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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D. C. 20549

FORM 10Q

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d)

OF THE SECURITIES EXCHANGE ACT OF 1934

FOR THE QUARTER ENDED SEPTEMBER 30, 2002

COMMISSION FILE NUMBER 1-31292

EMPIRE FINANCIAL HOLDING COMPANY
(Exact name of registrant as specified in its charter)

407-774-1300
(Registrant’s telephone number, including area code)

Securities registered under Section 12 (b) of the Exchange Act:

Check whether the registrant has (1) filed all reports required to be filed by Section 13 or 15 (d) of the Exchange Act during the past twelve months (or for such shorter periods 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   o.

As of September 30, 2002, there were 4,802,800 shares of common stock outstanding, par value $0.01 per share.

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EMPIRE FINANCIAL HOLDING COMPANY AND SUBSIDIARIES
FORM 10Q
FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2002

INDEX

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PART I — FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

EMPIRE FINANCIAL HOLDING COMPANY AND SUBSIDIARIES

The accompanying notes are an integral part of these financial statements.

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EMPIRE FINANCIAL HOLDING COMPANY AND SUBSIDIARIES

The accompanying notes are an integral part of these financial statements.

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EMPIRE FINANCIAL HOLDING COMPANY AND SUBSIDIARIES

The accompanying notes are an integral part of these financial statements.

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EMPIRE FINANCIAL HOLDING COMPANY AND SUBSIDIARIES

Supplemental disclosure of non-cash financing activities:

The shareholders who owned the Company prior to the public offering deferred payment of $785,000 due to them for taxes that they were responsible for during the time that the Company and its subsidiaries were under S corporation status. $334,000 was paid to the shareholders during the third quarter of 2002.

The accompanying notes are an integral part of these financial statements.

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EMPIRE FINANCIAL HOLDING COMPANY AND SUBSIDIARIES

1. NATURE OF BUSINESS AND BASIS OF PRESENTATION

Unaudited interim financial statements — The accompanying unaudited consolidated financial statements include the accounts of the Empire Financial Holding Company (the “Company”), Empire Financial Group, Inc. (“Empire Group”), Advantage Trading Group, Inc. (“Advantage”) and Empire Investment Advisors, Inc. (“Advisors”) and, in the opinion of management, reflect all adjustments, consisting only of normal recurring adjustments, necessary for a fair presentation of the results for the interim periods. Certain footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America have been condensed or omitted pursuant to SEC rules and regulations. The preparation of financial statements requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amount of revenue and expense during the reporting period. Actual results could differ from true estimates. The results of operations for the three and nine month periods ending September 30, 2002, are not necessarily indicative of the results to be expected for the year ended December 31, 2002. These consolidated financial statements should be read in conjunction with the financial statements and notes thereto included in the Company’s consolidated audited financial statements as of December 31, 2001, in its S-1 registration.

2. PRO FORMA INFORMATION

The Company and its subsidiaries’ S corporation elections automatically terminated on April 9, 2002, with the completion of its public offering. Prior to that date, the Company, Empire Group, Advantage and Advisors, individually, with the consent of their shareholders, elected to be taxed as S corporations in which taxable income of the respective companies is included in the income tax returns of the individual shareholders. The pro forma adjustments shown in the consolidated statements of income reflect provisions for income taxes computed based upon statutory tax rates as if the Company had been subject to federal and state taxation during the periods presented.

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EMPIRE FINANCIAL HOLDING COMPANY AND SUBSIDIARIES
SELECTED NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2002 AND 2001

3. ACCOUNTS PAYABLE, ACCRUED EXPENSES AND OTHER LIABILITIES

     Accounts payable, accrued expenses and other liabilities consisted of the following:

4. INCOME TAXES DUE TO CONVERSION FROM S CORPORATION TO C CORPORATION

For the period January 1, 2002 to April 9, 2002, the Company has provided a tax liability of approximately $785,000 which was due to the shareholders for income taxes during the time that the Company and its subsidiaries were under S Corporation status. The Company will make a final distribution to S Corporations shareholders not later than April 2003 related to their income taxes arising from the Company’s taxable income from January 1, 2002 to April 9, 2002. However, due to certain provisions of the Internal Revenue Code, the Company may be able to utilize its subsequent losses during the year to minimize the liability. As of September 30, 2001, one of the shareholders has been paid $334,000 of this liability. If the Company elects an alternative method of allocation and utilizes its losses, which is currently likely, a substantial portion of such funds will be repaid to the Company prior to the end of the year. This alternative method will not affect the earnings for the year ended December 31, 2002, but will affect the net operating loss carryforwards, because the application of 2002 losses reduces pre-tax income and, thus, taxes payable for 2002.

5. NET CAPITAL AND RESERVE REQUIREMENTS

The broker dealer subsidiaries of the Company are subject to the Securities and Exchange Commission Uniform Net Capital Rule 15c3-1 and the requirements of the securities exchanges of which they are members. This rule requires that aggregate indebtedness, as defined, not exceed 15 times net capital, as defined. Rule 15c3-1 also provides for an “alternative net capital requirement” which, if elected, requires that net capital be equal to the greater of $250,000 or 2% of aggregate debit items computed in applying the formula for determination of reserve requirements. The alternative net capital requirement has been utilized by Advantage. Net capital positions of the Company’s broker dealer subsidiaries were as follows at September 30, 2002:

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EMPIRE FINANCIAL HOLDING COMPANY AND SUBSIDIARIES
SELECTED NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2002 AND 2001

Advantage is also subject to Rule 15c3-3 (the “Rule”) under the Securities Exchange Act of 1934 which specifies certain conditions under which brokers and dealers carrying customer accounts are required to maintain cash or qualified securities in a special reserve bank account for the exclusive benefit of customers. Amounts to be maintained, if required, are computed in accordance with a formula defined in the Rule. At September 30, 2002, Advantage had $984,152 deposited in the special reserve account.

6. FINANCIAL INFORMATION BY BUSINESS SEGMENT

The Company operates in two business segments, retail brokerage services and order execution services. Retail brokerage services (including the sale of equities, mutual funds, fixed income products and investment advisory services) are provided to retail and institutional customers through online trading or the twenty retail branches of the Empire Group, which includes Advisors. Order execution services are conducted through Advantage, which fills orders to purchase or sell securities received from independent broker dealers on behalf of their retail customers and perform clearing functions for other brokers and dealers.

Information concerning operations in these segments of business was as follows:

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EMPIRE FINANCIAL HOLDING COMPANY AND SUBSIDIARIES
SELECTED NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
FOR THE THREE AND SIX MONTHS ENDED SEPTEMBER 30, 2002 AND 2001

6. FINANCIAL INFORMATION BY BUSINESS SEGMENT (continued)

All of the Company’s business and long-lived assets are located in the United States. Eliminations represent revenues and receivables from intercompany transactions resulting from clearing activities between Empire Group and Advantage.

Item 2. Management’s Discussion and Analysis or Plan of Operation.

The following discussion of the financial condition and results of operations of the Company should be read in conjunction with the Selected Consolidated Financial Data and the Consolidated Financial Statements and Notes thereto included in the Company’s Prospectus dated April 9, 2002 as filed with the Securities and Exchange Commission. This discussion contains forward-looking statements that involve risks and uncertainties that could cause actual results to differ materially from those anticipated in such forward-looking statements. Factors that may cause such differences include, but are not limited to: the effect of client trading patterns on Company revenues and earnings; computer system failures; trading volumes in excess of our capacity; the effects of competitors’ pricing, product and service decisions and intensified competition; evolving regulation and changing industry customs and practices adversely affecting the Company; adverse results of litigation; changes in revenues and profit margin due to cyclical securities markets and interest rates; a significant downturn in the securities markets over a short period of time or a sustained decline in securities prices and trading volumes; and the other risks and uncertainties set forth under the heading “Risk Factors” in the Company’s Prospectus dated April 9, 2002 as filed with the Securities and Exchange Commission.

Our significant accounting policies are disclosed in the Notes to Consolidated Financial Statements for the year ended December 31, 2001, found in our Prospectus dated April 9, 2002. As of January 1, 2002, we have adopted Statement of Financial Accounting Standards No. 142, “Goodwill and Other Intangible Assets” (“SFAS 142”), and Statement of Financial Accounting Standards No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets (“SFAS 144”). As of September 30, 2002, no impairment charges had been booked under SFAS 142. SFAS No. 144 requires us to test long-lived assets by comparing their carrying value against their undiscounted cash flows and to recognize impairment if the carrying value is greater than the undiscounted cash flows. No impairment charges were recognized for the nine months ended September 30, 2002 under SFAS 144.

The terms “we” and “us” as used in this document refer to Empire Financial Holding Company and its operating subsidiaries.

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Results of Operations:

Three Months Ended September 30, 2002 Compared to Three Months Ended September 30, 2001

Total revenues for the three months ended September 30, 2002 were $4,550,434, an increase of $383,359, or 9%, over the same period in 2001. This increase was primarily due to the reasons described below:

Order execution trading revenue for the three months ended September 30, 2002 was $1,041,337, a decrease of $368,550 over the same period in 2001, due to a decrease in the number of order executions caused by a decline in the market resulting in a decrease in the profitability per order execution transaction.

Commission and fee revenue for the three months ended September 30, 2002 was $3,313,863, an increase of $1,037,818 or 46%, over the same period in 2001. This was due to revenue from independent registered representatives processing securities transactions through us who had not recently used our services, a significant increase in the retail brokerage services, as well as commissions generated from Empire Investment Advisors, Inc.

Interest and dividends for the three months ended September 30, 2002 were $139,585, a decrease of $93,337 or 40%, over the same period in 2001, primarily due to a decrease in the average interest rates charged to customers and also a decrease in retail customers’ margin debit balances. The average customer debit balance for the three months ended September 30, 2002 was $5,729,404 compared to $7,344,746 for the three months ended September 30, 2001, a decrease of 21%.

Other revenue for the three months ended September 30, 2002 was $55,649, a decrease of $192,572, or 78%, over the same period in 2001.

Total expenses for the three months ended September 30, 2002 were $5,005,477, an increase of $1,134,927, or 29%, over the same period in 2001, primarily due to the reasons described below:

Employee compensation and benefit costs for the three months ended September 30, 2002 were $2,246,525, an increase of 1,193,987 or 113%, over the same period in 2001. This increase was primarily due to a significant shift from order execution services to retail brokerage services, which encompasses a higher payout percentage for employees.

Commissions and clearing costs for the three months ended September 30, 2002 were $1,793,546 an increase of $142,071 or 9%, over the same period in 2001. This increase was primarily attributable to increased volume and commissions paid to independent registered representatives who had previously not been affiliated with us.

Order flow payment expense for the three months ended September 30, 2002 was $217,322, a decrease of $196,690, or 48% over the same period in 2001, due to a reduction in the number of trade transactions that required order flow payments, as well as a decrease in the order flow payment amount paid per transaction.

Interest expense for the three months ended September 30, 2002 was $29,629, a decrease of $122,370, or 81%, over the same period in 2001, due to a reduction in loans required to fund the margin debit balances as well as a decrease in the interest on average loan balances. The month end loan balance for the three months ended September 30, 2002 was zero compared to $1,067,000 for the three months ended September 30, 2001, a decrease of 100%.

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Communications and data processing expense for the three months ended September 30, 2002 was $185,938 an increase of $53,631, or 41%, over the same period in 2001, due to increased activity and usage of our web sites and upgrades in computers and other hardware devices.

Other general and administrative expenses for the three months ended September 30, 2002 were $532,517, an increase of $64,298, or 14%, over the same period in 2001, due to the amortization of a customer list as well as the increased costs associated with being a public company.

Nine Months Ended September 30, 2002 Compared to Nine Months Ended September 30, 2001

Total revenues for the nine months ended September 30, 2002 were $14,605,852, a decrease of $636,818, or 4%, from the same period in 2001. This decrease was primarily due to the reasons described below:

Order execution trading revenue for the nine months ended September 30, 2002 was $3,351,680, a decrease of $3,296,346 or 50%, over the same period in 2001 due to a decrease in the number of order execution transactions as well as a decrease in the profitability per order of execution transactions.

Commission and fee revenue for the nine months ended September 30, 2002 was $10,584,949, an increase of $3,085,114 or 41%, over the same period in 2001. This was due to revenue from independent registered representatives processing securities transactions through us who had not recently used our services, a significant increase in the retail brokerage services, as well as commissions generated from Empire Investment Advisors, Inc.

Interest and dividends for the nine months ended September 30, 2002 were $414,269, a decrease of $132,990 or 24%, over the same period in 2001, primarily due to a decrease in the average interest rates charged to customers and also a decrease in retail customers’ margin debit balances. The average customer debit balance for the nine months ended September 30, 2002 was $5,859,269 compared to $8,741,979 for the nine months ended September 30, 2001, a decrease of 32%.

Other revenue for the nine months ended September 30, 2002 was $254,954, a decrease of $292,596, or 53%, over the same period in 2001.

Total expenses for the nine months ended September 30, 2002 were $14,151,935, an increase of $312,741 or 2%, over the same period in 2001, primarily due to the reasons described below:

Employee compensation and benefit costs for the nine months ended September 30, 2002 were $6,007,432 a decrease of 85,505 or 1%, over the same period in 2001.

Commissions and clearing costs for the nine months ended September 30, 2002 were $5,054,307 an increase of $2,183,395, or 76%, over the same period in 2001. This increase was primarily due to increased volume and commissions paid to independent registered representatives who had previously not been affiliated with us.

Order flow payment expense for the nine months ended September 30, 2002 was $803,530, a decrease of $1,107,431, or 58% over the same period in 2001. This was due to a reduction in the number of trade transactions that required order flow payments, as well as a decrease in the order flow payment amount paid per transaction.

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Interest expense for the nine months ended September 30, 2002 was $65,627, a decrease of $460,720, or 88%, over the same period in 2001, due to a reduction in loans required to fund the margin debit balances as well as a decrease in the interest on average loan balances. The month end loan balance for the nine months ended September 30, 2002 was zero compared to $1,032,000 for the nine months ended September 30, 2001, a decrease of 100%.

Communications and data processing expense for the nine months ended September 30, 2002 was $551,286 an increase of $149,430, or 37%, over the same period in 2001, due to increased activity in the usage of our web sites and upgrades in computers and other hardware devices.

Other general and administrative expenses for the nine months ended September 30, 2002 were $1,669,753, a decrease of $366,428, or 18%, over the same period in 2001.

Liquidity and Capital Resources:

Our broker dealer subsidiaries, Advantage and Empire Group have assets, which are highly liquid, consisting generally of cash, money market funds and securities freely saleable in the open market. Total assets at September 30, 2002 were $18,180,134, which consisted of approximately $15,000,000 in liquid assets.

Our broker dealer subsidiaries, Advantage and Empire Group are subject to the net capital requirements of the Securities Exchange Commission, the National Association of Securities Dealers and other regulatory authorities. At September 30, 2002, our broker dealer subsidiaries regulatory net capital for the combined subsidiaries was $3,518,345 with a minimum combined net capital requirement of $500,000. Combined excess net capital was $3,018,345.

Item 3. Quantitative and Qualitative Disclosures About Market Risk

Market risk generally represents the risk of loss that may result from the potential change in the value of a financial instrument as a result of fluctuations in interest rates and market prices. We have established policies, procedures and internal processes governing our management of market risks in the normal course of our business operations.

We seek to control the risks associated with our client activities by requiring clients to maintain margin collateral in compliance with various regulatory and internal guidelines. We monitor required margin levels daily and, pursuant to such guidelines, require our clients to deposit additional collateral, or to reduce positions, when necessary.

As a fundamental part of our brokerage business, we hold short-term interest earning assets, mainly funds required to be segregated in compliance with federal regulations for clients. These funds totaled $994,152 at September 30, 2002 and $523,706 at December 31, 2001. We invest these funds primarily in short-term fixed-rate U.S. Treasury Bills and repurchase agreements. Our interest earning assets are financed primarily by short-term interest bearing liabilities totaling zero at September 30, 2002 and $1,032,000 at December 31, 2001. We earn a net interest spread on the difference between amounts earned on client margin loans and amounts paid on client credit balances. Since we establish the rate paid on client cash balances, a substantial portion of our interest rate risk is under our direct management.

Our revenues and financial instruments are denominated in U.S. dollars, and we have not to date invested in derivative financial instruments or derivative commodity instruments.

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Part II. OTHER INFORMATION

Item 1. Legal Proceedings

The Company is involved in various routine lawsuits of a nature deemed by the Company customary and incidental to its business. In the opinion of management, the ultimate disposition of such actions will not have a material adverse effect on its financial position or results of operations.

Item 2. Changes in Securities and Use of Proceeds

The Company’s Registrations Statement on Form S-1, Registration No. 333-86365, was declared effective by the Securities and Exchange Commission on April 9, 2002. The offer and sale of all of the 1,000,000 shares of common stock, $.01 par value per share, of the Company registered by such Registration Statement occurred on April 9, 2002. The underwriters of the offering were Keefe, Bruyette & Woods, Inc. and Empire Financial Group, Inc., a wholly-owned subsidiary of the Company.

The aggregate price of the shares offered and sold pursuant to the Registration Statement was $6,000,000. The total expenses incurred by the Company relating to the offering was $821,626, including underwriting commissions and other fees. Of this amount, $230,000 involved payments to Empire Financial Group, Inc. and the remaining balance involved payments to others. The net offering proceeds to the Company after deducting the total expenses incurred in the offering was $5,178,374.

During April 2002, the Company repurchased 197,200 shares of its common stock sold in the public offering. This was done to stabilize the market for the Company’s stock. The total cost of the common stock purchased was $1,117,198 and is included as treasury stock on the accompanying balance sheet.

Effective April 9, 2002, the Company granted 540,200 stock options pursuant to its 2000 Incentive Compensation Plan at a price of $6.00, which was the offering price in the Company’s initial public offering as of that date. Of the total stock options, 340,200 vest over a five year schedule commencing April 9, 2002. The remaining 200,000 vested immediately upon grant, however, only 100,000 can be sold during the first twelve months commencing April 9, 2002, and thereafter, 20,000 may be sold per year on a cumulative basis.

Item 3. Defaults Upon Senior Securities

     None

Item 4. Submission of Matters to a Vote of Security Holders

     None

Item 5. Other Information

     None

Item 6. Exhibits and Reports on Form 8-K

(a) Exhibits

     None

(b) Reports on Form 8-K

A Form 8-K was filed on October 8, 2002 advising of management issues between the Company’s CO-CEOs and CO-Chairpersons, Kevin Gagne and Richard Goble, regarding the management and administration of the Company.

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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.

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