UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
Washington,
D.C. 20549
FORM
10-Q
QUARTERLY
REPORT PURSUANT TO SECTION 13 OR 15(d)
OF
THE
SECURITIES EXCHANGE ACT OF 1934
For the Quarter Ended March
31, 2007 |
Commission
File Number 001-12629
|
NATIONAL
HOLDINGS CORPORATION
(Exact
name of registrant as specified in its charter)
Delaware
(State
or other jurisdiction of
incorporation
or organization)
|
36-4128138
(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 May
7, 2007 there were 5,410,038 shares of the registrant's common stock
outstanding.
NATIONAL
HOLDINGS CORPORATION AND SUBSIDIARIES
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CONDENSED
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
|
|
|
|
|
|
|
|
|
|
|
|
|
|
ASSETS
|
|
|
March
31,
|
|
September
30,
|
|
|
|
2007
|
|
2006
|
|
|
|
(unaudited)
|
|
(see
note below)
|
|
|
|
|
|
|
|
CASH
|
|
$
|
1,536,000
|
|
$
|
1,441,000
|
|
DEPOSITS
WITH CLEARING ORGANIZATIONS
|
|
|
301,000
|
|
|
300,000
|
|
RECEIVABLES
FROM BROKER-DEALERS AND CLEARING ORGANIZATIONS
|
|
|
4,478,000
|
|
|
3,548,000
|
|
OTHER
RECEIVABLES, net of allowance for uncollectible accounts of
$467,000
|
|
|
|
|
|
|
|
at
March 31, 2007 and September 30, 2006, respectively
|
|
|
664,000
|
|
|
380,000
|
|
ADVANCES
TO REGISTERED REPRESENTATIVES
|
|
|
2,318,000
|
|
|
1,556,000
|
|
SECURITIES
OWNED
|
|
|
|
|
|
|
|
Marketable,
at
market value
|
|
|
890,000
|
|
|
475,000
|
|
Non-marketable,
at fair value
|
|
|
-
|
|
|
402,000
|
|
FIXED
ASSETS, net
|
|
|
289,000
|
|
|
305,000
|
|
SECURED
DEMAND NOTE
|
|
|
1,000,000
|
|
|
1,000,000
|
|
OTHER
ASSETS
|
|
|
446,000
|
|
|
300,000
|
|
|
|
|
|
|
|
|
|
TOTAL
ASSETS
|
|
$
|
11,922,000
|
|
$
|
9,707,000
|
|
|
|
|
|
|
|
|
|
LIABILITIES
AND STOCKHOLDERS' EQUITY
|
|
|
|
|
|
|
|
|
PAYABLE
TO BROKER-DEALERS AND CLEARING ORGANIZATIONS
|
|
$
|
714,000
|
|
$
|
113,000
|
|
SECURITIES
SOLD, BUT NOT YET PURCHASED, at market
|
|
|
176,000
|
|
|
162,000
|
|
ACCOUNTS
PAYABLE, ACCRUED EXPENSES AND OTHER LIABILITIES
|
|
|
4,707,000
|
|
|
3,943,000
|
|
CONVERTIBLE
NOTES PAYABLE, net of debt discounts of $140,000 and
$159,000
|
|
|
|
|
|
|
|
at
March 31, 2007 and September 30, 2006, respectively
|
|
|
860,000
|
|
|
841,000
|
|
NOTES
PAYABLE, net of debt discounts of $187,000 and $45,000
|
|
|
|
|
|
|
|
at
March 31, 2007 and September 30, 2006, respectively
|
|
|
813,000
|
|
|
805,000
|
|
TOTAL
LIABILITIES
|
|
|
7,270,000
|
|
|
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; 37,550 shares issued and outstanding
(liquidation
|
|
|
|
|
|
|
|
preference:
$3,755,000) at March 31, 2007 and 35,316 shares issued and
|
|
|
|
|
|
|
|
outstanding
(liquidation preference: $3,531,600) at September 30, 2006
|
|
|
-
|
|
|
-
|
|
Series
B 10% cumulative convertible preferred stock, $.01 par value,
20,000
|
|
|
|
|
|
|
|
shares
authorized; 10,000 shares issued and outstanding
(liquidation
|
|
|
|
|
|
|
|
preference:
$1,000,000) at March 31, 2007 and September 30, 2006,
|
|
|
|
|
|
|
|
respectively
|
|
|
-
|
|
|
-
|
|
Common
stock, $.02 par value, 30,000,000 shares authorized;
|
|
|
|
|
|
|
|
5,402,851
and
5,223,968 shares issued and outstanding,
|
|
|
|
|
|
|
|
at
March 31, 2007 and September 30, 2006, respectively
|
|
|
108,000
|
|
|
104,000
|
|
Additional
paid-in capital
|
|
|
17,639,000
|
|
|
16,956,000
|
|
Accumulated
deficit
|
|
|
(14,095,000
|
)
|
|
(14,217,000
|
)
|
TOTAL
STOCKHOLDERS' EQUITY
|
|
|
3,652,000
|
|
|
2,843,000
|
|
|
|
|
|
|
|
|
|
TOTAL
LIABILITIES AND STOCKHOLDERS' EQUITY
|
|
$
|
11,922,000
|
|
$
|
9,707,000
|
|
|
|
|
|
|
|
|
|
Note:
The balance sheet at September 30, 2006 has been derived from the
audited
consolidated financial statements at that
date.
|
NATIONAL
HOLDINGS CORPORATION AND SUBSIDIARIES
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CONDENSED
CONSOLIDATED STATEMENTS OF OPERATIONS
|
(Unaudited)
|
|
|
Three
Months Ended
|
|
Six
Months Ended
|
|
|
|
|
|
|
|
|
|
|
|
|
March
31,
|
|
March
31,
|
|
March
31,
|
|
March
31,
|
|
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
2006
|
|
2007
|
|
2006
|
|
Three
Months Ended
|
|
|
Six
Months Ended
|
|
REVENUES:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commissions
|
|
$
|
8,522,000
|
|
$
|
10,714,000
|
|
$
|
16,944,000
|
|
$
|
17,871,000
|
|
$
|
(2,192,000
|
)
|
|
-20
|
%
|
|
$
|
(927,000
|
)
|
|
-5
|
%
|
Net
dealer inventory gains
|
|
|
3,760,000
|
|
|
2,191,000
|
|
|
7,059,000
|
|
|
4,052,000
|
|
|
1,569,000
|
|
|
72
|
%
|
|
|
3,007,000
|
|
|
74
|
%
|
Investment
banking
|
|
|
3,112,000
|
|
|
4,042,000
|
|
|
3,667,000
|
|
|
7,093,000
|
|
|
(930,000
|
)
|
|
-23
|
%
|
|
|
(3,426,000
|
)
|
|
-48
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
commission and fee revenues
|
|
|
15,394,000
|
|
|
16,947,000
|
|
|
27,670,000
|
|
|
29,016,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
and dividends
|
|
|
796,000
|
|
|
696,000
|
|
|
1,361,000
|
|
|
1,382,000
|
|
|
100,000
|
|
|
14
|
%
|
|
|
(21,000
|
)
|
|
-2
|
%
|
Transfer
fees and clearing services
|
|
|
1,005,000
|
|
|
969,000
|
|
|
2,015,000
|
|
|
1,730,000
|
|
|
36,000
|
|
|
4
|
%
|
|
|
285,000
|
|
|
16
|
%
|
Other
|
|
|
420,000
|
|
|
175,000
|
|
|
853,000
|
|
|
347,000
|
|
|
245,000
|
|
|
140
|
%
|
|
|
506,000
|
|
|
146
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
TOTAL
REVENUES
|
|
|
17,615,000
|
|
|
18,787,000
|
|
|
31,899,000
|
|
|
32,475,000
|
|
|
(1,172,000
|
)
|
|
-6
|
%
|
|
|
(576,000
|
)
|
|
-2
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
EXPENSES:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commissions
|
|
|
12,392,000
|
|
|
14,043,000
|
|
|
22,176,000
|
|
|
23,731,000
|
|
|
(1,651,000
|
)
|
|
-12
|
%
|
|
|
(1,555,000
|
)
|
|
-7
|
%
|
Employee
compensation and related expenses
|
|
|
1,749,000
|
|
|
1,592,000
|
|
|
3,262,000
|
|
|
2,884,000
|
|
|
157,000
|
|
|
10
|
%
|
|
|
378,000
|
|
|
13
|
%
|
Clearing
fees
|
|
|
343,000
|
|
|
436,000
|
|
|
718,000
|
|
|
800,000
|
|
|
(93,000
|
)
|
|
-21
|
%
|
|
|
(82,000
|
)
|
|
-10
|
%
|
Communications
|
|
|
426,000
|
|
|
546,000
|
|
|
828,000
|
|
|
1,033,000
|
|
|
(120,000
|
)
|
|
-22
|
%
|
|
|
(205,000
|
)
|
|
-20
|
%
|
Occupancy
and equipment costs
|
|
|
741,000
|
|
|
633,000
|
|
|
1,476,000
|
|
|
1,308,000
|
|
|
108,000
|
|
|
17
|
%
|
|
|
168,000
|
|
|
13
|
%
|
Professional
fees
|
|
|
559,000
|
|
|
246,000
|
|
|
1,517,000
|
|
|
584,000
|
|
|
313,000
|
|
|
127
|
%
|
|
|
933,000
|
|
|
160
|
%
|
Interest
|
|
|
105,000
|
|
|
176,000
|
|
|
209,000
|
|
|
285,000
|
|
|
(71,000
|
)
|
|
-40
|
%
|
|
|
(76,000
|
)
|
|
-27
|
%
|
Taxes,
licenses, registration
|
|
|
164,000
|
|
|
169,000
|
|
|
342,000
|
|
|
314,000
|
|
|
(5,000
|
)
|
|
-3
|
%
|
|
|
28,000
|
|
|
9
|
%
|
Other
administrative expenses
|
|
|
560,000
|
|
|
522,000
|
|
|
880,000
|
|
|
854,000
|
|
|
38,000
|
|
|
7
|
%
|
|
|
26,000
|
|
|
3
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
TOTAL
EXPENSES
|
|
|
17,039,000
|
|
|
18,363,000
|
|
|
31,408,000
|
|
|
31,793,000
|
|
|
(1,324,000
|
)
|
|
-7
|
%
|
|
|
(385,000
|
)
|
|
-1
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NET
INCOME
|
|
|
576,000
|
|
|
424,000
|
|
|
491,000
|
|
|
682,000
|
|
|
152,000
|
|
|
36
|
%
|
|
|
(191,000
|
)
|
|
-28
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Preferred
stock dividends
|
|
|
(103,000
|
)
|
|
(95,000
|
)
|
|
(208,000
|
)
|
|
(171,000
|
)
|
|
(8,000
|
)
|
|
8
|
%
|
|
|
(37,000
|
)
|
|
22
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income attributable to common stockholders
|
|
$
|
473,000
|
|
$
|
329,000
|
|
$
|
283,000
|
|
$
|
511,000
|
|
$
|
144,000
|
|
|
44
|
%
|
|
$
|
(228,000
|
)
|
|
-45
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NET
INCOME PER COMMON SHARE
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income attributable to common stockholders
|
|
$
|
0.09
|
|
$
|
0.06
|
|
$
|
0.05
|
|
$
|
0.10
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income attributable to common stockholders
|
|
$
|
0.05
|
|
$
|
0.04
|
|
$
|
0.05
|
|
$
|
0.07
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
average number of shares outstanding
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
5,370,917
|
|
|
5,089,625
|
|
|
5,310,762
|
|
|
5,068,451
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
|
|
|
11,193,816
|
|
|
10,383,571
|
|
|
10,909,161
|
|
|
10,283,235
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NATIONAL
HOLDINGS CORPORATION AND SUBSIDIARIES
|
|
|
|
|
|
|
|
|
|
|
CONDENSED
CONSOLIDATED STATEMENTS OF CASH FLOWS
|
(Unaudited)
|
|
|
Six
Months Ended
|
|
|
|
March
31, 2007
|
|
March
31, 2006
|
|
CASH
FLOWS FROM OPERATING ACTIVITIES
|
|
|
|
|
|
Net
income
|
|
$
|
491,000
|
|
$
|
682,000
|
|
Adjustments
to reconcile net income to net
|
|
|
|
|
|
|
|
cash
provided by (used in) operating activities
|
|
|
|
|
|
|
|
Depreciation
and amortization
|
|
|
74,000
|
|
|
68,000
|
|
Amortization
of deferred financing costs
|
|
|
4,000
|
|
|
1,000
|
|
Amortization
of note discount
|
|
|
61,000
|
|
|
130,000
|
|
Compensatory
element of common stock issuance
|
|
|
-
|
|
|
12,000
|
|
Compensatory
element of common stock option issuances
|
|
|
29,000
|
|
|
5,000
|
|
Changes
in assets and liabilities
|
|
|
|
|
|
|
|
Deposits
with clearing organizations
|
|
|
(1,000
|
)
|
|
-
|
|
Receivables
from broker-dealers, clearing organizations and others
|
|
|
(1,976,000
|
)
|
|
(1,198,000
|
)
|
Securities
owned: marketable, at market value
|
|
|
(415,000
|
)
|
|
(300,000
|
)
|
Securities
owned: non-marketable, at fair value
|
|
|
402,000
|
|
|
-
|
|
Other
assets
|
|
|
(146,000
|
)
|
|
(96,000
|
)
|
Payables
|
|
|
1,392,000
|
|
|
1,678,000
|
|
Securities
sold, but not yet purchased, at market
|
|
|
14,000
|
|
|
29,000
|
|
Net
cash (used in) provided by operating activities
|
|
|
(71,000
|
)
|
|
1,011,000
|
|
|
|
|
|
|
|
|
|
CASH
FLOWS FROM INVESTING ACTIVITIES
|
|
|
|
|
|
|
|
Purchase
of fixed assets
|
|
|
(58,000
|
)
|
|
(117,000
|
)
|
|
|
|
|
|
|
|
|
CASH
FLOWS FROM FINANCING ACTIVITIES
|
|
|
|
|
|
|
|
Net
proceeds from issuance of common stock
|
|
|
-
|
|
|
175,000
|
|
Net
proceeds from issuance of preferred stock
|
|
|
-
|
|
|
972,000
|
|
Net
proceeds from issuance of convertible notes payable
|
|
|
-
|
|
|
1,000,000
|
|
Net
proceeds from issuance of notes payable
|
|
|
1,000,000
|
|
|
-
|
|
Cash
payment of deferred financing costs
|
|
|
(22,000
|
)
|
|
(28,000
|
)
|
Payment
of notes payable
|
|
|
(850,000
|
)
|
|
(1,175,000
|
)
|
Dividends
paid
|
|
|
(50,000
|
)
|
|
-
|
|
Exercise
of stock options and warrants
|
|
|
146,000
|
|
|
-
|
|
Net
cash provided by financing activities
|
|
|
224,000
|
|
|
944,000
|
|
|
|
|
|
|
|
|
|
NET
INCREASE IN CASH
|
|
|
95,000
|
|
|
1,838,000
|
|
|
|
|
|
|
|
|
|
CASH
BALANCE
|
|
|
|
|
|
|
|
Beginning
of the period
|
|
|
1,441,000
|
|
|
398,000
|
|
|
|
|
|
|
|
|
|
End
of the period
|
|
$
|
1,536,000
|
|
$
|
2,236,000
|
|
|
|
|
|
|
|
|
|
SUPPLEMENTAL
DISCLOSURES OF CASH FLOW INFORMATION
|
|
|
|
|
|
|
|
Cash
paid during the period for:
|
|
|
|
|
|
|
|
Interest
|
|
$
|
163,000
|
|
$
|
165,000
|
|
Series
B preferred stock dividends
|
|
$
|
50,000
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
SUPPLEMENTAL
DISCLOSURES OF NONCASH INVESTING AND
|
|
|
|
|
|
|
|
FINANCING
ACTIVITIES
|
|
|
|
|
|
|
|
Warrants
issued in connection with debt
|
|
$
|
195,000
|
|
$
|
187,000
|
|
Preferred
stock dividends
|
|
$
|
317,000
|
|
$
|
300,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
Equals
|
|
|
|
|
|
|
|
Interest
expense on operating statement
|
|
|
209,000
|
|
|
|
|
increased
by accrued interest payable at NHLD at beginning of period
and
|
|
|
56,082
|
|
|
|
|
decreased
by accrued interest payable at NHLD at end of period
|
|
|
37,260
|
|
|
|
|
|
|
|
|
|
|
|
|
NATIONAL
HOLDINGS CORPORATION AND SUBSIDIARIES
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MARCH
31, 2007
(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 March 31, 2007 and for the periods ended March 31, 2007 and
March 31, 2006 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. RECENT ACCOUNTING PRONOUNCEMENTS
In
July
2006, the FASB released Interpretation No. 48, "Accounting for Uncertainty
in
Income Taxes--an interpretation of FASB Statement No. 109" ("FIN 48"), which
clarifies the accounting and reporting for uncertainty in income tax law. FIN
48
prescribes a comprehensive model for the financial statement recognition,
measurement, presentation and disclosure of uncertain tax positions taken or
expected to be taken in income tax returns. The provisions of FIN 48 are
effective after December 15, 2006. Earlier adoption is permitted as of the
beginning of an enterprise's fiscal year, provided the enterprise has not yet
issued financial statements, including financial statements for any interim
period for that fiscal year. The cumulative effects, if any, of applying FIN
48
will be recorded as an adjustment to accumulated deficit as of the beginning
of
the period of adoption. The Company is evaluating the impact that the adoption
of this pronouncement will have on the consolidated financial position,
results of operations, or cash flows of the Company.
In
February 2007, the FASB issued SFAS No. 159, "The Fair Value Option for
Financial Assets and Financial Liabilities" ("SFAS 159"). SFAS 159 provides
companies with an option to report selected financial assets and liabilities
at
fair value. The objective of SFAS 159 is to reduce both complexity in accounting
for financial instruments and the volatility in earnings caused by measuring
related assets and liabilities differently. Generally accepted accounting
principles have required different measurement attributes for different assets
and liabilities that can create artificial volatility in earnings. The FASB
has
indicated it believes that SFAS 159 helps to mitigate this type of
accounting-induced volatility by enabling companies to report related assets
and
liabilities at fair value, which would likely reduce the need for companies
to
comply with detailed rules for hedge accounting. SFAS 159 also establishes
presentation and disclosure requirements designed to facilitate comparisons
between companies that choose different measurement attributes for similar
types
of assets and liabilities.
SFAS
159
does not eliminate disclosure requirements included in other accounting
standards, including requirements for disclosures about fair value measurements
included in SFAS 157 and SFAS No. 107, "Disclosures about Fair Value of
Financial Instruments." SFAS 159 is effective for the Company as of the
beginning of fiscal year 2009. The adoption of this pronouncement is not
expected to have an impact on the Company's consolidated financial
position, results of operations or cash flows.
In
December 2006, the FASB approved FASB Staff Position (FSP) No. EITF 00-19-2,
"Accounting for Registration Payment Arrangements" ("FSP EITF 00-19-2"), which
specifies that the contingent obligation to make future payments or otherwise
transfer consideration under a registration payment arrangement, whether issued
as a separate agreement or included as a provision of a financial instrument
or
other agreement, should be separately recognized and measured in accordance
with
SFAS No. 5, "Accounting for Contingencies". FSP EITF 00-19-2 also requires
additional disclosure regarding the nature of any registration payment
arrangements, alternative settlement methods, the maximum potential amount
of
consideration and the current carrying amount of the liability, if any. The
guidance in FSP EITF 00-19-2 amends FASB Statements No. 133, "Accounting for
Derivative Instruments and Hedging Activities", and No. 150, "Accounting for
Certain Financial Instruments with Characteristics of both Liabilities and
Equity", and FASB Interpretation No. 45, "Guarantor's Accounting and Disclosure
Requirements for Guarantees, Including Indirect Guarantees of Indebtedness
of
Others", to include scope exceptions for registration payment
arrangements.
FSP
EITF
00-19-2 is effective immediately for registration payment arrangements and
the
financial instruments subject to those arrangements that are entered into or
modified subsequent to the issuance date of this FSP, or for financial
statements issued for fiscal years beginning after December 15, 2006, and
interim periods within those fiscal years, for registration payment arrangements
entered into prior to the issuance date of this FSP. The adoption of this
pronouncement is not expected to have an impact on the
Company's consolidated financial position, results of operations or cash
flows.
NOTE
3. STOCK
BASED COMPENSATION
Effective
October 1, 2005, the Company adopted FASB Statement of Financial Accounting
Standard (“SFAS”) No. 123R “Share Based Payment”. This statement is a
revision of SFAS Statement No. 123, and supersedes APB Opinion No. 25,
and its related implementation guidance. SFAS 123R addresses all forms of share
based payment (“SBP”) awards including shares issued under employee stock
purchase plans, stock options, restricted stock and stock appreciation rights.
Under SFAS 123R, SBP awards will result in a charge to operations that will
be
measured at fair value on the awards grant date, based on the estimated number
of awards expected to vest over the service period. During the three and
six months ended March 31, 2006, the Company granted 70,000 and 170,000
stock options, respectively, with a fair value of approximately $55,000 and
$88,000, respectively. A charge of approximately $4,000 was recorded in the
three and six months ended March 31, 2006, relating to the amortization of
the fair value associated with these grants. During the three and six months
ended March 31, 2007, the Company granted 570,000 and 720,000 stock
options, respectively, with a fair value of approximately $478,000 and $574,000,
respectively. A charge of approximately $22,000 and $29,000 was recorded in
the
three and six months ended March 31, 2007, respectively, relating to the
amortization of the fair value associated with stock option grants.
As
stock-based compensation expense recognized in the condensed consolidated
statements of operations is based on awards that are ultimately expected to
vest, it has been reduced for expected forfeitures. SFAS No. 123(R) requires
forfeitures to be estimated at the time of grant and revised, if necessary,
in
subsequent periods if actual forfeitures differ from those estimates.
Forfeitures were estimated based on historical experience. If factors change
and
the Company employs different assumptions in the application of SFAS No. 123(R)
in future periods, the compensation expense that the Company records under
SFAS
No. 123(R) may differ significantly from what has been recorded in the current
period.
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:
|
|
2007
|
|
2006
|
Assumptions:
|
|
|
|
|
Risk-free
interest rate
|
|
4.40%
|
|
4.40%
|
|
|
|
|
|
Expected
life, in years
|
|
3.0
|
|
3.0
|
|
|
|
|
|
Expected
volatility
|
|
83%
|
|
88%
|
|
|
|
|
|
A
summary
of the stock option activity as of March 31, 2007, and changes during the six
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
|
|
|
720,000
|
|
$
|
1.60
|
|
|
4.91
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
(20,000
|
)
|
$
|
0.72
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Expired
|
|
|
(25,000
|
)
|
$
|
2.00
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding
at March 31, 2007
|
|
|
1,607,000
|
|
$
|
1.43
|
|
|
3.83
|
|
$
|
425,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exerciseable
at March 31, 2007
|
|
|
962,000
|
|
$
|
1.33
|
|
|
3.17
|
|
$
|
333,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As
of
March 31, 2007, there was $613,000 of total deferred compensation costs related
to share-based compensation arrangements.
A
summary
of the status of the Company’s nonvested shares as of March
31,
2007,
and changes during the six 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
|
|
595,000
|
|
$
0.81
|
|
|
|
|
|
|
|
|
|
Vested
|
|
(25,000)
|
|
$
0.33
|
|
|
|
|
|
|
|
|
|
Expired
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
Nonvested
at March 31, 2007
|
|
645,000
|
|
$
0.78
|
|
|
|
|
|
|
|
|
NOTE
4. SECURITIES OWNED AND SECURITIES SOLD, BUT NOT YET
PURCHASED
The
following table shows the quoted market values of the Company's marketable
securities owned and securities sold, but not yet purchased as of March 31,
2007:
|
|
Securities
held
|
|
Securities
sold, but
|
|
|
|
for
resale
|
|
not
yet purchased
|
|
Corporate
stocks
|
|
$
|
868,000
|
|
$
|
176,000
|
|
Corporate
bonds
|
|
|
6,000
|
|
|
-
|
|
Government
obligations
|
|
|
16,000
|
|
|
-
|
|
|
|
$
|
890,000
|
|
$
|
176,000
|
|
|
|
|
|
|
|
|
|
NOTE
5. 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 is being amortized over an eight year period, the net amount of
which has been included in “Accounts Payable, Accrued Expenses and Other
Liabilities” in the accompanying consolidated statements of financial condition
as of March 31, 2007. In the second quarter of fiscal year 2007, NFS agreed
to
provide National Securities a $250,000 clearing fee waiver that is being
amortized over a two year period, the net amount of which has been included
in
“Accounts Payable, Accrued Expenses and Other Liabilities” in the accompanying
consolidated statements of financial condition as of March 31, 2007. The
clearing agreement includes a termination fee if National Securities terminates
the agreement without cause. Additionally, in June 2005, National Securities
entered into a clearing agreement with Penson Financial Services, Inc.
(“Penson”) for the purpose of providing clearing services that are not provided
by NFS. The Company believes that the overall effect of these clearing
relationships is beneficial to the Company’s cost structure, liquidity and
capital resources.
NOTE
6. 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 $1,200,000. The Company
believes
such claims are substantially without merit, and estimates that its liability,
primarily for defense costs, will approximate $200,000 (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 March 31, 2007 and 2006, is $331,000 and $228,000, respectively,
and
have
been included in “Accounts Payable, Accrued Expenses and Other Liabilities” in
the accompanying consolidated statements of financial condition.
The
Company has included in “Professional fees” litigation and NASD related expenses
of $344,000 and $155,000 for the second quarter of fiscal year 2007 and 2006,
respectively, and $1,133,000 and $400,000 for the first six months of fiscal
year 2007 and 2006, respectively.
NOTE
7. 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. In March 2007, the Company’s Board of
Directors declared an in-kind dividend in the aggregate of 2,537 shares of
Series A preferred stock, in payment of approximately $317,000 of dividends
accrued through March 31, 2007. Such shares were issued on April 30, 2007.
At
March 31, 2007, the accumulated dividend on the Company’s 37,550 issued and
outstanding shares of Series A preferred stock was $0.
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 March 2007, 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 April 2007.
NOTE
8. 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
|
|
Six
Months Ended
|
|
|
|
March
31, 2007
|
|
March
31, 2006
|
|
March
31, 2007
|
|
March
31, 2006
|
|
Numerator:
|
|
|
|
|
|
|
|
|
|
Net
income
|
|
$
|
576,000
|
|
$
|
424,000
|
|
$
|
491,000
|
|
$
|
682,000
|
|
Preferred
stock
dividends
|
|
|
(103,000
|
)
|
|
(95,000
|
)
|
|
(208,000
|
)
|
|
(171,000
|
)
|
Numerator
for basic earnings per share
|
|
|
|
|
|
|
|
|
|
|
|
|
|
--
net income
attributable to
|
|
|
|
|
|
|
|
|
|
|
|
|
|
common
stockholders
- as reported
|
|
|
473,000
|
|
|
329,000
|
|
|
283,000
|
|
|
511,000
|
|
Effect
of dilutive
securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
on
convertible notes
|
|
|
27,000
|
|
|
24,000
|
|
|
54,000
|
|
|
24,000
|
|
Preferred
stock dividends
|
|
|
103,000
|
|
|
95,000
|
|
|
208,000
|
|
|
171,000
|
|
Numerator
for basic earnings per share
|
|
|
|
|
|
|
|
|
|
|
|
|
|
--
net income
attributable to
|
|
|
|
|
|
|
|
|
|
|
|
|
|
common
stockholders
- as adjusted
|
|
$
|
603,000
|
|
$
|
448,000
|
|
$
|
545,000
|
|
$
|
706,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator
for
basic earnings per
|
|
|
|
|
|
|
|
|
|
|
|
|
|
share--weighted
average shares
|
|
|
5,370,917
|
|
|
5,089,625
|
|
|
5,310,762
|
|
|
5,068,451
|
|
Effect
of dilutive
securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock
options
|
|
|
207,934
|
|
|
37,372
|
|
|
104,786
|
|
|
17,905
|
|
Warrants
|
|
|
277,632
|
|
|
97,961
|
|
|
156,280
|
|
|
38,266
|
|
Assumed
conversion of:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Series
A Preferred
Stock
|
|
|
3,004,000
|
|
|
2,825,280
|
|
|
3,004,000
|
|
|
2,825,280
|
|
Series
B Preferred
Stock
|
|
|
1,333,333
|
|
|
1,333,333
|
|
|
1,333,333
|
|
|
1,333,333
|
|
Notes
|
|
|
1,000,000
|
|
|
1,000,000
|
|
|
1,000,000
|
|
|
1,000,000
|
|
Dilutive
potential
common shares
|
|
|
5,822,899
|
|
|
5,293,946
|
|
|
5,598,399
|
|
|
5,214,784
|
|
Denominator
for diluted earnings per
|
|
|
|
|
|
|
|
|
|
|
|
|
|
share--adjusted
weighted-average
|
|
|
|
|
|
|
|
|
|
|
|
|
|
shares
and assumed
conversions
|
|
|
11,193,816
|
|
|
10,383,571
|
|
|
10,909,161
|
|
|
10,283,235
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income available to
|
|
|
|
|
|
|
|
|
|
|
|
|
|
common
stockholders
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic:
|
|
$
|
0.09
|
|
$
|
0.06
|
|
$
|
0.05
|
|
$
|
0.10
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted:
|
|
$
|
0.05
|
|
$
|
0.04
|
|
$
|
0.05
|
|
$
|
0.07
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NOTE
9. ACCOUNTS PAYABLE, ACCRUED EXPENSES AND OTHER
LIABILITIES
Accounts
payable, accrued expenses and other liabilities as of March 31, 2007 and
September 30, 2006, respectively, consist of the following:
|
|
March
31, 2007
|
|
September
30, 2006
|
|
|
|
|
|
|
|
Commissions
payable
|
|
$
|
1,975,000
|
|
$
|
1,993,000
|
|
Legal
payable
|
|
|
348,000
|
|
|
325,000
|
|
Other
|
|
|
2,384,000
|
|
|
1,625,000
|
|
Total
|
|
$
|
4,707,000
|
|
$
|
3,943,000
|
|
|
|
|
|
|
|
|
|
NOTE
10. NOTES PAYABLE
In
February 2007, the
Company used $850,000 of the proceeds from the private placement of 10%
promissory notes (See Note 11) to pay in full promissory notes that had maturity
dates in February 2007.
In
February 2007, National Securities and the holder of a $1.0 million secured
demand note that was scheduled to mature on March 1, 2007, extended the term
of
the secured demand note to March 1, 2008.
NOTE
11. PRIVATE PLACEMENT OF 10% PROMISSORY NOTES
In
February 2007, the Company completed a
financing transaction under which certain investors made an investment in the
Company by purchasing 10%
promissory notes in the principal amount of $1.0
million,
with
warrants
to purchase an aggregate of 250,000 shares of common stock at an exercise price
of $1.40 per share. The promissory notes mature in February 2009, and have
a
stated interest rate of 10% per annum. The fair value of the warrants was
calculated using the Black-Scholes Option Valuation Model. The Company recorded
a debt discount of approximately $195,000 that will be charged to interest
expense over the life of the debt.
The
Company and the investors entered into a registration rights agreement, wherein
the investors received unlimited piggyback registration rights and one demand
registration right for the shares of common stock issuable upon exercise of
the
warrants. The investors can make such demand one year after the date of issuance
of the warrants, and the Company has agreed to file the registration statement
within 90 days of such demand. The Company has agreed to use commercially
reasonable efforts to have the registration statement declared effective. There
are no penalties for failure to have the registration statement declared
effective.
The
investment included $500,000 by Christopher C. Dewey and $250,000 by St. Cloud
Capital Partners, L.P. (“St. Cloud”). Mr. Dewey, and Marshall S. Geller, the
Co-Founder and Senior Managing Partner of St. Cloud, are each members of the
Company’s board of directors. The
Company incurred legal fees and other costs related to this capital transaction
in the amount of $22,000 that were capitalized and will be amortized to interest
expense over the life of the promissory notes.
NOTE
12. STOCKHOLDERS’ EQUITY
In
the
three and six months ended March 31, 2007 the Company received proceeds of
approximately $14,000 and $146,000, respectively, from the exercise of 20,000
and 154,643, respectively, outstanding warrants and stock options. In the second
quarter ended March 31, 2007, a holder of Series A preferred stock converted
303
shares of Series A preferred stock into 24,240 share of the Company’s common
stock. In April 2007, the Company received proceeds of approximately $5,700
from
the exercise of outstanding warrants to purchase 7,187 shares of the Company’s
common stock.
NOTE
13. NEW SUBSIDIARIES
In
the
third quarter of fiscal year 2006, the Company formed National Insurance
Corporation (“National Insurance”) that provides fixed insurance products to its
clients, including life insurance, disability insurance, long term care
insurance and fixed annuities. National Insurance has finalized certain of
the
requisite state registrations, and commenced business operations during the
second quarter of fiscal year 2007, that were diminimus.
In
the
first quarter of fiscal year 2007, the Company formed a new wholly owned
subsidiary, National Holdings Mortgage Corporation (“National Holdings
Mortgage”) 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 March 31, 2007 Compared to Three Months Ended March 31,
2006
The
Company’s second quarter of fiscal year 2007 resulted in a decrease in revenues,
and a comparatively greater decrease in expenses compared
to the same period last year. As
a
result, the Company reported net income of $576,000 compared with net income
of
$424,000 for the second quarter of fiscal years 2007 and 2006, respectively.
This represents an improvement of $152,000 from the prior period.
|
|
Three
Months Ended
|
|
|
|
|
|
|
|
March
31,
|
|
Increase
(Decrease)
|
|
|
|
2007
|
|
2006
|
|
Amount
|
|
Percent
|
|
Commissions
|
|
$
|
8,522,000
|
|
$
|
10,714,000
|
|
$
|
(2,192,000
|
)
|
|
(20%)
|
|
Proprietary
trading
|
|
|
3,498,000
|
|
|
2,062,000
|
|
|
1,436,000
|
|
|
70%
|
|
Market
making
|
|
|
168,000
|
|
|
76,000
|
|
|
92,000
|
|
|
121%
|
|
Mark-ups
and mark-downs
|
|
|
94,000
|
|
|
53,000
|
|
|
41,000
|
|
|
77%
|
|
Net
dealer inventory gains
|
|
|
3,760,000
|
|
|
2,191,000
|
|
|
1,569,000
|
|
|
72%
|
|
Investment
banking
|
|
|
3,112,000
|
|
|
4,042,000
|
|
|
(930,000
|
)
|
|
(23%)
|
|
Interest
and dividends
|
|
|
796,000
|
|
|
696,000
|
|
|
100,000
|
|
|
14%
|
|
Transfer
fees and clearance services
|
|
|
1,005,000
|
|
|
969,000
|
|
|
36,000
|
|
|
4%
|
|
Other
|
|
|
420,000
|
|
|
175,000
|
|
|
245,000
|
|
|
140%
|
|
|
|
$
|
17,615,000
|
|
$
|
18,787,000
|
|
$
|
(1,172,000
|
)
|
|
(6%)
|
|
Total
revenues decreased $1,172,000, or 6%, in the second quarter of fiscal year
2007
to $17,615,000 from $18,787,000 in the second quarter of fiscal year 2006.
This
decrease is due to a decline in commissions and the completion of fewer and
relatively smaller investment banking transactions, partially offset by an
increase in net dealer inventory gains. During the second quarter of fiscal
year
2007, total trading volume decreased 8%, compared to the second quarter of
fiscal year 2006. The greater decrease in trading volume compared to revenues
reflects an increase in the average revenue per trade, partially offset by
the
Company’s re-entry into market making activities. Trading volume in this period
related to retail brokerage decreased 15%. Commission revenue decreased
$2,192,000, or 20%, to $8,522,000 from $10,714,000 during the second 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 $1,569,000, or
72%,
to $3,760,000 from $2,191,000 during the second quarter of fiscal year 2007
compared with the same period in fiscal year 2006. The increase is primarily
due
to an increase in proprietary trading in the bond market, and reflects the
Company’s re-entry into market making activities. During the second quarter of
fiscal year 2007, revenues from proprietary trading increased $1,436,000,
or
70%, to $3,498,000 from $2,062,000 in the same period of fiscal year 2006,
revenues from market making activities increased $92,000, or 121%, to $168,000
from $76,000 in the second quarter of fiscal year 2006, and revenues from
customer mark-ups and mark-downs increased $41,000, or 77%, to $94,000 from
$53,000 in the second quarter of fiscal year 2006.
Investment
banking revenue decreased $930,000, or 23%, to $3,112,000 from $4,042,000
in the
second quarter of fiscal year 2007 compared with the second quarter of fiscal
year 2006. The decrease in investment banking revenues is attributable to
the
Company having completed fewer and relatively smaller investment banking
transactions in the second quarter of fiscal year 2007. Interest and dividend
income increased $100,000, or 14%, to $796,000 from $696,000 in the second
quarter of fiscal year 2007 compared with the same period last year. The
increase in interest income is attributable to an increase in the amount
of
debit balances in National Securities’ customer accounts from the same period
last year. Transfer fees increased $36,000, or 4%, to $1,005,000 in the second
quarter of fiscal year 2007 from $969,000 in the second quarter of fiscal
year
2006. The increase reflects higher transfer fees for trades generated from
the
retail brokerage business of brokers recently associated with the
Company.
Other
revenue, consisting of asset management fees, and miscellaneous transaction
fees
and trading fees, increased $245,000, or 140%, to $420,000 from $175,000
during
the second quarter of fiscal year 2007 compared to the second quarter of
fiscal
year 2006. The increase is due to an increase in fee based assets under
management.
|
|
Three
Months Ended
|
|
|
|
|
|
|
|
March
31,
|
|
Increase
(Decrease)
|
|
|
|
2007
|
|
2006
|
|
Amount
|
|
Percent
|
|
Commission
expense related to:
|
|
|
|
|
|
|
|
|
|
Commission
revenue
|
|
$
|
7,629,000
|
|
$
|
9,449,000
|
|
$
|
(1,820,000
|
)
|
|
(19%)
|
|
Net
dealer inventory gains
|
|
|
2,927,000
|
|
|
1,644,000
|
|
|
1,283,000
|
|
|
78%
|
|
Investment
banking
|
|
|
1,836,000
|
|
|
2,950,000
|
|
|
(1,114,000
|
)
|
|
38%
|
|
Commissions
|
|
|
12,392,000
|
|
|
14,043,000
|
|
|
(1,651,000
|
)
|
|
(12%)
|
|
Employee
compensation
|
|
|
1,749,000
|
|
|
1,592,000
|
|
|
157,000
|
|
|
10%
|
|
Clearing
fees
|
|
|
343,000
|
|
|
436,000
|
|
|
(93,000
|
)
|
|
(21%)
|
|
Communications
|
|
|
426,000
|
|
|
546,000
|
|
|
(120,000
|
)
|
|
(22%)
|
|
Occupancy
and equipment costs
|
|
|
741,000
|
|
|
633,000
|
|
|
108,000
|
|
|
17%
|
|
Professional
fees
|
|
|
559,000
|
|
|
246,000
|
|
|
313,000
|
|
|
127%
|
|
Interest
|
|
|
105,000
|
|
|
176,000
|
|
|
(71,000
|
)
|
|
(40%)
|
|
Taxes,
licenses and registration
|
|
|
164,000
|
|
|
169,000
|
|
|
(5,000
|
)
|
|
(3%)
|
|
Other
administrative expenses
|
|
|
560,000
|
|
|
522,000
|
|
|
38,000
|
|
|
7%
|
|
|
|
$
|
17,039,000
|
|
$
|
18,363,000
|
|
$
|
(1,324,000
|
)
|
|
(7%)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
In
comparison with the 6% decrease in total revenues, total expenses decreased
7%,
or $1,324,000, to $17,039,000 for the second quarter of fiscal year 2007
compared to $18,363,000 in the second quarter of fiscal year 2006. The decrease
in total expenses is primarily the result of lower commission expenses directly
associated with commission revenues.
Commission
expense, which includes expenses related to commission revenue, net dealer
inventory gains and investment banking, decreased $1,651,000, or 12%, to
$12,392,000 in the second quarter of fiscal year 2007 from $14,043,000 in the
second quarter of fiscal year 2006. Commission expense related to commission
revenue decreased $1,820,000, or 19%, to $7,629,000 in the second quarter of
fiscal year 2007 from $9,449,000 in the second quarter of fiscal year 2006;
commission expense related to net dealer inventory gains increased $1,283,000,
or 78%, to $2,927,000 in the second quarter of fiscal year 2007 from $1,644,000
in the second quarter of fiscal year 2006; and commission expense related to
investment banking decreased $1,114,000, or 38%, to $1,836,000 in the second
quarter of fiscal year 2007 from $2,950,000 in the second quarter of fiscal
year
2006. Commission expense as a percentage of commission revenues increased to
90%
in the second quarter of fiscal year 2007 from 88% in the second quarter of
fiscal year 2006. 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
78% in the second quarter of fiscal year 2007 from 75% in the second quarter
of
fiscal year 2006. 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 59% in the second quarter of fiscal year 2007 from 73% in the
second quarter of fiscal year 2006. This decrease is attributable to the type
and size of the particular investment banking transactions completed in the
current year’s quarter. Commission expense includes the amortization of advances
to registered representatives of $346,000 and $305,000 for the second 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 $157,000, or 10%, to $1,749,000 in the second
quarter of fiscal year 2007 from $1,592,000 in the second quarter of fiscal
year
2006. The increase is attributable to new employees hired during fiscal years
2007 and 2006. Overall, combined commission and employee compensation expense,
as a percentage of revenue decreased to 80% from 83% in the second quarter
of
fiscal years 2007 and 2006, respectively. The decrease is attributable to an
overall lower payout percentage related to commission revenues.
Clearing
fees decreased $93,000, or 21%, to $343,000 in the second quarter of fiscal
year
2007 from $436,000 in
the
second quarter of fiscal year 2006. The decrease in clearing fees is
attributable to the reduction in commission revenues in the second quarter
of
fiscal year 2007 compared to the second quarter of fiscal year 2006, and the
amortization of credits received from one of the Company’s clearing
firms.
Communications
expense decreased $120,000, or 22%, to $426,000 from $546,000 in the second
quarter of fiscal year 2007 compared to the second quarter of fiscal year 2006.
The decrease is primarily due to the Company’s ability to acquire certain of
these services at a lower price. Occupancy costs increased $108,000, or 17%,
to
$741,000 from $633,000 in the second quarter of fiscal year 2007 compared to
the
second 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, and annual rent increases contained in the Company’s office leases.
Professional fees increased $313,000, or 127%, to $559,000 from $246,000 in
the
second quarter of fiscal year 2007 compared to the second quarter of fiscal
year
2006. The increase in professional fees is primarily a result of legal fees
and
costs incurred to settle certain arbitrations.
Interest
expense decreased $71,000, or 40%, to $105,000 from $176,000 in the second
quarter of fiscal year 2007 compared to the second quarter of fiscal year 2006.
The decrease in interest expense is primarily attributable to the acceleration
of amortization on notes that were paid prior to maturity in the second quarter
of fiscal year 2006. Included in interest expense is the amortization of $34,000
and $99,000 for the second quarter of fiscal years 2007 and 2006, respectively.
Taxes, licenses and registration decreased $5,000, or 3%, to $164,000 from
$169,000 in the second quarter of fiscal year 2007 compared to the second
quarter of fiscal year 2006. Other administrative expenses increased $38,000,
or
7%, to $560,000 from $522,000 in the second quarter of fiscal year 2007 compared
to the second quarter of fiscal year 2006. The increase in other administrative
expenses is attributable to incentives provided to new registered
representatives.
The
Company reported net income of $576,000 in the second quarter of fiscal year
2007 compared to net income of $424,000 in
the
second quarter of fiscal year 2006.
Overall, the diluted earnings attributable to common stockholders in the second
quarter of fiscal year 2007 was $473,000, or $.05 per common share, as compared
to the diluted earnings attributable to common stockholders of $329,000, or
$.04
per common share in the second quarter of fiscal year 2006. The net income
attributable to common stockholders reflects $103,000 and $95,000 of cumulative
preferred stock dividends on the Company’s preferred stock for the second
quarter of fiscal years 2007 and 2006, respectively.
Six
Months Ended March 31, 2007 Compared to Six Months Ended March 31,
2006
The
Company’s first six months of fiscal year 2007 resulted in a decrease in
revenues, and a relatively similar decrease in expenses compared
to the same period last year. As
a
result, the Company reported net income of $491,000 compared with net income
of
$682,000 for the first six months of fiscal years 2007 and 2006, respectively.
This represents a decline of $191,000 from the prior period.
|
|
Six
Months Ended
|
|
|
|
|
|
|
|
March
31,
|
|
Increase
(Decrease)
|
|
|
|
2007
|
|
2006
|
|
Amount
|
|
Percent
|
|
Commissions
|
|
$
|
16,944,000
|
|
$
|
17,871,000
|
|
$
|
(927,000
|
)
|
|
(5%)
|
|
Proprietary
trading
|
|
|
6,299,000
|
|
|
3,895,000
|
|
|
2,404,000
|
|
|
62%
|
|
Market
making
|
|
|
615,000
|
|
|
84,000
|
|
|
531,000
|
|
|
632%
|
|
Mark-ups
and mark-downs
|
|
|
145,000
|
|
|
73,000
|
|
|
72,000
|
|
|
99%
|
|
Net
dealer inventory gains
|
|
|
7,059,000
|
|
|
4,052,000
|
|
|
3,007,000
|
|
|
74%
|
|
Investment
banking
|
|
|
3,667,000
|
|
|
7,093,000
|
|
|
(3,426,000
|
)
|
|
(48%)
|
|
Interest
and dividends
|
|
|
1,361,000
|
|
|
1,382,000
|
|
|
(21,000
|
)
|
|
(2%)
|
|
Transfer
fees and clearance services
|
|
|
2,015,000
|
|
|
1,730,000
|
|
|
285,000
|
|
|
16%
|
|
Other
|
|
|
853,000
|
|
|
347,000
|
|
|
506,000
|
|
|
146%
|
|
|
|
$
|
31,899,000
|
|
$
|
32,475,000
|
|
$
|
(576,000
|
)
|
|
(2%)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
revenues decreased $576,000, or 2%, in the first six months of fiscal year
2007
to $31,899,000 from $32,475,000 in the first six months of fiscal year 2006.
This decrease is due to a decline in commissions and the completion of fewer
and
relatively smaller investment banking transactions, partially offset by an
increase in net dealer inventory gains. During the first six months of fiscal
year 2007, total trading volume increased less than 1%, compared to the first
six months of fiscal year 2006. This slight increase reflects an increase
in the
average revenue per trade. Trading volume in this period related to retail
brokerage decreased 10%. Commission revenue decreased $927,000, or 5%, to
$16,944,000 from $17,871,000 during the first six months 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 $3,007,000, or 74%, to $7,059,000
from $4,052,000 during the first six months of fiscal year 2007 compared
with
the same period in fiscal year 2006. The increase is primarily due to an
increase in proprietary trading in the bond market, and reflects the Company’s
re-entry into market making activities. During the first six months of fiscal
year 2007, revenues from proprietary trading increased $2,404,000, or 62%,
to
$6,299,000 from $3,895,000 in the same period of fiscal year 2006, revenues
from
market making activities increased $531,000, or 632%, to $615,000 from $84,000
in the first six months of fiscal year 2007, and revenues from customer mark-ups
and mark-downs increased $72,000, or 99%, to $145,000 from $73,000 in the
first
six months of fiscal year 2006.
Investment
banking revenue decreased $3,426,000, or 48%, to $3,667,000 from $7,093,000
in
the first six months of fiscal year 2007 compared with the first six months
of
fiscal year 2006. The decrease in investment banking revenues is attributable
to
the Company having completed fewer and relatively smaller investment banking
transactions in the first six months of fiscal year 2007. Interest and dividend
income decreased $21,000, or 2%, to $1,361,000 from $1,382,000 in the first
six
months of fiscal year 2007 compared with the same period last year. The
decrease in interest income is attributable to lower margin debit balances
in
the first quarter of fiscal year 2007 resulting from a stricter margin policy
imposed by our clearing firms.
Transfer fees increased $285,000, or 16%, to $2,015,000 in the first six months
of fiscal year 2007 from $1,730,000 in the first six months of fiscal year
2006.
The increase reflects higher transfer fees for trades generated from the retail
brokerage business of brokers recently associated with the Company.
Other
revenue, consisting of asset management fees and miscellaneous transaction
fees
and trading fees, increased $506,000, or 146%, to $853,000 from $347,000 during
the first six months of fiscal year 2007 compared to the first six months of
fiscal year 2006. The increase is due to an increase in fee based assets under
management.
|
|
Six
Months Ended
|
|
|
|
|
|
|
|
March
31,
|
|
Increase
(Decrease)
|
|
|
|
2007
|
|
2006
|
|
Amount
|
|
Percent
|
|
Commission
expense related to:
|
|
|
|
|
|
|
|
|
|
Commission
revenue
|
|
$
|
14,962,000
|
|
$
|
15,722,000
|
|
$
|
(760,000
|
)
|
|
(5%)
|
|
Net
dealer inventory gains
|
|
|
5,368,000
|
|
|
2,984,000
|
|
|
2,384,000
|
|
|
80%
|
|
Investment
banking
|
|
|
1,846,000
|
|
|
5,025,000
|
|
|
(3,179,000
|
)
|
|
(63%)
|
|
Commissions
|
|
|
22,176,000
|
|
|
23,731,000
|
|
|
(1,555,000
|
)
|
|
(7%)
|
|
Employee
compensation
|
|
|
3,262,000
|
|
|
2,884,000
|
|
|
378,000
|
|
|
13%
|
|
Clearing
fees
|
|
|
718,000
|
|
|
800,000
|
|
|
(82,000
|
)
|
|
(10%)
|
|
Communications
|
|
|
828,000
|
|
|
1,033,000
|
|
|
(205,000
|
)
|
|
(20%)
|
|
Occupancy
and equipment costs
|
|
|
1,476,000
|
|
|
1,308,000
|
|
|
168,000
|
|
|
13%
|
|
Professional
fees
|
|
|
1,517,000
|
|
|
584,000
|
|
|
933,000
|
|
|
160%
|
|
Interest
|
|
|
209,000
|
|
|
285,000
|
|
|
(76,000
|
)
|
|
(27%)
|
|
Taxes,
licenses and registration
|
|
|
342,000
|
|
|
314,000
|
|
|
28,000
|
|
|
9%
|
|
Other
administrative expenses
|
|
|
880,000
|
|
|
854,000
|
|
|
26,000
|
|
|
3%
|
|
|
|
$
|
31,408,000
|
|
$
|
31,793,000
|
|
$
|
(385,000
|
)
|
|
(1%)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
In
comparison with the 2% decrease in total revenues, total expenses decreased
1%,
or $385,000, to $31,408,000 for the first six months of fiscal year 2007
compared to $31,793,000 in the first six months of fiscal year 2006. The
decrease in total expenses is the result of lower commission expenses directly
associated with commission revenues.
Commission
expense, which includes expenses related to commission revenue, net dealer
inventory gains and investment banking, decreased $1,555,000, or 7%, to
$22,176,000 in the first six months of fiscal year 2007 from $23,731,000 in
the
first six months of fiscal year 2006. Commission expense related to commission
revenue decreased $760,000, or 5%, to $14,962,000 in the first six months of
fiscal year 2007 from $15,722,000 in the first six months of fiscal year 2006;
commission expense related to net dealer inventory gains increased $2,384,000,
or 80%, to $5,368,000 in the first six months of fiscal year 2007 from
$2,984,000 in the first six months of fiscal year 2006; and commission expense
related to investment banking decreased $3,179,000, or 63%, to $1,846,000 in
the
first six months of fiscal year 2007 from $5,025,000 in the first six months
of
fiscal year 2006. Commission expense as a percentage of commission revenues
remained relatively constant at 88% in the first six months of fiscal years
2007
and 2006. Commission expense as a percentage of net dealer inventory gains
increased to 76% in the first six months of fiscal year 2007 from 74% in the
first six months of fiscal year 2006. 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 50% in the second quarter of fiscal year 2007
from
71% in the second quarter of fiscal year 2006. This decrease is attributable
to
the type and size of the particular investment banking transactions completed
in
the current year’s quarter. Commission expense includes the amortization of
advances to registered representatives of $576,000 and $617,000 for the first
six months 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 $378,000, or 13%, to $3,262,000 in the first
six
months of fiscal year 2007 from $2,884,000 in the first six months of fiscal
year 2006. The increase is attributable to new employees hired during fiscal
years 2007 and 2006, and year-end bonuses that were paid to certain staff
employees in the first quarter of fiscal year 2007. Overall, combined commission
and employee compensation expense, as a percentage of revenue decreased to
80%
from 82% in the first six months of fiscal years 2007 and 2006, respectively.
The decrease is attributable to an overall lower payout percentage related
to
commission revenues.
Clearing
fees decreased
$82,000, or 10%, to $718,000 in the first six months of fiscal year 2007 from
$800,000 in the first six months of fiscal year 2006. The decrease in clearing
fees is attributable to the reduction in commission revenues in the first six
months of fiscal year 2007 compared to the first six months of fiscal year
2006,
and the amortization of credits received from one of the Company’s clearing
firms.
Communications
expense decreased $205,000, or 20%, to $828,000 from $1,033,000 in the first
six
months of fiscal year 2007 compared to the first six months of fiscal year
2006.
The decrease is primarily due to the Company’s ability to acquire certain of
these services at a lower price. Occupancy costs increased $168,000, or 13%,
to
$1,476,000 from $1,308,000 in the first six months of fiscal year 2007 compared
to the first six months 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, and annual rent increases contained in the Company’s office
leases. Professional fees increased $933,000, or 160%, to $1,517,000 from
$584,000 in the first six months of fiscal year 2007 compared to the first
six
months of fiscal year 2006. The increase in professional fees is primarily
a
result of legal fees and costs incurred to settle certain
arbitrations.
Interest
expense decreased $76,000, or 27%, to $209,000 from $285,000 in the first six
months of fiscal year 2007 compared to the first six months of fiscal year
2006.
The decrease in interest expense is primarily attributable to the acceleration
of amortization on notes that were paid prior to maturity in the second quarter
of fiscal year 2006. Included in interest expense is the amortization of $65,000
and $131,000 for the first six months of fiscal years 2007 and 2006,
respectively. Taxes, licenses and registration increased $28,000, or 9%, to
$342,000 from $314,000 in the first six months of fiscal year 2007 compared
to
the first six months 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 increased
$26,000, or 3%, to $880,000 from $854,000 in the first six months of fiscal
year
2007 compared to the first six months of fiscal year 2006. The increase in
other
administrative expenses is attributable to incentives provided to new registered
representatives.
The
Company reported net income of $491,000 in the first six months of fiscal year
2007 compared to net income of $682,000 in
the
first six months of fiscal year 2006.
Overall, the diluted earnings attributable to common stockholders in the first
six months of fiscal year 2007 was $283,000, or $.05 per common share, as
compared to diluted earnings attributable to common stockholders of $511,000,
or
$.07 per common share in the first six months of fiscal year 2006. The net
income attributable to common stockholders reflects $208,000 and $171,000 of
cumulative preferred stock dividends on the Company’s preferred
stock
for the
first six months of fiscal years 2007 and 2006, respectively.
Liquidity
and Capital Resources
National
Securities, as a registered broker-dealer, is subject to the SEC’s Uniform Net
Capital Rule 15c3-1 that requires the maintenance of minimum net capital.
National Securities has elected to use the alternative standard method permitted
by the rule. This requires that National Securities maintain minimum net capital
equal to the greater of $250,000 or a specified amount per security based on
the
bid price of each security for which National Securities is a market maker.
At
March
31, 2007, National Securities’ net capital exceeded the requirement by
$2,174,000.
Advances,
dividend payments and other equity withdrawals from the Company’s broker-dealer
subsidiary are restricted by the regulations of the SEC and other regulatory
agencies. These regulatory restrictions may limit the amounts that a
broker-dealer 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 is being amortized over
an
eight year period, the net amount of which has been included in “Accounts
Payable, Accrued Expenses and Other Liabilities” in the accompanying
consolidated statements of financial condition as of March 31, 2007. In the
second quarter of fiscal year 2007, NFS agreed to provide National Securities
a
$250,000 clearing fee waiver, that is being amortized over a two year period,
the net amount of which has been included in “Accounts Payable, Accrued Expenses
and Other Liabilities” in the accompanying consolidated statements of financial
condition as of March 31, 2007. 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 is
beneficial to the Company’s cost structure, liquidity and capital
resources.
In
February 2007, the Company completed a
financing transaction under which certain investors made an investment in the
Company by purchasing 10%
promissory notes in the principal amount of $1.0
million,
with
warrants
to purchase an aggregate of 250,000 shares of common stock at an exercise price
of $1.40 per share. The promissory notes mature in February 2009, and have
a
stated interest rate of 10% per annum. The fair value of the warrants was
calculated using the Black-Scholes Option Valuation Model. The Company recorded
a debt discount of approximately $195,000 that will be charged to interest
expense over the life of the debt.
The
investment included $500,000 by Christopher C. Dewey and $250,000 by St. Cloud.
Mr. Dewey, and Marshall S. Geller, the Co-Founder and Senior Managing Partner
of
St. Cloud, are each members of the Company’s board of directors. The
Company incurred legal fees and other costs related to this capital transaction
in the amount of $22,000 that were capitalized and will be amortized to interest
expense over the life of the promissory notes. The
Company
used $850,000 of the proceeds to pay in full promissory notes that had maturity
dates in February 2007.
In
February 2007, National Securities and the holder of a $1.0 million secured
demand note that was scheduled to mature on March 1, 2007, extended the term
of
the secured demand note to March 1, 2008.
In
the
quarter and six months ended March 31, 2007 the Company received proceeds of
approximately $14,000 and $146,000, respectively, from the exercise of
outstanding warrants and stock options.
ITEM
3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET
RISK
The
Company's primary market risk arises from the fact that it engages in
proprietary trading and historically made dealer markets in equity securities.
Accordingly, the Company may be required to maintain certain amounts of
inventories in order to facilitate customer order flow. The Company may incur
losses as a result of price movements in these inventories due to changes in
interest rates, foreign exchange rates, equity prices and other political
factors. The Company is not subject to direct market risk due to changes in
foreign exchange rates. However, the Company is subject to market risk as a
result of changes in interest rates and equity prices, which are affected by
global economic conditions. The Company manages its exposure to market risk
by
limiting its net long or short positions. Trading and inventory accounts are
monitored daily by management and the Company has instituted position limits.
Credit
risk represents the amount of accounting loss the Company could incur if
counterparties to its proprietary transactions fail to perform and the value
of
any collateral proves inadequate. Although credit risk relating to various
financing activities is reduced by the industry practice of obtaining and
maintaining collateral, the Company maintains more stringent requirements to
further reduce its exposure. The Company monitors its exposure to counterparty
risk on a daily basis by using credit exposure information and monitoring
collateral values. The Company maintains a credit committee, which reviews
margin requirements for large or concentrated accounts and sets higher
requirements or requires a reduction of either the level of margin debt or
investment in high-risk securities or, in some cases, requiring the transfer
of
the account to another broker-dealer.
The
Company monitors its market and credit risks daily through internal control
procedures designed to identify and evaluate the various risks to which the
Company is exposed. There can be no assurance, however, that the Company's
risk
management procedures and internal controls will prevent losses from occurring
as a result of such risks.
The
following table shows the quoted market values of the Company's marketable
securities owned ("long"), securities sold, but not yet purchased ("short")
and
net positions as of March 31, 2007:
|
|
Long
|
|
Short
|
|
Net
|
|
Corporate
stocks
|
|
$
|
868,000
|
|
$
|
176,000
|
|
$
|
692,000
|
|
Corporate
bonds
|
|
|
6,000
|
|
|
-
|
|
|
6,000
|
|
Government
obligations
|
|
|
16,000
|
|
|
-
|
|
|
16,000
|
|
|
|
$
|
890,000
|
|
$
|
176,000
|
|
$
|
714,000
|
|
|
|
|
|
|
|
|
|
|
|
|
ITEM
4. CONTROLS AND PROCEDURES
Evaluation
of disclosure controls and procedures.
Based on
the evaluation of the Company’s disclosure controls and procedures (as defined
in the Securities Exchange Act of 1934 Rules 13a-15(e) and 15d-15(e))
required by the Exchange Act Rules 13a-15(b) or 15d-15(b), the Company’s Chief
Executive Officer and Chief Financial Officer have concluded that, as of the
end
of the period covered by this report, the Company’s disclosure controls and
procedures were adequate and effective to ensure that material information
relating to the Company and its consolidated subsidiaries would be made known
to
them by others within those entities, particularly during the period in which
this quarterly report on Form 10-Q was being prepared.
Changes
in internal controls.
There
were no significant changes in the Company’s internal controls or in other
factors that could significantly affect those controls and procedures subsequent
to the date of our evaluation nor any significant deficiencies or material
weaknesses in such disclosure controls and procedures requiring corrective
actions.
PART
II - OTHER INFORMATION
ITEM
1. LEGAL PROCEEDINGS
During
the quarter ended March 31, 2007, 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 6 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
Previously
reported in the Company’s Current Report on Form 8-K filed with the SEC on
February 23, 2007.
ITEM
3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM
4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The
Company held its annual meeting of shareholders on March 13, 2007. Proxies
were
solicited by the Company pursuant to Regulation 14A under the Exchange Act
of
1934, as amended. At the annual meeting, the Company’s shareholders approved the
following proposals:
1. The
number of shares voted “for” and “withhold authority” in connection with the
election of Mark Goldwasser as a Class III Director to the Board of Directors
of
the Company was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Withhold
|
|
|
|
For
|
|
Authority
|
|
In
Person
|
|
|
-
|
|
|
-
|
|
By
Proxy
|
|
|
6,597,649
|
|
|
8,833
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
6,597,649
|
|
|
8,833
|
|
|
|
|
|
|
|
|
|
The
number of shares voted “for” and “withhold authority” in connection with the
election of Gary A. Rosenberg as a Class III Director to the Board of Directors
of the Company was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Withhold
|
|
|
|
For
|
|
Authority
|
|
In
Person
|
|
|
-
|
|
|
-
|
|
By
Proxy
|
|
|
6,593,274
|
|
|
13,208
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The
terms
of Marshall S. Geller and Christopher C. Dewey, Class I Directors, and Robert
J.
Rosan and Norman J. Kurlan, Class II Directors, continued after the annual
meeting.
2. The
number of shares voted “for”, “against” and “abstain” in connection with the
ratification of Marcum & Kliegman LLP as the Company’s independent public
accountants for the fiscal year ending September 30, 2007 was as
follows:
|
|
|
|
|
|
For
|
|
|
Against
|
|
|
Abstain
|
|
In
Person
|
|
|
|
|
|
-
|
|
|
-
|
|
|
-
|
|
By
Proxy
|
|
|
|
|
|
6,605,182
|
|
|
1,300
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
|
|
|
6,605,182
|
|
|
1,300
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
ITEM
5. OTHER INFORMATION
None.
ITEM
6. EXHIBITS
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 SUBSIDIARY
May 8, 2007 |
By: /s/
Mark Goldwasser
Mark
Goldwasser
President
and Chief Executive Officer
|
|
|
|
|
May 8, 2007 |
By: /s/
Robert H. Daskal
Robert
H. Daskal
Chief
Financial Officer
|