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 26, 1999 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
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(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, 1999 was 1,581,447.
OLYMPIC CASCADE FINANCIAL CORPORATION
CONSOLIDATED BALANCE SHEETS
ASSETS
March 26, September 25,
1999 1998
(unaudited) (audited)
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CASH, subject to immediate withdrawal $ 2,493,000 $ 551,000
CASH, CASH EQUIVALENTS AND SECURITIES 59,659,000 27,348,000
DEPOSITS 2,396,000 2,024,000
RECEIVABLES
Customers 32,419,000 39,680,000
Brokers and dealers 1,742,000 826,000
Other 649,000 315,000
Income tax receivable 634,000 654,000
SECURITIES HELD FOR RESALE, at market 520,000 235,000
FIXED ASSETS, net 1,200,000 1,292,000
GOODWILL, net 53,000 61,000
OTHER ASSETS 397,000 130,000
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$ 102,162,000 $ 73,116,000
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LIABILITIES AND STOCKHOLDERS' EQUITY
BANK LINE OF CREDIT $ 3,000,000 $ 2,700,000
PAYABLES
Customers 78,460,000 60,548,000
Brokers and dealers 11,449,000 1,714,000
SECURITIES SOLD, BUT NOT YET PURCHASED, at market 510,000 73,000
ACCOUNTS PAYABLE, ACCRUED EXPENSES AND OTHER LIABILITIES 2,965,000 2,073,000
NOTES PAYABLE 1,648,000 1,948,000
CAPITAL LEASE PAYABLE 988,000 1,112,000
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99,020,000 70,168,000
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CONTINGENCIES
STOCKHOLDERS' EQUITY
Preferred stock, $.01 par value, 100,000 shares authorized,
none issued and outstanding - -
Common stock, $.02 par value, 6,000,000 shares authorized, 1,581,447 and
1,463,007 shares issued and outstanding, respectively 32,000 29,000
Additional paid-in capital 5,841,000 5,407,000
Deficit (2,731,000) (2,488,000)
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3,142,000 2,948,000
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$ 102,162,000 $ 73,116,000
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2
The accompanying notes are an integral part of these financial statements.
OLYMPIC CASCADE FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
-----For The Quarter Ended----- ------The Six Months Ended------
March 26, March 27, March 26, March 27,
1999 1998 1999 1998
------------ ------------ ------------ ------------
REVENUES:
Commissions $ 7,202,000 $ 5,489,000 $ 12,838,000 $ 11,292,000
Net dealer inventory gains 790,000 1,917,000 1,256,000 3,062,000
Interest 1,239,000 984,000 2,408,000 2,033,000
Transfer fees 226,000 183,000 437,000 390,000
Underwriting 574,000 1,310,000 1,138,000 8,276,000
Other 324,000 290,000 437,000 521,000
------------ ------------ ------------ ------------
TOTAL REVENUES 10,355,000 10,173,000 18,514,000 25,574,000
------------ ------------ ------------ ------------
EXPENSES:
Commissions 5,960,000 5,443,000 10,547,000 13,757,000
Salaries 1,119,000 1,894,000 2,077,000 4,789,000
Clearing fees 385,000 415,000 710,000 844,000
Communications 295,000 475,000 574,000 974,000
Occupancy costs 580,000 912,000 1,237,000 1,811,000
Interest 888,000 667,000 1,711,000 1,358,000
Professional fees 687,000 164,000 1,066,000 498,000
Taxes, licenses, registration 107,000 251,000 220,000 492,000
Other 315,000 824,000 613,000 1,614,000
------------ ------------ ------------ ------------
TOTAL EXPENSES 10,336,000 11,045,000 18,755,000 26,137,000
------------ ------------ ------------ ------------
Income (loss) from operations before income taxes 19,000 (872,000) (241,000) (563,000)
Income tax (expense) benefit 1,000 295,000 (2,000) 178,000
------------ ------------ ------------ ------------
NET INCOME (LOSS) $ 20,000 $ (577,000) $ (243,000) $ (385,000)
------------ ------------ ------------ ------------
------------ ------------ ------------ ------------
EARNINGS (LOSS) PER COMMON SHARE
Basic Earnings (Loss) Per Share $ 0.01 $ (0.38) $ (0.16) $ (0.26)
------------ ------------ ------------ ------------
------------ ------------ ------------ ------------
Diluted Earnings (Loss) Per Share $ 0.01 $ (0.38) $ (0.16) $ (0.26)
------------ ------------ ------------ ------------
------------ ------------ ------------ ------------
WEIGHTED AVERAGE COMMON SHARES
OUTSTANDING -BASIC FOR THE PERIOD 1,505,799 1,517,674 1,482,992 1,482,496
------------ ------------ ------------ ------------
------------ ------------ ------------ ------------
WEIGHTED AVERAGE COMMON SHARES
OUTSTANDING-DILUTED FOR THE PERIOD 1,507,276 1,517,674 1,482,992 1,482,496
------------ ------------ ------------ ------------
------------ ------------ ------------ ------------
3
The accompanying notes are an integral part of these financial statements.
OLYMPIC CASCADE FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
--For The Six Month's Ended--
March 26, March 27,
1999 1998
CASH FLOWS FROM OPERATING ACTIVITIES ------------ ------------
Net loss $ (243,000) $ (385,000)
Adjustments to reconcile net loss to net
cash from operating activities
Depreciation and amortization 197,000 392,000
Issuance of common stock in lawsuit settlement 135,000 -
Issuance of common stock as payment of expenses 120,000 -
Changes in assets and liabilities
Cash, cash equivalents and securities (32,311,000) 5,385,000
Deposits (372,000) (721,000)
Receivables 6,031,000 (9,002,000)
Securities held for resale (285,000) (610,000)
Other assets (267,000) (421,000)
Customer and broker payables 27,647,000 3,197,000
Securities sold, but not yet purchased 437,000 (370,000)
Accounts payable, accrued expenses, and other liabilities 937,000 (593,000)
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2,026,000 (3,128,000)
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CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of fixed assets (97,000) (278,000)
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CASH FLOWS FROM FINANCING ACTIVITIES
Borrowings on line of credit, net 300,000 1,200,000
Payments on notes payable (300,000) 1,925,000
Payments on capital lease (170,000) -
Issuance of common stock through exercise of stock options 183,000 8,000
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13,000 3,133,000
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INCREASE (DECREASE) IN CASH 1,942,000 (273,000)
CASH BALANCE
Beginning of the period 551,000 979,000
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End of the period $ 2,493,000 $ 706,000
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SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash paid during the period for
Interest $ 1,675,000 $ 1,309,000
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Income taxes $ 2,000 $ -
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SUPPLEMENTAL DISCLOSURES OF NONCASH INVESTING AND
FINANCING ACTIVITIES
Warrants issued as a discount on notes payable $ - $ 293,000
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Note receivable from restructuring investment $ - $ 281,000
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4
The accompanying notes are an integral part of these financial statements.
OLYMPIC CASCADE FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 26, 1999 AND MARCH 27, 1998
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 26,
1999 AND MARCH 27, 1998 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 25, 1998.
NOTE 1 - OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES
NATURE OF BUSINESS - The Company is a financial services
organization, operating through its two wholly owned subsidiaries, National
Securities Corporation ("National"), and WestAmerica Investment Group
("WestAmerica"). Olympic is committed to establishing a significant presence
in the financial services industry by providing financing options for
emerging, small and middle capitalization companies through research,
financial advisory services 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.
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 provided for the payment of $207,000 of bonus compensation to
certain brokers.
5
During fiscal year 1998, the Company redirected its focus on retail
operations by divesting its ownership in two of its subsidiaries, L.H.
Friend, Weinress, Franksen & Presson, Inc. ("Friend") and Travis Capital,
Inc. ("Travis"). Friend was an institutional firm and Travis was a small
private placement firm. Neither of these firms had retail brokerage
operations, which is the Company's primary focus. The Company had acquired
each subsidiary in fiscal year 1997. Upon the sale of Friend, the Company
received cash of $500,000, 55,509 shares of its common stock and potential
fees resulting from pending corporate finance transactions in exchange for
all of the common stock of Friend. Upon the sale of Travis, the Company
received a note receivable of $281,000 in exchange for all of the common
stock of Travis.
NOTE 2 - LINE OF CREDIT
National has an unsecured line of credit of $3,000,000. The line is
subject to renewal on August 1, 1999. Borrowings bear interest at the bank's
prime rate. Historically, 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. Interest is payable monthly. At March
26, 1999, National had $3,000,000 of borrowings outstanding.
NOTE 3 - CONTINGENCIES
In April 1997, a Trust and three individuals, commenced an action
against National as discussed in the Company's Form 10-Q for the quarter
ended December 31, 1998. On February 16, 1999, the District Court dismissed
the plaintiffs' remaining claims against National in their entirety and
granted National's motion for summary judgment. A final judgment was issued
by the court on April 26, 1999. The plaintiffs filed a notice of appeal on
May 4, 1999.
In May 1997, a minority stockholder of the Company commenced a
lawsuit against the Company as discussed in the Company's Form 10-Q for the
quarter ended December 31, 1998. In April 1999, all parties agreed to a
settlement of this matter that is in the process of being finalized. As part
of the settlement, the Company will issue to the plaintiff 25,000 shares of
restricted common stock valued at approximately $100,000 and a five year
warrant to acquire 50,000 shares of the Company's common stock at a price of
$4.00 per share.
In September 1997, a corporation commenced an action against
National as discussed in the Company's Form 10-Q for the quarter ended
December 31, 1998. In February 1999, all parties agreed to settle this
litigation. As part of the settlement, the Company issued to the plaintiff
40,000 shares of common stock valued at $135,000. In April 1999, the court
dismissed this litigation with prejudice.
6
In October 1998, a corporation commenced an action against National
claiming that during the unsuccessful effort to complete an initial public
offering of the plaintiff's stock National breached the terms of two letters
of intent concerning the offering, breached their fiduciary duties, and
engaged in both intentional and negligent misrepresentation. Compensatory
damages of $650,000 are being sought in this matter as well as an unspecified
amount of punitive damages.
The Company has been named together with others as a defendant in
several class action lawsuits filed against Complete Management, Inc.
Although National has not yet been served in any of these actions, it intends
to vigorously defend itself.
The Company's subsidiaries are defendants in various other
arbitrations and administrative proceedings, lawsuits and claims, which in
the aggregate seek general and punitive damages. These matters 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.
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995 PROVIDES A SAFE
HARBOR FOR FORWARD-LOOKING STATEMENTS. THIS QUARTERLY REPORT MAY CONTAIN
CERTAIN STATEMENTS OF A FORWARD-LOOKING NATURE RELATING TO FUTURE EVENTS OR
FUTURE BUSINESS PERFORMANCE. ANY SUCH STATEMENTS THAT REFER TO THE COMPANY'S
ESTIMATED OR ANTICIPATED FUTURE RESULTS OR OTHER NON-HISTORICAL FACTS ARE
FORWARD-LOOKING AND REFLECT THE COMPANY'S CURRENT PERSPECTIVE OF EXISTING
TRENDS AND INFORMATION. THESE STATEMENTS INVOLVE RISKS AND UNCERTAINTIES THAT
CANNOT BE PREDICTED OR QUANTIFIED AND, CONSEQUENTLY, ACTUAL RESULTS MAY
DIFFER MATERIALLY FROM THOSE EXPRESSED OR IMPLIED BY SUCH FORWARD-LOOKING
STATEMENTS. SUCH RISKS AND UNCERTAINTIES INCLUDE, AMONG OTHERS, RISKS AND
UNCERTAINTIES DETAILED IN THE COMPANY'S REGISTRATION STATEMENT ON FORM S-3
(REGISTRATION NO. 333-74243), FILED WITH THE SECURITIES AND EXCHANGE
COMMISSION ON MARCH 11, 1999, AS AMENDED, AND THE COMPANY'S OTHER SECURITIES
AND EXCHANGE COMMISSION FILINGS, INCLUDING THE COMPANY'S ANNUAL REPORT ON
FORM 10-K AND QUARTERLY REPORTS ON FORM 10-Q. THE FORWARD-LOOKING STATEMENTS
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 26, 1999 COMPARED TO QUARTER ENDED MARCH 27, 1998
The Company's second quarter of fiscal 1999 resulted in a slight
increase in revenues and a decrease in expenses compared with the same period
of fiscal 1998. The increase in revenue is due to growth in retail brokerage
operations causing a significant increase in commission revenue.
7
Revenues increased $182,000, or 2%, to $10,355,000 from $10,173,000.
During the fourth quarter fiscal 1998, the Company sold its subsidiary, L.H.
Friend, Weinress, Franksen & Presson, Inc. ("Friend"). Revenues increased
$1,657,000 or 19% during the second quarter fiscal 1999 compared with the
second quarter fiscal 1998, exclusive of Friend. The increase in revenues is
due mainly to increased commission revenue. Commission revenue increased
$1,713,000, or 31%, to $7,202,000 from $5,489,000 during the second quarter
fiscal 1999 compared with the second quarter fiscal 1998. Commission revenue
increased $1,888,000, or 36%, during the second quarter fiscal, exclusive of
Friend. This increase is due to favorable market conditions and the addition
of registered representatives.
This increase in commission revenue almost offset the total decrease
in net dealer inventory gains and underwriting revenues. Net dealer inventory
gains decreased $1,127,000, or 59%, to $790,000 from $1,917,000 during the
second quarter fiscal 1999 compared with the second quarter fiscal 1998. Net
dealer inventory gains decreased $734,000, or 48%, exclusive of Friend. This
decrease is due to reduced trading margins in stocks where the Company makes
a market. Underwriting revenue decreased $736,000, or 56%, to $574,000 from
$1,310,000 during the second quarter fiscal 1999 compared to the second
quarter fiscal 1998. Underwriting revenue increased $163,000, or 40%, to
$574,000 from $411,000 during the second quarter fiscal 1999 compared with
the second quarter fiscal 1998, exclusive of Friend. Friend had underwriting
revenue of $899,000 during the second quarter fiscal 1998 from participation
in public offerings and various private placement fees. During the second
quarter fiscal 1999 and the second quarter fiscal 1998, the Company did not
manage a public underwriting. Underwriting revenue during the second quarter
fiscal 1999 was generated primarily from the close of several private
placement transactions and advisory fees.
Although revenues increased expenses decreased $709,000, or 6%, to
$10,336,000 from $11,045,000 during the second quarter fiscal 1999 from the
second quarter fiscal 1998. This decrease in expenses is due to the expenses
generated at Friend during the second quarter fiscal 1998. Expenses increased
$1,173,000, or 13%, to $10,336,000 from $9,163,000 during the second quarter
fiscal 1999 compared with the second quarter fiscal 1998, exclusive of
Friend. Concurrent with the 36% increase in commission revenues, commission
expenses increased 22%, or $1,088,000, to $5,960,000 from $4,872,000 during
the second quarter fiscal 1999 compared with second quarter fiscal 1998,
exclusive of Friend. Salaries decreased $775,000, or 41%, to $1,119,000 from
$1,894,000. This decrease is due to the sale of Friend, which had salaries of
$773,000 during the second quarter fiscal 1998. Overall, combined commissions
and salaries as a percentage of revenue decreased 4% to 68% in the second
quarter fiscal 1999 compared with 72% in the second quarter fiscal 1998.
As anticipated, with the sale of Friend expenses regarding
communications, occupancy, clearing, taxes, licenses and registration and
other have decreased from the second quarter fiscal 1998 to the second
quarter fiscal 1999. Communications expenses,
8
mainly telephone, telequote and mailing decreased $180,000, or 38%, to
$295,000 from $475,000. Friend had communications expenses of $99,000 in the
second quarter fiscal 1998. Occupancy expense, consisting mainly of rent,
office supplies and depreciation decreased $332,000, or 36%, to $580,000 from
$912,000. Friend had occupancy expenses totaling $165,000 during the second
quarter fiscal 1998. The additional decrease in communications and occupancy
relates to National closing a branch office in New York and subletting excess
office space in Chicago. Clearing fees decreased $30,000, or 7%, to $385,000
from $415,000. This relates to the sale of Friend, which accounted for
$94,000 of clearing expenses in the second quarter fiscal 1998. Exclusive of
Friend, clearing fees actually increased $64,000 due to the increased volume
of transactions. Taxes, licenses and registration decreased $144,000, or 57%,
to $107,000 from $251,000. Finally, other expenses decreased $509,000, or
62%, to $315,000 from $824,000 in the second quarter of fiscal 1999 and 1998,
respectively. The sale of Friend and closure of the branch office in New York
contributed $247,000 to this decrease. Additionally, in second quarter fiscal
1998, the Company incurred receivable write-offs of $97,000 and additional
travel and moving expenses of $93,000 at Olympic and National. During the
second quarter fiscal 1999, amortization expenses decreased $57,000 from the
second quarter fiscal 1998. Amortization decreased due to the write off of
goodwill related to the sale of the two subsidiaries and the amortization of
a prepaid asset at WestAmerica that was recorded during fiscal 1997 as part
of the purchase price.
Interest expense and professional fees increased during second
quarter fiscal 1999 as compared with the second quarter fiscal 1998. Interest
expense increased $221,000, or 33%, to $888,000 from $667,000. The main
reason for this increase is the increase in customer deposits, on which the
Company pays interest, and the interest on debt incurred in fiscal 1998.
Interest expense was offset by increased interest revenue of $255,000, or
26%, to $1,239,000 from $984,000.
Professional fees increased $523,000, or 319%, to $687,000 from
$164,000. After adjusting for professional fees paid at Friend, professional
fees increased $551,000, or 406%, in the second quarter fiscal 1999 compared
with second first quarter fiscal 1998 due to increased litigation (See Part
II, Item 1). As part of this litigation, the Company settled a lawsuit in
February 1999, whereby the Company issued 40,000 shares of common stock
valued at $135,000. This settlement is included in professional fees for the
1999 quarter.
Overall, the Company reported net income of $20,000 or $.01 per
share for the second quarter fiscal 1999 compared with a loss of $577,000 or
$.38 per share in the second quarter fiscal 1998.
SIX MONTHS ENDED MARCH 26, 1999 COMPARED TO SIX MONTHS ENDED MARCH 27, 1998
The Company's first six months of fiscal 1999 resulted in
significant decreases in both revenues and expenses compared with the same
period of fiscal 1998. These decreases were primarily due to the sale of two
subsidiaries, Friend and Travis Capital, Inc.
9
("Travis"). For the six months total revenues decreased 27% to $18,514,000 in
fiscal 1999 from $25,574,000 in fiscal 1998. This decrease in revenue is due
primarily to the decrease in underwriting revenue and dealer inventory gains
as the weak capital markets for initial public offerings by small cap issuers
continued.
For the first six months of fiscal 1999 underwriting revenue
decreased $7,138,000 or 86% to $1,138,000 from $8,276,000 as compared with
the same period for fiscal 1998. National participated in two private
placements raising approximately $7 million in gross proceeds in the first
six months of fiscal 1999. During the first six months fiscal 1998, National,
through the management of two underwritings and co-management of one
underwriting with Friend, as well as three successful private placements,
generated $4,284,000 of underwriting revenue. Friend managed its first
underwriting during the first six months of fiscal 1998 and participated in
several other underwritings and private placements, generating $3,903,000 of
underwriting revenue.
Net dealer inventory gains decreased $1,806,000, or 59%, to
$1,256,000 from $3,062,000 during the first six months of fiscal 1999
compared with the same period of fiscal 1998. Exclusive of Friend and Travis,
net dealer inventory gains decreased $1,369,000 or 52%. This decrease is due
to reduced trading margins in stocks where the Company makes a market.
Although overall revenue decreased during the first six months of
fiscal 1999, commission revenue increased $1,546,000, or 14%, to $12,838,000
from $11,292,000. Exclusive of Friend and Travis, commission revenue
increased $2,272,000, or 22%, during the first six months of fiscal 1999.
This increase is due to favorable market conditions and the addition of
registered representatives.
Concurrent with the overall decrease in revenues, total expenses
decreased $7,382,000, or 28%, to $18,755,000 from $26,137,000 in fiscal 1998.
This decrease in expenses was anticipated due to significant decreases in
revenues. The most significant decreases were commission expense and salaries.
Commission expense decreased $3,210,000, or 23%, to $10,547,000
during the first six months fiscal 1999 from $13,757,000 in the first six
months fiscal 1998. Salaries decreased $2,712,000, or 57%, to $2,077,000 from
$4,789,000. Friend and Travis had combined commission and salary expense of
$4,235,,000 in the first six months of fiscal 1998. The remaining decrease in
salary expense was $601,000 or 22% in the first six months of fiscal 1999, as
management incurred salary reductions in an effort to reduce overhead
expenses. Overall, combined commissions and salaries as a percentage of
revenue decreased 5% to approximately 68% from approximately 73% in the first
six months of fiscal 1999 and 1998, respectively.
As anticipated, with the sale of Friend and Travis expenses
regarding communications, occupancy, clearing, taxes, licenses and
registration and other have decreased from the first six months of fiscal
1998 to the first six months of fiscal 1999.
10
Communications expenses, mainly telephone, telequote and mailing decreased
$400,000, or 41%, to $574,000 from $974,000. Friend and Travis had combined
communications expenses of $210,000 in fiscal 1998. Occupancy expense,
consisting mainly of rent, office supplies and depreciation decreased
$574,000, or 32%, to $1,237,000 from $1,811,000. This decrease relates to the
sale of the two subsidiaries as well as National closed a branch office in
New York and subletting excess office space in Chicago. Clearing fees
decreased $134,000, or 16%, to $710,000 from $844,000. This relates to the
sale of Friend, which accounted for $242,000 of clearing expenses in the
first six months of fiscal 1998. Exclusive of Friend, clearing fees actually
increased $108,000 due to the increased volume of transactions. Taxes,
licenses and registration decreased $272,000, or 55%, to $220,000 from
$492,000. Finally, other expenses decreased $1,001,000, or 62%, to $613,000
from $1,614,000 during the first six months of fiscal 1999 and 1998,
respectively. The sale of the two subsidiaries and closure of a branch office
in New York contributed $497,000 to this decrease. Additionally, during the
first six months of fiscal 1998, the Company incurred receivable write-offs
of $97,000 and additional travel and moving expenses of $273,000 at Olympic
and National. During the first six months of fiscal 1999, amortization
expenses decreased $117,000 from the first six months of fiscal 1998.
Amortization decreased due to the write off of goodwill related to the sale
of the two subsidiaries and the amortization of a prepaid asset at
WestAmerica that was recorded during fiscal 1997 as part of the purchase
price.
Interest expense and professional fees increased during first six
months of fiscal 1999 as compared with the first six months of fiscal 1998.
Interest expense increased $353,000, or 26%, to $1,711,000 from $1,358,000.
The main reason for this increase is the increase in customer deposits, on
which the Company pays interest, and the interest on debt incurred in fiscal
1998. Interest expense was offset by increased interest revenue of $375,000,
or 18%, to $2,408,000 from $2,033,000.
Professional fees increased $568,000, or 114%, to $1,066,000 from
$498,000. After adjusting for professional fees paid at Friend and Travis,
professional fees increased $623,000, or 141%, during the first six months of
fiscal 1999 compared with the first six months of fiscal 1998 due to
increased litigation (See Part II, Item 1). As part of this litigation, the
Company settled a lawsuit in February 1999, whereby the Company issued 40,000
shares of common stock valued at $135,000. This settlement is included in
professional fees for the six months ended March 26, 1999.
Overall, the Company reported a loss of $243,000, or $.16 per share,
during the first six months of fiscal 1999 compared with a loss of $385,000,
or $.26 per share, during the same period fiscal 1998.
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
11
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.
Historically, 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. The line of credit agreement expires August 1, 1999. At
March 26, 1999 National had $3,000,000 of borrowings outstanding.
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 26, 1999, National's net capital exceeded the requirement by $1,457,000.
WestAmerica, as a registered broker-dealer is also subject to the
SEC's Net Capital Rule 15c3-1, which, under the standard method, requires
that the company maintain minimum net capital equal to the greater of
$100,000 or 6-2/3% of aggregate indebtedness. At March 31, 1998,
WestAmerica's net capital exceeded the requirement by $79,000.
Advances, dividend payments and other equity withdrawals from
National 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.
Unlike WestAmerica, National requires its registered representatives
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.
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YEAR 2000 UPDATE
The Company defines a system as Year 2000 compliant as one capable
of correct identification, manipulation and calculation when processing data
during the year change from December 31, 1999 to January 1, 2000.
The Company is addressing the Year 2000 issue in the following two
phases. During phase one, completed in October 1998, the Company prepared an
inventory of all Information Technology ("IT") and non-IT systems, critical
to operations. The Company tested all of its internal IT systems and
concluded that not all systems are compliant under the above definition. The
Company has determined the remedies necessary to achieve Year 2000
compliance. The Company has retained an outside consulting firm, Washington
Web Site Services, which works on site and will continue working with the
Company, at a minimum, until all IT systems are Year 2000 compliant.
In phase two, the Company has begun replacing hardware chips,
software and entire components in those systems deemed to be non-compliant.
The Company expects to complete phase two by September 1999 for National and
by May 1999 for WestAmerica. As required by the NASD, National and
WestAmerica will be completing a Year 2000 readiness report. As part of this
report, the Company engaged its independent accounting firm to perform
certain agreed upon procedures and report on the Company's process for
addressing Year 2000 problems. These reports were filed by April 30, 1999.
The majority of the Company's trade processing information is
handled through a third party vendor. In the first quarter of fiscal 1999,
the Company negotiated an agreement to change to BETA Systems, Inc. from its
prior vendor. The Company implemented this conversion at the end of March
1999. As part of this agreement, BETA Systems, Inc. has represented to the
Company that they will be Year 2000 compliant. Additionally, the Company has
initiated formal communications with all other significant data processing
and telecommunications vendors to determine the extent to which the Company
is vulnerable to those third parties failure to remediate their own Year 2000
Issue. These vendors have represented to the Company they will be compliant
with the requirements of the Year 2000.
The Company has determined that material costs and resources will
not be required to modify or replace portions of its hardware and software so
that its computer systems will properly utilize dates beyond December 31,
1999. To date, the Company has spent approximately $100,000 and estimates it
will spend less than $200,000 in total regarding the Year 2000 issue.
The Company has developed a contingency plan for unanticipated Year
2000 exposure as part of its overall efforts to ensure that its systems are
Year 2000 compliant on a timely basis. National has clearing arrangements
with other brokerage firms and if its internal systems incur Year 2000
problems, National will clear its business through these other firms.
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The costs of the project and the date on which the Company plans to
complete the Year 2000 modifications are based on management's best
estimates, which were derived utilizing numerous assumptions of future events
including the continued availability of certain resources, third party
modification plans and other factors. However, even if the Company's systems
and the Company's significant vendors are compliant, the potential impact of
the Year 2000 problem on the securities industry as a whole could be
material, as virtually every aspect of the sales of securities and processing
of transactions will be affected. Due to the size of the problem facing the
securities industry and the interdependent nature of the business, the
Company may be materially adversely affected by this issue.
The foregoing represents a Year 2000 readiness disclosure entitled
to protection as provided in the Year 2000 Information and Readiness
Disclosure Act.
PART II
The Company is not required to respond to Items 1 though 6 in Part II, except
as follows:
ITEM 1 - LEGAL PROCEEDINGS
1. THE MAXAL TRUST, ET AL. V. NATIONAL SECURITIES CORPORATION ET AL.,
United States District Court, Central District of California, Case No.
CV-97-4392 ABC (Shx). See disclosure in the Company's Form 10-Q for the
quarter ended December 31, 1998.
On February 16, 1999, the District Court dismissed the plaintiffs'
remaining claims against National in their entirety and granted
National's motion for summary judgment. A final judgment was issued by
the court on April 26, 1999. The plaintiffs filed a notice of appeal on
May 4, 1999.
2. MAYNARD MALL REALTY TRUST V. NATIONAL SECURITIES CORPORATION, ET AL.,
United States District Court, Western District of Washington, Case No.
97-CV-00967. See disclosure in the Company's Form 10-Q for the quarter
ended December 31, 1998.
In April 1999, all parties agreed to a settlement of this matter that
is in the process of being finalized. As part of the settlement, the
Company will issue to the plaintiff 25,000 shares of restricted common
stock valued at approximately $100,000 and a five year warrant to
acquire 50,000 shares of the Company's common stock at a price of $4.00
per share.
3. CASULL ARMS CORPORATION V. NATIONAL SECURITIES CORP. AND ROBERT A.
SHUEY, III, United States District Court, District of Wyoming,
97CV-229B. See disclosure in the Company's Form 10-Q for the quarter
ended December 31, 1998.
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In February 1999, all parties settled this litigation. As part of the
settlement, the Company issued to the plaintiff 40,000 shares of common
stock valued at $135,000. In April 1999, the court dismissed this
litigation with prejudice.
4. THERMOENERGY CORPORATION V. NATIONAL SECURITIES CORPORATION, ET AL.,
United States District Court, Eastern District of Arkansas, Docket No.
LR-C-98.657. This action was commenced in October 1998 against the
Company, National and an officer of the Company relating to purported
attempts to underwrite a public offering on behalf of the plaintiff.
The plaintiff alleges that in the course of the ultimately unsuccessful
efforts to complete an initial public offering, National breached the
terms of two letters of intent, breached fiduciary duties to the
plaintiff and engaged in both intentional and negligent
misrepresentation. The complaint also seeks relief based on a
quasi-contractual theory of "promissory estoppel." The plaintiff seeks
$650,000 in compensatory damages, plus an unspecified amount of
punitive damages. The Company denies all liability to the plaintiff and
believes it has meritorious defenses to plaintiff's claims. The Company
presently intends to continue its vigorous defense of this action.
5. LITIGATION INVOLVING COMPLETE MANAGEMENT, INC. The Company has been
named together with others as a defendant in several class action
lawsuits filed against Complete Management, Inc. Although National has
not yet been served in any of these actions it intends to vigorously
defend itself against any claims that may be brought.
ITEM 2 - CHANGES IN SECURITIES AND USE OF PROCEEDS
In February 1999, the Company issued 40,000 unregistered shares of
its common stock in settlement of a lawsuit. The common stock was valued at
$135,000. The issuance of these securities was exempt from registration under
the Securities Act pursuant to Section 4(2) thereof on the basis that the
transaction did not involve a public offering.
In March 1999, the Company issued 20,000 unregistered shares of its
common stock to a law firm that represents the Company in various matters.
These shares were issued in payment of balances owed for past services
rendered. The common stock was valued at $80,000. The issuance of these
securities was exempt from registration under the Securities Act pursuant to
Section 4(2) thereof on the basis that the transaction did not involve a
public offering.
In March 1999, the Company issued 10,000 unregistered shares of its
common stock to a law firm that represents the Company in various matters.
These shares were issued in payment of balances owed for past services
rendered. The common stock was valued at $40,000. The issuance of these
securities was exempt from registration under the Securities Act pursuant to
Section 4(2) thereof on the basis that the transaction did not involve a
public offering.
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ITEM 4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Company held its annual meeting of shareholders on March 25,
1999. The shareholders elected for the ensuing year all of the nominees for
the Board of Directors as follows: Steven A. Rothstein, Gary A. Rosenberg,
James C. Holcomb, Jr. and D.S. Patel. Also, the shareholders ratified the
appointment of Feldman Sherb Ehrlich & Co., P.C. as independent accountants
for the fiscal year ending September 24, 1999.
The voting results are as follows:
Number of Shares
----------------
Broker
For Against Abstentions Non-Votes
Election of the Board
of Directors 814,594 23,726 12,139 49,107
Ratify the appointment of
Feldman Sherb Ehrlich
& Co., P.C. as independent
accountants 844,427 5,797 235 49,107
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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 7, 1999 By: /s/ Steven A. Rothstein
Date Steven A. Rothstein, Chairman,
President and Chief Executive Officer
May 7, 1999 By: /s/ Robert H. Daskal
Date Robert H. Daskal, Senior Vice
President, Chief Financial Officer,
Secretary and Treasurer
May 7, 1999 By: /s/ David M. Williams
Date David M. Williams
Controller
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