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, 2002 Commission File Number 001-12629
OLYMPIC CASCADE FINANCIAL CORPORATION
(Exact name of registrant as specified)
DELAWARE 36-4128138
- ------------------------- -----------------------------------
(State of other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
875 North Michigan Avenue, Suite 1560, Chicago, IL 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 February 13, 2003 was 3,367,558.
1
OLYMPIC CASCADE FINANCIAL CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
ASSETS
December 31, September 30,
2002 2002
(unaudited) (see note below)
-------------- ----------------
CASH, subject to immediate withdrawal $ 295,000 $ 325,000
CASH, restricted 4,000 309,000
DEPOSITS 1,088,000 1,489,000
RECEIVABLES
Broker-dealers and clearing organizations 1,782,000 1,269,000
Other, net of reserve for uncollectible accounts of $209,000 1,006,000 1,155,000
ADVANCES TO REGISTERED REPRESENTATIVES 771,000 799,000
SECURITIES HELD FOR RESALE, at market 1,025,000 606,000
FIXED ASSETS, net 340,000 369,000
OTHER ASSETS 1,754,000 1,627,000
-------------- --------------
$ 8,065,000 $ 7,948,000
============== ==============
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
BANK OVERDRAFT $ 48,000 $ 408,000
PAYABLES
Broker-dealers and clearing organizations 810,000 490,000
SECURITIES SOLD, BUT NOT YET PURCHASED, at market 203,000 105,000
ACCOUNTS PAYABLE, ACCRUED EXPENSES AND OTHER LIABILITIES 2,201,000 2,821,000
NOTE PAYABLE - RELATED PARTY 1,000,000 1,000,000
NOTES PAYABLE 3,499,000 3,215,000
-------------- --------------
7,761,000 8,039,000
-------------- --------------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY (DEFICIT)
Preferred stock, $.01 par value, 100,000 shares authorized, 27,825
issued and outstanding
Common stock, $.02 par value, 60,000,000 shares authorized, 3,290,635
and 2,274,449 issued and outstanding at December 31, 2002 and
September 30, 2002, respectively 66,000 45,000
Additional paid-in capital 12,578,000 12,045,000
Deficit (12,340,000) (12,181,000)
-------------- --------------
304,000 (91,000)
-------------- --------------
$ 8,065,000 $ 7,948,000
============== ==============
Note: The balance sheet at September 30, 2002 has been derived from the audited financial statements at that date.
See notes to consolidated financial statements.
2
OLYMPIC CASCADE FINANCIAL CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
---------Three Months End---------
December 31, December 31,
2002 2001
------------- ------------
REVENUES:
Commissions $ 6,008,000 $ 7,833,000
Net dealer inventory gains 3,557,000 2,716,000
Interest 312,000 740,000
Transfer fees 375,000 385,000
Investment banking 106,000 102,000
Other 235,000 511,000
------------- ------------
10,593,000 12,287,000
------------- ------------
EXPENSES:
Commissions 6,901,000 7,538,000
Salaries 1,021,000 1,278,000
Clearing fees 682,000 1,108,000
Communications 558,000 816,000
Occupancy costs 753,000 975,000
Interest 45,000 392,000
Professional fees 231,000 282,000
Taxes, licenses, registration 85,000 90,000
Other 476,000 530,000
------------- ------------
10,752,000 13,009,000
------------- ------------
Loss from continuing operations before income
taxes and discontinued operations (159,000) (722,000)
Income tax expense - (12,000)
------------- ------------
Loss from continuing operations (159,000) (734,000)
Income from discontinued operations, net of tax - 300,000
------------- ------------
NET LOSS $ (159,000) $ (434,000)
============= ============
EARNINGS (LOSS) PER COMMON SHARE
Basic:
Loss from continuing operations $ (0.06) $ (0.32)
Income from discontinued operations - 0.13
------------- ------------
Net loss $ (0.06) $ (0.19)
============= ============
Diluted:
Loss from continuing operations $ (0.06) $ (0.32)
Income from discontinued operations - 0.13
------------- ------------
Net loss $ (0.06) $ (0.19)
============= ============
Weighted average number of shares outstanding:
Basic 2,624,085 2,236,449
============= ============
Diluted 2,624,085 2,236,449
============= ============
See notes to consolidated financial statements.
3
OLYMPIC CASCADE FINANCIAL CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
------Three Months Ended-------
December 31, December 31,
2002 2001
------------- -------------
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss $ (159,000) $ (434,000)
Adjustments to reconcile net loss to net cash
provided by (used in) operating activities
Depreciation and amortization 65,000 137,000
Change in net assets (liabilities) of discontinued operations - (300,000)
Changes in assets and liabilities
Cash, cash equivalents and securities - 36,926,000
Restricted cash 305,000 -
Deposits 401,000 2,345,000
Receivables (336,000) 26,928,000
Securities held for resale (419,000) 615,000
Other assets (127,000) 29,000
Payables 75,000 (62,536,000)
Securities sold, but not yet purchased 98,000 219,000
------------- -------------
Net cash provided by (used in) operating activities (97,000) 3,929,000
------------- -------------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of fixed assets (36,000) (21,000)
------------- -------------
CASH FLOWS FROM FINANCING ACTIVITIES
Borrowings (payments) on line of credit - (3,500,000)
Payments on capital lease - (85,000)
Proceeds from notes payable - 1,000,000
Payments on notes payable (91,000) (12,000)
Decrease in cash overdraft (360,000) (1,556,000)
Net proceeds from issuance of preferred stock - 972,000
Net proceeds from issuance of common stock and warrants 554,000 -
------------- -------------
Net cash provided by (used in) financing activities 103,000 (3,181,000)
------------- -------------
NET INCREASE (DECREASE) IN CASH (30,000) 727,000
CASH BALANCE
Beginning of the period 325,000 150,000
------------- -------------
End of the period $ 295,000 $ 877,000
============= =============
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash paid during the period for
Interest $ 45,000 $ 345,000
============= =============
Income taxes $ - $ 12,000
============= =============
SUPPLEMENTAL DISCLOSURES OF NONCASH INVESTING AND
FINANCING ACTIVITIES
Exchange of notes payable for preferred stock $ - $ 1,000,000
============= =============
Conversion of accounts payable to note payable $ 375,000 $ -
============= =============
See notes to consolidated financial statements.
4
OLYMPIC CASCADE FINANCIAL CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2002 AND DECEMBER 31, 2001
(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, 2002 and December 31, 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 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, 2002.
Certain revenues classified as net dealer inventory gains and other revenues in
prior quarters have been reclassified as commission revenues to conform with the
presentation used in the December 31, 2002 financial statements.
NOTE 2 - PRIVATE PLACEMENT
In the first quarter of fiscal year 2003, the Company consummated a private
placement (the "Private Offering") of its securities to a limited number of
"accredited investors" pursuant to Rule 501 of Regulation D under the Securities
Act of 1933, as amended (the "Securities Act"). Each unit in the Private
Offering sold for $0.65 and consisted of one share of the Company's common
stock, $.02 par value per share (the "Common Stock") and one three-year warrant
to purchase one share of the Company's Common Stock at a per share price of
$1.25 (the "Warrants"). Net proceeds of $554,500 closed in the first quarter of
fiscal year 2003, and the Company correspondingly issued 1,016,186 shares of
Common Stock and 1,016,186 Warrants.
NOTE 3 - LOAN FROM 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 is due to be repaid in January 2004. Additionally, First
Clearing has waived its stockholders' equity covenant as of December 31, 2002.
The minimum level of stockholders' equity required to be maintained will be
$500,000 as of March 31, 2003 and $1,000,000 as of June 30, 2003.
5
NOTE 4 - CLOSING OF WESTAMERICA INVESTMENT GROUP
In December 2001, the Company's former subsidiary, WestAmerica Investment Group
("WestAmerica") voluntarily withdrew its membership with the National
Association of Securities Dealers ("NASD"), ceased to conduct business as a
broker-dealer, and filed for Chapter 7 Bankruptcy protection in accordance with
the U.S. Bankruptcy Code. WestAmerica had been operated 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
year 2002, the Company recorded a gain of $300,000 from discontinued operations
related to the write-off of WestAmerica's net liabilities.
NOTE 5 - CONTINGENCIES
National Securities Corporation, the Company's wholly-owned subsidiary
("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, National 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. Plaintiffs thereafter withdrew
their motion and the case was referred to mediation. The mediation process is
moving toward a global settlement of the matter. Should the matter not be
settled, National will pursue its defenses, which it believes are meritorious.
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 $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. Plaintiffs are seeking approximately $14.0 million,
but no specific amount of damages has been sought against National in the
complaint. National's time to answer has not yet expired. National 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 $4.8 million. These matters arise out of the
normal course of business. The Company believes it has meritorious defenses and
intends to vigorously defend these actions, although the ultimate outcome of the
matters cannot be determined at this time.
NOTE 6 - ISSUANCE OF COMMON STOCK
In January 2003, the Company issued 76,923 shares of Common Stock and a
three-year warrant to purchase 76,923 shares of Common Stock at $1.25 per share
to D'Ancona & Pflaum LLC as payment of $50,000 of legal fees that were accrued
as of September 30, 2002.
6
NOTE 7 - THE AMERICAN STOCK EXCHANGE
The Company has received a letter from The American Stock Exchange indicating
that it is 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 intends to submit to the Exchange
a plan that indicates compliance with item (1) above within a maximum of 18
months, and the Company is actively seeking another independent director to
satisfy item (2) above.
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.
7
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 26, 2002. 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
Reclassification of Revenues
Certain revenues classified as net dealer inventory gains and other revenues in
prior quarters have been reclassified as commission revenues to conform with the
presentation used in the December 31, 2002 financial statements.
Quarter Ended December 31, 2002 Compared to Quarter Ended December 31, 2001
The Company's first quarter of fiscal year 2003 resulted in a decrease in total
revenues and a corresponding greater decrease in expenses compared with the same
period of fiscal year 2002. The decrease in revenues is due to the continued
weakness in the securities markets compared to a year ago. However, as a result
of management's efforts to reduce the fixed costs associated with its salaried
employees, communication expenses, occupancy costs and other expenses, the
Company's loss from continuing operations before income tax decreased $563,000
from $722,000 in the first quarter of fiscal year 2002 to $159,000 in the first
quarter of fiscal year 2003.
Total revenues decreased $1,694,000, or 14%, to $10,593,000 in the first quarter
of fiscal year 2003 from $12,287,000 in the first quarter of fiscal year 2002.
The decrease in total revenues is primarily due to the weaker overall securities
market compared with the securities market during the same period a year ago.
Accordingly, commission revenues decreased $1,825,000 or 23% to $6,008,000 in
the first quarter of fiscal year 2003 as compared to $7,833,000 in the first
quarter of fiscal year 2002. Net dealer inventory gains increased $841,000, or
31%, to $3,557,000 in the first quarter of fiscal year 2003 from $2,716,000 in
the first quarter of fiscal year 2002.
Investment banking revenues were virtually unchanged at $106,000 in the first
quarter of fiscal year 2003 from $102,000 in the first quarter of fiscal year
2002. Interest income decreased $428,000, or 58%, to $312,000 in the first
quarter of fiscal year 2003 from $740,000 in the first quarter of fiscal year
2002. This decrease is offset by the corresponding decrease in interest expense,
which decreased $347,000, or 89%, to $45,000 in the first quarter of fiscal year
2003 from $392,000 in the first quarter of fiscal year 2002. 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 due to the conversion
of its clearing business in the first quarter of fiscal year 2002, and a
decrease in interest rates in 2003 as compared to 2002. Other revenues decreased
$276,000, or 54%, to $235,000 in the first quarter of fiscal year 2003 from
$511,000 in the first quarter of fiscal year 2002. The decrease is due to a
decline in asset management fees, a decrease in service fees on IRA accounts
that are now collected by First Clearing rather than the Company, and fewer
order flow rebates from other broker-dealers.
8
In comparison with the 14% decrease in total revenues, total expenses decreased
$2,257,000, or 17%, to $10,752,000 in the first quarter of fiscal year 2003 from
$13,009,000 in the first quarter of fiscal year 2002. The decrease in total
expenses is a result of management's efforts to streamline its operations and
reduce costs.
Commission expense, which includes expenses related to commission revenue, net
dealer inventory gains and investment banking, decreased $637,000, or 8%, to
$6,901,000 in the first quarter of fiscal 2003 from $7,538,000 in the first
quarter of fiscal 2002. This is consistent with the decrease in combined
revenues from commissions, net dealer inventory gains and investment banking
during the same period. Salaries decreased $257,000, or 20%, to $1,021,000 in
the first quarter of fiscal year 2003 from $1,278,000 in the first quarter of
fiscal year 2002. This decrease is due to management's ongoing efforts to reduce
its fixed costs associated with salaried employees. Overall, combined commission
and salary expenses as a percentage of revenue increased 3% to 75% during the
first quarter of fiscal year 2003 compared to 72% during the first quarter of
fiscal year 2002.
Clearing fees decreased $426,000, or 38%, to $682,000 from $1,108,000 in the
first quarter of fiscal year 2003 compared to the first quarter of fiscal year
2002. The decrease in clearing fees is due to the Company's self clearing a
majority of its business in the first quarter of fiscal year 2002 compared to
clearing all of its business through First Clearing in the first quarter of
fiscal year 2003, as well as lower trading volume during the current period.
Communication expenses decreased $258,000, or 32%, to $558,000 from $816,000 due
to management's ongoing efforts to reduce its fixed costs associated with its
communication expenses. Occupancy costs decreased $222,000, or 23%, to $753,000
from $975,000 in first quarter of fiscal year 2003 compared to the first quarter
of fiscal year 2002. 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 decreased $51,000, or 18%, to $231,000 from $282,000 in the
first quarter of fiscal years 2003 and 2002, respectively. The decrease in
professional fees is due to a reduction in both the number and amount of legal
consultations used in operating our business. Taxes, licenses and registrations
were virtually unchanged at $85,000 in the first quarter of fiscal year 2003 and
$90,000 in the first quarter of fiscal year 2002. Other expenses decreased
$54,000, or 10%, to $476,000 from $530,000 in the first quarter of fiscal years
2003 and 2002, respectively. The decrease in other expenses is attributable to
management's efforts to reduce travel and miscellaneous expenses.
Due to the continued slumping markets, the Company reported a net loss from
continuing operations of $159,000 in the first quarter of fiscal year 2003
compared to a net loss from continuing operations of $734,000 the first quarter
of fiscal year 2002. Overall, the diluted loss from continuing operations was
$.06 per share for the first quarter of fiscal year 2003 as compared to a
diluted loss from continuing operations of $.32 per share for the first quarter
of fiscal year 2002.
9
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. Overall, the net loss was $.06 per share in the first quarter of
fiscal year 2003 as compared to a net loss of $.19 per share for the first
quarter of fiscal year 2002.
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. Through December 2001, 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 utilized
short-term bank financing to supplement its ability to meet day-to-day operating
cash requirements. Such financing was used to maximize cash flow and was
regularly repaid. The Company's line of credit was fully repaid and expired on
December 31, 2001.
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 the Company is a market maker. At December 31, 2002,
National's net capital exceeded the requirement by $1,178,000.
In December 2001, WestAmerica voluntarily withdrew its membership with the NASD,
ceased conducting business as a broker-dealer, and filed for Chapter 7
Bankruptcy protection in accordance with the U.S. Bankruptcy Code. WestAmerica
had been operated as a separate legal entity, and although the Company believes
it will not have any ongoing liability for any unpaid obligations of
WestAmerica, there can be no assurances that creditors of WestAmerica will not
seek recovery of their claims from the Company.
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.
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. In December 2001, the Company completed a
series of transactions under which certain new investors obtained a significant
ownership in the Company. (For a more complete description of these
transactions, see Item 1(b) of the Company's Annual Report on Form 10-K for the
fiscal year ended September 30, 2002.) The Company continued to incur operating
losses throughout fiscal year 2002, and as a result, the Company believed that
its then existing capital was not sufficient to satisfy its current level of
operations. Accordingly, the Company pursued additional sources of capital from
various potential investors. In the fourth quarter of fiscal year 2002, the
Company completed $210,000 of financing in the form of Series A Preferred Stock
and continued to seek additional investors.
In the first quarter of fiscal year 2003, the Company consummated a private
placement (the "Private Offering") of its securities to a limited number of
accredited investors pursuant to Rule 501 of Regulation D under the Securities
Act of 1933, as amended (the "Securities Act"). Each unit in the Private
Offering sold for $0.65 and consisted of one share of the Company's Common Stock
and one three-year warrant to purchase one share of the Company's Common Stock
at a per share price of $1.25 (the "Warrants"). Net proceeds of $554,500 were
received in the first quarter of fiscal year 2003, and the Company
correspondingly issued 1,016,186 shares of Common Stock and 1,016,186 Warrants.
The Company has agreed to file a Registration Statement 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, on or before March 3, 2003, and use its
commercially reasonable efforts to cause such registration statement to become
effective within 60 days after such filing and to maintain the effectiveness of
such registration statement for a period of no less than the earlier of (i) the
date on which all of the registrable securities may be resold without
restriction pursuant to Rule 144(k) under the Securities Act, or (ii) the date
on which all of the registrable securities have been sold. National acted as the
placement agent on a best efforts basis for the Private Offering.
10
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. 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 then outstanding divided by the remaining life of the note.
Borrowings under the promissory note are forgivable based on achieving certain
business performance and trading volumes of the Company over the life of the
loan, that the Company has satisfied through the quarter ended December 31,
2002.
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 clearing deposit, net of miscellaneous expenses, of
$975,000 from US Clearing. National terminated its clearing agreement with US
Clearing.
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 is due to be
repaid in January 2004. Additionally, First Clearing has waived the
stockholders' equity covenant as of December 31, 2002. The minimum level of
stockholders' equity required to be maintained was further amended to $500,000
as of March 31, 2003 and $1,000,000 as of June 30, 2003.
The Company believes that given the improved market conditions experienced
during the first quarter of fiscal year 2003 compared with the prior quarter
ended September 30, 2002, the continuation of such improved market conditions,
and the proceeds from its capital-raising activities, funds will be sufficient
to maintain its current level of business activities during fiscal year 2003. If
current market conditions do not continue, the Company would need to consider
curtailing certain of its business activities, further reducing its fixed
overhead costs and/or seek additional sources of financing. The Company's
ability to obtain such financing could be adversely affected by recent
developments relating to the listing of the Company's common stock on The
American Stock Exchange (See Note 7 herein).
11
New Accounting Standards
In December 2002, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standard ("SFAS") No. 148, "Accounting for
Stock-Based Compensation - Transition and Disclosure - an amendment of FASB
Statement No. 123. " SFAS No. 148 amends SFAS No. 123, "Accounting for
Stock-Based Compensation," to provide alternative methods of transition for a
voluntary change to the fair value based method of accounting for stock-based
employee compensation. In addition, SFAS No. 148 amends the disclosure
requirements of SFAS No. 123 to require prominent disclosures in both annual and
interim financial statements about the method of accounting for stock-based
employee compensation and the effect of the method used on reported results. The
disclosure requirements apply to all companies for fiscal years ending after
December 15, 2002. The interim disclosure provisions are effective for financial
reports containing financial statements for interim periods beginning after
December 15, 2002. The adoption of SFAS No. 148 is not expected to have a
material impact on the Company's financial statements.
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.
12
The following table shows the quoted market values of the Company's securities
owned ("long"), securities sold but not yet purchased ("short") and net
positions as of December 31, 2002:
Long Short Net
-------- --------- ---------
Corporate Stocks $505,000 $132,000 $373,000 (long)
Corporate Bonds $485,000 $ - $485,000 (long)
Government Obligations $ 35,000 $ 71,000 $ 36,000 (short)
ITEM 4 - CONTROLS AND PROCEDURES
Within 90 days prior to the date of this report, we carried out an evaluation,
under the supervision and with the participation of our principal executive
officer and principal financial officer, of the effectiveness of the design and
operation of our "disclosure controls and procedures" (as defined in the
Securities Exchange Act of 1934 Rules 13a-14(c) and 15(d)-14(c)). Based on this
evaluation, our principal executive officer and principal financial officer
concluded that our disclosure controls and procedures are effective in timely
alerting them to material information required to be included in our periodic
SEC reports.
In addition, we reviewed our internal controls, and there have been no
significant changes in our internal controls or in other factors that could
significantly affect those controls subsequent to the date of our evaluation.
PART II
ITEM 1 - LEGAL PROCEEDINGS
During the quarter, there were no 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, 2002.
ITEM 2 - CHANGES IN SECURITIES AND USE OF PROCEEDS
In the first quarter of fiscal year 2003, the Company consummated a private
placement (the "Private Offering") of its securities to a limited number of
"accredited investors" pursuant to Rule 501 of Regulation D under the Securities
Act of 1933, as amended (the "Securities Act"). Each unit in the Private
Offering sold for $0.65 and consisted of one share of the Company's Common Stock
and one three-year warrant to purchase one share of the Company's Common Stock
at a per share price of $1.25 (the "Warrants"). Net proceeds of $554,500 were
received in the first quarter of fiscal year 2003, and the Company
correspondingly issued 1,016,186 shares of Common Stock and 1,016,186 Warrants.
The Company has agreed to file a Registration Statement 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, on or before March 3, 2003, and use its
commercially reasonable efforts to cause such registration statement to become
effective within 60 days after such filing and to maintain the effectiveness of
such registration statement for a period of no less than the earlier of (i) the
date on which all of the registrable securities may be resold without
restriction pursuant to Rule 144(k) under the Securities Act, or (ii) the date
on which all of the registrable securities have been sold.
13
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.
14
CERTIFICATION
I, Mark Goldwasser, certify that:
1) I have reviewed this quarterly report on Form 10-Q of Olympic Cascade
Financial Corporation;
2) Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report;
3) Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4) The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) Designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated subsidiaries,
is made known to us by others within those entities, particularly during the
period in which this quarterly is being prepared;
b) Evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c) Presented in this quarterly report our conclusions about the effectiveness of
the disclosure controls and procedures based on our evaluation as of the
Evaluation Date;
5) The registrant's other certifying officer and I have disclosed, based on our
most recent evaluation, to the registrant's auditors and the audit committee of
registrant's board of directors (or persons performing the equivalent function);
a) All significant deficiencies in the design or operations of internal controls
which could adversely affect the registrant's ability to record, process,
summarize and report financial data and have identified for the registrant's
auditors any material weaknesses in internal controls; and
b) Any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal controls; and
6) The registrant's other certifying officer and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
/s/ Mark Goldwasser
Mark Goldwasser
Chief Executive Officer
February 13, 2003
15
CERTIFICATION
I, Robert H. Daskal, certify that:
1) I have reviewed this quarterly report on Form 10-Q of Olympic Cascade
Financial Corporation;
2) Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report;
3) Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4) The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated subsidiaries,
is made known to us by others within those entities, particularly during the
period in which this quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the effectiveness of
the disclosure controls and procedures based on our evaluation as of the
Evaluation Date;
5) The registrant's other certifying officer and I have disclosed, based on our
most recent evaluation, to the registrant's auditors and the audit committee of
registrant's board of directors (or persons performing the equivalent function);
a) all significant deficiencies in the design or operations of internal controls
which could adversely affect the registrant's ability to record, process,
summarize and report financial data and have identified for the registrant's
auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal controls; and
6) The registrant's other certifying officer and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
/s/ Robert H. Daskal
Robert H. Daskal
Acting Chief Financial Officer
February 13, 2003
16
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 13, 2003 By: /s/ Mark Goldwasser
-------------------------------------
Mark Goldwasser
President and Chief Executive Officer
February 13, 2003 By:/s/ Robert H. Daskal
--------------------------------------
Robert H. Daskal
Acting Chief Financial Officer
17
Exhibit 99.1
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Quarterly Report of Olympic Cascade Financial
Corporation (the "Company") on Form 10-Q for the fiscal quarter ended December
31, 2002 as filed with the Securities and Exchange Commission on the date hereof
(the "Report"), I, Mark Goldwasser, Chief Executive Officer of the Company,
certify, pursuant to 18 U.S.C. ss. 1350, as adopted pursuant to ss. 906 of the
Sarbanes-Oxley Act of 2002, that, to my knowledge:
(1) The Report fully complies with the requirements of section 13(a) or
15(d) of the Securities Exchange Act of 1934, as amended; and
(2) The information contained in the Report fairly presents, in all
material respects, the financial condition and results of operations of
the Company.
/s/Mark Goldwasser
Mark Goldwasser
Chief Executive Officer
February 13, 2003
18
Exhibit 99.2
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Quarterly Report of Olympic Cascade Financial
Corporation (the "Company") on Form 10-Q for the fiscal quarter ended December
31, 2002 as filed with the Securities and Exchange Commission on the date hereof
(the "Report"), I, Robert H. Daskal, Acting Chief Financial Officer of the
Company, certify, pursuant to 18 U.S.C. ss. 1350, as adopted pursuant to ss. 906
of the Sarbanes-Oxley Act of 2002, that, to my knowledge:
(1) The Report fully complies with the requirements of section 13(a) or
15(d) of the Securities Exchange Act of 1934, as amended; and
(2) The information contained in the Report fairly presents, in all
material respects, the financial condition and results of operations of
the Company.
/s/Robert H. Daskal
Robert H. Daskal
Acting Chief Financial Officer
February 13, 2003
19