<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 December 31, 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 February 10, 1997 was 933,913.
<PAGE> 2
NATIONAL SECURITIES CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENT OF FINANCIAL CONDITION
ASSETS
<TABLE>
<CAPTION>
December 31, September 27,
1996 1996
(unaudited) (audited)
----------- -----------
<S> <C> <C>
CASH, subject to immediate withdrawal $ 386,000 $ 2,726,000
CASH, CASH EQUIVALENTS AND SECURITIES 32,349,000 32,865,000
DEPOSITS 765,000 777,000
RECEIVABLES
Brokers and dealers 1,372,000 879,000
Customers 17,853,000 16,172,000
Other 442,000 443,000
SECURITIES HELD FOR RESALE, at market 2,812,000 3,507,000
FIXED ASSETS, net 814,000 534,000
OTHER ASSETS 181,000 52,000
----------- -----------
$56,974,000 $57,955,000
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
PAYABLES
Brokers and dealers $ 194,000 $ 87,000
Customers 47,798,000 48,388,000
FEDERAL INCOME TAX PAYABLE 306,000 429,000
SECURITIES SOLD, BUT NOT YET PURCHASED, at market 672,000 1,337,000
ACCOUNTS PAYABLE, ACCRUED EXPENSES AND OTHER LIABILITIES 1,975,000 2,398,000
----------- -----------
50,945,000 52,639,000
----------- -----------
CONTINGENCIES
STOCKHOLDERS' EQUITY
Common stock, $.02 par value, 5,000,000 shares authorized,
875,051 and 845,248 shares issued and outstanding,
respectively 18,000 17,000
Additional paid-in capital 1,956,000 1,825,000
Retained earnings 4,055,000 3,474,000
----------- -----------
6,029,000 5,316,000
----------- -----------
$56,974,000 $57,955,000
=========== ===========
</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>
-------Quarter Ended--------
December 31, December 29,
1996 1995
----------- -----------
<S> <C> <C>
REVENUES:
Commissions $ 3,888,000 $ 2,905,000
Net dealer inventory gains (losses) (253,000) 725,000
Interest 900,000 641,000
Transfer fees 158,000 117,000
Underwriting 4,780,000 254,000
Asset management 13,000 -
Other 45,000 69,000
----------- -----------
TOTAL REVENUES 9,531,000 4,711,000
----------- -----------
EXPENSES:
Commissions 5,796,000 2,565,000
Salaries 1,056,000 620,000
Clearing fees 131,000 191,000
Communications 176,000 173,000
Occupancy costs 416,000 422,000
Interest 537,000 404,000
Professional fees 113,000 101,000
Taxes, licenses, registration 207,000 84,000
Other 216,000 248,000
----------- -----------
TOTAL EXPENSES 8,648,000 4,808,000
----------- -----------
Income (loss) from operations before income taxes 883,000 (97,000)
(Provision) benefit for income taxes (302,000) 33,000
----------- -----------
NET INCOME $ 581,000 $ (64,000)
=========== ===========
EARNINGS PER COMMON SHARE $ 0.51 $ (0.08)
=========== ===========
</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-------
December 31, December 29,
1996 1995
----------- -----------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss) $ 581,000 $ (64,000)
Adjustments to reconcile net income (loss) to net
cash from operating activities
Depreciation and amortization 50,000 48,000
Deferred cost amortization - 52,000
Changes in assets and liabilities
Cash, cash equivalents and securities 516,000 1,503,000
Deposits 12,000 (146,000)
Receivables (2,173,000) (9,000)
Federal income taxes receivable/payable (123,000) (33,000)
Securities held for resale 695,000 (192,000)
Other assets (129,000) (198,000)
Payables (483,000) (2,000)
Securities sold, but not yet purchased (665,000) 46,000
Accounts payable, accrued expenses, and other liabilities (423,000) (394,000)
----------- -----------
(2,142,000) 611,000
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of fixed assets (330,000) (99,000)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES
Increase of borrowings - 300,000
Issuance of common stock through exercise of stock options 132,000 25,000
----------- -----------
132,000 325,000
----------- -----------
INCREASE (DECREASE) IN CASH (2,340,000) 837,000
CASH BALANCE
Beginning of the period 2,726,000 204,000
----------- -----------
End of the period $ 386,000 $ 1,041,000
=========== ===========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash paid during the period for
Interest $ 537,000 $ 404,000
=========== ===========
Income tax $ 425,0$ -
=========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
<PAGE> 5
NATIONAL SECURITIES CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1996 AND DECEMBER 29, 1995
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 including brokerage services, asset management and corporate finance
activities 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
first quarter of fiscal
<PAGE> 6
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
year 1997 and 1996, the number of shares used in the primary earnings per share
calculation was 1,142,633 and 756,349, respectively. The weighted average number
of 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 first quarter of fiscal year 1997 and 1996, number of
shares used in the fully diluted earnings per share calculation was 1,142,633
and 756,349, 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 ended December 29,
1995 on the accompanying Consolidated Statement of Operations have been
reclassified to conform to the December 31, 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>
December 31, September 27,
1996 1996
----------- -----------
<S> <C> <C>
Restricted cash deposits $ 5,000 $ -
U.S. Treasury and GNMA securities 32,102,000 31,426,000
Reverse repurchase agreement - 1,579,000
----------- -----------
$32,107,000 $33,005,000
=========== ===========
</TABLE>
The United States Treasury and GNMA securities mature at various dates
through March 2026 and are stated at current market values. The reverse
repurchase agreements are carried at cost which approximates market value. The
Company purchases these obligations at fixed, variable and adjustable interest
rates in order to reduce its exposure to interest rate changes.
<PAGE> 7
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 standard 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 items. The net
capital, excess net capital and percentage for the Company are:
<TABLE>
<CAPTION>
December 31, September 27,
1996 1996
---------- ----------
<S> <C> <C>
Net Capital $3,782,000 $3,606,000
========== ==========
Excess net capital $3,407,000 $3,274,000
========== ==========
Percentage of net capital to aggregate
debit items 20% 22%
========== ==========
</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 assisted 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.
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. 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 March 1997. Borrowings bear interest at the bank's prime rate with
interest payable monthly. At December 31, 1996 and September 27, 1996, the
Company had no outstanding borrowings on this line of credit.
<PAGE> 8
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
NOTE 6 - STOCKHOLDER'S EQUITY
Subsequent to the quarter ended December 31, 1996, the Company issued a
5% stock dividend. The dividend is to be paid on February 10, 1997 to
shareholders of record on January 27, 1997. All references in the accompanying
financial statements to earnings per share, the number of common shares subject
to options, and price per share amounts have been restated.
During fiscal year 1996, the Company issued two stock dividends to all
common stockholders. A 5% stock dividend was issued on June 4, 1996 and another
5% stock dividend was issued on September 16, 1996. All references in the
accompanying financial statements to earnings per share, the number of common
shares subject to options, and price per share amounts have 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. 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.
NOTE 8 - RESTRUCTURING PLAN
On September 26, 1996 the Company's Board approved a restructuring plan
whereby, the Company becomes the wholly-owned subsidiary of a holding company,
Olympic Cascade Financial Corporation ("Olympic"). Olympic is authorized to
issue up to 10,000,000 shares of common stock, and is authorized to issue
preferred stock. Stockholders of the Company will exchange shares of Olympic on
a one-for-one basis. The Company prepared and filed an S-4 Registration
Statement detailing this plan with the Securities and Exchange Commission
("SEC"), and presented the plan in the form of a proxy statement which was
forwarded to stockholders of record on October 31, 1996. The Company's
stockholders have approved this plan, and the restructuring was approved by the
SEC and became effective on February 10, 1997.
<PAGE> 9
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
First Quarter 1997 Compared to First Quarter 1996
The Company's first quarter 1997 resulted in significant increases in both
revenues and earnings compared with the same period during 1996. 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 $4,820,000, or 102% to $9,531,000 from $4,711,000. 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 of fiscal 1995, generated additional revenue of $4,526,000 to $4,780,000
from $254,000. This was primarily the result of the Company managing two
underwritings, totaling more than $80 million in proceeds. Commission revenue
increased $983,000, or 34% to $3,888,000 from $2,905,000. This was due to a
strong securities market which increased retail trading activity and because of
the production of approximately 50 additional investment executives. This
increase was offset by the decrease in net dealer inventory of $978,000. The net
dealer inventory loss totaled $254,000 for the first quarter 1997 as compared
with the $725,000 inventory gain for the same period in 1996. These losses were
attributable to market stabilization for securities which the Company had
underwritten. Total transactions processed by the Company increased 13,923 or
26% to 52,457 from 38,534. Additionally, the average revenue per transaction,
which includes commission revenue, net inventory gains and underwriting revenue,
increased to $160 from $101.
Concurrent with the 102% increase in revenues, overall expenses grew by 80%.
Total expenses increased by $3,840,000 to $8,648,000 from $4,808,000. This
proportional rise in expenses was anticipated as increased trading activity
creates increased commission payouts, and increased underwriting activities
increases various expenses including commission expense. Commission expense
increased $3,231,000, or 126% to $5,796,000 from $2,565,000. Interest expense
increased $133,000, or 33% to $537,000 from $404,000, 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
$259,000, or 40% to $900,000 from $641,000. Overall, the Company recorded its
largest net interest income, (interest income less interest expense), of
$363,000, up $44,000 from the previous high amount of $319,000 in fourth quarter
1996.
<PAGE> 10
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (CONTINUED)
Although overall expenses increased, non-commission, non-interest expense per
transaction decreased to $44 in 1997 from $48 in 1996, due to the increased
number of transactions processed at a lower incremental cost.
Overall, earnings from operations for the first quarter 1997 increased $645,000,
to $581,000 or $0.53 per share, versus a loss of ($64,000) or ($0.08) per share
for the same period 1996.
The Company's financial success is greatly influenced by the strength of the
securities markets. While management is optimistic that the financial markets
will remain healthy, a downturn in these markets would have an adverse effect on
future profitability. Management believes a market downturn may provide the
opportunity to acquire additional sources of production at a reasonable cost.
Management is hopeful that the operational investments it made during the last
fiscal year will allow the Company to weather any downturn and make potential
acquisitions accretive to future earnings.
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, 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 an operating line of credit with Seafirst Bank up to $16,000,000
($1,000,000 unsecured and $15,000,000 secured), primarily used to finance
underwritings. 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,
<PAGE> 11
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (CONTINUED)
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
December 31, 1996, the Company's net capital exceeded the SEC's requirement of
$375,000 by $3,407,000.
Inflation
The Company believes 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 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.
Additionally, as inflation increases the effect on Corporate Finance activities
may change dramatically. If the interest rates rise then the demand for
underwritings may decrease, however, other Corporate Financing activities may
become abundant, such as financial advisory services. 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 AND SUBSIDIARY
2/10/97 By Robert I. Kollack
Date ---------------------------------------------
Robert I. Kollack, President and
Chief Executive Officer
2/10/97 By Jay W. Hanville
Date ---------------------------------------------
Jay W. Hanville, Chief Financial Officer,
Chief Accounting Officer and Treasurer
<TABLE> <S> <C>
<ARTICLE> BD
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> SEP-26-1997
<PERIOD-START> SEP-30-1996
<PERIOD-END> DEC-31-1996
<CASH> 386
<RECEIVABLES> 19,667
<SECURITIES-RESALE> 2,812
<SECURITIES-BORROWED> 0
<INSTRUMENTS-OWNED> 32,349
<PP&E> 814
<TOTAL-ASSETS> 56,974
<SHORT-TERM> 0
<PAYABLES> 49,967
<REPOS-SOLD> 0
<SECURITIES-LOANED> 0
<INSTRUMENTS-SOLD> 672
<LONG-TERM> 0
0
0
<COMMON> 18
<OTHER-SE> 6,011
<TOTAL-LIABILITY-AND-EQUITY> 56,974
<TRADING-REVENUE> (253)
<INTEREST-DIVIDENDS> 900
<COMMISSIONS> 3,888
<INVESTMENT-BANKING-REVENUES> 4,780
<FEE-REVENUE> 13
<INTEREST-EXPENSE> 537
<COMPENSATION> 6,852
<INCOME-PRETAX> 883
<INCOME-PRE-EXTRAORDINARY> 883
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 581
<EPS-PRIMARY> 0.51
<EPS-DILUTED> 0.51
</TABLE>
