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, 2003 Commission File Number 001-12629
----------------- ---------
OLYMPIC CASCADE FINANCIAL CORPORATION
-------------------------------------
(Exact name of registrant as specified in its charter)
DELAWARE 36-4128138
- ----------------------- ----------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
875 North Michigan Avenue, Suite 1560, Chicago, Illinois 60611
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(Address of principal executive offices) (Zip code)
Registrant's telephone number, including area code: (312) 751-8833
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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 [ ]
Indicate by checkmark whether the registrant is an accelerated filer (as defined
in Rule 12b-2 of the Exchange Act). Yes [X] No [ ]
The number of shares outstanding of registrant's common stock, par value $0.02
per share, at February 11, 2004 was 3,367,558.
1
OLYMPIC CASCADE FINANCIAL CORPORATION AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
ASSETS
December 31, September 30,
2003 2003
(unaudited) (see note below)
-------------- ----------------
CASH $ 276,000 $ 451,000
DEPOSITS WITH CLEARING ORGANIZATIONS 569,000 1,041,000
RECEIVABLES FROM BROKER-DEALERS AND CLEARING ORGANIZATIONS 3,153,000 3,724,000
OTHER RECEIVABLES, net of reserve for uncollectible accounts of $650,000
at December 31, 2003 and September 30, 2003, respectively 687,000 709,000
ADVANCES TO REGISTERED REPRESENTATIVES 748,000 644,000
SECURITIES HELD FOR RESALE, at market 906,000 374,000
FIXED ASSETS, net 246,000 247,000
SECURED DEMAND NOTE 1,000,000 1,000,000
OTHER ASSETS 582,000 545,000
-------------- ----------------
TOTAL ASSETS $ 8,167,000 $ 8,735,000
============== ================
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
BANK OVERDRAFT $ 182,000 $ -
PAYABLE TO BROKER-DEALERS AND CLEARING ORGANIZATIONS 328,000 258,000
SECURITIES SOLD, BUT NOT YET PURCHASED, at market 578,000 116,000
ACCOUNTS PAYABLE, ACCRUED EXPENSES AND OTHER LIABILITIES 3,778,000 4,520,000
NOTES PAYABLE 2,166,000 3,170,000
-------------- ----------------
TOTAL LIABILITIES 7,032,000 8,064,000
-------------- ----------------
SUBORDINATED BORROWINGS 1,000,000 1,000,000
-------------- ----------------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY (DEFICIT)
Preferred stock, $.01 par value, 100,000 shares authorized; designated Series A
9% cumulative convertible preferred stock, 30,000 shares authorized; 27,825
shares issued and outstanding (liquidation preference: $2,782,500) - -
Common stock, $.02 par value, 60,000,000 shares authorized, 3,367,558 issued
and outstanding at December 31, 2003 and September 30, 2003, respectively 67,000 67,000
Additional paid-in capital 12,628,000 12,628,000
Accumulated deficit (12,560,000) (13,024,000)
-------------- ----------------
TOTAL STOCKHOLDERS' EQUITY (DEFICIT) 135,000 (329,000)
-------------- ----------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT) $ 8,167,000 $ 8,735,000
============== ================
Note: The balance sheet at September 30, 2003 has been derived from the audited consolidated financial statements at that date.
See notes to condensed consolidated financial statements
2
OLYMPIC CASCADE FINANCIAL CORPORATION AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
-------- Three Months Ended -----
December 31, December 31,
2003 2002
------------------ --------------
REVENUES:
Commissions $ 11,372,000 $ 6,008,000
Net dealer inventory gains 2,064,000 3,557,000
Interest and dividends 669,000 312,000
Transfer fees and clearing services 583,000 375,000
Investment banking 332,000 106,000
Other 124,000 235,000
------------------ --------------
TOTAL REVENUES 15,144,000 10,593,000
------------------ --------------
EXPENSES:
Commissions 10,561,000 6,901,000
Employee compensation and related expenses 1,277,000 1,021,000
Clearing fees 711,000 682,000
Communications 579,000 558,000
Occupancy and equipment costs 670,000 753,000
Interest 51,000 45,000
Professional fees 355,000 231,000
Taxes, licenses, registration 100,000 85,000
Other 351,000 476,000
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TOTAL EXPENSES 14,655,000 10,752,000
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INCOME (LOSS) FROM OPERATIONS 489,000 (159,000)
------------------ --------------
OTHER INCOME (EXPENSE):
Gain on extinguishment of debt 375,000 -
Litigation settlement (400,000) -
------------------ --------------
TOTAL OTHER INCOME (EXPENSE), NET (25,000) -
------------------ --------------
NET INCOME (LOSS) 464,000 (159,000)
Preferred stock dividends (63,000) (63,000)
------------------ --------------
Net income (loss) attributable to common stockholders $ 401,000 $ (222,000)
================== ==============
NET INCOME (LOSS) PER COMMON SHARE
Basic:
Net income (loss) attributable to common stockholders $ 0.12 $ (0.08)
================== ==============
Diluted:
Net income (loss) attributable to common stockholders $ 0.07 $ (0.08)
================== ==============
Weighted average number of shares outstanding
Basic 3,367,558 2,624,085
================== ==============
Diluted 5,441,964 2,624,085
================== ==============
See notes to condensed consolidated financial statements
3
OLYMPIC CASCADE FINANCIAL CORPORATION AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
----------Three Months Ended--------------
December 31, 2003 December 31, 2002
--------------------- ----------------------
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss) $ 464,000 $ (159,000)
Adjustments to reconcile net income (loss) to net
cash provided by (used in) operating activities
Depreciation and amortization 45,000 65,000
Amortization of note discount 8,000 8,000
Gain on extinguishment of debt (375,000) -
Forgiveness of loan (137,000) (99,000)
Litigation settlement 400,000 -
Changes in assets and liabilities
Restricted cash - 305,000
Deposits with clearing organizations 472,000 401,000
Receivables from broker-dealers, clearing organizations and others 489,000 (336,000)
Securities held for resale, at market (532,000) (419,000)
Other assets (37,000) (127,000)
Payables (1,072,000) 75,000
Securities sold, but not yet purchased, at market 462,000 98,000
--------------------- ----------------------
Net cash provided by (used in) operating activities 187,000 (188,000)
--------------------- ----------------------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of fixed assets (44,000) (36,000)
--------------------- ----------------------
CASH FLOWS FROM FINANCING ACTIVITIES
Payment of notes payable (500,000) -
Increase (decrease) in cash overdraft 182,000 (360,000)
Net proceeds from issuance of common stock and warrants - 554,000
--------------------- ----------------------
Net cash provided by (used in) financing activities (318,000) 194,000
--------------------- ----------------------
NET DECREASE IN CASH (175,000) (30,000)
CASH BALANCE
Beginning of the period 451,000 325,000
--------------------- ----------------------
End of the period $ 276,000 $ 295,000
===================== ======================
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash paid during the period for:
Interest $ 51,000 $ 45,000
===================== ======================
SUPPLEMENTAL DISCLOSURES OF NONCASH INVESTING AND
FINANCING ACTIVITIES
Conversion of accounts payable to loan payable $ - $ 375,000
===================== ======================
Gain on extinguishment of debt $ 375,000 $ -
===================== ======================
Forgiveness of loan $ 137,000 $ 99,000
===================== ======================
See notes to condensed consolidated financial statements
4
OLYMPIC CASCADE FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2003
(UNAUDITED)
NOTE 1 - BASIS OF PRESENTATION
The accompanying consolidated financial statements of Olympic Cascade Financial
Corporation ("Olympic" or the "Company") have been prepared in accordance with
generally accepted accounting principles for interim financial statements and
with the instructions to Form 10-Q and Rule 10-01 of Regulation S-X.
Accordingly, they do not include all of the information and disclosures required
for annual financial statements. In the opinion of management, all adjustments
(consisting of normal recurring accruals) considered necessary for a fair
presentation have been included. The consolidated financial statements as of and
for the periods ended December 31, 2003 and December 31, 2002 are unaudited. The
results of operations for the interim periods are not necessarily indicative of
the results of operations for the fiscal year. These consolidated 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 30, 2003.
Reclassifications - Certain amounts shown in the prior period's condensed
consolidated financial statements have been reclassified to conform with the
current period's condensed consolidated financial statement presentation. These
reclassifications had no effect on net income (loss) or stockholders' equity
(deficit) as previously presented.
NOTE 2 - RECENT ACCOUNTING PRONOUNCEMENTS
Stock-Based Compensation - During the quarter ended March 31, 2003, the Company
adopted Statement of Financial Accounting Standard ("SFAS") No. 148, "Accounting
for Stock-Based Compensation - Transition and Disclosure." This statement
amended SFAS No. 123, "Accounting for Stock-Based Compensation." As permitted
under SFAS No. 123, the Company continues to apply the Accounting Principles
Board Opinion No. 25, "Accounting for Stock Issued to Employees." As required
under SFAS No. 148, the following table presents pro forma net income (loss)
attributable to common stockholders for basic and diluted net income (loss) per
share as if the fair value-based method had been applied to all awards.
5
Three Months Ended
December 31, 2003 December 31, 2002
---------------------------------------
Net income (loss) attributable to common stockholders - as reported $ 401,000 $ (222,000)
Stock-based employee compensation cost determined
under fair value method, net of tax effects (9,000) (4,000)
---------------------------------------
Net income (loss) attributable to common stockholders - pro forma $ 392,000 $ (226,000)
=======================================
Earnings (loss) per share
Basic earnings (loss) per share:
Net income (loss) attributable to common stockholders - as reported $ 0.12 $ (0.08)
Per share stock-based employee compensation cost
determined under fair value method, net of tax effects - -
---------------------------------------
Net income (loss) attributable to common stockholders - pro forma $ 0.12 $ (0.08)
=======================================
Diluted earnings (loss) per share:
Net income (loss) attributable to common stockholders - as reported $ 0.07 $ (0.08)
Per share stock-based employee compensation cost
determined under fair value method, net of tax effects - -
---------------------------------------
Net income (loss) attributable to common stockholders - pro forma $ 0.07 $ (0.08)
=======================================
The Black-Scholes option valuation model was used to estimate the fair value of
the options granted in the quarters ended December 31, 2003 and 2002. The model
includes subjective input assumptions that can materially affect the fair value
estimates. The model was developed for use in estimating the fair value of
traded options that have no vesting restrictions and that are fully
transferable. For example, the expected volatility is estimated based on the
most recent historical period of time equal to the weighted average life of the
options granted. Options issued under the Company's option plans have
characteristics that differ from traded options. In management's opinion, this
valuation model does not necessarily provide a reliable single measure of the
fair value of its employee stock options. Principal assumptions used in applying
the Black-Scholes model along with the results from the model were as follows:
Three months ended December 31,
2003 2002
===============================
Assumptions:
Risk-free interest rate 4.01% 4.01%
Expected life, in years 5.0 5.0
Expected volatility 311% 311%
Results:
Fair value of options granted $ 0.52 $ 0.52
6
In January 2003, the Financial Accounting Standards Board ("FASB") issued
Interpretation Number 46, "Consolidation of Variable Interest Entities" ("FIN
No. 46"). This interpretation of Accounting Research Bulletin ("ARB") No. 51,
"Consolidated Financial Statements," provides guidance for identifying a
controlling interest in a variable interest entity ("VIE") established by means
other than voting interests. FIN No. 46 also requires consolidation of a VIE by
an enterprise that holds such a controlling interest. In December 2003, the FASB
completed its deliberations regarding the proposed modification to FIN No. 46
and issued Interpretation Number 46(R), "Consolidation of Variable Interest
Entities - an Interpretation of ARB No. 51" ("FIN No. 46(R)"). The decisions
reached included a deferral of the effective date and provisions for additional
scope exceptions for certain types of variable interests. Application of FIN No.
46(R) is required in financial statements of public entities that have interests
in VIEs or potential VIEs commonly referred to as special-purpose entities for
periods ending after December 15, 2003. Application by public entities (other
than small business issuers) for all other types of entities is required in
financial statements for periods ending after March 15, 2004. The adoption of
FIN No. 46(R) is not expected to have an impact on the Company's consolidated
financial position, results of operations or cash flows.
NOTE 3 - SECURITIES HELD FOR RESALE AND SECURITIES SOLD, BUT NOT YET
PURCHASED
The following table shows the quoted market values of the Company's securities
held for resale and securities sold, but not yet purchased as of December 31,
2003:
Securities held Securities sold, but
for resale not yet purchased
------------------- --------------------
Corporate Stocks $ 328,000 $ 515,000
Corporate Bonds 348,000 24,000
Government Obligations 230,000 39,000
------------------- --------------------
$ 906,000 $ 578,000
=================== ====================
NOTE 4 - FIRST CLEARING CORPORATION
In the first quarter of fiscal year 2003, First Clearing Corporation ("First
Clearing") loaned the Company an additional $375,000 in the form of clearing fee
rebates. The loan was due to be repaid in January 2004.
In December 2003, the Company engaged in various discussions with the NASD
relating to the Security Agreement between National and First Clearing, and its
effect on the computation of National's net capital. As a result of these
discussions, on December 15, 2003, the Company and First Clearing agreed in
principle to the following: (1) National's clearing deposit was reduced from
$1,000,000 to $500,000; (2) the excess $500,000 resulting from this reduction
was paid to First Clearing to reduce the Company's outstanding loan balance on
its promissory note to First Clearing; and (3) the Security Agreement between
National and First Clearing was terminated. Furthermore, First Clearing forgave
payment of $375,000 that was due to be paid in January 2004.
7
NOTE 5 - CONTINGENCIES
In April 2002, a former executive officer of the Company, Craig M. Gould,
commenced an action against the Company claiming a breach of his employment
contract, and seeking approximately $850,000 in damages. The arbitration
commenced in July 2003 and was completed in December 2003. On January 26, 2004,
the arbitration panel awarded damages against the Company of approximately
$400,000, which has been accrued for in "Accounts Payable, Accrued Expenses and
Other Liabilities" on the accompanying condensed consolidated statements of
financial condition at December 31, 2003. The Company believes it had
meritorious defenses and is currently considering the filing of a motion to
vacate this arbitration award and/or filing an appeal of this decision.
In June 2002, National was named, together with others, as a defendant in a
class action lawsuit relating to a series of private placements of securities in
Fastpoint Communications, Inc. in the Superior Court for the State of California
for the County of San Diego. Plaintiffs are seeking approximately $14.0 million,
but no specific amount of damages has been sought against National in the
complaint. National filed its answer, and believes it has meritorious defenses
and intends to vigorously defend this action, although the ultimate outcome of
the matter cannot be determined at this time. In January 2004, the court entered
an order denying class certification. Accordingly, the Company is unable to
predict the outcome of this matter, and no adjustments have been made in the
consolidated financial statements in response to this matter.
The Company is also a defendant in various other arbitrations and administrative
proceedings, lawsuits and claims, seeking damages aggregating approximately $3.0
million (exclusive of specified punitive damages of approximately $4.0 million,
unspecified punitive damages related to certain claims and expected insurance
coverage). The Company has filed a counterclaim for approximately $200,000 in
one such proceeding. These matters arise out of the normal course of business.
The Company intends to vigorously defend itself in these actions, however the
ultimate outcome of these matters cannot be determined at this time. The amount
related to such matters that is reasonably estimable and which has been included
in "Professional fees" and in "Accounts Payable, Accrued Expenses and Other
Liabilities" on the accompanying condensed consolidated December 31, 2003
financial statements for $164,000.
NOTE 6 - CUMULATIVE DIVIDENDS ON CONVERTIBLE PREFERRED STOCK
The holders of the Company's Series A Convertible Preferred Stock are to receive
dividends on a quarterly basis at a rate of 9% per annum, per share. Such
dividends are cumulative and accrue whether or not declared by the Company's
Board of Directors, but are payable only when, as and if declared by the
Company's Board of Directors. At December 31, 2003, the amount of accumulated
dividends on the Company's 27,825 issued and outstanding shares of preferred
stock was $481,000.
NOTE 7 - INCOME (LOSS) PER COMMON SHARE
Basic income (loss) per share is computed on the basis of the weighted average
number of common shares outstanding. Diluted income (loss) per share is computed
on the basis of the weighted average number of common shares outstanding plus
the potential dilution that could occur if securities or other contracts to
issue common shares were exercised or converted. Stock options and warrants, and
conversion of the cumulative convertible preferred stock, were excluded from the
diluted loss per share computation for the three-month period ended December,
2002, since the Company incurred a loss for this period and the inclusion of
such securities would be antidilutive.
8
The following table sets forth the components used in the computation of
basic and diluted income (loss) per common share:
Three Months Ended
December 31, 2003 December 31, 2002
--------------------------------------------
Net income (loss) attributable to common stockholders - basic $ 464,000 $ (159,000)
Effect of dilutive securities - preferred stock dividends (63,000) (63,000)
--------------------------------------------
Net income (loss) attributable to common stockholders - diluted $ 527,000 $ (222,000)
============================================
Basic-weighted average common shares outstanding 3,367,558 2,624,085
Dilutive stock options and warrants 219,408 -
Weighted average assumed conversion of 9%
cumulative convertible preferred stock 1,854,998 -
--------------------------------------------
Diluted-weighted average common shares outstanding 5,441,964 2,624,085
============================================
Net income (loss) attributable to common stockholders - basic $ 0.16 $ (0.08)
============================================
Net income (loss) attributable to common stockholders - diluted $ 0.10 $ (0.08)
============================================
For the three-month periods ended December 31, 2003 and 2002, 1,868,689 and
2,158,904 shares, respectively, attributable to outstanding stock options and
warrants were excluded from the calculation of diluted net income (loss) per
share because the effect was antildilutive.
NOTE 8 - THE AMERICAN STOCK EXCHANGE
In February 2003, the Company received a letter from The American Stock Exchange
(the "Exchange") indicating that it was not in compliance with certain listing
standards relating to (1) shareholders' equity of less than $2.0 million and
losses from continuing operations and/or net losses in two out of its three most
recent fiscal years, and (2) the requirement to have and maintain an audit
committee comprised of at least three independent directors. The Company
submitted to the Exchange a plan that indicated compliance with these items. In
May 2003, the Exchange notified the Company that it had accepted the Company's
plan of compliance and granted the Company an extension of time to August 5,
2004 to satisfy the financial standards, and an extension of time to July 18,
2003 to comply with the independent audit committee requirement, which was
satisfied in July 2003. The Company will be subject to periodic review by
Exchange Staff during the extension period. Failure to make progress consistent
with the plan or to regain compliance with the continued listing standards by
the end of the extension period could result in the Company's common stock being
delisted from The American Stock Exchange. In the event that the Company fails
to comply with the listing standards, the Company's common stock could trade on
the OTC Bulletin Board or in the "pink sheets" maintained by the National
Quotation Bureau, Inc. Such alternatives are generally considered to be less
efficient markets, and the Company's stock price, as well as the liquidity of
the Company's common stock, may be adversely impacted as a result.
9
NOTE 9 - EXTENSION OF NOTES
In November 2003, National and the holder of a $1.0 million secured demand note
that matures on February 1, 2004, agreed that the note will be replaced with a
note in a principal amount equal to at least $500,000 that will mature on
February 28, 2005. In January 2004, the holder agreed, subject to NASD approval
that was received in February 2004, to renew the entire $1.0 million due under
the secured demand note to March 1, 2005. Upon completion of the note renewal,
the noteholder's warrant to purchase 75,000 shares of the Company's common stock
at a price of $5.00 per share, expiring on February 1, 2004, will be repriced to
$1.25 per share, and warrants to purchase an aggregate of 150,000 shares of the
Company's common stock, 75,000 (with an exercise price of $1.75 per share) of
which expire on January 25, 2004 and 75,000 of which expire on February 1, 2004,
will instead expire on July 31, 2005.
Additionally, two other noteholders have agreed to extend the maturity dates on
$1.0 million of notes issued to them by the Company from January 25, 2004 to
July 31, 2005. Effective February 1, 2004, the interest rate on each note will
be increased to 12% from 9% per annum. Additionally, upon completion of the note
extension, each of the noteholders' warrants to purchase 100,000 shares of the
Company's common stock at a price of $5.00 per share expiring on February 1,
2004 will be repriced to $1.25 per share, and each noteholders' warrants to
purchase an aggregate of 200,000 shares (100,000 of which with an exercise price
of $1.75 per share) of the Company's common stock expiring on January 25, 2004
will instead expire on July 31, 2005.
NOTE 10 - SUBSEQUENT EVENTS
In February 2004, the Company agreed to pay First Clearing $250,000 to fully
repay its promissory note, that had an outstanding loan balance of approximately
$1,120,000 as of December 31, 2003. As a result of the repayment of this note,
the Company will realize a gain on extinguishment of debt of approximately
$750,000, after reflecting principal reductions attributable to January and
February 2004 trading volume. Additionally, National and First Clearing mutually
agreed to terminate their clearing relationship by June 30, 2004. National is
actively engaged in discussions with several other clearing firms regarding the
establishment of a new clearing relationship.
In January 2004, the Company issued an aggregate of $200,000 of three-year, 10%
promissory notes to five unaffiliated parties. Such noteholders received
three-year warrants to purchase an aggregate of 50,000 shares of the Company's
common stock at an exercise price of $1.40 per share. The securities were issued
pursuant to the exemption provided in Section 4(2) of the Securities Act of
1933, as amended, on the basis that the transaction did not involve a public
offering.
On January 26, 2004, the arbitration panel in Gould (see Note 5) awarded damages
against the Company of approximately $400,000, which has been accrued for at
December 31, 2003. The Company is currently considering the filing of a motion
to vacate this arbitration award and/or filing an appeal of this decision.
10
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
The Private Securities Litigation Reform Act of 1995 provides a safe harbor for
forward-looking statements. This Quarterly Report may contain certain statements
of a forward-looking nature relating to future events or future business
performance. Any such statements that refer to the Company's estimated or
anticipated future results or other non-historical facts are forward-looking and
reflect the Company's current perspective of existing trends and information.
These statements involve risks and uncertainties that cannot be predicted or
quantified and, consequently, actual results may differ materially from those
expressed or implied by such forward-looking statements. Such risks and
uncertainties include, among others, risks and uncertainties detailed in the
Company's Annual Report on Form 10-K, filed with the Securities and Exchange
Commission on December 29, 2003. Any forward-looking statements contained in or
incorporated into this Quarterly Report speak only as of the date of this
Quarterly Report. The Company undertakes no obligation to update publicly any
forward-looking statement, whether as a result of new information, future events
or otherwise.
RESULTS OF OPERATIONS
Three Months Ended December 31, 2003 Compared to Three Months Ended
December 31, 2002
- -------------------------------------------------------------------
The Company's first quarter of fiscal year 2004 resulted in a significant
increase in revenues, and a comparatively lesser increase in expenses compared
to the same period last year. The increase in revenues is primarily due to the
improved securities markets. As a result of this improvement, the Company
reported net income before income taxes of $464,000 compared with a net loss
before income taxes of $159,000 for the first quarters of fiscal years 2004 and
2003, respectively. This represents an improvement of $623,000 from the prior
period.
Total revenues increased $4,551,000, or 43%, in the first quarter of fiscal year
2004 to $15,144,000 from $10,593,000 in the first quarter of fiscal year 2003.
This increase is mainly due to the improved securities markets that increased
commission revenues, the number of commission tickets generated, and the charge
per ticket that affects commission revenue. During the first quarter of fiscal
year 2004, trading volume increased by approximately 37%, compared to the first
quarter of fiscal year 2003. Commission revenue increased $5,364,000, or 89%, to
$11,372,000 from $6,008,000 during the first quarter of fiscal year 2004
compared with the same period in fiscal year 2003. Net dealer inventory gains,
which includes profits on proprietary trading, market making activities and
customer mark-ups and mark-downs, decreased $1,493,000, or 42%, to $2,064,000
from $3,557,000 during the first quarter of fiscal year 2004 compared with the
same period in fiscal year 2003. The decrease is due to a reduction in
proprietary trading in the bond market, reflecting an overall decline in this
market compared to the strength that has been realized in the equity markets.
During the first quarter of fiscal year 2004, revenues from proprietary trading
decreased $1,578,000, or 49% to $1,663,000 from $3,241,000 in the same period of
fiscal year 2003, revenues from market making activities increased $64,000, or
24%, to $335,000 from $271,000 in the first quarter of fiscal year 2004, and
revenues from customer mark-ups and mark-downs increased $21,000, or 47%, to
$66,000 from $45,000 in the first quarter of fiscal year 2004.
Investment banking revenue increased $226,000, or 213%, to $332,000 from
$106,000 in the first quarter of fiscal year 2004 compared with the first
quarter of fiscal year 2003. The increase in investment banking revenues is
attributed to the Company's completion of a private placement during this
quarter. Interest and dividend income increased $357,000 or 114%, to $669,000
from $312,000 in the first quarter of fiscal year 2004 compared with the same
11
period last year. The increase in interest income is attributable to an increase
in the amount of customer debits in National's customers' accounts and an
increase in the interest rate charged to such debits from the same period last
year. Transfer fees increased $208,000, or 55%, to $583,000 in the first quarter
of fiscal year 2004 from $375,000 in the first quarter of fiscal year 2003. The
increase is due to an increase in transaction volume associated with the
Company's retail brokerage business. Other revenue, consisting of asset
management fees and miscellaneous transaction fees and trading fees, decreased
$111,000, or 47%, to $124,000 from $235,000 during the first quarter of fiscal
year 2004 compared to the first quarter of fiscal year 2003. The decrease is due
to reduced fees attributable to a reduction in the volume of institutional
business, and lower asset management fees.
In comparison with the 43% increase in total revenues, total expenses increased
36% or $3,903,000 to $14,655,000 for the first quarter of fiscal year 2004
compared to $10,752,000 in the first quarter of fiscal year 2003. The increase
in total expenses is a result of greater commission expenses directly associated
with commission revenues. The increase in total expenses was minimized by
management's efforts to streamline its operations and control the fixed expenses
associated with its business.
Commission expense, which includes expenses related to commission revenue, net
dealer inventory gains and investment banking, increased $3,660,000, or 53%, to
$10,561,000 in the first quarter of fiscal year 2004 from $6,901,000 in the
first quarter of fiscal year 2003. Commission expense related to commission
revenue increased $4,539,000, or 102%, to $9,003,000 in the first quarter of
fiscal year 2004 from $4,464,000 in the first quarter of fiscal year 2003;
commission expense related to net dealer inventory gains decreased $1,060,000,
or 45%, to $1,292,000 in the first quarter of fiscal year 2004 from $2,352,000
in the first quarter of fiscal year 2003; and commission expense related to
investment banking increased $181,000, or 213%, to $266,000 in the first quarter
of fiscal year 2004 from $85,000 in the first quarter of fiscal year 2003. The
increase of commission expense as a percentage of commission revenues and the
decrease of commission expense as a percentage of net dealer inventory gains are
both attributable to changes in the production of particular brokers, not all of
whom are paid at the same commission rate. The commission expense as a
percentage of investment banking was relatively unchanged between the first
quarter of fiscal year 2004 and the first quarter of fiscal year 2003.
Employee compensation expense increased $256,000, or 25%, to $1,277,000 in the
first quarter of fiscal year 2004 from $1,021,000 in the first quarter of fiscal
year 2003. This increase is attributable to the hiring of new employees, salary
increases for certain employees and the establishment of a bonus pool for senior
management. Overall, combined commission and employee compensation expense, as a
percentage of revenue increased to 78% from 75% in the first quarters of fiscal
year 2004 and 2003, respectively.
Clearing fees increased $29,000, or 4%, to $711,000 in the first quarter of
fiscal year 2004 from $682,000 in the first quarter of fiscal year 2003.
Although there was an increase in trading volume, clearing fees, as a percentage
of related revenues, decreased due to an increase in the number of lower priced
tickets from the prior period. Communication expenses increased $21,000 or 4% to
$579,000 from $558,000 in the first quarter of fiscal year 2004 compared to the
first quarter of fiscal year 2003. The increase is due to an increase in voice
and data charges. Occupancy costs decreased $83,000, or 11%, to $670,000 from
$753,000. The decrease in occupancy expense is due to the Company's
renegotiating certain long-term office leases, and finding subtenants to occupy
unused space. Professional fees increased $124,000, or 54%, to $355,000 from
$231,000 in the first quarter of fiscal year 2004 compared to the first quarter
of fiscal year 2003. The increase in professional fees is due to an increase in
the legal fees relating to various lawsuits and arbitrations.
Interest expense increased $6,000, or 13%, to $51,000 from $45,000 in the first
quarter of fiscal year 2004 compared to the first quarter of fiscal year 2003.
12
Taxes, licenses and registration increased $15,000, or 18%, to $100,000 from
$85,000 in the first quarter of fiscal year 2004 compared to the first quarter
of fiscal year 2003. Other expenses decreased $125,000 or 26% to $351,000 from
$476,000 in the first quarter of fiscal year 2004 compared to the first quarter
of fiscal year 2003. The decrease in other expenses is due to management's
efforts to control its fixed operating expenses.
The Company realized a gain of $375,000 on debt forgiveness from its clearing
firm, First Clearing, in the first quarter of fiscal year 2004. Additionally, on
January 26, 2004, an arbitration panel awarded damages against the Company of
approximately $400,000 related to an employment contract with a former employee
of the Company. This amount has been accrued for in the first quarter of fiscal
year 2004.
The Company reported net income before income taxes of $464,000 in the first
quarter of fiscal year 2004 compared to a loss before income taxes of $159,000
in the first quarter of fiscal year 2003.
Overall, the diluted earnings attributable to common stockholders in the first
quarter of fiscal year 2004 was $401,000, or $.07 per common share, as compared
to the diluted loss attributable to common stockholders of $222,000, or $.08 per
common share in the first quarter of fiscal year 2003. The net income
attributable to common stockholders for the first quarter of fiscal year 2004
and the net loss attributable to common stockholders for the first quarter of
fiscal year 2003 reflects $63,000 of cumulative but unpaid preferred stock
dividends, in both fiscal quarters, on the Company's Preferred Stock issued
during fiscal year 2002.
LIQUIDITY AND CAPITAL RESOURCES
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 a specified amount per security based on the bid price of
each security for which National is a market maker. On December 12, 2003, the
Company was advised by the NASD that, pursuant to National's pledge of its
assets as security for loans to the Company from First Clearing (such loans
aggregated $2,131,000 as of September 30, 2003), National was not in compliance
with its net capital requirements. Accordingly, at September 30, 2003, National
reported an excess net capital deficiency of $829,000. This compliance
requirement was corrected on December 15, 2003, upon termination of the security
agreement with First Clearing. At December 31, 2003, National's net capital
exceeded the requirement by $724,000.
Advances, dividend payments and other equity withdrawals from the Company's
subsidiary are restricted by the regulations of the SEC and other regulatory
agencies. These regulatory restrictions may limit the amounts that a subsidiary
may dividend or advance to the Company.
The objective of liquidity management is to ensure that the Company has ready
access to sufficient funds to meet commitments, fund deposit withdrawals and
efficiently provide for the credit needs of customers.
In March 2003, the Company filed a Registration Statement on Form S-3 under the
Securities Act for the resale of the shares of common stock and the shares of
common stock issuable upon exercise of the warrants. In October 2003, the
Company filed a Form RW withdrawing the filing of the Registration Statement on
Form S-3. Currently the Company is eligible to file a Registration Statement on
Form S-3, and management believes it will file such statement in the near term,
that will include the shares of common stock and the shares of common stock
issuable upon exercise of the warrants issued in the Private Offering.
13
In August 2001, the Company entered into an agreement with First Clearing under
which First Clearing provides clearing and related services for National. The
Clearing Agreement expands the products and services capabilities for National's
retail and institutional business, and enables National to consolidate its
existing clearing operations and reduce the fixed overhead associated with its
self-clearing activities.
The conversion to First Clearing began in December 2001 and was completed in
March 2002. It is standard business practice in the brokerage industry for
clearing firms to provide financial support to correspondent clearing firms. As
such, in connection with the Clearing Agreement, the Company executed a ten-year
promissory note in favor of First Clearing under which the Company immediately
borrowed $1,000,000. The funds were contributed by the Company to National, and
are being used as a deposit to secure National's performance under the Clearing
Agreement. The Clearing Agreement also provided for another $1,000,000 loan that
was extended to the Company upon substantial completion of the conversion on
December 31, 2001 that was also contributed to National. The amount of the note
that is repayable on each anniversary date is the principal, and interest if
any, then outstanding divided by the remaining life of the note. Borrowings
under the promissory note are forgivable annually based on achieving certain
business performance and trading volumes of the Company over the life of the
loan. The Company would need to generate approximately 250,000 tickets per year
over the ten-year term of the note to satisfy the trading volume requirement,
which has been satisfied through December 31, 2003.
In connection with the Clearing Agreement, additional borrowings were available
to the Company upon the attainment by National of certain volume and
profitability goals. In finalizing the conversion, a dispute arose among the
Company, US Clearing (one of its former clearing firms) and First Clearing,
regarding the responsibility for debit balances in certain trading accounts. The
three parties agreed to share the expense equally. The Company's share of this
settlement, $548,000, was advanced to the Company by First Clearing and added to
the existing promissory note. As part of the settlement, the minimum level of
stockholders' equity the Company is required to maintain under the promissory
note was reduced from $2,000,000 to $1,000,000 and no further borrowings are
available under the promissory note, as amended. First Clearing has waived its
stockholders' equity covenant as of December 31, 2003.
In the first quarter of fiscal year 2003, First Clearing loaned the Company an
additional $375,000 in the form of clearing fee rebates. The loan was due to be
repaid in January 2004.
In December 2003, the Company engaged in various discussions with the NASD
relating to the Security Agreement between National and First Clearing, and its
effect on the computation of National's net capital. As a result of these
discussions, on December 15, 2003, the Company and First Clearing agreed in
principle to the following: (1) National's clearing deposit was reduced from
$1,000,000 to $500,000, (2) the excess $500,000 was paid to First Clearing to
reduce the Company's outstanding loan balance on its promissory note and (3) the
Security Agreement between National and First Clearing was terminated.
Furthermore, First Clearing forgave payment of the $375,000 that was due to be
paid in January 2004.
In February 2004, the Company agreed to pay First Clearing $250,000 to fully
repay its promissory note, that had an outstanding loan balance of approximately
$1,120,000 as of December 31, 2003. As a result of the repayment of this note,
the Company will realize a gain on extinguishment of debt of approximately
$750,000, after reflecting principal reductions attributable to January and
February 2004 trading volume. Additionally, National and First Clearing mutually
agreed to terminate their clearing relationship by June 30, 2004. National is
actively engaged in discussions with several other clearing firms regarding the
establishment of a new clearing relationship.
14
In November 2003, National and the holder of a $1.0 million secured demand note
that matures on February 1, 2004, agreed that the note will be replaced with a
note in a principal amount equal to at least $500,000 that will mature on
February 28, 2005. In January 2004, the holder agreed, subject to NASD approval
that was received in February 2004, to renew the entire $1.0 million due under
the secured demand note to February 28, 2005.
Additionally, two other noteholders have agreed to extend the maturity dates on
$1.0 million of notes issued to them by the Company from January 25, 2004 to
July 31, 2005. Effective February 1, 2004, the interest rate on each note will
be increased to 12% from 9% per annum.
In January 2004, the Company issued an aggregate of $200,000 of three-year, 10%
promissory notes to five unaffiliated parties. Such noteholders received
three-year warrants to purchase an aggregate of 50,000 shares of the Company's
common stock at an exercise price of $1.40 per share.
ITEM 3 - QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company's primary market risk arises from the fact that it engages in
proprietary trading and makes dealer markets in equity securities. Accordingly,
the Company may be required to maintain certain amounts of inventories in order
to facilitate customer order flow. The Company may incur losses as a result of
price movements in these inventories due to changes in interest rates, foreign
exchange rates, equity prices and other political factors. The Company is not
subject to direct market risk due to changes in foreign exchange rates. However,
the Company is subject to market risk as a result of changes in interest rates
and equity prices, which are affected by global economic conditions. The Company
manages its exposure to market risk by limiting its net long or short positions.
Trading and inventory accounts are monitored daily by management and the Company
has instituted position limits.
Credit risk represents the amount of accounting loss the Company could incur if
counterparties to its proprietary transactions fail to perform and the value of
any collateral proves inadequate. Although credit risk relating to various
financing activities is reduced by the industry practice of obtaining and
maintaining collateral, the Company maintains more stringent requirements to
further reduce its exposure. The Company monitors its exposure to counterparty
risk on a daily basis by using credit exposure information and monitoring
collateral values. The Company maintains a credit committee, which reviews
margin requirements for large or concentrated accounts and sets higher
requirements or requires a reduction of either the level of margin debt or
investment in high-risk securities or, in some cases, requiring the transfer of
the account to another broker-dealer.
The Company monitors its market and credit risks daily through internal control
procedures designed to identify and evaluate the various risks to which the
Company is exposed. There can be no assurance, however, that the Company's risk
management procedures and internal controls will prevent losses from occurring
as a result of such risks.
The following table shows the quoted market values of the Company's securities
held for resale ("long"), securities sold, but not yet purchased ("short") and
net positions as of December 31, 2003:
Long Short Net
----------------------- ------------------------ ---------------------
Corporate Stocks $ 328,000 $ 515,000 $ (187,000)
Corporate Bonds 348,000 24,000 324,000
Government Obligations 230,000 39,000 191,000
----------------------- ------------------------ ---------------------
$ 906,000 $ 578,000 $ 328,000
======================= ======================== =====================
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ITEM 4 - CONTROLS AND PROCEDURES
Evaluation of disclosure controls and procedures. Based on the evaluation of the
Company's disclosure controls and procedures (as defined in the Exchange Act
Rules 13a-15(e) and 15d-15(e)) required by the Exchange Act Rules 13a-15(b) or
15d-15(b), the Company's Chief Executive Officer and Acting Chief Financial
Officer have concluded that, as of the end of the period covered by this report,
the Company's disclosure controls and procedures were effective.
Changes in internal controls. There were no significant changes in the Company's
internal controls or in other factors that could significantly affect those
controls subsequent to the date of our evaluation.
PART II - OTHER INFORMATION
ITEM 1 - LEGAL PROCEEDINGS
In April 2002, a former executive officer of the Company, Craig M. Gould,
commenced an action against the Company, in the matter Gould vs. Olympic Cascade
Financial Corporation, et al., NASD No. 02-03542. On January 26, 2004, the
arbitration panel in this action awarded damages against the Company of
approximately $400,000, which has been accrued for at December 31, 2003. The
Company believes it had meritorious defenses and is currently considering the
filing of a motion to vacate this arbitration award and/or filing an appeal of
this decision. During the quarter, there were no other significant developments
in the Company's legal proceedings. For a detailed discussion of the Company's
legal proceedings, please refer to Note 5 herein, and the Company's Annual
Report on Form 10-K for the fiscal year ended September 30, 2003.
ITEM 2 - CHANGES IN SECURITIES AND USE OF PROCEEDS
None.
ITEM 3 - DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
ITEM 5 - OTHER INFORMATION
None.
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ITEM 6 - EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
31.1 Chief Executive Officer's Certificate pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.
31.2 Acting Chief Financial Officer's Certificate pursuant to Section 302
of the Sarbanes-Oxley Act of 2002.
32.1 Chief Executive Officer's Certificate pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
32.2 Acting Chief Financial Officer's Certificate pursuant to Section 906
of the Sarbanes-Oxley Act of 2002.
(b) Reports on Form 8-K
The Company filed a Report on Form 8-K dated October 9, 2003
reporting a change in its independent public accountants
attributable to the merger of Feldman Sherb & Co., P.C. with Grassi
& Co., CPAs, P.C. on April 17, 2002.
The Company filed a Report on Form 8-K dated December 22, 2003
reporting amendments to its clearing arrangements with First
Clearing Corporation.
17
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 SUBSIDIARY
February 23, 2004 By: /s/ Mark Goldwasser
---------------------------------
Mark Goldwasser
President and Chief Executive Officer
February 23, 2004 By: /s/ Robert H. Daskal
------------------------------------
Robert H. Daskal
Acting Chief Financial Officer
18