-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, RRyCXjZyuAVHXfrhtjwKgHHMHiOknsvF7uIGGenrTCH3/h+wNvTgUdd9UGX4K5h1 PFYdaOq/wWOs+Uo+ONhbHQ== 0001015769-99-000114.txt : 19991223 0001015769-99-000114.hdr.sgml : 19991223 ACCESSION NUMBER: 0001015769-99-000114 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 10 CONFORMED PERIOD OF REPORT: 19990924 FILED AS OF DATE: 19991221 FILER: COMPANY DATA: COMPANY CONFORMED NAME: OLYMPIC CASCADE FINANCIAL CORP CENTRAL INDEX KEY: 0001023844 STANDARD INDUSTRIAL CLASSIFICATION: 6200 IRS NUMBER: 364128138 STATE OF INCORPORATION: DE FISCAL YEAR END: 0926 FILING VALUES: FORM TYPE: 10-K SEC ACT: SEC FILE NUMBER: 001-12629 FILM NUMBER: 99778527 BUSINESS ADDRESS: STREET 1: 1001 FOURTH AVENUE STREET 2: STE 2200 CITY: SEATTLE STATE: WA ZIP: 98154 BUSINESS PHONE: 3127518833 MAIL ADDRESS: STREET 1: 1001 FOURTH AVENUE STREET 2: STE 2200 CITY: SEATTLE STATE: WA ZIP: 98154 10KSB 1 10KSB 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 24, 1999 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) 751-8833 SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT: NONE SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT: COMMON STOCK $.02 PAR VALUE (Title of class) Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. YES X NO Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K of this chapter is not contained herein, and will not be contained, to the best of Registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. YES X NO As of December 2, 1999, 1,295,004 shares of the Company's common stock were held by non-affiliates, having an aggregate market value of $7,446,000. The number of common shares outstanding as of December 2, 1999 was 1,698,617. DOCUMENTS INCORPORATED BY REFERENCE Portions of the Company's Proxy Statement filed with the Securities and Exchange Commission ("SEC") in connection with the Company's Annual Meeting of Shareholders to be held on March 8, 2000 (the "Company's 2000 Proxy Statement") are incorporated by reference into Part III hereof. PART I ITEM 1 - BUSINESS (A) GENERAL Except for historical information contained herin, report contains ceritan forward-looking information that involves risks and uncertainties that could cause results to differ materially, including changing market conditions and other risks detailed in this annual report on form 10-K and other documents filed by the Company with the Securities and Exchange Commission from thime to time. Olympic Cascade Financial Corporation, a De;aware corporation organized in 1997 ("Olympic" or the "Company"), is a financial services organization, operating through its two wholly-owned subsidiaries, National Securities Corporation, a Washington corporation organized in 1947 ("National"), and WestAmerica Investment Group, a California corporation organized in 1974 ("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 both in the United States and abroad through research, financial advisory services and sales, and investment banking services for both public offerings and private placements, and providing retail brokerage 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, and 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 43 other offices located in 20 states. Additionally, National operates in several international cities. Its business includes securities brokerage for individual and institutional clients, market-making trading activities, asset management and corporate finance services. National 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. As of September 24, 1999, 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. The Company is engaged in a highly competitive business. With respect to one or more aspects of its business, its competitors include member organizations of the New York Stock Exchange, Inc. and other registered securities exchanges in the United States and Canada, and members of the National Association of Securities Dealers, Inc. ("NASD"). Many of these organizations have substantially greater personnel and financial resources and more sales offices than the Company. Discount brokerage firms affiliated with commercial banks provide additional competition, as well as companies that provide electronic on-line trading. In many instances, the Company is also competing directly for customer funds with investment opportunities offered by real estate, insurance, banking, and savings and loans industries. The Company's business plan includes the growth of its retail brokerage business and the introduction of online investing services. 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. (B) FINANCIAL INFORMATION ABOUT INDUSTRY SEGMENTS For a more detailed analysis of our results by segment see Item 7, "Management Discussion and Analysis of Financial Condition and Results of Operation." (C) BROKERAGE SERVICES Brokerage services to retail clients are provided through the Company's sales force of investment executives at National and WestAmerica. NATIONAL SECURITIES CORPORATION National is registered as a broker-dealer with the Securities and Exchange Commission ("SEC") and licensed in 50 states, the District of Columbia and Puerto Rico. National is also a member of the NASD, the Municipal Securities Rulemaking Board ("MSRB") the Securities Investor Protection Corporation ("SIPC"), and the Chicago Stock Exchange ("CHX"). 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. 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. During the second and third quarter of fiscal 1999, National converted its data processing system to a new third party vendor, BETA Systems Inc. This conversion was completed and operational in the third quarter of fiscal 1999. National utilizes other computer software, which is used for investment executive payroll and telephone cost allocation, including word processing and other office applications. National clears approximately 92% of its own securities transactions and posts its books and records daily, with the remaining 8% of the transactions clearing through Bear Stearns Securities Corporation and Pershing. Periodic reviews of controls are conducted, and administrative and operations personnel meet frequently with management to review operating conditions. Operations personnel monitor compliance with applicable laws, rules and regulations. WESTAMERICA INVESTMENT GROUP WestAmerica is registered as a broker-dealer with the SEC and is licensed in 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. (D) INVESTMENT BANKING National provides corporate finance and investment banking services, including underwriting the sale of securities to the public and arranging for the private placement of securities with investors. National has expanded its corporate finance operations to provide a broader range of financial and corporate advisory services, including mergers and acquisitions, project financing, capital structure and specific financing opportunities. National has underwritten both equity securities and convertible corporate bonds as initial or secondary public offerings. National will manage, underwrite and sell shares of each underwriting. National collects fees from the underwriting proceeds for providing these services, including non-accountable expenses. Additionally, National participates as an underwriter in the syndicate group of other underwritings, which it does not manage. All of these activities require a substantial commitment of capital and expose National to additional risk. Accordingly, National maintains a commitment committee that reviews every proposed underwriting and must approve each underwriting in order for it to proceed. Additionally, such activities are periodically reviewed by members of the Board of Directors. National's corporate finance department is headquartered in Chicago, Illinois. This office includes investment executives, investment bankers and employees. The office and the corporate finance department are under the direction of the Company's Chairman, Steven A. Rothstein. In fiscal 1998, WestAmerica was approved to engage in underwriting by the NASD, and participated as an underwriter of one public offering. (E) PRINCIPAL AND AGENCY TRANSACTIONS The Company buys and maintains inventories in equity securities as a "market-maker" for sale of those securities to other dealers and to customers through National. The Company also maintains inventories in corporate and municipal debt securities for sale to customers. At National, a staff of six traders and assistants in its Seattle headquarters, and two traders and assistants in its Spokane, Washington office, manage an inventory of securities, and conduct market-making activities. As of September 24, 1999, National made a market in approximately 100 equity securities, the majority of which were quoted on the NASDAQ stock market. 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 movements, trading activity and the size of inventories. Because the Company's trading activities occasionally may involve speculative and thinly capitalized stocks, including stabilizing the market for securities which it has underwritten, the Company imposes position limits to reduce its potential for loss. In executing customer orders to buy or sell a security in which the Company makes a market, the Company may sell to or purchase from customers at a price, which is substantially equal to the current inter-dealer market price plus or minus a mark-up or mark-down. The Company may also act as agent and execute a customer's purchase or sale order with another broker-dealer market-maker at the best inter-dealer market price available and charge a commission. The Company believes its mark-ups, mark-downs and commissions are competitive based on the services it provides to its customers. In executing customer orders to buy or sell listed and over-the-counter securities in which it does not make a market, the Company generally acts as agent and charges commissions which the Company believes are competitive, based on the services the Company provides to its customers. (F) ONLINE TRADING The Company through NSCdirect (a division of National), is planning to commence online investing services for its customers in the first quarter of calendar year 2000. The Company has various third party vendor agreements in place to develop, host and manage the website. The website is located at www.nscdirect.com. (G) SUPERVISION The Securities Exchange Act of 1934, as amended, and the NASD Conduct Rules require the Company's subsidiaries to supervise the activities of its investment executives. As part of providing such supervision, the subsidiaries maintain an Operations and Procedures Manual. Compliance personnel conduct inspections of branch offices no less frequently than annually to review compliance with the Company's procedures. A registered principal provides continuous supervision at each of the Company's larger offices. The other offices (averaging two investment executives per office) are not required by NASD rules to have a registered principal on site and are therefore supervised by registered principals of the subsidiaries. Traders and other personnel review each investment executive's order tickets to ensure compliance with the NASD Conduct Rules including mark-up guidelines. 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 July 2009. The Company believes the rent at each of its locations is at current market rates. At current production levels, the Company believes its leased space is suitable and adequate, however, increased activity could require additional space to be leased. ITEM 3 - LEGAL PROCEEDINGS 1. THE MAXAL TRUST, ET AL. V. NATIONAL SECURITIES CORPORATION ET AL., United States District Court, Central District of California, Case No. CV-97-4392 ABC (Shx). See disclosure in the Company's Form 10-Q for the quarter ended December 31, 1998. On February 16, 1999, the District Court dismissed the plaintiffs' remaining claims against National in their entirety and granted National's motion for summary judgment. A final judgment was issued by the court on April 26, 1999. The plaintiffs filed a notice of appeal on May 4, 1999. 2. COMPLETE MANAGEMENT, INC. National has been named together with others as a defendant in several class action lawsuits filed against Complete Management, Inc. Although, National has not yet been served in any of these actions it intends to vigorously defend itself against any claims that may be brought. The Company is a defendant in various other arbitrations and administrative proceedings, lawsuits and claims, which in the aggregate seek general and punitive damages approximating $1,600,000. The Company believes that the resolution of these matters will not have a material effect. These matters arise out of the normal course of business. ITEM 4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS There were no matters submitted to a vote of security holders in the fourth quarter of fiscal year ended September 24, 1999. ITEM 4(A)- EXECUTIVE OFFICERS OF REGISTRANT The following sets forth the names, ages and positions of all executive officers of the Company:
Steven A. Rothstein 49 Chairman, Chief Executive Officer and President Chairman and Chief Executive Officer of National Director of WestAmerica Robert H. Daskal 58 Senior Vice President, Chief Financial Officer, Treasurer and Secretary Secretary of National Director of WestAmerica Michael A. Bresner 55 President of National David M. Williams 30 Corporate Controller and Chief Accounting Officer Chief Operating Officer of National Craig M. Gould 29 Vice-Chairman of Technology Managing Director of National
PART II ITEM 5 - MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS The Company's common stock trades on The NASDAQ SmallCap Market and The Chicago Stock Exchange using the symbol NATS and OLY, respectively. As of September 24, 1999, the Company had approximately 900 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 January 27, 1997, May 20, 1997, August 29, 1997 and December 8, 1997. High and low closing bid quotations from September 27, 1997 to September 24, 1999 have been obtained from NASDAQ. The range of market prices for each quarter of fiscal years ended September 24, 1999 and September 25, 1998 are as follows: PERIOD HIGH LOW September 26, 1998/December 31, 1998 $4.00 $0.88 January 1, 1999/March 26, 1999 $8.97 $1.25 March 27, 1999/June 25, 1999 $6.38 $2.31 June 26, 1999/September 24, 1999 $5.19 $2.75 September 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 The closing bid price of the Company's common stock on December 2, 1999, as reported on the NASDAQ SmallCap Market, was $5.75 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 1999, 1998, 1997, 1996 and 1995. This information has been derived from, and should be read in conjunction with, the audited financial statements, which appear elsewhere in this report. All information is expressed in thousands of dollars except per share information.
FISCAL YEAR 1999 1998 1997 1996 1995 ------------------------------------------------------------------------------------------ Net revenues $ 43,330 $ 45,694 $ 39,994 $ 34,899 $ 14,275 Net income (loss) after tax 118 (4,666) 101 1,735 257 Net income (loss) per common share 0.08 (3.12) 0.07 1.66 0.30 Total assets 86,697 73,116 63,774 57,955 41,891 Long-term obligations 2,150 2,770 - - - Stockholders' equity 4,039 2,948 7,604 5,316 3,180 Cash dividends - - - - -
ITEM 7 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS RESULTS OF OPERATIONS FISCAL YEAR 1999 COMPARED WITH FISCAL YEAR 1998 The private securities litigation reform act of 1995 provides a safe harbor for forward-looking statements. This annual report contains certain statements of a forward-looking nature relating to future events or future business performance. Any such statements that refer to the Company's estimated or anticipated future results or other non-historical facts are forwad-looking and reflect the Company's current perspective of existing trends and information. These statements involve risks and uncertainties that cannot be predicted or quantified and, consequently, actual results may differ materially from thoseexpressed or implied by such forward-looking statements. Such risks and uncertainties include, among others, risks and uncertainties detailed in the Company's registration statement on Form S-3 (REGISTRATION NO. 333-80247), filed with the Securities and Exchange Commission on June 9, 1999, and the Company's other Securities and Exchange Commission filings. Any forward-looking statements comtained in or incorporated into this report speak only as of the dated of this report. The Company undertakes no obligation to update publicly any such forward-looking statement, whether as a result of new information, future events or otherwise. The Company's fiscal year 1999 resulted in net income of $118,000 or $.08 per share diluted as compared to a net loss of $4,666,000 or $3.12 per share diluted for fiscal year 1998. The Company's fiscal year 1999 resulted in decreases in both revenues and expenses compared with the fiscal year 1998. These decreases were primarily due to the sale of two subsidiaries, L.H. Friend, Weinress, Franksen & Presson, Inc. ("Friend") and Travis Capital, Inc. ("Travis"), as the Company continued its focus on retail operations, resulting in an increase in retail commissions and net dealer inventory gains. Revenues decreased $2,364,000 or 5% in the fiscal year 1999 to $43,330,000 from $45,694,000 in the fiscal year 1998 and expenses decreased $7,768,000 or 15% to $43,216,000 in the fiscal year 1999 from $50,984,000 in the fiscal year 1998. Exclusive of Friend and Travis, revenues increased $5,174,000 or 14% from $38,156,000 to $43,330,000 and expenses increased less than 1% or $407,000 in the fiscal year 1999 from the fiscal year 1998. Revenues decreased primarily due to the decrease in underwriting revenue as the weak capital markets for initial public offerings by emerging growth companies continued. For the fiscal year 1999, underwriting revenue decreased $8,267,000 or 77% to $2,459,000 from $10,726,000 in the fiscal year 1998. National participated in four private placements raising $13 million in gross proceeds in the fiscal year 1999. In the fiscal year 1998, National, through the management of two underwritings and co-management of one underwriting with Friend, as well as three successful private placements, generated $5,177,000 of underwriting revenue. Friend managed its first underwriting during the first nine months of fiscal 1998 and participated in several other underwritings and private placements, generating $5,460,000 of underwriting revenue. Exclusive of Friend and Travis, underwriting revenue decreased $2,718,000 or 25% in the fiscal year 1999 compared with the fiscal year 1998. Net dealer inventory gains increased $3,545,000, or 64%, to $9,057,000 from $5,512,000 during the fiscal year 1999 compared with the fiscal year 1998. Exclusive of Friend and Travis, net dealer inventory gains increased $4,397,000 or 80%. This increase is due to National's London office dramatically increasing its business and the strength of the markets the past twelve months. Although overall revenue decreased during the fiscal year 1999, commission revenue increased $929,000, or 4%, to $24,565,000 from $23,636,000. Exclusive of Friend and Travis, commission revenue increased $2,013,000, or 9%, during the fiscal year 1999. This increase is due to favorable market conditions and the addition of registered representatives. Concurrent with the overall decrease in revenues, total expenses decreased $7,768,000, or 15%, to $43,216,000 from $50,984,000 in the fiscal year 1998. This decrease in expenses was anticipated due to decreases in revenues, and the Company's efforts to reduce overhead costs. The most significant decreases were salary expense, occupancy and other. Salaries decreased $3,864,000, or 44%, to $4,882,000 from $8,746,000. Friend and Travis had combined salary expense of $3,251,000 in the fiscal year 1998. The remaining decrease in salary expense was $613,000 or 7% in the fiscal year 1999, as management incurred salary reductions in an effort to reduce overhead expenses. With the increased commission revenue and net dealer inventory gains, overall commission expense increased $690,000 or 3% from $25,045,000 in the fiscal year 1998 to $25,735,000 in the fiscal year 1999. Exclusive of Friend and Travis, commission expense increased $3,698,000 in the fiscal year 1999 from the fiscal year 1998. Overall, combined commissions and salaries as a percentage of revenue decreased 3% to 71% from 74% in the fiscal year 1999 and 1998, respectively. As anticipated, with the sale of Friend and Travis expenses regarding communications, occupancy, taxes, licenses and registration and other have decreased from the fiscal year 1998 to the fiscal year 1999. Communications expenses, mainly telephone, telequote and mailing decreased $789,000, or 41%, to $1,133,000 from $1,922,000. Friend and Travis had combined communications expenses of $344,000 in fiscal 1998. Occupancy expense, consisting mainly of rent, office supplies and depreciation decreased $1,188,000, or 32%, to $2,548,000 from $3,736,000. This decrease relates to the sale of the two subsidiaries as well as National closing a branch office in New York and subletting excess office space in Chicago. Taxes, licenses and registration decreased $514,000, or 83%, to $106,000 from $620,000. This decrease was due primarily to National receiving a refund of prior years' business operating taxes totaling $330,000. Finally, other expenses decreased $3,810,000, or 74%, to $1,319,000 from $5,129,000 during the fiscal year 1999 and 1998, respectively. The largest component of this decrease, totaling $2,521,000, relates to the write-down of certain receivables and investments, including those relating to the disposition of the two subsidiaries. Additionally, the other expenses relating to the sale of the two subsidiaries and closure of a branch office in New York contributed another $987,000 to this decrease. Moving expenses and amortization combined were $300,000 more in the fiscal year 1998 compared with the fiscal year 1999. Amortization decreased due to the write off of goodwill related to the sale of the two subsidiaries and the amortization of a prepaid asset at WestAmerica that was recorded during fiscal 1997 as part of the purchase price. Interest expense, clearing fees and professional fees increased during the fiscal year 1999 as compared with the fiscal year 1998. Interest expense increased $924,000, or 33%, to $3,764,000 from $2,840,000. The main reason for this increase is the increase in customer deposits, on which the Company pays interest, and the interest on debt incurred in fiscal 1998. Interest expense was offset by increased interest revenue of $1,177,000, or 27%, to $5,557,000 from $4,380,000. Clearing fees actually increased $208,000, or 13%, to $1,773,000 from $1,565,000. Exclusive of Friend, clearing fees increased $589,000 due to the increased volume of transactions including the London office of National. Professional fees increased $575,000, or 42%, to $1,956,000 from $1,381,000. After adjusting for professional fees paid at Friend and Travis, professional fees increased $654,000, or 47%, during the fiscal year 1999 compared with the fiscal year 1998 due to increased litigation that was substantially resolved during the fiscal year 1999 (See Part I Item 3). Included in professional fees is $524,000 relating to the settlement of three lawsuits during the fiscal year 1999, only $75,000 of which represented a cash payment. FISCAL YEAR 1998 COMPARED WITH FISCAL YEAR 1997 During fiscal year 1998, the Company redirected its focus on retail operations by divesting its ownership in two of its subsidiaries, Friend and Travis. The Company had acquired each subsidiary in fiscal year 1997. 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. 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 $5,128,000 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. 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 $1,232,000 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. 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. LIQUIDITY AND CAPITAL RESOURCES As with most financial services firms, substantial portions of the Company's assets are liquid, consisting mainly of cash or assets readily convertible into cash. These assets are financed primarily by National's interest bearing and non-interest bearing customer credit balances, other payables and equity capital. Occasionally, National utilizes short-term bank financing to supplement its ability to meet day-to-day operating cash requirements. Such financing has been used to maximize cash flow and is regularly repaid. National has a $3,000,000 revolving 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 24, 1999 borrowings outstanding were $2,100,000. This balance was repaid within three business days. 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 24, 1999, National's net capital exceeded the requirement by $2,525,000. 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, 1999, WestAmerica's net capital exceeded the requirement by $94,000. 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 the fiscal year ended September 24, 1999, total assets were $86,697,000 compared to total assets of $73,116,000 as of the fiscal year September 25, 1998, which represents a 19% increase in total assets for the 12-month period. As of fiscal year ended September 25, 1998, total assets were $73,116,000, compared to total assets of $63,774,000 as of September 26, 1997, which represents a 15% 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 has contributed significantly to liquidity. The Company believes its internally generated liquidity, together with access to external capital and debt resources will be sufficient to satisfy existing operations. However, as the Company expands its operations, including its new online trading services, or acquires other businesses, the Company will likely 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. However, in an inflationary environment other corporate financing activities may become more readily pursued, such as financial advisory services. It is therefore difficult to predict the net impact of inflation on the Company. NEW ACCOUNTING STANDARDS In June 1997, the FASB issued SFAS Nos. 130 and 131. SFAS No. 130 establishes standards for reporting and display of comprehensive income and its components. SFAS No. 131 establishes standards for reporting about operating segments, products and services, geographic areas, and major customers. The standards become effective for fiscal years beginning after December 15, 1997. Management adopted these standards in the year ended September 24, 1999. In June 1999, The FASB issued SFAS NO. 133 which establishes standards for accounting and reporting derivative instruments, including certain derivative instruments embedded in other contracts, (collectively referred to as derivatives) and for hedging activities. Management adopted these standards in the year ended September 24, 1999. IMPACT OF THE YEAR 2000 ISSUE The Company defines a system as Year 2000 compliant if it is 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 two phases. During phase one, completed in October 1998, the Company prepared an inventory of all Information Technology ("IT") and non-IT systems, which are critical to operations. The Company tested all of its internal IT systems and concluded that not all systems were compliant under the above definition. The Company has determined the remedies necessary to achieve Year 2000 compliance. The Company finished testing and remediation by November 1999. In phase two, the Company replaced hardware chips, software and entire components in those systems deemed to be non-compliant. The Company completed phase two in November 1999 for National and in June 1999 for WestAmerica. As required by the NASD, National and WestAmerica completed and filed, in April 1999, Year 2000 readiness reports. Additionally, National was audited by the NASD and completed all recommendations from the NASD audit in November 1999. 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 implemented this conversion at the end of March 1999. As part of this agreement, BETA Systems, Inc. has represented to the Company that they will be Year 2000 compliant. Additionally, the Company 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. The Company has determined that material costs and resources will not be required to modify or replace portions of its hardware and software so that its computer systems will properly utilize dates beyond December 31, 1999. To date, the Company has spent $160,000 and estimates it will spend less than $200,000 in total regarding the Year 2000 issue. The Company has developed a contingency plan for unanticipated Year 2000 exposure as part of its overall efforts to ensure that its systems are Year 2000 compliant on a timely basis. National has clearing arrangements with other brokerage firms and if its internal systems incur Year 2000 problems, National will clear its business through these other firms. 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 could 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. IMPACT OF THE YEAR 2000 ISSUE (Continued) The foregoing represents a Year 2000 readiness disclosure entitled to protection as provided in the Year 2000 Information and Readiness Disclosure Act. ITEM 7A - QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK The Company's primary market risk arises from the fact that it engages in proprietary trading and makes dealer markets in equity securities. Accordingly, the Company may be required to maintain certain amounts of inventories in order to facilitate customer order flow. The Company may incur losses as a result of price movements in these inventories due to changes in interest rates, foreign exchange rates, equity prices and other political factors. The Company is not subject to direct market risk due to changes in foreign exchange rates. However, the Company is subject to market risk as a result of changes in interest rates and equity prices, which are affected by global economic conditions. The Company manages its exposure to market risk by limiting its net long or short positions. Trading and inventory accounts are monitored daily by management and the Company has instituted position limits. Credit risk represents the amount of accounting loss the Company could incur if counterparties to its proprietary transactions fail to perform and the value of any collateral proves inadequate. Although credit risk relating to various financing activities is reduced by the industry practice of obtaining and maintaining collateral, the Company maintains more stringent requirements to further reduce its exposure. The Company monitors its exposure to counterparty risk on a daily basis by using credit exposure information and monitoring collateral values. The Company maintains a credit committee, which reviews margin requirements for large or concentrated accounts and sets higher requirements or requires a reduction of either the level of margin debt or investment in high-risk securities or, in some cases, requiring the transfer of the account to another broker-dealer. The Company monitors its market and credit risks daily through internal control procedures designed to identify and evaluate the various risks to which the Company is exposed. There can be no assurance, however, that the Company's risk management procedures and internal controls will prevent losses from occurring as a result of such risks. The following table shows the quoted market values of the Company's securities owned ("long"), securities sold but not yet purchased ("short") and net positions as of September 24, 1999: LONG SHORT NET Corporate stocks $294,000 $134,000 $ 160,000 (long) Stock options $ 4,000 $ 5,000 $ 1,000 (short) ITEM 8 - FINANCIAL STATEMENTS See part IV, Item 14(a)(1) for a list of financial statements filed as part of this Report. INDEPENDENT AUDITORS' REPORT To the Stockholders and Board of Directors Olympic Cascade Financial Corporation We have audited the accompanying consolidated statements of financial condition of Olympic Cascade Financial Corporation and Subsidiaries as of September 24, 1999 and September 25, 1998 and the related consolidated statements of operations, changes in stockholders' equity, and cash flows for the years 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 audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provides a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Olympic Cascade Financial Corporation and Subsidiaries as of September 24, 1999 and September 25, 1998, and the results of their operations and their cash flows for the years then ended in conformity with generally accepted accounting principles. /S/Feldman Sherb Horowitz & Co., P.C. Feldman Sherb Horowitz & Co., P.C. Certified Public Accountants New York, New York November 29, 1999 F-1 INDEPENDENT AUDITOR'S REPORT To the Stockholders and Board of Directors Olympic Cascade Financial Corporation We have audited the accompanying consolidated statements of operations, changes in stockholders' equity, and cash flows of Olympic Cascade Financial Corporation and subsidiaries for the year ended September 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 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 results of operations and cash flows of Olympic Cascade Financial Corporation and subsidiaries for the year ended September 26, 1997, in conformity with generally accepted accounting principles. /s/ Moss Adams LLP Seattle, Washington November 14, 1997 F-1A
OLYMPIC CASCADE FINANCIAL CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION September 24, September 25, 1999 1998 ------------ ------------ ASSETS CASH, subject to immediate withdrawal .......................... $ 384,000 $ 551,000 CASH, CASH EQUIVALENTS AND SECURITIES .......................... 41,416,000 27,348,000 DEPOSITS ....................................................... 1,679,000 2,024,000 RECEIVABLES: Customers ................................................. 38,038,000 39,680,000 Brokers and dealers ....................................... 2,342,000 826,000 Other ..................................................... 976,000 315,000 Refundable federal income tax ............................. -- 654,000 SECURITIES HELD FOR RESALE, at market .......................... 298,000 235,000 FIXED ASSETS, net .............................................. 1,176,000 1,292,000 GOODWILL, net .................................................. 45,000 61,000 OTHER ASSETS ................................................... 343,000 130,000 ------------ ------------ $ 86,697,000 $ 73,116,000 ============ ============ LIABILITIES AND STOCKHOLDERS' EQUITY PAYABLES: Customers ................................................. $ 67,158,000 $ 60,548,000 Brokers and dealers ....................................... 7,581,000 1,714,000 SECURITIES SOLD, BUT NOT YET PURCHASED, at market .............. 139,000 73,000 ACCOUNTS PAYABLE, ACCRUED EXPENSES AND OTHER LIABILITIES ......................................... 3,167,000 2,073,000 REVOLVING CREDIT LINE .......................................... 2,100,000 2,700,000 NOTES PAYABLE .................................................. 1,648,000 1,948,000 CAPITAL LEASES PAYABLE ......................................... 865,000 1,112,000 ------------ ------------ 82,658,000 70,168,000 ------------ ------------ 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, 1,694,595 and 1,463,007 shares issued and outstanding .. 34,000 29,000 Additional paid-in capital ................................ 6,375,000 5,407,000 Accumulated Deficit ....................................... (2,370,000) (2,488,000) ------------ ------------ 4,039,000 2,948,000 ------------ ------------ $ 86,697,000 $ 73,116,000 ============ ============
See notes to consolidated financial statements. F-2
OLYMPIC CASCADE FINANCIAL CORPORATION CONSOLIDATED STATEMENTS OF OPERATIONS For the Years Ended ------------- September 24, September 25, September 26, 1999 1998 1997 ------------ ------------ ------------- REVENUES: Commissions ................................................................. $ 24,565,000 $ 23,636,000 $ 17,496,000 Net dealer inventory gains .................................................. 9,057,000 5,512,000 4,782,000 Underwriting ................................................................ 2,459,000 10,726,000 12,837,000 Interest and dividends ...................................................... 5,557,000 4,380,000 3,775,000 Transfer fees and clearance services ........................................ 869,000 735,000 620,000 Other ....................................................................... 823,000 705,000 484,000 ------------ ------------ ------------- 43,330,000 45,694,000 39,994,000 ------------ ------------ ------------- EXPENSES: Commissions ................................................................. 25,735,000 25,045,000 22,017,000 Employee compensation and related expenses .................................. 4,882,000 8,746,000 6,364,000 Occupancy and equipment costs ............................................... 2,548,000 3,736,000 2,927,000 Interest .................................................................... 3,764,000 2,840,000 2,265,000 Clearance fees .............................................................. 1,773,000 1,565,000 965,000 Communications .............................................................. 1,133,000 1,922,000 1,499,000 Taxes, licenses, registration ............................................... 106,000 620,000 874,000 Professional fees ........................................................... 1,956,000 1,381,000 589,000 Other operating expenses .................................................... 1,319,000 5,129,000 2,300,000 ------------ ------------ ------------- 43,216,000 50,984,000 39,800,000 ------------ ------------ ------------- INCOME (LOSS) BEFORE INCOME TAXES ................................................ 114,000 (5,290,000) 194,000 BENEFIT (PROVISION) FOR INCOME TAXES ............................................. 4,000 624,000 (93,000) ----------- ------------ ------------- NET INCOME (LOSS) ................................................................ $ 118,000 $ (4,666,000) $ 101,000 ============ ============ ============= EARNINGS (LOSS) PER SHARE OF COMMON STOCK Basic ....................................................................... $ 0.08 $ (3.12) $ 0.08 ============ ============ ============= Diluted ..................................................................... $ 0.08 $ (3.12) $ 0.07 ============ ============ ============= WEIGHTED AVERAGE NUMBER OF COMMON SHARES Basic ....................................................................... 1,563,499 1,496,634 1,195,403 ============ ============ ============= Diluted ..................................................................... 1,563,499 1,496,634 1,425,119 ============ ============ =============
See notes to consolidated financial statements. F-3 OLYMPIC CASCADE FINANCIAL CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY YEARS ENDED SEPTEMBER 24, 1999, SEPTEMBER 25, 1998 AND SEPTEMBER 26, 1997
Common Stock Additional Retained -------------------------- Paid-In Earnings Shares Amount Capital (Deficit) Total ----------- ----------- ----------- ----------- ----------- BALANCE, September 28, 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 Exercise of stock options ..................... 82,613 2,000 297,000 -- 299,000 Exercise of stock warrants .................... 5,000 -- 20,000 -- 20,000 Issuance of common stock and warrants in lawsuit settlement and payment of expenses 145,000 3,000 618,000 -- 621,000 Options issued to consultants ................. -- -- 38,000 -- 38,000 Treasury stock ................................ (1,025) -- (5,000) -- (5,000) Net income .................................... -- -- -- 118,000 118,000 ----------- ----------- ----------- ----------- ----------- BALANCE, September 24, 1999 ........................ 1,694,595 $ 34,000 $ 6,375,000 $(2,370,000) $ 4,039,000 =========== =========== =========== =========== ===========
See notes to consolidated financial statements. F-4
OLYMPIC CASCADE FINANCIAL CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS For the Years Ended -------------------------------------------- September 24, September 25, September 26, 1999 1998 1997 ------------ ------------ ------------ CASH FLOWS FROM OPERATING ACTIVITIES: Net income (loss) ............................................... $ 118,000 $ (4,666,000) $ 101,000 Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities Depreciation and amortization ................................... 408,000 716,000 498,000 Issuance of common stock in lawsuit settlement .................. 501,000 - - Issuance of common stock in payment of expenses ................. 120,000 - - Compensation related to issuance of stock options ............... 38,000 - - Loss (gain) on sale of subsidiaries ............................. (5,000) 1,114,000 - Loss on disposal of fixed assets ................................ - - 2,000 Deferred income tax benefit ..................................... (2,000) 6,000 (45,000) Gain on foreign currency translation ............................ - - (43,000) Changes in assets and liabilities: Decrease (increase) in cash, cash equivalents and securities (14,068,000) 3,586,000 2,071,000 Decrease (increase) in deposits ............................. 345,000 (732,000) (515,000) Increase in receivables ..................................... (535,000) (16,379,000) (6,900,000) Decrease (increase) in federal income tax receivable ........ 654,000 (57,000) (948,000) Decrease (increase) securities held for resale .............. (63,000) 1,831,000 1,350,000 Increase in other assets .................................... (211,000) (413,000) (439,000) Increase in payables ........................................ 12,477,000 11,682,000 2,105,000 Increase (decrease) in securities sold, but not yet purchased 66,000 (974,000) (290,000) Increase (decrease) in accounts payable, accrued expenses and other liabilities ................................... 1,195,000 (320,000) 1,181,000 ------------ ------------ ------------ NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES .................. 1,038,000 (4,606,000) (1,872,000) ------------ ------------ ------------ CASH FLOWS FROM INVESTING ACTIVITIES: Purchase of fixed assets ........................................ (276,000) (371,000) (1,313,000) Sale of fixed assets ............................................ - 124,000 - Purchase of goodwill ............................................ - -- (83,000) Proceeds from sale of subsidiary ................................ - 500,000 - ------------ ------------ ------------ NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES .................. (276,000) 253,000 (1,396,000) ------------ ------------ ------------ CASH FLOWS FROM FINANCING ACTIVITIES: Issuance of common stock ........................................ - - 724,000 Exercise of stock options ....................................... 319,000 8,000 644,000 Borrowings (repayments) on line of credit ....................... (600,000) 2,700,000 - Proceeds from notes payable ..................................... - 1,925,000 1,805,000 Payments on capital lease ....................................... (348,000) (108,000) - Payments on notes payable ....................................... (300,000) (600,000) (1,653,000) ------------ ------------ ------------ NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES .................. (929,000) 3,925,000 1,520,000 ------------ ------------ ------------ DECREASE IN CASH ..................................................... (167,000) (428,000) (1,748,000) CASH, beginning of year .............................................. 551,000 979,000 2,727,000 ------------ ------------ ------------ CASH, end of year .................................................... $ 384,000 $ 551,000 $ 979,000 ============ ============ ============ SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION Cash paid during the year for: Interest .................................................... $ 3,727,000 $ 2,783,000 $ 2,265,000 ============ ============ ============ Income taxes ................................................ $ - $ - $ 1,117,000 ============ ============ ============ SUPPLEMENTAL DISCLOSURES OF NONCASH INVESTING AND FINANCING ACTIVITIES Tax effect of common stock issued and stock options exercised ............................................... $ - $ - $ 78,000 ============ ============ ============ Warrants issued as a discount on notes payable .............. $ - $ 307,000 $ - ============ ============ ============ Redemption and retirement of capital stock .................. $ 5,000 $ 305,000 $ - ============ ============ ============ Assets under capital lease .................................. $ - $ 1,180,000 $ - ============ ============ ============ Acquisitions of subsidiaries: Fair value of assets acquired ............................... - - 1,596,000 Liabilities assumed ......................................... - - 855,000 ----------- ------------ ------------ Common stock issued ......................................... $ - $ - $ 741,000 ============ ============ ============
See notes to consolidatd financial statements. F-5 OLYMPIC CASCADE FINANCIAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS SEPTEMBER 24, 1999, SEPTEMBER 25, 1998 AND SEPTEMBER 27, 1997 1. ORGANIZATION: OLYMPIC CASCADE FINANCIAL CORPORATION ("OLYMPIC" OR THE "COMPANY") is a diversified 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 institutional research and sales and investment banking services for both public offerings and private placements, and also provides retail brokerage and trade clearance operations. During the year ended September 25, 1998, the Company sold its interests in both L.H. Friend, Weinress, Frankson & Persson, 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. E. FISCAL YEAR - The Company has a fifty-two or fifty-three week year, ending on the last Friday in September. F-6 F. CASH AND CASH EQUIVALENTS - For purposes of the statement of cash flows, the Company defines cash as cash subject to immediate withdrawal. Cash, cash equivalents and securities as discussed in Note 4 are not considered a change in cash for this purpose. G. INCOME TAXES - The Company recognizes deferred tax assets and liabilities based on the difference between the financial statements carrying amounts and the tax basis of assets and liabilities, using the effective tax rates in the years in which the differences are expected to reverse. A valuation allowance related to deferred tax assets is also recorded when it is probable that some or all of the deferred tax asset will not be realized. H. FAIR VALUE OF FINANCIAL INSTRUMENTS - Substantially all of the Company's financial statements are carried at fair value. Assets, including cash, cash equivalents and securities, deposits, certain receivables, securities held for resale and other assets, are carried at fair value or contracted amounts which approximate fair value. Similarly, liabilities, including certain payables, securities sold but not yet purchased and notes payable are carried at fair value or contracted amounts approximating fair value. I. EARNINGS (LOSS) PER SHARE - Basic earnings (loss) per common share is based upon the net income (loss) for the year divided by the weighted average number of common shares outstanding during the year. Diluted earnings (loss) per common share assumes that all common stock equivalents have been converted to common shares using the treasury stock method. 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. 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 24, 1999 the Company believes that there has been no impairment of its long-lived assets. K. STOCK BASED COMPENSATION - The Company accounts for stock transactions in accordance with APB Opinion No. 25, "Accounting for Stock Issued to Employees". In accordance with Statement of Financial Standards No. 123, "Accounting for Stock Based Compensation" the Company has adopted the pro forma disclosure requirements of Statement No. 123. F-7 L. CONCENTRATIONS OF CREDIT RISK - The Company is actively involved in securities underwriting, brokerage, distribution and trading. These and other related services are provided on a national basis to a large and diversified group of clients and customers, including corporations, governments, financial institutions and individual investors. The Company's exposure to credit risk associated with the non-performance by these customers and counterparties in fulfilling their contractual obligations can be directly impacted by volatile or illiquid trading markets which may impair the ability of customers and counterparties to satisfy their obligations to the Company. Substantially all of the securities held for the exclusive benefit of customers, pursuant to SEC Rule 15c3-3, consist of issues by the U.S. Government or federal agencies. The Company's most significant counterparty concentrations are other brokers and dealers, commercial banks, institutional clients and other financial institutions. This concentration arises in the normal course of the Company's business. 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 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 In June 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 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 subsequent to the sale recorded a corresponding allowance on the note receivable of $216,000. Under the terms of the note, the Company collected approximately $66,000, through September 24, 1999 and received 1,025 shares of the Company's common stock. The operating results of these acquired companies are included in the consolidated statement of operations from their respective acquisition dates through their dates of disposition. Goodwill resulting from the WestAmerica 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:
September 24, September 25, 1999 1998 ----------------------- --------------------- United States Government obligations $ 40,521,000 $ 24,547,000 Reverse repurchase agreements - 2,530,000 Cash 895,000 271,000 ----------------------- --------------------- $ 41,416,000 $ 27,348,000 ======================= =====================
The United States Government obligations mature at various dates through June 2028 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 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 amounts payable to customers are balances in accounts of officers and directors totaling $109,000 at September 24, 1999 and $466,000 at September 25, 1998 respectively. 6. BROKER-DEALER RECEIVABLES AND PAYABLES Amounts receivable from and payable to brokers and dealers include:
September 24, September 25, 1999 1998 ---------------------- ---------------------- Due from clearing organization $ 1,231,000 $ 314,000 Deposits paid for securities borrowed 720,000 99,000 borrowed borrowed borrowed Commissions receivable 327,000 278,000 Interest and dividends 5,000 - Securities failed to deliver 59,000 135,000 ---------------------- ---------------------- Total receivable $ 2,342,000 $ 826,000 ====================== ====================== Due to clearing organization $ 6,819,000 $ 1,345,000 Securities failed to receive 762,000 369,000 ---------------------- Total payable $ 7,581,000 $ 1,714,000 ====================== ======================
Securities borrowed are recorded at the amount of cash collateral advanced or received. The Company monitors the market value of securities borrowed and loaned on a daily basis and obtains additional collateral from counterparties as necessary. The Company has receivables and payables for financial instruments sold to and purchased from broker-dealers. The Company is exposed to risk of loss from the inability of broker-dealers to pay for purchases or to deliver financial instruments sold, in which case the Company would have to sell or purchase the financial instruments at prevailing market prices. F-10 7. SECURITIES HELD FOR RESALE Securities held for resale and securities sold, but not yet purchased consist of the following:
September 24, 1999 September 25, 1998 ------------------------------------- ------------------------------------ Securities Sold , But Securities Sold, But Held For Not Yet Held For Not Yet Resale Purchased Resale Purchased ----------------- ---------------- ---------------- ----------------- Corporate stocks $ 294,000 $ 134,000 $ 230,000 $ 46,000 U.S. Government obligations - - - 27,000 Corporate obligations - - 5,000 - Stock options 4,000 5,000 - - ----------------- ---------------- ---------------- ----------------- $ 298,000 $ 139,000 $ 235,000 $ 73,000 ================= ================ ================ =================
Securities held for resale and securities sold, but not yet purchased are recorded at fair value. Fair value is generally based upon quoted market prices. If quoted market prices are not available, or if liquidating the Company's position is reasonably expected to impact market prices, fair value is determined based upon other relevant factors, including dealer price quotations, price activity of similar instruments and pricing models. Pricing models consider the time value and volatility factors underlying the financial instruments and other economic measurements. Securities sold, but not yet purchased commit the Company to deliver specified securities at predetermined prices. The transactions may result in market risk since, to satisfy the obligation, the Company must acquire the securities at market prices, which may exceed the values reflected on the Consolidated Statement of Financial Condition. F-11 8. FIXED ASSETS Fixed assets, at cost, consist of the following:
September 24, September 25, 1999 1998 -------------------- ---------------------- Office machines $ 320,000 $ 274,000 Furniture and fixtures 561,000 679,000 Electronic equipment 383,000 916,000 Leasehold improvements 935,000 55,000 Assets under capital leases 1,180,000 1,180,000 -------------------- ---------------------- 3,379,000 3,104,000 Less accumulated depreciation and amortization 2,203,000 1,812,000 -------------------- ---------------------- $ 1,176,000 $ 1,292,000 ==================== ======================
In April 1998 and June 1998, the Company entered into sale and leaseback agreements with an outside funding company. As part of the agreement the Company sold certain fixed assets to the funding company for $930,000 and $250,000 in April and June, respectively, and agreed to lease these assets back over a forty-eight month period. The Company recorded no gain or loss and has recorded this transaction as a capital lease. The following is a schedule of assets under capital leases:
Office machines $ 180,000 Furniture and fixtures 512,000 Electronic equipment 352,000 Leasehold improvements 136,000 ------------------- 1,180,000 Less accumulated depreciation and amortization 368,000 ------------------- $ 812,000 ===================
F-12 The following is a schedule by years of future minimum lease payments under these capital leases together with the present value of the net minimum lease payments as of September 24, 1999: Fiscal year ended 2000 $ 340,000 2001 340,000 2002 357,000 Total minimum lease payments 1,037,000 Less: Amount representing taxes 62,000 ---------------- Net minimum lease payments 975,000 Less amount representing interest 110,000 ---------------- Present value of net minimum lease payments $ 865,000 ================ 9. LINE OF CREDIT National has an unsecured line of credit of up to $3,000,000. The line is subject to renewal in January 2000. Borrowings bear interest at the bank's prime rate which is approximately 8.50% at September 24, 1999. Interest is payable monthly. At September 24, 1999, the Company has $2,100,000 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 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. F-13 The following is a schedule by years of debt maturity as of September 24, 1999: Fiscal year ended 2001 $ 802,000 2002 963,000 2003 160,000 1,925,000 Less: discount on notes (277,000) ------------------ $ 1,648,000 ================== 11. FEDERAL INCOME TAX The income tax benefit (provision) consists of:
For the Years Ended ------------------------------------------------------------------------------- September 24, September 25, September 26, 1999 1998 1997 ----------------------- ---------------------- --------------------- Current federal income tax $ 8,000 $ 626,000 $ (56,000) Deferred federal income tax - (2,000) 45,000 Current state income tax (4,000) - (82,000) ----------------------- ---------------------- --------------------- $ 4,000 $ 624,000 $ (93,000) ======================= ====================== =====================
F-14 The income tax benefit (provision) varies from the federal statutory rate as follows:
September 24, September 25, September 26, 1999 1998 1997 --------------------- --------------------- --------------------- Statutory federal rate $ (39,000) $ 1,852,000 $ (66,000) State income taxes, net of federal income tax benefit (4,000) - (54,000) Losses for which no benefit is provided - (1,230,000) - Tax benefit of net operating losses 47,000 - - Other - 2,000 27,000 --------------------- --------------------- --------------------- $ 4,000 $ 624,000 $ (93,000) ===================== ===================== =====================
The Company has net operating loss (NOL) carryforwards for Federal income tax purposes of approximately $1,700,000, substantially all of which expires in 2018. Significant components of the Company's deferred tax assets are as follows at September 24, 1999, September 25, 1998 and September 26, 1997:
1999 1998 1997 ------------------ ----------------- -------------- Net Operating losses $ 578,000 $ 1,017,000 $ 34,000 Other 125,000 41,000 11,000 ------------------ ----------------- -------------- Total 703,000 1,058,000 45,000 Valuation allowance (662,000) (1,017,000) - Total deferred tax asset $ 41,000 $ 41,000 $ 45,000 ================== ================= ==============
F-15 12. COMMITMENTS EMPLOYMENT AGREEMENTS - During fiscal 1999 the Company entered into employment agreements with five executive officers. Four of such agreements are for a term of three years expiring in June 2002 at an annual salary aggregating $960,000. The agreements provide for payment of one year's salary upon severance of employment by the Company and of two years salary if the Company or executive elects to terminate employment after the occurrence of a change in control of the Company, as defined. The other agreement is for a term of four years expiring in June 2003 at an annual salary of $350,000 plus incentive compensation, as defined, not to exceed $50,000. Such agreement provides for the same compensation terms in the event of termination of employment. LEASES - As of September 24, 1999, the Company is committed under operating leases for future minimum lease payments as follows: FISCAL YEAR ENDING 2000 $ 1,418,000 2001 1,605,000 2002 1,325,000 2003 1,109,000 THEREAFTER 911,000 --------------- $ 6,368,000 Rental expense for operating leases for the years ended September 24, 1999, September 25, 1998, and September 26, 1997 was $933,000, $1,661,000 and $1,113,000, respectively. UNDERWRITINGS - During fiscal 1999, the Company participated in underwriting securities for private placements, initial and secondary public offerings. At September 24, 1999, the Company has no outstanding commitments relating to underwriting transactions. 13. CONTINGENCIES In May 1997, a minority stockholder of Olympic commenced a lawsuit alleging that the Company breached its fiduciary duties to the plaintiff and that the proxy statement by which the Company and Olympic effected their merger was materially false and misleading. In June 1999, the litigation was settled whereby the plaintiff received 25,000 shares of common stock of Olympic, and a warrant to purchase 50,000 shares of Olympic common stock at $4.00 per share. The warrant expires on May 25, 2004. In June 1997, a Trust and three individuals, commenced a lawsuit against Olympic and National, the action against Olympic was subsequently dismissed. The plaintiffs alleged the defendants' failure to purchase securities from them constitutes, among other things, breach of contract, securities rule violations and fraud. In February 1999, the District Court dismissed plaintiffs' claims against National Securities in their F-16 entirety and granted National Securities motion for summary judgement. A final judgement was issued by the court in April 1999. The plaintiffs filed a notice of appeal in May 1999. In September 1997, a corporation commenced a lawsuit against the Company alleging breach of contract on an alleged promise to raise capital for the plaintiff through an initial public offering of stock. In February 1999, the litigation was settled whereby the plaintiff received 40,000 shares of common stock of Olympic. In October 1998, a corporation commenced a lawsuit against the Company relating to the unsuccessful effort to complete an initial public offering of the plaintiff's stock. In June 1999, the litigation was settled whereby the plaintiff received 50,000 shares of common stock of Olympic, a warrant to purchase 20,000 shares of Olympic common stock at $4.00 per share, and cash payments totaling $75,000. The warrant expires on June 3, 2004. The Company has been named together with others as a defendant in several class action lawsuits filed against an unrelated third party in 1999. The Company has not yet been served in any of these actions The Company is a defendant in various other arbitrations and administrative proceedings, lawsuits and claims which in the aggregate seek general and punitive damages approximating $1,600,000. These matters arise out of the normal course of business. The Company intends to vigorously defend itself in these actions, and in any event, does not believe these actions singularly or combined would have a material adverse effect on the Company's financial statements or business operations. 14. STOCKHOLDERS' EQUITY STOCK OPTIONS - The Company's stock option plans provide for the granting of stock options to certain key employees, directors and investment executives. Generally, options outstanding under the Company's stock option plan are granted at prices equal to or above the market value of the stock on the date of grant, vest either immediately or ratably over up to five years, and expire five years subsequent to award. The Company applies APB Opinion No. 25 and related Interpretations in accounting for its plans. FASB Statement No. 123 "Accounting for Stock-Based Compensation" ("SFAS 123") was issued by the FASB and, if fully adopted, changes the methods for recognition of cost on plans similar to those of the Company. Had compensation cost for the Company's stock option plans been determined base upon the fair value at the grant date for awards under these plans consistent with the methodology prescribed under SFAS 123, the Company's net income and earnings per share would have been reduced by approximately $705,000, or $.45 per share in 1999, $761,000, or $0.51 F-17 per share in 1998, $779,000, or $0.54 per share in 1997. The fair value of the options granted during 1999, 1998, and 1997 is estimated as $946,000, $1,153,000, and $960,000, respectively, on the date of grant using the Black-Scholes option-pricing model with the following assumptions:
1999 1998 1997 ----------------- ---------------- ---------------- Volatility 144.00% 63.87% 63.39% Risk-free interest rate 5.00% 6.17% 6.31% Expected life 5 years 5 years 5 years
A summary of the status of the Company's stock options is presented below:
Weighted Average Price Per Authorized Granted Available Share ------------------ ---------------- --------------- ------------- 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 1,183,806 781,130 402,676 $ 4.88 Granted - 148,500 (148,500) Exercised (2,012) (2,012) - $ 3.73 Forfeitures (161,640) (161,340) - ------------------ ---------------- --------------- Balance, September 25, 1998 1,020,454 766,278 254,176 $ 4.84 Creation of new plan 500,000 - 500,000 Granted - 425,500 (425,500) Exercised (82,613) (82,613) - $ 3.62 Forfeitures (40,643) (40,643) - $ - ------------------ ---------------- --------------- Balance, September 24, 1999 1,397,198 1,068,522 328,676 $ 4.65 ================== ================ ===============
The following table summarizes information about stock options outstanding at September 24, 1999:
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 - - ----------------- ----------------- --------------- ------------- ---------------- ------------- $3.39-3.73 290,214 1.96 $ 3.58 290,214 $ 3.58 $4.00-4.69 476,038 4.24 $ 4.37 246,904 $ 4.15 $5.36-5.64 163,356 2.91 $ 5.29 159,497 $ 5.42 $7.12 138,914 2.38 $ 7.12 138,914 $ 7.12 ----------------- ---------------- 1,068,522 835,529 ================= ================
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). In 1999 the Company issued stock warrants in conjunction with lawsuit settlements (see Note 13). 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. 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-18 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 24, 1999, National's net capital exceeded the requirement by $2,525,000. WestAmerica, as a registered broker-dealer is also subject to the SEC's Net Capital Rule 15c3-1, which, under the standard method, requires that each company maintain minimum net capital equal to the greater of $100,000 or 6 2/3% of aggregate indebtedness. At September 24, 1999, WestAmerica's net capital exceeded the requirement by $94,000. 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 24, 1999 and September 25, 1998, 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. FINANCIAL INFORMATION - OLYMPIC CASCADE FINANCIAL CORPORATION Olympic was formed on February 6, 1997. The following Olympic (parent company only) financial information should be read in conjunction with the other notes to the consolidated financial statements. F-19
OLYMPIC CASCADE FINANCIAL CORPORATION STATEMENTS OF FINANCIAL CONDITION ASSETS September 24, September 25, 1999 1998 ---------- ---------- Cash, subject to immediate withdrawal .................... $ 15,000 $ 8,000 Receivable from subsidiaries ............................. 197,000 14,000 Other receivables ........................................ 50,000 53,000 Capital leases ........................................... 812,000 1,078,000 Investment in subsidiaries ............................... 5,757,000 5,355,000 Other assets ............................................. 87,000 30,000 ---------- ---------- $ 6,918,000 $ 6,538,000 ========== ========== LIABILITIES AND STOCKHOLDERS' EQUITY Accounts payable, accrued expenses and other liabilities . $ 110,000 $ 271,000 Payable to subsidiaries .................................. 256,000 259,000 Capital lease payable .................................... 865,000 1,112,000 Note payable ............................................. 1,648,000 1,948,000 ---------- ---------- 2,879,000 3,590,000 ---------- ---------- Stockholders' equity ..................................... 4,039,000 2,948,000 ---------- ---------- $ 6,918,000 $ 6,538,000 ========== ==========
F-20 OLYMPIC CASCADE FINANCIAL CORPORATION STATEMENTS OF OPERATIONS
Period from February 6, 1997 Fiscal Year Ended Fiscal Year Ended (Inception) to September 24, 1999 September 25, 1998 September 26, 1997 ------------------------- ------------------------- ----------------------- Operating expenses $ 624,000 $ 2,609,000 $ 696,000 Other income (expenses) Gain on foreign currency translation - - 43,000 Interest and other income 20,000 151,000 - Gain (loss) on investment in subsidiaries 717,000 (1,094,000) (159,000) Gain (loss) on sale of investments 5,000 (1,114,000) - ------------------------- ------------------------- ----------------------- Net income (loss) before income tax 118,000 (4,666,000) (812,000) ------------------------- ------------------------- ----------------------- Income tax benefit - - 270,000 ------------------------- ------------------------- ----------------------- $ 118,000 $ (4,666,000) $ (542,000) ========================= ========================= =======================
F-21
OLYMPIC CASCADE FINANCIAL CORPORATION STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY Additional Common Stock Paid-In Accumulated Shares Amount Capital Deficit Total ------------ ------------ ------------ ------------ ------------ FORMATION, February 6, 1997 ........................ -- $ -- $ -- $ -- $ 0 Common Stock issued in connection with acquisitions .................. 1,203,930 24,000 7,648,000 -- 7,672,000 Exercise of stock options, including $25,000 income tax benefit .................... 109,175 2,000 472,000 -- 474,000 Stock dividends ............................... 131,100 3,000 701,000 (704,000) 0 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, including income tax benefit ............. 2,012 -- 8,000 -- 8,000 Stock dividends ............................... 72,299 1,000 351,000 (352,000) 0 Stock redemption .............................. (55,509) (1,000) (304,000) -- (305,000) Original discount on notes payable ............ -- -- 307,000 -- 307,000 Net loss ...................................... -- -- -- (4,666,000) (4,666,000) ------------ ------------ ------------ ------------ ------------ BALANCE, September 25, 1998 ........................ 1,463,007 29,000 9,183,000 (6,264,000) 2,948,000 ------------ ------------ ------------ ------------ ------------ Exercise stock options ........................ 82,613 2,000 297,000 0 299,000 Exercise stock warrants ....................... 5,000 0 20,000 0 20,000 Treasury stock ................................ (1,025) 0 (5,000) 0 (5,000) Issuance of common stock in legal settlements and payment of services .................... 145,000 3,000 498,000 0 501,000 Warrants issued in conjunction with legal settlements -- 0 120,000 0 120,000 Options issued to consultants ................. -- 0 38,000 0 38,000 Net income .................................... -- 0 0 118,000 118,000 ------------ ------------ ------------ ------------ ------------ BALANCE, September 24, 1999 ........................ 1,694,595 $ 34,000 $ 10,151,000 $ (6,146,000) $ 4,039,000 ============ ============ ============ ============ ============
* Additional 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-22
OLYMPIC CASCADE FINANCIAL CORPORATION STATEMENTS OF CASH FLOWS Period from February 6, 1997 For Year Ended For Year Ended (Inception) to September 24, September 25, September 26, 1999 1998 1997 ----------- ----------- ----------- CASH FLOWS FROM OPERATING ACTIVITIES Net income (loss) .................................... $ 118,000 $(4,666,000) $ (542,000) Adjustments to reconcile net income (loss) to net cash provided by (used in) from operating activities Gain on foreign currency translation ............ -- -- (43,000) Loss on investment in subsidiaries .............. 232,000 1,094,000 159,000 Gain (loss) on sale of subsidiaries ............. (5,000) 1,114,000 -- Issuance of common stock in lawsuit settlement .. 501,000 -- -- Issuance of common stock in payment of expenses . 120,000 -- -- Compensation related to issuance of stock options 38,000 -- -- Depreciation and amortization ................... 285,000 169,000 -- Changes in assets and liabilities ............... (720,000) 1,196,000 632,000 ----------- ----------- ----------- NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES ......... 569,000 (1,093,000) 206,000 ----------- ----------- ----------- CASH FLOWS FROM INVESTING ACTIVITIES Acquisition of subsidiaries ..................... -- -- (443,000) Capital contributions to subsidiaries ........... (233,000) (135,000) (1,177,000) ----------- ----------- ----------- NET CASH USED IN INVESTING ACTIVITIES ....................... (233,000) (135,000) (1,620,000) ----------- ----------- ----------- CASH FLOWS FROM FINANCING ACTIVITIES Exercise of stock options ....................... 319,000 8,000 474,000 Proceeds from notes payable ..................... -- 1,925,000 1,805,000 Payments on capital lease ....................... (348,000) (108,000) -- Payments on note payable ........................ (300,000) (600,000) (854,000) ----------- ----------- ----------- NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES ......... (329,000) 1,225,000 1,425,000 ----------- ----------- ----------- NET INCREASE (DECREASE) IN CASH ............................. 7,000 (3,000) 11,000 CASH BALANCE Beginning of year ............................... 8,000 11,000 -- ----------- ----------- ----------- End of year ..................................... $ 15,000 $ 8,000 $ 11,000 =========== =========== ===========
F-23 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 fiscal years ended September 26, 1997 and September 27, 1996 and through August 26, 1998 there were no reportable events. The Registrant engaged Feldman Sherb Horowitz & 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 Horowitz & 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 Horowitz & Co., P.C. as to any matter that was either the subject of a disagreement or reportable event. PART III ITEM 10 - DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS, COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT The information required by this item will be included in the Company's 2000 Proxy Statement and is incorporated herein by reference. ITEM 11 - EXECUTIVE COMPENSATION The information required by this item will be included in the Company's 2000 Proxy Statement and is incorporated herein by reference. ITEM 12 - SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT The information required by this item will be included in the Company's 2000 Proxy Statement and is incorporated herein by reference. ITEM 13 - CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS The information required by this item will be included in the Company's 2000 Proxy Statement and is incorporated herein by reference. ITEM 14 - EXHIBITS AND REPORTS ON FORM 8-K (a) The following financial statements are included in Part II Item 8: 1. FINANCIAL STATEMENTS Independent Auditors' Report Consolidated Financial Statements Statements of Financial Condition, September 24, 1999 and September 25, 1998 Statements of Operations, Years Ended September 24, 1999, September 25, 1998 and September 26, 1997 Statements of Changes in Stockholders' Equity, Years ended September 24, 1999, September 25, 1998 and September 26, 1997 Statements of Cash Flows, Years ended September 24, 1999, September 25, 1998 and September 26, 1997 Notes to Consolidated Financial Statements 2. FINANCIAL STATEMENT SCHEDULES Schedules not listed above have been omitted because they are not applicable or have been included in footnotes to the consolidated financial statements. (B) REPORTS ON FORM 8-K No Reports on Form 8-K were filed during the fourth quarter ended September 24, 1999. (C) EXHIBITS See Exhibit Index SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities and Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. OLYMPIC CASCADE FINANCIAL CORPORATION (Registrant) DATE: DECEMBER 20, 1999 BY: /S/STEVEN A. ROTHSTEIN ------------------------ -------------------------------------------- Steven A. Rothstein, Chairman, Chief Executive Officer and President DATE: DECEMBER 20, 1999 BY: /S/ROBERT H. DASKAL ------------------------ -------------------------------------------- Robert H. Daskal, Senior Vice President, Chief Financial Officer, Treasurer and Secretary DATE: DECEMBER 20, 1999 BY: /S/DAVID M. WILLIAMS ------------------------ -------------------------------------------- David M. Williams Chief Accounting Officer and Corporate Controller Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated. DATE: DECEMBER 20, 1999 BY: /S/STEVEN A. ROTHSTEIN ------------------------ -------------------------------------------- Steven A. Rothstein, Chairman, Chief Executive Officer and President DATE: DECEMBER 20, 1999 BY: /S/GARY A. ROSENBERG ------------------------ -------------------------------------------- Gary A. Rosenberg, Director DATE: DECEMBER 20, 1999 BY: /S/JAMES C. HOLCOMB, JR. ------------------------ -------------------------------------------- James C. Holcomb, Jr., Director DATE: DECEMBER 20, 1999 BY: /S/D.S. PATEL ------------------------- -------------------------------------------- D.S. Patel, Director EXHIBIT INDEX 3.1 Certificate of Incorporation, previously filed on Form S-4 in November 1996 and hereby incorporated by reference. 3.2 The Company's Bylaws, previously filed on Form S-4 in November 1996 and hereby incorporated by reference. 10.1 Office lease, Chicago, Illinois, previously filed as Exhibit 10.27 to Form 10-K in December 1996 and hereby incorporated by reference. 10.2 Office lease, Spokane Washington, previously filed as Exhibit 10.28 to Form 10-K in December 1996 and hereby incorporated by reference. 10.3 Amended office lease, Chicago, Illinois, previously filed as Exhibit 10.29 to Form 10-K in December 1996 and hereby incorporated by reference. 10.4 Purchase agreement between shareholders of Friend and the Company, previously filed as Exhibit 10.30 to Form 10-K in December 1997 and hereby incorporated by reference. 10.5 Purchase agreement between shareholders of WestAmerica and the Company, previously filed as Exhibit 10.31 to Form 10-K in December 1997 and hereby incorporated by reference. 10.6 Purchase agreement between shareholders of Travis and the Company, previously filed as Exhibit 10.32 to Form 10-K in December 1997 and hereby incorporated by reference. 10.7 Borrowing agreement between Seattle-First National Bank and the Company, previously filed as Exhibit 10.33 to Form 10-K in December 1998 and hereby incorporated by reference. 10.8 Note payable agreement, previously filed as Exhibit 10.34 to Form 10-K in December 1998 and hereby incorporated by reference. 10.9 Note payable agreement, previously filed as Exhibit 10.35 to Form 10-K in December 1998 and hereby incorporated by reference. 10.10 Note payable agreement, previously filed as Exhibit 10.36 to Form 10-K in December 1998 and hereby incorporated by reference. 10.11 Sales agreement between Friend and the Company, previously filed as Exhibit 10.37 to Form 10-K in December 1998 and hereby incorporated by reference. 10.12 1996 Stock Option Plan, previously filed as Exhibit 4.1 on Form S-8 in February 1999 and hereby incorporated by reference. 10.13 1997 Stock Option Plan, previously filed as Exhibit 4.2 on Form S-8 in February 1999 and hereby incorporated by reference. 10.14 1999 Stock Option Plan, previously filed as Exhibit 4.3 on Form S-8 in February 1999 and hereby incorporated by reference. 10.15* Employment contract dated July 1999. 10.16* Employment contract dated July 1999. 10.17* Employment contract dated July 1999. 10.18* Employment contract dated July 1999. 10.19* Employment contract dated July 1999. 10.20 Office lease, Seattle, Washington. 11. Computation of Earnings per Share. 16.1 Change in Certifying Accountant, previously filed on Form 8-K in August 1998 and hereby incorporated by reference. 21. Subsidiaries of Registrant. 23.1 Consent of Feldman Sherb Erhlich & Co., P.C., previously filed on Form S-8 in February 1999 and Forms S-3 in May 1999 and June 1999 and hereby incorporated by reference. 23.2 Consent of Moss Adams LLP, previously filed on Form S-8 in February 1999 and Forms S-3 in May 1999 and June 1999 and hereby incorporated by reference. 23.3 Consent of Camhy Karlinsky & Stein LLP, previously filed on Forms S-3 in May 1999 and June 1999 and hereby incorporated by reference. 24. Power of Attorney, previously filed on Forms S-3 in May 1999 and June 1999. 27. Financial Data Schedule. *Compensatory agreements EX-11 2 COMPUTATION OF PER SHARE EARNINGS
EXHIBIT 11 OLYMPIC CASCADE FINANCIAL CORPORATION COMPUTATION OF EARNINGS PER SHARE Basic September 24, September 25, September 26, 1999 1998 1997 ----------- ----------- ----------- Net income (loss) ......................................... $ 118,000 ($4,666,000) $ 101,000 =========== =========== =========== Weighted average number of common shares outstanding during the year .................. 1,563,499 1,496,634 1,195,403 =========== =========== =========== Basic earnings per share .................................. $ 0.08 ($ 3.12) $ 0.08 =========== =========== =========== Diluted Weighted average number of common shares outstanding during the year ................... 1,563,499 1,496,634 1,195,403 Add common equivalent shares upon exercise of stock options * * 229,716 ----------- ----------- ----------- Weighted average number of shares used in calculation of primary earnings per share ......... 1,563,499 1,496,634 1,425,119 =========== =========== =========== Diluted earnings per share ................................ $ 0.08 ($ 3.12) $ 0.07 =========== =========== =========== * No effect given to common stock equivalents, as their effect would be anti-dilutive.
EX-10.2 3 OFFICE LEASE LEASE EXTENSION AGREEMENT THIS AGREEMENT MADE AND ENTERED INTO AS OF THE 3RD DAY OF JULY BY AND BETWEEN SEAFO, INC., A DELAWARE CORPORATION ("LANDLORD") AND NATIONAL SECURITIES CORPORATION, A WASHINGTON CORPORATION ("Tenant"). WITNESSETH A. Landlord or its predecessor in interest, and tenant or its predecessor in interest, have heretofore entered into that certain lease dated January 31, 1989, for Premises (the "Premises") as described as suite(s) or room(s) 2200, initially containing approximately 23,391 square feet in the building (the "Property") known as 1001 Fourth avenue plaza, located at 1001 Fourth avenue, Seattle, Washington 98154 which lease has heretofore been amended or assigned by instruments dated; February 23, 1994, February 28, 1996 and August 16, 1996 (collectively, the "Lease"). *NOTE: The parties herby acknowledge and agree that the rentable area of the premises is 25,250 square feet, 6,937 RSF located on the 21st, 16,421 RSF located on the 22nd floor 1,892 RSF located on the 30TH floor, and the rentable area of the Property is 677,949 square feet. B. THE LEASE BY ITS TERMS SHALL EXPIRE ON JUNE 30, 1999 ("Prior Expiration Date") and the parties desire to extend the Lease, all on the terms and conditions hereinafter set forth. NOW THEREFORE, in consideration of the mutual terms and conditions herein contained, and other good and valuable consideration, the receipt and sufficiency of which is hereby acknowledged, the parties do hereby agree as follows: 1. EXTENSION. The term of the lease is herby extended from the prior expiration date so as to expire on June 30, 2004, (which extended period shall be referred to herein as the "Extended Term" and which extended expiration date shall be referred to herein as the "Extended Expiration Date"), unless sooner terminated in accordance with its terms. 2. BASE OR MINIMUM RENT. All erms and conditions contained in the lease shall continue to apply with full force and effect during the aformentioned extended term, except as amended herin and except that the base or minium monthly rent shall be increased to the monthly ammount of $62,073.00. 3. RENT ADJUSTMENT. It is understood and agreed that any terms and provisions in the Lease concerning rent adjustments shall remain in full force and effect, including without limitation any provisions relating to increases or escalations based on increases in any consumer or wholesale price index, or similar index ("CPI"), real estate taxes, utility or other charges, or operating expenses, except that: (A) The base year or stop level for operating expenses shall be 1999 . ------------------------------------------------------------ (B) The base year or stop level for real estate taxes shall be 1999 . -------------------------------------------------------------------- (C) The base date for CPI increases shall be N/A . Under no circumstances shall Tenant be entitled to any free rent period, construction allowance, tenant improvements or other work to the Premises, or any other such economic incentives that may have been provided to Tenant in connection with entering the Lease. 4. CANCELLATION OPTION. Tenant shall have the one time right to cancel this Lease, effective December 31, 2001, by sending Landlord at least six (6) months advance written notice accompanied by a certified or cashier's check in the amount of $372,438.00. 5. NONRECOURSE TO LANDLORD. Any alleged liability of Landlord or of Landlord's trustees, beneficiaries, shareholders, officers, directors, employees, agents, advisors, or consultants (collectively the "Alleged Responsible Parties") to Tenant or to Tenant's partners, employees, agents, guests or invitees or to any other person or entity claiming by, through or under Tenant (collectively the "Claimants") on account of any alleged loss, harm, claim or demand, including without limitation any of such related to attorneys' fees, court costs or to claims or demands of indemnification, which is related to, arises out of, or is in connection with this Lease or any of its Riders, Agreements, Exhibits or other addenda (the "Claims"), shall be limited to the interest of Landlord in the Building and the rental proceeds thereof. Claimants agree to look solely to Landlord's interest and the rental proceeds thereof for the recovery or satisfaction of any judgment obtained against the Alleged Responsible Parties and the Alleged Responsible Parties shall not be personally liable on such judgment and Claimants shall have no recourse personally against any of them. The limitations of liability contained in this paragraph shall apply equally to all present and future Alleged Responsible Parties and to its and their heirs, successors, transferees and assigns. Under no circumstances, including without limitation circumstances of gross negligence, willful misconduct, fraud or any other act or omission to act will any Alleged Responsible Parties be personally liable to Claimants for Claims. 6. INSURANCE, SUBROGATION, AND WAIVER OF CLAIMS. Tenant shall maintain during the Term comprehensive (or commercial) general liability insurance including premises operations, products/completed operations and contractual liability coverage with limits of not less than $3,000,000 combined single limit for personal injury, bodily injury or death, or property damage or destruction (including loss of use thereof) for any one occurrence. Tenant shall also maintain during the Term worker compensation/Employers liability insurance as required by statute, and primary, noncontributory, "all-risk" property damage insurance covering Tenant's improvements, personal property, business records, fixtures and equipment, for damage or other loss caused by fire or other casualty or cause including, but not limited to, vandalism and malicious mischief, theft, water damage of any type, including sprinkler leakage, bursting or stoppage of pipes, explosion, business interruption, Boiler and machinery and other insurable risks in amounts not less than the full insurable replacement value of such property and full insurable value of such other interest of Tenant (subject to $1,000.00 maximum deductible). Landlord shall, as part of Operating Expenses, maintain during the Term comprehensive (or commercial) general liability insurance, with limits of not less than $1,000,000 combined single limit for personal injury, bodily injury or death, or property damage or destruction (including loss of use thereof) for any one occurrence. Landlord shall also, as part of Operating Expenses, maintain during the Term worker compensation insurance as required by statute, and primary, non-contributory, extended coverage or "all-risk" property damage insurance, in an amount equal to at least ninety percent (90%) of the full insurable replacement value of the Property (exclusive of the costs of excavation, foundations and footings, and such risks required to be covered by Tenant's insurance, and subject to reasonable deductible amounts), or such other amount necessary to prevent Landlord from being a co-insured, and such other coverage as Landlord shall deem appropriate or that may be required by any Holder (as defined in Article 25). Tenant shall provide Landlord with certificates evidencing such coverage (and, with respect to liability coverage, showing Landlord, Jones Lang Wootton Realty Advisors and property manager as additional insureds) prior to the Commencement Date, which shall state that such insurance coverage may not be changed or canceled without at least thirty (30) days' prior written notice to Landlord, and shall provide renewal certificates to Landlord at least thirty (30) days prior to expiration of such policies. Landlord may periodically, but not more often than every five years, require that Tenant reasonably increase the aforementioned coverage. Except as provided to the contrary herein, any insurance carried by Landlord or Tenant shall be for the sole benefit of the party carrying such insurance. Any insurance policies hereunder may be "blanket policies". All insurance required hereunder shall be provided by responsible insurers and Tenant's insurer shall be reasonably acceptable to Landlord and have a minimum Best's rating of A-V.I. By this Article, Landlord and Tenant intend that their respective property loss risks shall be borne by responsible insurance carriers to the extent above provided, and Landlord and Tenant hereby agree to look solely to, and seek recovery only from, their respective insurance carriers in the event of a property loss to the extent that such coverage is agreed to be provided hereunder. The parties each hereby waive all rights and claims against each other for such losses, and waive all rights of subrogation of their respective insurers, provided such waiver of subrogation shall not affect the right of the insured to recover thereunder. The parties agree that their respective insurance policies are now, or shall be, endorsed such that said waiver of subrogation shall not affect the right of the insured to recover thereunder, so long as no material additional premium is charged therefor. Furthermore, if Tenant hires a contractor or subcontractor said contractors' general liability insurance will name Landlord, Jones Lang Wootton Realty Advisors and property manager as additional insureds. 7. PARKING AGREEMENT. See attached Parking Agreement for additional Lease provisions. 8. Extension Fee: Landlord will provide to National Securities Corporation, at its sole expense an extension fee equal to $44,187.50, to be paid upon lease execution. 9. NONDISCLOSURE. We are submitting this Lease Extension Agreement on the condition that Tenant not discuss any of the matters set forth in the Lease Extension and Amendment Agreement or disseminate or distribute any information concerning the terms, details or conditions hereof to any person, firm or entity without obtaining the express written approval of Landlord. 10. WHOLE AGREEMENT. This Agreement sets forth the entire agreement between the parties with respect to the matters set forth herein. There have been no additional oral or written representations or agreements. As extended and amended herein, the Lease between the parties shall remain in full force and effect. In case of any inconsistency between the provisions of the Lease and this Agreement, the latter provisions shall govern and control. Under no circumstances shall this Agreement be deemed to grant any right to Tenant to further extend the Lease, and any options to extend or renew contained in the Lease are hereby deleted. 11. NO OFFER. This Agreement shall not be binding until executed and delivered by both parties. Note: The following are attached hereto and made a part of this Extension Agreement dated July 3, 1999: Parking Agreement and Storage Agreement. IN WITNESS WHEREOF, the parties have executed this Agreement as of the date first above written. LANDLORD: SEAFO, INC. a Delaware corporation BY: ITS: TENANT: NATIONAL SECURITIES CORPORATION a Washington corporation BY: ITS: LANDLORD ACKNOWLEDGMENT STATE OF NEW YORK } }ss.: COUNTY OF KINGS } I certify that I know or have satisfactory evidence that __________________________________ is the person who appeared before me, and said person acknowledged that (he/she) signed this instrument, on oath stated that (he/she) was authorized to execute the instrument and acknowledged it as the _______________________________ of Seafo, Inc. to be the free and voluntary act of such party for the uses and purposes mentioned in the instrument. Dated: ____________________ ----------------------------------------- Notary Public in and for the State of New York (seal or stamp) Name Printed: __________________________ My commission expires: ___________________ TENANT ACKNOWLEDGMENTS INDIVIDUAL STATE OF: } } ss.: COUNTY OF: } I, the undersigned, as Notary Public in and for the County and State aforesaid, do hereby certify that _____________________________, personally known to me to be the same person whose name is subscribed to the foregoing instrument, appeared before me this day in person and acknowledged that (he/she) signed the said instrument as his/her free and voluntary act, for the uses and purposes therein set forth. GIVEN under my hand and official seal this _____ day of ________________, 19____. ----------------------------------------- Notary Public Name Printed: __________________________ My commission expires: ___________________ CORPORATION STATE OF: } } ss.: COUNTY OF: } On this the ______ day of _______________, 19____, before me a Notary Public duly authorized in and for the said County in the State aforesaid to take acknowledgments personally appeared ______________________________________ known to me to be the __________________________ of ___________________________________________, one of the corporations described in the foregoing instrument, and acknowledged that as such officer, being authorized so to do (he/she) executed the foregoing instrument on behalf of said corporation by subscribing the name of such corporation by himself/herself as such officer, as his/her free and voluntary act, and as the free and voluntary act of said corporation, for the uses and purposes therein set forth. IN WITNESS WHEREOF, I hereunto set my hand and official seal. ----------------------------------------- Notary Public Name Printed: __________________________ My commission expires: ___________________ EX-10.15 4 EMPLOYMENT AGREEMENTS FIRST AMENDMENT TO EMPLOYMENT AGREEMENT This Amendment is made as of July 1, 1999, by and between Olympic Cascade Financial Corporation, a Delaware corporation (the "Company") and Robert H. Daskal, an individual ("Executive"). A. The Company and Executive are parties to an Employment Agreement dated as of January 1, 1997 (the "Agreement"), pursuant to which the Company employs Executive as its Senior Vice President and Chief Financial Officer, based in the Company's executive offices in Chicago, Illinois; and B. The Company and Executive desire to amend certain provisions of the Agreement, as set forth in this Amendment. NOW, THEREFORE, in consideration of the mutual terms, covenants and conditions set forth below, the parties agree as follows: 1. TERM OF AGREEMENT. Section 2 of the Agreement is hereby deleted in its entirety and replaced with the ----------------- following: "The term of this Agreement shall be for a period of three (3) years commencing on July 1, 1999, unless terminated earlier pursuant to Section 7 below." 2. BASE SALARY. Section 3.1 of the Agreement is hereby deleted in its entirety and replaced with the following: "For all services rendered by Executive under this Agreement, and commencing July 1, 1999, the Company shall pay to Executive a base salary ("Base Salary") of $240,000 per annum. The Base Salary is subject to increases from time to time at the discretion of the Board of Directors of the Company." 3. CONFLICTING ACTIVITIES. Section 4.3 of the Agreement is hereby deleted in its entirety and replaced with the following: "4.3 CONFLICTING ACTIVITIES. For the term of this Agreement or until Executive's employment hereunder terminates, whichever occurs first, Executive hereby agrees to promote and develop all business opportunities that come to his attention relating to current or anticipated future business of the Company, in a manner consistent with the best interest of the Company and with his duties under this Agreement. If Executive becomes aware of a business opportunity during the performance of his Company duties, through the use of the Company's property or information, or under circumstances that would reasonably lead Executive to believe that the business opportunity was intended by the offeror to be offered to the Company, he shall first offer such opportunity to the Company. Should the Chief Executive Officer of the Company, on behalf of the Company, not exercise its right to pursue this business opportunity within a reasonable period of time, not to exceed thirty (30) days, Executive may develop the business opportunity for himself; provided, however, that such development may in no way conflict or interfere with the duties owed by Executive to the Company under this Agreement. Further, Executive may develop such business opportunities only on his own time, and may not use any service, personnel, equipment, supplies, facility, or trade secrets of the Company in their development. As used herein, the term "business opportunity" shall not include business opportunities involving investment in publicly traded stocks, bonds or other securities, or other investments of a personal nature. 4. SEVERANCE. Section 6 of the Agreement is hereby deleted in its entirety and replaced with the following: --------- "So long as this Agreement is in effect, and except as would be inconsistent with Section 7, upon termination of Executive's employment, Executive or Executive's designees or heirs shall be entitled to a lump sum payment equal to one year of Executive's Base Salary as then in effect (the "Severance Payment"). 5. CHANGE OF CONTROL. Section 7.1 of the Agreement shall be amended by adding a new subsection (e) and a new subsection (f) immediately following Section 7.1(d), as follows: "(e) Executive's employment hereunder may be terminated by the Company or by Executive at any time within ninety (90) days after the occurrence of a Change in Control (as defined below). Upon such termination: (i) the Company shall pay to Executive as a lump-sum payment an amount equal to two (2) years' Base Salary in effect at the time of termination; (ii) the Company shall provide Executive with a continuation of health insurance coverage, existing office space and existing secretarial and telephone services, in each case for a period of eighteen (18) months after the date of termination; and (iii)all stock options issued by the Company to Executive shall immediately vest and become exercisable for a period of at least two (2) years after the date of termination, notwithstanding any provision to the contrary in the Company's stock option plan or in any stock option agreement between the Company and Executive. For purposes of this Agreement, a "Change in Control" shall mean the occurrence of any of the following events: (x) the acquisition by any individual, entity or group (within the meaning of Section 13(d)(3) or 14(d)(2) of the Securities Exchange Act of 1934, as amended (the "Exchange Act") (collectively, a "person") of Beneficial ownership (as such term is defined in Rule 13d-3 promulgated under the Exchange Act), directly or indirectly, of twenty-five percent (25%) or more of the then outstanding shares of common stock of the Company or National Securities Corporation (collectively, the "Outstanding Common Stock"); provided, however, that the following shall not constitute a Change of Control: (i) any acquisition by an Underwriter (as such term is defined in Section 2(11) of the Securities Act of 1933, as amended) for the purpose of making a public offering; or (ii) any acquisition by any employee benefit plan (or related trust) sponsored or maintained by the Company or National Securities Corporation or any corporation controlled by the Company or National Securities Corporation; (y) the sale or liquidation of all or substantially all of the assets of the Company or National Securities Corporation; or (z) any transaction or series of transactions which result in Steven A. Rothstein directly or indirectly owning less than ten percent (10%) of the Outstanding Common Stock. (f) Notwithstanding anything contained herein, or in any other agreement between the Company and Executive, or benefit or compensation plan under which the Executive participates, to the contrary, in the event that any amounts due Executive under this Section 7.1, or under any other plan or program of the Company or other agreement between the Company and Executive, constitute "parachute payments," within the meaning of section 280G of the Internal Revenue Code of 1986, as amended (the "Code"), and the amount of such parachute payments, when reduced by the federal excise taxes due and owing on such parachute payments, if any, is less than the amount Executive would receive if he were paid only three (3) times his "base amount," as that term is defined in section 280G of the Code, then, in lieu of all payments hereunder which are parachute payments, Executive shall be paid, in cash, an amount equal to three (3) times his base amount less one dollar ($1.00). The determinations to be made with respect to this Section 7.1(f) shall be made by an independent auditor jointly selected by the parties." 6. NONCOMPETE. Section 8 of the Agreement is hereby amended by deleting the first sentence of such Section and replacing it with the following: "Executive covenants and agrees that during the terms of his employment hereunder and for a period of one (1) year thereafter (the "Noncompetition Period"), Executive shall not, directly or indirectly recruit, solicit or otherwise induce any customer, officer or employee of the Company or its affiliates, or any independent contractor associated with the Company or its affiliates, to discontinue such relationship with the Company or its affiliates." 7. GOVERNING LAW. Section 9.3 of the Agreement is hereby deleted in its entirety and replaced with the following: "This Agreement is made under and shall be construed in accordance with the laws of the State of Illinois, without regard to conflict of laws principles. The Company and Executive hereby consent and agree to be subject to the jurisdiction of the federal and state courts of the State of Illinois sitting in Chicago, Illinois, in any suit, action or proceeding arising out of this Agreement or the transactions contemplated hereby." 8. AFFECT ON AGREEMENT. Except as set forth in this Amendment, the Agreement and each of the parties' respective obligations thereunder shall remain in full force and effect, and shall not be waived, modified, superseded or otherwise affected by this Amendment. This Amendment is not to be construed as a release, waiver or modification of any of the terms, conditions, covenants, rights or remedies set forth in the Agreement, except as specifically set forth herein. 9. COUNTERPARTS. This Amendment may be executed in two or more counterparts, each of which shall be deemed an original and all of which together shall constitute one and the same instrument. 10. GOVERNING LAW. This Amendment is made under and shall be construed in accordance with the laws of the State of Illinois, without regard to conflict of laws principles. IN WITNESS WHEREOF, the parties have executed this Amendment as of the date first above written. OLYMPIC CASCADE FINANCIAL CORPORATION By:________________________________ Its:________________________________ EXECUTIVE - - ------------------------------------ Robert H. Daskal EX-10.16 5 EMPLOYMENT AGREEMENTS FIRST AMENDMENT TO EMPLOYMENT AGREEMENT This Amendment is made as of July 1, 1999, by and among Olympic Cascade Financial Corporation, a Delaware corporation (the "Company"), National Securities Corporation, a Washington corporation and a wholly-owned subsidiary of the Company ("National") and Steven A. Rothstein, an individual ("Executive"). A. The Company, National and Executive are parties to an Employment Agreement dated as of April 1, 1998 (the "Agreement"), pursuant to which each of the Company and National employ Executive as its Chairman and Chief Executive Officer, based in the Company's executive offices in Chicago, Illinois; and B. The Company, National and Executive desire to amend certain provisions of the Agreement, as set forth in this Amendment. NOW, THEREFORE, in consideration of the mutual terms, covenants and conditions set forth below, the parties agree as follows: 1. TERM OF AGREEMENT. Section 2 of the Agreement is hereby deleted in its entirety and replaced with the following: "The term of this Agreement shall be for a period of three (3) years commencing on July 1, 1999, unless terminated earlier pursuant to Section 7 below." 2. CONFLICTING ACTIVITIES. Section 4.3 of the Agreement is hereby deleted in its entirety and replaced with the following: "4.3 CONFLICTING ACTIVITIES. For the term of this Agreement or until Executive's employment hereunder terminates, whichever occurs first, Executive hereby agrees to promote and develop all business opportunities that come to his attention relating to current or anticipated future business of the Company and National, in a manner consistent with the best interest of the Company and National and with his duties under this Agreement. If Executive becomes aware of a business opportunity during the performance of his duties hereunder, through the use of the property or information of the Company or National, or under circumstances that would reasonably lead Executive to believe that the business opportunity was intended by the offeror to be offered to the Company or National, he shall first offer such opportunity to the Company or National, as the case may be. Should the Board of Directors of the Company or National, as the case may be, not exercise its right to pursue this business opportunity within a reasonable period of time, not to exceed thirty (30) days, Executive may develop the business opportunity for himself; provided, however, that such development may in no way conflict or interfere with the duties owed by Executive to the Company and National under this Agreement. Further, Executive may develop such business opportunities only on his own time, and may not use any service, personnel, equipment, supplies, facility, or trade secrets of the Company or National in their development. As used herein, the term "business opportunity" shall not include business opportunities involving investment in publicly traded stocks, bonds or other securities, or other investments of a personal nature. 3. SEVERANCE. Section 5 of the Agreement is hereby deleted in its entirety and replaced with the following: "So long as this Agreement is in effect, and except as would be inconsistent with Section 7, upon termination of Executive's employment, Executive or Executive's designees or heirs shall be entitled to a lump sum payment equal to one year of Executive's Base Salary as then in effect (the "Severance Payment"). Notwithstanding any other provision of this Agreement to the contrary, for purposes of this Section 5, all compensation payable pursuant to Section 3 of this Agreement shall be accrued to the date of termination of employment." 4. CHANGE OF CONTROL. Section 7.1 of the Agreement shall be amended by adding a new subsection (e) and a new subsection (f) immediately following Section 7.1(d), as follows: "(e) Executive's employment hereunder may be terminated by the Company or by Executive at any time within ninety (90) days after the occurrence of a Change in Control (as defined below). Upon such termination: (i) the Company shall pay to Executive as a lump-sum payment an amount equal to two (2) years' Base Salary in effect at the time of termination; (ii) the Company shall provide Executive with a continuation of health insurance coverage, existing office space and existing secretarial and telephone services, in each case for a period of eighteen (18) months after the date of termination; and (iii) all stock options issued by the Company and National to Executive shall immediately vest and become exercisable for a period of at least two (2) years after the date of termination, notwithstanding any provision to the contrary in the Company's stock option plan or in any stock option agreement between the Company and/or National and Executive. For purposes of this Agreement, a "Change in Control" shall mean the occurrence of any of the following events: (x) the acquisition by any individual, entity or group (within the meaning of Section 13(d)(3) or 14(d)(2) of the Securities Exchange Act of 1934, as amended (the "Exchange Act") (collectively, a "person") of Beneficial ownership (as such term is defined in Rule 13d-3 promulgated under the Exchange Act), directly or indirectly, of twenty-five percent (25%) or more of the then outstanding shares of common stock of the Company or National (collectively, the "Outstanding Common Stock"); provided, however, that the following shall not constitute a Change of Control: (i) any acquisition by an Underwriter (as such term is defined in Section 2(11) of the Securities Act of 1933, as amended) for the purpose of making a public offering; or (ii) any acquisition by any employee benefit plan (or related trust) sponsored or maintained by the Company or National or any corporation controlled by the Company or National; (y) the sale or liquidation of all or substantially all of the assets of the Company or National; or (z) any transaction or series of transactions which result in Steven A. Rothstein directly or indirectly owning less than ten percent (10%) of the Outstanding Common Stock, other than as a result of a transaction or series of transactions involving the direct or indirect voluntary sale, transfer or other disposition of common stock of the Company by Steven A. Rothstein. (f) Notwithstanding anything contained herein, or in any other agreement between the Company, National and Executive, or benefit or compensation plan under which the Executive participates, to the contrary, in the event that any amounts due Executive under this Section 7.1, or under any other plan or program of the Company or National or other agreement between the Company, National and Executive, constitute "parachute payments," within the meaning of section 280G of the Internal Revenue Code of 1986, as amended (the "Code"), and the amount of such parachute payments, when reduced by the federal excise taxes due and owing on such parachute payments, if any, is less than the amount Executive would receive if he were paid only three (3) times his "base amount," as that term is defined in section 280G of the Code, then, in lieu of all payments hereunder which are parachute payments, Executive shall be paid, in cash, an amount equal to three (3) times his base amount less one dollar ($1.00). The determinations to be made with respect to this Section 7.1(f) shall be made by an independent auditor jointly selected by the parties." 5. GOVERNING LAW. Section 9.3 of the Agreement is hereby deleted in its entirety and replaced with the following: "This Agreement is made under and shall be construed in accordance with the laws of the State of Illinois, without regard to conflict of laws principles. The Company, National and Executive hereby consent and agree to be subject to the jurisdiction of the federal and state courts of the State of Illinois sitting in Chicago, Illinois, in any suit, action or proceeding arising out of this Agreement or the transactions contemplated hereby." 6. AFFECT ON AGREEMENT. Except as set forth in this Amendment, the Agreement and each of the parties' respective obligations thereunder shall remain in full force and effect, and shall not be waived, modified, superseded or otherwise affected by this Amendment. This Amendment is not to be construed as a release, waiver or modification of any of the terms, conditions, covenants, rights or remedies set forth in the Agreement, except as specifically set forth herein. 7. COUNTERPARTS. This Amendment may be executed in two or more counterparts, each of which shall be deemed an original and all of which together shall constitute one and the same instrument. 8. GOVERNING LAW. This Amendment is made under and shall be construed in accordance with the laws of the State of Illinois, without regard to conflict of laws principles. IN WITNESS WHEREOF, the parties have executed this Amendment as of the date first above written. OLYMPIC CASCADE FINANCIAL CORPORATION NATIONAL SECURITIES CORPORATION By:________________________________ By:________________________________ Its:________________________________ Its:_________________________________ EXECUTIVE - - ------------------------------------ Steven A. Rothstein EX-10.17 6 EMPLOYMENT AGREEMENTS OLYMPIC CASCADE FINANCIAL CORPORATION NATIONAL SECURITIES CORPORATION EMPLOYMENT AGREEMENT This Employment Agreement ("Agreement") is made effective this 1st day of July, 1999, by and among NATIONAL SECURITIES CORPORATION, a Washington corporation (the "Company"), OLYMPIC CASCADE FINANCIAL CORPORATION, a Delaware corporation ("Olympic") and CRAIG GOULD, an individual ("Executive"). RECITALS A. The Company and Olympic desire to be assured of the association and services of Executive for the Company and Olympic. B. Executive is willing and desires to be employed by the Company and Olympic, and the Company and Olympic are willing to employ Executive, upon the terms, covenants and conditions hereinafter set forth. AGREEMENT NOW, THEREFORE, in consideration of the mutual terms, covenants and conditions hereinafter set forth, the parties hereto do hereby agree as follows: 1. EMPLOYMENT. The Company hereby employs Executive as "Vice President of Corporate Finance," and Olympic hereby employs Executive as "Vice Chairman of Technology," subject to the supervision and direction of the Chief Executive Officer and Board of Directors of the Company and Olympic, respectively. This Agreement supersedes any earlier Employment Agreement among the parties. 2. TERM. The term of this Agreement shall be for a period of time commencing on the date hereof, and terminating on June 30, 2002, unless terminated earlier pursuant to Section 6 below. 3. COMPENSATION; REIMBURSEMENT. 3.1 BASE SALARY. For all services rendered by Executive under this Agreement, the Company shall pay Executive a base salary ("Base Salary") of $120,000 per annum. The Base Salary is subject to increases from time to time at the discretion of the Board of Directors of the Company. 3.2 ADDITIONAL BENEFITS. In addition to the Base Salary, Executive shall be entitled to all other benefits of employment now or hereafter provided to the other executives of the Company, its operating divisions or subsidiaries, including but not limited to individual health insurance, life insurance and on-premises parking. 3.3 BONUSES. It is contemplated that from time to time Executive will be paid bonuses based upon the Company's and Executive's performance, in the sole discretion of the Company. 3.4 CONTINUING OBLIGATIONS. All of the Company's compensation obligations under this Section shall continue through the term of this Agreement. 3.5 REIMBURSEMENT. Executive shall be reimbursed for all reasonable out-of-pocket business expenses for business travel and business entertainment incurred in connection with the performance of his duties under this Agreement. The reimbursement of Executive's business expenses shall be upon weekly presentation to and approval by the Company of valid receipts and other appropriate documentation for such expenses. 4. SCOPE OF DUTIES. 4.1 ASSIGNMENT OF DUTIES. Executive shall have such duties as may be assigned to him from time to time by the Company's or Olympic's Chief Executive Officer and Board of Directors commensurate with his experience and responsibilities in the position for which he is employed pursuant to Section 1 above. Such duties shall be exercised subject to the control and supervision of the Boards of Directors of the Company and Olympic. 4.2 EXECUTIVE'S DEVOTION OF TIME. Executive hereby agrees to devote his full time, abilities and energy to the faithful performance of the duties assigned to him and to the promotion and forwarding of the business affairs of the Company and Olympic, and not to divert any business opportunities from the Company or Olympic to himself or to any other person or business entity. Executive shall be entitled to not less than three (3) weeks of paid vacation and not less than two (2) weeks of paid sick leave during each fiscal year of the Company. 4.3 CONFLICTING ACTIVITIES. For the term of this Agreement or until Executive's employment hereunder terminates, whichever occurs first, Executive hereby agrees to promote and develop all business opportunities that come to his attention relating to current or anticipated future business of the Company and Olympic, in a manner consistent with the best interest of the Company and Olympic and with his duties under this Agreement. If Executive becomes aware of a business opportunity during the performance of his duties hereunder, through the use of the property or information of the Company or Olympic, or under circumstances that would reasonably lead Executive to believe that the business opportunity was intended by the offeror to be offered to the Company or Olympic, he shall first offer such opportunity to the Company or Olympic, as the case may be. Should the Chief Executive Officer of the Company or Olympic, as the case may be, on behalf of the Company or Olympic, not exercise its right to pursue this business opportunity within a reasonable period of time, not to exceed thirty (30) days, Executive may develop the business opportunity for himself; provided, however, that such development may in no way conflict or interfere with the duties owed by Executive to the Company and Olympic under this Agreement. Further, Executive may develop such business opportunities only on his own time, and may not use any service, personnel, equipment, supplies, facility, or trade secrets of the Company or Olympic in their development. As used herein, the term "business opportunity" shall not include business opportunities involving investment in publicly traded stocks, bonds or other securities, or other investments of a personal nature. 5. CONFIDENTIALITY OF TRADE SECRETS AND OTHER MATERIALS. Other than in the performance of his duties hereunder, Executive agrees not to disclose, either during the term of his employment by the Company and Olympic or at any time thereafter, to any person, firm or corporation any information concerning the business affairs, the trade secrets or the customer lists or similar information of the Company or Olympic. Any technique, method, process, technology or customer compilation or list used by the Company or Olympic shall be considered a "trade secret" for the purposes of this Agreement. Notwithstanding the foregoing, the names and other information relating to the retail brokerage customers of Executive who have been assigned Executive's A/E number shall not be considered as "confidential information" for purposes of this Section 5 or any other provision of this Agreement. 6. SEVERANCE. So long as this Agreement is in effect, and except as would be inconsistent with Section 7, upon termination of Executive's employment, Executive or Executive's designees or heirs shall be entitled to a lump sum payment equal to one year of Executive's Base Salary as then in effect (the "Severance Payment"). 7. TERMINATION. 7.1 BASES FOR TERMINATION. (a) Executive's employment hereunder may be terminated at any time by mutual agreement of the parties. (b) Executive's employment hereunder shall automatically terminate on the last day of the month in which Executive dies. If Executive becomes permanently disabled and is unable to perform the essential duties defined in Section 4 hereof (the "Duties") with or without accommodation, then Executive's employment hereunder may be terminated. "Permanent disability" as used herein shall mean mental or physical disability or both, evidenced by: (i) a consecutive six month period of time during which Executive is unable to perform the Duties with or without accommodation; and (ii) medical documentation from Executive's attending physician or a duly licensed independent physician selected by the Company's Board of Directors, stating that Executive is physically and/or mentally disabled from performing the essential Duties with or without accommodation and that the disabling condition is permanent and will not substantially change or improve. (c) Executive may terminate his or her employment hereunder by giving the Company and Olympic 30 days prior written notice, which termination shall be effective on the 30th day following such notice. (d) Executive's employment may not be terminated by the Company and Olympic against his will without a finding, by an impartial third person or panel, of fraud, theft or defalcation. (e) Executive's employment hereunder may be terminated by the Company and Olympic or by Executive at any time within ninety (90) days after the occurrence of a Change in Control (as defined below). Upon such termination: (i) the Company shall pay to Executive as a lump-sum payment an amount equal to two (2) years' Base Salary in effect at the time of termination; (ii) the Company shall provide Executive with a continuation of health insurance coverage, existing office space and existing secretarial and telephone services, in each case for a period of eighteen (18) months after the date of termination; and (iii) all stock options issued by the Company and Olympic to Executive shall immediately vest and become exercisable for a period of at least two (2) years after the date of termination, notwithstanding any provision to the contrary in the Company's or Olympic's stock option plan or in any stock option agreement between the Company, Olympic and Executive. For purposes of this Agreement, a "Change in Control" shall mean the occurrence of any of the following events: (x) the acquisition by any individual, entity or group (within the meaning of Section 13(d)(3) or 14(d)(2) of the Securities Exchange Act of 1934, as amended (the "Exchange Act") (collectively, a "person") of Beneficial ownership (as such term is defined in Rule 13d-3 promulgated under the Exchange Act), directly or indirectly, of twenty-five percent (25%) or more of the then outstanding shares of common stock of the Company or Olympic (collectively, the "Outstanding Common Stock"); provided, however, that the following shall not constitute a Change of Control: (i) any acquisition by an Underwriter (as such term is defined in Section 2(11) of the Securities Act of 1933, as amended) for the purpose of making a public offering; or (ii) any acquisition by any employee benefit plan (or related trust) sponsored or maintained by the Company or Olympic or any corporation controlled by the Company or Olympic; (y) the sale or liquidation of all or substantially all of the assets of the Company or Olympic; or (z) any transaction or series of transactions which result in Steven A. Rothstein directly or indirectly owning less than ten percent (10%) of the Outstanding Common Stock. (f) Notwithstanding anything contained herein, or in any other agreement between the Company or Olympic and Executive, or benefit or compensation plan under which the Executive participates, to the contrary, in the event that any amounts due Executive under this Section 7.1, or under any other plan or program of the Company or Olympic or other agreement between the Company or Olympic and Executive, constitute "parachute payments," within the meaning of section 280G of the Internal Revenue Code of 1986, as amended (the "Code"), and the amount of such parachute payments, when reduced by the federal excise taxes due and owing on such parachute payments, if any, is less than the amount Executive would receive if he were paid only three (3) times his "base amount," as that term is defined in section 280G of the Code, then, in lieu of all payments hereunder which are parachute payments, Executive shall be paid, in cash, an amount equal to three (3) times his base amount less one dollar ($1.00). The determinations to be made with respect to this Section 7.1(f) shall be made by an independent auditor jointly selected by the parties. 8. NONCOMPETE. Executive covenants and agrees that during the term of his employment hereunder and for a period of one (1) year thereafter (the "Noncompetition Period"), Executive shall not, directly or indirectly recruit, solicit or otherwise induce any customer, officer or employee of the Company or Olympic, or independent contractor associated with the Company or Olympic, to discontinue such relationship with the Company or Olympic. During the Noncompetition Period, Executive shall hold in confidence and shall not disclose to anyone, or use or otherwise exploit for his own benefit or the benefit of any person or entity, any confidential or proprietary information of the Company or Olympic, including, without limitation, customer and vendor lists, financial statements and information, trade secrets or marketing arrangements and plans, unless directed to do so by order of any court; provided, however, that the terms of this Section 8 shall not restrict Executive with respect to any Company or Olympic customer who has been assigned Executive's A/E number. 9. MISCELLANEOUS. 9.1 TRANSFER AND ASSIGNMENT. This Agreement is personal as to Executive and shall not be assigned or transferred by Executive without the prior written consent of the Company and Olympic. This Agreement shall be binding upon and inure to the benefit of all of the parties hereto and their respective permitted heirs, personal representatives, successors and assigns. 9.2 SEVERABILITY. Nothing contained herein shall be construed to require the commission of any act contrary to law. Should there by any conflict between any provisions hereof and any present or future statute, law, ordinance, regulation, or other pronouncement having the force of law, the latter shall prevail, but the provision of this Agreement affected thereby shall be curtailed and limited only to the extent necessary to bring it within the requirements of the law, and the remaining provisions of this Agreement shall remain in full force and effect. 9.3 GOVERNING LAW. This Agreement is made under and shall be construed in accordance with the laws of the State of Illinois, without regard to conflict of laws principles. The Company, Olympic and Executive hereby consent and agree to be subject to the jurisdiction of the federal and state courts of the State of Illinois sitting in Chicago, Illinois, in any suit, action or proceeding arising out of this Agreement or the transactions contemplated hereby. 9.4 COUNTERPARTS. This Agreement may be executed in several counterparts and all documents so executed shall constitute one agreement, binding on all of the parties hereto, notwithstanding that all of the parties did not sign the original or the same counterparts. 9.5 ENTIRE AGREEMENT. This Agreement constitutes the entire agreement and understanding of the parties with respect to the subject matter hereof and supersedes all prior oral or written agreements, arrangements, and understandings with respect thereto. No representation, promise, inducement, statement or intention has been made by any party hereto that is not embodied herein, and not party shall be bound by or liable for any alleged representation, promise, inducement or statement not so set forth herein. 9.6 MODIFICATION. This Agreement may be modified, amended, superseded, or canceled, and any of the terms, covenants, representations, warranties or conditions hereof may be waived, only by a written instrument executed by the party or parties to be bound by any such modification, amendment, supersession, cancellation, or waiver. 9.7 ATTORNEYS' FEES AND COSTS. In the event of any dispute arising out of the subject matter of this Agreement, the prevailing party shall recover, in addition to any other damages assessed, its attorneys' fees and court costs incurred in litigating or otherwise settling or resolving such dispute whether or not an action is brought or prosecuted to judgment. In construing this Agreement, none of the parties hereto shall have any term or provision construed against such party solely by reason of such party having drafted the same. 9.8 WAIVER. The waiver by either of the parties, express or implied, of any right under this Agreement or any failure to perform under this Agreement by the other party, shall not constitute or be deemed as a waiver of any other right under this Agreement, or of any other failure to perform under this Agreement by the other party, whether of a similar or dissimilar nature. 9.9 CUMULATIVE REMEDIES. Each and all of the several rights and remedies provided in this Agreement, or by law or in equity, shall be cumulative, and no one of them shall be exclusive of any other right or remedy, and the exercise of any one of such rights or remedies shall not be deemed a waiver of, or an election to exercise, any other such right or remedy. 9.10 HEADINGS. The section and other headings contained in this Agreement are for reference purposes only and shall not in any way affect the meaning and interpretation of this Agreement. 9.11 NOTICES. Any notice under this Agreement must be in writing, may be telecopied, sent by express 24-hour guaranteed courier, or hand-delivered, or may be served by depositing the same in the United States mail, addressed to the party to be notified, postage-prepaid and registered or certified with a return receipt requested. The addresses of the parties for the receipt of notice shall be as follows: If to the Company or Olympic: National Securities Corporation 875 North Michigan Avenue Suite 1560 Chicago, Illinois 60611 Attn: Steven A. Rothstein If to the Executive: Craig Gould 875 North Michigan Avenue Suite 1560 Chicago, Illinois 60611 Each notice given by registered or certified mail shall be deemed delivered and effective on the date of delivery as shown on the return receipt, and each notice delivered in any other manner shall be deemed to be effective as of the time of actual delivery thereof. Each party may change its address for notice by giving notice thereof in the manner provided above. IN WITNESS WHEREOF, the parties hereto have caused this Employment Agreement to be executed as of the date first set forth above. NATIONAL SECURITIES CORPORATION By: _______________________________ Steven A. Rothstein, Chairman OLYMPIC CASCADE FINANCIAL CORPORATION By: _______________________________ Steven A. Rothstein, Chairman EXECUTIVE ----------------------------------- Craig Gould EX-10.18 7 EMPLOYMENT AGREEMENTS NATIONAL SECURITIES CORPORATION EMPLOYMENT AGREEMENT This Employment Agreement ("Agreement") is made effective this 1st day of July, 1999, by and between NATIONAL SECURITIES CORPORATION, a Washington corporation (the "Company") and DAVID M. WILLIAMS, an individual ("Executive"). RECITALS A. The Company desires to be assured of the association and services of Executive for the Company. B. Executive is willing and desires to be employed by the Company, and the Company is willing to employ Executive, upon the terms, covenants and conditions hereinafter set forth. AGREEMENT NOW, THEREFORE, in consideration of the mutual terms, covenants and conditions hereinafter set forth, the parties hereto do hereby agree as follows: 1. EMPLOYMENT. The Company hereby employs Executive as "Corporate Controller and Chief Operating Officer," subject to the supervision and direction of the Company's President and Board of Directors. This Agreement supersedes any earlier Employment Agreement between the parties. 2. TERM. The term of this Agreement shall be for a period of time commencing on the date hereof and terminating on June 30, 2002, unless terminated earlier pursuant to Section 6 below. 3. COMPENSATION; REIMBURSEMENT. 3.1 BASE SALARY. For all services rendered by Executive under this Agreement, the Company shall pay Executive a base salary ("Base Salary") of $90,0000 per annum through August 31, 1999, increasing to $120,000 per annum on September 1, 1999. The Base Salary is subject to increases from time to time at the discretion of the Board of Directors of the Company. 3.2 ADDITIONAL BENEFITS. In addition to the Base Salary, Executive shall be entitled to all other benefits of employment now or hereafter provided to the other executives of the Company, its operating divisions or subsidiaries, including but not limited to individual health insurance, life insurance and on-premises parking. The Company shall reimburse Executive for all reasonable costs associated with (i) his move to the Seattle area; and (ii) maintaining licensure as a Certified Public Accountant in the State of Washington, including, but not limited to, annual dues and the costs of meeting continuing education requirements. Additionally, the Company will provide air travel to Chicago four (4) times per year for Executive or one (1) member of Executive's family. 3.3 BONUSES. It is contemplated that from time to time Executive will be paid bonuses based upon the Company's and Executive's performance, in the sole discretion of the Company. 3.4 CONTINUING OBLIGATIONS. All of the Company's compensation obligations under this Section shall continue through the term of this Agreement. 3.5 REIMBURSEMENT. Executive shall be reimbursed for all reasonable out-of-pocket business expenses for business travel and business entertainment incurred in connection with the performance of his duties under this Agreement. The reimbursement of Executive's business expenses shall be upon weekly presentation to and approval by the Company of valid receipts and other appropriate documentation for such expenses. 4. SCOPE OF DUTIES. 4.1 ASSIGNMENT OF DUTIES. Executive shall have such duties as may be assigned to him from time to time by the Company's Chief Executive Officer, President and Board of Directors commensurate with his experience and responsibilities in the position for which he is employed pursuant to Section 1 above. Such duties shall be exercised subject to the control and supervision of the Board of Directors of the Company. 4.2 EXECUTIVE'S DEVOTION OF TIME. Executive hereby agrees to devote his full time, abilities and energy to the faithful performance of the duties assigned to him and to the promotion and forwarding of the business affairs of the Company, and not to divert any business opportunities from the Company to himself or to any other person or business entity. Executive shall be entitled to not less than three (3) weeks of paid vacation and not less than two (2) weeks of paid sick leave during each fiscal year of the Company. 4.3 CONFLICTING ACTIVITIES. For the term of this Agreement or until Executive's employment hereunder terminates, whichever occurs first, Executive hereby agrees to promote and develop all business opportunities that come to his attention relating to current or anticipated future business of the Company, in a manner consistent with the best interest of the Company and with his duties under this Agreement. If Executive becomes aware of a business opportunity during the performance of his Company duties, through the use of the Company's property or information, or under circumstances that would reasonably lead Executive to believe that the business opportunity was intended by the offeror to be offered to the Company, he shall first offer such opportunity to the Company. Should the Chief Executive Officer of the Company, on behalf of the Company, not exercise its right to pursue this business opportunity within a reasonable period of time, not to exceed thirty (30) days, Executive may develop the business opportunity for himself; provided, however, that such development may in no way conflict or interfere with the duties owed by Executive to the Company under this Agreement. Further, Executive may develop such business opportunities only on his own time, and may not use any service, personnel, equipment, supplies, facility, or trade secrets of the Company in their development. As used herein, the term "business opportunity" shall not include business opportunities involving investment in publicly traded stocks, bonds or other securities, or other investments of a personal nature. 5. CONFIDENTIALITY OF TRADE SECRETS AND OTHER MATERIALS. Other than in the performance of his duties hereunder, Executive agrees not to disclose, either during the term of his employment by the Company or at any time thereafter, to any person, firm or corporation any information concerning the business affairs, the trade secrets or the customer lists or similar information of the Company. Any technique, method, process, technology or customer compilation or list used by the Company shall be considered a "trade secret" for the purposes of this Agreement. Notwithstanding the foregoing, the names and other information relating to the retail brokerage customers of Executive who have been assigned Executive's A/E number shall not be considered as "confidential information" for purposes of this Section 5 or any other provision of this Agreement. 6. SEVERANCE. So long as this Agreement is in effect, and except as would be inconsistent with Section 7, upon termination of Executive's employment, Executive or Executive's designees or heirs shall be entitled to a lump sum payment equal to one year of Executive's Base Salary as then in effect (the "Severance Payment"). 7. TERMINATION. 7.1 BASES FOR TERMINATION. (a) Executive's employment hereunder may be terminated at any time by mutual agreement of the parties. (b) Executive's employment hereunder shall automatically terminate on the last day of the month in which Executive dies. If Executive becomes permanently disabled and is unable to perform the essential duties defined in Section 4 hereof (the "Duties") with or without accommodation, then Executive's employment hereunder may be terminated. "Permanent disability" as used herein shall mean mental or physical disability or both, evidenced by: (i) a consecutive six month period of time during which Executive is unable to perform the Duties with or without accommodation; and (ii) medical documentation from Executive's attending physician or a duly licensed independent physician selected by the Company's Board of Directors, stating that Executive is physically and/or mentally disabled from performing the essential Duties with or without accommodation and that the disabling condition is permanent and will not substantially change or improve. (c) Executive may terminate his or her employment hereunder by giving the Company 60 days prior written notice, which termination shall be effective on the 60th day following such notice. (d) Executive's employment may not be terminated by the Company against his will without a finding, by an impartial third person or panel, of fraud, theft or defalcation. (e) Executive's employment hereunder may be terminated by the Company or by Executive at any time within ninety (90) days after the occurrence of a Change in Control (as defined below). Upon such termination: (i) the Company shall pay to Executive as a lump-sum payment an amount equal to two (2) years' Base Salary in effect at the time of termination; (ii) the Company shall provide Executive with a continuation of health insurance coverage, existing office space and existing secretarial and telephone services, in each case for a period of eighteen (18) months after the date of termination; and (iii) all stock options issued by the Company to Executive shall immediately vest and become exercisable for a period of at least two (2) years after the date of termination, notwithstanding any provision to the contrary in the Company's stock option plan or in any stock option agreement between the Company and Executive. For purposes of this Agreement, a "Change in Control" shall mean the occurrence of any of the following events: (x) the acquisition by any individual, entity or group (within the meaning of Section 13(d)(3) or 14(d)(2) of the Securities Exchange Act of 1934, as amended (the "Exchange Act") (collectively, a "person") of Beneficial ownership (as such term is defined in Rule 13d-3 promulgated under the Exchange Act), directly or indirectly, of twenty-five percent (25%) or more of the then outstanding shares of common stock of the Company or Olympic Cascade Financial Corporation (collectively, the "Outstanding Common Stock"); provided, however, that the following shall not constitute a Change of Control: (i) any acquisition by an Underwriter (as such term is defined in Section 2(11) of the Securities Act of 1933, as amended) for the purpose of making a public offering; or (ii) any acquisition by any employee benefit plan (or related trust) sponsored or maintained by the Company or Olympic Cascade Financial Corporation or any corporation controlled by the Company or Olympic Cascade Financial Corporation; (y) the sale or liquidation of all or substantially all of the assets of the Company or Olympic Cascade Financial Corporation; or (z) any transaction or series of transactions which result in Steven A. Rothstein directly or indirectly owning less than ten percent (10%) of the Outstanding Common Stock. (f) Notwithstanding anything contained herein, or in any other agreement between the Company and Executive, or benefit or compensation plan under which the Executive participates, to the contrary, in the event that any amounts due Executive under this Section 7.1, or under any other plan or program of the Company or other agreement between the Company and Executive, constitute "parachute payments," within the meaning of section 280G of the Internal Revenue Code of 1986, as amended (the "Code"), and the amount of such parachute payments, when reduced by the federal excise taxes due and owing on such parachute payments, if any, is less than the amount Executive would receive if he were paid only three (3) times his "base amount," as that term is defined in section 280G of the Code, then, in lieu of all payments hereunder which are parachute payments, Executive shall be paid, in cash, an amount equal to three (3) times his base amount less one dollar ($1.00). The determinations to be made with respect to this Section 7.1(f) shall be made by an independent auditor jointly selected by the parties. 8. NONCOMPETE. Executive covenants and agrees that during the term of his employment hereunder and for a period of one (1) year thereafter (the "Noncompetition Period"), Executive shall not, directly or indirectly recruit, solicit or otherwise induce any customer, officer or employee of the Company, or independent contractor associated with the Company, to discontinue such relationship with the Company. During the Noncompetition Period, Executive shall hold in confidence and shall not disclose to anyone, or use or otherwise exploit for his own benefit or the benefit of any person or entity, any confidential or proprietary information of the Company, including, without limitation, customer and vendor lists, financial statements and information, trade secrets or marketing arrangements and plans, unless directed to do so by order of any court; provided, however, that the terms of this Section 8 shall not restrict Executive with respect to any Company customer who has been assigned Executive's A/E number. 9. MISCELLANEOUS. 9.1 TRANSFER AND ASSIGNMENT. This Agreement is personal as to Executive and shall not be assigned or transferred by Executive without the prior written consent of the Company. This Agreement shall be binding upon and inure to the benefit of all of the parties hereto and their respective permitted heirs, personal representatives, successors and assigns. 9.2 SEVERABILITY. Nothing contained herein shall be construed to require the commission of any act contrary to law. Should there by any conflict between any provisions hereof and any present or future statute, law, ordinance, regulation, or other pronouncement having the force of law, the latter shall prevail, but the provision of this Agreement affected thereby shall be curtailed and limited only to the extent necessary to bring it within the requirements of the law, and the remaining provisions of this Agreement shall remain in full force and effect. 9.3 GOVERNING LAW. This Agreement is made under and shall be construed in accordance with the laws of the State of Illinois, without regard to conflict of laws principles. The Company and Executive hereby consent and agree to be subject to the jurisdiction of the federal and state courts of the State of Illinois sitting in Chicago, Illinois, in any suit, action or proceeding arising out of this Agreement or the transactions contemplated hereby. 9.4 COUNTERPARTS. This Agreement may be executed in several counterparts and all documents so executed shall constitute one agreement, binding on all of the parties hereto, notwithstanding that all of the parties did not sign the original or the same counterparts. 9.5 ENTIRE AGREEMENT. This Agreement constitutes the entire agreement and understanding of the parties with respect to the subject matter hereof and supersedes all prior oral or written agreements, arrangements, and understandings with respect thereto. No representation, promise, inducement, statement or intention has been made by any party hereto that is not embodied herein, and not party shall be bound by or liable for any alleged representation, promise, inducement or statement not so set forth herein. 9.6 MODIFICATION. This Agreement may be modified, amended, superseded, or canceled, and any of the terms, covenants, representations, warranties or conditions hereof may be waived, only by a written instrument executed by the party or parties to be bound by any such modification, amendment, supersession, cancellation, or waiver. 9.7 ATTORNEYS' FEES AND COSTS. In the event of any dispute arising out of the subject matter of this Agreement, the prevailing party shall recover, in addition to any other damages assessed, its attorneys' fees and court costs incurred in litigating or otherwise settling or resolving such dispute whether or not an action is brought or prosecuted to judgment. In construing this Agreement, none of the parties hereto shall have any term or provision construed against such party solely by reason of such party having drafted the same. 9.8 WAIVER. The waiver by either of the parties, express or implied, of any right under this Agreement or any failure to perform under this Agreement by the other party, shall not constitute or be deemed as a waiver of any other right under this Agreement, or of any other failure to perform under this Agreement by the other party, whether of a similar or dissimilar nature. 9.9 CUMULATIVE REMEDIES. Each and all of the several rights and remedies provided in this Agreement, or by law or in equity, shall be cumulative, and no one of them shall be exclusive of any other right or remedy, and the exercise of any one of such rights or remedies shall not be deemed a waiver of, or an election to exercise, any other such right or remedy. 9.10 HEADINGS. The section and other headings contained in this Agreement are for reference purposes only and shall not in any way affect the meaning and interpretation of this Agreement. 9.11 NOTICES. Any notice under this Agreement must be in writing, may be telecopied, sent by express 24-hour guaranteed courier, or hand-delivered, or may be served by depositing the same in the United States mail, addressed to the party to be notified, postage-prepaid and registered or certified with a return receipt requested. The addresses of the parties for the receipt of notice shall be as follows: If to the Company: National Securities Corporation 875 North Michigan Avenue Suite 1560 Chicago, Illinois 60611 Attn: Steven A. Rothstein If to the Executive: David M. Williams 875 North Michigan Avenue Suite 1560 Chicago, Illinois 60611 Each notice given by registered or certified mail shall be deemed delivered and effective on the date of delivery as shown on the return receipt, and each notice delivered in any other manner shall be deemed to be effective as of the time of actual delivery thereof. Each party may change its address for notice by giving notice thereof in the manner provided above. IN WITNESS WHEREOF, the parties hereto have caused this Employment Agreement to be executed as of the date first set forth above. NATIONAL SECURITIES CORPORATION By: _______________________________ Steven A. Rothstein, Chairman EXECUTIVE ----------------------------------- David M. Williams EX-10.19 8 EMPLOYMENT AGREEMENTS NATIONAL SECURITIES CORPORATION EMPLOYMENT AGREEMENT This Employment Agreement ("Agreement") is made effective as of this 1st day of July, 1999, by and between NATIONAL SECURITIES CORPORATION, a Washington corporation (the "Company") and MICHAEL A. BRESNER, an individual ("Executive"). RECITALS A. The Company desires to be assured of the association and services of Executive for the Company. B. Executive is willing and desires to be employed by the Company, and the Company is willing to employ Executive, upon the terms, covenants and conditions hereinafter set forth. AGREEMENT NOW, THEREFORE, in consideration of the mutual terms, covenants and conditions hereinafter set forth, the parties hereto do hereby agree as follows: 1. EMPLOYMENT. The Company hereby employs Executive as "President" subject to the supervision and direction of the Company's Chief Executive Officer and Board of Directors. This Agreement supersedes any earlier Employment Agreement between the parties. 2. TERM. The term of this Agreement shall be for a period of time commencing on the date hereof, and terminating on June 30, 2003, unless terminated earlier pursuant to Section 6 below. The term of Executive's employment shall be automatically extended without further action by either party for additional one (1) year periods unless written notice of either party's intention not to extend has been given to the other party hereto at least three (3) months prior to the expiration of the then effective term. 3. COMPENSATION; REIMBURSEMENT. 3.1 BASE SALARY AND INCENTIVE COMPENSATION. a. For all services rendered by Executive under this Agreement, the Company shall pay Executive a base salary ("Base Salary") of $350,000 per annum. The Base Salary is subject to increases from time to time at the discretion of the Board of Directors of the Company. b. Additionally, the Company shall pay Executive incentive compensation on an annual basis ("Incentive Compensation") equal to seven and one-half percent (7 1/2%) of the Company's annual income from operations before income tax, for each fiscal year commencing with the fiscal year ending September 2000. Provided however, the Incentive Compensation payable hereunder shall not exceed $50,000 for each fiscal year. 3.2 ADDITIONAL BENEFITS AND COMPENSATION. In addition to the Base Salary and Incentive Compensation, Executive shall be entitled to all other benefits of employment now or hereafter provided to the other executives of the Company, its operating divisions or subsidiaries, including but not limited to individual health insurance, life insurance and on-premises parking. "Additional compensation" shall include underwriters warrants, equity participations and shares of investment banking deals. A pool shall be established equal to five (5) to fifteen (15) percent of the total of such "additional compensation" for all investment banking deals concluded under the "Olympic Cascade" umbrella, and Executive shall be allocated at least one-third (1/3) of such pool. 3.3 BONUSES. It is contemplated that from time to time Executive will be paid bonuses based upon the Company's and Executive's performance, in the sole discretion of the Company. 3.4 CONTINUING OBLIGATIONS. All of the Company's compensation obligations under this Section shall continue through the term of this Agreement. 3.5 REIMBURSEMENT. Executive shall be reimbursed for all reasonable out-of-pocket business expenses for business travel and business entertainment incurred in connection with the performance of his duties under this Agreement. The reimbursement of Executive's business expenses shall be upon weekly presentation to and approval by the Company of valid receipts and other appropriate documentation for such expenses. In addition, Executive shall be entitled to $20,000 in non-accountable travel expenses (airline tickets, hotels, car rentals, etc.) annually. 3.6 RELOCATION EXPENSE. The Company and the Executive agree that the Executive shall be required to relocate his residence to Seattle, Washington within a reasonable time from the commencement of the Employment Term. This relocation will be subject to the following relocation expense reimbursements: (a) reasonable moving expenses and closings costs, at cost; (b) real estate commission on the sale of Executive's current home; and (c) Executive's reasonable expenses to, from, and in Seattle, until such relocation is completed. 4. SCOPE OF DUTIES. 4.1 ASSIGNMENT OF DUTIES. Executive shall have such duties as may be assigned to him from time to time by the Company's Chief Executive Officer and Board of Directors commensurate with his experience and responsibilities in the position for which he is employed pursuant to Section 1 above. Such duties shall be exercised subject to the control and supervision of the Board of Directors of the Company. Executive' duties shall include full profit and loss responsibility, and he shall be responsible for the day-to-day activities of the Company, including the hiring and firing of subordinate employees. 4.2 EXECUTIVE'S DEVOTION OF TIME. Executive hereby agrees to devote his full time, abilities and energy to the faithful performance of the duties assigned to him and to the promotion and forwarding of the business affairs of the Company, and not to divert any business opportunities from the Company to himself or to any other person or business entity. Executive shall be entitled to not less than three (3) weeks of paid vacation and not less than two (2) weeks of paid sick leave during each fiscal year of the Company. 4.3 CONFLICTING ACTIVITIES. For the term of this Agreement or until Executive's employment hereunder terminates, whichever occurs first, Executive hereby agrees to promote and develop all business opportunities that come to his attention relating to current or anticipated future business of the Company, in a manner consistent with the best interest of the Company and with his duties under this Agreement. If Executive becomes aware of a business opportunity during the performance of his Company duties, through the use of the Company's property or information, or under circumstances that would reasonably lead Executive to believe that the business opportunity was intended by the offeror to be offered to the Company, he shall first offer such OPPORTUNITY TO THE COMPANY. SHOULD THE CHIEF EXECUTIVE OFFICER OF THE COMPANY, ON behalf of the Company, not exercise its right to pursue this business opportunity within a reasonable period of time, not to exceed thirty (30) days, Executive may develop the business opportunity for himself; provided, however, that such development may in no way conflict or interfere with the duties owed by Executive to the Company under this Agreement. Further, Executive may develop such business opportunities only on his own time, and may not use any service, personnel, equipment, supplies, facility, or trade secrets of the Company in their development. As used herein, the term "business opportunity" shall not include business opportunities involving investment in publicly traded stocks, bonds or other securities, or other investments of a personal nature. 5. CONFIDENTIALITY OF TRADE SECRETS AND OTHER MATERIALS. Other than in the performance of his duties hereunder, Executive agrees not to disclose, either during the term of his employment by the Company or at any time thereafter, to any person, firm or corporation any information concerning the business affairs, the trade secrets or the customer lists or similar information of the Company. Any technique, method, process, technology or customer compilation or list used by the Company shall be considered a "trade secret" for the purposes of this Agreement. Notwithstanding the foregoing, the names and other information relating to the retail brokerage customers of Executive who have been assigned Executive's A/E number shall not be considered as "confidential information" for purposes of this Section 5 or any other provision of this Agreement. 6. SEVERANCE. So long as this Agreement is in effect, and except as would be inconsistent with Section 7, upon termination of Executive's employment, Executive or Executive's designees or heirs shall be entitled to a lump sum payment equal to two (2) years of Executive's Base Salary as then in effect (the "Severance Payment"). 7. TERMINATION. 7.1 BASES FOR TERMINATION. (a) Executive's employment hereunder may be terminated at any time by mutual agreement of the parties. (b) Executive's employment hereunder shall automatically terminate on the last day of the month in which Executive dies. If Executive becomes permanently disabled and is unable to perform the essential duties defined in Section 4 hereof (the "Duties") with or without accommodation, then Executive's employment hereunder may be terminated. "Permanent disability" as used herein shall mean mental or physical disability or both, evidenced by: (i) a consecutive six month period of time during which Executive is unable to perform the Duties with or without accommodation; and (ii) medical documentation from Executive's attending physician or a duly licensed independent physician selected by the Company's Board of Directors, stating that Executive is physically and/or mentally disabled from performing the essential Duties with or without accommodation and that the disabling condition is permanent and will not substantially change or improve. (c) Executive may terminate his or her employment hereunder by giving the Company thirty (30) DAYS PRIOR WRITTEN NOTICE, WHICH TERMINATION SHALL BE EFFECTIVE ON THE THIRTIETH (30TH) day following such notice. (d) Executive's employment may not be terminated by the Company against his will unless he is convicted of a felony involving fraud, theft or defalcation involving his activities at the Company. If executive is terminated without cause, as defined herein, he shall be entitled to receive twenty-four (24) months of base compensation payable as follows: (a) $100,000 cash upon termination and (b) $700,000 in twenty-four (24) equal monthly installments. If the Company fails to make a monthly installment, which is not cured within (3) business days after written notice, then the entire remaining amount owed to the Executive shall be payable immediately. (e) Executive's employment hereunder may be terminated by the Company or by Executive at any time within ninety (90) days after the occurrence of a Change in Control (as defined below). Upon such termination: (i) the Company shall pay to Executive as a lump-sum payment an amount equal to two (2) years Base Salary in effect at the time of termination; (ii) the Company shall provide Executive with a continuation of health insurance coverage, existing office space and existing secretarial and telephone services, in each case for a period of eighteen (18) months after the date of termination; and (iii)all stock options issued by the Company to Executive shall immediately vest and become exercisable for a period of at least two (2) years after the date of termination, notwithstanding any provision to the contrary in the Company's stock option plan or in any stock option agreement between the Company and Executive. For purposes of this Agreement, a "Change in Control" shall mean the occurrence of any of the following events: (x) the acquisition by any individual, entity or group (within the meaning of Section 13(d)(3) or 14(d)(2) of the Securities Exchange Act of 1934, as amended (the "Exchange Act") (collectively, a "person") of Beneficial ownership (as such term is defined in Rule 13d-3 promulgated under the Exchange Act), directly or indirectly, of twenty-five percent (25%) or more of the then outstanding shares of common stock of the Company or Olympic Cascade Financial Corporation (collectively, the "Outstanding Common Stock"); provided, however, that the following shall not constitute a Change of Control: (i) any acquisition by an Underwriter (as such term is defined in Section 2(11) of the Securities Act of 1933, as amended) for the purpose of making a public offering; or (ii) any acquisition by any employee benefit plan (or related trust) sponsored or maintained by the Company or any corporation controlled by the Company; (y) the sale or liquidation of all or substantially all of the assets of the Company, or Olympic Cascade Financial Corporation; or (z) any transaction or series of transactions which result in Steven A. Rothstein directly or indirectly owning less than ten percent (10%) of the Outstanding Common Stock. (f) Notwithstanding anything contained herein, or in any other agreement between the Company and Executive, or benefit or compensation plan under which the Executive participates, to the contrary, in the event that any amounts due Executive under this Section 7.1, or under any other plan or program of the Company or other agreement between the Company and Executive, constitute "parachute payments," within the meaning of section 280G of the Internal Revenue Code of 1986, as amended (the "Code"), and the amount of such parachute payments, when reduced by the federal excise taxes due and owing on such parachute payments, if any, is less than the amount Executive would receive if he were paid only three (3) times his "base amount," as that term is defined in section 280G of the Code, then, in lieu of all payments hereunder which are parachute payments, Executive shall be paid, in cash, an amount equal to three (3) times his base amount less one dollar ($1.00). The determinations to be made with respect to this Section 7.1(f) shall be made by an independent auditor jointly selected by the parties. 8. NONCOMPETE. Executive covenants and agrees that during the term of his employment hereunder and for a period of one (1) year thereafter (the "Noncompetition Period"), Executive shall not, directly or indirectly recruit, solicit or otherwise induce any customer, officer or employee of the Company, or independent contractor associated with the Company, to discontinue such relationship with the Company. During the Noncompetition Period, Executive shall hold in confidence and shall not disclose to anyone, or use or otherwise exploit for his own benefit or the benefit of any person or entity, any confidential or proprietary information of the Company, including, without limitation, customer and vendor lists, financial statements and information, trade secrets or marketing arrangements and plans, unless directed to do so by order of any court; provided, however, that the terms of this Section 8 shall not restrict Executive with respect to any Company customer who has been assigned Executive's A/E number. 9. MISCELLANEOUS. 9.1 TRANSFER AND ASSIGNMENT. This Agreement is personal as to Executive and shall not be assigned or transferred by Executive without the prior written consent of the Company. This Agreement shall be binding upon and inure to the benefit of all of the parties hereto and their respective permitted heirs, personal representatives, successors and assigns. 9.2 SEVERABILITY. Nothing contained herein shall be construed to require the commission of any act contrary to law. Should there by any conflict between any provisions hereof and any present or future statute, law, ordinance, regulation, or other pronouncement having the force of law, the latter shall prevail, but the provision of this Agreement affected thereby shall be curtailed and limited only to the extent necessary to bring it within the requirements of the law, and the remaining provisions of this Agreement shall remain in full force and effect. 9.3 GOVERNING LAW. This Agreement is made under and shall be construed in accordance with the laws of the State of Illinois, without regard to conflict of laws principles. The Company and Executive hereby consent and agree to be subject to the jurisdiction of the federal and state courts of the State of Illinois sitting in Chicago, Illinois, in any suit, action or proceeding arising out of this Agreement or the transactions contemplated hereby. 9.4 COUNTERPARTS. This Agreement may be executed in several counterparts and all documents so executed shall constitute one agreement, binding on all of the parties hereto, notwithstanding that all of the parties did not sign the original or the same counterparts. 9.5 ENTIRE AGREEMENT. This Agreement constitutes the entire agreement and understanding of the parties with respect to the subject matter hereof and supersedes all prior oral or written agreements, arrangements, and understandings with respect thereto. No representation, promise, inducement, statement or intention has been made by any party hereto that is not embodied herein, and not party shall be bound by or liable for any alleged representation, promise, inducement or statement not so set forth herein. 9.6 MODIFICATION. This Agreement may be modified, amended, superseded, or canceled, and any of the terms, covenants, representations, warranties or conditions hereof may be waived, only by a written instrument executed by the party or parties to be bound by any such modification, amendment, supersession, cancellation, or waiver. 9.7 ATTORNEYS' FEES AND COSTS. In the event of any dispute arising out of the subject matter of this Agreement, the prevailing party shall recover, in addition to any other damages assessed, its attorneys' fees and court costs incurred in litigating or otherwise settling or resolving such dispute whether or not an action is brought or prosecuted to judgment. In construing this Agreement, none of the parties hereto shall have any term or provision construed against such party solely by reason of such party having drafted the same. 9.8 WAIVER. The waiver by either of the parties, express or implied, of any right under this Agreement or any failure to perform under this Agreement by the other party, shall not constitute or be deemed as a waiver of any other right under this Agreement, or of any other failure to perform under this Agreement by the other party, whether of a similar or dissimilar nature. 9.9 CUMULATIVE REMEDIES. Each and all of the several rights and remedies provided in this Agreement, or by law or in equity, shall be cumulative, and no one of them shall be exclusive of any other right or remedy, and the exercise of any one of such rights or remedies shall not be deemed a waiver of, or an election to exercise, any other such right or remedy. 9.10 HEADINGS. The section and other headings contained in this Agreement are for reference purposes only and shall not in any way affect the meaning and interpretation of this Agreement. 9.11 NOTICES. Any notice under this Agreement must be in writing, may be telecopied, sent by express 24-hour guaranteed courier, or hand-delivered, or may be served by depositing the same in the United States mail, addressed to the party to be notified, postage-prepaid and registered or certified with a return receipt requested. The addresses of the parties for the receipt of notice shall be as follows: If to the Company: National Securities Corporation 875 North Michigan Avenue Suite 1560 Chicago, Illinois 60611 Attn: Steven A. Rothstein If to the Executive: Michael A. Bresner At his then home address, currently: 229 Linden Avenue Wilmette, Illinois 60691 Each notice given by registered or certified mail shall be deemed delivered and effective on the date of delivery as shown on the return receipt, and each notice delivered in any other manner shall be deemed to be effective as of the time of actual delivery thereof. Each party may change its address for notice by giving notice thereof in the manner provided above. IN WITNESS WHEREOF, the parties hereto have caused this Employment Agreement to be executed as of the date first set forth above. NATIONAL SECURITIES CORPORATION By: _______________________________ Steven A. Rothstein, Chairman EXECUTIVE ----------------------------------- Michael A. Bresner EX-21 9 SUBSIDIARIES EXHIBIT 21 OLYMPIC CASCADE FINANCIAL CORPORATION Subsidiaries of the Registrant September 24, 1999 Percentage of Voting State of Securities SUBSIDIARY NAME INCORPORATION OWNED National Securities Corporation Washington 100% WestAmerica Investment Group California 100% EX-27 10 FDS --
BD STATEMENT OF FINANCIAL CONDITION AND STATEMENT OF OPERATIONS 0001023844 OLYMPIC CASCADE FINANCIAL CORPORATION 1 U.S.DOLLARS YEAR SEP-24-1999 SEP-26-1998 SEP-24-1999 1000 384 40,636 298 720 41,416 1,176 86,697 2,440 77,906 0 0 139 2,173 0 0 34 4,005 86,697 9,057 5,557 24,565 2,459 0 3,764 30,617 114 114 0 0 118 .08 .08
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