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 31, 2002 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, 2002 was 2,274,449.
1
OLYMPIC CASCADE FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
ASSETS
March 31, September 28,
2002 2001
(unaudited) (see Note below)
-------------- --------------
CASH, subject to immediate withdrawal $ 99,000 $ 150,000
CASH, segregated in escrow 330,000 435,000
CASH, CASH EQUIVALENTS AND SECURITIES - 37,188,000
DEPOSITS 1,850,000 4,654,000
RECEIVABLES
Customers - 29,755,000
Brokers and dealers 1,212,000 669,000
Other 1,431,000 836,000
SECURITIES HELD FOR RESALE, at market 1,185,000 1,131,000
FIXED ASSETS, net 465,000 841,000
OTHER ASSETS 2,434,000 1,940,000
-------------- --------------
$ 9,006,000 $ 77,599,000
============== ==============
LIABILITIES AND STOCKHOLDERS' EQUITY
CASH OVERDRAFT $ 304,000 $ 1,556,000
PAYABLES
Customers - 54,511,000
Brokers and dealers 21,000 10,020,000
SECURITIES SOLD, BUT NOT YET PURCHASED, at market 280,000 792,000
ACCOUNTS PAYABLE, ACCRUED EXPENSES AND OTHER LIABILITIES 2,430,000 1,963,000
BANK LINE OF CREDIT - 3,500,000
NOTES PAYABLE 4,405,000 4,035,000
CAPITAL LEASE PAYABLE 173,000 300,000
NET LIABILITIES FROM DISCONTINUED OPERATIONS - 300,000
-------------- --------------
7,613,000 76,977,000
-------------- --------------
CONTINGENCIES
STOCKHOLDERS' EQUITY
Preferred stock, $.01 par value, 100,000 shares authorized,
23,225 shares issued and outstanding at March 31, 2002 - -
Common stock, $.02 par value, 60,000,000 shares authorized,
2,274,449 and 2,236,449 shares issued and outstanding at
March 31, 2002 and September 28, 2001, respectively. 45,000 45,000
Additional paid-in capital 11,584,000 9,313,000
Accumulated deficit (10,236,000) (8,736,000)
-------------- --------------
1,393,000 622,000
-------------- --------------
$ 9,006,000 $ 77,599,000
============== ==============
Note: The balance sheet at September 28, 2001 has been derived from the audited
financial statements at that date.
See notes to consolidated financial statements
2
OLYMPIC CASCADE FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
-------- Quarter Ended--------- -------Six Months Ended----------
March 31, March 30, March 31, March 30,
2002 2001 2002 2001
---------------- ------------- --------------- ---------------
REVENUES:
Commissions $ 5,527,000 $5,865,000 $ 11,219,000 $ 11,532,000
Net dealer inventory gains 4,297,000 6,479,000 9,155,000 11,610,000
Interest 338,000 1,535,000 1,077,000 3,290,000
Transfer fees 390,000 231,000 775,000 506,000
Investment banking 82,000 204,000 183,000 734,000
Other 336,000 972,000 846,000 1,411,000
---------------- ------------- --------------- ---------------
TOTAL REVENUES 10,970,000 15,286,000 23,255,000 29,083,000
---------------- ------------- --------------- ---------------
EXPENSES:
Commissions 6,689,000 8,255,000 14,227,000 16,039,000
Salaries 1,481,000 2,457,000 2,759,000 4,565,000
Clearing fees 1,505,000 1,194,000 2,613,000 2,158,000
Communications 654,000 892,000 1,470,000 1,422,000
Occupancy costs 943,000 1,161,000 1,919,000 2,249,000
Interest 52,000 952,000 444,000 1,929,000
Professional fees 138,000 458,000 420,000 880,000
Taxes, licenses, registration 138,000 205,000 228,000 434,000
Other 486,000 751,000 1,016,000 1,047,000
---------------- ------------- --------------- ---------------
TOTAL EXPENSES 12,086,000 16,325,000 25,096,000 30,723,000
---------------- ------------- --------------- ---------------
Loss from continuing operations before (1,116,000) (1,039,000) (1,841,000) (1,640,000)
income taxes and extraordinary item
Benefit for income taxes 52,000 200,000 40,000 200,000
---------------- ------------- --------------- ---------------
Loss from continuing operations (1,064,000) (839,000) (1,801,000) (1,440,000)
---------------- ------------- --------------- ---------------
Income (loss) from discontinued operations, net of tax - (100,000) 300,000 (170,000)
Income from extraordinary item - gain from
extinguishment of debt, net of taxes - 418,000 - 418,000
---------------- ------------- --------------- ---------------
NET LOSS $ (1,064,000) $ (521,000) $ (1,501,000) $ (1,192,000)
================ ============= =============== ===============
NET INCOME (LOSS) PER COMMON SHARE
Basic:
Loss from continuing operations $ (0.48) $ (0.38) $ (0.81) $ (0.66)
Income (loss) from discontinued operations - (0.05) 0.14 (0.08)
Extraordinary gain - 0.19 - 0.19
---------------- ------------- --------------- ---------------
Net Loss $ (0.48) $ (0.24) $ (0.67) $ (0.55)
---------------- ------------- --------------- ---------------
Diluted:
Loss from continuing operations $ (0.48) $ (0.38) $ (0.81) $ (0.66)
Income (loss) from discontinued operations - (0.05) 0.14 (0.08)
Extraordinary gain - 0.19 - 0.19
---------------- ------------- --------------- ---------------
Net Loss $ (0.48) $ (0.24) $ (0.67) $ (0.55)
---------------- ------------- --------------- ---------------
Weighted average number of shares outstanding
Basic 2,236,449 2,214,048 2,236,449 2,186,308
---------------- ------------- --------------- ---------------
Diluted 2,236,449 2,214,048 2,236,449 2,186,308
---------------- ------------- --------------- ---------------
See notes to consolidated financial statements
3
OLYMPIC CASCADE FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
---------Six Months Ended---------
March 31, March 30,
2002 2001
------------- -------------
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss $ (1,501,000) $ (1,192,000)
Adjustments to reconcile net loss to net cash
provided by (used in) operating activities
Depreciation and amortization 428,000 278,000
Compensation related to issuance of stock options - 83,000
Gain on extraordinary item - extinguishment of debt - (418,000)
Change in net assets (liabilities) of discontinued operations (300,000) 223,000
Changes in assets and liabilities
Cash, cash equivalents, securities and escrow 37,293,000 (20,996,000)
Deposits 2,804,000 (1,903,000)
Receivables 28,617,000 21,699,000
Securities held for resale (54,000) (550,000)
Other assets (494,000) (2,595,000)
Payables (64,042,000) (2,536,000)
Securities sold, but not yet purchased (512,000) 159,000
------------- -------------
Net cash provided by (used in) operating activities 2,239,000 (7,748,000)
------------- -------------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of fixed assets (52,000) (155,000)
------------- -------------
CASH FLOWS FROM FINANCING ACTIVITIES
Borrowings (payments) on line of credit (3,500,000) 5,000,000
Payments on capital lease (127,000) (170,000)
Proceeds from notes payable 1,598,000 3,000,000
Payments on notes payable (179,000) (52,000)
Decrease in cash overdraft (1,252,000) -
Net proceeds from issuance of preferred stock 1,222,000 -
Exercise of stock options and warrants - 275,000
------------- -------------
Net cash provided by (used in) financing activities (2,238,000) 8,053,000
------------- -------------
INCREASE (DECREASE) IN CASH (51,000) 150,000
CASH BALANCE
Beginning of the period 150,000 2,349,000
------------- -------------
End of the period $ 99,000 $ 2,499,000
============= =============
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash paid during the period for
Interest $ 466,000 $ 1,896,000
============= =============
Income taxes $ 12,000 $ 324,000
============= =============
SUPPLEMENTAL DISCLOSURES OF NONCASH INVESTING AND
FINANCING ACTIVITIES
Exchange of notes payable for preferred stock $ 1,000,000 $ -
============= =============
Exchange of notes payable for common stock $ 49,000 $ -
============= =============
See notes to consolidated financial statements
4
OLYMPIC CASCADE FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2002
(UNAUDITED)
NOTE 1 - BASIS OF PRESENTATION
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 31, 2002 and March 30, 2001 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 28, 2001.
Cash and cash segregated in escrow have been reclassified in prior periods to
conform to the current period's presentation. The Company now reports based on a
calendar year ending in September, versus a fifty-two or fifty-three week year,
ending on the last Friday in September.
NOTE 2 - LINE OF CREDIT
In January 2001, National entered into a $5,000,000 secured line of credit with
American National Bank and Trust Company of Chicago, that is guaranteed by the
Company. During the first quarter of fiscal 2002, National entered into a
Forbearance Agreement with American National Bank based on an event of default
according to the original credit agreement. The Forbearance Agreement amended
the line of credit to $4,000,000. Additionally, Steven A. Rothstein and Mark
Goldwasser each signed a Guaranty unconditionally guaranteeing certain
indebtedness of the Company to American National Bank. These guarantees
effectively terminated in December 2001. The line of credit was fully repaid in
December 2001.
NOTE 3 - INVESTMENT TRANSACTION
On December 28, 2001, the Company completed a series of transactions under which
certain new investors (collectively, the "Investors") have obtained a
significant ownership in the Company through a $1,072,500 investment in the
Company and by purchasing a majority of the shares held by Steven A. Rothstein
and family, the former Chairman, Chief Executive Officer and principal
shareholder of the Company (the "Investment Transaction"). The Investors include
Triage Partners LLC ("Triage"), an affiliate of Sands Brothers & Co., Ltd., a
5
New York Stock Exchange ("NYSE") member firm, and One Clark LLC ("One Clark"),
an affiliate of Mark Goldwasser, the current Chief Executive Officer and
President of the Company. The Investors purchased an aggregate of $1,072,500 of
Series A Preferred Stock from the Company, which is convertible into Common
Stock at a price of $1.50 per share. The Company incurred $100,000 of legal
costs related to these capital transactions. In connection with the Investment
Transaction, Triage also purchased 285,000 shares of Common Stock from Mr.
Rothstein and his affiliates at a price of $1.50 per share. In addition, Mr.
Rothstein and his affiliates have granted Triage a three-year voting proxy on
the balance of their Common Stock (274,660 shares). As part of the Investment
Transaction, the Investors placed $500,000 into an escrow account to purchase
additional shares of Series A Preferred Stock in the event such funds are needed
by the Company. As a result of the losses incurred during the first six months
of fiscal 2002, $250,000 in February 2002 and $250,000 in April 2002 were drawn
from the escrow account and invested into the Company on the same terms.
Concurrent with the Investment Transaction, two unrelated individual noteholders
holding $2.0 million of the Company's debt converted one-half of their debt into
the same class of Series A Preferred Stock that was sold in the Investment
Transaction. The noteholders also had 100,000 of their 200,000 warrants to
acquire shares of common stock repriced from an exercise price of $5.00 per
share to $1.75 per share.
NOTE 4 - CLOSING OF WESTAMERICA INVESTMENT GROUP
In December 2001, WestAmerica voluntarily withdrew its membership with the NASD
and ceased to conduct business as a broker-dealer. On December 31, 2001
WestAmerica filed for Chapter 7 Bankruptcy protection in accordance with the
U.S. Bankruptcy Code. WestAmerica has been operated as a separate legal entity,
and the Company believes it will not have any ongoing liability for any unpaid
obligations of WestAmerica. Consequently, in the first quarter of fiscal 2002,
the Company recorded a gain of $300,000 from discontinued operations related to
the write-off of WestAmerica's net liabilities. The accompanying financial
statements have been reclassified to reflect WestAmerica as discontinued
operations for all periods presented.
NOTE 5 - CONTINGENCIES
National 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 the Company in the complaint. In June 2000,
the Company filed a motion to dismiss this action. In March 2001, the United
States District Court for the Southern District of New York denied the Company's
motion to dismiss. In May 2001, the Company submitted its answer to the
complaint in which it set forth its defenses. In November 2001, the plaintiffs
filed a motion to certify the class. The Company will contest class
certification and diligently pursue its defenses.
A former executive officer of the Company, Craig M. Gould, has commenced an
action against the Company claiming a breach of his employment contract, and
seeking approximately $575,000 in damages. The Company believes it has
meritorious defenses and intends to vigorously defend this action, although the
ultimate outcome of the matter cannot be determined at this time.
6
The Company is a defendant in various other arbitrations and administrative
proceedings, lawsuits and claims, which in the aggregate seek general and
punitive damages approximating $9,500,000. These matters arise out of the normal
course of business.
NOTE 6 - ISSUANCE OF WARRANTS
In November 2001 the Company granted 5,000 warrants to purchase its common stock
exercisable at $5.00 per share to the individual retirement account of the
Company's former chairman and chief executive officer pursuant to the terms of a
$50,000 loan made in August 2001.
NOTE 7 - COMMON STOCK
On March 12, 2002, the stockholders of the Company approved an amendment to the
Company's Certificate of Incorporation to increase the number of authorized
shares of common stock from 6,000,000 to 60,000,000 shares.
On March 31, 2002 an unrelated noteholder holding $49,000 of the Company's debt
converted its debt into 38,000 shares of common stock of the Company.
NOTE 8 -CLEARING AGREEMENT
In connection with the Clearing Agreement with First Clearing Corporation,
additional borrowings were available to the Company upon the attainment by
National of certain volume and profitability goals. In finalizing the
conversion, a dispute arose among the Company, US Clearing (one of its former
clearing firms) and First Clearing, regarding the responsibility for debit
balances in certain trading accounts. The three parties agreed to share the
expense equally. The Company's share of this settlement, $548,000, was advanced
to the Company by First Clearing and added to the existing promissory note. As
part of the settlement, the minimum level of stockholders equity required to be
maintained by the Company under the promissory note was reduced from $2,000,000
to $1,000,000 and no further borrowings are available under the promissory note,
as amended.
7
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 Annual Report on Form 10-K, filed with the Securities and Exchange
Commission on December 28, 2001 and the Company's 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 31, 2002 Compared to Quarter Ended March 30, 2001
- ---------------------------------------------------------------------
The results discussed below have been restated to reflect a discontinuation of
operations for the Company's subsidiary, WestAmerica.
The Company's second quarter of fiscal 2002 resulted in a decrease in revenues
and expenses compared with the same period of fiscal 2001. The decrease in
revenues is due to the continued slumping securities markets, that significantly
affected revenues. In March 2002, the Company incurred a one time clearing
charge of $548,000 that significantly increased the net loss for the quarter. As
a result, the Company reported a net loss of $1,064,000 compared with a net loss
of $521,000 for the second quarter of fiscal 2001. Included in the net loss for
fiscal 2001 was a gain on extinguishment of debt totaling $418,000. The net loss
from continuing operations for the second quarter of fiscal 2002, excluding the
one time clearing charge, income taxes and extraordinary item, decreased by
$471,000 to $568,000 compared to $1,039,000 in 2001. This improvement is a
result of management's efforts to reduce the fixed costs of the Company.
Total revenues decreased $4,316,000 or 28% to $10,970,000 from $15,286,000
during fiscal 2002 compared with fiscal 2001. This decrease is due mainly to the
weaker overall securities market, and a decrease in net dealer inventory gains
and interest income.
Commission revenues decreased $338,000, or 6% to $5,527,000 in the second
quarter of fiscal 2002 as compared to $5,865,000 in the second quarter of fiscal
2001.
Net dealer inventory gains decreased $2,182,000, or 34%, to $4,297,000 in the
second quarter of fiscal 2002 from $6,479,000 in the first quarter of fiscal
2001. The decrease is due to lower trading volume and a reduction in market
making activities.
8
Interest income decreased $1,197,000, or 78%, to $338,000 in the second quarter
of fiscal 2002 from $1,535,000 in the second quarter of fiscal 2001. This
decrease is offset by the corresponding decrease in interest expense, which
decreased $900,000, or 95%, to $52,000 in the second quarter of fiscal 2002 from
$952,000 in the second quarter of fiscal 2001. The decrease in both interest
income and interest expense is attributable to a decrease in the amount of
customer credits and customer debits at National, the conversion of its clearing
business in December 2001 and a decrease in interest rates from 2002 to 2001.
Investment banking revenue decreased $122,000, or 60%, to $82,000 in the second
quarter of fiscal 2002 from $204,000 in the second quarter of fiscal 2001. The
decrease is due to the continued down-turn in the capital markets which has
limited the Company's ability to conduct private placements and other investment
banking advisory services. Other revenues decreased $636,000, or 65%, to
$336,000 in the second quarter of fiscal 2002 from $972,000 in the second
quarter of fiscal 2001. The decrease is due to a decline in various types of fee
income, mainly from trading activities attributable to the New York City office.
In proportion with the 28% decrease in total revenues, total expenses decreased
26% to $12,086,000 in the second quarter of fiscal 2002 from $16,325,000 in the
second quarter of fiscal 2001.
Commission expense, which includes expenses related to commission revenue, net
dealer inventory gains and investment banking, decreased $1,566,000, or 19%, to
$6,689,000 in the second quarter of fiscal 2002 from $8,255,000 in the second
quarter of fiscal 2001. This is consistent with the decrease in combined
revenues from commissions, net dealer inventory gains and investment banking
during the same period. Salaries decreased $976,000, or 40%, to $1,481,000 from
$2,457,000. This decrease is due to a reduction in senior management salaries
and a reduction in staff made possible by clearing through First Clearing
Corporation, as opposed to self-clearing. Overall, combined commissions and
salaries as a percentage of total revenues increased slightly to 74% from 70% in
the second quarter of fiscal 2002 compared to the second quarter of fiscal 2001.
This increase is due to the 78% reduction in interest income associated with no
longer being a self clearing firm.
Clearing fees increased $311,000, or 26%, to $1,505,000 from $1,194,000. The
increase is due to a one time clearing charge of $548,000. This charge resulted
from a dispute among the Company, one of its former clearing firms, and its
current clearing firm regarding the responsibility for debit balances in certain
trading accounts. The three parties agreed to share the expense equally.
Communication, occupancy, professional fees and other expenses all decreased as
a result of slower markets and management's efforts to reduce expenses.
Communication expenses decreased $238,000 to $654,000, or 27%, from $892,000 as
a result of cost cutting efforts. Occupancy costs decreased $218,000, or 19%, to
$943,000 from $1,161,000 also as a result of cost cutting efforts. Professional
fees decreased $320,000, or 70%, to $138,000 from $458,000 in the second quarter
of fiscal 2002 compared to 2001. Other expenses decreased $265,000 or 35%, to
$486,000 from $751,000 in the second quarter of fiscal 2002 compared to 2001.
9
Due to the continued slumping securities markets, the Company reported a net
loss from continuing operations of $1,064,000 in the second quarter of fiscal
2002 compared to a net loss from continuing operations before extraordinary item
of $839,000 in the second quarter of fiscal 2001. Overall, the diluted loss from
continuing operations before extraordinary items was $.48 per share as compared
with a net loss of $.38 per share for the second quarter ended March 31, 2002
and March 30, 2001, respectively.
On December 31, 2001, WestAmerica, a subsidiary of the Company, filed for
Chapter 7 Bankruptcy protection in accordance with the U.S. Bankruptcy Code.
WestAmerica realized a loss of $100,000 in the second quarter of fiscal 2001, on
revenues of $602,000.
Six Months Ended March 31, 2002 Compared to Six Months Ended March 30, 2001
- ---------------------------------------------------------------------------
The results discussed below have been restated to reflect a discontinuation of
operations for the Company's subsidiary, WestAmerica.
The Company's first six months of fiscal 2002 resulted in a decrease in revenues
and a corresponding decrease in expenses compared with the same period of fiscal
2001. The decrease in revenues is due to the continued slumping securities
markets. As a result, the Company reported a net loss of $1,501,000 compared
with a net loss of $1,192,000 for the first six months of fiscal 2001.
Total revenues decreased $5,828,000 or 20% to $23,255,000 from $29,083,000
during fiscal 2002 compared with fiscal 2001. This decrease is due mainly to the
weaker overall securities markets that resulted in a decrease in net dealer
inventory gains, investment banking and interest income revenues.
Commission revenues decreased $313,000, or 3% to $11,219,000 in the first six
months of fiscal 2002 as compared to $11,532,000 in the same period of fiscal
2001.
Net dealer inventory gains decreased $2,455,000, or 21%, to $9,155,000 in the
second quarter of fiscal 2002 from $11,610,000 in the first six months of fiscal
2001. The decrease is due to lower trading volume and a reduction in market
making activities.
Interest income decreased $2,213,000, or 67%, to $1,077,000 in the first six
months of fiscal 2002 from $3,290,000 in the first six months of fiscal 2001.
This decrease is offset by the corresponding decrease in interest expense, which
decreased $1,485,000, or 77%, to $444,000 in the first six months of fiscal 2002
from $1,929,000 in the first six months of fiscal 2001. The decrease in both
interest income and interest expense is attributable to a decrease in the amount
of customer credits and customer debits at National, the conversion of its
clearing business in December 2001 and a decrease in interest rates from 2002 to
2001.
Investment banking revenue decreased $551,000, or 75%, to $183,000 in the first
six months of fiscal 2002 from $734,000 in the first six months of fiscal 2001.
The decrease is due to the continued down-turn in the capital markets which has
limited the Company's ability to conduct private placements and other investment
10
banking advisory services. Other revenues decreased $565,000, or 40%, to
$846,000 in the first six months of fiscal 2002 from $1,411,000 in the first six
months of fiscal 2001. The decrease is due to a decline in various types of fee
income, mainly from trading activities attributable to the New York City office.
In comparison with the 20% decrease in total revenues, total expenses decreased
18% to $25,096,000 during the first six months of fiscal 2002 compared to
$30,723,000 in the first six months of fiscal 2001.
Commission expense, which includes expenses related to commission revenue, net
dealer inventory gains and investment banking, decreased $1,812,000, or 11%, to
$14,227,000 in the first six months of fiscal 2002 from $16,039,000 in the same
period of fiscal 2001. Salaries decreased $1,806,000, or 40%, to $2,759,000 from
$4,565,000. This decrease is due to a reduction in senior management salaries
and a reduction in staff made possible by clearing through First Clearing
Corporation, as opposed to self-clearing. Overall, combined commissions and
salaries as a percentage of total revenues increased slightly to 73% from 71% in
the first six months of fiscal 2002 compared to the same period in 2001.
Clearing fees increased $455,000, or 21%, to $2,613,000 from $2,158,000. The
increase is mainly due to the one time clearing charge of $548,000. This charge
resulted from a dispute among the Company, one of its former clearing firms, and
its current clearing firm regarding the responsibility for debit balances in
certain trading accounts. The three parties agreed to share the expense equally.
Communication expenses increased slightly to $1,470,000 from $1,422,000 in the
first six months of fiscal 2002 compared to fiscal 2001. The net increase is due
in part to the expansion of the Company's New York City and Boca Raton offices
that were not fully operational during the first six months of fiscal 2001
offset by management's efforts to reduce communication expenses during fiscal
2002. These efforts have resulted in an 20% decrease in communication expenses
from $816,000 in the first quarter of fiscal 2002 compared to $654,000 in the
second quarter of fiscal 2002.
As a result of cost cutting efforts, occupancy, professional fees and other
expenses all decreased during the first six months of fiscal 2002 compared to
the same period in 2001. Occupancy costs decreased $330,000, or 15%, to
$1,919,000 from $2,249,000. Professional fees decreased $460,000, or 52%, to
$420,000 from $880,000 in the first six months of fiscal 2002 compared to 2001.
Other expenses decreased $31,000 or 3%, to $1,016,000 from $1,047,000 in the
first six months of fiscal 2002 compared to 2001.
Due to the continued slumping securities markets, the Company reported a net
loss from continuing operations of $1,801,000 in the first six months of of
fiscal 2002 compared to a net loss from continuing operations before
extraordinary item of $1,440,000 in the first six months of fiscal 2001.
Overall, the diluted loss from continuing operations before extraordinary items
was $.81 per share as compared with a net loss of $.66 per share for the six
months ended March 31, 2002 and March 30, 2001, respectively.
11
On December 31, 2001, WestAmerica, a subsidiary of the Company, filed for
Chapter 7 Bankruptcy protection in accordance with the U.S. Bankruptcy Code.
WestAmerica realized a loss of $170,000 in the first six months of fiscal 2001,
on revenues of $1,238,000. In the first quarter of fiscal 2002, the Company
recorded a gain of $300,000 from discontinued operations related to the
write-off of WestAmerica's net liabilities.
Liquidity and Capital Resources
As with most financial services firms, substantial portions of the Company's
assets are liquid, consisting mainly of cash or assets readily convertible into
cash. While acting as a self-clearing firm, these assets were financed primarily
by National's interest bearing and non-interest bearing customer credit
balances, other payables and equity capital. National also utilized short-term
bank financing to supplement its ability to meet day-to-day operating cash
requirements.
As a result of the losses throughout fiscal year 2001, notably those of the
fourth quarter, attributable in part to the unprecedented events in September
2001, the Company concluded that existing capital would not be sufficient to
satisfy existing operations. The Company explored various transactions to
finance the Company's operations. On December 28, 2001, the Company completed a
series of transactions (the "Investment Transaction") that are more fully
described in Footnote 3.
In August 2001, the Company entered into an agreement with First Clearing
Corporation ("First Clearing"), an affiliate of First Union Securities, Inc.,
under which First Clearing will provide clearing and related services for
National. The Clearing Agreement expands the products and services capabilities
for National's retail and institutional business, enables National to
consolidate its existing clearing operations and reduces fixed overhead
associated with its self-clearing activities.
The conversion to First Clearing began in December 2001 and was completed in
March 2002. In connection with the Clearing Agreement, the Company entered into
a ten-year promissory note with First Clearing under which the Company
immediately borrowed $1,000,000. The funds were contributed by the Company to
National, and are being used as a deposit to secure National's performance under
the Clearing Agreement. The Clearing Agreement also provided for another
$1,000,000 loan that was extended to the Company upon substantial completion of
the conversion on December 31, 2001. The amount of the note that is repayable on
each anniversary date is the principal and interest then outstanding divided by
the remaining life of the note. Borrowings under the promissory note are
forgivable based on certain business performance and trading volumes of the
Company over the life of the loan.
In connection with the Clearing Agreement, additional borrowings were available
to the Company upon the attainment by National of certain volume and
profitability goals. In finalizing the conversion, a dispute arose among the
Company, US Clearing (one of its former clearing firms) and First Clearing,
regarding the responsibility for debit balances in certain trading accounts. The
three parties agreed to share the expense equally. The Company's share of this
settlement, $548,000, was advanced to the Company by First Clearing and added to
the existing promissory note. As part of the settlement, the minimum level of
stockholders equity required to be maintained by the Company under the
promissory note was reduced from $2,000,000 to $1,000,000 and no further
borrowings are available under the promissory note, as amended. Additionally,
National received its $1,000,000 clearing deposit from US Clearing.
12
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 31, 2002,
National's net capital exceeded the requirement by approximately $1.6 million.
In December 2001, WestAmerica voluntarily withdrew its membership with the NASD
and ceased to conduct business as a broker-dealer. On December 31, 2001
WestAmerica filed for Chapter 7 Bankruptcy protection in accordance with the
U.S. Bankruptcy Code. WestAmerica has been operated as a separate legal entity,
and the Company believes it will not have any ongoing liability for any unpaid
obligations of WestAmerica.
Canterbury Securities Corporation ("Canterbury"), a wholly owned subsidiary of
the Company, is a registered as a broker-dealer with the SEC and is licensed in
Illinois. Canterbury is a member of the NASD, the MSRB and the SIPC. Canterbury
formerly engaged in private placement transactions. Canterbury has no retail
customer accounts and, therefore, operates pursuant to the exemptive provisions
of SEC Rule 15c3-3(k)(2)(i). Since acquisition in June 2000, Canterbury has had
no activity. The Company has agreed to sell Canterbury for its book value of
approximately $11,000 to Mr. Rothstein. At March 31, 2002, Canterbury's net
capital exceeded the requirement by $2,800.
Advances, dividend payments and other equity withdrawals from the Company's
subsidiaries 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 the Company .
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.
As of the period ended March 31, 2002, total assets were $9.0 million compared
to total assets of $77.6 million as of the fiscal year ended September 28, 2001.
This material decrease in the Company's assets is due to the change in the
Company's clearing arrangements. Customer assets that were included in the
fiscal year end 2001 balance sheet are no longer accounted for on the Company's
books. These assets are now held at First Clearing as part of the new clearing
arrangement.
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PART II
ITEM 1 - LEGAL PROCEEDINGS
A former executive officer of the Company, Craig M. Gould, has commenced an
action against the Company claiming a breach of his employment contract, and
seeking approximately $575,000 in damages. The Company believes it has
meritorious defenses and intends to vigorously defend this action, although the
ultimate outcome of the matter cannot be determined at this time.
For a detailed discussion of the Company's other legal proceedings, please refer
to the Company's Annual Report on Form 10-K for the fiscal year ended September
28, 2001.
ITEM 4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Company held its annual meeting of shareholders on March 12, 2002. 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 two nominees as Class I Directors to the Board of Directors of
the Company was as follows:
Steven B. Sands
For Withhold Authority
In Person 0 0
- -
By Proxy 3,294,289 44,639
--------- ------
Total 3,294,289 44,639
--------- ------
Martin S. Sands
For Withhold Authority
In Person 0 0
- -
By Proxy 3,294,289 44,639
--------- ------
Total 3,294,289 44,639
--------- ------
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
number of shares of Common Stock that the Company is authorized to issue from
6,000,000 to 60,000,000, was approved as follows:
14
For Against Abstain
In Person 0 0 0
- - -
By Proxy 3,184,315 132,795 21,818
--------- ------- ------
Total 3,184,315 132,795 21,818
--------- ------- ------
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 2002 fiscal year, was approved as follows:
For Against Abstain
In Person 0 0 0
- - -
By Proxy 3,297,554 34,674 6,700
--------- ------ -----
Total 3,297,554 34,674 6,700
--------- ------ -----
ITEM 6 - EXHIBITS AND REPORTS ON FORM 8-K
a) Exhibits
3.4 Certificate of Amendment to the Certificate of Incorporation.
b) Reports on Form 8-K
The Company filed a report on Form 8-K dated April 10, 2002 regarding the
resignation of a member of the board of directors.
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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 13, 2002 By:/s/ Mark Goldwasser
--------------------
Date Mark Goldwasser
President and Chief Executive Officer
May 13, 2002 By:/s/ Robert H. Daskal
-------------------------
Date Robert H. Daskal
Acting Chief Financial Officer
16