<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
QUARTERLY REPORT UNDER SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For Quarter Ended March 31, 1995 Commission File Number 0-15521
NATIONAL SECURITIES CORPORATION
- ------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
Washington 91-0519466
- ------------------------------- -------------------
(State of other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1001 Fourth Avenue, Suite 2200, Seattle, Washington 98154
- ------------------------------------------------------------------------------
(Address of principal executive offices) (Zip code)
Registrant's telephone number, including area code: (206) 622-7200
____________
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 ( )
The number of shares outstanding of registrant's Common stock, par value $0.02
per share, at April 11, 1995 was 561,938 shares.
<PAGE> 2
NATIONAL SECURITIES CORPORATION
STATEMENT OF FINANCIAL CONDITION
ASSETS
<TABLE>
<CAPTION>
March 31,
1995 September 30,
(unaudited) 1994
----------- -------------
<S> <C> <C>
CASH, subject to immediate withdrawal $ 2,085,000 $ 1,671,000
CASH, CASH EQUIVALENTS AND SECURITIES (Note 2) 14,847,000 9,159,000
DEPOSITS 70,000 59,000
RECEIVABLES
Brokers and dealers 982,000 565,000
Customers 7,025,000 6,229,000
Other 83,000 11,000
MARKETABLE SECURITIES, at market 690,000 557,000
FIXED ASSETS, net 235,000 278,000
OTHER ASSETS 134,000 98,000
----------- -----------
$26,151,000 $18,627,000
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
PAYABLES
Brokers and dealers $ 832,000 $ 691,000
Customers 21,929,000 14,775,000
FEDERAL INCOME TAX PAYABLE 8,000 15,000
SECURITIES SOLD, BUT NOT YET PURCHASED,
at market 593,000 121,000
ACCOUNTS PAYABLE, ACCRUED EXPENSES AND
OTHER LIABILITIES 229,000 505,000
CAPITAL LEASE OBLIGATION - 11,000
----------- -----------
23,591,000 16,118,000
----------- -----------
COMMITMENTS AND CONTINGENCIES (Notes 3, 4, and 5)
STOCKHOLDERS' EQUITY
Common stock, $.02 par value, 5,000,000 shares
authorized, 563,438 and 597,688 shares issued and
outstanding, respectively 11,000 12,000
Additional paid-in capital 315,000 400,000
Retained earnings 2,234,000 2,097,000
----------- -----------
2,560,000 2,509,000
----------- -----------
$26,151,000 $18,627,000
=========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
<PAGE> 3
NATIONAL SECURITIES CORPORATION
STATEMENT OF OPERATIONS
(Unaudited)
<TABLE>
<CAPTION>
2nd Qtr '95 2nd Qtr '94 YTD 1995 YTD 1994
PERIOD (3 Months) (3 Months) (6 Months) (6 Months)
----------- ----------- ---------- ----------
<S> <C> <C> <C> <C>
REVENUES:
Commissions $ 1,627,000 $ 2,227,000 $ 3,320,000 $ 4,300,000
Net dealer inventory gains 617,000 617,000 1,086,000 1,317,000
Interest and dividends 350,000 202,000 626,000 444,000
Transfer fees 82,000 109,000 174,000 211,000
Other 101,000 97,000 122,000 119,000
----------- ----------- ----------- -----------
TOTAL REVENUES $ 2,777,000 $ 3,252,000 $ 5,328,000 $ 6,391,000
----------- ----------- ----------- -----------
EXPENSES:
Commissions $ 1,404,000 $ 1,891,000 $ 2,837,000 $ 3,741,000
Employee compensation and benefits 429,000 420,000 735,000 771,000
Clearance fees paid to non-brokers 90,000 102,000 179,000 204,000
Communications 80,000 73,000 158,000 141,000
Occupancy and equipment costs 233,000 229,000 438,000 424,000
Interest 239,000 87,000 391,000 186,000
Other 137,000 230,000 334,000 416,000
----------- ----------- ----------- -----------
TOTAL EXPENSES $ 2,612,000 $ 3,032,000 $ 5,072,000 $ 5,883,000
----------- ----------- ----------- -----------
Income before income taxes 165,000 220,000 256,000 508,000
Provision for income taxes (52,000) (59,000) (83,000) (156,000)
NET INCOME: $ 113,000 $ 161,000 $ 173,000 $ 352,000
=========== =========== =========== ===========
EARNINGS PER SHARE $ .19 $ .24 $ .29 $ .55
=========== =========== =========== ===========
WEIGHTED AVERAGE NUMBER OF
COMMON STOCK SHARES OUTSTANDING
FOR THE PERIOD 587,972 663,560 588,220 637,953
======= ======= ======= =======
</TABLE>
The accompanying notes are an integral part of these financial statements.
<PAGE> 4
NATIONAL SECURITIES CORPORATION
STATEMENT OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
6 months ended 6 months ended
March 31, 1995 March 25, 1994
-------------- --------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net Income $ 173,000 $ 352,000
Charges to income not requiring cash
Depreciation and amortization 74,000 68,000
Changes in assets and liabilities
Cash, cash equivalents and securities (5,688,000) (1,576,000)
Deposits (11,000) (1,000)
Receivables (1,285,000) 1,167,000
Marketable securities (133,000) (1,319,000)
Other assets (36,000) (26,000)
Payables 7,295,000 777,000
Securities sold but not yet purchased 472,000 205,000
Income taxes payable (7,000) (253,000)
Accounts payable, accrued expense and
other liabilities (276,000) (92,000)
------------ ------------
578,000 (698,000)
------------ ------------
INVESTING ACTIVITIES
Purchase of fixed assets, net (31,000) (35,000)
------------ ------------
FINANCING ACTIVITIES
Capital lease payments (11,000) (30,000)
Issuance of common stock through
exercise of options - 154,000
Retirement of common stock (122,000) -
------------ ------------
(133,000) 124,000
------------ ------------
INCREASE (DECREASE) IN CASH 414,000 (609,000)
CASH BALANCE
Beginning of the period 1,671,000 1,035,000
------------ ------------
End of the period $ 2,085,000 $ 426,000
============ ============
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash paid during the quarter for:
Interest $ 239,000 $ 87,000
============ ============
Income taxes $ 75,000 $ 144,000
============ ============
SUPPLEMENTAL DISCLOSURES OF NONCASH INVESTING
AND FINANCING ACTIVITIES
Secured demand notes received (matured) for
liabilities subordinated to claims of
general creditors, net $ - $ (200,000)
============ ============
</TABLE>
The accompanying notes are an integral part of these financial statements.
<PAGE> 5
NATIONAL SECURITIES CORPORATION
NOTES TO FINANCIAL STATEMENTS
NOTE 1 - OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
NATURE OF BUSINESS - The Company was incorporated in 1947 under the
laws of the State of Washington. Its primary business is to provide financial
services and products to the general public and to the financial community as a
broker and dealer of securities. Its principal office is located in Seattle,
Washington.
ACCOUNTING METHOD - Customer security transactions and the related
commission income and commission expense are recorded on a settlement date
basis. The results of operations using the settlement date basis is not
materially different from the trade date basis.
The Company believes the financial statements presented herein include
all adjustments necessary in order to make the financial statements not
misleading.
TRADING SECURITIES - Trading securities are marked to market at month
end.
DEPRECIATION - Fixed assets are stated at cost and are depreciated
over their estimated useful lives. Depreciation is computed using
straight-line and accelerated methods.
EARNINGS PER SHARE - Earnings per common share is based upon the net
income for the quarter divided by the weighted average number of common shares
and common stock equivalents outstanding during the quarter. For second
quarter of fiscal year 1995 and 1994, the number of shares used in the primary
earnings per share calculation was 587,972 and 663,560, respectively. For the
first six months of fiscal year 1995 and 1994, the number of shares used was
588,220 and 637,953, respectively.
FISCAL YEAR - The Company has a fifty-two or fifty-three week year,
ending on the last Friday in September.
CASH AND CASH EQUIVALENTS - For purposes of the Statement of Cash
Flows, the Company considers only cash subject to immediate withdrawal. Cash,
cash equivalents and securities as discussed in Note 2 are not considered a
change in cash for this purpose.
NOTE 2 - CASH, CASH EQUIVALENTS AND SECURITIES
Cash, cash equivalents, and securities have been segregated in special
reserve bank accounts for the exclusive benefit of customers under Rule 15c3-3
of the Securities and Exchange Commission and consist of:
<TABLE>
<CAPTION>
March 31, September 30,
1995 1994
------------ -------------
<S> <C> <C>
Restricted cash deposits $ 8,000 $ -
U.S. Treasury and GNMA securities 14,839,000 7,070,000
Reverse Repurchase Agreement - 2,089,000
----------- -----------
$14,847,000 $ 9,159,000
=========== ===========
</TABLE>
<PAGE> 6
NATIONAL SECURITIES CORPORATION
NOTES TO FINANCIAL STATEMENTS
(CONTINUED)
NOTE 2 - CASH, CASH EQUIVALENTS AND SECURITIES (CONTINUED)
The United States treasury securities mature at various dates through
September 1999 and are stated at current market values.
NOTE 3 - NET CAPITAL REQUIREMENTS
The Company is subject to the Securities and Exchange Commission's
Uniform Net Capital Rule (Rule 15c3-1), which requires the maintenance of
minimum net capital. The Company has elected to use the alternative method as
permitted by the rule. This method requires that the Company maintain minimum
net capital equal to the greater of $250,000 or 2% of aggregate debit balances.
The net capital amount and percentage for the Company is:
<TABLE>
<S> <C>
Net capital $1,681,000
==========
Excess net capital $1,431,000
==========
Percentage of net capital to
aggregate debit balances 23%
===
</TABLE>
NOTE 4 - COMMITMENTS
As of March 31, 1995, the Company is committed under operating leases
to future minimum lease payments as follows:
<TABLE>
<CAPTION>
Fiscal Year Ending
------------------
<S> <C>
1995 205,000
1996 424,000
1997 427,000
1998 444,000
1999 333,000
----------
$1,833,000
==========
</TABLE>
NOTE 5 - CONTINGENCIES
The Company is a defendant in various arbitration and administrative
proceedings, lawsuits and claims which arise in the normal course of business.
The Company believes it has substantial defenses to each of the actions and
also believes the final resolution of these matters will not have a material
adverse impact on the Company's financial position or its results of
operations.
<PAGE> 7
NATIONAL SECURITIES CORPORATION
NOTES TO FINANCIAL STATEMENTS
(CONTINUED)
NOTE 5 - CONTINGENCIES (CONTINUED)
On October 31, 1994, the Company executed a letter of intent
acknowledging a proposal by a private group of investors to purchase
controlling interest of the Company's common stock. The group intends to
purchase new shares from the Company as well as shares from two officers. It
is contemplated that one of the officers would receive an option to re-acquire
a substantial number of shares.
<PAGE> 8
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Second Quarter 1995 Compared to Second Quarter 1994
The Company's second quarter of 1995 resulted in a decline of both
revenues and earnings compared with the same period during 1994. The decrease
does not concern management because the 1995 results are more indicative of the
Company's historical performance, while the second quarter of 1994 results
represented record earnings for the Company.
Net income declined to $113,000 ($0.19 per share) in the second
quarter of fiscal 1995 from $161,000 ($0.24 per share) for the same period a
year earlier, a $48,000 decline. The decline in net income is primarily
attributable to the decrease in revenues for the period, as opposed to
increases in expenses. Revenues declined $475,000, or 15% to $2,777,000 from
$3,252,000. This decline is the result of drops in commission revenues created
by lower investor activity. Commission revenue fell by $600,000 or 27% from
$2,227,000 to $1,627,000. Total transactions processed by the Company during
the quarter decreased by 6,729 or 23% to 22,452 from 29,181; however, the
average revenue per ticket rose from $111 to $124.
As expected, total expenses declined by $420,000 or 14% to $2,612,000
from $3,032,000. The primary component of the Company's expenses is the
commission payouts to brokers and traders. As revenues decline, commission
expenses decline accordingly. The Company's non-commission, non-interest
expenses fell by 8% (from $1,054,000 to $969,000), while costs per ticket
increased by 19% (from $36.00 to $43.00). This is because many of the
Company's costs are fixed, and a decrease in the number of trades does not
proportionally decrease costs associated with processing the trades.
Six Months Ended March 31, 1995 Compared to Six Months
Ended March 25, 1994
Earnings for the first six months of fiscal 1995 total $173,000 ($0.29
per share), versus $352,000 ($0.55 per share) for the prior year. The number
of transactions declined by approximately 21% (to 46,497 from 58,988), as did
revenues which declined by $1,063,000, or 17% (to $5,328,000 from $6,391,000).
Despite these declines, the Company is pleased with revenues per ticket, which
rose by 6% to $115 from $108. The increase in revenue per ticket was greater
than the increase in the Company's cost to process each trade.
Total expenses for the first six months declined by $811,000, or 14%,
to $5,072,000 from $5,883,000. As discussed above, commission expenses vary
directly with commission revenues. Since commission revenues decreased for the
period, commission expenses also decreased, to $2,837,000 from $3,741,000,
accounting for most of the decrease in overall expenses. Non-interest,
non-commission expenses also declined by 6% relative to the same period a year
earlier. For the reasons discussed in the quarterly comparisons above, costs
per ticket rose by 21% (from $33 to $40).
The Company's financial performance is greatly influenced by market
conditions. Although the second quarter results did not match those of the
prior year, these 1995 results did indeed show a substantial improvement as
compared to the first quarter in both revenues and earnings.
<PAGE> 9
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONTINUED)
Fears of inflation and the threat of rising interest rates, which had
recently impaired the Company's earnings, may have subsided. Securities
markets are stronger and retail trading activity, the core of the Company's
revenue base, has increased from the first quarter. Moreover, the balance of
cash deposits from customers has reached an all-time high (an increase of
approximately 48% during the last six months), and the Company added several
new brokers in the last three months. Due to the expected and as yet
unrealized benefits of these factors, the Company is cautiously optimistic
about the balance of fiscal 1995.
Liquidity and Capital Resources
As with most brokerage firms, a substantial portion of the Company's
assets are liquid, consisting mainly of cash or assets readily convertible into
cash. These assets are financed primarily by the Company's interest-bearing
and noninterest-bearing customer credit balances, loan of securities, other
payables and equity capital. Occasionally, the Company has utilized short-term
bank financing to supplement its ability to meet day-to-day operating cash
requirements. Such financings have been used to equalize cash flows and are,
therefore, regularly repaid. The Company has no long-term cash borrowings.
The objective of liquidity management is to ensure the Company has
ready access to sufficient funds to meet commitments and future obligations,
fund deposit withdrawals and efficiently provide for the credit needs of
customers. Cash flow from operations and earnings contribute significantly to
liquidity. Liquidity is also partially obtained through utilizing interest
bearing and non-interest bearing customer credit balances by maintaining assets
that are readily convertible to cash at minimal costs through maturities and
sales under agreements to repurchase.
The Company pays interest to customers on their funds awaiting
investment in securities. At March 31, 1995, these customer credit balances
increased by approximately $7,154,000. The result of this increase in customer
funds led the Company to increase its investment in U.S. Treasury and GNMA
securities by approximately $5,688,000.
The Company believes its internally generated liquidity, together with
access to external capital and debt resources, will be sufficient to satisfy
existing commitments and plans, and to provide adequate financial flexibility
to take advantage of potential strategic business opportunities should they
arise.
The Company requires its Investment Executives to be responsible for
substantially all of the overhead expenses associated with their sales efforts,
including their office furniture, sales assistants, telephone service, and
supplies. The Company does not maintain a high level of fixed assets.
The Company is subject to the net capital requirements of the
Securities and Exchange Commission which are designed to measure the general
financial soundness and liquidity of broker/dealers from a conservative view.
As of March 31, 1995, the Company's net capital exceeded the SEC's requirement
of $250,000 by $1,431,000.
As of March 31, 1995, the Company had no outstanding balance on its
$2,000,000 revolving line of credit with Seafirst Bank. Borrowings under the
line of credit bear interest at the prime rate (9.00%) plus .5%.
<PAGE> 10
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONTINUED)
Inflation
The Company has determined that the effect of inflation on its assets,
consisting of cash, securities, office equipment, leasehold improvements, and
computers has not been significant over the last three years.
Whereas inflation has not had a materially adverse impact on the costs
or the operations of the Company, inflation does have an effect on the
Company's business. Increases in inflation are generally accompanied by
increases in precious metals prices. As a result, there is increased investor
interest in precious metal-related securities, which is a significant revenue
source for the Company. At the same time, however, increases in inflation
rates may be accompanied by increases in interest rates, both of which may
adversely effect short-term stock prices and performance and, thereby,
adversely effect the Company's performance. It is, therefore, difficult to
predict the net impact of inflation on the Company.
<PAGE> 11
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 SECURITIES CORPORATION
Date Robert I. Kollack, President and
Chief Executive Officer
Date Jay W. Hanville, Chief Financial Officer,
Chief Accounting Officer and Treasurer
<TABLE> <S> <C>
<ARTICLE> BD
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> SEP-30-1995
<PERIOD-END> MAR-31-1995
<CASH> 2,093,000
<RECEIVABLES> 7,413,000
<SECURITIES-RESALE> 0
<SECURITIES-BORROWED> 677,000
<INSTRUMENTS-OWNED> 15,529,000
<PP&E> 235,000
<TOTAL-ASSETS> 26,151,000
<SHORT-TERM> 0
<PAYABLES> 22,761,000
<REPOS-SOLD> 0
<SECURITIES-LOANED> 0
<INSTRUMENTS-SOLD> 593,000
<LONG-TERM> 0
<COMMON> 11,000
0
0
<OTHER-SE> 2,549,000
<TOTAL-LIABILITY-AND-EQUITY> 26,151,000
<TRADING-REVENUE> 1,086,000
<INTEREST-DIVIDENDS> 626,000
<COMMISSIONS> 3,320,000
<INVESTMENT-BANKING-REVENUES> 0
<FEE-REVENUE> 0
<INTEREST-EXPENSE> 391,000
<COMPENSATION> 3,572,000
<INCOME-PRETAX> 256,000
<INCOME-PRE-EXTRAORDINARY> 256,000
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 173,000
<EPS-PRIMARY> .29
<EPS-DILUTED> .29
</TABLE>
