<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 June 30, 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 July 5, 1995 was 663,438 shares.
<PAGE> 2
NATIONAL SECURITIES CORPORATION
STATEMENT OF FINANCIAL CONDITION
ASSETS
<TABLE>
<CAPTION>
June 30,
1995 September 30,
(unaudited) 1994
----------- -------------
<S> <C> <C>
CASH, subject to immediate withdrawal $ 1,673,000 $ 1,671,000
CASH, CASH EQUIVALENTS AND SECURITIES (Note 2) 17,494,000 9,159,000
DEPOSITS 75,000 59,000
RECEIVABLES
Brokers and dealers 1,310,000 565,000
Customers 8,662,000 6,229,000
Other 108,000 11,000
MARKETABLE SECURITIES, at market 723,000 557,000
FIXED ASSETS, net 283,000 278,000
OTHER ASSETS 257,000 98,000
----------- -----------
$30,585,000 $18,627,000
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
PAYABLES
Brokers and dealers $ 140,000 $ 691,000
Customers 26,019,000 14,775,000
FEDERAL INCOME TAX PAYABLE - 15,000
SECURITIES SOLD, BUT NOT YET PURCHASED,
at market 418,000 121,000
ACCOUNTS PAYABLE, ACCRUED EXPENSES AND
OTHER LIABILITIES 926,000 505,000
CAPITAL LEASE OBLIGATION - 11,000
----------- -----------
27,503,000 16,118,000
----------- -----------
COMMITMENTS AND CONTINGENCIES (Notes 3, 4, and 5)
STOCKHOLDERS' EQUITY (Note 6)
Common stock, $.02 par value, 5,000,000 shares
authorized, 663,438 and 597,688 shares issued and
outstanding, respectively 13,000 12,000
Additional paid-in capital 815,000 400,000
Retained earnings 2,254,000 2,097,000
----------- -----------
3,082,000 2,509,000
----------- -----------
$30,585,000 $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>
3rd Qtr '95 3rd Qtr '94 YTD 1995 YTD 1994
PERIOD (3 Months) (3 Months) (9 Months) (9 Months)
----------- ----------- ---------- ----------
<S> <C> <C> <C> <C>
REVENUES:
Commissions $ 2,329,000 $ 1,672,000 $ 5,649,000 $ 5,972,000
Net dealer inventory gains 689,000 401,000 1,775,000 1,718,000
Interest and dividends 413,000 232,000 1,039,000 676,000
Transfer fees 104,000 91,000 278,000 302,000
Other 65,000 23,000 187,000 142,000
----------- ----------- ----------- -----------
TOTAL REVENUES $ 3,600,000 $ 2,419,000 $ 8,928,000 $ 8,810,000
----------- ----------- ----------- -----------
EXPENSES:
Commissions $ 1,955,000 $ 1,373,000 $ 4,792,000 $ 5,114,000
Employee compensation and benefits 428,000 340,000 1,163,000 1,111,000
Clearance fees paid to non-brokers 132,000 99,000 311,000 303,000
Communications 104,000 78,000 262,000 219,000
Occupancy and equipment costs 280,000 214,000 718,000 638,000
Interest 289,000 108,000 680,000 294,000
Other 385,000 180,000 719,000 596,000
----------- ----------- ----------- -----------
TOTAL EXPENSES $ 3,573,000 $ 2,392,000 $ 8,645,000 $ 8,275,000
----------- ----------- ----------- -----------
Income before income taxes 27,000 27,000 283,000 535,000
Provision for income taxes (2,000) (15,000) (85,000) (171,000)
NET INCOME $ 25,000 $ 12,000 $ 198,000 $ 364,000
=========== =========== =========== ===========
EARNINGS PER SHARE $ .04 $ .02 $ .33 $ .59
=========== =========== =========== ===========
WEIGHTED AVERAGE NUMBER OF
COMMON STOCK SHARES OUTSTANDING
FOR THE PERIOD 626,450 655,641 600,483 620,967
======= ======= ======= =======
</TABLE>
The accompanying notes are an integral part of these financial statements.
<PAGE> 4
NATIONAL SECURITIES CORPORATION
STATEMENT OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
9 months ended 9 months ended
June 25, 1995 June 24, 1994
-------------- --------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net Income $ 198,000 $ 364,000
Charges to income not requiring cash
Depreciation and amortization 114,000 104,000
Changes in assets and liabilities
Cash, cash equivalents and securities (8,335,000) (1,869,000)
Deposits (16,000) (2,000)
Receivables (3,275,000) 1,616,000
Marketable securities (166,000) (185,000)
Other assets (159,000) (37,000)
Payables 10,693,000 (451,000)
Securities sold but not yet purchased 297,000 (99,000)
Income taxes payable (15,000) (278,000)
Accounts payable, accrued expense and
other liabilities 421,000 (289,000)
----------- -----------
(243,000) (1,126,000)
----------- -----------
INVESTING ACTIVITIES
Purchase of fixed assets, net (119,000) (102,000)
----------- -----------
FINANCING ACTIVITIES
Capital lease payments (11,000) (46,000)
Payments to acquire common stock (132,000) (20,000)
Issuance of common stock 507,000 154,000
----------- -----------
364,000 88,000
----------- -----------
INCREASE (DECREASE) IN CASH 2,000 (1,140,000)
CASH BALANCE
Beginning of the period 1,671,000 1,035,000
----------- -----------
End of the period $ 1,673,000 $ (105,000)
=========== ===========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash paid during the period for:
Interest $ 680,000 $ 294,000
=========== ===========
Income taxes $ 100,000 $ 194,000
=========== ===========
</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 third quarter
of fiscal year 1995 and 1994, the number of shares used in the primary earnings
per share calculation was 626,450 and 655,641, respectively. For the first
nine months of fiscal year 1995 and 1994, the number of shares used was 600,483
and 620,967, 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>
June 30, September 30,
1995 1994
----------- -------------
<S> <C> <C>
Restricted cash deposits $ 1,574,000 $ -
U.S. Treasury and GNMA securities 15,920,000 7,070,000
Reverse Repurchase Agreement - 2,089,000
----------- -----------
$17,494,000 $ 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. The GNMA securities
mature at various dates through July 2010 and are also 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 $2,060,000
==========
Excess net capital $1,810,000
==========
Percentage of net capital to
aggregate debit balances 22%
===
</TABLE>
NOTE 4 - COMMITMENTS
As of June 30, 1995, the Company is committed under operating leases
to future minimum lease payments as follows:
<TABLE>
<CAPTION>
Fiscal Year Ending
------------------
<S> <C>
1995 172,000
1996 608,000
1997 427,000
1998 444,000
1999 333,000
----------
$1,984,000
==========
</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 6 - STOCKHOLDERS' EQUITY
On May 23, 1995, National Securities Corporation ("the Company") sold
100,000 newly issued common shares in a private placement to 23 individuals and
entities (the "Purchasers"). Additionally, Robert Block, Chairman of the
Company (and the Block Foundation) sold 108,830 shares to the Purchasers, and
Robert Kollack, President and Chief Executive Officer, sold 107,000 shares to
them. All shares were purchased at a price of $5.00 per share. The total
number of shares sold in these transactions equal approximately 48% of the
Company's outstanding shares.
Block and the Block Foundation held 25% of the Company's outstanding
stock. Block now holds 33,060 shares, or about 5%. Block retired from the
Board but will be appointed Chairman Emeritus and will continue to work as an
advisor to the Company. Kollack held 19% of the Company's shares. He sold all
of his shares and was granted options to purchase 75,000 shares at $5.00 each.
Kollack remains a Director and continues to serve as the Company's President.
As part of the transaction, Barry Shulman resigned from the Board. Purchasers
Steven A. Rothstein and Norman S. Lynn replaced Block and Shulman on the
Board. Mr. Rothstein was granted options to purchase 70,000 shares and
Mr. Lynn options to purchase 30,000 shares, all at $5.00 each.
Mr. Steven A. Rothstein was the only Purchaser acquiring a beneficial
interest in more than 10% of the Company's stock.
<PAGE> 8
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Third Quarter 1995 Compared to Third Quarter 1994
The Company underwent two significant changes during its third
quarter. First, in May several investors purchased an aggregate of 48% of the
Company's common stock; 215,830 outstanding shares from two directors and
100,000 newly issued shares from the Company, all at $5.00 per share. Second,
in June the Company negotiated terms under which approximately 60 new account
executives, formerly affiliated with a Massachusetts broker-dealer, became
affiliated with the Company. While the Company anticipates future benefits from
these activities, the Company's third quarter results were adversely impacted
by the expenses of consummating these extraordinary transactions.
Although the Company's third quarter exhibited a significant increase
in revenues (as compared to the same period a year earlier), earnings for the
period were negligible. These flat earnings were largely the product of
numerous non-recurring expenses which the Company incurred during the quarter
resulting from the change in control and the acquisition of the additional
account executives. These extraordinary expenses totaled approximately
$125,000, or $.10 per share.
Revenues jumped $1,181,000, or 49%, to $3,600,000 from $2,419,000.
This dramatic increase is due to both favorable market conditions and the
aforementioned success in acquiring additional account executives. Commission
revenue, the most significant component of the Company's revenue, climbed
accordingly, to $3,018,000 from $2,073,000, a $945,000 (46%) increase over the
third quarter 1994 results. Interest revenue rose substantially (to $413,000
from $232,000); however, interest expenses rose proportionally offsetting any
impact on net income.
Total transactions processed by the Company during the quarter
increased by 5,095, or 21%, to 29,661 from 24,566. Additionally, revenue per
ticket rose from $98 to $121, a 23% increase as compared with the prior year.
Concurrent with the 49% increase in revenues (see above), overall
expenses grew by 49%. Total expenses increased by $1,181,000, or 49%, to
$3,573,000 from $2,392,000. This significant rise in expenses was not
unexpected. The primary component of the Company's expenses is commission
payout to brokers and traders. As revenues increased, commission expenses
increased accordingly. Commission expense rose from $1,373,000 to $1,955,000,
an increase of $582,000, or 42%, over the same quarter a year earlier. More
meaningful, however, was the increase in the Company's non-commission,
non-interest expenses during the period. These expenses rose from $911,000 in
third quarter 1994 to $1,329,000 for the 1995 quarter, a 46% increase. Much of
this increase, primarily the result of the Company's change in control as well
as its acquisition of additional account executives, is temporary in nature or
non-recurring and not typical to the Company's operations. This also explains
the jump in the Company's costs per ticket which increased from $36.00 to
$43.00. Because many of the Company's costs are fixed, an increase in the
number of trades does not proportionally increase costs associated with
processing the trades.
<PAGE> 9
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONTINUED)
Nine Months Ended June 30, 1995 Compared to Nine Months
Ended June 30, 1994
Earnings for the first nine months of fiscal 1995 total $198,000
($0.33 per share), versus $364,000 ($0.59 per share) for the prior year. The
number of transactions declined by approximately 9% (to 76,158 from 83,544);
however, revenues increased by $118,000, or 1%, (to $8,928,000 from
$8,810,000). The company is pleased with revenues per ticket, which rose by
11% to $117 from $105. An increase in revenue per ticket is generally positive
because the Company receives more revenue per trade while the Company's cost to
process each trade remains relatively constant.
Total expenses for the first nine months rose by $370,000, or 4%, to
$8,645,000 from $8,275,000. As discussed above, commission expenses vary
directly with commission revenues. Since commission revenues decreased for the
period, commission expenses also decreased, to $4,792,000 from $5,114,000.
Interest expense rose dramatically, from $294,000 to $680,000, an increase of
$386,000. It is important to note, however, that this increase in interest
expense was almost entirely offset by the increase in interest income.
Non-interest, non-commission expenses rose by $306,000, or 11%,
relative to the same period a year earlier. This jump in expenses had a
material impact on the Company's earnings, but, as explained in the quarterly
comparison above, was largely the product of non-recurring or temporary
expenses. As expected with such an increase in expenses, costs per ticket rose
from $34 to $42.
The Company's financial success is greatly influenced by the strength
of the securities markets. During the third quarter of 1995 Securities markets
were stronger and retail trading activity, the core of the Company's revenue
base, increased markedly. Moreover, the balance of cash deposits from
customers again reached an all-time high (an increase of approximately 19%
during the last quarter), and the Company added many new account executives 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.
<PAGE> 10
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONTINUED)
The Company pays interest to customers on their funds awaiting
investment in securities. At June 30, 1995, these customer credit balances
increased by approximately $11,244,000. The result of this increase in
customer funds led the Company to increase its investment in U.S. Treasury and
GNMA securities by approximately $8,335,000.
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 June 30, 1995, the Company's net capital exceeded the SEC's requirement
of $250,000 by $1,810,000.
As of June 30, 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 (8.75%) plus .5%.
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> 9-MOS
<FISCAL-YEAR-END> SEP-30-1995
<PERIOD-END> JUN-30-1995
<CASH> 3,247,000
<RECEIVABLES> 10,080,000
<SECURITIES-RESALE> 0
<SECURITIES-BORROWED> 0
<INSTRUMENTS-OWNED> 16,643,000
<PP&E> 283,000
<TOTAL-ASSETS> 30,585,000
<SHORT-TERM> 0
<PAYABLES> 26,159,000
<REPOS-SOLD> 0
<SECURITIES-LOANED> 0
<INSTRUMENTS-SOLD> 418,000
<LONG-TERM> 0
<COMMON> 13,000
0
0
<OTHER-SE> 3,069,000
<TOTAL-LIABILITY-AND-EQUITY> 30,585,000
<TRADING-REVENUE> 1,775,000
<INTEREST-DIVIDENDS> 1,039,000
<COMMISSIONS> 5,649,000
<INVESTMENT-BANKING-REVENUES> 0
<FEE-REVENUE> 0
<INTEREST-EXPENSE> 680,000
<COMPENSATION> 5,955,000
<INCOME-PRETAX> 283,000
<INCOME-PRE-EXTRAORDINARY> 283,000
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 198,000
<EPS-PRIMARY> .33
<EPS-DILUTED> .33
</TABLE>
