UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
Washington,
D.C. 20549
FORM
10-K
ANNUAL
REPORT PURSUANT TO SECTION 13 OR 15(d)
OF
THE
SECURITIES EXCHANGE ACT OF 1934
For
the
Fiscal Year Ended
September
30, 2007
Commission
File No: 001-12629
NATIONAL
HOLDINGS CORPORATION
(Exact
Name of Registrant as specified in its charter)
Delaware
|
36-4128138
|
(State
or other jurisdiction of
incorporation
or organization)
|
(I.R.S.
Employer
Identification
No.)
|
120
Broadway, 27th Floor, New York, NY 10271
(Address,
including zip code, of principal executive offices)
Registrant's
telephone number, including area code: (212) 417-8000
Securities
registered pursuant to Section 12(b) of the Act: None
Securities
registered pursuant to Section 12(g) of the Act: Common
Stock, $.02 par value
(Title
of
class)
Indicate
by check mark if the registrant is a well-known seasoned issuer, as defined
in
Rule 405 of the Securities Act. YES o NO x
Indicate
by check mark if the registrant is not required to file reports pursuant to
Section 13 or 15(d) of the Act. YES o NO x
Indicate
by check mark whether the registrant (1) has filed all reports required to
be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the
preceding 12 months (or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements
for
the past 90 days. YES x NO o
Indicate
by check mark 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 if disclosure of delinquent filers pursuant to Item 405 of
Regulation S-K is not contained herein and will not be contained, to the best
of
registrant’s knowledge, in definitive proxy or information statements
incorporated by reference in Part III or any amendment to this Form 10-K.
YES o NO x
Indicate
by check mark whether the registrant is a shell company (as defined in Exchange
Act Rule 12b-2). YES o NO x
As
of
March 31, 2007, the aggregate market value of voting and non-voting common
equity held by non-affiliates of the registrant, based on the closing sales
price for the registrant's common stock, as quoted on the Over-the-Counter
Bulletin Board was approximately $6,600,000 (calculated by excluding shares
owned beneficially by directors, officers and 10% shareholders). As
of
December 6, 2007 there were 8,602,628 shares of the registrant's common stock
outstanding.
DOCUMENTS
INCORPORATED BY REFERENCE
Portions
of the Company’s Proxy Statement filed with the Securities and Exchange
Commission (the “SEC”) in connection with the Company’s Annual Meeting of
Shareholders to be held on or about March 12, 2008 (the “Company’s 2008 Proxy
Statement”) are incorporated by reference into Part III hereof.
PART
I
Item
1. BUSINESS
Statements
made in this report that relate to future plans, events, financial results
or
performance are forward-looking statements as defined under the Private
Securities Litigation Reform Act of 1995. These statements are based upon
current information and expectations. Actual results may differ materially
from
those anticipated as a result of certain risks and uncertainties. For details
concerning these and other risks and uncertainties, see Part I,
Item 1A, “Risk Factors” of this report, as well as the Company’s other
reports on Forms 10-K, 10-Q and 8-K subsequently filed with the SEC from
time to time. Readers are cautioned not to place undue reliance on these
forward-looking statements, which speak only as of the date hereof. The Company
undertakes no obligation to republish revised forward-looking statements to
reflect events or circumstances after the date hereof or to reflect the
occurrence of unanticipated events.
General
National
Holdings Corporation, a Delaware corporation organized in 1996 (“National
Holdings” or the
“Company”), is
a
financial services organization operating through its wholly owned subsidiary,
National Securities Corporation, a Washington corporation organized in 1947
(“National Securities”). National Securities conducts a national securities
brokerage business through its main offices in Seattle, Washington and New
York,
New York, as well as 64 other locations throughout the country, and one office
outside the country. National Securities’ business includes securities brokerage
for individual and institutional clients, market-making trading activities,
asset management and corporate finance services. On
March
15, 2006, the Company changed its name from “Olympic Cascade Financial
Corporation” to “National Holdings Corporation.”
National
Securities provides a broad range of securities brokerage and investment
services to a diverse retail and institutional clientele, as well as corporate
finance and investment banking services to corporations and businesses. National
Securities’ brokers operate as independent contractors. A registered
representative who becomes an affiliate of National Securities establishes
his
own office and is responsible for the payment of expenses associated with the
operation of such office, including rent, utilities, furniture, equipment,
stock
quotation machines and general office supplies. In return, the registered
representative is entitled to retain a higher percentage of the commissions
generated by his sales than a registered representative at a traditional
employee-based brokerage firm. This arrangement allows National Securities
to
operate with a reduced amount of fixed costs and lowers the risk of operational
losses for non-production.
In
the
third quarter of fiscal year 2006, the Company formed a wholly owned subsidiary,
National Insurance Corporation,
a
Washington corporation (“National Insurance”).
National Insurance provides fixed insurance products to its clients, including
life insurance, disability insurance, long term care insurance and fixed
annuities. National Insurance has finalized certain 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 wholly owned subsidiary,
National Holdings Mortgage Corporation (“National Mortgage”) in order to operate
a mortgage broker business. National Mortgage is currently
inactive.
In
the
first quarter of fiscal year 2007, the Company formed a wholly owned subsidiary,
National Group Benefits Corporation (“National Group Benefits”) in order to
provide
independent contractors the ability to purchase insurance benefits as part
of a
group.
National Group Benefits is currently inactive.
In
the
fourth quarter of fiscal year 2007, the Company formed a wholly owned
subsidiary, National Securities Futures Corporation (“National Futures”) that
will provide futures and derivates products to its clients. National Futures
is
in the process of obtaining the necessary approvals from the National Futures
Association, and has not yet commenced business operations.
Merger
Agreement with vFinance,
Inc.
In
November 2007, the Company entered into a definitive merger agreement vFinance,
Inc.,
a
publicly traded company who’s wholly owned subsidiary is also a registered
broker-dealer with a similar business to National Securities. The
merger agreement is subject to numerous conditions, including: execution of
definitive transaction documents, compliance with state and federal securities
laws and regulations, the
completion of an equity financing with gross proceeds of at least $3.0
million,
and
corporate, shareholder and regulatory approvals. However, no
assurance can be given that the Company will consummate
the merger
with vFinance,
Inc.
Clearing
Relationships
In
March
2005, National Financial Services LLC (“NFS”) acquired the clearing business of
Fiserv Securities,
Inc. (“Fiserv”), the Company’s former clearing firm. In April 2005, National
Securities entered into a clearing agreement with NFS that became effective
in
June 2005. 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 its clearing relationships has been beneficial to the Company’s cost
structure, liquidity and capital resources.
Financial
Information about Industry Segments
The
Company realized approximately 88% of its total revenues in fiscal year 2007
from brokerage services, principal and agency transactions, and investment
banking. During fiscal year 2007, brokerage services that consist of retail
brokerage commissions represent 54% of total revenues, principal and agency
transactions that consist of net dealer inventory gains represent 22% of total
revenues, and investment banking, that consist of corporate finance commissions
and fees, represent 12% of total revenues. For a more detailed analysis of
our
results by segment, see Item 7, “Management Discussion and Analysis of Financial
Condition and Results of Operation.”
Brokerage
Services
National
Securities is registered as a broker-dealer with the SEC and is licensed in
all
50 states, the District of Columbia and Puerto Rico. National Securities is
also
a member of the Financial Industry Regulatory Authority (“FINRA”, formerly the
NASD), the Municipal Securities Rulemaking Board ("MSRB") and the Securities
Investor Protection Corporation ("SIPC"). Brokerage
services to retail clients are provided through the Company's sales force of
investment executives at National Securities.
National
Securities’ goal is to meet the needs of its investment executives and their
clients. To foster individual service, flexibility and efficiency and to reduce
fixed costs, investment executives at National Securities act as independent
contractors responsible for providing their own office facilities, sales
assistants, telephone and quote service, supplies and other items of overhead.
Investment executives are given broad discretion to structure their own
practices and to specialize in different areas of the securities market subject
to supervisory procedures. In addition, investment executives have direct access
to research materials, management, traders, and all levels of support
personnel.
The
brokerage services provided by the investment executives at National Securities
include execution of purchases and sales of stocks, bonds, mutual funds,
annuities and various other securities for individual and institutional
customers. In fiscal year 2007, stocks represent approximately 78% of the
Company’s business, bonds represent approximately 12% of the Company’s business,
and mutual funds and annuities make up the remaining 10% of the Company’s
business. The percentage of each type of business varies over time as the
investment preferences of the Company’s customers change based on market
conditions.
Typically,
National Securities does not recommend particular securities to customers.
Recommendations to customers are determined by individual investment executives
based upon their own research and analysis, subject to applicable FINRA customer
suitability standards. Most investment executives perform fundamental (as
opposed to technical) analysis. Solicitations may be by telephone, seminars
or
newsletters. Investment executives may request trading to acquire an inventory
position to facilitate sales to customers (subject to the investment executive's
own risk). Supervisory personnel review trading activity from inventory
positions to ensure compliance with applicable standards of
conduct.
The
Company generally acts as an agent in executing customer orders to buy or sell
listed and over-the-counter securities in which it does not make a market,
and
charges commissions based on the services the Company provides to its customers.
In executing customer orders to buy or sell a security in which the Company
makes a market, the Company may sell to, or purchase from, customers at a price
that is substantially equal to the current inter-dealer market price plus or
minus a mark-up or mark-down. The Company may also act as agent and execute
a
customer's purchase or sale order with another broker-dealer market-maker at
the
best inter-dealer market price available and charge a commission. The Company
believes its mark-ups, mark-downs and commissions are competitive based on
the
services it provides to its customers. In each instance the commission charges,
mark-ups or mark-downs, are in compliance with guidelines established by the
FINRA. In order to increase revenues generated from these activities, the
Company continuously seeks to hire additional registered representatives, and
works with its current registered representatives to increase their
productivity.
The
Company’s registered representatives are independent contractors, not salaried
employees. As such, payments to these persons are based on commissions
generated, and represent a variable cost rather than a fixed cost of operating
our business. Commission expense represents a significant majority of the
Company’s total expenses. The Company works to control its fixed costs in order
to achieve profitability based upon its expectation of market conditions and
the
related level of revenues. Additionally, the Company
requires
most of its registered
representatives to
absorb
their own overhead and expenses, thereby reducing the Company’s share of the
fixed costs.
Investment
executives in the brokerage industry are traditionally compensated on the basis
of set percentages of total commissions and mark-ups generated. Most brokerage
firms bear substantially all of the costs of maintaining their sales forces,
including providing office space, sales assistants, telephone service and
supplies. The average commission paid to investment executives in the brokerage
industry generally ranges from 30% to 50% of total commissions
generated.
Since
National Securities requires most of its investment executives to absorb their
own overhead and expenses, it pays a higher percentage of the net commissions
and mark-ups generated by its investment executives, as compared to traditional
investment executives in the brokerage industry. This arrangement also reduces
fixed costs and lowers the risk of operational losses for non-production.
National Securities’ operations include execution of orders, processing of
transactions, internal financial controls and compliance with regulatory and
legal requirements.
As
of
September 30, 2007, the Company had 108 employees and 394 independent
contractors. Of these totals, 459 were registered representatives. Persons
who
have entered into independent contractor agreements are not considered employees
for purposes of determining the Company’s obligations for federal and state
withholding, unemployment and social security taxes. The Company’s independent
contractor arrangements conform to accepted industry practice, and therefore,
the Company does not believe there is a material risk of an adverse
determination from the tax authorities that would have a significant effect
on
the Company's ability to recruit and retain investment executives or on the
Company's current operations and financial results of operations. No employees
are covered by collective bargaining agreements, and the Company believes its
relations are good with both its employees and independent
contractors.
The
Company’s business plan includes the growth of its retail and institutional
brokerage business, while recognizing the volatility of the financial markets.
In response to historical market fluctuations, the Company has periodically
adjusted certain business activities, including, proprietary trading and
market-making trading. The Company believes that consolidation within the
industry is inevitable. Concerns attributable to the volatile market, and
increased competition, result in a number of acquisition opportunities being
introduced to the Company. The Company is focused on maximizing the
profitability of its existing operations, while it continues to seek selective
strategic acquisitions.
Periodic
reviews of controls are conducted and administrative and operations personnel
meet frequently with management to review operating conditions. Compliance
and
operations personnel monitor compliance with applicable laws, rules and
regulations.
Principal
and Agency Transactions
The
Company buys and maintains inventories in equity securities as a "market-maker"
for sale of those securities to other dealers and to customers through National
Securities. The Company may also maintain inventories in corporate, government
and municipal debt securities for sale to customers. The level of National
Securities’ market-making trading activities will increase or decrease depending
on the relative strength or weakness of the broader markets. As of September
30,
2007, National Securities made markets in approximately 40 securities. National
Securities anticipates that it will engage in some market-making trading
activity in the future, which may include companies for which National
Securities managed or co-managed a public offering.
The
Company's trading departments require a commitment of capital. Most principal
transactions place the Company's capital at risk. Profits and losses are
dependent upon the skill of the traders, price movements, trading activity
and
the size of inventories. Since the Company's trading activities occasionally
may
involve speculative and thinly capitalized stocks, including stabilizing the
market for securities which it has underwritten, the Company imposes position
limits to reduce its potential for loss.
In
executing customer orders to buy or sell a security in which the Company makes
a
market, the Company may sell to, or purchase from, customers at a price that
is
substantially equal to the current inter-dealer market price plus or minus
a
mark-up or mark-down. The Company may also act as agent and execute a customer's
purchase or sale order with another broker-dealer market-maker at the best
inter-dealer market price available and charge a commission. The Company
believes its mark-ups, mark-downs and commissions are competitive based on
the
services it provides to its customers.
In
executing customer orders to buy or sell listed and over-the-counter securities
in which it does not make a market, the Company generally acts as an agent
and
charges commissions that the Company believes are competitive, based on the
services the Company provides to its customers.
Investment
Banking
National
Securities provides corporate finance and investment banking services, including
underwriting the sale of securities to the public and arranging for the private
placement of securities with investors. National Securities’ corporate finance
operations provide a broad range of financial and corporate advisory services,
including mergers and acquisitions, project financing, capital structure and
specific financing opportunities. National Securities also acts as an
underwriter of equity securities in both initial and secondary public offerings.
Corporate
finance revenues will vary depending on the number of private and public
offerings completed by National Securities during a particular fiscal
year.
Competition
The
Company is engaged in a highly competitive business. With respect to one or
more
aspects of its business, its competitors include member organizations of the
New
York Stock Exchange and other registered securities exchanges in the United
States and Canada, and members of the FINRA. Many of these organizations have
substantially greater personnel and financial resources and more sales offices
than the Company. Discount brokerage firms affiliated with commercial banks
provide additional competition, as well as companies that provide electronic
on-line trading. In many instances, the Company is also competing directly
for
customer funds with investment opportunities offered by real estate, insurance,
banking, and savings and loans industries.
The
securities industry has become considerably more concentrated and more
competitive since we were founded, as numerous securities firms have either
ceased operations or have been acquired by or merged into other firms. In
addition, companies not engaged primarily in the securities business, but with
substantial financial resources, have acquired leading securities firms. These
developments have increased competition from firms with greater capital
resources than ours.
Since
the
adoption of the Gramm-Leach-Bliley Act of 1999, commercial banks and thrift
institutions have been able to engage in traditional brokerage and investment
banking services, thus increasing competition in the securities industry and
potentially increasing the rate of consolidation in the securities
industry.
We
also
compete with other securities firms for successful sales representatives,
securities traders and investment bankers. Competition for qualified employees
in the financial services industry is intense. Our continued ability to compete
effectively depends on our ability to attract new employees and to retain and
motivate our existing employees. For
a
further discussion of risks facing the Company, please see “Risk
Factors.”
Government
Regulation and Supervision
The
securities industry and National Securities’ business is subject to extensive
regulation by the SEC, FINRA, state securities regulators and other governmental
regulatory authorities. The principal purpose of these regulations is the
protection of customers and the securities markets. The SEC is the federal
agency charged with the administration of the federal securities laws. Much
of
the regulation of broker-dealers, however, has been delegated to self-regulatory
organizations, such as the FINRA, that adopt rules, subject to approval by
the
SEC, which govern their members and conduct periodic examinations of member
firms' operations. Securities firms are also subject to regulation by state
securities commissions in the states in which they are registered. National
Securities is a registered broker-dealer with the SEC and a member of the FINRA.
It is licensed to conduct activities as a broker-dealer in all 50 states, the
District of Columbia and Puerto Rico.
In
addition, as a registered broker-dealer and member of the FINRA, National
Securities is subject to the SEC's Uniform
Net Capital Rule 15c3-1,
which
is designed to measure the general financial integrity and liquidity of a
broker-dealer and requires
the maintenance of minimum net capital.
Net
capital is defined as the net worth of a broker-dealer subject to certain
adjustments. In computing net capital, various adjustments are made to net
worth
that exclude assets not readily convertible into cash. Additionally, the
regulations require that certain assets, such as a broker-dealer's position
in
securities, be valued in a conservative manner so as to avoid over-inflation
of
the broker-dealer's net capital.
National
Securities has elected to use the alternative standard method permitted by
the
rule. This requires that National Securities maintain minimum net capital equal
to the greater of $250,000 or a specified amount per security based on the
bid
price of each security for which National Securities is a market maker. At
September 30, 2007, National Securities’ net capital exceeded the requirement by
$2,134,000.
The
Securities Exchange Act of 1934, as amended (the “Exchange Act”), and the FINRA
Conduct Rules require National Securities to supervise the activities of its
investment executives. As part of providing such supervision, National
Securities maintains Written Supervisory Procedures and a Compliance Manual.
Compliance personnel and outside auditors conduct inspections of branch offices
periodically to review compliance with the Company's procedures. A registered
principal provides onsite supervision at each of the Company's larger offices.
The other offices (averaging two investment executives per office) are not
required by FINRA rules to have a registered principal on site and are therefore
supervised by registered principals of National Securities. Designated
principals review customer trades to ensure compliance with the FINRA Conduct
Rules including mark-up guidelines.
In
November 2006, without admitting or denying the alleged violations, National
Securities accepted and consented to the entry of the following findings by
NASD
Regulation: Pursuant to NASD Rules 2110, 3010, 6230(A), MSRB Rules G-14, G-17,
the firm failed to report to trace, transactions in trace eligible securities
executed on a business day during trace system hours within 30 minutes of the
time of execution; the firm’s supervisory system did not provide for supervision
reasonably designed to achieve compliance with applicable securities laws,
regulations and NASD rules concerning trace reporting; and failed to report
to
the MSRB customer transaction in municipal securities within 15 minutes of the
time of execution. The firm was censured and fined $30,000 in a settlement
dated
November 21, 2006.
In
July
2007, without admitting or denying the alleged violations, National Securities
accepted and consented to the entry of the following findings by NASD
Regulation: Pursuant to NASD
Rules 2110, 3010(A) AND (B), the firm ignored red flags that a representative
was circumventing his heightened supervision plan. The
firm
was censured and fined $20,000 in a settlement dated July 19, 2007.
Venture
Capital
In
2001,
the Company formed Robotic Ventures Fund I, L.P. (the “Fund”), a venture capital
fund dedicated to investing in companies engaged in the business of robotics
and
artificial intelligence. The Company has a 24.5% interest in, and serves as
the
managing member of, Robotic Ventures Group LLC (“LLC”), the general partner of
the Fund. The LLC has a 0.02% ownership interest in the Fund. The Fund has
twenty limited partners. Under the terms of the LLC agreement the managing
member may be removed under certain circumstances. As the managing member,
the
Company has no ongoing monetary responsibility to support operations or provide
for Fund losses. The carrying amount of the Company’s investment in the Fund was
$0 at September 30, 2007 and 2006. The Company’s investment is accounted for
under the equity method of accounting. The Company recognized income on this
investment of $192,000 in fiscal year 2006, and no income or loss on this
investment in fiscal years 2007 and 2005, respectively. During the formation
of
the Fund, the Company incurred various start-up expenses that were subsequently
reimbursed by the Fund.
Item
1A. RISK FACTORS
The
financial statements contained in this report and the related discussions
describe and analyze the Company’s financial performance and condition for the
periods indicated. For the most part, this information is historical. The
Company’s prior results, however, are not necessarily indicative of the
Company’s future performance or financial condition. The Company, therefore, has
included the following discussion of certain factors that could affect the
Company’s future performance or financial condition. These factors could cause
the Company’s future performance or financial condition to differ materially
from its prior performance or financial condition or from management’s
expectations or estimates of the Company’s future performance or financial
condition. These factors, among others, should be considered in assessing the
Company’s future prospects and prior to making an investment decision with
respect to the Company’s stock. The risks described below are not the only ones
facing us. Additional risks not presently known to us or that we currently
believe are immaterial may also impair our business
operations.
The
Company’s operations have generated reporting losses during certain fiscal
years.
Although
the Company was profitable in fiscal years 2007, 2006 and 2004, it reported
losses of approximately $1,183,000, $843,000, $3.4 million and $7.9 million
in
fiscal years 2005, 2003, 2002 and 2001, respectively. There is no assurance
that
the Company will be profitable in the future. The Company’s losses were
primarily attributable to the market slowdowns and reduced trading activity
and
volatility, and the cessation of its market making activities. If
we are
unable to achieve or sustain profitability, we may need to curtail, suspend
or
terminate certain operations.
The
Company may require additional financing.
In
order
for the Company to have the opportunity for future success and profitability,
it
periodically may need to obtain additional financing, either through borrowings,
public offerings, private offerings, or some type of business combination (e.g.,
merger, buyout, etc.). The Company has actively pursued a variety of funding
sources, and has consummated certain transactions in
order
to address its capital requirements. The
Company may need to seek to raise additional capital through other available
sources, including borrowing additional funds from third parties
and
there can be no assurance that it will be successful in such pursuits.
Additionally, the issuance of new securities to raise capital will cause the
dilution of shares held by current stockholders. Accordingly,
if we are unable to generate adequate cash from operations, and if we are unable
to find sources of funding, it would have an adverse impact on our liquidity
and
operations.
If
the Company is unable to pay its outstanding debt obligations when due, the
Company’s operations may be materially adversely affected.
At
September 30, 2007, we had total indebtedness of $1,500,000, of which $500,000
matures during fiscal year 2008. The Company cannot assure you that our
operations will generate funds sufficient to repay our existing debt obligations
as they come due. The Company’s failure to repay its indebtedness and make
interest payments as required by our debt obligations could have a material
adverse affect on the Company’s operations.
Because
the common stock may be subject to "penny stock" rules, the market for the
common stock may be limited.
If
the
common stock becomes subject to the Securities and Exchange Commission’s (the
“SEC”) penny stock rules, broker-dealers may experience difficulty in completing
customer transactions and trading activity in the Company’s securities may be
adversely affected. If at any time the common stock has a market price per
share
of less than $5.00, and the Company does not have net tangible assets of at
least $2,000,000 or average revenue of at least $6,000,000 for the preceding
three years, transactions in the common stock may be subject to the “penny
stock” rules promulgated under the Exchange Act. Under these rules,
broker-dealers who recommend such securities to persons other than institutional
accredited investors:
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·
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must
make a special written suitability determination for the
purchaser;
|
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·
|
receive
the purchaser’s written agreement to a transaction prior to
sale;
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·
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provide
the purchaser with risk disclosure documents which identify certain
risks
associated with investing in “penny stocks” and which describe the market
for these “penny stocks” as well as a purchaser’s legal remedies;
and
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·
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obtain
a signed and dated acknowledgment from the purchaser demonstrating
that
the purchaser has actually received the required risk disclosure
document
before a transaction in a “penny stock” can be
completed.
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If
the
common stock becomes subject to these rules, broker-dealers may find it
difficult to effectuate customer transactions and trading activity in the
Company’s securities may be adversely affected. As a result, the market price of
the Company’s securities may be depressed, and stockholders may find it more
difficult to sell the Company’s securities.
National
Securities is subject to various risk associated with the securities
industry.
As
a
securities broker-dealer, National Securities is subject to uncertainties that
are common in the securities industry. These uncertainties include:
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· |
the
volatility of domestic and international financial, bond and stock
markets;
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· |
extensive
governmental regulation;
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· |
substantial
fluctuations in the volume and price level of securities; and
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· |
dependence
on the solvency of various third parties.
|
As
a
result, revenues and earnings may vary significantly from quarter to quarter
and
from year to year. In periods of low volume, profitability is impaired because
certain expenses remain relatively fixed. In the event of a market downturn,
our
business could be adversely affected in many ways. Our revenues are likely
to
decline in such circumstances and, if we were unable to reduce expenses at
the
same pace, our profit margins would erode.
Failure
to comply with net capital requirements could subject us to sanctions imposed
by
the SEC or the FINRA.
National
Securities is subject to the SEC's net capital rule which requires the
maintenance of minimum net capital. We compute net capital under the alternate
method permitted by the net capital rule. National Securities is required to
maintain net capital equal to the
greater of $250,000 or a specified amount per security based on the bid price
of
each security for which National Securities is a market maker. The
net
capital rule is designed to measure the general financial integrity and
liquidity of a broker-dealer. Compliance with the net capital rule limits those
operations of broker-dealers that require the intensive use of their capital,
such as underwriting commitments and principal trading activities. The rule
also
limits the ability of securities firms to pay dividends or make payments on
certain indebtedness, such as subordinated debt, as it matures. The FINRA may
enter the offices of a broker-dealer at any time, without notice, and calculate
the firm's net capital. If the calculation reveals a deficiency in net capital,
the FINRA may immediately restrict or suspend certain or all of the activities
of a broker-dealer. National Securities may not be able to maintain adequate
net
capital, or its net capital may fall below requirements established by the
SEC,
and subject us to disciplinary action in the form of fines, censure, suspension,
expulsion or the termination of business altogether. In
addition, if these net capital rules are changed or expanded, or if there is
an
unusually large charge against net capital, operations that require the
intensive use of capital would be limited. A large operating loss or charge
against net capital could adversely affect our ability to expand or even
maintain our present levels of business,
which
could have a material adverse effect on our business. In addition, we may become
subject to net capital requirements in other foreign jurisdictions in which
we
currently operate or which we may enter. We cannot predict our future capital
needs or our ability to obtain additional financing.
The
Company is exposed to risks associated with its underwriting
activities.
Participation
in an underwriting syndicate or a selling group involves both economic and
regulatory risks. An underwriter may incur losses if it is unable to resell
the
securities it is committed to purchase, or if it is forced to liquidate its
commitment at less than the purchase price. In addition, under federal
securities laws, other laws and court decisions with respect to underwriters'
liabilities and limitations on the indemnification of underwriters by issuers,
an underwriter is subject to substantial potential liability for misstatements
or omissions of material facts in prospectuses and other communications with
respect to such offerings. Acting as a managing underwriter increases these
risks. Underwriting commitments constitute a charge against net capital and
our
ability to make underwriting commitments may be limited by the requirement
that
we must at all times be in compliance with the net capital rule.
The
Company’s business could be adversely affected by a breakdown in the financial
markets.
As
a
securities broker-dealer, National Securities’ business is materially affected
by conditions in the financial markets and economic conditions generally, both
in the United States and elsewhere around the world. Many factors or events
could lead to a breakdown in the financial markets including war, terrorism,
natural catastrophes and other types of disasters. These types of events could
cause people to begin to lose confidence in the financial markets and their
ability to function effectively. If the financial markets are unable to
effectively prepare for these types of events and ease public concern over
their
ability to function, the Company’s revenues are likely to decline and adversely
affect its operations.
Market
fluctuations may reduce the Company’s revenues and
profitability.
The
Company’s revenue and profitability may be adversely affected by declines in the
volume of securities transactions and in market liquidity. Additionally, the
Company’s profitability may be adversely affected by losses from the trading or
underwriting of securities or failure of third parties to meet commitments.
National Securities acts as a market maker in publicly traded common stocks.
In
market making transactions, the Company undertakes the risk of price changes
or
being unable to resell the common stock it holds or being unable to purchase
the
common stock it has sold. These risks are heightened by the illiquidity of
many
of the common stocks that the Company trades and/or makes a market. Any losses
from the Company trading activities, including as a result of unauthorized
trading by the Company’s employees, could have a material adverse effect on the
Company’s business, financial condition, results of operations or cash flows.
Lower
securities price levels may also result in a reduced volume of transactions,
as
well as losses from declines in the market value of common stocks held for
trading purposes. During periods of declining volume and revenue, the Company’s
profitability would be adversely affected. Declines in market values of common
stocks and the failure of issuers and third parties to perform their obligations
can result in illiquid markets.
Competition
with other financial firms may have a negative effect on the Company’s
business.
The
Company competes directly with national and regional full-service broker-dealers
and a broad range of other financial service firms, including banks and
insurance companies. Competition has increased as smaller securities firms
have
either ceased doing business or have been acquired by or merged into other
firms. Mergers and acquisitions have increased competition from these firms,
many of which have significantly greater financial, technical, marketing and
other resources than the Company. Many of these firms offer their customers
more
products and research than currently offered by the Company. These competitors
may be able to respond more quickly to new or changing opportunities,
technologies and client requirements. The Company also faces competition from
companies offering discount and/or electronic brokerage services, including
brokerage services provided over the Internet, which the Company is currently
not offering and does not intend to offer in the foreseeable future. These
competitors may have lower costs or provide more services, and may offer their
customers more favorable commissions, fees or other terms than those offered
by
the Company. To the extent that issuers and purchasers of securities transact
business without the assistance of the Company, the Company’s operating results
could be adversely affected.
There
are risks associated with our stock trading on the OTCBB rather than on a
national exchange.
There
may
be significant consequences associated with our stock trading on the OTCBB
rather than a national exchange. The effects of not being able to list our
securities on a national exchange include:
|
·
|
limited
release of the market price of our securities;
|
|
·
|
limited
interest by investors in our securities;
|
|
·
|
volatility
of our stock price due to low trading volume;
|
|
·
|
increased
difficulty in selling our securities in certain states due to “blue sky”
restrictions; and
|
|
·
|
limited
ability to issue additional securities or to secure additional
financing.
|
The
Company is currently subject to extensive securities regulation and the failure
to comply with these regulations could subject the Company to penalties or
sanctions.
The
securities industry and the Company’s business are subject to extensive
regulation by the SEC, state securities regulators and other governmental
regulatory authorities. The Company is also regulated by industry
self-regulatory organizations, including the FINRA and the MSRB. National
Securities is a registered broker-dealer with the SEC and a member firm of
the
FINRA. Broker-dealers are subject to regulations which cover all aspects of
the
securities business, including sales methods and supervision, trading practices
among broker-dealers, use and safekeeping of customers’ funds and securities,
capital structure of securities firms, record keeping, and the conduct of
directors, officers and employees. Changes in laws or regulations or in
governmental policies could cause us to change the way we conduct our business,
which could adversely affect us.
Compliance
with many of the regulations applicable to the Company involves a number of
risks, particularly in areas where applicable regulations may be subject to
varying interpretation. These regulations often serve to limit the Company’s
activities, including through net capital, customer protection and market
conduct requirements. If the Company is found to have violated an applicable
regulation, administrative or judicial proceedings may be initiated against
the
Company that may result in a censure, fine, civil penalties, issuance of
cease-and-desist orders, the deregistration or suspension of the Company’s
broker-dealer activities, the suspension or disqualification of the Company’s
officers or employees, or other adverse consequences. The imposition of any
of
these or other penalties could have a material adverse effect on the Company’s
operating results and financial condition.
The
Company relies on clearing brokers and unilateral termination of the agreements
with these clearing brokers could disrupt the Company’s
business.
The
Company is an introducing brokerage firm, using third party clearing brokers
to
process its securities transactions and maintain customer accounts on a fee
basis. The clearing brokers also provide billing services, extend credit and
provide for control and receipt, custody and delivery of securities. The
Company’s broker-dealer depends on the operational capacity and ability of the
clearing brokers for the orderly processing of transactions. In addition, by
engaging the processing services of a clearing firm, the Company is exempt
from
some capital reserve requirements and other regulatory requirements imposed
by
federal and state securities laws. If the clearing agreements are unilaterally
terminated for any reason, the Company would be forced to find alternative
clearing firms without adequate time to negotiate the terms of a new clearing
agreement and without adequate time to plan for such change. There can be no
assurance that if there were a unilateral termination of its clearing agreement
that the Company would be able to find an alternative clearing firm on
acceptable terms to them or at all.
In
April
2005, National Securities entered into a clearing agreement with NFS that became
effective in June 2005. 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 permits its clients to purchase securities on a margin basis or sell
securities short, which means that the clearing firm extends credit to the
client secured by cash and securities in the client’s account. During periods of
volatile markets, the value of the collateral held by the clearing brokers
could
fall below the amount borrowed by the client. If margin requirements are not
sufficient to cover losses, the clearing brokers sell or buy securities at
prevailing market prices, and may incur losses to satisfy client obligations.
The Company’s has agreed to indemnify the clearing brokers for losses they incur
while extending credit to its clients.
Credit
risk exposes the Company to losses caused by financial or other problems
experienced by third parties.
The
Company is exposed to the risk that third parties that owe it money, securities
or other assets will not perform their obligations. These parties include
trading counterparts, customers, clearing agents, exchanges, clearing houses,
and other financial intermediaries as well as issuers whose securities the
Company holds. These parties may default on their obligations owed to the
Company due to bankruptcy, lack of liquidity, operational failure or other
reasons. This risk may arise, for example, from holding securities of third
parties, executing securities trades that fail to settle at the required time
due to non-delivery by the counterparty or systems failure by clearing agents,
exchanges, clearing houses or other financial intermediaries, and extending
credit to clients through bridge or margin loans or other arrangements.
Significant failures by third parties to perform their obligations owed to
the
Company could adversely affect the Company’s revenues and perhaps the Company’s
ability to borrow in the credit markets.
Our
risk management policies and procedures may leave us exposed to unidentified
risks or an unanticipated level of risk.
The
policies and procedures we employ to identify, monitor and manage risks may
not
be fully effective. Some methods of risk management are based on the use of
observed historical market behavior. As a result, these methods may not
accurately predict future risk exposures, which could be significantly greater
than the historical measures indicate. Other risk management methods depend
on
evaluation of information regarding markets, clients or other matters that
are
publicly available or otherwise accessible by us. This information may not
be
accurate, complete, up-to-date or properly evaluated. Management of operational,
legal and regulatory risks requires, among other things, policies and procedures
to properly record and verify a large number of transactions and events. We
cannot assure that our policies and procedures will effectively and accurately
record and verify this information.
We
seek
to monitor and control our risk exposure through a variety of separate but
complementary financial, credit, operational and legal reporting systems. We
believe that we are able to evaluate and manage the market, credit and other
risks to which we are exposed. Nonetheless, our ability to manage risk exposure
can never be completely or accurately predicted or fully assured. For example,
unexpectedly large or rapid movements or disruptions in one or more markets
or
other unforeseen developments could have a material adverse effect on our
results of operations and financial condition. The consequences of these
developments can include losses due to adverse changes in inventory values,
decreases in the liquidity of trading positions, higher volatility in earnings,
increases in our credit risk to customers as well as to third parties and
increases in general systemic risk.
Adverse
results of current litigation and potential securities law liability would
result in financial losses and divert management’s attention to
business.
Many
aspects of National Securities’ business involve substantial risks of liability.
There has been an increase in litigation and arbitration within the securities
industry in recent years, including class action suits seeking substantial
damages. National Securities is subject to potential claims by dissatisfied
customers, including claims alleging they were damaged by improper sales
practices such as unauthorized trading, sale of unsuitable securities, use
of
false or misleading statements in the sale of securities, mismanagement and
breach of fiduciary duty. National Securities may be liable for the unauthorized
acts of its retail brokers if it fails to adequately supervise their conduct.
As
an underwriter, National Securities may be subject to substantial potential
liability under federal and state law and court decisions, including liability
for material misstatements and omissions in securities offerings. National
Securities may be required to contribute to a settlement, defense costs or
a
final judgment in legal proceedings or arbitrations involving a past
underwriting and in actions that may arise in the future. National Securities
carries “Errors and Omissions” insurance to protect against arbitrations;
however, the policy is limited in items and amounts covered and there can be
no
assurance that it will cover a particular complaint. The adverse resolution
of
any legal proceedings involving the Company and/or National Securities could
have a material adverse effect on the Company’s business, financial condition,
results of operations or cash flows.
The
Company depends on senior
employees and the loss of their services could harm our
business.
The
Company depends on the continued services of its management team, particularly
Mark Goldwasser, the Company’s Chairman, President and Chief Executive Officer,
as well as its ability to hire additional members of management, and to retain
and motivate its other officers and key employees. We may not be able to find
an
appropriate replacement for Mr. Goldwasser or any other executive officer if
the
need should arise. The Company maintains a $2.0 million life insurance policy
on
Mr. Goldwasser. Due to the regulated nature of some of our businesses, some
of
our executive officers, or other key personnel could become subject to
suspensions or other limitations on the scope of their services to us from
time
to time. If we lose the services of any executive officers or other key
personnel, we may not be able to manage and grow our operations effectively,
enter new brokerage markets or develop new products.
The
Company faces significant competition for registered representatives.
We
are
dependent upon the independent contractor model for our retail brokerage
business. We are exposed to the risk that a large group of independent
contractors could leave the firm or decide to affiliate with another firm and
that we are unable to recruit suitable replacements. A loss of a large group
of
our independent contractors could have a material adverse impact on our ability
to generate revenue in the retail brokerage business.
The
price of our common stock is volatile.
The
price
of our common stock has fluctuated substantially (See Part II, Item 5). The
market price of our common stock may be highly volatile as a result of factors
specific to the Company and the securities markets in general. Factors affecting
volatility may include: variations in the Company’s annual or quarterly
financial results or those of its competitors; economic conditions in general;
and changes in applicable laws or regulations, or their judicial or
administrative interpretations affecting the Company or its subsidiary or the
securities industry. In addition, volatility of the market price of our common
stock is further affected by its thinly traded nature.
We
have restricted shares outstanding that may depress the price of the common
stock.
As
of
September 30, 2007, of the 8,602,628
outstanding
shares of our common stock, approximately 3,350,000 shares may be deemed
restricted shares and, in the future, may be sold in compliance with Rule 144
under the Securities Act. On November 15, 2007, the SEC adopted changes to
Rule
144 which will take effect 60 days after publication of the changes. Rule 144,
as amended, will provide that a person who is not affiliated with us holding
restricted securities for six months may sell such shares without restriction.
A
person who is affiliated with us and who has held restricted securities for
six
months may sell such shares in brokerage transactions, subject to limitations
based on the number of shares outstanding and trading volume. Currently,
restricted securities may be sold in brokerage transactions by both affiliates
and non-affiliates after a one-year holding period, subject to trading
limitations and other requirements, and without restriction by non-affiliates
after a two-year holding period. Such sales may have a depressive effect on
the
price of our common stock in the open market.
Our
Board of Directors can issue shares of "blank check" preferred stock without
further action by our stockholders.
Our
Board
of Directors has the authority, without further action by the stockholders,
to
issue up to 200,000 shares of preferred stock in one or more series and to
fix
the rights, preferences, privileges and restrictions in each series of the
preferred stock, including:
|
·
|
voting
rights, which may be greater or lesser than the voting rights of
the
common stock;
|
|
·
|
rights
and terms of redemption;
|
|
·
|
liquidation
preferences; and
|
There
are
currently 50,000 shares of Series A preferred stock authorized, with 37,550
of
such shares issued and outstanding. The issuance of shares of preferred stock
could adversely affect the voting power of holders of our common stock, and
the
likelihood that these holders will receive dividends and payments upon our
liquidation, and could have the effect of delaying, deferring or preventing
a
change in control of the Company. We have no current plans to issue any
additional preferred stock in the next twelve months, although the issuance
of
preferred stock may be necessary in order to raise additional
capital.
The
Company’s principal shareholders including our directors and officers control a
large percentage of our shares of common stock and can significantly influence
our corporate actions.
At
the
present time, the Company’s executive officers, directors and/or entities that
these individuals are affiliated with, and certain more than 5% shareholders,
own approximately 65% of our common stock, including shares of common stock
issuable
upon conversion of our Series A preferred stock, and excluding stock options
and
warrants. Accordingly,
these individuals and entities will be able to significantly influence most,
if
not all, of our corporate actions, including the election of directors, the
appointment of officers, and potential merger or acquisition
transactions.
We
will be subject to new requirements that we evaluate our internal controls
over
financial reporting under Section 404 of the Sarbanes-Oxley Act and other
corporate governance initiatives that may expose us to certain
risks.
Currently,
for the year ending September 30, 2008, we will be subject to the requirements
of Section 404 of the Sarbanes-Oxley Act and the SEC rules and
regulations that require an annual management report on our internal controls
over financial reporting, including, among other matters, management’s
assessment of the effectiveness of our internal control over financial
reporting. For the year ending September 30, 2009, an attestation report by
our
independent registered public accounting firm regarding our internal controls
will also be required.
We
cannot
be certain as to the timing of the completion of our evaluation, testing and
remediation actions or the impact of the same on our operations. If we are
not
able to implement the requirements of Section 404 in a timely manner or
with adequate compliance, we may be subject to sanctions or investigation by
regulatory authorities, including the SEC. Moreover, if we are unable to assert
that our internal control over financial reporting is effective in any future
period (or if our auditors are unable to express an opinion on the effectiveness
of our internal controls), we could lose investor confidence in the accuracy
and
completeness of our financial reports, which may have an a material adverse
effect on our Company.
Our
compliance with the Sarbanes-Oxley Act may require significant expenses and
management resources that would need to be diverted from our other operations
and could require a restructuring of our internal controls over financial
reporting. Any such expenses, time reallocations or restructuring could have
a
material adverse effect on our operations. The applicability of the
Sarbanes-Oxley Act to us could make it more difficult and more expensive for
us
to obtain director and officer liability insurance, and also make it more
difficult for us to attract and retain qualified individuals to serve on our
boards of directors, or to serve as executive officers.
We
do not expect to pay any dividends on our common stock in the foreseeable
future.
We
do not
anticipate that we will pay any dividends to holders of our common stock in
the
foreseeable future. Other than dividends paid on our Series A preferred stock,
we expect to retain all future earnings, if any, for investment in our business.
In addition, our Certificates of Designation setting forth the relative rights
and preferences of our Series A preferred stock limit our ability to pay
dividends to the holders of our common stock.
Item
1B. UNRESOLVED STAFF COMMENTS
None.
Item
2. PROPERTIES
The
Company owns no real property. Its corporate headquarters are shared with
National Securities in leased space in Chicago, Illinois and New York, New
York.
The Company leases office space in Boca Raton, Florida, and through its
subsidiary, the Company leases office space in Chicago, New York, Seattle,
Washington and Tinton Falls, New Jersey. Independent contractors individually
lease the branch offices that are operated by those independent contractors.
Leases
expire at various times through September 2012. The Company believes the rent
at
each of its locations is reasonable based on current market rates and
conditions.
Item
3. LEGAL PROCEEDINGS
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,
FINRA
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. As of September 30, 2007, the outcome of this
arbitration is undeterminable and accordingly the Company has not established
a
provision for this matter.
The
Company is also a defendant in various other arbitrations and administrative
proceedings, lawsuits and claims seeking
in the aggregate damages of approximately $1,000,000. The Company
believes
such claims are substantially without merit, and estimates that its liability,
primarily for attorney representation, 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 September 30, 2007 and 2006, is $62,000 and $241,000 (primarily
legal fees), respectively, and
have
been included in “Accounts Payable, Accrued Expenses and Other Liabilities” in
the accompanying consolidated statements of financial condition.
The
Company has included in “Professional fees” litigation and other FINRA related
expenses of $1,444,000, $799,000 and $790,000 for the fiscal years ended
September 30, 2007, 2006 and 2005, respectively.
Item
4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
There
were no matters submitted to a vote of security holders in the fourth quarter
of
fiscal year ended September 30, 2007.
PART
II
Item
5. MARKET FOR THE REGISTRANT'S COMMON STOCK, RELATED STOCKHOLDER
MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
Market
Information
On
March
20, 2006, our common stock commenced trading under the symbol “NHLD” on the
OTCBB reflecting the Company’s name change. Quotations
on the OTCBB reflect inter-dealer prices, without retail mark-up, mark-down
or
commission and may not necessarily represent actual transactions.
From
October 1, 2005 to March 17, 2006, our common stock traded on the OTCBB under
the symbol “OLYD”.
The
following table sets forth
the high
and low closing sales prices for the common stock as
reported on the OTCBB for the period from October 1, 2005 to September 30,
2007.
|
|
High
|
|
Low
|
|
|
|
|
|
|
|
October
1, 2005/December 31, 2005
|
|
$
|
1.20
|
|
$
|
0.53
|
|
January
1, 2006/March 31, 2006
|
|
$
|
1.60
|
|
$
|
0.75
|
|
April
1, 2006/June 30, 2006
|
|
$
|
1.55
|
|
$
|
1.05
|
|
July
1, 2006/September 30, 2006
|
|
$
|
1.60
|
|
$
|
1.20
|
|
|
|
|
|
|
|
|
|
October
1, 2006/December 31, 2006
|
|
$
|
1.65
|
|
$
|
1.10
|
|
January
1, 2007/March 31, 2007
|
|
$
|
1.80
|
|
$
|
1.40
|
|
|
|
$
|
3.30
|
|
$
|
1.56
|
|
July
1, 2007/September 30, 2007
|
|
$
|
2.85
|
|
$
|
1.85
|
|
The
closing price of the common stock on December 6, 2007, as quoted on the OTCBB,
was $1.60 per share.
Shareholders
As
of
September 30, 2007, the Company had approximately 1,000 shareholders, including
those shareholders holding stock in street name and trust accounts.
Dividends
Delaware
law authorizes the Company’s Board of Directors to declare and pay dividends
with respect to the common stock either out of its surplus (as defined in the
Delaware Corporation Law) or, in case there is no such surplus, out of its
net
profits for the fiscal year in which the dividend is declared and/or the
preceding fiscal
year; provided, however, that no dividend may be paid out of net profits unless
the Company’s capital exceeds the aggregate amount represented by the issued and
outstanding stock of all classes having a preference in the distribution of
assets. The
Company’s
ability
to pay dividends in the future also may be restricted by its operating
subsidiary's obligation to comply with the net capital requirements imposed
on
broker-dealers by the SEC and the FINRA.
Prior to
the issuance of the Series A and Series B preferred stock, no shareholder held
preferential rights in liquidation. We do not anticipate that we will pay any
dividends to holders of our common stock in the foreseeable future.
The
holders of the Series A Convertible preferred stock are entitled to receive
dividends on a quarterly basis at a rate of 9% per annum, per share. Such
dividends are cumulative and accumulate whether or not declared by the Company’s
Board of Directors, but are payable only when and if declared by the Company’s
Board of Directors. In the years ended September 30, 2007, 2006 and 2005, the
Company’s Board of Directors declared in-kind dividends in the aggregate of
2,537, 1,996 and 2,143 shares of Series A preferred stock, in payment of
approximately $317,000, $300,000 and $322,000, respectively, for dividends
accumulated through March 31 of each year. In March 2006, the Company’s
shareholders approved an amendment to decrease the conversion price of the
Series A preferred stock to $1.25 per share from $1.50 per share. As of
September 30, 2007 and 2006, the amount of accumulated dividends for the
Company’s 37,550 and 35,516 issued and outstanding shares of Series A preferred
stock was approximately $169,000 and $159,000, respectively.
The
holders of the Company’s Series B Convertible preferred stock, convertible into
the Company’s common stock at $.75 per share, were entitled to receive dividends
on a quarterly basis at a rate of 10% per annum per share. Such dividends were
cumulative and were payable only when declared by the Company’s Board of
Directors. The Company declared and paid cash dividends on its Series B
preferred stock in fiscal years 2007 and 2006. In the fourth quarter of fiscal
year 2007, the
Company exercised the conversion option contained in its Series B preferred
stock, and is no longer obligated to pay dividends on its Series
B
preferred stock.
The
holders of the Company’s Series A convertible preferred stock have voting rights
equal to the number of shares of common stock into which such shares of
preferred stock could be converted at a particular record date.
Securities
Authorized for Issuance under Equity Compensation Plans
Item
12
of Part III contains information concerning securities authorized for issuance
under our equity compensation plans.
Issuer
Purchases of Equity Securities
We
have
not announced any currently effective authorization to repurchase shares of
our
common stock.
Item
6. SELECTED FINANCIAL DATA
Set
forth
below is the historical financial data with respect to the Company for the
fiscal years ended 2007, 2006, 2005, 2004 and 2003. This information has been
derived from, and should be read in conjunction with, the audited financial
statements, which appear elsewhere in this report. All information is expressed
in thousands of dollars except for per share information.
|
|
Fiscal
Year
|
|
|
|
2007
|
|
2006
|
|
2005
|
|
2004
|
|
2003
|
|
Net
revenues
|
|
$
|
72,819
|
|
$
|
58,727
|
|
$
|
45,730
|
|
$
|
62,460
|
|
$
|
50,158
|
|
Net
income (loss)
|
|
|
1,372
|
|
|
595
|
|
|
(1,183
|
)
|
|
566
|
|
|
(843
|
)
|
Preferred
stock dividends
|
|
|
(409
|
)
|
|
(381
|
)
|
|
(290
|
)
|
|
(266
|
)
|
|
(250
|
)
|
Net
income (loss) per common share
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
0.16
|
|
|
0.04
|
|
|
(0.29
|
)
|
|
0.08
|
|
|
(0.34
|
)
|
Diluted
|
|
|
0.13
|
|
|
0.04
|
|
|
(0.29
|
)
|
|
0.07
|
|
|
(0.34
|
)
|
Weighted
average number of shares used
in computing income (loss)per
share
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
6,042,646
|
|
|
5,146,422
|
|
|
5,024,643
|
|
|
3,580,446
|
|
|
3,175,315
|
|
Diluted
|
|
|
9,669,531
|
|
|
5,278,299
|
|
|
5,024,643
|
|
|
4,106,742
|
|
|
3,175,315
|
|
Total
assets
|
|
|
17,283
|
|
|
9,707
|
|
|
7,960
|
|
|
9,722
|
|
|
8,735
|
|
Total
liabilities
|
|
|
10,461
|
|
|
6,864
|
|
|
7,030
|
|
|
7,793
|
|
|
9,064
|
|
Stockholders’
equity (deficit)
|
|
|
6,822
|
|
|
2,843
|
|
|
930
|
|
|
1,929
|
|
|
(329
|
)
|
Cash
dividends
|
|
|
82
|
|
|
46
|
|
|
-
|
|
|
-
|
|
|
-
|
|
Item
7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF
OPERATIONS
The
Private Securities Litigation Reform Act of 1995 provides a safe harbor for
forward-looking statements. This Report may contain certain statements of a
forward-looking nature relating to future events or future business performance.
Any such statements that refer to the Company’s estimated or anticipated future
results or other non-historical facts are forward-looking and reflect the
Company’s current perspective of existing trends and information. These
statements involve risks and uncertainties that cannot be predicted or
quantified and, consequently, actual results may differ materially from those
expressed or implied by such forward-looking statements. Such risks and
uncertainties include, among others, risks and uncertainties detailed in Item
1
above. Any forward-looking statements contained in or incorporated into this
Report speak only as of the date of this Report. The Company undertakes no
obligation to update publicly any forward-looking statement, whether as a result
of new information, future events or otherwise.
Critical
Accounting Policies and Estimates
The
SEC
recently issued proposed guidance for disclosure of critical accounting policies
and estimates. The Company’s most critical accounting policies relate to income
recognition, income taxes, and stock-based compensation. The SEC defines
“critical accounting estimates” as those that require application of
management’s most difficult, subjective or complex judgments, often as a result
of the need to make estimates about the effects of matters that are inherently
uncertain and may change in subsequent periods.
The
Company’s critical accounting policies are as follows:
Revenue
Recognition
-
Customer security transactions and the related commission income and expense
are
recorded as of the trade date. Investment banking revenues include gains,
losses, and fees, net of syndicate expenses, arising from securities offerings
in which the Company acts as an underwriter or agent. Investment banking
revenues also include fees earned from providing financial advisory services.
Investment banking management fees are recorded on the offering date, sales
concessions on the settlement date, and underwriting fees at the time the
underwriting is completed and the income is reasonably determinable. Customers
who are financing their transaction on margin are charged interest. The
Company’s margin requirements are in accordance with the terms and conditions
mandated by its clearing firms, NFS, Penson and Legent. The interest is billed
on the average daily balance of the margin account.
Net
dealer inventory gains result from securities transactions entered into for
the
account and risk of the Company. Net dealer inventory gains are recorded on
a
trade date basis. Transfer fees are charged for each customer’s security
transaction, and are recognized as of the trade date. Investment advisory fees
are account management fees for high net worth clients based on the amount
of
the assets under management. These fees are billed quarterly and recognized
at
such time that the service is performed and collection is probable.
The
Company generally acts as an agent in executing customer orders to buy or sell
listed and over-the-counter securities in which it does not make a market,
and
charges commissions based on the services the Company provides to its customers.
In executing customer orders to buy or sell a security in which the Company
makes a market, the Company may sell to, or purchase from, customers at a price
that is substantially equal to the current inter-dealer market price plus or
minus a mark-up or mark-down. The Company may also act as agent and execute
a
customer's purchase or sale order with another broker-dealer market-maker at
the
best inter-dealer market price available and charge a commission. Mark-ups,
mark-downs and commissions are generally priced competitively based on the
services it provides to its customers. In each instance the commission charges,
mark-ups or mark-downs, are in compliance with guidelines established by the
FINRA.
Common
Stock Purchase Warrants
- The
Company accounts for the issuance of common stock purchase warrants issued
in
connection with capital financing transactions in accordance with the provisions
of Emerging Issues Task Force Issue No. 00-19 “Accounting for Derivative
Financial Instruments Indexed to, and Potentially Settled in, a Company's Own
Stock” (“EITF 00-19”). Based on the provisions of EITF 00-19, the Company
classifies as equity any contracts that (i) require physical settlement or
net-share settlement or (ii) gives the Company a choice of net-cash settlement
or settlement in its own shares (physical settlement or net-share settlement).
The Company classifies as assets or liabilities any contracts that (i) require
net-cash settlement (including a requirement to net-cash settle the contract
if
an event occurs and if that event is outside the control of the Company) or
(ii)
gives the counterparty a choice of net-cash settlement or settlement in shares
(physical settlement or net-share settlement).
The
Company assessed the classification of its derivative financial instruments
as
of September 30, 2007, which consist of common stock purchase warrants, and
determined that such derivatives meet the criteria for equity classification
under EITF 00-19.
Convertible
Instruments
- The
Company evaluates and accounts for conversion options embedded in its
convertible instruments in accordance with SFAS No. 133 “Accounting
for Derivative Instruments and Hedging Activities” (“SFAS 133”) and EITF
00-19.
SFAS 133
generally provides three criteria that, if met, require companies to bifurcate
conversion options from their host instruments and account for them as free
standing derivative financial instruments in accordance with EITF 00-19. These
three criteria include circumstances in which (a) the economic
characteristics and risks of the embedded derivative instrument are not clearly
and closely related to the economic characteristics and risks of the host
contract, (b) the hybrid instrument that embodies both the embedded
derivative instrument and the host contract is not remeasured at fair value
under otherwise applicable generally accepted accounting principles with changes
in fair value reported in earnings as they occur and (c) a separate
instrument with the same terms as the embedded derivative instrument would
be
considered a derivative instrument subject to the requirements of SFAS 133.
SFAS 133 and EITF 00-19 also provide an exception to this rule when the
host instrument is deemed to be conventional (as that term is described in
the
implementation guidance to SFAS 133 and further clarified in EITF 05-2 “The
Meaning of “Conventional Convertible Debt Instrument” in
EITF 00-19).
The
Company accounts for convertible instruments (when it has determined that the
embedded conversion options should not be bifurcated from their host
instruments) in accordance with the provisions of EITF 98-5 “Accounting for
Convertible Securities with Beneficial Conversion Features,” (“EITF 98-5”) and
EITF 00-27 “Application of EITF 98-5 to Certain Convertible Instruments.”
Accordingly, the Company records, when necessary, discounts to convertible
notes
for the intrinsic value of conversion options embedded in debt instruments
based
upon the differences between the fair value of the underlying common stock
at
the commitment date of the note transaction and the effective conversion price
embedded in the note. Debt discounts under these arrangements are amortized
over
the term of the related debt to their earliest date of redemption. The Company
also records when necessary deemed dividends for the intrinsic value of
conversion options embedded in preferred shares based upon the differences
between the fair value of the underlying common stock at the commitment date
of
the note transaction and the effective conversion price embedded in the
note.
The
Company evaluated the conversion option embedded in the convertible preferred
stock and determined, in accordance with the provisions of these statements,
that such conversion option does not meet the criteria requiring bifurcation
of
these instruments. The characteristics of the common stock that is issuable
upon
a holder’s exercise of the conversion option embedded in the convertible
preferred stock are deemed to be clearly and closely related to the
characteristics of the preferred shares (as that term is clarified in
paragraph 61.l. of the implementation guidance included in Appendix A
of SFAS 133). Additionally, the Company’s conversion options, if free
standing, would not be considered derivatives subject to the accounting
guidelines prescribed under SFAS 133.
Other
Receivables
- The
Company extends unsecured credit in the normal course of business to its
registered representatives. The determination of the amount of uncollectible
accounts is based on the amount of credit extended and the length of time each
receivable has been outstanding, as it relates to each individual registered
representative. The allowance for doubtful accounts reflects the amount of
loss
that can be reasonably estimated by management, and is included in other
expenses in the accompanying consolidated statements of operations.
Stock-Based
Compensation
- Prior
to October 1, 2005, the Company accounted for employee stock transactions
in accordance with Accounting Principle Board, APB Opinion No. 25,
“Accounting for Stock Issued to Employees.” The Company had adopted the pro
forma disclosure requirements of Statement of Financial Accounting Standards
No. 123, “Accounting For Stock-Based Compensation.”
Effective
October 1, 2005, the Company adopted FASB Statement of Financial Accounting
Standard (“SFAS”) No. 123R “Share Based Payment.” This statement is a
revision of SFAS Statement No. 123, and supersedes APB Opinion No. 25,
and its related implementation guidance. SFAS 123R addresses all forms of share
based payment (“SBP”) awards including shares issued under employee stock
purchase plans, stock options, restricted stock and stock appreciation rights.
Under SFAS 123R, SBP awards will result in a charge to operations that will
be
measured at fair value on the awards grant date, based on the estimated number
of awards expected to vest over the service period.
The
Black-Scholes option valuation model was used to estimate the fair value of
the
options granted during the fiscal years ended September 30, 2007, 2006 and
2005.
The model includes subjective input assumptions that can materially affect
the
fair value estimates. The model was developed for use in estimating the fair
value of traded options that have no vesting restrictions and that are fully
transferable. For example, the expected volatility is estimated based on the
most recent historical period of time equal to the weighted average life of
the
options granted. Options issued under the Company's option plans have
characteristics that differ from traded options. In the Company's opinion,
this
valuation model does not necessarily provide a reliable single measure of the
fair value of its employee stock options
Results
of Operations
Fiscal
Year 2007 Compared with Fiscal Year 2006
The
Company’s fiscal year 2007 resulted in an increase in revenues, and a
slightly lesser increase in expenses, compared with fiscal year 2006.
As
a
result, the Company reported net income of $1,372,000 compared with net income
of $595,000 for the fiscal years 2007 and 2006, respectively. This represents
an
improvement of $777,000 from the prior year.
|
|
Fiscal Year
|
|
Increase (Decrease)
|
|
|
|
2007
|
|
2006
|
|
Amount
|
|
Percent
|
|
Commissions
|
|
$
|
39,237,000
|
|
$
|
32,140,000
|
|
$
|
7,097,000
|
|
|
22
|
%
|
Proprietary
trading
|
|
|
14,550,000
|
|
|
7,391,000
|
|
|
7,159,000
|
|
|
97
|
%
|
Market
making
|
|
|
873,000
|
|
|
323,000
|
|
|
550,000
|
|
|
170
|
%
|
Mark-ups
and mark-downs
|
|
|
306,000
|
|
|
124,000
|
|
|
182,000
|
|
|
147
|
%
|
Net
dealer inventory gains
|
|
|
|
|
|
7,838,000
|
|
|
7,891,000
|
|
|
101
|
%
|
Investment
banking
|
|
|
9,097,000
|
|
|
11,323,000
|
|
|
(2,226,000
|
)
|
|
(20)
|
%
|
Interest
and dividends
|
|
|
2,824,000
|
|
|
2,891,000
|
|
|
(67,000
|
)
|
|
(2
|
)%
|
Transfer
fees and clearance services
|
|
|
4,075,000
|
|
|
3,336,000
|
|
|
739,000
|
|
|
22
|
%
|
Other
|
|
|
1,857,000
|
|
|
1,199,000
|
|
|
658,000
|
|
|
55
|
%
|
|
|
$
|
|
|
$
|
58,727,000
|
|
$
|
14,092,000
|
|
|
24
|
%
|
Total
revenues increased $14,092,000, or 24%, in fiscal year 2007 to $72,819,000
from
$58,727,000 in fiscal year 2006. The increase in revenues is primarily due
to
greater commissions and net dealer inventory gains, partially offset by a
decline in investment banking revenues. During fiscal year 2007, total trading
volume increased 4%, compared to fiscal year 2006. The lesser increase in
trading volume compared to revenues reflects an increase in the average revenue
per trade. Commission revenue increased $7,097,000, or 22%, to $39,237,000
from
$32,140,000 during fiscal year 2007 compared with fiscal year 2006. Net dealer
inventory gains, which includes profits on proprietary trading, market making
activities and customer mark-ups and mark-downs, increased $7,891,000, or 101%,
to $15,729,000 from $7,838,000 during fiscal year 2007 compared with fiscal
year
2006. The increase is primarily due to an increase in proprietary trading in
the
foreign bond market, and reflects the Company’s re-entry into market making
activities. During fiscal year 2007, revenues from proprietary trading increased
$7,159,000, or 97%, to $14,550,000 from $7,391,000 in fiscal year 2006, revenues
from market making activities increased $550,000, or 170%, to $873,000 from
$323,000 in fiscal year 2006, and revenues from customer mark-ups and mark-downs
increased $182,000, or 147%, to $306,000 from $124,000 in fiscal year
2006.
Investment
banking revenue decreased $2,226,000, or 20%, to $9,097,000 from $11,323,000
in
fiscal year 2007 compared with fiscal year 2006. The
decrease in investment banking revenues is attributable to the Company having
completed fewer investment banking transactions for private
companies
in
fiscal year 2007 than in fiscal year 2006. Interest and dividend income
decreased $67,000, or 2%, to $2,824,000 from $2,891,000 in fiscal year 2007
compared with fiscal year 2006. The
decrease in interest income is attributable to a decrease in the amount of
debit
balances in National Securities’ customer accounts in
fiscal
year 2007 compared to fiscal year 2006. Transfer fees increased $739,000, or
22%, to $4,075,000 in fiscal year 2007 from $3,336,000 in 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, miscellaneous transaction fees
and
trading fees, and other investment income, increased $658,000, or 55%, to
$1,857,000 from $1,199,000 during fiscal year 2007 compared to 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 fiscal year 2006.
|
|
Fiscal Year
|
|
Increase (Decrease)
|
|
|
|
2007
|
|
2006
|
|
Amount
|
|
Percent
|
|
Commission
expense related to:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commission
revenue
|
|
$
|
35,779,000
|
|
$
|
28,451,000
|
|
$
|
7,328,000
|
|
|
26
|
%
|
Net
dealer inventory gains
|
|
|
12,507,000
|
|
|
5,617,000
|
|
|
6,890,000
|
|
|
123
|
%
|
Investment
banking
|
|
|
3,985,000
|
|
|
8,208,000
|
|
|
(4,223,000
|
)
|
|
(51)
|
%
|
Commissions
|
|
|
52,271,000
|
|
|
42,276,000
|
|
|
9,995,000
|
|
|
24
|
%
|
Employee
compensation
|
|
|
7,464,000
|
|
|
5,835,000
|
|
|
1,629,000
|
|
|
28
|
%
|
Clearing
fees
|
|
|
1,745,000
|
|
|
1,538,000
|
|
|
207,000
|
|
|
13
|
%
|
Communications
|
|
|
1,719,000
|
|
|
1,748,000
|
|
|
(29,000
|
)
|
|
(2)
|
%
|
Occupancy
and equipment costs
|
|
|
2,996,000
|
|
|
2,805,000
|
|
|
191,000
|
|
|
7
|
%
|
Professional
fees
|
|
|
2,266,000
|
|
|
1,213,000
|
|
|
1,053,000
|
|
|
87
|
%
|
Interest
|
|
|
531,000
|
|
|
494,000
|
|
|
37,000
|
|
|
7
|
%
|
Taxes,
licenses and registration
|
|
|
666,000
|
|
|
617,000
|
|
|
49,000
|
|
|
8
|
%
|
Other
administrative expenses
|
|
|
1,789,000
|
|
|
1,606,000
|
|
|
183,000
|
|
|
11
|
%
|
|
|
$
|
71,447,000
|
|
$
|
58,132,000
|
|
$
|
13,315,000
|
|
|
23
|
%
|
In
comparison with the 24% increase in total revenues, total expenses increased
23%, or $13,315,000, to $71,447,000 for fiscal year 2007 compared to $58,132,000
in fiscal year 2006. The increase in total expenses is primarily the result
of
greater commission expense directly associated with commission revenues and
net
dealer inventory gain, and increases in employee compensation and legal fees,
partially offset by a decline in commission expense directly associated with
investment banking.
Commission
expense, which includes expenses related to commission revenue, net dealer
inventory gains and investment banking, increased $9,995,000, or 24%, to
$52,271,000 in fiscal year 2007 from $42,276,000 in fiscal year 2006. Commission
expense related to commission revenue increased $7,328,000, or 26%, to
$35,779,000 in fiscal year 2007 from $28,451,000 in fiscal year 2006; commission
expense related to net dealer inventory gains increased $6,890,000, or 123%,
to
$12,507,000 in fiscal year 2007 from $5,617,000 in fiscal year 2006; and
commission expense related to investment banking decreased $4,223,000, or 51%,
to $3,985,000 in fiscal year 2007 from $8,208,000 in fiscal year 2006.
Commission expense as a percentage of commission revenues increased to 91%
in
fiscal year 2007 from 89% in 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 80% in fiscal year 2007 from 72% in 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 fiscal year 2007 from 72% in fiscal year 2006. This decrease is
attributable to the type and size of the particular investment banking
transactions completed in the current fiscal year. Commission expense includes
the amortization of advances to registered representatives of $1,406,000 and
$1,281,000 for 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 $1,629,000, or 28%, to $7,464,000 in fiscal
year
2007 from $5,835,000 in fiscal year 2006. The increase is attributable to new
employees hired during fiscal years 2007 and 2006, bonuses based on the current
year’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 based compensation. The amortization of stock
based compensation is $171,000 and $19,000 for fiscal years 2007 and 2006,
respectively. Overall, combined commission and employee compensation expense,
as
a percentage of revenue remained relatively constant at approximately 82% in
fiscal years 2007 and 2006.
Clearing
fees increased $207,000, or 13%, to $1,745,000 in fiscal year 2007 from
$1,538,000 in fiscal year 2006. The increase in clearing fees is attributable
to
the increase in commission revenue in fiscal year 2007 compared to fiscal year
2006, partially offset by the amortization of credits received from one of
the
Company’s clearing firms.
Communication
expenses decreased $29,000, or 2%, to $1,719,000 from $1,748,000 in fiscal
year
2007 compared to 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 $191,000, or 7%, to $2,996,000 from $2,805,000 in
fiscal year 2007 compared to 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 $1,053,000, or 87%, to $2,266,000 from $1,213,000 in fiscal year
2007
compared to 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 $37,000, or 7%, to $531,000 from $494,000 in fiscal year
2007
compared to 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 fiscal year 2007, partially offset by an overall
decrease in the Company’s debt. Included in interest expense is the amortization
of $291,000 and $193,000 for fiscal years 2007 and 2006, respectively. Taxes,
licenses and registration increased $49,000, or 8%, to $666,000 from $617,000
in
fiscal year 2007 compared fiscal year 2006. The increase is due to registration
incentives provided to certain brokers who became affiliated with the Company
in
the fourth quarter of fiscal year 2007. Other administrative expenses increased
$183,000, or 11%, to $1,789,000 from $1,606,000 in fiscal year 2007 compared
to
fiscal year 2006. The increase in other expenses is due to costs incurred
relating to the recruitment of new registered representatives and the expansion
of investment banking operations in fiscal year 2007.
The
Company reported net income of $1,372,000 in fiscal year 2007 compared to net
income of $595,000 in
fiscal
year 2006.
The net
income attributable to common stockholders in fiscal year 2007 was $963,000,
or
diluted earnings of $.13 per common share, as compared net income attributable
to common of $214,000, or diluted earnings of $.04 per common share in fiscal
year 2006. The net income attributable to common stockholders for fiscal years
2007 and 2006 reflects $409,000 and $381,000, respectively, of cumulative
Preferred Stock dividends on the Company’s Preferred Stock.
Fiscal
Year 2006 Compared with Fiscal Year 2005
The
Company’s fiscal year 2006 resulted in an increase in revenues, and a
comparatively lesser increase in expenses compared with fiscal year 2005. The
increase in revenues is primarily due to the completion of investment banking
transactions in fiscal
year 2006.
As
a
result, the Company reported net income of $595,000 compared with a net loss
of
$1,183,000 for the fiscal years 2006 and 2005, respectively. This represents
an
improvement of $1,778,000 from the prior year.
|
|
Fiscal Year
|
|
Increase (Decrease)
|
|
|
|
2006
|
|
2005
|
|
Amount
|
|
Percent
|
|
Commissions
|
|
$
|
32,140,000
|
|
$
|
33,134,000
|
|
$
|
(994,000
|
)
|
|
(3)
|
%
|
Proprietary
trading
|
|
|
7,391,000
|
|
|
5,646,000
|
|
|
1,745,000
|
|
|
31
|
%
|
Market
making
|
|
|
323,000
|
|
|
-
|
|
|
323,000
|
|
|
n/a
|
|
Mark-ups
and mark-downs
|
|
|
124,000
|
|
|
64,000
|
|
|
60,000
|
|
|
94
|
%
|
Net
dealer inventory gains
|
|
|
7,838,000
|
|
|
5,710,000
|
|
|
2,128,000
|
|
|
37
|
%
|
Investment
banking
|
|
|
11,323,000
|
|
|
528,000
|
|
|
10,795,000
|
|
|
2045
|
%
|
Interest
and dividends
|
|
|
2,891,000
|
|
|
2,739,000
|
|
|
152,000
|
|
|
6
|
%
|
Transfer
fees and clearance services
|
|
|
3,336,000
|
|
|
3,097,000
|
|
|
239,000
|
|
|
8
|
%
|
Other
|
|
|
1,199,000
|
|
|
522,000
|
|
|
677,000
|
|
|
130
|
%
|
|
|
$
|
58,727,000
|
|
$
|
45,730,000
|
|
$
|
12,997,000
|
|
|
28
|
%
|
Total
revenues increased $12,997,000, or 28%, in fiscal year 2006 to $58,727,000
from
$45,753,000 in fiscal year 2005. This increase is mainly due to the completion
of investment banking transactions. During fiscal year 2006, total trading
volume increased 2%, compared to fiscal year 2005. The lesser increase in
trading volume compared to revenues reflects an increase in the average revenue
per trade, partially offset by the Company’s re-entry into market making
activities. Commission revenue decreased $994,000, or 3%, to $32,140,000 from
$33,134,000 during fiscal year 2006 compared with fiscal year 2005. Net dealer
inventory gains, which includes profits on proprietary trading, market making
activities and customer mark-ups and mark-downs, increased $2,128,000, or 37%,
to $7,838,000 from $5,710,000 during fiscal year 2006 compared with fiscal
year
2005. The increase is primarily due to an increase in proprietary trading in
the
foreign bond market, and reflects the Company’s re-entry into market making
activities. During fiscal year 2006, revenues from proprietary trading increased
$1,745,000, or 31%, to $7,391,000 from $5,646,000 in fiscal year 2005, revenues
from market making activities increased to $323,000 from $0 in fiscal year
2005,
and revenues from customer mark-ups and mark-downs increased $60,000, or 94%,
to
$124,000 from $64,000 in fiscal year 2005.
Investment
banking revenue increased $10,795,000, or 2,045%, to $11,323,000 from $528,000
in fiscal year 2006 compared with fiscal year 2005. The
increase in investment banking revenues is attributable to the Company having
completed significantly more investment banking transactions
in
fiscal year 2006 than in fiscal year 2005. Interest and dividend income
increased $152,000, or 6%, to $2,891,000 from $2,739,000 in fiscal year 2006
compared with fiscal year 2005. The
increase in interest income is attributable to an increase in the interest
rate
charged for debit balances in National Securities’ customer accounts
from the
same period last year. Transfer fees increased $239,000, or 8%, to $3,336,000
in
fiscal year 2006 from $3,097,000 in fiscal year 2005. The increase is due to
higher transfer fees for trades generated from the retail brokerage business
of
brokers recently associated with the Company.
Other
revenue, consisting of asset management fees, miscellaneous transaction fees
and
trading fees, and other investment income, increased $677,000, or 130%, to
$1,199,000 from $522,000 during fiscal year 2006 compared to fiscal year 2005.
The increase is due to an increase in fee based assets under management and
investment income realized in the Company’s venture capital fund in fiscal year
2006.
|
|
Fiscal Year
|
|
Increase (Decrease)
|
|
|
|
2006
|
|
2005
|
|
Amount
|
|
Percent
|
|
Commission
expense related to:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commission
revenue
|
|
$
|
28,451,000
|
|
$
|
28,504,000
|
|
$
|
(53,000
|
)
|
|
0
|
%
|
Net
dealer inventory gains
|
|
|
5,617,000
|
|
|
3,919,000
|
|
|
1,698,000
|
|
|
43
|
%
|
Investment
banking
|
|
|
8,208,000
|
|
|
415,000
|
|
|
7,793,000
|
|
|
1878
|
%
|
Commissions
|
|
|
42,276,000
|
|
|
32,838,000
|
|
|
9,438,000
|
|
|
29
|
%
|
Employee
compensation
|
|
|
5,835,000
|
|
|
5,010,000
|
|
|
825,000
|
|
|
16
|
%
|
Clearing
fees
|
|
|
1,538,000
|
|
|
432,000
|
|
|
1,106,000
|
|
|
256
|
%
|
Communications
|
|
|
1,748,000
|
|
|
1,670,000
|
|
|
78,000
|
|
|
5
|
%
|
Occupancy
and equipment costs
|
|
|
2,805,000
|
|
|
2,886,000
|
|
|
(81,000
|
)
|
|
(3)
|
%
|
Professional
fees
|
|
|
1,213,000
|
|
|
1,520,000
|
|
|
(307,000
|
)
|
|
(20)
|
%
|
Interest
|
|
|
494,000
|
|
|
448,000
|
|
|
46,000
|
|
|
10
|
%
|
Taxes,
licenses and registration
|
|
|
617,000
|
|
|
344,000
|
|
|
273,000
|
|
|
79
|
%
|
Other
administrative expenses
|
|
|
1,606,000
|
|
|
1,765,000
|
|
|
(159,000
|
)
|
|
(9
|
)%
|
|
|
$
|
58,132,000
|
|
$
|
46,913,000
|
|
$
|
11,219,000
|
|
|
24
|
%
|
In
comparison with the 28% increase in total revenues, total expenses increased
24%, or $11,219,000, to $58,132,000 for fiscal year 2006 compared to $46,913,000
in fiscal year 2005. The increase in total expenses is primarily the result
of
higher commission expenses directly associated with commission revenues,
particularly investment banking revenues.
Commission
expense, which includes expenses related to commission revenue, net dealer
inventory gains and investment banking, increased $9,438,000, or 29%, to
$42,276,000 in fiscal year 2006 from $32,838,000 in fiscal year 2005. Commission
expense related to commission revenue decreased $53,000, or less than 1%, to
$28,451,000 in fiscal year 2006 from $28,504,000 in fiscal year 2005; commission
expense related to net dealer inventory gains increased $1,698,000, or 43%,
to
$5,617,000 in fiscal year 2006 from $3,919,000 in fiscal year 2005; and
commission expense related to investment banking increased $7,793,000, or
1,878%, to $8,208,000 in fiscal year 2006 from $415,000 in fiscal year 2005.
Commission expense as a percentage of commission revenues increased to 89%
in
fiscal year 2006 from 86% in fiscal year 2005. This increase is attributable
to
changes in the production of particular brokers, not all of who are paid at
the
same commission rate and an increase in the amortization of advances to
registered representatives. Commission expense as a percentage of net dealer
inventory gains increased to 72% in fiscal year 2006 from 69% in fiscal year
2005. This increase is attributable to changes in the production of particular
brokers and traders, not all of who are paid at the same commission rate.
Commission expense as a percentage of investment banking revenues decreased
to
72% in fiscal year 2006 from 79% in fiscal year 2005. This decrease is
attributable to the type and size of the particular investment banking
transactions completed in the current fiscal year. Commission expense includes
the amortization of advances to registered representatives of $1,281,000 and
$1,206,000 for fiscal years 2006 and 2005, respectively. These amounts fluctuate
based upon the amounts of advances outstanding and the time period for which
the
registered representatives have agreed to be affiliated with National
Securities.
Employee
compensation expense increased $825,000, or 16%, to $5,835,000 in fiscal year
2006 from $5,010,000 in fiscal year 2005. The increase is attributable to new
hires, bonuses based on current year’s profits and year-end bonuses that were
paid to certain staff employees in the first quarter of fiscal year 2006.
Overall, combined commission and employee compensation expense, as a percentage
of revenue remained relatively constant at approximately 82% and 83% in fiscal
years 2006 and 2005, respectively.
Clearing
fees increased $1,106,000, or 256%, to $1,538,000 in fiscal year 2006 from
$432,000 in fiscal year 2005. The increase in clearing fees is attributable
to a
different pricing structure for certain products with different clearing firms,
and the receipt in fiscal year 2005 of a $1.0 million conversion fee credit
from
the Company’s clearing firm.
Communication
expenses increased $78,000, or 5%, to $1,748,000 from $1,670,000 in fiscal
year
2006 compared to fiscal year 2005. The increase is primarily due to
telecommunication incentives provided to certain brokers who recently became
affiliated with the Company, and additional quotation machines for the Company’s
market making activities, offset by the receipt of a refund of prior periods’
charges from a service provider. Occupancy costs decreased $81,000, or 3%,
to
$2,805,000 from $2,886,000 in fiscal year 2006 compared to fiscal year 2005.
The
decrease in occupancy expense is due to an overall reduction in leased office
space. Professional fees decreased $307,000, or 20%, to $1,213,000 from
$1,520,000 in fiscal year 2006 compared to fiscal year 2005. The decrease in
professional fees is due to the Company having expensed approximately $320,000
of professional fees relating to the proposed merger with First Montauk in
fiscal year 2005.
Interest
expense increased $46,000, or 10%, to $494,000 from $448,000 in fiscal year
2006
compared to fiscal year 2005. The increase is primarily attributable to the
acceleration of amortization on notes that were paid prior to maturity and
amortization related to new notes issued by the Company in the third quarter
of
fiscal year 2006. Included in interest expense is the amortization of $193,000
and $163,000 for fiscal years 2006 and 2005, respectively. Taxes, licenses
and
registration increased $273,000, or 79%, to $617,000 from $344,000 in fiscal
year 2006 compared fiscal year 2005. The increase is due to registration
incentives provided to certain brokers who became affiliated with the Company
in
fiscal year 2006, and the receipt of a refund of prior years’ state business
taxes in fiscal year 2005. Other administrative expenses decreased $159,000,
or
9%, to $1,606,000 from $1,765,000 in fiscal year 2006 compared to fiscal year
2005. The decrease in other expenses is due to costs incurred in fiscal year
2005 relating to the Company’s change of clearing firms.
The
Company reported net income of $595,000 in fiscal year 2006 compared to a net
loss of $1,183,000 in
fiscal
year 2005.
The net
income attributable to common stockholders in fiscal year 2006 was $214,000,
or
diluted earnings of $.04 per common share, as compared to a net loss
attributable to common stockholders of $1,473,000, or $.29 per common share
in
fiscal year 2005. The net income attributable to common stockholders for fiscal
year 2006 and the net loss attributable to common stockholders for fiscal year
2005 reflects $381,000 and $290,000 of cumulative Preferred Stock dividends
on
the Company’s Preferred Stock
for
fiscal years 2006 and 2005, respectively.
Liquidity
and Capital Resources
National
Securities, as a registered broker-dealer, is subject to the SEC’s Uniform Net
Capital Rule 15c3-1 that requires the maintenance of minimum net capital.
National Securities has elected to use the alternative standard method permitted
by the rule. This requires that National Securities maintain minimum net capital
equal to the greater of $250,000 or a specified amount per security based on
the
bid price of each security for which National Securities is a market maker.
At
September 30, 2007, National Securities’ net capital exceeded the requirement by
$2,134,000.
Advances,
dividend payments and other equity withdrawals from the Company’s subsidiary are
restricted by the regulations of the SEC and other regulatory agencies. These
regulatory restrictions may limit the amounts that a subsidiary may dividend
or
advance to the Company. During the fiscal year ended September
30, 2007
the
Company did not have any equity withdrawals.
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
August
2005, upon the maturity of previously issued notes, the Company and two note
holders entered into new note agreements providing for $1.0
million of notes
with a maturity date of July 31, 2007, together with warrants having an
expiration date of July 31, 2007 to purchase, in the aggregate, 200,000 shares
of common stock at a price of $1.25 per share. The notes had an interest rate
of
9%. These
notes were repaid in full in January 2006, and the warrants to purchase
200,000
shares of common stock were exercised in July 2007.
National
Securities entered into a secured demand note collateral agreement with an
employee of National Securities and a former Director of the Company to borrow
securities that can be used by the Company for collateral agreements. In
February 2007, upon the maturity of the previously issued note, National
Securities and the holder entered into a new $1.0 million secured demand note
collateral
agreement with
a
maturity date of March 1, 2008. In
May
2007, the Company paid $500,000 of this secured demand note, and the balance
is
due at maturity. The
holder also entered into a warrant agreement to
purchase 150,000 shares of common stock at a price of $1.25 per share, with
an expiration
date of July 31, 2008.
In
January 2006, the Company completed
a private placement of its securities to a limited number of accredited
investors in a transaction exempt from registration under Section 4(2) of the
Securities Act. The investors made a $2.0 million investment in the Company
by
purchasing an aggregate of the following: (i) $1.0
million
for
10,000 shares of the Company’s newly created Series B Preferred Stock, which had
a 10% dividend rate and was convertible into Common Stock at a price of $.75
per
share, and (ii) 11%
convertible promissory notes in the principal amount of $1.0
million,
which
were convertible into Common Stock at a price of $1.00 per share,
with
warrants
to purchase an aggregate of 300,000 shares of Common Stock at an exercise price
of $1.00 per share. The convertible promissory notes were to mature in January
2011. The fair value of the warrants was calculated using the Black-Scholes
Option Valuation Model. The Company recorded a debt discount of approximately
$187,000 that was charged to interest expense over the life of the
debt.
The
investment included $1.7 million by St. Cloud Capital Partners, L.P. (“St.
Cloud”), and an aggregate of $300,000 by two unrelated investors. Marshall S.
Geller, the Co-Founder and Senior Managing Member
of
SCGP,
LLC, the General Partner of St. Cloud,
became a
member of the Board of Directors of the
Company
simultaneous with the closing of the transaction. The
Company incurred legal fees and other costs related to this capital transaction,
in the amount of $56,000. The Company capitalized one-half of the fees to
deferred financing costs that were amortized to interest expense over the life
of the convertible promissory notes and one-half of the fees were charged to
paid-in capital.
In
January 2006, the
Company used $1.0 million of the proceeds from the above private placement
to
pay in full $1.0 million of promissory notes held by two unrelated note holders
that had a maturity date of July 31, 2007.
In
June
2007, the Company exercised the 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 remaining unamortized debt discount of approximately
$150,000 was expensed as “Interest” in the quarter ended June 30, 2007. In July
2007, the Company exercised the conversion option contained in its Series
B
Preferred Stock, and
issued
1,333,333 shares of its common stock for the retirement of the
Series B
preferred stock.
Accordingly, the Company is no
longer
obligated to pay dividends on the Series B preferred stock.
In
March
2006, the Company sold and issued 159,090 shares of the Company’s common stock
to an unaffiliated party for $175,000
in a
private placement exempt from registration under Section 4(2) of the Securities
Act.
The
proceeds from the private placement were used to retire $175,000 of the
Company’s promissory notes that were due to mature in January 2007.
In
May
2006, the Company filed a Registration Statement on Form S-1 under the
Securities Act of 1933 for the resale of certain shares of Common Stock, shares
of Common Stock issuable upon the conversion of preferred stock and notes,
and
exercise of certain warrants previously issued in connection with private
placement transactions. The Registration Statement became effective on November
6, 2006. The Company will receive proceeds from the exercise of warrants that
were included in the registration statement. The Registration Statement was
suspended in November 2007 as a result of the proposed merger transaction with
vFinance, Inc.
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 is being 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 September 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.
Mr. Dewey, and Mr. Geller, the 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.
In
March
2005, NFS acquired the clearing business of Fiserv. In April 2005, National
Securities entered into a clearing agreement with NFS that became effective
in
June 2005. As part of this transaction, NFS provided National Securities with
a
$1.0 million conversion fee credit to reimburse the Company for the
transitional, incremental costs incurred by National Securities relating to
the
conversion of its clearing business to NFS. National Securities was paid
$250,000 in May 2005, and the remaining $750,000 was paid in July 2005.
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 ending
November 2014, corresponding with the expiration date of the clearing agreement.
In the second quarter of fiscal year 2007, NFS provided National Securities
a
$250,000 clearing fee waiver that is being amortized over a two year period
ending December 2008, corresponding with the time period that certain
performance standards were to be achieved. The clearing agreement includes
a
termination fee if National Securities terminates the agreement without cause
that is initially $2.0 million and reduces to $125,000 over the eight-year
term
of the agreement. Additionally, in June 2005 National Securities entered into
a
clearing agreement with Penson for the purpose of providing clearing services
that are not provided by NFS. The Company believes that the overall effect
of
its clearing relationships has been beneficial to the Company’s cost structure,
liquidity and capital resources.
As
of
September 30, 2007, advances to registered representatives increased $2,454,000
to $4,010,000 from $1,556,000 as of September 30, 2006. This increase is
attributable to advances made to registered representatives who became
affiliated with National Securities during fiscal year 2007 and advances to
registered representatives already affiliated with National Securities who
agreed to renew their affiliation, offset in part by the amortization of
advances in fiscal year 2007 and prior years.
In
fiscal
year 2007 and 2006, the Company received proceeds of approximately $1,326,000
and $0, respectively, from the exercise of outstanding employee stock options
and warrants.
The
Company has historically satisfied its capital needs with cash generated from
operations or from financing activities. The Company believes that it will
have
sufficient funds to maintain its current level of business activities during
fiscal year 2008. If market conditions should weaken, the Company would need
to
consider curtailing certain of its business activities, reducing its fixed
overhead costs and/or seek additional sources of financing.
The
following table shows the contractual obligations of the Company as of September
30, 2007:
Fiscal Year Ending
|
|
Notes
Payable
|
|
Secured
Demand Note
|
|
Leases
|
|
Total
|
|
2008
|
|
$
|
-
|
|
$
|
500,000
|
|
$
|
1,556,000
|
|
$
|
2,056,000
|
|
2009
|
|
|
1,000,000
|
|
|
-
|
|
|
584,000
|
|
|
1,584,000
|
|
2010
|
|
|
-
|
|
|
-
|
|
|
562,000
|
|
|
562,000
|
|
2011
|
|
|
-
|
|
|
-
|
|
|
579,000
|
|
|
579,000
|
|
2012
|
|
|
-
|
|
|
-
|
|
|
443,000
|
|
|
443,000
|
|
Thereafter
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
Less:
Deferred debt discount
|
|
|
(138,000
|
)
|
|
-
|
|
|
-
|
|
|
(138,000
|
)
|
|
|
$
|
862,000
|
|
$
|
500,000
|
|
$
|
3,724,000
|
|
$
|
5,086,000
|
|
Inflation
The
Company believes that the effect of inflation on its assets, consisting of
cash,
securities, office equipment, leasehold improvements and computers has not
been
significant.
Recently
Issued Accounting Standards
In
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.
ITEM
7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET
RISK
The
Company's primary market risk arises from the fact that it engages in
proprietary trading and makes dealer markets in equity securities. Accordingly,
the Company may be required to maintain certain amounts of inventories in order
to facilitate customer order flow. The Company may incur losses as a result
of
price movements in these inventories due to changes in interest rates, foreign
exchange rates, equity prices and other political factors. The Company is not
subject to direct market risk due to changes in foreign exchange rates. However,
the Company is subject to market risk as a result of changes in interest rates
and equity prices, which are affected by global economic conditions. The Company
manages its exposure to market risk by limiting its net long or short positions.
Trading and inventory accounts are monitored daily by management and the Company
has instituted position limits.
Credit
risk represents the amount of accounting loss the Company could incur if
counterparties to its proprietary transactions fail to perform and the value
of
any collateral proves inadequate. Although credit risk relating to various
financing activities is reduced by the industry practice of obtaining and
maintaining collateral, the Company maintains more stringent requirements to
further reduce its exposure. The Company monitors its exposure to counterparty
risk on a daily basis by using credit exposure information and monitoring
collateral values. The Company maintains a credit committee, which reviews
margin requirements for large or concentrated accounts and sets higher
requirements or requires a reduction of either the level of margin debt or
investment in high-risk securities or, in some cases, requiring the transfer
of
the account to another broker-dealer.
The
Company monitors its market and credit risks daily through internal control
procedures designed to identify and evaluate the various risks to which the
Company is exposed. There can be no assurance, however, that the Company's
risk
management procedures and internal controls will prevent losses from occurring
as a result of such risks.
The
following table shows the market values of the Company's securities owned
and
securities sold, but not yet purchased
as of
September 30, 2007:
|
|
Securities owned
|
|
Securities sold, but
not yet purchased
|
|
Corporate
stocks
|
|
$
|
972,000
|
|
$
|
-
|
|
Government
obligations
|
|
|
219,000
|
|
|
77,000
|
|
|
|
$
|
1,191,000
|
|
$
|
77,000
|
|
Item
8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
See
Part
IV, Item 15(a)(1) for a list of financial statements filed as part of this
Report.
Item
9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
DISCLOSURE
There
were no disagreements with accountants on accounting and financial disclosure
for the fiscal year ended September 30, 2007.
Item
9A. CONTROLS AND PROCEDURES
Evaluation
of disclosure controls and procedures.
Based on
the evaluation of the Company’s disclosure controls and procedures (as defined
in the Exchange Act Rules 13a-15(e) and 15d-15(e)) required by the Exchange
Act Rules 13a-15(b) or 15d-15(b), the Company’s Chief Executive Officer and
Acting Chief Financial Officer have concluded that, as of the end of the period
covered by this report, the Company’s disclosure controls and procedures were
adequate and effective to ensure that material information relating to the
Company and its consolidated subsidiaries would be made known to them by others
within those entities, particularly during the period in which this yearly
report on Form 10-K was being prepared.
Changes
in internal controls.
There
were no significant changes in the Company’s internal controls or in other
factors that could significantly affect those controls and procedures subsequent
to the date of our evaluation nor any significant deficiencies or material
weaknesses in such disclosure controls and procedures requiring corrective
actions.
Item
9B. OTHER INFORMATION
There
is
no other information to be disclosed by the Company during the fourth quarter
of
fiscal year 2007 that has not been reported on a current report on Form
8-K.
PART
III
Item
10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The
other
information required by this Item will be included in the Company’s 2008 Proxy
Statement and is
incorporated herein by reference.
Item
11. EXECUTIVE COMPENSATION
The
information required by this Item will be included in the Company’s 2008 Proxy
Statement and is incorporated herein by reference.
Item
12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The
information required by this Item will be included in the Company’s 2008 Proxy
Statement and is incorporated herein by reference.
Item
13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The
information required by this Item will be included in the Company’s 2008 Proxy
Statement and is incorporated herein by reference.
Item
14. PRINCIPAL
ACCOUNTING FEES AND SERVICES
The
information required by this Item will be included in the Company’s 2008 Proxy
Statement and is incorporated herein by reference.
Item
15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES
(a) |
The
following financial statements are included in Part II, Item
8:
|
Independent
Auditors' Reports
Consolidated
Financial Statements
Statements
of Financial Condition, September 30, 2007 and September 30, 2006
Statements
of Operations for the Years ended September 30, 2007, September 30, 2006 and
September 30, 2005
Statement
of Changes in Stockholders' Equity for the Years ended September 30, 2007,
September 30, 2006 and September 30, 2005
Statements
of Cash Flows for the Years ended September 30, 2007, September 30, 2006 and
September 30, 2005
Notes
to
Consolidated Financial Statements
|
2. |
Financial
Statement Schedules
|
|
Schedules
not listed above have been omitted because they are not applicable
or have
been included in footnotes to the consolidated financial
statements.
|
SIGNATURES
Pursuant
to the requirements of Section 13 or 15(d) of the Securities and Exchange Act
of
1934, the Registrant has duly caused this report to be signed on its behalf
by
the undersigned, thereunto duly authorized.
NATIONAL
HOLDINGS CORPORATION
(Registrant)
Date:
December 10, 2007
|
By:
|
/s/
Mark Goldwasser
|
|
|
Mark
Goldwasser
|
|
|
Chairman,
President and Chief Executive Officer
|
|
|
|
|
|
|
Date:
December 10, 2007
|
By:
|
/s/
Robert H. Daskal
|
|
|
Robert
H. Daskal
|
|
|
Chief
Financial Officer
|
Pursuant
to the requirements of the Securities Exchange Act of 1934, this report has
been
signed below by the following persons on behalf of the registrant and in the
capacities and on the dates indicated.
Date:
December 10, 2007
|
By:
|
/s/
Mark Goldwasser
|
|
|
Mark
Goldwasser,
|
|
|
Chairman,
President and Chief Executive Officer
|
|
|
|
|
|
|
Date:
December 10, 2007
|
By:
|
/s/
Gary A. Rosenberg
|
|
|
Gary
A. Rosenberg, Director
|
|
|
|
|
|
|
Date:
December 10, 2007
|
By:
|
/s/
Robert J. Rosan
|
|
|
Robert
J. Rosan, Director
|
|
|
|
|
|
|
Date:
December 10, 2007
|
By:
|
/s/
Norman J. Kurlan
|
|
|
Norman
J. Kurlan, Director
|
|
|
|
|
|
|
Date:
December 10, 2007
|
By:
|
/s/
Marshall S. Geller
|
|
|
Marshall
S. Geller, Director
|
|
|
|
|
|
|
Date:
December 10, 2007
|
By:
|
/s/
Christopher C. Dewey
|
|
|
Christopher
C. Dewey, Director
|
EXHIBIT
INDEX
|
3.1
|
Certificate
of Incorporation, as amended, previously filed as Exhibit 3.5. to
Form
10-Q in May 2004 and hereby incorporated by reference.
|
|
3.2
|
The
Company's Bylaws, as amended, previously filed as Exhibit 3.3 to
Form 10-Q
in February 2002, and hereby incorporated by reference.
|
|
3.3
|
The
Company’s By-Laws, as amended and restated on December 12,
2001.
|
|
3.4
|
Certificate
of Designations, Preferences, and Relative Optional or Other Special
Rights of Preferred Stock and Qualifications, Limitations and Restrictions
Thereof of Series A Convertible Preferred Stock, as amended, previously
filed as Exhibit 3.6 to Form 10-Q in May 2004 and hereby incorporated
by
reference.
|
|
3.5
|
Certificate
of Designation of Series B Preferred Stock, filed with the Secretary
of
State of the State of Delaware on January 11, 2006.
|
|
3.6
|
Certificate
of Amendment to the Certificate of Incorporation, filed with the
Secretary
of State of the State of Delaware on March 15, 2006 filed as Exhibit
3.6
to Form 10-Q in May 2006 and hereby incorporated by
reference.
|
|
3.7
|
Certificate
of Amendment to the Certificate of Designation of Series A Preferred
Stock, filed with the Secretary of State of the State of Delaware
on March
15, 2006 filed as Exhibit 3.7 to Form 10-Q in May 2006 and hereby
incorporated by reference.
|
|
4.1
|
Form
of Warrant filed as Exhibit 4.1 to Form 8-K in January 2006 and hereby
incorporated by reference.
|
|
4.2
|
Form
of Promissory Note filed as Exhibit 4.2 to Form 8-K in January 2006
and
hereby incorporated by reference.
|
|
4.3
|
Amendment
No. 1 to 11% Convertible Promissory Note filed as Exhibit 4.3 to
Form 10-Q
in February 2007 and hereby incorporated by reference.
|
|
4.4
|
Form
of Warrant filed as Exhibit 4.4 to Form 8-K in February 2007 and
hereby
incorporated by reference.
|
|
4.5
|
Form
of 10% Promissory Note filed as Exhibit 4.5 to Form 8-K in February
2007
and hereby incorporated by reference.
|
|
10.1
|
Office
lease, Chicago, Illinois, previously filed as Exhibit 10.27 to Form
10-K
in December 1996 and hereby incorporated by reference.
|
|
10.2
|
Amended
office lease, Chicago, Illinois, previously filed as Exhibit 10.29
to Form
10-K in December 1996 and hereby incorporated by
reference.
|
|
10.3
|
Office
lease, Seattle, Washington previously filed as Exhibit 10.20 to Form
10-K
in December 1999 and hereby incorporated by reference.
|
|
10.4
|
Form
of Note payable agreement dated January 2001, previously filed as
Exhibit
10.23 to Form 10-Q in May 2001 and hereby incorporated by
reference.
|
|
10.5
|
Secured
Demand Note dated February 2001, previously filed as Exhibit 10.24
to Form
10-Q in May 2001 and hereby incorporated by reference.
|
|
10.6
|
Loan
and security agreement dated January 2001, previously filed as Exhibit
10.25 to Form 10-Q in February 2001 and hereby incorporated by
reference.
|
|
10.7*
|
2001
Stock Option Plan, previously included in the Proxy Statement-Schedule
14A
filed in January 2001 and hereby incorporated by
reference.
|
|
10.8
|
Audit
committee charter, previously filed as Exhibit 10.22 to Form 10-Q
in
August 2000 and hereby incorporated by reference.
|
|
10.9
|
Purchase
Agreement by and among Olympic Cascade Financial Corporation, Mark
Goldwasser and Triage Partners, LLC dated as of December 14, 2001,
previously filed as Exhibit 10.30 to Form 8-K in January 2002 and
hereby
incorporated by reference.
|
|
10.10
|
Stock
Purchase Agreement between Steven A. Rothstein, certain other persons
or
entities and Triage Partners, LLC dated as of December 14, 2001,
previously filed as Exhibit 10.31 to Form 8-K in January 2002 and
hereby
incorporated by reference.
|
|
10.11
|
Securities
Exchange Agreement by and among Olympic Cascade Financial Corporation,
Gregory P. Kusnick, Karen Jo Gustafson, Gregory C. Lowney and Maryanne
K.
Snyder dated as of December 14, 2001, previously filed as Exhibit
10.32 to
Form 8-K in January 2002 and hereby incorporated by
reference.
|
|
10.12
|
Escrow
Agreement by and made among Olympic Cascade Financial Corporation,
Mark
Goldwasser, Triage Partners, LLC and National Securities Corporation
dated
as of December 28, 2001, previously filed as Exhibit 10.33 to Form
8-K in
January 2002 and hereby incorporated by reference.
|
|
10.13
|
Form
of Warrant issued in December 2002.
|
|
10.14
|
Form
of Securities Purchase Agreement, previously filed as Exhibit 10.36
to
Form 8-K in February 2004 and hereby incorporated by
reference.
|
|
10.15
|
Form
of Note, previously filed as Exhibit 10.37 to Form 8-K in February
2004
and hereby incorporated by reference.
|
|
10.16
|
Form
of Warrant, previously filed as Exhibit 10.38 to Form 8-K in February
2004
and hereby incorporated by reference.
|
|
10.17
|
Form
of Registration Rights Agreement, previously filed as Exhibit 10.39
to
Form 8-K in February 2004 and hereby incorporated by
reference.
|
|
10.18
|
Clearing
Agreement previously filed as Exhibit 10.36 to Form 10-K in June
2004 and
hereby incorporated by reference.
|
|
10.19
|
Form
of Warrant issued in August 2004 filed as Exhibit 10.40 to Form 8-K
in
August 2004 and hereby incorporated by reference.
|
|
10.20
|
Form
of Registration Rights Agreement dated in August 2004 filed as Exhibit
10.41 to Form 8-K in August 2004 and hereby incorporated by
reference.
|
|
10.21*
|
Severance
Agreement dated February 4, 2005 between Michael A. Bresner and National
Securities Corporation filed as Exhibit 10.43 to Form 8-K in February
2005
and hereby incorporated by reference.
|
|
10.22
|
Warrant
issued by the Company to Triage Partners LLC dated April 1, 2005
filed as
Exhibit 10.45 to Form 8-K in April 2005 and hereby incorporated by
reference.
|
|
10.23
|
Securities
Purchase Agreement dated as of January 11, 2006 by and among Olympic
Cascade Financial Corporation and the investors set forth therein
filed as
Exhibit 10.48 to Form 8-K in January 2006 and hereby incorporated
by
reference.
|
|
10.24
|
Registration
Rights Agreement dated as of January 11, 2006 by and among Olympic
Cascade
Financial Corporation and the investors set forth therein filed as
Exhibit
10.49 to Form 8-K in January 2006 and hereby incorporated by
reference.
|
|
10.25*
|
Employment
Agreement dated as of March 15, 2006 between the Company and Mark
Goldwasser filed as Exhibit 10.50 to Form 10-Q in May 2006 and hereby
incorporated by reference.
|
|
10.26
|
Securities
Purchase Agreement dated as of March 17, 2006 filed as Exhibit 10.51
to
Form 10-Q in May 2006 and hereby incorporated by
reference.
|
|
10.27
|
Securities
Purchase Agreement, dated as of February 22, 2007 by and among National
Holdings Corporation and the investors set forth therein filed as
Exhibit
10.52 to Form 8-K in February 2007 and hereby incorporated by
reference.
|
|
10.28
|
Registration
Rights Agreement, dated as of February 22, 2007 by and among National
Holdings Corporation and the investors set forth therein filed as
Exhibit
10.53 to Form 8-K in February 2007 and hereby incorporated by
reference.
|
|
10.29*
|
2006
Stock Option Plan, previously included in the Proxy Statement-Schedule
14A
filed in January 2006 and hereby incorporated by
reference
|
|
14.
|
The
Code of Ethics filed as Exhibit 14 to Form 10-K in December 2003
and
hereby incorporated by reference.
|
|
16.1
|
Change
in Certifying Accountant, previously filed in Form 8-K in August
1998 and
hereby incorporated by reference.
|
|
16.2
|
Change
in its Independent Public Accountants, previously filed in Form 8-K
in May
2003 and hereby incorporated by reference.
|
|
16.3
|
Change
in its Independent Public Accountants, previously filed in Form 8-K
in
October 2003 and hereby incorporated by
reference.
|
|
21.
|
Subsidiaries
of Registrant.
|
|
23.1
|
Consent
of Marcum & Kliegman LLP
|
|
24.
|
Power
of Attorney, previously filed to Forms S-3 in May 1999 and June
1999.
|
|
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.
|
|
|
|
*Compensatory
agreements
|
REPORT
OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To
the
Board of Directors and Stockholders
National
Holdings Corporation
We
have
audited the accompanying consolidated statements of financial condition of
National Holdings Corporation and Subsidiaries (the "Company") as of September
30, 2007 and 2006, and the related consolidated statements of operations,
changes in stockholders' equity and cash flows for each of the three years
in
the period ended September 30, 2007. These consolidated financial statements
are
the responsibility of the Company's management. Our responsibility is to express
an opinion on these financial statements based on our audits.
We
conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we
plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. The Company is not required to
have, nor were we engaged to perform, an audit of its internal control over
financial reporting. Our audits include consideration of internal control over
financial reporting as a basis for designing audit procedures that are
appropriate in the circumstances, but not for the purpose of expressing an
opinion on the effectiveness of the Company’s internal control over financial
reporting. Accordingly, we express no such opinion. An audit also includes
examining, on a test basis, evidence supporting the amounts and disclosures
in
the financial statements, assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In
our
opinion, the consolidated financial statements referred to above present fairly,
in all material respects, the consolidated financial position of National
Holdings Corporation and Subsidiaries as of September 30, 2007 and 2006, and
the
consolidated results of its operations and its cash flows for each of the three
years in the period ended September 30, 2007, in conformity with accounting
principles generally accepted in the United States of America.
/s/
Marcum & Kliegman LLP
New
York,
New York
November
30, 2007
NATIONAL
HOLDINGS CORPORATION AND SUBSIDIARIES
CONSOLIDATED
STATEMENTS OF FINANCIAL CONDITION
|
|
September 30,
|
|
September 30,
|
|
|
|
2007
|
|
2006
|
|
ASSETS
|
|
|
|
|
|
|
|
CASH
|
|
$
|
4,957,000
|
|
$
|
1,441,000
|
|
DEPOSITS
WITH CLEARING ORGANIZATIONS
|
|
|
402,000
|
|
|
300,000
|
|
RECEIVABLES
FROM BROKER-DEALERS AND CLEARING ORGANIZATIONS
|
|
|
4,739,000
|
|
|
3,548,000
|
|
OTHER
RECEIVABLES, net of allowance for uncollectible accounts of $467,000
at
September 30, 2007 and 2006, respectively
|
|
|
784,000
|
|
|
380,000
|
|
ADVANCES
TO REGISTERED REPRESENTATIVES
|
|
|
4,010,000
|
|
|
1,556,000
|
|
SECURITIES
OWNED
|
|
|
|
|
|
|
|
Marketable,
at market value
|
|
|
1,191,000
|
|
|
475,000
|
|
Non-marketable,
at fair value
|
|
|
-
|
|
|
402,000
|
|
FIXED
ASSETS, net
|
|
|
304,000
|
|
|
305,000
|
|
SECURED
DEMAND NOTE
|
|
|
500,000
|
|
|
1,000,000
|
|
OTHER
ASSETS
|
|
|
396,000
|
|
|
300,000
|
|
|
|
|
|
|
|
|
|
TOTAL
ASSETS
|
|
$
|
17,283,000
|
|
$
|
9,707,000
|
|
|
|
|
|
|
|
|
|
LIABILITIES
AND STOCKHOLDERS' EQUITY
|
|
|
|
|
|
|
|
|
PAYABLE
TO BROKER-DEALERS AND CLEARING ORGANIZATIONS
|
|
$
|
1,115,000
|
|
$
|
113,000
|
|
SECURITIES
SOLD, BUT NOT YET PURCHASED, at market
|
|
|
77,000
|
|
|
162,000
|
|
ACCOUNTS
PAYABLE, ACCRUED EXPENSES AND OTHER LIABILITIES
|
|
|
7,907,000
|
|
|
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 $138,000 and $45,000 at September
30,
2007 and 2006, respectively
|
|
|
862,000
|
|
|
805,000
|
|
TOTAL
LIABILITIES
|
|
|
9,961,000
|
|
|
5,864,000
|
|
|
|
|
|
|
|
|
|
SUBORDINATED
BORROWINGS
|
|
|
500,000
|
|
|
1,000,000
|
|
|
|
|
|
|
|
|
|
COMMITMENTS
AND CONTINGENCIES (NOTES 15 and 16)
|
|
|
-
|
|
|
-
|
|
|
|
|
|
|
|
|
|
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 September 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; 0 shares issued and outstanding at September
30, 2007
and 10,000 shares issued and outstanding (liquidation
preference:
|
|
|
|
|
|
|
|
$1,000,000)
at September 30, 2006
|
|
|
-
|
|
|
-
|
|
Common
stock, $.02 par value, 30,000,000 shares authorized; 8,602,628
and
5,223,968 shares issued and outstanding, at September 30, 2007
and 2006,
respectively
|
|
|
172,000
|
|
|
104,000
|
|
Additional
paid-in capital
|
|
|
19,919,000
|
|
|
16,956,000
|
|
Accumulated
deficit
|
|
|
(13,269,000
|
)
|
|
(14,217,000
|
)
|
TOTAL
STOCKHOLDERS' EQUITY
|
|
|
6,822,000
|
|
|
2,843,000
|
|
|
|
|
|
|
|
|
|
TOTAL
LIABILITIES AND STOCKHOLDERS' EQUITY
|
|
$
|
17,283,000
|
|
$
|
9,707,000
|
|
The
accompanying notes are an integral part of these consolidated financial
statements.
NATIONAL
HOLDINGS CORPORATION AND SUBSIDIARIES
CONSOLIDATED
STATEMENTS OF OPERATIONS
|
|
Years
Ended
|
|
|
|
September 30, 2007
|
|
September 30, 2006
|
|
September 30, 2005
|
|
|
|
|
|
|
|
|
|
REVENUES
|
|
|
|
|
|
|
|
Commissions
|
|
$
|
39,237,000
|
|
$
|
32,140,000
|
|
$
|
33,134,000
|
|
Net
dealer inventory gains
|
|
|
15,729,000
|
|
|
7,838,000
|
|
|
5,710,000
|
|
Investment
banking
|
|
|
9,097,000
|
|
|
11,323,000
|
|
|
528,000
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
commission and fee revenues
|
|
|
64,063,000
|
|
|
51,301,000
|
|
|
39,372,000
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
and dividends
|
|
|
2,824,000
|
|
|
2,891,000
|
|
|
2,739,000
|
|
Transfer
fees and clearing services
|
|
|
4,075,000
|
|
|
3,336,000
|
|
|
3,097,000
|
|
Other
|
|
|
1,857,000
|
|
|
1,199,000
|
|
|
522,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
72,819,000
|
|
|
58,727,000
|
|
|
45,730,000
|
|
|
|
|
|
|
|
|
|
|
|
|
EXPENSES
|
|
|
|
|
|
|
|
|
|
|
Commissions
and fees
|
|
|
52,271,000
|
|
|
42,276,000
|
|
|
32,838,000
|
|
Employee
compensation and related expenses
|
|
|
7,464,000
|
|
|
5,835,000
|
|
|
5,010,000
|
|
Clearing
fees
|
|
|
1,745,000
|
|
|
1,538,000
|
|
|
432,000
|
|
Communications
|
|
|
1,719,000
|
|
|
1,748,000
|
|
|
1,670,000
|
|
Occupancy
and equipment costs
|
|
|
2,996,000
|
|
|
2,805,000
|
|
|
2,886,000
|
|
Professional
fees
|
|
|
2,266,000
|
|
|
1,213,000
|
|
|
1,520,000
|
|
Interest
|
|
|
531,000
|
|
|
494,000
|
|
|
448,000
|
|
Taxes,
licenses, registration
|
|
|
666,000
|
|
|
617,000
|
|
|
344,000
|
|
Other
administrative expenses
|
|
|
1,789,000
|
|
|
1,606,000
|
|
|
1,765,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
71,447,000
|
|
|
58,132,000
|
|
|
46,913,000
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income (loss)
|
|
|
1,372,000
|
|
|
595,000
|
|
|
(1,183,000
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Preferred
stock dividends
|
|
|
(409,000
|
)
|
|
(381,000
|
)
|
|
(290,000
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Net
income (loss) attributable to common stockholders
|
|
$
|
963,000
|
|
$
|
214,000
|
|
$
|
(1,473,000
|
)
|
|
|
|
|
|
|
|
|
|
|
|
INCOME
(LOSS) PER COMMON SHARE
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic:
|
|
|
|
|
|
|
|
|
|
|
Net
income (loss) attributable to common stockholders
|
|
$
|
0.16
|
|
$
|
0.04
|
|
$
|
(0.29
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Diluted:
|
|
|
|
|
|
|
|
|
|
|
Net
income (loss) attributable to common stockholders
|
|
$
|
0.13
|
|
$
|
0.04
|
|
$
|
(0.29
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
average number of shares outstanding:
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
6,042,646
|
|
|
5,146,422
|
|
|
5,024,643
|
|
Diluted
|
|
|
9,669,531
|
|
|
5,278,299
|
|
|
5,024,643
|
|
The
accompanying notes are an integral part of these consolidated financial
statements.
NATIONAL
HOLDINGS CORPORATION AND SUBSIDIARIES
CONSOLIDATED
STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
YEARS
ENDED SEPTEMBER 30, 2007, SEPTEMBER 30, 2006 AND SEPTEMBER 30,
2005
|
|
|
|
|
|
Additional
|
|
|
|
|
|
|
|
Preferred Stock
|
|
Common Stock
|
|
Paid-In
|
|
Accumulated
|
|
|
|
|
|
Shares
|
|
Amount
|
|
Shares
|
|
Amount
|
|
Capital
|
|
Deficit
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
BALANCE,
September 30, 2004
|
|
|
31,177
|
|
$
|
-
|
|
|
4,984,332
|
|
$
|
100,000
|
|
$
|
14,790,000
|
|
$
|
(12,961,000
|
)
|
$
|
1,929,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance
of series A preferred stock dividends
|
|
|
2,143
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
322,000
|
|
|
(322,000
|
)
|
|
-
|
|
Exercise
of warrants
|
|
|
-
|
|
|
-
|
|
|
21,546
|
|
|
-
|
|
|
19,000
|
|
|
-
|
|
|
19,000
|
|
Issuance
of restricted common stock:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Settlement
of arbitration
|
|
|
-
|
|
|
-
|
|
|
40,000
|
|
|
1,000
|
|
|
39,000
|
|
|
-
|
|
|
40,000
|
|
Warrants
issued in connection with debt
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
125,000
|
|
|
-
|
|
|
125,000
|
|
Net
loss
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
(1,183,000
|
)
|
|
(1,183,000
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
BALANCE,
September 30, 2005
|
|
|
33,320
|
|
|
-
|
|
|
5,045,878
|
|
|
101,000
|
|
|
15,295,000
|
|
|
(14,466,000
|
)
|
|
930,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance
of series A preferred stock dividends
|
|
|
1,996
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
300,000
|
|
|
(300,000
|
)
|
|
-
|
|
Payment
of series B preferred stock dividends
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
(46,000
|
)
|
|
(46,000
|
)
|
Issuance
of restricted common stock:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
From
private placement
|
|
|
-
|
|
|
-
|
|
|
159,090
|
|
|
3,000
|
|
|
170,000
|
|
|
-
|
|
|
173,000
|
|
Employee
bonuses
|
|
|
-
|
|
|
-
|
|
|
19,000
|
|
|
-
|
|
|
12,000
|
|
|
-
|
|
|
12,000
|
|
Issuance
of series B preferred stock
|
|
|
10,000
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
972,000
|
|
|
-
|
|
|
972,000
|
|
Warrants
issued in connection with debt
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
187,000
|
|
|
-
|
|
|
187,000
|
|
Amortization
of deferred compensation
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
20,000
|
|
|
-
|
|
|
20,000
|
|
Net
income
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
595,000
|
|
|
595,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
BALANCE,
September 30, 2006
|
|
|
45,316
|
|
|
-
|
|
|
5,223,968
|
|
|
104,000
|
|
|
16,956,000
|
|
|
(14,217,000
|
)
|
|
2,843,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance
of series A preferred stock dividends
|
|
|
2,537
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
317,000
|
|
|
(317,000
|
)
|
|
-
|
|
Payment
of series B preferred stock dividends
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
(107,000
|
)
|
|
(107,000
|
)
|
Exercise
of warrants
|
|
|
-
|
|
|
-
|
|
|
976,674
|
|
|
19,000
|
|
|
1,291,000
|
|
|
-
|
|
|
1,310,000
|
|
Exercise
of stock options
|
|
|
-
|
|
|
-
|
|
|
20,000
|
|
|
-
|
|
|
14,000
|
|
|
-
|
|
|
14,000
|
|
Conversion
of series A preferred stock
|
|
|
(303
|
)
|
|
-
|
|
|
24,240
|
|
|
1,000
|
|
|
(1,000
|
)
|
|
-
|
|
|
-
|
|
Conversion
of series B preferred stock
|
|
|
(10,000
|
)
|
|
-
|
|
|
1,333,333
|
|
|
27,000
|
|
|
(27,000
|
)
|
|
-
|
|
|
-
|
|
Conversion
of notes
|
|
|
-
|
|
|
-
|
|
|
1,024,413
|
|
|
21,000
|
|
|
1,003,000
|
|
|
-
|
|
|
1,024,000
|
|
Warrants
issued in connection with debt
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
194,000
|
|
|
-
|
|
|
194,000
|
|
Amortization
of deferred compensation
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
172,000
|
|
|
-
|
|
|
172,000
|
|
Net
income
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
1,372,000
|
|
|
1,372,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
BALANCE,
September 30, 2007
|
|
|
37,550
|
|
$
|
-
|
|
|
8,602,628
|
|
$
|
172,000
|
|
$
|
19,919,000
|
|
$
|
(13,269,000
|
)
|
$
|
6,822,000
|
|
The
accompanying notes are an integral part of these consolidated financial
statements.
NATIONAL
HOLDINGS CORPORATION AND SUBSIDIARIES
CONSOLIDATED
STATEMENTS OF CASH FLOWS
|
|
Years ended
|
|
|
|
September 30, 2007
|
|
September 30, 2006
|
|
September 30, 2005
|
|
CASH
FLOWS FROM OPERATING ACTIVITIES
|
|
|
|
|
|
|
|
Net
income (loss)
|
|
$
|
1,372,000
|
|
$
|
595,000
|
|
$
|
(1,183,000
|
)
|
Adjustments
to reconcile net income (loss) to net cash provided by (used in)
operating
activities
|
|
|
|
|
|
|
|
|
|
|
Depreciation
and amortization
|
|
|
148,000
|
|
|
162,000
|
|
|
145,000
|
|
Amortization
of deferred financing costs
|
|
|
30,000
|
|
|
4,000
|
|
|
-
|
|
Amortization
of note discount
|
|
|
262,000
|
|
|
189,000
|
|
|
163,000
|
|
Compensatory
element of common stock issuance
|
|
|
-
|
|
|
12,000
|
|
|
-
|
|
Compensatory
element of restricted common stock grant
|
|
|
5,000
|
|
|
-
|
|
|
-
|
|
Compensatory
element of common stock option issuances
|
|
|
167,000
|
|
|
19,000
|
|
|
-
|
|
Provision
for doubtful accounts
|
|
|
-
|
|
|
25,000
|
|
|
150,000
|
|
Issuance
of common stock in settlement of arbitration
|
|
|
-
|
|
|
-
|
|
|
40,000
|
|
Changes
in assets and liabilities
|
|
|
|
|
|
|
|
|
|
|
Deposits
with clearing organizations
|
|
|
(102,000
|
)
|
|
-
|
|
|
695,000
|
|
Receivables
from broker-dealers, clearing organizations and others
|
|
|
(4,049,000
|
)
|
|
(42,000
|
)
|
|
829,000
|
|
Securities
owned: marketable, at market value
|
|
|
(716,000
|
)
|
|
(309,000
|
)
|
|
(17,000
|
)
|
Securities
owned: non-marketable, at fair value
|
|
|
402,000
|
|
|
(402,000
|
)
|
|
-
|
|
Other
assets
|
|
|
(104,000
|
)
|
|
104,000
|
|
|
101,000
|
|
Payables
|
|
|
4,987,000
|
|
|
(111,000
|
)
|
|
(737,000
|
)
|
Securities
sold, but not yet purchased, at market
|
|
|
(85,000
|
)
|
|
118,000
|
|
|
11,000
|
|
Net
cash provided by operating activities
|
|
|
2,317,000
|
|
|
364,000
|
|
|
197,000
|
|
|
|
|
|
|
|
|
|
|
|
|
CASH
FLOWS FROM INVESTING ACTIVITIES
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchase
of fixed assets
|
|
|
(147,000
|
)
|
|
(217,000
|
)
|
|
(94,000
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Net
cash used in investing activities
|
|
|
(147,000
|
)
|
|
(217,000
|
)
|
|
(94,000
|
)
|
|
|
|
|
|
|
|
|
|
|
|
CASH
FLOWS FROM FINANCING ACTIVITIES
|
|
|
|
|
|
|
|
|
|
|
Net
proceeds from issuance of common stock and warrants
|
|
|
-
|
|
|
173,000
|
|
|
-
|
|
Net
proceeds from issuance of preferred stock
|
|
|
-
|
|
|
972,000
|
|
|
-
|
|
Net
proceeds from issuance of convertible notes payable
|
|
|
-
|
|
|
1,000,000
|
|
|
-
|
|
Net
proceeds from issuance of notes payable and warrants
|
|
|
1,000,000
|
|
|
-
|
|
|
-
|
|
Cash
payment of deferred financing costs
|
|
|
(22,000
|
)
|
|
(28,000
|
)
|
|
-
|
|
Payment
of notes payable
|
|
|
(850,000
|
)
|
|
(1,175,000
|
)
|
|
(75,000
|
)
|
Dividends
paid
|
|
|
(107,000
|
)
|
|
(46,000
|
)
|
|
-
|
|
Exercise
of stock options
|
|
|
14,000
|
|
|
-
|
|
|
-
|
|
Exercise
of warrants
|
|
|
1,311,000
|
|
|
-
|
|
|
19,000
|
|
Net
cash provided by (used in) financing activities
|
|
|
1,346,000
|
|
|
896,000
|
|
|
(56,000
|
)
|
|
|
|
|
|
|
|
|
|
|
|
NET
INCREASE IN CASH
|
|
|
3,516,000
|
|
|
1,043,000
|
|
|
47,000
|
|
|
|
|
|
|
|
|
|
|
|
|
CASH
BALANCE
|
|
|
|
|
|
|
|
|
|
|
Beginning
of the year
|
|
|
1,441,000
|
|
|
398,000
|
|
|
351,000
|
|
|
|
|
|
|
|
|
|
|
|
|
End
of the year
|
|
$
|
4,957,000
|
|
$
|
1,441,000
|
|
$
|
398,000
|
|
|
|
|
|
|
|
|
|
|
|
|
SUPPLEMENTAL
DISCLOSURES OF CASH FLOW INFORMATION
|
|
|
|
|
|
|
|
|
|
|
Cash
paid during the year for:
|
|
|
|
|
|
|
|
|
|
|
Interest
|
|
$
|
555,000
|
|
$
|
501,000
|
|
$
|
450,000
|
|
Series
B preferred stock dividends
|
|
$
|
107,000
|
|
$
|
46,000
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
SUPPLEMENTAL
DISCLOSURES OF NONCASH INVESTING AND FINANCING ACTIVITIES
|
|
|
|
|
|
|
|
|
|
|
Warrants
issued in connection with debt
|
|
$
|
194,000
|
|
$
|
187,000
|
|
$
|
125,000
|
|
Series
A preferred stock dividends
|
|
$
|
317,000
|
|
$
|
300,000
|
|
$
|
322,000
|
|
Common
stock issued to holders of convertible notes
|
|
$
|
1,024,000
|
|
$
|
-
|
|
$
|
-
|
|
The
accompanying notes are an integral part of these consolidated financial
statements.
NATIONAL
HOLDINGS CORPORATION
AND
SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER
30, 2007, SEPTEMBER 30, 2006 AND SEPTEMBER 30, 2005
National
Holdings Corporation (“National Holdings” or the
“Company”),
a
Delaware corporation organized in 1996, is
a
financial services organization, operating primarily through its wholly owned
subsidiary, National Securities Corporation (“National Securities”),
a
Washington corporation organized in 1947.
National
Securities conducts a national securities brokerage business through its main
offices in Seattle, Washington and New York, New York. The
Company’s business includes securities brokerage for individual and
institutional clients, market-making trading activities, asset management and
corporate finance services. National Securities is an introducing broker and
clears all transactions through clearing organizations on a fully disclosed
basis. On March 15, 2006, the Company changed its name from “Olympic Cascade
Financial Corporation” to “National Holdings Corporation.”
National
Holdings formed a new wholly owned subsidiary, National Insurance
Corporation,
a
Washington corporation (“National Insurance”) in
the
third quarter of fiscal year 2006. National Insurance provides fixed insurance
products to its clients, including life insurance, disability insurance, long
term care insurance and fixed annuities. National Insurance commenced business
operations during the second quarter of fiscal year 2007 that have been
diminimus.
During
fiscal year 2007, National Holdings formed three additional wholly owned
subsidiaries: National Securities Futures Corporation (“National Futures”),
National
Holdings Mortgage Corporation (“National Mortgage”), and National Group Benefits
Corporation (“National Group Benefits”), each a Washington corporation. None of
these three corporations have commenced active business operations.
2. |
SUMMARY
OF SIGNIFICANT ACCOUNTING
POLICIES
|
|
a.
|
Principles
of Consolidation
-
The consolidated financial statements include the accounts of National
Holdings and its wholly owned subsidiaries. All significant inter-company
accounts and transactions have been eliminated in
consolidation.
|
|
b.
|
Estimates - The
preparation of financial statements in conformity with accounting
principles generally accepted in the United States of America requires
management to make estimates and assumptions that affect the reported
amounts of assets and liabilities, disclosure of contingent assets
and
liabilities at the date of the financial statements, and the reported
amounts of revenues and expenses during the reporting period. Actual
results could differ from those
estimates.
|
|
c. |
Revenue
Recognition
-
Customer security transactions and the related commission income
and
expense are recorded as of the trade date. Investment banking revenues
include gains, losses, and fees, net of syndicate expenses, arising
from
securities offerings in which the Company acts as an underwriter
or agent.
Investment banking revenues also include fees earned from providing
financial advisory services. Investment banking management fees are
recorded on the offering date, sales concessions on the settlement
date,
and underwriting fees at the time the underwriting is completed and
the
income is reasonably determinable. Customers who are financing their
transaction on margin are charged interest. The Company’s margin
requirements are in accordance with the terms and conditions mandated
by
its clearing firms, National Financial Services LLC (“NFS”), Penson
Financial Services, Inc. (“Penson”) and Legent Clearing LLC (“Legent”).
The interest is billed on the average daily balance of the margin
account.
|
Net
dealer inventory gains result from securities transactions entered into for
the
account and risk of the Company. Net dealer inventory gains are recorded on
a
trade date basis. Transfer fees are charged for each customer’s security
transaction, and are recognized as of the trade date. Investment advisory fees
are account management fees for high net worth clients based on the amount
of
the assets under management. These fees are billed quarterly and recognized
at
such time that the service is performed and collection is probable.
The
Company generally acts as an agent in executing customer orders to buy or sell
listed and over-the-counter securities in which it does not make a market,
and
charges commissions based on the services the Company provides to its customers.
In executing customer orders to buy or sell a security in which the Company
makes a market, the Company may sell to, or purchase from, customers at a price
that is substantially equal to the current inter-dealer market price plus or
minus a mark-up or mark-down. The Company may also act as agent and execute
a
customer's purchase or sale order with another broker-dealer market-maker at
the
best inter-dealer market price available and charge a commission. Mark-ups,
mark-downs and commissions are generally priced competitively based on the
services it provides to its customers. In each instance the commission charges,
mark-ups or mark-downs, are in compliance with guidelines established by the
FINRA.
|
d. |
Cash
and Cash Equivalents
-
The Company considers all highly liquid temporary cash investments
with an
original maturity of three months or less when purchased, to be cash
equivalents. As of September 30, 2007, cash includes $5,000 of restricted
cash.
|
|
|
e.
|
Fixed
Assets
-
Fixed assets are recorded at cost. Depreciation is calculated using
the
straight-line method based on the estimated useful lives of the related
assets, which range from three to five years. Leasehold improvements
are
amortized using the straight-line method over the shorter of the
estimated
useful lives of the assets or the terms of the leases. Maintenance
and
repairs are charged to expense as incurred; costs of major additions
and
betterments that extend the useful life of the asset are capitalized.
When
assets are retired or otherwise disposed of, the costs and related
accumulated depreciation or amortization are removed from the accounts
and
any gain or loss on disposal is
recognized.
|
|
f. |
Income
Taxes
-
The Company recognizes deferred tax assets and liabilities based
on the
difference between the financial statements carrying amounts and
the tax
basis of assets and liabilities, using the effective tax rates in
the
years in which the differences are expected to reverse. A valuation
allowance related to deferred tax assets is also recorded when it
is more
likely than not that some or all of the deferred tax asset may not
be
realized.
|
|
g. |
Investment
in Limited Partnership -
The Company accounts for its investment in the limited partnership
in
accordance with the equity method of accounting. Such asset has been
included in other assets in the accompanying consolidated statements
of
financial condition. The Company has an investment in the limited
partnership for which the carrying value is $0 at September 30,
2007.
|
|
h.
|
Fair
Value of Financial Instruments -
The carrying amounts reported in the balance sheet for cash, receivables,
accounts payable, accrued expenses and other liabilities approximates
fair
value based on the short-term maturity of these
instruments.
|
|
i.
|
Impairment
of Long-Lived Assets - The
Company reviews long-lived assets for impairment whenever circumstances
and situations change such that there is an indication that the carrying
amounts may not be recovered. At September 30, 2007, the Company
has
determined that there has been no impairment of its long-lived
assets.
|
|
j.
|
Common
Stock Purchase Warrants - The
Company accounts for the issuance of common stock purchase warrants
issued
in connection with capital financing transactions in accordance with
the
provisions of Emerging Issues Task Force Issue No. 00-19 "Accounting
for
Derivative Financial Instruments Indexed to, and Potentially Settled
in, a
Company's Own Stock" (“EITF 00-19”). Based on the provisions of EITF
00-19, the Company classifies as equity any contracts that (i) require
physical settlement or net-share settlement or (ii) gives the Company
a
choice of net-cash settlement or settlement in its own shares (physical
settlement or net-share settlement). The Company classifies as assets
or
liabilities any contracts that (i) require net-cash settlement (including
a requirement to net-cash settle the contract if an event occurs
and if
that event is outside the control of the Company) or (ii) gives the
counterparty a choice of net-cash settlement or settlement in shares
(physical settlement or net-share
settlement).
|
The
Company assessed the classification of its derivative financial instruments
as
of September 30, 2007, which consist of common stock purchase warrants, and
determined that such derivatives meet the criteria for equity classification
under EITF 00-19.
|
k.
|
Convertible
Instruments - The
Company evaluates and accounts for conversion options embedded in
its
convertible instruments in accordance with SFAS No. 133
“Accounting for Derivative Instruments and Hedging Activities”
(“SFAS 133”) and EITF 00-19.
|
SFAS 133
generally provides three criteria that, if met, require companies to bifurcate
conversion options from their host instruments and account for them as free
standing derivative financial instruments in accordance with EITF 00-19. These
three criteria include circumstances in which (a) the economic
characteristics and risks of the embedded derivative instrument are not clearly
and closely related to the economic characteristics and risks of the host
contract, (b) the hybrid instrument that embodies both the embedded
derivative instrument and the host contract is not remeasured at fair value
under otherwise applicable generally accepted accounting principles with changes
in fair value reported in earnings as they occur and (c) a separate
instrument with the same terms as the embedded derivative instrument would
be
considered a derivative instrument subject to the requirements of SFAS 133.
SFAS 133 and EITF 00-19 also provide an exception to this rule when the
host instrument is deemed to be conventional (as that term is described in
the
implementation guidance to SFAS 133 and further clarified in EITF 05-2 “The
Meaning of “Conventional Convertible Debt Instrument” in EITF
00-19).
The
Company accounts for convertible instruments (when it has determined that the
embedded conversion options should not be bifurcated from their host
instruments) in accordance with the provisions of EITF 98-5 “Accounting for
Convertible Securities with Beneficial Conversion Features,” (“EITF 98-5”) and
EITF 00-27 “Application of EITF 98-5 to Certain Convertible Instruments.”
Accordingly, the Company records, when necessary, discounts to convertible
notes
for the intrinsic value of conversion options embedded in debt instruments
based
upon the differences between the fair value of the underlying common stock
at
the commitment date of the note transaction and the effective conversion price
embedded in the note. Debt discounts under these arrangements are amortized
over
the term of the related debt to their earliest date of redemption. The Company
also records when necessary deemed dividends for the intrinsic value of
conversion options embedded in preferred shares based upon the differences
between the fair value of the underlying common stock at the commitment date
of
the note transaction and the effective conversion price embedded in the
note.
The
Company evaluated the conversion option embedded in the convertible preferred
stock and determined, in accordance with the provisions of these statements,
that such conversion option does not meet the criteria requiring bifurcation
of
these instruments. The characteristics of the common stock that is issuable
upon
a holder’s exercise of the conversion option embedded in the convertible
preferred stock are deemed to be clearly and closely related to the
characteristics of the preferred shares (as that term is clarified in
paragraph 61.l. of the implementation guidance included in Appendix A
of SFAS 133). Additionally, the Company’s conversion options, if free
standing, would not be considered derivatives subject to the accounting
guidelines prescribed under SFAS 133.
|
l.
|
Net
Income (Loss) per Common Share
-
Basic net income (loss) per share is computed on the basis of the
weighted
average number of common shares outstanding. Diluted net income (loss)
per
share is computed on the basis of the weighted average number of
common
shares outstanding plus the potential dilution that could occur if
securities or other contracts to issue common shares were exercised
or
converted.
|
|
|
Years
Ended
|
|
|
|
September
30,
|
|
September
30,
|
|
September
30,
|
|
|
|
2007
|
|
2006
|
|
2005
|
|
Numerator:
|
|
|
|
|
|
|
|
|
|
|
Net
income (loss)
|
|
$
|
1,372,000
|
|
$
|
595,000
|
|
$
|
(1,183,000
|
)
|
Preferred
stock dividends
|
|
|
(409,000
|
)
|
|
(381,000
|
)
|
|
(290,000
|
)
|
Numerator
for basic earnings per share—net income (loss) attributable to common
stockholders - as reported
|
|
|
963,000
|
|
|
214,000
|
|
|
(1,473,000
|
)
|
Effect
of dilutive securities:
|
|
|
|
|
|
|
|
|
|
|
Series
A preferred stock
|
|
|
327,000
|
|
|
-
|
|
|
-
|
|
Numerator
for diluted earnings per share–net
income
(loss) attributable to common stockholders - as
adjusted
|
|
$
|
1,290,000
|
|
$
|
214,000
|
|
$
|
(1,473,000
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Denominator:
|
|
|
|
|
|
|
|
|
|
|
Denominator
for basic earnings per share—weighted average shares
|
|
|
6,042,646
|
|
|
5,146,422
|
|
|
5,024,643
|
|
Effect
of dilutive securities:
|
|
|
|
|
|
|
|
|
|
|
Assumed
conversion of Series A preferred stock
|
|
|
3,004,000
|
|
|
-
|
|
|
-
|
|
Stock
options
|
|
|
366,712
|
|
|
36,520
|
|
|
-
|
|
Warrants
|
|
|
256,173
|
|
|
95,357
|
|
|
-
|
|
Dilutive
potential common shares
|
|
|
3,626,885
|
|
|
131,877
|
|
|
-
|
|
Denominator
for diluted earnings per share—adjusted weighted-average shares and
assumed conversions
|
|
|
9,669,531
|
|
|
5,278,299
|
|
|
5,024,643
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income (loss) available to common stockholders
|
|
|
|
|
|
|
|
|
|
|
Basic:
|
|
$
|
0.16
|
|
$
|
0.04
|
|
$
|
(0.29
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Diluted:
|
|
$
|
0.13
|
|
$
|
0.04
|
|
$
|
(0.29
|
)
|
For
the
fiscal year ended September 30, 2006, 5,158,613 shares attributable to the
outstanding Series A and B Preferred Stock and convertible notes were excluded
from the calculation of diluted net income per share because their inclusion
would have been anti-dilutive. For the fiscal year ended September 30, 2005,
5,357,278 shares attributable to outstanding Series A Preferred Stock, stock
options and warrants were excluded from the net loss per share because their
inclusion would have been anti-dilutive.
|
|
m.
|
Stock-Based
Compensation
-
Prior to October 1, 2005, the Company accounted for employee stock
transactions in accordance with Accounting Principle Board, APB Opinion
No. 25, “Accounting for Stock Issued to Employees.” The Company had
adopted the pro forma disclosure requirements of Statement of Financial
Accounting Standards No. 123, “Accounting For Stock-Based
Compensation.”
|
|
|
|
Effective
October 1, 2005, the Company adopted FASB Statement of Financial
Accounting Standard (“SFAS”) No. 123R “Share Based Payment.”
This statement is a revision of SFAS Statement No. 123, and
supersedes APB Opinion No. 25, and its related implementation
guidance. SFAS 123R addresses all forms of share based payment (“SBP”)
awards including shares issued under employee stock purchase plans,
stock
options, restricted stock and stock appreciation rights. Under SFAS
123R,
SBP awards will result in a charge to operations that will be measured
at
fair value on the awards grant date, based on the estimated number
of
awards expected to vest over the service period. During fiscal years
2007 and 2006, the Company granted 1,120,000 and 170,000 stock options,
respectively, with a fair value of approximately $1,052,000 and $88,000,
respectively. A charge of $167,000 and $20,000 was recorded in fiscal
years 2007 and 2006, respectively, relating to the amortization of
the
fair value associated with these grants.
|
|
|
|
Additionally
in fiscal year 2007, the Company granted 50,000 shares of restricted
stock
with a fair value of $111,000. The fair value of the grant will be
charged
to the statement of operations over the four-year vesting period.
During
the fiscal year ended September 30, 2007 the Company recognized a
charge
of $5,000 for the amortization of this grant. During the fiscal year
ended
September 30, 2006, the Company issued 19,000 shares of common stock
with
a fair value of $12,000 to certain employees. The charge has been
included
in the statement of operations during the respective
period.
|
For
fiscal year 2005 the Company applied APB Opinion No. 25, “Accounting for
Stock Issued to Employees.” As required under SFAS No. 148,
“Accounting for Stock-based Compensation - Transition and Disclosure,” the
following table presents pro forma net income and basic and diluted earnings
per
share as if the fair value-based method had been applied to all awards during
that year.
|
|
Year
Ended
|
|
|
|
September
30,
|
|
|
|
2005
|
|
|
|
|
|
Net
loss attributable to common stockholders - as reported
|
|
$
|
(1,473,000
|
)
|
Stock-based
employee compensation cost determined under fair value method,
net of tax
effects
|
|
|
(869,000
|
)
|
Net
loss attributable to common stockholders - pro forma
|
|
$
|
(2,342,000
|
)
|
|
|
|
|
|
Loss
per share
|
|
|
|
|
|
|
|
|
|
Basic
loss per share:
|
|
|
|
|
Net
loss attributable to common stockholders - as reported
|
|
$
|
(0.29
|
)
|
Per
share stock-based employee compensation cost determined under
fair value
method, net of tax effects
|
|
|
(0.17
|
)
|
Net
loss attributable to common stockholders - pro forma
|
|
$
|
(0.46
|
)
|
|
|
|
|
|
Diluted
loss per share:
|
|
|
|
|
Net
loss attributable to common stockholders - as reported
|
|
$
|
(0.29
|
)
|
Per
share stock-based employee compensation cost determined under fair
value method, net of tax effects
|
|
|
(0.17
|
)
|
Net
loss attributable to common stockholders - pro forma
|
|
$
|
(0.46
|
)
|
The
Black-Scholes option valuation model was used to estimate the fair value of
the
options granted during the fiscal years ended September 30, 2007, 2006 and
2005.
The model includes subjective input assumptions that can materially affect
the
fair value estimates. The model was developed for use in estimating the fair
value of traded options that have no vesting restrictions and that are fully
transferable. For example, the expected volatility is estimated based on the
most recent historical period of time equal to the weighted average life of
the
options granted. Options issued under the Company's option plans have
characteristics that differ from traded options. In the Company's opinion,
this
valuation model does not necessarily provide a reliable single measure of the
fair value of its employee stock options. The principal assumptions used in
applying the Black-Scholes model along with the results from the model were
as
follows:
|
|
Years
Ended
|
|
|
|
September
30,
|
|
September
30,
|
|
September
30,
|
|
|
|
2007
|
|
2006
|
|
2005
|
|
Assumptions:
|
|
|
|
|
|
|
|
|
|
|
Risk-free
interest rate
|
|
|
4.40
|
%
|
|
4.40
|
%
|
|
3.15
|
%
|
|
|
|
|
|
|
|
|
|
|
|
Expected
life, in years
|
|
|
3.0
|
|
|
3.0
|
|
|
5.0
|
|
|
|
|
|
|
|
|
|
|
|
|
Expected
volatility
|
|
|
83
|
%
|
|
88
|
%
|
|
135
|
%
|
As
of
September 30, 2007, there was $1,060,000 of total unrecognized deferred
compensation costs related to share-based compensation arrangements. The Company
expects that future forfeitures will be diminimus
A
summary
of the status of the Company’s nonvested shares as of September 30, 2007, and
changes during the fiscal year then ended is presented below:
|
|
|
|
Weighted
|
|
|
|
|
|
Average
|
|
|
|
|
|
Grant
Date
|
|
Nonvested
Shares
|
|
Shares
|
|
Fair
Value
|
|
Nonvested
at September 30, 2006
|
|
|
75,000
|
|
$
|
0.33
|
|
|
|
|
|
|
|
|
|
Granted
|
|
|
945,000
|
|
$
|
0.96
|
|
|
|
|
|
|
|
|
|
Vested
|
|
|
(120,000
|
)
|
$
|
0.65
|
|
|
|
|
|
|
|
|
|
Expired
|
|
|
0
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
Nonvested
at September 30, 2007
|
|
|
900,000
|
|
$
|
0.95
|
|
|
n. |
Concentrations
of Credit Risk
-
The Company is engaged in trading and providing a broad range of
securities brokerage and investment services to a diverse group of
retail
and institutional clientele, as well as corporate finance and investment
banking services to corporations and businesses. Counterparties to
the
Company’s business activities include broker-dealers and clearing
organizations, banks and other financial institutions. The Company
uses
clearing brokers to process transactions and maintain customer accounts
on
a fee basis for the Company. The Company uses three clearing brokers
for
substantially all of its business. The Company permits the clearing
firms
to extend credit to its clientele secured by cash and securities
in the
client’s account. The Company’s exposure to credit risk associated with
the non-performance by its customers and counterparties in fulfilling
their contractual obligations can be directly impacted by volatile
or
illiquid trading markets, which may impair the ability of customers
and
counterparties to satisfy their obligations to the Company. The Company
has agreed to indemnify the clearing brokers for losses they incur
while
extending credit to the Company’s clients. It is the Company’s policy to
review, as necessary, the credit standing of its customers and each
counterparty. Amounts due from customers that are considered uncollectible
by the clearing broker are charged back to the Company by the clearing
broker when such amounts become determinable. Upon notification of
a
charge back, such amounts, in total or in part, are then either (i)
collected from the customers, (ii) charged to the broker initiating
the
transaction and included in other receivables in the accompanying
consolidated statements of financial condition, and/or (iii) charged
as an
expense in the accompanying consolidated statements of financial
condition, based on the particular facts and circumstances.
|
The
Company maintains cash with major financial institutions. The Federal Deposit
Insurance Corporation (“FDIC”) insures up to $100,000 at each institution. At
times such amounts may exceed the FDIC limits. At September 30, 2007 the
uninsured cash bank balance was $4,979,000. The Company believes it is not
exposed to any significant credit risks for cash.
|
o. |
Other
Receivables
-
The Company extends unsecured credit in the normal course of business
to
its registered representatives. The determination of the amount of
uncollectible accounts is based on the amount of credit extended
and the
length of time each receivable has been outstanding, as it relates
to each
individual registered representative. The allowance for doubtful
accounts
reflects the amount of loss that can be reasonably estimated by
management, and is included in other expenses in the accompanying
consolidated statements of
operations.
|
|
p. |
Advances
to Registered Representatives
-
Advances are given to certain registered representatives as an incentive
for their affiliation with National Securities. The representative
signs
an independent contractor agreement with National Securities for
a
specified term, typically a three-year period. The advance is then
amortized on a straight-line basis over the amount of time the
representative is obligated to be affiliated with National Securities,
and
is included in commissions expense in the accompanying consolidated
statements of operations. In the event a representative’s affiliation with
National Securities terminates prior to the fulfillment of their
contract,
the representative is required to repay the unamortized
balance.
|
|
q. |
Securities
Owned
-
Marketable securities which consist of publicly traded unrestricted
common
stock and bonds are valued at the closing price on the valuation
date.
Non-marketable securities which consist of non-tradable warrants
exercisable into freely trading common stock of public companies
are
carried at fair value as determined in good faith by
management.
|
|
r. |
Other
Assets
-
Other assets consist primarily of pre-paid expenses and lease
deposits.
|
|
s. |
Recently
Issued Accounting Standards -
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. 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.
|
In
June
2004, National Securities entered into an agreement with Fiserv Securities,
Inc.
(“Fiserv”) to clear its brokerage business. The conversion from First Clearing
Corporation, its former clearing firm, to Fiserv was completed in the first
week
of October 2004. As part of this transaction, Fiserv provided National
Securities with an $800,000 conversion assistance payment, $250,000 of which
was
paid upon execution of the clearing agreement, $250,000 of which was paid in
August 2004, and $300,000 of which was paid in October 2004. Such amounts were
recorded as a reduction in clearing fees expense in the respective
periods.
In
March
2005, NFS acquired the clearing business of Fiserv. In April 2005, National
Securities entered into a clearing agreement with NFS that became effective
in
June 2005. As part of this transaction, NFS provided National Securities with
a
$1.0 million conversion fee credit to reimburse the Company for the
transitional, incremental costs incurred by National Securities relating to
the
conversion of its clearing business to NFS. National Securities was paid
$250,000 in May 2005, and the remaining $750,000 was paid in July 2005. Such
amounts were recorded as a reduction in clearing fees expense (in accordance
with EITF 01-9 “Accounting for Consideration Given by a Vendor to a Customer
(including a Reseller of the Vendor’s Products)”) in the respective
periods.
In
the
first quarter of fiscal year 2007, NFS paid National Securities a $750,000
general business credit that is being amortized over an eight year period ending
November 2014, corresponding with the expiration date of the clearing agreement.
In the second quarter of fiscal year 2007, NFS provided National Securities
a
$250,000 clearing fee waiver that is being amortized over a two year period
ending December 2008, corresponding with the time period that certain
performance standards were to be achieved. 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 its clearing relationships has been beneficial to the
Company’s cost structure, liquidity and capital resources.
4. |
BROKER-DEALERS
AND CLEARING ORGANIZATIONS RECEIVABLES AND
PAYABLES
|
At
September 30, 2007 and 2006 the receivables of $4,739,000 and $3,548,000,
respectively, from broker-dealers and clearing organizations represent net
amounts due for fees and commissions. At September 30, 2007 and 2006, the
amounts payable to broker-dealers and clearing organizations of $1,115,000
and
$113,000, respectively, represent amounts payable for inventory purchases on
behalf of the Company and its customers.
An
analysis of other receivables and the allowance for uncollectible accounts
on
such receivables, for the fiscal years ended September 30, 2005, 2006 and 2007
is as follows:
|
|
Other
|
|
|
|
Net
|
|
|
|
Receivables
|
|
Allowance
|
|
Receivables
|
|
Balance,
September 30, 2004
|
|
$
|
1,739,000
|
|
$
|
(850,000
|
)
|
$
|
889,000
|
|
Additions
|
|
|
110,000
|
|
|
-
|
|
|
110,000
|
|
Collections
|
|
|
(364,000
|
)
|
|
-
|
|
|
(364,000
|
)
|
Provision
|
|
|
-
|
|
|
(150,000
|
)
|
|
(150,000
|
)
|
Write-offs
|
|
|
(632,000
|
)
|
|
632,000
|
|
|
-
|
|
Balance,
September 30, 2005
|
|
|
853,000
|
|
|
(368,000
|
)
|
|
485,000
|
|
Additions
|
|
|
343,000
|
|
|
-
|
|
|
343,000
|
|
Collections
|
|
|
(349,000
|
)
|
|
-
|
|
|
(349,000
|
)
|
Provision
|
|
|
-
|
|
|
(99,000
|
)
|
|
(99,000
|
)
|
Balance,
September 30, 2006
|
|
|
847,000
|
|
|
(467,000
|
)
|
|
380,000
|
|
Additions
|
|
|
513,000
|
|
|
-
|
|
|
513,000
|
|
Collections
|
|
|
(109,000
|
)
|
|
-
|
|
|
(109,000
|
)
|
Provision
|
|
|
-
|
|
|
-
|
|
|
-
|
|
Balance,
September 30, 2007
|
|
$
|
1,251,000
|
|
$
|
(467,000
|
)
|
$
|
784,000
|
|
6. |
ADVANCES
TO REGISTERED
REPRESENTATIVES
|
An
analysis of advances to registered representatives for the fiscal years ended
September 30, 2006 and 2007 is as follows:
Balance,
September 30, 2005
|
|
$
|
1,653,000
|
|
Advances
|
|
|
1,184,000
|
|
Amortization
of advances
|
|
|
(1,281,000
|
)
|
Balance,
September 30, 2006
|
|
|
1,556,000
|
|
Advances
|
|
|
3,860,000
|
|
Amortization
of advances
|
|
|
(1,406,000
|
)
|
Balance,
September 30, 2007
|
|
$
|
4,010,000
|
|
The
unamortized advances outstanding at September 30, 2007, 2006 and 2005
attributable to registered representatives who ended their affiliation with
National Securities prior to the fulfillment of their obligation was $134,000,
$32,000 and $44,000, respectively.
7. |
SECURITIES
OWNED AND SECURITIES SOLD, BUT NOT YET PURCHASED, AT
MARKET
|
The
following table shows the market values of the Company's securities owned
and
securities sold, but not yet purchased
as of
September 30, 2007 and 2006, respectively:
|
|
September
30, 2007
|
|
September
30, 2006
|
|
|
|
|
|
Securities
|
|
|
|
Securities
|
|
|
|
Securities
|
|
sold,
but not
|
|
Securities
|
|
sold,
but not
|
|
|
|
owned
|
|
yet
purchased
|
|
owned
|
|
yet
purchased
|
|
Corporate
stocks
|
|
$
|
972,000
|
|
$
|
-
|
|
$
|
459,000
|
|
$
|
162,000
|
|
Government
obligations
|
|
|
219,000
|
|
|
77,000
|
|
|
16,000
|
|
|
-
|
|
|
|
$
|
1,191,000
|
|
$
|
77,000
|
|
$
|
475,000
|
|
$
|
162,000
|
|
Securities
sold, but not yet purchased commit the Company to deliver specified securities
at predetermined prices. The transactions may result in market risk since,
to
satisfy the obligation, the Company must acquire the securities at market
prices, which may exceed the values reflected in the consolidated statements
of
financial condition.
Securities
owned, non-marketable, which consist of warrants that are not exercisable into
freely trading common stock of public companies, totaled $0 and $402,000 as
of
September 30, 2007 and 2006, respectively.
Fixed
assets as of September 30, 2007 and 2006, respectively, consist of the
following:
|
|
September
30, 2007
|
|
September
30, 2006
|
|
Estimated
Useful Lives
|
|
Office
machines
|
|
$
|
138,000
|
|
$
|
138,000
|
|
|
5
years
|
|
Furniture
and fixtures
|
|
|
186,000
|
|
|
160,000
|
|
|
5
years
|
|
Telephone
system
|
|
|
34,000
|
|
|
34,000
|
|
|
5
years
|
|
Electronic
equipment
|
|
|
699,000
|
|
|
596,000
|
|
|
3
years
|
|
Leasehold
improvements
|
|
|
280,000
|
|
|
262,000
|
|
|
Lesser
of terms of leases or useful lives
|
|
|
|
|
1,337,000
|
|
|
1,190,000
|
|
|
|
|
Less
accumulated depreciation and amortization
|
|
|
(1,033,000
|
)
|
|
(885,000
|
)
|
|
|
|
Fixed
assets - net
|
|
$
|
304,000
|
|
$
|
305,000
|
|
|
|
|
Depreciation
and amortization expense for the years ended September 30, 2007, 2006 and 2005
was $148,000, $162,000 and $145,000, respectively.
Other
assets as of September 30, 2007 and 2006, respectively, consist of the
following:
|
|
September
30, 2007
|
|
September
30, 2006
|
|
Pre-paid
expenses
|
|
$
|
292,000
|
|
$
|
203,000
|
|
Deposits
|
|
|
38,000
|
|
|
38,000
|
|
Deferred
financing costs
|
|
|
16,000
|
|
|
24,000
|
|
Other
|
|
|
50,000
|
|
|
35,000
|
|
Total
|
|
$
|
396,000
|
|
$
|
300,000
|
|
10. |
ACCOUNTS
PAYABLE, ACCRUED EXPENSES AND OTHER
LIABILITIES
|
Accounts
payable, accrued expenses and other liabilities as of September 30, 2007 and
2006, respectively, consist of the following:
|
|
September
30, 2007
|
|
September
30, 2006
|
|
Commissions
payable
|
|
$
|
5,128,000
|
|
$
|
1,993,000
|
|
Deferred
clearing fee credits
|
|
|
828,000
|
|
|
-
|
|
Telecommunications
vendors payable
|
|
|
366,000
|
|
|
291,000
|
|
Legal
payable
|
|
|
84,000
|
|
|
325,000
|
|
Deferred
rent payable
|
|
|
133,000
|
|
|
152,000
|
|
Other
vendors
|
|
|
1,368,000
|
|
|
1,182,000
|
|
Total
|
|
$
|
7,907,000
|
|
$
|
3,943,000
|
|
11. |
CONVERTIBLE
NOTES PAYABLE
|
In
January 2006, the Company completed a financing transaction that included 11%
convertible promissory notes in the principal amount of $1,000,000 that were
convertible into common stock at a price of $1.00 per share. Under a
conversion
option contained in the convertible
promissory notes the Company was entitled to convert the notes into common
stock
at any time if the following occur:
|
·
|
The
closing price of the common stock has equaled or exceeded $2.00 per
share
for 10 consecutive trading days and the trading volume exceeds 10,000
during that 10 day period or
|
|
·
|
The
closing price of the common stock has equaled or exceeded $3.00 per
share
for 10 consecutive trading days regardless of the trading volume,
and
|
|
·
|
The
shares of common stock into which the notes are convertible are then
covered by an effective registration
statement.
|
The
convertible promissory notes were to mature in January 2011. The Company granted
300,000 warrants to acquire shares of common stock to the note holders, and
the
fair value of the warrants was calculated using the Black-Scholes Option
Valuation Model. The Company recorded a debt discount of approximately $187,000
that was charged to interest expense over the life of the debt. Such
amortization has been included in “Interest” in the accompanying consolidated
financial statements. In June 2007, the Company exercised its conversion option
contained in its 11% convertible promissory notes, and 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 at September 30,
2006 of approximately $159,000 was expensed in fiscal year 2007 as “Interest” in
the accompanying consolidated financial statements.
The
following table summarizes convertible notes payable at September 30,
2006.
|
|
September 30,
|
|
|
|
2006
|
|
11%
convertible notes payable
|
|
$
|
1,000,000
|
|
Less:
Deferred debt discount
|
|
|
(159,000
|
)
|
|
|
$
|
841,000
|
|
The
Company incurred interest expense related to these convertible notes of $262,000
and $111,000 for the fiscal years ended September 30, 2007 and 2006,
respectively.
In
February 2004, the Company consummated a private offering of its securities
to a
limited number of accredited investors wherein the Company issued an aggregate
of $850,000 of three-year, 10% senior subordinated promissory notes to four
unaffiliated parties. The note holders received three-year warrants to purchase
an aggregate of 170,000 shares of the Company’s common stock at an exercise
price of $1.50 per share, with a fair value of approximately $143,000. The
Company amortized the total debt discount of $183,000 over the three-year term
of these promissory notes. Such amortization has been included in “Interest” in
the accompanying consolidated financial statements. These notes were repaid
in
full during the fiscal year ended September 30, 2007.
In
August
2005, upon the maturity of previously issued notes, the Company and two note
holders entered into new note agreements providing for $1.0
million of notes
with a maturity date of July 31, 2007, together with warrants having an
expiration date of July 31, 2007 to purchase, in the aggregate, 200,000 shares
of common stock at a price of $1.25 per share. The Company recorded a debt
discount of approximately $130,000 for the fair value of the warrants. The
Company amortized the total allocated fair value over the term of the notes.
Such
amortization has been included in “Interest” in the accompanying consolidated
financial statements. The
notes
had an interest rate of 9%. These
notes were repaid in full in January 2006 and the warrants were
exercised in July 2007.
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 is being charged to interest
expense over the life of the debt. Such amortization has been included in
“Interest” in the accompanying consolidated financial statements.
The
following table summarizes notes payable at September 30, 2007 and 2006,
respectively:
|
|
2007
|
|
September 30,
2006
|
|
2007
10% promissory notes
|
|
$
|
1,000,000
|
|
$
|
-
|
|
2004
10% promissory notes
|
|
|
-
|
|
|
850,000
|
|
|
|
|
1,000,000
|
|
|
850,000
|
|
|
|
|
(138,000
|
)
|
|
(45,000
|
)
|
|
|
$
|
862,000
|
|
$
|
805,000
|
|
The
notes
outstanding on September 30, 2007 mature in fiscal year 2009. The Company
incurred interest expense related to these notes of $173,000 and $133,000 for
the fiscal years ended September 30, 2007 and 2006, respectively.
13. |
SECURED
DEMAND NOTE / SUBORDINATED
BORROWINGS
|
Subordinated
borrowings represent a secured demand note that was entered into between
National Securities and a related party. National Securities is a registered
broker-dealer. The secured demand note was entered into in accordance with
the
form prescribed by the FINRA, and it is accounted for in accordance with
broker-dealer accounting SEC rule 15c3-1d. Accordingly, our balance sheet
includes both an asset (“Secured demand note”) and the corresponding liability
(“Subordinated borrowings”) in an identical amount. The secured demand note is
available to compute net capital under SEC rule 15c3-1. The borrowings are
subordinated to the claims of present and future creditors of the Company and
cannot be repaid where such repayment will cause the Company to fail to meet
its
minimum net capital requirements in accordance with SEC rule
15c3-1.
National
Securities entered into a secured demand note collateral agreement with an
employee of National Securities and a former Director of the Company, to borrow
securities that can be used by the Company for collateral agreements. These
securities have been pledged through an unrelated broker-dealer, and have a
borrowing value totaling $500,000. This note bears interest at 5% per annum
with
interest paid monthly. In February 2007, upon the maturity of the previously
issued note, National Securities and the holder entered into a new $1.0 million
secured demand note collateral agreement with a maturity date of
March 1,
2008.
In
May
2007, the Company paid $500,000 of this secured demand note, and the remaining
balance of $500,000 is due at maturity. Certain
of the securities, totaling $163,000, have been pledged as collateral for
security deposits for office leases under two letters of credit. No amounts
have
been drawn on either of these letters of credit. In addition, $249,000 of such
securities are being maintained in a separate account and designated for a
security deposit for an office lease. The holder also entered into a warrant
agreement to
purchase 150,000 shares of common stock at a price of $1.25 per share, with
an expiration
date of July 31, 2008.
The
income tax provision (benefit) consists of:
|
|
Years Ended
|
|
|
|
September
30, 2007
|
|
September
30, 2006
|
|
September
30, 2005
|
|
Federal
income tax provision (benefit)
|
|
$
|
-
|
|
$
|
-
|
|
$
|
-
|
|
State
income tax provision (benefit)
|
|
|
-
|
|
|
-
|
|
|
-
|
|
Change
in valuation allowance
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
|
$ |
- |
|
$
|
-
|
|
$
|
-
|
|
The
primary difference between income tax expense at the federal statutory rate
and
actual tax expense is due to the utilization of net operating loss carryovers.
The Company did not record a provision for income taxes due to the utilization
of net operating losses.
The
income tax provision (benefit) related to income (loss) from continuing
operations before income taxes and extraordinary items varies from the federal
statutory rate as follows:
|
|
Years Ended
|
|
|
|
September 30,
2007
|
|
September 30,
2006
|
|
September 30,
2005
|
|
Statutory
federal rate
|
|
$
|
524,000
|
|
$
|
168,000
|
|
$
|
(402,000
|
)
|
State
income taxes net of federal income tax benefit
|
|
|
93,000
|
|
|
30,000
|
|
|
(35,000
|
)
|
Losses
for which no benefit is provided
|
|
|
-
|
|
|
-
|
|
|
437,000
|
|
Utilization
of net operating loss carryforwards
|
|
|
(617,000
|
)
|
|
(198,000
|
)
|
|
-
|
|
|
|
$ |
- |
|
$
|
-
|
|
$
|
-
|
|
Significant
components of the Company’s deferred tax assets that are included in other
assets in the accompanying financial statements are as follows:
|
|
September 30,
2007
|
|
September 30,
2006
|
|
Deferred
tax assets:
|
|
|
|
|
|
|
|
Net
operating loss carryforwards
|
|
$
|
3,781,000
|
|
$
|
4,398,000
|
|
Reserves
for uncollectible receivables
|
|
|
150,000
|
|
|
183,000
|
|
Other
temporary differences
|
|
|
129,000
|
|
|
69,000
|
|
Total
deferred tax assets
|
|
|
4,060,000
|
|
|
4,650,000
|
|
Deferred
tax liability:
|
|
|
|
|
|
|
|
Other
temporary differences
|
|
|
(2,000
|
)
|
|
(161,000
|
)
|
Deferred
tax asset
|
|
|
4,058,000
|
|
|
4,489,000
|
|
Valuation
allowance
|
|
|
(4,058,000
|
)
|
|
(4,489,000
|
)
|
Net
deferred tax asset
|
|
$
|
-
|
|
$
|
-
|
|
At
September 30, 2007, the Company had available net operating loss carryovers
of
approximately $9.5 million that may be applied against future taxable income
and
expires at various dates through 2025, subject to certain limitations. The
Company has a deferred tax asset arising substantially from the benefits of
such
net operating loss deduction and has recorded a valuation allowance for the
full
amount of this deferred tax asset since it is more likely than not that some
or
all of the deferred tax asset may not be realized. The valuation allowance
for
the deferred tax asset decreased $431,000 and increased $219,000 during the
fiscal years ended September 30, 2007 and 2006, respectively. The net change
in
the valuation allowance is due principally to the net operating loss carryovers,
reserve for uncollectible accounts and other temporary and permanent
differences.
Leases
- As of
September 30, 2007, the Company leases office space and equipment in various
states expiring at various dates through 2012 and is committed under operating
leases for future minimum lease payments as follows:
Fiscal Year Ending
|
|
|
|
|
|
|
|
2008
|
|
$
|
1,556,000
|
|
2009
|
|
|
584,000
|
|
2010
|
|
|
562,000
|
|
2011
|
|
|
579,000
|
|
2012
|
|
|
443,000
|
|
Thereafter
|
|
|
-
|
|
|
|
$
|
3,724,000
|
|
The
totals amount of rent payable under the leases is recognized on a straight
line
basis over the term of the leases. As of September 30, 2007 and September 30,
2006, the Company has recognized deferred rent payable of $133,000 and $152,000,
respectively (See Note 10). Rental expense under all operating leases for the
years ended September 30, 2007, September 30, 2006 and September 30, 2005 was
$1,781,000, $1,901,000 and $1,976,000, respectively.
Guarantees –
The Company has guaranteed a lease of one of its branch offices, in the amount
of $25,000 at September 30, 2007. The Company has determined that the fair
value
of the guarantee to be diminimus.
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,
FINRA
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. As of September 30, 2007, the outcome of this
arbitration is undeterminable and accordingly the Company has not established
a
provision for this matter.
The
Company is also a defendant in various other arbitrations and administrative
proceedings, lawsuits and claims seeking
in the aggregate damages of approximately $1,000,000. The Company
believes
such claims are substantially without merit, and estimates that its liability,
primarily for attorney representation, 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 September 30, 2007 and 2006, is $62,000 and $241,000 (primarily
legal fees), respectively, and
have
been included in “Accounts Payable, Accrued Expenses and Other Liabilities” in
the accompanying consolidated statements of financial condition.
The
Company has included in “Professional fees” litigation and other FINRA related
expenses of $1,444,000, $799,000 and $790,000 for the fiscal years ended
September 30, 2007, 2006 and 2005, respectively.
Shares
Authorized –
The Company’s authorized number of shares of common stock is 30,000,000, and its
authorized number of shares of preferred stock is 200,000. The number of
authorized shares of preferred stock designated as Series A is
50,000.
Common
Stock –
During the fiscal year ended September 30, 2007, the Company granted 50,000
shares of restricted stock with a fair value of $111,000. The fair value of
the
grant will be charged to the statement of operations over the four-year vesting
period. During the fiscal year ended September 30, 2007 the Company recognized
a
charge of $5,000 for the amortization of this grant.
During
the fiscal year ended September 30, 2006, the Company issued 19,000 shares
of
common stock with a fair value of $12,000 to certain employees. The charge
has
been included in the statement of operations during the respective
period.
In
March
2006, the Company sold and issued 159,090 shares of the Company’s common stock
to an unaffiliated party for $175,000
in a
private placement.
The
proceeds from the private placement were used to retire $175,000 of the
Company’s promissory notes that were due to mature in January 2007.
During
the fiscal year ended September 30, 2005, the Company issued 40,000 shares
of
common stock with a fair value of $40,000 for the settlement of an arbitration.
The charge has been included in the statement of operations during the
respective period.
Series
A Convertible Preferred Stock –
Each Series A convertible preferred stock is convertible into 80 shares of
common stock ($1.25 per share of common). The holders are entitled to receive
dividends on a quarterly basis at a rate of 9% per annum, per share. Such
dividends are cumulative and accumulate whether or not declared by the Company’s
Board of Directors, but are payable only when and if declared by the Company’s
Board of Directors.
During
the years ended September 30, 2007, 2006 and 2005, the Company’s Board of
Directors declared in-kind dividends in the aggregate of 2,537, 1,996 and 2,143
shares of Series A preferred stock, in payment of approximately $317,000,
$300,000 and $322,000, respectively for dividends accumulated through March
31
of each year. The Company did not incur an additional charge for the in-kind
dividends as the conversion price of the preferred stock exceeded the market
price of the common stock underlying the conversion feature. As of September
30,
2007 and 2006, the amount of accumulated dividends for the Company’s 37,550 and
33,516 issued and outstanding shares of Series A preferred stock was
approximately $169,000 and $159,000, respectively.
During
the fiscal year ended September
30, 2007 a
holder
of the Series A convertible preferred stock converted 303 shares of preferred
stock into 24,240 shares of common stock.
Series
B Convertible Preferred Stock –
In
January 2006, the Company completed a
financing transaction under which investors made a $2.0 million investment
in
the Company by purchasing an aggregate of the following:
|
·
|
$1.0
million
for 10,000 shares of the Company’s Series B Convertible Preferred Stock
and,
|
|
·
|
11%
convertible promissory notes in the principal amount of $1.0
million,
which
were convertible into Common Stock at a price of $1.00 per
share
with warrants
to purchase an aggregate of 300,000 shares of Common Stock at an
exercise
price of $1.00 per share (See Note
11).
|
The
holders of the Series B Preferred Stock were entitled to dividends of 10% per
annum, and each share of preferred stock was convertible into 133 shares of
common stock ($.75 per share of common). Dividends
were cumulative and were payable only when declared by the Company’s Board of
Directors. Upon the issuance of the Series
B
Preferred Stock, the Company did not incur an additional charge for any
beneficial conversion features as the conversion price of
the
preferred stock
exceeded
the market price
of the
common stock underlying the conversion feature.
During
the year ended September 30, 2007 and 2006, the Company declared and paid cash
dividends on its Series B convertible preferred stock of $82,000 and $46,000,
respectively.
Under
a
conversion
option contained in its Series B preferred
stock the Company was entitled to convert the preferred stock into common stock
at a conversion price of $0.70 per share at any time if the following
occur:
|
·
|
The
closing price of the common stock has equaled or exceeded $1.80 per
share
for 30 consecutive trading days and the trading volume exceeds 10,000
during that 30 day period or
|
|
·
|
The
closing price of the common stock has equaled or exceeded $3.00 per
share
for 30 consecutive trading days regardless of the trading volume,
and
|
|
·
|
The
shares of common stock into which the Series B Convertible Preferred
Stock
are convertible are then covered by an effective registration
statement.
|
In
the
fourth quarter of fiscal year 2007, the
Company exercised its conversion option and issued 1,333,333 shares of common
stock for the retirement of the
Series B
convertible preferred stock.
Accordingly, the Company is no
longer
obligated to pay dividends on the Series B convertible preferred
stock.
Stock
Options –
The Company’s stock option plans provide for the granting of stock options to
certain key employees, directors and investment executives. Generally, options
outstanding under the Company’s stock option plan are granted at prices equal to
or above the market value of the stock on the date of grant, vest either
immediately or ratably over up to five years, and expire five years subsequent
to award.
In
February 2005, the Company issued 150,000 options to employees to purchase
common stock. The options vested immediately at the date of the grant, have
a
5-year life and are exercisable at prices ranging from $1.25 to $1.375 per
share. Prior to October 1, 2005, the Company applied APB Opinion No. 25,
“Accounting for Stock Issued to Employees” and accordingly did not record a
charge for the options granted to employees.
In
February 2005, prior to the adoption of SFAS No. 123R on October 1, 2005, the
Company modified the terms of 522,000 existing options by restating the exercise
price to a range from $1.25 to $1.375 and fully accelerated the vesting period
for these options. Accordingly, the Company did not incur an additional charge
for accelerating the vesting of these options.
In
the
fiscal year ended September 30, 2006, the Company issued options to purchase
170,000 shares of its common stock. The options vest over periods from six
months to two years, have a 5-year life and are exercisable at prices from
$1.00
to $1.35 per share. The fair value of the options was $88,000, and $20,000
and
$30,000 was charged to operations in the fiscal years ended September 2006
and
2007, respectively.
In
the
fiscal year ended September 30, 2007, the Company issued options to purchase
1,120,000 shares of its common stock. The options vest over periods from six
months to four years, have a 5-year life and are exercisable at prices from
$1.30 to $2.50 per share. The fair value of the options was $1,052,000 and
$137,000 was charged to operations in the fiscal year ended September
2007.
In
March
2006, the Company’s shareholders approved the 2006 stock option plan that
reserved 1,500,000 shares of common stock for issuance of options granted under
such plan. A summary of the status of the Company’s stock options outstanding at
September 30, 2007 is in the tables presented below.
|
|
Options Outstanding
|
|
Options Exercisable
|
|
Range of
Exercise
Prices
|
|
Number
Outstanding
|
|
Weighted
Average
Remaining
Contractual
Life
|
|
Weighted
Average
Exercise
Prices
|
|
Number
Exercisable
|
|
Weighted
Average
Exercise
Prices
|
|
$0.40-$1.00
|
|
|
130,000
|
|
|
2.57
|
|
$
|
0.90
|
|
|
105,000
|
|
$
|
0.88
|
|
$1.25-$1.375
|
|
|
877,000
|
|
|
2.79
|
|
$
|
1.32
|
|
|
802,000
|
|
$
|
1.32
|
|
$1.55-$1.705
|
|
|
420,000
|
|
|
4.45
|
|
$
|
1.57
|
|
|
120,000
|
|
$
|
1.57
|
|
$2.00-$2.50
|
|
|
580,000
|
|
|
4.56
|
|
$
|
2.59
|
|
|
80,000
|
|
$
|
2.33
|
|
|
|
|
2,007,000
|
|
|
|
|
|
|
|
|
1,107,000
|
|
|
|
|
|
|
|
|
Weighted
|
|
Aggregate
|
|
|
|
|
|
Average Price
|
|
Intrinsic
|
|
|
|
Outstanding
|
|
Per Share
|
|
Value
|
|
Balance,
September 30, 2004
|
|
|
1,025,150
|
|
$
|
3.47
|
|
|
|
|
Granted
|
|
|
672,000
|
|
$
|
1.32
|
|
|
|
|
Forfeitures
|
|
|
(903,483
|
)
|
$
|
3.73
|
|
|
|
|
Balance,
September 30, 2005
|
|
|
793,667
|
|
$
|
1.35
|
|
$
|
-
|
|
|
|
|
- |
|
|
|
|
|
|
|
Granted
|
|
|
170,000
|
|
$
|
1.14
|
|
|
|
|
Forfeitures
|
|
|
(31,667
|
)
|
$
|
1.58
|
|
|
|
|
Balance,
September 30, 2006
|
|
|
932,000
|
|
$
|
1.30
|
|
$
|
56,000
|
|
Granted
|
|
|
1,120,000
|
|
$
|
1.88
|
|
|
|
|
Exercised
|
|
|
(20,000
|
)
|
$
|
0.72
|
|
|
|
|
Forfeitures
|
|
|
(25,000
|
)
|
$
|
2.00
|
|
|
|
|
Balance,
September 30, 2007
|
|
|
2,007,000
|
|
$
|
1.62
|
|
$
|
2,359,000
|
|
As
of
September 30, 2007, the aggregate intrinsic value of the Company’s outstanding
and exercisable options was $2,359,000 and $1,574,000,
respectively.
Warrants –
In April 2005, in connection with the resignation of the former chairmen of
the
Company, the Company issued to his designee, a three-year warrant to purchase
50,000 shares of the Company’s common stock at $1.25 per share. The warrants
were fully vested. Prior to October 1, 2005, the Company applied APB Opinion
No. 25, “Accounting for Stock Issued to Employees” and accordingly did not
record a charge for the warrant that was granted.
In
January 2006, as further discussed in Notes 11 and 17, the Company completed
a
financing transaction that included five-year warrants to purchase 300,000
shares of the Company’s common stock at $1.00 per share.
In
February 2007, as further discussed in Note 12, the Company completed a
financing transaction that included five-year warrants to purchase 250,000
shares of the Company’s common stock at $1.40 per share.
During
the years ended September 30, 2007 and 2005 the warrant holders exercised
976,674 and 21,546 of their warrants and provided cash proceeds to the Company
of $1,311,000 and $20,000, respectively. No warrants were exercised during
the
year ended September 30, 2006.
The
following tables summarize information about warrants outstanding at September
30, 2007.
Warrants
|
|
Shares
|
|
Weighted Average
Exercise Price
|
|
Exercisable
|
|
Outstanding
at September 30, 2004
|
|
|
2,325,076
|
|
$
|
1.36
|
|
|
2,325,076
|
|
Granted
|
|
|
50,000
|
|
$
|
1.25
|
|
|
|
|
Exercised
|
|
|
(21,546
|
)
|
$
|
0.93
|
|
|
|
|
Expired
|
|
|
(11,250
|
)
|
$
|
3.61
|
|
|
|
|
Outstanding
at September 30, 2005
|
|
|
2,342,280
|
|
$
|
1.36
|
|
|
2,342,280
|
|
Granted
|
|
|
300,000
|
|
$
|
1.00
|
|
|
|
|
Expired
|
|
|
(76,923
|
)
|
$
|
1.25
|
|
|
|
|
Outstanding
at September 30, 2006
|
|
|
2,565,357
|
|
$
|
1.28
|
|
|
2,565,357
|
|
Granted
|
|
|
250,000
|
|
$
|
1.40
|
|
|
|
|
Exercised
|
|
|
(976,674
|
)
|
$
|
1.34
|
|
|
|
|
Expired
|
|
|
(1,088,683
|
)
|
$
|
1.30
|
|
|
|
|
Outstanding
at September 30, 2007
|
|
|
750,000
|
|
$
|
1.20
|
|
|
750,000
|
|
Warrants
Outstanding and Exercisable
|
|
|
|
Exercise Prices
|
|
Number
Outstanding
|
|
Weighted Average
Remaining
Contractual Life
|
|
Weighted Average
Exercise Prices
|
|
$1.00
|
|
|
300,000
|
|
|
3.28
|
|
$
|
1.00
|
|
$1.25
|
|
|
50,000
|
|
|
0.5
|
|
$
|
1.25
|
|
$1.25
|
|
|
150,000
|
|
|
0.83
|
|
$
|
1.25
|
|
$1.40
|
|
|
250,000
|
|
|
4.42
|
|
$
|
1.40
|
|
|
|
|
750,000
|
|
|
|
|
|
|
|
As
of
September 30, 2007, the aggregate intrinsic value of the Company’s outstanding
and exercisable warrants was $1,200,000.
18. |
NET
CAPITAL REQUIREMENTS
|
National
Securities, as a registered broker-dealer, is subject to the SEC’s Uniform Net
Capital Rule 15c3-1 that requires the maintenance of minimum net capital.
National Securities has elected to use the alternative standard method permitted
by the rule. This requires that National Securities maintain minimum net capital
equal to the greater of $250,000 or a specified amount per security based on
the
bid price of each security for which National Securities is a market maker.
At
September 30, 2007, National Securities’ net capital exceeded the requirement by
$2,134,000.
Advances,
dividend payments and other equity withdrawals from its subsidiaries are
restricted by the regulations of the SEC, and other regulatory agencies. These
regulatory restrictions may limit the amounts that a subsidiary may dividend
or
advance to the Company.
National
Securities
has a
defined 401(k) profit sharing plan (the “Plan”) that covers substantially all of
its employees. Under the terms of the Plan, employees can elect to defer up
to
25% of eligible compensation, subject to certain limitations, by making
voluntary contributions to the Plan. The Company’s annual contributions are made
at the discretion of the Board of Directors. During the fiscal years ended
September 30, 2007, 2006 and 2005, the Company made no contributions to the
Plan.
In
November 2007, the Company entered into a definitive merger agreement vFinance,
Inc.,
a
publicly traded company who’s wholly owned subsidiary is also a registered
broker-dealer with a similar business to National Securities. The
merger agreement is subject to numerous conditions, including: execution of
definitive transaction documents, compliance with state and federal securities
laws and regulations, the completion of an equity financing with gross proceeds
of at least $3.0 million, and corporate, shareholder and regulatory approvals.
However, no
assurance can be given that the Company will consummate the merger with
vFinance,
Inc.
21. |
UNAUDITED
QUARTERLY DATA
|
Selected
Quarterly Financial Data (Dollars in thousands, except per share
data)
|
|
December
|
|
March
|
|
June
|
|
September
|
|
|
|
31, 2005
|
|
31, 2006
|
|
30, 2006
|
|
30, 2006
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
$
|
13,691
|
|
$
|
18,787
|
|
$
|
13,984
|
|
$
|
12,265
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income (loss)
|
|
$
|
259
|
|
$
|
424
|
|
$
|
152
|
|
$
|
(240
|
)
|
Preferred
stock dividends
|
|
|
(76
|
)
|
|
(95
|
)
|
|
(104
|
)
|
|
(106
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income (loss) attributable to common stockholders
|
|
$
|
183
|
|
$
|
329
|
|
$
|
48
|
|
$
|
(346
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
(loss) per common share - Basic
|
|
$
|
0.04
|
|
$
|
0.06
|
|
$
|
0.01
|
|
$
|
(0.07
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
(loss) per common share - Diluted
|
|
$
|
0.04
|
|
$
|
0.04
|
|
$
|
0.01
|
|
$
|
(0.07
|
)
|
|
|
December
|
|
March
|
|
June
|
|
September
|
|
|
|
31, 2006
|
|
31, 2007
|
|
30, 2007
|
|
30, 2007
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
$
|
14,286
|
|
$
|
17,615
|
|
$
|
20,229
|
|
$
|
20,689
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income (loss)
|
|
$
|
(85
|
)
|
$
|
576
|
|
$
|
1,561
|
|
$
|
(680
|
)
|
Preferred
stock dividends
|
|
|
(105
|
)
|
|
(103
|
)
|
|
(109
|
)
|
|
(92
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income (loss) attributable to common stockholders
|
|
$
|
(190
|
)
|
$
|
473
|
|
$
|
1,452
|
|
$
|
(772
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
(loss) per common share - Basic
|
|
$
|
(0.04
|
)
|
$
|
0.09
|
|
$
|
0.26
|
|
$
|
(0.10
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
(loss) per common share - Diluted
|
|
$
|
(0.04
|
)
|
$
|
0.05
|
|
$
|
0.14
|
|
$
|
(0.10
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
(loss) per share for each quarter was computed independently using the
weighted-average number of shares outstanding during the quarter. However,
income (loss) per share for the year was computed using the weighted-average
number of shares outstanding during the year. As a result, the sum of the income
(loss) per share for the four quarters may not equal the full year income (loss)
per share. The Company realized a majority of its investment banking revenue
in
the second and third quarters of fiscal year 2007. In the fourth quarter of
fiscal year 2007, the Company incurred significant costs related to the
expansion of its business operations, including the
recruitment of new registered representatives.
22. |
FINANCIAL
INFORMATION - NATIONAL HOLDINGS CORPORATION
|
National
Holdings was organized in 1996 and began operations on February 6, 1997. The
following National Holdings (parent company only) financial information should
be read in conjunction with the other notes to the consolidated financial
statements.
STATEMENTS
OF FINANCIAL CONDITION
|
|
September
30,
|
|
September
30,
|
|
|
|
2007
|
|
2006
|
|
ASSETS
|
|
Cash
|
|
$
|
189,000
|
|
$
|
134,000
|
|
Investment
in subsidiaries
|
|
|
7,527,000
|
|
|
4,309,000
|
|
Other
assets
|
|
|
92,000
|
|
|
252,000
|
|
|
|
$
|
7,808,000
|
|
$
|
4,695,000
|
|
|
|
|
|
|
|
|
|
LIABILITIES
AND STOCKHOLDERS' EQUITY
|
|
|
|
|
|
|
|
|
|
Accounts
payable, accrued expenses
|
|
|
|
|
|
|
|
and
other liabilities
|
|
$
|
124,000
|
|
$
|
206,000
|
|
Convertible
notes payable
|
|
|
862,000
|
|
|
841,000
|
|
Notes
payable
|
|
|
-
|
|
|
805,000
|
|
|
|
|
986,000
|
|
|
1,852,000
|
|
Stockholders'
equity
|
|
|
6,822,000
|
|
|
2,843,000
|
|
|
|
$
|
7,808,000
|
|
$
|
4,695,000
|
|
STATEMENTS
OF OPERATIONS
|
|
Years ended
|
|
|
|
September 30,
|
|
September 30,
|
|
September 30,
|
|
|
|
2007
|
|
2006
|
|
2005
|
|
Operating
expenses
|
|
$
|
(1,056,000
|
)
|
$
|
(1,017,000
|
)
|
$
|
(1,247,000
|
)
|
Other
income (expense)
|
|
|
|
|
|
|
|
|
|
|
Gain
on investment
|
|
|
38,000
|
|
|
192,000
|
|
|
-
|
|
Gain
on investment in subsidiaries
|
|
|
2,390,000
|
|
|
1,420,000
|
|
|
64,000
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income (loss) before income tax
|
|
$
|
1,372,000
|
|
$
|
595,000
|
|
$
|
(1,183,000
|
)
|
STATEMENTS
OF CASH FLOWS
|
|
Years ended
|
|
|
|
September 30, 2007
|
|
September 30, 2006
|
|
September 30, 2005
|
|
|
|
|
|
|
|
|
|
CASH
FLOWS FROM OPERATING ACTIVITIES
|
|
|
|
|
|
|
|
|
|
|
Net
income (loss)
|
|
$
|
1,372,000
|
|
$
|
595,000
|
|
$
|
(1,183,000
|
)
|
Adjustments
to reconcile net income (loss) to net cash provided by (used in)
operating
activities (Gain) loss on investment in subsidiaries
|
|
|
(2,315,000
|
)
|
|
(1,424,000
|
)
|
|
(157,000
|
)
|
Amortization
of deferred financing costs
|
|
|
30,000
|
|
|
4,000
|
|
|
-
|
|
Amortization
of note discount
|
|
|
261,000
|
|
|
189,000
|
|
|
163,000
|
|
Compensatory
element of common stock issuance
|
|
|
-
|
|
|
12,000
|
|
|
-
|
|
Compensatory
element of restricted common stock grant
|
|
|
5,000
|
|
|
-
|
|
|
-
|
|
Compensatory
element of common stock option issuances
|
|
|
29,000
|
|
|
19,000
|
|
|
-
|
|
Issuance
of common stock in settlement of arbitration
|
|
|
-
|
|
|
-
|
|
|
40,000
|
|
Changes
in assets and liabilities
|
|
|
-
|
|
|
(154,000
|
)
|
|
1,021,000
|
|
Net
cash provided by (used in) operating activities
|
|
|
(618,000
|
)
|
|
(759,000
|
)
|
|
(116,000
|
)
|
|
|
|
|
|
|
|
|
|
|
|
CASH
FLOWS FROM INVESTING ACTIVITIES
|
|
|
|
|
|
|
|
|
|
|
(Capital
contributions to) advances from subsidiary - net
|
|
|
(698,000
|
)
|
|
(5,000
|
)
|
|
17,000
|
|
Net
cash provided by (used in) investing activities
|
|
|
(698,000
|
)
|
|
(5,000
|
)
|
|
17,000
|
|
|
|
|
|
|
|
|
|
|
|
|
CASH
FLOWS FROM FINANCING ACTIVITIES
|
|
|
|
|
|
|
|
|
|
|
Net
proceeds from issuance of common stock and warrants
|
|
|
-
|
|
|
173,000
|
|
|
-
|
|
Net
proceeds from issuance of preferred stock
|
|
|
-
|
|
|
972,000
|
|
|
-
|
|
Net
proceeds from issuance of convertible notes payable
|
|
|
-
|
|
|
1,000,000
|
|
|
-
|
|
Net
proceeds from issuance of notes payable and warrants
|
|
|
1,000,000
|
|
|
-
|
|
|
-
|
|
Cash
payment of deferred financing costs
|
|
|
(22,000
|
)
|
|
(28,000
|
)
|
|
-
|
|
Payments
of notes payable
|
|
|
(850,000
|
)
|
|
(1,175,000
|
)
|
|
(75,000
|
)
|
Dividends
paid
|
|
|
(82,000
|
)
|
|
(46,000
|
)
|
|
-
|
|
Exercise
of stock options
|
|
|
14,000
|
|
|
-
|
|
|
-
|
|
Exercise
of warrants
|
|
|
1,311,000
|
|
|
-
|
|
|
19,000
|
|
Net
cash provided by financing activities
|
|
|
1,371,000
|
|
|
896,000
|
|
|
(56,000
|
)
|
|
|
|
|
|
|
|
|
|
|
|
NET
(DECREASE) INCREASE IN CASH
|
|
|
55,000
|
|
|
132,000
|
|
|
(155,000
|
)
|
|
|
|
|
|
|
|
|
|
|
|
CASH
BALANCE
|
|
|
|
|
|
|
|
|
|
|
Beginning
of year
|
|
|
134,000
|
|
|
2,000
|
|
|
157,000
|
|
End
of year
|
|
$
|
189,000
|
|
$
|
134,000
|
|
$
|
2,000
|
|
|
|
|
|
|
|
|
|
|
|
|
SUPPLEMENTAL
DISCLOSURES OF CASH FLOW INFORMATION
|
|
|
|
|
|
|
|
|
|
|
Cash
paid during the year for:
|
|
|
|
|
|
|
|
|
|
|
Interest
|
|
$
|
486,000
|
|
$
|
406,000
|
|
$
|
389,000
|
|
Series
B preferred stock dividends
|
|
$
|
82,000
|
|
$
|
46,000
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
SUPPLEMENTAL
DISCLOSURES OF NONCASH INVESTING AND FINANCING
ACTIVITIES
|
|
|
|
|
|
|
|
|
|
|
Warrants
issued in connection with debt
|
|
$
|
194,000
|
|
$
|
187,000
|
|
$
|
125,000
|
|
Series
A preferred stock dividends
|
|
$
|
317,000
|
|
$
|
300,000
|
|
$
|
322,000
|
|
Common
stock issued to holders of convertible notes
|
|
$
|
1,024,000
|
|
$
|
-
|
|
$
|
-
|
|