<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 December 29, 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 February 9, 1996 was 689,438 shares.
<PAGE> 2
NATIONAL SECURITIES CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENT OF FINANCIAL CONDITION
ASSETS
<TABLE>
<CAPTION>
December 29, September 29,
1995 1995
(unaudited)
------------ -------------
<S> <C> <C>
CASH, subject to immediate withdrawal $ 1,041,000 $ 204,000
CASH, CASH EQUIVALENTS AND SECURITIES 23,891,000 25,394,000
DEPOSITS 325,000 179,000
RECEIVABLES
Brokers and dealers 940,000 1,244,000
Customers 13,518,000 13,108,000
Other 135,000 232,000
FEDERAL INCOME TAX RECEIVABLE 73,000 40,000
SECURITIES HELD FOR RESALE, at market 1,021,000 829,000
FIXED ASSETS, net 464,000 414,000
DEFERRED COST 102,000 154,000
OTHER ASSETS 291,000 93,000
----------- -----------
$41,801,000 $41,891,000
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
LINE OF CREDIT $ 300,000 $ -
PAYABLES
Brokers and dealers 258,000 676,000
Customers 37,229,000 36,813,000
SECURITIES SOLD, BUT NOT YET PURCHASED,
at market 241,000 195,000
ACCOUNTS PAYABLE, ACCRUED EXPENSES AND
OTHER LIABILITIES 528,000 922,000
----------- -----------
38,556,000 38,606,000
----------- -----------
ISSUABLE COMMON STOCK 105,000 105,000
STOCKHOLDERS' EQUITY
Common stock, $.02 par value, 5,000,000
shares authorized, 689,438 and 676,938
shares issued and outstanding,
respectively 14,000 14,000
Additional paid-in capital 943,000 918,000
Retained earnings 2,183,000 2,248,000
----------- -----------
3,140,000 3,180,000
----------- -----------
$41,801,000 $41,891,000
=========== ===========
</TABLE>
<PAGE> 3
NATIONAL SECURITIES CORPORATION AND SUBSIDIARY
CONSOLIDATED INCOME STATEMENT
(Unaudited)
<TABLE>
<CAPTION>
Quarter Ended
-------------------------
12/29/95 12/30/94
---------- ----------
<S> <C> <C>
REVENUES:
Commissions $2,905,000 $1,693,000
Net dealer inventory gains 725,000 469,000
Interest and dividends 641,000 276,000
Transfer fees 117,000 92,000
Underwriting 254,000 -
Other 69,000 21,000
---------- ----------
TOTAL REVENUES $4,711,000 $2,551,000
---------- ----------
EXPENSES:
Commissions $2,565,000 $1,433,000
Employee compensation and benefits 620,000 306,000
Clearance fees paid to non-brokers 197,000 89,000
Communications 173,000 78,000
Occupancy and equipment costs 422,000 205,000
Interest 404,000 152,000
Professional fees 101,000 62,000
Other 326,000 135,000
---------- ----------
TOTAL EXPENSES $4,808,000 $2,460,000
---------- ----------
Income (loss) before income taxes (97,000) 91,000
Income taxes (33,000) 31,000
========== ==========
NET INCOME (LOSS) $ (64,000) $ 60,000
========== ==========
EARNINGS (LOSS) PER SHARE
OF COMMON STOCK $(0.09) $0.10
========== ==========
</TABLE>
The accompanying notes are an integral part of these financial statements.
<PAGE> 4
NATIONAL SECURITIES CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENT OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
Quarter Ended
-------------------------
12/29/95 12/30/94
---------- ----------
<S> <C> <C>
OPERATING ACTIVITIES
Net Income/(Loss) $ (64,000) $ 60,000
Charges to income not requiring cash
Depreciation and amortization 48,000 36,000
Deferred cost amortization 52,000 -
Changes in assets and liabilities
Cash, cash equivalents and securities 1,503,000 99,000
Deposits (146,000) -
Receivables (9,000) (1,319,000)
Federal Income Tax receivable (33,000)
Securities held for resale (192,000) (688,000)
Other assets (198,000) (113,000)
Payables (2,000) 2,032,000
Income tax payable - 16,000
Securities sold but not yet purchased 46,000 (77,000)
Accounts payable, accrued expenses
and other liabilities (394,000) (107,000)
---------- ----------
611,000 (61,000)
---------- ----------
INVESTING ACTIVITIES
Purchase of fixed assets, net (99,000) -
---------- ----------
FINANCING ACTIVITIES
Increase of borrowings 300,000 -
Capital lease payments - (11,000)
Issuance of common stock through
exercise of options 25,000 -
Retirement of common stock - (85,000)
---------- ----------
325,000 (96,000)
---------- ----------
INCREASE (DECREASE) IN CASH 837,000 (157,000)
CASH BALANCE
Beginning of the period 204,000 1,671,000
---------- ----------
End of the period $1,041,000 $1,514,000
========== ==========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash paid during the quarter for:
Interest $ 404,000 $ 152,000
========== ==========
Income taxes $ - $ 15,000
========== ==========
</TABLE>
The accompanying notes are an integral part of these financial statements.
<PAGE> 5
NATIONAL SECURITIES CORPORATION AND SUBSIDIARY
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 and financial condition 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 of five years. 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 first quarter
of fiscal year 1996 and 1995, the number of shares used in the earnings per
share calculation was 686,031 and 593,264, 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>
December 29, September 29,
1995 1995
------------ -------------
<S> <C> <C>
Restricted cash deposits $ 9,000 $ -
U.S. Treasury and GNMA securities 18,997,000 23,323,000
Reverse Repurchase Agreement 4,885,000 2,071,000
----------- -----------
$23,891,000 $25,394,000
=========== ===========
</TABLE>
<PAGE> 6
NATIONAL SECURITIES CORPORATION AND SUBSIDIARY
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 August 2024 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 as of December 29, 1996 is:
<TABLE>
<S> <C>
Net capital $1,656,000
==========
Excess net capital $1,369,000
==========
Percentage of net capital to
aggregate debit balances 12%
===
</TABLE>
NOTE 4 - COMMITMENTS
As of December 29, 1995, the Company is committed under operating leases
to future minimum lease payments as follows:
Fiscal Year Ending
<TABLE>
<CAPTION>
Fiscal Year Ending
------------------
<S> <C>
1996 $ 498,000
1997 438,000
1998 444,000
1999 333,000
----------
$1,713,000
==========
</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
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
First Quarter 1996 Compared to First Quarter 1995
Although the Company's first quarter exhibited a significant increase in
revenues (as compared to the same period a year earlier), the Company
experienced a loss due largely to increased expenses related to the expansion of
its brokerage operations and corporate finance business.
Revenues increased $2,160,000, or 85% to $4,711,000 from $2,551,000. This
dramatic increase is due to both favorable market conditions and the Company's
success in acquiring additional account executives. Commission revenue, the
most significant component of the Company's revenue, climbed accordingly, to
$3,630,000 from $2,162,000, a $1,468,000 (68%) increase over the first quarter
1995 results. Interest revenue rose substantially (to $641,000 from $276,000);
however, interest expenses rose proportionally offsetting any material impact
on net results.
Total transactions processed by the Company during the quarter increased
by 14,489 or 60% to 38,534 from 24,045. Additionally, revenue per ticket rose
from $106 to $122, a 15% increase as compared with the prior year.
Concurrent with the 85% increase in revenues, overall expenses grew by
95%. Total expenses increased by $2,348,000 or 95% to $4,808,000 from
$2,460,000. This significant rise in expenses was not entirely 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 $1,433,000 to $2,565,000, an increase of
$1,132,000 or 79% 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 $875,000 in first quarter
1995 to $1,839,000 for the 1996 quarter, a 110% increase. A significant
portion of this increase in expenses is temporary in nature or non-recurring
and is attributable the Company's acquisition of additional account executives.
The Company also incurred significant expenses further developing and
expanding its corporate finance department and operations. This jump in
expenses explains the large increase in the Company's costs per ticket which
increased from $36 to $48. 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.
The Company's financial success is greatly influenced by the strength of
the securities markets. During the first quarter of 1996, securities markets
were strong and retail trading activity, the core of the company's revenue
base, increased markedly. The balance of cash deposits from customers again
reached an all-time high. The Company has now opened an office in New York and
has begun activities in corporate finance with hopes of increasing revenues
still further. Therefore, despite the disappointing results of the first
quarter and due to the expected and as yet unrealized benefits of these
factors, the Company is cautiously optimistic about the remainder of fiscal
1996.
<PAGE> 8
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
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 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
December 29, 1995, the Company's net capital exceeded the SEC's requirement of
$287,000 by $1,369,000.
As of December 29, 1995, the Company had an outstanding balance of
$300,000 on its $2,000,000 revolving line of credit with Seafirst Bank.
Borrowings under the line of credit bear interest at the prime rate (8.25%)
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
<PAGE> 9
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.
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> 3-MOS
<FISCAL-YEAR-END> SEP-30-1996
<PERIOD-END> DEC-29-1995
<CASH> 1,041,000
<RECEIVABLES> 14,593,000
<SECURITIES-RESALE> 0
<SECURITIES-BORROWED> 0
<INSTRUMENTS-OWNED> 24,912,000
<PP&E> 464,000
<TOTAL-ASSETS> 41,801,000
<SHORT-TERM> 300,000
<PAYABLES> 37,487,000
<REPOS-SOLD> 0
<SECURITIES-LOANED> 0
<INSTRUMENTS-SOLD> 241,000
<LONG-TERM> 0
<COMMON> 14,000
0
0
<OTHER-SE> 3,126,000
<TOTAL-LIABILITY-AND-EQUITY> 41,801,000
<TRADING-REVENUE> 725,000
<INTEREST-DIVIDENDS> 641,000
<COMMISSIONS> 2,905,000
<INVESTMENT-BANKING-REVENUES> 254,000
<FEE-REVENUE> 186,000
<INTEREST-EXPENSE> 404,000
<COMPENSATION> 3,185,000
<INCOME-PRETAX> (97,000)
<INCOME-PRE-EXTRAORDINARY> (97,000)
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (64,000)
<EPS-PRIMARY> (.09)
<EPS-DILUTED> (.09)
</TABLE>
