<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, 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, IL 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 February 10, 1999 was 1,510,436.
1
<PAGE>
OLYMPIC CASCADE FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
ASSETS
<TABLE>
<CAPTION>
December 31, September 25,
1998 1998
(unaudited) (audited)
------------ ------------
<S> <C> <C>
CASH, subject to immediate withdrawal $ 365,000 $ 551,000
CASH, CASH EQUIVALENTS AND SECURITIES 46,860,000 27,348,000
DEPOSITS 6,380,000 2,024,000
RECEIVABLES
Customers 23,872,000 39,680,000
Brokers and dealers 3,506,000 826,000
Other 455,000 315,000
Income tax receivable 634,000 654,000
SECURITIES HELD FOR RESALE, at market 710,000 235,000
FIXED ASSETS, net 1,198,000 1,292,000
GOODWILL, net 57,000 61,000
OTHER ASSETS 293,000 130,000
------------ ------------
$ 84,330,000 $ 73,116,000
------------ ------------
------------ ------------
LIABILITIES AND STOCKHOLDERS' EQUITY
PAYABLES
Customers $ 64,815,000 $ 60,548,000
Brokers and dealers 6,860,000 1,714,000
SECURITIES SOLD, BUT NOT YET PURCHASED, at market 508,000 73,000
ACCOUNTS PAYABLE, ACCRUED EXPENSES AND OTHER LIABILITIES 3,691,000 2,073,000
REVOLVING CREDIT LINE 3,000,000 2,700,000
NOTES PAYABLE 1,722,000 1,948,000
CAPITAL LEASE PAYABLE 1,048,000 1,112,000
------------ ------------
81,644,000 70,168,000
------------ ------------
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, 1,463,007 and
shares issued and outstanding, respectively 29,000 29,000
Additional paid-in capital 5,407,000 5,407,000
Retained earnings (2,750,000) (2,488,000)
------------ ------------
2,686,000 2,948,000
------------ ------------
$ 84,330,000 $ 73,116,000
------------ ------------
------------ ------------
</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>
--------Quarter Ended---------
December 31, December 31,
1998 1997
------------- ------------
------------- ------------
<S> <C> <C>
REVENUES:
Commissions $5,636,000 $5,803,000
Net dealer inventory gains 466,000 1,145,000
Interest 1,169,000 1,049,000
Transfer fees 212,000 207,000
Underwriting 564,000 6,967,000
Other 114,000 231,000
------------- ------------
------------- ------------
TOTAL REVENUES 8,161,000 15,402,000
------------- ------------
------------- ------------
EXPENSES:
Commissions 4,587,000 8,315,000
Salaries 958,000 2,894,000
Clearing fees 325,000 429,000
Communications 279,000 499,000
Occupancy costs 657,000 899,000
Interest 824,000 691,000
Professional fees 379,000 334,000
Taxes, licenses, registration 113,000 241,000
Other 297,000 790,000
------------- ------------
------------- ------------
TOTAL EXPENSES 8,419,000 15,092,000
------------- ------------
------------- ------------
Income (loss) from operations before income taxes (258,000) 310,000
Provision for income taxes (3,000) (118,000)
------------- ------------
------------- ------------
NET INCOME (LOSS) $ (261,000) $192,000
------------- ------------
------------- ------------
EARNINGS (LOSS) PER COMMON SHARE
Basic Earnings (loss) Per Share $ (0.18) $ 0.13
------------- ------------
------------- ------------
Diluted Earnings (loss) Per Share $ (0.18) $ 0.12
------------- ------------
------------- ------------
</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>
--------------Quarter Ended---------------
December 31, December 31,
1998 1997
------------ ------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss) $ (261,000) $ 192,000
Adjustments to reconcile net income (loss) to net
cash used in operating activities
Depreciation and amortization 100,000 194,000
Changes in assets and liabilities
Cash, cash equivalents and securities (19,512,000) (5,637,000)
Deposits (4,356,000) 474,000
Receivables 13,008,000 1,001,000
Securities held for resale (475,000) (1,336,000)
Other assets (163,000) (576,000)
Payables 11,049,000 3,021,000
Securities sold, but not yet purchased 435,000 (605,000)
------------ ------------
(175,000) (3,272,000)
------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of fixed assets (2,000) (162,000)
------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES
Borrowings on line of credit 300,000 2,500,000
Proceeds from notes payable -- 946,000
Payments on capital lease (84,000) --
Payments on notes payable (225,000) --
------------ ------------
(9,000) 3,446,000
------------ ------------
INCREASE (DECREASE) IN CASH (186,000) 12,000
CASH BALANCE
Beginning of the period 551,000 979,000
------------ ------------
End of the period $ 365,000 $ 991,000
============ ============
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash paid during the period for
Interest $ 761,000 $ 670,000
============ ============
Income taxes $ -- $ --
============ ============
</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, 1998 AND DECEMBER 31, 1997
THE ACCOMPANYING CONSOLIDATED FINANCIAL STATEMENTS OF OLYMPIC CASCADE
FINANCIAL CORPORATION ("OLYMPIC" OR THE "COMPANY") HAVE BEEN PREPARED IN
ACCORDANCE WITH GENERALLY ACCEPTED ACCOUNTING PRINCIPLES FOR INTERIM
FINANCIAL STATEMENTS AND WITH THE INSTRUCTIONS TO FORM 10-Q AND RULE 10-01 OF
REGULATION S-X. ACCORDINGLY, THEY DO NOT INCLUDE ALL OF THE INFORMATION AND
DISCLOSURES REQUIRED FOR ANNUAL FINANCIAL STATEMENTS. IN THE OPINION OF
MANAGEMENT, ALL ADJUSTMENTS (CONSISTING OF NORMAL RECURRING ACCRUALS)
CONSIDERED NECESSARY FOR A FAIR PRESENTATION HAVE BEEN INCLUDED. THE
CONSOLIDATED FINANCIAL STATEMENTS AS OF AND FOR THE PERIODS ENDED DECEMBER
31, 1998 AND 1997 ARE UNAUDITED. THE RESULTS OF OPERATIONS FOR THE INTERIM
PERIODS ARE NOT NECESSARILY INDICATIVE OF THE RESULTS OF OPERATIONS FOR THE
FISCAL YEAR. THESE FINANCIAL STATEMENTS SHOULD BE READ IN CONJUNCTION WITH
THE CONSOLIDATED FINANCIAL STATEMENTS AND RELATED FOOTNOTES INCLUDED THERETO
IN THE COMPANY'S ANNUAL REPORT ON FORM 10-K FOR THE FISCAL YEAR ENDED
SEPTEMBER 25, 1998.
NOTE 1 - OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
NATURE OF BUSINESS - The Company is a financial services
organization, operating through its two wholly owned subsidiaries, National
Securities Corporation ("National"), and WestAmerica Investment Group
("WestAmerica"). Olympic is committed to establishing a significant presence
in the financial services industry by providing financing options for
emerging, small and middle capitalization companies through research,
financial advisory services and 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.
In June 1997, the Company acquired all of the outstanding stock of
WestAmerica, a Scottsdale, Arizona based broker-dealer specializing in retail
brokerage services. WestAmerica was acquired for $443,000 in cash and an
agreement that provided for the payment of bonus compensation to certain
brokers.
5
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During fiscal year 1998, the Company redirected its focus on retail
operations by divesting its ownership in two of its subsidiaries, L.H.
Friend, Weinress, Franksen & Presson, Inc. ("Friend") and Travis Capital,
Inc. ("Travis"). The Company had acquired each subsidiary in fiscal year 1997.
ESTIMATES - The preparation of the financial statements in
conformity with generally accepted accounting principles requires management
to make estimates and assumptions that affect the reported amounts of assets
and liabilities at the date of the financial statements, and the reported
amounts of revenues and expenses during the reporting period. 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 1998 Form
10-K.
The operating results of these subsidiaries are included in the
consolidated statements of operations for their respective periods of
ownership. Goodwill resulting from these transactions is being amortized over
five years.
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 first
quarter of fiscal 1999 and 1998, the number of shares used in the basic
earnings (loss) per share calculation was 1,463,007 and 1,450,983,
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 first quarter
of fiscal years 1999 and 1998, the number of shares used in the diluted
earnings (loss) per share calculation was 1,463,007 and 1,588,882,
respectively.
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 1999. Borrowings bear interest at the
bank's prime rate. Interest is payable monthly. These borrowings are
short-term and have not extended beyond a few days. Although at times
National has not satisfied, and may not in the future, satisfy a minor loan
covenant, the bank has continued to provide all necessary borrowings. At
December 31, 1998, National had $3,000,000 in borrowings outstanding. This
amount was repaid within the first three business days of January 1999.
NOTE 3 - CONTINGENCIES
In May 1997, a minority stockholder of the Company commenced a
lawsuit alleging that the Company, and certain present and former officers
and directors breached their fiduciary duties to the plaintiff and that the
proxy statement by which the Company's corporate restructuring was affected
was materially false and misleading. In March, 1998, the parties engaged in
mediation, the plaintiff dismissed the lawsuit with prejudice, the parties
agreed to enter into a binding arbitration agreement and commenced to
determine the fair value of the plaintiff's shares. The arbitration of this
matter is still pending.
6
<PAGE>
In April 1997, a Trust and three individuals, commenced an action
against National. The plaintiffs allege the defendants' failure to purchase
securities from them constitutes, among other things, breach of contract,
securities rule violations and fraud. They seek unspecified compensatory and
punitive damages and specific performance of their alleged agreements.
On February 8, 1999, the District Court issued a tentative ruling
dismissing plaintiffs' claims against National in their entirety and granting
National's motion for summary judgement. National is awaiting a signed order
from the court and expects that order to be consistent with the tentative
order issued by the court.
In September 1997, a corporation served National with a complaint
alleging that the Company and a former representative breached a contract and
committed various torts by failing to perform an alleged promise to raise
capital for the plaintiff through an initial public offering of stock. The
plaintiff sought not less than $8.5 million in actual damages and not less
than $42.5 million in punitive damages. On November 3, 1997, the plaintiff
voluntarily dismissed the complaint without prejudice but refiled the same
complaint in August 1998. National has filed a motion to dismiss all counts
of the complaint. In February 1999, all parties agreed to settle this
litigation and it is expected that this litigation will be dismissed with
prejudice within the second quarter of fiscal 1999.
In October 1998, a corporation commenced an action against National
claiming that during the unsuccessful effort to complete an initial public
offering of the plaintiff's stock National breached the terms of two letters
of intent concerning the offering, breached their fiduciary duties, and
engaged in both intentional and negligent misrepresentation. Compensatory
damages of $650,000 are being sought in this matter as well as an unspecified
amount of punitive damages.
The Company's subsidiaries are defendants in various other
arbitrations and administrative proceedings, lawsuits and claims, which in
the aggregate seek general and punitive damages. These matters arise out of
the normal course of business.
The Company intends to vigorously defend itself in these actions,
and in any event, does not believe these actions singularly or combined would
have a material adverse effect on the Company's financial statements or
business operations.
7
<PAGE>
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
QUARTER ENDED DECEMBER 31, 1998 COMPARED TO QUARTER ENDED DECEMBER
31, 1997
EXCEPT FOR HISTORICAL INFORMATION CONTAINED HEREIN, THE MATTERS
DISCUSSED IN THIS REPORT CONTAIN CERTAIN FORWARD-LOOKING INFORMATION THAT
INVOLVE RISKS AND UNCERTAINTIES THAT COULD CAUSE RESULTS TO DIFFER
MATERIALLY, INCLUDING CHANGING MARKET CONDITIONS AND OTHER RISKS DETAILED IN
THIS 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 1999 resulted in significant decreases
in both revenues and expenses compared with the same period of fiscal 1998.
These decreases were due to the sale of its subsidiaries, L.H. Friend,
Weinress, Franksen & Presson, Inc. ("Friend") and Travis Capital, Inc.
("Travis"). The Company had acquired each subsidiary in fiscal year 1997.
Additionally, the continuing weak capital markets for public offerings
contributed significantly to the decrease in revenues and net income.
Revenues decreased $7,241,000, or 47% to $8,161,000 from $15,402,000. This
decrease is due primarily to the decrease in underwriting revenue and dealer
inventory gains as the weak capital markets for initial public offerings by
small cap issuers continued. Underwriting revenues decreased $6,403,000, or
92% to $564,000 from $6,967,000. National participated in two private
placements raising approximately $5 million in gross proceeds in the first
quarter fiscal 1999. During the first quarter fiscal 1998, 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 of underwriting revenue. Friend managed its first underwriting
during the quarter and participated in several other underwritings and
private placements, generating $3,004,000 of underwriting revenue.
Net dealer inventory gains decreased $679,000 or 59% to $466,000 in the first
quarter fiscal 1999 from $1,145,000 in the first quarter fiscal 1998. This
decrease was due to changed market conditions relating to internal trading
activities.
Commission revenue decreased $167,000, or 3% to $5,636,000 from $5,803,000;
however, Friend and Travis had commission revenue of $551,000 in the first
quarter fiscal 1998. Therefore, commission revenue for National and
WestAmerica actually increased $384,000 in the first quarter fiscal 1999 from
the first quarter fiscal 1998.
Concurrent with the 47% decrease in revenues, total expenses decreased by
44%. Total expenses decreased by $6,673,000 to $8,419,000 from $15,092,000.
This decrease in expenses was anticipated due to significant decreases in
revenues. The most significant decreases were commission expense and salaries.
8
<PAGE>
Commission expense decreased $3,728,000 or 45% to $4,587,000 in first quarter
fiscal 1999 from $8,315,000 in first quarter fiscal 1998. Salaries decreased
$1,936,000 or 67% to $958,000 from $2,894,000. Friend and Travis had combined
salary expense of $1,339,000 in the first quarter fiscal 1998. The remaining
decrease in salary expense was $597,000 or 21% in the first quarter fiscal
1999, as management incurred salary reductions in an effort to reduce
overhead expenses. Overall, combined commissions and salaries as a percentage
of revenue decreased 5% to approximately 68% from approximately 73% in the
first quarter of fiscal 1999 and 1998, respectively.
As anticipated with the sale of Friend and Travis expenses regarding
communications, occupancy, clearing, taxes, licenses and registration and
other have decreased from the first quarter fiscal 1998 to the first quarter
fiscal 1999. Communication expenses, mainly telephone, telequote and mailing,
decreased $220,000 or 44% to $279,000 from $499,000. Friend and Travis had
combined communication expenses of $111,000 in fiscal 1998. Occupancy
expense, consisting mainly of rent, office supplies and depreciation
decreased $242,000 or 27% to $657,000 from $899,000. This decrease relates to
the sale of the two subsidiaries as well as National closing a branch office
in New York and subletting excess space in Chicago. Clearing fees decreased
$104,000 or 24% to $325,000 from $429,000, which mainly related to the
reduction in commission revenue from the sale of the two subsidiaries. Taxes,
licenses and registration decreased $128,000 or 53% to $113,000 from
$241,000. Finally, other expenses decreased $493,000 or 62% to $297,000 from
$790,000 in the first quarter of fiscal 1999 and 1998, respectively. The sale
of the two subsidiaries and closure of a branch office in New York
contributed $250,000 to this decrease. Additionally, in first quarter fiscal
1998, the Company incurred additional travel and moving expense of $180,000
at Olympic and National. During the first quarter fiscal 1999, amortization
decreased $60,000 from the first quarter fiscal 1998. Amortization decreased
due to the write off of goodwill related to the sale of the two subsidiaries
and the amortization of a prepaid asset at WestAmerica that was recorded
during fiscal 1997 as part of the purchase price.
Interest expense and professional fees increased during first quarter fiscal
1999 as compared with the first quarter fiscal 1998. Interest expense
increased $133,000 or 19% to $824,000 from $691,000. The main reason for this
increase is the increase in customer deposits, on which the Company pays
interest and the interest on debt incurred in fiscal 1998. Interest expense
was offset by the increased interest revenue of $120,000 or 11% to $1,169,000
from $1,049,000.
Professional fees increased $45,000 or 13% to $379,000 from $334,000. After
adjusting for professional fees paid at Friend and Travis, professional fees
increased $71,000 or 23% in first quarter fiscal 1999 compared with the first
quarter fiscal 1998 due to increased litigation (See Part II, Item 1).
Overall, net income decreased $453,000 to a loss of $261,000 or $.18 per
share from net income of $192,000 or $.12 per share for the first quarter
ended December 31, 1998 compared with the first quarter ended December 31,
1997, respectively.
9
<PAGE>
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, 1998
National had $3,000,000 of borrowing outstanding. This amount was repaid
within the first three business days of January 1999.
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, 1998,
National's net capital exceeded the requirement by $1,403,000.
WestAmerica, as a registered broker-dealer is also subject to the SEC's Net
Capital Rule 15c3-1, which, under the standard method, requires that the
company maintain minimum net capital equal to the greater of $100,000 or 6
2/3% of aggregate indebtedness. At December 31, 1998, WestAmerica's net
capital exceeded the requirement by $48,000.
Advances, dividend payments and other equity withdrawals from National or
WestAmerica are restricted by the regulations of the SEC, and other
regulatory agencies. These regulatory restrictions may limit the amounts that
these subsidiaries may dividend or advance to Olympic.
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.
Unlike WestAmerica, National requires its investment executives to be
responsible for substantially all of the overhead expenses associated with their
sales efforts, including their office furniture, sales assistants, telephone
service and supplies.
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.
10
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YEAR 2000 UPDATE
The Company defines a system as Year 2000 compliant as one capable of correct
identification, manipulation and calculation when processing data during the
year change from December 31, 1999 to January 1, 2000.
The Company is addressing the Year 2000 issue in the following two phases.
Phase one, completed in October 1998, the Company prepared an inventory of
all Information Technology ("IT") and non-IT systems, critical to operations.
The Company tested all of its internal IT systems and concluded that not all
systems are compliant under the above definition. The Company has determined
the remedies necessary to achieve Year 2000 compliance. The Company has
retained an outside consulting firm, Washington Web Site Services, which
works on site and will continue working with the Company, at a minimum, until
all IT systems are Year 2000 compliant.
In phase two, the Company has begun replacing hardware chips, software and
entire components in those systems deemed to be non-compliant. The Company
expects to complete phase two by June 1999. As required by the NASD, National
and WestAmerica will be completing a Year 2000 readiness report. As part of
this report, the Company must engage their independent accounting firm to
perform procedures and report on the Company's process for addressing Year
2000 problems. These reports are to be filed by April 30, 1999.
The majority of the Company's trade processing information is handled through
a third party vendor. In the first quarter of fiscal 1999, the Company
negotiated an agreement to change to BETA Systems, Inc. from its prior
vendor. The Company has begun this conversion process and anticipates that
this conversion will be completed and fully operational by April 1, 1999. As
part of this agreement, BETA Systems, Inc. has represented to the Company
that they will be Year 2000 compliant. Additionally, the Company has
initiated formal communications with all other significant data processing
and telecommunications vendors to determine the extent to which the Company
is vulnerable to those third parties failure to remediate their own Year 2000
Issue. These vendors have represented to the Company they will be compliant
with the requirements of the Year 2000.
The Company has determined that material costs and resources will not be
required to modify or replace portions of its hardware and software so that
its computer systems will properly utilize dates beyond December 31, 1999. To
date, the Company has spent approximately $50,000 and estimates it will spend
less than $150,000 in total regarding the Year 2000 issue.
The costs of the project and the date on which the Company plans to complete the
Year 2000 modifications are based on management's best estimates, which were
derived utilizing numerous assumptions of future events including the continued
availability of certain resources, third party modification plans and other
factors. However, even if the
11
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Company's systems and the Company's significant vendors are compliant, the
potential impact of the Year 2000 problem on the securities industry as a
whole could be material, as virtually every aspect of the sales of securities
and processing of transactions will be affected. Due to the size of the
problem facing the securities industry and the interdependent nature of the
business, the Company may be materially adversely affected by this issue.
PART II
ITEM 1 - LEGAL PROCEEDINGS
1. THE MAXAL TRUST, ET AL. V. NATIONAL SECURITIES CORPORATION ET AL., United
States District Court, Central District of California, Case No.
CV-97-4392 ABC (Shx). In April 1997, the plaintiffs brought an action
against the Company and its subsidiary National, alleging that National
breached an agreement to purchase their shares of Interact Medical
Technologies Corp. ("Interact"). The plaintiffs alleged claims under
section 10(b) of the Securities Exchange Act of 1934 and SEC Rule 10b-5
promulgated thereunder, for common law fraud and misrepresentation, for
breach of express and implied contract, and for negligence, and are
seeking damages in excess of $4 million.
The Company and National moved to dismiss the plaintiffs' claims on
various grounds, and the plaintiffs moved for partial summary judgment on
their claims of breach of contract. In late October 1997 the Court (i)
dismissed all of plaintiffs' claims against the Company; (ii) dismissed
plaintiffs' Securities law claims against National; and (iii) denied
plaintiffs' motion. Consequently, the case proceeded against National on
theories of common law fraud, misrepresentation, breach of contract and
negligence.
On February 8, 1999, the District Court issued a tentative ruling
dismissing plaintiffs' claims against National in their entirety and
granting National's motion for summary judgement. National is awaiting a
signed order from the court and expects that order to be consistent with
the tentative order issued by the court.
2. MAYNARD MALL REALTY TRUST V. NATIONAL SECURITIES CORPORATION, ET AL.,
United States District Court, Western District of Washington, Case No.
97-CV-00967. In May 1997, the plaintiff brought an action against the
Company, its subsidiary National, and several officers and directors
of the Company and National, originally alleging fraud, breach of
fiduciary duties and state securities law violations in connection
with the share exchange between the Company and National (the "Share
Exchange") and otherwise. The plaintiff, prosecuting the case both
individually and derivatively, seeks monetary damages, corporate
dissolution of the Company and National, recission of the Share
Exchange, and the fair value of its shares in an appraisal proceeding.
In an amended pleading, plaintiff dropped all allegations of fraud and
the claim for recission of the Share Exchange, and alleged that the
defendants breached fiduciary duties by, among other things, secretly
receiving excessive and otherwise
12
<PAGE>
inappropriate overrides and other compensation, and that defendants
traded in the Company's stock with knowledge of material, non-public
information. The second amended complaint also alleges that the proxy
statement underlying the Share Exchange wrongly failed to disclose
that shareholders' rights would be governed by Delaware, and not
Washington law, and that the plaintiff was wrongly denied access to
the Company's books and records.
In March 1998, the parties engaged in mediation resulting in the plantiff
dismissing the lawsuit without prejudice and National agreeing to enter
into binding arbitration to determine the fair value of the plantiff's
shares. The arbitration is expected to take place within the next several
months.
3. CASULL ARMS CORPORATION V. NATIONAL SECURITIES CORP. AND ROBERT A. SHUEY,
III, United States District Court, District of Wyoming, 97CV-229B. In
September 1997, plaintiff served National with a complaint alleging that
National and a former National representative, Robert A. Shuey, III,
breached a contract and committed various torts by failing to perform an
alleged promise to raise capital for plaintiff through an initial public
offering of stock. The plaintiff sought not less than $8.5 million in
actual damages and not less than $42.5 million in punitive damages. In
November 1997, all claims against National were dismissed without
prejudice. This complaint was re-filed in the same court in August 1998.
National believes it has meritorious defenses to plaintiff's claims.
National has vigorously contested liability, and in September 1998 filed
a motion to dismiss all counts of the complaint. In February 1999, all
parties agreed to settle this litigation and it is expected that this
litigation will be dismissed with prejudice within the second quarter of
fiscal 1999.
4. THERMOENERGY CORPORATION V. NATIONAL SECURITIES CORPORATION, ET AL.,
United States District Court, Eastern District of Arkansas, Docket No.
LR-C-98.657. This action was commenced in October 1998 against the
Company, National and an officer of the Company relating to purported
attempts to underwrite a public offering on behalf of the plantiff.
The plantiff alleges that in the course of the ultimately unsuccessful
efforts to complete an initial public offering, National breached the
terms of two letters of intent, breached fiduciary duties to the
plaintiff and engaged in both intentional and negligent
misrepresentation. The complaint also seeks relief based on a
quasi-contractual theory of "promissory estoppel." The plaintiff seeks
$650,000 in compensatory damages, plus an unspecified amount of
punitive damages.
The Company denies all liability to the plaintiff and believes it has
meritorious defenses to plaintiff's claims. The Company presently intends
to continue its vigorous defense of this action.
ITEMS 2, 3, 4, 5 AND 6 ARE NOT APPLICABLE AND HAVE BEEN OMITTED.
13
<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, 1999 By: Steven A. Rothstein
Date Steven A. Rothstein, Chairman,
President and Chief Executive Officer
February 12, 1999 By: Robert H. Daskal
Date Robert H. Daskal, Senior Vice
President, Chief Financial Officer,
Secretary and Treasurer
14
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