<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 December 31, 1997 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.)
1001 Fourth Avenue, Suite 2200, Seattle, Washington 98154
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(Address of principal executive offices) (Zip code)
Registrant's telephone number, including area code: (206) 622-7200
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 February 10, 1998 was 1,516,504.
1
<PAGE>
OLYMPIC CASCADE FINANCIAL CORPORATION
CONSOLIDATED STATEMENT OF FINANCIAL CONDITION
ASSETS
<TABLE>
<CAPTION>
December 31, September 26,
1997 1997
(unaudited) (audited)
--------------- --------------
<S> <C> <C>
CASH, subject to immediate withdrawal $ 991,000 $ 979,000
CASH, CASH EQUIVALENTS AND SECURITIES 36,571,000 30,934,000
DEPOSITS 818,000 1,292,000
RECEIVABLES
Customers 21,646,000 22,114,000
Brokers and dealers 1,620,000 1,847,000
Other 657,000 481,000
Income tax receivable 115,000 597,000
SECURITIES HELD FOR RESALE, at market 3,402,000 2,066,000
FIXED ASSETS, net 1,561,000 1,528,000
GOODWILL, net 1,371,000 1,391,000
OTHER ASSETS 1,076,000 545,000
--------------- --------------
$ 69,828,000 $ 63,774,000
--------------- --------------
--------------- --------------
LIABILITIES AND STOCKHOLDERS' EQUITY
BANK LINE OF CREDIT $ 2,500,000 $ -
PAYABLES
Customers 54,016,000 48,828,000
Brokers and dealers 364,000 1,752,000
SECURITIES SOLD, BUT NOT YET PURCHASED, at market 442,000 1,047,000
ACCOUNTS PAYABLE, ACCRUED EXPENSES AND OTHER LIABILITIES 2,855,000 3,634,000
NOTES PAYABLE 1,726,000 909,000
--------------- --------------
61,903,000 56,170,000
--------------- --------------
CONTINGENCIES
STOCKHOLDERS' EQUITY
Preferred stock, $.01 par value, 2,000,000 shares authorized,
none issued and outstanding - -
Common stock, $.02 par value, 10,000,000 shares authorized, 1,516,504 and
1,444,205 shares issued and outstanding, respectively 30,000 29,000
Additional paid-in capital 5,524,000 5,045,000
Retained earnings 2,371,000 2,530,000
--------------- --------------
7,925,000 7,604,000
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$ 69,828,000 $ 63,774,000
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</TABLE>
2
The accompanying notes are an integral part of these financial statements.
<PAGE>
OLYMPIC CASCADE FINANCIAL CORPORATION
CONSOLIDATED STATEMENT OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
-------Quarter Ended-------
December 31, December 31,
1997 1996
------------- --------------
<S> <C> <C>
REVENUES:
Commissions $ 5,803,000 $ 3,888,000
Net dealer inventory gains (losses) 1,145,000 (253,000)
Interest 1,049,000 900,000
Transfer fees 207,000 158,000
Underwriting 6,967,000 4,780,000
Other 231,000 58,000
------------- --------------
TOTAL REVENUES 15,402,000 9,531,000
------------- --------------
EXPENSES:
Commissions 8,315,000 5,796,000
Salaries 2,894,000 1,056,000
Clearing fees 429,000 131,000
Communications 499,000 176,000
Occupancy costs 899,000 416,000
Interest 691,000 537,000
Professional fees 334,000 113,000
Taxes, licenses, registration 241,000 207,000
Other 790,000 216,000
------------- --------------
TOTAL EXPENSES 15,092,000 8,648,000
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Income from operations before income taxes 310,000 883,000
Provision for income taxes (118,000) (302,000)
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NET INCOME $ 192,000 $ 581,000
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------------- --------------
EARNINGS PER COMMON SHARE
Basic Earnings Per Share $ 0.13 $ 0.53
------------- --------------
------------- --------------
Diluted Earnings Per Share $ 0.12 $ 0.43
------------- --------------
------------- --------------
</TABLE>
3
The accompanying notes are an integral part of these financial statements.
<PAGE>
OLYMPIC CASCADE FINANCIAL CORPORATION
CONSOLIDATED STATEMENT OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
------Quarter Ended--------
December 31, December 31,
1997 1996
--------------- ----------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 192,000 $ 581,000
Adjustments to reconcile net income to net
cash from operating activities
Depreciation and amortization 194,000 50,000
Changes in assets and liabilities
Cash, cash equivalents and securities (5,637,000) 516,000
Deposits 474,000 12,000
Receivables 519,000 (2,173,000)
Income taxes receivable (payable) 482,000 (123,000)
Securities held for resale (1,336,000) 695,000
Other assets (576,000) (129,000)
Payables 3,800,000 (483,000)
Securities sold, but not yet purchased (605,000) (665,000)
Accounts payable, accrued expenses, and other liabilities (779,000) (423,000)
--------------- ----------------
(3,272,000) (2,142,000)
--------------- ----------------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of fixed assets (162,000) (330,000)
--------------- ----------------
CASH FLOWS FROM FINANCING ACTIVITIES
Borrowings on line of credit 2,500,000 -
Proceeds from notes payable 946,000
Issuance of common stock through exercise of stock options - 132,000
--------------- ----------------
3,446,000 132,000
--------------- ----------------
INCREASE (DECREASE) IN CASH 12,000 (2,340,000)
CASH BALANCE
Beginning of the period 979,000 2,726,000
--------------- ----------------
End of the period $ 991,000 $ 386,000
--------------- ----------------
--------------- ----------------
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash paid during the period for
Interest $ 670,000 $ 537,000
--------------- ----------------
--------------- ----------------
Income taxes $ - $ 425,000
--------------- ----------------
--------------- ----------------
SUPPLEMENTAL DISCLOSURES OF NONCASH FINANCING
ACTIVITIES
Original issue discount on notes payable $ 128,000 $ -
--------------- ----------------
--------------- ----------------
</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
DECEMBER 31, 1997 AND DECEMBER 31, 1996
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 four wholly owned subsidiaries, National Securities Corporation
("National"), L. H. Friend, Weinress, Frankson & Presson, Inc. ("Friend"),
WestAmerica Investment Group ("WestAmerica") and Travis Capital, Inc.
("Travis"). 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 becoming a wholly owned subsidiary of Olympic. 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, 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 has recorded goodwill of $45,000 for
the purchase price and direct costs in excess of the net fair value of the
assets acquired (See also Note 8).
5
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NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
The operating results of these acquired companies are included in the
consolidated statement of income 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
income 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
thereto 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 PER SHARE - Basic earnings per common share is based upon the
net income for the quarter divided by the weighted average number of common
shares outstanding during the quarter. For the first quarter of fiscal 1998 and
1997, the number of shares used in the basic earnings per share calculation was
1,450,983 and 1,099,509, respectively. Diluted earnings 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 first
quarter of fiscal years 1998 and 1997, the number of shares used in the diluted
earnings per share calculation was 1,588,882 and 1,359,308, 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 per
share under FAS No. 128 is not materially different than earnings per share
calculated under the previous method.
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.
6
<PAGE>
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
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 up to $3,000,000. The
line is subject to renewal in March 1998. Borrowings bear interest at the
bank's prime rate. Interest is payable monthly. These borrowings are
short-term and have not extended beyond a few days. Although at times National
has not satisfied, and may not in the future, satisfy a minor loan covenant, the
bank has continued to provide all necessary borrowings. At December 31, 1997,
National had $2,500,000 in borrowings outstanding.
NOTE 3 - NOTES PAYABLE
On November 17, 1997, the Company executed two promissory notes
totaling $925,000. The notes bear interest at 8% and the principal is to be
repaid in 24 monthly installments commencing on December 31, 2000. In
connection with the notes, warrants for the purchase of 120,000 shares at an
exercise price of $5.625 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.
On January 28, 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.
NOTE 4 - STOCKHOLDER'S 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 per share have been restated to reflect the dividends.
7
<PAGE>
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
NOTE 5 - CONTINGENCIES
In April 1997, certain minority stockholders 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.
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. National negotiated agreements whereby
applicable statutes of limitations would be tolled through March 31, 1998 and
all claims against it would be dismissed. On November 4, 1997, all claims
against National were dismissed without prejudice.
8
<PAGE>
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
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
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.
NOTE 8 - SUBSEQUENT EVENT
In January 1998, the Company concluded that it could best maximize its
profit potential through a strategic alliance with Travis rather than through a
direct investment. This transaction is in the process of being restructured
accordingly with an effective date of January 1, 1998. Olympic acquired Travis
in July 1997.
9
<PAGE>
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
QUARTER ENDED DECEMBER 31, 1997 COMPARED TO QUARTER ENDED DECEMBER 31, 1996
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.
The Company's first quarter of fiscal 1998 resulted in significant increases in
both revenues and expenses compared with the same period of fiscal 1997. These
increases are due to growth in brokerage operations and corporate finance
business, including the underwriting of securities to the public and arranging
for the private placement of securities with investors.
Revenues increased $5,871,000, or 62% to $15,402,000 from $9,531,000. This
increase is due to favorable market conditions, the addition of investment
executives and the Company's success in corporate financing activities. The
most significant components of this increase were underwriting revenue and
commission revenue. Underwriting activities, through National and Friend,
generated additional revenue of $2,187,000, an increase of 46% to $6,967,000
from $4,780,000. National through the management of two underwritings and
co-management of one underwriting with Friend, as well as three successful
private placements, generated $3,873,000 during the quarter. Friend managed its
first underwriting during the quarter and participated in several other
underwritings and private placements, generating $3,004,000 of underwriting
revenue. Commission revenue increased $1,915,000, or 49% to $5,803,000 from
$3,888,000. This increase was due to a strong securities market, which
increased retail trading activity, and the production of Friend and WestAmerica.
Friend and WestAmerica were acquired during fiscal 1997 and were not included in
the results for the first quarter of fiscal 1997. Friend and WestAmerica had
combined commission revenue of $1,441,000 in the first quarter of fiscal 1998.
Additionally, net dealer inventory gains increased $1,398,000 to $1,145,000 in
fiscal 1998 from a loss of $253,000 in fiscal 1997. Due to the strong
securities market the Company had success in its trading activities whereas in
fiscal 1997 the Company had net dealer inventory losses attributable to market
stabilization for securities that the Company had underwritten.
Concurrent with the 62% increase in revenues, total expenses grew by 75%. Total
expenses increased by $6,444,000 to $15,092,000 from $8,648,000. This rise in
expenses was anticipated as increased trading activity creates increased
commission payouts, and increased underwriting activities increases various
expenses including commission expense. Commission expense increased $2,519,000,
or 43% to $8,315,000 from
10
<PAGE>
MANAGEMENT DISCUSSION AND ANALYSIS
(CONTINUED)
$5,796,000. Salaries increased $1,838,000 or 174% to $2,894,000 from
$1,056,000. This increase is due to the addition of Friend, WestAmerica and
Travis, which primarily have employees as opposed to independent contractors,
thereby increasing the number of people who receive salaries from that in fiscal
1997. Overall, combined commissions and salaries as a percentage of revenue
increased less than 1% to approximately 73% from approximately 72% in the first
quarter of fiscal 1998 and 1997, respectively.
As anticipated with the addition of Friend, WestAmerica and Travis each of which
operate independently, expenses regarding communications, occupancy, clearing
and other have increased from fiscal 1997 to fiscal 1998. Communication
expenses mainly telephone, telequote and mailing have increased $323,000 or 184%
to $499,000 from $176,000. Occupancy expense, consisting mainly of rent, office
supplies and depreciation has increased $483,000 or 116% to $899,000 from
$416,000. This increase relates to the occupancy costs of additional
subsidiaries acquired as well as National adding offices in New York and Los
Angeles and increased depreciation associated with furnishing the Chicago office
and upgrading the computer systems. Clearing fees increased $298,000 or 227% to
$429,000 from $131,000. Finally, other expenses increased $574,000 to $790,000
from $216,000 in the first quarter of fiscal 1998 and 1997, respectively. With
the addition of the subsidiaries and formation of Olympic other expenses have
increased. Included in these other expenses are increased travel expense of
$207,000, increased insurance expense of $56,000 and non-operating expenses of
$175,000.
Overall, net income decreased $389,000 to $192,000 or $.12 per share from
$581,000 or $.43 per share for the first quarter ended December 31, 1997
compared with the first quarter ended December 31, 1996, respectively. The
Company adopted FAS No. 128 in the first quarter of fiscal 1998. The
calculation of earnings per share under FAS No. 128 is not materially different
than earnings 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 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. Although at times National has not satisfied and may not in
the future satisfy a minor loan covenant, the bank has continued to provide all
necessary borrowings. At December 31, 1997 National had $2,500,000 of
borrowing outstanding. This borrowing was repaid within the first three days of
January.
11
<PAGE>
MANAGEMENT DISCUSSION AND ANALYSIS
(CONTINUED)
On November 17, 1997, the Company executed two promissory notes totaling
$925,000. The notes bear interest at 8% and the principal is to be repaid in 24
monthly installments commencing on December 31, 2000. In connection with the
notes, warrants for the purchase of 120,000 shares at an exercise price of
$5.625 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.
On January 28, 1998, the Company executed a promissory note totaling $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.
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 December 31, 1997,
National's net capital exceeded the requirement by $1,654,000.
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 December 31, 1997, Friend's and
WestAmerica's net capital exceeded the requirement by $373,000 and $205,000,
respectively.
Travis, also subject to the SEC's Net Capital Rule, is required to maintain the
greater of $5,000 or 6 2/3% of aggregate indebtedness. At December 31, 1997,
Travis' net capital exceeded the requirement by $20,893.
Advances, dividend payments and other equity withdrawals from National, Friend,
WestAmerica or Travis 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. Cash flow from
operations and earnings contribute significantly to liquidity.
Unlike the Company's other subsidiaries, National requires its investment
executives to be responsible for substantially all of the overhead expenses
associated with their sales efforts, including their office furniture, sales
assistants, telephone service and supplies.
12
<PAGE>
MANAGEMENT DISCUSSION AND ANALYSIS
(CONTINUED)
The Company believes its internally generated liquidity, together with access to
external capital and debt resources will be sufficient to satisfy existing
operations. However, if the Company continues to expand its operations and
acquire other businesses the Company will require additional capital.
PART II
ITEM 1 - LEGAL PROCEEDINGS
In April 1997, certain minority stockholders 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.
13
<PAGE>
LEGAL PROCEEDINGS
(CONTINUED)
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. National negotiated agreements whereby applicable statutes
of limitations would be tolled through March 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 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.
ITEMS 2, 3, 4, 5 AND 6 ARE NOT APPLICABLE AND HAVE BEEN OMITTED.
14
<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
February 12, 1998 By: Steven A. Rothstein
Date Steven A. Rothstein, Chairman
and Chief Executive Officer
February 12, 1998 By: Robert H. Daskal
Date Robert H. Daskal, Senior Vice
President, Chief Financial Officer
and Treasurer
15
<PAGE>
PROMISSORY NOTE
$1,000,000 Seattle, Washington
January 26, 1998
FOR VALUE RECEIVED, the undersigned, Olympic Cascade Financial
Corporation, a Delaware corporation having an address at 1001 Fourth Avenue,
Suite 2200, Seattle, Washington, 98154, ("Maker"), promises to pay to the
order of LVE, LLC, a New York limited liability company ("Payee") at c/o
Douglas Elliman Gibbons & Ives, 575 Madison Avenue, New York, New York 10022,
or at such other place as Payee may from time to time designate by written
notice to Maker, in lawful money of the United States, the sum of One Million
Dollars ($1,000,000), plus interest from the date of this Note on the unpaid
balance. All principal and interest is to be paid as set forth below. Maker
further agrees as follows:
SECTION 1. INTEREST RATE.
(a) Interest shall accrue at a rate equal to eight percent (8%)
per annum.
(b) Interest shall be computed on the basis of a year of 360 days
for the actual number of days elapsed. After maturity (whether by
acceleration or otherwise, and before as well as after judgment), all unpaid
principal and interest shall bear interest until it is paid at five percent
(5%) in excess of the rate otherwise applicable to the unpaid balance under
this Note.
SECTION 2. PAYMENTS.
(a) Principal shall be due and payable in twenty-four equal
installments (each a "Principal Payment") commencing on December 31, 2000 and
continuing on the last day of each month (each a "Principal Payment Date")
through November 30, 2002 ("Maturity") unless Maker makes demand as set forth
pursuant to Section 2(c) below.
(b) During the first three years of this Note accrued interest
shall be payable in arrears on a quarterly calendar basis commencing March
30, 1998. Thereafter, accrued interest
<PAGE>
shall be paid on each Principal Payment Date.
(c) If Maker completes one or more public offerings or private
placements of debt or equity securities, having gross proceeds in the
aggregate of at least $5,000,000 (a "Financing") Maker shall give notice to
Payee within five (5) days of the closing of such Financing. Payee shall
have twenty-five (25) days from receipt of such notice to demand that the
principal and all accrued interest under this Note be then due and payable.
(d) Maker shall have the right to prepay this Note in full or
in part at any time without penalty.
SECTION 3. DEFAULT.
It shall be an event of default ("Event of Default"), and the
entire unpaid principal of this Note, together with accrued interest, shall
become immediately due and payable, at the election of Payee, upon the
occurrence of any of the following events:
(a) any failure on the part of Maker to make any payment when
due, whether by acceleration or otherwise, and the continuation of such
failure for a period of five (5) business days thereafter;
(b) any failure on the part of Maker to keep or perform any of
the material provisions (other than payment) of this Note or any amendment
thereof, which failure is not cured within ten (10) days;
(c) any failure on the part of Maker to pay any material debt
within sixty (60) days of its due date (except where contested in good faith);
(d) Maker shall commence (or take any action for the purpose
of commencing)
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<PAGE>
any proceeding under any bankruptcy, reorganization, arrangement,
readjustment of debt, moratorium or similar law or statute;
(e) a proceeding shall be commenced against Maker under any
bankruptcy, reorganization, arrangement, readjustment of debt, moratorium or
similar law or statute and relief is ordered against it, or the proceeding is
controverted but is not dismissed within sixty (60) days after the
commencement thereof;
(f) Maker consents to or suffers the appointment of a
receiver, trustee or custodian to any substantial part of its assets that is
not vacated within thirty (30) days;
(g) Maker consents to or suffers an attachment, garnishment,
execution or other legal process against any of its assets that is not
released within thirty (30) days;
SECTION 4. SUBORDINATION.
This note shall be subordinated to Maker's loan agreement with
Seafirst Bank, dated September 16, 1997, in the principal amount of $900,000
(the "Seafirst Loan"); provided, however, that Maker may make all payments of
interest and principal hereunder if no event of default under the Seafirst
Loan has occurred and is continuing at the time of such payments. Maker
shall not incur any other indebtedness which is senior to this Note without
the prior written consent of the Payee.
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<PAGE>
SECTION 5. JURISDICTION.
Maker irrevocably submits to the exclusive jurisdiction of the
courts of the State of New York, and of any federal court located in the
State of New York, in connection with any action or proceeding arising out of
or relating to, or a breach of, this Note. Maker agrees that such court may
award reasonable legal fees and expenses to the prevailing party.
SECTION 6. WAIVERS.
(a) Maker waives demand, presentment, protest, notice of
protest, notice of dishonor, and all other notices or demands of any kind or
nature with respect to this Note.
(b) Maker agrees that a waiver of rights under this Note
shall not be deemed to be made by Payee unless such waiver shall be in
writing, duly signed by Payee, and each such waiver, if any, shall apply only
with respect to the specific instance involved and shall in no way impair the
rights of Payee or the obligations of Maker in any other respect at any other
time.
(c) Maker agrees that in the event Payee demands or accepts
partial payment of this Note, such demand or acceptance shall not be deemed
to constitute a waiver of any right to demand the entire unpaid balance of
this Note at any time in accordance with the terms of this Note.
(d) Maker agrees and acknowledges that Payee may disclose to
any other Obligor confidential information relating to this Note, and waives,
to the full extent permitted by law, any right to privacy or similar right
under federal or state laws which Maker may have with respect to such
disclosures.
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<PAGE>
(e) In any action or proceeding arising out of or relating to
this Note, Maker waives (to the full extent permitted by law) all right to a
trial by jury or to plead as a defense any statute of limitations or any
other similar law or equitable doctrine.
SECTION 7. COLLECTION COSTS.
Maker will upon demand pay to Payee the amount of any and all
reasonable costs and expenses, including, without limitation, the reasonable
fees and disbursements of its counsel (whether or not suit is instituted) and
of any experts and agents, which Payee may incur in connection with the
following: (i) the enforcement of this Note; and (ii) the enforcement of
payment of all obligations of Maker by any action or participation in, or in
connection with, a case or proceeding under Chapters 7, 11, or 13 of the
Bankruptcy Code, or any successor statute thereto.
SECTION 8. ASSIGNMENT OF NOTE.
Maker may not assign or transfer this Note or any of its
obligations under this Note in any manner whatsoever (including, without
limitation, by the consolidation or merger of Maker, if a corporation, with
or into another corporation) without the prior written consent of Payee. The
Note may be assigned at any time by Payee. Maker agrees not to assert
against any assignee of this Note any claim or defense which Maker may have
against any assignor of this Note.
SECTION 9. MISCELLANEOUS.
(a) This Note may be altered only by prior written agreement
signed by the party against whom enforcement of any waiver, change,
modification, or discharge is sought.
-5-
<PAGE>
This Note may not be modified by an oral agreement, even if supported by new
consideration.
(b) This Note shall be governed by, and construed in
accordance with, the laws of the State of New York, without giving effect to
such jurisdiction's principles of conflict of laws.
(c) Subject to Section 8, the covenants, terms, and conditions
contained in this Note apply to and bind the heirs, successors, executors,
administrators and assigns of the parties.
(d) This Note constitute a final written expression of all
the terms of the agreement between the parties regarding the subject matter
hereof, are a complete and exclusive statement of those terms, and supersede
all prior and contemporaneous agreements, understandings, and representations
between the parties. If any provision or any word, term, clause, or other
part of any provision of this Note shall be invalid for any reason, the same
shall be ineffective, but the remainder of this Note shall not be affected
and shall remain in full force and effect.
(e) The singular includes the plural. If more than one Maker
executes this Note, the term "Maker" shall be deemed to refer to each of the
undersigned Makers as well as to all of them, and their obligations and
agreements under this Note shall be joint and several. If any of the
undersigned is a married person, recourse may be had against his or her
separate property for all of his or her obligations under this Note. The
term "Obligor" shall be deemed to refer to each Maker, endorser, guarantor,
or surety of this Note as well as to all of them. The term "Payee" shall
include the initial party to whom payment is designated to be made and, in
the event of an assignment of this Note, the successor assignee or assignees,
and, as to each
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<PAGE>
successive additional assignment, such successor assignee or assignees.
(f) All notices, consents, or other communications provided
for in this Note or otherwise required by law shall be in writing and may be
given to or made upon the respective parties at the addresses set forth in
the preamble hereof. Such addresses may be changed by notice given as
provided in this subsection. Notices shall be effective upon the date of
receipt; provided, however, that a notice (other than a notice of a changed
address) sent by certified or registered U.S. mail, with postage prepaid,
shall be presumed received not later than three (3) business days following
the date of sending.
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<PAGE>
(g) Time is of the essence under this Note.
IN WITNESS WHEREOF, Maker has executed this Note effective as
of the date first set forth above.
OLYMPIC CASCADE FINANCIAL CORPORATION
By:
-------------------------------------------
Steven A. Rothstein
Chairman
-8-
<PAGE>
THIS WARRANT AND ANY SHARES ISSUABLE UPON THE EXERCISE OF THIS WARRANT HAVE
NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE "ACT"),
NOR UNDER ANY STATE SECURITIES LAW AND SUCH SECURITIES MAY NOT BE PLEDGED,
SOLD, ASSIGNED, HYPOTHECATED, OR OTHERWISE TRANSFERRED UNTIL (1) A
REGISTRATION STATEMENT WITH RESPECT THERETO IS EFFECTIVE UNDER THE ACT AND
ANY APPLICABLE STATE SECURITIES LAW OR (2) THE COMPANY RECEIVES AN OPINION OF
COUNSEL TO THE COMPANY OR COUNSEL TO THE HOLDER OF SUCH SECURITIES, WHICH
COUNSEL AND OPINION ARE REASONABLY SATISFACTORY TO THE COMPANY, THAT SUCH
SECURITIES MAY BE PLEDGED, SOLD, ASSIGNED, HYPOTHECATED, OR TRANSFERRED
WITHOUT AN EFFECTIVE REGISTRATION STATEMENT UNDER THE ACT AND APPLICABLE
STATE SECURITIES LAWS.
THE TRANSFER OF THIS WARRANT AND THE SHARES ISSUABLE UPON THE EXERCISE HEREOF
IS RESTRICTED AS DESCRIBED HEREIN.
OLYMPIC CASCADE FINANCIAL CORPORATION
WARRANT FOR THE PURCHASE OF SHARES OF COMMON STOCK,
$.02 PAR VALUE PER SHARE
No. 4
<PAGE>
THIS CERTIFIES that, for $1575 and other good and valuable
consideration, the receipt and sufficiency of which are hereby acknowledged,
LVE, LLC (the "Holder"), is entitled to subscribe for and purchase from
Olympic Cascade Financial Corporation, a Delaware corporation (the
"Company"), upon the terms and conditions set forth herein, at any time or
from time to time, during the period commencing on the date hereof (January
26, 1998) and expiring at 5:00 p.m. on November 31, 2002 (the "Exercise
Period"), 157,500 shares of the Company's common stock, $.02 par value per
share ("the Common Stock"), at a price (the "Exercise Price") per share of
Common Stock equal to $5.34. As used herein, the term "this Warrant" shall
mean and include this Warrant and any Warrant or Warrants hereafter issued as
a consequence of the exercise or transfer of this Warrant in whole or in
part. This Warrant is issued to the original Holder in connection with the
loan by Holder to the Company of $1,000,000. As used herein, the term
"Holder" shall include any transferee to whom this Warrant has been
transferred in accordance with the terms hereof.
The number of shares of Common Stock issuable upon exercise of the
Warrants (the "Warrant Shares") and the Exercise Price may be adjusted from
time to time as hereinafter set forth.
1. Subject to the provisions of Section 2, this Warrant may be
exercised during the Exercise Period, as to the whole or any lesser number of
whole Warrant Shares, by transmission by telecopy of the Election to
Exercise, followed within three (3) business days by the surrender of this
Warrant (with the Election to Exercise attached hereto duly executed) to the
Company at its office at 1001 Fourth Avenue, Suite 2200, Seattle, Washington
98154, or at such other place as is designated in writing by the Company,
together with a certified or bank cashier's check payable to the order of the
Company in an amount equal to the product of the Exercise Price and the
number of Warrant Shares for which this Warrant is being exercised (the
"Aggregate Exercise Price"). Alternatively, this Warrant may be exercised in
the manner set forth in the preceding sentence by surrendering this Warrant
in exchange for the number of Warrant Shares equal to the product of (x) the
number of shares of Common Stock as to which this Warrant is being exercised,
multiplied by (y) a fraction, the numerator of which is the Market Price (as
defined below) of the shares of Common Stock minus the Exercise Price of the
shares of Common Stock and the denominator of which is the Market Price per
share of Common Stock. Solely for the purposes of this Section 1 Market Price
shall be calculated either (i) on the date on which the form of election
attached hereto is deemed to have been sent to the Company pursuant to this
Section 1 ("Notice Date") or (ii) as the average of the Market Price for each
of the five trading days immediately preceding the Notice Date, whichever of
(i) or (ii) results in a greater Market Price. As used herein, the phrase
"Market Price" at any date shall be deemed to be the last reported sale
price, or, in case no such reported sale takes place on such day, the average
of the last reported sale prices for the last three (3) trading days, in
either case as officially reported by the principal securities exchange on
which the Common Stock is listed or admitted to trading, or, if the Common
Stock is not listed or admitted to trading on any national securities
exchange, the average closing sale price as furnished by the NASD through The
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<PAGE>
Nasdaq Stock Market, Inc. ("Nasdaq") or similar organization if Nasdaq is no
longer reporting such information, or if the Common Stock is not quoted on
Nasdaq, as determined in good faith by resolution of the Board of Directors
of the Company, based on the best information available to it.
2. Upon each exercise of the Holder's rights to purchase Warrant
Shares, the Holder shall be deemed to be the holder of record of the Warrant
Shares issuable upon such exercise, notwithstanding that the transfer books
of the Company shall then be closed or certificates representing such Warrant
Shares shall not then have been actually delivered to the Holder. Within
five (5) business days after each such exercise of this Warrant and receipt
by the Company of this Warrant, the Election to Exercise and the Aggregate
Exercise Price, the Company shall issue and deliver to the Holder a
certificate or certificates for the Warrant Shares issuable upon such
exercise, registered in the name of the Holder or its designee. If this
Warrant should be exercised in part only, the Company shall, upon surrender
of this Warrant for cancellation, execute and deliver a new Warrant
evidencing the right of the Holder to purchase the balance of the Warrant
Shares (or portions thereof) subject to purchase hereunder.
3. Any Warrants issued upon the transfer or exercise in part of
this Warrant shall be numbered and shall be registered in a warrant register
(the "Warrant Register") as they are issued. The Company shall be entitled
to treat the registered holder of any Warrant on the Warrant Register as the
owner in fact thereof for all purposes and shall not be bound to recognize
any equitable or other claim to or interest in such Warrant on the part of
any other person, and shall not be liable for any registration of transfer
of Warrants which are registered or to be registered in the name of a
fiduciary or the nominee of a fiduciary unless made with the actual knowledge
of the general counsel of the Company that a fiduciary or nominee is
committing a breach of trust in requesting such registration of transfer. In
all cases of transfer by an attorney, executor, administrator, guardian, or
other legal representative, duly authenticated evidence of his or its
authority shall be produced. Upon any registration of transfer, the Company
shall deliver a new Warrant or Warrants to the person entitled thereto. This
Warrant may be exchanged, at the option of the Holder thereof, for another
Warrant, or other Warrants of different denominations, of like tenor and
representing in the aggregate the right to purchase a like number of Warrant
Shares (or portions thereof), upon surrender to the Company or its duly
authorized agent. Notwithstanding anything contained herein to the contrary,
the Company shall have no obligation to cause Warrants to be transferred on
its books to any person if, in the opinion of counsel to the Company, such
transfer does not comply with the provisions of the Act and the rules and
regulations thereunder.
4. The Company shall at all times reserve and keep available out
of its authorized and unissued Common Stock, solely for the purpose of
providing for the exercise of the rights to purchase all Warrant Shares
granted pursuant to the Warrants, such number of shares of Common Stock as
shall, from time to time, be sufficient therefor. The Company covenants that
all shares of Common Stock issuable upon exercise of this Warrant, upon
receipt by the Company of the full Exercise Price therefor, shall be validly
issued, fully paid,
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<PAGE>
nonassessable, and free of preemptive rights.
5. The Exercise Price in effect at any time and the number and
kind of securities purchasable upon the exercise of this Warrant shall be
subject to adjustment from time to time upon the happening of certain events
as follows:
(a) In case the Company shall (i) declare a dividend or make
a distribution on its outstanding shares of Common Stock, in each case, in
shares of Common Stock, (ii) subdivide or reclassify its outstanding shares
of Common Stock into a greater number of shares, or (iii) combine or
reclassify its outstanding shares of Common Stock into a smaller number of
shares, the Exercise Price in effect at the time of the record date for such
dividend or distribution or of the effective date of such subdivision,
combination or reclassification shall be adjusted so that it shall equal the
price determined by multiplying the Exercise Price by a fraction, the
denominator of which shall be the number of shares of Common Stock
outstanding after giving effect to such action, and the numerator of which
shall be the number of shares of Common Stock outstanding immediately prior
to such action. Such adjustment shall be made successively whenever any
event listed above shall occur.
(b) In the event that the Company shall sell or issue at any
time after the date of issuance of this Warrant and prior to its termination,
shares of Common Stock at a consideration per share less than the Exercise
Price, then the Exercise Price shall be adjusted to a new Exercise Price
(calculated to the nearest cent) determined by dividing:
(i) an amount equal to (A) the total number of shares of Common
Stock outstanding on the date of issuance of this Warrant
multiplied by the Exercise Price in effect on the date of
issuance of this Warrant (subject, however, to adjustment in the
manner set forth in this Section 5), plus (B) the aggregate of
the amount of all consideration, if any, received by the Company
for the issuance or sale of shares of Common Stock since the date
of issuance of this Warrant, by
(ii) the total number of shares of Common Stock outstanding
immediately after such issuance or sale.
In no event shall any such adjustment be made pursuant to this Section 5(b)
if it would increase the Exercise Price in effect immediately prior to such
adjustment. Upon each adjustment of the Exercise Price pursuant to this
Section 5(b), the holder of this Warrant shall thereafter be entitled to
purchase, at the Exercise Price resulting from such adjustment, the number of
Warrant Shares obtained by multiplying the Exercise Price in effect
immediately prior to such adjustment by the number of Warrant Shares
purchasable pursuant hereto immediately prior to such adjustment, and
dividing the product thereof by the Exercise Price resulting from such
adjustment. In addition, in no event shall the issuance of shares of Common
Stock pursuant to options and/or
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<PAGE>
warrants which are outstanding as of the date of the issuance of this Warrant
trigger the dilution provisions of this Section 5(b).
(c) Upon each adjustment of the Exercise Price pursuant to
the provisions of this Section 5, the number of Warrant Shares issuable upon
the exercise at the adjusted Exercise Price of each Warrant shall be adjusted
to the nearest number of whole shares of Common Stock by multiplying a number
equal to the Exercise Price in effect immediately prior to such adjustment by
the number of Warrant Shares issuable upon exercise of this Warrant
immediately prior to such adjustment and dividing the product so obtained by
the adjusted Exercise Price.
(d) For the purpose of this Warrant, the term "Common Stock"
shall mean (i) the class of stock designated as Common Stock in the Articles
of Incorporation of the Company as amended as of the date hereof, or (ii) any
other class of stock resulting from successive changes or reclassifications
of such Common Stock consisting solely of changes in par value, or from par
value to no par value, or from no par value to par value.
(e) In case of any consolidation of the Company with, or
merger of the Company into, another corporation (other than a consolidation
or merger which does not result in any reclassification or change of the
outstanding Common Stock), the corporation formed by such consolidation or
merger shall execute and deliver to the Holder a supplemental warrant
agreement providing that the Holder of this Warrant shall have the right
thereafter (until the expiration of such Warrant) to receive, upon exercise
of such Warrant, the kind and amount of shares of stock and other securities
and property receivable upon such consolidation or merger by a holder of the
number of shares of Common Stock for which such Warrant might have been
exercised immediately prior to such consolidation, merger, sale or transfer.
Such supplemental warrant agreement shall provide for adjustments which shall
be identical to the adjustments provided in this Section 5. The above
provision of this subsection shall similarly apply to successive
consolidations or mergers.
(f) No adjustment in the number of Warrant Shares shall be
required if such adjustment is less than one; PROVIDED, HOWEVER, that any
adjustments which by reason of this Section 5(f) are not required to be made
shall be carried forward and taken into account in any subsequent adjustment.
All calculations under this Section 5 shall be made to the nearest
one-thousandth of a share.
(g) In any case in which this Section 5 shall require that an
adjustment in the number of Warrant Shares be made effective as of a record
date for a specified event, the Company may elect to defer, until the
occurrence of such event, issuing to the Holder, if the Holder exercised this
Warrant after the record date, the Warrant Shares, if any, issuable upon such
exercise over and above the Warrant Shares, if any, issuable upon such
exercise prior to such adjustment; PROVIDED, HOWEVER, that the Company shall
deliver to the Holder a due bill or other appropriate instrument evidencing
the Holder's right to receive such additional Warrant
-5-
<PAGE>
Shares upon the occurrence of the event requiring such adjustment.
(h) Whenever there shall be an adjustment as provided in this
Section 5, the Company shall promptly cause written notice thereof to be sent
by certified mail, postage prepaid, to the Holder, at its address as it shall
appear in the Warrant Register, which notice shall be accompanied by an
officer's certificate setting forth the number of Warrant Shares issuable
upon the exercise of this Warrant if such Warrant were exercisable on the
date of such notice, and setting forth a brief statement of the facts
requiring such adjustment and the computation thereof, which officer's
certificate shall be conclusive evidence of the correctness of any such
adjustment absent manifest error.
6. In case at any time the Company shall propose
(a) to pay any dividend or make any distribution on
shares of Common Stock in shares of Common Stock or make any other
distribution (other than regularly scheduled cash dividends which are not in
a greater amount per share than the most recent such cash dividend) to all
holders of Common Stock; or
(b) to issue any rights, warrants, or other securities to
all holders of Common Stock entitling them to purchase any additional shares
of Common Stock or any other rights, warrants, or other securities; or
(c) to effect any reclassification or change of
outstanding shares of Common Stock, or any consolidation or merger, described
in Section 7; or
(d) to effect any liquidation, dissolution, or winding-up of
the Company,
then, and in any one or more of such cases, the Company shall give written
notice thereof, by registered mail, postage prepaid, to the Holder at the
Holder's address as it shall appear in the Warrant Register, mailed at least
15 days prior to (i) the date as of which the holders of record of shares of
Common Stock to be entitled to receive any such dividend, distribution,
rights, warrants, or other securities are to be determined, or (ii) the date
on which any such reclassification, change of outstanding shares of Common
Stock, consolidation, merger, liquidation, dissolution, or winding-up is
expected to become effective, and the date as of which it is expected that
holders of record of shares of Common Stock shall be entitled to exchange
their shares for securities or other property, if any, deliverable upon such
reclassification, change of outstanding shares, consolidation, merger, sale,
lease, conveyance of property, liquidation, dissolution, or winding-up.
7. The issuance of any shares or other securities upon the
exercise of this Warrant, and the delivery of certificates or other
instruments representing such shares or other securities, shall be made
without charge to the Holder for any tax or other charge in respect of
-6-
<PAGE>
such issuance, other than applicable transfer taxes. The Company shall not,
however, be required to pay any tax which may be payable in respect of any
transfer involved in the issue and delivery of any certificate in a name
other than that of the Holder and the Company shall not be required to issue
or deliver any such certificate unless and until the person or persons
requesting the issue thereof shall have paid to the Company the amount of
such tax or shall have established to the satisfaction of the Company that
such tax has been paid.
(8) (a) If, at any time during the Exercise Period, the Company
proposes to register any of its securities under the Act (other than on a
Form S-4 or a Form S-8 or successor form thereto) it will give written notice
by registered mail, at least thirty (30) days prior to the filing of each
such registration statement, to the Holders of this Warrant or the Warrant
Shares of its intention to do so. If any of the Holders of this Warrant or
the Warrant Shares notify the Company within twenty (20) days after mailing
of any such notice of its or their desire to include any such securities in
such proposed registration statement, the Company shall afford such Holders
the opportunity to have any such Warrant Shares registered under such
registration statement. In the event that the managing underwriter for said
offering advises the Company in writing that in its opinion the number of
securities requested to be included in such registration exceeds the number
which can be sold in such offering without causing a diminution in the
offering price or otherwise adversely affecting the offering, the Company
will include in such registration (a) FIRST, the securities the Company
proposes to sell, (b) SECOND, the securities held by entities that made have
demand registration rights, (c) THIRD, the Warrant Shares requested to be
included in such registration which in the opinion of such underwriter can be
sold, PRO RATA among those persons having registration rights similar those
set forth in this Section 8 who requested such registration, and (d) FOURTH,
other securities requested to be included in such registration.
Notwithstanding the provisions of this Section 8, the Company shall have the
right at any time after it shall have given written notice pursuant to this
SECTION 9.2 (irrespective of whether a written request for inclusion of any
such securities shall have been made) to elect not to file any such proposed
registration statement or to withdraw the same after the filing but prior to
the effective date thereof.
(b) At any time during the one (1) year period commencing on the
date of the issuance of this Warrant, the Holder shall have the right,
exercisable by written notice to the Company, to have the Company prepare and
file with the Securities and Exchange Commission, on one occasion, a
registration statement and such other documents, including a prospectus, as
may be necessary in the opinion of both counsel for the Company and counsel
for the Holder, in order to comply with the provisions of the Act, so as to
permit a public offering and sale by the Holder. The Company shall use its
commercially reasonable efforts to have such registration statement filed
with and declared effective by the Commission within one hundred twenty (120)
days of receipt of the notice from the Holder.
9. Unless registered as contemplated by Section 8 hereof, the
Warrant Shares issued upon exercise of the Warrants shall be subject to a
stop transfer order and the certificate or certificates evidencing such
Warrant Shares shall bear the following legend:
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<PAGE>
"THE SHARES REPRESENTED BY THIS CERTIFICATE HAVE BEEN NOT
REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED. SUCH SHARES
MAY NOT BE OFFERED OR SOLD EXCEPT PURSUANT TO AN EFFECTIVE
REGISTRATION STATEMENT UNDER SUCH ACT, OR AN EXEMPTION FROM
REGISTRATION UNDER SUCH ACT. SUCH SHARES ARE SUBJECT TO CERTAIN
RESTRICTIONS ON TRANSFER CONTAINED IN A WARRANT, DATED JANUARY 26,
1998, A COPY OF WHICH IS ON FILE WITH THE SECRETARY OF THE COMPANY."
10. Upon receipt of evidence satisfactory to the Company of the
loss, theft, destruction, or mutilation of any Warrant (and upon surrender of
any Warrant if mutilated), and upon reimbursement of the Company's reasonable
incidental expenses and, if reasonably requested, an indemnity reasonably
acceptable to the Company, the Company shall execute and deliver to the
Holder thereof a new Warrant of like date, tenor, and denomination.
11. The Holder of any Warrant shall not have, solely on account of
such status, any rights of a stockholder of the Company, either at law or in
equity, or to any notice of meetings of stockholders or of any other
proceedings of the Company, except as provided in this Warrant.
-8-
<PAGE>
12. This Warrant shall be construed in accordance with the laws of
the State of Delaware applicable to contracts made and performed within such
State, without regard to principles of conflicts of law.
Dated: January 26, 1998
OLYMPIC CASCADE FINANCIAL CORPORATION
By:
----------------------------------
Name: Steven A. Rothstein
Title: Chairman
-9-
<PAGE>
FORM OF ASSIGNMENT
(To be executed by the registered holder if such holder desires to transfer
the attached Warrant.)
FOR VALUE RECEIVED, ________________________________________________
hereby sells, assigns, and transfers unto __________________ a Warrant to
purchase __________ shares of Common Stock, $.02 par value per share, of
Olympic Cascade Financial Corporation (the "Company"), together with all
right, title, and interest therein, and does hereby irrevocably constitute
and appoint _________________________________________________ attorney to
transfer such Warrant on the books of the Company, with full power of
substitution.
Dated:
-------------------
Signature
---------------------------------------------
Signature Guaranteed:
NOTICE
The signature on the foregoing Assignment must correspond to the name as
written upon the face of this Warrant in every particular, without alteration
or enlargement or any change whatsoever.
<PAGE>
To: Olympic Cascade Financial Corporation
1001 Fourth Avenue
Suite 2200
Seattle, Washington 98154
ELECTION TO EXERCISE
The undersigned hereby exercises his or its rights to purchase _______
Warrant Shares covered by the within Warrant and tenders payment herewith
[in the amount of $_________] [in the form of ________ number of Warrant
Shares] in accordance with the terms thereof, certifies that he owns this
Warrant free and clear of any and all claims, liens and/or encumbrances and
requests that certificates for such securities be issued in the name of,
and delivered to:
------------------------------------
------------------------------------
------------------------------------
(Print Name, Address and Social Security
or Tax Identification Number)
and, if such number of Warrant Shares shall not be all the Warrant Shares
covered by the within Warrant, that a new Warrant for the balance of the
Warrant Shares covered by the within Warrant be registered in the name of,
and delivered to, the undersigned at the address stated below.
Dated: Name
---------------------- -------------------
(Print)
Address:
------------------------------------------------
--------------------------
(Signature)
<TABLE> <S> <C>
<PAGE>
<ARTICLE> BD
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM FORM 10-Q
AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> SEP-25-1998
<PERIOD-START> SEP-27-1997
<PERIOD-END> DEC-31-1997
<CASH> 999
<RECEIVABLES> 23,528
<SECURITIES-RESALE> 3,402
<SECURITIES-BORROWED> 510
<INSTRUMENTS-OWNED> 36,563
<PP&E> 1,561
<TOTAL-ASSETS> 69,828
<SHORT-TERM> 2,500
<PAYABLES> 57,235
<REPOS-SOLD> 0
<SECURITIES-LOANED> 0
<INSTRUMENTS-SOLD> 442
<LONG-TERM> 1,726
0
0
<COMMON> 30
<OTHER-SE> 7,895
<TOTAL-LIABILITY-AND-EQUITY> 69,828
<TRADING-REVENUE> 1,145
<INTEREST-DIVIDENDS> 1,049
<COMMISSIONS> 5,803
<INVESTMENT-BANKING-REVENUES> 6,967
<FEE-REVENUE> 0
<INTEREST-EXPENSE> 691
<COMPENSATION> 11,209
<INCOME-PRETAX> 310
<INCOME-PRE-EXTRAORDINARY> 310
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 192
<EPS-PRIMARY> .13
<EPS-DILUTED> .12
</TABLE>
