UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarter Ended March 31, 2004 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.)
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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 |_|
Indicate by checkmark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). Yes |_| No |X|
The number of shares outstanding of registrant's common stock, par value $0.02 per share, at May 12, 2004 was 3,380,192.
OLYMPIC CASCADE FINANCIAL CORPORATION AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
ASSETS
March 31, September 30,
2004 2003
(unaudited) (see note below)
------------ ------------
CASH $ 1,023,000 $ 451,000
DEPOSITS WITH CLEARING ORGANIZATIONS 591,000 1,041,000
RECEIVABLES FROM BROKER-DEALERS AND CLEARING ORGANIZATIONS 3,893,000 3,724,000
OTHER RECEIVABLES, net of reserve for uncollectible accounts of $650,000
at March 31, 2004 and September 30, 2003, respectively 752,000 709,000
ADVANCES TO REGISTERED REPRESENTATIVES 1,255,000 644,000
SECURITIES HELD FOR RESALE, at market 930,000 374,000
FIXED ASSETS, net 298,000 247,000
SECURED DEMAND NOTE 1,000,000 1,000,000
OTHER ASSETS 659,000 545,000
------------ ------------
TOTAL ASSETS $ 10,401,000 $ 8,735,000
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
PAYABLE TO BROKER-DEALERS AND CLEARING ORGANIZATIONS $ 455,000 $ 258,000
SECURITIES SOLD, BUT NOT YET PURCHASED, at market 476,000 116,000
ACCOUNTS PAYABLE, ACCRUED EXPENSES AND OTHER LIABILITIES 4,928,000 4,520,000
NOTES PAYABLE 1,769,000 3,170,000
------------ ------------
TOTAL LIABILITIES 7,628,000 8,064,000
------------ ------------
SUBORDINATED BORROWINGS 1,000,000 1,000,000
------------ ------------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY (DEFICIT)
Series A 9% cumulative convertible preferred stock, 50,000 shares
authorized; 31,177 shares issued and outstanding (liquidation
preference: $3,117,700) at March 31, 2004, and 27,825 shares issued
and outstanding (liquidation preference:
$2,782,500) at September 30, 2003, respectively -- --
Common stock, $.02 par value, 30,000,000 shares authorized, 3,367,558 issued
and outstanding at March 31, 2004 and September 30, 2003, respectively 67,000 67,000
Additional paid-in capital 13,473,000 12,628,000
Accumulated deficit (11,767,000) (13,024,000)
------------ ------------
TOTAL STOCKHOLDERS' EQUITY (DEFICIT) 1,773,000 (329,000)
------------ ------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT) $ 10,401,000 $ 8,735,000
============ ============
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Note: The balance sheet at September 30, 2003 has been derived from the audited consolidated financial statements at that date.
OLYMPIC CASCADE FINANCIAL CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
--- Three Months Ended ---- ---- Six Months Ended -----
March 31, March 31, March 31, March 31,
2004 2003 2004 2003
------------ ------------ ------------ ------------
REVENUES:
Commissions $ 15,302,000 $ 5,887,000 $ 26,674,000 $ 11,895,000
Net dealer inventory gains 1,988,000 2,668,000 4,051,000 6,225,000
Interest and dividends 862,000 304,000 1,531,000 616,000
Transfer fees and clearing services 747,000 346,000 1,329,000 721,000
Investment banking 368,000 25,000 700,000 131,000
Gain on extinguishment of debt 756,000 -- 1,131,000 --
Other 207,000 163,000 332,000 397,000
------------ ------------ ------------ ------------
TOTAL REVENUES 20,230,000 9,393,000 35,748,000 19,985,000
------------ ------------ ------------ ------------
EXPENSES:
Commissions 13,747,000 6,045,000 24,308,000 12,946,000
Employee compensation and related expenses 1,531,000 1,060,000 2,808,000 2,081,000
Clearing fees 1,051,000 542,000 1,762,000 1,224,000
Communications 731,000 709,000 1,310,000 1,267,000
Occupancy and equipment costs 771,000 676,000 1,441,000 1,429,000
Interest 91,000 33,000 142,000 78,000
Professional fees 470,000 299,000 825,000 531,000
Litigation settlement -- -- 400,000 --
Taxes, licenses, registration 162,000 48,000 262,000 133,000
Other 379,000 572,000 730,000 1,047,000
------------ ------------ ------------ ------------
TOTAL EXPENSES 18,933,000 9,984,000 33,988,000 20,736,000
------------ ------------ ------------ ------------
NET INCOME (LOSS) 1,297,000 (591,000) 1,760,000 (751,000)
Preferred stock dividends (62,000) (62,000) (126,000) (125,000)
------------ ------------ ------------ ------------
Net income (loss) attributable to common stockholders $ 1,235,000 $ (653,000) $ 1,634,000 $ (876,000)
============ ============ ============ ============
NET INCOME (LOSS) PER COMMON SHARE
Basic:
Net income (loss) attributable to common stockholders $ 0.37 $ (0.20) $ 0.49 $ (0.29)
============ ============ ============ ============
Diluted:
Net income (loss) attributable to common stockholders $ 0.20 $ (0.20) $ 0.27 $ (0.29)
============ ============ ============ ============
Weighted average number of shares outstanding
Basic 3,367,558 3,347,900 3,367,558 2,982,015
============ ============ ============ ============
Diluted 6,331,005 3,347,900 6,065,057 2,982,015
============ ============ ============ ============
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OLYMPIC CASCADE FINANCIAL CORPORATION AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
-------------Six Months Ended-------------
March 31, 2004 March 31, 2003
------------------- --------------------
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss) $ 1,760,000 $ (751,000)
Adjustments to reconcile net income (loss) to net
cash provided by (used in) operating activities
Depreciation and amortization 89,000 123,000
Amortization of note discount 38,000 11,000
Gain on extinguishment of debt (1,131,000) --
Forgiveness of loan (251,000) (193,000)
Changes in assets and liabilities
Restricted cash -- 305,000
Deposits with clearing organizations 450,000 398,000
Receivables from broker-dealers, clearing organizations and others (823,000) (281,000)
Securities held for resale, at market (556,000) (1,038,000)
Other assets (114,000) (148,000)
Payables 608,000 826,000
Securities sold, but not yet purchased, at market 360,000 209,000
----------- -----------
Net cash provided by (used in) operating activities 430,000 (539,000)
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of fixed assets (140,000) (55,000)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES
Net proceeds from issuance of notes payable and warrants 1,032,000 --
Payment of notes payable (750,000) 29,000
Increase (decrease) in cash overdraft -- (311,000)
Net proceeds from issuance of common stock and warrants -- 554,000
----------- -----------
Net cash provided by financing activities 282,000 272,000
----------- -----------
NET INCREASE (DECREASE) IN CASH 572,000 (322,000)
CASH BALANCE
Beginning of the period 451,000 325,000
----------- -----------
End of the period $ 1,023,000 $ 3,000
=========== ===========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash paid during the period for:
Interest $ 72,000 $ 79,000
=========== ===========
SUPPLEMENTAL DISCLOSURES OF NONCASH INVESTING AND
FINANCING ACTIVITIES
Conversion of accounts payable to loan payable $ -- $ 375,000
=========== ===========
Gain on extinguishment of debt $ 1,131,000 $ --
=========== ===========
Exchange of accounts payable for common stock $ -- $ 50,000
=========== ===========
Forgiveness of loan $ 251,000 $ 99,000
=========== ===========
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OLYMPIC CASCADE FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2004
(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 March 31, 2004 and March 31, 2003 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.
Three Months Ended Six Months Ended
------------------------------ -----------------------------
March 31, 2004 March 31, 2003 March 31, 2004 March 31, 2003
-------------- -------------- -------------- --------------
Net income (loss) attributable to common stockholders - as reported $ 1,235,000 (653,000) $ 1,634,000 $ (876,000)
Stock-based employee compensation cost determined under fair value
method, net of tax effects (64,000) (8,000) (73,000) (15,000)
------------- ------------- ------------- -------------
Net income (loss) attributable to common stockholders - pro forma $ 1,171,000 (661,000) $ 1,561,000 $ (891,000)
============= ============= ============= =============
Earnings (loss) per share
Basic earnings (loss) per share:
Net income (loss) attributable to common stockholders - as reported $ 0.37 $ (0.20) $ 0.49 $ (0.29)
Per share stock-based employee compensation cost determined under fair
value method, net of tax effects (0.02) -- (0.03) (0.01)
------------- ------------- ------------- -------------
Net income (loss) attributable to common stockholders - pro forma $ 0.35 $ (0.20) $ 0.46 $ (0.30)
============= ============= ============= =============
Diluted earnings (loss) per share:
Net income (loss) attributable to common stockholders - as reported $ 0.20 $ (0.20) $ 0.27 $ (0.29)
Per share stock-based employee compensation cost determined under fair
value method, net of tax effects (0.01) -- (0.01) (0.01)
------------- ------------- ------------- -------------
Net income (loss) attributable to common stockholders - pro forma $ 0.19 $ (0.20) $ 0.26 $ (0.30)
============= ============= ============= =============
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The Black-Scholes option valuation model was used to estimate the fair value of the options granted in the quarter and six months ended March 31, 2004 and 2003. 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 the Company'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:
2004 2003
-------- --------
Assumptions:
Risk-free interest rate 2.48% 4.06%
Dividend 0.00% 0.00%
Expected life, in years 3.0 4.6
Expected volatility 123% 311%
Results:
Fair value of options granted $1.47 $0.36
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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 the first reporting period ending after March 15, 2004. The adoption of FIN No. 46(R) did not 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 March 31, 2004:
Securities held Securities sold, but
for resale not yet purchased
--------------- --------------------
Corporate Stocks $279,000 $234,000
Corporate Bonds 71,000 39,000
Government Obligations 580,000 203,000
-------- --------
$930,000 $476,000
======== ========
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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 payable in January 2004.
In December 2003, the Company engaged in various discussions with the National Association of Securities Dealers, Inc. (the "NASD") relating to the Security Agreement between National Securities Corporation, the Company's wholly-owned subsidiary ("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 the $375,000 loan that was due to be paid in January 2004, resulting in a $375,000 gain on extinguishment of debt in the first quarter of fiscal year 2004 National is required to 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. At March 31, 2004, National's net capital exceeded the requirement by $926,000.
In February 2004, the Company paid First Clearing $250,000 to fully repay its promissory note that had a balance of approximately $1,006,000 at such time. As a result of the repayment of this note, the Company realized a gain on extinguishment of debt of approximately $756,000 in the second quarter of fiscal year 2004. Additionally, National and First Clearing mutually agreed to terminate their clearing relationship by June 30, 2004.
National is in the final stages of completing the discussions and negotiations with several clearing firms regarding the establishment of a new clearing relationship. Based upon discussions among National, First Clearing and the new clearing firms, it is expected that the conversion to the new clearing firm will occur in the fourth quarter of fiscal year 2004. The Company believes that the overall effect of the new clearing relationship will be beneficial to the Company's cost structure, liquidity and capital resources.
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. In January 2004, the arbitration panel awarded damages against the Company of approximately $400,000 that was accrued for in the quarter ended December 31, 2003. The Company paid this award during the quarter ended March 31, 2004.
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 in April 2003. In January 2004, the court entered an order denying class certification, and plaintiffs have filed an appeal of this order. National 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. Accordingly, no adjustments have been made in the consolidated financial statements in response to this matter.
The NASD has recently commenced an industry-wide investigation of mutual fund trading activities. The Company's subsidiary, National, is one of the numerous broker-dealers that have been contacted by the NASD with respect to this investigation. The NASD has identified certain customer mutual fund transactions during the time period from October 2000 to February 2003 that it believes may have constituted mutual fund timing and/or excessive trading activity. National has been engaged in ongoing discussions and negotiations with the NASD regarding these matters. Although no formal proceeding has been commenced against National, no assurance can be given that despite our on-going discussions and negotiations with the NASD, that a formal proceeding will not be commenced, or that the possible resulting penalties and fines would not be in a material amount. The Company believes National has meritorious defenses, and if necessary, intends to vigorously defend this matter, although the ultimate outcome cannot be determined at this time.
The Company is also a defendant in various other arbitrations and administrative proceedings, lawsuits and claims, seeking damages aggregating approximately $2.0 million (exclusive of specified punitive damages of approximately $5.8 million, unspecified punitive damages related to certain claims and expected insurance coverage). The Company has filed a counterclaim for approximately $220,000 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. At March 31, 2004, the amount of $164,000 related to such matters that is reasonably estimable has been included in "Accounts Payable, Accrued Expenses and Other Liabilities" on the accompanying condensed consolidated statements of financial condition. The Company has included in "Professional fees" litigation related expenses of $401,000 and $699,000 in the second quarter and first six months of fiscal year 2004, respectively.
NOTE 6 - CUMULATIVE DIVIDENDS ON CONVERTIBLE PREFERRED STOCK
The holders of the Company's Series A Convertible Preferred Stock (the "Series A Preferred Stock") are entitled 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. In March 2004, the Company's Board of Directors declared an in-kind dividend in the aggregate of 3,352 shares of Series A Preferred Stock, in payment of approximately $503,000 of dividends accrued through January 31, 2004. Such shares were issued on March 31, 2004. At March 31, 2004, the amount of accumulated dividends on the Company's 31,177 issued and outstanding shares of Series A Preferred Stock was $41,000.
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 Series A Preferred Stock, were excluded from the diluted loss per share computation for the three-month and six-month periods ended March 31, 2003, since the Company incurred a loss for these periods and the inclusion of such securities would be antidilutive.
The following table sets forth the components used in the computation of basic and diluted income (loss) per common share:
Three Months Ended Six Months Ended
------------------------------ -------------------------------
March 31, 2004 March 31, 2003 March 31, 2004 March 31, 2003
-------------- -------------- -------------- --------------
Net income (loss) attributable to common stockholders - basic $ 1,297,000 $ (591,000) $ 1,760,000 $ (751,000)
Effect of dilutive securities - preferred stock dividends (62,000) (62,000) (126,000) (125,000)
----------- ----------- ----------- -----------
Net income (loss) attributable to common stockholders - diluted $ 1,235,000 $ (653,000) $ 1,634,000 $ (876,000)
=========== =========== =========== ===========
Basic-weighted average common shares outstanding 3,367,558 3,347,900 3,367,558 2,982,015
Dilutive stock options and warrants 884,982 -- 619,034 --
Weighted average assumed conversion of 9%
cumulative convertible preferred stock 2,078,465 -- 2,078,465 --
----------- ----------- ----------- -----------
Diluted-weighted average common shares outstanding 6,331,005 3,347,900 6,065,057 2,982,015
=========== =========== =========== ===========
Net income (loss) attributable to common stockholders - basic $ 0.37 $ (0.20) $ 0.49 $ (0.29)
=========== =========== =========== ===========
Net income (loss) attributable to common stockholders - diluted $ 0.20 $ (0.20) $ 0.27 $ (0.29)
=========== =========== =========== ===========
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For the three-month periods ended March 31, 2004 and 2003, 942,750 shares and 2,384,065 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. For the six-month periods ended March 31, 2004 and 2003, 1,012,750 shares and 2,384,065 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 until August 5, 2004 to satisfy the financial standards requirements, and an extension until 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 the 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 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.
NOTE 9 - EXTENSION OF NOTES
In February 2004, National and the holder of a $1.0 million secured demand note that matured on February 1, 2004, extended the term of the $1.0 million 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, that was to expire on February 1, 2004, was repriced to $1.25 per share, with an allocated fair value of approximately $68,000, and the expiration date of such warrants was extended to July 31, 2005. The expiration date for the noteholder's warrant to purchase an additional 75,000 shares of the Company's common stock at a price of $1.75 per share was also extended from January 25, 2004 to July 31, 2005.
In January 2004, two other noteholders extended 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 was increased to 12% from 9% per annum. Additionally, each of the noteholders' warrants to purchase, in the aggregate, 100,000 shares of the Company's common stock at a price of $5.00 per share expiring on February 1, 2004 was repriced to $1.25 per share, with an allocated fair value of approximately $90,000, and the expiration date of such warrants was extended to July 31, 2005. The expiration date for the noteholders' warrants to purchase, in the aggregate, an additional 100,000 shares of the Company's common stock at a price of $1.75 per share was also extended from January 25, 2004 to July 31, 2005.
The Company is amortizing the total allocated fair value of $158,000 over the extended 18-month term of these notes. Such amortization has been included in "Interest" on the accompanying condensed consolidated March 31, 2004 financial statements.
NOTE 10 - PRIVATE PLACEMENTS
In January 2004, the Company issued an aggregate of $200,000 of three-year, 10% senior subordinated 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, with an allocated fair value of approximately $40,000. The securities were issued pursuant to the exemption provided in Section 4(2) of the Securities Act of 1933, as amended (the "Securities Act"), on the basis that the transaction did not involve a public offering.
In February 2004, pursuant to a confidential private placement memorandum, the Company issued an aggregate of $850,000 of three-year, 10% senior subordinated promissory notes to four unaffiliated parties. Such noteholders received three-year warrants to purchase an aggregate of 170,000 shares of the Company's common stock at an exercise price of $1.50 per share, with an allocated fair value of approximately $143,000. The securities were issued pursuant to the exemption provided in Section 4(2) of the Securities Act, on the basis that the transaction did not involve a public offering.
The Company is amortizing the total allocated fair value of $183,000 over the three-year term of these promissory notes. Such amortization has been included in "Interest" on the accompanying condensed consolidated March 31, 2004 financial statements. The holders of the warrants received certain registration rights relating to the common stock issuable upon exercise of the warrants.
NOTE 11 - STOCKHOLDERS' EQUITY
At the Company's annual meeting of shareholders on March 16, 2004, the shareholders voted, effective immediately, to amend the Company's Certificate of Incorporation to decrease the number of shares of the Company's common stock, par value $.02 per share, from 60,000,000 shares to 30,000,000 shares, and to increase the number of shares of Preferred Stock, par value $.01 per share, from 100,000 shares to 200,000 shares
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 March 31, 2004 Compared to Three Months Ended March 31, 2003
The Company's second 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 $1,297,000 compared with a net loss before income taxes of $591,000 for the second quarters of fiscal years 2004 and 2003, respectively. This represents an improvement of $1,888,000 from the prior period.
Total revenues increased $10,837,000, or 115%, in the second quarter of fiscal year 2004 to $20,230,000 from $9,393,000 in the second 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 second quarter of fiscal year 2004, trading volume increased by approximately 76%, compared to the second quarter of fiscal year 2003. Commission revenue increased $9,415,000, or 160%, to $15,302,000 from $5,887,000 during the second 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 $680,000, or 25%, to $1,988,000 from $2,668,000 during the second quarter of fiscal year 2004 compared with the same period in fiscal year 2003. The decrease is primarily 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 second quarter of fiscal year 2004, revenues from proprietary trading decreased $614,000, or 26%, to $1,763,000 from $2,377,000 in the second quarter of fiscal year 2003, revenues from market making activities decreased $57,000, or 24%, to $181,000 from $238,000 in the second quarter of fiscal year 2003, and revenues from customer mark-ups and mark-downs decreased $9,000, or 17%, to $44,000 from $53,000 in the second quarter of fiscal year 2003.
Investment banking revenue increased $343,000, or 1,372%, to $368,000 from $25,000 in the second quarter of fiscal year 2004 compared with the second quarter of fiscal year 2003. The increase in investment banking revenues is attributed to the Company's completion of private placements during this quarter. Interest and dividend income increased $558,000 or 184%, to $862,000 from $304,000 in the second quarter of fiscal year 2004 compared with the same 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 $401,000, or 116%, to $747,000 in the second quarter of fiscal year 2004 from $346,000 in the second quarter of fiscal year 2003. The increase is due to an increase in transaction volume associated with the Company's retail brokerage business.
The Company realized a gain on extinguishment of debt of $756,000 from its clearing firm, First Clearing, in the second quarter of fiscal year 2004 (See Note 4). Other revenue, consisting of asset management fees and miscellaneous transaction fees and trading fees, increased $44,000, or 27%, to $207,000 from $163,000 during the second quarter of fiscal year 2004 compared to the second quarter of fiscal year 2003. The increase is due to an increase in asset management fees in the second quarter of fiscal year 2004 compared to the same period last year.
In comparison with the 115% increase in total revenues, total expenses increased 90% or $8,949,000 to $18,933,000 for the second quarter of fiscal year 2004 compared to $9,984,000 in the second 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 the Company'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 $7,702,000, or 127%, to $13,747,000 in the second quarter of fiscal year 2004 from $6,045,000 in the second quarter of fiscal year 2003. Commission expense related to commission revenue increased $7,976,000, or 184%, to $12,317,000 in the second quarter of fiscal year 2004 from $4,341,000 in the second quarter of fiscal year 2003; commission expense related to net dealer inventory gains decreased $548,000, or 33%, to $1,136,000 in the second quarter of fiscal year 2004 from $1,684,000 in the second quarter of fiscal year 2003; and commission expense related to investment banking increased $274,000, or 1,370%, to $294,000 in the second quarter of fiscal year 2004 from $20,000 in the second 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 compensated at the same commission rate. Commission expense as a percentage of investment banking was relatively unchanged between the second quarter of fiscal year 2004 and the second quarter of fiscal year 2003. Commission expense includes the amortization of advances to registered representatives of $153,000 and $199,000 for the second quarter of fiscal year 2004 and 2003, respectively. These amounts fluctuate based upon the amounts of advances outstanding and the time period for which the registered representatives have agreed to be affiliated with National.
Employee compensation expense increased $471,000, or 44%, to $1,531,000 in the second quarter of fiscal year 2004 from $1,060,000 in the second 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 was relatively constant at 76% in the second quarters of both fiscal year 2004 and 2003.
Clearing fees increased $509,000, or 94%, to $1,051,000 in the second quarter of fiscal year 2004 from $542,000 in the second 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. Clearing fees were reduced by forgiveness of debt, that was fully repaid in February 2004, from the Company's clearing firm based on ticket volume in the amount of $114,000 and $93,000 in the second quarter of fiscal year 2004 and 2003, respectively. Communication expenses increased $22,000, or 3%, to $731,000 from $709,000 in the second quarter of fiscal year 2004 compared to the second quarter of fiscal year 2003. The increase is due to an increase in voice and data charges. Occupancy costs increased $95,000, or 14%, to $771,000 from $676,000 in the second quarter of fiscal year 2004 compared to the second quarter of fiscal year 2003. The increase in occupancy expense is due to the expansion of office facilities in order to accommodate new brokers. Professional fees increased $171,000, or 57%, to $470,000 from $299,000 in the second quarter of fiscal year 2004 compared to the second 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. Professional fees include litigation related expenses of $401,000 and $171,000 in the second quarter of fiscal year 2004 and 2003, respectively.
Interest expense increased $58,000, or 176%, to $91,000 from $33,000 in the second quarter of fiscal year 2004 compared to the second quarter of fiscal year 2003. The increase is due to interest on the notes issued by the Company in the second quarter of fiscal year 2004, and the amortization of $26,000 attributable to newly issued notes and modified notes. Taxes, licenses and registration increased $114,000, or 238%, to $162,000 from $48,000 in the second quarter of fiscal year 2004 compared to the second quarter of fiscal year 2003. The increase in taxes, licenses and registration expense is due to an increase in the number of brokers associated with the Company from the prior period. Other expenses decreased $193,000, or 34%, to $379,000 from $572,000 in the second quarter of fiscal year 2004 compared to the second quarter of fiscal year 2003. The decrease in other expenses is due to the Company's efforts to control its fixed operating expenses.
The Company reported net income before income taxes of $1,297,000 in the second quarter of fiscal year 2004 compared to a loss before income taxes of $591,000 in the second quarter of fiscal year 2003.
Overall, the diluted earnings attributable to common stockholders in the second quarter of fiscal year 2004 was $1,235,000, or $.20 per common share, as compared to the diluted loss attributable to common stockholders of $653,000, or $.20 per common share in the second quarter of fiscal year 2003. The net income attributable to common stockholders for the second quarter of fiscal year 2004 and the net loss attributable to common stockholders for the second quarter of fiscal year 2003 reflects $62,000 of cumulative preferred stock dividends, in both fiscal quarters, on the Company's Series A Preferred Stock.
Six Months Ended March 31, 2004 Compared to Six Months Ended March 31, 2003
The Company's first six months 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 $1,760,000 compared with a net loss before income taxes of $751,000 for the first six months of fiscal years 2004 and 2003, respectively. This represents an improvement of $2,511,000 from the prior period.
Total revenues increased $15,763,000, or 79%, in the first six months of fiscal year 2004 to $35,748,000 from $19,985,000 in the first six months 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 six months of fiscal year 2004, trading volume increased by approximately 56%, compared to the first six months of fiscal year 2003. Commission revenue increased $14,779,000, or 124%, to $26,674,000 from $11,895,000 during the first six months 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 $2,174,000, or 35%, to $4,051,000 from $6,225,000 during the first six months 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 six months of fiscal year 2004, revenues from proprietary trading decreased $2,191,000, or 39%, to $3,426,000 from $5,617,000 in the first six months of fiscal year 2003, revenues from market making activities increased $5,000, or 1%, to $515,000 from $510,000 in the first six months of fiscal year 2003, and revenues from customer mark-ups and mark-downs increased $12,000, or 12%, to $110,000 from $98,000 in the first six months of fiscal year 2003.
Investment banking revenue increased $569,000, or 434%, to $700,000 from $131,000 in the first six months of fiscal year 2004 compared with the first six months of fiscal year 2003. The increase in investment banking revenues is attributed to the Company's completion of private placements during this period. Interest and dividend income increased $915,000 or 149%, to $1,531,000 from $616,000 in the first six months of fiscal year 2004 compared with the same 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 $608,000, or 84%, to $1,329,000 in the first six months of fiscal year 2004 from $721,000 in the first six months of fiscal year 2003. The increase is due to an increase in transaction volume associated with the Company's retail brokerage business.
The Company realized a gain on extinguishment of debt of $1,131,000 from its clearing firm, First Clearing, in the first six months of fiscal year 2004 (See Note 4). Other revenue, consisting of asset management fees and miscellaneous transaction fees and trading fees, decreased $65,000, or 16%, to $332,000 from $397,000 during the first six months of fiscal year 2004 compared to the first six months of fiscal year 2003. The decrease is due to reduced fees attributable to a reduction in the volume of institutional business in the first six months of fiscal year 2004 compared to the same period last year.
In comparison with the 79% increase in total revenues, total expenses increased 64% or $13,252,000 to $33,988,000 for the first six months of fiscal year 2004 compared to $20,736,000 in the first six months 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 the Company'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 $11,362,000, or 88%, to $24,308,000 in the first six months of fiscal year 2004 from $12,946,000 in the first six months of fiscal year 2003. Commission expense related to commission revenue increased $12,514,000, or 142%, to $21,319,000 in the first six months of fiscal year 2004 from $8,805,000 in the first six months of fiscal year 2003; commission expense related to net dealer inventory gains decreased $1,607,000, or 40%, to $2,429,000 in the first six months of fiscal year 2004 from $4,036,000 in the first six months of fiscal year 2003; and commission expense related to investment banking increased $455,000, or 433%, to $560,000 in the first six months of fiscal year 2004 from $105,000 in the first six months 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 compensated at the same commission rate. Commission expense as a percentage of investment banking was relatively unchanged between the first six months of fiscal year 2004 and the first six months of fiscal year 2003. Commission expense includes the amortization of advances to registered representatives of $268,000 and $376,000 for the first six months of fiscal year 2004 and 2003, respectively. These amounts fluctuate based upon the amounts of advances outstanding and the time period for which the registered representatives have agreed to be affiliated with National.
Employee compensation expense increased $727,000, or 35%, to $2,808,000 in the first six months of fiscal year 2004 from $2,081,000 in the first six months 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 76% from 75% in the first six months of fiscal year 2004 and 2003, respectively.
Clearing fees increased $538,000, or 44%, to $1,762,000 in the first six months of fiscal year 2004 from $1,224,000 in the first six months 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. Clearing fees were reduced by forgiveness of debt, that was fully repaid in February 2004, from the Company's clearing firm based on ticket volume in the amount of $250,000 and $193,000 in the first six months of fiscal year 2004 and 2003, respectively. Communication expenses increased $43,000, or 3%, to $1,310,000 from $1,267,000 in the first six months of fiscal year 2004 compared to the first six months of fiscal year 2003. The increase is due to an increase in voice and data charges. Occupancy costs increased $12,000, or 1%, to $1,441,000 from $1,429,000 in the first six months of fiscal year 2004 compared to the first six months of fiscal year 2003. The increase in occupancy expense is due to the expansion of office facilities in order to accommodate new brokers. Professional fees increased $294,000, or 55%, to $825,000 from $531,000 in the first six months of fiscal year 2004 compared to the first six months of fiscal year 2003. The increase in professional fees is due to an increase in the legal fees relating to various lawsuits and arbitrations. Professional fees include litigation related expenses of $699,000 and $316,000 in the first six months of fiscal year 2004 and 2003, respectively.
In January 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 was recorded as "Litigation settlement" and paid during the first six months of fiscal year 2004.
Interest expense increased $64,000, or 82%, to $142,000 from $78,000 in the first six months of fiscal year 2004 compared to the first six months of fiscal year 2003. The increase is due to interest on the notes issued by the Company in the second quarter of fiscal year 2004, and the amortization of $26,000 attributable to newly issued notes and modified notes. Taxes, licenses and registration increased $129,000, or 97%, to $262,000 from $133,000 in the first six months of fiscal year 2004 compared to the first six months of fiscal year 2003. The increase in taxes, licenses and registration expense is due to an increase in the number of brokers associated with the Company from the prior period. Other expenses decreased $317,000, or 30%, to $730,000 from $1,047,000 in the first six months of fiscal year 2004 compared to the first six months of fiscal year 2003. The decrease in other expenses is due to the Company's efforts to control its fixed operating expenses.
The Company reported net income before income taxes of $1,760,000 in the first six months of fiscal year 2004 compared to a loss before income taxes of $751,000 in the first six months of fiscal year 2003.
Overall, the diluted earnings attributable to common stockholders in the first six months of fiscal year 2004 was $1,634,000, or $.27 per common share, as compared to the diluted loss attributable to common stockholders of $876,000, or $.29 per common share in the first six months of fiscal year 2003. The net income attributable to common stockholders for the first six months of fiscal year 2004 reflects $126,000 of cumulative preferred stock dividends, and the net loss attributable to common stockholders for the first six months of fiscal year 2003 reflects $125,000 of cumulative preferred stock dividends, on the Company's Series A Preferred Stock.
LIQUIDITY AND CAPITAL RESOURCES
National, as a registered broker-dealer, is subject to Rule 15c3-1, the Uniform Net Capital Rule of the Securities and Exchange Commission (the "SEC"), that 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 inadvertently 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 March 31, 2004, National's net capital exceeded the requirement by $926,000.
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 shares of common stock and shares of common stock issuable upon exercise of 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 the Company believes that it will file such statement in the near term. The Registration Statement will include certain shares of common stock and shares of common stock issuable upon the exercise of certain warrants previously issued, and certain warrants that were issued in the private placements that have been completed in the current fiscal year.
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 expanded the products and services capabilities for National's retail and institutional business, and enabled 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 March 31, 2004.
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.
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 paid 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 paid First Clearing $250,000 to fully repay its promissory note. As a result of the repayment of this note, the Company realized a gain on extinguishment of debt of approximately $756,000. Additionally, National and First Clearing mutually agreed to terminate their clearing relationship by June 30, 2004. National is in the final stages of completing the discussions and negotiations with several clearing firms regarding the establishment of a new clearing relationship. Based upon discussions among National, First Clearing and the new clearing firms, it is expected that the conversion to the new clearing firm will occur in the fourth quarter of fiscal year 2004. The Company believes that the overall effect of the new clearing relationship will be beneficial to the Company's cost structure, liquidity and capital resources.
As of March 31, 2004, advances to registered representatives increased $611,000 to $1,255,000 from $644,000 as of September 30, 2003. This increase is attributable to advances made to registered representatives who became affiliated with National during this period.
In February 2004, National and the holder of a $1.0 million secured demand note that matured on February 1, 2004, extended the term of the $1.0 million secured demand note to March 1, 2005. (See Note 9.)
In January 2004, two other noteholders extended 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 was increased to 12% from 9% per annum. (See Note 9.)
In January 2004, the Company issued an aggregate of $200,000 of three-year, 10% senior subordinated promissory notes to five unaffiliated parties. Such noteholders received three-year warrants, with certain registration rights, to purchase an aggregate of 50,000 shares of the Company's common stock at an exercise price of $1.40 per share. (See Note 10.)
In February 2004, the Company issued an aggregate of $850,000 of three-year, 10% senior subordinated promissory notes to four unaffiliated parties. Such noteholders received three-year warrants, with certain registration rights, to purchase an aggregate of 170,000 shares of the Company's common stock at an exercise price of $1.50 per share. (See Note 10.)
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 March 31, 2004:
Long Short Net
-------- -------- --------
Corporate Stocks $279,000 $234,000 $ 45,000
Corporate Bonds 71,000 39,000 32,000
Government Obligations 580,000 203,000 377,000
-------- -------- --------
$930,000 $476,000 $454,000
======== ======== ========
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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 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. In January 2004, the arbitration panel awarded damages against the Company of approximately $400,000 that was recorded as "Litigation settlement" in the quarter ended December 31, 2003. The Company paid this award during the quarter ended March 31, 2004.
The NASD has recently commenced an industry-wide investigation of mutual fund trading activities. The Company's subsidiary, National, is one of the numerous broker-dealers that have been contacted by the NASD with respect to this investigation. The NASD has identified certain customer mutual fund transactions during the time period from October 2000 to February 2003 that it believes may have constituted mutual fund timing and/or excessive trading activity. National has been engaged in ongoing discussions and negotiations with the NASD regarding these matters. Although no formal proceeding has been commenced against National, no assurance can be given that despite our on-going discussions and negotiations with the NASD, that a formal proceeding will not be commenced, or that the possible resulting penalties and fines would not be in a material amount. The Company believes National has meritorious defenses, and if necessary, intends to vigorously defend this matter, although the ultimate outcome cannot be determined at this time.
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
In January 2004, the Company issued an aggregate of $200,000 of three-year, 10% senior subordinated 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 Company received net proceeds of $184,000. The securities were issued pursuant to the exemption provided in Section 4(2) of the Securities Act, on the basis that the transaction did not involve a public offering.
In February 2004, the Company issued an aggregate of $850,000 of three-year, 10% senior subordinated promissory notes to four unaffiliated parties. Such noteholders received three-year warrants to purchase an aggregate of 170,000 shares of the Company's common stock at an exercise price of $1.50 per share. The Company received net proceeds of $848,000. The securities were issued pursuant to the exemption provided in Section 4(2) of the Securities Act, on the basis that the transaction did not involve a public offering.
ITEM 3 - DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Company held its annual meeting of shareholders on March 16, 2004. Proxies were solicited by the Company pursuant to Regulation 14A under the Exchange Act of 1934, as amended. At the annual meeting, the Company's shareholders approved the following proposals:
1. The number of shares voted "for" and "withhold authority" in connection with the election of Mark Goldwasser as a Class III Director to the Board of Directors of the Company was as follows:
Withhold
For Authority
--- ---------
In Person 0 0
By Proxy 4,253,562 6,055
Total 4,253,562 6,055
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The number of shares voted "for" and "withhold authority" in connection with the election of Gary A. Rosenberg as a Class III Director to the Board of Directors of the Company was as follows:
Withhold
For Authority
--- ---------
In Person 0 0
By Proxy 4,240,462 19,155
Total 4,240,462 19,155
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The number of shares voted "for" and "withhold authority" in connection with the election of Peter Rettman as a Class III Director to the Board of Directors of the Company was as follows:
Withhold
For Authority
--- ---------
In Person 0 0
By Proxy 4,254,662 4,955
Total 4,254,662 4,955
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The terms of Steven B. Sands, a Class I Director, and Robert J. Rosan and Norman J. Kurlan, Class II Directors, continued after the annual meeting.
2. The number of shares voted "for", "against" and "abstain" in connection with the amendment to the Company's Certificate of Incorporation to decrease the number of shares of the Company's common stock, par value $.02 per share, from 60,000,000 shares to 30,000,000 shares, was approved as follows:
For Against Abstain
--- ------- -------
In Person 0 0 0
By Proxy 4,161,229 94,801 3,587
Total 4,161,229 94,801 3,587
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3. The number of shares voted "for", "against" and "abstain" in connection with the amendment to the Company's Certificate of Incorporation to increase the number of shares of Preferred Stock, par value $.01 per share, from 100,000 shares to 200,000 shares, and the amendment to the Company's Certificate of Designation to increase the number of authorized shares designated as Series A Preferred Stock from 30,000 to 50,000, was approved as follows:
For Against Abstain
--- ------- -------
In Person 0 0 0
By Proxy 2,760,486 146,332 3,926
Total 2,760,486 146,332 3,926
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4. The number of shares voted "for", "against" and "abstain" in connection with the ratification of Marcum & Kliegman LLP as the Company's independent public accountants for the fiscal year ending September 30, 2004, was approved as follows:
For Against Abstain
--- ------- -------
In Person 0 0 0
By Proxy 4,255,255 1,775 2,587
Total 4,255,255 1,775 2,587
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ITEM 5 - OTHER INFORMATION
None.
ITEM 6 - EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
3.5 Certificate of Incorporation, as amended.
3.6 Certificate of Designations, Preferences, and Relative Optional or Other
Special Rights of Preferred Stock and Qualifications, Limitations and
Restrictions Thereof of Series A Convertible Preferred Stock, as amended.
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 February 25, 2004 reporting a
private placement of its securities and certain matters relating to
members of its Board of Directors.
|
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
May 17, 2004 By: /s/ Mark Goldwasser
-----------------------------------------
Mark Goldwasser
President and Chief Executive Officer
May 17, 2004 By: /s/ Robert H. Daskal
-----------------------------------------
Robert H. Daskal
Acting Chief Financial Officer
|
CERTIFICATE OF INCORPORATION
OF
OLYMPIC CASCADE FINANCIAL CORPORATION
Pursuant to Section 102 of the General
Corporation Law of the State of Delaware
FIRST: The name of the corporation (hereinafter called the "Corporation") is Olympic Cascade Financial Corporation.
SECOND: The registered office of the Corporation in the State of Delaware is located at 1013 Centre Road, City of Wilmington, County of New Castle, Delaware 19805. The name and address of the Corporation's registered agent is Corporation Service Company, 1013 Centre Road, Wilmington, Delaware 19805.
THIRD: The purpose of the Corporation is to engage in any lawful act or activity for which corporations may now or hereafter be organized under the General Corporation Law of the State of Delaware.
FOURTH: The total number of shares of all classes of stock which the
corporation has authority to issue is Thirty Million Two Hundred Thousand
(30,200,000) shares, consisting of two classes: Thirty Million (30,000,000)
shares of Common Stock, $0.02 par value per share (the "Common Stock"), and Two
Hundred Thousand (200,000) shares of Preferred Stock, $0.01 par value per share
(the "Preferred Stock").
The powers, preferences and rights of the shares of Preferred Stock and the Common Stock, and the qualifications, limitations or restrictions thereof are as follows:
A. Preferred Stock
Authority is hereby vested in the board of directors of the Corporation (the "Board of Directors") to provide for the issuance of Preferred Stock and in connection therewith to fix by resolution providing for the issue of such series, the number of shares to be included and such of the preferences and relative participating, optional or other special rights and limitations of such series, including, without limitation, rights of redemption or conversion into Common Stock, to the fullest extent now or hereafter permitted by the Delaware General Corporation Law.
B. Common Stock
(a) Each shares of Common Stock issued and outstanding shall be identical in all respect one with the other, and no dividends shall be paid on any shares of Common Stock unless the same dividend is paid on all shares of Common Stock outstanding at the time of such payment.
(b) Except for and subject to those rights expressly granted to the
holders of the Preferred Stock, or except as may be provided by the
Delaware General Corporation Law, the holders of Common Stock shall have
exclusively all other rights of stockholders including, but not by way of
limitation, (i) the right to receive dividends, when, as and if declared
by the Board of Directors out of assets lawfully available therefor, and
(ii) in the event of any distribution of assets upon liquidation,
dissolution or winding up of the Corporation or otherwise, the right to
receive ratably and equally all the assets and funds of the Corporation
remaining after payment to the holders of the Preferred Stock of the
Corporation of the specific amounts which they are entitled to receive
upon such liquidation, dissolution or winding up of the Corporation as
herein provided.
(c) In the event that the holder of any share of Common Stock shall receive any payment of any dividend on, liquidation of, or other amounts payable with respect to, any shares of Common Stock, which he is not then entitled to receive, he will forthwith deliver the same in the form received to the holders of shares of the Preferred Stock as their respective interests may appear, or the Corporation if no shares of Preferred Stock are then outstanding, and until so delivered will hold the same in trust for such holders or the Corporation.
(d) Each holder of shares of Common Stock shall be entitled to one vote for each share of such Common Stock held by him, and voting power with respect to all classes of securities of the Corporation shall be vested solely in the Common Stock, other than as specifically provided in the Corporation's Certificate of Incorporation, as it may be amended, with respect to the Preferred Stock.
(e) No stockholder shall be entitled to any preemptive right to purchase or subscribe for any unissued stock of any class or any additional shares of any class to be issued by reason of any increase in the authorized capital stock of the Corporation.
(f) Any action required to be taken at any annual or special meeting of the holders of Common Stock, may be taken by written consent without a meeting, provided that such written consent is signed by the holders of all of the outstanding shares of Common Stock.
FIFTH: The name and mailing address of the sole incorporator is: Elise A. Wolf. c/o Orrick, Herrington & Sutcliffe LLP, 666 Fifth Avenue, New York, NY 10103.
SIXTH: The Board of Directors is expressly authorized to adopt, amend or repeal the by-laws of the Corporation.
SEVENTH: Elections of directors shall be by written ballot.
EIGHTH: The number of directors constituting the Board of Directors shall be determined by the Board of Directors, subject to the by-laws of the Corporation. Any vacancy in the Board of Directors, whether arising from death, resignation, removal (with or without cause), an increase in the number of directors or any other cause, may be filled by the vote of either a majority of the directors then in office, though less than a quorum, or by the stockholders at the next annual meeting thereof or at a special meeting called for such purpose. Stockholders may not apply to request that the Delaware Court of Chancery summarily order an election to be held to fill any vacancies in the Board of Directors whether or not, at the time of filling any vacancy or any newly created directorship, the directors then in office shall constitute less than a majority of the whole Board of Directors as constituted immediately prior to any such vacancy or increase. Each director so elected shall hold office until the next meeting of the stockholders in which the election of directors is in the regular order of business and until his successor shall have been elected and qualified.
NINTH: A director of the Corporation shall not be personally liable to the Corporation or its stockholders for monetary damages for breach of fiduciary duty as a director, provided, however, that the foregoing shall not eliminate or limit the liability of a director (i) for any breach of the director's duty of loyalty to the Corporation or its stockholders, (ii) for acts or omissions not in good faith or which involve intentional misconduct or a knowing violation of law, (iii) under Section 174 of the General Corporation Law of the State of Delaware, or (iv) for any transaction from which the director derived an improper personal benefit.
TENTH: Whenever a compromise or arrangement is proposed between this Corporation and its creditors or any class of them and/or between this Corporation and its stockholders or any class of them, any court of equitable jurisdiction within the State of Delaware may, on the application in a summary way of this Corporation or of any creditor or stockholder thereof or on the application of any receiver or receivers appointed for this Corporation under the provisions of Section 291 of Title 8 of the Delaware Code or the application of trustees in dissolution or of any receiver or receivers appointed for this Corporation under the provisions of Section 279 of Title 8 of the Delaware Code order a meeting of the creditors or class of creditors, and/or of the stockholders or class of stockholders of this Corporation, as the case may be, to be summoned in such manner as the said court directs. If a majority in number representing three-fourths in value of the creditors or class of creditors, and/or of the stockholders or class of stockholders of this Corporation, as the case may be, agree to any compromise or arrangement and to any reorganization of this corporation as a consequence of such compromise or arrangement, the said compromise or arrangement and the said reorganization shall, if sanctioned by the court to which said application has been made, be binding on all the creditors or class of creditors, and/or on all of the stockholders or class of stockholders, of this Corporation, as the case may be, and also on this Corporation.
ELEVENTH: The Corporation reserves the right to amend, alter, change or repeal any provision contained in this Certificate of Incorporation, in the manner now or hereafter prescribed by statue or by this Certificate of Incorporation, and all rights conferred upon stockholders herein are granted subject to this reservation.
TWELFTH: Special meetings of the stockholders of the Corporation may only be called by the Board of Directors upon the request of any two directors, by the holders of one-third or more of the outstanding Common Stock, or by the duly elected officers of the Corporation.
Composite as amended through March 16, 2004.
CERTIFICATE OF DESIGNATIONS, PREFERENCES, AND RELATIVE
OPTIONAL OR OTHER SPECIAL RIGHTS OF
PREFERRED STOCK AND QUALIFICATIONS,
LIMITATIONS AND RESTRICTIONS THEREOF
OF
SERIES A CONVERTIBLE PREFERRED STOCK
OF
OLYMPIC CASCADE FINANCIAL CORPORATION
Pursuant to the
General Corporation Law of the State of Delaware
Olympic Cascade Financial Corporation, a Delaware corporation (the "Corporation"), certifies that pursuant to the authority contained in Article A of its Certificate of Incorporation, its Board of Directors ("Board") adopted the following resolution creating a series of its Preferred Stock, par value $0.01 per share, designated as Series A Convertible Preferred Stock:
WHEREAS, the Certificate of Incorporation of the Corporation authorizes a class of shares known as Preferred Stock, par value $0.01 per share, to be issuable from time to time in one or more series;
RESOLVED, that pursuant to the authority expressly granted to and vested in the Board of Directors of the Corporation by the provisions of the Certificate of Incorporation, the Board hereby creates a series of the class of authorized Preferred Stock of the Corporation, and hereby fixes the designation and amount thereof and the voting powers, preferences and relative, participating, optional and other special rights of the shares of such series, and the qualifications, limitations or restrictions thereof as follows:
(A) Designation of Series. The Corporation shall have a series of Preferred Stock designated as "Series A Preferred Stock " (the "Series A Preferred Stock").
(B) Designation of Number of Shares in Series. The number of shares constituting the Series A Preferred Stock shall be 50,000.
(C) Fixing the Rights, Preferences, Privileges and Restrictions. The following rights, preferences, privileges and restrictions are hereby granted to and imposed upon the Series A Preferred Stock:
1. RANK.
The Series A Preferred Stock shall rank (i) prior to the Corporation's common stock, par value $.02 per share (the "Common Stock"); (ii) prior to any class or series of capital stock of the Corporation hereafter created (collectively, with the Common Stock, "Junior Securities"); (iii) pari passu with any class or series of capital stock of the Corporation hereafter created specifically ranking, by its terms, on parity with the Series A Preferred Stock ("Pari Passu Securities"); and (iv) junior to any class or series of capital stock of the Corporation hereafter created specifically ranking, by its terms, senior to the Series A Preferred Stock ("Senior Securities"), in each case as to distribution of assets upon liquidation, dissolution or winding up of the Corporation, whether voluntary or involuntary.
2. DIVIDENDS.
(a) The holders of the Series A Preferred Stock shall be entitled to receive dividends on a quarterly basis at a rate of 9% per annum per share (the "Premium Amount"), payable out of any assets or funds legally available therefor. Such dividends shall be cumulative and shall accrue, whether or not declared by the Board of Directors, but shall be payable only when, as and if declared by the Board of Directors. Accrued but unpaid dividends will be paid upon conversion of the Series A Preferred Stock.
(b) In no event, so long as any Series A Preferred Stock shall remain outstanding, shall any dividend whatsoever be declared or paid upon, nor shall any distribution be made upon, any Junior Securities, nor shall any shares of Junior Securities be purchased or redeemed by the Corporation nor shall any moneys be paid to or made available for a sinking fund for the purchase or redemption of any Junior Securities (other than a distribution of Junior Securities), without, in each such case, the written consent of the holders of a majority of the outstanding shares of Series A Preferred Stock, voting together as a class.
3. LIQUIDATION PREFERENCE.
In the event of any liquidation, dissolution or winding up of the Corporation, either voluntary or involuntary, distributions to the stockholders of the Corporation shall be made in the following manner:
(a) The holders of the Series A Preferred Stock shall be entitled to receive, prior and in preference to any distribution of any of the assets or surplus funds of the Corporation to the holders of the Common Stock by reason of their ownership of such stock, an amount equal to $100 (the "Initial Series A Preferred Stock Price") for each share of Series A Preferred Stock then held by them and, in addition, an amount equal to all cumulated and unpaid dividends on the Series A Preferred Stock. If upon the occurrence of a liquidation, dissolution or winding up of the Corporation the assets and funds thus distributed among the holders of the Series A Preferred Stock shall be insufficient to permit the payment to such holders of the full preferential amount, then the entire assets and funds of the Corporation legally available for distribution shall be distributed ratably among the holders of the Series A Preferred Stock in proportion to the preferential amount each such holder is otherwise entitled to receive.
(b) After setting apart or paying in full the preferential amounts due pursuant to Section 2(a) above, the remaining assets of the Corporation available for distribution to stockholders, if any, shall be distributed to the holders of the Series A Preferred Stock and Common Stock on a pro rata basis, based on the number of shares of Common Stock then held by each holder on an as-converted basis.
(c) A consolidation or merger of this Corporation with or into any other corporation or corporations, or a sale, conveyance or disposition of all or substantially all of the assets of this Corporation, the effectuation by the Corporation of a transaction or series of related transactions in which more than 50% of the voting power of the Corporation is disposed of; or an underwritten public offering pursuant to an effective registration statement under the Securities Act of 1933, as amended, of shares of Common Stock of this Corporation (each, a "Liquidity Event"), shall be deemed to be a liquidation, dissolution or winding up within the meaning of this Section 2.
(d) Notwithstanding any other provision of this Section 2, the Corporation may at any time, out of funds legally available therefor, repurchase shares of Common Stock of the Corporation issued to or held by employees, officers or consultants of the Corporation or its subsidiaries upon termination of their employment or services, pursuant to any agreement providing for such right of repurchase, whether or not dividends on the Series A Preferred Stock shall have been declared and funds set aside therefor and such repurchases shall not be subject to the liquidation preferences of the Series A Preferred Stock.
(e) In the event the Corporation proposes to distribute assets other than cash in connection with any liquidation, dissolution or winding up of the Corporation, the value of the assets to be distributed to the holder of shares of Series A Preferred Stock and Common Stock shall be determined in good faith by the Board. Any securities not subject to investment letter or similar restrictions on free marketability shall be valued as follows:
(i) If traded on a securities exchange, the value shall be deemed to be the average
of the security's closing prices on such exchange over the thirty (30) day period ending one (1) day prior to the distribution;
(ii) If actively traded over-the-counter, the value shall be deemed to be the average
of the closing bid prices over the thirty (30) day period ending three (3) days prior to the distribution; and
(iii) If there is no active public market, the value shall be the fair market value thereof as determined in good faith by the Board.
The method of valuation of securities subject to investment
letter or other restrictions on free marketability shall be adjusted to make an
appropriate discount from the market value determined as above in clauses (i),
(ii) or (iii) to reflect the fair market value thereof as determined in good
faith by the Board. The holders of at least a majority of the outstanding Series
A Preferred Stock shall have the right to challenge any determination by the
Board of fair market value pursuant to this Section 2(e), in which case the
determination of fair market value shall be made by an independent appraiser
selected jointly by the Board and the challenging parties, the cost of such
appraisal to be borne equally by the Corporation and the challenging parties.
4. VOTING RIGHTS.
Except as otherwise required by law or as set forth herein, the holder of each share of Series A Preferred Stock shall be entitled to the number of votes equal to the number of shares of Common Stock into which such share of A Preferred could be converted at the record date for determination on of the stockholders entitled to vote on such matters, or, if no such record date is established, at the date such vote is taken or any written consent of stockholders is solicited, such votes to be counted together with all other shares of stock of the Corporation having general voting power and not counted separately as a class. Holders of Series A Preferred Stock shall be entitled to notice of any stockholders' meeting in accordance with the Bylaws of the Corporation.
5. CONVERSION.
The holders of the Series A Preferred Stock have conversion rights as follows (the "Conversion Rights"):
(a) Right to Convert Series A Preferred Stock. Each share of Series A Preferred Stock shall be convertible, at the option of the holder thereof, at any time after the date of issuance of such share at the office of the Corporation or any transfer agent for the Series A Preferred Stock, into such number of fully paid and nonassessable shares of Common Stock as is determined in the case of the Series A Preferred Stock by dividing Initial Series A Preferred Stock Price by the Series A Conversion Price, determined as hereinafter provided, in effect at the time of the conversion. The price at which shares of Common Stock shall be deliverable upon conversion of the Series A Preferred Stock (the "Series A Conversion Price") shall initially be $1.50 per share of Common Stock. Such Initial Conversion Price shall be subject to adjustment as hereinafter provided.
(b) Mechanics of Conversion. No fractional shares of Common Stock shall be issued upon conversion of the Series A Preferred Stock. In lieu of any fractional shares to which the holder would otherwise be entitled, the Corporation shall pay cash equal to such fraction multiplied by the then effective respective Conversion Price. Before any holder of Series A Preferred Stock shall be entitled to convert the same into full shares of Common Stock and to receive certificates therefor, he shall surrender the certificate or certificates therefor, duly endorsed, at the office of the Corporation or of any transfer agent for the Series A Preferred Stock and shall give written notice to the Corporation at such office that he elects to convert the same. The Corporation shall, as soon as practicable thereafter, issue and deliver at such office to such holder of Series A Preferred Stock a certificate or certificates for the number of shares of Common Stock to which he shall be entitled as aforesaid and a check payable to the holder in the amount of any cash amounts payable as the result of a conversion into fractional shares of Common Stock. Such conversion shall be deemed to have been made immediately prior to the close of business on the date of such surrender of the shares of Series A Preferred Stock to be converted, and the person or persons entitled to receive the shares of Common Stock issuable upon such conversion shall be treated for all purposes as the record holder or holders of such shares of Common Stock on such date.
(c) Reservation of Stock Issuable Upon Conversion. This Corporation shall at all times reserve and keep available out of its authorized but unissued shares of Common Stock solely for the purpose of effecting the conversion of the shares of the Series A Preferred Stock such number of its shares of Common Stock as shall from time to time be sufficient to effect the conversion of all outstanding shares of the Series A Preferred Stock, and if at any time the number of authorized but unissued shares of Common Stock shall not be sufficient to effect the conversion of all then outstanding shares of the Series A Preferred Stock, in addition to such other remedies as shall be available to the holder of such Series A Preferred Stock, this Corporation will take such corporate action as may, in the opinion of its counsel, be necessary to increase its authorized but unissued shares of Common Stock to such number of shares as shall be sufficient for such purposes.
6. TRADING MARKET LIMITATION.
Unless the Corporation either (i) is permitted by the applicable rules and regulations of the principal securities market on which the Common Stock is listed or traded or (ii) has obtained approval of the issuance of the Common Stock upon conversion of or otherwise pursuant to the Series A Preferred Stock in accordance with applicable law and the rules and regulations of any stock exchange, interdealer quotation system or other self-regulatory organization with jurisdiction over the Corporation or any of its securities (the "Stockholder Approval"), in no event shall the total number of shares of Common Stock issued upon conversion of or otherwise pursuant to the Series A Preferred Stock (including any shares of capital stock or rights to acquire shares of capital stock issued by the Corporation which are aggregated or integrated with the Common Stock issued or issuable upon conversion of or otherwise pursuant to the Series A Preferred Stock for purposes of any such rule or regulation) exceed the maximum number of shares of Common Stock that the Corporation can so issue pursuant to any rule of the principal United States securities market on which the Common Stock trades (including Rules 711 and 713 of the American Stock Exchange or any successor rule)(the "Maximum Share Amount"). With respect to each holder of Series A Preferred Stock, the Maximum Share Amount shall refer to such holder's pro rata share thereof. In the event that the sum of (x) the aggregate number of shares of Common Stock actually issued upon conversion of or otherwise pursuant to the outstanding Series A Preferred Stock plus (y) the aggregate number of shares of Common Stock that remain issuable upon conversion of or otherwise pursuant to the Series A Preferred Stock at the then effective Conversion Price, represents at least one hundred percent (100%) of the Maximum Share Amount (the "Triggering Event"), the Corporation will use its best efforts to seek and obtain Stockholder Approval (or obtain such other relief as will allow conversions hereunder in excess of the Maximum Share Amount) as soon as practicable following the Triggering Event.
7. REDEMPTION OR CONVERSION AT MATURITY.
(a) So long as all of the shares of Common Stock issuable upon conversion of all outstanding shares of Series A Preferred Stock are then authorized and reserved for issuance, each share of Series A Preferred Stock issued and outstanding on December __, 2011 (the "Maturity Date"), shall be either (i) redeemed in cash by the Corporation for the Liquidation Preference (the "Redemption Price") or (ii) at the option of the Corporation, automatically converted into shares of Common Stock on such date at a conversion price equal to the Series A Conversion Price then in effect one business day prior to the Maturity Date, in accordance with, and subject to, the provisions of Section 7 hereof (the "Automatic Conversion").
(b) From and after the Maturity Date, unless there shall have been a default in the payment of the Redemption Price or the Automatic Conversion, all rights of the holders of shares of Series A Preferred Stock (except the right to receive the Redemption Price or shares of Common Stock pursuant to the Automatic Conversion) shall cease with respect to such shares, and such shares shall not thereafter be transferred on the books of the Corporation or be deemed to be outstanding for any purpose whatsoever.
8. ADJUSTMENTS TO CONVERSION PRICE.
(a) Adjustments for Stock Dividends, Subdivisions, Combinations or Consolidations of Common Stock. In the event the outstanding shares of Common Stock shall be subdivided (by stock dividend, stock split, or otherwise), into a greater number of shares of Common Stock, the Series A Conversion Price then in effect shall, concurrently with the effectiveness of such subdivision, be proportionately decreased. In the event the outstanding shares of Common Stock shall be combined or consolidated, by reclassification or otherwise, into a lesser number of shares of Common Stock, the Series A Conversion Prices then in effect shall, concurrently with the effectiveness of such combination or consolidation, be proportionately increased.
(b) Adjustments for Other Distributions. In the event the
Corporation at any time or from time to time makes, or files a record date for
the determination of holders of Common Stock entitled to receive any
distribution payable in securities or assets of the Corporation other than
shares of Common Stock then and in each such event provision shall be made so
that the holders of Series A Preferred Stock shall receive upon conversion
thereof, in addition to the number of shares of Common Stock receivable
thereupon, the amount of securities or assets of the Corporation which they
would have received had their Series A Preferred Stock been converted into
Common Stock on the date of such event and had they thereafter, during the
period from the date of such event to and including the date of conversion,
retained such securities or assets receivable by them as aforesaid during such
period, subject to all other adjustment called for during such period under this
Section 8 with respect to the rights of the holders of the Series A Preferred
Stock.
(c) Adjustments for Reclassification, Exchange and Substitution. If the Common Stock issuable upon conversion of the Series A Preferred Stock shall be changed into the same or a different number of shares of any other class or classes of stock, whether by capital reorganization, reclassification or otherwise (other than a subdivision or combination of shares provided for above), then and in each such event the holder of each share of Series A Preferred Stock shall have the right thereafter to convert such share into the kind and amount of shares of stock and other securities and property receivable upon such reorganization or reclassification or other change by holders of the number of shares of Common Stock that would have been subject to receipt by the holders upon conversion of the Series A Preferred Stock immediately before that change, all subject to further adjustment as provided herein.
(d) No Impairment. The Corporation will not, by amendment of its
Certificate of Incorporation or through any reorganization, transfer of assets,
consolidation, merger, dissolution, issue or sale of securities or any other
voluntary action, avoid or seek to avoid the observance or performance of any of
the terms to be observed or performed hereunder by the Corporation but will at
all times in good faith assist in the carrying out of all the provisions of
Section 5 and in the taking of all such action as may be necessary or
appropriate in order to protect the Conversion Rights of the holders of the
Series A Preferred Stock against impairment.
(e) Certificate as to Adjustments. Upon the occurrence of each adjustment or readjustment of the Conversion Price pursuant to Section 8, the Corporation at its expense shall promptly compute such adjustment or readjustment in accordance with the terms hereof and furnish to each holder of Series A Preferred Stock a certificate setting forth such adjustment or readjustment and showing in detail the facts upon which such adjustment or readjustment is based. The Corporation shall, upon the written request at any time of any holder of Series A Preferred Stock, furnish or cause to be furnished to such holder a like certificate setting forth (i) such adjustments and readjustments, (ii) the Conversion Price at the time in effect, and (iii) the number of shares of Common Stock and the amount, if any, of other property which at the time would be received upon the conversion of Series A Preferred Stock.
9. PROTECTIVE PROVISIONS.
So long as any shares of Series A Preferred Stock are outstanding, the Corporation shall not, without first obtaining the approval of the holders of at least a majority of the then-outstanding shares of Series A Preferred Stock, take any action that:
(a) alters the rights, preferences or privileges of the Series A Preferred Stock;
(b) creates any new class or series of shares that has a preference over or is on a parity with the Series A Preferred Stock with respect to voting rights, dividends or liquidation preferences; or
(c) reclassifies stock into shares having a preference over or on a parity with the Series A Preferred Stock with respect to voting, dividends or liquidation preferences.
Composite as amended through March 16, 2004.
EXHIBIT 31.1
CERTIFICATION PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
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 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 report;
3. Based on my knowledge, the financial statements, and other financial information included in this 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 report;
4. The registrant's other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have:
a) designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, 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 report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
c) disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and
5. The registrant's other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions):
a) all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and
b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting.
/s/ Mark Goldwasser ---------------------------------------- Mark Goldwasser, Chief Executive Officer May 17, 2004 |
EXHIBIT 31.2
CERTIFICATION PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
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 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 report;
3. Based on my knowledge, the financial statements, and other financial information included in this 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 report;
4. The registrant's other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have:
a) designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, 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 report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
c) disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and
5. The registrant's other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions):
a) all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and
b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting.
/s/ Robert H. Daskal ---------------------------------------- Robert H. Daskal, Acting Chief Financial Officer May 17, 2004 |
EXHIBIT 32.1
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 March 31, 2004 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 May 17, 2004 |
EXHIBIT 32.2
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 March 31, 2004 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 May 17, 2004 |