UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
Washington,
D.C. 20549
FORM
10-Q
QUARTERLY
REPORT PURSUANT TO SECTION 13 OR 15(d)
OF
THE
SECURITIES EXCHANGE ACT OF 1934
For
the Quarter Ended June
30, 2008
|
Commission
File Number 001-12629
|
NATIONAL
HOLDINGS CORPORATION
(Exact
name of registrant as specified in its charter)
Delaware
|
|
36-4128138
|
(State or other jurisdiction of
|
|
(I.R.S. Employer
|
incorporation or organization)
|
|
Identification No.)
|
120 Broadway,
27th Floor, New York, NY 10271
(Address
including zip code of principal executive offices)
Registrant’s
telephone number, including area code: (212)
417-8000
Indicate
by check mark whether the registrant (1) has filed all reports required to
be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the
preceding 12 months (or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements
for
the past 90 days. Yes x No ¨
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer or a smaller reporting company.
See
definition of “accelerated filer”, “large accelerated filer” and “smaller
reporting company” in Rule 12b-2 of the Exchange Act (check one).
|
Large
Accelerated Filer ¨
|
Accelerated
Filer ¨
|
|
|
|
|
Non-Accelerated
Filer ¨
|
Smaller
Reporting Company x
|
Indicate
by check mark whether the registrant is a shell company (as defined in Exchange
Act Rule 12b-2).
YES ¨ NO x
As
of
August 11, 2008 there were 16,421,538 shares of the registrant's common stock
outstanding.
NATIONAL
HOLDINGS CORPORATION AND SUBSIDIARIES
CONDENSED
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
|
|
June 30,
|
|
September 30,
|
|
|
|
2008
|
|
2007
|
|
|
|
(unaudited)
|
|
(see note below)
|
|
|
|
|
|
|
|
ASSETS
|
|
|
|
|
|
|
|
CASH
|
|
$
|
5,464,000
|
|
$
|
4,957,000
|
|
DEPOSITS
WITH CLEARING ORGANIZATIONS
|
|
|
402,000
|
|
|
402,000
|
|
RECEIVABLES
FROM BROKER-DEALERS AND CLEARING ORGANIZATIONS
|
|
|
3,639,000
|
|
|
4,739,000
|
|
OTHER
RECEIVABLES, net of allowance for uncollectible accounts of $467,000
at
June 30, 2008 and September 30, 2007, respectively
|
|
|
534,000
|
|
|
784,000
|
|
ADVANCES
TO REGISTERED REPRESENTATIVES
|
|
|
4,469,000
|
|
|
4,010,000
|
|
SECURITIES
OWNED
|
|
|
|
|
|
|
|
Marketable,
at market value
|
|
|
341,000
|
|
|
1,191,000
|
|
FIXED
ASSETS, net
|
|
|
300,000
|
|
|
304,000
|
|
SECURED
DEMAND NOTE
|
|
|
500,000
|
|
|
500,000
|
|
OTHER
ASSETS
|
|
|
1,144,000
|
|
|
396,000
|
|
|
|
|
|
|
|
|
|
TOTAL
ASSETS
|
|
$
|
16,793,000
|
|
$
|
17,283,000
|
|
|
|
|
|
|
|
|
|
LIABILITIES
AND STOCKHOLDERS' EQUITY
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
PAYABLE
TO BROKER-DEALERS AND CLEARING ORGANIZATIONS
|
|
$
|
35,000
|
|
$
|
1,115,000
|
|
SECURITIES
SOLD, BUT NOT YET PURCHASED, at market
|
|
|
306,000
|
|
|
77,000
|
|
ACCOUNTS
PAYABLE, ACCRUED EXPENSES AND OTHER LIABILITIES
|
|
|
5,239,000
|
|
|
7,907,000
|
|
CONVERTIBLE
PROMISSORY NOTES PAYABLE, net of debt discount of $1,159,000 at June
30,
2008
|
|
|
4,841,000
|
|
|
-
|
|
NOTES
PAYABLE, net of debt discounts of $65,000 and $138,000 at June 30,
2008
and September 30, 2007, respectively
|
|
|
935,000
|
|
|
862,000
|
|
TOTAL
LIABILITIES
|
|
|
11,356,000
|
|
|
9,961,000
|
|
|
|
|
|
|
|
|
|
SUBORDINATED
BORROWINGS
|
|
|
500,000
|
|
|
500,000
|
|
|
|
|
|
|
|
|
|
COMMITMENTS
AND CONTINGENCIES
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
STOCKHOLDERS'
EQUITY
|
|
|
|
|
|
|
|
Preferred
stock, $.01 par value, 200,000 shares authorized; 50,000 shares designated
as Series A and 20,000 shares designated as Series B Series A 9%
cumulative convertible preferred stock, $.01 par value, 50,000 shares
authorized; 37,550 shares issued and outstanding (liquidation preference:
$3,755,000) at June 30, 2008 and September 30, 2007
|
|
|
-
|
|
|
-
|
|
Series
B 9% cumulative convertible preferred stock, $.01 par value, 20,000
shares
authorized; 0 shares issued and outstanding (liquidation preference:
$0)
at June 30, 2008 and September 30, 2007
|
|
|
-
|
|
|
-
|
|
Common
stock, $.02 par value, 50,000,000 shares authorized; 8,622,628 and
8,602,628 shares issued and outstanding, at June 30, 2008 and September
30, 2007, respectively
|
|
|
172,000
|
|
|
172,000
|
|
Additional
paid-in capital
|
|
|
21,474,000
|
|
|
19,919,000
|
|
Accumulated
deficit
|
|
|
(16,709,000
|
)
|
|
(13,269,000
|
)
|
TOTAL
STOCKHOLDERS' EQUITY
|
|
|
4,937,000
|
|
|
6,822,000
|
|
|
|
|
|
|
|
|
|
TOTAL
LIABILITIES AND STOCKHOLDERS' EQUITY
|
|
$
|
16,793,000
|
|
$
|
17,283,000
|
|
Note:
The
balance sheet at September 30, 2007 has been derived from the audited
consolidated financial statements at that date.
See
notes
to condensed consolidated financial statements.
CONDENSED
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
|
|
Three Months Ended
|
|
Nine Months Ended
|
|
|
|
June 30,
|
|
June 30,
|
|
June 30,
|
|
June 30,
|
|
|
|
2008
|
|
2007
|
|
2008
|
|
2007
|
|
REVENUES:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commissions
|
|
$
|
11,428,000
|
|
$
|
10,761,000
|
|
$
|
34,644,000
|
|
$
|
27,705,000
|
|
Net
dealer inventory gains
|
|
|
3,202,000
|
|
|
3,051,000
|
|
|
11,035,000
|
|
|
10,109,000
|
|
Investment
banking
|
|
|
1,210,000
|
|
|
4,278,000
|
|
|
1,277,000
|
|
|
7,945,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
commission and fee revenues
|
|
|
15,840,000
|
|
|
18,090,000
|
|
|
46,956,000
|
|
|
45,759,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
and dividends
|
|
|
837,000
|
|
|
649,000
|
|
|
2,647,000
|
|
|
2,010,000
|
|
Transfer
fees and clearing services
|
|
|
1,105,000
|
|
|
1,029,000
|
|
|
3,378,000
|
|
|
3,045,000
|
|
Other
|
|
|
897,000
|
|
|
461,000
|
|
|
2,347,000
|
|
|
1,314,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
TOTAL
REVENUES
|
|
|
18,679,000
|
|
|
20,229,000
|
|
|
55,328,000
|
|
|
52,128,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
EXPENSES:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commissions
|
|
|
14,695,000
|
|
|
14,017,000
|
|
|
43,449,000
|
|
|
36,193,000
|
|
Employee
compensation and related expenses
|
|
|
1,786,000
|
|
|
2,168,000
|
|
|
6,334,000
|
|
|
5,430,000
|
|
Clearing
fees
|
|
|
541,000
|
|
|
444,000
|
|
|
1,676,000
|
|
|
1,162,000
|
|
Communications
|
|
|
299,000
|
|
|
419,000
|
|
|
907,000
|
|
|
1,247,000
|
|
Occupancy
and equipment costs
|
|
|
831,000
|
|
|
614,000
|
|
|
2,564,000
|
|
|
2,090,000
|
|
Professional
fees
|
|
|
546,000
|
|
|
318,000
|
|
|
1,597,000
|
|
|
1,835,000
|
|
Interest
|
|
|
176,000
|
|
|
252,000
|
|
|
319,000
|
|
|
461,000
|
|
Taxes,
licenses, registration
|
|
|
123,000
|
|
|
134,000
|
|
|
330,000
|
|
|
476,000
|
|
Other
administrative expenses
|
|
|
591,000
|
|
|
302,000
|
|
|
1,590,000
|
|
|
1,182,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
TOTAL
EXPENSES
|
|
|
19,588,000
|
|
|
18,668,000
|
|
|
58,766,000
|
|
|
50,076,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NET
(LOSS) INCOME
|
|
|
(909,000
|
)
|
|
1,561,000
|
|
|
(3,438,000
|
)
|
|
2,052,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Preferred
stock dividends
|
|
|
(84,000
|
)
|
|
(109,000
|
)
|
|
(253,000
|
)
|
|
(317,000
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
(loss) income attributable to common stockholders
|
|
$
|
(993,000
|
)
|
$
|
1,452,000
|
|
$
|
(3,691,000
|
)
|
$
|
1,735,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NET
(LOSS) INCOME PER COMMON SHARE
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
(loss) income attributable to common stockholders
|
|
$
|
(0.12
|
)
|
$
|
0.26
|
|
$
|
(0.43
|
)
|
$
|
0.32
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
(loss) income attributable to common stockholders
|
|
$
|
(0.12
|
)
|
$
|
0.14
|
|
$
|
(0.43
|
)
|
$
|
0.20
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
average number of shares outstanding
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
8,622,628
|
|
|
5,543,151
|
|
|
8,611,602
|
|
|
5,388,225
|
|
Diluted
|
|
|
8,622,628
|
|
|
10,817,779
|
|
|
8,611,602
|
|
|
10,220,264
|
|
See
notes
to condensed consolidated financial statements.
CONDENSED
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
|
|
Nine Months Ended
|
|
|
|
June 30, 2008
|
|
June 30, 2007
|
|
CASH
FLOWS FROM OPERATING ACTIVITIES
|
|
|
|
|
|
|
|
Net
(loss) income
|
|
$
|
(3,438,000
|
)
|
$
|
2,052,000
|
|
Adjustments
to reconcile net income to net cash provided by (used in) operating
activities
|
|
|
|
|
|
|
|
Depreciation
and amortization
|
|
|
146,000
|
|
|
111,000
|
|
Amortization
of deferred financing costs
|
|
|
15,000
|
|
|
27,000
|
|
Amortization
of note discount
|
|
|
98,000
|
|
|
237,000
|
|
Compensatory
element of common stock option issuances
|
|
|
361,000
|
|
|
85,000
|
|
Changes
in assets and liabilities
|
|
|
|
|
|
|
|
Restricted
cash
|
|
|
-
|
|
|
(9,000
|
)
|
Deposits
with clearing organizations
|
|
|
-
|
|
|
(51,000
|
)
|
Receivables
from broker-dealers, clearing organizations and others
|
|
|
891,000
|
|
|
(731,000
|
)
|
Securities
owned: marketable, at market value
|
|
|
850,000
|
|
|
(442,000
|
)
|
Securities
owned: non-marketable, at fair value
|
|
|
-
|
|
|
402,000
|
|
Other
assets
|
|
|
(133,000
|
)
|
|
(408,000
|
)
|
Payables
|
|
|
(3,748,000
|
)
|
|
2,947,000
|
|
Securities
sold, but not yet purchased, at market
|
|
|
229,000
|
|
|
53,000
|
|
Net
cash (used in) provided operating activities
|
|
|
(4,729,000
|
)
|
|
4,273,000
|
|
|
|
|
|
|
|
|
|
CASH
FLOWS FROM INVESTING ACTIVITIES
|
|
|
|
|
|
|
|
Purchase
of fixed assets
|
|
|
(142,000
|
)
|
|
(83,000
|
)
|
|
|
|
|
|
|
|
|
CASH
FLOWS FROM FINANCING ACTIVITIES
|
|
|
|
|
|
|
|
Net
proceeds from issuance of convertible notes payable
|
|
|
6,000,000
|
|
|
-
|
|
Net
proceeds from issuance of notes payable
|
|
|
-
|
|
|
1,000,000
|
|
Cash
payment of deferred financing costs
|
|
|
(181,000
|
)
|
|
(22,000
|
)
|
Payment
of notes payable
|
|
|
-
|
|
|
(850,000
|
)
|
Dividends
paid
|
|
|
-
|
|
|
(75,000
|
)
|
Deferred
merger costs
|
|
|
(449,000
|
)
|
|
-
|
|
Exercise
of stock options
|
|
|
8,000
|
|
|
14,000
|
|
Exercise
of warrants
|
|
|
-
|
|
|
489,000
|
|
Net
cash provided by financing activities
|
|
|
5,378,000
|
|
|
556,000
|
|
|
|
|
|
|
|
|
|
NET
INCREASE IN CASH
|
|
|
507,000
|
|
|
4,746,000
|
|
|
|
|
|
|
|
|
|
CASH
BALANCE
|
|
|
|
|
|
|
|
Beginning
of the period
|
|
|
4,957,000
|
|
|
1,441,000
|
|
|
|
|
|
|
|
|
|
End
of the period
|
|
$
|
5,464,000
|
|
$
|
6,187,000
|
|
|
|
|
|
|
|
|
|
SUPPLEMENTAL
DISCLOSURES OF CASH FLOW INFORMATION
|
|
|
|
|
|
|
|
Cash
paid during the period for:
|
|
|
|
|
|
|
|
Interest
|
|
$
|
162,000
|
|
$
|
192,000
|
|
Income
taxes
|
|
$
|
37,000
|
|
$
|
-
|
|
Series
B preferred stock dividends
|
|
$
|
-
|
|
$
|
75,000
|
|
|
|
|
|
|
|
|
|
SUPPLEMENTAL
DISCLOSURES OF NONCASH INVESTING AND FINANCING ACTIVITIES
|
|
|
|
|
|
|
|
Warrants
issued in connection with debt
|
|
$
|
1,184,000
|
|
$
|
195,000
|
|
Series
A Preferred stock dividends
|
|
$
|
-
|
|
$
|
317,000
|
|
Common
stock issued to holders of convertible notes
|
|
$
|
-
|
|
$
|
1,024,413
|
|
See
notes
to condensed consolidated financial statements.
NATIONAL
HOLDINGS CORPORATION AND SUBSIDIARIES
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE
30, 2008
(UNAUDITED)
NOTE
1. BASIS OF PRESENTATION
The
accompanying condensed consolidated financial statements of National Holdings
Corporation (“National Holdings” or the “Company”) have been prepared in
accordance with generally accepted accounting principles for interim financial
statements and with the instructions to Form 10-Q and Rule 10-01 of Regulation
S-X. Accordingly, they do not include all of the information and disclosures
required for annual financial statements. In the opinion of management, all
adjustments (consisting of normal recurring accruals) considered necessary
for a
fair presentation have been included. The condensed consolidated financial
statements as of June 30, 2008 and for the periods ended June 30, 2008 and
June
30, 2007 are unaudited. The results of operations for the interim periods are
not necessarily indicative of the results of operations for the fiscal year.
These condensed consolidated financial statements should be read in conjunction
with the consolidated financial statements and related footnotes included
thereto in the Company’s Annual Report on Form 10-K for the fiscal year ended
September 30, 2007.
NOTE
2. CONSOLIDATION
The
condensed consolidated financial statements include the accounts of National
Holdings and its wholly owned subsidiaries. National Securities Corporation
(“National Securities”)
is 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. National Asset Management, Inc. (“NAM”),
a
Washington corporation,
is a
federally-registered investment adviser that provides asset management advisory
services to high net worth clients for a fee based upon a percentage of assets
managed. National Insurance Corporation (“National
Insurance”),
a
Washington corporation,
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. National Securities Futures Corporation (“National
Futures”), National Holdings Mortgage Corporation (“National Mortgage”), and
National Group Benefits Corporation (“National Group Benefits”), each a
Washington corporation, have not commenced active business operations. All
significant inter-company accounts and transactions have been eliminated in
consolidation.
NOTE
3. RECENT ACCOUNTING PRONOUNCEMENTS
In
December 2007, the FASB issued SFAS No. 141 (revised 2007), “Business
Combinations” (“SFAS 141(R)”). SFAS 141(R) replaces SFAS No. 141, “Business
Combinations”, and is effective for the Company for business combinations
for which the acquisition date is on or after the beginning of the first annual
reporting period beginning on or after December 15, 2008. SFAS 141(R)
requires the new acquiring entity to recognize all assets acquired and
liabilities assumed in the transactions; establishes an acquisition-date fair
value for acquired assets and liabilities; and fully discloses to investors
the
financial effect the acquisition will have. The Company is evaluating
the impact of this pronouncement on the Company’s condensed consolidated
financial position, results of operations and cash flows.
In
December 2007, the FASB issued SFAS No. 160, “Noncontrolling Interests in
Consolidated Financial Statements” (“SFAS 160”). SFAS 160 requires all entities
to report minority interests in subsidiaries as equity in the consolidated
financial statements, and requires that transactions between entities and
non-controlling interests be treated as equity. SFAS 160 is effective
for fiscal years, and interim periods within those fiscal years, beginning
on or
after December 15, 2008, and earlier adoption is prohibited. The Company is
evaluating the impact of this pronouncement on the Company’s condensed
consolidated financial position, results of operations and cash
flows.
In
March
2008, the FASB issued Statement of Financial Accounting Standards No. 161
"Disclosures about Derivative Instruments and Hedging Activities - an amendment
of FASB Statement No. 133 "("SFAS 161"). SFAS 161 changes the disclosure
requirements for derivative instruments and hedging activities. Entities are
required to provide enhanced disclosures about (a) how and why an entity uses
derivative instruments, (b) how derivative instruments and related hedged items
are accounted for under SFAS No. 133 and its related interpretations, and (c)
how derivative instruments and related hedged items affect an entity's financial
position, financial performance and cash flows. The guidance in SFAS 161 is
effective for financial statements issued for fiscal years and interim periods
beginning after November 15, 2008, with early application encouraged. This
Statement encourages, but does not require, comparative disclosures for earlier
periods at initial adoption. At this time, management is evaluating the
implications of SFAS 161 and its impact on the condensed consolidated financial
statements has not yet been determined.
NOTE
4. INCOME
TAXES
Effective
October 1, 2007, the Company adopted the provisions of FASB Interpretation
No.
48, "Accounting for Uncertainty in Income Taxes - an interpretation of FASB
Statement No. 109" ("FIN 48"). FIN 48 prescribes a recognition threshold and
a
measurement attribute for the financial statement recognition and measurement
of
tax positions taken or expected to be taken in a tax return. For those benefits
to be recognized, a tax position must be more-likely-than-not to be sustained
upon examination by taxing authorities. Differences between tax positions taken
or expected to be taken in a tax return and the benefit recognized and measured
pursuant to the interpretation are referred to as "unrecognized benefits".
A
liability is recognized (or amount of net operating loss carry forward or amount
of tax refundable is reduced) for an unrecognized tax benefit because it
represents an enterprise's potential future obligation to the taxing authority
for a tax position that was not recognized as a result of applying the
provisions of FIN 48.
In
accordance with FIN 48, interest costs related to unrecognized tax benefits
are
required to be calculated (if applicable) and would be classified as “Interest”
expense in the consolidated statements of operations. Penalties would be
recognized as a component of "Other administrative expenses".
In
many
cases the Company's uncertain tax positions are related to tax years that remain
subject to examination by relevant tax authorities. The Company files income
tax
returns in the United States (federal) and in various state and local
jurisdictions. In most instances, the Company is no longer subject to federal,
state and local income tax examinations by tax authorities for years prior
to
the fiscal year ended September 30, 2005.
The
adoption of the provisions of FIN 48 did not have a material impact on the
Company's financial position and results of operations. As of June 30, 2008,
no
liability for unrecognized tax benefits was required to be recorded. The Company
recognized a deferred tax asset of approximately $5.4 million as of June 30,
2008, primarily relating to net operating loss carryovers of approximately
$13.0
million, available to offset future taxable income through 2025.
The
ultimate realization of deferred tax assets is dependent upon the generation
of
future taxable income during the periods in which those temporary differences
become deductible. The Company considers projected future taxable income and
tax
planning strategies in making this assessment. At present, the Company does
not
have a sufficient history of income to conclude that it is more likely than
not
that the Company will be able to realize all of its tax benefits in the near
future and therefore a valuation allowance was established in the full value
of
the deferred tax asset. A valuation allowance will be maintained until
sufficient positive evidence exists to support the reversal of any portion
or
all of the valuation allowance net of appropriate reserves.
NOTE
5. STOCK
BASED COMPENSATION
Effective
October 1, 2005, the Company adopted FASB Statement of Financial Accounting
Standard (“SFAS”) No. 123R “Share Based Payment”. This statement is a
revision of SFAS Statement No. 123, and supersedes APB Opinion No. 25,
and its related implementation guidance. SFAS 123R addresses all forms of share
based payment (“SBP”) awards including shares issued under employee stock
purchase plans, stock options, restricted stock and stock appreciation rights.
Under SFAS 123R, SBP awards will result in a charge to operations that will
be
measured at fair value on the awards grant date, based on the estimated number
of awards expected to vest over the service period. During the nine months
ended June 30, 2007, the Company granted 720,000 stock options with a fair
value
of approximately $574,000. A charge of approximately $55,000 and $85,000 was
recorded in the three and nine months ended June 30, 2007, respectively,
relating to the amortization of the fair value associated with stock option
grants. During the nine months ended June 30, 2008, the Company granted 180,000
stock options with a fair value of approximately $201,000. A charge of
approximately $149,000 and $361,000 was recorded in the three and nine months
ended June 30, 2008, respectively, relating to the amortization of the fair
value associated with stock option grants. The Company did not make any stock
option grants in the three months ended June 30, 2007 or June 30,
2008.
The
Black-Scholes option valuation model is used to estimate the fair value of
the
options granted. The model includes subjective input assumptions that can
materially affect the fair value estimates. The model was developed for use
in
estimating the fair value of traded options that have no vesting restrictions
and that are fully transferable. For example, the expected volatility is
estimated based on the most recent historical period of time equal to the
weighted average life of the options granted. Options issued under the Company's
option plans have characteristics that differ from traded options. In
management's opinion, this valuation model does not necessarily provide a
reliable single measure of the fair value of its employee stock options.
Principal assumptions used in applying the Black-Scholes model along with the
results from the model were as follows:
|
|
2008
|
|
2007
|
|
Assumptions:
|
|
|
|
|
|
|
|
Risk-free
interest rate
|
|
|
1.47%
- 2.19
|
%
|
|
4.40
|
%
|
|
|
|
|
|
|
|
|
Expected
life, in years
|
|
|
3.0
|
|
|
3.0
|
|
|
|
|
|
|
|
|
|
Expected
volatility
|
|
|
81
|
%
|
|
83
|
%
|
A
summary
of the stock option activity as of June 30, 2008, and changes during the nine
month period then ended is presented below:
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
|
Weighted
|
|
Average
|
|
|
|
|
|
|
|
Average
|
|
Remaining
|
|
Aggregate
|
|
|
|
|
|
Exercise
|
|
Contractual
|
|
Intrinsic
|
|
|
|
Shares
|
|
Price
|
|
Term
|
|
Value
|
|
Outstanding
at September 30, 2007
|
|
|
2,007,000
|
|
$
|
1.62
|
|
|
3.64
|
|
$
|
2,359,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Granted
|
|
|
180,000
|
|
$
|
2.10
|
|
|
4.70
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
(20,000
|
)
|
$
|
0.40
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Expired
|
|
|
(75,000
|
)
|
$
|
2.00
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding
at June 30, 2008
|
|
|
2,092,000
|
|
$
|
1.66
|
|
|
3.04
|
|
$
|
537,875
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exerciseable
at June 30, 2008
|
|
|
1,293,250
|
|
$
|
1.40
|
|
|
2.39
|
|
$
|
499,250
|
|
As
of
June 30, 2008, there was $774,000 of total unrecognized deferred compensation
costs related to share-based compensation arrangements that will be amortized
over periods ranging from six months to four years. The Company expects that
future forfeitures will be diminimus.
A
summary
of the status of the Company’s non-vested shares as of June
30,
2008,
and changes during the nine month period then ended is presented
below:
|
|
|
|
Weighted
|
|
|
|
|
|
Average
|
|
|
|
|
|
Grant Date
|
|
Nonvested Shares
|
|
Shares
|
|
Fair Value
|
|
Nonvested
at September 30, 2007
|
|
|
900,000
|
|
$
|
0.95
|
|
|
|
|
|
|
|
|
|
Granted
|
|
|
180,000
|
|
$
|
2.10
|
|
|
|
|
|
|
|
|
|
Vested
|
|
|
(206,250
|
)
|
$
|
0.71
|
|
|
|
|
|
|
|
|
|
Expired
|
|
|
(75,000
|
)
|
$
|
2.00
|
|
|
|
|
|
|
|
|
|
Nonvested
at June 30, 2008
|
|
|
798,750
|
|
$
|
1.20
|
|
NOTE
6. SECURITIES OWNED AND SECURITIES SOLD, BUT NOT YET
PURCHASED
The
following table shows the quoted market values of securities owned by the
Company, and securities sold but not yet purchased by the Company, as of June
30, 2008:
|
|
Securities held
|
|
Securities sold, but
|
|
|
|
for resale
|
|
not yet purchased
|
|
Corporate
stocks
|
|
$
|
320,000
|
|
$
|
35,000
|
|
Corporate
bonds
|
|
|
21,000
|
|
|
-
|
|
Government
obligations
|
|
|
-
|
|
|
-
|
|
|
|
$
|
341,000
|
|
$
|
35,000
|
|
NOTE
7. CONTINGENCIES
In
September 2006, the
former
chairman and chief executive officer of the Company, Steven A. Rothstein,
commenced an arbitration against the current chairman and chief executive
officer of the Company, Mark Goldwasser, in the matter Rothstein
et al. vs. Goldwasser,
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 for any adverse award
up to $1,000,000. The Company and Mr. Goldwasser believe this action is
without merit, and intend to vigorously defend this action. As of June 30,
2008,
the outcome of this arbitration is not determinable and accordingly the Company
has not established a provision for this matter.
The
Company is a defendant in various other arbitrations and administrative
proceedings, lawsuits and claims seeking in the aggregate damages of
approximately $800,000. The Company believes such claims are substantially
without merit, and estimates that its liability, primarily for attorney
representation, will be less than $200,000 (exclusive of unspecified punitive
damages related to certain claims and inclusive of expected insurance coverage).
These matters arise in the normal course of business. The Company intends to
vigorously defend itself in these actions, and believes that the eventual
outcome of these matters will not have a material adverse effect on the Company.
However, the ultimate outcome of these matters cannot be determined at this
time. The amounts related to such matters that are reasonably estimable and
which have been accrued at June 30, 2008 and 2007, is $40,000 and $97,000
(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 FINRA related expenses of $170,000 and
$121,000 for the third quarter of fiscal year 2008 and 2007, respectively,
and
$660,000 and $1,254,000 for the first nine months of fiscal year 2008 and 2007,
respectively.
NOTE
8. DIVIDENDS ON CONVERTIBLE PREFERRED STOCK
The
holders of the Company’s Series A convertible preferred stock, that are
convertible into the Company’s common stock at $1.25 per share, are entitled to
receive dividends on a quarterly basis at a rate of 9% per annum, per share.
Such dividends are cumulative and accrue whether or not declared by the
Company’s Board of Directors, but are payable only when, as and if declared by
the Company’s Board of Directors. At June 30, 2008, the accumulated unpaid
dividends on the Company’s 37,550 issued and outstanding shares of Series A
preferred stock were $422,000.
NOTE
9. INCOME (LOSS) PER COMMON SHARE
Basic
income (loss) per share is computed on the basis of the weighted average number
of common shares outstanding. Diluted income (loss) per share is computed on
the
basis of the weighted average number of common shares outstanding plus the
potential dilution that would occur if securities or other contracts to issue
common shares were exercised or converted.
The
following table sets forth the components used in the computation of basic
and
diluted income per common share:
|
|
Three Months Ended
|
|
Six Months Ended
|
|
|
|
June 30, 2008
|
|
June 30, 2007
|
|
June 30, 2008
|
|
June 30, 2007
|
|
Numerator:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income (loss)
|
|
$
|
(909,000
|
)
|
$
|
1,561,000
|
|
$
|
(3,438,000
|
)
|
$
|
2,052,000
|
|
Preferred
stock dividends
|
|
|
(84,000
|
)
|
|
(109,000
|
)
|
|
(253,000
|
)
|
|
(317,000
|
)
|
Numerator
for basic earnings per share
|
|
|
|
|
|
|
|
|
|
|
|
|
|
–
net income (loss) attributable to
|
|
|
|
|
|
|
|
|
|
|
|
|
|
common
stockholders - as reported
|
|
|
(993,000
|
)
|
|
1,452,000
|
|
|
(3,691,000
|
)
|
|
1,735,000
|
|
Effect
of dilutive securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
on convertible notes
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
Preferred
stock dividends
|
|
|
-
|
|
|
109,000
|
|
|
-
|
|
|
317,000
|
|
Numerator
for basic earnings per share
|
|
|
|
|
|
|
|
|
|
|
|
|
|
–
net income (loss) attributable to
|
|
|
|
|
|
|
|
|
|
|
|
|
|
common
stockholders - as adjusted
|
|
$
|
(993,000
|
)
|
$
|
1,561,000
|
|
$
|
(3,691,000
|
)
|
$
|
2,052,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator
for basic earnings per
|
|
|
|
|
|
|
|
|
|
|
|
|
|
share–weighted
average shares
|
|
|
8,622,628
|
|
|
5,543,151
|
|
|
8,611,602
|
|
|
5,388,225
|
|
Effect
of dilutive securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock
options
|
|
|
-
|
|
|
404,669
|
|
|
-
|
|
|
229,609
|
|
Warrants
|
|
|
-
|
|
|
532,626
|
|
|
-
|
|
|
265,097
|
|
Assumed
conversion of:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Series
A Preferred Stock
|
|
|
-
|
|
|
3,004,000
|
|
|
-
|
|
|
3,004,000
|
|
Series
B Preferred Stock
|
|
|
-
|
|
|
1,333,333
|
|
|
-
|
|
|
1,333,333
|
|
Notes
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
Dilutive
potential common shares
|
|
|
-
|
|
|
5,274,628
|
|
|
-
|
|
|
4,832,039
|
|
Denominator
for diluted earnings per
|
|
|
|
|
|
|
|
|
|
|
|
|
|
share–adjusted
weighted-average
|
|
|
|
|
|
|
|
|
|
|
|
|
|
shares
and assumed conversions
|
|
|
8,622,628
|
|
|
10,817,779
|
|
|
8,611,602
|
|
|
10,220,264
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income available to
|
|
|
|
|
|
|
|
|
|
|
|
|
|
common
stockholders
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic:
|
|
$
|
(0.12
|
)
|
$
|
0.26
|
|
$
|
(0.43
|
)
|
$
|
0.32
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted:
|
|
$
|
(0.12
|
)
|
$
|
0.14
|
|
$
|
(0.43
|
)
|
$
|
0.20
|
|
For
both
the three and nine month periods ended June 30, 2008, 10,014,750 common share
equivalents were excluded from the calculation of diluted net loss per share
because their inclusion would have been anti-dilutive. For the three and nine
month periods ended June 30, 2007, 2,048,486 and 2,491,075, respectively, common
share equivalents were excluded from the calculation of diluted net loss per
share because their inclusion would have been anti-dilutive.
The
following table sets forth the common share equivalents that were excluded
from
the calculation:
|
|
Three Months Ended
|
|
Six Months Ended
|
|
|
|
June 30, 2008
|
|
June 30, 2007
|
|
June 30, 2008
|
|
June 30, 2007
|
|
|
|
|
|
|
|
|
|
|
|
Stock
options
|
|
|
2,092,000
|
|
|
1,202,331
|
|
|
2,092,000
|
|
|
1,377,391
|
|
Warrants
|
|
|
1,543,750
|
|
|
846,155
|
|
|
1,543,750
|
|
|
1,113,684
|
|
Assumed
conversion of:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Series
A Preferred Stock
|
|
|
3,004,000
|
|
|
-
|
|
|
3,004,000
|
|
|
-
|
|
Series
B Preferred Stock
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
Notes
|
|
|
3,375,000
|
|
|
-
|
|
|
3,375,000
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dilutive
potential common shares
|
|
|
10,014,750
|
|
|
2,048,486
|
|
|
10,014,750
|
|
|
2,491,075
|
|
NOTE
10. ACCOUNTS PAYABLE, ACCRUED EXPENSES AND OTHER
LIABILITIES
Accounts
payable, accrued expenses and other liabilities as of June 30, 2008 and
September 30, 2007, respectively, consist of the following:
|
|
June 30, 2008
|
|
September 30,
2007
|
|
|
|
|
|
|
|
Commissions
payable
|
|
$
|
2,921,000
|
|
$
|
5,128,000
|
|
Deferred
clearing fee credits
|
|
|
606,000
|
|
|
828,000
|
|
Telecommunications
vendors payable
|
|
|
266,000
|
|
|
366,000
|
|
Legal
payable
|
|
|
40,000
|
|
|
84,000
|
|
Deferred
rent payable
|
|
|
283,000
|
|
|
133,000
|
|
Other
vendors
|
|
|
1,123,000
|
|
|
1,368,000
|
|
Total
|
|
$
|
5,239,000
|
|
$
|
7,907,000
|
|
NOTE
11. NOTES PAYABLE
In
February 2008, National Securities and the holder of a $500,000 secured demand
note that was scheduled to mature on March 1, 2008, extended the term of the
secured demand note to March 1, 2009.
NOTE
12. PRIVATE PLACEMENT OF 10% CONVERTIBLE PROMISSORY NOTES
On
March
31, 2008, the Company completed a
financing transaction under which an investor made an investment in the Company
by purchasing a
convertible promissory note in the principal amount of $3.0
million,
with a
warrant
to purchase 375,000 shares of common stock at an exercise price of $2.50 per
share. The promissory note matures in March 2012, is convertible into common
stock at a price of $2.00 per share and has a stated interest rate of 10% per
annum. The Company accounted for this transaction by applying Emerging Issues
Task Force ("EITF") No 98-5 "Accounting for Convertible Securities with
Beneficial Conversion Features or Contingently Adjustable Conversion
Ratios" and EITF No. 00-27 "Application of Issue No. 98-5 to Certain
Convertible Instruments", and the relative fair value of the warrant of
approximately $395,000 was calculated using the Black-Scholes Option Valuation
Model. This amount has been recorded as a debt discount that will be charged
to
interest expense over the life of the promissory
note.
On
June
30, 2008, the Company completed a
financing transaction under which the same investor made an additional
investment in the Company by purchasing a
convertible promissory note in the principal amount of $3.0
million,
with a
warrant
to purchase 468,750 shares of common stock at an exercise price of $2.00 per
share. The promissory note matures in June 2012, is convertible into common
stock at a price of $1.60 per share and has a stated interest rate of 10% per
annum. Under accounting guidance provided by EITF No 98-5 and EITF No. 00-27
the
relative fair value of the warrant was calculated using the Black-Scholes Option
Valuation Model. The Company also recorded an additional debt discount for
the
beneficial conversion feature of the instrument. These amounts, totaling
approximately $789,000, have been recorded as a debt discount that will be
charged to interest expense over the life of the promissory
note.
The
Company and the investor entered into registration rights agreements, wherein
the Company has agreed to file a registration statement for the shares of common
stock issuable upon conversion of the note and exercise of the warrant within
ninety (90) days of the effective date of the proposed merger with vFinance,
Inc. (See Note 15), and to cause the registration statement to be declared
effective within one hundred eighty (180) days of the effective date of such
merger. Should the Company fail to either file the registration statement or
have it declared effective within such time limits then as liquidated damages
the interest rate of the note shall increase 1% per annum for each month the
applicable failure is not cured, up to a maximum of 15%.
The
investment was made by St. Cloud Capital Partners II, L.P. (“St. Cloud II”),
whose managing partner is Marshall S. Geller, a member of the Company's board
of
directors. Robert W. Lautz, Jr., a Managing Director
of St.
Cloud,
became a
member of the Board of Directors of the Company concurrent with the closing
of
the June 2008 financing transaction. The
Company incurred legal fees and other costs related to these capital
transactions of
approximately $101,000
and $75,000, respectively, that were capitalized and will be amortized to
interest expense over the life of the promissory notes.
NOTE
13. STOCKHOLDERS’ EQUITY
In
the
three and nine months ended June 30, 2008 the Company received proceeds of
$0
and $8,000, respectively, from the exercise of outstanding stock options to
acquire 20,000 shares of common stock. In July 2008 the Company received
proceeds of $9,000 from the exercise of outstanding stock options to acquire
10,000 shares of common stock.
NOTE
14. 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
June
30, 2008, National Securities’ net capital exceeded the requirement by
$1,610,000.
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.
NOTE
15. MERGER AGREEMENT
In
November 2007, the Company entered into a definitive merger agreement with
vFinance, Inc.,
a
publicly traded company with two wholly owned subsidiaries which are also
registered broker-dealers with a similar business to National Securities.
Effective
as of 12:01 a.m. (EDT) July 1, 2008 (the “Effective Date”), the merger was
completed. On the Effective Date each of the 55,635,066 shares of vFinance
common stock issued and outstanding immediately prior to the Effective Date
was
exchanged for 0.14 shares of Company common stock, or approximately 7,788,910
shares of Company common stock. The closing price of the Company’s common stock,
as quoted on the Over-the-Counter Bulletin Board, on June 30, 2008 was $1.75
per
share. Each option and warrant to purchase shares of vFinance common stock
outstanding prior to the Effective Date was converted into options or warrants,
as applicable, to acquire the number of shares of the Company’s Common Stock
determined by multiplying (i) the number of vFinance shares of common stock
underlying each outstanding vFinance stock option or warrant immediately prior
to the Effective Date of the Merger by (ii) 0.14, at an exercise price per
share
of the Company’s Common Stock equal to (i) the exercise price per share of each
stock option or warrant otherwise purchasable pursuant to the vFinance stock
option divided by (ii) 0.14.
The
Company has capitalized approximately $449,000 of costs associated with this
merger that have been included in “Other Assets” in the condensed consolidated
statements of financial condition as of June 30, 2008. Upon the completion
of
the merger, these costs were included as part of the purchase price.
NOTE
16. LIQUIDITY
During
the nine months ended June 30, 2008, the Company incurred a net loss of
$3,438,000. The Company has historically satisfied its capital needs with cash
generated from operations or from financing activities. On
March
31, 2008 and June 30, 2008, the Company issued convertible
promissory notes in the aggregate principal amount of $6.0
million (See Note 12). As
a result of the merger with vFinance (See Note 15), the Company’s capital
requirements to fund its business will change. There can be no assurance that
the Company will be successful in meeting these requirements. The Company will
also be responsible for the outstanding commitments and contingencies of
vFinance. However, the
Company believes that it will have sufficient funds to maintain its current
level of business activities, including those of vFinance, 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.
NOTE
17. SUBSIDIARIES
In
July
1994, National Securities formed a wholly owned subsidiary, National Asset
Management, Inc.,
a
Washington corporation ("NAM").
NAM is
a federally registered investment adviser providing asset management advisory
services to high net worth clients for a fee based upon a percentage of assets
managed. In March 2008, all of the issued and outstanding stock of NAM was
transferred from National Securities to the Company.
ITEM
2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
The
Private Securities Litigation Reform Act of 1995 provides a safe harbor for
forward-looking statements. This Quarterly Report may contain certain statements
of a forward-looking nature relating to future events or future business
performance. Any such statements that refer to the Company’s estimated or
anticipated future results or other non-historical facts are forward-looking
and
reflect the Company’s current perspective of existing trends and information.
These statements involve risks and uncertainties that cannot be predicted or
quantified and, consequently, actual results may differ materially from those
expressed or implied by such forward-looking statements. Such risks and
uncertainties include, among others, risks and uncertainties detailed in the
Company’s Annual Report on Form 10-K, filed with the Securities and Exchange
Commission on December 10, 2007. Any forward-looking statements contained in
or
incorporated into this Quarterly Report speak only as of the date of this
Quarterly Report. The Company undertakes no obligation to update publicly any
forward-looking statement, whether as a result of new information, future events
or otherwise.
RESULTS
OF OPERATIONS
Three
Months Ended June 30, 2008 Compared to Three Months Ended June 30,
2007
The
Company’s third quarter of fiscal year 2008 resulted in a decrease in revenues,
and an increase in expenses compared
to the same period last year. As
a
result, the Company reported a net loss of $909,000 compared with net income
of
$1,561,000 for the third quarter of fiscal years 2008 and 2007, respectively.
|
|
Three Months Ended
|
|
|
|
|
|
|
|
June 30,
|
|
Increase (Decrease)
|
|
|
|
2008
|
|
2007
|
|
Amount
|
|
Percent
|
|
Commissions
|
|
$
|
11,428,000
|
|
$
|
10,761,000
|
|
$
|
667,000
|
|
|
6
|
%
|
Proprietary
trading
|
|
|
3,236,000
|
|
|
2,876,000
|
|
|
360,000
|
|
|
13
|
%
|
Market
making
|
|
|
(60,000
|
)
|
|
89,000
|
|
|
(149,000
|
)
|
|
(167
|
)%
|
Mark-ups
and mark-downs
|
|
|
26,000
|
|
|
86,000
|
|
|
(60,000
|
)
|
|
(70
|
)%
|
Net
dealer inventory gains
|
|
|
3,202,000
|
|
|
3,051,000
|
|
|
151,000
|
|
|
5
|
%
|
Investment
banking
|
|
|
1,210,000
|
|
|
4,278,000
|
|
|
(3,068,000
|
)
|
|
(72
|
)%
|
Interest
and dividends
|
|
|
837,000
|
|
|
649,000
|
|
|
188,000
|
|
|
29
|
%
|
Transfer
fees and clearance services
|
|
|
1,105,000
|
|
|
1,029,000
|
|
|
76,000
|
|
|
7
|
%
|
Other
|
|
|
897,000
|
|
|
461,000
|
|
|
436,000
|
|
|
95
|
%
|
|
|
$
|
18,679,000
|
|
$
|
20,229,000
|
|
$
|
(1,550,000
|
)
|
|
(8
|
)%
|
Total
revenues decreased $1,550,000, or 8%, in the third quarter of fiscal year 2008
to $18,679,000 from $20,229,000 in the third quarter of fiscal year 2007. This
decrease is due to a decline in investment banking revenue. During the third
quarter of fiscal year 2008, total trading volume decreased 3%, compared to
the
third quarter of fiscal year 2007. The decrease in trading volume is due to
an
increase in annuity and insurance commissions which do not generate trading
tickets. Trading volume in this period related to retail brokerage also
decreased 3%. Commission revenue increased $667,000, or 6%, to $11,428,000
from
$10,761,000 during the third quarter of fiscal year 2008 compared with the
same
period in fiscal year 2007. Net dealer inventory gains, which includes profits
on proprietary trading, market making activities and customer mark-ups and
mark-downs, increased $151,000, or 5%, to $3,202,000 from $3,051,000 during
the
third quarter of fiscal year 2008 compared with the same period in fiscal year
2007. The increase is due to increased trading activity in foreign securities
partially offset set by a decline in market making activities and customer
mark-ups and mark-downs. During the third quarter of fiscal year 2008, revenues
from proprietary trading increased $360,000, or 13%, to $3,236,000 from
$2,876,000 in the same period of fiscal year 2007 and revenues from customer
mark-ups and mark-downs decreased $60,000, or 70%, to $26,000 from $86,000
in
the third quarter of fiscal year 2007. The Company realized a loss from market
making activities in the third quarter of fiscal year 2008.
Investment
banking revenue decreased $3,068,000, or 72%, to $1,210,000 from $4,278,000
in
the third quarter of fiscal year 2008 compared with the third quarter of fiscal
year 2007. The Company did not complete any investment banking transactions
in
the third quarter of fiscal year 2008, and received only fee income. Interest
and dividend income increased $188,000, or 29%, to $837,000 from $649,000 in
the
third quarter of fiscal year 2008 compared with the same period last year.
The
increase in interest income is attributable to an increase in the amount of
debit balances in National Securities’ customer accounts from the same period
last year. Transfer fees increased $76,000, or 7%, to $1,105,000 in the third
quarter of fiscal year 2008 from $1,029,000 in the third quarter of fiscal
year
2007. The increase is consistent with the increase in commission
revenue.
Other
revenue, consisting of asset management fees, miscellaneous transaction fees,
trading fees and other investment income, increased $436,000, or 95%, to
$897,000 from $461,000 during the third quarter of fiscal year 2008 compared
to
the third quarter of fiscal year 2007. The increase is due to an increase in
fee
based assets under management.
In
comparison with the 8% decrease in total revenues, total expenses increased
5%,
or $920,000, to $19,588,000 for the third quarter of fiscal year 2008 compared
to $18,668,000 in the third quarter of fiscal year 2007. The increase in total
expenses is primarily the result of greater commission expense.
|
|
Three Months Ended
|
|
|
|
|
|
|
|
June 30,
|
|
Increase (Decrease)
|
|
|
|
2008
|
|
2007
|
|
Amount
|
|
Percent
|
|
Commission
expense related to:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commission
revenue
|
|
$
|
10,766,000
|
|
$
|
9,891,000
|
|
$
|
875,000
|
|
|
9
|
%
|
Net
dealer inventory gains
|
|
|
2,856,000
|
|
|
2,471,000
|
|
|
385,000
|
|
|
16
|
%
|
Investment
banking
|
|
|
1,073,000
|
|
|
1,655,000
|
|
|
(582,000
|
)
|
|
(35
|
)%
|
Commissions
|
|
|
14,695,000
|
|
|
14,017,000
|
|
|
678,000
|
|
|
5
|
%
|
Employee
compensation
|
|
|
1,786,000
|
|
|
2,168,000
|
|
|
(382,000
|
)
|
|
(18
|
)%
|
Clearing
fees
|
|
|
541,000
|
|
|
444,000
|
|
|
97,000
|
|
|
22
|
%
|
Communications
|
|
|
299,000
|
|
|
419,000
|
|
|
(120,000
|
)
|
|
(29
|
)%
|
Occupancy
and equipment costs
|
|
|
831,000
|
|
|
614,000
|
|
|
217,000
|
|
|
35
|
%
|
Professional
fees
|
|
|
546,000
|
|
|
318,000
|
|
|
228,000
|
|
|
72
|
%
|
Interest
|
|
|
176,000
|
|
|
252,000
|
|
|
(76,000
|
)
|
|
(30
|
)%
|
Taxes,
licenses and registration
|
|
|
123,000
|
|
|
134,000
|
|
|
(11,000
|
)
|
|
(8
|
)%
|
Other
administrative expenses
|
|
|
591,000
|
|
|
302,000
|
|
|
289,000
|
|
|
96
|
%
|
|
|
$
|
19,588,000
|
|
$
|
18,668,000
|
|
$
|
920,000
|
|
|
5
|
%
|
Commission
expense, which includes expenses related to commission revenue, net dealer
inventory gains and investment banking, increased $678,000, or 5%, to
$14,695,000 in the third quarter of fiscal year 2008 from $14,017,000 in the
third quarter of fiscal year 2007. Commission expense related to
commission revenue
increased $875,000, or 9%, to $10,766,000 in the third quarter of fiscal year
2008 from $9,891,000 in the third quarter of fiscal year 2007; commission
expense related to net dealer inventory gains increased $385,000, or 16%, to
$2,856,000 in the third quarter of fiscal year 2008 from $2,471,000 in the
third
quarter of fiscal year 2007; and commission expense related to investment
banking decreased $582,000, or 35%, to $1,073,000 in the third quarter of fiscal
year 2008 from $2,471,000 in the third quarter of fiscal year 2007. Commission
expense as a percentage of commissions and related revenues decreased
to 79% in the third quarter of fiscal year 2008 from 80% in the third quarter
of
fiscal year 2007. Commission expense as a percentage of net dealer inventory
gains increased to 89% in the third quarter of fiscal year 2008 from 81% in
the
third quarter of fiscal year 2007. This increase is attributable to changes
in
the securities traded, and their related commission payouts. Commission expense
as a percentage of investment banking revenues increased to 89% in the third
quarter of fiscal year 2008 from 39% in the third quarter of fiscal year 2007.
This increase is attributable to the type and size of the particular investment
banking transactions completed in the respective quarters. Commission expense
includes the amortization of advances to registered representatives of $240,000
and $371,000 for the third quarter of fiscal years 2008 and 2007, respectively.
These amounts fluctuate based upon the amounts of advances outstanding and
the
time period for which the registered representatives have agreed to be
affiliated with National Securities.
Employee
compensation expense decreased $382,000, or 18%, to $1,786,000 in the third
quarter of fiscal year 2008 from $2,168,000 in the third quarter of fiscal
year
2007. The decrease is attributable bonuses paid based on profits in fiscal
year
2007, offset in part by new employees hired during fiscal years 2008 and 2007,
and salary increases for certain employees. Overall, combined commission and
employee compensation expense, as a percentage of revenue increased to 88%
from
80% in the third quarter of fiscal years 2008 and 2007,
respectively.
Clearing
fees increased $97,000, or 22%, to $541,000 in the third quarter of fiscal
year
2008 from $444,000 in the third quarter of fiscal year 2007. The increase in
clearing fees is attributable to the increase in commission revenue and net
dealer inventory gains in the third quarter of fiscal year 2008 as compared
to
the third quarter of fiscal year 2007. The greater increase in clearing fees
as
compared to the increase in commission revenue is attributable to lower average
commission revenue per ticket in the third quarter of fiscal year
2008.
Communications
expense decreased $120,000, or 29%, to $299,000 from $419,000 in the third
quarter of fiscal year 2008 compared to the third quarter of fiscal year 2007.
The decrease is due to the Company’s ability to acquire certain of these
services at a lower price. Occupancy costs increased $217,000, or 35%, to
$831,000 from $614,000 in the third quarter of fiscal year 2008 compared to
the
third quarter of fiscal year 2007. The increase in occupancy expense is
primarily due to annual rent increases contained in the Company’s office leases,
higher operating expenses and a new office lease. Professional fees increased
$228,000, or 72%, to $546,000 from $318,000 in the third quarter of fiscal
year
2008 compared to the third quarter of fiscal year 2007. The increase in
professional fees is primarily a result of legal fees and costs incurred to
settle certain arbitrations in the third quarter of fiscal year
2008.
Interest
expense decreased $76,000, or 30%, to $176,000 from $252,000 in the third
quarter of fiscal year 2008 compared to the third quarter of fiscal year 2007.
The decrease in interest expense is attributable to the acceleration of
amortization on the Company’s convertible notes that were converted to common
stock in the third quarter of fiscal year 2007, partially offset by interest
on
new convertible notes issued in fiscal year 2008. Taxes, licenses and
registration decreased $11,000, or 8%, to $123,000 from $134,000 in the third
quarter of fiscal year 2008 compared to the third quarter of fiscal year 2007.
The decrease in taxes, licenses and registration is due to lower registration
fees paid on behalf of brokers in the third quarter of fiscal year 2008 compared
to the third quarter of fiscal year 2007. Other administrative expenses
increased $289,000, or 96%, to $591,000 from $302,000 in the third quarter
of
fiscal year 2008 compared to the third quarter of fiscal year 2007. The increase
in other administrative expenses is attributable to recruiting costs associated
with new registered representatives.
The
Company reported a net loss of $909,000 in the third quarter of fiscal year
2008
compared to net income of $1,561,000 in
the
third quarter of fiscal year 2007.
The net
loss attributable to common stockholders in the third quarter of fiscal year
2008 was $993,000, or $.12 per common share, as compared to the diluted earnings
attributable to common stockholders of $1,452,000, or $.14 per common share,
in
the third quarter of fiscal year 2007. The net income attributable to common
stockholders reflects $84,000 and $109,000 of cumulative preferred stock
dividends on the Company’s preferred stock for the third quarter of fiscal years
2008 and 2007, respectively.
Nine
Months Ended June 30, 2008 Compared to Nine Months Ended June 30,
2007
The
Company’s first nine months of fiscal year 2008 resulted in an increase in
revenues, and a greater increase in expenses compared
to the same period last year. As
a
result, the Company reported a net loss of $3,438,000 compared with net income
of $2,052,000 for the first nine months of fiscal years 2008 and 2007,
respectively.
|
|
Nine Months Ended
|
|
|
|
|
|
|
|
June 30,
|
|
Increase (Decrease)
|
|
|
|
2008
|
|
2007
|
|
Amount
|
|
Percent
|
|
Commissions
|
|
$
|
34,644,000
|
|
$
|
27,705,000
|
|
$
|
6,939,000
|
|
|
25
|
%
|
Proprietary
trading
|
|
|
10,915,000
|
|
|
9,174,000
|
|
|
1,741,000
|
|
|
19
|
%
|
Market
making
|
|
|
83,000
|
|
|
704,000
|
|
|
(621,000
|
)
|
|
(88
|
)%
|
Mark-ups
and mark-downs
|
|
|
37,000
|
|
|
231,000
|
|
|
(194,000
|
)
|
|
(84
|
)%
|
Net
dealer inventory gains
|
|
|
11,035,000
|
|
|
10,109,000
|
|
|
926,000
|
|
|
9
|
%
|
Investment
banking
|
|
|
1,277,000
|
|
|
7,945,000
|
|
|
(6,668,000
|
)
|
|
(84
|
)%
|
Interest
and dividends
|
|
|
2,647,000
|
|
|
2,010,000
|
|
|
637,000
|
|
|
32
|
%
|
Transfer
fees and clearance services
|
|
|
3,378,000
|
|
|
3,045,000
|
|
|
333,000
|
|
|
11
|
%
|
Other
|
|
|
2,347,000
|
|
|
1,314,000
|
|
|
1,033,000
|
|
|
79
|
%
|
|
|
$
|
55,328,000
|
|
$
|
52,128,000
|
|
$
|
3,200,000
|
|
|
6
|
%
|
Total
revenues increased $3,200,000, or 6%, in the first nine months of fiscal year
2008 to $55,328,000 from $52,128,000 in the first nine months of fiscal year
2007. This increase is due to an increase in commissions. During the first
nine
months of fiscal year 2008, total trading volume increased 18%, compared to
the
first nine months of fiscal year 2007. The increase in revenues and trading
volume is due to an increase in the number of registered representatives
associated with the Company, offset in part by a decline in market making
activities. Trading volume in this period related to retail brokerage increased
24%. Commission revenue increased $6,939,000, or 25%, to $34,644,000 from
$27,705,000 during the first nine months of fiscal year 2008 compared with
the
same period in fiscal year 2007. Net dealer inventory gains, which includes
profits on proprietary trading, market making activities and customer mark-ups
and mark-downs, increased $926,000, or 9%, to $11,035,000 from $10,109,000
during the first nine months of fiscal year 2008 compared with the same period
in fiscal year 2007. The increase is due to increased trading activity in
foreign securities partially offset set by a decline in market making activities
and customer mark-ups and mark-downs. During the first nine months of fiscal
year 2008, revenues from proprietary trading increased $1,741,000, or 19%,
to
$10,915,000 from $9,174,000 in the same period of fiscal year 2007, revenues
from market making activities decreased $621,000, or 88%, to $83,000 from
$704,000 in the first nine months of fiscal year 2007, and revenues from
customer mark-ups and mark-downs decreased $194,000, or 84%, to $37,000 from
$231,000 in the first nine months of fiscal year 2007.
Investment
banking revenue decreased $6,668,000, or 84%, to $1,277,000 from $7,945,000
in
the first nine months of fiscal year 2008 compared with the first nine months
of
fiscal year 2007. The Company did not complete any investment banking
transactions in the first nine months of fiscal year 2008, and received only
fee
income. Interest and dividend income increased $637,000, or 32%, to $2,647,000
from $2,010,000 in the first nine months of fiscal year 2008 compared with
the
same period last year. The increase in interest income is attributable to an
increase in the amount of debit balances in National Securities’ customer
accounts from the same period last year, and an adjustment of the interest
sharing agreement with one of the Company’s clearing firms. Transfer fees
increased $333,000, or 11%, to $3,378,000 in the first nine months of fiscal
year 2008 from $3,045,000 in the first nine months of fiscal year 2007. The
increase is primarily due to the higher trading volume experienced during the
first quarter of fiscal year 2008.
Other
revenue, consisting of asset management fees, miscellaneous transaction fees,
trading fees and other investment income, increased $1,033,000, or 79%, to
$2,347,000 from $1,314,000 during the first nine months of fiscal year 2008
compared to the first nine months of fiscal year 2007. The increase is due
to an
increase in fee based assets under management.
In
comparison with the 6% increase in total revenues, total expenses increased
17%,
or $8,690,000, to $58,766,000 for the first nine months of fiscal year 2008
compared to $50,076,000 in the first nine months of fiscal year 2007. The
increase in total expenses is primarily the result of greater commission expense
and employee compensation.
|
|
Nine Months Ended
|
|
|
|
|
|
|
|
June 30,
|
|
Increase (Decrease)
|
|
|
|
2008
|
|
2007
|
|
Amount
|
|
Percent
|
|
Commission
expense related to:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commission
revenue
|
|
$
|
32,956,000
|
|
$
|
24,853,000
|
|
$
|
8,103,000
|
|
|
33
|
%
|
Net
dealer inventory gains
|
|
|
9,420,000
|
|
|
7,839,000
|
|
|
1,581,000
|
|
|
20
|
%
|
Investment
banking
|
|
|
1,073,000
|
|
|
3,501,000
|
|
|
(2,428,000
|
)
|
|
(69
|
)%
|
Commissions
|
|
|
43,449,000
|
|
|
36,193,000
|
|
|
7,256,000
|
|
|
20
|
%
|
Employee
compensation
|
|
|
6,334,000
|
|
|
5,430,000
|
|
|
904,000
|
|
|
17
|
%
|
Clearing
fees
|
|
|
1,676,000
|
|
|
1,162,000
|
|
|
514,000
|
|
|
44
|
%
|
Communications
|
|
|
907,000
|
|
|
1,247,000
|
|
|
(340,000
|
)
|
|
(27
|
)%
|
Occupancy
and equipment costs
|
|
|
2,564,000
|
|
|
2,090,000
|
|
|
474,000
|
|
|
23
|
%
|
Professional
fees
|
|
|
1,597,000
|
|
|
1,835,000
|
|
|
(238,000
|
)
|
|
(13
|
)%
|
Interest
|
|
|
319,000
|
|
|
461,000
|
|
|
(142,000
|
)
|
|
(31
|
)%
|
Taxes,
licenses and registration
|
|
|
330,000
|
|
|
476,000
|
|
|
(146,000
|
)
|
|
(31
|
)%
|
Other
administrative expenses
|
|
|
1,590,000
|
|
|
1,182,000
|
|
|
408,000
|
|
|
35
|
%
|
|
|
$
|
58,766,000
|
|
$
|
50,076,000
|
|
$
|
8,690,000
|
|
|
17
|
%
|
Commission
expense, which includes expenses related to commission revenue, net dealer
inventory gains and investment banking, increased $7,256,000, or 20%, to
$43,449,000 in the first nine months of fiscal year 2008 from $36,193,000 in
the
first nine months of fiscal year 2007. Commission expense related to commission
revenue increased $8,103,000, or 33%, to $32,956,000 in the first nine months
of
fiscal year 2008 from $24,853,000 in the first nine months of fiscal year 2007;
commission expense related to net dealer inventory gains increased $1,581,000,
or 20%, to $9,420,000 in the first nine months of fiscal year 2008 from
$7,839,000 in the first nine months of fiscal year 2007; and commission expense
related to investment banking decreased $2,428,000, or 69%, to $1,073,000 in
the
first nine months of fiscal year 2008 from $3,501,000 in the first nine months
of fiscal year 2007. Commission expense as a percentage of commissions and
related revenues increased to 80% in the first nine months of fiscal year 2008
from 76% in the first nine months of fiscal year 2007. This increase is
attributable to changes in the production of particular brokers, not all of
who
are paid at the same commission rate and higher payouts for certain registered
representatives recently affiliated with the Company. Commission expense as
a
percentage of net dealer inventory gains increased to 85% in the first nine
months of fiscal year 2008 from 78% in the first nine months of fiscal year
2007. This increase is attributable to changes in the securities traded, and
their related commission payouts. Commission expense as a percentage of
investment banking revenues increased to 84% in the first nine months of fiscal
year 2008 from 44% in the first nine months of fiscal year 2007. This increase
is attributable to the type and size of the particular investment banking
transactions completed in the respective periods. Commission expense includes
the amortization of advances to registered representatives of $1,044,000 and
$947,000 for the first nine months of fiscal years 2008 and 2007, 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 $904,000, or 17%, to $6,334,000 in the first
nine
months of fiscal year 2008 from $5,430,000 in the first nine months of fiscal
year 2007. The increase is attributable to new employees hired during fiscal
years 2008 and 2007, and salary increases for certain employees. Overall,
combined commission and employee compensation expense, as a percentage of
revenue increased to 90% from 80% in the first nine months of fiscal years
2008
and 2007, respectively.
Clearing
fees increased $514,000, or 44%, to $1,676,000 in the first nine months of
fiscal year 2008 from $1,162,000 in the first nine months of fiscal year 2007.
The increase in clearing fees is attributable to the increase in commission
revenue and net dealer inventory gains in the first nine months of fiscal year
2008 as compared to the first nine months of fiscal year 2007. The greater
increase in clearing fees as compared to the increase in commission revenue
is
attributable to lower average commission revenue per ticket in the first nine
months of fiscal year 2008.
Communications
expense decreased $340,000, or 27%, to $907,000 from $1,247,000 in the first
nine months of fiscal year 2008 compared to the first nine months of fiscal
year
2007. The decrease is due to the Company’s ability to acquire certain of these
services at a lower price. Occupancy costs increased $474,000, or 23%, to
$2,564,000 from $2,090,000 in the first nine months of fiscal year 2008 compared
to the first nine months of fiscal year 2007. The increase in occupancy expense
is primarily due to annual rent increases contained in the Company’s office
leases, higher operating expenses and a new office lease. Professional fees
decreased $238,000, or 13%, to $1,597,000 from $1,835,000 in the first nine
months of fiscal year 2008 compared to the first nine months of fiscal year
2007. The decrease in professional fees is primarily a result of greater legal
fees and costs incurred to settle certain arbitrations in the first nine months
of fiscal year 2007.
Interest
expense decreased $142,000, or 31%, to $319,000 from $461,000 in the first
nine
months of fiscal year 2008 compared to the first nine months of fiscal year
2007. The decrease in interest expense is attributable to the acceleration
of
amortization on the Company’s convertible notes that were converted to common
stock in the third quarter of fiscal year 2007, partially offset by interest
on
new convertible notes issued in fiscal year 2008. Taxes, licenses and
registration decreased $146,000, or 31%, to $330,000 from $476,000 in the first
nine months of fiscal year 2008 compared to the first nine months of fiscal
year
2007. The decrease in taxes, licenses and registration is due to lower
registration fees paid on behalf of brokers in the first nine months of fiscal
year 2008 compared to the first nine months of fiscal year 2007. Other
administrative expenses increased $408,000, or 35%, to $1,590,000 from
$1,182,000 in the first nine months of fiscal year 2008 compared to the first
nine months of fiscal year 2007. The other administrative expenses increase
is
attributable to an increase in marketing and other promotional expenses in
the
first quarter of fiscal year 2008 and recruiting costs associated with new
registered representatives.
The
Company reported a net loss of $3,438,000 in the first nine months of fiscal
year 2008 compared to net income of $2,052,000 in
the
first
nine months of
fiscal
year 2007.
The net
loss attributable to common stockholders in the first nine months of fiscal
year
2008 was $3,691,000, or $.43 per common share, as compared to the diluted
earnings attributable to common stockholders of $1,735,000, or $.20 per common
share, in the first nine months of fiscal year 2007. The net income attributable
to common stockholders reflects $253,000 and $317,000 of cumulative preferred
stock dividends on the Company’s preferred stock for the third quarter of fiscal
years 2008 and 2007, respectively.
Liquidity
and Capital Resources
National
Securities, as a registered broker-dealer, is subject to the SEC’s Uniform Net
Capital Rule 15c3-1 that requires the maintenance of minimum net capital.
National Securities has elected to use the alternative standard method permitted
by the rule. This requires that National Securities maintain minimum net capital
equal to the greater of $250,000 or a specified amount per security based on
the
bid price of each security for which National Securities is a market maker.
At
June
30, 2008, National Securities’ net capital exceeded the requirement by
$1,610,000.
Advances,
dividend payments and other equity withdrawals from the Company’s broker-dealer
subsidiary are restricted by the regulations of the SEC and other regulatory
agencies. These regulatory restrictions may limit the amounts that a
broker-dealer subsidiary may dividend or advance to the Company.
The
Company extends unsecured credit in the normal course of business to its
brokers. The determination of the appropriate amount of the reserve for
uncollectible accounts is based upon a review of the amount of credit extended,
the length of time each receivable has been outstanding, and the specific
individual brokers from whom the receivables are due.
The
objective of liquidity management is to ensure that the Company has ready access
to sufficient funds to meet commitments, fund deposit withdrawals and
efficiently provide for the credit needs of customers.
In
April
2005, National Securities entered into a clearing agreement with National
Financial Services LLC (“NFS”) that became effective in June 2005. In the first
quarter of fiscal year 2007, NFS paid National Securities a $750,000 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
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.
In
February 2007, the Company completed a
financing transaction under which certain investors made an investment in the
Company by purchasing 10%
promissory notes in the principal amount of $1.0
million,
with
warrants
to purchase an aggregate of 250,000 shares of common stock at an exercise price
of $1.40 per share. The promissory notes mature in February 2009, and have
a
stated interest rate of 10% per annum. The relative fair value of the warrants
was calculated using the Black-Scholes Option Valuation Model. The Company
recorded a debt discount of approximately $195,000 that will be charged to
interest expense over the life of the promissory
notes.
The
investment included $500,000 by Christopher C. Dewey and $250,000 by St. Cloud
Capital Partners, L.P. (“St. Cloud”). Mr. Dewey, and Marshall S. Geller, the
Co-Founder and Senior Managing Partner of St. Cloud, are each members of the
Company’s board of directors. The
Company incurred legal fees and other costs related to this capital transaction
in the amount of $22,000 that were capitalized and will be amortized to interest
expense over the life of the promissory notes. The
Company used $850,000 of the proceeds to pay in full promissory notes that
had
maturity dates in February 2007.
In
February 2008, National Securities and the holder of a $500,000 secured demand
note that was scheduled to mature on March 1, 2008, extended the term of the
secured demand note to March 1, 2009.
On
March
31, 2008, the Company completed a
financing transaction under which an investor made an investment in the Company
by purchasing a
convertible promissory note in the principal amount of $3.0
million,
with a
warrant
to purchase 375,000 shares of common stock at an exercise price of $2.50 per
share. The promissory note matures in March 2012, is convertible into common
stock at a price of $2.00 per share and has a stated interest rate of 10% per
annum. The Company accounted for this transaction by applying EITF No 98-5
and
EITF No. 00-27, and the relative fair value of the warrant of approximately
$395,000 was calculated using the Black-Scholes Option Valuation Model. This
amount has been recorded as a debt discount that will be charged to interest
expense over the life of the promissory
note.
On
June
30, 2008, the Company completed a
financing transaction under which the same investor made an additional
investment in the Company by purchasing a
convertible promissory note in the principal amount of $3.0
million,
with a
warrant
to purchase 468,750 shares of common stock at an exercise price of $2.00 per
share. The promissory note matures in June 2012, is convertible into common
stock at a price of $1.60 per share and has a stated interest rate of 10% per
annum. Under accounting guidance provided by EITF No 98-5 and EITF No. 00-27
the
relative fair value of the warrant was calculated using the Black-Scholes Option
Valuation Model. The Company also recorded an additional debt discount for
the
beneficial conversion feature of the instrument. These amounts, totaling
approximately $789,000, have been recorded as a debt discount that will be
charged to interest expense over the life of the promissory
note.
The
Company and the investor entered into registration rights agreements, wherein
the Company has agreed to file a registration statement for the shares of common
stock issuable upon conversion of the note and exercise of the warrant within
ninety (90) days of the effective date of the merger with vFinance, and to
cause
the registration statement to be declared effective within one hundred eighty
(180) days of the effective date of such merger. Should the Company fail to
either file the registration statement or have it declared effective within
such
time limits then as liquidated damages the interest rate of the note shall
increase 1% per annum for each month the applicable failure is not cured, up
to
a maximum of 15%. The investment was made by an affiliate of St. Cloud, whose
managing partner is Marshall S. Geller, a member of the Company's board of
directors. Robert W. Lautz, Jr., a Managing Director
of St.
Cloud,
became a
member of the Board of Directors of the Company concurrent with the closing
of
the June 2008 financing transaction. The
Company incurred legal fees and other costs related to these capital
transactions of
approximately $101,000
and $75,000, respectively, that were capitalized and will be amortized to
interest expense over the life of the promissory notes.
In
the
three and nine months ended June 30, 2008 the Company received proceeds of
$0
and $8,000, respectively, from the exercise of outstanding stock options. In
July 2008 the Company received proceeds of $9,000 from the exercise of
outstanding stock options.
ITEM
3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET
RISK
The
Company's primary market risk arises from the fact that it engages in
proprietary trading and historically made dealer markets in equity securities.
Accordingly, the Company may be required to maintain certain amounts of
inventories in order to facilitate customer order flow. The Company may incur
losses as a result of price movements in these inventories due to changes in
interest rates, foreign exchange rates, equity prices and other political
factors. The Company is not subject to direct market risk due to changes in
foreign exchange rates. However, the Company is subject to market risk as a
result of changes in interest rates and equity prices, which are affected by
global economic conditions. The Company manages its exposure to market risk
by
limiting its net long or short positions. Trading and inventory accounts are
monitored daily by management and the Company has instituted position limits.
Credit
risk represents the amount of accounting loss the Company could incur if
counterparties to its proprietary transactions fail to perform and the value
of
any collateral proves inadequate. Although credit risk relating to various
financing activities is reduced by the industry practice of obtaining and
maintaining collateral, the Company maintains more stringent requirements to
further reduce its exposure. The Company monitors its exposure to counterparty
risk on a daily basis by using credit exposure information and monitoring
collateral values. The Company maintains a credit committee, which reviews
margin requirements for large or concentrated accounts and sets higher
requirements or requires a reduction of either the level of margin debt or
investment in high-risk securities or, in some cases, requiring the transfer
of
the account to another broker-dealer.
The
Company monitors its market and credit risks daily through internal control
procedures designed to identify and evaluate the various risks to which the
Company is exposed. There can be no assurance, however, that the Company's
risk
management procedures and internal controls will prevent losses from occurring
as a result of such risks.
The
following table shows the quoted market values of marketable securities owned
("long") by the Company, securities sold but not yet purchased ("short") the
Company, and net positions as of June 30, 2008:
|
|
Long
|
|
Short
|
|
Net
|
|
Corporate
stocks
|
|
$
|
320,000
|
|
$
|
35,000
|
|
$
|
285,000
|
|
Corporate
bonds
|
|
|
21,000
|
|
|
-
|
|
|
21,000
|
|
Government
obligations
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
|
$
|
341,000
|
|
$
|
35,000
|
|
$
|
306,000
|
|
ITEM
4. CONTROLS AND PROCEDURES
Evaluation
of disclosure controls and procedures.
Based on
the evaluation of the Company’s disclosure controls and procedures (as defined
in the Securities Exchange Act of 1934 Rules 13a-15(e) and 15d-15(e))
required by the Exchange Act Rules 13a-15(b) or 15d-15(b), the Company’s Chief
Executive Officer and Chief Financial Officer have concluded that, as of the
end
of the period covered by this report, the Company’s disclosure controls and
procedures were adequate and effective to ensure that material information
relating to the Company and its consolidated subsidiaries would be made known
to
them by others within those entities, particularly during the period in which
this quarterly report on Form 10-Q was being prepared.
Changes
in internal controls.
There
were no significant changes in the Company’s internal controls or in other
factors that could significantly affect those controls and procedures subsequent
to the date of our evaluation nor any significant deficiencies or material
weaknesses in such disclosure controls and procedures requiring corrective
actions.
PART
II - OTHER INFORMATION
ITEM
1. LEGAL PROCEEDINGS
During
the quarter ended June 30, 2008, there were no significant developments in
the
Company’s legal proceedings. For a detailed discussion of the Company’s legal
proceedings, please refer to Note 7 herein, and the Company’s Annual Report on
Form 10-K for the fiscal year ended September 30, 2007.
ITEM
1A. RISK FACTORS
There
are
no material changes from the risk factors previously disclosed in the Company’s
Form 10-K for the year ended September 30, 2007.
ITEM
2. UNREGISTERED
SALES OF EQUITY SECURITIES
AND USE OF PROCEEDS
Previously
reported in the Company’s Current Report on Form 8-K filed with the SEC on July
2, 2008.
ITEM
3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM
4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The
Company held a special meeting of shareholders on June 12, 2008. Proxies were
solicited by the Company pursuant to Regulation 14A under the Exchange Act
of
1934, as amended. At the special meeting, the Company’s shareholders approved
the proposal to amend the Company’s Certificate of Incorporation to increase the
authorized common stock, $0.02 par value, of the Company from 30,000,000 to
50,000,000 shares. The number of shares voted “for”, “against” and “abstain” was
as follows:
|
|
For
|
|
Against
|
|
Abstain
|
|
In
Person
|
|
|
-
|
|
|
-
|
|
|
-
|
|
By
Proxy
|
|
|
9,665,649
|
|
|
47,645
|
|
|
15,562
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
9,665,649
|
|
|
47,645
|
|
|
15,562
|
|
ITEM
5. OTHER INFORMATION
None.
ITEM
6. EXHIBITS
31.1
|
Chief
Executive Officer’s Certificate pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.
|
31.2
|
Chief
Financial Officer’s Certificate pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.
|
32.1
|
Chief
Executive Officer’s Certificate pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
|
32.2
|
Chief
Financial Officer’s Certificate pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
|
SIGNATURES
Pursuant
to the requirements of the Securities Exchange Act of 1934, the registrant
has
duly caused this report to be signed on its behalf by the undersigned thereunto
duly authorized.
NATIONAL
HOLDINGS CORPORATION AND SUBSIDIARY
|
By:
|
/s/
Mark Goldwasser
|
|
|
Mark
Goldwasser
|
|
Chief
Executive Officer
|
August
13, 2008
|
By:
|
s/
Alan B. Levin
|
|
|
Alan
B. Levin
|
|
Chief
Financial Officer
|