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 June 30, 2002
COMMISSION FILE NUMBER 1-31292
EMPIRE FINANCIAL HOLDING COMPANY
--------------------------------
(Exact name of registrant as specified in its charter)
Florida 56-3627212
------- ----------
(State of Incorporation (I. R. S. Employer
or Organization) Identification No.)
1385 West State Road 434, Longwood, FL 32750
-------------------------------------- -----
(Address of principal executive offices) (Zip Code)
407-774-1300
------------
(Registrant's telephone number, including area code)
Securities registered under Section 12 (b) of the Exchange Act:
Name of each Exchange On
Title of each class Which Registered
------------------- ----------------
Common stock, $0.01 par value American Stock Exchange
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 ___
As of July 31, 2002, there were 4,802,800 shares of common stock outstanding,
par value $0.01 per share.
EMPIRE FINANCIAL HOLDING COMPANY AND SUBSIDIARIES
FORM 10Q
FOR THE THREE MONTHS ENDED JUNE 30, 2002
INDEX
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements: Page No.
Consolidated Statement of Financial Condition, June 30, 2002 3
and December 31, 2001
Consolidated Statements of Income, Three Months Ended
June 30, 2002 and 2001 4
Consolidated Statements of Income, Six Months Ended
June 30, 2002 and 2001 5
Consolidated Statements of Cash Flows, Six Months Ended
June 30, 2002 and 2001 6
Selected Notes to Consolidated Financial Statements 7
Item 2. Management's Discussion and Analysis of Second Quarter
2002 Results 10
Part II - OTHER INFORMATION
Item 1. Legal Proceedings 14
Item 2. Changes in Securities and Use of Proceeds 14
Item 3. Defaults Upon Senior Securities 15
Item 4. Submission of Matters to a Vote of Security Holders 15
Item 5. Other Information 15
Item 6. Exhibits and Reports on Form 8-K 15
Signatures 15
Officer Certification 16
Page 2
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
EMPIRE FINANCIAL HOLDING COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
June 30,
2002 December 31,
(unaudited) 2001
ASSETS ------------ ------------
Cash and cash equivalents .......................... $ 6,684,583 $ 1,803,323
Cash and treasury bills segregated persuant
to federal regulations ........................... 1,206,917 523,706
Receivables from customers ......................... 3,946,536 8,774,765
Receivables from brokers and dealers and
clearing organizations ........................... 1,908,647 3,776,626
Deposits at clearing organizations ................. 510,000 535,237
Fixed assets, net of accumulated
depreciation of $121,827 ......................... 80,391 111,466
Customer list, net of accumulated
amortization of $591,438 ......................... 1,553,804 1,811,777
Deferred tax asset ................................. 400,000 -
Other assets ....................................... 505,554 238,516
------------ -----------
Total assets ............................ $ 16,796,432 $17,575,416
============ ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities:
Short-term borrowings from bank .................. $ 206,000 $ 1,032,000
Accounts payable, accrued expenses and
other liabilities .............................. 3,820,522 2,731,576
Payable to customers ............................. 5,361,839 8,990,457
Payable to brokers and dealers and clearing
organizations .................................. 92,759 116,152
Contract payable ................................. - 1,735,155
Due to related party shareholders ................ 785,000 -
------------ -----------
Total liabilities ....................... 10,266,120 14,605,340
------------ -----------
Shareholders' equity
Preferred stock, $.01 par value; 1,000,000 shares
authorized; none issued and outstanding ........ - -
Common stock, $.01 par value; 100,000,000 shares
authorized: 5,000,000 shares issued and
4,802,800 outstanding .......................... 50,000 40,000
Additional paid-in capital ....................... 7,590,248 500,691
Retained earnings ................................ 7,262 2,429,385
Treasury stock, at cost .......................... (1,117,198) -
------------ -----------
Total shareholders' equity ............ 6,530,312 2,970,076
------------ -----------
Total liabilities and shareholders' equity $ 16,796,432 $17,575,416
============ ===========
The accompanying notes are an integral part of these financial statements.
Page 3
EMPIRE FINANCIAL HOLDING COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
Three Months Ended
June 30,
--------------------------
2002 2001
----------- ------------
(unaudited)
Revenues:
Order execution trading revenues, net ......... $1,082,442 $ 1,947,668
Commissions and fees .......................... 3,198,055 1,863,691
Interest ...................................... 139,137 134,287
Other ......................................... 185,193 147,574
---------- -----------
4,604,827 4,093,220
---------- -----------
Expenses:
Employee compensation and benefits ............ 1,723,237 1,893,593
Commissions and clearing costs ................ 1,736,220 788,758
Orderflow payments ............................ 255,247 566,028
Interest ...................................... 13,493 164,309
Communications and data processing ............ 216,818 192,694
General and administrative .................... 651,550 516,568
---------- -----------
4,596,565 4,121,950
---------- -----------
Income before income taxes ....................... 8,262 (28,730)
Federal and state income taxes ................... 1,000 -
---------- -----------
Net income ....................................... $ 7,262 $ (28,730)
========== ===========
Earnings per share-basic and diluted ............. $ - $ -
========== ===========
Unaudited pro forma information (Note 3):
Income before taxes ........................... $ - $ (28,730)
Benefit from income taxes ..................... - 11,000
---------- -----------
Net income ....................................... $ - $ (17,730)
========== ===========
Pro forma earnings per share - basic and diluted . $ - $ -
========== ===========
Weighted average shares outstanding .............. 4,740,112 4,000,000
========== ===========
The accompanying notes are an integral part of these financial statements.
Page 4
EMPIRE FINANCIAL HOLDING COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
Six Months Ended
June 30,
--------------------------
2002 2001
----------- -----------
(unaudited)
Revenues:
Order execution trading revenues, net ......... $ 2,310,343 $ 5,238,139
Commissions and fees .......................... 7,271,085 5,223,790
Interest ...................................... 274,684 314,337
Other ......................................... 199,305 261,102
----------- -----------
10,055,417 11,037,368
----------- -----------
Expenses:
Employee compensation and benefits ............ 3,760,907 5,040,399
Commissions and clearing costs ................ 3,260,762 1,219,437
Orderflow payments ............................ 586,208 1,496,949
Interest ...................................... 35,997 374,348
Communications and data processing ............ 365,348 269,549
General and administrative .................... 1,136,236 1,567,962
----------- -----------
9,145,458 9,968,644
----------- -----------
Income before income taxes ....................... 909,959 1,068,724
Federal and state income taxes ................... 1,000 -
----------- -----------
Net income ....................................... $ 908,959 $ 1,068,724
=========== ===========
Earnings per share-basic and diluted ............. $ 0.21 $ 0.27
=========== ===========
Unaudited pro forma information (Note 3):
Income before taxes ........................... $ 909,959 $ 1,068,724
Provisions for income taxes ................... 341,000 432,000
----------- -----------
Net income ....................................... $ 568,959 $ 636,724
=========== ===========
Pro forma earnings per share - basic and diluted . $ 0.13 $ 0.16
=========== ===========
Weighted average shares outstanding .............. 4,372,101 4,000,000
=========== ===========
The accompanying notes are an integral part of these financial statements.
Page 5
EMPIRE FINANCIAL HOLDING COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Six Months Ended
June 30,
--------------------------
2002 2001
----------- -----------
(unaudited)
Operating activities:
Net income ...................................... $ 908,959 $ 904,915
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation ................................... 31,075 21,631
Amortization of customer list .................. 325,000 -
Changes in assets and liabilities:
Segregated cash and treasury bills ........... (683,211) (110,756)
Receivables from customers ................... 4,828,229 2,906,316
Receivable from brokers and dealers and
clearing organizations ...................... 1,867,979 574,314
Deposits at clearing organizations ........... 25,237 (48,188)
Deferred tax asset ........................... (400,000) -
Other assets ................................. (267,038) 41,970
Accounts payable, accrued expenses
and other liabilities ....................... 1,088,946 (574,929)
Payable to customers ......................... (3,628,618) (1,395,297)
Payable to brokers and dealers
and clearing organizations .................. (23,393) (298,869)
----------- -----------
Net cash provided by operating activities .... 4,073,165 2,021,107
----------- -----------
Investing activities:
Purchases of furniture and equipment ............ - (35,433)
Purchase of assets .............................. (16,004) -
----------- -----------
Net cash used in investing activities ........ (16,004) (35,433)
----------- -----------
Financing activities:
Proceeds from sale of common stock .............. 5,153,479 -
Purchase of treasury stock ...................... (1,117,198) -
Payment of short-term borrowings from bank ...... (826,000) (2,029,000)
Payment on contract payable ..................... (1,786,182) -
Shareholder distributions ....................... (600,000) (296,928)
----------- -----------
Net cash provided by (used in) financing activities 824,099 (2,325,928)
----------- -----------
Net increase (decrease) in cash and cash equivalents 4,881,260 (340,254)
Cash and cash equivalents at beginning of year ..... 1,803,323 2,003,693
----------- -----------
Cash and cash equivalents at end of the period ..... $ 6,684,583 $ 1,663,439
=========== ===========
Supplemental disclosures of cash flow information:
Cash paid during the period for interest ....... $ 35,997 $ 374,348
=========== ===========
Cash paid for during the period for income taxes $ - $ -
=========== ===========
Supplemental disclosure of non-cash investing and financing activities:
The shareholders who owned the Company prior to the public offering deferred
payment of $785,000 due them for taxes they are responsible for while the
Company and its subsidiaries were S corporations.
The accompanying notes are an integral part of these financial statements.
Page 6
EMPIRE FINANCIAL HOLDING COMPANY AND SUBSIDIARIES
SELECTED NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2002 AND 2001
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 six month periods ending June 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 audited financial statements as of December 31, 2001, in its S-1
registration.
2. EARNINGS PER SHARE
Basic earnings per share are computed by dividing income (loss) available to
common shareholders by the weighted-average number of common shares outstanding
for the period. Diluted earnings per share considers the potential dilution that
could occur if securities or other contracts to issue common stock were
exercised or converted into common stock or resulted in the issuance of common
stock that then shared in the earnings of the Company. Basic and dilutive
earnings per share were the same at June 30, 2002 because the exercise price of
the vested stock options was above the market price of the stock on that date.
3. PRO FORMA INFORMATION
The Company's and its subsidiaries' S corporation election automatically
terminated on April 9, 2002, with the completion of its public offering. Prior
to that date, Empire Group, Advantage and Advisors, individually, with the
consent of their shareholders, elected to be taxed as S corporations, which
provide for taxable income of the respective companies to be 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.
Page 7
EMPIRE FINANCIAL HOLDING COMPANY AND SUBSIDIARIES
SELECTED NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS (unaudited) (continued)
FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2002 AND 2001
4. ACCOUNTS PAYABLE, ACCRUED EXPENSES AND OTHER LIABILITIES
Accounts payable, accrued expenses and other liabilities consisted of the
following:
June 30, December 31,
2002 2001
---- ----
Accounts payable ................ $ 810,935 $ 440,054
Bank overdrafts ................. 589,567 835,053
Accrued payroll and payroll taxes 479,295 508,885
Accrued rent .................... - 276,312
Income taxes payable ............ 81,000 -
Other ........................... 294,215 171,272
Deferred revenue
1,565,510 500,000
---------- ----------
$3,820,522 $2,731,576
========== ==========
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, not exceed 15 times net capital. 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 June 30, 2002:
Advantage:
Net capital as a percentage of Aggregate
debit items ............................ 48%
Net capital ............................ $3,215,062
Required net capital ................... $ 250,000
Empire:
Net Capital as a percentage of Aggregate
debit items ............................ 3%
Net capital ............................ $ 840,347
Required net capital ................... $ 250,000
Page 8
EMPIRE FINANCIAL HOLDING COMPANY AND SUBSIDIARIES
SELECTED NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS (unaudited) (continued)
FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2002 AND 2001
5. NET CAPITAL AND RESERVE REQUIREMENTS (continued)
Advantage is also subject to Rule 15c3-3 (the "Rule") under the Securities And
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 June 30, 2002, Advantage had $1,206,917
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
for the three months ended June 30:
2002 2001
---- ----
Revenue:
Order execution services $ 1,614,261 $ 2,240,289
Retail brokerage services 2,989,828 1,987,707
Corporate ............... 738 -
Eliminations ............ - (134,776)
------------ ------------
$ 4,604,827 $ 4,093,220
============ ============
Net income:
Order execution services $ 238,998 $ (37,358)
Retail brokerage services (20,985) 8,628
Corporate ............... (210,751) -
------------ ------------
$ 7,262 $ (28,730)
============ ============
Identifiable assets:
Order execution services $ 11,081,741 $ 13,011,023
Retail brokerage services 4,235,529 1,801,532
Corporate ............... 1,953,897 -
Eliminations ............ (474,735) (314,314)
------------ ------------
$ 16,796,432 $ 14,498,241
============ ============
Information concerning operations in these segments of business was as follows
for the six months ended June 30, 2002:
2002 2001
---- ----
Revenue:
Order execution services $ 3,233,092 $ 5,896,300
Retail brokerage services 6,821,587 5,375,489
Corporate ............... 738 -
Eliminations ............ - (234,421)
------------ ------------
$ 10,055,417 $ 11,037,368
============ ============
Net income:
Order execution services $ 336,525 $ 906,091
Retail brokerage services 943,186 162,633
Corporate ............... (370,852) -
------------ ------------
$ 908,859 $ 1,068,724
============ ============
Identifiable assets:
Order execution services $ 11,081,741 $ 13,011,023
Retail brokerage services 4,235,529 1,801,532
Corporate ............... 1,953,897 -
Eliminations ............ (474,735) (314,314)
------------ ------------
$ 16,796,432 $ 14,498,241
============ ============
Page 9
EMPIRE FINANCIAL HOLDING COMPANY AND SUBSIDIARIES
SELECTED NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS (unaudited) (continued)
FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2002 AND 2001
5. 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 June 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 six months ended June 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.
Page 10
Results of Operations:
Three Months Ended June 30, 2002 Compared to Three Months Ended June 30, 2001
Total revenues for the three months ended June 30, 2002 were $4,604,827, an
increase of $511,607, or 13%, 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 June 30, 2002 was
$1,082,442, a decrease of $865,226 or 44%, over the same period in 2001, due to
an approximate 48% decrease in the number of order execution transactions and a
decrease of approximately 38% in the profitability per order execution
transaction, primarily as a result of decimalization and the downturn in the
stock market.
Commission and fee revenue for the three months ended June 30, 2002 was
$3,198,055, an increase of $1,334,364 or 72%, over the same period in 2001. This
was due to revenue from independent registered representatives processing
securities transactions through us who had previously not used our services, as
well as commissions generated from Empire Investment Advisors, Inc.
Interest and dividends for the three months ended June 30, 2002 were $139,137,
an increase of $4,850, or 4%, 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 customer margin debit balance
for the three months ended June 30, 2002 was $3,946,536 compared to $9,939,579
for the three months ended June 30, 2001, a decrease of 60%.
Other revenue for the three months ended June 30, 2002 was $185,193, an increase
of $37,619, or 26%, over the same period in 2001.
Total expenses for the three months ended June 30, 2002 were $4,596,565, an
increase of $474,615, or 12%, over the same period in 2001, primarily due to the
reasons described below:
Employee compensation and benefit costs for the three months ended June 30, 2002
were $1,723,237 a decrease of 170,356 or 9%, over the same period in 2001. This
decrease was primarily due to a reduction in employees as a result of lower
trading volumes, which resulted in reduced commissions, bonuses, and other
personnel costs. At June 30, we employed 66 people compared to 78 people at June
30, 2001, a decrease of 15%.
Commissions and clearing costs for the three months ended June 30, 2002 were
$1,736,220 an increase of $947,462, or 120%, over the same period in 2001. This
increase was primarily attributable to commissions paid to independent
registered representatives who had previously not been affiliated with us and
with commissions paid on Empire Financial annuity sales that were not present in
the same period in 2001.
Order flow payment expense for the three months ended June 30, 2002 was
$255,247, a decrease of $310,781, or 55% over the same period in 2001, due to a
reduction in the number of trade transactions requiring order flow payments,
as well as a decrease in the order flow payment amount paid per transaction.
Interest expense for the three months ended June 30, 2002 was $13,493, a
decrease of $150,816, or 92%, 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 June 30, 2002 was $206,000 compared to $1,962,000 for the three
months ended June 30, 2001, a decrease of 90%.
Page 11
Communications expense for the three months ended June 30, 2002 was $216,818 an
increase of $24,124, or 13%, over the same period in 2001, due to improvements
to our web sites and upgrades in computers and other hardware devices that were
not capitalized.
Other general and administrative expenses for the three months ended June 30,
2002 were $651,550, a increase of $134,982, or 26%, over the same period in
2001, primarily due to the amortization of a customer list.
Federal and state income taxes for the three months ended June 30, 2002, were
$1,000 as compared to none for the same period in 2001. Prior to our public
offering on April 9, 2002, we had elected to be taxed as S corporations, and
therefore, no federal and state income taxes were recorded in 2001.
Six Months Ended June 30, 2002 Compared to Six Months Ended June 30, 2001
Total revenues for the six months ended June 30, 2002 were $10,055,417, a
decrease of $981,951, or 9%, from the same period in 2001. This decrease was
primarily due to the reasons described below:
Order execution trading revenue for the six months ended June 30, 2002 was
$2,310,343, a decrease of $2,927,796 or 56%, over the same period in 2001 due to
an approximate 42% decrease in the number of order execution transactions and a
decrease of approximately 36% in the profitability per order of execution
transactions. This is primarily as a result of decimalization and the downturn
in the stock market.
Commission and fee revenue for the six months ended June 30, 2002 was
$7,271,085, an increase of $2,047,295 or 39%, over the same period in 2001, due
to increased revenues from independent registered representatives who had
previously not processed securities transactions through us, as well as
commissions generated from Empire Investment Advisors, Inc.
Interest and dividends for the six months ended June 30, 2002 were $274,684, a
decrease of $39,653, or 13%, 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 customer margin debit balance
for the six months ended June 30, 2002 was $3,946,536 compared to $9,939,579 for
the six months ended June 30, 2001, a decrease of 60%.
Other revenue for the six months ended June 30, 2002 was $199,305, a decrease of
$61,797, a decrease of less than 24% over the same period in 2001.
Total expenses for the six months ended June 30, 2002 were $9,145,458, a
decrease of $823,186 or 8%, over the same period in 2001, primarily due to the
reasons described below:
Employee compensation and benefit costs for the six months ended June 30, 2002
were $3,760,907 a decrease of 1,279,492 or 25%, over the same period in 2001.
This decrease was primarily due to a reduction in employees resulting from lower
trading volumes and the reduction reduced commissions, bonuses, and other
personnel costs paid to employees. At June 30, we employed 66 people compared to
78 people at June 30, 2001, a decrease of 15%.
Commissions and clearing costs for the six months ended June 30, 2002 were
$3,260,762 an increase of $2,041,325, or 167%, over the same period in 2001.
This increase was primarily due to increased commissions paid to independent
registered representatives who had previously not been affiliated with us, as
well as increased commissions paid on revenue generated through the sale of
annuity contracts.
Page 12
Order flow payment expense for the six months ended June 30, 2002 was $586,208,
a decrease of $910,741, or 61% 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.
Interest expense for the six months ended June 30, 2002 was $35,997, a decrease
of $338,351, or 90%, 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
June 30, 2002 was $206,000 compared to $1,962,000 for the three months ended
June 30, 2001, a decrease of 90%.
Communications expense for the six months ended June 30, 2002 was $365,348 an
increase of $95,799, or 36%, over the same period in 2001, due to improvements
to our web sites and upgrades in computers and other hardware devices that were
not capitalized.
Other general and administrative expenses for the six months ended June 30, 2002
were $1,136,236, a decrease of $431,726, or 28%, over the same period in 2001,
due to a significant drop in professional fees and office expenses.
Federal and state income taxes for the six months ended June 30, 2002, were
$1,000 as compared to none for the same period in 2001. Prior to our public
offering on April 9, 2002, we had elected to be taxed as S corporations, and
therefore, no federal and state income taxes were recorded in 2001.
Liquidity and Capital Resources:
Our broker and 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 June 30, 2002
were $16,796,432, which consisted of approximately $14,255,000 in liquid assets.
Our broker and 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 June 30,
2002, our broker and dealer subsidiaries regulatory net capital for the combined
subsidiaries was $4,055,409 with a minimum combined net capital requirement of
$500,000. Combined excess net capital was $3,555,409.
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.
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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 $1,206,917 at June 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 $206,000 at June 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.
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, approximately $230,000 involved payments to Empire Financial Group,
Inc. and the balance involved payments to others. The net offering proceeds to
the Company after deducting the total expenses incurred in the offering was
$5,153,479.
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.
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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
There were not any Current Reports on Form 8-K filed during the six
months ended June 30, 2002.
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.
Date: August 14, 2002 Empire Financial Holding Company
/s/ Richard L. Goble
Richard L. Goble
Co-Chief Executive Officer
/s/ Kevin M. Gagne
Kevin M. Gagne
Co-Chief Executive Officer
/s/ George R. Cupples
George R. Cupples
Chief Financial Officer
(Principal Accounting Officer)
Page 15
OFFICER CERTIFICATION
In connection with the Quarterly Report of Form 10-Q of Empire Financial Holding
Company (the "Company") for the quarter ended June 30, 2002, as filed with the
Securities and Exchange Commission on the date hereof (the "Report"), we Richard
L. Goble, Co-Chief Executive Officer, Kevin M. Gagne, Co-Chief Executive Officer
and George R. Cupples, Chief Financial Officer, certify that:
o the Report fully complies with the requirements of Section 13(a) or 15(d)
of the Securities Exchange Act of 1934; and
o information contained in the Report fairly presents, in all material
respects, the financial condition and results of operations of the Company.
Date: August 14, 2002 /s/ Richard L. Goble
Richard L. Goble
Co-Chief Executive Officer
/s/ Kevin M. Gagne
Kevin M. Gagne
Co-Chief Executive Officer
/s/ George R. Cupples
George R. Cupples
Chief Financial Officer
(Principal Accounting Officer)
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