UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
NATIONAL HOLDINGS CORPORATION
(Exact name of registrant as specified in its charter)
DELAWARE 36-4128138
------------------------- --------------------------
(State or other jurisdiction of (I.R.S. Employer incorporation or
organization) Identification No.)
|
875 North Michigan Avenue, Suite 1560, Chicago, Illinois 60611
(Address of principal executive offices) (Zip code)
Olympic Cascade Financial Corporation
(Former name, if changed since last report)
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 |_|
Indicate by checkmark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). Yes |_| No |X|
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes |_| No |X|
The number of shares outstanding of registrant's common stock, par value $0.02 per share, at May 9, 2006 was 5,223,968.
NATIONAL HOLDINGS CORPORATION AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
ASSETS
March 31, September 30,
2006 2005
(unaudited) (see note below)
-------------- ---------------
CASH $ 2,236,000 $ 398,000
DEPOSITS WITH CLEARING ORGANIZATIONS 300,000 300,000
RECEIVABLES FROM BROKER-DEALERS AND CLEARING ORGANIZATIONS 4,716,000 3,329,000
OTHER RECEIVABLES, net of allowance for uncollectible accounts of $368,000
at March 31, 2006 and September 30, 2005, respectively 350,000 485,000
ADVANCES TO REGISTERED REPRESENTATIVES 1,599,000 1,653,000
SECURITIES HELD FOR RESALE, at market 466,000 166,000
FIXED ASSETS, net 299,000 250,000
SECURED DEMAND NOTE 1,000,000 1,000,000
OTHER ASSETS 501,000 379,000
-------------- ---------------
TOTAL ASSETS $11,467,000 $ 7,960,000
============== ===============
LIABILITIES AND STOCKHOLDERS' EQUITY
PAYABLE TO BROKER-DEALERS AND CLEARING ORGANIZATIONS $ 393,000 $ 122,000
SECURITIES SOLD, BUT NOT YET PURCHASED, at market 73,000 44,000
ACCOUNTS PAYABLE, ACCRUED EXPENSES AND OTHER LIABILITIES 5,474,000 4,045,000
CONVERTIBLE NOTES PAYABLE, net of debt discounts of $178,000 and $0
at March 31, 2006 and September 30, 2005, respectively 822,000 -
NOTES PAYABLE, net of debt discounts of $85,000 and $206,000
at March 31, 2006 and September 30, 2005, respectively 765,000 1,819,000
-------------- ---------------
TOTAL LIABILITIES 7,527,000 6,030,000
-------------- ---------------
SUBORDINATED BORROWINGS 1,000,000 1,000,000
-------------- ---------------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY
Preferred stock, $.01 par value, 200,000 shares authorized; 50,000 shares
designated as Series A and 20,000 shares designated as Series B - -
Series A 9% cumulative convertible preferred stock, $.01 par value, 50,000
shares authorized; 35,316 shares issued and outstanding (liquidation
preference: $3,531,600) at March 31, 2006 and 33,320 shares issued and
outstanding (liquidation preference: $3,332,000) at September 30, 2005 - -
Series B 10% cumulative convertible preferred stock, $.01 par value, 20,000
shares authorized; 10,000 shares issued and outstanding (liquidation
preference: $1,000,000) at March 31, 2006 and 0 shares issued and
outstanding at September 30, 2005 - -
Common stock, $.02 par value, 30,000,000 shares authorized;
5,223,968 and 5,045,878 shares issued and outstanding,
at March 31, 2006 and September 30, 2005, respectively 104,000 101,000
Additional paid-in capital 17,025,000 15,295,000
Deferred compensation (83,000) -
Accumulated deficit (14,106,000) (14,466,000)
-------------- ---------------
TOTAL STOCKHOLDERS' EQUITY 2,940,000 930,000
-------------- ---------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 11,467,000 $ 7,960,000
============== ===============
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Note: The balance sheet at September 30, 2005 has been derived from the audited consolidated financial statements at that date.
See notes to condensed consolidated financial statements.
NATIONAL HOLDINGS CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
-------- Three Months Ended --------- -------- Six Months Ended -----
March 31, March 31, March 31, March 31,
2006 2005 2006 2005
------------------ --------------- --------------- ---------------
REVENUES:
Commissions $ 10,714,000 $ 8,850,000 $ 17,871,000 $ 19,146,000
Net dealer inventory gains 2,191,000 1,395,000 4,052,000 2,592,000
Investment banking 4,042,000 132,000 7,093,000 238,000
Interest and dividends 696,000 859,000 1,382,000 1,362,000
Transfer fees and clearing services 969,000 711,000 1,730,000 1,576,000
Other 175,000 259,000 347,000 401,000
------------------ --------------- --------------- ---------------
------------------ --------------- --------------- ---------------
TOTAL REVENUES 18,787,000 12,206,000 32,475,000 25,315,000
------------------ --------------- --------------- ---------------
EXPENSES:
Commissions 14,043,000 8,623,000 23,731,000 18,119,000
Employee compensation and related expenses 1,592,000 1,316,000 2,884,000 2,552,000
Clearing fees 436,000 323,000 800,000 670,000
Communications 546,000 370,000 1,033,000 835,000
Occupancy and equipment costs 633,000 757,000 1,308,000 1,473,000
Professional fees 246,000 305,000 584,000 719,000
Interest 176,000 109,000 285,000 228,000
Taxes, licenses, registration 169,000 48,000 314,000 159,000
Other administrative expenses 522,000 494,000 854,000 883,000
------------------ --------------- --------------- ---------------
TOTAL EXPENSES 18,363,000 12,345,000 31,793,000 25,638,000
------------------ --------------- --------------- ---------------
NET INCOME (LOSS) 424,000 (139,000) 682,000 (323,000)
Preferred stock dividends (95,000) (69,000) (171,000) (140,000)
------------------ --------------- --------------- ---------------
Net income (loss) attributable to common stockholders $ 329,000 $ (208,000) $ 511,000 $ (463,000)
================== =============== =============== ===============
NET INCOME (LOSS) PER COMMON SHARE
Basic:
Net income (loss) attributable to common stockholders $ 0.06 $ (0.04) $ 0.10 $ (0.09)
================== =============== =============== ===============
Diluted:
Net income (loss) attributable to common stockholders $ 0.04 $ (0.04) $ 0.07 $ (0.09)
================== =============== =============== ===============
Weighted average number of shares outstanding
Basic 5,089,625 5,013,434 5,068,451 5,003,291
================== =============== =============== ===============
Diluted 10,383,571 5,013,434 10,283,235 5,003,291
================== =============== =============== ===============
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See notes to condensed consolidated financial statements.
NATIONAL HOLDINGS CORPORATION AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
----------Six Months Ended--------------
March 31, 2006 March 31, 2005
--------------------- ----------------------
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss) $ 682,000 $ (323,000)
Adjustments to reconcile net income (loss) to net
cash provided by (used in) operating activities
Depreciation and amortization 68,000 85,000
Amortization of deferred financing costs 1,000 -
Amortization of note discount 130,000 91,000
Compensatory element of common stock issuance 12,000 -
Compensatory element of common stock option issuances 5,000 -
Issuance of common stock in settlement of arbitrations and claims - 40,000
Changes in assets and liabilities
Deposits with clearing organizations - 495,000
Receivables from broker-dealers, clearing organizations and others (1,198,000) 1,717,000
Securities held for resale, at market (300,000) (917,000)
Other assets (96,000) (80,000)
Payables 1,678,000 (1,640,000)
Securities sold, but not yet purchased, at market 29,000 707,000
--------------------- ----------------------
Net cash provided by operating activities 1,011,000 175,000
--------------------- ----------------------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of fixed assets (117,000) (40,000)
--------------------- ----------------------
CASH FLOWS FROM FINANCING ACTIVITIES
Net proceeds from issuance of common stock 175,000 -
Net proceeds from issuance of preferred stock 972,000 -
Net proceeds from issuance of convertible notes payable 1,000,000 -
Cash payment of deferred financing costs (28,000) -
Payment of notes payable (1,175,000) (75,000)
Exercise of stock options and warrants - 20,000
--------------------- ----------------------
Net cash (used in) provided by financing activities 944,000 (55,000)
--------------------- ----------------------
NET INCREASE IN CASH 1,838,000 80,000
CASH BALANCE
Beginning of the period 398,000 351,000
--------------------- ----------------------
End of the period $ 2,236,000 $ 431,000
===================== ======================
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION Cash paid during the period
for:
Interest $ 165,000 $ 147,000
===================== ======================
SUPPLEMENTAL DISCLOSURES OF NONCASH INVESTING AND
FINANCING ACTIVITIES
Warrants issued in connection with debt $ 187,000 $ -
===================== ======================
Preferred stock dividends $ 300,000 $ 322,000
===================== ======================
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See notes to condensed consolidated financial statements.
NATIONAL HOLDINGS CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2006
(UNAUDITED)
NOTE 1. BASIS OF PRESENTATION
The accompanying consolidated financial statements of National Holdings Corporation f/k/a Olympic Cascade Financial Corporation ("National Holdings" or the "Company") have been prepared in accordance with generally accepted accounting principles for interim financial statements and with the instructions to Form 10-Q and Rule 10-01 of Regulation S-X. Accordingly, they do not include all of the information and disclosures required for annual financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. The consolidated financial statements as of and for the periods ended March 31, 2006 and March 31, 2005 are unaudited. The results of operations for the interim periods are not necessarily indicative of the results of operations for the fiscal year. These consolidated financial statements should be read in conjunction with the consolidated financial statements and related footnotes included thereto in the Company's Annual Report on Form 10-K for the fiscal year ended September 30, 2005.
NOTE 2. ACCOUNTING POLICY
In February 2006, the Financial Accounting Standards Board ("FASB") issued SFAS
No. 155, which is an amendment of SFAS No. 133 and 140. This Statement (a)
permits fair value re-measurement for any hybrid financial instrument that
contains an embedded derivative that otherwise would require bifurcation, (b)
clarifies which interest-only strip and principal-only strip are not subject to
the requirements of SFAS 133, (c) establishes a requirement to evaluate
interests in securitized financial assets to identify interests that are
freestanding derivatives or that are hybrid financial instruments that contain
an embedded derivative requiring bifurcation, (d) clarifies that concentrations
of credit risk in the form of subordination are not embedded derivatives, and
(e) amends SFAS 140 to eliminate the prohibition on a qualifying special-purpose
entity from holding a derivative financial instrument that pertains to a
beneficial interest other than another derivative financial instrument. This
Statement is effective for financial statements for fiscal years beginning after
September 15, 2006. Earlier adoption of this Statement is permitted as of the
beginning of an entity's fiscal year, provided the entity has not yet issued any
financial statements for that fiscal year. Management believes this Statement
will not have an impact on the financial statements of the Company once adopted.
In March 2006, the FASB issued SFAS No. 156, which amends FASB Statement No.
140. This Statement establishes, among other things, the accounting for all
separately recognized servicing assets and servicing liabilities. This Statement
amends SFAS 140 to require that all separately recognized servicing assets and
servicing liabilities be initially measured at fair value, if practicable. This
Statement permits, but does not require, the subsequent measurement of
separately recognized servicing assets and servicing liabilities at fair value.
An entity that uses derivative instruments to mitigate the risks inherent in
servicing assets and servicing liabilities is required to account for those
derivative instruments at fair value. Under this Statement, an entity can elect
subsequent fair value measurement to account for its separately recognized
servicing assets and servicing liabilities. By electing that option, an entity
may simplify its accounting because this Statement permits income statement
recognition of the potential offsetting changes in fair value of those servicing
assets and servicing liabilities and derivative instruments in the same
accounting period. This Statement is effective for financial statements for
fiscal years beginning after September 15, 2006. Earlier adoption of this
Statement is permitted as of the beginning of an entity's fiscal year, provided
the entity has not yet issued any financial statements for that fiscal year.
Management believes this Statement will not have an impact on the financial
statements of the Company once adopted.
NOTE 3. STOCK BASED COMPENSATION
Stock Based Compensation - Prior to October 1, 2005, the Company accounted for employee stock transactions in accordance with Accounting Principle Board, APB Opinion No. 25, "Accounting for Stock Issued to Employees." The Company had adopted the pro forma disclosure requirements of Statement of Financial Accounting Standards No. 123, "Accounting For Stock-Based Compensation."
Effective October 1, 2005, the Company adopted FASB Statement of Financial Accounting Standard ("SFAS") No. 123R "Share Based Payment". This statement is a revision of SFAS Statement No. 123, and supersedes APB Opinion No. 25, and its related implementation guidance. SFAS 123R addresses all forms of share based payment ("SBP") awards including shares issued under employee stock purchase plans, stock options, restricted stock and stock appreciation rights. Under SFAS 123R, SBP awards will result in a charge to operations that will be measured at fair value on the awards grant date, based on the estimated number of awards expected to vest over the service period. During the three and six months ended March 31, 2006, the Company granted 70,000 and 170,000 stock options, respectively, with a fair value of approximately $55,000 and $88,000, respectively. A charge of approximately $4,000 was recorded in the three and six months ended March 31, 2006, relating to the amortization of the fair value associated with these grants.
For the three and six months ended March 31, 2005, the Company applied APB Opinion No. 25, "Accounting for Stock Issued to Employees." As required under SFAS No. 148, "Accounting for Stock-based Compensation - Transition and Disclosure," the following table presents pro forma net income and basic and diluted earnings per share as if the fair value-based method had been applied to all awards during that period.
Three months ended Six months ended
March 31, 2005 March 31, 2005
---------------------- ----------------------
Net income (loss) attributable to common stockholders - as reported $ (208,000) $ (463,000)
Stock-based employee compensation cost determined
under fair value method, net of tax effects (791,000) (869,000)
---------------------- ----------------------
Net income (loss) attributable to common stockholders - pro forma $ (999,000) $ (1,332,000)
====================== ======================
Earnings (loss) per share Basic earnings (loss) per share:
Net income (loss) attributable to common stockholders - as reported $ (0.04) $ (0.09)
Per share stock-based employee compensation cost
determined under fair value method, net of tax effects (0.16) (0.17)
---------------------- ----------------------
Net income (loss) attributable to common stockholders - pro forma $ (0.20) $ (0.26)
====================== ======================
Diluted earnings (loss) per share:
Net income (loss) attributable to common stockholders - as reported $ (0.04) $ (0.09)
Per share stock-based employee compensation cost
determined under fair value method, net of tax effects (0.16) (0.17)
---------------------- ----------------------
Net income (loss) attributable to common stockholders - pro forma $ (0.20) $ (0.26)
====================== ======================
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The Black-Scholes option valuation model is used to estimate the fair value of the options granted. The model includes subjective input assumptions that can materially affect the fair value estimates. The model was developed for use in estimating the fair value of traded options that have no vesting restrictions and that are fully transferable. For example, the expected volatility is estimated based on the most recent historical period of time equal to the weighted average life of the options granted. Options issued under the Company's option plans have characteristics that differ from traded options. In management's opinion, this valuation model does not necessarily provide a reliable single measure of the fair value of its employee stock options. Principal assumptions used in applying the Black-Scholes model along with the results from the model were as follows:
2006 2005
-------------------- ------------------
Assumptions:
Risk-free interest rate 4.40% 3.15%
Expected life, in years 3.0 5.0
Expected volatility 88% 135%
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NOTE 4. SECURITIES HELD FOR RESALE AND SECURITIES SOLD, BUT NOT YET PURCHASED
The following table shows the quoted market values of the Company's securities held for resale and securities sold, but not yet purchased as of March 31, 2006:
Securities held Securities sold, but
for resale not yet purchased
---------------------- ------------------------
Corporate Stocks $ 427,000 $ 73,000
Corporate Bonds 4,000 -
Government Obligations 35,000 -
---------------------- ------------------------
$ 466,000 $ 73,000
====================== ========================
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NOTE 5. CLEARING AGREEMENTS
In April 2005, National Securities Corporation ("National Securities") entered into a clearing agreement with National Financial Services LLC ("NFS") that became effective in June 2005. The clearing agreement includes a termination fee if National Securities terminates the agreement without cause. Additionally, in June 2005, National Securities entered into a clearing agreement with Penson Financial Services, Inc. ("Penson") for the purpose of providing clearing services that are not provided by NFS. The Company believes that the overall effect of these clearing relationships is beneficial to the Company's cost structure, liquidity and capital resources.
NOTE 6. CONTINGENCIES
The NASD was engaged in an industry-wide investigation of mutual fund trading activities. National Securities is one of the numerous broker-dealers that were contacted by the NASD with respect to this investigation. The NASD identified certain customer mutual fund transactions ordered through National Securities during the time period from October 2000 to February 2003 that it believed constituted mutual fund timing and/or excessive trading activity. National Securities engaged in discussions and negotiations with the NASD to informally resolve these matters. Such resolution resulted in a settlement, whereby National Securities, without admitting or denying any violations, agreed to make both restitution and pay a fine to the NASD that in the aggregate approximated $600,000. Additionally, the Company was obligated to pay the fines imposed by the NASD on two executive officers totaling $50,000 pursuant to its indemnification obligations. The unpaid balance of approximately $126,000 and $219,000 at March 31, 2006 and 2005, respectively, has been included in "Accounts Payable, Accrued Expenses and Other Liabilities" in the accompanying consolidated statements of financial condition.
The Company is also a defendant in various other arbitrations and administrative proceedings, lawsuits and claims, seeking damages the Company approximates at $700,000 (exclusive of unspecified punitive damages related to certain claims and inclusive of expected insurance coverage). The Company has filed a counterclaim for approximately $220,000 in one such proceeding. These matters arise in the normal course of business. The Company intends to vigorously defend itself in these actions, and believes that the eventual outcome of these matters will not have a material adverse effect on the Company. However, the ultimate outcome of these matters cannot be determined at this time. The amounts related to such matters that are reasonably estimable and which have been accrued at March 31, 2006 and 2005, is $228,000 and $225,000 (including related legal fees), respectively, and have been included in "Accounts Payable, Accrued Expenses and Other Liabilities" in the accompanying consolidated statements of financial condition. The Company has included in "Professional fees" litigation and NASD related expenses of $155,000 and $212,000 for the second quarter of fiscal year 2006 and 2005, respectively, and $400,000 and $546,000 for the first six months of fiscal year 2006 and 2005, respectively.
NOTE 7. DIVIDENDS ON CONVERTIBLE PREFERRED STOCK
The holders of the Company's Series A Convertible Preferred Stock, that are convertible into the Company's common stock at $1.25 per share, are to receive dividends on a quarterly basis at a rate of 9% per annum per share. Such dividends are cumulative and are payable only when declared by the Company's Board of Directors. In March 2006, the Company's Board of Directors declared an in-kind dividend in the aggregate of 1,996 shares of Series A Preferred Stock, in payment of approximately $300,000 of dividends accrued through March 31, 2006. Such shares were issued on April 30, 2006. At March 31, 2006, the accumulated dividend on the Company's 35,316 issued and outstanding shares of Series A Preferred Stock was $0.
The holders of the Company's Series B Convertible Preferred Stock, that are convertible into the Company's common stock at $.75 per share, are to receive dividends on a quarterly basis at a rate of 10% per annum per share. Such dividends are cumulative and are payable only when declared by the Company's Board of Directors. In March 2006, the Company's Board of Directors declared a cash dividend of $21,000 payable to the holders of the Series B Preferred Stock that was paid in April 2006.
Both the holders of the Company's Series A and Series B Convertible Preferred Stock have voting rights equal to the number of common shares into which such preferred shares could be converted at a particular record date.
NOTE 8. INCOME (LOSS) PER COMMON SHARE
Basic income (loss) per share is computed on the basis of the weighted average number of common shares outstanding. Diluted income (loss) per share is computed on the basis of the weighted average number of common shares outstanding plus the potential dilution that would occur if securities or other contracts to issue common shares were exercised or converted.
The following table sets forth the components used in the computation of basic and diluted income (loss) per common share:
Three Months Ended Six Months Ended
--------------------------------------- -------------------------------------
March 31, 2006 March 31, 2005 March 31, 2006 March 31, 2005
--------------------------------------- -------------------------------------
Numerator:
Net income (loss) $ 424,000 $ (139,000) $ 682,000 $ (323,000)
Preferred stock dividends (95,000) (69,000) (171,000) (140,000)
--------------------------------------- -------------------------------------
Numerator for basic earnings per share
-- net income (loss) attributable to
common stockholders - as reported 329,000 (208,000) 511,000 (463,000)
Effect of dilutive securities
Interest on convertible notes 24,000 - 24,000 -
Preferred stock dividends 95,000 - 171,000 -
--------------------------------------- -------------------------------------
Numerator for basic earnings per share
-- net income (loss) attributable to
common stockholders - as adjusted $ 448,000 $ (208,000) $ 706,000 $ (463,000)
======================================= =====================================
Denominator:
Denominator for basic earnings per
share--weighted average shares 5,089,625 5,013,434 5,068,451 5,003,291
--------------------------------------- -------------------------------------
Effect of dilutive securities:
Stock options 37,372 - 17,905 -
Warrants 97,961 - 38,266 -
Assumed conversion of Series A
Preferred Stock 2,825,280 - 2,825,280 -
Assumed conversion of Series B
Preferred Stock 1,333,333 - 1,333,333 -
Assumed conversion of Note 1,000,000 - 1,000,000 -
--------------------------------------- -------------------------------------
Dilutive potential common shares 5,293,946 - 5,214,784 -
--------------------------------------- -------------------------------------
Denominator for diluted earnings per
share--adjusted weighted-average
shares and assumed conversions 10,383,571 5,013,434 10,283,235 5,003,291
======================================= =====================================
Net income (loss) available to
common stockholders
Basic: $ 0.06 $ (0.04) $ 0.10 $ (0.09)
======================================= =====================================
Diluted: $ 0.04 $ (0.04) $ 0.07 $ (0.09)
======================================= =====================================
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For the three and six-month periods ended March 31, 2006, 2,904,784 and
3,304,784 shares, respectively, attributable to outstanding stock options and
warrants, and for both the three and six-month periods ended March 31, 2005,
5,525,611 shares attributable to outstanding Series A Preferred Stock, stock
options and warrants, were excluded from the calculation of diluted net income
(loss) per share because if included the effect would be antildilutive.
NOTE 9. ACCOUNTS PAYABLE, ACCRUED EXPENSES AND OTHER LIABILITIES
Accounts payable, accrued expenses and other liabilities as of March 31, 2006 and September 30, 2005, respectively, consist of the following:
March 31, 2006 September 30, 2005
-------------------- --------------------
Commissions payable $ 3,788,000 $ 2,204,000
Legal payable 354,000 555,000
Other 1,332,000 1,286,000
-------------------- --------------------
Total $ 5,474,000 $ 4,045,000
==================== ====================
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NOTE 10. NOTES PAYABLE
In January 2006, the Company used $1.0 million of the proceeds from a private placement (See Note 11) to pay in full $1.0 million of promissory notes held by two unrelated note holders that had a maturity date of July 31, 2007.
In February 2006, National Securities and the holder of a $1.0 million secured demand note that was scheduled to mature on March 1, 2006, extended the term of the secured demand note to March 1, 2007.
NOTE 11. PRIVATE PLACEMENTS
In January 2006, the Company completed a financing transaction under which certain new investors (collectively, the "New Investors") made a $2.0 million investment in the Company (the "New Transaction") by purchasing an aggregate of the following: (i) $1.0 million of the Company's newly created Series B Preferred Stock, which has a 10% dividend rate and is convertible into Common Stock at a price of $.75 per share, and (ii) 11% convertible promissory notes in the principal amount of $1.0 million, which are convertible into Common Stock at a price of $1.00 per share with warrants to purchase an aggregate of 300,000 shares of Common Stock at an exercise price of $1.00 per share.
The convertible promissory notes mature in January 2011, and have a stated interest rate of 11% per annum. The Company granted 300,000 warrants to acquire shares of common stock to the note holders, and the fair value of the warrants was calculated using the Black-Scholes Option Valuation Model. The Company recorded a debt discount of approximately $187,000 that will be charged to interest expense over the life of the debt.
The investment by the New Investors included $1.7 million by St. Cloud Capital Partners, L.P. ("St. Cloud"), and an aggregate of $300,000 by two unrelated investors. Marshall S. Geller, the Senior Managing Member of SCGP, LLC, the General Partner of St. Cloud, became a member of the Board of Directors of the Company simultaneous with the closing of the New Transaction. The Company incurred legal fees and other costs related to this capital transaction, in the amount of $56,000. The Company capitalized one-half of the fees to deferred financing costs that will be amortized to interest expense over the life of the convertible promissory notes and one-half of the fees were charged to paid-in capital.
The preferred stock and warrants were accounted for in accordance with EITF 98-5 and EITF 00-27. The preferred stock is considered permanent equity. The warrants and conversion option are components of equity and were not determined to be a derivative liability in accordance with SFAS No. 133 (par 11). The convertible promissory notes and warrants were accounted for in accordance with EITF 98-5 and EITF 00-27.
In March 2006, the Company issued 159,090 shares of the Company's common stock to an unaffiliated party for $175,000. The proceeds from the private placement were used to retire $175,000 of the Company's promissory notes that were due to mature in January 2007.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The Private Securities Litigation Reform Act of 1995 provides a safe harbor for forward-looking statements. This Quarterly Report may contain certain statements of a forward-looking nature relating to future events or future business performance. Any such statements that refer to the Company's estimated or anticipated future results or other non-historical facts are forward-looking and reflect the Company's current perspective of existing trends and information. These statements involve risks and uncertainties that cannot be predicted or quantified and, consequently, actual results may differ materially from those expressed or implied by such forward-looking statements. Such risks and uncertainties include, among others, risks and uncertainties detailed in the Company's Annual Report on Form 10-K, filed with the Securities and Exchange Commission on December 28, 2004. Any forward-looking statements contained in or incorporated into this Quarterly Report speak only as of the date of this Quarterly Report. The Company undertakes no obligation to update publicly any forward-looking statement, whether as a result of new information, future events or otherwise.
RESULTS OF OPERATIONS
Three Months Ended March 31, 2006 Compared to Three Months Ended March 31, 2005
The Company's second quarter of fiscal year 2006 resulted in an increase in revenues, and a comparatively lesser increase in expenses compared to the same period last year. The increase in revenues is due to the stronger securities markets experienced by the Company, and the completion of investment banking transactions in the current year's quarter. As a result, the Company reported net income of $424,000 compared with a net loss of $139,000 for the second quarters of fiscal years 2006 and 2005, respectively. This represents an improvement of $563,000 from the prior period.
Three Months Ended
March 31, Increase (Decrease)
------------------------------------- -------------------------------
2006 2005 Amount Percent
----------------- ----------------- ----------------- ------------
Commissions $ 10,714,000 $ 8,850,000 $ 1,864,000 21%
----------------- ----------------- -----------------
Proprietary trading 2,062,000 1,372,000 690,000 50%
Market making 76,000 - 76,000 n/a
Mark-ups and mark-downs 53,000 23,000 30,000 130%
----------------- ----------------- -----------------
Net dealer inventory gains 2,191,000 1,395,000 796,000 57%
Investment banking 4,042,000 132,000 3,910,000 2962%
Interest and dividends 696,000 859,000 (163,000) (19%)
Transfer fees and clearance services 969,000 711,000 258,000 36%
Other 175,000 259,000 (84,000) (32%)
----------------- ----------------- -----------------
$ 18,787,000 $12,206,000 $ 6,581,000 54%
================= ================= =================
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Total revenues increased $6,581,000, or 54%, in the second quarter of fiscal year 2006 to $18,787,000 from $12,206,000 in the second quarter of fiscal year 2005. This increase is mainly due to the improved securities markets, and the completion of investment banking transactions. During the second quarter of fiscal year 2006, total trading volume increased 4%, compared to the second quarter of fiscal year 2005. The lesser increase in trading volume compared to revenues reflects an increase in the average revenue per trade, partially offset by the Company's re-entry into market making activities. Trading volume in this period related to retail brokerage increased 1%. Commission revenue increased $1,864,000, or 21%, to $10,714,000 from $8,850,000 during the second quarter of fiscal year 2006 compared with the same period in fiscal year 2005. Net dealer inventory gains, which includes profits on proprietary trading, market making activities and customer mark-ups and mark-downs, increased $796,000, or 57%, to $2,191,000 from $1,395,000 during the second quarter of fiscal year 2006 compared with the same period in fiscal year 2005. The increase is primarily due to an increase in proprietary trading in the bond market, and reflects the Company's re-entry into market making activities. During the second quarter of fiscal year 2006, revenues from proprietary trading increased $690,000, or 50%, to $2,062,000 from $1,372,000 in the same period of fiscal year 2005, revenues from market making activities increased to $76,000 from $0 in the second quarter of fiscal year 2005, and revenues from customer mark-ups and mark-downs increased $30,000, or 130%, to $53,000 from $23,000 in the second quarter of fiscal year 2005.
Investment banking revenue increased $3,910,000, or 2,962%, to $4,042,000 from $132,000 in the second quarter of fiscal year 2006 compared with the second quarter of fiscal year 2005. The increase in investment banking revenues is attributable to the Company having completed investment banking transactions in the second quarter of fiscal year 2006. Interest and dividend income decreased $163,000, or 19%, to $696,000 from $859,000 in the second quarter of fiscal year 2006 compared with the same period last year. The decrease in interest income is attributable to a decrease in the amount of debit balances in National Securities' customers accounts from the same period last year. Transfer fees increased $258,000, or 36%, to $969,000 in the second quarter of fiscal year 2006 from $711,000 in the second quarter of fiscal year 2005. The increase reflects higher transfer fees for trades generated from the retail brokerage business of brokers recently associated with the Company.
Other revenue, consisting of asset management fees, and miscellaneous transaction fees and trading fees, decreased $84,000, or 32%, to $175,000 from $259,000 during the second quarter of fiscal year 2006 compared to the second quarter of fiscal year 2005. The decrease is due to nonrecurring income realized in fiscal year 2005.
Three Months Ended
March 31, Increase (Decrease)
---------------------------------------- ------------------------------
2006 2005 Amount Percent
-------------------- ------------------ ----------------- -----------
Commission expense related to:
Commission revenue $ 9,449,000 $ 7,638,000 $ 1,811,000 24%
Net dealer inventory gains 1,644,000 879,000 765,000 87%
Investment banking 2,950,000 106,000 2,844,000 2683%
-------------------- ------------------ -----------------
Commissions 14,043,000 8,623,000 5,420,000 63%
Employee compensation 1,592,000 1,316,000 276,000 21%
Clearing fees 436,000 323,000 113,000 35%
Communications 546,000 370,000 176,000 48%
Occupancy and equipment costs 633,000 757,000 (124,000) (16%)
Professional fees 246,000 305,000 (59,000) (19%)
Interest 176,000 109,000 67,000 61%
Taxes, licenses and registration 169,000 48,000 121,000 252%
Other administrative expenses 522,000 494,000 28,000 6%
-------------------- ------------------ -----------------
$ 18,363,000 $ 12,345,000 $ 6,018,000 49%
==================== ================== =================
|
In comparison with the 54% increase in total revenues, total expenses increased 49%, or $6,018,000, to $18,363,000 for the second quarter of fiscal year 2006 compared to $12,345,000 in the second quarter of fiscal year 2005. The increase in total expenses is primarily the result of higher commission expenses directly associated with commission revenues.
Commission expense, which includes expenses related to commission revenue, net dealer inventory gains and investment banking, increased $5,420,000, or 63%, to $14,043,000 in the second quarter of fiscal year 2006 from $8,623,000 in the second quarter of fiscal year 2005. Commission expense related to commission revenue increased $1,811,000, or 24%, to $9,449,000 in the second quarter of fiscal year 2006 from $7,638,000 in the second quarter of fiscal year 2005; commission expense related to net dealer inventory gains increased $765,000, or 87%, to $1,644,000 in the second quarter of fiscal year 2006 from $879,000 in the second quarter of fiscal year 2005; and commission expense related to investment banking increased $2,844,000, or 2,683%, to $2,950,000 in the second quarter of fiscal year 2006 from $106,000 in the second quarter of fiscal year 2005. Commission expense as a percentage of commission revenues increased to 88% in the second quarter of fiscal year 2006 from 86% in the second quarter of fiscal year 2005. This increase is attributable to changes in the production of particular brokers, not all of who are paid at the same commission rate and an increase in the amortization of advances to registered representatives. Commission expense as a percentage of net dealer inventory gains increased to 75% in the second quarter of fiscal year 2006 from 63% in the second quarter of fiscal year 2005. This increase is attributable to changes in the production of particular brokers and traders, not all of who are paid at the same commission rate. Commission expense as a percentage of investment banking revenues decreased to 73% in the second quarter of fiscal year 2006 from 80% in the second quarter of fiscal year 2005. This decrease is attributable to the type and size of the particular investment banking transactions completed in the current year's quarter. Commission expense includes the amortization of advances to registered representatives of $305,000 and $267,000 for the second quarter of fiscal years 2006 and 2005, respectively. These amounts fluctuate based upon the amounts of advances outstanding and the time period for which the registered representatives have agreed to be affiliated with National Securities.
Employee compensation expense increased $276,000, or 21%, to $1,592,000 in the second quarter of fiscal year 2006 from $1,316,000 in the second quarter of fiscal year 2005. The increase is attributable to new hires and a bonus accrual based on current year's profits. Overall, combined commission and employee compensation expense, as a percentage of revenue increased to 83% from 81% in the second quarter of fiscal years 2006 and 2005, respectively. The increase is attributable to an overall higher payout percentage to National Securities' retail brokers.
Clearing fees increased $113,000, or 35%, to $436,000 in the second quarter of fiscal year 2006 from $323,000 in the second quarter of fiscal year 2005. The increase in clearing fees is attributable to the increased commission revenues in the second quarter of fiscal year 2006 compared to the second quarter of fiscal year 2005, and a different pricing structure for certain products with different clearing firms.
Communication expenses increased $176,000, or 48%, to $546,000 from $370,000 in the second quarter of fiscal year 2006 compared to the second quarter of fiscal year 2005. The increase is primarily due to telecommunication incentives provided to certain brokers who recently became affiliated with the Company, and additional quotation machines for the Company's market making activities. Occupancy costs decreased $124,000, or 16%, to $633,000 from $757,000 in the second quarter of fiscal year 2006 compared to the second quarter of fiscal year 2005. The decrease in occupancy expense is due to an overall reduction in leased office space. Professional fees decreased $59,000, or 19%, to $246,000 from $305,000 in the second quarter of fiscal year 2006 compared to the second quarter of fiscal year 2005. The decrease in professional fees is due to a decrease in legal fees relating to various lawsuits and arbitrations.
Interest expense increased $67,000, or 61%, to $176,000 from $109,000 in the second quarter of fiscal year 2006 compared to the second quarter of fiscal year 2005. The increase is primarily attributable to the acceleration of amortization on notes that were paid prior to maturity and amortization related to new notes issued by the Company in the second quarter of fiscal year 2006. Included in interest expense is the amortization of $98,000 and $41,000 for the second quarter of fiscal years 2006 and 2005, respectively. Taxes, licenses and registration increased $121,000, or 252%, to $169,000 from $48,000 in the second quarter of fiscal year 2006 compared to the second quarter of fiscal year 2005. The increase is due to registration incentives provided to certain brokers who became affiliated with the Company in fiscal year 2006, and the receipt of a refund of prior years state business taxes in fiscal year 2005. Other administrative expenses increased $28,000, or 6%, to $522,000 from $494,000 in the second quarter of fiscal year 2006 compared to the second quarter of fiscal year 2005.
The Company reported net income of $424,000 in the second quarter of fiscal year 2006 compared to a net loss of $139,000 in the second quarter of fiscal year 2005. Overall, the diluted earnings attributable to common stockholders in the second quarter of fiscal year 2006 was $329,000, or $.03 per common share, as compared to the net loss attributable to common stockholders of $208,000, or $.04 per common share in the second quarter of fiscal year 2005. The net income attributable to common stockholders for the second quarter of fiscal year 2006 and the net loss attributable to common stockholders for the second quarter of fiscal year 2005 reflects $95,000 and $69,000 of cumulative Preferred Stock dividends on the Company's Preferred Stock for the second quarter of fiscal years 2006 and 2005, respectively.
Six Months Ended March 31, 2006 Compared to Six Months Ended March 31, 2005
The Company's first six months of fiscal year 2006 resulted in an increase in revenues, and a comparatively lesser increase in expenses compared to the same period last year. The increase in revenues is primarily due the completion of investment banking transactions in the first six months of fiscal year 2006. As a result, the Company reported net income of $682,000 compared with a net loss of $323,000 for the first six months of fiscal years 2006 and 2005, respectively. This represents an improvement of $1,005,000 from the prior period.
Six Months Ended
March 31, Increase (Decrease)
------------------------------------- -------------------------------
2006 2005 Amount Percent
----------------- ----------------- ----------------- ------------
Commissions $ 17,871,000 $ 19,146,000 $(1,275,000) (7%)
----------------- ----------------- -----------------
Proprietary trading 3,895,000 2,528,000 1,367,000 54%
Market making 84,000 - 84,000 n/a
Mark-ups and mark-downs 73,000 64,000 9,000 14%
----------------- ----------------- -----------------
Net dealer inventory gains 4,052,000 2,592,000 1,460,000 56%
Investment banking 7,093,000 238,000 6,855,000 2880%
Interest and dividends 1,382,000 1,362,000 20,000 1%
Transfer fees and clearance services 1,730,000 1,576,000 154,000 10%
Other 347,000 401,000 (54,000) (13%)
----------------- ----------------- -----------------
$ 32,475,000 $ 25,315,000 $ 7,160,000 28%
================= ================= =================
|
Total revenues increased $7,160,000, or 28%, in the first six months of fiscal year 2006 to $32,475,000 from $25,315,000 in the first six months of fiscal year 2005. This increase is mainly due to the completion of investment banking transactions. During the first six months of fiscal year 2006, total trading volume decreased 10%, compared to the first six months of fiscal year 2005. This decrease reflects an increase in the average revenue per trade, partially offset by the Company's re-entry into market making activities. Trading volume in this period related to retail brokerage decreased 11%. Commission revenue decreased $1,275,000, or 7%, to $17,871,000 from $19,146,000 during the first six months of fiscal year 2006 compared with the same period in fiscal year 2005. This decrease is attributable to the lower level of retail brokerage business experienced by the market as a whole in the first quarter of fiscal year 2006. Net dealer inventory gains, which includes profits on proprietary trading, market making activities and customer mark-ups and mark-downs, increased $1,460,000, or 56%, to $4,052,000 from $2,592,000 during the first six months of fiscal year 2006 compared with the same period in fiscal year 2005. The increase is primarily due to an increase in proprietary trading in the bond market, and reflects the Company's re-entry into market making activities. During the first six months of fiscal year 2006, revenues from proprietary trading increased $1,367,000, or 54%, to $3,895,000 from $2,528,000 in the same period of fiscal year 2005, revenues from market making activities increased to $84,000 from $0 in the first six months of fiscal year 2006, and revenues from customer mark-ups and mark-downs increased $9,000, or 14%, to $73,000 from $64,000 in the first six months of fiscal year 2005.
Investment banking revenue increased $6,855,000, or 2,880%, to $7,093,000 from $238,000 in the first six months of fiscal year 2006 compared with the first six months of fiscal year 2005. The increase in investment banking revenues is attributable to the Company having completed investment banking transactions in the first six months of fiscal year 2005. Interest and dividend income increased $20,000, or 1%, to $1,382,000 from $1,362,000 in the first six months of fiscal year 2006 compared with the same period last year. The increase in interest income is attributable to an increase in the interest rate charged for debit balances in National Securities' customers accounts substantially offset by a decrease in the amount of debit balances in those customers accounts from the same period last year. Transfer fees increased $154,000, or 10%, to $1,730,000 in the first six months of fiscal year 2006 from $1,576,000 in the first six months of fiscal year 2005. The increase is due to higher transfer fees for trades generated from the retail brokerage business of brokers recently associated with the Company.
Other revenue, consisting of asset management fees and miscellaneous transaction fees and trading fees, decreased $54,000, or 13%, to $347,000 from $401,000 during the first six months of fiscal year 2006 compared to the first six months of fiscal year 2005. The decrease is due to nonrecurring income realized in fiscal year 2005.
Six Months Ended
March 31, Increase (Decrease)
------------------------------------- -------------------------------
2006 2005 Amount Percent
----------------- ----------------- ----------------- ------------
Commission expense related to:
Commission revenue $ 15,722,000 $ 16,294,000 $ (572,000) (4%)
Net dealer inventory gains 2,984,000 1,633,000 1,351,000 83%
Investment banking 5,025,000 192,000 4,833,000 2517%
----------------- ----------------- -----------------
Commissions 23,731,000 18,119,000 5,612,000 31%
Employee compensation 2,884,000 2,552,000 332,000 13%
Clearing fees 800,000 670,000 130,000 19%
Communications 1,033,000 835,000 198,000 24%
Occupancy and equipment costs 1,308,000 1,473,000 (165,000) (11%)
Professional fees 584,000 719,000 (135,000) (19%)
Interest 285,000 228,000 57,000 25%
Taxes, licenses and registration 314,000 159,000 155,000 97%
Other administrative expenses 854,000 883,000 (29,000) (3%)
----------------- ----------------- -----------------
$ 31,793,000 $ 25,638,000 $ 6,155,000 24%
================= ================= =================
|
In comparison with the 28% increase in total revenues, total expenses increased 24%, or $6,155,000, to $31,793,000 for the first six months of fiscal year 2006 compared to $25,638,000 in the first six months of fiscal year 2005. The increase in total expenses is primarily the result of higher commission expenses directly associated with commission revenues, particularly investment banking revenues.
Commission expense, which includes expenses related to commission revenue, net dealer inventory gains and investment banking, increased $5,612000, or 31%, to $23,731,000 in the first six months of fiscal year 2006 from $18,119,000 in the first six months of fiscal year 2005. Commission expense related to commission revenue decreased $572,000, or 4%, to $15,722,000 in the first six months of fiscal year 2006 from $16,294,000 in the first six months of fiscal year 2005; commission expense related to net dealer inventory gains increased $1,351,000, or 83%, to $2,984,000 in the first six months of fiscal year 2006 from $1,633,000 in the first six months of fiscal year 2005; and commission expense related to investment banking increased $368,000, or 2,517%, to $5,025,000 in the first six months of fiscal year 2006 from $192,000 in the first six months of fiscal year 2005. Commission expense as a percentage of commission revenues increased to 88% in the first six months of fiscal year 2006 from 85% in the first six months of fiscal year 2005. This increase is attributable to changes in the production of particular brokers, not all of who are paid at the same commission rate and an increase in the amortization of advances to registered representatives. Commission expense as a percentage of net dealer inventory gains increased to 74% in the first six months of fiscal year 2006 from 63% in the first six months of fiscal year 2005. This increase is attributable to changes in the production of particular brokers and traders, not all of who are paid at the same commission rate. Commission expense as a percentage of investment banking revenues decreased to 73% in the second quarter of fiscal year 2006 from 80% in the second quarter of fiscal year 2005. This decrease is attributable to the type and size of the particular investment banking transactions completed in the current year's quarter. Commission expense includes the amortization of advances to registered representatives of $617,000 and $500,000 for the first six months of fiscal years 2006 and 2005, respectively. These amounts fluctuate based upon the amounts of advances outstanding and the time period for which the registered representatives have agreed to be affiliated with National Securities.
Employee compensation expense increased $332,000, or 13%, to $2,884,000 in the first six months of fiscal year 2006 from $2,552,000 in the first six months of fiscal year 2005. The increase is attributable to new hires, a bonus accrual based on current year's profits and year-end bonuses that were paid to certain staff employees in the first quarter of fiscal year 2006. Overall, combined commission and employee compensation expense, as a percentage of revenue remained constant at 82% in the first six months of fiscal years 2006 and 2005.
Clearing fees increased $130,000, or 19%, to $800,000 in the first six months of fiscal year 2006 from $670,000 in the first six months of fiscal year 2005. The increase in clearing fees is attributable to a different pricing structure for certain products with different clearing firms.
Communication expenses increased $198,000, or 24%, to $1,033,000 from $835,000 in the first six months of fiscal year 2006 compared to the first six months of fiscal year 2005. The increase is primarily due to telecommunication incentives provided to certain brokers who recently became affiliated with the Company, and additional quotation machines for the Company's market making activities. Occupancy costs decreased $165,000, or 11%, to $1,308,000 from $1,473,000 in the first six months of fiscal year 2006 compared to the first six months of fiscal year 2005. The decrease in occupancy expense is due to an overall reduction in leased office space. Professional fees decreased $135,000, or 19%, to $584,000 from $719,000 in the first six months of fiscal year 2006 compared to the first six months of fiscal year 2005. The decrease in professional fees is due to a decrease in legal fees relating to various lawsuits and arbitrations.
Interest expense increased $57,000, or 25%, to $285,000 from $228,000 in the first six months of fiscal year 2006 compared to the first six months of fiscal year 2005. The increase is primarily attributable to the acceleration of amortization on notes that were paid prior to maturity and amortization related to new notes issued by the Company in the second quarter of fiscal year 2006. Included in interest expense is the amortization of $131,000 and $91,000 for the first six months of fiscal year 2006 and 2005, respectively. Taxes, licenses and registration increased $155,000, or 97%, to $314,000 from $159,000 in the first six months of fiscal year 2006 compared to the first six months of fiscal year 2005. The increase is due to registration incentives provided to certain brokers who became affiliated with the Company in fiscal year 2006, and the receipt of a refund of prior years state business taxes in fiscal year 2005. Other administrative expenses decreased $29,000, or 3%, to $854,000 from $883,000 in the first six months of fiscal year 2006 compared to the first six months of fiscal year 2005. The decrease in other expenses is due to costs incurred in the first quarter of fiscal year 2005 relating to the Company's change of clearing firms.
The Company reported net income of $682,000 in the first six months of fiscal year 2006 compared to a net loss of $323,000 in the first six months of fiscal year 2005. Overall, the diluted earnings attributable to common stockholders in the first six months of fiscal year 2006 was $511,000, or $.05 per common share, as compared to the net loss attributable to common stockholders of $463,000, or $.09 per common share in the first six months of fiscal year 2005. The net income attributable to common stockholders for the first six months of fiscal year 2006 and the net loss attributable to common stockholders for the first six months of fiscal year 2005 reflects $171,000 and $140,000 of cumulative Preferred Stock dividends on the Company's Preferred Stock for the first six months of fiscal years 2006 and 2005, respectively.
LIQUIDITY AND CAPITAL RESOURCES
National Securities, as a registered broker-dealer, is subject to the SEC's Uniform Net Capital Rule 15c3-1 that requires the maintenance of minimum net capital. National Securities has elected to use the alternative standard method permitted by the rule. This requires that National Securities maintain minimum net capital equal to the greater of $250,000 or a specified amount per security based on the bid price of each security for which National Securities is a market maker. At March 31, 2006, National Securities' net capital exceeded the requirement by $2,253,000.
Advances, dividend payments and other equity withdrawals from the Company's subsidiary are restricted by the regulations of the SEC and other regulatory agencies. These regulatory restrictions may limit the amounts that a subsidiary may dividend or advance to the Company.
The Company extends unsecured credit in the normal course of business to its brokers. The determination of the appropriate amount of the reserve for uncollectible accounts is based upon a review of the amount of credit extended, the length of time each receivable has been outstanding, and the specific individual brokers from whom the receivables are due.
The objective of liquidity management is to ensure that the Company has ready access to sufficient funds to meet commitments, fund deposit withdrawals and efficiently provide for the credit needs of customers.
In April 2005, National Securities entered into a clearing agreement with NFS that became effective in June 2005. The clearing agreement includes a termination fee if National Securities terminates the agreement without cause. Additionally, in June 2005, National Securities entered into a clearing agreement with Penson for the purpose of providing clearing services that are not provided by NFS. The Company believes that the overall effect of these clearing relationships will be beneficial to the Company's cost structure, liquidity and capital resources.
In January 2006, the Company completed a financing transaction under which certain new investors made a $2.0 million investment in the Company by purchasing an aggregate of the following: (i) $1.0 million of the Company's newly created Series B Preferred Stock, which has a 10% dividend rate and is convertible into Common Stock at a price of $.75 per share, and (ii) 11% convertible promissory notes in the principal amount of $1.0 million, which are convertible into Common Stock at a price of $1.00 per share with warrants to purchase an aggregate of 300,000 shares of Common Stock at an exercise price of $1.00 per share.
The convertible promissory notes mature in January 2011, and have a stated interest rate of 11% per annum. The Company granted 300,000 warrants to acquire shares of common stock to the note holders, and the fair value of the warrants was calculated using the Black-Scholes Option Valuation Model. The Company recorded a debt discount of approximately $187,000 that will be charged to interest expense over the life of the debt.
The investment by the New Investors included $1.7 million by St. Cloud, and an aggregate of $300,000 by two unrelated investors. Marshall S. Geller, the Senior Managing Member of SCGP, LLC, the General Partner of St. Cloud, became a member of the Board of Directors of the Company simultaneous with the closing of the New Transaction. The Company incurred legal fees and other costs related to this capital transaction, in the amount of $56,000. The Company capitalized one-half of the fees to deferred financing costs that will be amortized to interest expense over the life of the convertible promissory notes and one-half of the fees were charged to paid-in capital.
In January 2006, the Company used $1.0 million of the proceeds from the above private placement to pay in full $1.0 million of promissory notes held by two unrelated note holders that had a maturity date of July 31, 2007.
In February 2006, National Securities and the holder of a $1.0 million secured demand note that was scheduled to mature on March 1, 2006, extended the term of the secured demand note to March 1, 2007. In March 2006, the Company issued 159,090 shares of the Company's common stock to an unaffiliated party for $175,000. The proceeds from the private placement were used to retire $175,000 of the Company's promissory notes that were due to mature in January 2007.
In May 2006, the Company filed a Registration Statement on Form S-1 under the Securities Act of 1933 for the resale of certain shares of Common Stock and shares of Common Stock issuable upon the conversion of preferred stock, and exercise of certain warrants previously issued in connection with private placement transactions, and shares of Common Stock issuable upon the conversion of preferred stock and notes, and warrants that were issued in the private placement that was completed in the current fiscal year. The Registration Statement is currently being reviewed by the SEC.
In the quarter and six months ended March 31, 2005 the Company received proceeds of approximately $12,500 and $20,000, respectively, from the exercise of outstanding warrants.
In October 2004, the Company entered into a preliminary letter of intent to consummate a merger or other similar combination with First Montauk Financial Corp., a publicly traded company whose wholly owned subsidiary is also a registered broker-dealer with a business similar to National Securities. In February 2005, the Company and First Montauk entered into a definitive merger agreement that was amended and restated in June 2005. In October 2005, the Company and First Montauk mutually agreed to terminate their proposed merger. The Company expensed approximately $320,000 in "Professional fees" relating to the proposed merger with First Montauk in the fourth quarter of fiscal year 2005.
The Company believes that it will have sufficient funds to maintain its current level of business activities during fiscal year 2006. If market conditions should weaken, the Company would need to consider curtailing certain of its business activities, reducing its fixed overhead costs and/or seek additional sources of financing.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company's primary market risk arises from the fact that it engages in proprietary trading and historically made dealer markets in equity securities. Accordingly, the Company may be required to maintain certain amounts of inventories in order to facilitate customer order flow. The Company may incur losses as a result of price movements in these inventories due to changes in interest rates, foreign exchange rates, equity prices and other political factors. The Company is not subject to direct market risk due to changes in foreign exchange rates. However, the Company is subject to market risk as a result of changes in interest rates and equity prices, which are affected by global economic conditions. The Company manages its exposure to market risk by limiting its net long or short positions. Trading and inventory accounts are monitored daily by management and the Company has instituted position limits.
Credit risk represents the amount of accounting loss the Company could incur if counterparties to its proprietary transactions fail to perform and the value of any collateral proves inadequate. Although credit risk relating to various financing activities is reduced by the industry practice of obtaining and maintaining collateral, the Company maintains more stringent requirements to further reduce its exposure. The Company monitors its exposure to counterparty risk on a daily basis by using credit exposure information and monitoring collateral values. The Company maintains a credit committee, which reviews margin requirements for large or concentrated accounts and sets higher requirements or requires a reduction of either the level of margin debt or investment in high-risk securities or, in some cases, requiring the transfer of the account to another broker-dealer.
The Company monitors its market and credit risks daily through internal control procedures designed to identify and evaluate the various risks to which the Company is exposed. There can be no assurance, however, that the Company's risk management procedures and internal controls will prevent losses from occurring as a result of such risks.
The following table shows the quoted market values of the Company's securities held for resale ("long"), securities sold, but not yet purchased ("short") and net positions as of March 31, 2006:
Long Short Net
--------------- ----------------- --------------
Corporate Stocks $ 427,000 $ 73,000 $ 354,000
Corporate Bonds 4,000 - 4,000
Government Obligations 35,000 - 35,000
--------------- ----------------- --------------
$ 466,000 $ 73,000 $ 393,000
=============== ================= ==============
|
ITEM 4. CONTROLS AND PROCEDURES
Evaluation of disclosure controls and procedures. Based on the evaluation of the Company's disclosure controls and procedures (as defined in the Securities Exchange Act of 1934 Rules 13a-15(e) and 15d-15(e)) required by the Exchange Act Rules 13a-15(b) or 15d-15(b), the Company's Chief Executive Officer and Acting Chief Financial Officer have concluded that, as of the end of the period covered by this report, the Company's disclosure controls and procedures were adequate and effective to ensure that material information relating to the Company and its consolidated subsidiaries would be made known to them by others within those entities, particularly during the period in which this quarterly report on Form 10-Q was being prepared.
Changes in internal controls. There were no significant changes in the Company's internal controls or in other factors that could significantly affect those controls and procedures subsequent to the date of our evaluation nor any significant deficiencies or material weaknesses in such disclosure controls and procedures requiring corrective actions.
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
During the quarter ended March 31, 2006, there were no significant developments in the Company's legal proceedings. For a detailed discussion of the Company's legal proceedings, please refer to Note 6 herein, and the Company's Annual Report on Form 10-K for the fiscal year ended September 30, 2005.
ITEM 1A. RISK FACTORS
There are no material changes from the risk factors previously disclosed in the Company's Form 10-K for the year ended September 30, 2005.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
In January 2006, the Company completed a financing transaction under which certain new investors made a $2.0 million investment in the Company by purchasing an aggregate of the following: (i) $1.0 million of the Company's newly created Series B Preferred Stock, which has a 10% dividend rate and is convertible into Common Stock at a price of $.75 per share, and (ii) 11% convertible promissory notes in the principal amount of $1.0 million, which are convertible into Common Stock at a price of $1.00 per share with warrants to purchase an aggregate of 300,000 shares of Common Stock at an exercise price of $1.00 per share.
The convertible promissory notes mature in January 2011, and have a stated interest rate of 11% per annum. The Company granted 300,000 warrants to acquire shares of common stock to the note holders, and the fair value of the warrants was calculated using the Black-Scholes Option Valuation Model. The Company recorded a debt discount of approximately $187,000 that will be charged to interest expense over the life of the debt.
The investment by the New Investors included $1.7 million by St. Cloud, and an aggregate of $300,000 by two unrelated investors. Marshall S. Geller, the Senior Managing Member of SCGP, LLC, the General Partner of St. Cloud, became a member of the Board of Directors of the Company simultaneous with the closing of the New Transaction. The Company incurred legal fees and other costs related to this capital transaction, in the amount of $56,000. The Company capitalized one-half of the fees to deferred financing costs that will be amortized to interest expense over the life of the convertible promissory notes and one-half of the fees were charged to paid-in capital.
In January 2006, the Company used $1.0 million of the proceeds from the above private placement to pay in full $1.0 million of promissory notes held by two unrelated note holders that had a maturity date of July 31, 2007.
In March 2006, the Company issued 159,090 shares of the Company's common stock to an unaffiliated party for $175,000. The proceeds from the private placement were used to retire $175,000 of the Company's promissory notes that were due to mature in January 2007.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Company held its annual meeting of shareholders on March 15, 2006. Proxies were solicited by the Company pursuant to Regulation 14A under the Exchange Act of 1934, as amended. At the annual meeting, the Company's shareholders approved the following proposals:
1. The number of shares voted "for" and "withhold authority" in connection with the election of Marshall S. Geller as a Class I Director to the Board of Directors of the Company was as follows:
Withhold
For Authority
---------------- ----------------
In Person 444,362 -
By Proxy 5,935,358 652,582
---------------- ----------------
Total 6,379,720 652,582
================ ================
|
The number of shares voted "for" and "withhold authority" in connection with the election of Robert J. Rosan as a Class II Director to the Board of Directors of the Company was as follows:
Withhold
For Authority
---------------- ----------------
In Person 444,362 -
By Proxy 6,561,511 26,429
---------------- ----------------
Total 7,005,873 26,429
================ ================
|
The number of shares voted "for" and "withhold authority" in connection with the election of Norman J. Kurlan as a Class II Director to the Board of Directors of the Company was as follows:
Withhold
For Authority
---------------- ----------------
In Person 444,362 -
By Proxy 5,933,312 654,628
---------------- ----------------
Total 6,377,674 654,628
================ ================
|
The terms of Mark Goldwasser, Gary A. Rosenberg and Peter Rettman, Class III Directors, continued after the annual meeting.
2. The number of shares voted "for", "against" and "abstain" in connection with the amendment to the Company's Certificate of Incorporation to change the name of the Company from Olympic Cascade Financial Corporation to National Holdings Corporation was as follows:
For Against Abstain
---------------- ---------------- ---------------
In Person 444,362 - -
By Proxy 6,585,326 514 100
---------------- ---------------- ---------------
Total 7,029,688 514 100
================ ================ ===============
|
3. The number of shares voted "for", "against" and "abstain" in connection with the amendment to the Company's Certificate of Designation to decrease the conversion price of the Company's Series A Preferred Stock to $1.25 per share from $1.50 per share was as follows:
For Against Abstain
---------------- ---------------- ---------------
In Person 444,362 - -
By Proxy 4,593,539 68,736 766
---------------- ---------------- ---------------
Total 5,037,901 68,736 766
================ ================ ===============
|
4. The number of shares voted "for", "against" and "abstain" in connection with the approval of the Company's 2006 Stock Option Plan was as follows:
For Against Abstain
---------------- ---------------- ---------------
In Person 444,362 - -
By Proxy 3,966,575 695,766 700
---------------- ---------------- ---------------
Total 4,410,937 695,766 700
================ ================ ===============
|
5. The number of shares voted "for", "against" and "abstain" in connection with the ratification of Marcum & Kliegman LLP as the Company's independent public accountants for the fiscal year ending September 30, 2006 was as follows:
For Against Abstain
---------------- ---------------- ---------------
In Person 444,362 - -
By Proxy 6,575,235 12,305 400
---------------- ---------------- ---------------
Total 7,019,597 12,305 400
================ ================ ===============
|
ITEM 5. OTHER INFORMATION
None.
ITEM 6. EXHIBITS
3.6 Certificate of Amendment to the Certificate of Incorporation, filed
with the Secretary of State of the State of Delaware on March 15, 2006.
3.7 Certificate of Amendment to the Certificate of Designation of Series A
Preferred Stock, filed with the Secretary of State of the State of
Delaware on March 15, 2006.
10.50* Employment Agreement dated as of March 15, 2006 between the Company and
Mark Goldwasser.
10.51 Securities Purchase Agreement dated as of March 17, 2006.
31.1 Chief Executive Officer's Certificate pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.
31.2 Chief Financial Officer's Certificate pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.
32.1 Chief Executive Officer's Certificate pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
32.2 Chief Financial Officer's Certificate pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
|
* Compensatory agreement
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 HOLDINGS CORPORATION AND SUBSIDIARY
May 10, 2006 By: /s/ Mark Goldwasser
----------------------------------
Mark Goldwasser
President and Chief Executive Officer
May 10, 2006 By: /s/ Robert H. Daskal
----------------------------------
Robert H. Daskal
Chief Financial Officer
|
EXHIBIT 3.6
CERTIFICATE OF AMENDMENT
TO THE
CERTIFICATE OF INCORPORATION
OF
OLYMPIC CASCADE FINANCIAL CORPORATION
Pursuant to Section 242 of the General Corporation Law of the State of Delaware, Olympic Cascade Financial Corporation, a corporation organized under and existing by virtue of the General Corporation Law of the State of Delaware, DOES HEREBY CERTIFY:
1. The certificate of incorporation of said corporation is hereby amended by striking out the FIRST paragraph thereof and by substituting in lieu of said paragraph the following paragraph:
"FIRST: The name of the corporation (hereinafter called the "Corporation") is National Holdings Corporation."
2. The foregoing amendment was effected pursuant to a resolution of the Board of Directors of said corporation.
3. The foregoing amendment was approved by a majority vote of stockholders of said corporation at a duly called and held meeting of stockholders on March 15, 2006.
Dated: March 15, 2006
/s/ Mark Goldwasser
--------------------------
Mark Goldwasser
President and Chief Executive Officer
|
EXHIBIT 3.7
CERTIFICATE OF AMENDMENT
TO
CERTIFICATE OF DESIGNATIONS, PREFERENCES, AND RELATIVE
OPTIONAL OR OTHER SPECIAL RIGHTS OF
PREFERRED STOCK AND QUALIFICATIONS,
LIMITATIONS AND RESTRICTIONS THEREOF
OF
SERIES A CONVERTIBLE PREFERRED STOCK
OF
NATIONAL HOLDINGS CORPORATION
Pursuant to Section 242 of the General Corporation Law of the State of Delaware, National Holdings Corporation, a corporation organized under and existing by virtue of the General Corporation Law of the State of Delaware, DOES HEREBY CERTIFY:
1. The name of the corporation is National Holdings Corporation (the "Corporation").
2. The Certificate of Designations, Preferences, and Relative Optional or Other Special Rights of Preferred Stock and Qualifications, Limitations and Restrictions Thereof of Series A Convertible Preferred Stock of said corporation is hereby amended by striking out the penultimate sentence of Section 5(a) thereof and by substituting in lieu of said sentence the following sentence:
"The price at which shares of Common Stock shall be deliverable upon conversion of the Series A Preferred Stock (the "Series A Conversion Price") shall initially be $1.25 per share of Common Stock."
3. The foregoing amendment was effected pursuant to a resolution of the Board of Directors of said corporation.
4. The foregoing amendment was approved by a majority vote of stockholders of said corporation at a duly called and held meeting of stockholders on March 15, 2006.
Dated: March 15, 2006
/s/ Mark Goldwasser
-------------------------------------
Mark Goldwasser
President and Chief Executive Officer
|
EXHIBIT 10.50
EMPLOYMENT AGREEMENT ("Agreement"), dated as of the 15th day of March 2006 (the "Effective Date"), by and between OLYMPIC CASCADE FINANCIAL CORPORATION (the "Company"), a Delaware corporation, and MARK GOLDWASSER ("Executive").
WHEREAS, the Board of Directors of the Company (the "Board") wishes that the Executive serve as Chief Executive Officer of the Company and of various Company subsidiaries; and
WHEREAS, Executive is willing to provide his services and experience to the Company and its subsidiaries in such capacities upon the terms, conditions and provisions hereinafter set forth.
NOW, THEREFORE, in consideration of the promises and mutual representations, covenants and agreements set forth herein, and for other good and valuable consideration, the receipt and sufficiency of which is hereby acknowledged, the parties hereto agree as follows:
1. TERM: Subject to the terms and conditions set forth herein, the Company hereby agrees to employ Executive for a three-year term commencing effective as of March 15, 2006 (such period being herein referred to as the "Initial Term"). After the Initial Term, this Agreement shall automatically renew for successive one year periods (each such period being referred to as a "Renewal Term"), unless, more than ninety (90) days prior to the expiration of the Initial Term or any Renewal Term, either the Executive or the Company provide written notice that Executive's employment will not be renewed, or unless otherwise terminated in accordance with the provisions of Section 7 below. The Initial Term and Renewal Term are hereby referred to herein as the "Employment Term."
2. EMPLOYMENT:
(A) During the Employment Term, Executive shall serve as the Company's Chief Executive Officer. Executive's powers and duties shall be those of an executive nature which are appropriate for a Chief Executive Officer. The Executive shall report directly to the Board. Executive does hereby accept such employment and agrees to devote substantially all of his business time, attention, knowledge and skills faithfully, diligently and to the best of his ability, in furtherance of the business and activities of the Company. The Company shall not require Executive to be employed in any location other than the metropolitan New York area unless he consents in writing to such location. Executive agrees to also serve as the Chief Executive Officer and President of the Company's subsidiary, National Securities Corporation (the "Broker Dealer Subsidiary"), and as the Chairman of the Board of Directors of the Broker Dealer Subsidiary.
(B) During the Employment Term, Executive shall be furnished with office space and facilities commensurate with his position and adequate for the performance of his duties; Executive also shall be provided with the perquisites customarily associated with his position as Chief Executive Officer. During the Employment Term, the Company and Broker Dealer Subsidiary shall use their best efforts to cause Executive to be nominated to serve as a director of the Company and Broker Dealer Subsidiary, and Executive agrees to serve as a director of the Company and Broker Dealer Subsidiary, if so appointed, without additional compensation.
(C) Executive shall be allowed, to the extent such activities do not substantially interfere with the performance of his duties and responsibilities hereunder, (i) to manage his personal, financial and legal affairs, (ii) to be engaged in civic, charitable, religious and educational activities, and (iii) to serve on other corporate boards with the prior written approval of the Board.
3. COMPENSATION:
(A) SALARY: During the Employment Term, the Company agrees to pay Executive, and Executive agrees to accept, an annual salary of not less than Three Hundred Fifty Thousand Dollars ($350,000) per year (the "Initial Base Salary"), payable in accordance with the Company's policies, for services rendered by Executive hereunder.
(B) INCREASES: The annual salary is subject to periodic increase at the discretion of the Company's Compensation Committee (the "Committee") (or the Board in lieu thereof), with such increases to take effect no later than on each anniversary date of this Agreement; provided, however, that the Committee (or the Board in lieu thereof) shall review the annual salary for possible increase not less than annually; provided, further, that upon achieving specified target revenue and EBIDTA targets, which targets shall be determined in consultation with Executive no later than thirty (30) days prior to the start of the Company's fiscal year, such annual increase shall not be less than ten (10%) percent in the first two years of the Term of this Agreement, and at such percentage as determined in the reasonable discretion of the Committee (or the Board in lieu thereof) in the third year of the Term of this Agreement.
(C) BONUS: The Company agrees to establish a bonus pool no later than thirty
(30) days after the Effective Date of this Agreement (the "Bonus Pool"), from
which Bonus Pool the Executive shall have sole and absolute discretion to
allocate bonuses to members of the Company's senior management, other than
himself, in accordance with the guidelines set forth for such Bonus Pool by the
Committee (or the Board in lieu thereof). The portion of the Bonus Pool
allocable to the Executive shall be determined by the Committee (or the Board in
lieu thereof) in consultation with members of the Company's senior management
other than the Executive.
(D) OTHER COMPENSATION: Subject to compliance with any and all applicable SEC, NASD, or other federal or state rules and regulations, and the policies and procedures of the Broker Dealer Subsidiary, and the general oversight of the Committee, Executive shall have the right to receive commissions and fees in accordance with the schedules or programs in effect for non-affiliate brokers of the Broker Dealer Subsidiary, including, without limitation, fees, warrants and/or other compensation received by the Broker Dealer Subsidiary in connection with corporate finance activities.
4. EXPENSES: The Company shall reimburse Executive for any and all reasonable and actual business expenses incurred by Executive in connection with services provided for or on behalf of the Company, Broker Dealer Subsidiary and/or any direct and/or indirect subsidiaries of such entities upon submission by Executive of appropriate vouchers and expense account reports.
5. BENEFITS:
(A) CAR AND PARKING ALLOWANCE: During the Employment Term, the Company shall provide reimbursement to the Executive for (i) payments and/or fees up to $975 per month in connection with the use of an automobile of Executive's choosing, and (ii) payments and/or fees up to $400 per month incurred by the Executive in connection with parking of his vehicle in connection with the services he performs on behalf of the Company and/or Broker Dealer Subsidiary. Executive is responsible for submitting appropriate documentation related to such fees and expenses which will be paid by the Company within a reasonable period of time following receipt of such documentation.
(B) GYM OR CLUB MEMBERSHIP FEES: During the Employment Term, the Company agrees to pay up to $150 per month for Executive to belong to a health club of his choosing.
(C) INSURANCE: During the Employment term, the Company shall maintain a policy to provide for the health insurance of the Executive and his immediate family members. In addition, Executive and his dependents shall be entitled to participate in such other benefits and benefit plans as may be extended to active executive employees of the Company and/or Broker Dealer Subsidiary and their dependents including but not limited to pension, retirement, profit-sharing, 401(k), stock option, bonus and incentive plans, group insurance, hospitalization, medical or other benefits made available by the Company to its employees generally.
(D) VACATION: During the Employment Term, the Executive will be entitled to the number of paid holidays, personal days off, and vacation days in each calendar year as are determined by the Company from time to time (provided that in no event shall vacation time be fewer than four weeks per year). Such vacation may be taken in the Executive's discretion at such time or times as are not inconsistent with the reasonable business needs of the Company.
(E) INDEMNIFICATION: Executive shall be entitled to the benefits of all provisions of the Certificate of Incorporation of the Company, as amended, and the Bylaws of the Company, as amended, that provide for indemnification of officers and directors of the Company. In addition, without limiting the indemnification provisions of the Certificate of Incorporation or Bylaws, to the fullest extent permitted by law, the Company shall indemnify and save and hold harmless the Executive from and against any and all claims, demands, liabilities, costs and expenses, including judgments, fines or amounts paid on account thereof (whether in settlement or otherwise), and reasonable expenses, including attorneys' fees actually and reasonably incurred (except only if and to the extent that such amounts shall be finally adjudged to have been caused by Executive's willful misconduct or gross negligence, including the willful breach of the provisions of this Agreement) to the extent that Executive is made a party to or witness in any action, suit or proceeding, or if a claim or liability is asserted against Executive (whether or not in the right of the Company), by reason of the fact that he was or is a director or officer, or acted in such capacity on behalf of the Company, or the rendering of services by Executive pursuant to this Agreement, whether or not the same shall proceed to judgment or be settled or otherwise brought to a conclusion. The Company shall, at no cost to Executive, include Executive during the Employment Term, and for a period of not less than two (2) years thereafter, as an insured under the directors and officers liability insurance policy maintained by the Company, unless (despite best efforts of the Company) due to some unforeseeable reason it is not possible for Executive to be so included, in which event the Company shall immediately notify Executive.
6. RESTRICTIVE COVENANTS:
(A) Executive recognizes and acknowledges that the Company, Broker Dealer Subsidiary and their subsidiaries, through the expenditure of considerable time and money, have developed and will continue to develop in the future information concerning customers, clients, marketing, business and operational methods of the Company, Broker Dealer Subsidiary and their subsidiaries and their customers or clients, contracts, financial or other data, technical data or any other confidential or proprietary information possessed, owned or used by the Company, Broker Dealer Subsidiary and their subsidiaries, and that the same are confidential and proprietary, and are "confidential information" of the Company, Broker Dealer Subsidiary and their subsidiaries. In consideration of his continued employment by the Company hereunder, Executive agrees that he will not, during or for a period of one year after termination of employment, directly or indirectly, make any disclosure of confidential information now or hereafter possessed by the Company, Broker Dealer Subsidiary, and/or any of their current or future, direct or indirect subsidiaries (collectively, the "Group"), to any person, partnership, corporation or entity either during or after the term hereunder, except to employees of the Group and to others within or without the Group, as Executive may deem necessary in order to conduct the Group's business and except as may be required pursuant to any court order, judgment or decision from any court of competent jurisdiction. The foregoing shall not apply to information which is in the public domain on the date hereof; which, after it is disclosed to Executive by the Group, is published or becomes part of the public domain through no fault of Executive; which is known to Executive prior to disclosure thereof to him by the Group as evidenced by his written records; or, after Executive is no longer employed by the Group, which is thereafter disclosed to Executive in good faith by a third party which is not under any obligation of confidence or secrecy to the Group with respect to such information at the time of disclosure to him. The provisions of this Section 6 shall continue in full force and effect notwithstanding termination of Executive's employment under this Agreement or otherwise.
(B) Executive agrees that if the Company has made and is continuing to make all
required payments to him upon and after termination of his employment, then for
a period commencing on the date of termination of Executive's employment
pursuant to this Agreement and ending twelve (12) months thereafter, Executive
shall neither directly and/or indirectly (a) solicit, hire and/or contact any
prior (within twelve (12) months) or then current employee of the Company and/or
Broker Dealer Subsidiary nor any of their respective direct and/or indirect
subsidiaries (collectively, the "Applicable Entities"), nor (b) solicit any
business with any prior (within twelve (12) months of termination) or then
current customer and/or client of the Applicable Entities. In addition,
Executive shall not attempt (directly and/or indirectly) to do anything either
by himself or through others that he is prohibited from doing pursuant to this
Section 6. Given that this Agreement is providing significant benefits to
Executive, Executive hereby agrees that, from the Effective Date until twelve
(12) months following Executive's termination of employment hereunder, without
the prior written consent of the Board, he will not, directly or indirectly,
either as principal, manager, agent, consultant, officer, director, stockholder,
partner, investor, lender or employee or in any other capacity, carry on, be
engaged in or have any financial interest in, any business which is in
competition with any business of the Applicable Entities. For purposes of this
section, a business shall be deemed to be in competition with any business of
the Applicable Entities if it is materially involved in the purchase, sale or
other dealing in any property or the rendering of any service purchased, sold,
dealt in or rendered by any member of the Applicable Entities within the same
geographic area in which such member of the Applicable Entities effects such
purchases, sales or dealings or renders such services; PROVIDED, HOWEVER, that
for the period commencing with the termination of Executive's employment, a
business shall be deemed to be in competition with any business of the
Applicable Entities only if it is materially involved in the retail brokerage
business. Notwithstanding the foregoing, Executive shall be allowed to make
passive investments in publicly held competitive businesses as long as his
ownership is less than 5% of such business.
(C) Executive acknowledges that the restrictive covenants (the "Restrictive Covenants") contained in this Section 6 are a condition of his continued employment and are reasonable and valid in geographical and temporal scope and in all other respects. If any court determines that any of the Restrictive Covenants, or any part of any of the Restrictive Covenants, is invalid or unenforceable, the remainder of the Restrictive Covenants and parts thereof shall not thereby be affected and shall be given full effect, without regard to the invalid portion. If any court determines that any of the Restrictive Covenants, or any part thereof, is invalid or unenforceable because of the geographic or temporal scope of such provision, such court shall have the power to reduce the geographic or temporal scope of such provision, as the case may be, and, in its reduced form, such provision shall then be enforceable.
(D) If Executive breaches, or threatens to breach, any of the Restrictive Covenants, the Company, in addition to and not in lieu of any other rights and remedies it may have at law or in equity, shall have the right to injunctive relief; it being acknowledged and agreed to by Executive that any such breach or threatened breach would cause irreparable and continuing injury to the Company and that money damages would not provide an adequate remedy to the Company.
7. TERMINATION:
(A) DEATH: In the event of Executive's death ("Death") during the term of his employment, Executive's designated beneficiary, or in the absence of such beneficiary designation, his estate, shall be entitled to the Accrued Obligations and to the payment of Executive's salary through the date of Death. For purposes of this Agreement, "Accrued Obligations" shall mean (i) all accrued but unpaid salary, compensation or other benefits through the date of termination of Executive's employment, (ii) any unpaid or unreimbursed expenses incurred in accordance with this Agreement, and (iii) all compensation or benefits due to the Executive under the terms and rules of any Company or Broker Dealer Subsidiary compensation or benefit plan in which the Executive participates, including without limitation, any Company option plans, or otherwise required by applicable law.
(B) DISABILITY:
(i) In the event Executive, by reason of physical or mental incapacity, shall be disabled for a period of at least a period of 180 consecutive days ("Disability"), the Company shall have the option at any time thereafter to terminate Executive's employment hereunder for Disability. Such termination will be effective ten (10) days after the Board gives written notice of such termination to Executive, unless Executive shall have returned to the performance of his duties prior to the effective date of the notice. Upon such termination, Executive shall be entitled to the Accrued Obligations and such benefits to which he and his dependents are entitled by law, and except as otherwise expressly provided herein, all obligations of the Company hereunder shall cease upon the effectiveness of such termination other than payment of salary earned through the date of Disability, provided that such termination shall not affect or impair any rights Executive may have under any policy of long term disability insurance or benefits then maintained on his behalf by the Company.
(ii) "Incapacity" as used herein shall mean the inability of the Executive due to physical or mental illness, injury or disease substantially to perform his normal duties as President and Chief Executive Officer. Executive's salary as provided for hereunder shall continue to be paid during any period of incapacity prior to and including the date on which Executive's employment is terminated for Disability.
(C) BY THE COMPANY FOR CAUSE:
(i) The Company shall have the right, before the expiration of the Employment Term, to terminate the Executive's employment hereunder and to discharge Executive for cause (hereinafter "Cause"), and all compensation to Executive shall cease to accrue upon discharge of Executive for Cause. For the purposes of this Agreement, the term "Cause" shall mean (i) Executive's conviction of a felony; (ii) the alcoholism or drug addiction of Executive; (iii) the continued and willful failure by Executive to substantially and materially perform his material duties hereunder, after reasonable notice and an opportunity to cure same; (iv) any material breach or violation of Executive's fiduciary duty owed to the Company, Broker Dealer Subsidiary or any of their subsidiaries or affiliates; (v) acts of willful or gross misconduct which results, or is likely to result, in material economic, or other harm, to the Company, Broker Dealer Subsidiary or any of their subsidiaries or affiliates, which are not cured by the Executive after reasonable notice is provided; or (vi) action taken by a regulatory body or self regulatory organization that substantially impairs the Executive from performing his duties pursuant to this Agreement.
(ii) If the Company elects to terminate Executive's employment for Cause under 7(C)(i) above, such termination shall be effective five (5) days after the Company gives written notice of such termination to Executive. In the event of a termination of Executive's employment for Cause in accordance with the provisions of 7(C)(i), the Company shall have no further obligation to the Executive, except for the payment of the Accrued Obligations and such benefits to which he and his dependents are entitled by law.
(D) RESIGNATION FOR REASON. Executive shall have the right to terminate his employment at any time for "good reason" (herein designated and referred to as "Reason"). The term Reason shall mean (i) the Company's failure or refusal to perform any obligations required to be performed in accordance with this Agreement after a reasonable notice and an opportunity to cure same, (ii) a material diminution in Executive's title, duties, responsibilities, reporting relationship or positions, (iii) the relocation of Executive's principal office location more than fifty (50) miles from its current location, and (iv) the failure of the Company or Broker Dealer Subsidiary to obtain the assumption in writing of its obligation to perform this Agreement by any successor to all or substantially all of the assets of the Company. Notwithstanding the occurrence of any such event or circumstance above, such occurrence shall not be deemed to constitute Reason hereunder if, within a thirty-day notice period, the event or circumstance giving rise to Reason has been fully corrected by the Company.
(E) CHANGE OF CONTROL. In the event that Executive's employment with the Company is terminated by Employer without cause following a Change in Control (as defined below), then the Executive shall be entitled to the Accrued Obligations and to the payment of Executive's salary through the date of termination. In the event of such termination, the Company shall also pay Executive an amount equal to two times the Executive's prior year's compensation including salary and bonus but excluding the compensation Executive received in the year prior to the Change in Control pursuant to Section 3(D) above. The Company shall also continue to provide benefits to the Executive in accordance with Section 5 above for a period of eighteen (18) months following termination as a result of the Change in Control. All amounts payable to Executive pursuant to this Section shall be paid in one lump-sum payment immediately upon such termination, and all options and shares of restricted stock granted to Executive prior to such date shall immediately vest.
For purposes of this Agreement, the term "Change in Control" shall mean: (i) consummation of a reorganization, merger or consolidation or sale or other disposition of all or substantially all of the assets or stock of the Company (a "Business Combination"), in each case, unless, following such Business Combination, all or substantially all of the individuals or entities who were the beneficial owners, respectively, of the voting securities of the Company entitled to vote generally in the election of directors immediately prior to such Business Combination beneficially own, directly or indirectly, more than 50% of, respectively, the then outstanding voting securities entitled to vote generally in the election of directors, as the case may be, of the corporation resulting from such Business Combination (including, without limitation, a corporation which as a result of such transaction owns the Company or all or substantially all of the Company's assets either directly or through one or more subsidiaries); or (ii) the election of a majority of new (i.e., non-incumbent) directors to the Board unless such new directors are proposed for nomination as directors by the Executive or the Executive plays a role in selecting such new directors for nomination to the Board, or (iii) approval by the Company's shareholders of a complete dissolution or liquidation of the Company.
(F) SEVERANCE: In the event Executive's employment hereunder shall be terminated by the Company other than for Cause, Death, Disability or Change of Control, than the Executive shall receive any and all unpaid and Accrued Obligations and, as a severance payment, (i) an amount equal to two times the Executive's prior year's compensation including salary and bonus but excluding the compensation Executive received in the year prior to such termination pursuant to Section 3(D) above (the "Severance Payment"), and (ii) benefits to the Executive in accordance with Section 5 above for a period of eighteen (18) months following such termination. The Severance Payment shall be paid in installments consistent with the normal payroll policies of the Company during the period which is the shorter of (i) two (2) years from the date of termination or (ii) what would have been the balance of the Term of this Agreement.
(G) RESIGNATION WITHOUT REASON: Executive may voluntarily resign his employment with the Company upon ten (10) days' written notice to the Company without any liability to Executive. In the event Executive resigns without reason prior to the expiration of this Agreement, he shall receive only the Accrued Obligations and such benefits to which he and his dependents are entitled by law.
8. WAIVER: No delay or failure to exercise any right, power or remedy accruing to either party hereto shall impair any such right, power or remedy or shall be construed to be a waiver of or an acquiescence to any breach hereof. No waiver of any breach hereof shall be deemed to be a waiver of any other breach hereof theretofore or thereafter occurring. Any waiver of any provision hereof shall be effective only to the extent specifically set forth in the applicable writing. All remedies afforded to either party under this Agreement, by law or otherwise, shall be cumulative and not alternative and shall not preclude assertion by either party of any other rights or the seeking of any other rights or remedies against the other party.
9. GOVERNING LAW: The validity of this Agreement or of any of the provisions hereof shall be determined under and according to the laws of the State of New York, and this Agreement and its provisions shall be construed according to the laws of the State of New York, without regard to the principles of conflicts of law and the actual domiciles of the parties hereto.
10. NOTICES: All notices, demands or other communications required or permitted to be given in connection with this Agreement shall be given in writing, shall be transmitted to the appropriate party by hand delivery, by certified mail, return receipt requested, postage prepaid or by overnight carrier, and shall be addressed to a party at such party's address shown on the signature page hereof. A party may designate by written notice given to the other parties a new address to which any notice, demand or other communication hereunder shall thereafter be given. Each notice, demand or other communication transmitted in the manner described in this Section 10 shall be deemed to have been given and received for all purposes at the time it shall have been (i) delivered to the addressee as indicated by the return receipt (if transmitted by mail) or the affidavit of the messenger (if transmitted by hand delivery or overnight carrier) or (ii) presented for delivery during normal business hours, if such delivery shall not have been accepted for any reason.
11. ASSIGNMENTS: This Agreement shall be binding upon and inure to the benefit of the parties hereto and each of their respective successors, assigns, heirs and legal representatives; PROVIDED, HOWEVER, that Executive may not assign or delegate his obligations, responsibilities and duties hereunder except as may otherwise be expressly agreed to in writing by the parties hereto. The Company and Broker Dealer Subsidiary will require any purchaser, successor or assignee to expressly assume and agree to perform this Agreement in the same manner and to the same extent that the Company and Broker Dealer Subsidiary would be required to perform if no such purchase, succession or assignment had taken place. If Executive shall die, then any and all amounts then payable to Executive hereunder shall be paid in accordance with the terms of this Agreement to Executive's devisee, legatee or other designee or, if there be no such designee, the Executive's estate.
12. MISCELLANEOUS: This Agreement contains the entire understanding between the parties hereto and supersedes any and all other oral and written agreements or understandings between them with respect to the subject matter hereof. No modification or addition hereto or waiver or cancellation of any provision shall be valid except by a writing signed by the party to be charged therewith. The Company shall pay the reasonable costs associated with legal advice incurred by the Executive with respect to this Agreement (not to exceed $5,000).
13. SEVERABILITY: The parties agree that if any of the covenants, agreements or restrictions contained herein are held to be invalid by any court of competent jurisdiction, the remainder of the other covenants, agreements, restrictions and parts thereof herein contained shall be severable so not to invalidate any others and such other covenants, agreements, restrictions and parts thereof shall be given full effect without regard to the invalid portion.
14. ARBITRATION: Any and all disputes, controversies, or differences, whether arising or commenced during or subsequent to the term hereof, which may arise between the parties directly and/or indirectly out of or in relation to or in connection with this Agreement, or for the breach of this Agreement, shall be adjudicated by arbitration in New York City, New York under the commercial arbitration rules of the American Arbitration Association then in effect. Such arbitration shall be final and binding and shall be limited to an interpretation and application of the provisions of this Agreement and any related agreements or documents. Any arbitral award shall be enforceable in any court, wherever located, having jurisdiction over the party against whom the award was rendered. In addition, with respect to any such arbitration or enforcement proceedings, the prevailing party shall be entitled to all costs, expenses and fees incurred in the prosecution or defense of such action, including an award for reasonable attorney's fees.
15. SURVIVAL OF OPERATIVE SECTIONS: The respective rights and obligations of the parties hereto, including, without limitation, the rights and obligations set forth in Sections 5(c), 6 through 15 of this Agreement, shall survive any termination of this Agreement to the extent necessary to preserve all such rights and obligations until discharged in full.
16. COUNTERPARTS: This Agreement may be executed in two or more counterparts, each of which shall be deemed to be an original but all of which together shall constitute one and the same instrument. The execution of this Agreement may be by actual or facsimile signature.
IN WITNESS WHEREOF, the parties have duly executed this Agreement as of the day and year first above written.
OLYMPIC CASCADE FINANCIAL CORP. MARK GOLDWASSER By: /s/ Robert H. Daskal (Signature): /s/ Mark Goldwasser ---------------------------------- ------------------------ Name: Robert H. Daskal Print Name: Mark Goldwasser |
Title: Acting Chief Financial Officer
EXHIBIT 10.51
SECURITIES PURCHASE AGREEMENT
This SECURITIES PURCHASE AGREEMENT (the "Agreement"), dated as of March 17, 2006, by and between NATIONAL HOLDINGS CORPORATION, a Delaware corporation (the "Company") and the purchaser listed on Exhibit A hereto under the heading "Purchaser" (the "Purchaser") who has become a party to this Agreement by executing and delivering a financing signature page in the form attached hereto as Exhibit B (the "Financing Signature Page").
WHEREAS, the Company desires to sell to the Purchaser, and the Purchaser desires to purchase from the Company 159,090 shares of the Company's common stock, $0.02 par value per share (the "Common Stock"), pursuant to the provisions of this Agreement; and
NOW, THEREFORE, in consideration of the mutual covenants and agreements set forth in this Agreement, and for other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties do hereby agree as follows:
1. Authorization; Sale of Common Stock.
1.1 Authorization. The Company has, or before the Closing (as defined in Section 2.1) will have, duly authorized the sale and issuance, pursuant to the terms of this Agreement, of the Common Stock.
1.2 Sale of Common Stock. Subject to the terms and conditions of this Agreement, at the Closing, the Company will sell and the Purchaser will purchase the Common Stock in the principal amount set forth on Exhibit A hereto.
2. Purchase Price; Closing.
2.1 Purchase Price. The purchase price (the "Purchase Price") to be paid by the Purchaser to the Company to acquire the Common Stock shall be $175,000.
2.2 The Closing. Subject to the terms and conditions of this Agreement, the closing (the "Closing") of the sale and purchase of the Common Stock under this Agreement shall take place at the offices of Littman Krooks LLP, 655 Third Avenue, New York NY 10017 (or remotely via the exchange of documents and signatures) on the date of this Agreement (the "Closing Date"). At the Closing:
(a) the Company shall deliver to the Purchaser that number of shares of Common Stock set forth opposite the Purchaser's name on Exhibit A attached hereto, registered in the name of the Purchaser; and
(b) the Purchaser shall pay directly to the Company, by wire transfer of immediately available funds, the Purchase Price for the Common Stock being purchased.
3. Representations of the Company. The Company hereby represents and warrants to the Purchaser that the statements contained in this Section 3 are complete and accurate as of the date of this Agreement.
3.1 Organization and Standing. The Company and each of its subsidiaries (as defined below) is a corporation or other legal entity duly organized, validly existing and in good standing under the laws of its jurisdiction of existence, has all requisite corporate power and authority, and has been duly authorized by all necessary approvals and orders, to own, lease and operate its assets and properties to the extent owned, leased and operated and to carry on its business as it is now being conducted and is duly qualified and in good standing to do business in each jurisdiction in which the nature of its business or the ownership or leasing of its assets and properties makes such qualification necessary, other than in such jurisdictions where the failure to be so qualified and in good standing would not, when taken together with all other such failures, reasonably be expected to have a material adverse effect on the business, properties, condition (financial or otherwise), prospects (other than effects that are the result of general economic changes or industry-specific risks) or results of operations of the Company and its subsidiaries taken as a whole (any such material adverse effect being hereafter referred to as a "Company Material Adverse Effect"). As used in this Agreement, the term "subsidiary" of a person shall mean any corporation or other entity (including partnerships and other business associations) of which a majority of the outstanding capital stock or other voting securities having voting power under ordinary circumstances to elect directors or similar members of the governing body of such corporation or entity shall at the time be held, directly or indirectly, by such person.
3.2 Capitalization. The authorized and outstanding capital stock of the Company consists of the following: (i) a total of Thirty Million (30,000,000) shares of Common Stock, of which 5,064,878 shares are issued and outstanding; and (ii) a total of Two Hundred Thousand (200,000) shares of preferred stock, $0.01 par value per share, of which (A) 50,000 shares are designated as Series A Convertible Preferred Stock (the "Series A Stock"), 33,320 of which are issued and outstanding and (B) 20,000 shares are designated as Series B Convertible Preferred Stock (the "Series A Stock"), 10,000 of which are issued and outstanding.
3.3 Issuance of Common Stock. The issuance, sale and delivery of the Common Stock in accordance with this Agreement has been, or will be on or prior to the Closing, duly authorized by all necessary corporate action on the part of the Company, and all such shares have been duly reserved for issuance.
3.4 Corporate Power; Authority for Agreement; No Conflict. The Company will have, at the Closing, all requisite legal and corporate power to execute and deliver this Agreement, to sell and issue the Common Stock, to consummate the other transactions contemplated by the terms of this Agreement and carry out and perform its obligations under the terms of this Agreement. The execution, delivery and performance by the Company of this Agreement, and the consummation by the Company of the transactions contemplated hereby and thereby, have been duly authorized by all necessary corporate action. This Agreement has been, and when executed at the Closing will be, duly executed and delivered by the Company and constitute valid and binding obligations of the Company enforceable in accordance with their respective terms, subject as to enforcement of remedies to applicable bankruptcy, insolvency, reorganization, moratorium or similar laws affecting generally the enforcement of creditors' rights and subject to a court's discretionary authority with respect to the granting of a decree ordering specific performance or other equitable remedies. The execution and delivery of this Agreement, the consummation of the transactions contemplated hereby and thereby and the compliance with their respective provisions by the Company will not (a) conflict with or violate any provision of the Certificate of Incorporation or By-laws of the Company, (b) require on the part of the Company any filing with, or any permit, order, authorization, consent or approval of, any court, arbitrational tribunal, administrative agency or commission or other governmental or regulatory authority or agency (each of the foregoing is hereafter referred to as a "Governmental Entity"), (c) conflict with, result in a breach of, constitute (with or without due notice or lapse of time or both) a default under, result in the acceleration of obligations under, create in any party the right to accelerate, terminate, modify or cancel, or require any notice, consent or waiver under, any contract, agreement or mortgage for borrowed money, instrument of indebtedness, or other arrangement to which the Company is a party or by which the Company is bound or to which its assets are subject, other than any of the foregoing events listed in this clause (c) which do not and will not, individually or in the aggregate, have a Company Material Adverse Effect, or (d) violate any order, writ, injunction, decree, statute, rule or regulation applicable to the Company or any of its properties or assets.
3.5 Governmental Consents. No consent, approval, order or authorization of, or registration, qualification, designation, declaration or filing with, any Governmental Entity is required on the part of the Company in connection with the offer, issuance, sale and delivery of the Common Stock or the other transactions to be consummated at the Closing, as contemplated by this Agreement, except such filings as shall have been made prior to and shall be effective on and as of the Closing and such filings required to be made after the Closing under applicable federal and state securities laws. Based on the representations made by the Purchaser in Section 4 of this Agreement, the offer and sale of the Common Stock to the Purchaser will be in material compliance with applicable federal and state securities laws.
3.6 Financial Statements. The Purchaser has had the opportunity to review the audited financial statements of the Company for the fiscal year ended September 30, 2005, and the unaudited financial statements of the Company for the quarter ended December 31, 2005 (all such financial statements being collectively referred to herein as the "Financial Statements"), which have been prepared on a consistent basis throughout the periods indicated and with each other. Such Financial Statements (i) are in accordance with the books and records of the Company; and (ii) are true, correct and complete, in all material respects, and present fairly the financial condition of the Company at the date or dates, and for the periods, indicated therein and the results of operations for the period therein specified.
3.7 Broker's, Finder's or Similar Fees. There are no brokerage commissions, finder's fees or similar fees or commissions payable by the Company in connection with the transactions contemplated hereby based on any agreement, arrangement or understanding with the Company or any action taken by any entity or individual.
4. Representations of the Purchaser. The Purchaser represents and warrants to the Company as follows:
4.1 Organization and Existence. The Purchaser is a validly existing limited partnership and has all partnership power and authority to invest in the Common Stock pursuant to this Agreement. The Purchaser was not formed solely for the purpose of investing in the Common Stock.
4.2 Authorization; No Contravention. The execution delivery and performance by the Purchaser of this Agreement to which the Purchaser is a party and the transactions contemplated hereby and thereby do not violate, conflict with or result in any breach or contravention of, or the creation of any lien under, any material contractual obligation of such Purchaser or any requirement of law applicable to the Purchaser, and do not violate any orders of any Governmental Entity against, or binding upon, the Purchaser.
4.3 Governmental Authorization; Third Party Consents. No approval, consent, compliance, exemption, authorization or other action by, or notice to, or filing with, any Governmental Entity or any other person, and no lapse of a waiting period under any requirement of law, is necessary or required in connection with the execution, delivery or performance (including, without limitation, the purchase of the Common Stock) by, or enforcement against, the Purchaser of this Agreement to which it is a party or the transactions contemplated hereby and thereby.
4.4 Binding Effect. This Agreement and the other documents to which the Purchaser is a party have been duly executed and delivered by the Purchaser and constitutes the legal, valid and binding obligations of the Purchaser, enforceable against him in accordance with its terms, except as enforceability may be limited by applicable bankruptcy, insolvency, reorganization, moratorium or similar laws affecting generally the enforcement of creditors' rights and subject to a court's discretionary authority with respect to granting a decree ordering specific performance or other equitable remedies.
4.5 Purchase for Own Account. The Common Stock hereby acquired by the Purchaser pursuant to this Agreement are being acquired for the Purchaser's own account and with no intention of distributing or reselling such securities in any transaction that would be in violation of the securities laws of the United States of America or any state, without prejudice. If the Purchaser should in the future decide to dispose of any of such Common Stock, the Purchaser understands and agrees that it may do so only in compliance with the Securities Act and applicable state securities laws, as then in effect. The Purchaser agrees to the imprinting, so long as required by law, of legends on certificates representing all of its Common Stock:
"THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE "ACT"), OR THE SECURITIES LAWS OF ANY STATE. THE SECURITIES MAY NOT BE TRANSFERRED EXCEPT PURSUANT TO AN EFFECTIVE REGISTRATION STATEMENT UNDER SUCH ACT AND APPLICABLE STATE SECURITIES LAWS OR PURSUANT TO AN APPLICABLE EXEMPTION FROM THE REGISTRATION REQUIREMENTS OF SUCH ACT AND SUCH LAWS."
4.6 Restricted Securities. The Purchaser understands the Common Stock will not be registered at the time of their issuance under the Securities Act since they are being acquired from the Company in a transaction exempt from the registration requirements of the Securities Act and that the reliance of the Company on such exemption is predicated in part on the Purchaser's representations set forth herein.
4.7 Brokers, Finder's or Similar Fees. The Company has not incurred, and will not incur, directly or indirectly, as a result of any action taken by the Purchaser, any liability for brokerage or finders' fees or agents' commissions or any similar charges in connection with this Agreement.
4.8 Accredited Investor. The Purchaser is an "accredited investor" within the meaning of Rule 501 of Regulation D under the Securities Act, as presently in effect.
4.9 Experience. The Purchaser has carefully reviewed the representations concerning the Company contained in this Agreement and has made detailed inquiry concerning the Company, its business and its personnel; the officers of the Company have made available to the Purchaser any and all written information which he has requested and have answered to the Purchaser's satisfaction all inquiries made by the Purchaser; and the Purchaser has sufficient knowledge and experience in finance and business that he is capable of evaluating the risks and merits of his, her or its investment in the Company and the Purchaser is able financially to bear the risks thereof.
4.10 No General Solicitation. Such Investor did not learn of the investment in the Securities as a result of any public advertising or general solicitation.
4.11 SEC Reports. The Purchaser acknowledges that it has had the opportunity to review the SEC Reports filed with the SEC, including the information contained in the Company's most recently filed Annual Report on Form 10-K, Quarterly Report on Form 10-Q and Proxy Statement on Schedule 14A. The Purchaser acknowledged that it has read the information in such reports, including the information under the caption "Risk Factors" contained in the SEC Reports.
4.12 Investment in Brokerage Business. The Purchaser acknowledges that it is familiar with the risks involved in the security brokerage business. The Purchaser acknowledges that it understands that a securities broker-dealer is subject to uncertainties that are common in the securities industry, including, the volatility of domestic and international financial, bond and stock markets; extensive governmental regulation; litigation; intense competition; substantial fluctuations in the volume and price level of securities; and dependence on the solvency of various third parties. The Purchaser acknowledges that it has had access to the NASD Investor Alert entitled, "Brokerage Firm Private Securities Offerings: Buying Your Brokerage," dated June 14, 2004.
5. Conditions of Closing of the Purchaser. The obligations of the Purchaser to purchase the Common Stock and transfer the Purchase Price for the Common Stock being purchased at the Closing are subject to the fulfillment at or before the Closing, as applicable, of the following conditions precedent, any one or more of which may be waived in whole or in part by the Purchaser, which waiver shall be at the sole discretion of the Purchases:
5.1 Representations and Warranties. The representations and warranties made by the Company in this Agreement shall have been true and correct in all respects as of the date when made and as of the Closing Date, except for the representations and warranties that are expressly made as of a particular date (which shall remain true and correct as of such date).
5.2 Agreements. All agreements, and conditions contained in this Agreement to be performed or complied with by the Company prior to Closing shall have been performed or complied with by the Company prior to or at the Closing.
5.3 Consents, Etc. The Company shall have secured and delivered to the Purchaser all consents and authorizations that shall be necessary or required lawfully to consummate this Agreement and to issue the Common Stock to be purchased by the Purchaser at the Closing.
5.4 Proceedings and Documents. All corporate and other proceedings in connection with the transactions contemplated by this Agreement and all documents and instruments incident to such transactions shall be in a form and substance reasonably satisfactory to the Purchaser and his counsel, and the Purchaser and his counsel shall have received all such counterpart originals or certified or other copies of such documents as the Purchaser or his counsel may reasonably request.
6. Conditions of Closing of the Company. The Company's obligations to sell and issue the Common Stock at the Closing are subject to the fulfillment at or before the Closing of the following conditions, which conditions may be waived in whole or in part by the Company, and which waiver shall be at the sole discretion of the Company:
6.1 Representations and Warranties. The representations and warranties made by the Purchaser in this Agreement shall have been true and correct in all respects as of the date when made and as of the Closing Date, except for the representations and warranties that are expressly made as of a particular date (which shall remain true and correct as of such date).
6.2 Agreements. All agreements, and conditions contained in this Agreement to be performed or complied with by the Purchaser prior to the Closing shall have been performed or complied with by the Company prior to or at the Closing.
6.3 Payment of Purchase Price. The Purchaser shall have tendered the Purchase Price in exchange for the Common Stock being issued hereunder in accordance with Section 2.1.
6.4 Delivery of Documents. All of the documents to be delivered by the Purchaser pursuant to Section 2.1 or 2.2, as applicable, shall be in a form and substance reasonably satisfactory to the Company and its counsel, and shall have been executed and delivered to the Company by each of the other parties thereto.
7. Registration Rights. If the Company shall determine to prepare and file with the Securities and Exchange Commission a registration statement relating to an offering for its own account or the account of others under the Securities Act of any of its equities securities, other than on Form S-4 or Form S-8 (each as promulgated under the Securities Act) or their then equivalents relating to equity securities to be issued solely in connection with any acquisition of any entity or business or equity securities issuable in connection with the stock option or other employee benefit plans, then the Company shall send to the Purchaser a written notice of such determination and, if within 15 days after the date of such notice, the Purchaser shall so request in writing, the Company shall include in such registration statement all or any part of the Common Stock purchased hereunder (the "Shares") the Purchaser requests to be registered, subject to customary underwriter cutbacks applicable to all selling holders proportionately in such offering; provided, that the Company shall not be required to register any Shares pursuant to this section that are eligible for resale pursuant to Rule 144(k) promulgated under the Securities Act and all fees and expenses incurred by the Purchaser in connection with such registration shall be paid for by the Company (other than underwriting discounts and commissions and legal expenses of the Purchaser). In addition, the Purchaser shall be entitled to similar indemnification and related rights and benefits provided by the Company to any other selling holders in such offering. The Company shall have the right to terminate or withdraw any registration statement initiated by it pursuant to this Section 7 prior to the effectiveness of such registration statement whether or not the Purchaser has elected to include its Shares in such registration statement.
8. Miscellaneous.
8.1 Successors and Assigns. This Agreement, and the rights and
obligations of the Purchaser hereunder, may be assigned by the Purchaser to (a)
any person or entity to which Common Stock are transferred by the Purchaser, or
(b) to any Affiliated Party (as hereinafter defined), and, in each case, such
transferee shall be deemed a "Purchaser" for purposes of this Agreement;
provided that such assignment of rights shall be contingent upon the transferee
providing a written instrument to the Company notifying the Company of such
transfer and assignment and agreeing in writing to be bound by the terms of this
Agreement. The Company may not assign its rights under this Agreement. For
purposes of this Agreement, "Affiliated Party" shall mean, with respect to the
Purchaser, any person or entity which, directly or indirectly, controls, is
controlled by or is under common control with the Purchaser, including, without
limitation, any general partner, officer or director of the Purchaser and any
venture capital fund now or hereafter existing which is controlled by one or
more general partners of, or shares the same management company as, the
Purchaser.
8.2 Expenses. Each party hereto shall pay its or his own expenses relating to the transactions contemplated by this Agreement, including, without limitation, the fees and expenses of their respective counsel, financial advisors and accountants.
8.3 Severability. The invalidity or unenforceability of any provision of this Agreement shall not affect the validity or enforceability of any other provision of this Agreement.
8.4 Specific Performance. In addition to any and all other remedies that may be available at law in the event of any breach of this Agreement, the Purchaser shall be entitled to specific performance of the agreements and obligations of the Company hereunder and to such other injunctive or other equitable relief as may be granted by a court of competent jurisdiction.
8.5 Governing Law. This Agreement shall be governed by and construed in accordance with the internal laws of the State of New York (without reference to the conflicts of law provisions thereof).
8.6 Notices. All notices, requests, consents, and other communications under this Agreement shall be in writing and shall be deemed delivered (i) three business days after being sent by registered or certified mail, return receipt requested, postage prepaid or (ii) one business day after being sent via a reputable nationwide overnight courier service guaranteeing next business day delivery, in each case to the intended recipient as set forth below:
If to the Company, to National Holdings Corporation, 875 North Michigan Avenue, Suite 1560, Chicago, IL 60611, Attention: Chief Executive Officer, or at such other address as may have been furnished in writing by the Company to the other parties hereto, with a copy to Littman Krooks LLP, 655 Third Avenue, New York, NY 10017, Attention: Mitchell C. Littman, Esq.; or
If to the Purchaser, at its address set forth on Exhibit A, or at such other address as may have been furnished in writing by the Purchaser to the Company.
Any party may give any notice, request, consent or other communication under this Agreement using any other means (including, without limitation, personal delivery, messenger service, telecopy, first class mail or electronic mail), but no such notice, request, consent or other communication shall be deemed to have been duly given unless and until it is actually received by the party for whom it is intended. Any party may change the address to which notices, requests, consents or other communications hereunder are to be delivered by giving the other parties notice in the manner set forth in this Section.
8.7 Complete Agreement. This Agreement (including its exhibits) constitutes the entire agreement and understanding of the parties hereto with respect to the subject matter hereof and supersedes all prior agreements and understandings relating to such subject matter.
8.8 Amendments and Waivers. This Agreement may not be amended or terminated without the prior written consent of the Company.
8.9 Pronouns. Whenever the context may require, any pronouns used in this Agreement shall include the corresponding masculine, feminine or neuter forms, and the singular form of nouns and pronouns shall include the plural, and vice versa.
8.10 Counterparts; Facsimile Signatures. This Agreement may be executed in any number of counterparts (including, in the case of the Purchaser, Financing Signature Pages), each of which shall be deemed to be an original, and all of which shall constitute one and the same document. This Agreement (including the Financing Signature Pages) may be executed by facsimile signatures.
8.11 Section Headings and References. The section headings are for the convenience of the parties and in no way alter, modify, amend, limit or restrict the contractual obligations of the parties. Any reference in this agreement to a particular section or subsection shall refer to a section or subsection of this Agreement, unless specified otherwise.
8.12 Confidentiality. The Purchaser acknowledges and agrees not to use the Confidential Information (as hereafter defined) disclosed to him by the Company for any purpose except as set forth in this Agreement. The Purchaser will not disclose any Confidential Information to any third party except those directors, officers, employees, consultants and agents who are required to have the information in order to carry out the purpose of this Agreement. The Purchaser also understands that certain of the Confidential Information may constitute material non-public information and that trading in the Company's securities while in possession of Confidential Information, recommending trading in the Company's securities based upon Confidential Information or providing Confidential Information to others who may trade in the Company's securities could constitute a violation of federal securities laws and expose the Purchaser to civil and criminal liability. The Purchaser specifically acknowledges that the Confidential Information is subject to the public disclosure requirements of Regulation FD promulgated under the Securities Exchange Act of 1934, as amended, and that the Company is specifically relying on the Purchaser's execution of, and performance under, this Agreement in providing the Purchaser with the Confidential Information in compliance with Regulation FD. "Confidential Information" means any the information herein and any information, financial data, research, technical data, or know-how disclosed to the Purchaser by the Company, including, but not limited to, that which relates to services, products, plans for future products and services, clients, markets, operational methods, plans for future development, research, software, inventions, processes, designs, drawings, engineering, hardware configuration information, marketing, financial information, know-how and other trade secrets. Confidential Information does not include information, technical data or know-how that the Purchaser can show: (i) was rightfully in the possession of the Purchaser at the time of disclosure; (ii) becomes a matter of public knowledge, not as a result of any inaction or action of the Purchaser; or (iii) was received from a third party without a duty or confidentiality.
Executed as of the date first written above.
COMPANY:
NATIONAL HOLDINGS CORPORATION
By: /s/ Mark Goldwasser
-----------------------
Mark Goldwasser
Chief Executive Officer
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EXHIBIT A
Name and Address No. of Shares of
of Purchaser Purchase Price Common Stock
------------ -------------- ------------
Bedford Oak Partners, LP $175,000 159,090
100 South Bedford Road
Mt. Kisko, NY 10549
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EXHIBIT B
FINANCING SIGNATURE PAGE
By execution and delivery of this signature page, the undersigned hereby agrees to become a Purchaser, as defined in that certain Securities Purchase Agreement (the "Purchase Agreement") by and among National Holdings Corporation, a Delaware corporation (the "Company"), and the Purchaser (as defined in the Purchase Agreement), dated as of the Closing Date (as defined in the Purchase Agreement), acknowledges having read the representations in the Purchase Agreement section entitled "Representations of the Purchaser," and hereby represents that the statements contained therein are complete and accurate with respect to the undersigned as a Purchaser. The undersigned further hereby agrees to be bound by the terms and conditions of the Purchase Agreement as a "Purchaser" thereunder and authorizes this signature page to be attached to the Purchase Agreement.
Executed, in counterpart, as of the date set forth below.
PURCHASER:
BEDFORD OAK PARTNERS, LP
By: /s/ Harvey Eisen
------------------------------
Name: Harvey Eisen
Title: Chairman and Managing Partner
Date:
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EXHIBIT 31.1
CERTIFICATION PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
I, Mark Goldwasser, certify that:
1. I have reviewed this quarterly report on Form 10-Q of National Holdings Corporation;
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4. The registrant's other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have:
a) designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
c) disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and
5. The registrant's other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions):
a) all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and
b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting.
/s/ Mark Goldwasser ----------------------- Mark Goldwasser, Chief Executive Officer May 10, 2006 |
EXHIBIT 31.2
CERTIFICATION PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
I, Robert H. Daskal, certify that:
1. I have reviewed this quarterly report on Form 10-Q of National Holdings Corporation;
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4. The registrant's other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have:
a) designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
c) disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and
5. The registrant's other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions):
a) all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and
b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting.
/s/ Robert H. Daskal -------------------- Robert H. Daskal, Chief Financial Officer May 10, 2006 |
EXHIBIT 32.1
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Quarterly Report of National Holdings Corporation (the "Company") on Form 10-Q for the fiscal quarter ended March 31, 2006 as filed with the Securities and Exchange Commission on the date hereof (the "Report"), I, Mark Goldwasser, Chief Executive Officer of the Company, certify, pursuant to 18 U.S.C. ss. 1350, aS adopted pursuant to ss. 906 of the Sarbanes-Oxley Act of 2002, that, to my knowledge:
(1) The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended; and
(2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.
/s/ Mark Goldwasser ------------------- Mark Goldwasser Chief Executive Officer May 10, 2006 |
EXHIBIT 32.2
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Quarterly Report of National Holdings Corporation (the "Company") on Form 10-Q for the fiscal quarter ended March 31, 2006 as filed with the Securities and Exchange Commission on the date hereof (the "Report"), I, Robert H. Daskal, Acting Chief Financial Officer of the Company, certify, pursuant to 18 U.S.C. ss. 1350, as adopted pursuant to ss. 906 of the Sarbanes-Oxley Act of 2002, that, to my knowledge:
(1) The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended; and
(2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.
/s/ Robert H. Daskal -------------------- Robert H. Daskal Chief Financial Officer May 10, 2006 |