UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
Washington,
D.C. 20549
FORM
10-Q
QUARTERLY
REPORT PURSUANT TO SECTION 13 OR 15(d)
OF
THE
SECURITIES EXCHANGE ACT OF 1934
For
the Quarter Ended December
31, 2006
|
Commission
File Number 001-12629
|
NATIONAL
HOLDINGS CORPORATION
(Exact
name of registrant as specified in its charter)
Delaware
|
36-4128138
|
(State
or other jurisdiction of
incorporation
or organization)
|
(I.R.S.
Employer
Identification
No.)
|
120
Broadway, 27th Floor, New York, NY 10271
(Address
including zip code of principal executive offices)
Registrant’s
telephone number, including area code: (212)
417-8000
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 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 Filer o
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
February 7, 2007 there were 5,358,611 shares of the registrant's common stock
outstanding.
NATIONAL
HOLDINGS CORPORATION AND SUBSIDIARIES
CONDENSED
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
|
|
December
31,
|
|
September
30,
|
|
|
|
2006
|
|
2006
|
|
|
|
(unaudited)
|
|
(see
note below)
|
|
ASSETS
|
|
|
|
|
|
CASH
|
|
$
|
243,000
|
|
$
|
1,441,000
|
|
DEPOSITS
WITH CLEARING ORGANIZATIONS
|
|
|
301,000
|
|
|
300,000
|
|
RECEIVABLES
FROM BROKER-DEALERS AND CLEARING ORGANIZATIONS
|
|
|
5,434,000
|
|
|
3,548,000
|
|
OTHER
RECEIVABLES, net of allowance for uncollectible accounts of
$467,000
|
|
|
|
|
|
|
|
at
December 31, 2006 and September 30, 2006, respectively
|
|
|
464,000
|
|
|
380,000
|
|
ADVANCES
TO REGISTERED REPRESENTATIVES
|
|
|
1,806,000
|
|
|
1,556,000
|
|
SECURITIES
OWNED
|
|
|
|
|
|
|
|
Marketable,
at market value
|
|
|
1,937,000
|
|
|
475,000
|
|
Non-marketable,
at fair value
|
|
|
32,000
|
|
|
402,000
|
|
FIXED
ASSETS, net
|
|
|
270,000
|
|
|
305,000
|
|
SECURED
DEMAND NOTE
|
|
|
1,000,000
|
|
|
1,000,000
|
|
OTHER
ASSETS
|
|
|
438,000
|
|
|
300,000
|
|
|
|
|
|
|
|
|
|
TOTAL
ASSETS
|
|
$
|
11,925,000
|
|
$
|
9,707,000
|
|
|
|
|
|
|
|
|
|
LIABILITIES
AND STOCKHOLDERS' EQUITY
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
PAYABLE
TO BROKER-DEALERS AND CLEARING ORGANIZATIONS
|
|
$
|
1,662,000
|
|
$
|
113,000
|
|
SECURITIES
SOLD, BUT NOT YET PURCHASED, at market
|
|
|
275,000
|
|
|
162,000
|
|
ACCOUNTS
PAYABLE, ACCRUED EXPENSES AND OTHER LIABILITIES
|
|
|
4,441,000
|
|
|
3,943,000
|
|
CONVERTIBLE
NOTES PAYABLE, net of debt discounts of $150,000 and
|
|
|
|
|
|
|
|
$159,000
at December 31, 2006 and September 30, 2006, respectively
|
|
|
850,000
|
|
|
841,000
|
|
NOTES
PAYABLE, net of debt discounts of $25,000 and $45,000 at
|
|
|
|
|
|
|
|
December
31, 2006 and September 30, 2006, respectively
|
|
|
825,000
|
|
|
805,000
|
|
TOTAL
LIABILITIES
|
|
|
8,053,000
|
|
|
5,864,000
|
|
|
|
|
|
|
|
|
|
SUBORDINATED
BORROWINGS
|
|
|
1,000,000
|
|
|
1,000,000
|
|
|
|
|
|
|
|
|
|
COMMITMENTS
AND CONTINGENCIES
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 December 31, 2006 and September 30, 2006
|
|
|
-
|
|
|
-
|
|
Series
B 9% cumulative convertible preferred stock, $.01 par value,
20,000
|
|
|
|
|
|
|
|
shares
authorized; 10,000 shares issued and outstanding
(liquidation
|
|
|
|
|
|
|
|
preference:
$1,000,000) at December 31, 2006 and September 30, 2006
|
|
|
-
|
|
|
-
|
|
Common
stock, $.02 par value, 30,000,000 shares authorized;
|
|
|
|
|
|
|
|
5,358,611
and 5,223,968 shares issued and outstanding,
|
|
|
|
|
|
|
|
at
December 31, 2006 and September 30, 2006, respectively
|
|
|
107,000
|
|
|
104,000
|
|
Additional
paid-in capital
|
|
|
17,092,000
|
|
|
16,956,000
|
|
Accumulated
deficit
|
|
|
(14,327,000
|
)
|
|
(14,217,000
|
)
|
TOTAL
STOCKHOLDERS' EQUITY
|
|
|
2,872,000
|
|
|
2,843,000
|
|
|
|
|
|
|
|
|
|
TOTAL
LIABILITIES AND STOCKHOLDERS' EQUITY
|
|
$
|
11,925,000
|
|
$
|
9,707,000
|
|
Note:
The
balance sheet at September 30, 2006 has been derived from the audited
consolidated financial statements at that date.
See
notes
to condensed consolidated financial statements.
NATIONAL
HOLDINGS CORPORATION AND SUBSIDIARIES
CONDENSED
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
|
|
Three Months Ended
|
|
|
|
December
31,
|
|
December
31,
|
|
|
|
2006
|
|
2005
|
|
REVENUES:
|
|
|
|
|
|
Commissions
|
|
$
|
8,422,000
|
|
$
|
7,157,000
|
|
Net
dealer inventory gains
|
|
|
3,298,000
|
|
|
1,861,000
|
|
Investment
banking
|
|
|
556,000
|
|
|
3,052,000
|
|
|
|
|
|
|
|
|
|
Total
commission and fee revenues
|
|
|
12,276,000
|
|
|
12,070,000
|
|
|
|
|
|
|
|
|
|
Interest
and dividends
|
|
|
566,000
|
|
|
686,000
|
|
Transfer
fees and clearing services
|
|
|
1,010,000
|
|
|
762,000
|
|
Other
|
|
|
434,000
|
|
|
173,000
|
|
|
|
|
|
|
|
|
|
TOTAL
REVENUES
|
|
|
14,286,000
|
|
|
13,691,000
|
|
|
|
|
|
|
|
|
|
EXPENSES:
|
|
|
|
|
|
|
|
Commissions
ad fees
|
|
|
9,784,000
|
|
|
9,688,000
|
|
Employee
compensation and related expenses
|
|
|
1,514,000
|
|
|
1,292,000
|
|
Clearing
fees
|
|
|
375,000
|
|
|
364,000
|
|
Communications
|
|
|
402,000
|
|
|
487,000
|
|
Occupancy
and equipment costs
|
|
|
735,000
|
|
|
676,000
|
|
Professional
fees
|
|
|
958,000
|
|
|
338,000
|
|
Interest
|
|
|
104,000
|
|
|
110,000
|
|
Taxes,
licenses, registration
|
|
|
179,000
|
|
|
145,000
|
|
Other
administrative expenses
|
|
|
320,000
|
|
|
332,000
|
|
|
|
|
|
|
|
|
|
TOTAL
EXPENSES
|
|
|
14,371,000
|
|
|
13,432,000
|
|
|
|
|
|
|
|
|
|
NET
(LOSS) INCOME
|
|
|
(85,000
|
)
|
|
259,000
|
|
|
|
|
|
|
|
|
|
Preferred
stock dividends
|
|
|
(105,000
|
)
|
|
(76,000
|
)
|
|
|
|
|
|
|
|
|
Net
(loss) income attributable to common stockholders
|
|
$
|
(190,000
|
)
|
$
|
183,000
|
|
|
|
|
|
|
|
|
|
NET
(LOSS) INCOME PER COMMON SHARE
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic:
|
|
|
|
|
|
|
|
Net
(loss) income attributable to common stockholders
|
|
$
|
(0.04
|
)
|
$
|
0.04
|
|
|
|
|
|
|
|
|
|
Diluted:
|
|
|
|
|
|
|
|
Net
(loss) income attributable to common stockholders
|
|
$
|
(0.04
|
)
|
$
|
0.04
|
|
|
|
|
|
|
|
|
|
Weighted
average number of shares outstanding
|
|
|
|
|
|
|
|
Basic
|
|
|
5,251,915
|
|
|
5,047,737
|
|
Diluted
|
|
|
5,251,915
|
|
|
7,294,903
|
|
See
notes
to condensed consolidated financial statements.
NATIONAL
HOLDINGS CORPORATION AND SUBSIDIARIES
CONDENSED
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
|
|
Three
Months Ended
|
|
|
|
December
31, 2006
|
|
December
31, 2005
|
|
CASH
FLOWS FROM OPERATING ACTIVITIES
|
|
|
|
|
|
Net
(loss) income
|
|
$
|
(85,000
|
)
|
$
|
259,000
|
|
Adjustments
to reconcile net (loss) income to net
|
|
|
|
|
|
|
|
cash
provided by (used in) operating activities
|
|
|
|
|
|
|
|
Depreciation
and amortization
|
|
|
37,000
|
|
|
32,000
|
|
Amortization
of deferred financing costs
|
|
|
1,000
|
|
|
-
|
|
Amortization
of note discount
|
|
|
29,000
|
|
|
33,000
|
|
Compensatory
element of common stock issuance
|
|
|
-
|
|
|
12,000
|
|
Compensatory
element of common stock options issuance
|
|
|
7,000
|
|
|
-
|
|
Changes
in assets and liabilities
|
|
|
|
|
|
|
|
Deposits
with clearing organizations
|
|
|
(1,000
|
)
|
|
-
|
|
Receivables
from broker-dealers, clearing organizations and others
|
|
|
(2,220,000
|
)
|
|
(132,000
|
)
|
Securities
owned: marketable, at market value
|
|
|
(1,462,000
|
)
|
|
(239,000
|
)
|
Securities
owned: non-marketable, at fair value
|
|
|
370,000
|
|
|
-
|
|
Other
assets
|
|
|
(138,000
|
)
|
|
95,000
|
|
Payables
|
|
|
2,046,000
|
|
|
129,000
|
|
Securities
sold, but not yet purchased, at market
|
|
|
113,000
|
|
|
40,000
|
|
Net
cash (used in) provided by operating activities
|
|
|
(1,303,000
|
)
|
|
229,000
|
|
|
|
|
|
|
|
|
|
CASH
FLOWS FROM INVESTING ACTIVITIES
|
|
|
|
|
|
|
|
Purchase
of fixed assets
|
|
|
(2,000
|
)
|
|
(38,000
|
)
|
|
|
|
|
|
|
|
|
CASH
FLOWS FROM FINANCING ACTIVITIES
|
|
|
|
|
|
|
|
Dividends
paid
|
|
|
(25,000
|
)
|
|
-
|
|
Exercise
of warrants
|
|
|
132,000
|
|
|
-
|
|
Net
cash provided by (used in) financing activities
|
|
|
107,000
|
|
|
-
|
|
|
|
|
|
|
|
|
|
NET
DECREASE IN CASH
|
|
|
(1,198,000
|
)
|
|
191,000
|
|
|
|
|
|
|
|
|
|
CASH
BALANCE
|
|
|
|
|
|
|
|
Beginning
of the period
|
|
|
1,441,000
|
|
|
398,000
|
|
|
|
|
|
|
|
|
|
End
of the period
|
|
$
|
243,000
|
|
$
|
589,000
|
|
|
|
|
|
|
|
|
|
SUPPLEMENTAL
DISCLOSURES OF CASH FLOW INFORMATION
|
|
|
|
|
|
|
|
Cash
paid during the period for:
|
|
|
|
|
|
|
|
Interest
|
|
$
|
74,000
|
|
$
|
77,000
|
|
Series
B preferred stock dividends
|
|
$
|
25,000
|
|
$
|
-
|
|
See
notes
to condensed consolidated financial statements.
NATIONAL
HOLDINGS CORPORATION AND SUBSIDIARIES
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31, 2006
(UNAUDITED)
NOTE
1. BASIS OF PRESENTATION
The
accompanying condensed consolidated financial statements of National Holdings
Corporation (“National Holdings” or the “Company”) have been prepared in
accordance with generally accepted accounting principles for interim financial
statements and with the instructions to Form 10-Q and Rule 10-01 of Regulation
S-X. Accordingly, they do not include all of the information and disclosures
required for annual financial statements. In the opinion of management, all
adjustments (consisting of normal recurring accruals) considered necessary
for a
fair presentation have been included. The condensed consolidated financial
statements as of December 31, 2006 and for the periods ended December 31, 2006
and December 31, 2005 are unaudited. The results of operations for the interim
periods are not necessarily indicative of the results of operations for the
fiscal year. These condensed consolidated financial statements should be read
in
conjunction with the consolidated financial statements and related footnotes
included thereto in the Company’s Annual Report on Form 10-K for the fiscal year
ended September 30, 2006.
NOTE
2. STOCK
BASED COMPENSATION
Effective
October 1, 2005, the Company adopted FASB Statement of Financial Accounting
Standard (“SFAS”) No. 123R “Share Based Payment.” This statement is a
revision of SFAS Statement No. 123, and supersedes APB Opinion No. 25,
and its related implementation guidance. SFAS 123R addresses all forms of share
based payment (“SBP”) awards including shares issued under employee stock
purchase plans, stock options, restricted stock and stock appreciation rights.
Under SFAS 123R, SBP awards will result in a charge to operations that will
be
measured at fair value on the awards grant date, based on the estimated number
of awards expected to vest over the service period. During the three
months ended December 31, 2005, the Company granted 100,000 employee stock
options with a fair value of $33,000. No charge was recorded in the quarter
ended December 31, 2005 as the expense incurred during the period associated
with this grant was nominal. During the three months ended December 31,
2006, the Company granted 150,000 employee stock options with a fair value
of
$96,400. No charge was recorded in the quarter ended December 31, 2006 as the
expense incurred during the period associated with this grant was
nominal.
The
Black-Scholes option valuation model is used to estimate the fair value of
the
options granted. The model includes subjective input assumptions that can
materially affect the fair value estimates. The model was developed for use
in
estimating the fair value of traded options that have no vesting restrictions
and that are fully transferable. For example, the expected volatility is
estimated based on the most recent historical period of time equal to the
weighted average life of the options granted. Options issued under the Company's
option plans have characteristics that differ from traded options. In
management's opinion, this valuation model does not necessarily provide a
reliable single measure of the fair value of its employee stock options.
Principal assumptions used in applying the Black-Scholes model along with the
results from the model were as follows:
|
|
2006
|
|
2005
|
|
Assumptions:
|
|
|
|
|
|
Risk-free
interest rate
|
|
|
4.40
|
%
|
|
4.40
|
%
|
|
|
|
|
|
|
|
|
Expected
life, in years
|
|
|
3.0
|
|
|
3.0
|
|
|
|
|
|
|
|
|
|
Expected
volatility
|
|
|
122
|
%
|
|
124
|
%
|
A
summary
of the stock option activity as of December 31, 2006, and changes during the
three month period then ended is presented below:
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
|
Weighted
|
|
Average
|
|
|
|
|
|
|
|
Average
|
|
Remaining
|
|
Aggregate
|
|
|
|
|
|
Exercise
|
|
Contractual
|
|
Intrinsic
|
|
|
|
Shares
|
|
Price
|
|
Term
|
|
Value
|
|
Outstanding
at September 30, 2006
|
|
|
932,000
|
|
$
|
1.30
|
|
|
3.31
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Granted
|
|
|
150,000
|
|
$
|
1.30
|
|
|
4.99
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Expired
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding
at December 31, 2006
|
|
|
1,082,000
|
|
$
|
1.30
|
|
|
3.33
|
|
$
|
252,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exerciseable
at December 31, 2006
|
|
|
957,000
|
|
$
|
1.32
|
|
|
3.16
|
|
$
|
212,000
|
|
As
of
December 31, 2006, there was $158,000 of total deferred compensation costs
related to share-based compensation arrangements.
A
summary
of the status of the Company’s nonvested shares as of December
31,
2006,
and changes during the three month period then ended is presented
below:
|
|
|
|
Weighted
|
|
|
|
|
|
Average
|
|
|
|
|
|
Grant
Date
|
|
Nonvested
Shares
|
|
Shares
|
|
Fair
Value
|
|
Nonvested
at September 30, 2006
|
|
|
75,000
|
|
$
|
0.33
|
|
|
|
|
|
|
|
|
|
Granted
|
|
|
75,000
|
|
$
|
0.78
|
|
|
|
|
|
|
|
|
|
Vested
|
|
|
(25,000
|
)
|
$
|
0.33
|
|
|
|
|
|
|
|
|
|
Expired
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
Nonvested
at December 31, 2006
|
|
|
125,000
|
|
$
|
0.60
|
|
NOTE
3. SECURITIES OWNED AND SECURITIES SOLD, BUT NOT YET
PURCHASED
The
following table shows the quoted market values of the Company's securities
owned
and securities sold, but not yet purchased as of December 31, 2006:
|
|
Securities
|
|
Securities
sold, but
|
|
|
|
owned
|
|
not
yet purchased
|
|
Corporate
stocks
|
|
$
|
1,921,000
|
|
$
|
230,000
|
|
Corporate
bonds
|
|
|
-
|
|
|
45,000
|
|
Government
obligations
|
|
|
16,000
|
|
|
-
|
|
|
|
$
|
1,937,000
|
|
$
|
275,000
|
|
Non-marketable
securities owned at December 31, 2006 consist of non-tradable warrants
exercisable into freely trading common stock of public companies totaling
$32,000.
NOTE
4. CLEARING AGREEMENTS
In
April
2005, the Company’s wholly-owned subsidiary, National Securities Corporation
(“National Securities”) entered into a clearing agreement with National
Financial Services LLC (“NFS”) that became effective in June 2005. In the first
quarter of fiscal year 2007, NFS paid National Securities a $750,000 business
credit that has been included in “Accounts Payable, Accrued Expenses and Other
Liabilities” in the accompanying consolidated statements of financial condition
as of December 31, 2006. The clearing agreement includes a termination fee
if
National Securities terminates the agreement without cause. Additionally, in
June 2005, National Securities entered into a clearing agreement with Penson
Financial Services, Inc. (“Penson”) for the purpose of providing clearing
services that are not provided by NFS. The Company believes that the overall
effect of these clearing relationships will be beneficial to the Company’s cost
structure, liquidity and capital resources.
NOTE
5. CONTINGENCIES
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 intend to
vigorously defend this action.
The
Company is a defendant in various other arbitrations and administrative
proceedings, lawsuits and claims seeking
in the aggregate damages of approximately $1,600,000. The Company
believes
such claims are substantially without merit, and estimates that its liability,
primarily for defense costs, will approximate $160,000 (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 December 31, 2006 and 2005, is $762,000 and $245,000,
respectively, and
have
been included in “Accounts Payable, Accrued Expenses and Other Liabilities” in
the accompanying consolidated statements of financial condition.
Approximately $575,000 of the accrued legal fees at December 31, 2006 relates
to
the settlement of certain arbitrations. The
Company has included in “Professional fees” litigation and NASD related expenses
of $789,000 and $245,000 for the first quarter of fiscal year 2007 and 2006,
respectively.
NOTE
6. DIVIDENDS ON CONVERTIBLE PREFERRED STOCK
The
holders of the Company’s Series A convertible preferred stock, that are
convertible into the Company’s common stock at $1.25 per share, are 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. At December 31, 2006, the amount of
accumulated dividends on the Company’s 35,316 issued and outstanding shares of
Series A preferred stock was approximately $239,000.
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 December 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 January 2007.
NOTE
7. INCOME PER COMMON SHARE
Basic
income per share is computed on the basis of the weighted average number of
common shares outstanding. Diluted income per share is computed on the basis
of
the weighted average number of common shares outstanding plus the potential
dilution that would occur if securities or other contracts to issue common
shares were exercised or converted.
The
following table sets forth the components used in the computation of basic
and
diluted income per common share:
|
|
Three
Months Ended
|
|
|
|
December
31, 2006
|
|
December
31, 2005
|
|
Numerator:
|
|
|
|
|
|
Net
income
|
|
$
|
(85,000
|
)
|
$
|
259,000
|
|
Preferred
stock dividends
|
|
|
(105,000
|
)
|
|
(76,000
|
)
|
|
|
|
|
|
|
|
|
Numerator
for basic earnings per share--net income
|
|
|
|
|
|
|
|
attributable
to common stockholders - as reported
|
|
|
(190,000
|
)
|
|
183,000
|
|
Effect
of dilutive securities:
|
|
|
|
|
|
|
|
Preferred
stock dividends
|
|
|
-
|
|
|
76,000
|
|
Numerator
for basic earnings per share--net income
|
|
|
|
|
|
|
|
attributable
to common stockholders - as adjusted
|
|
$
|
(190,000
|
)
|
$
|
259,000
|
|
|
|
|
|
|
|
|
|
Denominator:
|
|
|
|
|
|
|
|
Denominator
for basic earnings per share--weighted average shares
|
|
|
5,251,915
|
|
|
5,047,737
|
|
Effective
of dilutive securities:
|
|
|
|
|
|
|
|
Stock
options
|
|
|
-
|
|
|
11,645
|
|
Warrants
|
|
|
-
|
|
|
14,190
|
|
Assumed
conversion of:
|
|
|
|
|
|
|
|
Series
A Preferred Stock
|
|
|
-
|
|
|
2,221,331
|
|
Series
B Preferred Stock
|
|
|
-
|
|
|
-
|
|
Notes
|
|
|
-
|
|
|
-
|
|
Dilutive
potential common shares
|
|
|
-
|
|
|
2,247,166
|
|
Denominator
for diluted earnings per share--adjusted
|
|
|
|
|
|
|
|
weighted-average
shares and assumed conversions
|
|
|
5,251,915
|
|
|
7,294,903
|
|
|
|
|
|
|
|
|
|
Net
income available to common stockholders
|
|
|
|
|
|
|
|
Basic:
|
|
$
|
(0.04
|
)
|
$
|
0.04
|
|
|
|
|
|
|
|
|
|
Diluted:
|
|
$
|
(0.04
|
)
|
$
|
0.04
|
|
For
the
three-month period ended December 31, 2006, 7,829,644 shares attributable to
outstanding Series A and B Preferred Stock, convertible notes, stock options
and
warrants were excluded from the calculation of diluted net income per share
because if included the effect would be antildilutive.
NOTE
8. ACCOUNTS PAYABLE, ACCRUED EXPENSES AND OTHER
LIABILITIES
Accounts
payable, accrued expenses and other liabilities as of December 31, 2006 and
September 30, 2006, respectively, consist of the following:
|
|
December
31, 2006
|
|
September
30, 2006
|
|
|
|
|
|
|
|
Commissions
payable
|
|
$
|
1,974,000
|
|
$
|
1,993,000
|
|
Legal
payable
|
|
|
768,000
|
|
|
325,000
|
|
Other
|
|
|
1,699,000
|
|
|
1,625,000
|
|
Total
|
|
$
|
4,441,000
|
|
$
|
3,943,000
|
|
NOTE
9. STOCKHOLDERS’ EQUITY
In
the
first quarter ended December 31, 2006 the Company received proceeds of
approximately $132,000 from the exercise of outstanding warrants.
NOTE
10. NEW SUBSIDIARIES
In
the
third quarter of fiscal year 2006, the Company formed National Insurance
Corporation that will provide fixed insurance products to its clients, including
life insurance, disability insurance, long term care insurance and fixed
annuities. National Insurance is finalizing the requisite state registrations,
and expects to commence active business operations during the current fiscal
year.
In
the
first quarter of fiscal year 2007, the Company formed a new wholly owned
subsidiary, National Holdings Mortgage Corporation that will operate a mortgage
broker business. National Mortgage is in the process of completing the requisite
state registrations, and has not yet commenced business operations.
ITEM
2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
The
Private Securities Litigation Reform Act of 1995 provides a safe harbor for
forward-looking statements. This Quarterly Report may contain certain statements
of a forward-looking nature relating to future events or future business
performance. Any such statements that refer to the Company’s estimated or
anticipated future results or other non-historical facts are forward-looking
and
reflect the Company’s current perspective of existing trends and information.
These statements involve risks and uncertainties that cannot be predicted or
quantified and, consequently, actual results may differ materially from those
expressed or implied by such forward-looking statements. Such risks and
uncertainties include, among others, risks and uncertainties detailed in the
Company’s Annual Report on Form 10-K, filed with the Securities and Exchange
Commission on December 7, 2006. Any forward-looking statements contained in
or
incorporated into this Quarterly Report speak only as of the date of this
Quarterly Report. The Company undertakes no obligation to update publicly any
forward-looking statement, whether as a result of new information, future events
or otherwise.
RESULTS
OF OPERATIONS
Three
Months Ended December 31, 2006 Compared to Three Months Ended December 31,
2005
The
Company’s first quarter of fiscal year 2007 resulted in an increase in revenues,
and a greater increase in expenses compared
to the same period last year. As
a
result, the Company reported a net loss of $85,000 compared with net income
of
$259,000 for the first quarters of fiscal years 2007 and 2006, respectively.
This represents a decline of $344,000 from the prior period.
|
|
Three
Months Ended
|
|
|
|
|
|
|
|
December
31,
|
|
Increase
(Decrease)
|
|
|
|
2006
|
|
2005
|
|
Amount
|
|
Percent
|
|
Commissions
|
|
$
|
8,422,000
|
|
$
|
7,157,000
|
|
$
|
1,265,000
|
|
|
18
|
%
|
Proprietary
trading
|
|
|
2,800,000
|
|
|
1,841,000
|
|
|
959,000
|
|
|
52
|
%
|
Market
making
|
|
|
447,000
|
|
|
-
|
|
|
447,000
|
|
|
n/a
|
|
Mark-ups
and mark-downs
|
|
|
51,000
|
|
|
20,000
|
|
|
31,000
|
|
|
155
|
%
|
Net
dealer inventory gains
|
|
|
3,298,000
|
|
|
1,861,000
|
|
|
1,437,000
|
|
|
77
|
%
|
Investment
banking
|
|
|
556,000
|
|
|
3,052,000
|
|
|
(2,496,000
|
)
|
|
(82
|
%)
|
Interest
and dividends
|
|
|
566,000
|
|
|
686,000
|
|
|
(120,000
|
)
|
|
(17
|
%)
|
Transfer
fees and clearance services
|
|
|
1,010,000
|
|
|
762,000
|
|
|
248,000
|
|
|
33
|
%
|
Other
|
|
|
434,000
|
|
|
173,000
|
|
|
261,000
|
|
|
151
|
%
|
|
|
$
|
14,286,000
|
|
$
|
13,691,000
|
|
$
|
595,000
|
|
|
4
|
%
|
Total
revenues increased $595,000, or 4%, in the first quarter of fiscal year 2007
to
$14,286,000 from $13,691,000 in the first quarter of fiscal year 2006. During
the first quarter of fiscal year 2007, total trading volume increased by
approximately 11%, compared to the first quarter of fiscal year 2006. The
increase in revenues and trading volume is due to the stronger securities market
in fiscal year 2007 and the Company’s re-entry into market making activities.
Commission revenue increased $1,265,000, or 18%, to $8,422,000 from $7,157,000
during the first quarter of fiscal year 2007 compared with the same period
in
fiscal year 2006. Net dealer inventory gains, which includes profits on
proprietary trading, market making activities and customer mark-ups and
mark-downs, increased $1,437,000, or 77%, to $3,298,000 from $1,861,000 during
the first quarter of fiscal year 2007 compared with the same period in fiscal
year 2006. The increase is due to the Company’s re-entry into market making
activities and increased trading activity in foreign securities. During the
first quarter of fiscal year 2007, revenues from proprietary trading increased
$959,000, or 52%, to $2,800,000 from $1,841,000 in the first quarter of fiscal
year 2006, revenues from market making activities increased to $447,000 from
$0
in the first quarter of fiscal year 2006, and revenues from customer mark-ups
and mark-downs increased $31,000, or 155%, to $51,000 from $20,000 in the first
quarter of fiscal year 2006.
Investment
banking revenue decreased $2,496,000, or 82%, to $556,000 from $3,052,000 in
the
first quarter of fiscal year 2007 compared with the first quarter of fiscal
year
2006. The decrease in investment banking revenues is attributable to the Company
having completed more investment banking transactions in the first quarter
of
fiscal year 2006. Interest and dividend income decreased $120,000 or 17%, to
$566,000 from $686,000
in the first quarter of fiscal year 2007 compared with the same period last
year. The decrease in interest income is attributable to lower margin debit
balances resulting from a stricter margin policy imposed by our clearing firms.
Transfer fees increased $248,000, or 33%, to $1,010,000 in the first quarter
of
fiscal year 2007 from
$762,000
in the first quarter of fiscal year 2006. The increase is due to the higher
trading volume experienced during the current year’s quarter.
Other
revenue, consisting of asset management fees, miscellaneous transaction fees
and
trading fees and other investment income, increased $261,000, or 151%, to
$434,000 from $173,000 during the first quarter of fiscal year 2007 compared
to
the first quarter of fiscal year 2006. The increase is due to an increase in
fee
based assets under management and investment income realized from the Company’s
venture capital fund.
|
|
Three
Months Ended
|
|
|
|
|
|
|
|
December
31,
|
|
Increase
(Decrease)
|
|
|
|
2006
|
|
2005
|
|
Amount
|
|
Percent
|
|
Commission
expense related to:
|
|
|
|
|
|
|
|
|
|
Commission
revenue
|
|
$
|
7,333,000
|
|
$
|
6,273,000
|
|
$
|
1,060,000
|
|
|
17
|
%
|
Net
dealer inventory gains
|
|
|
2,441,000
|
|
|
1,340,000
|
|
|
1,101,000
|
|
|
82
|
%
|
Investment
banking
|
|
|
10,000
|
|
|
2,075,000
|
|
|
(2,065,000
|
)
|
|
(100
|
%)
|
Commissions
|
|
|
9,784,000
|
|
|
9,688,000
|
|
|
96,000
|
|
|
1
|
%
|
Employee
compensation
|
|
|
1,514,000
|
|
|
1,292,000
|
|
|
222,000
|
|
|
17
|
%
|
Clearing
fees
|
|
|
375,000
|
|
|
364,000
|
|
|
11,000
|
|
|
3
|
%
|
Communications
|
|
|
402,000
|
|
|
487,000
|
|
|
(85,000
|
)
|
|
(17
|
%)
|
Occupancy
and equipment costs
|
|
|
735,000
|
|
|
676,000
|
|
|
59,000
|
|
|
9
|
%
|
Professional
fees
|
|
|
958,000
|
|
|
338,000
|
|
|
620,000
|
|
|
183
|
%
|
Interest
|
|
|
104,000
|
|
|
110,000
|
|
|
(6,000
|
)
|
|
(5
|
%)
|
Taxes,
licenses and registration
|
|
|
179,000
|
|
|
145,000
|
|
|
34,000
|
|
|
23
|
%
|
Other
administrative expenses
|
|
|
320,000
|
|
|
332,000
|
|
|
(12,000
|
)
|
|
(4
|
%)
|
|
|
$
|
14,371,000
|
|
$
|
13,432,000
|
|
$
|
939,000
|
|
|
7
|
%
|
In
comparison with the 4% increase in total revenues, total expenses increased
7%
or $939,000 to $14,371,000 for the first quarter of fiscal year 2007 compared
to
$13,432,000 in the first quarter of fiscal year 2006. The increase in total
expenses is a result of legal fees and costs incurred to settle certain
arbitrations. Commission expense, which includes expenses related to commission
revenue, net dealer inventory gains and investment banking, increased $96,000,
or 1%, to $9,784,000 in the first quarter of fiscal year 2007 from $9,688,000
in
the first quarter of fiscal year 2006. Commission expense related to commission
revenue increased $1,060,000, or 17%, to $7,333,000 in the first quarter of
fiscal year 2007 from $6,273,000 in the first quarter of fiscal year 2006;
commission expense related to net dealer inventory gains increased $1,101,000,
or 82%, to $2,441,000 in the first quarter of fiscal year 2007 from $1,340,000
in the first quarter of fiscal year 2006; and commission expense related to
investment banking decreased $2,065,000, or almost 100%, to $10,000 in the
first
quarter of fiscal year 2007 from $2,075,000 in the first quarter of fiscal
year
2006. Commission expense as a percentage of commission revenues decreased to
87%
in the first quarter of fiscal year 2007 from 88% in the first quarter of fiscal
year 2006. This decrease is attributable to a decrease in the amortization
of
advances to registered representatives. Commission expense as a percentage
of
net dealer inventory gains increased to 74% in the first quarter of fiscal
year
2007 from 72% in the first quarter of fiscal year 2006. This increase is
attributable to changes in the securities traded, and their related commission
payouts. Commission expense as a percentage of investment banking decreased
to
2% in the first quarter of fiscal year 2007 from 68% in the first quarter of
fiscal year 2006. This decrease is due to the receipt of investment banking
revenues in the first quarter of fiscal year 2007 that did not incur any
corresponding commission expense. Commission expense includes the amortization
of advances to registered representatives of $230,000 and $312,000 for the
first
quarter of fiscal years 2007 and 2006, 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 $222, 000, or 17%, to $1,514,000 in the first
quarter of fiscal year 2007 from $1,292,000 in the first quarter of fiscal
year
2006. The increase is attributable to new employees hired during fiscal year
2006. Overall, combined commission and employee compensation expense, as a
percentage of revenue, decreased slightly to 79% from 80% in the first quarters
of fiscal year 2007 and 2006, respectively.
Clearing
fees increased $11,000, or 3%, to $375000 in the first quarter of fiscal year
2007 from $364,000 in the first quarter of fiscal year 2006. The smaller
increase in clearing fees as compared to the increase in commission revenue
is
attributable to higher average commission revenue per ticket in the first
quarter of fiscal year 2007.
Communication
expenses decreased $85,000 or 17%, to $402,000 from $487,000 in the first
quarter of fiscal year 2007 compared to the first quarter of fiscal year 2006.
The decrease is due to the Company’s ability to acquire certain of these
services at a lower price. Occupancy costs increased $59,000, or 9%, to $735,000
from $676,000 in the first quarter of fiscal year 2007 compared to the first
quarter of fiscal year 2006. The increase in occupancy expense is due to costs
incurred to transfer certain of the Company’s paper files to a digital system.
Professional fees increased $620,000, or 183%, to $958,000 from $338,000 in
the
first quarter of fiscal year 2007 compared to the first quarter of fiscal year
2006. The increase in professional fees is a result of legal fees and costs
incurred to settle certain arbitrations.
Interest
expense decreased $6,000, or 5%, to $104,000 from $110,000 in the first quarter
of fiscal year 2007 compared to the first quarter of fiscal year 2006. Taxes,
licenses and registration increased $34,000, or 23%, to $179,000 from $145,000
in the first quarter of fiscal year 2007 compared to the first quarter of fiscal
year 2006. The increase is due to registration incentives provided to certain
brokers who became affiliated with the Company in the first quarter of fiscal
year 2007. Other administrative expenses decreased $12,000 or 4% to $320,000
from $332,000 in the first quarter of fiscal year 2007 compared to the first
quarter of fiscal year 2006.
The
Company reported a net loss of $85,000 in the first quarter of fiscal year
2007
compared to net income of $259,000 in the first quarter of fiscal year 2006.
The
net loss attributable to common stockholders in the first quarter of fiscal
year
2007 was $190,000, or $.04 per common share, as compared to net income
attributable to common stockholders in the first quarter of fiscal year 2006
of
$183,000, or $.04 per common share. The net income attributable to common
stockholders for the first quarter of fiscal year 2007 and 2006 reflects
$105,000 and $76,000, respectively, of cumulative preferred stock dividends
on
the Company’s preferred stock.
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
December 31, 2006, National Securities’ net capital exceeded the requirement by
$1,665,000.
Advances,
dividend payments and other equity withdrawals from the Company’s subsidiary are
restricted by the regulations of the SEC and other regulatory agencies. These
regulatory restrictions may limit the amounts that a subsidiary may dividend
or
advance to the Company.
The
Company extends unsecured credit in the normal course of business to its
brokers. The determination of the appropriate amount of the reserve for
uncollectible accounts is based upon a review of the amount of credit extended,
the length of time each receivable has been outstanding, and the specific
individual brokers from whom the receivables are due.
The
objective of liquidity management is to ensure that the Company has ready access
to sufficient funds to meet commitments, fund deposit withdrawals and
efficiently provide for the credit needs of customers.
In
April
2005, National Securities entered into a clearing agreement with NFS that became
effective in June 2005. In the first quarter of fiscal year 2007, NFS paid
National Securities a $750,000 business credit that has been included in
“Accounts Payable, Accrued Expenses and Other Liabilities” in the accompanying
consolidated statements of financial condition as of December 31, 2006. The
clearing agreement includes a termination fee if National Securities terminates
the agreement without cause. Additionally, in June 2005, National Securities
entered into a clearing agreement with Penson for the purpose of providing
clearing services that are not provided by NFS. The Company believes that the
overall effect of these clearing relationships will be beneficial to the
Company’s cost structure, liquidity and capital resources.
In
the
quarter ended December 31, 2006, the Company received proceeds of approximately
$132,000 from the exercise of outstanding warrants.
ITEM
3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET
RISK
The
Company's primary market risk arises from the fact that it engages in
proprietary trading and historically made dealer markets in equity securities.
Accordingly, the Company may be required to maintain certain amounts of
inventories in order to facilitate customer order flow. The Company may incur
losses as a result of price movements in these inventories due to changes in
interest rates, foreign exchange rates, equity prices and other political
factors. The Company is not subject to direct market risk due to changes in
foreign exchange rates. However, the Company is subject to market risk as a
result of changes in interest rates and equity prices, which are affected by
global economic conditions. The Company manages its exposure to market risk
by
limiting its net long or short positions. Trading and inventory accounts are
monitored daily by management and the Company has instituted position limits.
Credit
risk represents the amount of accounting loss the Company could incur if
counterparties to its proprietary transactions fail to perform and the value
of
any collateral proves inadequate. Although credit risk relating to various
financing activities is reduced by the industry practice of obtaining and
maintaining collateral, the Company maintains more stringent requirements to
further reduce its exposure. The Company monitors its exposure to counterparty
risk on a daily basis by using credit exposure information and monitoring
collateral values. The Company maintains a credit committee, which reviews
margin requirements for large or concentrated accounts and sets higher
requirements or requires a reduction of either the level of margin debt or
investment in high-risk securities or, in some cases, requiring the transfer
of
the account to another broker-dealer.
The
Company monitors its market and credit risks daily through internal control
procedures designed to identify and evaluate the various risks to which the
Company is exposed. There can be no assurance, however, that the Company's
risk
management procedures and internal controls will prevent losses from occurring
as a result of such risks.
|
|
Long
|
|
Short
|
|
Net
|
|
Corporate
stocks
|
|
$
|
1,921,000
|
|
$
|
230,000
|
|
$
|
1,691,000
|
|
Corporate
bonds
|
|
|
-
|
|
|
45,000
|
|
|
(45,000
|
)
|
Government
obligations
|
|
|
16,000
|
|
|
-
|
|
|
16,000
|
|
|
|
$
|
1,937,000
|
|
$
|
275,000
|
|
$
|
1,662,000
|
|
The
following table shows the quoted market values of the Company's marketable
securities owned ("long"), securities sold, but not yet purchased ("short")
and
net positions as of December 31, 2006:
ITEM
4. CONTROLS AND PROCEDURES
Evaluation
of disclosure controls and procedures.
Based on
the evaluation of the Company’s disclosure controls and procedures (as defined
in the Exchange Act Rules 13a-15(e) and 15d-15(e)) required by the Exchange
Act Rules 13a-15(b) or 15d-15(b), the Company’s Chief Executive Officer and
Chief Financial Officer have concluded that, as of the end of the period covered
by this report, the Company’s disclosure controls and procedures were adequate
and effective to ensure that material information relating to the Company and
its consolidated subsidiaries would be made known to them by others within
those
entities, particularly during the period in which this quarterly report on
Form
10-Q was being prepared.
Changes
in internal controls.
There
were no significant changes in the Company’s internal controls or in other
factors that could significantly affect those controls and procedures subsequent
to the date of our evaluation nor any significant deficiencies or material
weaknesses in such disclosure controls and procedures requiring corrective
actions.
PART
II - OTHER INFORMATION
ITEM
1. LEGAL PROCEEDINGS
During
the quarter ended December 31, 2006, there were no significant developments
in
the Company’s legal proceedings. For a detailed discussion of the Company’s
legal proceedings, please refer to Note 5 herein, and the Company’s Annual
Report on Form 10-K for the fiscal year ended September 30, 2006.
ITEM
1A. RISK FACTORS
There
are
no material changes from the risk factors previously disclosed in the Company’s
Form 10-K for the year ended September 30, 2006.
ITEM
2. UNREGISTERED
SALES OF EQUITY SECURITIES
AND USE OF PROCEEDS
None.
ITEM
3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM
4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
ITEM
5. OTHER INFORMATION
On
January 24, 2007, the Company and St. Cloud Capital Partners, L.P. (“St. Cloud”)
amended the 11% convertible promissory note held by St. Cloud in the principal
amount of $850,000 (the “Note”) in order to amend the Prepayment Charge (as
defined therein) from a charge of 120% of the principal amount of the Note
to a
sliding charge of between 5% and 1% of the outstanding principal amount of
the
Note, depending upon the year in which a prepayment is made. Marshall S. Geller,
a director of the Company, is a principal of St. Cloud.
ITEM
6. EXHIBITS
4.3 |
Amendment No. 1 to 11% Convertible
Promissory Note. |
31.1 |
Chief
Executive Officer’s Certificate pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.
|
31.2 |
Chief
Financial Officer’s Certificate pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.
|
32.1 |
Chief
Executive Officer’s Certificate pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
|
32.2 |
Chief
Financial Officer’s Certificate pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
|
SIGNATURES
Pursuant
to the requirements of the Securities Exchange Act of 1934, the registrant
has
duly caused this report to be signed on its behalf by the undersigned thereunto
duly authorized.
NATIONAL
HOLDINGS CORPORATION AND SUBSIDIARIES
|
|
|
February 9, 2007 |
By: |
/s/ Mark Goldwasser |
|
Mark
Goldwasser |
|
President and Chief Executive
Officer |
|
|
|
February 9, 2007 |
By: |
/s/ Robert H. Daskal |
|
Robert
H. Daskal |
|
Chief Financial
Officer |