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 March 30, 2001
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 May 7, 2001 was 2,227,449.
OLYMPIC CASCADE FINANCIAL CORPORATION
CONSOLIDATED BALANCE SHEETS
ASSETS
March 30, September 29,
2001 2000
(unaudited) (audited)
------------------ -----------------
CASH, subject to immediate withdrawal $ 3,120,000 $ 3,020,000
CASH, CASH EQUIVALENTS AND SECURITIES 50,513,000 29,517,000
DEPOSITS 3,700,000 1,792,000
RECEIVABLES
Customers 30,325,000 54,243,000
Brokers and dealers 3,519,000 1,994,000
Other 829,000 394,000
SECURITIES HELD FOR RESALE, at market 923,000 376,000
FIXED ASSETS, net 999,000 1,112,000
GOODWILL, net 57,000 74,000
OTHER ASSETS 3,011,000 393,000
------------------ -----------------
$ 96,996,000 $ 92,915,000
================== =================
LIABILITIES AND STOCKHOLDERS' EQUITY
PAYABLES
Customers $ 64,491,000 $ 74,183,000
Brokers and dealers 13,397,000 5,329,000
SECURITIES SOLD, BUT NOT YET PURCHASED, at market 351,000 192,000
ACCOUNTS PAYABLE, ACCRUED EXPENSES AND OTHER LIABILITIES 2,949,000 3,976,000
REVOLVING CREDIT LINE 5,000,000 -
NOTES PAYABLE 3,065,000 614,000
CAPITAL LEASE PAYABLE 443,000 582,000
------------------ -----------------
89,696,000 84,876,000
------------------ -----------------
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, 2,227,449 and
2,056,075 shares issued and outstanding, respectively 45,000 43,000
Additional paid-in capital 9,264,000 8,810,000
Deficit (2,009,000) (814,000)
------------------ -----------------
7,300,000 8,039,000
------------------ -----------------
$ 96,996,000 $ 92,915,000
================== =================
The accompanying notes are an integral part of these financial statements
2
OLYMPIC CASCADE FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
-------- Quarter Ended--------- -------Six Months Ended----------
March 30, March 31, March 30, March 31,
2001 2000 2001 2000
---------------- ------------- --------------- --------------
REVENUES:
Commissions $ 6,339,000 $ 12,650,000 $ 12,579,000 $22,032,000
Net dealer inventory gains 6,486,000 4,580,000 11,617,000 6,361,000
Interest 1,535,000 2,079,000 3,292,000 3,741,000
Transfer fees 231,000 419,000 506,000 711,000
Investment banking 313,000 792,000 898,000 2,008,000
Other 984,000 503,000 1,428,000 640,000
---------------- ------------- --------------- --------------
TOTAL REVENUES 15,888,000 21,023,000 30,320,000 35,493,000
---------------- ------------- --------------- --------------
EXPENSES:
Commissions 8,596,000 12,664,000 16,723,000 21,192,000
Salaries 2,565,000 2,328,000 4,783,000 3,933,000
Clearing fees 1,243,000 606,000 2,253,000 1,227,000
Communications 940,000 300,000 1,504,000 625,000
Occupancy costs 1,208,000 940,000 2,375,000 1,656,000
Interest 952,000 1,534,000 1,929,000 2,488,000
Professional fees 469,000 379,000 907,000 885,000
Taxes, licenses, registration 214,000 245,000 461,000 453,000
Other 840,000 773,000 1,195,000 1,375,000
---------------- ------------- --------------- --------------
TOTAL EXPENSES 17,027,000 19,769,000 32,130,000 33,834,000
---------------- ------------- --------------- --------------
Income (loss) from operations before income taxes (1,139,000) 1,254,000 (1,810,000) 1,659,000
and extraordinary items
(Provision) benefit for income taxes 200,000 (35,000) 200,000 (35,000)
---------------- ------------- --------------- --------------
Income (loss) from operations before
extraordinary items (939,000) 1,219,000 (1,610,000) 1,624,000
Income from extraordinary items- gain from
extinguishment of debt, net of taxes 418,000 - 418,000
---------------- ------------- --------------- --------------
NET INCOME (LOSS) $ (521,000) $ 1,219,000 $ (1,192,000) $ 1,624,000
================ ============= =============== ==============
EARNINGS (LOSS) PER COMMON SHARE
Earnings (Loss) Per Share before extraordinary
item
Basic Earnings (Loss) Per Share $ (0.42) $ 0.64 $ (0.74) $ 0.92
================ ============= =============== ==============
Diluted Earnings (Loss) Per Share $ (0.42) $ 0.53 $ (0.74) $ 0.81
================ ============= =============== ==============
Earnings (Loss) Per Share of extraordinary
item
Basic Earnings (Loss) Per Share $ 0.18 $ - $ 0.19 $ -
================ ============= =============== ==============
Diluted Earnings (Loss) Per Share $ 0.18 $ - $ 0.19 $ -
================ ============= =============== ==============
Earnings (Loss) Per Share after extraordinary
item
Basic Earnings (Loss) Per Share $ (0.24) $ 0.64 $ (0.55) $ 0.92
================ ============= =============== ==============
Diluted Earnings (Loss) Per Share $ (0.24) $ 0.53 $ (0.55) $ 0.81
================ ============= =============== ==============
The accompanying notes are an integral part of these financial statements
3
OLYMPIC CASCADE FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
--------------Six Months Ended---------------
March 30, March 31,
2001 2000
------------------- -------------------
CASH FLOWS FROM OPERATING ACTIVITIES
Net Income (loss) $ (1,192,000) $ 1,624,000
Adjustments to reconcile net loss to net
cash from operating activities
Depreciation and amortization 285,000 232,000
Compensation related to issuance of stock options 83,000 41,000
(Gain) on extraordinary item-extinguishment of debt (418,000)
Changes in assets and liabilities
Cash, cash equivalents and securities (20,996,000) (21,931,000)
Deposits (1,908,000) (3,756,000)
Receivables 21,958,000 (29,769,000)
Securities held for resale (547,000) (131,000)
Other assets (2,618,000) (327,000)
Customer and broker payables (1,624,000) 49,153,000
Securities sold, but not yet purchased 159,000 220,000
Accounts payable, accrued expenses, and other liabilities (980,000) 3,622,000
------------------- -------------------
NET CASH USED IN OPERATING ACTIVITIES (7,798,000) (1,022,000)
------------------- -------------------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of fixed assets (155,000) (207,000)
------------------- -------------------
CASH FLOWS FROM FINANCING ACTIVITIES
Borrowings on line of credit 5,000,000 900,000
Payments on capital lease (170,000) (170,000)
Payments on notes (52,000) (609,000)
Borrowings on notes 3,000,000 -
Exercise of stock options and warrants 275,000 1,735,000
------------------- -------------------
NET CASH PROVIDED BY FINANCING ACTIVITIES 8,053,000 1,856,000
------------------- -------------------
INCREASE IN CASH 100,000 627,000
CASH BALANCE
Beginning of the period 3,020,000 384,000
------------------- -------------------
End of the period $ 3,120,000 $ 1,011,000
=================== ===================
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash paid during the period for
Interest $ 1,896,000 $ 2,442,000
=================== ===================
Income taxes $ 324,000 $ -
=================== ===================
SUPPLEMENTAL DISCLOSURES OF NONCASH INVESTING AND
FINANCING ACTIVITIES
Warrants issued as a discount on notes payable $ 138,000 $ -
=================== ===================
The accompanying notes are an integral part of these financial statements
4
OLYMPIC CASCADE FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 30, 2001 AND MARCH 31, 2000
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 March 30, 2001 and March 31, 2000 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 29, 2000.
NOTE 1 - OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Nature of Business - The Company is a financial services organization,
operating through its three wholly owned subsidiaries, National Securities
Corporation ("National"), WestAmerica Investment Group ("WestAmerica") and
Canterbury Securities Corporation ("Canterbury"). 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 and institutional brokerage,
OTC market making and trade clearance operations.
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 second quarter of fiscal
2001 and 2000, the number of shares used in the basic earnings (loss) per share
calculation was 2,214,048 and 1,918,493, respectively. For the first six months
of fiscal 2001 and 2000, the number of shares used in the basic earnings (loss)
per share calculation was 2,186,308 and 1,762,616, 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 second quarter of fiscal 2001 and 2000, the number of
shares used in the diluted earnings (loss) per share calculation was 2,214,048
and 2,295,485, respectively. For the first six months of fiscal 2001 and 2000,
the number of shares used in the diluted earnings (loss) per share calculation
was 2,186,308 and 1,995,589, respectively.
5
NOTE 2 - LINE OF CREDIT
In January 2001, National consummated a new secured line of credit of
$5,000,000. The line is subject to renewal on December 31, 2001. Borrowings bear
interest at the call money rate plus 1%. At March 30, 2001, the interest rate
was 7.75%. Interest is payable monthly. The line is secured by certain assets of
National excluding items prohibited from being pledged and assets included in
the SEC Customer Protection Rule 15c3-3 formula. These borrowings are short-term
and generally do not extend beyond a few days. At March 30, 2001, National had
$5,000,000 in borrowings outstanding.
NOTE 3 - NOTES PAYABLE
In January 2001, the Company executed two promissory notes each in the amount of
$1,000,000. The notes bear interest annually at 9% with interest paid quarterly.
The principal of each note matures on January 25, 2004. In connection with each
note, warrants were issued for the purchase of 100,000 shares of the Company's
common stock at an exercise price of $5.00 per share. The warrants, which expire
on January 25, 2004, were valued at $50,000 each, and have been recorded as a
discount to the respective notes.
Additionally, on February 1, 2001, National executed a secured demand note
collateral agreement with an employee of the Company, to borrow securities as
collateral to be pledged through an unrelated broker-dealer, which have a
borrowing value totaling $1,000,000. This note bears interest annually at 5%
with interest paid monthly. The demand note matures on February 1, 2004. In
connection with the note, a warrant was issued for the purchase of 75,000 shares
of the Company's common stock at an exercise price of $5.00 per share. The
warrant, which expires on February 1, 2004, was valued at $37,500 and has been
recorded as a discount to the note.
NOTE 4 - OTHER ASSETS
During the quarter, the Company had its initial closing of Robotics Ventures
Fund I, L.P., a venture capital fund dedicated to investing in robotics and
artificial intelligence companies. The fund raised $5.1 million of which the
Company invested $265,000. The Company has recorded this investment in other
assets.
Additionally, the Company, through WestAmerica, invested $150,000 in the opening
of a branch office in Israel. The Company has recorded such amount as a prepaid
expense, which is being amortized during the current fiscal year.
NOTE 5 - EXTRAORDINARY ITEMS-EXTINGUISHMENT OF DEBT
In March 2001, the Company settled a note in full for $52,000. Under the terms
of the previous agreement, the note was to be repaid monthly through November
30, 2002. The debt was recorded on the books at $455,000 plus accrued interest
of $15,000. The Company has recorded the gain of $418,000 as an extraordinary
item on the Statements of Operations.
6
NOTE 6 - CONTINGENCIES
The Company has been named together with others as a defendant in a consolidated
class action lawsuit filed against Complete Management, Inc. No specific amount
of damages has been sought against National in the complaint. In June 2000,
National filed to dismiss this action. In March 2001, the United States District
Court for the Southern District of New York denied National's motion to dismiss.
National's answer to the complaint is due in May 2001, in which it will set
forth its defenses. National believes that its defenses are valid and will
vigorously defend this action.
The Company is a defendant in various other arbitrations and administrative
proceedings, lawsuits and claims, which in the aggregate seek general and
punitive damages. The Company believes that the resolution of these matters will
not have a material adverse effect. These matters arise out of the normal course
of business.
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 March 30, 2001 Compared to Quarter Ended March 31, 2000
- ---------------------------------------------------------------------
The Company's second quarter of fiscal 2001 resulted in a decrease in revenues
and to a lesser extent a decrease in expenses compared with the same period of
fiscal 2000. The decrease in revenues is due to continued slumping securities
markets, which significantly affected commission revenues. As a result, the
Company reported a net loss of $521,000 compared with net income of $1,219,000
for the second quarter of fiscal 2000. Included in the net loss for fiscal 2001
was a gain on extinguishment of debt totaling $418,000.
7
Revenues decreased $5,135,000 or 24% to $15,888,000 from $21,023,000 during
fiscal 2001 compared with fiscal 2000. This decrease is due mainly to the weaker
overall market compared with the strong market during the second quarter of
fiscal 2000. The mix of commission revenue and net dealer inventory gains
changed, mainly due to National's New York office, which focuses on principal
mark-ups and mark-downs as well as agency trading of fixed income products, OTC
and listed equities to various institutional clients, proprietary trading and
market making activities. Commission revenue decreased in the second quarter of
fiscal 2001 while net dealer inventory gains increased during the same period.
Commission revenue decreased $6,311,000 or 50%, to $6,339,000 from $12,650,000
during the second quarter fiscal 2001 compared with the second quarter of fiscal
2000. This decrease is due to the dramatic downturn in the market during the
period from a very strong market for the same period of fiscal 2000.
Net dealer inventory gains increased $1,906,000 or 42%, to $6,486,000 from
$4,580,000 during the second quarter fiscal 2001 compared with the second
quarter fiscal 2000. This increase was primarily due to the activities derived
from the New York office, which opened in October 2000.
Investment banking revenue decreased $479,000 or 60% to $313,000 in fiscal 2001
from $792,000 in fiscal 2000. National earned fees from advisory agreements
during the second quarter of fiscal 2001. During the same period in fiscal 2000,
National earned fees from advisory agreements and participated in two private
placements raising approximately $3.0 million in gross proceeds for clients.
Transfer fees decreased $188,000, or 45%, to $231,000 from $419,000 during the
second quarter fiscal 2001 compared to the second quarter fiscal 2000. This
decrease was due primarily to the decreased retail agency trade volume.
Other revenues increased $481,000 or 96% to $984,000 from $503,000. The main
reason for this increase is income from revenues generated from the proprietary
execution system developed in our New York office.
As expected, with the decrease in revenues, expenses also decreased. Total
expenses decreased $2,742,000, or 14%, to $17,027,000 from $19,769,000. The
largest component of this decrease was commission expense. Commission expense
decreased 32%, or $4,068,000, to $8,596,000 from $12,664,000 during the second
quarter fiscal 2001 compared with the second quarter fiscal 2000. This decrease
is consistent with the dramatic decrease in commission revenue. Although
revenues decreased, salaries increased $237,000, or 10%, to $2,565,000 from
$2,328,000. This increase was due to the increased number of employees in New
York City, the addition of new employees in the latter part of fiscal 2000 and
annual raises given during the first quarter of fiscal 2001. Overall, combined
commissions and salaries as a percentage of revenue decreased 1% to 71% from 70%
in the second quarter of fiscal 2001 and 2000, respectively.
8
As anticipated with the business expansion, expenses regarding communications,
occupancy, and clearing fees have increased from the second quarter fiscal 2000
to the second quarter fiscal 2001. The most significant expense increases were
clearing fees, communications and occupancy costs.
Clearing fees increased $637,000 or 105% to $1,243,000 from $606,000, mainly
relating to the increased business generated from the New York office.
Communication expenses increased $640,000 to $940,000 or 213% from $300,000 due
to the New York office as well as costs associated with a branch office opened
in Boca Raton, Florida during the first quarter of fiscal 2001. Occupancy costs
increased $268,000 or 29% to $1,208,000 from $940,000, again mainly relating to
the New York office.
Interest expense decreased during the second quarter of fiscal 2001 as compared
with the second quarter of fiscal 2000. Interest expense decreased $582,000 or
38% to $952,000 from $1,534,000. The decrease relates to lower customer balances
on which the Company pays interest, during the second quarter of fiscal 2001 as
compared with the second quarter of fiscal 2000. Customer credits at the end of
the second fiscal quarter 2001 totaled $64 million compared with $98 million at
the end the second quarter of fiscal 2000. Additionally, in fiscal 2000, the
Company recorded interest expense of $232,000 relating to original issue
discount. The decrease in interest expense was greater than the decrease in
interest revenue. Interest revenue decreased $544,000 or 26% to $1,535,000 from
$2,079,000 as a result of the decrease in margin debits of $35 million from the
end of fiscal 2000 to the end of fiscal 2001.
Overall, the diluted loss before the extraordinary gain was $0.42 per share as
compared with diluted earnings of $0.53 per share for the second quarters of
fiscal 2001 and 2000, respectively. The diluted loss after the extraordinary
gain was $0.24 per share as compared with diluted earnings of $0.53 per share
for the second quarters of fiscal 2001 and 2000, respectively.
Six Months Ended March 30, 2001 Compared to Six Months Ended March 31, 2000
- ---------------------------------------------------------------------------
The Company's first six months of fiscal 2001 resulted in a decrease in revenues
and to a lesser extent a decrease in expenses compared with the same period of
fiscal 2000. The decrease in revenue is due to continued slumping securities
markets, which significantly affected commission revenues. As a result, the
Company reported a net loss of $1,192,000 compared with net income of $1,624,000
for the first six months of fiscal 2000. Included in the net loss for fiscal
2001 was a gain on extinguishment of debt totaling $418,000.
Revenues decreased $5,173,000 or 15% to $30,320,000 from $35,493,000 during
fiscal 2001 compared with fiscal 2000. This decrease is due mainly to the weaker
overall market compared with the strong market during the first six months of
fiscal 2000. The mix of commission revenue and net dealer inventory gains
changed, mainly due to National's New York office, which focuses on principal
mark-ups and mark-downs as well as agency trading of fixed income products, OTC
and listed equities to various institutional clients, proprietary trading and
market making activities. Commission revenue decreased in the first six months
of fiscal 2001 while net dealer inventory gains increased during the same
9
period. Commission revenue decreased $9,453,000 or 43%, to $12,579,000 from
$22,032,000 during the first six months of fiscal 2001 compared with the first
six months of fiscal 2000. This decrease is due to the dramatic downturn in the
market during the period from a very strong market for the same period of fiscal
2000.
Net dealer inventory gains increased $5,256,000 or 83%, to $11,617,000 from
$6,361,000 during the first six months of fiscal 2001 compared with the first
six months of fiscal 2000. This increase was primarily due to the activities
derived from the New York office, which opened in October 2000.
Investment banking revenue decreased $1,110,000, or 55% to $898,000 from
$2,008,000. National earned fees from advisory agreements and participated in
two private placement raising approximately $1.0 million in gross proceeds
during the first six months of fiscal 2001 compared with participating in seven
private placements raising approximately $13.0 million in gross proceeds for
clients during the first six months of fiscal 2000.
Transfer fees decreased $205,000, or 29%, to $506,000 from $711,000 during the
first six months of fiscal 2001 compared to the first six months of fiscal 2000.
This decrease was due primarily to the decreased retail agency trade volume.
Other revenues increased $788,000 or 123% to $1,428,000 from $640,000. The main
reason for this increase is income from revenues generated from the proprietary
execution system developed in our New York office.
As expected, with the decrease in revenues expenses also decreased. Total
expenses decreased $1,704,000, or 5%, to $32,130,000 from $33,834,000. The
largest component of this decrease was commission expense. Commission expense
decreased 21%, or $4,469,000, to $16,723,000 from $21,192,000 during the first
six months of fiscal 2001 compared with the first six months of fiscal 2000.
This decrease is consistent with the dramatic decrease in commission revenue.
Although revenues decreased, salaries increased $850,000, or 22%, to $4,783,000
from $3,933,000. This increase was due to the increased number of employees in
New York City, the addition of new employees in the latter part of fiscal 2000
and annual raises given during the first quarter of fiscal 2001. Overall,
combined commissions and salaries, as a percentage of revenue, did not change
from 71% in the six months of fiscal 2001 and 2000, respectively.
As anticipated with the business expansion, expenses regarding communications,
occupancy, and clearing fees have increased from the first six months of fiscal
2000 to the first six months of fiscal 2001. The most significant expense
increases were clearing fees, communications and occupancy costs.
Clearing fees increased $1,026,000 or 84% to $2,253,000 from $1,227,000, mainly
relating to the increased business generated from the New York office.
Communication expenses increased $879,000 to $1,504,000 or 141% from $625,000
due to the New York office as well as costs associated with a branch office
10
opened in Boca Raton, Florida during the first quarter of fiscal 2001. Occupancy
costs increased $719,000 or 43% to $2,375,000 from $1,656,000, again mainly
relating to the New York office.
Interest expense decreased during the first six months of fiscal 2001 as
compared with the first six months of fiscal 2000. Interest expense decreased
$559,000 or 22% to $1,929,000 from $2,488,000. The decrease relates to lower
customer balances on which the Company pays interest, during the first six
months of fiscal 2001 as compared with the first six months of fiscal 2000.
Customer credits at the end of the first six months of fiscal 2001 totaled $64
million compared with $98 million at the end the first six months of fiscal
2000. Additionally, in fiscal 2000, the Company recorded interest expense of
$232,000 relating to original issue discount. The decrease in interest expense
was greater than the decrease in interest revenue. Interest revenue decreased
$449,000 or 12% to $3,292,000 from $3,741,000 as a result of the decrease in
margin debits of $35 million from the end of fiscal 2000 to the end of fiscal
2001.
Overall, the diluted loss before the extraordinary gain was $0.74 per share as
compared with diluted earnings of $0.81 per share for the first six months of
fiscal 2001 and 2000, respectively. The diluted loss after the extraordinary
gain was $0.55 per share as compared with diluted earnings of $0.81 per share
for the first six months of fiscal 2001 and 2000, 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. National
also 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. At March 30, 2001, National had a $5,000,000
secured line of credit with American National Bank and Trust Company of Chicago,
which is guaranteed by the Company. The line is subject to renewal on December
31, 2001. Borrowings bear interest at the call money rate plus 1%. Interest is
payable monthly. These borrowings are short-term and generally do not extend
beyond a few days. At March 30, 2001, National had $5,000,000 in borrowings
outstanding. Additionally, National may borrow up to 70% of the market value of
eligible securities pledged through an unrelated broker-dealer.
In January 2001, the Company executed two promissory notes each in the amount of
$1,000,000. The notes bear interest annually at 9% with interest paid quarterly.
The principal of each note matures on January 25, 2004. In connection with each
note, warrants were issued for the purchase of 100,000 shares of the Company's
common stock at an exercise price of $5.00 per share. The warrants, which expire
on January 25, 2004, were valued at $50,000 each, and have been recorded as a
discount to the respective notes.
11
Additionally, on February 1, 2001, National executed a secured demand note
collateral agreement with an employee of the Company, to borrow securities as
collateral to be pledged through an unrelated broker-dealer, which have a
borrowing value totaling $1,000,000. This note bears interest annually at 5%
with interest paid monthly. The demand note matures on February 1, 2004. In
connection with the note, a warrant was issued for the purchase of 75,000 shares
of the Company's common stock at an exercise price of $5.00 per share. The
warrant, which expires on February 1, 2004, was valued at $37,500 and has been
recorded as a discount to the note.
National, as a registered broker-dealer is subject to the SEC's Uniform Net
Capital Rule 15c3-1, which requires the maintenance of minimum net capital.
National has elected to use the alternative standard method permitted by the
rule. This requires that National maintain minimum net capital equal to the
greater of $250,000 or 2% of aggregate debit items. At March 30, 2001,
National's net capital exceeded the requirement by $5,122,000.
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 March 30, 2001, WestAmerica's net capital exceeded
the requirement by $146,000.
Canterbury, as a registered broker-dealer, is also subject to the SEC's Net
Capital Rule 15c3-1, which, under the standard method, requires that Canterbury
maintain minimum net capital equal to $5,000. At March 30, 2001, Canterbury's
net capital exceeded the requirement by $3,174.
Advances, dividend payments and other equity withdrawals from National,
WestAmerica or Canterbury 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.
The Company believes its internally generated liquidity, together with access to
external capital and debt resources will be sufficient to satisfy existing
operations. The $3,000,000 of additional capital raised by the Company, in the
second quarter of fiscal 2001, will be used primarily to support its expanded
National's market making activities. Furthermore, as the Company continues to
expand its operations, or acquires other businesses, the Company will likely
require additional capital. Additionally, the Company is rigorously reviewing
its overhead expenses, and in April 2001 implemented multiple expense reductions
including reductions in the salaries of members of management of 10% to 20%.
12
PART II
ITEM 1 - LEGAL PROCEEDINGS
During the quarter, there was a development in the following proceeding:
Complete Management, Inc., United States District Court for the Southern
District of New York. See disclosure in the Company's Form 10-K for the fiscal
year ended September 29, 2000.
In March 2001, the District Court denied National's motion to dismiss.
National's answer to the complaint is due in May 2001, in which it will set
forth its defenses. National believes that its defenses are valid and will
vigorously defend this action.
ITEM 4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Company held its annual meeting of shareholders on March 12, 2001. The
following lists all the proposals and the voting results.
The number of shares voted for and withhold authority in connection with the
election of the four nominees to the Board of Directors of the Company was as
follows:
Steven A. Rothstein
Withhold
For Authority
--- ----------
In Person 0 0
- -
By Proxy 1,533,039 616,702
--------- -------
Total 1,533,039 616,702
--------- -------
James C. Holcomb, Jr.
Withhold
For Authority
--- ----------
In Person 0 0
- -
By Proxy 1,553,502 596,239
--------- -------
Total 1,553,502 596,239
--------- -------
D. S. Patel
Withhold
For Authority
--- ----------
In Person 0 0
- -
By Proxy 1,552,039 597,702
--------- -------
Total 1,552,039 597,702
--------- -------
Gary A. Rosenberg
Withhold
For Authority
--- ----------
In Person 0 0
- -
By Proxy 1,532,502 617,239
--------- -------
Total 1,532,502 617,239
--------- -------
13
As a result of the separate approval of a By-Laws amendment providing for a
classified board of directors, Mr. Patel was elected for a term expiring at the
2002 Annual Meeting of Shareholders, Mr. Holcomb was elected for a term expiring
at the 2003 Annual Meeting, and Messrs. Rothstein and Rosenberg were elected for
terms expiring at the 2004 Annual Meeting.
The number of shares voted for, against and abstain in connection with the
proposal to amend the Company's By-Laws to provide for a classified Board of
Directors, was approved as follows:
For Against Abstain
In Person 0 0 0
- - -
By Proxy 1,032,204 690,850 12,667
--------- ------- ------
Total 1,032,204 690,850 12,667
--------- ------- ------
The number of shares voted for, against and abstain in connection with the
proposal to amend the Company's Certificate of Incorporation to require that
election of directors proceed by written ballot, was approved as follows:
For Against Abstain
In Person 0 0 0
- - -
By Proxy 1,603,642 540,422 5,677
--------- ------- -----
Total 1,603,642 540,422 5,677
--------- ------- -----
The number of shares voted for, against and abstain in connection with the
proposal to amend the Company's Certificate of Incorporation to provide that
actions by written consent of the shareholders require approval by all
shareholders, was approved as follows:
For Against Abstain
In Person 0 0 0
- - -
By Proxy 1,111,470 621,802 2,449
--------- ------- -----
Total 1,111,470 621,802 2,449
--------- ------- -----
The number of shares voted for, against and abstain in connection with the
proposal to amend the Company's Certificate of Incorporation in connection with
who can call a special meeting of the shareholders, which was not approved as
follows:
For Against Abstain
In Person 0 0 0
- - -
By Proxy 1,036,477 697,376 1,868
--------- ------- -----
Total 1,036,477 697,376 1,868
--------- ------- -----
14
The number of shares voted for, against and abstain in connection with the
proposal to amend the Company's Certificate of Incorporation to increase the
vote required to amend the By-Laws relating to approval of a business
combination, which was not approved as follows:
For Against Abstain
In Person 0 0 0
- - -
By Proxy 1,077,191 652,149 6,381
--------- ------- -----
Total 1,077,191 652,149 6,381
--------- ------- -----
The number of shares voted for, against and abstain in connection with approving
the Company's 2001 Stock Option Plan, was approved as follows:
For Against Abstain
In Person 0 0 0
- - -
By Proxy 1,013,913 715,550 6,258
--------- ------- -----
Total 1,013,913 715,550 6,258
--------- ------- -----
The number of shares voted for, against and abstain in connection with the
ratification of Feldman Sherb & Co., P.C. as the Company's independent public
accountants for the 2001 fiscal year, was approved as follows:
For Against Abstain
In Person 0 0 0
- - -
By Proxy 1,562,401 584,482 2,858
--------- ------- -----
Total 1,562,401 584,482 2,858
--------- ------- -----
ITEM 6 - EXHIBITS AND REPORTS ON FORM 8-K
a) Exhibits
3.4 The Company's Amended Certificate of Incorporation.
3.5 The Company's Amended and Restated By-Laws.
10.23 Form of Note payable agreement dated January 2001.
10.24 Secured Demand Note dated February 2001.
b) Reports on Form 8-K (None)
15
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
May 10, 2001 By: /s/ Steven A. Rothstein
-------------------------
Date Steven A. Rothstein, Chairman
and Chief Executive Officer
May 10, 2001 By: /s/ Robert H. Daskal
-------------------------
Date Robert H. Daskal, Senior Vice
President, Chief Financial Officer,
Secretary and Treasurer
May 10, 2001 By: /s/ David M. Williams
-------------------------
Date David M. Williams
Corporate Controller and
Chief Accounting Officer
16