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 30, 2000 Commission File Number 001-12629
OLYMPIC CASCADE FINANCIAL CORPORATION
(Exact name of registrant as specified in its charter)
DELAWARE 36-4128138
(State or 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 8, 2000 was 2,096,113.
OLYMPIC CASCADE FINANCIAL CORPORATION
CONSOLIDATED BALANCE SHEETS
ASSETS
June 30, September 24,
2000 1999
(unaudited) (audited)
--------------- --------------
CASH, subject to immediate withdrawal $ 2,114,000 $ 384,000
CASH, CASH EQUIVALENTS AND SECURITIES 33,547,000 41,416,000
DEPOSITS 2,702,000 1,679,000
RECEIVABLES
Customers 49,235,000 38,038,000
Brokers and dealers 1,059,000 2,342,000
Other 335,000 976,000
SECURITIES HELD FOR RESALE, at market 540,000 298,000
FIXED ASSETS, net 1,198,000 1,176,000
GOODWILL, net 82,000 45,000
OTHER ASSETS 429,000 343,000
--------------- --------------
$ 91,241,000 $86,697,000
=============== ==============
LIABILITIES AND STOCKHOLDERS' EQUITY
PAYABLES
Customers $ 71,602,000 $67,158,000
Brokers and dealers 6,837,000 7,581,000
SECURITIES SOLD, BUT NOT YET PURCHASED, at market 148,000 139,000
ACCOUNTS PAYABLE, ACCRUED EXPENSES AND OTHER LIABILITIES 3,489,000 3,167,000
INCOME TAX PAYABLE 109,000 -
REVOLVING LINE OF CREDIT - 2,100,000
NOTES PAYABLE 614,000 1,648,000
CAPITAL LEASE PAYABLE 655,000 865,000
--------------- --------------
83,454,000 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, 2,091,113 and
1,694,595 shares issued and outstanding, respectively 42,000 34,000
Additional paid-in capital 8,359,000 6,375,000
Accumulated deficit (614,000) (2,370,000)
--------------- --------------
7,787,000 4,039,000
--------------- --------------
$ 91,241,000 $86,697,000
=============== ==============
2
See notes to these financial statements
OLYMPIC CASCADE FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
--------Quarter Ended---------- -------Nine Months Ended----------
June 30, June 25, June 30, June 25,
2000 1999 2000 1999
-------------- ------------- ------------- --------------
REVENUES:
Commissions $ 7,718,000 $ 7,650,000 $ 29,750,000 $ 20,488,000
Net dealer inventory gains 2,291,000 2,024,000 8,652,000 3,280,000
Interest 1,970,000 1,615,000 5,716,000 4,023,000
Transfer fees 297,000 231,000 1,008,000 668,000
Investment banking 171,000 863,000 2,179,000 2,001,000
Other 708,000 292,000 1,342,000 723,000
TOTAL REVENUES 13,155,000 12,675,000 48,647,000 31,183,000
EXPENSES:
Commissions 7,342,000 7,649,000 28,534,000 18,195,000
Salaries 1,620,000 1,492,000 5,553,000 3,569,000
Clearing fees 435,000 432,000 1,662,000 1,141,000
Communications 341,000 303,000 966,000 876,000
Occupancy costs 987,000 591,000 2,643,000 1,829,000
Interest 1,243,000 1,098,000 3,730,000 2,803,000
Professional fees 355,000 726,000 1,240,000 1,792,000
Taxes, licenses, registration 185,000 (158,000) 638,000 62,000
Other 441,000 324,000 1,816,000 937,000
TOTAL EXPENSES 12,949,000 12,457,000 46,782,000 31,204,000
Income (loss) from operations
before income taxes 206,000 218,000 1,865,000 (21,000)
Income tax (expense) benefit (74,000) 7,000 (109,000) 5,000
NET INCOME (LOSS) $ 132,000 $ 225,000 $ 1,756,000 $ (16,000)
============== ============== =============== ================
EARNINGS (LOSS) PER COMMON SHARE
Basic Earnings (Loss) Per Share $ 0.06 $ 0.14 $ 0.93 $ (0.01)
============== ============== =============== ================
Diluted Earnings (Loss) Per Share $ 0.06 $ 0.14 $ 0.81 $ (0.01)
============== ============== =============== ================
3
See notes to these financial statements
OLYMPIC CASCADE FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
--------Nine Months Ended-------
June 30, June 25,
2000 1999
-------------- ------------
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss) $ 1,756,000 $ (16,000)
Adjustments to reconcile net income (loss) to net
cash from operating activities
Depreciation and amortization 360,000 300,000
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 61,000 18,000
Changes in assets and liabilities -
Cash, cash equivalents and securities 7,869,000 (23,998,000)
Deposits (1,023,000) (139,000)
Receivables (9,273,000) (116,000)
Income taxes receivable (payable) 109,000 654,000
Securities held for resale (242,000) (142,000)
Other assets (86,000) (304,000)
Customer and broker payables 3,700,000 21,045,000
Securities sold, but not yet purchased 9,000 168,000
Accounts payable, accrued expenses, and other liabilities 367,000 1,737,000
3,607,000 (175,000)
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of fixed assets (369,000) (162,000)
Purchase of goodwill (30,000) -
(399,000) (162,000)
CASH FLOWS FROM FINANCING ACTIVITIES
Borrowings (repayments) on line of credit (2,100,000) 300,000
Repayment of notes payable (1,034,000) (300,000)
Payments on capital lease (255,000) (263,000)
Issuance of common stock through exercise of
stock options and warrants 1,911,000 297,000
(1,478,000) 34,000
INCREASE (DECREASE) IN CASH 1,730,000 (303,000)
CASH BALANCE
Beginning of the period 384,000 551,000
End of the period $ 2,114,000 $ 248,000
=============== ================
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash paid during the period for
Interest $ 3,712,000 $ 2,766,000
=============== ================
Income taxes $ - $ -
=============== ================
SUPPLEMENTAL DISCLOSURES OF NONCASH INVESTING AND
FINANCING ACTIVITIES
Warrant issued as part of acquistion $ 20,000 $ -
=============== ================
4
See notes to these financial statements
OLYMPIC CASCADE FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2000 AND JUNE 25, 1999
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 30, 2000 AND JUNE 25, 1999 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 (i) research, financial advisory services and sales, (ii) investment
banking services for both public offerings and private placements and (iii)
retail brokerage and trade clearance operations. In April 2000, the Company
commenced 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 period divided by the weighted
average number of common shares outstanding during the period. For the third
quarter of fiscal 2000 and 1999, the number of shares used in the basic earnings
per share calculation was 2,078,821 and 1,599,936, respectively. For the first
nine months of fiscal 2000 and 1999, the number of shares used in the basic
earnings (loss) per share calculation was 1,894,755 and 1,521,974, 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 period. For the third quarter of fiscal 2000 and 1999,
the number of shares used in the diluted earnings per share calculation was
2,377,931 and 1,602,612, respectively. For the first nine months of fiscal 2000
and 1999, the number of shares used in the diluted earnings (loss) per share
calculation was 2,165,863 and 1,521,974, respectively.
5
RECLASSIFICATION - Other revenue and commission expense for the
third quarter of fiscal 1999 and the nine months ended June 25, 1999 have been
reclassified to reflect comparable figures for the third quarter of fiscal 2000
and the nine months ended June 30, 2000. The effect of this reclassification is
to increase other revenue and commission expense by $49,000 for the third
quarter of fiscal 1999 and the nine months ended June 25, 1999, respectively.
This reclassification did not affect net income.
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 June 30, 2000, National had no
borrowings outstanding on this line.
NOTE 3 - ACQUISITION
On June 30, 2000, the Company acquired all of the outstanding stock of
Canterbury Securities Corporation (Canterbury), a Chicago, Illinois based
broker-dealer specializing in private placement transactions. Canterbury was
acquired for cash of $30,000 and the issuance of five-year warrants to acquire
5,000 unregistered shares of common stock of the Company at a price of $6.375
per share. The Company recorded this transaction under the purchase method of
accounting and has recorded goodwill of $50,000, which will be amortized over a
period of 36 months.
NOTE 4 - COMMITMENTS
During the third quarter the Company entered into an employment agreement with
an executive officer. The term of the agreement is three years expiring in June
2003 with an annual salary of $400,000 and immediately vested options to acquire
150,000 shares of the Company's common stock at an exercise price of $7.25 per
share. The agreement provides for payment of one year's salary upon severance of
employment by the Company.
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OFOPERATIONS
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
REPORTS 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.
6
Quarter Ended June 30, 2000 Compared to Quarter Ended June 25, 1999
The Company's third quarter of fiscal 2000 resulted in a minimal increase in
revenues and virtually no change in pre-tax income compared with the same period
of fiscal 1999. The increase in total revenue is due to increased interest
revenue, a large increase in other revenue, and a decrease in investment banking
revenue. Commissions, net dealer inventory gains and transfer fees all increased
slightly over the same period in 1999. Overall, the Company reported pre-tax
income of $206,000 in the third quarter of fiscal 2000 as compared to pre-tax
income of $218,000 in the third quarter of fiscal 1999. Net income, however,
decreased to $132,000 from $225,000 for the third quarter of fiscal 2000
compared to the third quarter of fiscal 1999. The reason for this decrease was
the income tax expense of $74,000 recorded in fiscal 2000. There was no income
tax expense recorded during fiscal 1999 due to the utilization of a net
operating loss (NOL) carry forward from fiscal 1998.
Total revenues increased 4% or $480,000, to $13,155,000 from $12,675,000. During
the quarter, market trading volumes decreased significantly from the previous
six months of fiscal year 2000 which caused commissions and net dealer inventory
gains to be lower than the second quarter of fiscal 2000. Although, the Company
has increased its overall registered representative base from the third quarter
of fiscal 1999, because of the lower market trading volumes there was no marked
increase in commissions or net dealer inventory gains.
Investment banking revenue decreased $692,000, or 80%, to $171,000 from $863,000
during the third of quarter fiscal 2000 compared to the third quarter of fiscal
1999. During both the third quarter of fiscal 2000 and 1999, the Company did not
manage a public underwriting. Investment banking revenue decreased during the
third quarter of fiscal 2000 because the Company did not complete any private
placement transactions, but rather the revenue was generated through advisory
fees. In the third quarter of fiscal 1999 investment banking revenue was
generated primarily from the completion of private placement transactions and
advisory fees.
Other revenue, consisting of asset management fees and revenue from market trade
order flow, increased $416,000, or 142%, to $708,000 from $292,000 during the
third quarter of fiscal 2000 compared to the third quarter of fiscal 1999. The
increase in other revenue was due mainly to an increase in asset management fees
received through National Asset Management, a subsidiary of National. Asset
management fees increased $246,000 during the quarter, due to increased assets
under management.
7
Expenses increased proportionately with the modest increase in revenues. Total
expenses increased $492,000, or 4%, to $12,949,000 from $12,457,000. Expenses,
which increased during the quarter, include salaries, occupancy costs, interest,
taxes, licenses and registration and other.
Salaries increased $128,000, or 9%, to $1,620,000 from $1,492,000. In September
1998, certain members of management of the Company received temporary reductions
in compensation, ranging from 10% to 62%. These reductions were reinstated in
full prior to the first quarter of fiscal 2000. Overall, combined commissions
and salaries as a percentage of revenue decreased 4% to 68% in the third quarter
of fiscal 2000 compared with 72% in the third quarter of fiscal 1999.
Occupancy expense, consisting mainly of rent, office supplies, computer services
and depreciation, increased $396,000, or 67%, to $987,000 from $591,000. This
increase was due mainly to increased rent, depreciation and computer services.
Rent increased approximately $124,000 at National due to a new office lease
signed in July 1999 at a higher rate per square foot, as well as office space
added for NSCdirect. Additionally, with the commencement of NSCdirect, computer
services and depreciation increased approximately $198,000, due to the costs for
additional equipment and computer services such as web hosting, off-site server
maintenance and other costs associated with online trade execution and online
account access.
Taxes, licenses and registration increased $343,000, to $185,000 from a credit
of $158,000 in the third quarter of fiscal 1999. This increase is because
National received a refund of $330,000 in the third quarter of fiscal 1999 from
the prior years' business operating taxes.
Other expenses increased $117,000, or 36%, to $441,000 from $324,000 in the
third quarter of fiscal 2000 and 1999, respectively. In the third quarter of
fiscal 2000, the Company incurred travel and moving expense of approximately
$245,000, an increase of approximately $60,000 from the prior year. Also, the
Company incurred additional employment agency fees totaling $28,000 as the
Company hired new regional compliance officers.
Interest expense increased $145,000, or 13%, to $1,243,000 from $1,098,000. The
main reason for this increase was the increase in customer deposits, on which
the Company pays interest. Customer deposits increased $9.5 million from June
25, 1999 to June 30, 2000. However, this increase was more than offset by
increased interest income from customer margin debt that increased by $11.0
million during the same period. Interest income increased $355,000, or 22%, to
$1,970,000 from $1,615,000 during the third quarter of fiscal 2000 as compared
with the third quarter of fiscal 1999.
Despite the general increase in expenses during the third quarter of fiscal 2000
as compared to the third quarter of fiscal 1999, professional fees decreased
$371,000, or 51%, to $355,000 from $726,000. This decrease was due to the
settlement of several lawsuits during the previous fiscal year.
8
Overall, diluted earnings were $0.06 per share and $0.14 per share for the third
quarters of fiscal 2000 and 1999, respectively.
Nine Months Ended June 30, 2000 Compared to Nine Months Ended June 25, 1999
- ---------------------------------------------------------------------------
The first nine months of fiscal 2000 resulted in a dramatic increase in revenues
and net income compared with the same period of fiscal 1999. The increase in
revenues was due to growth in retail brokerage and dealer operations causing a
significant increase in commission revenue and net dealer inventory gains. The
Company reported net income of $1,756,000 in the first nine months of fiscal
2000 compared with a loss of $16,000 during the first nine months of fiscal
1999.
Revenues increased $17,464,000, or 56% to $48,647,000 from $31,183,000. This
increase is due primarily to the increase in commission revenue and dealer
inventory gains resulting from the strong markets in the first six months of
fiscal year 2000 and the solid performance of investment executives at National.
Commission revenue increased $9,262,000 or 45% to $29,750,000 from $20,488,000.
National added additional offices in New York as well as adding an office in
Florida. Net dealer inventory gains increased $5,372,000 or 164% to $8,652,000
in the first nine months of fiscal 2000 from $3,280,000 in the first nine months
of fiscal 1999. Transfer fees increased $340,000, or 51% to $1,008,000 from
$668,000, due to the increase in overall trade volume.
Additionally, other revenue, consisting of asset management fees and revenue
from market trade order flow, increased $619,000, or 86% to $1,342,000 from
$723,000. The increase in other revenue was due to an increase in asset
management fees received through National Asset Management, a subsidiary of
National. Asset management fees increased $204,000 during the nine-month period,
due to increased assets under management. Additionally, the increase related to
increased rebates for trade order flow from market makers due to the increased
trading volume for the first six months of fiscal year 2000.
Finally, investment banking revenue increased $178,000, or 9% to $2,179,000 from
$2,001,000. National participated in private placements raising approximately
$13.0 million in gross proceeds for clients in the first nine months of fiscal
2000. During the same period in fiscal 1999, National participated in private
placements raising approximately $8.0 million in gross proceeds for clients. The
Company did not manage any public underwritings during either the first nine
months of fiscal 2000 or fiscal 1999.
Concurrent with the 55% increase in revenues, total expenses increased 50%.
Total expenses increased by $15,578,000 to $46,782,000 from $31,204,000. The
most significant increases were commission expense and salaries.
Commission expense increased $10,339,000 or 57% to $28,534,000 in the first nine
months of fiscal 2000 from $18,195,000 in the first nine months of fiscal 1999.
Salaries increased $1,984,000 or 56% to $5,553,000 from $3,569,000. In September
9
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. Additionally, with the increased
growth the Company has hired additional employees at National. These increases
were mainly relating to the information technology department, including
NSCdirect.com, the online brokerage division of National. Overall, combined
commissions and salaries as a percentage of revenue did not change from
approximately 70% in the first nine months of fiscal 2000 and 1999,
respectively.
Consistent with the increased revenues, expenses regarding occupancy, clearing,
taxes, licenses and registration and other have increased from the first nine
months of fiscal 1999 to the first nine months of fiscal 2000. The most
significant expense increases were clearing, occupancy, interest and other.
Clearing fees increased $521,000, or 46%, to $1,662,000 from $1,141,000, which
mainly relates to the increased business in National's European offices and the
business generated from the additional New York offices. Occupancy expenses
increased $814,000, or 45%, to $2,643,000 from $1,829,000 in the first nine
months of fiscal 2000 as compared with the first nine months of fiscal 1999. As
discussed in the quarterly results above, this increase was due mainly to
increased rent and computer services. Taxes, licenses and registration increased
$576,000, or 929%, to $638,000 from $62,000 in the first nine months of fiscal
1999. This increase is because National received a refund of $330,000 in the
third quarter fiscal 1999, from the prior years' business operating taxes. Other
expenses increased $879,000 or 94% to $1,816,000 from $937,000 in the first nine
months of fiscal 2000 and 1999, respectively. In the first nine months of fiscal
2000, the Company incurred travel and moving expense of approximately $690,000,
an increase of approximately $241,000 from the prior year's nine-month period.
Also, the Company incurred additional employment agency fees totaling $83,000 as
the Company hired more people to accommodate growth. Finally, customer
write-offs and bad debt expense increased approximately $391,000 from the first
nine months of fiscal 1999.
Interest expense increased during the first nine months of fiscal 2000 as
compared with the first nine months of fiscal 1999. Interest expense increased
$927,000, or 33%, to $3,730,000 from $2,803,000. The main reason for this
increase is the increase in customer deposits, on which the Company pays
interest and the accelerated accretion of interest on original issue discount
notes, which were repaid during the second quarter of fiscal 2000. Original
issue discount interest for the nine months totaled $232,000. The remaining
interest expense increase was due to the increase in customer deposits of $4.4
million during the current nine-month period. This increase was more than offset
by increased interest income from customer margin debt that increased by $11.2
million during the current nine-month period. Interest income increased
$1,693,000, or 42%, to $5,716,000 from $4,023,000 during the first nine months
of fiscal 2000 as compared with the first nine months of fiscal 1999.
Professional fees decreased $552,000, or 31%, to $1,240,000 from $1,792,000.
This decrease is due to the Company resolving several of its lawsuits during the
previous fiscal year.
10
Overall, diluted earnings were $0.81 per share as compared with a net loss of
$0.01 per share for the first nine months of fiscal 2000 and 1999, 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. These borrowings are
short-term and generally do not extend beyond a few days. At June 30, 2000,
National had no borrowings outstanding on this line. Additionally National may
borrow up to 70% of the market value of eligible securities pledged with an
unrelated broker dealer.
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. Accordingly, the increased
customer margin debt during the current quarter resulted in an increase in the
net capital requirements. At June 30, 2000, National's net capital exceeded the
requirement by $4,744,000.
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 30, 2000, WestAmerica's net capital exceeded the
requirement by $232,000.
Any advances, dividend payments and other equity withdrawals from National or
WestAmerica may be 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.
The Company believes its internally generated liquidity, together with access to
external capital and debt resources, is 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.
11
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 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 at June 30, 2000 and September 24, 1999:
JUNE 30, 2000
LONG SHORT NET
Corporate stocks $540,000 $148,000 $392,000 (long)
SEPTEMBER 24, 1999
LONG SHORT NET
Corporate stocks $294,000 $134,000 $160,000 (long)
Stock options $ 4,000 $ 5,000 $ 1,000(short)
12
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. IN RE COMPLETE MANAGEMENT, INC. SECURITIES LITIGATION, United States
District Court, Southern District of New York, Case No. 99 Civ. 1454 (NRB).
See disclosure in the Company's Form 10-Q for the quarter ended March 31,
2000.
The Company is a defendant in various other arbitrations and administrative
proceedings, lawsuits and claims that arise out of the normal course of
business. The Company believes that the resolution of these matters will not
have an adverse material effect on the Company's financial statements or
business operations.
ITEM 2 - CHANGES IN SECURITIES AND USE OF PROCEEDS
On June 30, 2000, as part of the purchase of all the outstanding stock of
Canterbury Securities Corporation, the Company issued five-year warrants to
acquire 5,000 unregistered shares of common stock at a price of $6.375 per
share. 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.
ITEM 6 - EXHIBITS AND REPORTS ON FORM 8-K
a) Exhibits
10.21 Employment contract dated June 2000
10.22 Audit committee charter
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)
13
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
OLYMPIC CASCADE FINANCIAL CORPORATION AND SUBSIDIARIES
August 10, 2000 By:/s/ Steven A. Rothstein
Date Steven A. Rothstein, Chairman,
President and Chief Executive Officer
August 10, 2000 By: /s/ Robert H. Daskal
Date Robert H. Daskal, Senior Vice
President, Chief Financial Officer,
Secretary and Treasurer
August 10, 2000 By: /s/ David M. Williams
Date David M. Williams
Corporate Controller and
Chief Accounting Officer
14