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 June 30, 2002 Commission File Number 001-12629
------------- ---------
OLYMPIC CASCADE FINANCIAL CORPORATION
(Exact name of registrant as specified in its charter)
DELAWARE 36-4128138
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
875 North Michigan Avenue, Suite 1560, Chicago, Illinois 60611
(Address of principal executive offices) (Zip code)
Registrant's telephone number, including area code: (312) 751-8833
----------------
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
The number of shares outstanding of registrant's common stock, par value $0.02
per share, at August 12, 2002 was 2,274,449.
INDEX
PAGE NUMBER
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PART I. FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements
(unaudited)
Consolidated Statements of Financial Condition
as of June 30, 2002 and September 28, 2001 3
Consolidated Statements of Operations for the three months
and nine months ended June 30, 2002 and June 29, 2001 4
Consolidated Statements of Cash Flows for the nine months
ended June 30, 2002 and June 29, 2001 5
Notes to Consolidated Financial Statements 6-9
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 10-16
PART II. OTHER INFORMATION 17
SIGNATURES 18
2
OLYMPIC CASCADE FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
ASSETS
June 30, September 28,
2002 2001
(unaudited) (see Note below)
------------- --------------
CASH, subject to immediate withdrawal $ 476,000 $ 150,000
CASH, segregated in escrow 310,000 435,000
CASH, CASH EQUIVALENTS AND SECURITIES - 37,188,000
DEPOSITS 1,450,000 4,654,000
RECEIVABLES
Customers - 29,755,000
Brokers and dealers 328,000 669,000
Other 1,856,000 836,000
SECURITIES HELD FOR RESALE, at market 1,067,000 1,131,000
FIXED ASSETS, net 426,000 841,000
OTHER ASSETS 2,038,000 1,940,000
------------- --------------
$ 7,951,000 $ 77,599,000
============= ==============
LIABILITIES AND STOCKHOLDERS' EQUITY
CASH OVERDRAFT $ - $ 1,556,000
PAYABLES
Customers - 54,511,000
Brokers and dealers 16,000 10,020,000
SECURITIES SOLD, BUT NOT YET PURCHASED, at market 190,000 792,000
ACCOUNTS PAYABLE, ACCRUED EXPENSES AND OTHER LIABILITIES 2,353,000 1,963,000
BANK LINE OF CREDIT - 3,500,000
NOTES PAYABLE 4,323,000 4,035,000
CAPITAL LEASE PAYABLE - 300,000
NET LIABILITIES FROM DISCONTINUED OPERATIONS - 300,000
------------- --------------
6,882,000 76,977,000
------------- --------------
CONTINGENCIES
STOCKHOLDERS' EQUITY
Preferred stock, $.01 par value, 100,000 shares authorized,
25,725 shares issued and outstanding at June 30, 2002 - -
Common stock, $.02 par value, 60,000,000 shares authorized,
2,274,449 and 2,236,449 shares issued and outstanding at
June 30, 2002 and September 28, 2001, respectively. 45,000 45,000
Additional paid-in capital 11,834,000 9,313,000
Accumulated deficit (10,810,000) (8,736,000)
------------- --------------
1,069,000 622,000
------------- --------------
$ 7,951,000 $ 77,599,000
============= ==============
Note: The balance sheet at September 28, 2001 has been derived from
the audited financial statements at that date.
See notes to consolidated financial statements.
3
OLYMPIC CASCADE FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
------Three Months Ended---------- ------Nine Months Ended----------
June 30, June 29, June 30, June 29,
2002 2001 2002 2001
---------------- ------------- --------------- ---------------
REVENUES:
Commissions $ 5,259,000 $ 4,802,000 $ 16,477,000 $ 16,333,000
Net dealer inventory gains 3,600,000 3,936,000 12,755,000 15,546,000
Interest 277,000 1,396,000 1,354,000 4,687,000
Transfer fees 260,000 310,000 1,035,000 816,000
Investment banking 9,000 191,000 192,000 924,000
Other 424,000 838,000 1,270,000 2,251,000
---------------- ------------- --------------- ---------------
TOTAL REVENUES 9,829,000 11,473,000 33,083,000 40,557,000
---------------- ------------- --------------- ---------------
EXPENSES:
Commissions 5,824,000 6,274,000 20,050,000 22,314,000
Salaries 1,205,000 2,142,000 3,964,000 6,707,000
Clearing fees 897,000 1,126,000 3,510,000 3,283,000
Communications 760,000 852,000 2,230,000 2,275,000
Occupancy costs 885,000 1,136,000 2,804,000 3,385,000
Interest 33,000 790,000 477,000 2,719,000
Professional fees 267,000 305,000 687,000 1,185,000
Taxes, licenses, registration 76,000 194,000 304,000 629,000
Other 496,000 458,000 1,512,000 1,505,000
---------------- ------------- --------------- ---------------
TOTAL EXPENSES 10,443,000 13,277,000 35,538,000 44,002,000
---------------- ------------- --------------- ---------------
Loss from continuing operations before (614,000) (1,804,000) (2,455,000) (3,445,000)
income taxes and extraordinary item
Income tax benefit 40,000 - 80,000 200,000
---------------- ------------- --------------- ---------------
Loss from continuing operations (574,000) (1,804,000) (2,375,000) (3,245,000)
---------------- ------------- --------------- ---------------
Income (loss) from discontinued operations, net of tax - (159,000) 300,000 (326,000)
Income from extraordinary item - gain from
extinguishment of debt, net of taxes - - - 418,000
---------------- ------------- --------------- ---------------
NET LOSS $ (574,000) $ (1,963,000) $ (2,075,000) $ (3,153,000)
================ ============= =============== ===============
NET INCOME (LOSS) PER COMMON SHARE
Basic:
Loss from continuing operations $ (0.25) $ (0.81) $ (1.06) $ (1.47)
Income (loss) from discontinued operations - (0.07) 0.14 (0.15)
Extraordinary gain - - - 0.19
---------------- ------------- --------------- ---------------
Net Loss $ (0.25) $ (0.88) $ (0.92) $ (1.43)
================ ============= =============== ===============
Diluted:
Loss from continuing operations $ (0.25) $ (0.81) $ (1.06) $ (1.47)
Income (loss) from discontinued operations - (0.07) 0.14 (0.15)
Extraordinary gain - - - 0.19
---------------- ------------- --------------- ---------------
Net Loss $ (0.25) $ (0.88) $ (0.92) $ (1.43)
================ ============= =============== ===============
Weighted average number of shares outstanding
Basic 2,274,449 2,227,449 2,249,116 2,200,021
---------------- ------------- --------------- ---------------
Diluted 2,274,449 2,227,449 2,249,116 2,200,021
---------------- ------------- --------------- ---------------
See notes to consolidated financial statements.
4
OLYMPIC CASCADE FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
-------- Nine Months Ended -----
June 30, June 29,
2002 2001
------------ ------------
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss $ (2,075,000) $ (3,153,000)
Adjustments to reconcile net loss to net cash
provided by (used in) operating activities
Depreciation and amortization 499,000 516,000
Compensation related to issuance of stock options - 104,000
Gain on extraordinary item - extinguishment of debt - (418,000)
Change in net assets (liabilities) of discontinued operations (300,000) 378,000
Changes in assets and liabilities
Cash, cash equivalents, securities and escrow 37,313,000 (13,858,000)
Deposits 3,204,000 (2,279,000)
Receivables 29,076,000 22,490,000
Securities held for resale 64,000 (625,000)
Other assets (98,000) (2,538,000)
Payables (64,124,000) (9,077,000)
Securities sold, but not yet purchased (602,000) 16,000
------------ ------------
Net cash provided by (used in) operating activities 2,957,000 (8,444,000)
------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of fixed assets (84,000) (264,000)
------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES
Borrowings (payments) on line of credit (3,500,000) 4,750,000
Payments on capital lease (300,000) (255,000)
Proceeds from notes payable 1,548,000 3,000,000
Payments on notes payable (211,000) (78,000)
Decrease in cash overdraft (1,556,000) -
Net proceeds from issuance of preferred stock 1,472,000 -
Exercise of stock options and warrants - 275,000
------------ ------------
Net cash (used in) provided by financing activities (2,547,000) 7,692,000
------------ ------------
INCREASE (DECREASE) IN CASH 326,000 (1,016,000)
CASH BALANCE
Beginning of the period 150,000 2,694,000
------------ ------------
End of the period $ 476,000 $ 1,678,000
============ ============
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash paid during the period for
Interest $ 501,000 $ 2,671,000
============ ============
Income taxes $ 12,000 $ 324,000
============ ============
SUPPLEMENTAL DISCLOSURES OF NONCASH INVESTING AND
FINANCING ACTIVITIES
Exchange of notes payable for preferred stock $ 1,000,000 $ -
============ ============
Exchange of notes payable for common stock $ 49,000 $ -
============ ============
Warrants issued as a discount on notes payable $ - $ 138,000
============ ============
See notes to consolidated financial statements.
5
OLYMPIC CASCADE FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2002
(UNAUDITED)
NOTE 1 - BASIS OF PRESENTATION
The accompanying consolidated financial statements of Olympic Cascade Financial
Corporation ("Olympic" or the "Company") have been prepared in accordance with
generally accepted accounting principles for interim financial statements and
with the instructions to Form 10-Q and Rule 10-01 of Regulation S-X.
Accordingly, they do not include all of the information and disclosures required
for annual financial statements. In the opinion of management, all adjustments
(consisting of normal recurring accruals) considered necessary for a fair
presentation have been included. The consolidated financial statements as of and
for the periods ended June 30, 2002 and June 29, 2001 are unaudited. The results
of operations for the interim periods are not necessarily indicative of the
results of operations for the fiscal year. These 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 28, 2001.
Cash and cash segregated in escrow have been reclassified in prior periods to
conform to the current period's presentation. The Company now reports based on a
calendar year ending in September, versus a fifty-two or fifty-three week year,
ending on the last Friday in September.
NOTE 2 - NEW ACCOUNTING PRONOUNCEMENTS
On April 30, 2002, the FASB issued SFAS No. 145, "Rescission of FASB Statement
No. 4, 44 and 64, Amendment of FASB Statement No. 13, and Technical
Corrections." The rescission of SFAS No. 4, "Reporting Gains and Losses from
Extinguishments," and SFAS No. 64, "Extinguishments of Debt made to Satisfy
Sinking Fund Requirements," which amended SFAS No. 4 will affect income
statement classification of gains and losses from extinguishment of debt. SFAS
No. 4 requires that gains and losses from extinguishment of debt be classified
as an extraordinary item, if material. Under SFAS No. 145, extinguishment of
debt is now considered a risk management strategy by the reporting enterprise
and the FASB does not believe it should be considered extraordinary under the
criteria in APB Opinion No. 30, "Reporting the Results of Operations-Reporting
the Effects of Disposal of a Segment of a Business, and Extraordinary, Unusual
and Infrequently Occurring Events and Transactions," unless the debt
extinguishment meets the unusual in nature and infrequency of occurrence
criteria in APB Opinion No. 30. SFAS No. 145 will be effective for fiscal years
beginning after May 15, 2002. Upon adoption, extinguishments of debt shall be
classified under the criteria in APB Opinion No. 30.
6
In June 2002, the FASB issued SFAS No. 146, "Accounting for Costs Associated
with Exit or Disposal Activities." SFAS No. 146 addresses financial accounting
and reporting for costs associated with exit or disposal activities and
nullified Emerging Issues Task Force Issue No. 94-3, "Liability Recognition for
Certain Employee Termination Benefits and Other Costs to Exit an Activity
(including Certain Costs Incurred in a Restructuring)." SFAS No. 146 requires
that a liability for a cost associated with an exit or disposal activity be
recognized when the liability is incurred. A fundamental conclusion reached by
the FASB in this statement is that an entity's commitment to a plan, by itself,
does not create a present obligation to others that meets the definition of a
liability. SFAS No. 146 also establishes that fair value is the objective for
initial measurement of the liability. The provisions of this statement are
effective for exit or disposal activities that are initiated after December 31,
2002, with early application encouraged. The Company has not yet determined the
impact of SFAS No.146 on its financial position and results of operations, if
any.
NOTE 3 - LINE OF CREDIT
In January 2001, the Company's wholly-owned subsidiary, National Securities
Corporation ("National") entered into a $5,000,000 secured line of credit with
American National Bank and Trust Company of Chicago, that is guaranteed by the
Company. During the first quarter of fiscal 2002, National entered into a
Forbearance Agreement with American National Bank based on an event of default
according to the original credit agreement. The Forbearance Agreement amended
the line of credit to $4,000,000. Additionally, Steven A. Rothstein and Mark
Goldwasser each signed a Guaranty unconditionally guaranteeing certain
indebtedness of the Company to American National Bank. These guarantees
effectively terminated in December 2001. The line of credit was fully repaid in
December 2001.
NOTE 4 - INVESTMENT TRANSACTION
On December 28, 2001, the Company completed a series of transactions under which
certain new investors (collectively, the "Investors") obtained a significant
ownership in the Company through a $1,072,500 investment in the Company and by
purchasing a majority of shares held by Steven A. Rothstein and family, the
former Chairman, Chief Executive Officer and principal shareholder of the
Company (the "Investment Transaction"). The Investors included Triage Partners
LLC ("Triage"), an affiliate of Sands Brothers & Co., Ltd., a New York Stock
Exchange ("NYSE") member firm, and One Clark LLC ("One Clark"), an affiliate of
Mark Goldwasser, the current Chief Executive Officer and President of the
Company. The Investors purchased an aggregate of $1,072,500 of Series A
Preferred Stock from the Company, which is convertible into Common Stock at a
price of $1.50 per share. The Company incurred $100,000 of legal costs related
to these capital transactions. In connection with the Investment Transaction,
Triage also purchased 285,000 shares of Common Stock from Mr. Rothstein and his
affiliates at a price of $1.50 per share. In addition, Mr. Rothstein and his
affiliates granted Triage a three-year voting proxy on the balance of their
Common Stock (274,660 shares).
7
As part of the Investment Transaction, the Investors placed $500,000 into an
escrow account to purchase additional shares of Series A Preferred Stock in the
event such funds were needed by the Company. As a result of the losses incurred
during the first nine months of fiscal 2002, $250,000 in February 2002 and
$250,000 in April 2002 were drawn from the escrow account and invested into the
Company on the same terms.
Concurrent with the Investment Transaction, two unrelated individual noteholders
holding $2.0 million of the Company's debt converted one-half of their debt into
the same class of Series A Preferred Stock that was sold in the Investment
Transaction. The noteholders also had 100,000 of their 200,000 warrants to
acquire shares of common stock repriced from an exercise price of $5.00 per
share to $1.75 per share.
NOTE 5 - CLOSING OF WESTAMERICA INVESTMENT GROUP
In December 2001, the Company's former subsidiary, WestAmerica Investment Group
("WestAmerica"), voluntarily withdrew its membership with the NASD and ceased to
conduct business as a broker-dealer. On December 31, 2001 WestAmerica filed for
Chapter 7 Bankruptcy protection in accordance with the U.S. Bankruptcy Code.
WestAmerica had been operating as a separate legal entity, and the Company
believes it will not have any ongoing liability for any unpaid obligations of
WestAmerica. Consequently, in the first quarter of fiscal 2002, the Company
recorded a gain of $300,000 from discontinued operations related to the
write-off of WestAmerica's net liabilities. The accompanying consolidated
financial statements have been reclassified to reflect WestAmerica as
discontinued operations for all periods presented.
NOTE 6 - CONTINGENCIES
National has been named, together with others, as a defendant in a consolidated
class action lawsuit filed against Complete Management, Inc. No specific amount
of damages has been sought against the Company in the complaint. In June 2000,
the Company filed a motion to dismiss this action. In March 2001, the United
States District Court for the Southern District of New York denied the Company's
motion to dismiss. In May 2001, the Company submitted its answer to the
complaint in which it set forth its defenses. In November 2001, the plaintiffs
filed a motion to certify the class. The Company will contest class
certification and diligently pursue its defenses.
A former executive officer of the Company, Craig M. Gould, has commenced an
action against the Company claiming a breach of his employment contract, and
seeking approximately $575,000 in damages. The Company believes it has
meritorious defenses and intends to vigorously defend this action, although the
ultimate outcome of the matter cannot be determined at this time.
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. No specific amount of damages has been sought
against the Company in the complaint. National's time to answer has not yet
8
expired. The Company believes it has meritorious defenses and intends to
vigorously contest class certification and defend this action, although the
ultimate outcome of the matter cannot be determined at this time.
The Company is a defendant in various other arbitrations and administrative
proceedings, lawsuits and claims, which in the aggregate seek general and
punitive damages approximating $9.0 million. These matters arise out of the
normal course of business.
NOTE 7 - ISSUANCE OF WARRANTS
In November 2001, the Company granted 5,000 warrants to purchase its common
stock exercisable at $5.00 per share to the individual retirement account of the
Company's former chairman and chief executive officer pursuant to the terms of a
$50,000 loan made to the Company in August 2001.
NOTE 8 - COMMON STOCK
On March 12, 2002, the stockholders of the Company approved an amendment to the
Company's Certificate of Incorporation to increase the number of authorized
shares of common stock from 6,000,000 to 60,000,000 shares.
On March 31, 2002, an unrelated noteholder holding $49,000 of the Company's debt
converted its debt into 38,000 shares of common stock of the Company.
NOTE 9 - CLEARING AGREEMENT
In connection with the Clearing Agreement with First Clearing Corporation,
additional borrowings were available to the Company upon the attainment by
National of certain volume and profitability goals. In finalizing the
conversion, a dispute arose among the Company, US Clearing (one of its former
clearing firms) and First Clearing, regarding the responsibility for debit
balances in certain trading accounts. The three parties agreed to share the
expense equally. The Company's share of this settlement, $548,000, was advanced
to the Company by First Clearing and added to the existing promissory note. As
part of the settlement, the minimum level of stockholders' equity required to be
maintained by the Company under the promissory note was reduced from $2,000,000
to $1,000,000 and no further borrowings are available under the promissory note,
as amended.
NOTE 10 - SUBSEQUENT EVENT
Subsequent to June 30, 2002, Steven A. Rothstein completed $210,000 of
investments in the Company in the form of Series A Preferred Stock, identical in
all respects to the stock issued in the Investment Transaction (See Note 4).
9
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The Private Securities Litigation Reform Act of 1995 provides a safe harbor for
forward-looking statements. This Quarterly Report may contain certain statements
of a forward-looking nature relating to future events or future business
performance. Any such statements that refer to the Company's estimated or
anticipated future results or other non-historical facts are forward-looking and
reflect the Company's current perspective of existing trends and information.
These statements involve risks and uncertainties that cannot be predicted or
quantified and, consequently, actual results may differ materially from those
expressed or implied by such forward-looking statements. Such risks and
uncertainties include, among others, risks and uncertainties detailed in the
Company's Annual Report on Form 10-K, filed with the Securities and Exchange
Commission on December 28, 2001 and the Company's Quarterly Reports on Form
10-Q. Any forward-looking statements contained in or incorporated into this
Quarterly Report speak only as of the date of this Quarterly Report. The Company
undertakes no obligation to update publicly any forward-looking statement,
whether as a result of new information, future events or otherwise.
Critical Accounting Policies
The Securities and Exchange Commission (SEC) recently issued proposed guidance
for disclosure of critical accounting policies. The SEC defines "critical
accounting policies" as those that require application of management's most
difficult, subjective or complex judgments, often as a result of the need to
make estimates about the effects of matters that are inherently uncertain and
may change in subsequent periods. The Company plans to adopt the disclosure
requirements regarding critical accounting policies once the final rules are
required to be adopted.
Quarter Ended June 30, 2002 Compared to Quarter Ended June 29, 2001
The results discussed below have been restated to reflect a discontinuation of
operations for the Company's subsidiary, WestAmerica.
The Company's third quarter of fiscal 2002 resulted in a decrease in revenues
and a corresponding decrease in expenses compared with the same period of fiscal
2001. The decrease in revenues is due to the continued slumping securities
markets and lower interest income. As a result of management's efforts to reduce
fixed costs, the Company reported a net loss of $574,000 for the third fiscal
quarter of 2002 compared with a net loss from continuing operations of
$1,804,000 for the third quarter of fiscal 2001.
Total revenues decreased $1,644,000, or 14%, to $9,829,000 from $11,473,000
during fiscal 2002 compared with fiscal 2001. This decrease is due to a decrease
in interest income and a decrease in other revenues.
Commission revenues increased $457,000, or 10%, to $5,259,000 in the third
quarter of fiscal 2002 as compared to $4,802,000 in the third quarter of fiscal
10
2001. Despite the slumping securities markets, the Company has been able to
increase its commission revenues by continuing to add producing registered
representatives to its independent contractor system.
Net dealer inventory gains decreased $336,000, or 9%, to $3,600,000 in the third
quarter of fiscal 2002 from $3,936,000 in the third quarter of fiscal 2001. The
decrease is due to lower trading volume and a reduction in market making
activities.
Interest income decreased $1,119,000, or 80%, to $277,000 in the third quarter
of fiscal 2002 from $1,396,000 in the third quarter of fiscal 2001. This
decrease is partially offset by the corresponding decrease in interest expense,
which decreased $757,000, or 96%, to $33,000 in the third quarter of fiscal 2002
from $790,000 in the third quarter of fiscal 2001. The decrease in both interest
income and interest expense is attributable to a decrease in the amount of
customer credits and customer debits at National, the conversion of its clearing
business in December 2001 and a decrease in interest rates from 2002 to 2001.
Investment banking revenue decreased $182,000, or 95%, to $9,000 in the third
quarter of fiscal 2002 from $191,000 in the third quarter of fiscal 2001. The
decrease is due to the continued down-turn in the capital markets which has
limited the Company's ability to conduct private placements and other investment
banking advisory services. Other revenues decreased $414,000, or 49%, to
$424,000 in the third quarter of fiscal 2002 from $838,000 in the third quarter
of fiscal 2001. The decrease is due to a decline in various types of fee income,
mainly from trading activities attributable to the New York City office.
As a result of management's cost saving efforts, total expenses decreased at a
greater rate than total revenues. While total revenues decreased by 14%, total
expenses decreased 21% to $10,443,000 in the third quarter of fiscal 2002 from
$13,277,000 in the third quarter of fiscal 2001.
Commission expense, which includes expenses related to commission revenue, net
dealer inventory gains and investment banking, decreased $450,000, or 7%, to
$5,824,000 in the third quarter of fiscal 2002 from $6,274,000 in the third
quarter of fiscal 2001. This is consistent with the decrease in combined
revenues from commissions, net dealer inventory gains and investment banking
during the same period. Salaries decreased $937,000, or 44%, to $1,205,000 from
$2,142,000. This decrease is due to a reduction in senior management salaries
and a reduction in staff made possible by clearing through First Clearing
Corporation, as opposed to self-clearing. Overall, combined commissions and
salaries as a percentage of total revenues decreased slightly to 71.5% from
73.4% in the third quarter of fiscal 2002 compared to the third quarter of
fiscal 2001. This reduction is due to the reduction in salary expenses.
Clearing, communication, occupancy, and professional fees all decreased as a
result of slower markets and management's efforts to reduce expenses. Clearing
fees decreased $229,000, or 20%, to $897,000 from $1,126,000. Communication
expenses decreased $92,000 to $760,000, or 11%, from $852,000. Occupancy costs
decreased $251,000, or 22%, to $885,000 from $1,136,000. Professional fees
decreased $38,000, or 12%, to $267,000 from $305,000 in the third quarter of
fiscal 2002 compared to 2001. Other expenses increased $38,000 or 8%, to
11
$496,000 from $458,000 in the third quarter of fiscal 2002 compared to 2001.
Due to the continued slumping securities markets, the Company reported a net
loss from continuing operations of $574,000 in the third quarter of fiscal 2002
compared to a net loss from continuing operations of $1,804,000 in the third
quarter of fiscal 2001. Overall, the diluted loss from continuing operations was
$.25 per share as compared with a loss of $.81 per share for the third quarter
ended June 30, 2002 and June 29, 2001, respectively.
On December 31, 2001, WestAmerica, a subsidiary of the Company, filed for
Chapter 7 Bankruptcy protection in accordance with the U.S. Bankruptcy Code.
WestAmerica realized a loss of $159,000 in the third quarter of fiscal 2001, on
revenues of $439,000.
Nine Months Ended June 30, 2002 Compared to Nine Months Ended June 29, 2001
- ---------------------------------------------------------------------------
The results discussed below have been restated to reflect a discontinuation of
operations for the Company's subsidiary, WestAmerica.
The Company's first nine months of fiscal 2002 resulted in a decrease in
revenues and a corresponding decrease in expenses compared with the same period
of fiscal 2001. The decrease in revenues is primarily due to the continued
slumping securities markets, decreased net dealer inventory gains and lower
interest income. As a result, the Company reported a net loss from continuing
operations of $2,375,000 for the first nine months of 2002 compared with a net
loss from continuing operations before extraordinary item of $3,245,000 for the
first nine months of fiscal 2001. In March 2002, the Company incurred a one time
clearing charge of $548,000 that significantly increased the net loss for the
quarter. Overall, the net loss for the first nine months of fiscal 2002 from
continuing operations, excluding the one time clearing charge, income taxes, and
extraordinary item, decreased by $1,538,000 to $1,907,000 from $3,445,000 in the
first nine months of fiscal 2001. This improvement is a result of management's
efforts to reduce the fixed costs of the Company.
Total revenues decreased $7,474,000, or 18%, to $33,083,000 from $40,557,000
during fiscal 2002 compared with fiscal 2001. This decrease is due mainly to the
weaker overall securities markets that resulted in a decrease in net dealer
inventory gains, investment banking and interest income revenues.
Commission revenues increased slightly to $16,477,000 or 1%, in the first nine
months of fiscal 2002 as compared to $16,333,000 in the same period of fiscal
2001. Despite the slumping securities markets, the Company has been able to keep
commission revenues stable by continuing to add producing registered
representatives to its independent contractor system.
Net dealer inventory gains decreased $2,791,000, or 18%, to $12,755,000 in the
first nine months of fiscal 2002 from $15,546,000 in the first nine months of
fiscal 2001. The decrease is due to lower trading volume and a reduction in
market making activities.
12
Interest income decreased $3,333,000, or 71%, to $1,354,000 in the first nine
months of fiscal 2002 from $4,687,000 in the first nine months of fiscal 2001.
This decrease is partially offset by the corresponding decrease in interest
expense, which decreased 82% or $2,242,000, to $477,000 in the first nine months
of fiscal 2002 from $2,719,000 in the first nine months of fiscal 2001. The
decrease in both interest income and interest expense is attributable to a
decrease in the amount of customer credits and customer debits at National, the
conversion of its clearing business in December 2001 and a decrease in interest
rates from 2002 to 2001.
Investment banking revenue decreased $732,000, or 79%, to $192,000 in the first
nine months of fiscal 2002 from $924,000 in the first nine months of fiscal
2001. The decrease is due to the continued down-turn in the capital markets
which has limited the Company's ability to conduct private placements and other
investment banking advisory services. Other revenues decreased $981,000, or 44%,
to $1,270,000 in the first nine months of fiscal 2002 from $2,251,000 in the
first nine months of fiscal 2001. The decrease is due to a decline in various
types of fee income, mainly from trading activities attributable to the New York
City office.
In comparison with the 18% decrease in total revenues, total expenses decreased
19% to $35,538,000 during the first nine months of fiscal 2002 compared to
$44,002,000 in the first nine months of fiscal 2001.
Commission expense, which includes expenses related to commission revenue, net
dealer inventory gains and investment banking, decreased $2,264,000, or 10%, to
$20,050,000 in the first nine months of fiscal 2002 from $22,314,000 in the same
period of fiscal 2001. Salaries decreased $2,743,000, or 41%, to $3,964,000 from
$6,707,000. This decrease is due to a reduction in senior management salaries
and a reduction in staff made possible by clearing through First Clearing
Corporation, as opposed to self-clearing. Overall, combined commissions and
salaries as a percentage of total revenues increased slightly to 72.6% from
71.6% in the first nine months of fiscal 2002 compared to the same period in
2001.
Clearing fees increased $227,000, or 7%, to $3,510,000 in the first nine months
of fiscal 2002 from $3,283,000 in the first nine months of fiscal 2001. The
increase is due to the one time clearing charge of $548,000 that was incurred in
March 2002. This charge resulted from a dispute among the Company, one of its
former clearing firms, and its current clearing firm regarding the
responsibility for debit balances in certain trading accounts. The three parties
agreed to share the expense equally.
As a result of cost cutting efforts, communication, occupancy, and professional
fees all decreased during the first nine months of fiscal 2002 compared to the
same period in 2001. Communication expenses decreased slightly to $2,230,000
from $2,275,000 in the first nine months of fiscal 2002 compared to fiscal 2001.
Occupancy costs decreased $581,000, or 17%, to $2,804,000 from $3,385,000.
Professional fees decreased $498,000, or 42%, to $687,000 from $1,185,000 in the
first nine months of fiscal 2002 compared to 2001. Other expenses increased
$7,000 to $1,512,000 from $1,505,000 in the first nine months of fiscal 2002
compared to 2001.
13
The Company reported a net loss from continuing operations of $2,375,000 in the
first nine months of fiscal 2002 compared to a net loss from continuing
operations before extraordinary item of $3,245,000 in the first nine months of
fiscal 2001. Overall, the diluted loss from continuing operations before
extraordinary item was $1.06 per share as compared with $1.47 per share for the
nine months ended June 30, 2002 and June 29, 2001, respectively.
On December 31, 2001, WestAmerica, a subsidiary of the Company, filed for
Chapter 7 Bankruptcy protection in accordance with the U.S. Bankruptcy Code.
WestAmerica realized a loss of $326,000 in the first nine months of fiscal 2001,
on revenues of $1,679,000. In the first quarter of fiscal 2002, the Company
recorded a gain of $300,000 from discontinued operations related to the
write-off of WestAmerica's net liabilities.
Liquidity and Capital Resources
As with most financial services firms, substantial portions of the Company's
assets are liquid, consisting mainly of cash or assets readily convertible into
cash. While acting as a self-clearing firm, these assets were financed primarily
by National's interest bearing and non-interest bearing customer credit
balances, other payables and equity capital. National also utilized short-term
bank financing to supplement its ability to meet day-to-day operating cash
requirements.
As a result of the losses throughout fiscal year 2001, notably those of the
fourth quarter, attributable in part to the unprecedented events in September
2001, the Company concluded that existing capital would not be sufficient to
satisfy existing operations. The Company explored various transactions to
finance the Company's operations. On December 28, 2001, the Company completed a
series of transactions (the "Investment Transaction") that are more fully
described in Footnote 4. The Company has continued to incur operating losses
throughout fiscal year 2002. If the losses were to continue, the Company
believes that its existing capital would not be sufficient to satisfy current
operations. Accordingly, the Company is actively pursuing additional sources of
capital from various potential investors. Subsequent to June 30 2002, the
Company completed $210,000 of investments in the form of Series A Preferred
Stock and is continuing to seek additional investments.
In August 2001, the Company entered into an agreement with First Clearing
Corporation ("First Clearing"), an affiliate of First Union Securities, Inc.,
under which First Clearing will provide clearing and related services for
National. The Clearing Agreement expands the products and services capabilities
for National's retail and institutional business, enables National to
consolidate its existing clearing operations and reduces fixed overhead
associated with its self-clearing activities.
The conversion to First Clearing began in December 2001 and was completed in
March 2002. In connection with the Clearing Agreement, the Company entered into
a ten-year promissory note with First Clearing under which the Company
immediately borrowed $1,000,000. The funds were contributed by the Company to
National, and are being used as a deposit to secure National's performance under
the Clearing Agreement. The Clearing Agreement also provided for another
14
$1,000,000 loan that was extended to the Company upon substantial completion of
the conversion on December 31, 2001. The amount of the note that is repayable on
each anniversary date is the principal and interest then outstanding divided by
the remaining life of the note. Borrowings under the promissory note are
forgivable based on certain business performance and trading volumes of the
Company over the life of the loan.
In connection with the Clearing Agreement, additional borrowings were available
to the Company upon the attainment by National of certain volume and
profitability goals. In finalizing the conversion, a dispute arose among the
Company, US Clearing (one of its former clearing firms) and First Clearing,
regarding the responsibility for debit balances in certain trading accounts. The
three parties agreed to share the expense equally. The Company's share of this
settlement, $548,000, was advanced to the Company by First Clearing and added to
the existing promissory note. As part of the settlement, the minimum level of
stockholders' equity required to be maintained by the Company under the
promissory note was reduced from $2,000,000 to $1,000,000 and no further
borrowings are available under the promissory note, as amended. Additionally,
National received its $1,000,000 clearing deposit from US Clearing.
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 June 30, 2002, National's
net capital exceeded the requirement by approximately $874,000.
In December 2001, WestAmerica voluntarily withdrew its membership with the NASD
and ceased to conduct business as a broker-dealer. On December 31, 2001
WestAmerica filed for Chapter 7 Bankruptcy protection in accordance with the
U.S. Bankruptcy Code. WestAmerica has been operated as a separate legal entity,
and the Company believes it will not have any ongoing liability for any unpaid
obligations of WestAmerica.
Canterbury Securities Corporation ("Canterbury"), a wholly owned subsidiary of
the Company, is registered as a broker-dealer with the SEC and is licensed in
Illinois. Canterbury is a member of the NASD, the MSRB and the SIPC. Canterbury
formerly engaged in private placement transactions. Canterbury had no retail
customer accounts and, therefore, operated pursuant to the exemptive provisions
of SEC Rule 15c3-3(k)(2)(i). Since its acquisition in June 2000, Canterbury had
no activity. In May 2002, the Company sold Canterbury for its book value of
approximately $11,000 to Mr. Rothstein.
Advances, dividend payments and other equity withdrawals from the Company's
subsidiaries are restricted by the regulations of the SEC and other regulatory
agencies. These regulatory restrictions may limit the amounts that these
subsidiaries may dividend or advance to the Company.
The objective of liquidity management is to ensure that the Company has ready
access to sufficient funds to meet commitments, fund deposit withdrawals and
efficiently provide for the credit needs of customers.
15
As of the period ended June 30, 2002, total assets were approximately $8 million
compared to total assets of $77.6 million as of the fiscal year ended September
28, 2001. This material decrease in the Company's assets is due to the change in
the Company's clearing arrangements. Customer assets that were included in the
fiscal year end 2001 balance sheet are no longer accounted for on the Company's
books. These assets are now held at First Clearing as part of the new clearing
arrangement.
On April 30, 2002, the FASB issued SFAS No. 145, "Rescission of FASB Statement
No. 4, 44 and 64, Amendment of FASB Statement No. 13, and Technical
Corrections." The rescission of SFAS No. 4, "Reporting Gains and Losses from
Extinguishments," and SFAS No. 64, "Extinguishments of Debt made to Satisfy
Sinking Fund Requirements," which amended SFAS No. 4 will affect income
statement classification of gains and losses from extinguishment of debt. SFAS
No. 4 requires that gains and losses from extinguishment of debt be classified
as an extraordinary item, if material. Under SFAS No. 145, extinguishment of
debt is now considered a risk management strategy by the reporting enterprise
and the FASB does not believe it should be considered extraordinary under the
criteria in APB Opinion No. 30, "Reporting the Results of Operations-Reporting
the Effects of Disposal of a Segment of a Business, and Extraordinary, Unusual
and Infrequently Occurring Events and Transactions," unless the debt
extinguishment meets the unusual in nature and infrequency of occurrence
criteria in APB Opinion No. 30. SFAS No. 145 will be effective for fiscal years
beginning after May 15, 2002. Upon adoption, extinguishments of debt shall be
classified under the criteria in APB Opinion No. 30.
In June 2002, the FASB issued SFAS No. 146, "Accounting for Costs Associated
with Exit or Disposal Activities." SFAS No. 146 addresses financial accounting
and reporting for costs associated with exit or disposal activities and
nullified Emerging Issues Task Force Issue No. 94-3, "Liability Recognition for
Certain Employee Termination Benefits and Other Costs to Exit an Activity
(including Certain Costs Incurred in a Restructuring)." SFAS No. 146 requires
that a liability for a cost associated with an exit or disposal activity be
recognized when the liability is incurred. A fundamental conclusion reached by
the FASB in this statement is that an entity's commitment to a plan, by itself,
does not create a present obligation to others that meets the definition of a
liability. SFAS No. 146 also establishes that fair value is the objective for
initial measurement of the liability. The provisions of this statement are
effective for exit or disposal activities that are initiated after December 31,
2002, with early application encouraged. The Company has not yet determined the
impact of SFAS No.146 on its financial position and results of operations, if
any.
PART II
ITEM 1 - LEGAL PROCEEDINGS
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. No specific amount of damages has been sought
against the Company in the complaint. National's time to answer has not yet
16
expired. The Company believes it has meritorious defenses and intends to
vigorously contest class certification and defend this action, although the
ultimate outcome of the matter cannot be determined at this time.
For a detailed discussion of the Company's other legal proceedings, please refer
to the Company's Annual Report on Form 10-K for the fiscal year ended September
28, 2001 and Quarterly Report on Form 10-Q for the quarter ended March 31, 2002.
ITEM 2 - CHANGES IN SECURITIES
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.
ITEM 6 - EXHIBITS AND REPORTS ON FORM 8-K
a) Exhibits
99.1 Certification of Chief Executive Officer pursuant to 18 U.S.C.
Section 1350, as adopted pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002.
99.2 Certification of Chief Financial Officer pursuant to 18 U.S.C.
Section 1350, as adopted pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002.
b) Reports on Form 8-K
None.
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.
17
OLYMPIC CASCADE FINANCIAL CORPORATION AND SUBSIDIARIES
August 14, 2002 By: /s/ Mark Goldwasser
--------------------------------------------
Date Mark Goldwasser
President and Chief Executive Officer
August 14, 2002 By: /s/ Robert H. Daskal
--------------------------------------------
Date Robert H. Daskal
Acting Chief Financial Officer