UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarter Ended December 31, 1997 Commission File Number 001-12629
OLYMPIC CASCADE FINANCIAL CORPORATION
-------------------------------------
(Exact name of registrant as specified)
DELAWARE 36-4128138
- ----------------------------- ------------------------------
(State of other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1001 Fourth Avenue, Suite 2200, Seattle, Washington 98154
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(Address of principal executive offices) (Zip code)
Registrant's telephone number, including area code: (206) 622-7200
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
--------
The number of shares outstanding of registrant's Common stock, par value $0.02
per share, at February 10, 1998 was 1,516,504.
1
OLYMPIC CASCADE FINANCIAL CORPORATION
CONSOLIDATED STATEMENT OF FINANCIAL CONDITION
ASSETS
December 31, September 26,
1997 1997
(unaudited) (audited)
--------------- --------------
CASH, subject to immediate withdrawal $ 991,000 $ 979,000
CASH, CASH EQUIVALENTS AND SECURITIES 36,571,000 30,934,000
DEPOSITS 818,000 1,292,000
RECEIVABLES
Customers 21,646,000 22,114,000
Brokers and dealers 1,620,000 1,847,000
Other 657,000 481,000
Income tax receivable 115,000 597,000
SECURITIES HELD FOR RESALE, at market 3,402,000 2,066,000
FIXED ASSETS, net 1,561,000 1,528,000
GOODWILL, net 1,371,000 1,391,000
OTHER ASSETS 1,076,000 545,000
--------------- --------------
$ 69,828,000 $ 63,774,000
--------------- --------------
--------------- --------------
LIABILITIES AND STOCKHOLDERS' EQUITY
BANK LINE OF CREDIT $ 2,500,000 $ -
PAYABLES
Customers 54,016,000 48,828,000
Brokers and dealers 364,000 1,752,000
SECURITIES SOLD, BUT NOT YET PURCHASED, at market 442,000 1,047,000
ACCOUNTS PAYABLE, ACCRUED EXPENSES AND OTHER LIABILITIES 2,855,000 3,634,000
NOTES PAYABLE 1,726,000 909,000
--------------- --------------
61,903,000 56,170,000
--------------- --------------
CONTINGENCIES
STOCKHOLDERS' EQUITY
Preferred stock, $.01 par value, 2,000,000 shares authorized,
none issued and outstanding - -
Common stock, $.02 par value, 10,000,000 shares authorized, 1,516,504 and
1,444,205 shares issued and outstanding, respectively 30,000 29,000
Additional paid-in capital 5,524,000 5,045,000
Retained earnings 2,371,000 2,530,000
--------------- --------------
7,925,000 7,604,000
--------------- --------------
$ 69,828,000 $ 63,774,000
--------------- --------------
--------------- --------------
2
The accompanying notes are an integral part of these financial statements.
OLYMPIC CASCADE FINANCIAL CORPORATION
CONSOLIDATED STATEMENT OF OPERATIONS
(UNAUDITED)
-------Quarter Ended-------
December 31, December 31,
1997 1996
------------- --------------
REVENUES:
Commissions $ 5,803,000 $ 3,888,000
Net dealer inventory gains (losses) 1,145,000 (253,000)
Interest 1,049,000 900,000
Transfer fees 207,000 158,000
Underwriting 6,967,000 4,780,000
Other 231,000 58,000
------------- --------------
TOTAL REVENUES 15,402,000 9,531,000
------------- --------------
EXPENSES:
Commissions 8,315,000 5,796,000
Salaries 2,894,000 1,056,000
Clearing fees 429,000 131,000
Communications 499,000 176,000
Occupancy costs 899,000 416,000
Interest 691,000 537,000
Professional fees 334,000 113,000
Taxes, licenses, registration 241,000 207,000
Other 790,000 216,000
------------- --------------
TOTAL EXPENSES 15,092,000 8,648,000
------------- --------------
Income from operations before income taxes 310,000 883,000
Provision for income taxes (118,000) (302,000)
------------- --------------
NET INCOME $ 192,000 $ 581,000
------------- --------------
------------- --------------
EARNINGS PER COMMON SHARE
Basic Earnings Per Share $ 0.13 $ 0.53
------------- --------------
------------- --------------
Diluted Earnings Per Share $ 0.12 $ 0.43
------------- --------------
------------- --------------
3
The accompanying notes are an integral part of these financial statements.
OLYMPIC CASCADE FINANCIAL CORPORATION
CONSOLIDATED STATEMENT OF CASH FLOWS
(UNAUDITED)
------Quarter Ended--------
December 31, December 31,
1997 1996
--------------- ----------------
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 192,000 $ 581,000
Adjustments to reconcile net income to net
cash from operating activities
Depreciation and amortization 194,000 50,000
Changes in assets and liabilities
Cash, cash equivalents and securities (5,637,000) 516,000
Deposits 474,000 12,000
Receivables 519,000 (2,173,000)
Income taxes receivable (payable) 482,000 (123,000)
Securities held for resale (1,336,000) 695,000
Other assets (576,000) (129,000)
Payables 3,800,000 (483,000)
Securities sold, but not yet purchased (605,000) (665,000)
Accounts payable, accrued expenses, and other liabilities (779,000) (423,000)
--------------- ----------------
(3,272,000) (2,142,000)
--------------- ----------------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of fixed assets (162,000) (330,000)
--------------- ----------------
CASH FLOWS FROM FINANCING ACTIVITIES
Borrowings on line of credit 2,500,000 -
Proceeds from notes payable 946,000
Issuance of common stock through exercise of stock options - 132,000
--------------- ----------------
3,446,000 132,000
--------------- ----------------
INCREASE (DECREASE) IN CASH 12,000 (2,340,000)
CASH BALANCE
Beginning of the period 979,000 2,726,000
--------------- ----------------
End of the period $ 991,000 $ 386,000
--------------- ----------------
--------------- ----------------
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash paid during the period for
Interest $ 670,000 $ 537,000
--------------- ----------------
--------------- ----------------
Income taxes $ - $ 425,000
--------------- ----------------
--------------- ----------------
SUPPLEMENTAL DISCLOSURES OF NONCASH FINANCING
ACTIVITIES
Original issue discount on notes payable $ 128,000 $ -
--------------- ----------------
--------------- ----------------
4
The accompanying notes are an integral part of these financial statements.
OLYMPIC CASCADE FINANCIAL CORPORATION AND
SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997 AND DECEMBER 31, 1996
NOTE 1 - OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES
NATURE OF BUSINESS - Olympic Cascade Financial Corporation ("Olympic"
or the "Company") is a diversified financial services organization, operating
through its four wholly owned subsidiaries, National Securities Corporation
("National"), L. H. Friend, Weinress, Frankson & Presson, Inc. ("Friend"),
WestAmerica Investment Group ("WestAmerica") and Travis Capital, Inc.
("Travis"). Olympic is committed to establishing a significant presence in the
financial services industry by providing financing options for emerging, small
and middle capitalization companies through institutional research and sales and
investment banking services for both public offerings and private placements,
and also provides retail brokerage and trade clearance operations.
CORPORATE RESTRUCTURING - In November 1996, the Company's stockholders
approved a restructuring whereby National's stockholders exchanged their shares
of common stock on a one-for-one basis for shares of common stock of the Company
resulting in National becoming a wholly owned subsidiary of Olympic. This
restructuring became effective in February 1997 and was accounted for as a
pooling of interests.
ACQUISITIONS - In March 1997, the Company acquired all of the
outstanding stock of Friend, a Southern California based broker-dealer
specializing in investment banking, institutional brokerage, research and
trading activities for middle market companies. Friend was acquired in exchange
for 250,000 unregistered shares of Olympic common stock valued at $1,375,000.
The Company recorded this transaction under the purchase method of accounting
and has recorded goodwill of $1,300,000 for the purchase price and direct costs
in excess of the net fair value of the assets acquired.
In June 1997, the Company acquired all of the outstanding stock of
WestAmerica, a Scottsdale, Arizona based broker-dealer specializing in retail
brokerage services. WestAmerica was acquired for $443,000 in cash and an
agreement that provides for the payment of bonus compensation to certain
brokers. The Company recorded this transaction under the purchase method of
accounting and has recorded goodwill of $83,000 for the purchase price and
direct costs in excess of the net fair value of the assets acquired.
In July 1997, the Company acquired all of the outstanding stock of
Travis, a Salt Lake City, Utah based broker-dealer focusing on private placement
of securities for emerging and middle market companies in the U.S. and
internationally. Travis was acquired in exchange for 20,000 unregistered shares
of Olympic common stock valued at $90,000. The Company recorded this transaction
under the purchase method of accounting and has recorded goodwill of $45,000 for
the purchase price and direct costs in excess of the net fair value of the
assets acquired (See also Note 8).
5
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
The operating results of these acquired companies are included in the
consolidated statement of income from their respective acquisition dates.
Goodwill resulting from these transactions is being amortized over 5 to 25
years.
BASIS OF PRESENTATION AND USE OF ESTIMATES - In the opinion of
management, the accompanying balance sheets and related interim statements of
income and cash flows include all adjustments (consisting only of normal
recurring items) necessary for their fair presentation in conformity with
generally accepted accounting principles. Preparing financial statements in
conformity with generally accepted accounting principles requires management to
make estimates and assumptions that affect the reported amounts of assets,
liabilities, revenue and expenses. Actual results may differ from these
estimates. Interim results are not necessarily indicative of results for a full
year. The information included in this Form 10-Q should be read in conjunction
with Management's Discussion and Analysis and financial statements and notes
thereto included in Olympic's 1997 Form 10-K.
PRINCIPLES OF CONSOLIDATION - The consolidated financial statements
include the accounts of Olympic and its wholly owned subsidiaries. All
significant intercompany accounts and transactions have been eliminated.
ACCOUNTING METHOD - Customer security transactions and the related
commission income and commission expense are recorded on a settlement date
basis. The Company's financial condition and results of operations using the
settlement date basis are not materially different from that of the trade date
basis. Revenue from consulting services and investment banking activities is
recognized as the services are performed.
DEPRECIATION - Fixed assets are stated at cost and are depreciated
over their estimated useful lives of three to seven years. Depreciation is
computed using the straight-line method.
EARNINGS PER SHARE - Basic earnings per common share is based upon the
net income for the quarter divided by the weighted average number of common
shares outstanding during the quarter. For the first quarter of fiscal 1998 and
1997, the number of shares used in the basic earnings per share calculation was
1,450,983 and 1,099,509, respectively. Diluted earnings per common share
assumes that all common stock equivalents have been converted to common shares
using the treasury stock method at the beginning of the quarter. For the first
quarter of fiscal years 1998 and 1997, the number of shares used in the diluted
earnings per share calculation was 1,588,882 and 1,359,308, respectively. All
shares used in the basic and diluted calculations have been restated to show the
effect of the stock dividends as described in Note 4. The Company adopted FAS
No. 128 in the first quarter of fiscal 1998. The calculation of earnings per
share under FAS No. 128 is not materially different than earnings per share
calculated under the previous method.
INCOME TAXES - The Company utilizes an asset and liability approach to
financial accounting and reporting for income taxes. Deferred income tax assets
and liabilities are computed annually for differences between the financial
statement and tax bases of assets and liabilities that will result in taxable or
deductible amounts in the future based on currently enacted tax laws and rates.
6
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
FISCAL YEAR - The Company has a 52 or 53 week year, ending on the last
Friday in September.
CASH AND CASH EQUIVALENTS - For purposes of the statement of cash
flows, the Company considers only cash subject to immediate withdrawal. Cash,
cash equivalents and securities are not considered a change in cash for this
purpose.
NOTE 2 - LINE OF CREDIT
National has an unsecured line of credit of up to $3,000,000. The
line is subject to renewal in March 1998. Borrowings bear interest at the
bank's prime rate. Interest is payable monthly. These borrowings are
short-term and have not extended beyond a few days. Although at times National
has not satisfied, and may not in the future, satisfy a minor loan covenant, the
bank has continued to provide all necessary borrowings. At December 31, 1997,
National had $2,500,000 in borrowings outstanding.
NOTE 3 - NOTES PAYABLE
On November 17, 1997, the Company executed two promissory notes
totaling $925,000. The notes bear interest at 8% and the principal is to be
repaid in 24 monthly installments commencing on December 31, 2000. In
connection with the notes, warrants for the purchase of 120,000 shares at an
exercise price of $5.625 per share of the Company's common stock were issued.
The warrants were valued at $120,000 and have been recorded as a discount to the
notes.
On January 28, 1998, the Company executed a promissory note for
$1,000,000. This note bears interest at 8% and the principal is to be repaid in
24 monthly installments commencing on December 31, 2000. In connection with the
note, warrants for the purchase of 157,500 shares at an exercise price of $5.34
per share of the Company's common stock were issued. The warrants were valued
at $157,500 and have been recorded as a discount to the note.
NOTE 4 - STOCKHOLDER'S EQUITY
STOCK DIVIDENDS - The Company issued stock dividends on January 27,
1997, May 30, 1997, September 10, 1997 and December 22, 1997. All references in
the accompanying financial statements to the number of stock options and
warrants, and earnings per share have been restated to reflect the dividends.
7
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
NOTE 5 - CONTINGENCIES
In April 1997, certain minority stockholders brought action against
the Company and its subsidiary National, alleging National breached an agreement
to purchase their shares of Interact Medical Technologies Corp. ("Interact").
The plaintiffs alleged claims under section 10(b) of the Securities Exchange Act
of 1934 and SEC Rule 10b-5 promulgated thereunder, for common law fraud and
misrepresentation, for breach of express and implied contract, and for
negligence and are seeking damages in excess of $4,000,000.
The Company and National moved to dismiss the plaintiffs' claims on
various grounds, and the plaintiffs moved for partial summary judgment on their
claims of breach of contract. In late October 1997 the Court (i) dismissed all
of plaintiffs' claims against the Company; (ii) dismissed plaintiffs' Securities
law claims against National; and (iii) denied plaintiffs' motion entirely.
Consequently, the case is proceeding against National on theories of common law
fraud, misrepresentation, breach of contract and negligence.
In May 1997, a Trust brought action against the Company, its
subsidiary National, and several officers and directors of the Company and
National, originally alleging fraud, breach of fiduciary duties and state
securities law violations in connection with the share exchange between the
Company and National (the "Share Exchange") and otherwise. The plaintiff,
prosecuting the case both individually and derivatively, seeks monetary damages,
corporate dissolution of the Company and National, recission of the Share
Exchange, and the fair value of its shares in an appraisal proceeding. In an
amended pleading, plaintiff dropped all allegations of fraud and the claim for
recission of the Share Exchange, and alleged that the defendants breached
fiduciary duties by, among other things, secretly receiving excessive and
otherwise inappropriate overrides and other compensation, and that defendants
traded in the Company's stock with knowledge of material, non-public
information. The second amended complaint also alleges that the proxy statement
underlying the Share Exchange wrongly failed to disclose that stockholders'
rights would be governed by Delaware, and not Washington law, and that the
plaintiff was wrongly denied access to the Company's books and records.
In October 1997, a corporation served National with a complaint
alleging National and a former National representative breached a contract and
committed various torts by failing to perform an alleged promise to raise
capital for plaintiff through an initial public offering of stock. The
plaintiff sought not less than $8.5 million in actual damages and not less than
$42.5 million in punitive damages. National negotiated agreements whereby
applicable statutes of limitations would be tolled through March 31, 1998 and
all claims against it would be dismissed. On November 4, 1997, all claims
against National were dismissed without prejudice.
8
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
The Company is a defendant in various other arbitrations and
administrative proceedings, lawsuits and claims which arise out of the normal
course of business.
The Company intends to vigorously defend itself in these actions, and
in any event, does not believe these actions singularly or combined would have a
material adverse effect on the Company's financial statements or business
operations.
NOTE 8 - SUBSEQUENT EVENT
In January 1998, the Company concluded that it could best maximize its
profit potential through a strategic alliance with Travis rather than through a
direct investment. This transaction is in the process of being restructured
accordingly with an effective date of January 1, 1998. Olympic acquired Travis
in July 1997.
9
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
QUARTER ENDED DECEMBER 31, 1997 COMPARED TO QUARTER ENDED DECEMBER 31, 1996
EXCEPT FOR HISTORICAL INFORMATION CONTAINED HEREIN, THE MATTERS DISCUSSED IN
THIS REPORT CONTAIN CERTAIN FORWARD-LOOKING INFORMATION THAT INVOLVE RISKS AND
UNCERTAINTIES THAT COULD CAUSE RESULTS TO DIFFER MATERIALLY, INCLUDING CHANGING
MARKET CONDITIONS AND OTHER RISKS DETAILED IN THIS REPORT, THE COMPANY'S ANNUAL
REPORT OR FORM 10-K AND OTHER DOCUMENTS FILED BY THE COMPANY WITH THE SECURITIES
AND EXCHANGE COMMISSION FROM TIME TO TIME.
The Company's first quarter of fiscal 1998 resulted in significant increases in
both revenues and expenses compared with the same period of fiscal 1997. These
increases are due to growth in brokerage operations and corporate finance
business, including the underwriting of securities to the public and arranging
for the private placement of securities with investors.
Revenues increased $5,871,000, or 62% to $15,402,000 from $9,531,000. This
increase is due to favorable market conditions, the addition of investment
executives and the Company's success in corporate financing activities. The
most significant components of this increase were underwriting revenue and
commission revenue. Underwriting activities, through National and Friend,
generated additional revenue of $2,187,000, an increase of 46% to $6,967,000
from $4,780,000. National through the management of two underwritings and
co-management of one underwriting with Friend, as well as three successful
private placements, generated $3,873,000 during the quarter. Friend managed its
first underwriting during the quarter and participated in several other
underwritings and private placements, generating $3,004,000 of underwriting
revenue. Commission revenue increased $1,915,000, or 49% to $5,803,000 from
$3,888,000. This increase was due to a strong securities market, which
increased retail trading activity, and the production of Friend and WestAmerica.
Friend and WestAmerica were acquired during fiscal 1997 and were not included in
the results for the first quarter of fiscal 1997. Friend and WestAmerica had
combined commission revenue of $1,441,000 in the first quarter of fiscal 1998.
Additionally, net dealer inventory gains increased $1,398,000 to $1,145,000 in
fiscal 1998 from a loss of $253,000 in fiscal 1997. Due to the strong
securities market the Company had success in its trading activities whereas in
fiscal 1997 the Company had net dealer inventory losses attributable to market
stabilization for securities that the Company had underwritten.
Concurrent with the 62% increase in revenues, total expenses grew by 75%. Total
expenses increased by $6,444,000 to $15,092,000 from $8,648,000. This rise in
expenses was anticipated as increased trading activity creates increased
commission payouts, and increased underwriting activities increases various
expenses including commission expense. Commission expense increased $2,519,000,
or 43% to $8,315,000 from
10
MANAGEMENT DISCUSSION AND ANALYSIS
(CONTINUED)
$5,796,000. Salaries increased $1,838,000 or 174% to $2,894,000 from
$1,056,000. This increase is due to the addition of Friend, WestAmerica and
Travis, which primarily have employees as opposed to independent contractors,
thereby increasing the number of people who receive salaries from that in fiscal
1997. Overall, combined commissions and salaries as a percentage of revenue
increased less than 1% to approximately 73% from approximately 72% in the first
quarter of fiscal 1998 and 1997, respectively.
As anticipated with the addition of Friend, WestAmerica and Travis each of which
operate independently, expenses regarding communications, occupancy, clearing
and other have increased from fiscal 1997 to fiscal 1998. Communication
expenses mainly telephone, telequote and mailing have increased $323,000 or 184%
to $499,000 from $176,000. Occupancy expense, consisting mainly of rent, office
supplies and depreciation has increased $483,000 or 116% to $899,000 from
$416,000. This increase relates to the occupancy costs of additional
subsidiaries acquired as well as National adding offices in New York and Los
Angeles and increased depreciation associated with furnishing the Chicago office
and upgrading the computer systems. Clearing fees increased $298,000 or 227% to
$429,000 from $131,000. Finally, other expenses increased $574,000 to $790,000
from $216,000 in the first quarter of fiscal 1998 and 1997, respectively. With
the addition of the subsidiaries and formation of Olympic other expenses have
increased. Included in these other expenses are increased travel expense of
$207,000, increased insurance expense of $56,000 and non-operating expenses of
$175,000.
Overall, net income decreased $389,000 to $192,000 or $.12 per share from
$581,000 or $.43 per share for the first quarter ended December 31, 1997
compared with the first quarter ended December 31, 1996, respectively. The
Company adopted FAS No. 128 in the first quarter of fiscal 1998. The
calculation of earnings per share under FAS No. 128 is not materially different
than earnings per share calculated under the previous method.
LIQUIDITY AND CAPITAL RESOURCES
As with most financial firms, substantial portions of the Company's assets are
liquid, consisting mainly of cash or assets readily convertible into cash.
These assets are financed primarily by National's interest bearing and
non-interest bearing customer credit balances, other payables and equity
capital. Occasionally, National utilizes short-term bank financing to
supplement its ability to meet day-to-day operating cash requirements. Such
financing has been used to maximize cash flow and is regularly repaid. National
has a $3,000,000 revolving unsecured credit facility with Seafirst Bank and may
borrow up to 70% of the market value of eligible securities pledged through an
unrelated broker-dealer. These borrowings are short-term and have not extended
beyond a few days. Although at times National has not satisfied and may not in
the future satisfy a minor loan covenant, the bank has continued to provide all
necessary borrowings. At December 31, 1997 National had $2,500,000 of
borrowing outstanding. This borrowing was repaid within the first three days of
January.
11
MANAGEMENT DISCUSSION AND ANALYSIS
(CONTINUED)
On November 17, 1997, the Company executed two promissory notes totaling
$925,000. The notes bear interest at 8% and the principal is to be repaid in 24
monthly installments commencing on December 31, 2000. In connection with the
notes, warrants for the purchase of 120,000 shares at an exercise price of
$5.625 per share of the Company's common stock were issued. The warrants were
valued at $120,000 and have been recorded as a discount to the notes.
On January 28, 1998, the Company executed a promissory note totaling $1,000,000.
This note bears interest at 8% and the principal is to be repaid in 24 monthly
installments commencing on December 31, 2000. In connection with the note,
warrants for the purchase of 157,500 shares at an exercise price of $5.34 per
share of the Company's common stock were issued. The warrants were valued at
$157,500 and have 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 December 31, 1997,
National's net capital exceeded the requirement by $1,654,000.
Friend and WestAmerica, as registered broker-dealers are also subject to the
SEC's Net Capital Rule 15c3-1, which, under the standard method, requires that
each company maintain minimum net capital equal to the greater of $100,000 or 6
2/3% of aggregate indebtedness. At December 31, 1997, Friend's and
WestAmerica's net capital exceeded the requirement by $373,000 and $205,000,
respectively.
Travis, also subject to the SEC's Net Capital Rule, is required to maintain the
greater of $5,000 or 6 2/3% of aggregate indebtedness. At December 31, 1997,
Travis' net capital exceeded the requirement by $20,893.
Advances, dividend payments and other equity withdrawals from National, Friend,
WestAmerica or Travis 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. Cash flow from
operations and earnings contribute significantly to liquidity.
Unlike the Company's other subsidiaries, National requires its investment
executives to be responsible for substantially all of the overhead expenses
associated with their sales efforts, including their office furniture, sales
assistants, telephone service and supplies.
12
MANAGEMENT DISCUSSION AND ANALYSIS
(CONTINUED)
The Company believes its internally generated liquidity, together with access to
external capital and debt resources will be sufficient to satisfy existing
operations. However, if the Company continues to expand its operations and
acquire other businesses the Company will require additional capital.
PART II
ITEM 1 - LEGAL PROCEEDINGS
In April 1997, certain minority stockholders brought action against the Company
and its subsidiary National, alleging National breached an agreement to purchase
their shares of Interact Medical Technologies Corp. ("Interact"). The
plaintiffs alleged claims under section 10(b) of the Securities Exchange Act of
1934 and SEC Rule 10b-5 promulgated thereunder, for common law fraud and
misrepresentation, for breach of express and implied contract, and for
negligence and are seeking damages in excess of $4,000,000.
The Company and National moved to dismiss the plaintiffs' claims on various
grounds, and the plaintiffs moved for partial summary judgment on their claims
of breach of contract. In late October 1997 the Court (i) dismissed all of
plaintiffs' claims against the Company; (ii) dismissed plaintiffs' Securities
law claims against National; and (iii) denied plaintiffs' motion entirely.
Consequently, the case is proceeding against National on theories of common law
fraud, misrepresentation, breach of contract and negligence.
In May 1997, a Trust brought action against the Company, its subsidiary
National, and several officers and directors of the Company and National,
originally alleging fraud, breach of fiduciary duties and state securities law
violations in connection with the share exchange between the Company and
National (the "Share Exchange") and otherwise. The plaintiff, prosecuting the
case both individually and derivatively, seeks monetary damages, corporate
dissolution of the Company and National, recission of the Share Exchange, and
the fair value of its shares in an appraisal proceeding. In an amended
pleading, plaintiff dropped all allegations of fraud and the claim for recission
of the Share Exchange, and alleged that the defendants breached fiduciary duties
by, among other things, secretly receiving excessive and otherwise inappropriate
overrides and other compensation, and that defendants traded in the Company's
stock with knowledge of material, non-public information. The second amended
complaint also alleges that the proxy statement underlying the Share Exchange
wrongly failed to disclose that stockholders' rights would be governed by
Delaware, and not Washington law, and that the plaintiff was wrongly denied
access to the Company's books and records.
13
LEGAL PROCEEDINGS
(CONTINUED)
In October 1997, a corporation served National with a complaint alleging
National and a former National representative breached a contract and committed
various torts by failing to perform an alleged promise to raise capital for
plaintiff through an initial public offering of stock. The plaintiff sought not
less than $8.5 million in actual damages and not less than $42.5 million in
punitive damages. National negotiated agreements whereby applicable statutes
of limitations would be tolled through March 31, 1998 and all claims against it
would be dismissed. On November 4, 1997, all claims
against National were dismissed without prejudice.
The Company is a defendant in various other arbitrations and administrative
proceedings, lawsuits and claims which arise out of the normal course of
business.
The Company intends to vigorously defend itself in these actions, and in any
event, does not believe these actions singularly or combined would have a
material adverse effect on the Company's financial statements or business
operations.
ITEMS 2, 3, 4, 5 AND 6 ARE NOT APPLICABLE AND HAVE BEEN OMITTED.
14
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
OLYMPIC CASCADE FINANCIAL CORPORATION AND SUBSIDIARIES
February 12, 1998 By: Steven A. Rothstein
Date Steven A. Rothstein, Chairman
and Chief Executive Officer
February 12, 1998 By: Robert H. Daskal
Date Robert H. Daskal, Senior Vice
President, Chief Financial Officer
and Treasurer
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