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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarter Ended June 25, 1999 Commission File Number 001-12629
OLYMPIC CASCADE FINANCIAL CORPORATION
----------------------------------------
(Exact name of registrant as specified)
DELAWARE 36-4128138
---------- ------------
(State of other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
875 North Michigan Avenue, Suite 1560, Chicago, Illinois 60611
----------------------------------------------------------------------
(Address of principal executive offices) (Zip code)
Registrant's telephone number, including area code: (312) 751-8833
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
---
The number of shares outstanding of registrant's Common stock, par value $0.02
per share, at August 6, 1999 was 1,687,894.
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OLYMPIC CASCADE FINANCIAL CORPORATION
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
ASSETS
June 25, September 25,
1999 1998
------------ ------------
(unaudited) (audited)
<S> <C> <C>
CASH, subject to immediate withdrawal $ 248,000 $ 551,000
CASH, CASH EQUIVALENTS AND SECURITIES 51,346,000 27,348,000
DEPOSITS 2,163,000 2,024,000
RECEIVABLES
Customers 38,267,000 39,680,000
Brokers and dealers 2,098,000 826,000
Other 572,000 315,000
Income tax receivable -- 654,000
SECURITIES HELD FOR RESALE, at market 377,000 235,000
FIXED ASSETS, net 1,166,000 1,292,000
GOODWILL, net 49,000 61,000
OTHER ASSETS 434,000 130,000
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$ 96,720,000 $ 73,116,000
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
BANK LINE OF CREDIT $ 3,000,000 $ 2,700,000
PAYABLES
Customers 62,130,000 60,548,000
Brokers and dealers 21,177,000 1,714,000
SECURITIES SOLD, BUT NOT YET PURCHASED, at market 241,000 73,000
ACCOUNTS PAYABLE, ACCRUED EXPENSES AND OTHER LIABILITIES 3,733,000 2,073,000
NOTES PAYABLE 1,647,000 1,948,000
CAPITAL LEASE PAYABLE 927,000 1,112,000
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92,855,000 70,168,000
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CONTINGENCIES
STOCKHOLDERS' EQUITY
Preferred stock, $.01 par value, 100,000 shares authorized,
none issued and outstanding -- --
Common stock, $.02 par value, 6,000,000 shares authorized, 1,688,919 and
1,463,007 shares issued and outstanding, respectively 34,000 29,000
Additional paid-in capital 6,335,000 5,407,000
Accumulated deficit (2,504,000) (2,488,000)
------------ ------------
3,865,000 2,948,000
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$ 96,720,000 $ 73,116,000
============ ============
</TABLE>
The accompanying notes are an integral part of these financial statements.
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OLYMPIC CASCADE FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
For The Quarter Ended The Nine Months Ended
---------------------------------- ----------------------------------
June 25, June 26, June 25, June 26,
1999 1998 1999 1998
-------------- -------------- -------------- --------------
<S> <C> <C> <C> <C>
REVENUES:
Commissions $ 7,650,000 $ 6,665,000 $ 20,488,000 $ 17,957,000
Net dealer inventory gains 2,024,000 1,775,000 3,280,000 4,836,000
Interest 1,615,000 1,123,000 4,023,000 3,156,000
Transfer fees 231,000 177,000 668,000 567,000
Underwriting 863,000 2,004,000 2,001,000 10,281,000
Other 243,000 102,000 674,000 623,000
-------------- -------------- -------------- --------------
TOTAL REVENUES 12,626,000 11,846,000 31,134,000 37,420,000
-------------- -------------- -------------- --------------
EXPENSES:
Commissions 7,600,000 6,763,000 18,146,000 20,521,000
Salaries 1,492,000 2,102,000 3,569,000 6,891,000
Clearing fees 432,000 401,000 1,141,000 1,245,000
Communications 303,000 525,000 876,000 1,499,000
Occupancy costs 591,000 987,000 1,829,000 2,798,000
Interest 1,098,000 706,000 2,803,000 2,064,000
Professional fees 726,000 250,000 1,792,000 747,000
Taxes, licenses, registration (158,000) 276,000 62,000 768,000
Other 324,000 768,000 937,000 2,381,000
-------------- -------------- -------------- --------------
TOTAL EXPENSES 12,408,000 12,778,000 31,155,000 38,914,000
-------------- -------------- -------------- --------------
Income (loss) from operations before income taxes 218,000 (932,000) (21,000) (1,494,000)
Income tax benefit 7,000 309,000 5,000 513,000
-------------- -------------- -------------- --------------
NET INCOME (LOSS) $ 225,000 $ (623,000) $ (16,000) $ (981,000)
============== ============== ============== ==============
EARNINGS (LOSS) PER COMMON SHARE
Basic Earnings (Loss) Per Share $ 0.14 $ (0.41) $ (0.01) $ (0.66)
============== ============== ============== ==============
Diluted Earnings (Loss) Per Share $ 0.14 $ (0.41) $ (0.01) $ (0.66)
============== ============== ============== ==============
BASIC COMMON SHARES OUTSTANDING
FOR THE PERIOD 1,599,936 1,518,516 1,521,974 1,494,503
============== ============== ============== ==============
DILUTED COMMON SHARES OUTSTANDING
FOR THE PERIOD 1,602,612 1,518,516 1,521,974 1,494,503
============== ============== ============== ==============
</TABLE>
The accompanying notes are an integral part of these financial statements.
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OLYMPIC CASCADE FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
For The Nine Month's Ended
------------------------------
June 25, June 26,
1999 1998
------------ ------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss $ (16,000) $ (981,000)
Adjustments to reconcile net loss to net
cash from operating activities
Depreciation and amortization 300,000 568,000
Issuance of common stock in lawsuit settlement 498,000
Issuance of common stock as payment of expenses 120,000
Compensation related to issuance of stock options 18,000
------------ ------------
Changes in assets and liabilities
Cash, cash equivalents and securities (23,998,000) 6,674,000
Deposits (139,000) (847,000)
Receivables (116,000) (11,876,000)
Income taxes receivable (payable) 654,000 (166,000)
Securities held for resale (142,000) (668,000)
Other assets (304,000) (381,000)
Customer and broker payables 21,045,000 5,124,000
Securities sold, but not yet purchased 168,000 (16,000)
Accounts payable, accrued expenses, and other liabilities 1,737,000 600,000
------------ ------------
(175,000) (1,969,000)
------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of fixed assets (162,000) (339,000)
------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES
Borrowings on line of credit 300,000 600,000
Proceeds from notes payable -- 1,925,000
Repayment of notes payable (300,000) (300,000)
Payments on capital lease (263,000) (43,000)
Issuance of common stock through exercise of stock options 297,000 8,000
------------ ------------
34,000 2,190,000
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DECREASE IN CASH (303,000) (118,000)
CASH BALANCE
Beginning of the period 551,000 979,000
------------ ------------
End of the period $ 248,000 $ 861,000
============ ============
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash paid during the period for
Interest $ 2,766,000 $ 2,013,000
============ ============
Income taxes $ -- $ --
============ ============
SUPPLEMENTAL DISCLOSURES OF NONCASH INVESTING AND
FINANCING ACTIVITIES
Warrants issued as a discount on notes payable $ 301,000
============
Note receivable from restructuring investment $ 281,000
============
</TABLE>
The accompanying notes are an integral part of these financial statements.
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OLYMPIC CASCADE FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 25, 1999 AND JUNE 26, 1998
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 JUNE 25, 1999 AND JUNE 26, 1998 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 $207,000 of bonus compensation to
certain brokers.
During fiscal year 1998, the Company redirected its focus on retail
operations by divesting its ownership in two of its subsidiaries, L.H. Friend,
Weinress, Franksen & Presson, Inc. ("Friend") and Travis Capital, Inc.
("Travis"). Friend was an institutional firm and Travis was a small private
placement firm. Neither of these firms had retail
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brokerage operations, which is the Company's primary focus. The Company had
acquired each subsidiary in fiscal year 1997. Upon the sale of Friend, the
Company received cash of $500,000, 55,509 shares of its common stock and
potential fees resulting from pending corporate finance transactions in exchange
for all of the common stock of Friend. Upon the sale of Travis, the Company
received a note receivable of $281,000 and 1,025 shares of its common stock in
exchange for all of the common stock of Travis.
NOTE 2 - LINE OF CREDIT
National has an unsecured line of credit of $3,000,000. The line is
subject to renewal on October 15, 1999. Borrowings bear interest at the bank's
prime rate. Historically, these borrowings are short-term and have not extended
beyond a few days. Interest is payable monthly. At June 25, 1999, National had
$3,000,000 of borrowings outstanding.
NOTE 3 - CONTINGENCIES
In April 1997, a Trust and three individuals, commenced an action
against National as discussed in the Company's Form 10-Q for the quarter ended
December 31, 1998. On February 16, 1999, the District Court dismissed the
plaintiffs' remaining claims against National in their entirety and granted
National's motion for summary judgment. A final judgment was issued by the court
on April 26, 1999. The plaintiffs filed a notice of appeal on May 4, 1999.
In May 1997, a minority stockholder of the Company commenced a lawsuit
against the Company as discussed in the Company's Form 10-Q for the quarter
ended December 31, 1998. In June 1999 this litigation was settled. As part of
the settlement, the Company issued to the plaintiff 25,000 shares of restricted
common stock and a five year warrant to purchase 50,000 shares of the Company's
common stock at a price of $4.00 per share. The common stock and warrant were
valued at $183,000.
In September 1997, a corporation commenced an action against National
as discussed in the Company's Form 10-Q for the quarter ended December 31, 1998.
In February 1999, all parties agreed to settle this litigation. As part of the
settlement, the Company issued to the plaintiff 40,000 shares of restricted
common stock valued at $135,000. In April 1999, the court dismissed this
litigation with prejudice.
In October 1998, a corporation commenced an action against National as
discussed in the Company's Form 10-Q for the quarter ended March 26, 1999. In
June 1999, the Company settled this litigation. As part of the settlement, the
Company issued 50,000 shares of common stock, a five year warrant to purchase
20,000 shares of the Company's common stock at a price of $4.00 per share and
$75,000 in cash. The common stock and warrant were valued at $180,000. In June
1999, the court dismissed this litigation with prejudice.
National has been named together with others as a defendant in several
class action lawsuits filed against Complete Management, Inc. Although National
has not yet
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been served in any of these actions, it intends to vigorously defend itself.
The Company's subsidiaries are defendants in various other
arbitration's 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.
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The Private Securities Litigation Reform Act of 1995 provides a safe
harbor for forward-looking statements. This Quarterly Report may contain certain
statements of a forward-looking nature relating to future events or future
business performance. Any such statements that refer to the Company's estimated
or anticipated future results or other non-historical facts are forward-looking
and reflect the Company's current perspective of existing trends and
information. These statements involve risks and uncertainties that cannot be
predicted or quantified and, consequently, actual results may differ materially
from those expressed or implied by such forward-looking statements. Such risks
and uncertainties include, among others, risks and uncertainties detailed in the
Company's Registration Statement on Form S-3 (Registration No. 333-80247), filed
with the Securities and Exchange Commission on June 9, 1999 and the Company's
other Securities and Exchange Commission filings, including the Company's Annual
Report on Form 10-K and Quarterly Reports on Form 10-Q. The forward-looking
statements speak only as of the date of this Quarterly Report. The Company
undertakes no obligation to update publicly any forward-looking statement,
whether as a result of new information, future events or otherwise.
Quarter Ended June 25, 1999 Compared to Quarter Ended June 26, 1998
The Company's third quarter of fiscal 1999 resulted in an increase in
revenues and a decrease in expenses compared with the same period of fiscal
1998. The increase in revenue is due to growth in retail brokerage operations,
which resulted in an increase in commission revenue.
Revenues increased $780,000, or 7%, to $12,626,000 from $11,846,000.
During the fourth quarter fiscal 1998, the Company sold its subsidiary, L.H.
Friend, Weinress, Franksen & Presson, Inc. ("Friend"). Exclusive of Friend,
revenues increased $2,662,000 or 27% during the third quarter fiscal 1999
compared with the third quarter fiscal 1998. Commission revenue increased
$985,000, or 15%, to $7,650,000 from $6,665,000 during the third quarter fiscal
1999 compared with the third quarter fiscal 1998. Exclusive of Friend,
commission revenue increased $1,240,000, or 19%, during the third quarter
fiscal. This increase is due to favorable market conditions and the addition of
registered representatives.
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Net dealer inventory gains increased $249,000, or 14%, to $2,024,000
from $1,775,000 during the third quarter fiscal 1999 compared with the third
quarter fiscal 1998. Exclusive of Friend, net dealer inventory gains increased
$507,000, or 33%. This increase is due to favorable market conditions and the
sale of common stock received through the exercise of warrants of a company for
which National had acted as an underwriter. Underwriting revenue decreased
$1,141,000, or 57%, to $863,000 from $2,004,000 during the third quarter fiscal
1999 compared to the third quarter fiscal 1998. However, underwriting revenue
actually increased $220,000, or 34%, to $863,000 from $643,000 during the third
quarter fiscal 1999 compared with the third quarter fiscal 1998, exclusive of
Friend. Friend had underwriting revenue of $1,361,000 during the third quarter
fiscal 1998 from participation in public offerings and various private placement
fees. During the third quarter fiscal 1999 and the third quarter fiscal 1998,
the Company did not manage a public underwriting due to the weak capital markets
for initial public offerings by emerging growth companies. Underwriting revenue
during the third quarter fiscal 1999 was generated primarily from the several
private placement transactions, participation in public underwritings and
advisory fees.
Although revenues increased, expenses decreased $370,000, or 3%, to
$12,408,000 from $12,778,000 during the third quarter fiscal 1999 from the third
quarter fiscal 1998. This decrease in expenses is due to the relatively high
expenses generated at Friend during the third quarter fiscal 1998. Exclusive of
Friend, expenses increased $1,685,000, or 16%, to $12,408,000 from $10,723,000
during the third quarter fiscal 1999 compared with the third quarter fiscal
1998. Concurrent with the 15% increase in commission revenues, commission
expenses increased 12%, or $837,000, to $7,600,000 from $6,763,000 during the
third quarter fiscal 1999 compared with third quarter fiscal 1998, exclusive of
Friend. Salaries decreased $610,000, or 29%, to $1,492,000 from $2,102,000. This
decrease is due to the sale of Friend, which had salaries of $742,000 during the
third quarter fiscal 1998. Overall, combined commissions and salaries as a
percentage of revenue decreased 3% to 72% in the third quarter fiscal 1999
compared with 75% in the third quarter fiscal 1998.
As anticipated, with the sale of Friend expenses regarding
communications, occupancy, taxes, licenses and registration and other have
decreased from the third quarter fiscal 1998 to the third quarter fiscal 1999.
Communications expenses, mainly telephone, telequote and mailing decreased
$222,000, or 42%, to $303,000 from $525,000. Friend had communications expenses
of $84,000 in the third quarter fiscal 1998. Occupancy expense, consisting
mainly of rent, office supplies and depreciation decreased $396,000, or 40%, to
$591,000 from $987,000. Friend had occupancy expenses totaling $152,000 during
the third quarter fiscal 1998. The additional decrease in communications and
occupancy relates to National closing a branch office in New York and subletting
excess office space in Chicago. Clearing fees actually increased $31,000, or 8%,
to $432,000 from $401,000. Exclusive of Friend, clearing fees increased $123,000
due to the increased volume of transactions. Taxes, licenses and registration
decreased $434,000, or 157%, to ($158,000) from $276,000. This decrease was due
to National receiving a
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refund of prior years' business operating taxes totaling $330,000. Without this
refund, taxes, licenses and registration decreased $104,000 or 38% in the third
quarter fiscal 1999 as compared with the third quarter fiscal 1998. Finally,
other expenses decreased $444,000, or 58%, to $324,000 from $769,000 in the
third quarter of fiscal 1999 and 1998, respectively. The sale of Friend and
closure of the branch office in New York contributed $287,000 to this decrease.
Additionally, in third quarter fiscal 1998, the Company incurred $62,000 of
additional travel and moving expenses. During the third quarter fiscal 1999,
amortization expenses decreased $58,000 from the third 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 third quarter
fiscal 1999 as compared with the third quarter fiscal 1998. Interest expense
increased $392,000, or 56%, to $1,098,000 from $706,000. The main reason for
this increase is the increase in customer deposits, on which the Company pays
interest, and the interest on debt incurred in fiscal 1998. Interest expense was
offset by increased interest revenue of $492,000, or 44%, to $1,615,000 from
$1,123,000.
Professional fees increased $476,000, or 190%, to $726,000 from
$250,000 due to increased litigation (See Part II, Item 1). Included in
professional fees is $389,000 relating to the settlement of two lawsuits during
the third quarter fiscal 1999, only $25,000 of which represented a cash payment.
Overall, the Company reported net income of $225,000, or $.14 per share
for the third quarter fiscal 1999 compared with a loss of $623,000, or $.41 per
share in the third quarter fiscal 1998.
Nine Months Ended June 25, 1999 Compared to Nine Months Ended June 26, 1998
The Company's first nine months of fiscal 1999 resulted in decreases in
both revenues and expenses compared with the same period of fiscal 1998. These
decreases were primarily due to the sale of two subsidiaries, Friend and Travis
Capital, Inc. ("Travis"). For the nine months total revenues decreased 16% to
$31,134,000 in fiscal 1999 from $37,420,000 in fiscal 1998. This decrease in
revenue is due primarily to the decrease in underwriting revenue as the weak
capital markets for initial public offerings by emerging growth companies
continued and the decrease in dealer inventory gains due to reduced trading
margins in stocks, which the Company makes a market.
For the first nine months of fiscal 1999 underwriting revenue decreased
$8,280,000 or 81% to $2,001,000 from $10,281,000 as compared with the same
period for fiscal 1998. National participated in three private placements
raising $8 million in gross proceeds in the first nine months of fiscal 1999.
During the first nine months 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
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$4,927,000 of underwriting revenue. Friend managed its first underwriting during
the first nine months of fiscal 1998 and participated in several other
underwritings and private placements, generating $5,264,000 of underwriting
revenue.
Net dealer inventory gains decreased $1,556,000, or 32%, to $3,280,000
from $4,836,000 during the first nine months of fiscal 1999 compared with the
same period of fiscal 1998. Exclusive of Friend and Travis, net dealer inventory
gains decreased $861,000 or 21%. This decrease is due to reduced trading margins
in stocks, which the Company makes a market.
Although overall revenue decreased during the first nine months of
fiscal 1999, commission revenue increased $2,531,000, or 14%, to $20,488,000
from $17,957,000. Exclusive of Friend and Travis, commission revenue increased
$3,512,000, or 21%, during the first nine months of fiscal 1999. This increase
is due to favorable market conditions and the addition of registered
representatives.
Concurrent with the overall decrease in revenues, total expenses
decreased $7,759,000, or 20%, to $31,155,000 from $38,914,000 in fiscal 1998.
This decrease in expenses was anticipated due to significant decreases in
revenues. The most significant decreases were commission expense and salaries.
Commission expense decreased $2,375,000, or 12%, to $18,146,000 during
the first nine months fiscal 1999 from $20,521,000 in the first nine months
fiscal 1998. Salaries decreased $3,322,000, or 48%, to $3,569,000 from
$6,891,000. Friend and Travis had combined commission and salary expense of
$5,773,000 in the first nine months of fiscal 1998. The remaining decrease in
salary expense was $469,000 or 12% in the first nine months of 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
3% to 70% from 73% in the first nine months 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 nine months of fiscal 1998 to the first nine
months of fiscal 1999. Communications expenses, mainly telephone, telequote and
mailing decreased $623,000, or 42%, to $876,000 from $1,499,000. Friend and
Travis had combined communications expenses of $294,000 in fiscal 1998.
Occupancy expense, consisting mainly of rent, office supplies and depreciation
decreased $969,000, or 35%, to $1,829,000 from $2,798,000. This decrease relates
to the sale of the two subsidiaries as well as National closing a branch office
in New York and subletting excess office space in Chicago. Clearing fees
decreased $104,000, or 8%, to $1,141,000 from $1,245,000. This relates to the
sale of Friend, which accounted for $344,000 of clearing expenses in the first
nine months of fiscal 1998. Exclusive of Friend, clearing fees actually
increased $230,000 due to the increased volume of transactions. Taxes, licenses
and registration decreased $706,000, or 92%, to $62,000 from $768,000. This
decrease was due to National receiving a refund of
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prior years' business operating taxes totaling $330,000. Finally, other expenses
decreased $1,444,000, or 61%, to $937,000 from $2,381,000 during the first nine
months of fiscal 1999 and 1998, respectively. The sale of the two subsidiaries
and closure of a branch office in New York contributed $784,000 to this
decrease. Additionally, during the first nine months of fiscal 1998, the Company
incurred receivable write-offs of $97,000 and additional travel and moving
expenses of $335,000 at Olympic and National. During the first nine months of
fiscal 1999, amortization expenses decreased $175,000 from the first nine months
of 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 nine
months of fiscal 1999 as compared with the first nine months of fiscal 1998.
Interest expense increased $739,000, or 36%, to $2,803,000 from $2,064,000. The
main reason for this increase is the increase in customer deposits, on which the
Company pays interest, and the interest on debt incurred in fiscal 1998.
Interest expense was offset by increased interest revenue of $867,000, or 27%,
to $4,023,000 from $3,156,000.
Professional fees increased $1,045,000, or 140%, to $1,792,000 from
$747,000. After adjusting for professional fees paid at Friend and Travis,
professional fees increased $1,109,000, or 162%, during the first nine months of
fiscal 1999 compared with the first nine months of fiscal 1998 due to increased
litigation (See Part II, Item 1). Included in professional fees is $524,000
relating to the settlement of three lawsuits during the first nine months of
fiscal 1999, only $25,000 of which represented a cash payment.
Overall, the Company reported a loss of $16,000, or $.01 per share,
during the first nine months of fiscal 1999 compared with a loss of $981,000, or
$.66 per share, during the same period fiscal 1998.
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. Historically, these borrowings are short-term and have
not extended beyond a few days. The line of credit agreement expires October 15,
1999. At June 25, 1999 National had $3,000,000 of borrowings outstanding.
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
11
<PAGE> 12
items. At June 25, 1999, National's net capital exceeded the requirement by
$2,490,000.
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 June 25, 1999 WestAmerica's net capital exceeded
the requirement by $111,000.
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.
National requires its registered representatives 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, as the Company continues to expand its operations
and acquire other businesses the Company will require additional capital.
YEAR 2000 UPDATE
The Company defines a system as Year 2000 compliant if it is capable of
correct identification, manipulation and calculation when processing data during
the year change from December 31, 1999 to January 1, 2000.
The Company is addressing the Year 2000 issue in the following two
phases. During phase one, completed in October 1998, the Company prepared an
inventory of all Information Technology ("IT") and non-IT systems, critical to
operations. The Company tested all of its internal IT systems and concluded that
not all systems were compliant under the above definition. The Company has
determined the remedies necessary to achieve Year 2000 compliance. The Company
anticipates finishing testing and remediation by October 1999.
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 October 1999 for National and has completed
Phase II for WestAmerica. As required by the NASD, National and WestAmerica
completed and filed, in April 1999, Year 2000 readiness reports.
12
<PAGE> 13
The majority of the Company's trade processing information is handled
through a third party vendor. In the first quarter of fiscal 1999, the Company
negotiated an agreement to change to BETA Systems, Inc. from its prior vendor.
The Company implemented this conversion at the end of March 1999. As part of
this agreement, BETA Systems, Inc. has represented to the Company that they will
be Year 2000 compliant. Additionally, the Company initiated formal
communications with all other significant data processing and telecommunications
vendors to determine the extent to which the Company is vulnerable to those
third parties failure to remediate their own Year 2000 Issue. These vendors have
represented to the Company they will be compliant with the requirements of the
Year 2000.
The Company has determined that material costs and resources will not
be required to modify or replace portions of its hardware and software so that
its computer systems will properly utilize dates beyond December 31, 1999. To
date, the Company has spent $130,000 and estimates it will spend less than
$200,000 in total regarding the Year 2000 issue.
The Company has developed a contingency plan for unanticipated Year
2000 exposure as part of its overall efforts to ensure that its systems are Year
2000 compliant on a timely basis. National has clearing arrangements with other
brokerage firms and if its internal systems incur Year 2000 problems, National
will clear its business through these other firms.
The costs of the project and the date on which the Company plans to
complete the Year 2000 modifications are based on management's best estimates,
which were derived utilizing numerous assumptions of future events including the
continued availability of certain resources, third party modification plans and
other factors. However, even if the Company's systems and the Company's
significant vendors are compliant, the potential impact of the Year 2000 problem
on the securities industry as a whole could be material, as virtually every
aspect of the sales of securities and processing of transactions could be
affected. Due to the size of the problem facing the securities industry and the
interdependent nature of the business, the Company may be materially adversely
affected by this issue.
The foregoing represents a Year 2000 readiness disclosure entitled to
protection as provided in the Year 2000 Information and Readiness Disclosure
Act.
ITEM 3 - QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company's primary market risk arises from the fact that it engages in
proprietary trading and makes dealer markets in equity securities. Accordingly,
the Company may be
13
<PAGE> 14
required to maintain certain amounts of inventories in order to facilitate
customer order flow. The Company may incur losses as a result of price movements
in these inventories due to changes in interest rates, foreign exchange rates,
equity prices and other political factors. The Company is not subject to direct
market risk due to changes in foreign exchange rates. However, the Company is
subject to market risk as a result of changes in interest rates and equity
prices, which are affected by global economic conditions. The Company manages
its exposure to market risk by limiting its net long or short positions. Trading
and inventory accounts are monitored daily by management and the Company has
instituted position limits.
Credit risk represents the amount of accounting loss the Company could incur if
counterparties to its proprietary transactions fail to perform and the value of
any collateral proves inadequate. Although credit risk relating to various
financing activities is reduced by the industry practice of obtaining and
maintaining collateral, the Company maintains more stringent requirements to
further reduce its exposure. The Company monitors its exposure to counterparty
risk on a daily basis by using credit exposure information and monitoring
collateral values. The Company maintains a credit committee, which reviews
margin requirements for large or concentrated accounts and sets higher
requirements or requires a reduction of either the level of margin debt or
investment in high-risk securities or, in some cases, requiring the transfer of
the account to another broker-dealer.
The Company monitors its market and credit risks daily through internal control
procedures designed to identify and evaluate the various risks to which the
Company is exposed. There can be no assurance, however, that the Company's risk
management procedures and internal controls will prevent losses from occurring
as a result of such risks.
The following table shows the quoted market values of the Company's securities
owned ("long"), securities sold but not yet purchased ("short") and net
positions as of June 25, 1999:
<TABLE>
<CAPTION>
Long Short Net
-------- -------- --------
<S> <C> <C> <C>
Corporate stocks $372,000 $241,000 $131,000 (long)
Municipal bonds $ 5,000 $ - $ 5,000 (long)
</TABLE>
PART II
The Company is not required to respond to Items 1 though 6 in Part II, except as
follows:
14
<PAGE> 15
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). See disclosure in the Company's Form 10-Q for the
quarter ended December 31, 1998.
On February 16, 1999, the District Court dismissed the plaintiffs'
remaining claims against National in their entirety and granted
National's motion for summary judgment. A final judgment was issued by
the court on April 26, 1999. The plaintiffs filed a notice of appeal on
May 4, 1999.
2. Maynard Mall Realty Trust v. National Securities Corporation, et al.,
United States District Court, Western District of Washington, Case No.
97-CV-00967. See disclosure in the Company's Form 10-Q for the quarter
ended December 31, 1998.
In June 1999, this litigation was settled. As part of the settlement,
the Company issued to the plaintiff 25,000 shares of restricted common
stock and a five year warrant to purchase 50,000 shares of the
Company's common stock at a price of $4.00 per share. The common stock
and warrant were valued at $183,000.
3. Casull Arms Corporation v. National Securities Corp. and Robert A.
Shuey, III, United States District Court, District of Wyoming,
97CV-229B. See disclosure in the Company's Form 10-Q for the quarter
ended December 31, 1998.
In February 1999, all parties settled this litigation. As part of the
settlement, the Company issued to the plaintiff 40,000 shares of common
stock valued at $135,000. In April 1999, the court dismissed this
litigation with prejudice.
4. ThermoEnergy Corporation v. National Securities Corporation, et al.,
United States District Court, Eastern District of Arkansas, Docket No.
LR-C-98.657. See disclosure in the Company's Form 10-Q for the quarter
ended March 26, 1999.
In June 1999, the parties settled this litigation. As part of the
settlement, the Company issued 50,000 restricted shares of common
stock, a five year warrant to purchase 20,000 shares of the Company's
common stock at a price of $4.00 per share and $75,000 in cash. The
common stock and warrant were valued at $180,000. In June 1999, the
court dismissed this suit with prejudice.
5. Litigation involving Complete Management, Inc. National has been named
together with others as a defendant in several class action lawsuits
filed against Complete Management, Inc. Although, National has not yet
been served in any of these actions it intends to vigorously defend
itself against any claims that may be brought.
ITEM 2 - CHANGES IN SECURITIES AND USE OF PROCEEDS
In June 1999, the Company issued 25,000 unregistered shares of its
common stock and a five year warrant to purchase 50,000 shares of our common
stock in settlement of a
15
<PAGE> 16
lawsuit. The common stock and warrant were valued at $183,000. The issuance of
these securities was exempt from registration under the Securities Act pursuant
to Section 4(2) thereof on the basis that the transaction did not involve a
public offering. Subsequently, these shares were registered in connection with a
registration statement filed June 9, 1999 (Registration No. 333-80247).
Also in June 1999, the Company issued 50,000 unregistered shares of
its common stock and a five year warrant to purchase 20,000 shares of our common
stock in settlement of a lawsuit. The common stock and warrant were valued at
$180,000. The issuance of these securities was exempt from registration under
the Securities Act pursuant to Section 4(2) thereof on the basis that the
transaction did not involve a public offering. Subsequently, these shares were
registered in connection with a registration statement filed June 9, 1999
(Registration No. 333-80247).
ITEM 6 - EXHIBITS AND REPORTS ON FORM 8-K
a) Exhibits
27 Financial Data Schedule (This financial data schedule is only required to
be submitted with the registrant's Quarterly Report on Form 10-Q as filed
electronically with the SEC's EDGAR database.)
(b) Reports on Form 8-K (None)
16
<PAGE> 17
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
<TABLE>
<S> <C>
August 6, 1999 By: Steven A. Rothstein
Date Steven A. Rothstein, Chairman,
President and Chief Executive Officer
August 6, 1999 By: Robert H. Daskal
Date Robert H. Daskal, Senior Vice
President, Chief Financial Officer,
Secretary and Treasurer
August 6, 1999 By: David M. Williams
Date David M. Williams
Controller
</TABLE>
17
<TABLE> <S> <C>
<ARTICLE> BD
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> SEP-24-1999
<PERIOD-START> MAR-27-1999
<PERIOD-END> JUN-25-1999
<CASH> 248
<RECEIVABLES> 40,938
<SECURITIES-RESALE> 377
<SECURITIES-BORROWED> 483
<INSTRUMENTS-OWNED> 51,346
<PP&E> 1,165
<TOTAL-ASSETS> 96,720
<SHORT-TERM> 3,000
<PAYABLES> 87,040
<REPOS-SOLD> 0
<SECURITIES-LOANED> 0
<INSTRUMENTS-SOLD> 241
<LONG-TERM> 2,574
0
0
<COMMON> 34
<OTHER-SE> 3,831
<TOTAL-LIABILITY-AND-EQUITY> 96,720
<TRADING-REVENUE> 2,024
<INTEREST-DIVIDENDS> 1,615
<COMMISSIONS> 7,650
<INVESTMENT-BANKING-REVENUES> 863
<FEE-REVENUE> 0
<INTEREST-EXPENSE> 1,098
<COMPENSATION> 9,092
<INCOME-PRETAX> 218
<INCOME-PRE-EXTRAORDINARY> 218
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 225
<EPS-BASIC> .14
<EPS-DILUTED> .14
</TABLE>
