<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarter Ended June 26, 1998 Commission File Number 001-12629
OLYMPIC CASCADE FINANCIAL CORPORATION
-------------------------------------
(Exact name of registrant as specified)
DELAWARE 36-4128138
- ----------------------------- -----------------------------
(State of other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
875 NORTH MICHIGAN AVENUE, SUITE 1560, CHICAGO, ILLINOIS 60611
----------------------------------------------------------------
(Address of principal executive offices) (Zip code)
Registrant's telephone number, including area code: (312) 751-8833
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
--------
The number of shares outstanding of registrant's Common stock, par value $0.02
per share, at August 6, 1998 was 1,518,516.
1
<PAGE>
OLYMPIC CASCADE FINANCIAL CORPORATION
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
ASSETS
June 26, September 26,
1998 1997
(unaudited) (audited)
-------------- --------------
<S> <C> <C>
CASH, subject to immediate withdrawal $ 861,000 $ 979,000
CASH, CASH EQUIVALENTS AND SECURITIES 24,260,000 30,934,000
DEPOSITS 2,139,000 1,292,000
RECEIVABLES
Customers 32,955,000 22,114,000
Brokers and dealers 2,283,000 1,847,000
Other 1,080,000 481,000
Income tax receivable 763,000 597,000
SECURITIES HELD FOR RESALE, at market 2,734,000 2,066,000
FIXED ASSETS, net 1,488,000 1,528,000
GOODWILL, net 1,297,000 1,391,000
OTHER ASSETS 831,000 545,000
-------------- --------------
$ 70,691,000 $ 63,774,000
-------------- --------------
-------------- --------------
LIABILITIES AND STOCKHOLDERS' EQUITY
BANK LINE OF CREDIT $ 600,000 $ -
PAYABLES
Customers 55,246,000 48,828,000
Brokers and dealers 458,000 1,752,000
SECURITIES SOLD, BUT NOT YET PURCHASED, at market 1,031,000 1,047,000
ACCOUNTS PAYABLE, ACCRUED EXPENSES AND OTHER LIABILITIES 3,023,000 3,634,000
CAPITAL LEASE PAYABLE 1,154,000 -
NOTES PAYABLE 2,248,000 909,000
-------------- --------------
63,760,000 56,170,000
-------------- --------------
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,
1,518,516 and 1,444,205 shares issued and outstanding, respectively 30,000 29,000
Additional paid-in capital 5,704,000 5,045,000
Retained earnings 1,197,000 2,530,000
-------------- --------------
6,931,000 7,604,000
-------------- --------------
$ 70,691,000 $ 63,774,000
-------------- --------------
-------------- --------------
</TABLE>
2
The accompanying notes are an integral part of these financial statements.
<PAGE>
OLYMPIC CASCADE FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
----For The Quarter Ended---- ----The Nine Months Ended----
June 26, June 27, June 26, June 27,
1998 1997 1998 1997
-------------- -------------- -------------- --------------
<S> <C> <C> <C> <C>
REVENUES:
Commissions $ 6,665,000 $ 4,168,000 $ 17,957,000 $ 12,132,000
Net dealer inventory gains 1,775,000 1,857,000 4,836,000 2,323,000
Interest 1,123,000 953,000 3,156,000 2,782,000
Transfer fees 177,000 154,000 567,000 459,000
Underwriting 2,004,000 3,882,000 10,281,000 10,688,000
Other 102,000 115,000 623,000 268,000
-------------- -------------- -------------- --------------
TOTAL REVENUES 11,846,000 11,129,000 37,420,000 28,652,000
-------------- -------------- -------------- --------------
EXPENSES:
Commissions 6,763,000 5,813,000 20,521,000 15,992,000
Salaries 2,102,000 1,915,000 6,891,000 4,289,000
Clearing fees 401,000 255,000 1,245,000 584,000
Communications 525,000 437,000 1,499,000 871,000
Occupancy costs 987,000 845,000 2,798,000 1,852,000
Interest 706,000 581,000 2,064,000 1,639,000
Professional fees 250,000 303,000 747,000 552,000
Taxes, licenses, registration 276,000 245,000 768,000 754,000
Other 768,000 616,000 2,381,000 1,230,000
-------------- -------------- -------------- --------------
TOTAL EXPENSES 12,778,000 11,010,000 38,914,000 27,763,000
-------------- -------------- -------------- --------------
Income (loss) from operations before income taxes (932,000) 119,000 (1,494,000) 889,000
Income tax (expense) benefit 309,000 (33,000) 513,000 (296,000)
-------------- -------------- -------------- --------------
NET INCOME (LOSS) $ (623,000) $ 86,000 $ (981,000) $ 593,000
-------------- -------------- -------------- --------------
-------------- -------------- -------------- --------------
EARNINGS (LOSS) PER COMMON SHARE
Basic Earnings (Loss) Per Share $ (0.41) $ 0.06 $ (0.66) $ 0.51
-------------- -------------- -------------- --------------
-------------- -------------- -------------- --------------
Diluted Earnings (Loss) Per Share $ (0.41) $ 0.05 $ (0.66) $ 0.42
-------------- -------------- -------------- --------------
-------------- -------------- -------------- --------------
BASIC COMMON SHARES OUTSTANDING
FOR THE PERIOD 1,518,516 1,377,533 1,494,503 1,163,580
-------------- -------------- -------------- --------------
-------------- -------------- -------------- --------------
DILUTED COMMON SHARES OUTSTANDING
FOR THE PERIOD 1,518,516 1,579,414 1,494,503 1,408,249
-------------- -------------- -------------- --------------
-------------- -------------- -------------- --------------
</TABLE>
3
The accompanying notes are an integral part of these financial statements.
<PAGE>
OLYMPIC CASCADE FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
--------------For The Nine Month's Ended---------------
June 26, June 27,
1998 1997
------------------ ------------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss) $ (981,000) $ 593,000
Adjustments to reconcile net income (loss) to net
cash from operating activities
Depreciation and amortization 568,000 209,000
Changes in assets and liabilities -
Cash, cash equivalents and securities 6,674,000 (764,000)
Deposits (847,000) (111,000)
Receivables (11,876,000) (5,031,000)
Income taxes receivable (payable) (166,000) (733,000)
Securities held for resale (668,000) 1,383,000
Other assets (381,000) (1,854,000)
Customer and broker payables 5,124,000 3,019,000
Securities sold, but not yet purchased (16,000) (873,000)
Accounts payable, accrued expenses, and other liabilities 600,000 1,169,000
------------------ ------------------
(1,969,000) (2,993,000)
------------------ ------------------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of fixed assets (339,000) (1,082,000)
------------------ ------------------
CASH FLOWS FROM FINANCING ACTIVITIES
Borrowings on line of credit 600,000 -
Proceeds from notes payable 1,925,000 913,000
Repayment of notes payable (300,000) -
Payments on capital lease (43,000) -
Issuance of common stock through exercise of stock options 8,000 646,000
Issuance of common stock in business combination - 1,375,000
------------------ ------------------
2,190,000 2,934,000
------------------ ------------------
(DECREASE) IN CASH (118,000) (1,141,000)
CASH BALANCE
Beginning of the period 979,000 2,727,000
------------------ ------------------
End of the period $ 861,000 $ 1,586,000
------------------ ------------------
------------------ ------------------
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash paid during the period for
Interest $ 2,013,000 $ 1,639,000
------------------ ------------------
------------------ ------------------
Income taxes $ - $ 1,028,000
------------------ ------------------
------------------ ------------------
SUPPLEMENTAL DISCLOSURES OF NONCASH INVESTING AND
FINANCING ACTIVITIES
Warrants issued as a discount on notes payable $ 301,000 $ -
------------------ ------------------
------------------ ------------------
Note receivable from restructuring investment $ 281,000 $ -
------------------ ------------------
------------------ ------------------
Assets under capital lease $ 1,145,000 $ -
------------------ ------------------
------------------ ------------------
</TABLE>
4
The accompanying notes are an integral part of these financial statements.
<PAGE>
OLYMPIC CASCADE FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 26, 1998 AND JUNE 27, 1997
NOTE 1 - OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES
Nature of Business - Olympic Cascade Financial Corporation ("Olympic" or
the "Company") is a diversified financial services organization, operating
through its wholly owned subsidiaries, National Securities Corporation
("National"), L. H. Friend, Weinress, Frankson & Presson, Inc. ("Friend") 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.
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 (a Washington corporation) becoming a wholly owned
subsidiary of Olympic (a Delaware corporation). This 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 Olympic common stock valued at $1,375,000. 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.
In June 1997, the Company acquired all of the outstanding stock of
WestAmerica, a Scottsdale, Arizona based broker-dealer specializing in retail
brokerage services. WestAmerica was acquired for $443,000 in cash and an
agreement that provides for the payment of bonus compensation to certain
brokers. The Company recorded this transaction under the purchase method of
accounting and has recorded goodwill of $83,000 for the purchase price and
direct costs in excess of the net fair value of the assets acquired.
In July 1997, the Company acquired all of the outstanding stock of Travis
Capital, Inc. ("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 Olympic 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. In January 1998, this acquisition was
restructured as described in Note 6.
5
<PAGE>
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
The operating results of these acquired companies are included in the
consolidated statements of operations from their respective acquisition dates.
Goodwill resulting from these transactions is being amortized over 5 to 25
years.
BASIS OF PRESENTATION AND USE OF ESTIMATES - In the opinion of management,
the accompanying balance sheets and related interim statements of operations and
cash flows include all adjustments (consisting only of normal recurring items)
necessary for their fair presentation in conformity with generally accepted
accounting principles. Preparing financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets, liabilities, revenue
and expenses. Actual results may differ from these estimates. Interim results
are not necessarily indicative of results for a full year. The information
included in this Form 10-Q should be read in conjunction with Management's
Discussion and Analysis and financial statements and notes there to included in
Olympic's 1997 Form 10-K.
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.
ACCOUNTING METHOD - Customer security transactions and the related
commission income and commission 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.
DEPRECIATION - Fixed assets are stated at cost and are depreciated over
their estimated useful lives of three to seven years. Depreciation is computed
using the straight-line method.
EARNINGS (Loss) PER SHARE - Basic earnings (loss) per common share is based
upon the net income (loss) for the quarter divided by the weighted average
number of common shares outstanding during the quarter. For the third quarter
of fiscal 1998 and 1997, the number of shares used in the basic earnings (loss)
per share calculation was 1,518,516 and 1,377,533 respectively. For the first
nine months of fiscal 1998 and 1997, the number of shares used in the basic
earnings (loss) per share calculation was 1,494,503 and 1,163,580, respectively.
Diluted earnings (loss) per common share assumes that all common stock
equivalents have been converted to common shares using the treasury stock method
at the beginning of the quarter. For the third quarter of fiscal 1998 and 1997,
the number of shares used in the diluted earnings (loss) per share calculation
was 1,518,516 and 1,579,414, respectively. For the first nine months of fiscal
1998 and 1997, the number of shares used in the diluted earnings (loss) per
share calculation was 1,494,503 and 1,408,249, respectively. All shares used in
the basic and diluted calculations have been restated to show the effect of the
stock dividends as described in Note 4. The Company adopted FAS No. 128 in the
first quarter of fiscal 1998. The calculation of earnings (loss) per share
under FAS No. 128 is not materially different than earnings (loss) per share
calculated under the previous method.
6
<PAGE>
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
INCOME TAXES - The Company utilizes an asset and liability approach to
financial accounting and reporting for income taxes. Deferred income tax assets
and liabilities are computed annually for differences between the financial
statement and tax bases of assets and liabilities that will result in taxable or
deductible amounts in the future based on currently enacted tax laws and rates.
FISCAL YEAR - The Company has a 52 or 53 week year, ending on the last
Friday in September.
CASH AND CASH EQUIVALENTS - For purposes of the statement of cash flows,
the Company considers only cash subject to immediate withdrawal. Cash, cash
equivalents and securities are not considered a change in cash for this purpose.
NOTE 2 - LINE OF CREDIT
National has an unsecured line of credit of $3,000,000. The line is
subject to renewal in March 1999. Borrowings bear interest at the bank's prime
rate. Interest is payable monthly. These borrowings are short-term and have
not extended beyond a few days. At June 26, 1998, National had $600,000 of
borrowings outstanding.
NOTE 3 - 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.
In July 1998, the Company renegotiated the term on a note payable to a bank
with an original amount of $900,000. Under the original agreement the note was
to be repaid in monthly installments of $150,000 of principal plus interest from
May through October 1998. The revised agreement calls for repayment in monthly
installments of $75,000 of principal plus interest from August 1998 through
January 1999. The principal balance owing on the note at June 26, 1998 was
$600,000.
7
<PAGE>
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
NOTE 4 - STOCKHOLDERS' EQUITY
STOCK DIVIDENDS - The Company issued stock dividends on January 27, 1997,
May 30, 1997, September 10, 1997 and December 22, 1997. All references in the
accompanying financial statements to the number of stock options and warrants,
and earnings (loss) per share have been restated to reflect the dividends.
NOTE 5 - CONTINGENCIES
In April 1997, certain individuals brought action against the Company and
its subsidiary National, alleging National breached an agreement to purchase
their shares of Interact Medical Technologies Corp. ("Interact"). The
plaintiffs alleged claims under section 10(b) of the Securities Exchange Act of
1934 and SEC Rule 10b-5 promulgated thereunder, for common law fraud and
misrepresentation, for breach of express and implied contract, and for
negligence and are seeking damages in excess of $4,000,000.
The Company and National moved to dismiss the plaintiffs' claims on various
grounds, and the plaintiffs moved for partial summary judgment on their claims
of breach of contract. In late October 1997 the Court (i) dismissed all of
plaintiffs' claims against the Company; (ii) dismissed plaintiffs' Securities
law claims against National; and (iii) denied plaintiffs' motion entirely.
Consequently, the case is proceeding against National on theories of common law
fraud, misrepresentation, breach of contract and negligence.
In May 1997, a Trust brought action against the Company, its subsidiary
National, and several officers and directors of the Company and National,
originally alleging fraud, breach of fiduciary duties and state securities law
violations in connection with the share exchange between the Company and
National (the "Share Exchange") and otherwise. The plaintiff, prosecuting the
case both individually and derivatively, seeks monetary damages, corporate
dissolution of the Company and National, recission of the Share Exchange, and
the fair value of its shares in an appraisal proceeding. In an amended
pleading, plaintiff dropped all allegations of fraud and the claim for recission
of the Share Exchange, and alleged that the defendants breached fiduciary duties
by, among other things, secretly receiving excessive and otherwise inappropriate
overrides and other compensation, and that defendants traded in the Company's
stock with knowledge of material, non-public information. The second amended
complaint also alleges that the proxy statement underlying the Share Exchange
wrongly failed to disclose that stockholders' rights would be governed by
Delaware, and not Washington law, and that the plaintiff was wrongly denied
access to the Company's books and records. The case is proceeding in the
Federal District Court for the Western District of Washington.
In October 1997, a corporation served National with a complaint alleging
National and a former National representative breached a contract and committed
various torts by failing to perform an alleged promise to raise capital for
plaintiff through an
8
<PAGE>
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
initial public offering of stock. The plaintiff sought not less than $8.5
million in actual damages and not less than $42.5 million in punitive damages.
In late 1997 National negotiated agreements whereby applicable statutes of
limitations would be tolled through May 31, 1998 and all claims against it
would be dismissed. On November 4, 1997, all claims against National were
dismissed without prejudice.
The Company is a defendant in various other arbitrations and administrative
proceedings, lawsuits and claims which arise out of the normal course of
business.
The Company intends to vigorously defend itself in these actions, and
believes it has meritorious defenses to all.
NOTE 6 - COMMITMENTS
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.
<TABLE>
<CAPTION>
The following is a schedule of assets under capital lease:
<S> <C>
Office machines $ 96,000
Furniture and fixtures 653,000
Electronic equipment 663,000
Leasehold improvements 178,000
----------
1,590,000
Less accumulated depreciation
and amortization (445,000)
----------
$1,145,000
----------
----------
</TABLE>
9
<PAGE>
The following is a schedule by years of future minimum lease payments under
these capital leases together with the present value of the net minimum lease
payments as of June 26, 1998:
<TABLE>
<CAPTION>
Fiscal year ended
<S> <C> <C>
1998 $ 79,000
1999 340,000
2000 340,000
2001 340,000
2002 358,000
----------
Total minimum lease payments 1,457,000
Less: Amount representing
taxes (91,000)
----------
Net minimum lease payments 1,366,000
Less amount representing interest ( 212,000)
----------
Present value of net minimum lease payments $1,154,000
----------
----------
</TABLE>
NOTE 7 - RESTRUCTURING
The Company concluded that it could best maximize its profit potential
through a strategic alliance with Travis rather than through a direct
investment. Effective January 1, 1998, the Company sold its investment in Travis
to Travis & Company in exchange for a note receivable of $280,650 which is
included in other assets. The Company wrote-off unamortized goodwill of
$40,000, recorded a gain of approximately $97,000 and recorded a corresponding
allowance on the note receivable of $97,000. Under the terms of the note, the
Company has collected approximately $52,000, through June 26, 1998.
NOTE 8 - SUBSEQUENT EVENT
In July 1998, the Company entered into an agreement in principle to
purchase certain fixed assets of a former brokerage firm for approximately
250,000 shares of common stock. The formal agreement is in the process of being
finalized. Approximately 60 to 65 registered representatives have become
registered investment executives with National.
10
<PAGE>
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
EXCEPT FOR HISTORICAL INFORMATION CONTAINED HEREIN, THE MATTERS DISCUSSED
IN THIS REPORT CONTAIN CERTAIN FORWARD-LOOKING INFORMATION THAT INVOLVE RISKS
AND UNCERTAINTIES THAT COULD CAUSE RESULTS TO DIFFER MATERIALLY, INCLUDING
CHANGING MARKET CONDITIONS AND OTHER RISKS DETAILED IN THIS REPORT, THE
COMPANY'S ANNUAL REPORT OR FORM 10-K AND OTHER DOCUMENTS FILED BY THE COMPANY
WITH THE SECURITIES AND EXCHANGE COMMISSION FROM TIME TO TIME.
QUARTER ENDED JUNE 26, 1998 COMPARED TO QUARTER ENDED JUNE 27, 1997
The Company's third quarter of fiscal 1998 resulted in significant
increases in expenses with only marginal increases in revenue when compared
with the same period of fiscal 1997. This disproportionate increase in expenses
was attributable in part to revenue mix, as commission revenue generally results
in a lower net profitability than underwriting revenue.
Revenues increased $717,000, or 7% to $11,846,000 from $11,129,000. This
increase is due to favorable market conditions and the addition of investment
executives. The most significant component of this increase was commission
revenue, which was substantially offset by a decrease in underwriting revenue.
Commission revenue increased $2,497,000, or 60% to $6,665,000 from
$4,168,000. This increase was due to a strong securities market, which
increased retail trading activity, and the production of WestAmerica.
WestAmerica was acquired in June 1997 and therefore its results for only
one-month were included in the results for the third quarter of fiscal 1997.
Underwriting revenue decreased $1,878,000 or 48% to $2,004,000 from
$3,882,000 in the third quarter of fiscal 1998 compared with the third quarter
of fiscal 1997, respectively. During the third quarter of fiscal 1998, the
Company's subsidiaries generated revenue by participating in public
underwritings and providing other corporate finance services such as advisory
services and private placement of securities, however, the Company's
subsidiaries did not manage any public underwritings. In the third quarter of
fiscal 1997, the Company's subsidiaries managed two public underwritings that
raised approximately $29 million in proceeds.
Net dealer inventory gains decreased $82,000 to $1,775,000 from $1,857,000
in the third quarter of fiscal 1998 compared with the third quarter of fiscal
1997. During the 1998 fiscal third quarter, the Company incurred mark to market
losses of approximately $300,000, which it did not incur during the same period
for fiscal 1997.
Total expenses grew by 16% in the third quarter of fiscal 1998 compared
with the third quarter of fiscal 1997. Total expenses increased by $1,768,000
to $12,778,000 from
11
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
(CONTINUED)
$11,010,000. The rise in expenses was due to the structure of Olympic, whereby
operations were transferred from a single brokerage firm to a holding company
with three separate brokerage firms, as well as the addition of WestAmerica.
During the second quarter of fiscal 1998, Olympic increased management by adding
a Chief Operating Officer. Additionally, during the third quarter of fiscal
1998, Olympic added a Controller, formerly with National, and the compensation
arrangement with the Chief Executive Officer and Chairman changed whereby he is
now compensated with a base salary plus bonus based on consolidated net income
rather than principally from commissions related to transactions. This structure
is consistent with the Company's long-term strategy of growth through
acquisitions and roll-ups.
Commission expense increased $950,000, or 16% to $6,763,000 from
$5,813,000. Commission expense as a percentage of commission related revenues
(commissions, inventory gains and underwriting), increased 6% to approximately
65% from approximately 59% in the third quarter of fiscal 1998 and 1997,
respectively.This was mainly due to the type of commissions generated at
National and the mark to market trading losses incurred at National. During the
third quarter fiscal 1998, a larger percentage of commission revenues were
generated by mutual fund transactions, which have a higher commission payout
than other security transactions. Combined these two items totaled more than 4%
of the 6% increase.
Salaries increased $187,000 or 10% to $2,102,000 from $1,915,000. This
increase is due to the addition of WestAmerica, and the structure of Olympic.
WestAmerica, which was acquired in June 1997, primarily has employees as opposed
to independent contractors, thereby increasing the number of people who receive
salaries in fiscal 1998. Overall, salary expense as a percentage of revenue
increased less than one-half of one percent in the third quarter of fiscal 1998
as compared with the third quarter of fiscal 1997.
As anticipated with the higher commission revenue, clearing expenses
increased in the third quarter of fiscal 1998; however, as a percentage of
commission revenue, clearing expense was approximately 6% for both the third
quarter of fiscal 1998 and the third quarter of fiscal 1997. Occupancy expense,
consisting mainly of rent, office supplies and depreciation has increased
$142,000 or 17% to $987,000 from $845,000. This increase relates to the
occupancy cost of WestAmerica as well as increased depreciation associated with
furnishing the Chicago office and upgrading computer systems. Finally, other
expenses increased $152,000 to $768,000 from $616,000 or 25% in the third
quarter of fiscal 1998 and 1997, respectively. This was mainly due to the
increased travel expense of $61,000 and expenses of approximately $54,000
related to moving the Chief Operating Officer and Controller for Olympic to
Chicago.
Overall, the Company recorded a net (loss) of ($623,000) or ($.41) per
share as compared with net income of $86,000 or $.05 per share for the third
quarter ended June 26, 1998 and June 27, 1997, respectively. The Company adopted
FAS No. 128 in the first quarter of fiscal 1998. The calculation of earnings
(loss) per share under FAS No. 128 is
12
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
(CONTINUED)
not materially different than earnings (loss) per share calculated under the
previous method.
NINE MONTHS ENDED JUNE 28, 1998 COMPARED TO NINE MONTHS
ENDED JUNE 27, 1997
For the nine months total revenues increased 31% to $37,420,000 in fiscal
1998 from $28,652,000 in fiscal 1997. Concurrent with this increase in revenues
was a 40% increase in expenses to $38,913,000 in fiscal 1998 from $27,763,000 in
fiscal 1997. The largest expense increase, commission expense, is directly
related to increase in revenues.
The most significant components of the increase in total revenues are the
increase in commission revenue and increase in dealer inventory gains.
Commission revenue increased $5,825,000 or 48% to $17,957,000 in 1998 from
$12,132,000 in 1997. This increase was the result of added investment
executives through the addition of Friend and WestAmerica and the addition of
National offices in Los Angeles and New York. Revenues from net dealer
inventory gains or principal trading activities increased 108% or $2,513,000 to
$4,836,000 from $2,323,000 in fiscal 1998 compared with fiscal 1997 due to the
continued strength of the securities market. However, underwriting revenue
decreased $407,000 or 4% to $10,281,000 from $10,688,000 in fiscal 1998 to
fiscal 1997, respectively. This decrease for the nine months was primarily the
result of the Company not managing any underwritings in the second or third
quarter of fiscal 1998. For the first nine months of fiscal 1998 the Company
through its subsidiaries National and Friend managed three public underwritings
and several private placements, which raised over $55 million in proceeds. In
comparison, during the first nine months of fiscal 1997 the Company's
subsidiaries managed seven public underwritings, which totaled more than $133
million in proceeds.
Correspondingly, commission expense, the most significant expense
component, increased by $4,529,000 or 28% to $20,521,000 in 1998 from
$15,992,000 in 1997. The increase in commission expense is a direct result of
the increase in revenues. Commission expense as a percentage of commission
related revenues (commissions, inventory gains and underwriting), decreased 2%
to approximately 62% from approximately 64% in the third quarter of fiscal 1998
and 1997, respectively. This is primarily due to nine months of results for
Friend and WestAmerica, which have lower commission payout, during fiscal 1998
compared to four months and one month, respectively in fiscal 1997. Overall,
the commission expense as a percentage of commission related revenues was higher
at National for the nine months of fiscal 1998 as compared with fiscal 1997 due
to reasons discussed in the quarterly results.
Salaries increased $2,602,000 or 61% to $6,891,000 from $4,289,000. This
increase is due to the addition of Friend, WestAmerica and Travis (only for the
first quarter fiscal 1998), which primarily have employees as opposed to
independent contractors, thereby increasing the number of people who receive
salaries from that in
13
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
(CONTINUED)
fiscal 1997. The addition of these subsidiaries accounted for $2,157,000 of
the total increase in salaries. Additionally, the structure at Olympic
increased the overall salaries. In comparison, combined commissions and
salaries as a percentage of revenue increased approximately 2.4% to 70.8%
from 73.2% in the first nine months of 1998 from the first nine months of
1997.
During the first nine months of fiscal 1998 the largest expense increases
were clearing, communication, occupancy and other as compared with the first
nine months of fiscal 1997. Concurrent with the higher commission revenue,
clearing expenses increased $661,000 or 113% to $1,245,000 from $584,000 for the
first nine months of fiscal 1998. As anticipated, with the addition of Friend
and WestAmerica, the additional National offices in New York and Los Angeles and
the depreciation associated with furnishing the Chicago office and upgrading the
computer system, communication and occupancy costs increased $946,000 or
51%. Finally, other expenses increased $1,150,000 or 93% to $2,380,000 from
$1,230,000. This increase is primarily made up of increased travel expense of
approximately $335,000, increased amortization of approximately $160,000,
expenses related to moving the Chief Operating Officer, Chief Financial Officer
and Controller for Olympic to Chicago of approximately $200,000, increased bad
debt write-offs of approximately $83,000 and increased consulting expense of
approximately $170,000.
Overall, the Company reported a net (loss) for the first nine months of
fiscal 1998, which totaled ($981,000) or ($0.66) per share versus net income of
$593,000 or $0.42 per share for the first nine months of fiscal 1997. The
Company adopted FAS No. 128 in the first quarter of fiscal 1998. The
calculation of earnings (loss) per share under FAS No. 128 is not materially
different than earnings (loss) per share calculated under the previous method.
LIQUIDITY AND CAPITAL RESOURCES
As with most financial firms, substantial portions of the Company's assets
are liquid, consisting mainly of cash or assets readily convertible into cash.
These assets are financed primarily by 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
June 26, 1998 National had $600,000 of borrowings outstanding. This borrowing
was repaid within three days.
In November 1997, the Company executed two promissory notes totaling
$925,000. The notes bear interest at 6% and 8% with the principal to be repaid
in 24 monthly installments commencing on December 31, 2000. In connection with
the notes, warrants for the purchase of 126,000 shares at an exercise price of
$5.36 per share of the
14
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
(CONTINUED)
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.
In July 1998, the Company renegotiated the term on a note payable to a bank
with an original amount of $900,000. Under the original agreement the note was
to be repaid in monthly installments of $150,000 of principal plus interest from
May through October 1998. The revised agreement calls for repayment in monthly
installments of $75,000 of principal plus interest from August 1998 through
January 1999. The principal balance owing on the note at June 26, 1998 was
$600,000.
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.
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 June 26, 1998,
National's net capital exceeded the requirement by $2,656,000.
Friend and WestAmerica, as registered broker-dealers are also subject to
the SEC's Net Capital Rule 15c3-1, which, under the standard method, requires
that each company maintain minimum net capital equal to the greater of $100,000
or 6 2/3% of aggregate indebtedness. At June 30, 1998, Friend's and
WestAmerica's net capital exceeded the requirement by $363,000 and $386,000,
respectively.
Advances, dividend payments and other equity withdrawals from National,
Friend, 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.
The objective of liquidity management is to ensure that the Company has
ready access to sufficient funds to meet commitments, fund deposit withdrawals
and efficiently provide for the credit needs of customers. Historically, cash
flow from operations and
15
<PAGE>
earnings contribute significantly to liquidity.
Unlike the Company's other subsidiaries, National requires the majority of
its investment executives to be responsible for substantially all of the
overhead expenses associated with their sales efforts, including their office
furniture, sales assistants, telephone service and supplies.
The Company believes its internally generated liquidity, together with
access to external capital and debt resources will be sufficient to satisfy
existing operations. However, if the Company continues to expand its operations
and acquire other businesses the Company will require additional capital.
PART II
ITEM 1 - LEGAL PROCEEDINGS
In April 1997, certain individuals brought action against the Company and
its subsidiary National, alleging National breached an agreement to purchase
their shares of Interact Medical Technologies Corp. ("Interact"). The
plaintiffs alleged claims under section 10(b) of the Securities Exchange Act of
1934 and SEC Rule 10b-5 promulgated thereunder, for common law fraud and
misrepresentation, for breach of express and implied contract, and for
negligence and are seeking damages in excess of $4,000,000.
The Company and National moved to dismiss the plaintiffs' claims on various
grounds, and the plaintiffs moved for partial summary judgment on their claims
of breach of contract. In late October 1997 the Court (i) dismissed all of
plaintiffs' claims against the Company; (ii) dismissed plaintiffs' Securities
law claims against National; and (iii) denied plaintiffs' motion entirely.
Consequently, the case is proceeding against National on theories of common law
fraud, misrepresentation, breach of contract and negligence.
In May 1997, a Trust brought action against the Company, its subsidiary
National, and several officers and directors of the Company and National,
originally alleging fraud, breach of fiduciary duties and state securities law
violations in connection with the share exchange between the Company and
National (the "Share Exchange") and otherwise. The plaintiff, prosecuting the
case both individually and derivatively, seeks monetary damages, corporate
dissolution of the Company and National, recission of the Share Exchange, and
the fair value of its shares in an appraisal proceeding. In an amended
pleading, plaintiff dropped all allegations of fraud and the claim for recission
of the Share Exchange, and alleged that the defendants breached fiduciary duties
by, among other things, secretly receiving excessive and otherwise inappropriate
overrides and other compensation, and that defendants traded in the Company's
stock with knowledge of material, non-public information. The second amended
complaint also alleges that the proxy statement underlying the Share Exchange
wrongly failed to disclose that stockholders' rights would be governed by
Delaware, and not Washington law, and that
16
<PAGE>
LEGAL PROCEEDINGS
(CONTINUED)
the plaintiff was wrongly denied access to the Company's books and records. The
case is proceeding in the Federal District Court for the Western District of
Washington.
In October 1997, a corporation served National with a complaint alleging
National and a former National representative breached a contract and committed
various torts by failing to perform an alleged promise to raise capital for
plaintiff through an initial public offering of stock. The plaintiff sought not
less than $8.5 million in actual damages and not less than $42.5 million in
punitive damages. In late 1997 National negotiated agreements whereby
applicable statutes of limitations would be tolled through May 31, 1998 and all
claims against it would be dismissed. On November 4, 1997, all claims against
National were dismissed without prejudice.
The Company is a defendant in various other arbitrations and administrative
proceedings, lawsuits and claims which arise out of the normal course of
business.
The Company intends to vigorously defend itself in these actions, and
believes it has meritorious defenses to all.
ITEM 4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Company held its annual meeting of shareholders on June 22, 1998.
The shareholders elected for the ensuing year all of the nominees for the
Board of Directors, approved the amended Certificate of Incorporation
decreasing the number of authorized shares of Common Stock from 10,000,000 to
6,000,000 and decreasing the number of authorized shares of Preferred Stock
from 1,000,000 to 100,000 and ratified the appointment of Moss Adams LLP as
independent accountants for the fiscal year ending September 25, 1998.
The voting results are as follows:
<TABLE>
<CAPTION>
NUMBER OF SHARES
-------------------------------------------
Director For Against Abstentions Not voted
-------- ------- ------- ----------- ---------
<S> <C> <C> <C> <C>
Steven A. Rothstein 864,309 22,378 562 631,267
Robert I. Kollack 864,309 22,378 562 631,267
Gary A. Rosenberg 864,309 22,378 562 631,267
James C. Holcomb, Jr. 864,309 22,378 562 631,267
D.S. Patel 864,309 22,378 562 631,267
For Against Abstentions Not voted
------- ------- ----------- ---------
Approve amendment
to Certificate of
Incorporation 628,265 2,300 574 887,377
For Against Abstentions Not voted
------- ------- ----------- ---------
Ratify the appointment
of Moss Adams LLP
as independent accountants 617,583 11,621 1,665 887,647
</TABLE>
Items 2, 3 and 5 are not applicable and have been omitted.
ITEM 6 - EXHIBITS AND REPORTS
27 Financial Data Schedule
17
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities 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 AND SUBSIDIARIES
August 6, 1998 By: Steven A. Rothstein
Date Steven A. Rothstein, Chairman, President
and Chief Executive Officer
August 6, 1998 By: Robert H. Daskal
Date Robert H. Daskal, Senior Vice President,
Chief Financial Officer, Treasurer
andSecretary
18
<TABLE> <S> <C>
<PAGE>
<ARTICLE> BD
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> SEP-25-1998
<PERIOD-START> SEP-27-1997
<PERIOD-END> JUN-26-1998
<CASH> 861
<RECEIVABLES> 35,788
<SECURITIES-RESALE> 2,734
<SECURITIES-BORROWED> 530
<INSTRUMENTS-OWNED> 24,260
<PP&E> 1,488
<TOTAL-ASSETS> 70,691
<SHORT-TERM> 1,548
<PAYABLES> 58,727
<REPOS-SOLD> 0
<SECURITIES-LOANED> 0
<INSTRUMENTS-SOLD> 1,031
<LONG-TERM> 2,454
0
0
<COMMON> 30
<OTHER-SE> 6,901
<TOTAL-LIABILITY-AND-EQUITY> 70,691
<TRADING-REVENUE> 4,836
<INTEREST-DIVIDENDS> 3,156
<COMMISSIONS> 17,957
<INVESTMENT-BANKING-REVENUES> 10,281
<FEE-REVENUE> 0
<INTEREST-EXPENSE> 2,064
<COMPENSATION> 6,891
<INCOME-PRETAX> (1,493)
<INCOME-PRE-EXTRAORDINARY> (1,494)
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (981)
<EPS-PRIMARY> (0.66)
<EPS-DILUTED> (0.66)
</TABLE>
