10 Q/A
UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
Washington,
D.C. 20549
FORM
10-Q/A
QUARTERLY
REPORT PURSUANT TO SECTION 13 OR 15(d)
OF
THE
SECURITIES EXCHANGE ACT OF 1934
For
the Quarter Ended March
31, 2006
|
Commission
File Number 001-12629
|
NATIONAL
HOLDINGS CORPORATION
(Exact
name of registrant as specified in its charter)
DELAWARE
|
|
36-4128138
|
(State
or other jurisdiction of organization)
|
|
(I.R.S.
Employer incorporation or Identification
No.)
|
875
North Michigan Avenue, Suite 1560, Chicago, Illinois
|
|
60611
|
(Address
of principal executive offices)
|
|
(Zip
code)
|
Registrant’s
telephone number, including area code: (312)
751-8833
Olympic
Cascade Financial Corporation
(Former
name, if changed since last report)
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
o
Indicate
by checkmark whether the registrant is an accelerated filer (as defined in
Rule
12b-2 of the Exchange Act). Yes o
No
x
Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act).
YES o
NO
x
The
number of shares outstanding of registrant’s common stock, par value $0.02 per
share, at October 23, 2006 was 5,223,968.
EXPLANATORY
NOTE
This
Quarterly Report on Form 10-Q/A (the “Report”) is being filed by National
Holdings Corporation (the “Company”) to amend the Company's Quarterly Report on
Form 10-Q for the period ended March 31, 2006 that was initially filed with
the
Securities and Exchange Commission (the “SEC”) on May 10, 2006. This Report
reflects the restatement of the Company's Series B Preferred Stock outside
of
permanent equity on its balance sheet as of March 31, 2006.
NATIONAL
HOLDINGS CORPORATION AND SUBSIDIARY
|
|
CONDENSED
CONSOLIDATED STATEMENTS OF FINANCIAL
CONDITION
|
|
|
|
|
|
|
ASSETS
|
|
|
|
|
|
|
|
|
|
March
31,
|
|
|
|
|
|
2006
|
|
|
|
|
|
(unaudited)
|
|
September
30,
|
|
|
|
(See:
Note
2.
|
|
2005
|
|
|
|
Restatement)
|
|
(see
note
below)
|
|
|
|
|
|
|
|
CASH
|
|
$
|
2,236,000
|
|
$
|
398,000
|
|
DEPOSITS
WITH CLEARING ORGANIZATIONS
|
|
|
300,000
|
|
|
300,000
|
|
RECEIVABLES
FROM BROKER-DEALERS AND CLEARING
ORGANIZATIONS
|
|
|
4,716,000
|
|
|
3,329,000
|
|
OTHER
RECEIVABLES, net of allowance for uncollectible accounts of
$368,000
|
|
|
|
|
|
|
|
at
March 31, 2006 and September 30, 2005,
respectively
|
|
|
350,000
|
|
|
485,000
|
|
ADVANCES
TO REGISTERED REPRESENTATIVES
|
|
|
1,599,000
|
|
|
1,653,000
|
|
SECURITIES
HELD FOR RESALE, at market
|
|
|
466,000
|
|
|
166,000
|
|
FIXED
ASSETS, net
|
|
|
299,000
|
|
|
250,000
|
|
SECURED
DEMAND NOTE
|
|
|
1,000,000
|
|
|
1,000,000
|
|
OTHER
ASSETS
|
|
|
501,000
|
|
|
379,000
|
|
TOTAL
ASSETS
|
|
$
|
11,467,000
|
|
$
|
7,960,000
|
|
|
|
|
|
|
|
|
|
LIABILITIES
AND STOCKHOLDERS'
EQUITY
|
|
|
|
|
|
|
|
|
|
PAYABLE
TO
BROKER-DEALERS AND CLEARING ORGANIZATIONS
|
|
$
|
393,000
|
|
$
|
122,000
|
|
SECURITIES
SOLD, BUT NOT YET PURCHASED, at market
|
|
|
73,000
|
|
|
44,000
|
|
ACCOUNTS
PAYABLE, ACCRUED EXPENSES AND OTHER LIABILITIES
|
|
|
5,474,000
|
|
|
4,045,000
|
|
CONVERTIBLE
NOTES PAYABLE, net of debt discounts of $178,000 and $0
|
|
|
|
|
|
|
|
at
March 31,
2006 and September 30, 2005, respectively
|
|
|
822,000
|
|
|
—
|
|
NOTES
PAYABLE, net of debt discounts of $85,000 and $206,000
|
|
|
|
|
|
|
|
at
March 31,
2006 and September 30, 2005, respectively
|
|
|
765,000
|
|
|
1,819,000
|
|
TOTAL
LIABILITIES
|
|
|
7,527,000
|
|
|
6,030,000
|
|
|
|
|
|
|
|
|
|
SUBORDINATED
BORROWINGS
|
|
|
1,000,000
|
|
|
1,000,000
|
|
|
|
|
|
|
|
|
|
COMMITMENTS
AND CONTINGENCIES
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
REDEEMABLE
STOCK
|
|
|
|
|
|
|
|
Series
B 10%
cumulative convertible preferred stock, $.01 par value,
20,000
|
|
|
|
|
|
|
|
shares
authorized; 10,000 shares issued and outstanding
(liquidation
|
|
|
|
|
|
|
|
preference:
$1,000,000) at March 31, 2006 and 0 shares issued and
|
|
|
|
|
|
|
|
outstanding
at September 30, 2005
|
|
|
1,000,000
|
|
|
—
|
|
|
|
|
|
|
|
|
|
STOCKHOLDERS'
EQUITY
|
|
|
|
|
|
|
|
Preferred
stock, $.01 par value, 200,000 shares authorized; 50,000
shares
|
|
|
|
|
|
|
|
designated
as Series A and 20,000 shares designated as Series
B
|
|
|
|
|
|
|
|
Series
A 9%
cumulative convertible preferred stock, $.01 par value,
50,000
|
|
|
|
|
|
|
|
shares
authorized; 35,316 shares issued and outstanding
(liquidation
|
|
|
|
|
|
|
|
preference:
$3,531,600) at March 31, 2006 and 33,320 shares issued
and
|
|
|
|
|
|
|
|
outstanding
(liquidation preference: $3,332,000) at September 30,
2005
|
|
|
|
|
|
|
|
Common
stock,
$.02 par value, 30,000,000 shares authorized;
|
|
|
|
|
|
|
|
5,223,968
and 5,045,878 shares issued and
outstanding,
|
|
|
|
|
|
|
|
at
March 31, 2006 and September 30, 2005,
respectively
|
|
|
104,000
|
|
|
101,000
|
|
Additional
paid-in capital
|
|
|
16,025,000
|
|
|
15,295,000
|
|
Deferred
compensation
|
|
|
(83,000
|
)
|
|
|
|
Accumulated
deficit
|
|
|
(14,106,000
|
)
|
|
(14,466,000
|
)
|
TOTAL
STOCKHOLDERS' EQUITY
|
|
|
1,940,000
|
|
|
930,000
|
|
|
|
|
|
|
|
|
|
TOTAL
LIABILITIES AND STOCKHOLDERS' EQUITY
|
|
$
|
11,467,000
|
|
$
|
7,960,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Note:
The balance sheet at September 30, 2005 has been derived from the
audited consolidated financial statements at that date.
See
notes
to condensed consolidated financial statements.
NATIONAL
HOLDINGS CORPORATION
|
|
CONDENSED
CONSOLIDATED STATEMENTS OF OPERATIONS
|
(Unaudited)
|
|
|
Three
Months Ended
|
|
Six
Months Ended
|
|
|
|
March
31,
|
|
March
31,
|
|
March
31,
|
|
March
31,
|
|
|
|
2006
|
|
2005
|
|
2006
|
|
2005
|
|
REVENUES:
|
|
|
|
|
|
|
|
|
|
Commissions
|
|
$
|
10,714,000
|
|
$
|
8,850,000
|
|
$
|
17,871,000
|
|
$
|
19,146,000
|
|
Net
dealer inventory gains
|
|
|
2,191,000
|
|
|
1,395,000
|
|
|
4,052,000
|
|
|
2,592,000
|
|
Investment
banking
|
|
|
4,042,000
|
|
|
132,000
|
|
|
7,093,000
|
|
|
238,000
|
|
Interest
and dividends
|
|
|
696,000
|
|
|
859,000
|
|
|
1,382,000
|
|
|
1,362,000
|
|
Transfer
fees and clearing services
|
|
|
969,000
|
|
|
711,000
|
|
|
1,730,000
|
|
|
1,576,000
|
|
Other
|
|
|
175,000
|
|
|
259,000
|
|
|
347,000
|
|
|
401,000
|
|
TOTAL
REVENUES
|
|
|
18,787,000
|
|
|
12,206,000
|
|
|
32,475,000
|
|
|
25,315,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
EXPENSES:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commissions
|
|
|
14,043,000
|
|
|
8,623,000
|
|
|
23,731,000
|
|
|
18,119,000
|
|
Employee
compensation and related expenses
|
|
|
1,592,000
|
|
|
1,316,000
|
|
|
2,884,000
|
|
|
2,552,000
|
|
Clearing
fees
|
|
|
436,000
|
|
|
323,000
|
|
|
800,000
|
|
|
670,000
|
|
Communications
|
|
|
546,000
|
|
|
370,000
|
|
|
1,033,000
|
|
|
835,000
|
|
Occupancy
and equipment costs
|
|
|
633,000
|
|
|
757,000
|
|
|
1,308,000
|
|
|
1,473,000
|
|
Professional
fees
|
|
|
246,000
|
|
|
305,000
|
|
|
584,000
|
|
|
719,000
|
|
Interest
|
|
|
176,000
|
|
|
109,000
|
|
|
285,000
|
|
|
228,000
|
|
Taxes,
licenses, registration
|
|
|
169,000
|
|
|
48,000
|
|
|
314,000
|
|
|
159,000
|
|
Other
administrative expenses
|
|
|
522,000
|
|
|
494,000
|
|
|
854,000
|
|
|
883,000
|
|
TOTAL
EXPENSES
|
|
|
18,363,000
|
|
|
12,345,000
|
|
|
31,793,000
|
|
|
25,638,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NET
INCOME (LOSS)
|
|
|
424,000
|
|
|
(139,000
|
)
|
|
682,000
|
|
|
(323,000
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Preferred
stock dividends
|
|
|
(95,000
|
)
|
|
(69,000
|
)
|
|
(171,000
|
)
|
|
(140,000
|
)
|
Net
income (loss) attributable to common stockholders
|
|
$
|
329,000
|
|
$
|
(208,000
|
)
|
$
|
511,000
|
|
$
|
(463,000
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NET
INCOME (LOSS) PER COMMON SHARE
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income (loss) attributable to common stockholders
|
|
$
|
0.06
|
|
$
|
(0.04
|
)
|
$
|
0.10
|
|
$
|
(0.09
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income (loss) attributable to common stockholders
|
|
$
|
0.04
|
|
$
|
(0.04
|
)
|
$
|
0.07
|
|
$
|
(0.09
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
average number of shares outstanding
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
5,089,625
|
|
|
5,013,434
|
|
|
5,068,451
|
|
|
5,003,291
|
|
Diluted
|
|
|
10,383,571
|
|
|
5,013,434
|
|
|
10,283,235
|
|
|
5,003,291
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See
notes
to condensed consolidated financial statements.
NATIONAL
HOLDINGS CORPORATION AND SUBSIDIARY
|
|
CONDENSED
CONSOLIDATED STATEMENTS OF CASH FLOWS
|
(Unaudited)
|
|
|
Six
Months Ended
|
|
|
|
March
31, 2006
|
|
March
31, 2005
|
|
CASH
FLOWS FROM OPERATING ACTIVITIES
|
|
|
|
|
|
Net
income (loss)
|
|
$
|
682,000
|
|
$
|
(323,000
|
)
|
Adjustments
to reconcile net income (loss) to net
|
|
|
|
|
|
|
|
cash
provided by (used in) operating activities
|
|
|
|
|
|
|
|
Depreciation
and amortization
|
|
|
68,000
|
|
|
85,000
|
|
Amortization
of deferred financing costs
|
|
|
1,000
|
|
|
|
|
Amortization
of note discount
|
|
|
130,000
|
|
|
91,000
|
|
Compensatory
element of common stock issuance
|
|
|
12,000
|
|
|
|
|
Compensatory
element of common stock option issuances
|
|
|
5,000
|
|
|
|
|
Issuance
of common stock in settlement of arbitrations and claims
|
|
|
|
|
|
40,000
|
|
Changes
in assets and liabilities
|
|
|
|
|
|
|
|
Deposits
with clearing organizations
|
|
|
|
|
|
495,000
|
|
Receivables
from broker-dealers, clearing organizations and others
|
|
|
(1,198,000
|
)
|
|
1,717,000
|
|
Securities
held for resale, at market
|
|
|
(300,000
|
)
|
|
(917,000
|
)
|
Other
assets
|
|
|
(96,000
|
)
|
|
(80,000
|
)
|
Payables
|
|
|
1,678,000
|
|
|
(1,640,000
|
)
|
Securities
sold, but not yet purchased, at market
|
|
|
29,000
|
|
|
707,000
|
|
Net
cash provided by operating activities
|
|
|
1,011,000
|
|
|
175,000
|
|
|
|
|
|
|
|
|
|
CASH
FLOWS FROM INVESTING ACTIVITIES
|
|
|
|
|
|
|
|
Purchase
of fixed assets
|
|
|
(117,000
|
)
|
|
(40,000
|
)
|
|
|
|
|
|
|
|
|
CASH
FLOWS FROM FINANCING ACTIVITIES
|
|
|
|
|
|
|
|
Net
proceeds from issuance of common stock
|
|
|
175,000
|
|
|
|
|
Net
proceeds from issuance of preferred stock
|
|
|
972,000
|
|
|
|
|
Net
proceeds from issuance of convertible notes payable
|
|
|
1,000,000
|
|
|
|
|
Cash
payment of deferred financing costs
|
|
|
(28,000
|
)
|
|
|
|
Payment
of notes payable
|
|
|
(1,175,000
|
)
|
|
(75,000
|
)
|
Exercise
of stock options and warrants
|
|
|
|
|
|
20,000
|
|
Net
cash (used in) provided by financing activities
|
|
|
944,000
|
|
|
(55,000
|
)
|
|
|
|
|
|
|
|
|
NET
INCREASE IN CASH
|
|
|
1,838,000
|
|
|
80,000
|
|
|
|
|
|
|
|
|
|
CASH
BALANCE
|
|
|
|
|
|
|
|
Beginning
of the period
|
|
|
398,000
|
|
|
351,000
|
|
End
of the period
|
|
$
|
2,236,000
|
|
$
|
431,000
|
|
|
|
|
|
|
|
|
|
SUPPLEMENTAL
DISCLOSURES OF CASH FLOW INFORMATION
|
|
|
|
|
|
|
|
Cash
paid during the period for:
|
|
|
|
|
|
|
|
Interest
|
|
$
|
165,000
|
|
$
|
147,000
|
|
|
|
|
|
|
|
|
|
SUPPLEMENTAL
DISCLOSURES OF NONCASH INVESTING AND
|
|
|
|
|
|
|
|
FINANCING
ACTIVITIES
|
|
|
|
|
|
|
|
Warrants
issued in connection with debt
|
|
$
|
187,000
|
|
$
|
—
|
|
Preferred
stock dividends
|
|
$
|
300,000
|
|
$
|
322,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See
notes
to condensed consolidated financial statements.
NATIONAL
HOLDINGS CORPORATION AND SUBSIDIARIES
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MARCH
31, 2006
(UNAUDITED)
NOTE
1. BASIS OF PRESENTATION
The
accompanying consolidated financial statements of National Holdings Corporation
f/k/a Olympic Cascade Financial Corporation (“National Holdings” 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,
2006
and March 31, 2005 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, 2005.
NOTE
2. RESTATEMENT
In
the
Company’s Form 10-Q for the quarter ended March 31, 2006, the Company’s Series B
Preferred Stock that was issued in a private placement in January 2006 was
originally classified on the Company’s balance sheet as part of Stockholders’
Equity. This amended Report is being filed to classify the Company’s Series B
Preferred Stock as Redeemable Preferred Stock on the Company’s balance sheet for
the quarter ended March 31, 2006. This treatment is consistent with the
treatment in the Company’s Form 10-Q for the quarter ended June 30, 2006, and is
necessitated by certain redemption rights held by the New Investors at that
time. Subsequent to June 30, 2006, the New Investors waived the provision which
allowed for the contingent redemption, and the Series B Preferred Stock will
be
classified as part of Stockholders’ Equity in future filings.
NOTE
3. ACCOUNTING
POLICY
In
February 2006, the Financial Accounting Standards Board (“FASB”) issued SFAS No.
155, which is an amendment of SFAS No. 133 and 140. This Statement (a) permits
fair value re-measurement for any hybrid financial instrument that contains
an
embedded derivative that otherwise would require bifurcation, (b) clarifies
which interest-only strip and principal-only strip are not subject to the
requirements of SFAS 133, (c) establishes a requirement to evaluate interests
in
securitized financial assets to identify interests that are freestanding
derivatives or that are hybrid financial instruments that contain an embedded
derivative requiring bifurcation, (d) clarifies that concentrations of credit
risk in the form of subordination are not embedded derivatives, and (e) amends
SFAS 140 to eliminate the prohibition on a qualifying special-purpose entity
from holding a derivative financial instrument that pertains to a beneficial
interest other than
another
derivative financial instrument. This Statement is effective for financial
statements for fiscal years beginning after September 15, 2006. Earlier adoption
of this Statement is permitted as of the beginning of an entity’s fiscal year,
provided the entity has not yet issued any financial statements for that fiscal
year. Management believes this Statement will not have an impact on the
financial statements of the Company once adopted.
In
March
2006, the FASB issued SFAS No. 156, which amends FASB Statement No. 140. This
Statement establishes, among other things, the accounting for all separately
recognized servicing assets and servicing liabilities. This Statement amends
SFAS 140 to require that all separately recognized servicing assets and
servicing liabilities be initially measured at fair value, if practicable.
This
Statement permits, but does not require, the subsequent measurement of
separately recognized servicing assets and servicing liabilities at fair value.
An entity that uses derivative instruments to mitigate the risks inherent in
servicing assets and servicing liabilities is required to account for those
derivative instruments at fair value. Under this Statement, an entity can elect
subsequent fair value measurement to account for its separately recognized
servicing assets and servicing liabilities. By electing that option, an entity
may simplify its accounting because this Statement permits income statement
recognition of the potential offsetting changes in fair value of those servicing
assets and servicing liabilities and derivative instruments in the same
accounting period. This Statement is effective for financial statements for
fiscal years beginning after September 15, 2006. Earlier adoption of this
Statement is permitted as of the beginning of an entity’s fiscal year, provided
the entity has not yet issued any financial statements for that fiscal year.
Management believes this Statement will not have an impact on the financial
statements of the Company once adopted.
NOTE
4. STOCK
BASED COMPENSATION
Stock
Based Compensation - Prior to October 1, 2005, the Company accounted for
employee stock transactions in accordance with Accounting Principle Board,
APB
Opinion No. 25, “Accounting for Stock Issued to Employees.” The Company had
adopted the pro forma disclosure requirements of Statement of Financial
Accounting Standards No. 123, “Accounting For Stock-Based Compensation.”
Effective
October 1, 2005, the Company adopted FASB Statement of Financial Accounting
Standard (“SFAS”) No. 123R “Share Based Payment”. This statement is a
revision of SFAS Statement No. 123, and supersedes APB Opinion No. 25,
and its related implementation guidance. SFAS 123R addresses all forms of share
based payment (“SBP”) awards including shares issued under employee stock
purchase plans, stock options, restricted stock and stock appreciation rights.
Under SFAS 123R, SBP awards will result in a charge to operations that will
be
measured at fair value on the awards grant date, based on the estimated number
of awards expected to vest over the service period. During the three and
six months ended March 31, 2006, the Company granted 70,000 and 170,000
stock options, respectively, with a fair value of approximately $55,000 and
$88,000, respectively. A charge of approximately $4,000 was recorded in the
three and six months ended March 31, 2006, relating to the amortization of
the fair value associated with these grants.
For
the
three and six months ended March 31, 2005, the Company applied APB Opinion
No. 25, “Accounting for Stock Issued to Employees.” As required under
SFAS No. 148, “Accounting for Stock-based Compensation - Transition and
Disclosure,” the following table presents pro forma net income and basic and
diluted earnings per share as if the fair value-based method had been applied
to
all awards during that period.
|
|
Three
months ended
|
|
Six
months ended
|
|
|
|
March
31, 2005
|
|
March
31, 2005
|
|
Net
income (loss) attributable to common stockholders - as
reported
|
|
$
|
(208,000
|
)
|
$
|
(463,000
|
)
|
Stock-based
employee compensation cost determined
|
|
|
|
|
|
|
|
under
fair value method, net of tax effects
|
|
|
(791,000
|
)
|
|
(869,000
|
)
|
Net
income (loss) attributable to common stockholders - pro
forma
|
|
$
|
(999,000
|
)
|
$
|
(1,332,000
|
)
|
|
|
|
|
|
|
|
|
Earnings
(loss) per share
|
|
|
|
|
|
|
|
Basic
earnings (loss) per share:
|
|
|
|
|
|
|
|
Net
income (loss) attributable to common stockholders - as
reported
|
|
$
|
(0.04
|
)
|
$
|
(0.09
|
)
|
Per
share stock-based employee compensation cost
|
|
|
|
|
|
|
|
determined
under fair value method, net of tax effects
|
|
|
(0.16
|
)
|
|
(0.17
|
)
|
Net
income (loss) attributable to common stockholders - pro
forma
|
|
$
|
(0.20
|
)
|
$
|
(0.26
|
)
|
|
|
|
|
|
|
|
|
Diluted
earnings (loss) per share:
|
|
|
|
|
|
|
|
Net
income (loss) attributable to common stockholders - as
reported
|
|
$
|
(0.04
|
)
|
$
|
(0.09
|
)
|
Per
share stock-based employee compensation cost
|
|
|
|
|
|
|
|
determined
under fair value method, net of tax effects
|
|
|
(0.16
|
)
|
|
(0.17
|
)
|
Net
income (loss) attributable to common stockholders - pro
forma
|
|
$
|
(0.20
|
)
|
$
|
(0.26
|
)
|
|
|
|
|
|
|
|
|
The
Black-Scholes option valuation model is used to estimate the fair value of
the
options granted. The model includes subjective input assumptions that can
materially affect the fair value estimates. The model was developed for use
in
estimating the fair value of traded options that have no vesting restrictions
and that are fully transferable. For example, the expected volatility is
estimated based on the most recent historical period of time equal to the
weighted average life of the options granted. Options issued under the Company's
option plans have characteristics that differ from traded options. In
management's opinion, this valuation model does not necessarily provide a
reliable single measure of the fair value of its employee stock options.
Principal assumptions used in applying the Black-Scholes model along with the
results from the model were as follows:
|
|
2006
|
|
2005
|
|
Assumptions:
|
|
|
|
|
|
Risk-free
interest rate
|
|
|
4.40
|
%
|
|
3.15
|
%
|
|
|
|
|
|
|
|
|
Expected
life, in years
|
|
|
3.0
|
|
|
5.0
|
|
|
|
|
|
|
|
|
|
Expected
volatility
|
|
|
88
|
%
|
|
135
|
%
|
NOTE
5. 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,
2006:
|
|
Securities
held
|
|
Securities
sold, but
|
|
|
|
for
resale
|
|
not
yet purchased
|
|
Corporate
Stocks
|
|
$
|
427,000
|
|
$
|
73,000
|
|
Corporate
Bonds
|
|
|
4,000
|
|
|
—
|
|
Government
Obligations
|
|
|
35,000
|
|
|
|
|
|
|
$
|
466,000
|
|
$
|
73,000
|
|
NOTE
6. CLEARING AGREEMENTS
In
April
2005, National Securities Corporation (“National Securities”) entered into a
clearing agreement with National Financial Services LLC (“NFS”) that became
effective in June 2005. The clearing agreement includes a termination fee if
National Securities terminates the agreement without cause. Additionally, in
June 2005, National Securities entered into a clearing agreement with Penson
Financial Services, Inc. (“Penson”) for the purpose of providing clearing
services that are not provided by NFS. The Company believes that the overall
effect of these clearing relationships is beneficial to the Company’s cost
structure, liquidity and capital resources.
NOTE
7. CONTINGENCIES
The
NASD
was engaged in an industry-wide investigation of mutual fund trading activities.
National Securities is one of the numerous broker-dealers that were contacted
by
the NASD with respect to this investigation. The NASD identified certain
customer mutual fund transactions ordered through National Securities during
the
time period from October 2000 to February 2003 that it believed constituted
mutual fund timing and/or excessive trading activity. National Securities
engaged in discussions and negotiations with the NASD to informally resolve
these matters. Such resolution resulted in a settlement, whereby National
Securities, without admitting or denying any violations, agreed to make both
restitution and pay a fine to the NASD that in the aggregate approximated
$600,000. Additionally, the Company was obligated to pay the fines imposed
by
the NASD on two executive officers totaling $50,000 pursuant to its
indemnification obligations. The unpaid balance of approximately $126,000 and
$219,000 at
March
31, 2006 and 2005, respectively, has
been
included in “Accounts Payable, Accrued Expenses and Other Liabilities” in the
accompanying consolidated statements of financial condition.
The
Company is also a defendant in various other arbitrations and administrative
proceedings, lawsuits and claims, seeking
damages the Company approximates
at $700,000 (exclusive of unspecified punitive damages related to certain claims
and inclusive of expected insurance coverage). The Company has filed a
counterclaim for approximately $220,000 in one such proceeding. These matters
arise in the normal course of business. The Company intends to vigorously defend
itself in these actions, and believes that the eventual outcome of these matters
will not have a material adverse effect on the Company. However,
the ultimate outcome of these matters cannot be determined at this time. The
amounts related to such matters that are reasonably estimable and which have
been accrued at March 31, 2006 and 2005, is $228,000 and $225,000 (including
related legal fees), respectively, and
have
been included in “Accounts Payable, Accrued Expenses and Other Liabilities” in
the accompanying consolidated statements of financial condition.
The
Company has included in “Professional fees” litigation and NASD related expenses
of $155,000 and $212,000 for the second quarter of fiscal year 2006 and 2005,
respectively, and $400,000 and $546,000 for the first six months of fiscal
year
2006 and 2005, respectively.
NOTE
8. DIVIDENDS ON CONVERTIBLE PREFERRED STOCK
The
holders of the Company’s Series A Convertible Preferred Stock, that are
convertible into the Company’s common stock at $1.25 per share, are to receive
dividends on a quarterly basis at a rate of 9%
per
annum
per share. Such dividends are cumulative and are payable only when declared
by
the Company’s Board of Directors. In March 2006, the Company’s Board of
Directors declared an in-kind dividend in the aggregate of 1,996 shares of
Series A Preferred Stock, in payment of approximately $300,000 of dividends
accrued through March 31, 2006. Such shares were issued on April 30, 2006.
At
March 31, 2006, the accumulated dividend on the Company’s 35,316 issued and
outstanding shares of Series A Preferred Stock was $0.
The
holders of the Company’s Series B Convertible Preferred Stock, that are
convertible into the Company’s common stock at $.75 per share, are to receive
dividends on a quarterly basis at a rate of 10% per annum per share. Such
dividends are cumulative and are payable only when declared by the Company’s
Board of Directors. In March 2006, the Company’s Board of Directors declared a
cash dividend of $21,000 payable to the holders of the Series B Preferred Stock
that was paid in April 2006.
Both
the
holders of the Company’s Series A and Series B Convertible Preferred Stock have
voting rights equal to the number of common shares into which such preferred
shares could be converted at a particular record date.
NOTE
9. 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 would occur if securities or other contracts to issue
common shares were exercised or converted.
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, 2006
|
|
March
31, 2005
|
|
March
31, 2006
|
|
March
31, 2005
|
|
Numerator:
|
|
|
|
|
|
|
|
|
|
Net
income (loss)
|
|
$
|
424,000
|
|
$
|
(139,000
|
)
|
$
|
682,000
|
|
$
|
(323,000
|
)
|
Preferred
stock dividends
|
|
|
(95,000
|
)
|
|
(69,000
|
)
|
|
(171,000
|
)
|
|
(140,000
|
)
|
Numerator
for basic earnings per share
|
|
|
|
|
|
|
|
|
|
|
|
|
|
--
net income (loss) attributable to
|
|
|
|
|
|
|
|
|
|
|
|
|
|
common
stockholders - as reported
|
|
|
329,000
|
|
|
(208,000
|
)
|
|
511,000
|
|
|
(463,000
|
)
|
Effect
of dilutive securities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
on convertible notes
|
|
|
24,000
|
|
|
—
|
|
|
24,000
|
|
|
|
|
Preferred
stock dividends
|
|
|
95,000
|
|
|
|
|
|
171,000
|
|
|
|
|
Numerator
for basic earnings per share
|
|
|
|
|
|
|
|
|
|
|
|
|
|
--
net income (loss) attributable to
|
|
|
|
|
|
|
|
|
|
|
|
|
|
common
stockholders - as adjusted
|
|
$
|
448,000
|
|
$
|
(208,000
|
)
|
$
|
706,000
|
|
$
|
(463,000
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator
for basic earnings per
|
|
|
|
|
|
|
|
|
|
|
|
|
|
share--weighted
average shares
|
|
|
5,089,625
|
|
|
5,013,434
|
|
|
5,068,451
|
|
|
5,003,291
|
|
Effect
of dilutive securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock
options
|
|
|
37,372
|
|
|
|
|
|
17,905
|
|
|
|
|
Warrants
|
|
|
97,961
|
|
|
|
|
|
38,266
|
|
|
|
|
Assumed
conversion of Series A
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Preferred
Stock
|
|
|
2,825,280
|
|
|
|
|
|
2,825,280
|
|
|
|
|
Assumed
conversion of Series B
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Preferred
Stock
|
|
|
1,333,333
|
|
|
|
|
|
1,333,333
|
|
|
|
|
Assumed
conversion of Note
|
|
|
1,000,000
|
|
|
|
|
|
1,000,000
|
|
|
|
|
Dilutive
potential common shares
|
|
|
5,293,946
|
|
|
|
|
|
5,214,784
|
|
|
|
|
Denominator
for diluted earnings per
|
|
|
|
|
|
|
|
|
|
|
|
|
|
share--adjusted
weighted-average
|
|
|
|
|
|
|
|
|
|
|
|
|
|
shares
and assumed conversions
|
|
|
10,383,571
|
|
|
5,013,434
|
|
|
10,283,235
|
|
|
5,003,291
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income (loss) available to
|
|
|
|
|
|
|
|
|
|
|
|
|
|
common
stockholders
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic:
|
|
$
|
0.06
|
|
$
|
(0.04
|
)
|
$
|
0.10
|
|
$
|
(0.09
|
)
|
Diluted:
|
|
$
|
0.04
|
|
$
|
(0.04
|
)
|
$
|
0.07
|
|
$
|
(0.09
|
)
|
For
the
three and six-month periods ended March 31, 2006, 2,904,784 and 3,304,784
shares, respectively, attributable to outstanding stock options and warrants,
and for both the three and six-month periods ended March 31, 2005, 5,525,611
shares attributable to outstanding Series A Preferred Stock, stock options
and
warrants, were excluded from the calculation of diluted net income (loss) per
share because if included the effect would be antildilutive.
NOTE
10. ACCOUNTS PAYABLE, ACCRUED EXPENSES AND OTHER
LIABILITIES
Accounts
payable, accrued expenses and other liabilities as of March 31, 2006 and
September 30, 2005, respectively, consist of the following:
|
|
March
31, 2006
|
|
September
30, 2005
|
|
|
|
|
|
|
|
Commissions
payable
|
|
$
|
3,788,000
|
|
$
|
2,204,000
|
|
Legal
payable
|
|
|
354,000
|
|
|
555,000
|
|
Other
|
|
|
1,332,000
|
|
|
1,286,000
|
|
Total
|
|
$
|
5,474,000
|
|
$
|
4,045,000
|
|
NOTE
11. NOTES PAYABLE
In
January 2006, the
Company used $1.0 million of the proceeds from a private placement (See Note
11)
to pay in full $1.0 million of promissory notes held by two unrelated note
holders that had a maturity date of July 31, 2007.
In
February 2006, National Securities and the holder of a $1.0 million secured
demand note that was scheduled to mature on March 1, 2006, extended the term
of
the secured demand note to March 1, 2007.
NOTE
12. PRIVATE PLACEMENTS
In
January 2006, the Company completed a
financing transaction under which certain new investors (collectively, the
“New
Investors”) made a $2.0 million investment in the Company (the “New
Transaction”) by purchasing an aggregate of the following: (i) $1.0
million
of the
Company’s newly created Series B Preferred Stock, which has a 10% dividend rate
and is convertible into Common Stock at a price of $.75 per share, and (ii)
11%
convertible promissory notes in the principal amount of $1.0
million,
which
are
convertible into Common Stock at a price of $1.00 per share
with
warrants
to purchase an aggregate of 300,000 shares of Common Stock at an exercise price
of $1.00 per share.
The
convertible promissory notes mature in January 2011, and have a stated interest
rate of 11% per annum. The Company granted 300,000 warrants to acquire shares
of
common stock to the note holders, and the fair value of the warrants was
calculated using the Black-Scholes Option Valuation Model. The Company recorded
a debt discount of approximately $187,000 that will be charged to interest
expense over the life of the debt.
The
investment by the New Investors included $1.7 million by St. Cloud Capital
Partners, L.P. (“St. Cloud”), and an aggregate of $300,000 by two unrelated
investors. Marshall S. Geller, the Senior Managing Member
of
SCGP,
LLC, the General Partner of St. Cloud,
became a
member of the Board of Directors of the
Company
simultaneous with the closing of the New Transaction. The
Company incurred legal fees and other costs related to this capital transaction,
in the amount of $56,000. The Company capitalized one-half of the fees to
deferred financing costs that will be amortized to interest expense over the
life of the convertible promissory notes and one-half of the fees were charged
to paid-in capital.
The
preferred stock and warrants were accounted for in accordance with EITF 98-5
and
EITF 00-27. The preferred stock is considered permanent equity. The warrants
and
conversion option are components of equity and were not determined to be a
derivative liability in accordance with SFAS No. 133 (par 11). The convertible
promissory notes and warrants
were
accounted for in accordance with EITF 98-5 and EITF 00-27.
In
March
2006, the Company issued 159,090 shares of the Company’s common stock to an
unaffiliated party for $175,000. The proceeds from the private placement were
used to retire $175,000 of the Company’s promissory notes that were due to
mature in January 2007.
ITEM
2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
The
Private Securities Litigation Reform Act of 1995 provides a safe harbor for
forward-looking statements. This Quarterly Report may contain certain statements
of a forward-looking nature relating to future events or future business
performance. Any such statements that refer to the Company’s estimated or
anticipated future results or other non-historical facts are forward-looking
and
reflect the Company’s current perspective of existing trends and information.
These statements involve risks and uncertainties that cannot be predicted or
quantified and, consequently, actual results may differ materially from those
expressed or implied by such forward-looking statements. Such risks and
uncertainties include, among others, risks and uncertainties detailed in the
Company’s Annual Report on Form 10-K, filed with the Securities and Exchange
Commission on December 28, 2004. 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, 2006 Compared to Three Months Ended March 31,
2005
The
Company’s second quarter of fiscal year 2006 resulted in an increase in
revenues, and a comparatively lesser increase in expenses compared
to the same period last year. The increase in revenues is due to the stronger
securities markets experienced by the Company, and the completion of investment
banking transactions in the current year’s quarter. As
a
result, the Company reported net income of $424,000 compared with a net loss
of
$139,000 for the second quarters of fiscal years 2006 and 2005, respectively.
This represents an improvement of $563,000 from the prior period.
|
|
Three
Months Ended
|
|
|
|
|
|
|
|
March
31,
|
|
Increase
(Decrease)
|
|
|
|
2006
|
|
2005
|
|
Amount
|
|
Percent
|
|
Commissions
|
|
$
|
10,714,000
|
|
$
|
8,850,000
|
|
$
|
1,864,000
|
|
|
21
|
%
|
Proprietary
trading
|
|
|
2,062,000
|
|
|
1,372,000
|
|
|
690,000
|
|
|
50
|
%
|
Market
making
|
|
|
76,000
|
|
|
—
|
|
|
76,000
|
|
|
n/a
|
|
Mark-ups
and mark-downs
|
|
|
53,000
|
|
|
23,000
|
|
|
30,000
|
|
|
130
|
%
|
Net
dealer inventory gains
|
|
|
2,191,000
|
|
|
1,395,000
|
|
|
796,000
|
|
|
57
|
%
|
Investment
banking
|
|
|
4,042,000
|
|
|
132,000
|
|
|
3,910,000
|
|
|
2962
|
%
|
Interest
and dividends
|
|
|
696,000
|
|
|
859,000
|
|
|
(163,000
|
)
|
|
(19
|
%)
|
Transfer
fees and clearance services
|
|
|
969,000
|
|
|
711,000
|
|
|
258,000
|
|
|
36
|
%
|
Other
|
|
|
175,000
|
|
|
259,000
|
|
|
(84,000
|
)
|
|
(32
|
%)
|
|
|
$
|
18,787,000
|
|
$
|
12,206,000
|
|
$
|
6,581,000
|
|
|
54
|
%
|
Total
revenues increased $6,581,000, or 54%, in the second quarter of fiscal year
2006
to $18,787,000 from $12,206,000 in the second quarter of fiscal year 2005.
This
increase is mainly due to the improved securities markets, and the completion
of
investment banking transactions. During the second quarter of fiscal year 2006,
total trading volume increased 4%, compared to the second quarter of fiscal
year
2005. The lesser increase in trading volume compared to revenues reflects an
increase in the average revenue per trade, partially offset by the Company’s
re-entry into market making activities. Trading volume in this period related
to
retail brokerage increased 1%. Commission revenue increased $1,864,000, or
21%,
to $10,714,000 from $8,850,000 during the second quarter of fiscal year 2006
compared with the same period in fiscal year 2005. Net dealer inventory gains,
which includes profits on proprietary trading, market making activities and
customer mark-ups and mark-downs, increased $796,000, or 57%, to $2,191,000
from
$1,395,000 during the second quarter of fiscal year 2006 compared with the
same
period in fiscal year 2005.
The
increase is primarily due to an increase in proprietary trading in the bond
market, and reflects the Company’s re-entry into market making activities.
During the second quarter of fiscal year 2006, revenues from proprietary trading
increased $690,000, or 50%, to $2,062,000 from $1,372,000 in the same period
of
fiscal year 2005, revenues from market making activities increased to $76,000
from $0 in the second quarter of fiscal year 2005, and revenues from customer
mark-ups and mark-downs increased $30,000, or 130%, to $53,000 from $23,000
in
the second quarter of fiscal year 2005.
Investment
banking revenue increased $3,910,000, or 2,962%, to $4,042,000 from $132,000
in
the second quarter of fiscal year 2006 compared with the second quarter of
fiscal year 2005. The increase in investment banking revenues is attributable
to
the Company having completed investment banking transactions in the second
quarter of fiscal year 2006. Interest and dividend income decreased $163,000,
or
19%, to $696,000 from $859,000 in the second quarter of fiscal year 2006
compared with the same period last year. The decrease in interest income is
attributable to a decrease in the amount of debit balances in National
Securities’ customers accounts from the same period last year. Transfer fees
increased $258,000, or 36%, to $969,000 in the second quarter of fiscal year
2006 from $711,000 in the second quarter of fiscal year 2005. The increase
reflects higher transfer fees for trades generated from the retail brokerage
business of brokers recently associated with the Company.
Other
revenue, consisting of asset management fees, and miscellaneous transaction
fees
and trading fees, decreased $84,000, or 32%, to $175,000 from $259,000 during
the second quarter of fiscal year 2006 compared to the second quarter of fiscal
year 2005. The decrease is due to nonrecurring income realized in fiscal year
2005.
|
|
Three
Months Ended
|
|
|
|
|
|
|
|
March
31,
|
|
Increase
(Decrease)
|
|
|
|
2006
|
|
2005
|
|
Amount
|
|
Percent
|
|
Commission
expense related to:
|
|
|
|
|
|
|
|
|
|
Commission
revenue
|
|
$
|
9,449,000
|
|
$
|
7,638,000
|
|
$
|
1,811,000
|
|
|
24
|
%
|
Net
dealer inventory gains
|
|
|
1,644,000
|
|
|
879,000
|
|
|
765,000
|
|
|
87
|
%
|
Investment
banking
|
|
|
2,950,000
|
|
|
106,000
|
|
|
2,844,000
|
|
|
2683
|
%
|
Commissions
|
|
|
14,043,000
|
|
|
8,623,000
|
|
|
5,420,000
|
|
|
63
|
%
|
Employee
compensation
|
|
|
1,592,000
|
|
|
1,316,000
|
|
|
276,000
|
|
|
21
|
%
|
Clearing
fees
|
|
|
436,000
|
|
|
323,000
|
|
|
113,000
|
|
|
35
|
%
|
Communications
|
|
|
546,000
|
|
|
370,000
|
|
|
176,000
|
|
|
48
|
%
|
Occupancy
and equipment costs
|
|
|
633,000
|
|
|
757,000
|
|
|
(124,000
|
)
|
|
(16
|
%)
|
Professional
fees
|
|
|
246,000
|
|
|
305,000
|
|
|
(59,000
|
)
|
|
(19
|
%)
|
Interest
|
|
|
176,000
|
|
|
109,000
|
|
|
67,000
|
|
|
61
|
%
|
Taxes,
licenses and registration
|
|
|
169,000
|
|
|
48,000
|
|
|
121,000
|
|
|
252
|
%
|
Other
administrative expenses
|
|
|
522,000
|
|
|
494,000
|
|
|
28,000
|
|
|
6
|
%
|
|
|
$
|
18,363,000
|
|
$
|
12,345,000
|
|
$
|
6,018,000
|
|
|
49
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
In
comparison with the 54% increase in total revenues, total expenses increased
49%, or $6,018,000, to $18,363,000 for the second quarter of fiscal year 2006
compared to $12,345,000 in the second quarter of fiscal year 2005. The increase
in total expenses is primarily the result of higher commission expenses directly
associated with commission revenues.
Commission
expense, which includes expenses related to commission revenue, net dealer
inventory gains and investment banking, increased $5,420,000, or 63%, to
$14,043,000 in the second quarter of fiscal year 2006 from $8,623,000 in the
second quarter of fiscal year 2005. Commission expense related to commission
revenue increased $1,811,000, or 24%, to $9,449,000 in the second quarter of
fiscal year 2006 from $7,638,000 in the second quarter of fiscal year 2005;
commission expense related to net dealer inventory gains increased $765,000,
or
87%, to $1,644,000 in the second quarter of fiscal year 2006 from $879,000
in
the
second quarter of fiscal year 2005; and commission expense related to investment
banking increased $2,844,000, or 2,683%, to $2,950,000 in the second quarter
of
fiscal year 2006 from $106,000 in the second quarter of fiscal year 2005.
Commission expense as a percentage of commission revenues increased to 88%
in
the second quarter of fiscal year 2006 from 86% in the second quarter of fiscal
year 2005. This increase is attributable to changes in the production of
particular brokers, not all of who are paid at the same commission rate and
an
increase in the amortization of advances to registered representatives.
Commission expense as a percentage of net dealer inventory gains increased
to
75% in the second quarter of fiscal year 2006 from 63% in the second quarter
of
fiscal year 2005. This increase is attributable to changes in the production
of
particular brokers and traders, not all of who are paid at the same commission
rate. Commission expense as a percentage of investment banking revenues
decreased to 73% in the second quarter of fiscal year 2006 from 80% in the
second quarter of fiscal year 2005. This decrease is attributable to the type
and size of the particular investment banking transactions completed in the
current year’s quarter. Commission expense includes the amortization of advances
to registered representatives of $305,000 and $267,000 for the second quarter
of
fiscal years 2006 and 2005, 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
Securities.
Employee
compensation expense increased $276,000, or 21%, to $1,592,000 in the second
quarter of fiscal year 2006 from $1,316,000 in the second quarter of fiscal
year
2005. The increase is attributable to new hires and a bonus accrual based on
current year’s profits. Overall, combined commission and employee compensation
expense, as a percentage of revenue increased to 83% from 81% in the second
quarter of fiscal years 2006 and 2005, respectively. The increase is
attributable to an overall higher payout percentage to National Securities’
retail brokers.
Clearing
fees increased $113,000, or 35%, to $436,000 in the second quarter of fiscal
year 2006 from $323,000 in
the
second quarter of fiscal year 2005. The increase in clearing fees is
attributable to the increased commission revenues in the second quarter of
fiscal year 2006 compared to the second quarter of fiscal year 2005, and a
different pricing structure for certain products with different clearing
firms.
Communication
expenses increased $176,000, or 48%, to $546,000 from $370,000 in the second
quarter of fiscal year 2006 compared to the second quarter of fiscal year 2005.
The increase is primarily due to telecommunication incentives provided to
certain brokers who recently became affiliated with the Company, and additional
quotation machines for the Company’s market making activities. Occupancy costs
decreased $124,000, or 16%, to $633,000 from $757,000 in the second quarter
of
fiscal year 2006 compared to the second quarter of fiscal year 2005. The
decrease in occupancy expense is due to an overall reduction in leased office
space. Professional fees decreased $59,000, or 19%, to $246,000 from $305,000
in
the second quarter of fiscal year 2006 compared to the second quarter of fiscal
year 2005. The decrease in professional fees is due to a decrease in legal
fees
relating to various lawsuits and arbitrations.
Interest
expense increased $67,000, or 61%, to $176,000 from $109,000 in the second
quarter of fiscal year 2006 compared to the second quarter of fiscal year 2005.
The increase is primarily attributable to the acceleration of amortization
on
notes that were paid prior to maturity and amortization related to new notes
issued by the Company in the second quarter of fiscal year 2006. Included in
interest expense is the amortization of $98,000 and $41,000 for the second
quarter of fiscal years 2006 and 2005, respectively. Taxes, licenses and
registration increased $121,000, or 252%, to $169,000 from $48,000 in the second
quarter of fiscal year 2006 compared to the second quarter of fiscal year 2005.
The increase is due to registration incentives provided to certain brokers
who
became affiliated with the Company in fiscal year 2006, and the receipt of
a
refund of prior years state business taxes in fiscal year 2005. Other
administrative expenses increased $28,000, or 6%, to $522,000 from $494,000
in
the second quarter of fiscal year 2006 compared to the second quarter of fiscal
year 2005.
The
Company reported net income of $424,000 in the second quarter of fiscal year
2006 compared to a net loss of $139,000 in
the
second quarter of fiscal year 2005.
Overall, the diluted earnings attributable to common stockholders in the second
quarter of fiscal year 2006 was $329,000, or $.03 per common share, as compared
to the net loss attributable to common stockholders of $208,000, or $.04 per
common share in the second quarter of fiscal year 2005. The net income
attributable to common stockholders for the second quarter of fiscal year 2006
and the net loss attributable to common stockholders for the second quarter
of
fiscal year 2005 reflects $95,000 and $69,000 of cumulative Preferred Stock
dividends on the Company’s Preferred Stock for the second quarter of fiscal
years 2006 and 2005, respectively.
Six
Months Ended March 31, 2006 Compared to Six Months Ended March 31,
2005
The
Company’s first six months of fiscal year 2006 resulted in an increase in
revenues, and a comparatively lesser increase in expenses compared
to the same period last year. The increase in revenues is primarily due the
completion of investment banking transactions in the
first
six months of fiscal year 2006.
As
a
result, the Company reported net income of $682,000 compared with a net loss
of
$323,000 for the first six months of fiscal years 2006 and 2005, respectively.
This represents an improvement of $1,005,000 from the prior period.
|
|
Six
Months Ended
|
|
|
|
|
|
|
|
March
31,
|
|
Increase
(Decrease)
|
|
|
|
2006
|
|
2005
|
|
Amount
|
|
Percent
|
|
Commissions
|
|
$
|
17,871,000
|
|
$
|
19,146,000
|
|
$
|
(1,275,000
|
)
|
|
(7
|
%)
|
Proprietary
trading
|
|
|
3,895,000
|
|
|
2,528,000
|
|
|
1,367,000
|
|
|
54
|
%
|
Market
making
|
|
|
84,000
|
|
|
—
|
|
|
84,000
|
|
|
n/a
|
|
Mark-ups
and mark-downs
|
|
|
73,000
|
|
|
64,000
|
|
|
9,000
|
|
|
14
|
%
|
Net
dealer inventory gains
|
|
|
4,052,000
|
|
|
2,592,000
|
|
|
1,460,000
|
|
|
56
|
%
|
Investment
banking
|
|
|
7,093,000
|
|
|
238,000
|
|
|
6,855,000
|
|
|
2880
|
%
|
Interest
and dividends
|
|
|
1,382,000
|
|
|
1,362,000
|
|
|
20,000
|
|
|
1
|
%
|
Transfer
fees and clearance services
|
|
|
1,730,000
|
|
|
1,576,000
|
|
|
154,000
|
|
|
10
|
%
|
Other
|
|
|
347,000
|
|
|
401,000
|
|
|
(54,000
|
)
|
|
(13
|
%)
|
|
|
$
|
32,475,000
|
|
$
|
25,315,000
|
|
$
|
7,160,000
|
|
|
28
|
%
|
Total
revenues increased $7,160,000, or 28%, in the first six months of fiscal year
2006 to $32,475,000 from $25,315,000 in the first six months of fiscal year
2005. This increase is mainly due to the completion of investment banking
transactions. During the first six months of fiscal year 2006, total trading
volume decreased 10%, compared to the first six months of fiscal year 2005.
This
decrease reflects an increase in the average revenue per trade, partially offset
by the Company’s re-entry into market making activities. Trading volume in this
period related to retail brokerage decreased 11%. Commission revenue decreased
$1,275,000, or 7%, to $17,871,000 from $19,146,000 during the first six months
of fiscal year 2006 compared with the same period in fiscal year 2005. This
decrease is attributable to the lower level of retail brokerage business
experienced by the market as a whole in the first quarter of fiscal year 2006.
Net dealer inventory gains, which includes profits on proprietary trading,
market making activities and customer mark-ups and mark-downs, increased
$1,460,000, or 56%, to $4,052,000 from $2,592,000 during the first six months
of
fiscal year 2006 compared with the same period in fiscal year 2005. The increase
is primarily due to an increase in proprietary trading in the bond market,
and
reflects the Company’s re-entry into market making activities. During the first
six months of fiscal year 2006, revenues from proprietary trading increased
$1,367,000, or 54%, to $3,895,000 from $2,528,000 in the same period of fiscal
year 2005, revenues from market making activities increased to $84,000 from
$0
in the first six months of fiscal year 2006, and revenues from customer mark-ups
and mark-downs increased $9,000, or 14%, to $73,000 from $64,000 in the first
six months of fiscal year 2005.
Investment
banking revenue increased $6,855,000, or 2,880%, to $7,093,000 from $238,000
in
the first six months of fiscal year 2006 compared with the first six months
of
fiscal year 2005. The increase in
investment
banking revenues is attributable to the Company having completed investment
banking transactions in the first six months of fiscal year 2005. Interest
and
dividend income increased $20,000, or 1%, to $1,382,000 from $1,362,000 in
the
first six months of fiscal year 2006 compared with the same period last year.
The increase in interest income is attributable to an increase in the interest
rate charged for debit balances in National Securities’ customers accounts
substantially offset by a decrease in the amount of debit balances in those
customers accounts from the same period last year. Transfer fees increased
$154,000, or 10%, to $1,730,000 in the first six months of fiscal year 2006
from
$1,576,000 in the first six months of fiscal year 2005. The increase is due
to
higher transfer fees for trades generated from the retail brokerage business
of
brokers recently associated with the Company.
Other
revenue, consisting of asset management fees and miscellaneous transaction
fees
and trading fees, decreased $54,000, or 13%, to $347,000 from $401,000 during
the first six months of fiscal year 2006 compared to the first six months of
fiscal year 2005. The decrease is due to nonrecurring income realized in fiscal
year 2005.
|
|
Six
Months Ended
|
|
|
|
|
|
|
|
March
31,
|
|
Increase
(Decrease)
|
|
|
|
2006
|
|
2005
|
|
Amount
|
|
Percent
|
|
Commission
expense related to:
|
|
|
|
|
|
|
|
|
|
Commission
revenue
|
|
$
|
15,722,000
|
|
$
|
16,294,000
|
|
$
|
(572,000
|
)
|
|
(4
|
%)
|
Net
dealer inventory gains
|
|
|
2,984,000
|
|
|
1,633,000
|
|
|
1,351,000
|
|
|
83
|
%
|
Investment
banking
|
|
|
5,025,000
|
|
|
192,000
|
|
|
4,833,000
|
|
|
2517
|
%
|
Commissions
|
|
|
23,731,000
|
|
|
18,119,000
|
|
|
5,612,000
|
|
|
31
|
%
|
Employee
compensation
|
|
|
2,884,000
|
|
|
2,552,000
|
|
|
332,000
|
|
|
13
|
%
|
Clearing
fees
|
|
|
800,000
|
|
|
670,000
|
|
|
130,000
|
|
|
19
|
%
|
Communications
|
|
|
1,033,000
|
|
|
835,000
|
|
|
198,000
|
|
|
24
|
%
|
Occupancy
and equipment costs
|
|
|
1,308,000
|
|
|
1,473,000
|
|
|
(165,000
|
)
|
|
(11
|
%)
|
Professional
fees
|
|
|
584,000
|
|
|
719,000
|
|
|
(135,000
|
)
|
|
(19
|
%)
|
Interest
|
|
|
285,000
|
|
|
228,000
|
|
|
57,000
|
|
|
25
|
%
|
Taxes,
licenses and registration
|
|
|
314,000
|
|
|
159,000
|
|
|
155,000
|
|
|
97
|
%
|
Other
administrative expenses
|
|
|
854,000
|
|
|
883,000
|
|
|
(29,000
|
)
|
|
(3
|
%)
|
|
|
$
|
31,793,000
|
|
$
|
25,638,000
|
|
$
|
6,155,000
|
|
|
24
|
%
|
In
comparison with the 28% increase in total revenues, total expenses increased
24%, or $6,155,000, to $31,793,000 for the first six months of fiscal year
2006
compared to $25,638,000 in the first six months of fiscal year 2005. The
increase in total expenses is primarily the result of higher commission expenses
directly associated with commission revenues, particularly investment banking
revenues.
Commission
expense, which includes expenses related to commission revenue, net dealer
inventory gains and investment banking, increased $5,612000, or 31%, to
$23,731,000 in the first six months of fiscal year 2006 from $18,119,000 in
the
first six months of fiscal year 2005. Commission expense related to commission
revenue decreased $572,000, or 4%, to $15,722,000 in the first six months of
fiscal year 2006 from $16,294,000 in the first six months of fiscal year 2005;
commission expense related to net dealer inventory gains increased $1,351,000,
or 83%, to $2,984,000 in the first six months of fiscal year 2006 from
$1,633,000 in the first six months of fiscal year 2005; and commission expense
related to investment banking increased $368,000, or 2,517%, to $5,025,000
in
the first six months of fiscal year 2006 from $192,000 in the first six months
of fiscal year 2005. Commission expense as a percentage of commission revenues
increased to 88% in the first six months of fiscal year 2006 from 85% in the
first six months of fiscal year 2005. This increase is attributable to changes
in the production of particular brokers, not all of who are paid at the same
commission rate and an increase in the amortization of advances to registered
representatives. Commission expense as a percentage of net dealer inventory
gains increased to 74% in the first six months of fiscal year 2006 from 63%
in
the first six months of fiscal year 2005. This increase is attributable to
changes in the production of particular brokers and traders, not all of who
are
paid at the same
commission
rate. Commission expense as a percentage of investment banking revenues
decreased to 73% in the second quarter of fiscal year 2006 from 80% in the
second quarter of fiscal year 2005. This decrease is attributable to the type
and size of the particular investment banking transactions completed in the
current year’s quarter. Commission expense includes the amortization of advances
to registered representatives of $617,000 and $500,000 for the first six months
of fiscal years 2006 and 2005, 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
Securities.
Employee
compensation expense increased $332,000, or 13%, to $2,884,000 in the first
six
months of fiscal year 2006 from $2,552,000 in the first six months of fiscal
year 2005. The increase is attributable to new hires, a bonus accrual based
on
current year’s profits and year-end bonuses that were paid to certain staff
employees in the first quarter of fiscal year 2006. Overall, combined commission
and employee compensation expense, as a percentage of revenue remained constant
at 82% in the first six months of fiscal years 2006 and 2005.
Clearing
fees increased $130,000, or 19%, to $800,000 in the first six months of fiscal
year 2006 from $670,000 in the first six months of fiscal year 2005. The
increase in clearing fees is attributable to a different pricing structure
for
certain products with different clearing firms.
Communication
expenses increased $198,000, or 24%, to $1,033,000 from $835,000 in the first
six months of fiscal year 2006 compared to the first six months of fiscal year
2005. The increase is primarily due to telecommunication incentives provided
to
certain brokers who recently became affiliated with the Company, and additional
quotation machines for the Company’s market making activities. Occupancy costs
decreased $165,000, or 11%, to $1,308,000 from $1,473,000 in the first six
months of fiscal year 2006 compared to the first six months of fiscal year
2005.
The decrease in occupancy expense is due to an overall reduction in leased
office space. Professional fees decreased $135,000, or 19%, to $584,000 from
$719,000 in the first six months of fiscal year 2006 compared to the first
six
months of fiscal year 2005. The decrease in professional fees is due to a
decrease in legal fees relating to various lawsuits and
arbitrations.
Interest
expense increased $57,000, or 25%, to $285,000 from $228,000 in the first six
months of fiscal year 2006 compared to the first six months of fiscal year
2005.
The increase is primarily attributable to the acceleration of amortization
on
notes that were paid prior to maturity and amortization related to new notes
issued by the Company in the second quarter of fiscal year 2006. Included in
interest expense is the amortization of $131,000 and $91,000 for the first
six
months of fiscal year 2006 and 2005, respectively. Taxes, licenses and
registration increased $155,000, or 97%, to $314,000 from $159,000 in the first
six months of fiscal year 2006 compared to the first six months of fiscal year
2005. The increase is due to registration incentives provided to certain brokers
who became affiliated with the Company in fiscal year 2006, and the receipt
of a
refund of prior years state business taxes in fiscal year 2005. Other
administrative expenses decreased $29,000, or 3%, to $854,000 from $883,000
in
the first six months of fiscal year 2006 compared to the first six months of
fiscal year 2005. The decrease in other expenses is due to costs incurred in
the
first quarter of fiscal year 2005 relating to the Company’s change of clearing
firms.
The
Company reported net income of $682,000 in the first six months of fiscal year
2006 compared to a net loss of $323,000 in
the
first six months of fiscal year 2005.
Overall, the diluted earnings attributable to common stockholders in the first
six months of fiscal year 2006 was $511,000, or $.05 per common share, as
compared to the net loss attributable to common stockholders of $463,000, or
$.09 per common share in the first six months of fiscal year 2005. The net
income attributable to common stockholders for the first six months of fiscal
year 2006 and the net loss attributable to common stockholders for the first
six
months of fiscal year 2005 reflects $171,000 and $140,000 of cumulative
Preferred Stock dividends on the Company’s Preferred Stock
for the
first six months of fiscal years 2006 and 2005, respectively.
Liquidity
and Capital Resources
National
Securities, as a registered broker-dealer, is subject to the SEC’s Uniform Net
Capital Rule 15c3-1 that requires the maintenance of minimum net capital.
National Securities has elected to use the alternative standard method permitted
by the rule. This requires that National Securities 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 Securities is a market maker.
At
March
31, 2006, National Securities’ net capital exceeded the requirement by
$2,253,000.
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
Company extends unsecured credit in the normal course of business to its
brokers. The determination of the appropriate amount of the reserve for
uncollectible accounts is based upon a review of the amount of credit extended,
the length of time each receivable has been outstanding, and the specific
individual brokers from whom the receivables are due.
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
April
2005, National Securities entered into a clearing agreement with NFS that became
effective in June 2005. The clearing agreement includes a termination fee if
National Securities terminates the agreement without cause. Additionally, in
June 2005, National Securities entered into a clearing agreement with Penson
for
the purpose of providing clearing services that are not provided by NFS. The
Company believes that the overall effect of these clearing relationships will
be
beneficial to the Company’s cost structure, liquidity and capital
resources.
In
January 2006, the Company completed a
financing transaction under which certain new investors made a $2.0 million
investment in the Company by purchasing an aggregate of the following: (i)
$1.0
million
of the
Company’s newly created Series B Preferred Stock, which has a 10% dividend rate
and is convertible into Common Stock at a price of $.75 per share, and (ii)
11%
convertible promissory notes in the principal amount of $1.0
million,
which
are
convertible into Common Stock at a price of $1.00 per share
with
warrants
to purchase an aggregate of 300,000 shares of Common Stock at an exercise price
of $1.00 per share.
The
convertible promissory notes mature in January 2011, and have a stated interest
rate of 11% per annum. The Company granted 300,000 warrants to acquire shares
of
common stock to the note holders, and the fair value of the warrants was
calculated using the Black-Scholes Option Valuation Model. The Company recorded
a debt discount of approximately $187,000 that will be charged to interest
expense over the life of the debt.
The
investment by the New Investors included $1.7 million by St. Cloud, and an
aggregate of $300,000 by two unrelated investors. Marshall S. Geller, the Senior
Managing Member
of
SCGP,
LLC, the General Partner of St. Cloud,
became a
member of the Board of Directors of the
Company
simultaneous with the closing of the New Transaction. The
Company incurred legal fees and other costs related to this capital transaction,
in the amount of $56,000. The Company capitalized one-half of the fees to
deferred financing costs that will be amortized to interest expense over the
life of the convertible promissory notes and one-half of the fees were charged
to paid-in capital.
In
January 2006, the
Company used $1.0 million of the proceeds from the above private placement
to
pay in full $1.0 million of promissory notes held by two unrelated note holders
that had a maturity date of July 31, 2007.
In
February 2006, National Securities and the holder of a $1.0 million secured
demand note that was scheduled to mature on March 1, 2006, extended the term
of
the secured demand note to March 1, 2007.
In
March
2006, the Company issued 159,090 shares of the Company’s common stock to an
unaffiliated party for $175,000. The proceeds from the private placement were
used to retire $175,000 of the Company’s promissory notes that were due to
mature in January 2007.
In
May
2006, the Company filed a Registration Statement on Form S-1 under the
Securities Act of 1933 for the resale of certain shares of Common Stock and
shares of Common Stock issuable upon the conversion of preferred stock, and
exercise of certain warrants previously issued in connection with private
placement transactions, and shares of Common Stock issuable upon the conversion
of preferred stock and notes, and warrants that were issued in the private
placement that was completed in the current fiscal year. The Registration
Statement is currently being reviewed by the SEC.
In
the
quarter and six months ended March 31, 2005 the Company received proceeds of
approximately $12,500 and $20,000, respectively, from the exercise of
outstanding warrants.
In
October 2004, the Company entered into a preliminary letter of intent to
consummate a merger or other similar combination with First Montauk Financial
Corp.,
a
publicly traded company whose wholly owned subsidiary is also a registered
broker-dealer with a business similar to National Securities. In
February 2005, the Company and First Montauk entered into a definitive merger
agreement that
was
amended and restated
in June
2005. In October 2005, the Company and First Montauk mutually agreed to
terminate their proposed merger. The
Company expensed approximately $320,000 in “Professional fees” relating to the
proposed merger with First Montauk in the fourth quarter of fiscal year
2005.
The
Company believes that it will have sufficient funds to maintain its current
level of business activities during fiscal year 2006. If market conditions
should weaken, the Company would need to consider curtailing certain of its
business activities, reducing its fixed overhead costs and/or seek additional
sources of financing.
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 historically made 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, 2006:
|
|
Long
|
|
Short
|
|
Net
|
|
Corporate
Stocks
|
|
$
|
427,000
|
|
$
|
73,000
|
|
$
|
354,000
|
|
Corporate
Bonds
|
|
|
4,000
|
|
|
|
|
|
4,000
|
|
Government
Obligations
|
|
|
35,000
|
|
|
—
|
|
|
35,000
|
|
|
|
$
|
466,000
|
|
$
|
73,000
|
|
$
|
393,000
|
|
|
|
|
|
|
|
|
|
|
|
|
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 Securities Exchange Act of 1934 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 adequate and effective to ensure that material information
relating to the Company and its consolidated subsidiaries would be made known
to
them by others within those entities, particularly during the period in which
this quarterly report on Form 10-Q was being prepared.
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 and procedures subsequent
to the date of our evaluation nor any significant deficiencies or material
weaknesses in such disclosure controls and procedures requiring corrective
actions.
PART
II - OTHER INFORMATION
ITEM
1. LEGAL PROCEEDINGS
During
the quarter ended March 31, 2006, there were no significant developments in
the
Company’s legal proceedings. For a detailed discussion of the Company’s legal
proceedings, please refer to Note 7 herein, and the Company’s Annual Report on
Form 10-K for the fiscal year ended September 30, 2005.
ITEM
1A. RISK FACTORS
There
are
no material changes from the risk factors previously disclosed in the Company’s
Form 10-K for the year ended September 30, 2005.
ITEM
2. UNREGISTERED
SALES OF EQUITY SECURITIES
AND USE OF PROCEEDS
In
January 2006, the Company completed a
financing transaction under which certain new investors made a $2.0 million
investment in the Company by purchasing an aggregate of the following: (i)
$1.0
million
of the
Company’s newly created Series B Preferred Stock, which has a 10% dividend rate
and is convertible into Common Stock at a price of $.75 per share, and (ii)
11%
convertible promissory notes in the principal amount of $1.0
million,
which
are
convertible into Common Stock at a price of $1.00 per share
with
warrants
to purchase an aggregate of 300,000 shares of Common Stock at an exercise price
of $1.00 per share.
The
convertible promissory notes mature in January 2011, and have a stated interest
rate of 11% per annum. The Company granted 300,000 warrants to acquire shares
of
common stock to the note holders, and the fair value of the warrants was
calculated using the Black-Scholes Option Valuation Model. The Company recorded
a debt discount of approximately $187,000 that will be charged to interest
expense over the life of the debt.
The
investment by the New Investors included $1.7 million by St. Cloud, and an
aggregate of $300,000 by two unrelated investors. Marshall S. Geller, the Senior
Managing Member
of
SCGP,
LLC, the General Partner of St. Cloud,
became a
member of the Board of Directors of the
Company
simultaneous with the closing of the New Transaction. The
Company incurred legal fees and other costs related to this capital transaction,
in the amount of $56,000. The Company capitalized one-half of the fees to
deferred financing costs that will be amortized to interest expense over the
life of the convertible promissory notes and one-half of the fees were charged
to paid-in capital.
In
January 2006, the
Company used $1.0 million of the proceeds from the above private placement
to
pay in full $1.0 million of promissory notes held by two unrelated note holders
that had a maturity date of July 31, 2007.
In
March
2006, the Company issued 159,090 shares of the Company’s common stock to an
unaffiliated party for $175,000. The proceeds from the private placement were
used to retire $175,000 of the Company’s promissory notes that were due to
mature in January 2007.
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 15, 2006. 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 Marshall S. Geller as a Class I Director to the Board of Directors
of the Company was as follows:
|
|
|
|
Withhold
|
|
|
|
For
|
|
Authority
|
|
In
Person
|
|
|
444,362
|
|
|
—
|
|
By
Proxy
|
|
|
5,935,358
|
|
|
652,582
|
|
Total
|
|
|
6,379,720
|
|
|
652,582
|
|
The
number of shares voted “for” and “withhold authority” in connection with the
election of Robert J. Rosan as a Class II Director to the Board of Directors
of
the Company was as follows:
|
|
|
|
Withhold
|
|
|
|
For
|
|
Authority
|
|
In
Person
|
|
|
444,362
|
|
|
—
|
|
By
Proxy
|
|
|
6,561,511
|
|
|
26,429
|
|
Total
|
|
|
7,005,873
|
|
|
26,429
|
|
The
number of shares voted “for” and “withhold authority” in connection with the
election of Norman J. Kurlan as a Class II Director to the Board of Directors
of
the Company was as follows:
|
|
|
|
Withhold
|
|
|
|
For
|
|
Authority
|
|
In
Person
|
|
|
444,362
|
|
|
—
|
|
By
Proxy
|
|
|
5,933,312
|
|
|
654,628
|
|
Total
|
|
|
6,377,674
|
|
|
654,628
|
|
The
terms
of Mark Goldwasser, Gary A. Rosenberg and Peter Rettman, Class III 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 change the name of
the Company from Olympic Cascade Financial Corporation to National Holdings
Corporation was as follows:
|
|
For
|
|
Against
|
|
Abstain
|
|
In
Person
|
|
|
444,362
|
|
|
—
|
|
|
|
|
By
Proxy
|
|
|
6,585,326
|
|
|
514
|
|
|
100
|
|
Total
|
|
|
7,029,688
|
|
|
514
|
|
|
100
|
|
3. The
number of shares voted “for”, “against” and “abstain” in connection with the
amendment to the Company’s Certificate of Designation to decrease the conversion
price of the Company’s Series A Preferred Stock to $1.25 per share from $1.50
per share was as follows:
|
|
For
|
|
Against
|
|
Abstain
|
|
In
Person
|
|
|
444,362
|
|
|
|
|
|
|
|
By
Proxy
|
|
|
4,593,539
|
|
|
68,736
|
|
|
766
|
|
Total
|
|
|
5,037,901
|
|
|
68,736
|
|
|
766
|
|
4. The
number of shares voted “for”, “against” and “abstain” in connection with the
approval of the Company's 2006 Stock Option Plan was as follows:
|
|
For
|
|
Against
|
|
Abstain
|
|
In
Person
|
|
|
444,362
|
|
|
|
|
|
|
|
By
Proxy
|
|
|
3,966,575
|
|
|
695,766
|
|
|
700
|
|
Total
|
|
|
4,410,937
|
|
|
695,766
|
|
|
700
|
|
5. 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, 2006 was as
follows:
|
|
For
|
|
Against
|
|
Abstain
|
|
In
Person
|
|
|
444,362
|
|
|
|
|
|
|
|
By
Proxy
|
|
|
6,575,235
|
|
|
12,305
|
|
|
400
|
|
Total
|
|
|
7,019,597
|
|
|
12,305
|
|
|
400
|
|
ITEM
5. OTHER INFORMATION
None.
ITEM
6. EXHIBITS
|
Certificate
of Amendment to the Certificate of Incorporation, filed with the
Secretary
of State of the State of Delaware on March 15,
2006.
|
|
Certificate
of Amendment to the Certificate of Designation of Series A Preferred
Stock, filed with the Secretary of State of the State of Delaware
on March
15, 2006.
|
10.50* |
Employment
Agreement dated as of March 15, 2006 between the Company and Mark
Goldwasser.
|
10.51 |
Securities
Purchase Agreement dated as of March 17,
2006.
|
|
Chief
Executive Officer’s Certificate pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.
|
|
Chief
Financial Officer’s Certificate pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.
|
|
Chief
Executive Officer’s Certificate pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
|
|
Chief
Financial Officer’s Certificate pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
|
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.
NATIONAL
HOLDINGS CORPORATION AND SUBSIDIARY
October
25, 2006
Mark
Goldwasser
President
and Chief Executive Officer
October
25, 2006
Robert
H.
Daskal
Chief
Financial Officer