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 27, 1998 Commission File Number 001-12629
OLYMPIC CASCADE FINANCIAL CORPORATION
---------------------------------------
(Exact name of registrant as specified)
DELAWARE 36-4128138
- ------------------------------- -----------------------
(State of other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
875 North Michigan Avenue, Suite 1560, Chicago, Illinois 60611
----------------------------------------------------------------
(Address of principal executive offices) (Zip code)
Registrant's telephone number, including area code: (312) 751-8833
Former Address: 1001 Fourth Ave, Suite 2200, Seattle, Washington 98154
----------------------------------------------------------------------
(Former Name, Former Address and Former Fiscal Year,
if changed since last report)
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, 1998 was 1,518,516.
1
OLYMPIC CASCADE FINANCIAL CORPORATION
CONSOLIDATED BALANCE SHEETS
ASSETS
March 27, September 26,
1998 1997
(unaudited) (audited)
------------ ------------
CASH, subject to immediate withdrawal $ 706,000 $ 979,000
CASH, CASH EQUIVALENTS AND SECURITIES 25,549,000 30,934,000
DEPOSITS 2,013,000 1,292,000
RECEIVABLES
Customers 30,969,000 22,114,000
Brokers and dealers 1,649,000 1,847,000
Other 1,013,000 481,000
Income tax receivable 410,000 597,000
SECURITIES HELD FOR RESALE, at market 2,676,000 2,066,000
FIXED ASSETS, net 1,541,000 1,528,000
GOODWILL, net 1,314,000 1,391,000
OTHER ASSETS 916,000 545,000
----------- -----------
$68,756,000 $63,774,000
----------- -----------
----------- -----------
LIABILITIES AND STOCKHOLDERS' EQUITY
BANK LINE OF CREDIT $ 1,200,000 $ -
PAYABLES
Customers 52,694,000 48,828,000
Brokers and dealers 1,083,000 1,752,000
SECURITIES SOLD, BUT NOT YET PURCHASED, at market 677,000 1,047,000
ACCOUNTS PAYABLE, ACCRUED EXPENSES AND OTHER LIABILITIES 3,035,000 3,634,000
NOTES PAYABLE 2,548,000 909,000
----------- -----------
61,237,000 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, 1,518,516 and 1,444,205 shares issued
and outstanding, respectively 30,000 29,000
Additional paid-in capital 5,696,000 5,045,000
Retained earnings 1,793,000 2,530,000
----------- -----------
7,519,000 7,604,000
----------- -----------
$68,756,000 $63,774,000
----------- -----------
----------- -----------
2
The accompanying notes are an integral part of these finanial statements.
OLYMPIC CASCADE FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
-For The Quarter Ended- ---The Six Months Ended--
March 27, March 27, March 27, March 27,
1998 1997 1998 1997
---------- ---------- ----------- -----------
REVENUES:
Commissions $5,489,000 $4,076,000 $11,292,000 $ 7,964,000
Net dealer inventory gains 1,917,000 719,000 3,062,000 466,000
Interest 984,000 929,000 2,033,000 1,829,000
Transfer fees 183,000 147,000 390,000 305,000
Underwriting 1,310,000 2,026,000 8,276,000 6,806,000
Other 290,000 95,000 521,000 153,000
---------- ---------- ----------- -----------
TOTAL REVENUES 10,173,000 7,992,000 25,574,000 17,523,000
---------- ---------- ----------- -----------
EXPENSES:
Commissions 5,443,000 4,382,000 13,757,000 10,178,000
Salaries 1,894,000 1,247,000 4,789,000 2,303,000
Clearing fees 415,000 198,000 844,000 329,000
Communications 475,000 258,000 974,000 434,000
Occupancy costs 912,000 591,000 1,811,000 1,007,000
Interest 667,000 522,000 1,358,000 1,059,000
Professional fees 164,000 136,000 498,000 249,000
Taxes, licenses, registration 251,000 258,000 492,000 509,000
Other 824,000 513,000 1,614,000 685,000
---------- ---------- ----------- -----------
TOTAL EXPENSES 11,045,000 8,105,000 26,137,000 16,753,000
---------- ---------- ----------- -----------
Income (loss) from operations before
income taxes (872,000) (113,000) (563,000) 770,000
Income tax (expense) benefit 295,000 38,000 178,000 (262,000)
---------- ---------- ----------- -----------
NET INCOME (LOSS) $ (577,000) $ (75,000) $ (385,000) $ 508,000
---------- ---------- ----------- -----------
---------- ---------- ----------- -----------
EARNINGS (LOSS) PER COMMON SHARE
Basic Earnings (Loss) Per Share $ (0.38) $ (0.06) $ (0.26) $ 0.46
---------- ---------- ----------- -----------
---------- ---------- ----------- -----------
Diluted Earnings (Loss) Per Share $ (0.38) $ (0.06) $ (0.26) $ 0.36
---------- ---------- ----------- -----------
---------- ---------- ----------- -----------
BASIC COMMON SHARES OUTSTANDING
FOR THE PERIOD 1,517,674 1,176,927 1,482,496 1,108,813
---------- ---------- ----------- -----------
---------- ---------- ----------- -----------
DILUTED COMMON SHARES OUTSTANDING
FOR THE PERIOD 1,517,674 1,176,927 1,482,496 1,405,584
---------- ---------- ----------- -----------
---------- ---------- ----------- -----------
3
The accompanying notes are an integral part of these finanial statements.
OLYMPIC CASCADE FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
-For The Six Month's Ended-
March 27, March 27,
1998 1997
----------- -----------
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss) $ (385,000) $ 508,000
Adjustments to reconcile net income (loss) to net
cash from operating activities
Depreciation and amortization 392,000 117,000
Changes in assets and liabilities
Cash, cash equivalents and securities 5,385,000 (3,340,000)
Deposits (721,000) (420,000)
Receivables (9,189,000) (8,257,000)
Income taxes receivable (payable) 187,000 (766,000)
Securities held for resale (610,000) 488,000
Other assets (421,000) (1,331,000)
Customer and broker payables 3,197,000 6,524,000
Securities sold, but not yet purchased (370,000) (930,000)
Accounts payable, accrued expenses, and other liabilities (593,000) (193,000)
----------- -----------
(3,128,000) (7,600,000)
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of fixed assets (278,000) (746,000)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES
Borrowings on line of credit 1,200,000 3,200,000
Proceeds from notes payable 1,925,000 -
Borrowings from shareholders - 800,000
Issuance of common stock through exercise of
stock options 8,000 283,000
Issuance of common stock in business combination - 1,375,000
----------- -----------
3,133,000 5,658,000
----------- -----------
(DECREASE) IN CASH (273,000) (2,688,000)
CASH BALANCE
Beginning of the period 979,000 2,727,000
----------- -----------
End of the period $ 706,000 $ 39,000
----------- -----------
----------- -----------
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash paid during the period for
Interest $ 1,309,000 $ 1,059,000
----------- -----------
----------- -----------
Income taxes $ - $ 1,028,000
----------- -----------
----------- -----------
SUPPLEMENTAL DISCLOSURES OF NONCASH INVESTING AND
FINANCING ACTIVITIES
Warrants issued as a discount on notes payable $ 293,000 $ -
----------- -----------
----------- -----------
Note receivable from restructuring investment $ 281,000 $ -
----------- -----------
----------- -----------
4
The accompanying notes are an integral part of these finanial statements.
OLYMPIC CASCADE FINANCIAL CORPORATION AND
SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 27, 1998 AND MARCH 27, 1997
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 wholly owned subsidiaries, National Securities Corporation
("National"), L. H. Friend, Weinress, Frankson & Presson, Inc. ("Friend") and
WestAmerica Investment Group ("WestAmerica"). Olympic is committed to
establishing a significant presence in the financial services industry by
providing financing options for emerging, small and middle capitalization
companies 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 (a Washington corporation)
becoming a wholly owned subsidiary of Olympic (a Delaware corporation). 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 Capital, Inc. ("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
recorded goodwill of $45,000 for the purchase price and direct costs in
excess of the net fair value of the assets acquired. In January 1998, this
acquisition was restructured as described in Note 6.
5
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
The operating results of these acquired companies are included in the
consolidated statements of operations 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 there to 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 (LOSS) PER SHARE - Basic earnings (loss) per common share is
based upon the net income (loss) for the quarter divided by the weighted
average number of common shares outstanding during the quarter. For the
second quarter of fiscal 1998 and 1997, the number of shares used in the
basic earnings (loss) per share calculation was 1,517,674 and 1,176,927
respectively. For the first six months of fiscal 1998 and 1997, the number
of shares used in the basic earnings (loss) per share calculation was
1,482,496 and 1,108,813, respectively. Diluted earnings (loss) per common
share assumes that all common stock equivalents have been converted to common
shares using the treasury stock method at the beginning of the quarter. For
the second quarter of fiscal 1998 and 1997, the number of shares used in the
diluted earnings (loss) per share calculation was 1,517,674 and 1,176,927,
respectively. For the first six months of fiscal 1998 and 1997, the number of
shares used in the diluted earnings (loss) per share calculation was
1,482,496 and 1,405,584, 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 (loss) per share
under FAS No. 128 is not materially different than earnings (loss) per share
calculated under the previous method.
6
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
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.
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 $3,000,000. The line is
subject to renewal in March 1999. 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. At March 27, 1998, National had
$1,200,000 of borrowings outstanding.
NOTE 3 - NOTES PAYABLE
On November 17, 1997, the Company executed two promissory notes
totaling $925,000. The notes bear interest at 6% and 8% with the principal
to be repaid in 24 monthly installments commencing on December 31, 2000. In
connection with the notes, warrants for the purchase of 126,000 shares at an
exercise price of $5.36 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 - STOCKHOLDERS' 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 (loss) per share have been restated to reflect the
dividends.
7
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
NOTE 5 - CONTINGENCIES
In April 1997, certain individuals 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. The case is proceeding in the Federal District Court for the Western
District of Washington.
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 May 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
believes it has meritorious defenses.
NOTE 6 - RESTRUCTURING
The Company concluded that it could best maximize its profit
potential through a strategic alliance with Travis rather than through a
direct investment. Effective January 1, 1998, the Company sold its
investment in Travis to Travis & Company in exchange for a note receivable of
$280,650 which is included in other assets. The Company wrote-off
unamortized goodwill of $40,000, recorded a gain of approximately $97,000 and
recorded a corresponding allowance on the note receivable of $97,000.
NOTE 7 - SUBSEQUENT EVENT
In April 1997, the Company entered into a sale and leaseback
agreement with an outside funding company. As part of the agreement the
Company sold certain fixed assets to the funding company for $815,000 and
agreed to lease these assets back over a forty-eight month period. The
Company recorded no gain or loss and has recorded this transaction as a
capital lease.
9
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
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.
QUARTER ENDED MARCH 27, 1998 COMPARED TO QUARTER ENDED MARCH 27, 1997
The Company's second 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
including increased retail and institutional commissions and increased
principal trading activity.
Revenues increased $2,181,000, or 27% to $10,173,000 from $7,992,000.
This increase is due to favorable market conditions and the addition of
investment executives. The most significant components of this increase were
commission revenue and net dealer inventory gains. Commission revenue
increased $1,413,000, or 35% to $5,489,000 from $4,076,000. This increase
was due to a strong securities market, which increased retail trading
activity, and the production of Friend and WestAmerica. Friend was acquired
in March 1997 and therefore only the results of March 1997 were included in
the results of the second quarter of fiscal 1997. WestAmerica was acquired
after the second quarter in fiscal 1997 and therefore their results were not
included in the results for the second quarter of fiscal 1997. Friend and
WestAmerica had combined commission revenue of $1,070,000 in the second
quarter of fiscal 1998. Additionally, net dealer inventory gains increased
$1,198,000 to $1,917,000 in fiscal 1998 from $719,000 in fiscal 1997. This
increase of 167% was due to the continued strength of the securities markets.
Underwriting revenue decreased $716,000 or 35% to $1,310,000 from
$2,026,000 in the second quarter fiscal 1998 compared with the second quarter
fiscal 1997, respectively. During the second quarter fiscal 1998, the
Company's subsidiaries generated revenue by participating in public
underwritings and providing other corporate finance services such as advisory
services and private placement of securities, however, the Company's
subsidiaries did not manage any public underwritings. In the second quarter
fiscal 1997, the Company's subsidiaries managed three public underwritings
that raised approximately $17 million in proceeds.
Concurrent with the 27% increase in revenues, total expenses grew by
36%. Total expenses increased by $2,940,000 to $11,045,000 from $8,105,000.
This rise in expenses was anticipated as increased trading activity creates
increased commission payouts. The structuring of Olympic and the addition of
Friend and WestAmerica increased various other expenses.
10
MANAGEMENT'S DISCUSSION AND ANALYSIS
(CONTINUED)
Commission expense increased $1,061,000, or 24% to $5,443,000 from
$4,382,000. Salaries increased $647,000 or 52% to $1,894,000 from
$1,247,000. This increase is due to the addition of Friend and WestAmerica,
which primarily have employees as opposed to independent contractors, thereby
increasing the number of people who receive salaries in fiscal 1998.
Overall, combined commissions and salaries as a percentage of revenue
increased less than 1.5% to approximately 72% from approximately 70.5% in the
first quarter of fiscal 1998 and 1997, respectively.
As anticipated with the structuring of Olympic and the addition of
Friend and WestAmerica 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 $217,000 or 84% to $475,000 from
$258,000. Occupancy expense, consisting mainly of rent, office supplies and
depreciation has increased $321,000 or 54% to $912,000 from $591,000. 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
computer systems. Clearing fees increased $217,000 or 110% to $415,000 from
$198,000. Finally, other expenses increased $311,000 to $824,000 from
$513,000 in the second quarter of fiscal 1998 and 1997, respectively. With
the addition of the subsidiaries and formation of Olympic other expenses have
increased. The $311,000 increase is primarily made up of increased travel
expense of $135,000, increased insurance expense of $49,000 and amortization
of goodwill of $62,000 which occurred in second quarter fiscal 1998.
Overall, the net (loss) increased ($502,000) to ($577,000) or ($.38) per
share from ($75,000) or ($.06) per share for the second quarter ended March
27, 1998 compared with the second quarter ended March 27, 1997, respectively.
The Company adopted FAS No. 128 in the first quarter of fiscal 1998. The
calculation of earnings (loss) per share under FAS No. 128 is not materially
different than earnings (loss) per share calculated under the previous method.
SIX MONTHS ENDED MARCH 27, 1998 COMPARED TO SIX MONTHS
ENDED MARCH 27, 1997
For the six months total revenues increased 46% to $25,574,000 in fiscal
1998 from $17,523,000 in fiscal 1997. Concurrent with this increase in
revenues was a 56% increase in expenses to $26,137,000 in fiscal 1998 from
$16,753,000 in fiscal 1997. The majority of the increase in expenses is
directly related to increase in revenues. However, the Company incurred
additional other expenses during the six months of fiscal 1998 that are
discussed in the quarterly comparisons above.
The most significant components of the increase in total revenues are the
increase in commission revenue, increase dealer inventory gains and the increase
in underwriting
11
MANAGEMENT'S DISCUSSION AND ANALYSIS
(CONTINUED)
revenue. Commission revenue increased $3,328,000 or 42% to $11,292,000 in
1998 from $7,964,000 in 1997. This increase was the result of added
investment executives through the addition of Friend and WestAmerica and the
addition of offices in Los Angeles and New York. Revenues from net dealer
inventory gains or principal trading activities increased 557% or $2,596,000
to $3,062,000 from $466,000 in fiscal 1998 compared with fiscal 1997 due to
the continued strength of the securities market. Additionally, underwriting
revenue increased $1,470,000 or 22% to $8,276,000 from $6,806,000 in fiscal
1998 to fiscal 1997, respectively. This increase for the six months was
primarily the result of the Company's active first quarter fiscal 1998.
National through the management of two public underwritings and three
successful private placements generated $3,873,000 of underwriting revenue
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. In total the Company's
subsidiaries raised over $55 million in proceeds. In comparison during the
first six months of fiscal 1997 the Company's subsidiaries managed five
public underwritings which totaled more than $104 million in proceeds.
Correspondingly, commission expense, the most significant expense
component, increased by $3,579,000 or 35% to $13,757,000 in 1998 from
$10,178,000 in 1997. The increase in commission expense is a direct result
of the increase in revenues. Salaries increased $2,486,000 or 108% to
$4,789,000 from $2,303,000. This increase is due to the addition of Friend
and WestAmerica and Travis (only for the first quarter fiscal 1998), 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 1.5% to 72.5% from 71.2% in the first six months of 1998
from the first six months of 1997.
Overall, the Company reported a net (loss) for the first six months of
fiscal 1998 which totaled ($385,000) or ($0.26) per share versus net income
of $508,000 or $0.36 per share for the first six months of fiscal 1997. The
Company adopted FAS No. 128 in the first quarter of fiscal 1998. The
calculation of earnings (loss) per share under FAS No. 128 is not materially
different than earnings (loss) 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 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. At March
12
MANAGEMENT'S DISCUSSION AND ANALYSIS
(CONTINUED)
27, 1998 National had $1,200,000 of borrowings outstanding. This borrowing
was repaid within three days.
On November 17, 1997, the Company executed two promissory notes totaling
$925,000. The notes bear interest at 6% and 8% with the principal to be
repaid in 24 monthly installments commencing on December 31, 2000. In
connection with the notes, warrants for the purchase of 126,000 shares at an
exercise price of $5.36 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.
In April 1997, the Company entered into a sale and leaseback agreement
with an outside funding company. As part of the agreement the Company sold
certain fixed assets to the funding company for $815,000 and agreed to lease
these assets back over a forty-eight month period. The Company recorded no
gain or loss and has recorded this transaction as a capital lease.
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 27, 1998, National's net capital exceeded the requirement by $2,044,000.
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 March 31, 1998, Friend's
and WestAmerica's net capital exceeded the requirement by $289,000 and
$287,000, respectively.
Advances, dividend payments and other equity withdrawals from National,
Friend, or WestAmerica are restricted by the regulations of the SEC, and
other regulatory agencies. These regulatory restrictions may limit the
amounts that these subsidiaries may dividend or advance to Olympic.
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.
13
MANAGEMENT'S DISCUSSION AND ANALYSIS
(CONTINUED)
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.
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 individuals 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. The case is proceeding in the Federal District Court for the Western
District of Washington.
14
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 May 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
believes it has meritorious defenses.
ITEMS 2, 3, 4 AND 5 ARE NOT APPLICABLE AND HAVE BEEN OMITTED.
ITEM 6 - EXHIBITS AND REPORTS
10.37 Sale and Leaseback Agreement
27. Financial Data Schedule
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 7, 1998 By: Steven A. Rothstein
Date Steven A. Rothstein, Chairman, President
and Chief Executive Officer
May 7, 1998 By: Robert H. Daskal
Date Robert H. Daskal, Senior Vice President,
Chief Financial Officer and Treasurer
16