1
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, 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, 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 7, 2000 was 1,905,725.
2
OLYMPIC CASCADE FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
ASSETS
December 31, September 24,
1999 1999
(unaudited) (audited)
------------ -------------
CASH, subject to immediate withdrawal $ 2,178,000 $ 384,000
CASH, CASH EQUIVALENTS AND SECURITIES 44,624,000 41,416,000
DEPOSITS 2,859,000 1,679,000
RECEIVABLES
Customers 44,419,000 38,038,000
Brokers and dealers 2,482,000 2,342,000
Other 434,000 976,000
SECURITIES HELD FOR RESALE, at market 336,000 298,000
FIXED ASSETS, net 1,146,000 1,176,000
GOODWILL, net 40,000 45,000
OTHER ASSETS 699,000 343,000
------------ ------------
$ 99,217,000 $ 86,697,000
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
PAYABLES
Customers $ 80,333,000 $ 67,158,000
Brokers and dealers 7,143,000 7,581,000
SECURITIES SOLD, BUT NOT YET PURCHASED, at market 210,000 139,000
ACCOUNTS PAYABLE, ACCRUED EXPENSES AND OTHER LIABILITIES 4,217,000 3,167,000
REVOLVING CREDIT LINE 200,000 2,100,000
NOTES PAYABLE 1,648,000 1,648,000
CAPITAL LEASE PAYABLE 779,000 865,000
------------ ------------
94,530,000 82,658,000
------------ ------------
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, 1,756,725
and 1,694,595 shares issued and outstanding, respectively 35,000 34,000
Additional paid-in capital 6,619,000 6,375,000
Accumulated deficit (1,967,000) (2,370,000)
------------ ------------
4,687,000 4,039,000
------------ ------------
$ 99,217,000 $ 86,697,000
============ ============
2
The accompanying notes are an integral part of these financial statements.
3
OLYMPIC CASCADE FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
--------Quarter Ended--------
December 31, December 31,
1999 1998
------------ ------------
REVENUES:
Commissions $ 9,382,000 $ 5,636,000
Net dealer inventory gains 1,782,000 466,000
Interest 1,661,000 1,169,000
Transfer fees 292,000 212,000
Underwriting 1,216,000 564,000
Other 138,000 114,000
----------- -----------
TOTAL REVENUES 14,471,000 8,161,000
----------- -----------
EXPENSES:
Commissions 8,528,000 4,587,000
Salaries 1,606,000 958,000
Clearing fees 622,000 325,000
Communications 326,000 279,000
Occupancy costs 716,000 657,000
Interest 953,000 824,000
Professional fees 506,000 379,000
Taxes, licenses, registration 208,000 113,000
Other 601,000 297,000
----------- -----------
TOTAL EXPENSES 14,066,000 8,419,000
----------- -----------
Income (loss) from operations before income taxes 405,000 (258,000)
Provision for income taxes -- (3,000)
----------- -----------
NET INCOME (LOSS) $ 405,000 $ (261,000)
=========== ============
EARNINGS (LOSS) PER COMMON SHARE
Basic Earnings (loss) Per Share $ 0.24 $ (0.18)
=========== ============
Diluted Earnings (loss) Per Share $ 0.23 $ (0.18)
=========== ============
3
The accompanying notes are an integral part of these financial statements.
4
OLYMPIC CASCADE FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
--------Quarter Ended-----------
December 31, December 31,
1999 1998
------------ -------------
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss) $ 405,000 $ (261,000)
Adjustments to reconcile net income (loss) to net
cash used in operating activities
Depreciation and amortization 47,000 100,000
Compensation related to issuance of stock options 20,000
Changes in assets and liabilities
Cash, cash equivalents and securities (3,208,000) (19,512,000)
Deposits (1,180,000) (4,356,000)
Receivables (5,979,000) 13,008,000
Securities held for resale (38,000) (475,000)
Other assets (356,000) (163,000)
Payables 13,785,000 11,049,000
Securities sold, but not yet purchased 71,000 435,000
------------ ------------
3,567,000 (175,000)
------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of fixed assets (12,000) (2,000)
------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES
Borrowings on line of credit (1,900,000) 300,000
Payments on capital lease (85,000) (84,000)
Payments on notes payable -- (225,000)
Exercise of stock options and warrants 224,000 --
------------ ------------
(1,761,000) (9,000)
------------ ------------
INCREASE (DECREASE) IN CASH 1,794,000 (186,000)
CASH BALANCE
Beginning of the period 384,000 551,000
------------ ------------
End of the period $ 2,178,000 $ 365,000
============ ============
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash paid during the period for
Interest $ 953,000 $ 761,000
============ ============
Income taxes $ -- $ --
============ ============
4
The accompanying notes are an integral part of these financial statements.
5
OLYMPIC CASCADE FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999 AND DECEMBER 31, 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 December 31, 1999 and 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 24, 1999.
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 both in the United States and abroad through research,
financial advisory services and sales, and investment banking services for both
public offerings and private placements, and providing retail brokerage and
trade clearance operations. Additionally, the Company plans to commence online
trading services for its customers on the Internet through NSCdirect
(www.nscdirect.com).
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 2000 and 1999, the number of shares used in the basic earnings (loss) per
share calculation was 1,701,794 and 1,463,007, 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 2000 and 1999, the number of shares
used in the diluted earnings (loss) per share calculation was 1,778,455 and
1,463,007, respectively.
5
6
NOTE 2 - LINE OF CREDIT
National has a secured line of credit of up to $3,000,000. The line is
subject to renewal in January 2001. Borrowings bear interest at the bank's prime
rate. Interest is payable monthly. The line is secured by certain assets of
National excluding items prohibited from being pledged and assets included the
SEC Customer Protection Rule 15c3-3 formula. These borrowings are short-term and
generally do not extend beyond a few days. At December 31, 1999, National had
$200,000 in borrowings outstanding. This amount was repaid within the first
three business days of January 2000.
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. Any forward-looking
statements contained in or incorporated into this Quarterly Report 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 December 31, 1999 Compared to Quarter Ended December 31, 1998
---------------------------------------------------------------------------
The Company's first quarter of fiscal 2000 resulted in significant increases in
revenues and net income compared with the same period of fiscal 1999. The
Company reported net income of $405,000 compared to a net loss of $261,000 for
the first quarter of fiscal 1999.
Revenues increased $6,310,000, or 77% to $14,471,000 from $8,161,000. This
increase is due primarily to the increase in commission revenue and dealer
inventory gains because of the continued overall strong markets and the addition
of investment executives at National. Commission revenue increased $3,746,000 or
66% to $9,382,000 from $5,636,000. National added additional offices in New York
as well as adding an office in
6
7
Florida. Net dealer inventory gains increased $1,316,000 or 282% to $1,782,000
in the first quarter of fiscal 2000 from $466,000 in the first quarter of fiscal
1999. The main reason for this significant increase was the strength of the
markets, increased production of existing investment executives and the
production of additional investment executives.
The other category in which revenue increased significantly was underwriting
revenue. Underwriting revenue increased $652,000, or 116% to $1,216,000 from
$564,000. National participated in five private placements raising approximately
$10 million in gross proceeds for clients in the first quarter of fiscal 2000.
During the same period in fiscal 1999, National participated in two private
placements raising approximately $5 million in gross proceeds for clients. The
Company did not manage any public underwritings during either the first quarter
of fiscal 2000 or the first quarter of fiscal 1999.
Concurrent with the 77% increase in revenues, total expenses increased only 67%.
Total expenses increased by $5,647,000 to $14,066,000 from $8,419,000. This
increase in expenses was anticipated due to significant increases in revenues.
The most significant increases were commission expense and salaries.
Commission expense increased $3,941,000 or 86% to $8,528,000 in first quarter of
fiscal 2000 from $4,587,000 in first quarter of fiscal 1999. Salaries increased
$648,000 or 68% to $1,606,000 from $958,000. In September 1998, certain
management of the Company had received temporary reductions in compensation
ranging from 10% to 62%. These reductions had been reinstated in full prior to
the first quarter of fiscal 2000. Overall, combined commissions and salaries as
a percentage of revenue increased 2% to approximately 70% from approximately 68%
in the first quarter of fiscal 2000 and 1999, respectively. This increase is due
mainly to a higher payout percentage based on higher commission levels for the
investment executives at National.
As anticipated with the increased revenues, expenses regarding communications,
occupancy, clearing, taxes, licenses and registration and other have increased
from the first quarter fiscal 1999 to the first quarter fiscal 2000. The most
significant expense increases were clearing, interest, professional fees and
other.
Clearing fees increased $297,000 or 91% to $622,000 from $325,000, which mainly
relates to the increased business in the London office and the business
generated from the additional New York offices. Other expenses increased
$304,000 or 102% to $601,000 from $297,000 in the first quarter of fiscal 2000
and 1999, respectively. In the first quarter of fiscal 2000, the Company
incurred additional travel and moving expense of approximately $76,000 at
Olympic and National. Also, the Company incurred additional employment agency
fees totaling $30,000 as the Company hired more people to accommodate the
growth. Finally, customer write-offs increased approximately $183,000 from the
first quarter of fiscal 1999.
7
8
Interest expense and professional fees increased during first quarter of fiscal
2000 as compared with the first quarter of fiscal 1999. Interest expense
increased $129,000 or 16% to $953,000 from $824,000. 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 $492,000 or 42% to $1,661,000 from
$1,169,000.
Professional fees increased $127,000 or 34% to $506,000 from $379,000. This
increase was due to the settlement of several arbitrations totaling
approximately $150,000.
Overall, diluted earnings were $.23 per share as compared with a net loss of
$.18 per share for the first quarter ended December 31, 1999 and December 31,
1998, respectively.
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 secured credit facility with Bank of America 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 generally do not extend
beyond a few days. At December 31, 1999 National had $200,000 in borrowing
outstanding. This amount was repaid within the first three business days of
January 2000.
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, 1999,
National's net capital exceeded the requirement by $2,636,000.
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, 1999, WestAmerica's net capital exceeded
the requirement by $192,000.
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.
8
9
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.
The Company believes its internally generated liquidity, together with access to
external capital and debt resources will be sufficient to satisfy existing
operations. However, as the Company expands its operations, including its new
online trading services, or acquires other businesses, the Company will likely
require additional capital.
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). See disclosure in the Company's Form 10-Q for the quarter ended
December 31, 1998 and Form 10-K for the fiscal year ended September 24,
1999.
2. Complete Management, Inc., United States District Court, Southern District
of New York. National has been named together with others as a defendant in
a consolidated class action lawsuit brought by purported shareholders of
Complete Management, Inc. ("CMI"). A consolidated amended class action
complaint has yet to be filed. National has been joined as a defendant in
this lawsuit predicated upon allegations that National was an underwriter
of CMI's initial public offering and a convertible debenture offering and
that it issued certain analyst reports which may have been disseminated in
the press. No specific amount of damages against National has been sought
in the complaint. National intends to vigorously defend itself against any
claims that may be brought.
The Company is a defendant in various other arbitrations and administrative
proceedings, lawsuits and claims. The Company believes that the resolution of
these matters will not have a material effect. These matters arise out of the
normal course of business.
ITEM 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)
9
10
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 10, 2000 By: Steven A. Rothstein
Date Steven A. Rothstein, Chairman,
President and Chief Executive Officer
February 10, 2000 By: Robert H. Daskal
Date Robert H. Daskal, Senior Vice
President, Chief Financial Officer,
Secretary and Treasurer
February 10, 2000 By: David M. Williams
Date David M. Williams, Corporate
Controller and Chief Accounting
Officer
10