<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarter Ended March 29, 1996 Commission File Number 0-15521
NATIONAL SECURITIES CORPORATION
(Exact name of registrant as specified)
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 26, 1996 was 702,463.
<PAGE> 2
NATIONAL SECURITIES CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENT OF FINANCIAL CONDITION
ASSETS
<TABLE>
<CAPTION>
March 29,
1996 September 29,
(unaudited) 1995
------------- -------------
<S> <C> <C>
CASH, subject to immediate withdrawal $ 176,000 $ 204,000
CASH, CASH EQUIVALENTS AND SECURITIES 27,007,000 25,394,000
DEPOSITS 420,000 179,000
RECEIVABLES
Brokers and dealers 1,909,000 1,244,000
Customers 13,328,000 13,108,000
Other 357,000 232,000
FEDERAL INCOME TAX RECEIVABLE -- 40,000
SECURITIES HELD FOR RESALE, at market 1,325,000 829,000
FIXED ASSETS, net 457,000 414,000
DEFERRED COST 104,000 154,000
OTHER ASSETS 340,000 93,000
----------- -----------
$45,423,000 $41,891,000
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
PAYABLES
Brokers and dealers $ 277,000 $ 676,000
Customers 39,248,000 36,813,000
FEDERAL INCOME TAX 14,000 --
SECURITIES SOLD, BUT NOT YET PURCHASED, at market 684,000 195,000
ACCOUNTS PAYABLE, ACCRUED EXPENSES AND OTHER LIABILITIES 1,383,000 922,000
----------- -----------
41,606,000 38,606,000
----------- -----------
CONTINGENCIES (Note 7)
ISSUABLE COMMON STOCK 210,000 105,000
----------- -----------
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 2,650,000 2,248,000
----------- -----------
3,607,000 3,180,000
----------- -----------
$45,423,000 $41,891,000
=========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
<PAGE> 3
NATIONAL SECURITIES CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENT OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
2nd Qtr '96 2nd Qtr '95 YTD 1996 YTD 1995
PERIOD (3 Months) (3 Months) (6 Months) (6 Months)
------------- ------------- -------------- ------------
<S> <C> <C> <C> <C>
REVENUES:
Commissions $ 3,606,000 1,627,000 $ 6,511,000 3,320,000
Net dealer inventory gains 736,000 617,000 1,461,000 1,086,000
Interest and dividends 689,000 350,000 1,330,000 626,000
Transfer fees 142,000 82,000 259,000 174,000
Underwriting 2,536,000 -- 2,790,000 --
Other 319,000 101,000 388,000 122,000
----------- ----------- ------------ ----------
TOTAL REVENUES 8,028,000 2,777,000 12,739,000 5,328,000
----------- ----------- ------------ ----------
EXPENSES:
Commissions 4,747,000 1,404,000 7,312,000 2,837,000
Employee compensation and benefits 916,000 429,000 1,536,000 735,000
Clearance fees paid to non-brokers 220,000 90,000 417,000 179,000
Communications 180,000 80,000 353,000 158,000
Occupancy and equipment costs 510,000 233,000 932,000 438,000
Interest 425,000 239,000 829,000 391,000
Professional fees 124,000 48,000 225,000 110,000
Other 264,000 89,000 590,000 224,000
----------- ----------- ------------ ----------
TOTAL EXPENSES 7,386,000 2,612,000 12,194,000 5,072,000
----------- ----------- ------------ ----------
Income from operations before income taxes 642,000 165,000 545,000 256,000
Provision for income taxes (175,000) (52,000) (142,000) (83,000)
----------- ----------- ------------ ----------
NET INCOME $467,000 $ 113,000 $ 403,000 $ 173,000
=========== =========== ============ ==========
EARNINGS PER COMMON SHARE $0.67 $ 0.19 $ 0.58 $ 0.29
=========== =========== ============ ==========
WEIGHTED AVERAGE NUMBER OF
COMMON SHARES OUTSTANDING
FOR THE PERIOD 698,378 587,972 696,060 588,220
=========== =========== ============ ==========
</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>
6 months ended 6 months ended
March 29, 1996 March 31, 1995
-------------- --------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 403,000 $ 173,000
Adjustments to reconcile net income to net
cash from operating activities
Depreciation and amortization 98,000 74,000
Deferred cost amortization 155,000 --
Changes in assets and liabilities
Cash, cash equivalents and securities (1,613,000) (5,688,000)
Deposits (241,000) (11,000)
Receivables (1,010,000) (1,285,000)
Federal income taxes receivable/payable 54,000 (7,000)
Securities held for resale (496,000) (133,000)
Other assets (247,000) (36,000)
Payables 2,036,000 7,295,000
Securities sold, but not yet purchased 489,000 472,000
Accounts payable, accrued expenses, and other liabilities 461,000 (276,000)
---------- ----------
89,000 578,000
---------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of fixed assets (142,000) (31,000)
---------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES
Capital lease payments -- (11,000)
Issuance of common stock through exercise of stock options 25,000 --
Retirement of common stock -- (122,000)
---------- ----------
25,000 (133,000)
---------- ----------
INCREASE (DECREASE) IN CASH (28,000) 414,000
CASH BALANCE
Beginning of the period 204,000 1,671,000
---------- ----------
End of the period $ 176,000 $2,085,000
========== ==========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash paid during the period for
Interest $ 829,000 $ 391,000
========== ==========
Income tax $ 121,000 $ 90,000
========== ==========
SUPPLEMENTAL DISCLOSURES OF NONCASH
INVESTING AND FINANCING ACTIVITIES
Deferred cost and issuable common stock $ 105,000 $ --
========== ==========
Secured demand notes received for liabilities
subordinated to claims of general creditors $ -- $ 200,000
========== ==========
</TABLE>
The accompanying notes are an integral part of these financial statements.
<PAGE> 5
NATIONAL SECURITIES CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES
NATURE OF BUSINESS - National Securities Corporation and Subsidiary
(collectively 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 registered
broker-dealer in accordance with the Securities and Exchange Act of 1934. Its
principal office is located in Seattle, Washington.
PRINCIPLES OF CONSOLIDATION - The consolidated financial statements
include the accounts of National Securities Corporation and its wholly-owned
subsidiary National Asset Management, Inc. All significant intercompany accounts
and transactions have been eliminated.
ACCOUNTING METHOD - Customer security transactions and the related
commission income and commission expense are recorded on a settlement date
basis. The financial condition and results of operations using the settlement
date basis are not materially different from that of the trade date basis.
The Company believes the consolidated financial statements presented
herein include all adjustments necessary in order to make the financial
statements not misleading.
SECURITIES HELD FOR RESALE - Securities held for resale are marked to
market at month-end and the unrealized appreciation or depreciation is included
in the Consolidated Statement of Operations.
DEPRECIATION - Fixed assets are stated at cost and are depreciated over
their estimated useful lives of 3 to 5 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 the second
quarter of fiscal year 1996 and 1995, the number of shares used in the earnings
per share calculation was 698,378 and 587,972, respectively. For the first six
months of fiscal year 1996 and 1995, the number of shares used was 696,060 and
588,220, respectively.
<PAGE> 6
NATIONAL SECURITIES CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
FISCAL YEAR - The Company has fifty-two or fifty three week year,
ending on the last Friday in September.
CASH AND CASH EQUIVALENTS - For the purposes of the Consolidated
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.
RECLASSIFICATION - Certain balances for the quarter and six months
ended March 31, 1995 on the accompanying Consolidated Statement of Operations
have been reclassified to conform to the March 29, 1996 presentation. These
reclassifications have no impact on the results of operations.
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 29, September 29,
1996 1995
------------ -------------
<S> <C> <C>
Restricted cash deposits $ 3,000 $ -
U.S. Treasury and GNMA securities 25,299,000 23,323,000
Reverse Repurchase Agreement 1,705,000 2,071,000
------------ ------------
$ 27,007,000 $ 25,394,000
============ ============
</TABLE>
The United States Treasury and GNMA securities mature at various dates
through August 2024 and are stated at current market values. The Company has a
policy to take possession of all securities purchased under agreements to
resell. These securities are carried at cost which approximates market value.
NOTE 3 - NET CAPITAL REQUIREMENTS
The Company is subject to the Securities and Exchange Commission's
Uniform Net Capital Rule 15c3-1, which requires the maintenance of minimum net
capital. The Company has elected to use the alternative method permitted by the
rule. This 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:
<PAGE> 7
NATIONAL SECURITIES CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
<TABLE>
<CAPTION>
March 29, September 29,
1996 1995
---- ----
<S> <C> <C>
Net Capital $1,743,000 $1,523,000
========== ==========
Excess net capital $1,474,000 $1,244,000
========== ==========
Percentage of net capital to aggregate
debit balances 13% 11%
========== ==========
</TABLE>
NOTE 4 - DEFERRED COST AND ISSUABLE COMMON STOCK
During 1995, the Company entered into an agreement with a brokerage
firm and its principal stockholder. Under the terms of the agreement, the
principal stockholder will assist in causing the transfer of the registered
representatives and the customer accounts to the Company. The Company obtained
no assets, tangible or intangible, and assumed no liabilities, with the
exception of a short-term office lease. In exchange, the Company paid cash of
$100,000 and may issue up to 100,000 unregistered shares of the Company's stock
plus options to purchase an additional 50,000 shares. The shares and options are
contingent upon the stockholder meeting certain obligations and the registered
representatives meeting certain revenue criteria.
At March 29, 1996, substantially all requirements of the contingency
related to the $100,000 payment and issuance of 60,000 shares of common stock
have been satisfied. Accordingly, the Company has recorded the cash payment and
issuance of stock as a deferred cost to be amortized through June 1996. The
deferred cost of $104,000 on the Consolidated Statement of Financial Condition
is net $206,000 of related amortization. Additionally, the Company has recorded
issuable common stock of $210,000 which will be issued on June 30, 1996. No
liability has been recorded for the remaining shares of stock and options as the
related contingencies have not yet been satisfied.
NOTE 5 - LINE OF CREDIT
The Company has a revolving credit facility with a bank and may borrow
up to $1,000,000, unsecured and $11,000,000, secured. This facility is subject
to renewal in May 1996. Borrowings bear interest at the bank's prime rate plus
.5% with interest payable monthly. At March 29, 1996 and September 29, 1995, the
Company had no outstanding borrowings on this line of credit.
<PAGE> 8
NATIONAL SECURITIES CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
NOTE 6 - OTHER INCOME
During the quarter ended March 29, 1996, the Company recorded other
income related to keyman life insurance proceeds. The Company is the beneficiary
of the policy. The Company has recorded total other income of $126,000. There
were no related income taxes due to the nature of the transaction.
NOTE 7 - 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 condition or its results of operations.
<PAGE> 9
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Second Quarter 1996 Compared to Second Quarter 1995
The Company's second quarter 1996 resulted in significant increases in both
revenues and earnings compared with the same period during 1995. These increases
are due to growth in brokerage operations and corporate finance business,
including the underwriting of securities to the public and arranging for the
private placement of securities with investors.
Revenues increased $5,251,000, or 189% to $8,028,000 from $2,777,000. This
dramatic increase is due to favorable market conditions, the addition of
investment executives and the Company's success in corporate financing
activities. The most significant components of this increase were underwriting
revenue and commission revenue. Underwriting activities, which began in the last
quarter fiscal 1995, generated additional revenue of $2,536,000. Commission
revenue increased $1,979,000, or 122% to $3,606,000 from $1,627,000 due to the
strong securities market which increased retail trading activity and because of
the production of additional investment executives, formerly affiliated with a
Massachusetts broker-dealer. Total transactions processed by the Company
increased 25,967 or 116% to 48,419 from 22,452. Additionally, the average
revenue per transaction, which includes commission revenue, net inventory gains
and underwriting revenue, increased to $142 from $100.
Concurrent with the 189% increase in revenues, overall expenses grew by 183%.
Total expenses increased by $4,774,000 to $7,386,000 from $2,612,000. This rise
in expenses was anticipated due to increased trading activity and therefore
increased commission payout, as well as increased underwriting activities which
increases various expenses including commission expense. Commission expense
increased $3,343,000, or 238% to $4,747,000 from $1,404,000. With the addition
of new offices the Company's occupancy costs increased $277,000, or 119% to
$510,000 from $233,000. Interest expense increased $186,000, or 78% to $425,000
from $239,000, primarily because of increased customer deposits, on which the
Company pays interest. However, this expense was more than offset by the
increased interest income of $339,000, or 97% to $689,000 from $350,000.
Overall, the Company recorded its largest net interest income, (interest income
less interest expense), of $264,000, up $153,000 from the $111,000 amount in
second quarter 1995. The overall increase in expenses, due to substantial
underwriting activities, explains the increase in the Company's non-commission,
non-interest expenses per transaction which increased to $46 from $43.
Overall, earnings from operations for the second quarter 1996 increased
$354,000, or 313% to $467,000 or $0.67 per share, versus $113,000 or $0.19 per
share.
<PAGE> 10
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
Six Months Ended March 29, 1996 Compared to Six Months
Ended March 31, 1995
Earnings for the first six months of fiscal 1996 totaled $403,000 or $0.58 per
share, versus $173,000 or $0.29 per share for first six months of fiscal 1995.
The number of transactions significantly increased by 40,456 to 86,953 from
46,497, as did revenues by $7,411,000 or 139% to $12,739,000 from $5,328,000,
for reasons discussed in the quarterly comparisons above.
As anticipated, total expenses for the first six months significantly increased
by $7,122,000, or 140% to $12,194,000 from $5,072,000. As discussed above,
commission expense directly relates to commission revenue, however, also
included in commission expense are the commissions paid on underwriting
activities. The related revenue for these commission expenses is recorded in
underwriting revenues. Therefore, commission expense increased significantly
more than the increase in commission revenue. Additionally, because of the
significant underwriting activities the Company incurred significant increases
in non-commission and non-interest expenses as well. This explains the large
increase in the Company's non-commission and non-interest cost per transaction
which increased to $47 from $40.
The Company's financial success is greatly influenced by the strength of the
securities markets. During the second 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. Additionally, corporate financing activities have provided
significant revenues during this quarter. Due to these factors and the expected
continued success of corporate financing activities, the Company is cautiously
optimistic about the balance of fiscal 1996.
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 non-interest
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
financing has been used to maximize cash flow and is 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, fund deposit withdrawals and
efficiently provide
<PAGE> 11
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
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 as 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 standpoint. As of
March 29, 1996, the Company's net capital exceeded the SEC's requirement of
$269,000 by $1,474,000.
As of March 29, 1996, the Company had no outstanding balance on its combined
$12,000,000 revolving line of credit with Seafirst Bank. Borrowings under the
line of credit bear interest at the prime rate 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.
Although 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 metal prices. As a result, there is 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 affect short-term stock
prices and performance and, thereby, adversely affect the Company's performance.
It is, therefore, difficult to predict the net impact of inflation on the
Company.
<PAGE> 12
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
4/26/96 By Robert I. Kollack
------------------------------------
Date Robert I. Kollack, President and
Chief Executive Officer
4/26/96 By Jay W. Hanville
------------------------------------
Date Jay W. Hanville, Chief Financial Officer,
Chief Accounting Officer and Treasurer
<TABLE> <S> <C>
<ARTICLE> BD
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> SEP-27-1996
<PERIOD-START> JAN-02-1996
<PERIOD-END> MAR-29-1996
<CASH> 179,000
<RECEIVABLES> 15,594,000
<SECURITIES-RESALE> 1,325,000
<SECURITIES-BORROWED> 0
<INSTRUMENTS-OWNED> 27,004,000
<PP&E> 457,000
<TOTAL-ASSETS> 45,423,000
<SHORT-TERM> 0
<PAYABLES> 40,908,000
<REPOS-SOLD> 0
<SECURITIES-LOANED> 0
<INSTRUMENTS-SOLD> 684,000
<LONG-TERM> 0
0
0
<COMMON> 14,000
<OTHER-SE> 3,593,000
<TOTAL-LIABILITY-AND-EQUITY> 45,423,000
<TRADING-REVENUE> 1,461,000
<INTEREST-DIVIDENDS> 1,330,000
<COMMISSIONS> 6,511,000
<INVESTMENT-BANKING-REVENUES> 2,790,000
<FEE-REVENUE> 647,000
<INTEREST-EXPENSE> 829,000
<COMPENSATION> 8,848,000
<INCOME-PRETAX> 545,000
<INCOME-PRE-EXTRAORDINARY> 403,000
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 403,000
<EPS-PRIMARY> 0.58
<EPS-DILUTED> 0.58
</TABLE>
