UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
Washington,
D.C. 20549
FORM
10-K
ANNUAL
REPORT PURSUANT TO SECTION 13 OR 15(d)
OF
THE
SECURITIES EXCHANGE ACT OF 1934
For
the
Fiscal Year Ended
September
30, 2006
Commission
File No: 001-12629
NATIONAL
HOLDINGS CORPORATION
(Exact
Name of Registrant as specified in its charter)
Delaware
|
36-4128138
|
(State
or other jurisdiction of
|
(I.R.S.
Employer
|
incorporation
or organization)
|
Identification
No.)
|
875
North Michigan Avenue, Suite 1560, Chicago, IL 60611
(Address,
including zip code, of principal executive offices)
Registrant's
telephone number, including area code: (312) 751-8833
Securities
registered pursuant to Section 12(b) of the Act: None
Securities
registered pursuant to Section 12(g) of the Act: Common
Stock, $.02 par value
(Title
of
class)
Indicate
by check mark whether the registrant is a well-known seasoned issuer, as defined
in Rule 405 of the Securities Act. YES
o
NO
x
Indicate
by check mark whether the registrant is not required to file reports pursuant
to
Section 13 or 15(d) of the Act. YES
o
NO
x
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 check mark if disclosure of delinquent filers pursuant to Item 405 of
Regulation S-K of this chapter is not contained herein, and will not be
contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form
10-K or any amendment to this Form 10-K. o
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer or a non-accelerated filer (see definition of “accelerated
filer and large accelerated filer” in Rule 12b-2 of the Exchange Act (check
one)). Large Accelerated o Filer
Accelerated
Filer o Non-Accelerated
Filer x
Indicate
by check mark whether the registrant is a shell company (as defined in Exchange
Act Rule 12b-2). YES
o
NO
x
As
of
March 31, 2006, the aggregate market value of voting and non-voting common
equity held by non-affiliates of the registrant, based on the closing sales
price for the registrant's common stock, as quoted on the Over-the-Counter
Bulletin Board was approximately $8,000,000 (calculated by excluding shares
owned beneficially by directors and officers). As
of
December 5, 2006 there were 5,238,187 shares of the registrant's common stock
outstanding.
DOCUMENTS
INCORPORATED BY REFERENCE
Portions
of the Company’s Proxy Statement filed with the Securities and Exchange
Commission (the “SEC”) in connection with the Company’s Annual Meeting of
Shareholders to be held on or about March 13, 2007 (the “Company’s 2007 Proxy
Statement”)
are incorporated by reference into Part III hereof.
PART
I
Item
1. BUSINESS
Statements
made in this report that relate to future plans, events, financial results
or
performance are forward-looking statements as defined under the Private
Securities Litigation Reform Act of 1995. These statements are based upon
current information and expectations. Actual results may differ materially
from
those anticipated as a result of certain risks and uncertainties. For details
concerning these and other risks and uncertainties, see Part I,
Item 1A, “Risk Factors” of this report, as well as the Company’s other
reports on Forms 10-K, 10-Q and 8-K subsequently filed with the SEC from
time to time. Readers are cautioned not to place undue reliance on these
forward-looking statements, which speak only as of the date hereof. The Company
undertakes no obligation to republish revised forward-looking statements to
reflect events or circumstances after the date hereof or to reflect the
occurrence of unanticipated events.
General
National
Holdings Corporation, a Delaware corporation organized in 1996 (“National
Holdings” or the
“Company”), is
a
financial services organization operating through its wholly owned subsidiary,
National Securities Corporation, a Washington corporation organized in 1947
(“National Securities”). National Securities conducts a national securities
brokerage business through its main offices in Seattle, Washington and New
York,
New York, as well as 41 other branch offices located throughout the country,
and
one office outside the country. National Securities’ business includes
securities brokerage for individual and institutional clients, market-making
trading activities, asset management and corporate finance services.
On
March
15, 2006, the Company changed its name from “Olympic Cascade Financial
Corporation” to “National Holdings Corporation.”
National
Securities provides a broad range of securities brokerage and investment
services to a diverse retail and institutional clientele, as well as corporate
finance and investment banking services to corporations and businesses. National
Securities’ brokers operate as independent contractors. A registered
representative who becomes an affiliate of National Securities establishes
his
own office and is responsible for the payment of expenses associated with the
operation of such office, including rent, utilities, furniture, equipment,
stock
quotation machines and general office supplies. In return, the registered
representative is entitled to retain a higher percentage of the commissions
generated by his sales than a registered representative at a traditional
employee-based brokerage firm. This arrangement allows National Securities
to
operate with a reduced amount of fixed costs and lowers the risk of operational
losses for non-production.
The
Company formed a new wholly owned subsidiary, National Insurance
Corporation,
a
Washington corporation (“National Insurance”) in
the
third quarter of fiscal year 2006. National Insurance will provide fixed
insurance products to its clients, including life insurance, disability
insurance, long term care insurance and fixed annuities. National Insurance
is
in the process of completing the requisite state registrations, and has not
yet
commenced active business operations.
Clearing
Relationships
In
December 2003, the Company engaged in discussions with the NASD relating to
the
Security Agreement between National Securities and its then current clearing
firm, First Clearing
Corporation (“First Clearing”), a wholly owned subsidiary of Wachovia
Corporation,
and its
effect on the computation of National Securities’ 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 Securities’ 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 Securities and First
Clearing was terminated. Furthermore, First Clearing forgave payment of an
additional
$375,000
loan that was due to be paid in January 2004, resulting in a $375,000 gain
on
extinguishments of debt in the first quarter of fiscal year 2004.
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 gains on
extinguishments of debt of approximately $756,000 in the second quarter of
fiscal year 2004. Additionally, National Securities and First Clearing mutually
agreed to terminate their clearing relationship.
In
June
2004, National Securities entered into an agreement with Fiserv Securities,
Inc.
(“Fiserv”) to clear its brokerage business. The conversion from First Clearing
to Fiserv was completed in the first week of October 2004. As part of this
transaction, Fiserv provided National Securities with an $800,000 conversion
assistance payment, $250,000 of which was paid upon execution of the clearing
agreement, $250,000 of which was paid in mid-August 2004, and $300,000 of which
was paid in October 2004.
In
March
2005, National Financial Services LLC (“NFS”) acquired the clearing business of
Fiserv. In April 2005, National Securities entered into a clearing agreement
with NFS that became effective in June 2005. As part of this transaction, NFS
provided National Securities with a $1.0 million conversion fee credit to
reimburse the Company for the transitional, incremental costs incurred by
National Securities relating to the conversion of its clearing business to
NFS.
National Securities was paid $250,000 in May 2005, and the remaining $750,000
was paid in July 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 its clearing relationships has been beneficial to the Company’s cost
structure, liquidity and capital resources.
Recapitalization
Transactions
In
fiscal
year 2002, the Company completed a
series
of transactions under which certain new investors obtained a significant
ownership in the Company through a $1,572,500 investment in the Company and
by
purchasing a majority of shares held by Steven A. Rothstein and family, a former
Chairman, Chief Executive Officer and principal shareholder of the Company.
The
investors included Triage Partners LLC (“Triage”), an affiliate of Steven B.
Sands, the former Chairman of the Company, and One Clark LLC (“One Clark”), an
affiliate of Mark Goldwasser, the current Chairman, President and Chief
Executive Officer of the Company.
Triage
purchased an aggregate of 7,863 shares of the Company’s Series A Convertible
Preferred Stock, $.01 par value per share (the “Series A Preferred Stock”) from
the Company and One Clark purchased an aggregate of 7,862 shares of the
Company’s Series A Preferred Stock from the Company, which is convertible into
shares of the Company’s common stock, $.02 par value per share (the “Common
Stock”) at a price of $1.50 per share. The Company incurred $100,000 of legal
costs related to these capital transactions. In connection with the Investment
Transaction, Triage also purchased 285,000 shares of Common Stock from Mr.
Rothstein and his affiliates at a price of $1.50 per share. In
March
2004 the Company’s Board of Directors declared an in-kind dividend of Series A
Preferred Stock, resulting in the issuance to both Triage and One Clark of
an
additional 954 shares.
In
March
2005 the Company’s Board of Directors declared an in-kind dividend of Series A
Preferred Stock, resulting in the issuance to both Triage and One Clark of
an
additional 606 shares. In March 2006 the Company’s Board of Directors declared
an in-kind dividend of Series A Preferred Stock, resulting in the issuance
to
both Triage and One Clark of an additional 565 shares. As
of
September 30,
2006,
Triage and One Clark own 9,988 and 9,987 shares, respectively, of the Company’s
Series A Preferred Stock.
In
connection with Steven Sands' resignation as Chairman and as a director of
the
Company, on April 1, 2005, the Company issued to his designee, Triage, a
three-year warrant to purchase 50,000 shares of the Company’s common stock at
$1.25 per share. As a result of Mr. Sands' resignation, the options to
purchase
10,000
shares of common stock of which he was the beneficial owner expired on April
30,
2005.
In
August
2005, upon the maturity of previously issued notes, the Company and the two
note
holders entered into new note agreements providing for $1.0
million of notes
with a maturity date of July 31, 2007, together with warrants having an
expiration date of July 31, 2007 to purchase, in the aggregate, 200,000 shares
of common stock at a price of $1.25 per share. These
notes in the principal amount of $1.0 million were repaid in full in January
2006.
In
February 2006, upon
the
maturity of a previously issued secured demand note, National
Securities and the holder entered into a new $1.0 million secured demand note
collateral
agreement with
a
maturity date of March 1, 2007. The holder also entered into a warrant agreement
to
purchase 150,000 shares of common stock at a price of $1.25 per share, with
an expiration
date of July 31, 2007.
Financial
Information about Industry Segments
The
Company realized approximately 87% of its total revenues in fiscal year 2006
from brokerage services, principal and agency transactions, and investment
banking. During fiscal year 2006, brokerage services that consist of retail
brokerage commissions represent 68% of total revenues, principal and agency
transactions that consist of net dealer inventory gains represent 13% of total
revenues, and investment banking, that consist of corporate finance commissions
and fees, represent 19% of total revenues. For a more detailed analysis of
our
results by segment, see Item 7, “Management Discussion and Analysis of Financial
Condition and Results of Operation.”
Brokerage
Services
National
Securities is registered as a broker-dealer with the SEC and is licensed in
all
50 states, the District of Columbia and Puerto Rico. National Securities is
also
a member of the NASD, the Municipal Securities Rulemaking Board ("MSRB") and
the
Securities Investor Protection Corporation ("SIPC"). Brokerage
services to retail clients are provided through the Company's sales force of
investment executives at National Securities.
National
Securities’ goal is to meet the needs of its investment executives and their
clients. To foster individual service, flexibility and efficiency and to reduce
fixed costs, investment executives at National Securities act as independent
contractors responsible for providing their own office facilities, sales
assistants, telephone and quote service, supplies and other items of overhead.
Investment executives are given broad discretion to structure their own
practices and to specialize in different areas of the securities market subject
to supervisory procedures. In addition, investment executives have direct access
to research materials, management, traders, and all levels of support
personnel.
The
brokerage services provided by the investment executives at National Securities
include execution of purchases and sales of stocks, bonds, mutual funds,
annuities and various other securities for individual and institutional
customers. In fiscal year 2006, stocks represent approximately 87% of the
Company’s business, bonds represent approximately 3% of the Company’s business,
and mutual funds and annuities make up the remaining 10% of the Company’s
business. The percentage of each type of business varies over time as the
investment preferences of the Company’s customers change based on market
conditions.
Typically,
National Securities does not recommend particular securities to customers.
Recommendations to customers are determined by individual investment executives
based upon their own research and analysis, subject to applicable NASD customer
suitability standards. Most investment executives perform fundamental (as
opposed to technical) analysis. Solicitations may be by telephone, seminars
or
newsletters. Investment executives may request trading to acquire an inventory
position to facilitate sales to customers (subject to the investment executive's
own risk). Supervisory personnel review trading activity from inventory
positions to
ensure
compliance with applicable standards of conduct.
The
Company generally acts as an agent in executing customer orders to buy or sell
listed and over-the-counter securities in which it does not make a market,
and
charges commissions based on the services the Company provides to its customers.
In executing customer orders to buy or sell a security in which the Company
makes a market, the Company may sell to, or purchase from, customers at a price
that is substantially equal to the current inter-dealer market price plus or
minus a mark-up or mark-down. The Company may also act as agent and execute
a
customer's purchase or sale order with another broker-dealer market-maker at
the
best inter-dealer market price available and charge a commission. The Company
believes its mark-ups, mark-downs and commissions are competitive based on
the
services it provides to its customers. In each instance the commission charges,
mark-ups or mark-downs, are in compliance with guidelines established by the
NASD. In order to increase revenues generated from these activities, the Company
continuously seeks to hire additional registered representatives, and works
with
its current registered representatives to increase their productivity.
The
Company’s registered representatives are independent contractors, not salaried
employees. As such, payments to these persons are based on commissions
generated, and represent a variable cost rather than a fixed cost of operating
our business. Commission expense represents a significant majority of the
Company’s total expenses. The Company works to control its fixed costs in order
to achieve profitability based upon its expectation of market conditions and
the
related level of revenues. Additionally, the Company
requires
most of its registered
representatives to
absorb
their own overhead and expenses, thereby reducing the Company’s share of the
fixed costs.
Investment
executives in the brokerage industry are traditionally compensated on the basis
of set percentages of total commissions and mark-ups generated. Most brokerage
firms bear substantially all of the costs of maintaining their sales forces,
including providing office space, sales assistants, telephone service and
supplies. The average commission paid to investment executives in the brokerage
industry generally ranges from 30% to 50% of total commissions
generated.
Since
National Securities requires most of its investment executives to absorb their
own overhead and expenses, it pays a higher percentage of the net commissions
and mark-ups generated by its investment executives, as compared to traditional
investment executives in the brokerage industry. This arrangement also reduces
fixed costs and lowers the risk of operational losses for non-production.
National Securities’ operations include execution of orders, processing of
transactions, internal financial controls and compliance with regulatory and
legal requirements.
As
of
September 30, 2006, the Company had 89 employees and 278 independent
contractors. Of these totals, 333 were registered representatives. Persons
who
have entered into independent contractor agreements are not considered employees
for purposes of determining the Company’s obligations for federal and state
withholding, unemployment and social security taxes. The Company’s independent
contractor arrangements conform to accepted industry practice, and therefore,
the Company does not believe there is a material risk of an adverse
determination from the tax authorities that would have a significant effect
on
the Company's ability to recruit and retain investment executives or on the
Company's current operations and financial results of operations. No employees
are covered by collective bargaining agreements, and the Company believes its
relations are good with both its employees and independent
contractors.
The
Company’s business plan includes the growth of its retail and institutional
brokerage business, while recognizing the volatility of the financial markets.
The markets improved in the second half of fiscal year 2003 and the first half
of fiscal year 2004, but weakened again in the second half of fiscal year 2004,
and continued to be weak in fiscal year 2005. The markets improved again in
the
first half of fiscal year 2006, but weakened in the second half of fiscal year
2006. In response to these periodic slowdowns, the Company has periodically
adjusted certain business activities, including, proprietary trading and
market-making trading. The Company
believes
that consolidation within the industry is inevitable. Concerns attributable
to
the volatile market, and increased competition, result in a number of
acquisition opportunities being introduced to the Company. The Company is
focused on maximizing the profitability of its existing operations, while it
continues to seek selective strategic acquisitions.
Periodic
reviews of controls are conducted and administrative and operations personnel
meet frequently with management to review operating conditions. Compliance
and
operations personnel monitor compliance with applicable laws, rules and
regulations.
Principal
and Agency Transactions
The
Company buys and maintains inventories in equity securities as a "market-maker"
for sale of those securities to other dealers and to customers through National
Securities. The Company may also maintain inventories in corporate, government
and municipal debt securities for sale to customers. The level of National
Securities’ market-making trading activities will increase or decrease depending
on the relative strength or weakness of the broader markets. As of September
30,
2006, National Securities made markets in approximately 29 securities. National
Securities anticipates that it will engage in some market-making trading
activity in the future, which may include companies for which National
Securities managed or co-managed a public offering.
The
Company's trading departments require a commitment of capital. Most principal
transactions place the Company's capital at risk. Profits and losses are
dependent upon the skill of the traders, price movements, trading activity
and
the size of inventories. Since the Company's trading activities occasionally
may
involve speculative and thinly capitalized stocks, including stabilizing the
market for securities which it has underwritten, the Company imposes position
limits to reduce its potential for loss.
In
executing customer orders to buy or sell a security in which the Company makes
a
market, the Company may sell to, or purchase from, customers at a price that
is
substantially equal to the current inter-dealer market price plus or minus
a
mark-up or mark-down. The Company may also act as agent and execute a customer's
purchase or sale order with another broker-dealer market-maker at the best
inter-dealer market price available and charge a commission. The Company
believes its mark-ups, mark-downs and commissions are competitive based on
the
services it provides to its customers.
In
executing customer orders to buy or sell listed and over-the-counter securities
in which it does not make a market, the Company generally acts as an agent
and
charges commissions that the Company believes are competitive, based on the
services the Company provides to its customers.
Investment
Banking
National
Securities provides corporate finance and investment banking services, including
underwriting the sale of securities to the public and arranging for the private
placement of securities with investors. National Securities’ corporate finance
operations provide a broad range of financial and corporate advisory services,
including mergers and acquisitions, project financing, capital structure and
specific financing opportunities. National Securities also acts as an
underwriter of equity securities in both initial and secondary public offerings.
Corporate
finance revenues will vary depending on the number of private and public
offerings completed by National Securities during a particular fiscal
year.
Competition
The
Company is engaged in a highly competitive business. With respect to one or
more
aspects of its business, its competitors include member organizations of the
New
York Stock Exchange and other registered securities exchanges in the United
States and Canada, and members of the NASD. Many of these organizations
have
substantially
greater personnel and financial resources and more sales offices than the
Company. Discount brokerage firms affiliated with commercial banks provide
additional competition, as well as companies that provide electronic on-line
trading. In many instances, the Company is also competing directly for customer
funds with investment opportunities offered by real estate, insurance, banking,
and savings and loans industries. For a further discussion of risks facing
the
Company, please see “Risk Factors.”
Government
Regulation and Supervision
The
securities industry and National Securities’ business is subject to extensive
regulation by the SEC, NASD, state securities regulators and other governmental
regulatory authorities. The principal purpose of these regulations is the
protection of customers and the securities markets. The SEC is the federal
agency charged with the administration of the federal securities laws. Much
of
the regulation of broker-dealers, however, has been delegated to self-regulatory
organizations, such as the NASD, that adopt rules, subject to approval by the
SEC, which govern their members and conduct periodic examinations of member
firms' operations. Securities firms are also subject to regulation by state
securities commissions in the states in which they are registered. National
Securities is a registered broker-dealer with the SEC and a member of the NASD.
It is licensed to conduct activities as a broker-dealer in all 50 states, the
District of Columbia and Puerto Rico.
In
addition, as a registered broker-dealer and member of the NASD, National
Securities is subject to the SEC's Uniform
Net Capital Rule 15c3-1,
which
is designed to measure the general financial integrity and liquidity of a
broker-dealer and requires
the maintenance of minimum net capital.
Net
capital is defined as the net worth of a broker-dealer subject to certain
adjustments. In computing net capital, various adjustments are made to net
worth
that exclude assets not readily convertible into cash. Additionally, the
regulations require that certain assets, such as a broker-dealer's position
in
securities, be valued in a conservative manner so as to avoid over-inflation
of
the broker-dealer's 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
September 30, 2006, National Securities’ net capital exceeded the requirement by
$2,076,000.
The
Securities Exchange Act of 1934, as amended (the “Exchange Act”), and the NASD
Conduct Rules require National Securities to supervise the activities of its
investment executives. As part of providing such supervision, National
Securities maintains Written Supervisory Procedures and a Compliance Manual.
Compliance personnel and outside auditors conduct inspections of branch offices
periodically to review compliance with the Company's procedures. A registered
principal provides onsite supervision at each of the Company's larger offices.
The other offices (averaging two investment executives per office) are not
required by NASD rules to have a registered principal on site and are therefore
supervised by registered principals of National Securities. Designated
principals review customer trades to ensure compliance with the NASD Conduct
Rules including mark-up guidelines.
Venture
Capital
In
March
2001, the Company had its initial closing of Robotic Ventures Fund I, L.P.
(the
“Fund”), a venture capital fund dedicated to investing in companies engaged in
the business of robotics and artificial intelligence. The Fund raised a total
of
$5.2 million, $265,000 of which was capital directly invested by the Company
into the Fund, representing a 5.1% limited partnership interest in the Fund.
The
Company serves as the managing member of Robotic Ventures Group LLC, the general
partner of the Fund (the “Fund General Partner”). As the managing member of the
Fund General Partner, the Company is entitled to a 2% management fee paid by
the
Fund. Additionally, the Company invested $1,000, and owns 24.5% of the
limited
liability company membership interests in the Fund
General Partner, which is entitled to 20% of the profits generated by the Fund
after investors in the Fund receive the return of their invested
capital,
representing
a 4.9% indirect interest in the profits of the Fund. The Company keeps the
books
and records of the Fund and oversees the Fund’s investments. From time to time,
employees of National Securities will work with and advise the Fund’s investee
companies on its business plan, capital structure and future goals. The Company
has not been compensated or engaged to provide any management or advisory
services to the investee companies. In February 2002, due to a dramatic slowdown
in the technology venture markets, the Fund returned a majority of the
uninvested capital to the investors, representing approximately 50% of the
funds
raised, and no further management fees are to be paid. In fiscal year 2006,
the
Fund made an in-kind distribution of common stock of iRobot Corporation, one
of
its investee companies.
The
carrying amount of the Company’s investment in the Fund was $0 and $107,000 at
September 30, 2006 and September 30, 2005, respectively. The Company’s
investment in the Fund is accounted for in accordance with the equity method
of
accounting. The Company recognized income on this investment attributable to
the
in-kind stock distribution of $192,000 in fiscal year 2006, and no income or
loss on this investment in fiscal years 2005 and 2004, respectively. During
the
formation of the Fund, the Company incurred various start-up expenses that
were
subsequently reimbursed by the Fund.
Item
1A. RISK FACTORS
The
financial statements contained in this report and the related discussions
describe and analyze the Company’s financial performance and condition for the
periods indicated. For the most part, this information is historical. The
Company’s prior results, however, are not necessarily indicative of the
Company’s future performance or financial condition. The Company, therefore, has
included the following discussion of certain factors that could affect the
Company’s future performance or financial condition. These factors could cause
the Company’s future performance or financial condition to differ materially
from its prior performance or financial condition or from management’s
expectations or estimates of the Company’s future performance or financial
condition. These factors, among others, should be considered in assessing the
Company’s future prospects and prior to making an investment decision with
respect to the Company’s stock. The risks described below are not the only ones
facing us. Additional risks not presently known to us or that we currently
believe are immaterial may also impair our business
operations.
The
Company’s operations have generated reporting losses during certain fiscal
years.
Although
the Company was profitable in fiscal years 2006 and 2004, it reported losses
of
approximately $1,183,000, $843,000, $3.4 million and $7.9 million in fiscal
years 2005, 2003, 2002 and 2001, respectively. There is no assurance that the
Company will be profitable in the future. The Company’s losses were primarily
attributable to the market slowdowns and reduced trading activity and
volatility, and the cessation of its market making activities. If
we are
unable to achieve or sustain profitability, we may need to curtail, suspend
or
terminate certain operations.
The
Company may require additional financing.
In
order
for the Company to have the opportunity for future success and profitability,
it
periodically may need to obtain additional financing, either through borrowings,
public offerings, private offerings, or some type of business combination (e.g.,
merger, buyout, etc.). The Company has actively pursued a variety of funding
sources, and has consummated certain transactions in
order
to address its capital requirements. The
Company may need to seek to raise additional capital through other available
sources, including borrowing additional funds from third parties
and
there can be no assurance that it will be successful in such pursuits.
Additionally, the issuance of new securities to raise capital will cause the
dilution of shares held by current stockholders. Accordingly,
if we are unable to generate adequate cash from operations, and if we are unable
to find sources of funding, it would have an adverse impact on our liquidity
and
operations.
If
the Company is unable to pay its outstanding debt obligations when due, the
Company’s operations may be materially adversely affected.
At
September 30, 2006, we had total indebtedness of $2,850,000, of which $1,850,000
matures during fiscal year 2007. The Company cannot assure you that our
operations will generate funds sufficient to repay our existing debt obligations
as they come due. The Company’s failure to repay its indebtedness and make
interest payments as required by our debt obligations, could have a material
adverse affect on the Company’s operations.
Because
the common stock may be subject to "penny stock" rules, the market for the
common stock may be limited.
If
the
common stock becomes subject to the Securities and Exchange Commission’s (the
“SEC”) penny stock rules, broker-dealers may experience difficulty in completing
customer transactions and trading activity in the Company’s securities may be
adversely affected. If at any time the common stock has a market price per
share
of less than $5.00, and the Company does not have net tangible assets of at
least $2,000,000 or average revenue of at least $6,000,000 for the preceding
three years, transactions in the common stock may be subject to the “penny
stock” rules promulgated under the Exchange Act. Under these rules,
broker-dealers who recommend such securities to persons other than institutional
accredited investors:
|
·
|
must
make a special written suitability determination for the
purchaser;
|
|
·
|
receive
the purchaser’s written agreement to a transaction prior to
sale;
|
|
·
|
provide
the purchaser with risk disclosure documents which identify certain
risks
associated with investing in “penny stocks” and which describe the market
for these “penny stocks” as well as a purchaser’s legal remedies;
and
|
|
·
|
obtain
a signed and dated acknowledgment from the purchaser demonstrating
that
the purchaser has actually received the required risk disclosure
document
before a transaction in a “penny stock” can be
completed.
|
If
the
common stock becomes subject to these rules, broker-dealers may find it
difficult to effectuate customer transactions and trading activity in the
Company’s securities may be adversely affected. As a result, the market price of
the Company’s securities may be depressed, and stockholders may find it more
difficult to sell the Company’s securities.
National
Securities is subject to various risk associated with the securities
industry.
As
a
securities broker-dealer, National Securities is subject to uncertainties that
are common in the securities industry. These uncertainties include:
|
· |
the
volatility of domestic and international financial, bond and stock
markets;
|
|
· |
extensive
governmental regulation;
|
|
· |
substantial
fluctuations in the volume and price level of securities; and
|
|
· |
dependence
on the solvency of various third parties.
|
As
a
result, revenues and earnings may vary significantly from quarter to quarter
and
from year to year. In periods of low volume, profitability is impaired because
certain expenses remain relatively fixed. In the event of a market downturn,
our
business could be adversely affected in many ways. Our revenues are likely
to
decline in such circumstances and, if we were unable to reduce expenses at
the
same pace, our profit margins would erode.
Failure
to comply with net capital requirements could subject us to sanctions imposed
by
the SEC or the NASD.
National
Securities is subject to the SEC's net capital rule which requires the
maintenance of minimum net capital. We compute net capital under the alternate
method permitted by the net capital rule. National Securities is required to
maintain 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. The
net
capital rule is designed to measure the general financial integrity and
liquidity of a broker-dealer. Compliance with the net capital rule limits those
operations of broker-dealers that require the intensive use of their capital,
such as underwriting commitments and principal trading activities. The rule
also
limits the ability of securities firms to pay dividends or make payments on
certain indebtedness, such as subordinated debt, as it matures. The NASD may
enter the offices of a broker-dealer at any time, without notice, and calculate
the firm's net capital. If the calculation reveals a deficiency in net capital,
the NASD may immediately restrict or suspend certain or all of the activities
of
a broker-dealer. National Securities may not be able to maintain adequate net
capital, or its net capital may fall below requirements established by the
SEC,
and subject us to disciplinary action in the form of fines, censure, suspension,
expulsion or the termination of business altogether. In
addition, if these net capital rules are changed or expanded, or if there is
an
unusually large charge against net capital, operations that require the
intensive use of capital would be limited. A large operating loss or charge
against net capital could adversely affect our ability to expand or even
maintain our present levels of business,
which
could have a material adverse effect on our business. In addition, we may become
subject to net capital requirements in other foreign jurisdictions in which
we
currently operate or which we may enter. We cannot predict our future capital
needs or our ability to obtain additional financing.
The
Company is exposed to risks associated with its underwriting
activities.
Participation
in an underwriting syndicate or a selling group involves both economic and
regulatory risks. An underwriter may incur losses if it is unable to resell
the
securities it is committed to purchase, or if it is forced to liquidate its
commitment at less than the purchase price. In addition, under federal
securities laws, other laws and court decisions with respect to underwriters'
liabilities and limitations on the indemnification of underwriters by issuers,
an underwriter is subject to substantial potential liability for misstatements
or omissions of material facts in prospectuses and other communications with
respect to such offerings. Acting as a managing underwriter increases these
risks. Underwriting commitments constitute a charge against net capital and
our
ability to make underwriting commitments may be limited by the requirement
that
we must at all times be in compliance with the net capital rule.
The
Company’s business could be adversely affected by a breakdown in the financial
markets.
As
a
securities broker-dealer, National Securities’ business is materially affected
by conditions in the financial markets and economic conditions generally, both
in the United States and elsewhere around the world. Many factors or events
could lead to a breakdown in the financial markets including war, terrorism,
natural catastrophes and other types of disasters. These types of events could
cause people to begin to lose confidence in the financial markets and their
ability to function effectively. If the financial markets are unable to
effectively prepare for these types of events and ease public concern over
their
ability to function, the Company’s revenues are likely to decline and adversely
affect its operations.
Market
fluctuations may reduce the Company’s revenues and
profitability.
The
Company’s revenue and profitability may be adversely affected by declines in the
volume of securities transactions and in market liquidity. Additionally, the
Company’s profitability may be adversely affected by losses from the trading or
underwriting of securities or failure of third parties to meet commitments.
National
Securities acts as a market maker in publicly traded common stocks. In market
making transactions, the Company undertakes the risk of price changes or being
unable to resell the common stock it holds or being unable to purchase the
common stock it has sold. These risks are heightened by the illiquidity of
many
of the common stocks the Company trades and/or makes a market. Any losses from
the Company trading activities, including as a result of unauthorized trading
by
the Company’s employees, could have a material adverse effect on the Company’s
business, financial condition, results of operations or cash flows.
Lower
securities price levels may also result in a reduced volume of transactions,
as
well as losses from declines in the market value of common stocks held for
trading purposes. During periods of declining volume and revenue, the Company’s
profitability would be adversely affected. Declines in market values of common
stocks and the failure of issuers and third parties to perform their obligations
can result in illiquid markets.
Competition
with other financial firms may have a negative effect on the Company’s
business.
The
Company competes directly with national and regional full-service broker-dealers
and a broad range of other financial service firms, including banks and
insurance companies. Competition has increased as smaller securities firms
have
either ceased doing business or have been acquired by or merged into other
firms. Mergers and acquisitions have increased competition from these firms,
many of which have significantly greater financial, technical, marketing and
other resources than the Company. Many of these firms offer their customers
more
products and research than currently offered by the Company. These competitors
may be able to respond more quickly to new or changing opportunities,
technologies and client requirements. The Company also faces competition from
companies offering discount and/or electronic brokerage services, including
brokerage services provided over the Internet, which the Company is currently
not offering and does not intend to offer in the foreseeable future. These
competitors may have lower costs or provide more services, and may offer their
customers more favorable commissions, fees or other terms than those offered
by
the Company. To the extent that issuers and purchasers of securities transact
business without the assistance of the Company, the Company’s operating results
could be adversely affected.
There
are risks associated with our stock trading on the OTCBB rather than on a
national exchange.
There
may
be significant consequences associated with our stock trading on the OTCBB
rather than a national exchange. The effects of not being able to list our
securities on a national exchange include:
|
·
|
limited
release of the market price of our securities;
|
|
·
|
limited
interest by investors in our securities;
|
|
·
|
volatility
of our stock price due to low trading volume;
|
|
·
|
increased
difficulty in selling our securities in certain states due to “blue sky”
restrictions; and
|
|
·
|
limited
ability to issue additional securities or to secure additional
financing.
|
The
Company is currently subject to extensive securities regulation and the failure
to comply with these regulations could subject the Company to penalties or
sanctions.
The
securities industry and the Company’s business are subject to extensive
regulation by the SEC, state securities regulators and other governmental
regulatory authorities. The Company is also regulated by industry
self-regulatory organizations, including the NASD and the MSRB. National
Securities is a registered broker-dealer with the SEC and a member firm of
the
NASD. Broker-dealers are subject to regulations which cover all aspects of
the
securities business, including sales methods and supervision, trading practices
among broker-dealers, use and safekeeping of customers’ funds and securities,
capital structure of securities firms, record keeping, and the conduct of
directors, officers and employees. Changes
in
laws
or regulations or in governmental policies could cause us to change the way
we
conduct our business, which could adversely affect us.
Compliance
with many of the regulations applicable to the Company involves a number of
risks, particularly in areas where applicable regulations may be subject to
varying interpretation. These regulations often serve to limit the Company’s
activities, including through net capital, customer protection and market
conduct requirements. If the Company is found to have violated an applicable
regulation, administrative or judicial proceedings may be initiated against
the
Company that may result in a censure, fine, civil penalties, issuance of
cease-and-desist orders, the deregistration or suspension of the Company’s
broker-dealer activities, the suspension or disqualification of the Company’s
officers or employees, or other adverse consequences. The imposition of any
of
these or other penalties could have a material adverse effect on the Company’s
operating results and financial condition.
The
Company relies on clearing brokers and unilateral termination of the agreements
with these clearing brokers could disrupt the Company’s
business.
The
Company is an introducing brokerage firm, using third party clearing brokers
to
process its securities transactions and maintain customer accounts on a fee
basis. The clearing brokers also provide billing services, extend credit and
provide for control and receipt, custody and delivery of securities. The
Company’s broker-dealer depends on the operational capacity and ability of the
clearing brokers for the orderly processing of transactions. In addition, by
engaging the processing services of a clearing firm, the Company is exempt
from
some capital reserve requirements and other regulatory requirements imposed
by
federal and state securities laws. If the clearing agreements are unilaterally
terminated for any reason, the Company would be forced to find alternative
clearing firms without adequate time to negotiate the terms of a new clearing
agreement and without adequate time to plan for such change. There can be no
assurance that if there were a unilateral termination of its clearing agreement
that the Company would be able to find an alternative clearing firm on
acceptable terms to them or at all.
In
April
2005, National Securities entered into a clearing agreement with NFS that became
effective in June 2005. 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 permits its clients to purchase securities on a margin basis or sell
securities short, which means that the clearing firm extends credit to the
client secured by cash and securities in the client’s account. During periods of
volatile markets, the value of the collateral held by the clearing brokers
could
fall below the amount borrowed by the client. If margin requirements are not
sufficient to cover losses, the clearing brokers sell or buy securities at
prevailing market prices, and may incur losses to satisfy client obligations.
The Company’s has agreed to indemnify the clearing brokers for losses they incur
while extending credit to its clients.
Credit
risk exposes the Company to losses caused by financial or other problems
experienced by third parties.
The
Company is exposed to the risk that third parties that owe it money, securities
or other assets will not perform their obligations. These parties include
trading counterparts, customers, clearing agents, exchanges, clearing houses,
and other financial intermediaries as well as issuers whose securities the
Company holds. These parties may default on their obligations owed to the
Company due to bankruptcy, lack of liquidity, operational failure or other
reasons. This risk may arise, for example, from holding securities of third
parties, executing securities trades that fail to settle at the required time
due to non-delivery by the counterparty or systems failure by clearing agents,
exchanges, clearing houses or other financial intermediaries, and extending
credit to clients through bridge or margin loans or other arrangements.
Significant failures by third parties to perform their obligations owed to
the
Company could adversely affect
the
Company’s revenues and perhaps the Company’s ability to borrow in the credit
markets.
Our
risk management policies and procedures may leave us exposed to unidentified
risks or an unanticipated level of risk.
The
policies and procedures we employ to identify, monitor and manage risks may
not
be fully effective. Some methods of risk management are based on the use of
observed historical market behavior. As a result, these methods may not
accurately predict future risk exposures, which could be significantly greater
than the historical measures indicate. Other risk management methods depend
on
evaluation of information regarding markets, clients or other matters that
are
publicly available or otherwise accessible by us. This information may not
be
accurate, complete, up-to-date or properly evaluated. Management of operational,
legal and regulatory risks requires, among other things, policies and procedures
to properly record and verify a large number of transactions and events. We
cannot assure that our policies and procedures will effectively and accurately
record and verify this information.
We
seek
to monitor and control our risk exposure through a variety of separate but
complementary financial, credit, operational and legal reporting systems. We
believe that we are able to evaluate and manage the market, credit and other
risks to which we are exposed. Nonetheless, our ability to manage risk exposure
can never be completely or accurately predicted or fully assured. For example,
unexpectedly large or rapid movements or disruptions in one or more markets
or
other unforeseen developments could have a material adverse effect on our
results of operations and financial condition. The consequences of these
developments can include losses due to adverse changes in inventory values,
decreases in the liquidity of trading positions, higher volatility in earnings,
increases in our credit risk to customers as well as to third parties and
increases in general systemic risk.
Adverse
results of current litigation and potential securities law liability would
result in financial losses and divert management’s attention to
business.
Many
aspects of National Securities’ business involve substantial risks of liability.
There has been an increase in litigation and arbitration within the securities
industry in recent years, including class action suits seeking substantial
damages. National Securities is subject to potential claims by dissatisfied
customers, including claims alleging they were damaged by improper sales
practices such as unauthorized trading, sale of unsuitable securities, use
of
false or misleading statements in the sale of securities, mismanagement and
breach of fiduciary duty. National Securities may be liable for the unauthorized
acts of its retail brokers if it fails to adequately supervise their conduct.
As
an underwriter, National Securities may be subject to substantial potential
liability under federal and state law and court decisions, including liability
for material misstatements and omissions in securities offerings. National
Securities may be required to contribute to a settlement, defense costs or
a
final judgment in legal proceedings or arbitrations involving a past
underwriting and in actions that may arise in the future. National Securities
carries “Errors and Omissions” insurance to protect against arbitrations;
however, the policy is limited in items and amounts covered and there can be
no
assurance that it will cover a particular complaint. The adverse resolution
of
any legal proceedings involving the Company and/or National Securities could
have a material adverse effect on the Company’s business, financial condition,
results of operations or cash flows.
The
Company depends on senior
employees and the loss of their services could harm our
business.
The
Company depends on the continued services of its management team, particularly
Mark Goldwasser, the Company’s Chairman, President and Chief Executive Officer,
as well as its ability to hire additional members of management, and to retain
and motivate its other officers and key employees. We may not be able to find
an
appropriate replacement for Mr. Goldwasser or any other executive officer if
the
need should arise. The Company maintains a $2.0 million life insurance policy
on
Mr. Goldwasser. Due to the regulated nature of some of our businesses, some
of
our executive officers, or other key personnel could become
subject
to suspensions or other limitations on the scope of their services to us from
time to time. If we lose the services of any executive officers or other key
personnel, we may not be able to manage and grow our operations effectively,
enter new brokerage markets or develop new products.
The
Company faces significant competition for registered representatives.
We
are
dependent upon the independent contractor model for our retail brokerage
business. We are exposed to the risk that a large group of independent
contractors could leave the firm or decide to affiliate with another firm and
that we are unable to recruit suitable replacements. A loss of a large group
of
our independent contractors could have a material adverse impact on our ability
to generate revenue in the retail brokerage business.
The
price of our common stock is volatile.
The
price
of our common stock has fluctuated substantially (See Part II, Item 5). The
market price of our common stock may be highly volatile as a result of factors
specific to the Company and the securities markets in general. Factors affecting
volatility may include: variations in the Company’s annual or quarterly
financial results or those of its competitors; economic conditions in general;
and changes in applicable laws or regulations, or their judicial or
administrative interpretations affecting the Company or its subsidiary or the
securities industry. In addition, volatility of the market price of our common
stock is further affected by its thinly traded nature.
We
have restricted shares outstanding that may depress the price of the common
stock.
As
of
September 30, 2006, of the 5,223,968 outstanding shares of our common stock,
approximately 1,100,000 shares may be deemed restricted shares and, in the
future, may be sold in compliance with Rule 144 under the Securities Act. Rule
144 provides that a person holding restricted securities for one year may sell
shares in brokerage transactions, subject to limitations based on the number
of
shares outstanding and trading volume. A person who is not affiliated with
us
and who has held restricted securities for two years is not subject to these
limitations as long as the other conditions of Rule 144 are met. Such sales
may
have a depressive effect on the price of our common stock in the open
market.
The
Company’s principal shareholders including our directors and officers control a
large percentage of our shares of common stock and can significantly influence
our corporate actions.
At
the
present time, the Company’s executive officers, directors and/or entities that
these individuals are affiliated with, and certain more than 5% shareholders,
own approximately 38% of our common stock, including shares of common stock
issuable
upon conversion of our Series A and Series B preferred stock and conversion
of
our notes, and excluding stock options and warrants. Accordingly,
these individuals and entities will be able to significantly influence most,
if
not all, of our corporate actions, including the election of directors, the
appointment of officers, and potential merger or acquisition
transactions.
We
will be subject to new requirements that we evaluate our internal controls
over
financial reporting under Section 404 of the Sarbanes-Oxley Act and other
corporate governance initiatives that may expose us to certain
risks.
Currently,
commencing September 30, 2007, we will be subject to the requirements of
Section 404 of the Sarbanes-Oxley Act and the SEC rules and
regulations that require an annual management report on our internal controls
over financial reporting, including, among other matters, management’s
assessment of the effectiveness of our internal control over financial
reporting, and an attestation report by our independent registered public
accounting firm addressing these assessments. The SEC is proposing to further
extend the compliance dates for non-accelerated filers.
We
cannot
be certain as to the timing of the completion of our evaluation, testing and
remediation actions or the impact of the same on our operations. If we are
not
able to implement the requirements of Section 404 in a timely manner or
with adequate compliance, we may be subject to sanctions or investigation by
regulatory authorities, including the SEC. Moreover, if we are unable to assert
that our internal control over financial reporting is effective in any future
period (or if our auditors are unable to express an opinion on the effectiveness
of our internal controls), we could lose investor confidence in the accuracy
and
completeness of our financial reports, which may have an a material adverse
effect on our Company.
Our
compliance with the Sarbanes-Oxley Act may require significant expenses and
management resources that would need to be diverted from our other operations
and could require a restructuring of our internal controls over financial
reporting. Any such expenses, time reallocations or restructuring could have
a
material adverse effect on our operations. The applicability of the
Sarbanes-Oxley Act to us could make it more difficult and more expensive for
us
to obtain director and officer liability insurance, and also make it more
difficult for us to attract and retain qualified individuals to serve on our
boards of directors, or to serve as executive officers.
We
do not expect to pay any dividends on our common stock in the foreseeable
future.
We
do not
anticipate that we will pay any dividends to holders of our common stock in
the
foreseeable future. Other than dividends paid on our Series A and Series B
preferred stock, we expect to retain all future earnings, if any, for investment
in our business. In addition, our Certificates of Designation setting forth
the
relative rights and preferences of our Series A and Series B preferred stock
limit our ability to pay dividends to the holders of our common
stock.
Item
1B. UNRESOLVED STAFF COMMENTS
None.
Item
2. PROPERTIES
The
Company owns no real property. Its corporate headquarters are shared with
National Securities in leased space in Chicago, Illinois and New York, New
York.
The Company leases office space in Boca Raton, Florida, and through its
subsidiary, the Company leases office space in Chicago, New York and Seattle,
Washington. Independent contractors individually lease the branch offices that
are operated by those independent contractors.
Leases
expire at various times through June 2012. The Company believes the rent at
each
of its locations is at current market rates.
Item
3. LEGAL PROCEEDINGS
The
NASD
was engaged in an industry-wide investigation of mutual fund trading activities.
National Securities is one of the numerous broker-dealers 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 approximate $600,000. Additionally,
the
Company is obligated to pay the fines imposed by the NASD on two executive
officers totaling $50,000 pursuant to its indemnification obligations. The
Company included the $650,000 in “Professional fees” in fiscal year 2004. The
unpaid balance of $84,000 and $187,000 at
September 30, 2006 and September 30, 2005, respectively, has
been
included in “Accounts Payable, Accrued Expenses and Other Liabilities” in the
accompanying consolidated
statements
of financial condition.
In
September 2006, the
former
chairman and chief executive officer of the Company, Steven A. Rothstein,
commenced an arbitration against the current chairman and chief executive
officer of the Company, Mark Goldwasser, in the matter Rothstein
et al. vs. Goldwasser,
NASD
No. 06-04000. Rothstein is alleging fraud and inequitable conduct relating
to his attempts to sell his investment in the Company in calendar year
2001, and is seeking approximately $5,750,000 in damages. The
Company is indemnifying Mr. Goldwasser in this action. The Company
and Mr. Goldwasser believe this action is without merit, and intends to
vigorously defend this action.
The
Company is also a defendant in various other arbitrations and administrative
proceedings, lawsuits and claims seeking
in the aggregate damages of approximately $1,800,000 to $2,000,000. The
Company
believes
such claims are substantially without merit, and estimates that its liability,
primarily for defense costs, will approximate $300,000 (exclusive of unspecified
punitive damages related to certain claims and inclusive of expected insurance
coverage). 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 September 30, 2006 and 2005, is $241,000 and $206,000 (primarily
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 other NASD related
expenses of $799,000, $790,000 and $1,424,000 for the fiscal years ended
September 30, 2006, 2005 and 2004, respectively.
Item
4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
There
were no matters submitted to a vote of security holders in the fourth quarter
of
fiscal year ended September 30, 2006.
PART
II
Item
5. MARKET FOR THE REGISTRANT'S COMMON STOCK, RELATED STOCKHOLDER
MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
Market
Information
On
March
20, 2006, our common stock commenced trading under the symbol “NHLD” on the
OTCBB reflecting the Company’s name change. Quotations
on the OTCBB reflect inter-dealer prices, without retail mark-up, mark-down
or
commission and may not necessarily represent actual transactions.
From
November 1, 2004 to March 17, 2006, our common stock traded on the OTCBB under
the symbol “OLYD”. Previously, the common stock traded on the AMEX under the
symbol “OLY”.
The
following table sets forth
the high
and low closing sales prices for the common stock as
reported on the AMEX for the period from October 1, 2004 to October 31, 2004,
and as reported on the OTCBB for the period from November 1, 2004 to
September 30, 2006.
Period
|
|
High
|
|
Low
|
|
|
|
|
|
October
1, 2004/December 31, 2004
|
|
$1.10
|
|
$0.41
|
January
1, 2005/March 31, 2005
|
|
$1.35
|
|
$0.85
|
April
1, 2005/June 30, 2005
|
|
$1.40
|
|
$0.95
|
July
1, 2005/September 30, 2005
|
|
$1.15
|
|
$0.70
|
October
1, 2005/December 31, 2005
|
|
$1.20
|
|
$0.53
|
January
1, 2006/March 31, 2006
|
|
$1.60
|
|
$0.75
|
April
1, 2006/June 30, 2006
|
|
$1.55
|
|
$1.05
|
July
1, 2006/September 30, 2006
|
|
$1.60
|
|
$1.20
|
The
closing price of the common stock on December 5, 2006, as quoted on the OTCBB,
was $1.19 per share.
Shareholders
As
of
September 30, 2006, the Company had approximately 1,000 shareholders, including
those shareholders holding stock in street name and trust accounts.
Dividends
Delaware
law authorizes the Company’s Board of Directors to declare and pay dividends
with respect to the common stock either out of its surplus (as defined in the
Delaware Corporation Law) or, in case there is no such surplus, out of its
net
profits for the fiscal year in which the dividend is declared and/or the
preceding fiscal
year; provided, however, that no dividend may be paid out of net profits unless
the Company’s capital exceeds the aggregate amount represented by the issued and
outstanding stock of all classes having a preference in the distribution of
assets. The
Company’s
ability
to pay dividends in the future also may be restricted by its operating
subsidiary's obligation to comply with the net capital requirements imposed
on
broker-dealers by the SEC and the NASD.
Prior to
the issuance of the Series A and Series B preferred stock, no shareholder held
preferential rights in liquidation. The Company has declared and paid cash
dividends on its Series B preferred stock in fiscal year 2006, and anticipates
that we will continue to do so in the coming fiscal year. We do not anticipate
that we will pay any dividends to holders of our common stock in the foreseeable
future.
The
holders of the Series A Convertible 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. In March 2005, the Company’s Board of Directors
declared an in-kind dividend in the aggregate of 2,143 shares of Series A
preferred stock, in payment of approximately $322,000 of dividends accrued
through March 31, 2005. 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. In March 2006, the
Company’s shareholders approved an amendment to decrease the conversion price of
the Series A preferred stock to $1.25 per share from $1.50 per share. At
September 30, 2006, the amount of accumulated dividends on the Company’s 35,316
issued and outstanding shares of Series A preferred stock was approximately
$159,000.
The
holders of the Company’s Series B Convertible preferred stock, convertible into
the Company’s common stock at $.75 per share, are entitled 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 August 2006, the Company’s Board of Directors declared a cash
dividend of $25,000 payable to the holders of the Series B preferred stock
that
was paid in October 2006.
Both
the
holders of the Company’s Series A and Series B Convertible preferred stock have
voting rights equal to the number of shares of common stock into which such
shares of preferred stock could be converted at a particular record
date.
Securities
Authorized for Issuance under Equity Compensation Plans
Item
12
of Part III contains information concerning securities authorized for issuance
under our equity compensation plans.
Item
6. SELECTED FINANCIAL DATA
Set
forth
below is the historical financial data with respect to the Company for the
fiscal years ended 2006, 2005, 2004, 2003 and 2002. This information has been
derived from, and should be read in conjunction with, the audited financial
statements, which appear elsewhere in this report. The financial data for the
fiscal year ended 2002 has been restated to reflect the discontinued operations
of the Company’s former subsidiary, WestAmerica Investment Group. The
information for the fiscal year 2002 has been revised to reflect the cumulative
dividends on the Series A Preferred Stock. All information is expressed in
thousands of dollars except for per share information.
|
|
2006
|
|
2005
|
|
2004
|
|
2003
|
|
2002
|
|
Net
revenues
|
|
$
|
58,727
|
|
$
|
45,730
|
|
$
|
62,460
|
|
$
|
50,158
|
|
$
|
42,002
|
|
Net
income (loss) from continuing
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
operations
|
|
|
595
|
|
|
(1,183
|
)
|
|
566
|
|
|
(843
|
)
|
|
(3,745
|
)
|
Preferred
stock dividends
|
|
|
(381
|
)
|
|
(290
|
)
|
|
(266
|
)
|
|
(250
|
)
|
|
(168
|
)
|
Net
income (loss) per common share
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
from
continuing operations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
0.04
|
|
|
(0.29
|
)
|
|
0.08
|
|
|
(0.34
|
)
|
|
(1.73
|
)
|
Diluted
|
|
|
0.04
|
|
|
(0.29
|
)
|
|
0.07
|
|
|
(0.34
|
)
|
|
(1.73
|
)
|
Weighted
average number of shares
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
used
in computing income (loss)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
per
share
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
5,146,422
|
|
|
5,024,643
|
|
|
3,580,446
|
|
|
3,175,315
|
|
|
2,255,449
|
|
Diluted
|
|
|
5,278,299
|
|
|
5,024,643
|
|
|
4,106,742
|
|
|
3,175,315
|
|
|
2,255,449
|
|
Total
assets
|
|
|
9,707
|
|
|
7,960
|
|
|
9,722
|
|
|
8,735
|
|
|
7,948
|
|
Total
liabilities
|
|
|
6,864
|
|
|
7,030
|
|
|
7,793
|
|
|
9,064
|
|
|
8,039
|
|
Stockholders’
equity (deficit)
|
|
|
2,843
|
|
|
930
|
|
|
1,929
|
|
|
(329
|
)
|
|
(91
|
)
|
Cash
dividends
|
|
|
46
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Item
7. 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 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 Item
1
above. Any forward-looking statements contained in or incorporated into this
Report speak only as of the date of this Report. The Company undertakes no
obligation to update publicly any forward-looking statement, whether as a result
of new information, future events or otherwise.
Critical
Accounting Policies and Estimates
The
SEC
recently issued proposed guidance for disclosure of critical accounting policies
and estimates. The Company’s most critical accounting policies relate to income
recognition, income taxes, and stock-based compensation. The SEC defines
“critical accounting estimates” as those that require application of
management’s most difficult, subjective or complex judgments, often as a result
of the need to make estimates about the effects of matters that are inherently
uncertain and may change in subsequent periods. In fiscal years 2006 and 2005,
the Company estimated its ability to collect the receivables due from its
registered representatives. These receivables are derived from debts owed to
the
Company and from money advanced to the registered representatives that may
be
forgiven over time based on the representatives’ affiliation with, and
production at, National Securities. The Company also estimated the amount of
reserves necessary to cover existing contingencies.
Results
of Operations
Fiscal
Year 2006 Compared with Fiscal Year 2005
The
Company’s fiscal year 2006 resulted in an increase in revenues, and a
comparatively lesser increase in expenses compared with fiscal year 2005. The
increase in revenues is primarily due to the completion of investment banking
transactions in fiscal
year 2006.
As
a
result, the Company reported net income of $595,000 compared with a net loss
of
$1,183,000 for the fiscal years 2006 and 2005, respectively. This represents
an
improvement of $1,778,000 from the prior year.
|
|
Fiscal
Year
|
|
Increase
(Decrease)
|
|
|
|
2006
|
|
2005
|
|
Amount
|
|
Percent
|
|
Commissions
|
|
$
|
32,140,000
|
|
$
|
33,134,000
|
|
$
|
(994,000
|
)
|
|
(3
|
%)
|
Proprietary
trading
|
|
|
7,391,000
|
|
|
5,646,000
|
|
|
1,745,000
|
|
|
31
|
%
|
Market
making
|
|
|
323,000
|
|
|
—
|
|
|
323,000
|
|
|
n/a
|
|
Mark-ups
and mark-downs
|
|
|
124,000
|
|
|
64,000
|
|
|
60,000
|
|
|
94
|
%
|
Net
dealer inventory gains
|
|
|
7,838,000
|
|
|
5,710,000
|
|
|
2,128,000
|
|
|
37
|
%
|
Investment
banking
|
|
|
11,323,000
|
|
|
528,000
|
|
|
10,795,000
|
|
|
2045
|
%
|
Interest
and dividends
|
|
|
2,891,000
|
|
|
2,739,000
|
|
|
152,000
|
|
|
6
|
%
|
Transfer
fees and clearance services
|
|
|
3,336,000
|
|
|
3,097,000
|
|
|
239,000
|
|
|
8
|
%
|
Other
|
|
|
1,199,000
|
|
|
522,000
|
|
|
677,000
|
|
|
130
|
%
|
|
|
$
|
58,727,000
|
|
$
|
45,730,000
|
|
$
|
12,997,000
|
|
|
28
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
revenues increased $12,997,000, or 28%, in fiscal year 2006 to $58,727,000
from
$45,753,000 in fiscal year 2005. This increase is mainly due to the completion
of investment banking transactions. During fiscal year 2006, total trading
volume increased 2%, compared to 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. Commission revenue decreased $994,000, or 3%, to $32,140,000 from
$33,134,000 during fiscal year 2006 compared with fiscal year 2005. Net dealer
inventory gains, which includes profits on proprietary trading, market making
activities and customer mark-ups and mark-downs, increased $2,128,000, or 37%,
to $7,838,000 from $5,710,000 during fiscal year 2006 compared with fiscal
year
2005. The increase is primarily due to an increase in proprietary trading in
the
foreign bond market, and reflects the Company’s re-entry into market making
activities. During fiscal year 2006, revenues from proprietary trading increased
$1,745,000, or 31%, to $7,391,000 from $5,646,000 in fiscal year 2005, revenues
from market making activities increased to $323,000 from $0 in fiscal year
2005,
and revenues from customer mark-ups and mark-downs increased $60,000, or 94%,
to
$124,000 from $64,000 in fiscal year 2005.
Investment
banking revenue increased $10,795,000, or 2,045%, to $11,323,000 from $528,000
in fiscal year 2006 compared with fiscal year 2005. The
increase in investment banking revenues is attributable to the Company having
completed significantly more investment banking transactions
in
fiscal year 2006 than in fiscal year 2005. Interest and dividend income
increased $152,000, or 6%, to $2,891,000 from $2,739,000 in fiscal year 2006
compared with fiscal year 2005. The
increase in interest income is attributable to an increase in the interest
rate
charged for debit balances in National Securities’ customer accounts
from the
same period last year. Transfer fees increased $239,000, or 8%, to $3,336,000
in
fiscal year 2006 from $3,097,000 in 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, miscellaneous transaction fees
and
trading fees, and other investment income, increased $677,000, or 130%, to
$1,199,000 from $522,000 during fiscal year 2006 compared to fiscal year 2005.
The increase is due to an increase in fee based assets under management and
investment income realized in the Company’s venture capital fund in fiscal year
2006.
|
|
Fiscal
Year
|
|
Increase
(Decrease)
|
|
|
|
2006
|
|
2005
|
|
Amount
|
|
Percent
|
|
Commission
expense related to:
|
|
|
|
|
|
|
|
|
|
Commission
revenue
|
|
$
|
28,451,000
|
|
$
|
28,504,000
|
|
$
|
(53,000
|
)
|
|
0
|
%
|
Net
dealer inventory gains
|
|
|
5,617,000
|
|
|
3,919,000
|
|
|
1,698,000
|
|
|
43
|
%
|
Investment
banking
|
|
|
8,208,000
|
|
|
415,000
|
|
|
7,793,000
|
|
|
1878
|
%
|
Commissions
|
|
|
42,276,000
|
|
|
32,838,000
|
|
|
9,438,000
|
|
|
29
|
%
|
Employee
compensation
|
|
|
5,835,000
|
|
|
5,010,000
|
|
|
825,000
|
|
|
16
|
%
|
Clearing
fees
|
|
|
1,538,000
|
|
|
432,000
|
|
|
1,106,000
|
|
|
256
|
%
|
Communications
|
|
|
1,748,000
|
|
|
1,670,000
|
|
|
78,000
|
|
|
5
|
%
|
Occupancy
and equipment costs
|
|
|
2,805,000
|
|
|
2,886,000
|
|
|
(81,000
|
)
|
|
(3
|
%)
|
Professional
fees
|
|
|
1,213,000
|
|
|
1,520,000
|
|
|
(307,000
|
)
|
|
(20
|
%)
|
Interest
|
|
|
494,000
|
|
|
448,000
|
|
|
46,000
|
|
|
10
|
%
|
Taxes,
licenses and registration
|
|
|
617,000
|
|
|
344,000
|
|
|
273,000
|
|
|
79
|
%
|
Other
administrative expenses
|
|
|
1,606,000
|
|
|
1,765,000
|
|
|
(159,000
|
)
|
|
(9
|
%)
|
|
|
$
|
58,132,000
|
|
$
|
46,913,000
|
|
$
|
11,219,000
|
|
|
24
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
In
comparison with the 28% increase in total revenues, total expenses increased
24%, or $11,219,000, to $58,132,000 for fiscal year 2006 compared to $46,913,000
in 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 $9,438,000, or 29%, to
$42,276,000 in fiscal year 2006 from $32,838,000 in fiscal year 2005. Commission
expense related to commission revenue decreased $53,000, or less than 1%, to
$28,451,000 in fiscal year 2006 from $28,504,000 in fiscal year 2005; commission
expense related to net dealer inventory gains increased $1,698,000, or 43%,
to
$5,617,000 in fiscal year 2006 from $3,919,000 in fiscal year 2005; and
commission expense related to investment banking increased $7,793,000, or
1,878%, to $8,208,000 in fiscal year 2006 from $415,000 in fiscal year 2005.
Commission expense as a percentage of commission revenues increased to 89%
in
fiscal year 2006 from 86% in 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 72% in fiscal year 2006 from 69% in 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
72% in fiscal year 2006 from 79% in fiscal year 2005. This decrease is
attributable to the type and size of the particular investment banking
transactions completed in the current
fiscal
year. Commission expense includes the amortization of advances to registered
representatives of $1,281,000 and $1,206,000 for 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 $825,000, or 16%, to $5,835,000 in fiscal year
2006 from $5,010,000 in fiscal year 2005. The increase is attributable to new
hires, bonuses 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 relatively constant at approximately 82% and 83% in fiscal
years 2006 and 2005, respectively.
Clearing
fees increased $1,106,000, or 256%, to $1,538,000 in fiscal year 2006 from
$432,000 in fiscal year 2005. The increase in clearing fees is attributable
to a
different pricing structure for certain products with different clearing firms,
and the receipt in fiscal year 2005 of a $1.0 million conversion fee credit
from
the Company’s clearing firm.
Communication
expenses increased $78,000, or 5%, to $1,748,000 from $1,670,000 in fiscal
year
2006 compared to 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, offset by the receipt of a refund of prior periods’
charges from a service provider. Occupancy costs decreased $81,000, or 3%,
to
$2,805,000 from $2,886,000 in fiscal year 2006 compared to fiscal year 2005.
The
decrease in occupancy expense is due to an overall reduction in leased office
space. Professional fees decreased $307,000, or 20%, to $1,213,000 from
$1,520,000 in fiscal year 2006 compared to fiscal year 2005. The decrease in
professional fees is due to the Company having expensed approximately $320,000
of professional fees relating to the proposed merger with First Montauk in
fiscal year 2005.
Interest
expense increased $46,000, or 10%, to $494,000 from $448,000 in fiscal year
2006
compared to 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 third quarter
of
fiscal year 2006. Included in interest expense is the amortization of $193,000
and $163,000 for fiscal years 2006 and 2005, respectively. Taxes, licenses
and
registration increased $273,000, or 79%, to $617,000 from $344,000 in fiscal
year 2006 compared 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 $159,000,
or
9%, to $1,606,000 from $1,765,000 in fiscal year 2006 compared to fiscal year
2005. The decrease in other expenses is due to costs incurred in fiscal year
2005 relating to the Company’s change of clearing firms.
The
Company reported net income of $595,000 in fiscal year 2006 compared to a net
loss of $1,183,000 in
fiscal
year 2005.
The net
income attributable to common stockholders in fiscal year 2006 was $214,000,
or
diluted earnings of $.04 per common share, as compared to a net loss
attributable to common stockholders of $1,473,000, or $.29 per common share
in
fiscal year 2005. The net income attributable to common stockholders for fiscal
year 2006 and the net loss attributable to common stockholders for fiscal year
2005 reflects $381,000 and $290,000 of cumulative Preferred Stock dividends
on
the Company’s Preferred Stock
for
fiscal years 2006 and 2005, respectively.
Fiscal
Year 2005 Compared with Fiscal Year 2004
The
Company’s fiscal year 2005 resulted in a decrease in revenues, and a
comparatively lesser decrease in expenses compared with fiscal year 2004. The
decrease in revenues is primarily due to the weaker securities markets
experienced by the Company, and the Company’s cessation of its market making
activities. As
a
result, the Company reported a net loss of $1,183,000 compared with net income
of $566,000 for the fiscal
years
2005 and 2004, respectively. This represents a reduction of $1,749,000 from
the
prior year.
|
|
Fiscal
Year
|
|
Increase
(Decrease)
|
|
|
|
2005
|
|
2004
|
|
Amount
|
|
Percent
|
|
Commissions
|
|
$
|
33,134,000
|
|
$
|
46,881,000
|
|
$
|
(13,747,000
|
)
|
|
(29
|
%)
|
Proprietary
trading
|
|
|
5,646,000
|
|
|
6,642,000
|
|
|
(996,000
|
)
|
|
(15
|
%)
|
Market
making
|
|
|
—
|
|
|
645,000
|
|
|
(645,000
|
)
|
|
n/a
|
|
Mark-ups
and mark-downs
|
|
|
64,000
|
|
|
117,000
|
|
|
(53,000
|
)
|
|
(45
|
%)
|
Net
dealer inventory gains
|
|
|
5,710,000
|
|
|
7,404,000
|
|
|
(1,694,000
|
)
|
|
(23
|
%)
|
Investment
banking
|
|
|
528,000
|
|
|
1,548,000
|
|
|
(1,020,000
|
)
|
|
(66
|
%)
|
Interest
and dividends
|
|
|
2,739,000
|
|
|
3,420,000
|
|
|
(681,000
|
)
|
|
(20
|
%)
|
Transfer
fees and clearance services
|
|
|
3,097,000
|
|
|
2,806,000
|
|
|
291,000
|
|
|
10
|
%
|
Other
|
|
|
522,000
|
|
|
401,000
|
|
|
121,000
|
|
|
30
|
%
|
|
|
$
|
45,730,000
|
|
$
|
62,460,000
|
|
$
|
(16,730,000
|
)
|
|
(27
|
%)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
revenues decreased $16,730,000, or 27%, in fiscal year 2005 to $45,730,000
from
$62,460,000 in fiscal year 2004. This decrease is mainly due to the weaker
securities markets that reduced commission revenues, the number of commission
tickets generated, and the charge per ticket that affects commission revenue.
During fiscal year 2005, total trading volume decreased 50%, compared to fiscal
year 2004. This decrease is attributable in part to the current cessation of
the
Company’s market making activities. Trading volume in this fiscal year related
to retail brokerage decreased 24%. Commission revenue decreased $13,747,000,
or
29%, to $33,134,000 from $46,881,000 during fiscal year 2005 compared with
fiscal year 2004. Net dealer inventory gains, which includes profits on
proprietary trading, market making activities and customer mark-ups and
mark-downs, decreased $1,694,000, or 23%, to $5,710,000 from $7,404,000 during
fiscal year 2005 compared with fiscal year 2004. The decrease is due to a
reduction in proprietary trading in the bond market and the current cessation
of
the Company’s market making activities. During fiscal year 2005, revenues from
proprietary trading decreased $996,000, or 15%, to $5,646,000 from $6,642,000
in
fiscal year 2004, revenues from market making activities decreased to $0 from
$645,000 in fiscal year 2004, and revenues from customer mark-ups and mark-downs
decreased $53,000, or 45%, to $64,000 from $117,000 in fiscal year
2004.
Investment
banking revenue decreased $1,020,000, or 66%, to $528,000 from $1,548,000 in
fiscal year 2005 compared with fiscal year 2004. The decrease in investment
banking revenues is attributable to the
Company
having
completed fewer corporate finance transactions in fiscal year 2005 than in
fiscal year 2004. Interest and dividend income decreased $681,000, or 20%,
to
$2,739,000 from $3,420,000 in fiscal year 2005 compared with fiscal year 2004.
The decrease in interest income is primarily attributable to an overall decrease
in the interest rate charged for debit balances in National Securities’ customer
accounts from the same period last year. Transfer fees increased $291,000,
or
10%, to $3,097,000 in fiscal year 2005 from $2,806,000 in fiscal year 2004.
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, increased $121,000, or 30%, to
$522,000 from $401,000 during fiscal year 2005 compared to fiscal year 2004.
The
increase is due to an increased level of assets under management.
|
|
Fiscal
Year
|
|
Increase
(Decrease)
|
|
|
|
2005
|
|
2004
|
|
Amount
|
|
Percent
|
|
Commission
expense related to:
|
|
|
|
|
|
|
|
|
|
Commission
revenue
|
|
$
|
28,504,000
|
|
$
|
38,980,000
|
|
$
|
(10,476,000
|
)
|
|
(27
|
%)
|
Net
dealer inventory gains
|
|
|
3,919,000
|
|
|
3,714,000
|
|
|
205,000
|
|
|
6
|
%
|
Investment
banking
|
|
|
415,000
|
|
|
1,238,000
|
|
|
(823,000
|
)
|
|
(66
|
%)
|
Commissions
|
|
|
32,838,000
|
|
|
43,932,000
|
|
|
(11,094,000
|
)
|
|
(25
|
%)
|
Employee
compensation
|
|
|
5,010,000
|
|
|
5,449,000
|
|
|
(439,000
|
)
|
|
(8
|
%)
|
Clearing
fees
|
|
|
432,000
|
|
|
2,391,000
|
|
|
(1,959,000
|
)
|
|
(82
|
%)
|
Communications
|
|
|
1,670,000
|
|
|
2,589,000
|
|
|
(919,000
|
)
|
|
(35
|
%)
|
Occupancy
and equipment costs
|
|
|
2,886,000
|
|
|
2,983,000
|
|
|
(97,000
|
)
|
|
(3
|
%)
|
Professional
fees
|
|
|
1,520,000
|
|
|
2,559,000
|
|
|
(1,039,000
|
)
|
|
(41
|
%)
|
Litigation
settlement
|
|
|
—
|
|
|
400,000
|
|
|
(400,000
|
)
|
|
n/a
|
|
Interest
|
|
|
448,000
|
|
|
397,000
|
|
|
51,000
|
|
|
13
|
%
|
Taxes,
licenses and registration
|
|
|
344,000
|
|
|
560,000
|
|
|
(216,000
|
)
|
|
(39
|
%)
|
Other
administrative expenses
|
|
|
1,765,000
|
|
|
1,765,000
|
|
|
—
|
|
|
0
|
%
|
|
|
$
|
46,913,000
|
|
$
|
63,025,000
|
|
$
|
(16,112,000
|
)
|
|
(26
|
%)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
In
comparison with the 28% decrease in total revenues, total expenses decreased
26%, or $16,112,000, to $46,913,000 for fiscal year 2005 compared to $63,025,000
in fiscal year 2004. The decrease in total expenses is a result of lower
commission expenses directly associated with commission revenues, lower clearing
fees and lower professional fees.
Commission
expense, which includes expenses related to commission revenue, net dealer
inventory gains and investment banking, decreased $11,094,000, or 25%, to
$32,838,000 in fiscal year 2005 from $43,932,000 in fiscal year 2004. Commission
expense related to commission revenue decreased $10,476,000, or 27%, to
$28,504,000 in fiscal year 2005 from $38,980,000 in fiscal year 2004; commission
expense related to net dealer inventory gains increased $205,000, or 6%, to
$3,919,000 in fiscal year 2005 from $3,714,000 in fiscal year 2004; and
commission expense related to investment banking decreased $823,000, or 66%,
to
$415,000 in fiscal year 2005 from $1,238,000 in fiscal year 2004. Commission
expense as a percentage of commission revenues increased to 86% in fiscal year
2005 from 83% in fiscal year 2004. 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 69% in fiscal year 2005 from 50% in fiscal year 2004. 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 was relatively unchanged between fiscal
year 2005 and fiscal year 2004. Commission expense includes the amortization
of
advances to registered representatives of $1,206,000 and $763,000 for fiscal
years 2005 and 2004, 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 decreased $439,000, or 8%, to $5,010,000 in fiscal year
2005 from $5,449,000 in fiscal year 2004. The decrease is attributable to
personnel reductions and bonuses based on operating income that were paid to
senior management in fiscal year 2004. Overall, combined commission and employee
compensation expense, as a percentage of revenue increased to 83% from 78%
in
fiscal years 2005 and 2004, respectively. The increase is attributable to an
overall higher payout percentage to National Securities’ retail brokers, and the
relatively fixed employee compensation component.
Clearing
fees decreased $1,959,000, or 82%, to $432,000 in fiscal year 2005 from
$2,391,000 in fiscal year 2004. The reduction in clearing fees is attributable
to the lower trading volume in fiscal year 2005
compared
to fiscal year 2004, and lower clearing costs associated with the Company’s new
clearing agreement. Clearing fees in fiscal year 2005 were reduced by the $1.0
million conversion fee credit the Company received from its clearing firm,
NFS,
to offset the transitional, incremental conversion costs incurred by the
Company. Clearing fees in fiscal year 2004 were reduced by the $800,000
conversion assistance payment the Company received from its clearing firm,
Fiserv, to offset conversion costs incurred by the Company. In fiscal year
2004,
clearing fees were reduced based on ticket volume in the amount of $250,000,
from forgiveness of debt that was fully repaid in February 2004, from the
Company’s prior clearing firm.
Communication
expenses decreased $919,000, or 35%, to $1,670,000 from $2,589,000 in fiscal
year 2005 compared to fiscal year 2004. The decrease is due to a reduction
in
the number of quotation machines resulting from the current cessation of the
Company’s market making activities, and cost savings realized from a new
telephone vendor. Occupancy costs decreased $97,000, or 3%, to $2,886,000 from
$2,983,000 in fiscal year 2005 compared to fiscal year 2004. The decrease
resulted from an overall reduction in leased office space. Professional fees
decreased $1,039,000, or 41%, to $1,520,000 from $2,559,000 in fiscal year
2005
compared to fiscal year 2004. The decrease in professional fees is due to a
decrease in legal fees relating to various lawsuits and arbitrations in fiscal
year 2005. In fiscal year 2005 the Company expensed approximately $320,000
of
professional fees relating to the proposed merger with First Montauk. In fiscal
year 2004 professional fees included legal fees, fines and restitution payments
related to the NASD investigation of mutual fund trading activities, and legal
fees regarding an arbitration panel award of damages against the Company of
approximately $400,000 related to an employment contract with a former employee
of the Company.
Interest
expense increased $51,000, or 13%, to $448,000 from $397,000 in fiscal year
2005
compared to fiscal year 2004. The increase is due to interest on the notes
issued by the Company in the second quarter of fiscal year 2004. Included in
interest expense is the amortization of $163,000 and $113,000 for fiscal years
2005 and 2004, respectively, attributable to those notes, and other notes that
were modified in fiscal years 2005 and 2004. Taxes, licenses and registration
decreased $216,000, or 39%, to $344,000 from $560,000 in fiscal year 2005
compared to fiscal year 2004. The decrease resulted from a refund of prior
years
state business taxes, a reduction in registration fees paid as an incentive
for
new brokers and lower taxes attributable to our reduced level of revenues.
Other
administrative expenses were $1,765,000 in both fiscal years 2005 and 2004.
The
Company realized gains on extinguishments of debt of $1,131,000 from its prior
clearing firm, First Clearing, in fiscal year 2004.
The
Company reported a net loss before income taxes of $1,183,000 in fiscal year
2005 compared to net income before income taxes of $566,000 in
fiscal
year 2004.
The net
loss attributable to common stockholders in fiscal year 2005 was $1,473,000
or
$.29 per common share, as compared to diluted earnings attributable to common
stockholders of $300,000, or $.07 per common share in fiscal year 2004. The
net
loss attributable to common stockholders for fiscal year 2005 and the net income
attributable to common stockholders for fiscal year 2004 reflects $290,000
and
$266,000 of cumulative Preferred Stock dividends on the Company’s Preferred
Stock
for
fiscal years 2005 and 2004, 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
September 30, 2006, National Securities’ net capital exceeded the requirement by
$2,076,000.
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 allowance for doubtful
accounts increased by $99,000 in fiscal year 2006, reflecting the amount of
loss
that can be reasonably estimated by management.
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
the
first quarter of fiscal year 2003, the Company consummated a private placement
of its securities, and issued 1,016,186 shares of Common Stock and 1,016,186
warrants. In December 2005, the Company extended the expiration date of the
warrants issued in this private placement, including the placement agent
warrants, to December 23, 2006 from December 23, 2005.
In
January 2004, the Company consummated a private offering of its securities
to a
limited number of accredited investors pursuant to Rule 506 of Regulation D
under the Securities Act wherein the Company issued an aggregate of $200,000
of
three-year, 10% senior subordinated promissory notes to five unaffiliated
parties. The note holders received three-year warrants to purchase an aggregate
of 50,000 shares of Common Stock at an exercise price of $1.40 per share, with
an allocated fair value of approximately $40,000. In December 2004, the Company
rescinded a note in the principal amount of $25,000 and
a
warrant to purchase 6,250 shares of Common Stock. The remaining notes in the
principal amount of $175,000 were repaid in full in March 2006.
In
February 2004, the Company consummated a private offering of its securities
to a
limited number of accredited investors pursuant to Rule 506 of Regulation D
under the Securities Act wherein the Company issued an aggregate of $850,000
of
three-year, 10% senior subordinated promissory notes to four unaffiliated
parties. The note holders received three-year warrants to purchase an aggregate
of 170,000 shares of Common Stock at an exercise price of $1.50 per share,
with
an allocated fair value of approximately $143,000.
In
the
fourth quarter of fiscal year 2004, the Company consummated a private placement
of its securities to a limited number of accredited investors pursuant to Rule
506 of Regulation D under the Securities Act. Each unit in the offering sold
for
$1.60 and consisted of two shares of Common Stock and one three-year warrant
to
purchase one share of Common Stock at a per share price of $1.50. Net proceeds
of approximately $930,000 closed in the fourth quarter of fiscal year 2004,
and
the Company correspondingly issued 1,250,000 shares of Common Stock and 625,000
warrants.
In
January 2006, the Company consummated
a private placement of its securities to a limited number of accredited
investors in a transaction exempt from registration under Section 4(2) of the
Securities Act. The investors made a $2.0 million investment in the Company
by
purchasing an aggregate of the following: (i) $1.0
million
for
10,000 shares 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. The Company granted
warrants to acquire 300,000 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 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 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
in a
private placement exempt from registration under Section 4(2) of the Securities
Act.
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, shares
of Common Stock issuable upon the conversion of preferred stock and notes,
and
exercise of certain warrants previously issued in connection with private
placement transactions. The Registration Statement became effective on November
6, 2006. The Company will receive proceeds from the exercise of warrants that
were included in the registration statement.
In
December 2003, the Company engaged in discussions with the NASD relating to
the
Security Agreement between National Securities and First Clearing, and its
effect on the computation of National Securities’ 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 Securities’ 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 Securities and First
Clearing was terminated. Furthermore, First Clearing forgave payment of a
$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.
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 Securities and First Clearing mutually agreed
to terminate their clearing relationship.
In
June
2004, National Securities entered into an agreement with Fiserv to clear its
brokerage business. The conversion from First Clearing to Fiserv was completed
in the first week of October 2004. As part of this transaction, Fiserv provided
National Securities with an $800,000 conversion assistance payment, $250,000
of
which was paid upon execution of the clearing agreement, $250,000 of which
was
paid in mid-August 2004, and $300,000 of which was paid in October
2004.
In
March
2005, NFS acquired the clearing business of Fiserv. In April 2005, National
Securities entered into a clearing agreement with NFS that became effective
in
June 2005. As part of this transaction, NFS provided National Securities with
a
$1.0 million conversion fee credit to reimburse the Company for the
transitional, incremental costs incurred by National Securities relating to
the
conversion of its clearing
business
to NFS. National Securities was paid $250,000 in May 2005, and the remaining
$750,000 was paid in July 2005. The clearing agreement includes a termination
fee if National Securities terminates the agreement without cause that is
initially $2.0 million and reduces to $125,000 over the eight-year term of
the
agreement. 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
its clearing relationships has been beneficial to the Company’s cost structure,
liquidity and capital resources.
In
January 2004, $1.0 million of notes with an interest rate of 9% held by two
note
holders matured. At that time warrants held by the note holders to purchase,
in
the aggregate, 100,000 shares of common stock at a price of $5.00 per share
and
100,000 shares of common stock at a price of $1.25 per share expired. In January
2004, the Company and the two note holders entered into new note agreements
providing for $1.0
million of notes
with an interest rate of 12% and a maturity date of July 31, 2005, together
with
warrants having an expiration date of July 31, 2005 to purchase, in the
aggregate, 100,000 shares of common stock at a price of $1.75 per share and
100,000 shares of common stock at a price of $1.25 per share. In July 2005
these
notes matured and warrants expired. In August 2005, the Company and the two
note
holders entered into new note agreements providing for $1.0
million of notes
with a maturity date of July 31, 2007, together with warrants having an
expiration date of July 31, 2007 to purchase, in the aggregate, 200,000 shares
of common stock at a price of $1.25 per share. These
notes in the principal amount of $1.0 million were repaid in full in January
2006.
In
February 2004, National Securities and the holder of a $1.0 million secured
demand note that matured on February 1, 2004, entered into a new secured demand
note collateral
agreement with
a
maturity date of March 1, 2005, together
with warrants having an expiration date of July 31, 2005 to purchase 75,000
shares of common stock at a price of $1.75 per share and 75,000 shares of common
stock at a price of $1.25 per share.
In
February 2005, National Securities and the holder entered into a new $1.0
million secured demand collateral
agreement note
with
a maturity date of March 1, 2006. In August 2005, National Securities and the
holder entered into a new warrant agreement that provided for an expiration
date of July 31, 2007 to purchase 150,000 shares of common stock at a price
of
$1.25 per share.
In
February 2006, National Securities and the holder entered into a new $1.0
million secured demand note collateral
agreement with
a
maturity date of March 1, 2007.
As
of
September 30, 2006, advances to registered representatives decreased $97,000
to
$1,556,000 from $1,653,000 as of September 30, 2005. This decrease is
attributable to the amortization of advances in fiscal year 2006 in excess
of
advances made to registered representatives who became affiliated with National
Securities during this period, and advances to registered representatives
already affiliated with National Securities who agreed to renew their
affiliation.
In
fiscal
year 2006 and 2005, the Company received proceeds of approximately $0 and
$20,000, respectively, from the exercise of outstanding employee stock options
and warrants.
The
Company has historically satisfied its capital needs with cash generated from
operations or from financing activities. 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.
The
following table shows the contractual obligations of the Company as of September
30, 2006:
|
|
Notes
|
|
Secured
|
|
|
|
|
|
Fiscal
Year Ending
|
|
Payable
|
|
Demand
Note
|
|
Leases
|
|
Total
|
|
2007
|
|
$
|
850,000
|
|
$
|
1,000,000
|
|
$
|
1,602,000
|
|
$
|
3,452,000
|
|
2008
|
|
|
—
|
|
|
|
|
|
1,556,000
|
|
|
1,556,000
|
|
2009
|
|
|
|
|
|
|
|
|
584,000
|
|
|
584,000
|
|
2010
|
|
|
|
|
|
|
|
|
562,000
|
|
|
562,000
|
|
2011
|
|
|
1,000,000
|
|
|
|
|
|
579,000
|
|
|
1,579,000
|
|
Thereafter
|
|
|
|
|
|
|
|
|
443,000
|
|
|
443,000
|
|
Less:
Deferred debt discount
|
|
|
(204,000
|
)
|
|
|
|
|
|
|
|
(204,000
|
)
|
|
|
$
|
1,646,000
|
|
$
|
1,000,000
|
|
$
|
5,326,000
|
|
$
|
7,972,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Inflation
The
Company believes that the effect of inflation on its assets, consisting of
cash,
securities, office equipment, leasehold improvements and computers has not
been
significant.
Recently
Issued Accounting Standards
In
February 2006, the FASB issued Statement of Financial Accounting Standard 155
“Accounting for Certain Hybrid Financial Instruments” (“SFAS 155”), which
eliminates the exemption from applying SFAS 133 “Accounting for Derivative
Instruments and Hedging Activities” (“SFAS 133”) to interests in securitized
financial assets so that similar instruments are accounted for similarly
regardless of the form of the instruments. SFAS 155 also allows the election
of
fair value measurement at acquisition, at issuance, or when a previously
recognized financial instrument is subject to a remeasurement event. Adoption
is
effective for all financial instruments acquired or issued after the beginning
of the first fiscal year that begins after September 15, 2006. Early
adoption is permitted. The adoption of SFAS 155 is not expected to have a
material effect on the Company’s consolidated financial position, results of
operations or cash flows.
In
March
2006, the FASB issued Statement of Financial Accounting Standard 156 “Accounting
for Servicing of Financial Assets” (“SFAS 156”), which requires all separately
recognized servicing assets and servicing liabilities be initially measured
at
fair value. SFAS 156 permits, but does not require, the subsequent measurement
of servicing assets and servicing liabilities at fair value. Adoption is
required as of the beginning of the first fiscal year that begins after
September 15, 2006. Early adoption is permitted. The adoption of SFAS 156
is not expected to have a material effect on the Company’s consolidated
financial position, results of operations or cash flows.
In
September 2006, the FASB issued SFAS No. 157, “Accounting for Fair Value
Measurements” (“SFAS 157”). SFAS 157 defines fair value, and establishes a
framework for measuring fair value in generally accepted accounting principles
and expands disclosure about fair value measurements. SFAS 157 is effective
for
the Company for financial statements issued subsequent to November 15,
2007. The Company does not expect the new standard to have a material impact
on
the Company’s financial position, results of operations or cash flows.
In
September 2006, the staff of the SEC issued Staff Accounting Bulletin No. 108
(“SAB 108”) which provides interpretive guidance on how the effects of the
carryover or reversal of prior year misstatements should be considered in
quantifying a current year misstatement. SAB 108 becomes effective in fiscal
year 2007. Adoption of SAB 108 is not expected to have a material impact on
the
Company’s consolidated financial position, results of operations or cash
flows.
ITEM
7A. 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 market values of the Company's securities owned
and
securities sold, but not yet purchased
as of
September 30, 2006:
|
|
|
|
Securities
sold, but
|
|
|
|
Securities
owned
|
|
not
yet purchased
|
|
Corporate
stocks
|
|
$
|
459,000
|
|
$
|
162,000
|
|
Corporate
bonds
|
|
|
—
|
|
|
|
|
Government
obligations
|
|
|
16,000
|
|
|
|
|
|
|
$
|
475,000
|
|
$
|
162,000
|
|
Item
8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
See
Part
IV, Item 15(a)(1) for a list of financial statements filed as part of this
Report.
Item
9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
DISCLOSURE
There
were no disagreements with accountants on accounting and financial disclosure
for the fiscal year ended September 30, 2006.
Item
9A. 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
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 yearly
report on Form 10-K 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.
Item
9B. OTHER INFORMATION
There
is
no other information to be disclosed by the Company during the fourth quarter
of
fiscal year 2006 that has not been reported on a current report on Form
8-K.
PART
III
Item
10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The
other
information required by this Item will be included in the Company’s 2007 Proxy
Statement and is
incorporated herein by reference.
Item
11. EXECUTIVE COMPENSATION
The
information required by this Item will be included in the Company’s 2007 Proxy
Statement and is incorporated herein by reference.
Item
12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The
information required by this Item will be included in the Company’s 2007 Proxy
Statement and is incorporated herein by reference.
Item
13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The
information required by this Item will be included in the Company’s 2007 Proxy
Statement and is incorporated herein by reference.
Item
14. PRINCIPAL
ACCOUNTING FEES AND SERVICES
The
information required by this Item will be included in the Company’s 2007 Proxy
Statement and is incorporated herein by reference.
Item
15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES
(a) |
The
following financial statements are included in Part II, Item
8:
|
Independent
Auditors' Reports
Consolidated
Financial Statements
Statements
of Financial Condition, September 30, 2006 and September 30, 2005
Statements
of Operations for the Years ended September 30, 2006, September 30, 2005 and
September 30, 2004
Statement
of Changes in Stockholders' Equity (Deficit) for the Years ended September
30,
2006, September 30, 2005 and September 30, 2004
Statements
of Cash Flows for the Years ended September 30, 2006, September 30, 2005 and
September 30, 2004
Notes
to
Consolidated Financial Statements
|
2. |
Financial
Statement Schedules
|
|
Schedules
not listed above have been omitted because they are not applicable
or have
been included in footnotes to the consolidated financial
statements.
|
SIGNATURES
Pursuant
to the requirements of Section 13 or 15(d) of the Securities and 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
(Registrant)
Date:
December 7, 2006
Mark
Goldwasser
Chairman,
President and Chief Executive Officer
Date:
December 7, 2006
Robert
H.
Daskal
Chief
Financial Officer
Pursuant
to the requirements of the Securities Exchange Act of 1934, this report has
been
signed below by the following persons on behalf of the registrant and in the
capacities and on the dates indicated.
Date:
December 7, 2006
By:
/s/
Mark
Goldwasser
Mark
Goldwasser,
Chairman,
President and Chief Executive Officer
Date:
December 7, 2006
By:
/s/
Gary
A. Rosenberg
Gary
A.
Rosenberg, Director
Date:
December 7, 2006
By:
/s/
Robert J. Rosan
Robert
J.
Rosan, Director
Date:
December 7, 2006
By:
/s/
Peter
Rettman
Peter
Rettman, Director
Date:
December 7, 2006
By:
/s/
Norman J. Kurlan
Norman
J.
Kurlan, Director
Date:
December 7, 2006
By:
/s/
Marshall S. Geller
Marshall
S. Geller, Director
EXHIBIT
INDEX
3.1
|
Certificate
of Incorporation, as amended, previously filed as Exhibit 3.5.
to Form
10-Q in May 2004 and hereby incorporated by reference.
|
3.2
|
The
Company's Bylaws, as amended, previously filed as Exhibit 3.3 to
Form 10-Q
in February 2002, and hereby incorporated by reference.
|
3.3
|
The
Company’s By-Laws, as amended and restated on December 12,
2001.
|
3.4
|
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, previously
filed as Exhibit 3.6 to Form 10-Q in May 2004 and hereby incorporated
by
reference.
|
3.5
|
Certificate
of Designation of Series B Preferred Stock, filed with the Secretary
of
State of the State of Delaware on January 11, 2006.
|
3.6
|
Certificate
of Amendment to the Certificate of Incorporation, filed with the
Secretary
of State of the State of Delaware on March 15, 2006 filed
as Exhibit 3.6 to Form 10-Q in May 2006 and hereby incorporated
by
reference.
|
3.7
|
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 filed
as Exhibit 3.7 to Form 10-Q in May 2006 and hereby incorporated
by
reference.
|
4.1
|
Form
of Warrant filed as Exhibit 4.1 to Form 8-K in January 2006 and
hereby
incorporated by reference.
|
4.2
|
Form
of Promissory Note filed as Exhibit 4.2 to Form 8-K in January
2006 and
hereby incorporated by reference.
|
10.1
|
Office
lease, Chicago, Illinois, previously filed as Exhibit 10.27 to
Form 10-K
in December 1996 and hereby incorporated by reference.
|
10.2
|
Office
lease, Spokane, Washington, previously filed as Exhibit 10.28 to
Form 10-K
in December 1996 and hereby incorporated by reference.
|
10.3
|
Amended
office lease, Chicago, Illinois, previously filed as Exhibit 10.29
to Form
10-K in December 1996 and hereby incorporated by
reference.
|
10.4
|
Purchase
agreement between shareholders of Friend and the Company, previously
filed
as Exhibit 10.30 to Form 10-K in December 1997 and hereby incorporated
by
reference.
|
10.5
|
Purchase
agreement between shareholders of WestAmerica and the Company,
previously
filed as Exhibit 10.31 to Form 10-K in December 1997 and hereby
incorporated by reference.
|
10.6
|
Purchase
agreement between shareholders of Travis and the Company, previously
filed
as Exhibit 10.32 to Form 10-K in December 1997 and hereby incorporated
by
reference.
|
10.7
|
Borrowing
agreement between Seattle-First National Bank and the Company previously
filed as Exhibit 10.33 to Form 10-K in December 1998 and hereby
incorporated by reference.
|
10.8
|
Note
payable agreement, previously filed as Exhibit 10.34 to Form 10-K
in
December 1998 and hereby incorporated by reference.
|
10.9
|
Note
payable agreement, previously filed as Exhibit 10.35 to Form 10-K
in
December 1998 and hereby incorporated by reference.
|
10.10
|
Note
payable agreement, previously filed as Exhibit 10.36 to Form 10-K
in
December 1998 and hereby incorporated by reference.
|
10.11
|
Sales
agreement between Friend and the Company previously filed as Exhibit
10.37
to Form 10-K in December 1998 and hereby incorporated by
reference.
|
10.12
|
1996
Stock Option Plan, previously filed as Exhibit 4.1 to Form S-8
in February
1999 and hereby incorporated by reference.
|
10.13
|
1997
Stock Option Plan, previously filed as Exhibit 4.2 to Form S-8
in February
1999 and hereby incorporated by reference.
|
10.14
|
1999
Stock Option Plan, previously filed as Exhibit 4.3 to Form S-8
in February
1999 and hereby incorporated by
reference.
|
10.15*
|
Employment
contract dated July 1999, previously filed as Exhibit 10.15 to
Form 10-K
in December 1999 and hereby incorporated by reference.
|
10.16*
|
Employment
contract dated July 1999 previously filed as Exhibit 10.16 to Form
10-K in
December 1999 and hereby incorporated by reference.
|
10.17*
|
Employment
contract dated July 1999 previously filed as Exhibit 10.17 to Form
10-K in
December 1999 and hereby incorporated by reference.
|
10.18*
|
Employment
contract dated July 1999 previously filed as Exhibit 10.18 to Form
10-K in
December 1999 and hereby incorporated by reference.
|
10.19*
|
Employment
contract dated July 1999 previously filed as Exhibit 10.19 to Form
10-K in
December 1999 and hereby incorporated by reference.
|
10.20
|
Office
lease, Seattle, Washington previously filed as Exhibit 10.20 to
Form 10-K
in December 1999 and hereby incorporated by reference.
|
10.21
|
2000
Stock Option Plan previously filed as Exhibit 4.1 to Form S-8 in
June 2000
and hereby incorporated by reference.
|
10.22*
|
Employment
contract dated June 2000, previously filed as Exhibit 10.21 to
Form 10-Q
in August 2000 and hereby incorporated by reference.
|
10.23
|
Form
of Note payable agreement dated January 2001, previously filed
as Exhibit
10.23 to Form 10-Q in May 2001 and hereby incorporated by
reference.
|
10.24
|
Secured
Demand Note dated February 2001, previously filed as Exhibit 10.24
to Form
10-Q in May 2001 and hereby incorporated by reference.
|
10.25
|
Loan
and security agreement dated January 2001, previously filed as
Exhibit
10.25 to Form 10-Q in February 2001 and hereby incorporated by
reference.
|
10.26
|
2001
Stock Option Plan, previously included in the Proxy Statement-Schedule
14A
filed in January 2001 and hereby incorporated by
reference.
|
10.27
|
Audit
committee charter, previously filed as Exhibit 10.22 to Form 10-Q
in
August 2000 and hereby incorporated by reference.
|
10.28
|
Clearing
Agreement previously filed as Exhibit 10.28 to Form 10-K in December
2001
and hereby incorporated by reference.
|
10.29
|
First
Amendment to Clearing Agreement previously filed as Exhibit 10.29
to Form
10-K in December 2001 and hereby incorporated by
reference.
|
10.30
|
Purchase
Agreement by and among Olympic Cascade Financial Corporation, Mark
Goldwasser and Triage Partners, LLC dated as of December 14, 2001,
previously filed as Exhibit 10.30 to Form 8-K in January 2002 and
hereby
incorporated by reference.
|
10.31
|
Stock
Purchase Agreement between Steven A. Rothstein, certain other persons
or
entities and Triage Partners, LLC dated as of December 14, 2001,
previously filed as Exhibit 10.31 to Form 8-K in January 2002 and
hereby
incorporated by reference.
|
10.32
|
Securities
Exchange Agreement by and among Olympic Cascade Financial Corporation,
Gregory P. Kusnick, Karen Jo Gustafson, Gregory C. Lowney and Maryanne
K.
Snyder dated as of December 14, 2001, previously filed as Exhibit
10.32 to
Form 8-K in January 2002 and hereby incorporated by
reference.
|
10.33
|
Escrow
Agreement by and made among Olympic Cascade Financial Corporation,
Mark
Goldwasser, Triage Partners, LLC and National Securities Corporation
dated
as of December 28, 2001, previously filed as Exhibit 10.33 to Form
8-K in
January 2002 and hereby incorporated by reference.
|
10.34
|
Second
Amendment to Clearing Agreement, previously filed as Exhibit 10.34
to Form
10-Q in February 2002 and hereby incorporated by
reference.
|
10.35
|
Form
of Warrant issued in December 2002.
|
10.36
|
Form
of Securities Purchase Agreement,
previously filed as Exhibit 10.36 to Form 8-K in February 2004
and hereby
incorporated by reference.
|
10.37
|
Form
of Note, previously
filed as Exhibit 10.37 to Form 8-K in February 2004 and hereby
incorporated by reference.
|
10.38
|
Form
of Warrant,
previously filed as Exhibit 10.38 to Form 8-K in February 2004
and hereby
incorporated by reference.
|
10.39
|
Form
of Registration Rights Agreement,
previously filed as Exhibit 10.39 to Form 8-K in February 2004
and hereby
incorporated by reference.
|
10.40
|
Clearing
Agreement previously filed as Exhibit 10.36 to Form 10-K in June
2004 and
hereby incorporated by reference.
|
10.41
|
Form
of Warrant issued in August 2004 filed as Exhibit 10.40 to Form
8-K in
August 2004 and hereby incorporated by reference.
|
10.42
|
Form
of Registration Rights Agreement dated in August 2004 filed as
Exhibit
10.41 to Form 8-K in August 2004 and hereby incorporated by
reference.
|
10.43*
|
Severance
Agreement dated February 4, 2005 between Michael A. Bresner and
National
Securities Corporation
filed as Exhibit 10.43 to Form 8-K in February 2005 and hereby
incorporated by reference.
|
10.44
|
Agreement
and Plan of Merger dated February 10, 2005, by and among Olympic
Cascade
Financial Corporation, FMFC Acquisition Corporation and First Montauk
Financial Corp.
filed as Exhibit 10.44 to Form 8-K in February 2005 and hereby
incorporated by reference.
|
10.45
|
Warrant
issued by the Company to Triage Partners LLC dated April 1,
2005
filed as Exhibit 10.45 to Form 8-K in April 2005 and hereby incorporated
by reference.
|
10.46
|
Amended
and Restated Agreement and Plan of Merger dated June 27, 2005,
by and
among Olympic Cascade Financial Corporation, OLY Acquisition Corporation
and First Montauk Financial Corp.
filed as Exhibit 10.46 to Form 8-K in June 2005 and hereby incorporated
by
reference.
|
10.47
|
Letter
Agreement dated as of October 24, 2005 terminating the Amended
and
Restated Agreement and Plan of Merger, dated June 27, 2005, by
and among
Olympic Cascade Financial Corporation, OLY Acquisition Corporation
and
First Montauk Financial Corp.
filed as Exhibit 10.47 to Form 8-K in October 2005 and hereby incorporated
by reference.
|
10.48
|
Securities
Purchase Agreement dated as of January 11, 2006 by and among Olympic
Cascade Financial Corporation and the investors set forth therein
filed as
Exhibit 10.48 to Form 8-K in January 2006 and hereby incorporated
by
reference.
|
10.49
|
Registration
Rights Agreement dated as of January 11, 2006 by and among Olympic
Cascade
Financial Corporation and the investors set forth therein filed
as Exhibit
10.49 to Form 8-K in January 2006 and hereby incorporated by
reference.
|
10.50*
|
Employment
Agreement dated as of March 15, 2006 between the Company and Mark
Goldwasser filed
as Exhibit 10.50 to Form 10-Q in May 2006 and hereby incorporated
by
reference.
|
10.51
|
Securities
Purchase Agreement dated as of March 17, 2006 filed
as Exhibit 10.51 to Form 10-Q in May 2006 and hereby incorporated
by
reference.
|
14.
|
The
Code of Ethics
filed as Exhibit 14 to Form 10-K in December 2003 and hereby incorporated
by reference.
|
16.1
|
Change
in Certifying Accountant, previously filed in Form 8-K in August 1998 and
hereby incorporated by reference.
|
16.2
|
Investment
Transaction previously filed in Form 8-K in January 2002 and hereby
incorporated by reference.
|
16.3
|
Resignation
of Director previously filed in Form 8-K in April 2002 and hereby
incorporated by reference.
|
16.4
|
Change
in its Independent Public Accountants, previously filed in Form
8-K in May
2003 and hereby incorporated by reference.
|
16.5
|
Change
in its Independent Public Accountants, previously filed in Form
8-K in
October 2003 and hereby incorporated by reference.
|
|
Subsidiaries
of Registrant.
|
23.1
|
Consent
of Feldman Sherb Erhlich & Co., P.C., previously filed to Forms S-8 in
February 1999 and June 2000 and Forms S-3 in May 1999 and June
1999 and
hereby incorporated by
reference.
|
23.2
|
Consent
of Moss Adams LLP, previously filed to Forms S-8 in February 1999
and June
2000 and Forms S-3 in May 1999 and June 1999 and hereby incorporated
by
reference.
|
23.3
|
Consent
of Camhy Karlinsky & Stein LLP, previously filed to Form S-8 in
February 1999 and Forms S-3 in May 1999 and June 1999 and hereby
incorporated by reference.
|
23.4
|
Consent
of D’Ancona & Pflaum LLC, previously filed to Forms S-8 in June 2000
and June 2001 and hereby incorporated by reference.
|
|
Consent
of Marcum & Kliegman LLP
|
24.
|
Power
of Attorney, previously filed to Forms S-3 in May 1999 and June
1999.
|
|
Chief
Executive Officer’s Certificate pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.
|
|
Acting
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.
|
|
Acting
Chief Financial Officer’s Certificate pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
|
|
|
* |
Compensatory
agreements
|
REPORT
OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To
the
Board of Directors and Stockholders
National
Holdings Corporation
We
have
audited the accompanying consolidated statements of financial condition of
National Holdings Corporation (the "Company") as of September 30, 2006 and
2005,
and the related consolidated statements of operations, changes in stockholders'
equity and cash flows for each of the three years in the period ended September
30, 2006. These consolidated financial statements are the responsibility
of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We
conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that
we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. The Company is not required
to
have, nor were we engaged to perform, an audit of its internal control over
financial reporting. Our audits include consideration of internal control
over
financial reporting as a basis for designing audit procedures that are
appropriate in the circumstances, but not for the purpose of expressing an
opinion on the effectiveness of the Company’s internal control over financial
reporting. Accordingly, we express no such opinion. An audit also includes
examining, on a test basis, evidence supporting the amounts and disclosures
in
the financial statements, assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In
our
opinion, the consolidated financial statements referred to above present
fairly,
in all material respects, the consolidated financial position of National
Holdings Corporation as of September 30, 2006 and 2005, and the consolidated
results of its operations and its cash flows for each of the three years
in the
period ended September 30, 2006, in conformity with accounting principles
generally accepted in the United States of America.
/s/
Marcum & Kliegman LLP
New
York,
New York
November
28, 2006
NATIONAL
HOLDINGS CORPORATION AND SUBSIDIARIES
|
|
CONSOLIDATED
STATEMENTS OF FINANCIAL
CONDITION
|
ASSETS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September
30,
|
|
September
30,
|
|
|
|
2006
|
|
2005
|
|
|
|
|
|
|
|
CASH
|
|
$
|
1,441,000
|
|
$
|
398,000
|
|
DEPOSITS
WITH CLEARING ORGANIZATIONS
|
|
|
300,000
|
|
|
300,000
|
|
RECEIVABLES
FROM BROKER-DEALERS AND CLEARING ORGANIZATIONS
|
|
|
3,548,000
|
|
|
3,329,000
|
|
OTHER
RECEIVABLES, net of allowance for uncollectible accounts of
$467,000
|
|
|
|
|
|
|
|
and
$368,000 at September 30, 2006 and 2005, respectively
|
|
|
380,000
|
|
|
485,000
|
|
ADVANCES
TO REGISTERED REPRESENTATIVES
|
|
|
1,556,000
|
|
|
1,653,000
|
|
SECURITIES
OWNED
|
|
|
|
|
|
|
|
Marketable,
at market value
|
|
|
475,000
|
|
|
166,000
|
|
Non-marketable,
at fair value
|
|
|
402,000
|
|
|
|
|
FIXED
ASSETS, net
|
|
|
305,000
|
|
|
250,000
|
|
SECURED
DEMAND NOTE
|
|
|
1,000,000
|
|
|
1,000,000
|
|
OTHER
ASSETS
|
|
|
300,000
|
|
|
379,000
|
|
TOTAL
ASSETS
|
|
$
|
9,707,000
|
|
$
|
7,960,000
|
|
|
|
|
|
|
|
|
|
LIABILITIES
AND STOCKHOLDERS' EQUITY
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
PAYABLE
TO BROKER-DEALERS AND CLEARING ORGANIZATIONS
|
|
$
|
113,000
|
|
$
|
122,000
|
|
SECURITIES
SOLD, BUT NOT YET PURCHASED, at market
|
|
|
162,000
|
|
|
44,000
|
|
ACCOUNTS
PAYABLE, ACCRUED EXPENSES AND OTHER LIABILITIES
|
|
|
3,943,000
|
|
|
4,045,000
|
|
CONVERTIBLE
NOTES PAYABLE, net of debt discounts of $159,000 and $0
|
|
|
|
|
|
|
|
at
September 30, 2006 and 2005, respectively
|
|
|
841,000
|
|
|
|
|
NOTES
PAYABLE, net of debt discounts of $45,000 and $206,000
|
|
|
|
|
|
|
|
at
September 30, 2006 and 2005, respectively
|
|
|
805,000
|
|
|
1,819,000
|
|
TOTAL
LIABILITIES
|
|
|
5,864,000
|
|
|
6,030,000
|
|
|
|
|
|
|
|
|
|
SUBORDINATED
BORROWINGS
|
|
|
1,000,000
|
|
|
1,000,000
|
|
|
|
|
|
|
|
|
|
COMMITMENTS
AND CONTINGENCIES (NOTES 14 and 15)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 September 30, 2006 and 33,320 shares issued and
|
|
|
|
|
|
|
|
outstanding
(liquidation preference: $3,332,000) at September 30, 2005
|
|
|
|
|
|
|
|
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 September 30, 2006 and 0 shares issued and
|
|
|
|
|
|
|
|
outstanding
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
September 30, 2006 and 2005, respectively
|
|
|
104,000
|
|
|
101,000
|
|
Additional
paid-in capital
|
|
|
16,956,000
|
|
|
15,295,000
|
|
Accumulated
deficit
|
|
|
(14,217,000
|
)
|
|
(14,466,000
|
)
|
TOTAL
STOCKHOLDERS' EQUITY
|
|
|
2,843,000
|
|
|
930,000
|
|
TOTAL
LIABILITIES AND STOCKHOLDERS' EQUITY
|
|
$
|
9,707,000
|
|
$
|
7,960,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See
notes
to consolidated financials statements.
NATIONAL
HOLDINGS CORPORATION AND SUBSIDIARIES
|
|
CONSOLIDATED
STATEMENTS OF OPERATIONS
|
|
|
|
|
|
|
|
|
|
|
Years
Ended
|
|
|
|
September
30,
2006
|
|
September
30,
2005
|
|
September
30,
2004
|
|
|
|
|
|
|
|
|
|
REVENUES
|
|
|
|
|
|
|
|
Commissions
|
|
$
|
32,140,000
|
|
$
|
33,134,000
|
|
$
|
46,881,000
|
|
Net
dealer inventory gains
|
|
|
7,838,000
|
|
|
5,710,000
|
|
|
7,404,000
|
|
Investment
banking
|
|
|
11,323,000
|
|
|
528,000
|
|
|
1,548,000
|
|
Total
commission and fee revenues
|
|
|
51,301,000
|
|
|
39,372,000
|
|
|
55,833,000
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
and dividends
|
|
|
2,891,000
|
|
|
2,739,000
|
|
|
3,420,000
|
|
Transfer
fees and clearing services
|
|
|
3,336,000
|
|
|
3,097,000
|
|
|
2,806,000
|
|
Other
|
|
|
1,199,000
|
|
|
522,000
|
|
|
401,000
|
|
|
|
|
58,727,000
|
|
|
45,730,000
|
|
|
62,460,000
|
|
|
|
|
|
|
|
|
|
|
|
|
EXPENSES
|
|
|
|
|
|
|
|
|
|
|
Commissions
and fees
|
|
|
42,276,000
|
|
|
32,838,000
|
|
|
43,932,000
|
|
Employee
compensation and related expenses
|
|
|
5,835,000
|
|
|
5,010,000
|
|
|
5,449,000
|
|
Clearing
fees
|
|
|
1,538,000
|
|
|
432,000
|
|
|
2,391,000
|
|
Communications
|
|
|
1,748,000
|
|
|
1,670,000
|
|
|
2,589,000
|
|
Occupancy
and equipment costs
|
|
|
2,805,000
|
|
|
2,886,000
|
|
|
2,983,000
|
|
Professional
fees
|
|
|
1,213,000
|
|
|
1,520,000
|
|
|
2,559,000
|
|
Litigation
settlement
|
|
|
|
|
|
|
|
|
400,000
|
|
Interest
|
|
|
494,000
|
|
|
448,000
|
|
|
397,000
|
|
Taxes,
licenses, registration
|
|
|
617,000
|
|
|
344,000
|
|
|
560,000
|
|
Other
administrative expenses
|
|
|
1,606,000
|
|
|
1,765,000
|
|
|
1,765,000
|
|
|
|
|
58,132,000
|
|
|
46,913,000
|
|
|
63,025,000
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income (loss) from operations
|
|
|
595,000
|
|
|
(1,183,000
|
)
|
|
(565,000
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Gains
on extinguishments of debt
|
|
|
|
|
|
|
|
|
1,131,000
|
|
Net
income (loss)
|
|
|
595,000
|
|
|
(1,183,000
|
)
|
|
566,000
|
|
|
|
|
|
|
|
|
|
|
|
|
Preferred
stock dividends
|
|
|
(381,000
|
)
|
|
(290,000
|
)
|
|
(266,000
|
)
|
Net
income (loss) attributable to common stockholders
|
|
$
|
214,000
|
|
$
|
(1,473,000
|
)
|
$
|
300,000
|
|
|
|
|
|
|
|
|
|
|
|
|
INCOME
(LOSS) PER COMMON SHARE
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic:
|
|
|
|
|
|
|
|
|
|
|
Net
income (loss) attributable to common stockholders
|
|
$
|
0.04
|
|
$
|
(0.29
|
)
|
$
|
0.08
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted:
|
|
|
|
|
|
|
|
|
|
|
Net
income (loss) attributable to common stockholders
|
|
$
|
0.04
|
|
$
|
(0.29
|
)
|
$
|
0.07
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
average number of shares outstanding:
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
5,146,422
|
|
|
5,024,643
|
|
|
3,580,446
|
|
Diluted
|
|
|
5,278,299
|
|
|
5,024,643
|
|
|
4,106,742
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See
notes to consolidated financials
statements.
NATIONAL
HOLDINGS CORPORATION AND SUBSIDIARIES
|
|
CONSOLIDATED
STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
(DEFICIT)
|
|
YEARS
ENDED SEPTEMBER 30, 2006, SEPTEMBER 30, 2005 AND SEPTEMBER 30,
2004
|
|
|
|
|
|
|
|
|
|
|
Additional
|
|
|
|
|
|
|
|
Preferred
Stock
|
|
Common
Stock
|
|
Paid-In
|
|
|
|
|
|
|
|
Shares
|
|
Amount
|
|
Shares
|
|
Amount
|
|
Capital
|
|
Deficit
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
BALANCE,
September 30, 2003
|
|
|
27,825
|
|
$
|
|
|
|
3,367,558
|
|
$
|
67,000
|
|
$
|
12,628,000
|
|
$
|
(13,024,000
|
)
|
$
|
(329,000
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance
of series A preferred stock dividends
|
|
|
3,352
|
|
|
|
|
|
|
|
|
|
|
|
503,000
|
|
|
(503,000
|
)
|
|
|
|
Exercise
of stock options
|
|
|
|
|
|
|
|
|
26,003
|
|
|
1,000
|
|
|
25,000
|
|
|
|
|
|
26,000
|
|
Exercise
of warrants
|
|
|
|
|
|
|
|
|
240,771
|
|
|
5,000
|
|
|
290,000
|
|
|
|
|
|
295,000
|
|
Issuance
of restricted common stock:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
From
private placement
|
|
|
|
|
|
|
|
|
1,250,000
|
|
|
25,000
|
|
|
905,000
|
|
|
|
|
|
930,000
|
|
Settlement
of arbitration
|
|
|
|
|
|
|
|
|
100,000
|
|
|
2,000
|
|
|
98,000
|
|
|
|
|
|
100,000
|
|
Warrants
issued in connection with debt
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
341,000
|
|
|
|
|
|
341,000
|
|
Net
income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
566,000
|
|
|
566,000
|
|
BALANCE,
September 30, 2004
|
|
|
31,177
|
|
|
|
|
|
4,984,332
|
|
|
100,000
|
|
|
14,790,000
|
|
|
(12,961,000
|
)
|
|
1,929,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance
of series A preferred stock dividends
|
|
|
2,143
|
|
|
|
|
|
|
|
|
|
|
|
322,000
|
|
|
(322,000
|
)
|
|
|
|
Exercise
of warrants
|
|
|
|
|
|
|
|
|
21,546
|
|
|
|
|
|
19,000
|
|
|
|
|
|
19,000
|
|
Issuance
of restricted common stock:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Settlement
of arbitration
|
|
|
|
|
|
|
|
|
40,000
|
|
|
1,000
|
|
|
39,000
|
|
|
|
|
|
40,000
|
|
Warrants
issued in connection with debt
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
125,000
|
|
|
|
|
|
125,000
|
|
Net
loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1,183,000
|
)
|
|
(1,183,000
|
)
|
BALANCE,
September 30, 2005
|
|
|
33,320
|
|
|
|
|
|
5,045,878
|
|
|
101,000
|
|
|
15,295,000
|
|
|
(14,466,000
|
)
|
|
930,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance
of series A preferred stock dividends
|
|
|
1,996
|
|
|
|
|
|
|
|
|
|
|
|
300,000
|
|
|
(300,000
|
)
|
|
|
|
Payment
of series B preferred stock dividends
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(46,000
|
)
|
|
(46,000
|
)
|
Issuance
of restricted common stock:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
From
private placement
|
|
|
|
|
|
|
|
|
159,090
|
|
|
3,000
|
|
|
170,000
|
|
|
|
|
|
173,000
|
|
Employee
bonuses
|
|
|
|
|
|
|
|
|
19,000
|
|
|
|
|
|
12,000
|
|
|
|
|
|
12,000
|
|
Issuance
of series B preferred stock
|
|
|
10,000
|
|
|
|
|
|
|
|
|
|
|
|
972,000
|
|
|
|
|
|
972,000
|
|
Warrants
issued in connection with debt
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
187,000
|
|
|
|
|
|
187,000
|
|
Amortization
of deferred compensation
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
20,000
|
|
|
|
|
|
20,000
|
|
Net
income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
595,000
|
|
|
595,000
|
|
BALANCE,
September 30, 2006
|
|
|
45,316
|
|
$
|
|
|
|
5,223,968
|
|
$
|
104,000
|
|
$
|
16,956,000
|
|
$
|
(14,217,000
|
)
|
$
|
2,843,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See
notes to consolidated financials
statements.
NATIONAL
HOLDINGS CORPORATION AND SUBSIDIARIES
|
|
CONSOLIDATED
STATEMENTS OF CASH FLOWS
|
|
|
Years
ended
|
|
|
|
September
30,
2006
|
|
September
30,
2005
|
|
September
30,
2004
|
|
CASH
FLOWS FROM OPERATING ACTIVITIES
|
|
|
|
|
|
|
|
Net
income (loss)
|
|
$
|
595,000
|
|
$
|
(1,183,000
|
)
|
$
|
566,000
|
|
Adjustments
to reconcile net income (loss) to net
|
|
|
|
|
|
|
|
|
|
|
cash
provided by (used in) operating activities
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
|
162,000
|
|
|
145,000
|
|
|
165,000
|
|
Gains on extinguishments of debt
|
|
|
|
|
|
|
|
|
(1,131,000
|
)
|
Amortization of deferred financing costs
|
|
|
4,000
|
|
|
|
|
|
|
|
Amortization of note discount
|
|
|
189,000
|
|
|
163,000
|
|
|
122,000
|
|
Compensatory element of common stock issuance
|
|
|
12,000
|
|
|
|
|
|
|
|
Compensatory element of common stock option issuances
|
|
|
19,000
|
|
|
|
|
|
|
|
Provision for doubtful accounts
|
|
|
25,000
|
|
|
150,000
|
|
|
200,000
|
|
Forgiveness of loan
|
|
|
|
|
|
|
|
|
(251,000
|
)
|
Issuance of common stock in settlement of arbitration
|
|
|
|
|
|
40,000
|
|
|
100,000
|
|
Changes
in assets and liabilities
|
|
|
|
|
|
|
|
|
|
|
Deposits
with clearing organizations
|
|
|
|
|
|
695,000
|
|
|
46,000
|
|
Receivables
from broker-dealers, clearing organizations and others
|
|
|
(42,000
|
)
|
|
829,000
|
|
|
(1,569,000
|
)
|
Securities
owned: marketable, at market value
|
|
|
(309,000
|
)
|
|
(17,000
|
)
|
|
225,000
|
|
Securities
owned: non-marketable, at fair value
|
|
|
(402,000
|
)
|
|
|
|
|
|
|
Other
assets
|
|
|
104,000
|
|
|
101,000
|
|
|
65,000
|
|
Payables
|
|
|
(111,000
|
)
|
|
(737,000
|
)
|
|
127,000
|
|
Securities
sold, but not yet purchased, at market
|
|
|
118,000
|
|
|
11,000
|
|
|
(83,000
|
)
|
Net
cash provided by (used in) operating activities
|
|
|
364,000
|
|
|
197,000
|
|
|
(1,418,000
|
)
|
|
|
|
|
|
|
|
|
|
|
|
CASH
FLOWS FROM INVESTING ACTIVITIES
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchase
of fixed assets
|
|
|
(217,000
|
)
|
|
(94,000
|
)
|
|
(219,000
|
)
|
Net
cash used in investing activities
|
|
|
(217,000
|
)
|
|
(94,000
|
)
|
|
(219,000
|
)
|
|
|
|
|
|
|
|
|
|
|
|
CASH
FLOWS FROM FINANCING ACTIVITIES
|
|
|
|
|
|
|
|
|
|
|
Net
proceeds from issuance of common stock and warrants
|
|
|
173,000
|
|
|
|
|
|
930,000
|
|
Net
proceeds from issuance of preferred stock
|
|
|
972,000
|
|
|
|
|
|
|
|
Net
proceeds from issuance of convertible notes payable
|
|
|
1,000,000
|
|
|
|
|
|
|
|
Net
proceeds from issuance of notes payable and warrants
|
|
|
|
|
|
|
|
|
1,036,000
|
|
Cash
payment of deferred financing costs
|
|
|
(28,000
|
)
|
|
|
|
|
|
|
Payment
of notes payable
|
|
|
(1,175,000
|
)
|
|
(75,000
|
)
|
|
(750,000
|
)
|
Dividends
paid
|
|
|
(46,000
|
)
|
|
|
|
|
|
|
Exercise
of stock options and warrants
|
|
|
|
|
|
19,000
|
|
|
321,000
|
|
Net
cash provided by (used in) financing activities
|
|
|
896,000
|
|
|
(56,000
|
)
|
|
1,537,000
|
|
|
|
|
|
|
|
|
|
|
|
|
NET
INCREASE (DECREASE) IN CASH
|
|
|
1,043,000
|
|
|
47,000
|
|
|
(100,000
|
)
|
|
|
|
|
|
|
|
|
|
|
|
CASH
BALANCE
|
|
|
|
|
|
|
|
|
|
|
Beginning
of the year
|
|
|
398,000
|
|
|
351,000
|
|
|
451,000
|
|
End
of the year
|
|
$
|
1,441,000
|
|
$
|
398,000
|
|
$
|
351,000
|
|
|
|
|
|
|
|
|
|
|
|
|
SUPPLEMENTAL
DISCLOSURES OF CASH FLOW INFORMATION
|
|
|
|
|
|
|
|
|
|
|
Cash
paid during the year for:
|
|
|
|
|
|
|
|
|
|
|
Interest
|
|
$
|
501,000
|
|
$
|
450,000
|
|
$
|
363,000
|
|
Series
B preferred stock dividends
|
|
$
|
46,000
|
|
$
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
SUPPLEMENTAL
DISCLOSURES OF NONCASH INVESTING AND
|
|
|
|
|
|
|
|
|
|
|
FINANCING
ACTIVITIES
|
|
|
|
|
|
|
|
|
|
|
Warrants
issued in connection with debt
|
|
$
|
187,000
|
|
$
|
125,000
|
|
$
|
341,000
|
|
Series
A preferred stock dividends
|
|
$
|
300,000
|
|
$
|
322,000
|
|
$
|
503,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See
notes to consolidated financials
statements.
NATIONAL
HOLDINGS CORPORATION
AND
SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER
30, 2006, SEPTEMBER 30, 2005 AND SEPTEMBER 30, 2004
National
Holdings Corporation (“National Holdings” or the
“Company”),
a
Delaware corporation organized in 1996, is
a
financial services organization, operating through its wholly owned subsidiary,
National Securities Corporation (“National Securities”)
a
Washington corporation organized in 1947.
National
Securities conducts a national securities brokerage business through its main
offices in Seattle, Washington and New York, New York. The
Company’s business includes securities brokerage for individual and
institutional clients, market-making trading activities, asset management and
corporate finance services. National Securities is an introducing broker and
clears all transactions through clearing organizations on a fully disclosed
basis. On March 15, 2006, the Company changed its name from “Olympic Cascade
Financial Corporation” to “National Holdings Corporation.”
National
Holdings formed a new wholly owned subsidiary, National Insurance
Corporation,
a
Washington corporation (“National Insurance”) in
the
third quarter of fiscal year 2006. National Insurance will provide fixed
insurance products to its clients, including life insurance, disability
insurance, long term care insurance and fixed annuities. National Insurance
is
in the process of completing the requisite state registrations, and has not
yet
commenced active business operations.
2. |
SUMMARY
OF SIGNIFICANT ACCOUNTING
POLICIES
|
|
a. |
Principles
of Consolidation
-
The consolidated financial statements include the accounts of
National
Holdings, National Securities and National Insurance, its wholly
owned
subsidiaries. All significant inter-company accounts and transactions
have
been eliminated in
consolidation.
|
|
b.
|
Estimates - The
preparation of financial statements in conformity with accounting
principles generally accepted in the United States of America requires
management to make estimates and assumptions that affect the reported
amounts of assets and liabilities, disclosure of contingent assets
and
liabilities at the date of the financial statements, and the reported
amounts of revenues and expenses during the reporting period. Actual
results could differ from those
estimates.
|
|
c. |
Revenue
Recognition
-
Customer security transactions and the related commission income
and
expense are recorded as of the trade date. Investment banking revenues
include gains, losses, and fees, net of syndicate expenses, arising
from
securities offerings in which the Company acts as an underwriter
or agent.
Investment banking revenues also include fees earned from providing
financial advisory services. Investment banking management fees are
recorded on the offering date, sales concessions on the settlement
date,
and underwriting fees at the time the underwriting is completed and
the
income is reasonably determinable. Customers who are financing their
transaction on margin are charged interest. The Company’s margin
requirements are in accordance with the terms and conditions mandated
by
its clearing firms, National Financial Services
LLC
|
(“NFS”)
and Penson Financial Services, Inc. (“Penson”). The interest is billed on the
average daily balance of the margin account.
Net
dealer inventory gains result from securities transactions entered into for
the
account and risk of the Company. Net dealer inventory gains are recorded on
a
trade date basis. Transfer fees are charged for each customer’s security
transaction, and are recognized as of the trade date. Investment advisory fees
are account management fees for high net worth clients. These fees are billed
quarterly and recognized at such time that collection is probable.
The
Company generally acts as an agent in executing customer orders to buy or sell
listed and over-the-counter securities in which it does not make a market,
and
charges commissions based on the services the Company provides to its customers.
In executing customer orders to buy or sell a security in which the Company
makes a market, the Company may sell to, or purchase from, customers at a price
that is substantially equal to the current inter-dealer market price plus or
minus a mark-up or mark-down. The Company may also act as agent and execute
a
customer's purchase or sale order with another broker-dealer market-maker at
the
best inter-dealer market price available and charge a commission. Mark-ups,
mark-downs and commissions are generally priced competitive based on the
services it provides to its customers. In each instance the commission charges,
mark-ups or mark-downs, are in compliance with guidelines established by the
NASD.
|
|
d.
|
Fixed
Assets
-
Fixed assets are recorded at cost. Depreciation is calculated using
the
straight-line method based on the estimated useful lives of the related
assets, which range from three to five years. Leasehold improvements
are
amortized using the straight-line method over the shorter of the
estimated
useful lives of the assets or the terms of the leases. Expenditures
for
maintenance and repairs, which do not extend the economic useful
life of
the related assets, are charged to operations as incurred. When assets
are
retired or otherwise disposed of, the costs and related accumulated
depreciation or amortization are removed from the accounts and any
gain or
loss on disposal is recognized.
|
|
e. |
Income
Taxes
-
The Company recognizes deferred tax assets and liabilities based
on the
difference between the financial statements carrying amounts and
the tax
basis of assets and liabilities, using the effective tax rates
in the
years in which the differences are expected to reverse. A valuation
allowance related to deferred tax assets is also recorded when
it is more
likely than not that some or all of the deferred tax asset will
not be
realized.
|
|
f. |
Investment
in Limited Partnership -
The Company accounts for its investment in the limited partnership
in
accordance with the equity method of accounting. Such asset has been
included in other assets in the accompanying consolidated statements
of
financial condition. The Company has an investment in the limited
partnership for which the carrying value is $0 at September 30,
2006.
|
|
g.
|
Fair
Value of Financial Instruments -
The carrying amounts reported in the balance sheet for cash, receivables,
accounts payable, accrued expenses and other liabilities approximates
fair
value based on the short-term maturity of these
instruments.
|
|
h. |
Impairment
of Long-Lived Assets - The
Company reviews long-lived assets for impairment whenever circumstances
and situations change such that there is an indication that the carrying
amounts may not be recovered. At September 30, 2006, the Company
has
determined that there has been no impairment of its long-lived
assets.
|
|
i.
|
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.
|
|
|
Fiscal
Years Ended
|
|
|
|
September
30,
|
|
September
30,
|
|
September
30,
|
|
|
|
2006
|
|
2005
|
|
2004
|
|
Numerator:
|
|
|
|
|
|
|
|
Net
income (loss)
|
|
$
|
595,000
|
|
$
|
(1,183,000
|
)
|
$
|
566,000
|
|
Preferred
stock dividends
|
|
|
(381,000
|
)
|
|
(290,000
|
)
|
|
(266,000
|
)
|
Numerator
for basic and diluted earnings per share--net
|
|
|
|
|
|
|
|
|
|
|
income
(loss) attributable to common stockholders
|
|
$
|
214,000
|
|
$
|
(1,473,000
|
)
|
$
|
300,000
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator:
|
|
|
|
|
|
|
|
|
|
|
Denominator
for basic earnings per share--weighted
|
|
|
|
|
|
|
|
|
|
|
average
shares
|
|
|
5,146,422
|
|
|
5,024,643
|
|
|
3,580,446
|
|
Effective
of dilutive securities:
|
|
|
|
|
|
|
|
|
|
|
Stock
options
|
|
|
36,520
|
|
|
|
|
|
36,182
|
|
Warrants
|
|
|
95,357
|
|
|
|
|
|
490,114
|
|
Dilutive
potential common shares
|
|
|
131,877
|
|
|
—
|
|
|
526,296
|
|
Denominator
for diluted earnings per share--adjusted
|
|
|
|
|
|
|
|
|
|
|
weighted-average
shares and assumed conversions
|
|
|
5,278,299
|
|
|
5,024,643
|
|
|
4,106,742
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income (loss) available to common stockholders
|
|
|
|
|
|
|
|
|
|
|
Basic:
|
|
$
|
0.04
|
|
$
|
(0.29
|
)
|
$
|
0.08
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted:
|
|
$
|
0.04
|
|
$
|
(0.29
|
)
|
$
|
0.07
|
|
For
the
fiscal year ended September 30, 2006, 5,158,613 shares attributable to
outstanding Series A and B Preferred Stock and convertible notes were excluded
from the calculation of diluted net income per share because if included
the
effect would be anitdilutive. For the fiscal year ended September 30, 2005,
5,357,278 shares attributable to outstanding Series A Preferred Stock, stock
options and warrants were excluded from the calculation of diluted net income
per share because if included the effect would be anitdilutive. For the fiscal
year ended September 30, 2004, 2,078,465 shares attributable to outstanding
Series A Preferred Stock were excluded from the calculation of diluted net
income per share because if included the effect would be
anitdilutive.
|
j. |
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 fiscal year
2006, the Company granted 170,000 stock options with a fair value of
approximately $88,000. A charge of approximately $20,000 was recorded in fiscal
year 2006, relating to the amortization of the fair value associated with these
grants.
For
fiscal years 2005 and 2004, 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 those years.
|
|
Fiscal
Years Ended
|
|
|
|
September
30,
|
|
September
30,
|
|
|
|
2005
|
|
2004
|
|
|
|
|
|
|
|
Net
income (loss) attributable to common stockholders - as
reported
|
|
$
|
(1,473,000
|
)
|
$
|
300,000
|
|
Stock-based
employee compensation cost determined under
|
|
|
|
|
|
|
|
fair
value method, net of tax effects
|
|
|
(869,000
|
)
|
|
(286,000
|
)
|
Net
income (loss) attributable to common stockholders - pro
forma
|
|
$
|
(2,342,000
|
)
|
$
|
14,000
|
|
|
|
|
|
|
|
|
|
Earnings
(loss) per share
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
earnings (loss) loss per share:
|
|
|
|
|
|
|
|
Net
income (loss) attributable to common stockholders - as
reported
|
|
$
|
(0.29
|
)
|
$
|
0.08
|
|
Per
share stock-based employee compensation cost
|
|
|
|
|
|
|
|
determined
under fair value method, net of tax effects
|
|
|
(0.17
|
)
|
|
(0.08
|
)
|
Net
income (loss) attributable to common stockholders - pro
forma
|
|
$
|
(0.46
|
)
|
$
|
|
|
|
|
|
|
|
|
|
|
Diluted
earnings (loss) loss per share:
|
|
|
|
|
|
|
|
Net
income (loss) attributable to common stockholders - as
reported
|
|
$
|
(0.29
|
)
|
$
|
0.07
|
|
Per
share stock-based employee compensation cost
|
|
|
|
|
|
|
|
determined
under fair value method, net of tax effects
|
|
|
(0.17
|
)
|
|
(0.07
|
)
|
Net
income (loss) attributable to common stockholders - pro
forma
|
|
$
|
(0.46
|
)
|
$
|
—
|
|
The
Black-Scholes option valuation model was used to estimate the fair value of
the
options granted during the fiscal years ended September 30, 2005, 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:
|
|
Fiscal
Years Ended
|
|
|
|
September
30,
|
|
September
30,
|
|
September
30,
|
|
|
|
2006
|
|
2005
|
|
2004
|
|
Assumptions:
|
|
|
|
|
|
|
|
Risk-free
interest rate
|
|
|
4.40
|
%
|
|
3.15
|
%
|
|
2.48
|
%
|
|
|
|
|
|
|
|
|
|
|
|
Expected
life, in years
|
|
|
3.0
|
|
|
5.0
|
|
|
3.0
|
|
|
|
|
|
|
|
|
|
|
|
|
Expected
volatility
|
|
|
88
|
%
|
|
135
|
%
|
|
123
|
%
|
As
of
September 30, 2006, there was $68,000 of total deferred compensation costs
related to share-based compensation arrangements.
A
summary
of the status of the Company’s nonvested shares as of September 30, 2006, and
changes during the fiscal year then ended is presented below:
|
|
|
|
Weighted
|
|
|
|
|
|
Average
|
|
|
|
|
|
Grant
Date
|
|
Nonvested
Shares
|
|
Shares
|
|
Fair
Value
|
|
Nonvested
at September 30, 2005
|
|
|
10,000
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
Granted
|
|
|
170,000
|
|
$
|
0.52
|
|
|
|
|
|
|
|
|
|
Vested
|
|
|
(101,250
|
)
|
$
|
0.62
|
|
|
|
|
|
|
|
|
|
Expired
|
|
|
(3,750
|
)
|
$
|
|
|
|
|
|
|
|
|
|
|
Nonvested
at September 30, 2006
|
|
|
75,000
|
|
$
|
0.33
|
|
|
k. |
Concentrations
of Credit Risk
-
The Company is engaged in trading and providing a broad range of
securities brokerage and investment services to a diverse group of
retail
and institutional clientele, as well as corporate finance and investment
banking services to corporations and businesses. Counterparties to
the
Company’s business activities include broker-dealers and clearing
organizations, banks and other financial institutions. The Company
uses
clearing brokers to process transactions and maintain customer accounts
on
a fee basis for the Company. The Company uses two clearing brokers
for
substantially all of its business. The Company permits the clearing
firms
to extend credit to its clientele secured by cash and securities
in the
client’s account. The Company’s exposure to credit
risk
|
associated
with the non-performance by its customers and counterparties in fulfilling
their
contractual obligations can be directly impacted by volatile or illiquid trading
markets, which may impair the ability of customers and counterparties to satisfy
their obligations to the Company. The Company has agreed to indemnify the
clearing brokers for losses they incur while extending credit to the Company’s
clients. It is the Company’s policy to review, as necessary, the credit standing
of its customers and each counterparty. Amounts due from customers that are
considered uncollectible by the clearing broker are charged back to the Company
by the clearing broker when such amounts become determinable. Upon notification
of a charge back, such amounts, in total or in part, are then either (i)
collected from the customers, (ii) charged to the broker initiating the
transaction and included in other receivables in the accompanying consolidated
statements of financial condition, and/or (iii) charged as an expense in the
accompanying consolidated statements of financial condition, based on the
particular facts and circumstances.
The
Company maintains cash with major financial institutions. The Federal Deposit
Insurance Corporation (“FDIC”) insures up to $100,000 at each institution. At
times such amounts may exceed the FDIC limits. At September 30, 2006 the
uninsured cash bank balance was $1,051,000. The Company believes it is not
exposed to any significant credit risks for cash.
|
l. |
Other
Receivables
-
The Company extends unsecured credit in the normal course of business
to
its brokers. The determination of the amount of uncollectible accounts
is
based on the amount of credit extended and the length of time each
receivable has been outstanding, as it relates to each individual
broker.
The allowance for doubtful accounts reflects the amount of loss that
can
be reasonably estimated by management, and is included in other expenses
in the accompanying consolidated statements of
operations.
|
|
m.
|
Advances
to Registered Representatives
-
Advances are given to certain registered representatives as an incentive
for their affiliation with National Securities. The representative
signs
an independent contractor agreement with National Securities for
a
specified term, typically a three-year period. The advance is then
amortized on a straight-line basis over the amount of time the
representative is obligated to be affiliated with National Securities,
and
is included in commissions expense in the accompanying consolidated
statements of operations. In the event the representative’s affiliation
with National Securities terminates prior to the fulfillment of their
contract, the representative is required to repay the unamortized
balance.
|
|
n.
|
Securities
Owned
-
Marketable securities which consist of publicly traded unrestricted
common
stock and bonds are valued at the closing price on the valuation
date.
Non-marketable securities which consist of non-tradable warrants
exercisable into freely trading common stock of public companies
are
carried at fair value as determined in good faith by
management.
|
|
o. |
Other
Assets
-
Other assets consist of investment in a venture capital fund, pre-paid
expenses and lease deposits.
|
|
p. |
Recently
Issued Accounting Standards -
In February 2006, the FASB issued Statement of Financial Accounting
Standard 155 “Accounting for Certain
Hybrid
|
Financial
Instruments” (“SFAS 155”), which eliminates the exemption from applying SFAS 133
“Accounting for Derivative Instruments and Hedging Activities” (“SFAS 133”) to
interests in securitized financial assets so that similar instruments are
accounted for similarly regardless of the form of the instruments. SFAS 155
also
allows the election of fair value measurement at acquisition, at issuance,
or
when a previously recognized financial instrument is subject to a remeasurement
event. Adoption is effective for all financial instruments acquired or issued
after the beginning of the first fiscal year that begins after
September 15, 2006. Early adoption is permitted. The adoption of SFAS 155
is not expected to have a material effect on the Company’s consolidated
financial position, results of operations or cash flows.
In
March
2006, the FASB issued Statement of Financial Accounting Standard 156 “Accounting
for Servicing of Financial Assets” (“SFAS 156”), which requires all separately
recognized servicing assets and servicing liabilities be initially measured
at
fair value. SFAS 156 permits, but does not require, the subsequent measurement
of servicing assets and servicing liabilities at fair value. Adoption is
required as of the beginning of the first fiscal year that begins after
September 15, 2006. Early adoption is permitted. The adoption of SFAS 156
is not expected to have a material effect on the Company’s consolidated
financial position, results of operations or cash flows.
In
September 2006, the FASB issued SFAS No. 157, “Accounting for Fair Value
Measurements” (“SFAS 157”). SFAS 157 defines fair value, and establishes a
framework for measuring fair value in generally accepted accounting principles
and expands disclosure about fair value measurements. SFAS 157 is effective
for
the Company for financial statements issued subsequent to November 15,
2007. The Company does not expect the new standard to have a material impact
on
the Company’s financial position, results of operations or cash
flows.
In
September 2006, the staff of the SEC issued Staff Accounting Bulletin No. 108
(“SAB 108”) which provides interpretive guidance on how the effects of the
carryover or reversal of prior year misstatements should be considered in
quantifying a current year misstatement. SAB 108 becomes effective in fiscal
year 2007. Adoption of SAB 108 is not expected to have a material impact on
the
Company’s consolidated financial position, results of operations or cash
flows.
3. |
SIGNIFICANT
AGREEMENTS AND TRANSACTIONS
|
In
December 2003, the Company engaged in discussions with the NASD relating to
the
Security Agreement between National Securities and its then current clearing
firm, First Clearing
Corporation (“First Clearing”), a wholly owned subsidiary of Wachovia
Corporation,
and its
effect on the computation of National Securities’ 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 Securities’ 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 Securities and First
Clearing was terminated. Furthermore, First
Clearing
forgave payment of an additional $375,000 loan that was due to be paid in
January 2004, resulting in a $375,000 gain on extinguishments of debt in the
first quarter of fiscal year 2004.
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 gains on
extinguishments of debt of approximately $756,000 in the second quarter of
fiscal year 2004. Additionally, National Securities and First Clearing mutually
agreed to terminate their clearing relationship.
In
June
2004, National Securities entered into an agreement with Fiserv Securities,
Inc.
(“Fiserv”) to clear its brokerage business. The conversion from First Clearing
to Fiserv was completed in the first week of October 2004. As part of this
transaction, Fiserv provided National Securities with an $800,000 conversion
assistance payment, $250,000 of which was paid upon execution of the clearing
agreement, $250,000 of which was paid in mid-August 2004, and $300,000 of which
was paid in October 2004.
In
March
2005, NFS acquired the clearing business of Fiserv. In April 2005, National
Securities entered into a clearing agreement with NFS that became effective
in
June 2005. As part of this transaction, NFS provided National Securities with
a
$1.0 million conversion fee credit to reimburse the Company for the
transitional, incremental costs incurred by National Securities relating to
the
conversion of its clearing business to NFS. National Securities was paid
$250,000 in May 2005, and the remaining $750,000 was paid in July 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 its clearing relationships has been beneficial to the
Company’s cost structure, liquidity and capital resources.
|
(i) |
In
August 2005, upon the maturity of previously issued notes, the Company
and
two note holders entered into new note agreements providing for
$1.0
million of notes
with a maturity date of July 31, 2007, together with warrants having
an
expiration date of July 31, 2007 to purchase, in the aggregate, 200,000
shares of common stock at a price of $1.25 per share. These
notes in the principal amount of $1.0 million were repaid in full
in
January 2006.
|
|
|
In
February 2006, upon
the maturity of a previously issued secured demand note, National
Securities and the holder entered into a new $1.0 million secured
demand
note collateral
agreement with
a maturity date of March 1, 2007. The holder also entered into a
warrant
agreement to
purchase 150,000 shares of common stock at a price of $1.25 per share,
with an expiration
date of July 31, 2007.
|
The
Company recorded total allocated fair value of $130,000 to the warrants. The
fair value of the warrants was recorded as a debt discount and is being
amortized to interest expense.
|
(ii)
|
In
the first quarter of fiscal year 2003, the Company consummated a
private
placement of its securities, and issued 1,016,186 shares of restricted
common stock and 1,016,186 warrants. In December 2005, the Company
extended the expiration date of the warrants issued in this private
placement, including the placement agent warrants, to December 23,
2006
from December 23, 2005.
|
|
(iii)
|
In
January 2004, the Company consummated a private offering of its securities
to a limited number of accredited investors pursuant to Rule 506
of
Regulation D under the Securities Act wherein the Company issued
an
aggregate of $200,000 of three-year, 10% senior subordinated promissory
notes to five unaffiliated parties. The note holders 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. In December 2004, the Company rescinded
a
note in the principal amount of $25,000 and
a warrant to purchase 6,250 shares of Common Stock. The remaining
notes in
the principal amount of $175,000 were repaid in full in March
2006.
|
In
February 2004, the Company consummated a private offering of its securities
to a
limited number of accredited investors pursuant to Rule 506 of Regulation D
under the Securities Act wherein the Company issued an aggregate of $850,000
of
three-year, 10% senior subordinated promissory notes to four unaffiliated
parties. The note holders 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
Company is accreting the total allocated fair value of $183,000 over the
three-year term of these promissory notes, and the balance from the January
2004
notes was accreted in March 2006. Such accretion has been included in “Interest”
in the accompanying consolidated financial statements.
|
(iv)
|
In
the fourth quarter of fiscal year 2004, the Company consummated a
private
placement of its securities to a limited number of accredited investors
pursuant to Rule 506 of Regulation D under the Securities Act. Each
unit
in this offering sold for $1.60 and consisted of two shares of the
Company’s common stock and one three-year warrant to purchase one share of
the Company’s common stock at a per share price of $1.50. Net proceeds of
$930,000 closed in the fourth quarter of fiscal year 2004, and the
Company
correspondingly issued 1,250,000 shares of the Company’s common stock and
625,000 warrants.
|
|
(v) |
In
the fourth quarter of fiscal year 2004, the Company issued 100,000
shares
of common stock as part of the settlement of an arbitration, as payment
of
approximately $100,000. In the second quarter of fiscal year 2005,
the
Company issued 40,000 shares of common stock as part of the settlement
of
two arbitrations as payment of approximately $40,000. Such payments
have
|
been
included in “Professional fees”, and the issuance of the shares of common stock
has been included in “Common stock” and “Additional paid-in capital”, in the
accompanying consolidated financial statements.
|
(vi) |
In
January 2006, the Company completed a
financing transaction exempt from registration under Section 4(2)
of the
Securities Act, 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
for 10,000 shares 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. 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 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 transaction. The
Company incurred legal fees and other costs related to this capital transaction,
in the amount of $56,000.
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.
|
(vii)
|
In
March 2006, the Company issued 159,090 shares of the Company’s common
stock to an unaffiliated party for $175,000
in
a private placement exempt from registration under Section 4(2) of
the
Securities Act.
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.
|
|
(viii)
|
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,
shares of Common Stock issuable upon the conversion of preferred
stock and
notes, and exercise of certain warrants previously issued in connection
with private placement transactions. The Registration Statement became
effective on November 6, 2006.
|
4. |
BROKER-DEALERS
AND CLEARING ORGANIZATIONS RECEIVABLES AND
PAYABLES
|
At
September 30, 2006 and 2005 the receivables of $3,548,000 and $3,329,000,
respectively, from brokers and dealers represent net amounts due for fees and
commissions. At September
30,
2006
and 2005, the amounts payable to broker dealers and clearing organizations
of
$113,000 and $122,000, respectively, represent amounts payable for inventory
purchases on behalf of the Company and its customers.
An
analysis of other receivables, and the allowance for uncollectible accounts
on
such receivables for the fiscal years ended September 30, 2004, 2005 and 2006
is
as follows:
|
|
Other
|
|
|
|
Net
|
|
|
|
Receivables
|
|
Allowance
|
|
Receivables
|
|
Balance,
September 30, 2003
|
|
$
|
1,359,000
|
|
$
|
(650,000
|
)
|
$
|
709,000
|
|
Additions
|
|
|
435,000
|
|
|
|
|
|
435,000
|
|
Collections
|
|
|
(55,000
|
)
|
|
|
|
|
(55,000
|
)
|
Provision
|
|
|
—
|
|
|
(200,000
|
)
|
|
(200,000
|
)
|
Balance,
September 30, 2004
|
|
|
1,739,000
|
|
|
(850,000
|
)
|
|
889,000
|
|
Additions
|
|
|
110,000
|
|
|
|
|
|
110,000
|
|
Collections
|
|
|
(364,000
|
)
|
|
|
|
|
(364,000
|
)
|
Provision
|
|
|
|
|
|
(150,000
|
)
|
|
(150,000
|
)
|
Write-offs
|
|
|
(632,000
|
)
|
|
632,000
|
|
|
|
|
Balance,
September 30, 2005
|
|
|
853,000
|
|
|
(368,000
|
)
|
|
485,000
|
|
Additions
|
|
|
343,000
|
|
|
|
|
|
343,000
|
|
Collections
|
|
|
(349,000
|
)
|
|
|
|
|
(349,000
|
)
|
Provision
|
|
|
|
|
|
(99,000
|
)
|
|
(99,000
|
)
|
Balance,
September 30, 2006
|
|
$
|
847,000
|
|
$
|
(467,000
|
)
|
$
|
380,000
|
|
|
|
|
|
|
|
|
|
|
|
|
The
$632,000 write off in fiscal year 2005 represents a reduction in the allowance
for uncollectible amounts that had been reserved for in previous periods. Since
this was a write off of an already existing allowance for uncollectible
accounts, there was only a balance sheet effect and there was no income
statement effect.
6.
|
ADVANCES
TO REGISTERED REPRESENTATIVES
|
An
analysis of advances to registered representatives for the fiscal years ended
September 30, 2005 and 2006 is as follows:
|
|
|
|
Balance,
September 30, 2004
|
|
$
|
1,736,000
|
|
Advances
|
|
|
1,123,000
|
|
Amortization
of advances
|
|
|
(1,206,000
|
)
|
Balance,
September 30, 2005
|
|
|
1,653,000
|
|
Advances
|
|
|
1,184,000
|
|
Amortization
of advances
|
|
|
(1,281,000
|
)
|
Balance,
September 30, 2006
|
|
$
|
1,556,000
|
|
|
|
|
|
|
The
unamortized advances outstanding at September 30, 2006, 2005 and 2004
attributable to registered representatives who ended their affiliation with
National Securities prior to the fulfillment of their obligation was $32,000,
$44,000 and $40,000, respectively.
7. |
SECURITIES
OWNED AND SECURITIES SOLD, BUT NOT YET PURCHASED, AT
MARKET
|
The
following table shows the market values of the Company's
securities owned
and
securities sold, but not yet purchased
as of
September 30, 2006 and 2005, respectively:
|
|
|
|
|
|
|
|
|
|
|
|
September
30, 2006
|
|
September
30, 2005
|
|
|
|
|
|
Securities
|
|
|
|
Securities
|
|
|
|
Securities
|
|
sold,
but not
|
|
Securities
|
|
sold,
but not
|
|
|
|
owned
|
|
yet
purchased
|
|
owned
|
|
yet
purchased
|
|
Corporate
stocks
|
|
$
|
459,000
|
|
$
|
162,000
|
|
$
|
150,000
|
|
$
|
25,000
|
|
Corporate
bonds
|
|
|
|
|
|
—
|
|
|
|
|
|
19,000
|
|
Government
obligations
|
|
|
16,000
|
|
|
|
|
|
16,000
|
|
|
|
|
|
|
$
|
475,000
|
|
$
|
162,000
|
|
$
|
166,000
|
|
$
|
44,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Securities
sold, but not yet purchased commit the Company to deliver specified securities
at predetermined prices. The transactions may result in market risk since,
to
satisfy the obligation, the Company must acquire the securities at market
prices, which may exceed the values reflected in the consolidated statements
of
financial condition.
Non-marketable
securities owned at September 30, 2006 consist of non-tradable warrants
exercisable into freely trading common stock of public companies totaling
$402,000.
Fixed
assets as of September 30, 2006 and 2005, respectively, consist of the
following:
|
|
September
30,
2006
|
|
September
30,
2005
|
|
Estimated
Useful Lives
|
|
Office
machines
|
|
$
|
138,000
|
|
$
|
138,000
|
|
|
5
years
|
|
Furniture
and fixtures
|
|
|
160,000
|
|
|
157,000
|
|
|
5
years
|
|
Telephone
system
|
|
|
34,000
|
|
|
34,000
|
|
|
5
years
|
|
Electronic
equipment
|
|
|
596,000
|
|
|
399,000
|
|
|
3
years
|
|
Leasehold
improvements
|
|
|
262,000
|
|
|
246,000
|
|
|
Lesser
of terms of leases or useful lives
|
|
|
|
|
1,190,000
|
|
|
974,000
|
|
|
|
|
Less
accumulated depreciation and amortization
|
|
|
(885,000
|
)
|
|
(724,000
|
)
|
|
|
|
Fixed
assets - net
|
|
$
|
305,000
|
|
$
|
250,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation
and amortization expense for the years ended September
30, 2006, 2005
and
2004 was $162,000, $145,000 and $165,000, respectively.
Other
assets as of September 30, 2006 and 2005, respectively, consist of the
following:
|
|
September
30,
2006
|
|
September
30,
2005
|
|
|
|
|
|
|
|
Pre-paid
expenses
|
|
$
|
203,000
|
|
$
|
234,000
|
|
Deposits
|
|
|
38,000
|
|
|
38,000
|
|
Deferred
financing costs
|
|
|
24,000
|
|
|
—
|
|
Other
|
|
|
235,000
|
|
|
107,000
|
|
Total
|
|
$
|
500,000
|
|
$
|
379,000
|
|
10. |
ACCOUNTS
PAYABLE, ACCRUED EXPENSES AND OTHER
LIABILITIES
|
Accounts
payable, accrued expenses and other liabilities as of September 30, 2006 and
2005, respectively, consist of the following:
|
|
September
30,
2006
|
|
September
30,
2005
|
|
|
|
|
|
|
|
Commissions
payable
|
|
$
|
1,993,000
|
|
$
|
2,204,000
|
|
Legal
payable
|
|
|
325,000
|
|
|
555,000
|
|
Other
|
|
|
1,625,000
|
|
|
1,286,000
|
|
Total
|
|
$
|
3,943,000
|
|
$
|
4,045,000
|
|
11. |
CONVERTIBLE
NOTES PAYABLE
|
In
January 2006, the Company completed a
financing transaction that included 11%
convertible promissory notes in the principal amount of $1,000,000
that
are
convertible into common stock at a price of $1.00 per share.
The
convertible promissory notes mature in January 2011. 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. Such amortization
has
been included in “Interest” in the accompanying consolidated financial
statements.
The
following table summarizes convertible notes payable at September 30,
2006.
|
|
September
30,
2006
|
|
Notes
payable to noteholders
|
|
$
|
1,000,000
|
|
Less:
Deferred debt discount
|
|
|
(159,000
|
)
|
|
|
$
|
841,000
|
|
In
August
2005, upon the maturity of previously issued notes, the Company and two note
holders entered into new note agreements providing for $1.0
million of notes
with a maturity date of July 31, 2007, together with warrants having an
expiration date of July 31, 2007 to purchase, in the aggregate, 200,000 shares
of common stock at a price of $1.25 per share. These
notes in the principal amount of $1.0 million were repaid in full in January
2006.
As
discussed in Note 3b(iii) in January 2004, the Company consummated a private
offering of its securities to a limited number of accredited investors wherein
the Company issued an aggregate of $200,000 of three-year, 10% senior
subordinated promissory notes to five unaffiliated parties. The note holders
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. In December 2004, the Company
rescinded a note in the principal amount of $25,000 and
a
warrant to purchase 6,250 shares of Common Stock. The remaining notes in the
principal amount of $175,000 were repaid in full in March 2006.
In
February 2004, the Company consummated a private offering of its securities
to a
limited number of accredited investors wherein the Company issued an aggregate
of $850,000 of three-year, 10% senior subordinated promissory notes to four
unaffiliated parties. The note holders 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
Company is amortizing the total allocated fair value of $183,000 over the
three-year term of these promissory notes, and the balance from the January
2004
notes was amortized in March 2006. Such amortization has been included in
“Interest” in the accompanying consolidated financial statements.
The
following table summarizes notes payable at September 30, 2006 and 2005,
respectively:
|
|
September
30,
2006
|
|
September
30,
2005
|
|
Notes
payable to noteholders
|
|
$
|
—
|
|
$
|
1,000,000
|
|
2004
private placements
|
|
|
850,000
|
|
|
1,025,000
|
|
|
|
|
850,000
|
|
|
2,025,000
|
|
Less:
Deferred debt discount
|
|
|
(45,000
|
)
|
|
(206,000
|
)
|
|
|
$
|
805,000
|
|
$
|
1,819,000
|
|
The
notes
outstanding on September 30, 2006 mature in fiscal year 2007.
13. |
SECURED
DEMAND NOTE / SUBORDINATED
BORROWINGS
|
Subordinated
borrowings represent a secured demand note that was entered into between
National Securities and a related party. National Securities is a registered
broker-dealer. The secured demand note was entered into in accordance with
the
form prescribed by the NASD, and it is accounted for in accordance with
broker-dealer accounting SEC rule 15c3-1d. Accordingly, our balance sheet
includes both an asset (“Secured demand note”) and the
corresponding
liability (“Subordinated borrowings”) in an identical amount. The secured demand
note is available to compute net capital under SEC rule 15c3-1. The borrowings
are subordinated to the claims of present and future creditors of the Company
and cannot be repaid where such repayment will cause the Company to fail to
meet
its minimum net capital requirements in accordance with SEC rule
15c3-1.
In
February 2001, National Securities entered into a three-year secured demand
note
collateral agreement with an employee of National Securities and a Director
of
the Company, to borrow securities that can be used by the Company for collateral
agreements. These securities have been pledged through an unrelated
broker-dealer, and have a borrowing value totaling $1,000,000. This note bears
interest at 5% per annum with interest paid monthly. National Securities and
the
holder have entered into a new secured demand note collateral agreement with
a
maturity date of
March 1,
2007.
Certain
of the securities totaling $412,000 have been pledged as collateral for a
security deposit in the amount of $249,000 for an office lease, and two letters
of credit in the amounts of $125,000 and $38,000, executed by the Company on
behalf of National Securities. No amounts have been drawn on these letters
of
credit.
The
income tax (provision) benefit consists of:
|
|
Fiscal
Years Ended
|
|
|
|
September
30,
2006
|
|
September
30,
2005
|
|
September
30,
2004
|
|
Current
federal income tax benefit
|
|
$
|
—
|
|
$
|
|
|
$
|
|
|
Current
state income tax provision
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
—
|
|
$
|
|
|
$
|
|
|
The
income tax (provision) benefit related to income (loss) from continuing
operations before income taxes and extraordinary items varies from the federal
statutory rate as follows:
|
|
Years
Ended
|
|
|
|
September
30,
2006
|
|
September
30,
2005
|
|
September
30,
2004
|
|
Statutory
federal rate
|
|
$
|
(168,000
|
)
|
$
|
402,000
|
|
$
|
(192,000
|
)
|
State
income taxes net of federal income tax benefit
|
|
|
(30,000
|
)
|
|
35,000
|
|
|
(19,000
|
)
|
Losses
for which no benefit is provided
|
|
|
|
|
|
(437,000
|
)
|
|
|
|
Utilization
of net operating loss carryforwards
|
|
|
198,000
|
|
|
|
|
|
211,000
|
|
|
|
$
|
—
|
|
$
|
—
|
|
$
|
|
|
Significant
components of the Company’s deferred tax assets that are included in other
assets in the accompanying financial statements are as
follows:
|
|
September
30,
2006
|
|
September
30,
2005
|
|
Deferred
tax assets:
|
|
|
|
|
|
Net
operating loss carryforwards
|
|
$
|
3,874,000
|
|
$
|
4,187,000
|
|
Reserves
for uncollectible receivables
|
|
|
159,000
|
|
|
128,000
|
|
Other
temporary differences
|
|
|
52,000
|
|
|
44,000
|
|
Total
deferred tax assets
|
|
|
4,085,000
|
|
|
4,359,000
|
|
Deferred
tax liability:
|
|
|
|
|
|
|
|
Other
temporary differences
|
|
|
(137,000
|
)
|
|
|
|
Deferred
tax asset
|
|
|
3,948,000
|
|
|
4,359,000
|
|
Valuation
allowance
|
|
|
(3,948,000
|
)
|
|
(4,359,000
|
)
|
Net
deferred tax asset
|
|
$
|
|
|
$
|
|
|
At
September 30, 2006, the Company had available net operating loss carryovers
of
approximately $9.7 million that may be applied against future taxable income
and
expires at various dates through 2025, subject to certain limitations. The
Company has a deferred tax asset arising substantially from the benefits of
such
net operating loss deduction and has recorded a valuation allowance for the
full
amount of this deferred tax asset since it is more likely than not, that these
tax benefits will not be realized. The valuation allowance for the deferred
tax
asset decreased by $411,000 during the fiscal year ended September 30, 2006
and
increased by $547,000 during the fiscal year ended September 30,
2005.
Leases
- As of
September 30, 2006, the Company leases office space and equipment in various
states expiring at various dates through 2012 and is committed under operating
leases for future minimum lease payments as follows:
Fiscal
Year Ending
|
|
|
|
|
|
|
|
2007
|
|
$
|
1,602,000
|
|
2008
|
|
|
1,556,000
|
|
2009
|
|
|
584,000
|
|
2010
|
|
|
562,000
|
|
2011
|
|
|
579,000
|
|
Thereafter
|
|
|
443,000
|
|
|
|
$
|
5,326,000
|
|
Rental
expense under all operating leases for the years ended September 30, 2006,
September 30, 2005 and September 30, 2004 was $1,901,000, $1,976,000 and
$2,006,000, respectively.
Guarantees
- The
Company has secondarily guaranteed a lease of one of its branch offices, in
the
amount of $125,000 at September 30, 2006.
The
NASD
was engaged in an industry-wide investigation of mutual fund trading activities.
National Securities is one of the numerous broker-dealers 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 approximate $600,000. Additionally,
the
Company is obligated to pay the fines imposed by the NASD on two executive
officers totaling $50,000 pursuant to its indemnification obligations. The
Company included the $650,000 in “Professional fees” in fiscal year 2004. The
unpaid balance of $84,000 and $187,000 at
September 30, 2006 and September 30, 2005, respectively, has
been
included in “Accounts Payable, Accrued Expenses and Other Liabilities” in the
accompanying consolidated statements of financial condition..
In
September 2006, the
former
chairman and chief executive officer of the Company, Steven A. Rothstein,
commenced an arbitration against the current chairman and chief executive
officer of the Company, Mark Goldwasser, in the matter Rothstein
et al. vs. Goldwasser,
NASD
No. 06-04000. Rothstein is alleging fraud and inequitable conduct relating
to his attempts to sell his investment in the Company in calendar year
2001, and is seeking approximately $5,750,000 in damages. The
Company is indemnifying Mr. Goldwasser in this action. The Company
and Mr. Goldwasser believe this action is without merit, and intends to
vigorously defend this action.
The
Company is also a defendant in various other arbitrations and administrative
proceedings, lawsuits and claims seeking
in the aggregate damages of approximately $1,800,000 to $2,000,000. The
Company
believes
such claims are substantially without merit, and estimates that its liability,
primarily for defense costs, will approximate $300,000 (exclusive of unspecified
punitive damages related to certain claims and inclusive of expected insurance
coverage). 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 September 30, 2006 and 2005, is $241,000 and $206,000 (primarily
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 other NASD related
expenses of $799,000, $790,000 and $1,424,000 for the fiscal years ended
September 30, 2006, 2005 and 2004, respectively.
Shares
Authorized
- During
the fiscal year ended September 30, 2004, the Company decreased its authorized
number of shares of common stock from 60,000,000 to 30,000,000, increased its
authorized number of shares of preferred stock from 100,000 to 200,000 and
increased the number of authorized shares designated as Series A preferred
stock
from 30,000 to 50,000. During the fiscal year ended September 30, 2006, of
the
200,000 authorized number of shares of preferred stock, the Company designated
20,000 of such shares as Series B preferred stock.
Cumulative
Dividends on Convertible Preferred Stock
- The
holders of the Series A convertible 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. In March 2005, the Company’s Board of Directors
declared an in-kind dividend in the aggregate of 2,143 shares of Series A
preferred stock, in payment of approximately $322,000 of dividends accrued
through March 31, 2005. 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. In March 2006, the
Company’s shareholders approved an amendment to decrease the conversion price of
the Series A preferred stock to $1.25 per share from $1.50 per share. At
September 30, 2006, the amount of accumulated dividends on the Company’s 35,316
issued and outstanding shares of Series A preferred stock was approximately
$159,000.
The
holders of the Company’s Series B Convertible preferred stock, convertible into
the Company’s common stock at $.75 per share, are entitled 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 August 2006, the Company’s Board of Directors declared a cash
dividend of $25,000 payable to the holders of the Series B preferred stock
that
was paid in October 2006.
Stock
Options
- The
Company’s stock option plans provide for the granting of stock options to
certain key employees, directors and investment executives. Generally, options
outstanding under the Company’s stock option plan are granted at prices equal to
or above the market value of the stock on the date of grant, vest either
immediately or ratably over up to five years, and expire five years subsequent
to award.
In
March
2006, the Company’s shareholders approved the 2006 stock option plan that
reserved 1,500,000 shares of common stock for issuance of options granted
under
such plan. A summary of the status of the Company’s stock options and warrants
outstanding is presented below.
The
following tables summarize information about stock options outstanding at
September 30, 2006.
Stock
Options Under Plan
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
|
Average
Price
|
|
|
|
Authorized
|
|
Outstanding
|
|
Per
Share
|
|
Balance,
September 30, 2003
|
|
|
1,991,500
|
|
|
404,150
|
|
$
|
5.08
|
|
Granted
|
|
|
|
|
|
694,000
|
|
$
|
2.47
|
|
Exercised
|
|
|
(26,003
|
)
|
|
(26,003
|
)
|
$
|
1.00
|
|
Forfeitures
|
|
|
|
|
|
(46,997
|
)
|
$
|
3.00
|
|
Balance,
September 30, 2004
|
|
|
1,965,497
|
|
|
1,025,150
|
|
$
|
3.47
|
|
Granted
|
|
|
|
|
|
672,000
|
|
$
|
1.32
|
|
Exercised
|
|
|
|
|
|
|
|
|
|
|
Forfeitures
|
|
|
|
|
|
(903,483
|
)
|
$
|
3.73
|
|
Balance,
September 30, 2005
|
|
|
1,965,497
|
|
|
793,667
|
|
$
|
1.35
|
|
2006
stock option plan
|
|
|
1,500,000
|
|
|
|
|
|
|
|
Granted
|
|
|
|
|
|
170,000
|
|
$
|
1.14
|
|
Exercised
|
|
|
|
|
|
|
|
|
|
|
Forfeitures
|
|
|
(1,033,497
|
)
|
|
(31,667
|
)
|
$
|
1.58
|
|
Balance,
September 30, 2006
|
|
|
2,432,000
|
|
|
932,000
|
|
$
|
1.30
|
|
|
|
Options
Outstanding
|
|
Options
Exercisable
|
|
Range
of Exercise Prices
|
|
Number
Outstanding
|
|
Weighted
Average Remaining Contractual Life
|
|
Weighted
Average Exercise Prices
|
|
Number
Exercisable
|
|
Weighted
Average Exercise Prices
|
|
$0.40-$1.00
|
|
|
150,000
|
|
|
3.15
|
|
$
|
0.88
|
|
|
75,000
|
|
$
|
0.75
|
|
$1.25
|
|
|
290,000
|
|
|
3.38
|
|
$
|
1.25
|
|
|
290,000
|
|
$
|
1.25
|
|
$1.35-$1.375
|
|
|
437,000
|
|
|
3.55
|
|
$
|
1.37
|
|
|
437,000
|
|
$
|
1.37
|
|
$2.00-$3.80
|
|
|
55,000
|
|
|
1.51
|
|
$
|
2.22
|
|
|
55,000
|
|
$
|
2.22
|
|
|
|
|
932,000
|
|
|
|
|
|
|
|
|
857,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As
of
September 30, 2006, the aggregate intrinsic value of the Company’s outstanding
and exercisable options was $56,000 and $37,000, respectively.
In
February 2005, the Company issued 150,000 options to employees to purchase
common stock. The options vested immediately at the date of the grant, have
a
5-year life and are exercisable at prices ranging from $1.25 to $1.375 per
share. The weighted average fair value of these options is approximately $1.30
per share. Also in February 2005, the Company modified the terms of 522,000
existing options by restating the exercise price to a range from $1.25 to $1.375
and fully accelerated the vesting period for these options.
In
November 2005, the Company issued 100,000 options to an employee to purchase
common stock. The options vest over two years, have a 5-year life and are
exercisable at a price $1.00 per share. In March 2006, the Company issued 70,000
options to non-employee directors to purchase common stock. The options fully
vest in six months after the date of grant, have a 5-year life and are
exercisable at a price $1.35 per share.
The
following tables summarize information about warrants outstanding at September
30, 2006.
Warrants
|
|
|
|
|
|
|
|
|
|
Shares
|
|
Weighted
Average Exercise Price
|
|
Exercisable
|
|
Outstanding
at September 30, 2003
|
|
|
1,683,947
|
|
$
|
1.71
|
|
|
1,683,947
|
|
Granted
|
|
|
909,500
|
|
$
|
1.09
|
|
|
|
|
Exercised
|
|
|
(240,771
|
)
|
$
|
1.23
|
|
|
|
|
Expired
|
|
|
(27,600
|
)
|
$
|
3.09
|
|
|
|
|
Outstanding
at September 30, 2004
|
|
|
2,325,076
|
|
$
|
1.36
|
|
|
2,325,076
|
|
Granted
|
|
|
50,000
|
|
$
|
1.25
|
|
|
|
|
Exercised
|
|
|
(21,546
|
)
|
$
|
0.93
|
|
|
|
|
Expired
|
|
|
(11,250
|
)
|
$
|
3.61
|
|
|
|
|
Outstanding
at September 30, 2005
|
|
|
2,342,280
|
|
$
|
1.36
|
|
|
2,342,280
|
|
Granted
|
|
|
300,000
|
|
$
|
1.00
|
|
|
|
|
Expired
|
|
|
(76,923
|
)
|
$
|
1.25
|
|
|
|
|
Outstanding
at September 30, 2006
|
|
|
2,565,357
|
|
$
|
1.28
|
|
|
2,565,357
|
|
Warrants
Outstanding and Exercisable
|
|
Exercise
Prices
|
|
Number
Outstanding
|
|
Weighted
Average Remaining
Contractual
Life
|
|
Weighted
Average
Exercise
Prices
|
|
$0.65
|
|
|
80,073
|
|
|
0.23
|
|
$
|
0.65
|
|
$0.80
|
|
|
62,500
|
|
|
0.94
|
|
$
|
0.80
|
|
$1.00
|
|
|
300,000
|
|
|
4.28
|
|
$
|
1.00
|
|
$1.25
|
|
|
1,277,034
|
|
|
0.45
|
|
$
|
1.25
|
|
$1.40
|
|
|
43,750
|
|
|
0.29
|
|
$
|
1.40
|
|
$1.50
|
|
|
797,000
|
|
|
0.78
|
|
$
|
1.50
|
|
$5.00
|
|
|
5,000
|
|
|
0.16
|
|
$
|
5.00
|
|
|
|
|
2,565,357
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As
of
September 30, 2006, the aggregate intrinsic value of the Company’s outstanding
and exercisable warrants was $151,000.
In
April
2005, in connection with the resignation of the former chairmen of the Company,
the Company issued to his designee, a three-year warrant to purchase 50,000
shares of the Company’s common stock at $1.25 per share.
In
January 2006, as discussed in Note 3b(vi), the Company completed a financing
transaction that included five-year warrants to purchase 300,000 shares of
the
Company’s common stock at $1.00 per share.
18. |
NET
CAPITAL REQUIREMENTS
|
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
September 30, 2006, National Securities’ net capital exceeded the requirement by
$2,076,000.
Advances,
dividend payments and other equity withdrawals from its subsidiaries 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’s
subsidiary has a defined 401(k) profit sharing plan (the “Plan”) that covers
substantially all of its employees. Under the terms of the Plan, employees
can
elect to defer up to 25% of eligible compensation, subject to certain
limitations, by making voluntary contributions to the Plan. The Company’s annual
contributions are made at the discretion of the Board of Directors. During
the
fiscal years ended September 30, 2006, 2005 and 2004, the Company made no
contributions to the Plan.
In
the
first quarter of fiscal year 2007, the Company received proceeds of
approximately $11,000 from the exercise of outstanding warrants to purchase
14,219 shares of the Company’s common stock.
21. |
UNAUDITED
QUARTERLY DATA
|
Selected
Quarterly Financial Data (Dollars in thousands, except per share
data)
|
|
December
31,
|
|
March
31,
|
|
June
30,
|
|
September
30,
|
|
|
|
2004
|
|
2005
|
|
2005
|
|
2005
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
$
|
13,108
|
|
$
|
12,206
|
|
$
|
9,996
|
|
$
|
10,420
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income (loss)
|
|
$
|
(184
|
)
|
$
|
(139
|
)
|
$
|
111
|
|
$
|
(971
|
)
|
Preferred
stock dividends
|
|
|
(71
|
)
|
|
(69
|
)
|
|
(75
|
)
|
|
(75
|
)
|
Net
income (loss) attributable to common stockholders
|
|
$
|
(255
|
)
|
$
|
(208
|
)
|
$
|
36
|
|
$
|
(1,046
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
(loss) per common share - Basic
|
|
$
|
(0.05
|
)
|
$
|
(0.04
|
)
|
$
|
0.01
|
|
$
|
(0.21
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
(loss) per common share - Diluted
|
|
$
|
(0.05
|
)
|
$
|
(0.04
|
)
|
$
|
0.01
|
|
$
|
(0.21
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December
31,
|
|
March
31,
|
|
June
30,
|
|
September
30,
|
|
|
|
2005
|
|
2006
|
|
2006
|
|
2006
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
$
|
13,691
|
|
$
|
18,787
|
|
$
|
13,984
|
|
$
|
12,265
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income (loss)
|
|
$
|
259
|
|
$
|
424
|
|
$
|
152
|
|
$
|
(240
|
)
|
Preferred
stock dividends
|
|
|
(76
|
)
|
|
(95
|
)
|
|
(104
|
)
|
|
(106
|
)
|
Net
income (loss) attributable to common stockholders
|
|
$
|
183
|
|
$
|
329
|
|
$
|
48
|
|
$
|
(346
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
(loss) per common share - Basic
|
|
$
|
0.04
|
|
$
|
0.06
|
|
$
|
0.01
|
|
$
|
(0.07
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
(loss) per common share - Diluted
|
|
$
|
0.04
|
|
$
|
0.04
|
|
$
|
0.01
|
|
$
|
(0.07
|
)
|
Income
(loss) per share for each quarter was computed independently using the
weighted-average number of shares outstanding during the quarter. However,
income (loss) per share for the year was computed using the weighted-average
number of shares outstanding during the year. As a result, the sum of the income
(loss) per share for the four quarters may not equal the full year income (loss)
per share.
22. |
FINANCIAL
INFORMATION - NATIONAL HOLDINGS CORPORATION
|
National
Holdings was organized in 1996 and began operations on February 6, 1997. The
following National Holdings (parent company only) financial information should
be read in conjunction with the other notes to the consolidated financial
statements.
STATEMENTS
OF FINANCIAL CONDITION
|
|
|
|
|
|
|
|
ASSETS
|
|
|
|
|
|
|
|
|
|
September
30,
|
|
September
30,
|
|
|
|
2006
|
|
2005
|
|
Cash
|
|
$
|
134,000
|
|
$
|
2,000
|
|
Investment
in subsidiaries
|
|
|
4,309,000
|
|
|
2,884,000
|
|
Other
assets
|
|
|
252,000
|
|
|
153,000
|
|
|
|
$
|
4,695,000
|
|
$
|
3,039,000
|
|
LIABILITIES
AND STOCKHOLDERS' EQUITY
|
|
|
|
|
|
|
|
Accounts
payable, accrued expenses
|
|
|
|
|
|
and
other liabilities
|
|
$
|
206,000
|
|
$
|
290,000
|
|
Convertible
notes payable
|
|
|
841,000
|
|
|
|
|
Notes
payable
|
|
|
805,000
|
|
|
1,819,000
|
|
|
|
|
1,852,000
|
|
|
2,109,000
|
|
Stockholders'
equity
|
|
|
2,843,000
|
|
|
930,000
|
|
|
|
$
|
4,695,000
|
|
$
|
3,039,000
|
|
STATEMENTS
OF OPERATIONS
|
|
|
|
|
|
|
|
|
|
|
|
Years
ended
|
|
|
|
September
30,
|
|
September
30,
|
|
September
30,
|
|
|
|
2006
|
|
2005
|
|
2004
|
|
Operating
expenses
|
|
$
|
(1,017,000
|
)
|
$
|
(1,247,000
|
)
|
$
|
(1,215,000
|
)
|
Other
income (expense)
|
|
|
|
|
|
|
|
|
|
|
Gains
on extinguishments of debt
|
|
|
—
|
|
|
|
|
|
1,131,000
|
|
Gain
on investment
|
|
|
192,000
|
|
|
|
|
|
|
|
Gain
on investment in subsidiaries
|
|
|
1,420,000
|
|
|
64,000
|
|
|
650,000
|
|
Net
income (loss) before income tax
|
|
$
|
595,000
|
|
$
|
(1,183,000
|
)
|
$
|
566,000
|
|
STATEMENTS
OF CASH FLOWS
|
|
|
|
|
|
|
|
|
|
|
|
Years
ended
|
|
|
|
September
30,
2006
|
|
September
30,
2005
|
|
September
30,
2004
|
|
|
|
|
|
|
|
|
|
CASH
FLOWS FROM OPERATING ACTIVITIES
|
|
|
|
|
|
|
|
Net
income (loss)
|
|
$
|
595,000
|
|
$
|
(1,183,000
|
)
|
$
|
566,000
|
|
Adjustments
to reconcile net income (loss) to net
|
|
|
|
|
|
|
|
|
|
|
cash
provided by (used in) operating activities
|
|
|
|
|
|
|
|
|
|
|
(Gain)
loss on investment in subsidiaries
|
|
|
(1,424,000
|
)
|
|
(157,000
|
)
|
|
(650,000
|
)
|
Gains
on extinguishments of debt
|
|
|
|
|
|
|
|
|
(1,131,000
|
)
|
Amortization
of deferred financing costs
|
|
|
4,000
|
|
|
|
|
|
|
|
Amortization
of note discount
|
|
|
189,000
|
|
|
163,000
|
|
|
122,000
|
|
Compensatory
element of common stock issuance
|
|
|
12,000
|
|
|
|
|
|
|
|
Compensatory
element of common stock option issuances
|
|
|
19,000
|
|
|
|
|
|
|
|
Forgiveness
of loan
|
|
|
|
|
|
|
|
|
(251,000
|
)
|
Issuance
of common stock in settlement of arbitration
|
|
|
|
|
|
40,000
|
|
|
100,000
|
|
Changes
in assets and liabilities
|
|
|
(154,000
|
)
|
|
1,021,000
|
|
|
(366,000
|
)
|
Net
cash provided by (used in) operating activities
|
|
|
(759,000
|
)
|
|
(116,000
|
)
|
|
(1,610,000
|
)
|
|
|
|
|
|
|
|
|
|
|
|
CASH
FLOWS FROM INVESTING ACTIVITIES
|
|
|
|
|
|
|
|
|
|
|
(Capital
contributions to) advances from subsidiary - net
|
|
|
(5,000
|
)
|
|
17,000
|
|
|
207,000
|
|
Net
cash provided by (used in) investing activities
|
|
|
(5,000
|
)
|
|
17,000
|
|
|
207,000
|
|
|
|
|
|
|
|
|
|
|
|
|
CASH
FLOWS FROM FINANCING ACTIVITIES
|
|
|
|
|
|
|
|
|
|
|
Net
proceeds from issuance of common stock and warrants
|
|
|
173,000
|
|
|
|
|
|
930,000
|
|
Net
proceeds from issuance of preferred stock
|
|
|
972,000
|
|
|
|
|
|
|
|
Net
proceeds from issuance of convertible notes payable
|
|
|
1,000,000
|
|
|
|
|
|
|
|
Net
proceeds from issuance of notes payable and warrants
|
|
|
|
|
|
|
|
|
1,036,000
|
|
Cash
payment of deferred financing costs
|
|
|
(28,000
|
)
|
|
|
|
|
|
|
Payments
of notes payable
|
|
|
(1,175,000
|
)
|
|
(75,000
|
)
|
|
(750,000
|
)
|
Dividends
paid
|
|
|
(46,000
|
)
|
|
|
|
|
|
|
Exercise
of stock options and warrants
|
|
|
|
|
|
19,000
|
|
|
321,000
|
|
Net
cash provided by financing activities
|
|
|
896,000
|
|
|
(56,000
|
)
|
|
1,537,000
|
|
|
|
|
|
|
|
|
|
|
|
|
NET
(DECREASE) INCREASE IN CASH
|
|
|
132,000
|
|
|
(155,000
|
)
|
|
134,000
|
|
|
|
|
|
|
|
|
|
|
|
|
CASH
BALANCE
|
|
|
|
|
|
|
|
|
|
|
Beginning
of year
|
|
|
2,000
|
|
|
157,000
|
|
|
23,000
|
|
End
of year
|
|
$
|
134,000
|
|
$
|
2,000
|
|
$
|
157,000
|
|
|
|
|
|
|
|
|
|
|
|
|
SUPPLEMENTAL
DISCLOSURES OF CASH FLOW INFORMATION
|
|
|
|
|
|
|
|
|
|
|
Cash
paid during the year for:
|
|
|
|
|
|
|
|
|
|
|
Interest
|
|
$
|
406,000
|
|
$
|
389,000
|
|
$
|
272,000
|
|
Series
B preferred stock dividends
|
|
$
|
46,000
|
|
$
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
SUPPLEMENTAL
DISCLOSURES OF NONCASH INVESTING AND
|
|
|
|
|
|
|
|
|
|
|
FINANCING
ACTIVITIES
|
|
|
|
|
|
|
|
|
|
|
Warrants
issued in connection with debt
|
|
$
|
187,000
|
|
$
|
125,000
|
|
$
|
341,000
|
|
Series
A preferred stock dividends
|
|
$
|
300,000
|
|
$
|
322,000
|
|
$
|
503,000
|
|
|
|
|
|
|
|
|
|
|
|
|