive any or all of these conditions in whole or in part
without prior notice, provided, however, that no such waiver shall constitute
a waiver by Purchaser of any other right or remedy if Olympic shall be in
default of any of its representations, warranties or covenants under this
Agreement.
5.1 NO MATERIAL ADVERSE CHANGE. Prior to the Closing Date, Olympic
shall not have caused, except as provided for in this Agreement, any material
adverse change in the assets, liabilities, business, condition (financial or
otherwise), or the results of operations of LHF.
5.2 PERFORMANCE OF AGREEMENTS. Each and all of the agreements of
Olympic to be performed pursuant to the terms hereof on or before the Closing
Date shall have been duly performed in all material respects, and Olympic
shall have each delivered to Purchaser a certificate, dated the Closing Date,
to such effect.
5.3 RESOLUTIONS. Purchaser shall have received a copy of the
resolutions of the Board of Directors of Olympic approving the transactions
contemplated by this Agreement, certified by the Secretary of Olympic.
5.4 NO LITIGATION THREATENED. No action or proceedings shall have been
instituted against LHF or, to the knowledge of Olympic, shall have been
threatened, before a court or other governmental body or by any public
authority to restrain or prohibit Olympic or LHF from consummating any of the
transactions contemplated hereby, and a duly authorized officer of Olympic
shall have delivered to the Purchaser a certificate, dated the Closing Date,
to such effect.
5.5 DISTRIBUTIONS. Olympic shall have caused LHF to distribute to
Olympic the assets of LHF listed on Schedules 2.1(a)-(e) hereto and shall not
have caused LHF to distribute nor claim an interest in any other assets of
LHF at or after the Closing.
5.6 TAX AUTHORITY FILINGS. Olympic shall have prepared and filed all
required documents, submissions, notices, amended applications or similar
filings with federal, state and local taxing authorities required with
respect to (i) the transfer of the LHF Shares to
11
<PAGE>
Purchaser and (ii) that certain tax sharing agreement previously executed by
and between Olympic and LHF.
5.7 CERTAIN WARRANTS OUTSTANDING. Olympic hereby acknowledges that
certain warrants remain due and outstanding to LHF for transactions completed
by LHF on or prior to the Closing Date. These warrants that remain due and
outstanding to LHF include those warrants granted in the Audio Book Club,
Inc., Home Security International, Inc. and Riviera Tool Company
transactions. Furthermore, Olympic hereby represents and warrants that to
Olympic's knowledge there are no other warrants which remain due and
outstanding to LHF for transactions completed by LHF on or prior to the
Closing Date.
5.8 FURTHER ASSURANCES BY OLYMPIC. Olympic shall execute and deliver
such further documents and to do all matters and things which may be
convenient or necessary to more effectively and completely carry out the
intentions of this Agreement, including but not limited to, preparing and
filing all required documents, submissions, notices, amended applications or
similar filings with NASD to effect and give evidence of the purchase and
sale of the LHF Shares and to secure the approval of the Exchange and to
obtain the necessary state "blue sky" clearances, if any are required with
respect to the transfer of the LHF Shares to Purchaser. Any failure of
Olympic to perform under this Section 5.8 shall not void this Agreement nor
waive Purchaser's rights hereunder.
ARTICLE VI
CONDITIONS TO OLYMPIC'S OBLIGATIONS
The obligation of Olympic to consummate the transactions contemplated
herein shall be subject to the fulfillment, at or prior to the Closing, of
all of the conditions set forth below in this Article VI. Olympic may, by
written notice, waive any or all of these conditions in whole or in part
without prior notice, provided, however, that no such waiver shall constitute
a waiver by Olympic of any other right or remedy if Purchaser shall be in
default of any of its representations, warranties or covenants under this
Agreement.
6.1 PERFORMANCE OF AGREEMENTS. Each and all of the agreements of
Purchaser to be performed on or before Closing Date pursuant to the terms
hereof shall have been duly performed in all material respects, and Purchaser
shall have delivered to Olympic a certificate, dated the Closing Date, to
such effect.
6.2 NO LITIGATION THREATENED. No action or proceedings shall have been
instituted or, to the knowledge of Purchaser, shall have been threatened,
before a court or other governmental body or by any public authority to
restrain or prohibit Purchaser from consummating any of the transactions
contemplated hereby, and a duly authorized officer of Purchaser shall have
delivered to Olympic a certificate, dated the Closing Date, to such effect.
6.3 REGULATORY FILINGS. Purchaser shall have prepared and filed all
required documents, submissions, notices, amended applications or similar
filings with federal, state, and local regulatory authorities and the NASD to
effect and give evidence of the purchase and sale of the LHF Shares and to
secure the approval of the Exchange and to obtain the necessary state "blue
sky" clearances, if any are required with respect to the transfer of the LHF
Shares to Purchaser.
12
<PAGE>
6.4 FURTHER ASSURANCES BY PURCHASER. Purchaser shall execute and
deliver such further documents and to do all matters and things which may be
convenient or necessary to more effectively and completely carry out the
intentions of this Agreement, including but not limited to, preparing and
filing all required documents, submissions, notices, amended applications or
similar filings with federal, state and local taxing authorities if any are
required with respect to the transfer of the LHF Shares to Purchaser.
6.5 RESOLUTIONS. Olympic shall have received a copy of the
resolutions of the Board of Directors of the Purchaser approving the
transactions contemplated by this Agreement, certified by the Secretary of
the Purchaser
ARTICLE VII
SURVIVAL OF REPRESENTATIONS: INDEMNITY
AND OTHER POST-CLOSING COVENANTS
7.1 SURVIVAL OF REPRESENTATIONS AND WARRANTIES OF OLYMPIC. Except as
otherwise provided in this Agreement, all representations, warranties,
covenants and agreements of Olympic made in this Agreement or in any
certificate delivered pursuant hereto or otherwise shall survive the
consummation of the transactions contemplated hereby for a period of one (1)
year following the Closing and after one (1) year shall be terminated and
extinguished (except for the representations and warranties made in Sections
3.4, which shall not expire, and the representations and warranties made in
Sections 3.1, 3.2, 3.3 and 3.13, which shall survive for a period of three
(3) years following the Closing), except as to matters as to which an
Indemnitee (as defined in Section 7.3.1) has made a claim for indemnification
or made a Claims Notice, pursuant to Section 7.3.1 hereafter, on or prior to
such date, in which case the rights to indemnification shall survive until
such claim is finally resolved and any obligations with respect thereto are
fully satisfied.
7.2 SURVIVAL OF REPRESENTATIONS AND WARRANTIES OF THE PURCHASER. All
representations, warranties, covenants and agreements of Purchaser contained
in this Agreement shall survive the execution and delivery of this Agreement
and the Closing hereunder, and shall thereafter terminate and expire, except
for Purchaser's covenants in Section 4.3, and any claim based thereon shall
be brought one year from the Closing Date, except as to matters as to which
an Indemnitee (as defined in Section 7.3.1) has made a claim for
indemnification or given a Claims Notice under Section 7.3.1 hereafter on or
prior to such date, in which case the rights to indemnification shall survive
until such claim is finally resolved and any obligations with respect thereto
are fully satisfied, and except for the representations and warranties set
forth in Sections 4.3 which shall not expire.
7.3 NOTICE AND OPPORTUNITY TO DEFEND
7.3.1 NOTICE OF ASSERTED LIABILITY. Promptly after receipt by
any party hereto (the "Indemnitee") of notice of any demand, claim or
circumstances which, with the lapse of time, would or might give rise to a
claim or the commencement (or threatened commencement) of any action,
proceeding or investigation (an "Asserted Liability") that may result in any
Losses, the Indemnitee, shall promptly give notice thereof (a "Claims
Notice") to any other party obligated to provide indemnification pursuant to
the terms of this Agreement (the "Indemnifying Party"). The Claims Notice
shall describe the Asserted
13
<PAGE>
Liability in reasonable detail, and shall indicate the amount (estimated, if
necessary and to the extent feasible) of the Losses that have been or may be
suffered by the Indemnitee.
7.3.2 OPPORTUNITY TO DEFEND. The Indemnifying Party may elect to
compromise or defend, at its own expense and by its own counsel, any Asserted
Liability. If the Indemnifying Party elects to compromise or defend such
Asserted Liability, it shall within thirty (30) days (or sooner, if the
nature of the Asserted Liability so requires) notify the Indemnitee of its
intent to so, and the Indemnitee shall cooperate, at the expense of
Indemnifying Party, in the compromise of, or defense against, the Asserted
Liability. If the Indemnifying Party elects not to compromise or defend the
Asserted Liability, fails to notify Indemnitee of its election as herein
provided, or contests its obligation to indemnify under this Agreement, the
Indemnitee may pay, compromise or defend such Asserted Liability at the
expense of the Indemnifying Party. Subject to the limitations contained in
Section 8.6 on the obligations of the Indemnifying Party in respect of
proposed settlements, the Indemnitee shall have the right to employ its own
counsel with respect to any Asserted Liability, but the fees and expenses of
such counsel shall be at the expense of such Indemnitee unless (a) the
employment of such counsel shall have been authorized in writing by the
Indemnifying Party in connection with the defense of such action, or (b) such
Indemnifying Party shall not have, as provided above, promptly employed
counsel reasonably satisfactory to such Indemnitee to take charge of the
defense of such action, or (c) such Indemnitee shall have reasonably
concluded based on an opinion of counsel that there may be one or more legal
defenses available to it which are different from or additional to those
available to such Indemnifying Party, in any of which events such reasonable
fees and expenses shall be borne by the Indemnifying Party and the
Indemnifying Party shall not have the right to direct the defense of such
action on behalf of the Indemnitee in respect of such different or additional
defenses. If the Indemnifying Party chooses to defend any claim, the
Indemnitee shall make vailable to the Indemnifying Party any books, records
or other documents within its control that are necessary or appropriate for
such defense.
7.4 SETTLEMENT. Notwithstanding the provisions of Section 7.3.2,
neither the Indemnifying Party nor the Indemnitee may settle or compromise
any claim for which indemnification has been sought and is available
hereunder, over the objection of the other; provided, however, that consent
to settlement or compromise shall not be unreasonably withheld or delayed.
If, however, the Indemnitee refuses to consent to a bona fide offer of
settlement which the Indemnifying Party wishes to accept, the Indemnitee may
continue to pursue such matter, free of any participation by Indemnifying
Party, at the sole expense of the Indemnitee. In such event, the obligation
of the Indemnifying Party to the Indemnitee shall be equal to the lesser of
(i) the amount of the offer of settlement which the Indemnitee refused to
accept plus the costs and expenses of the Indemnitee prior to the date the
Indemnifying Party notified the Indemnitee of the offer of settlement, and
(ii) the actual out-of-pocket amount the Indemnitee is obligated to pay as a
result of the Indemnitee continuing to pursue such matter.
7.5 COMPUTATION OF LOSSES. For purposes of calculating any Losses
suffered by an indemnified party pursuant to this Article VII, the amount of
the Losses suffered by the indemnified party shall be the net amount of
damage so suffered after giving effect to any insurance proceeds and tax
benefit received with respect to such matter.
14
<PAGE>
7.6 APPROVALS. Any and all necessary consents to, or approvals of, the
transactions contemplated by this Agreement of any governmental agencies and
authorities, including, without limitation, approval of the NASD, shall have
been obtained and such approvals and the transactions contemplated hereby
shall not have been contested by any federal or state governmental authority
by formal proceeding and no party hereto shall have any knowledge of the
existence of any fact or the occurrence of any event forming the basis for a
reasonable belief that such approvals or the transactions contemplated hereby
will be contested by any federal or state governmental authority or by any
other third party by formal proceeding.
7.7 TRANSACTION ACCOUNTING. Upon the consummation and completion of
each transaction deal listed on EXHIBIT A, Purchaser shall cause to be
delivered to Olympic a full accounting of such transaction.
ARTICLE VIII
MISCELLANEOUS
8.1 EXPENSE. The parties hereto shall pay all of their own expenses
relating to the transactions contemplated by this Agreement, including,
without limitation, the fees and expenses of their respective counsel and
financial advisers.
8.2 GOVERNING LAW. The interpretation and construction of this
Agreement, and all matters relating hereto, shall be governed by the laws of
the State of California without reference to any conflict of laws provisions.
8.3 JURISDICTION. Any judicial proceeding brought against any of the
parties to this Agreement on any dispute arising out of this Agreement or any
matter related hereto shall be brought in the courts of the State of
California in Orange County or in United States District Court located in
Santa Ana, California, and by execution and delivery of this Agreement, each
of the parties to this Agreement accepts for itself or himself the
jurisdiction of the aforesaid courts, irrevocably consents to the service of
any and all process in any action or proceeding by the mailing of copies of
such process to such party at its address as set forth below each parties'
signature, and irrevocably agrees to be bound by any judgment rendered
thereby in connection with this Agreement. Each party hereto irrevocably
waives to fullest extent permitted by law any objection that it or he may now
or hereafter have to the laying of the venue of any judicial proceeding
brought in such courts and any claim that any such judicial proceeding has
been brought in an inconvenient forum. the foregoing consent to jurisdiction
shall not constitute general consent to service of process in the State of
California for any purpose except as provided above and shall not be deemed
to confer rights on any Person other than the respective parties to this
Agreement.
8.4 CAPTIONS. The article and section captions used herein are for
reference purposes only, and shall not in any way affect the meaning, or
interpretation of this Agreement.
8.5 NOTICES. Any notice or other communications required or permitted
hereunder shall be in writing and shall be deemed effective (a) upon personal
delivery, if delivered by hand, (b) three days after the date of deposit in
the mails, if mailed by certified or registered mail (return receipt
requested), or (c) on the next business day, if mailed by an
15
<PAGE>
overnight mail service to the parties or sent by facsimile transmission, and
in each case, postage prepaid, addressed to a party at its or his address set
forth on the signature page hereof, or such other address as shall be
furnished in writing by like notice by any such party.
8.6 TERMINATION. This Agreement may be terminated at any time prior to
the Closing Date:
8.6.1 By mutual agreement of Olympic and Purchaser;
8.6.2 By Purchaser if (i) there has been a material
misrepresentation, breach of warranty or breach of covenant by Olympic under
this Agreement or (ii) any of the conditions
16
<PAGE>
precedent to the Closing set forth in Article V and VI have not been
satisfied on the Closing Date, and, in each case, Purchaser is not then in
default of its obligations hereunder; and
8.6.3 By Olympic if (i) there has been a material
misrepresentation, breach of warranty or breach of covenant by Purchaser
under this Agreement or (ii) any of the conditions precedent to the Closing
set forth in Article VI has not been satisfied on the Closing Date, and, in
each case, Olympic is not in default of their obligations hereunder.
In the event of termination of this Agreement as provided in
Section 8.6.1, this Agreement shall become void and there shall be no
liability hereunder on the part of any party hereto. In the event of
termination of this Agreement as provided in Section 8.6.2, such termination
shall be without prejudice to any of the rights that the Purchaser may have
against Olympic or any other party under the terms of this Agreement or
otherwise. In the event of termination of this Agreement as provided in
Section 8.6.3, such termination shall be without prejudice to any of the
rights that Olympic may have against Purchaser or any other Person under the
terms of this Agreement or otherwise.
8.7 INTENTIONALLY OMITTED.
THE REMAINDER OF THIS PAGE WAS INTENTIONALLY LEFT BLANK
17
<PAGE>
8.8 ASSIGNMENTS. This Agreement may not be transferred, assigned,
pledged or hypothecated by any party hereto, other than by operation of law.
No assignment or transfer shall be effective unless the assignee agrees in
writing to assume such assignor's obligations under the Agreement. This
Agreement shall be binding upon and shall inure to the benefit of the parties
hereto and their respective heirs, executors, administrators, successors and
assigns.
8.9 PRESS RELEASES AND ANNOUNCEMENTS. No party to this Agreement shall
issue any press release or public announcement relating to the subject matter
of this Agreement without the prior approval of the other parties to this
Agreement; provided, however, that any party to this Agreement may make any
public disclosure it believes in good faith is required by law or regulation,
including any state or federal securities laws (in which case the disclosing
party will advise the other parties prior to making the disclosure).
8.10 CONSTRUCTION. The language used in this Agreement will be deemed
to be the language chosen by all of the parties hereto to express their
mutual intent, and no rule of construction shall be specified against any
party.
8.11 SEVERABILITY. In the event any provision of this Agreement is
found to be void and unenforceable by a court of competent jurisdiction or
arbitration panel, the remaining provisions of this Agreement shall
nevertheless be binding upon the parties with the same effect as though the
void or unenforceable part had been severed and deleted.
8.12 COUNTERPARTS. This Agreement may be executed in two or more
counterparts, all of which taken together shall constitute one instrument.
8.13 ENTIRE AGREEMENT. This Agreement, including the documents referred
to herein which form a part hereof, contains entire understanding of the
parties hereto with respect to the subject matter contained herein and
therein. This Agreement supersedes all prior agreements and understandings
between the parties with respect to such subject matter.
8.14 AMENDMENTS. This Agreement may not be changed orally, but only by
an agreement in writing signed by Olympic and the Purchaser.
8.15 THIRD-PARTY BENEFICIARIES, Each party hereto intends that this
Agreement shall not benefit or create any right or cause of action in or on
behalf of any Person other than the parties hereto and their respective
affiliates, officers, directors, employees, agents, attorneys,
representatives, successors and assigns as permitted under Section 8.8.
8.16 CONFIDENTIALITY. Subject to any obligation to comply with any law,
rule or regulation of any governmental authority or any subpoena or other
legal process to make information available to the persons entitled thereto,
the parties hereto shall, and shall cause their affiliates, employees,
attorneys, accountants and representatives to keep confidential and such
party shall not use, or permit its affiliates, attorneys, accountants and
representatives to use, in any manner other than for the purpose of
evaluating the transaction contemplated herein any information obtained from
the other party, whether or not obtained or acquired pursuant to the terms of
this Agreement, unless such information is readily ascertainable from public
or published information, from trade sources, or is already known to the
receiving party.
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<PAGE>
IN WITNESS WHEREOF, the parties hereto have executed this Purchase
Agreement as of the date first above written.
"OLYMPIC" OLYMPIC CASCADE FINANCIAL
CORPORATION, a Delaware corporation
By: ______________________________
Steven A. Rothstein
Chairman of the Board
Address:
875 North Michigan Avenue, Suite 1560
Chicago, Illinois 60611
Fax: 312/951-0769
"PURCHASER" LHF HOLDCO, LLC
By:
Gregory E. Presson, Chairman of the
Board and Chief Executive Officer
Address:
3333 Michelson Drive, Suite 650
Irvine, California 92612-1686
Fax
19
<PAGE>
EXHIBIT 11
OLYMPIC CASCADE FINANCIAL CORPORATION
COMPUTATION OF EARNINGS PER SHARE
BASIC
<TABLE>
<CAPTION>
September 25, September 26, September 27,
1998 1997 1996
------------- ------------- -------------
<S> <C> <C> <C>
Net income (loss) $ (4,666,000) $ 101,000 $ 1,735,000
============= ============= =============
Weighted average number of common
shares outstanding during the year 1,496,634 1,195,403 933,069
============= ============= =============
Basic earnings per share $ (3.12) $ 0.08 $ 1.86
============= ============= =============
DILUTED
Weighted average number of common
shares outstanding during the year 1,496,634 1,195,403 933,069
Add common equivalent shares upon
exercise of stock options * 229,716 114,762
------------- ------------- -------------
Weighted average number of shares used
in calculation of primary earnings per
share 1,496,634 1,425,119 1,047,831
============= ============= =============
Diluted earnings per share $ (3.12) $ 0.07 $ 1.66
============= ============= =============
</TABLE>
* No effect given to common stock equivalents, as their effect would
be anti-dilutive.
-35-
<PAGE>
EXHIBIT 21
OLYMPIC CASCADE FINANCIAL CORPORATION
Subsidiaries of the Registrant
September 25, 1998
<TABLE>
<CAPTION>
Percentage
of Voting
State of Securities
Subsidiary Name Incorporation Owned
- --------------- ------------- ----------
<S> <C> <C>
National Securities Corporation Washington 100%
WestAmerica Investment Group California 100%
</TABLE>
-36-
<TABLE> <S> <C>
<PAGE>
<ARTICLE> BD
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM STATEMENT OF
FINANCIAL CONDITION AND STATEMENT OF OPERATIONS AND IS QUALIFIED IN ITS ENTIRETY
BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> SEP-25-1998
<PERIOD-START> SEP-29-1997
<PERIOD-END> SEP-25-1998
<CASH> 551
<RECEIVABLES> 41,376
<SECURITIES-RESALE> 235
<SECURITIES-BORROWED> 99
<INSTRUMENTS-OWNED> 27,348
<PP&E> 1,292
<TOTAL-ASSETS> 73,116
<SHORT-TERM> 2,700
<PAYABLES> 64,659
<REPOS-SOLD> 0
<SECURITIES-LOANED> 0
<INSTRUMENTS-SOLD> 73
<LONG-TERM> 2,736
0
0
<COMMON> 29
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<TRADING-REVENUE> 5,512
<INTEREST-DIVIDENDS> 4,380
<COMMISSIONS> 23,636
<INVESTMENT-BANKING-REVENUES> 10,726
<FEE-REVENUE> 0
<INTEREST-EXPENSE> 2,840
<COMPENSATION> 33,791
<INCOME-PRETAX> (5,290)
<INCOME-PRE-EXTRAORDINARY> (5,290)
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (4,666)
<EPS-PRIMARY> (3.12)
<EPS-DILUTED> (3.12)
</TABLE>
