<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 June 28, 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 July 15, 1996 was 807,822.
<PAGE> 2
NATIONAL SECURITIES CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENT OF FINANCIAL CONDITION
ASSETS
<TABLE>
<CAPTION>
June 28,
1996 September 29,
(unaudited) 1995
----------- -----------
<S> <C> <C>
CASH, subject to immediate withdrawal $1,682,000 $204,000
CASH, CASH EQUIVALENTS AND SECURITIES 28,288,000 25,394,000
DEPOSITS 411,000 179,000
RECEIVABLES
Brokers and dealers 782,000 1,244,000
Customers 18,217,000 13,108,000
Other 244,000 232,000
FEDERAL INCOME TAX RECEIVABLE 0 40,000
SECURITIES HELD FOR RESALE, at market 1,732,000 829,000
FIXED ASSETS, net 479,000 414,000
DEFERRED COST 0 154,000
OTHER ASSETS 62,000 93,000
----------- -----------
$51,897,000 $41,891,000
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
PAYABLES
Brokers and dealers $245,000 $676,000
Customers 44,265,000 36,813,000
FEDERAL INCOME TAX PAYABLE 214,000 0
SECURITIES SOLD, BUT NOT YET PURCHASED, at market 669,000 195,000
ACCOUNTS PAYABLE, ACCRUED EXPENSES AND OTHER LIABILITIES 2,123,000 922,000
----------- -----------
47,516,000 38,606,000
----------- -----------
CONTINGENCIES (Note 7)
ISSUABLE COMMON STOCK 0 105,000
----------- -----------
STOCKHOLDERS' EQUITY
Common stock, $.02 par value, 5,000,000 shares
authorized, 802,614 and 676,938 shares issued
and outstanding, respectively 16,000 14,000
Additional paid-in capital 1,420,000 918,000
Retained earnings 2,945,000 2,248,000
----------- -----------
4,381,000 3,180,000
----------- -----------
$51,897,000 $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>
3rd Qtr '96 3rd Qtr '95 YTD 1996 YTD 1995
PERIOD (3 Months) (3 Months) (9 Months) (9 Months)
---------- ---------- ----------- ----------
<S> <C> <C> <C> <C>
REVENUES:
Commissions $4,255,000 $2,329,000 $10,766,000 $5,649,000
Net dealer inventory gains 1,095,000 689,000 2,556,000 1,775,000
Interest and dividends 743,000 413,000 2,073,000 1,039,000
Transfer fees 167,000 104,000 426,000 278,000
Underwriting 3,470,000 0 6,377,000 0
Other 81,000 65,000 469,000 187,000
---------- ---------- ---------- ----------
TOTAL REVENUES 9,811,000 3,600,000 22,667,000 8,928,000
---------- ---------- ---------- ----------
EXPENSES:
Commissions 6,175,000 1,955,000 13,487,000 4,792,000
Employee compensation and benefits 1,099,000 428,000 2,633,000 1,152,000
Clearance fees paid to non-brokers 152,000 132,000 555,000 310,000
Communications 153,000 104,000 503,000 262,000
Occupancy and equipment costs 379,000 280,000 1,313,000 718,000
Interest 452,000 289,000 1,296,000 685,000
Professional fees 124,000 170,000 349,000 280,000
Amortization 104,000 0 259,000 0
Other 315,000 215,000 869,000 446,000
---------- ---------- ---------- ----------
TOTAL EXPENSES 8,953,000 3,573,000 21,264,000 8,645,000
---------- ---------- ---------- ----------
Income from operations before income taxes 858,000 27,000 1,403,000 283,000
Provision for income taxes (335,000) (2,000) (477,000) (85,000)
---------- ---------- ---------- ----------
NET INCOME $ 523,000 $ 25,000 $ 926,000 $ 198,000
========== ========== ========== ==========
EARNINGS PER COMMON SHARE
Primary $ 0.60 $ 0.04 $ 1.24 $ 0.33
========== ========== ========== ==========
Fully diluted $ 0.54 $ 0.04 $ 0.97 $ 0.33
========== ========== ========== ==========
</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>
9 months ended 9 months ended
June 28, 1996 June 30, 1995
-------------- --------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $926,000 $198,000
Adjustments to reconcile net income to net
cash from operating activities
Depreciation and amortization 112,000 114,000
Deferred cost amortization 259,000 0
Changes in assets and liabilities
Cash, cash equivalents and securities (2,894,000) (8,335,000)
Deposits (232,000) (16,000)
Receivables (4,659,000) (3,275,000)
Federal income taxes receivable/payable 254,000 (15,000)
Securities held for resale (903,000) (166,000)
Other assets 31,000 (159,000)
Payables 7,021,000 10,693,000
Securities sold, but not yet purchased 474,000 297,000
Accounts payable, accrued expenses, and other liabilities 1,201,000 421,000
---------- ----------
1,590,000 (243,000)
---------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of fixed assets (177,000) (119,000)
---------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES
Capital lease payments 0 (11,000)
Issuance of common stock through exercise of stock options 65,000 507,000
Retirement of common stock 0 (132,000)
---------- ----------
65,000 364,000
---------- ----------
INCREASE (DECREASE) IN CASH 1,478,000 2,000
CASH BALANCE
Beginning of the period 204,000 1,671,000
---------- ----------
End of the period $1,682,000 $1,673,000
========== ==========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash paid during the period for
Interest $1,296,000 $680,000
========== ==========
Income tax $223,000 $100,000
========== ==========
SUPPLEMENTAL DISCLOSURES OF NONCASH
INVESTING AND FINANCING ACTIVITIES
Issued common stock $210,000 $0
========== ==========
</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 - Primary 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
third quarter of fiscal year 1996 and 1995, the number of shares used in the
primary earnings per share calculation was 876,597 and 626,450, respectively.
For the first nine months of fiscal year 1996 and 1995, the number of shares
used in the primary earnings per share calculation was 746,578 and 600,483,
respectively. The weighted average number of
<PAGE> 6
NATIONAL SECURITIES CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
shares outstanding, assuming full dilution, includes common stock equivalents
which would arise from the exercise of stock options and assumes that all have
been converted to common shares using the treasury stock method at the
beginning of the year. For the third quarter of fiscal year 1996 and 1995,
number of shares used in the fully diluted earnings per share calculation was
976,852 and 626,450, respectively. For the first nine months of fiscal year
1996 and 1995, the number of shares used in the fully diluted earnings per
share calculation was 951,660 and 600,483, respectively.
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 nine months
ended June 30, 1995 on the accompanying Consolidated Statement of Operations
have been reclassified to conform to the June 28, 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>
June 28, September 29,
1996 1995
----------- -----------
<S> <C> <C>
Restricted cash deposits $ 1,000 $ -
U.S. Treasury and GNMA securities 24,575,000 23,323,000
Reverse Repurchase Agreement 3,712,000 2,071,000
----------- -----------
$28,288,000 $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.
<PAGE> 7
NATIONAL SECURITIES CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
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:
<TABLE>
<CAPTION>
June 28, September 29,
1996 1995
---------- ----------
<S> <C> <C>
Net Capital $2,996,000 $1,523,000
========== ==========
Excess net capital $2,666,000 $1,244,000
========== ==========
Percentage of net capital to aggregate
debit balances 18% 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 June 28, 1996, all the 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 recorded the cash payment and issuance of
stock as a deferred cost which has been fully amortized through June 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 $15,000,000, secured. This facility is subject
to renewal in
<PAGE> 8
NATIONAL SECURITIES CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
March 1997. Borrowings bear interest at the bank's prime rate with interest
payable monthly. At June 28, 1996 and September 29, 1995, the Company had no
outstanding borrowings on this line of credit.
NOTE 6 - STOCKHOLDER'S EQUITY
As of June 4, 1996 the Company issued a 5% stock dividend to all
common shareholders. This stock dividend did not have a material impact on the
number of shares outstanding. Appropriately, prior period earnings per share
have not been restated.
During 1996, the Board of Directors adopted a new incentive stock
option plan. In accordance with the plan, the Company authorized options to
purchase for a period of five years up to 350,000 shares of common stock with
exercise prices equal to at least its fair market value at the time such
options are granted. For the first nine months of fiscal 1996, the Company has
issued 260,300 stock options to key employees, investment executives and
registered representatives under this plan.
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
Third Quarter 1996 Compared to Third Quarter 1995
The Company's third 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 $6,211,000, or 173% to $9,811,000 from $3,600,000. 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 $3,470,000. This was
mostly the cause of the Company successfully managing a $40 million dollar
convertible debenture underwriting. Commission revenue increased $1,926,000,
or 83% to $4,255,000 from $2,329,000 due to the strong securities market which
increased retail trading activity and because of the production of additional
investment executives hired during the fiscal year as well as the production of
additional investment executives, formerly affiliated with a Massachusetts
broker-dealer. Total transactions processed by the Company increased 20,706 or
70% to 50,367 from 29,661. Additionally, the average revenue per transaction,
which includes commission revenue, net inventory gains and underwriting
revenue, increased to $175 from $102.
Concurrent with the 173% increase in revenues, overall expenses grew by 151%.
Total expenses increased by $5,380,000 to $8,953,000 from $3,573,000. 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 $4,220,000, or 216% to $6,175,000 from $1,955,000.
With the addition of new offices the Company's occupancy costs increased
$99,000, or 35% to $379,000 from $280,000. Interest expense increased $163,000,
or 56% to $452,000 from $289,000, primarily because of increased customer
deposits, on which the Company pays interest. However, this expense was more
than offset by the increased interest and dividend income of $330,000, or 80%
to $743,000 from $413,000. Overall, the Company recorded its largest net
interest income, (interest income less interest expense), of $291,000, up
$27,000 from the previous high amount of $264,000 in second quarter 1996. 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 $45.
<PAGE> 10
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
RESULTS OF OPERATIONS (CONTINUED)
Overall, earnings from operations for the third quarter 1996 increased
$498,000, or 1992% to $523,000 or $0.54 per share, versus $25,000 or $0.04 per
share. Although overall earnings increased from the second quarter 1996,
earnings per share decreased due to increased weighted average number of common
shares outstanding. The increase in the weighted average number of common
shares is due to the Company issuing a 5% stock dividend during the quarter as
well as the dilutive effect of stock options outstanding.
Nine Months Ended June 28, 1996 Compared to Nine Months
Ended June 30, 1995
Earnings for the nine months of fiscal 1996 totaled $926,000 or $0.97 per
share, versus $198,000 or $0.33 per share for the nine months of fiscal 1995.
The number of transactions significantly increased by 61,162 to 137,320 from
76,158, as did revenues by $13,739,000 or 154% to $22,667,000 from $8,928,000,
for reasons discussed in the quarterly comparisons above. Additionally, during
the nine months of fiscal 1996 the Company either managed or co-managed six
underwritings and participated in private placements which accounted for
additional revenue of $6,377,000.
As anticipated, total expenses for the nine months significantly increased by
$12,619,000, or 146% to $21,264,000 from $8,645,000. 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 $42.
The Company's financial success is greatly influenced by the strength of the
securities markets. During the third 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.
<PAGE> 11
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL 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
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. Additionally, the Company has significant borrowings on its
secured line of credit to finance its underwriting activities. These
borrowings are short-term and have not extended beyond a few days. 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 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 June 28, 1996, the Company's net capital exceeded the SEC's requirement of
$330,000 by $2,666,000.
As of June 28, 1996, the Company had no outstanding balance on its combined
$16,000,000 revolving line of credit with Seafirst Bank. Borrowings under the
line of credit bear interest at the prime rate.
<PAGE> 12
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL 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.
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> 13
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
7/26/96 By Robert I. Kollack
-----------------------
Date Robert I. Kollack, President and
Chief Executive Officer
7/26/96 By Jay W. Hanville
---------------------
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-27-1996
<PERIOD-START> APR-01-1996
<PERIOD-END> JUN-28-1996
<CASH> 1,683,000
<RECEIVABLES> 19,243,000
<SECURITIES-RESALE> 1,732,000
<SECURITIES-BORROWED> 0
<INSTRUMENTS-OWNED> 28,287,000
<PP&E> 479,000
<TOTAL-ASSETS> 51,897,000
<SHORT-TERM> 0
<PAYABLES> 46,633,000
<REPOS-SOLD> 0
<SECURITIES-LOANED> 0
<INSTRUMENTS-SOLD> 669,000
<LONG-TERM> 0
0
0
<COMMON> 16,000
<OTHER-SE> 4,365,000
<TOTAL-LIABILITY-AND-EQUITY> 51,897,000
<TRADING-REVENUE> 2,556,000
<INTEREST-DIVIDENDS> 2,073,000
<COMMISSIONS> 10,766,000
<INVESTMENT-BANKING-REVENUES> 6,377,000
<FEE-REVENUE> 895,000
<INTEREST-EXPENSE> 1,296,000
<COMPENSATION> 16,120,000
<INCOME-PRETAX> 1,403,000
<INCOME-PRE-EXTRAORDINARY> 926,000
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 926,000
<EPS-PRIMARY> 1.24
<EPS-DILUTED> .97
</TABLE>
