Unassociated Document
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 June
30, 2007
|
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
|
|
(I.R.S.
Employer
|
incorporation
or organization)
|
|
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 o Filer Accelerated
Filer o
Non-Accelerated
Filer x
Indicate
by check mark whether the registrant is a shell company (as defined in Exchange
Act Rule 12b-2).
YES o
NO
x
As
of
July 31, 2007 there were 8,235,878 shares of the registrant's common stock
outstanding.
NATIONAL
HOLDINGS CORPORATION AND SUBSIDIARIES
|
|
CONDENSED
CONSOLIDATED STATEMENTS OF FINANCIAL
CONDITION
|
|
|
|
|
|
|
ASSETS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June
30,
|
|
September
30,
|
|
|
|
2007
|
|
2006
|
|
|
|
(unaudited)
|
|
(see
note
below)
|
|
|
|
|
|
|
|
CASH
|
|
$
|
6,187,000
|
|
$
|
1,441,000
|
|
RESTRICTED
CASH
|
|
|
9,000
|
|
|
—
|
|
DEPOSITS
WITH CLEARING ORGANIZATIONS
|
|
|
351,000
|
|
|
300,000
|
|
RECEIVABLES
FROM BROKER-DEALERS AND CLEARING
ORGANIZATIONS
|
|
|
3,335,000
|
|
|
3,548,000
|
|
OTHER
RECEIVABLES, net of allowance for uncollectible accounts of
$467,000
|
|
|
|
|
|
|
|
at
June 30, 2007 and September 30, 2006,
respectively
|
|
|
774,000
|
|
|
380,000
|
|
ADVANCES
TO REGISTERED REPRESENTATIVES
|
|
|
2,106,000
|
|
|
1,556,000
|
|
SECURITIES
OWNED
|
|
|
|
|
|
|
|
Marketable,
at market value
|
|
|
917,000
|
|
|
475,000
|
|
Non-marketable,
at fair value
|
|
|
—
|
|
|
402,000
|
|
FIXED
ASSETS, net
|
|
|
277,000
|
|
|
305,000
|
|
SECURED
DEMAND NOTE
|
|
|
500,000
|
|
|
1,000,000
|
|
OTHER
ASSETS
|
|
|
708,000
|
|
|
300,000
|
|
TOTAL
ASSETS
|
|
$
|
15,164,000
|
|
$
|
9,707,000
|
|
|
|
|
|
|
|
|
|
LIABILITIES
AND STOCKHOLDERS'
EQUITY
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
PAYABLE
TO
BROKER-DEALERS AND CLEARING ORGANIZATIONS
|
|
$
|
702,000
|
|
$
|
113,000
|
|
SECURITIES
SOLD, BUT NOT YET PURCHASED, at market
|
|
|
215,000
|
|
|
162,000
|
|
ACCOUNTS
PAYABLE, ACCRUED EXPENSES AND OTHER LIABILITIES
|
|
|
6,285,000
|
|
|
3,943,000
|
|
CONVERTIBLE
NOTES PAYABLE, net of debt discount of $159,000
|
|
|
|
|
|
|
|
at
September
30, 2006
|
|
|
—
|
|
|
841,000
|
|
NOTES
PAYABLE, net of debt discounts of $162,000 and $45,000
|
|
|
|
|
|
|
|
at
June 30,
2007 and September 30, 2006, respectively
|
|
|
838,000
|
|
|
805,000
|
|
TOTAL
LIABILITIES
|
|
|
8,040,000
|
|
|
5,864,000
|
|
|
|
|
|
|
|
|
|
SUBORDINATED
BORROWINGS
|
|
|
500,000
|
|
|
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 June 30, 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 June 30, 2007 and September 30, 2006,
|
|
|
|
|
|
|
|
respectively
|
|
|
—
|
|
|
—
|
|
Common
stock,
$.02 par value, 30,000,000 shares authorized;
|
|
|
|
|
|
|
|
6,671,764
and 5,223,968 shares issued and
outstanding,
|
|
|
|
|
|
|
|
at
June 30, 2007 and September 30, 2006,
respectively
|
|
|
133,000
|
|
|
104,000
|
|
Additional
paid-in capital
|
|
|
19,050,000
|
|
|
16,956,000
|
|
Accumulated
deficit
|
|
|
(12,559,000
|
)
|
|
(14,217,000
|
)
|
TOTAL
STOCKHOLDERS' EQUITY
|
|
|
6,624,000
|
|
|
2,843,000
|
|
TOTAL
LIABILITIES AND STOCKHOLDERS' EQUITY
|
|
$
|
15,164,000
|
|
$
|
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
|
|
Nine
Months Ended
|
|
|
|
June
30,
|
|
June
30,
|
|
June
30,
|
|
June
30,
|
|
|
|
2007
|
|
2006
|
|
2007
|
|
2006
|
|
REVENUES:
|
|
|
|
|
|
|
|
|
|
Commissions
|
|
$
|
10,761,000
|
|
$
|
7,952,000
|
|
$
|
27,705,000
|
|
$
|
25,823,000
|
|
Net
dealer inventory gains
|
|
|
3,051,000
|
|
|
2,219,000
|
|
|
10,109,000
|
|
|
6,270,000
|
|
Investment
banking
|
|
|
4,278,000
|
|
|
1,574,000
|
|
|
7,945,000
|
|
|
8,667,000
|
|
Total
commission and fee revenues
|
|
|
18,090,000
|
|
|
11,745,000
|
|
|
45,759,000
|
|
|
40,760,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
and dividends
|
|
|
649,000
|
|
|
825,000
|
|
|
2,010,000
|
|
|
2,207,000
|
|
Transfer
fees and clearing services
|
|
|
1,029,000
|
|
|
867,000
|
|
|
3,045,000
|
|
|
2,597,000
|
|
Other
|
|
|
461,000
|
|
|
547,000
|
|
|
1,314,000
|
|
|
894,000
|
|
TOTAL
REVENUES
|
|
|
20,229,000
|
|
|
13,984,000
|
|
|
52,128,000
|
|
|
46,458,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
EXPENSES:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commissions
|
|
|
14,017,000
|
|
|
10,044,000
|
|
|
36,193,000
|
|
|
33,775,000
|
|
Employee
compensation and related expenses
|
|
|
2,168,000
|
|
|
1,541,000
|
|
|
5,430,000
|
|
|
4,425,000
|
|
Clearing
fees
|
|
|
444,000
|
|
|
405,000
|
|
|
1,162,000
|
|
|
1,205,000
|
|
Communications
|
|
|
419,000
|
|
|
296,000
|
|
|
1,247,000
|
|
|
1,328,000
|
|
Occupancy
and equipment costs
|
|
|
614,000
|
|
|
693,000
|
|
|
2,090,000
|
|
|
2,001,000
|
|
Professional
fees
|
|
|
318,000
|
|
|
246,000
|
|
|
1,835,000
|
|
|
830,000
|
|
Interest
|
|
|
252,000
|
|
|
104,000
|
|
|
461,000
|
|
|
389,000
|
|
Taxes,
licenses, registration
|
|
|
134,000
|
|
|
177,000
|
|
|
476,000
|
|
|
490,000
|
|
Other
administrative expenses
|
|
|
302,000
|
|
|
326,000
|
|
|
1,182,000
|
|
|
1,180,000
|
|
TOTAL
EXPENSES
|
|
|
18,668,000
|
|
|
13,832,000
|
|
|
50,076,000
|
|
|
45,623,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NET
INCOME
|
|
|
1,561,000
|
|
|
152,000
|
|
|
2,052,000
|
|
|
835,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Preferred
stock dividends
|
|
|
(109,000
|
)
|
|
(104,000
|
)
|
|
(317,000
|
)
|
|
(275,000
|
)
|
Net
income attributable to common stockholders
|
|
$
|
1,452,000
|
|
$
|
48,000
|
|
$
|
1,735,000
|
|
$
|
560,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NET
INCOME PER COMMON SHARE
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income attributable to common stockholders
|
|
$
|
0.26
|
|
$
|
0.01
|
|
$
|
0.32
|
|
$
|
0.11
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income attributable to common stockholders
|
|
$
|
0.14
|
|
$
|
0.01
|
|
$
|
0.20
|
|
$
|
0.09
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
average number of shares outstanding
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
5,543,151
|
|
|
5,223,968
|
|
|
5,388,225
|
|
|
5,120,290
|
|
Diluted
|
|
|
10,817,779
|
|
|
5,454,099
|
|
|
10,220,264
|
|
|
10,378,810
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See
notes
to condensed consolidated financial statements.
NATIONAL
HOLDINGS CORPORATION AND SUBSIDIARIES
|
|
CONDENSED
CONSOLIDATED STATEMENTS OF CASH FLOWS
|
(Unaudited)
|
|
|
|
|
|
|
|
|
Nine
Months Ended
|
|
|
|
June
30, 2007
|
|
June
30, 2006
|
|
CASH
FLOWS FROM OPERATING ACTIVITIES
|
|
|
|
|
|
Net
income
|
|
$
|
2,052,000
|
|
$
|
835,000
|
|
Adjustments
to reconcile net income to net
|
|
|
|
|
|
|
|
cash
provided by operating activities
|
|
|
|
|
|
|
|
Depreciation
and amortization
|
|
|
111,000
|
|
|
113,000
|
|
Amortization
of deferred financing costs
|
|
|
27,000
|
|
|
3,000
|
|
Amortization
of note discount
|
|
|
237,000
|
|
|
159,000
|
|
Compensatory
element of common stock issuance
|
|
|
—
|
|
|
12,000
|
|
Compensatory
element of common stock option issuances
|
|
|
85,000
|
|
|
12,000
|
|
Provision
for doubtful accounts
|
|
|
—
|
|
|
25,000
|
|
Changes
in assets and liabilities
|
|
|
|
|
|
|
|
Restricted
cash
|
|
|
(9,000
|
)
|
|
—
|
|
Deposits
with clearing organizations
|
|
|
(51,000
|
)
|
|
—
|
|
Receivables
from broker-dealers, clearing organizations and others
|
|
|
(731,000
|
)
|
|
(50,000
|
)
|
Securities
owned: marketable, at market value
|
|
|
(442,000
|
)
|
|
(267,000
|
)
|
Securities
owned: non-marketable, at fair value
|
|
|
402,000
|
|
|
—
|
|
Other
assets
|
|
|
(408,000
|
)
|
|
(202,000
|
)
|
Payables
|
|
|
2,947,000
|
|
|
533,000
|
|
Securities
sold, but not yet purchased, at market
|
|
|
53,000
|
|
|
190,000
|
|
Net
cash provided by operating activities
|
|
|
4,273,000
|
|
|
1,363,000
|
|
|
|
|
|
|
|
|
|
CASH
FLOWS FROM INVESTING ACTIVITIES
|
|
|
|
|
|
|
|
Purchase
of fixed assets
|
|
|
(83,000
|
)
|
|
(193,000
|
)
|
|
|
|
|
|
|
|
|
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
|
|
|
(75,000
|
)
|
|
(22,000
|
)
|
Exercise
of stock options and warrants
|
|
|
503,000
|
|
|
—
|
|
Net
cash provided by financing activities
|
|
|
556,000
|
|
|
922,000
|
|
|
|
|
|
|
|
|
|
NET
INCREASE IN CASH
|
|
|
4,746,000
|
|
|
2,092,000
|
|
|
|
|
|
|
|
|
|
CASH
BALANCE
|
|
|
|
|
|
|
|
Beginning
of the period
|
|
|
1,441,000
|
|
|
398,000
|
|
End
of the period
|
|
$
|
6,187,000
|
|
$
|
2,490,000
|
|
|
|
|
|
|
|
|
|
SUPPLEMENTAL
DISCLOSURES OF CASH FLOW INFORMATION
|
|
|
|
|
|
|
|
Cash
paid during the period for:
|
|
|
|
|
|
|
|
Interest
|
|
$
|
192,000
|
|
$
|
234,000
|
|
Dividends
|
|
$
|
75,000
|
|
$
|
21,000
|
|
|
|
|
|
|
|
|
|
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
|
|
Common
stock issued to holders of convertible notes
|
|
$
|
1,024,413
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See
notes
to condensed consolidated financial statements.
NATIONAL
HOLDINGS CORPORATION AND SUBSIDIARIES
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE
30, 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 June 30, 2007 and for the periods ended June 30, 2007 and
June
30, 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 for the Company for its fiscal year commencing October 1, 2007.
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 nine months
ended June 30, 2006, the Company granted 170,000 stock options with a fair
value
of approximately $88,000. A charge of approximately $7,000 and $12,000 was
recorded in the three and nine months ended June 30, 2006, respectively,
relating to the amortization of the fair value associated with these grants.
During the nine months ended June 30, 2007, the Company granted 720,000 stock
options with a fair value of approximately $574,000. A charge of approximately
$55,000 and $85,000 was recorded in the three and nine months ended June 30,
2007, respectively, relating to the amortization of the fair value associated
with stock option grants. The Company did not make any stock options grants
in
the three months ended June 30, 2006 or June 30, 2007.
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 June 30, 2007, and changes during the nine
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 June 30, 2007
|
|
|
1,607,000
|
|
$
|
1.43
|
|
|
3.58
|
|
$
|
2,517,000
|
|
Exerciseable
at June 30, 2007
|
|
|
987,000
|
|
$
|
1.32
|
|
|
2.93
|
|
$
|
1,658,000
|
|
As
of
June 30, 2007, there was $558,000 of total unrecognized deferred compensation
costs related to share-based compensation arrangements.
A
summary
of the status of the Company’s nonvested shares as of June
30,
2007,
and changes during the nine 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
|
|
|
(50,000
|
)
|
$
|
0.33
|
|
|
|
|
|
|
|
|
|
Expired
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
Nonvested
at March 31, 2007
|
|
|
620,000
|
|
$
|
0.79
|
|
|
|
|
|
|
|
|
|
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 June 30,
2007:
|
|
Securities
held
|
|
Securities
sold, but not yet
|
|
|
|
for
resale
|
|
purchased
|
|
Corporate
stocks
|
|
$
|
901,000
|
|
$
|
215,000
|
|
Corporate
bonds
|
|
|
—
|
|
|
—
|
|
Government
obligations
|
|
|
16,000
|
|
|
—
|
|
|
|
$
|
917,000
|
|
$
|
215,000
|
|
|
|
|
|
|
|
|
|
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 June 30, 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 June 30, 2007. The clearing
agreement includes a termination fee if National Securities terminates the
agreement without cause. 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.
Additionally, in June 2007, National Securities entered into a clearing
agreement with Legent Clearing LLC (“Legent”) for the purpose of providing
clearing services that are not provided by NFS and to maintain a pre-existing
clearing relationship for brokers newly associated with National Securities.
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 June 30, 2007 and 2006, is $97,000 and $207,000, 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 $121,000 and $127,000 for the third quarter of fiscal year 2007 and 2006,
respectively, and $1,254,000 and $527,000 for the first nine 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, 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 June 30, 2007, the
accumulated dividend on the Company’s 37,550 issued and outstanding shares of
Series A preferred stock was $84,000.
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 June 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 July 2007. (See Note 12.)
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
|
|
Nine
Months Ended
|
|
|
|
June
30, 2007
|
|
June
30, 2006
|
|
June
30, 2007
|
|
June
30, 2006
|
|
Numerator:
|
|
|
|
|
|
|
|
|
|
Net
income
|
|
$
|
1,561,000
|
|
$
|
152,000
|
|
$
|
2,052,000
|
|
$
|
835,000
|
|
Preferred
stock dividends
|
|
|
(109,000
|
)
|
|
(104,000
|
)
|
|
(317,000
|
)
|
|
(275,000
|
)
|
Numerator
for basic earnings per share
|
|
|
|
|
|
|
|
|
|
|
|
|
|
--
net income attributable to
|
|
|
|
|
|
|
|
|
|
|
|
|
|
common
stockholders - as reported
|
|
|
1,452,000
|
|
|
48,000
|
|
|
1,735,000
|
|
|
560,000
|
|
Effect
of dilutive securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
on convertible notes
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
51,000
|
|
Preferred
stock dividends
|
|
|
109,000
|
|
|
—
|
|
|
317,000
|
|
|
275,000
|
|
Numerator
for basic earnings per share
|
|
|
|
|
|
|
|
|
|
|
|
|
|
--
net income attributable to
|
|
|
|
|
|
|
|
|
|
|
|
|
|
common
stockholders - as adjusted
|
|
$
|
1,561,000
|
|
$
|
48,000
|
|
$
|
2,052,000
|
|
$
|
886,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator
for basic earnings per
|
|
|
|
|
|
|
|
|
|
|
|
|
|
share--weighted
average shares
|
|
|
5,543,151
|
|
|
5,223,968
|
|
|
5,388,225
|
|
|
5,120,290
|
|
Effect
of dilutive securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock
options
|
|
|
404,669
|
|
|
57,626
|
|
|
229,609
|
|
|
28,645
|
|
Warrants
|
|
|
532,626
|
|
|
172,505
|
|
|
265,097
|
|
|
71,262
|
|
Assumed
conversion of:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Series
A Preferred Stock
|
|
|
3,004,000
|
|
|
—
|
|
|
3,004,000
|
|
|
2,825,280
|
|
Series
B Preferred Stock
|
|
|
1,333,333
|
|
|
—
|
|
|
1,333,333
|
|
|
1,333,333
|
|
Notes
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
1,000,000
|
|
Dilutive
potential common shares
|
|
|
5,274,628
|
|
|
230,131
|
|
|
4,832,039
|
|
|
5,258,520
|
|
Denominator
for diluted earnings per
|
|
|
|
|
|
|
|
|
|
|
|
|
|
share--adjusted
weighted-average
|
|
|
|
|
|
|
|
|
|
|
|
|
|
shares
and assumed conversions
|
|
|
10,817,779
|
|
|
5,454,099
|
|
|
10,220,264
|
|
|
10,378,810
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income available to
|
|
|
|
|
|
|
|
|
|
|
|
|
|
common
stockholders
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic:
|
|
$
|
0.26
|
|
$
|
0.01
|
|
$
|
0.32
|
|
$
|
0.11
|
|
Diluted:
|
|
$
|
0.14
|
|
$
|
0.01
|
|
$
|
0.20
|
|
$
|
0.09
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NOTE
9. ACCOUNTS PAYABLE, ACCRUED EXPENSES AND OTHER
LIABILITIES
Accounts
payable, accrued expenses and other liabilities as of June 30, 2007 and
September 30, 2006, respectively, consist of the following:
|
|
June
30, 2007
|
|
September
30, 2006
|
|
|
|
|
|
|
|
Commissions
payable
|
|
$
|
3,366,000
|
|
$
|
1,993,000
|
|
Legal
payable
|
|
|
97,000
|
|
|
325,000
|
|
Other
|
|
|
2,822,000
|
|
|
1,625,000
|
|
Total
|
|
$
|
6,285,000
|
|
$
|
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 retire promissory notes that had maturity
dates in February 2007.
The
Company’s $1.0 million secured demand note matured on March 1, 2007. National
Securities and the holder of the $1.0 million secured demand note entered into
a
new secured demand note that matures on March 1, 2008. In May 2007, the Company
paid $500,000 of this secured demand note, and the balance is due at maturity.
In
June
2007, the Company exercised the mandatory conversion option contained in its
11%
convertible promissory notes. The Company issued 1,024,413 shares of its common
stock in full payment of the $1,000,000 convertible promissory notes, plus
accrued interest. The unamortized debt discount of approximately $150,000 was
expensed as “Interest” in the third quarter ended June 30, 2007.
NOTE
11. PRIVATE PLACEMENT OF 10% PROMISSORY NOTES
In
February 2007, the Company completed a
financing transaction under which certain investors purchased 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. As of June 30, 2007, the Company has not registered the securities
covered by the warrants.
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 nine months ended June 30, 2007 the Company received proceeds of
approximately $356,000 and $503,000, respectively, from the exercise of 244,500
and 399,143, 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 July 2007, the Company received proceeds of approximately $289,000
from the exercise of outstanding warrants to purchase 230,781 shares of the
Company’s common stock.
In
July
2007, the Company exercised the mandatory conversion option contained in its
Series B convertible
preferred stock.
The
Company issued 1,333,333 shares of its common stock to convert in full all
of
its outstanding Series B convertible
preferred stock.
In
addition, the Company will pay the Series B preferred shareholders a dividend
in
the aggregate amount of approximately $7,200 for the period from July 1, 2007
to
July 26, 2007.
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 have been diminimus.
In
the
first quarter of fiscal year 2007, the Company formed a new wholly owned
subsidiary, National Holdings Mortgage Corporation (“National 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 June 30, 2007 Compared to Three Months Ended June 30,
2006
The
Company’s third quarter of fiscal year 2007 resulted in a substantial increase
in revenues, and a comparatively smaller increase in expenses compared
to the same period last year. As
a
result, the Company reported net income of $1,561,000 compared with net income
of $152,000 for the third quarter of fiscal years 2007 and 2006, respectively.
This represents an improvement of $1,409,000 from the prior period.
|
|
Three
Months Ended
|
|
|
|
|
|
|
|
June
30,
|
|
Increase
(Decrease)
|
|
|
|
2007
|
|
2006
|
|
Amount
|
|
Percent
|
|
Commissions
|
|
$
|
10,761,000
|
|
$
|
7,952,000
|
|
$
|
2,809,000
|
|
|
35
|
%
|
Proprietary
trading
|
|
|
2,876,000
|
|
|
2,133,000
|
|
|
743,000
|
|
|
35
|
%
|
Market
making
|
|
|
89,000
|
|
|
68,000
|
|
|
21,000
|
|
|
31
|
%
|
Mark-ups
and mark-downs
|
|
|
86,000
|
|
|
18,000
|
|
|
68,000
|
|
|
378
|
%
|
Net
dealer inventory gains
|
|
|
3,051,000
|
|
|
2,219,000
|
|
|
832,000
|
|
|
37
|
%
|
Investment
banking
|
|
|
4,278,000
|
|
|
1,574,000
|
|
|
2,704,000
|
|
|
172
|
%
|
Interest
and dividends
|
|
|
649,000
|
|
|
825,000
|
|
|
(176,000
|
)
|
|
(21
|
%)
|
Transfer
fees and clearance services
|
|
|
1,029,000
|
|
|
867,000
|
|
|
162,000
|
|
|
19
|
%
|
Other
|
|
|
461,000
|
|
|
547,000
|
|
|
(86,000
|
)
|
|
(16
|
%)
|
|
|
$
|
20,229,000
|
|
$
|
13,984,000
|
|
$
|
6,245,000
|
|
|
45
|
%
|
Total
revenues increased $6,245,000, or 45%, in the third quarter of fiscal year
2007
to $20,229,000 from $13,984,000 in the third quarter of fiscal year 2006. This
increase is due to greater commissions and net dealer inventory gains, and
the
completion of both a greater number of, and larger, investment banking
transactions. During the third quarter of fiscal year 2007, total trading volume
decreased 20%, compared to the third quarter of fiscal year 2006. The decrease
in trading volume compared to the increase in revenues primarily reflects an
increase in the average revenue per trade. Trading volume in this period related
to retail brokerage decreased 22%. Commission revenue increased $2,809,000,
or
35%, to $10,761,000 from $7,952,000 during the third 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 $832,000, or 37%, to $3,051,000
from
$2,219,000 during the third 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. During the third quarter of fiscal
year
2007, revenues from proprietary trading increased $743,000, or 35%, to
$2,876,000 from $2,133,000 in the same period of fiscal year 2006, revenues
from
market making activities increased $21,000, or 31%, to $89,000 from $68,000
in
the third quarter of fiscal year 2006, and revenues from customer mark-ups
and
mark-downs increased $68,000, or 378%, to $86,000 from $18,000 in the third
quarter of fiscal year 2006.
Investment
banking revenue increased $2,704,000, or 172%, to $4,278,000 from $1,574,000
in
the third quarter of fiscal year 2007 compared with the third quarter of fiscal
year 2006. The increase in investment banking revenues is attributable to the
Company having completed both a greater number of, and larger, investment
banking transactions in the third quarter of fiscal year 2007. Interest and
dividend income decreased $176,000, or 21%, to $649,000 from $825,000 in the
third quarter of fiscal year 2007 compared with the same period last year.
The
decrease in interest income is attributable to a decrease in the amount of
debit
balances in National Securities’ customer accounts from the same period last
year. Transfer fees increased $162,000, or 19%, to $1,029,000 in the third
quarter of fiscal year 2007 from $867,000 in the third 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, decreased $86,000, or 16%, to $461,000 from $547,000 during
the third quarter of fiscal year 2007 compared to the third quarter of fiscal
year 2006. The decrease is primarily due to investment income realized in the
Company’s venture capital fund in the third quarter of fiscal year 2006,
partially offset by an increase in fee based assets under
management.
|
|
Three
Months Ended
|
|
|
|
|
|
|
|
June
30,
|
|
Increase
(Decrease)
|
|
|
|
2007
|
|
2006
|
|
Amount
|
|
Percent
|
|
Commission
expense related to:
|
|
|
|
|
|
|
|
|
|
Commission
revenue
|
|
$
|
9,891,000
|
|
$
|
7,111,000
|
|
$
|
2,780,000
|
|
|
39
|
%
|
Net
dealer inventory gains
|
|
|
2,471,000
|
|
|
1,753,000
|
|
|
718,000
|
|
|
41
|
%
|
Investment
banking
|
|
|
1,655,000
|
|
|
1,180,000
|
|
|
475,000
|
|
|
40
|
%
|
Commissions
|
|
|
14,017,000
|
|
|
10,044,000
|
|
|
3,973,000
|
|
|
40
|
%
|
Employee
compensation
|
|
|
2,168,000
|
|
|
1,541,000
|
|
|
627,000
|
|
|
41
|
%
|
Clearing
fees
|
|
|
444,000
|
|
|
405,000
|
|
|
39,000
|
|
|
10
|
%
|
Communications
|
|
|
419,000
|
|
|
296,000
|
|
|
123,000
|
|
|
42
|
%
|
Occupancy
and equipment costs
|
|
|
614,000
|
|
|
693,000
|
|
|
(79,000
|
)
|
|
(11
|
%)
|
Professional
fees
|
|
|
318,000
|
|
|
246,000
|
|
|
72,000
|
|
|
29
|
%
|
Interest
|
|
|
252,000
|
|
|
104,000
|
|
|
148,000
|
|
|
142
|
%
|
Taxes,
licenses and registration
|
|
|
134,000
|
|
|
177,000
|
|
|
(43,000
|
)
|
|
(24
|
%)
|
Other
administrative expenses
|
|
|
302,000
|
|
|
326,000
|
|
|
(24,000
|
)
|
|
(7
|
%)
|
|
|
$
|
18,668,000
|
|
$
|
13,832,000
|
|
$
|
4,836,000
|
|
|
35
|
%
|
In
comparison with the 45% increase in total revenues, total expenses increased
35%, or $4,836,000, to $18,668,000 for the third quarter of fiscal year 2007
compared to $13,832,000 in the third quarter of fiscal year 2006. The increase
in total expenses is primarily the result of greater commission expenses
directly associated with commission revenues.
Commission
expense, which includes expenses related to commission revenue, net dealer
inventory gains and investment banking, increased $3,973,000, or 40%, to
$14,017,000 in the third quarter of fiscal year 2007 from $10,044,000 in the
third quarter of fiscal year 2006. Commission expense related to commission
revenue increased $2,780,000, or 39%, to $9,891,000 in the third quarter of
fiscal year 2007 from $7,111,000 in the third quarter of fiscal year 2006;
commission expense related to net dealer inventory gains increased $718,000,
or
41%, to $2,471,000 in the third quarter of fiscal year 2007 from $1,753,000
in
the third quarter of fiscal year 2006; and commission expense related to
investment banking increased $475,000, or 40%, to $1,655,000 in the third
quarter of fiscal year 2007 from $1,180,000 in the third quarter of fiscal
year
2006. Commission expense as a percentage of commission revenues increased to
92%
in the third quarter of fiscal year 2007 from 89% in the third 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
81% in the third quarter of fiscal year 2007 from 79% in the third 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 39% in the third quarter of fiscal year 2007 from 75% in the third
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 $371,000 and $319,000 for the third 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 $627,000, or 41%, to $2,168,000 in the third
quarter of fiscal year 2007 from $1,541,000 in the third quarter of fiscal
year
2006. The increase is attributable to new employees hired during fiscal years
2007 and 2006, bonuses based on the current quarter’s profits and an increase in
the amortization of the fair value associated with stock option grants. The
amortization of the fair value associated with stock option grants is $55,000
and $7,000 for the third quarter of fiscal years 2007 and 2006, respectively.
Overall, combined commission and employee compensation expense, as a percentage
of revenue decreased to 80% from 83% in the third quarter of fiscal years 2007
and 2006, respectively. The decrease is attributable to an overall lower payout
percentage related to commission revenues.
Clearing
fees increased $39,000, or 10%, to $444,000 in the third quarter of fiscal
year
2007 from $405,000 in
the
third quarter of fiscal year 2006. The increase in clearing fees is attributable
to the increase in commission revenues in the third quarter of fiscal year
2007
compared to the third quarter of fiscal year 2006, partially offset by the
amortization of credits received from one of the Company’s clearing
firms.
Communications
expense increased $123,000, or 42%, to $419,000 from $296,000 in the third
quarter of fiscal year 2007 compared to the third quarter of fiscal year 2006.
The increase is primarily due to the Company’s receipt of a refund of prior
periods charges from a service provider in the third quarter of fiscal year
2006. Occupancy costs decreased $79,000, or 11%, to $614,000 from $693,000
in
the third quarter of fiscal year 2007 compared to the third quarter of fiscal
year 2006. The decrease in occupancy expense is due to the settlement of a
lawsuit by the Company against a former subtenant, partially offset by 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 $72,000, or 29%, to $318,000 from $246,000 in the third quarter
of fiscal
year
2007
compared to the third 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 increased $148,000, or 142%, to $252,000 from $104,000 in the third
quarter of fiscal year 2007 compared to the third quarter of fiscal year 2006.
The increase in interest expense is attributable to the acceleration of
amortization on the Company’s convertible notes that were converted to common
stock in the third quarter of fiscal year 2007. Included in interest expense
is
the amortization of $199,000 and $31,000 for the third quarter of fiscal years
2007 and 2006, respectively. Taxes, licenses and registration decreased $43,000,
or 24%, to $134,000 from $177,000 in the third quarter of fiscal year 2007
compared to the third quarter of fiscal year 2006. The decrease in taxes,
licenses and registration is due to a reduction in incentives provided to new
brokers. Other administrative expenses decreased $24,000, or 7%, to $302,000
from $326,000 in the third quarter of fiscal year 2007 compared to the third
quarter of fiscal year 2006.
The
Company reported net income of $1,561,000 in the third quarter of fiscal year
2007 compared to net income of $152,000 in
the
third quarter of fiscal year 2006.
Overall, the diluted earnings attributable to common stockholders in the third
quarter of fiscal year 2007 was $1,452,000, or $.14 per common share, as
compared to the diluted earnings attributable to common stockholders of $48,000,
or $.01 per common share in the third quarter of fiscal year 2006. The net
income attributable to common stockholders reflects $109,000 and $104,000 of
cumulative preferred stock dividends on the Company’s preferred stock for the
third quarter of fiscal years 2007 and 2006, respectively.
Nine
Months Ended June 30, 2007 Compared to Nine Months Ended June 30,
2006
The
Company’s first nine months of fiscal year 2007 resulted in an increase in
revenues, and a relatively smaller increase in expenses compared
to the same period last year. As
a
result, the Company reported net income of $2,052,000 compared with net income
of $835,000 for the first nine months of fiscal years 2007 and 2006,
respectively. This represents an improvement of $1,217,000 from the prior
period.
|
|
Nine
Months Ended
|
|
|
|
|
|
|
|
June
30,
|
|
Increase
(Decrease)
|
|
|
|
2007
|
|
2006
|
|
Amount
|
|
Percent
|
|
Commissions
|
|
$
|
27,705,000
|
|
$
|
25,823,000
|
|
$
|
1,882,000
|
|
|
7
|
%
|
Proprietary
trading
|
|
|
9,174,000
|
|
|
6,028,000
|
|
|
3,146,000
|
|
|
52
|
%
|
Market
making
|
|
|
704,000
|
|
|
151,000
|
|
|
553,000
|
|
|
366
|
%
|
Mark-ups
and mark-downs
|
|
|
231,000
|
|
|
91,000
|
|
|
140,000
|
|
|
154
|
%
|
Net
dealer inventory gains
|
|
|
10,109,000
|
|
|
6,270,000
|
|
|
3,839,000
|
|
|
61
|
%
|
Investment
banking
|
|
|
7,945,000
|
|
|
8,667,000
|
|
|
(722,000
|
)
|
|
(8
|
%)
|
Interest
and dividends
|
|
|
2,010,000
|
|
|
2,207,000
|
|
|
(197,000
|
)
|
|
(9
|
%)
|
Transfer
fees and clearance services
|
|
|
3,045,000
|
|
|
2,597,000
|
|
|
448,000
|
|
|
17
|
%
|
Other
|
|
|
1,314,000
|
|
|
894,000
|
|
|
420,000
|
|
|
47
|
%
|
|
|
$
|
52,128,000
|
|
$
|
46,458,000
|
|
$
|
5,670,000
|
|
|
12
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
revenues increased $5,670,000, or 12%, in the first nine months of fiscal year
2007 to $52,128,000 from $46,458,000 in the first nine months of fiscal year
2006. This increase is due to greater commissions and net dealer inventory
gains. During the first nine months of fiscal year 2007, total trading volume
decreased 8%, compared to the first nine months of fiscal year 2006. The
decrease in trading volume compared to the increase in revenues primarily
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 increased
$1,882,000, or 7%, to $27,705,000 from $25,823,000 during the first nine 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 $3,839,000,
or
61%, to $10,109,000 from $6,270,000
during
the first nine 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 nine months of fiscal year 2007, revenues
from proprietary trading increased $3,146,000, or 52%, to $9,174,000 from
$6,028,000 in the same period of fiscal year 2006, revenues from market making
activities increased $553,000, or 366%, to $704,000 from $151,000 in the first
nine months of fiscal year 2007, and revenues from customer mark-ups and
mark-downs increased $140,000, or 154%, to $231,000 from $91,000 in the first
nine months of fiscal year 2006.
Investment
banking revenue decreased $722,000, or 8%, to $7,945,000 from $8,667,000 in
the
first nine months of fiscal year 2007 compared with the first nine months of
fiscal year 2006. Although the Company completed more investment banking
transactions in the first nine months of fiscal year 2007, the decrease is
attributable to the Company having co-managed certain of these transactions
in
the first nine months of fiscal year 2007. Interest and dividend income
decreased $197,000, or 9%, to $2,010,000 from $2,207,000 in the first nine
months of fiscal year 2007 compared with the same period last year. The decrease
in interest income is attributable to a decrease in the amount of debit balances
in National Securities’ customer accounts from the same period last year.
Transfer fees increased $448,000, or 17%, to $3,045,000 in the first nine months
of fiscal year 2007 from $2,597,000 in the first nine 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 $420,000, or 47%, to $1,314,000 from $894,000 during
the first nine months of fiscal year 2007 compared to the first nine months
of
fiscal year 2006. The increase is due to an increase in fee based assets under
management, partially offset by investment income realized in the Company’s
venture capital fund in the third quarter of fiscal year 2006.
|
|
Nine
Months Ended
|
|
|
|
|
|
|
|
June
30,
|
|
Increase
(Decrease)
|
|
|
|
2007
|
|
2006
|
|
Amount
|
|
Percent
|
|
Commission
expense related to:
|
|
|
|
|
|
|
|
|
|
Commission
revenue
|
|
$
|
24,853,000
|
|
$
|
22,833,000
|
|
$
|
2,020,000
|
|
|
9
|
%
|
Net
dealer inventory gains
|
|
|
7,839,000
|
|
|
4,737,000
|
|
|
3,102,000
|
|
|
65
|
%
|
Investment
banking
|
|
|
3,501,000
|
|
|
6,205,000
|
|
|
(2,704,000
|
)
|
|
(44
|
%)
|
Commissions
|
|
|
36,193,000
|
|
|
33,775,000
|
|
|
2,418,000
|
|
|
7
|
%
|
Employee
compensation
|
|
|
5,430,000
|
|
|
4,425,000
|
|
|
1,005,000
|
|
|
23
|
%
|
Clearing
fees
|
|
|
1,162,000
|
|
|
1,205,000
|
|
|
(43,000
|
)
|
|
(4
|
%)
|
Communications
|
|
|
1,247,000
|
|
|
1,328,000
|
|
|
(81,000
|
)
|
|
(6
|
%)
|
Occupancy
and equipment costs
|
|
|
2,090,000
|
|
|
2,001,000
|
|
|
89,000
|
|
|
4
|
%
|
Professional
fees
|
|
|
1,835,000
|
|
|
830,000
|
|
|
1,005,000
|
|
|
121
|
%
|
Interest
|
|
|
461,000
|
|
|
389,000
|
|
|
72,000
|
|
|
19
|
%
|
Taxes,
licenses and registration
|
|
|
476,000
|
|
|
490,000
|
|
|
(14,000
|
)
|
|
(3
|
%)
|
Other
administrative expenses
|
|
|
1,182,000
|
|
|
1,180,000
|
|
|
2,000
|
|
|
0
|
%
|
|
|
$
|
50,076,000
|
|
$
|
45,623,000
|
|
$
|
4,453,000
|
|
|
10
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
In
comparison with the 12% increase in total revenues, total expenses increased
10%, or $4,453,000, to $50,076,000 for the first nine months of fiscal year
2007
compared to $45,623,000 in the first nine months of fiscal year 2006. The
increase in total expenses is primarily the result of greater commission
expenses directly associated with commission revenues, and increases in employee
compensation and legal fees.
Commission
expense, which includes expenses related to commission revenue, net dealer
inventory gains and investment banking, increased $2,418,000, or 7%, to
$36,193,000 in the first nine months of fiscal year 2007 from $33,775,000 in
the
first nine months of fiscal year 2006. Commission expense related to commission
revenue increased $2,020,000, or 9%, to $24,853,000 in the first nine months
of
fiscal year 2007 from $22,833,000 in the first nine months of fiscal year 2006;
commission expense related to net dealer inventory gains increased $3,102,000,
or 65%, to $7,839,000 in the first nine months of fiscal year 2007 from
$4,737,000 in the first nine months of fiscal year 2006; and commission expense
related to investment banking decreased $2,704,000, or 44%, to $3,501,000 in
the
first nine months of fiscal year 2007 from $6,205,000 in the first nine months
of fiscal year 2006. Commission expense as a percentage of commission revenues
increased to 90% in the first nine months of fiscal year 2007 from 88% in the
first nine months 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 first nine months of fiscal year 2007 from 76%
in
the first nine 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 44% in the third quarter of fiscal
year
2007 from 72% in the third 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 $947,000
and $936,000 for the first nine 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 $1,005,000, or 23%, to $5,430,000 in the first
nine months of fiscal year 2007 from $4,425,000 in the first nine months of
fiscal year 2006. The increase is attributable to new employees hired during
fiscal years 2007 and 2006, bonuses based on the current period’s profits,
year-end bonuses that were paid to certain staff employees in the first quarter
of fiscal year 2007 and an increase in the amortization of the fair value
associated with stock option grants. The amortization of the fair value
associated with stock option grants is $85,000 and $12,000 for the first nine
months of fiscal years 2007 and 2006, respectively. Overall, combined commission
and employee compensation expense, as a percentage of revenue decreased to
80%
from 82% in the first nine 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 $43,000, or 4%, to $1,162,000 in the first nine months of fiscal
year 2007 from $1,205,000 in the first nine months of fiscal year 2006. The
decrease in clearing fees is attributable to the amortization of credits
received from one of the Company’s clearing firms.
Communications
expense decreased $81,000, or 6%, to $1,247,000 from $1,328,000 in the first
nine months of fiscal year 2007 compared to the first nine 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 $89,000, or 4%,
to
$2,090,000 from $2,001,000 in the first nine months of fiscal year 2007 compared
to the first nine 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, partially offset by the settlement of a lawsuit by the Company against
a
former subtenant in the third quarter of fiscal year 2007. Professional fees
increased $1,005,000, or 121%, to $1,835,000 from $830,000 in the first nine
months of fiscal year 2007 compared to the first nine 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 increased $72,000, or 19%, to $461,000 from $389,000 in the first nine
months of fiscal year 2007 compared to the first nine months of fiscal year
2006. The increase in interest expense is attributable to the acceleration
of
amortization on the Company’s convertible notes that were converted to common
stock in the third quarter of fiscal year 2007. Included in interest expense
is
the amortization of
$264,000
and $162,000 for the first nine months of fiscal years 2007 and 2006,
respectively. Taxes, licenses and registration decreased $14,000, or 3%, to
$476,000 from $490,000 in the first nine months of fiscal year 2007 compared
to
the first nine months of fiscal year 2006. The decrease in taxes, licenses
and
registration is due to a reduction in incentives provided to new brokers. Other
administrative expenses increased $2,000, or less than 1%, to $1,182,000 from
$1,180,000 in the first nine months of fiscal year 2007 compared to the first
nine months of fiscal year 2006.
The
Company reported net income of $2,052,000 in the first nine months of fiscal
year 2007 compared to net income of $835,000 in
the
first nine months of fiscal year 2006.
Overall, the diluted earnings attributable to common stockholders in the first
nine months of fiscal year 2007 was $1,735,000, or $.20 per common share, as
compared to diluted earnings attributable to common stockholders of $560,000,
or
$.09 per common share in the first nine months of fiscal year 2006. The net
income attributable to common stockholders reflects $317,000 and $275,000 of
cumulative preferred stock dividends on the Company’s preferred
stock
for the
first nine 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
June
30, 2007, National Securities’ net capital exceeded the requirement by
$3,570,000.
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 June 30, 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 June 30, 2007. The clearing agreement includes a termination
fee
if National Securities terminates the agreement without cause. 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.
Additionally, in June 2007, National Securities entered into a clearing
agreement with Legent for the purpose of providing clearing services that are
not provided by NFS and to maintain a pre-existing clearing relationship for
brokers newly associated with National Securities. 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 purchased 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 retire promissory notes that had maturity
dates
in February 2007.
The
Company’s $1.0 million secured demand matured on March 1, 2007. National
Securities and the holder of the $1.0 million secured demand note entered into
a
new secured demand note that matures on March 1, 2008. In May 2007, the Company
paid $500,000 of this secured demand note, and the balance is due at maturity.
In
June
2007, the Company exercised the mandatory conversion option contained in its
11%
convertible promissory notes. The Company issued 1,024,413 shares of its common
stock in full payment of the $1,000,000 convertible promissory notes, plus
accrued interest. The unamortized debt discount of approximately $150,000 was
expensed as “Interest” in the third quarter ended June 30, 2007.
In
the
quarter and nine months ended June 30, 2007 the Company received proceeds of
approximately $356,000 and $503,000, 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 June 30, 2007:
|
|
Long
|
|
Short
|
|
Net
|
|
Corporate
stocks
|
|
$
|
901,000
|
|
$
|
215,000
|
|
$
|
686,000
|
|
Corporate
bonds
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Government
obligations
|
|
|
16,000
|
|
|
—
|
|
|
16,000
|
|
|
|
$
|
917,000
|
|
$
|
215,000
|
|
$
|
702,000
|
|
|
|
|
|
|
|
|
|
|
|
|
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 June 30, 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
In
June
2007, the Company exercised the mandatory conversion option contained in its
11%
convertible promissory notes. The Company issued 1,024,413 shares of its common
stock in full payment of the $1,000,000 convertible promissory notes, plus
accrued interest. We
believe that the issuance of our common stock in connection with this conversion
was exempt from registration under Section 4(2) of the Security Act of 1933,
as
amended. The Company received no proceeds from the issuance of such common
stock.
ITEM
3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM
4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
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
August
2,
2007
Mark
Goldwasser
President
and Chief Executive Officer
August
2,
2007
Robert
H.
Daskal
Chief
Financial Officer