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
FOR THE QUARTER ENDED June 30, 2003
COMMISSION FILE NUMBER 1-31292
EMPIRE FINANCIAL HOLDING COMPANY
(Exact name of registrant as specified in its charter)
Florida 59-3627212
------- ----------
(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, 2003, there were 4,887,800 shares of common stock outstanding,
par value $0.01 per share.
EMPIRE FINANCIAL HOLDING COMPANY AND SUBSIDIARIES
FORM 10-Q
FOR THE THREE AND SIX MONTHS PERIODS ENDED JUNE 30, 2003
INDEX
PART I
FINANCIAL INFORMATION
Page No.
Item 1. Financial Statements .................................................3
Consolidated Statement of Financial Condition,
June 30, 2003 (unaudited) and December 31, 2002 ......................3
Consolidated Statements of Operations for the Three Months
Ended June 30, 2003 and 2002 (unaudited) .............................4
Consolidated Statements of Operations for the Six Months Ended
June 30, 2003 and 2002 (unaudited) ...................................5
Consolidated Statements of Cash Flows for the Six Months Ended
June 30, 2003 and 2002 (unaudited) ...................................6
Selected Notes to Consolidated Financial Statements ..................7
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations ...........................................12
Item 3. Quantitative and Qualitative Disclosures About Market Risk ..........15
Item 4. Controls and Procedures .............................................16
Part II
OTHER INFORMATION
Item 1. Legal Proceedings ...................................................17
Item 2. Changes in Securities and Use of Proceeds ...........................17
Item 3. Defaults Upon Senior Securities .....................................18
Item 4. Submission of Matters to a Vote Security Holders ....................18
Item 5. Other Information ...................................................18
Item 6. Exhibits and Reports on Form 8-K ....................................18
Signatures ...................................................................19
2
FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
EMPIRE FINANCIAL HOLDING COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
June 30, December 31,
2003 2002
---- ----
(unaudited)
ASSETS
Cash and cash equivalents .................................................... $ 5,023,993 $ 4,146,857
Receivable from customers .................................................... 11,489,319 5,772,216
Receivables from broker dealers and clearing organizations ................... 3,467,497 1,723,621
Deposits at clearing organizations ........................................... 515,098 631,687
Fixed assets, net of accumulated depreciation of $207,012 and $163,962,
respectively .............................................................. 78,557 109,879
Customer list, net ........................................................... 236,890 331,390
Income taxes receivable ...................................................... 351,000 351,000
Other assets ................................................................. 257,933 427,983
Due from related parties ..................................................... 133,647 -
------------ ------------
Total assets ........................................................ $ 21,553,934 $ 13,494,633
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities:
Accounts payable, accrued expenses and other liabilities ................ $ 2,609,201 $ 3,413,044
Payable to customers .................................................... 14,807,911 5,661,667
Payable to broker dealers and clearing organizations .................... 876,126 472,436
Due to related parties .................................................. - 61,353
------------ ------------
Total liabilities ................................................... 18,293,238 9,608,500
------------ ------------
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: 5,100,000
and 5,000,000 shares, respectively, issued and outstanding ............ 51,000 50,000
Additional paid-in capital .............................................. 9,304,555 8,350,095
Deferred compensation.................................................... (131,000) -
Retained earnings (deficit) ............................................. (5,090,662) (3,378,765)
Treasury stock, at cost, 212,200 shares ................................. (1,135,197) (1,135,197)
------------ ------------
Total shareholders' equity .......................................... 3,129,696 3,886,133
------------ ------------
Total liabilities and shareholders' equity .......................... $ 21,553,934 $ 13,494,633
============ ============
The accompanying notes are an integral part of these financial statements.
3
EMPIRE FINANCIAL HOLDING COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
Three Months Ended June 30,
2003 2002
---- ----
Revenues:
Commissions and fees .......................... $ 4,197,523 $ 3,198,055
Order execution trading revenues, net ......... 1,355,922 1,245,442
Interest ...................................... 98,474 139,137
Other ......................................... 7,660 22,193
----------- -----------
5,659,579 4,604,827
----------- -----------
Expenses:
Commissions ................................... 3,018,990 1,351,640
General and administrative:
Non-cash compensation ....................... 629,460 413,000
Legal and professional ...................... 392,320 215,981
Other ....................................... 477,096 436,569
Employee compensation and benefits ............ 1,025,072 1,723,237
Execution fees ................................ 1,147,723 639,827
Communications and data processing ............ 256,446 216,818
Advertising ................................... 23,638 -
Interest ...................................... 1,455 13,493
----------- -----------
6,972,200 5,010,565
----------- -----------
Net (loss) ....................................... $(1,312,621) $ (405,738)
=========== ===========
Basic and diluted (loss) per share ............... $ (.27) $ (.09)
=========== ===========
Unaudited pro forma information: (Note 2)
(Loss) before income tax benefit .............. $(1,312,621) $ (405,738)
Benefit from income taxes ..................... - 153,000
----------- -----------
Pro forma net (loss) .......................... $(1,312,621) $ (252,738)
=========== ===========
Pro forma basic and diluted (loss) per share: . $ (.27) $ (.05)
=========== ===========
Weighted average shares outstanding .............. 4,796,087 4,740,112
=========== ===========
The accompanying notes are an integral part of these financial statements.
4
EMPIRE FINANCIAL HOLDING COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
Six Months Ended June 30,
2003 2002
---- ----
Revenues:
Commissions and fees .......................... $ 7,382,400 $ 6,902,010
Order execution trading revenues, net ......... 2,183,930 2,842,418
Interest ...................................... 188,846 274,684
Other ......................................... 19,135 36,305
------------ ------------
9,774,311 10,055,417
------------ ------------
Expenses:
Commissions ................................... 4,653,254 2,462,926
General and administrative:
Non-cash compensation ....................... 629,460 413,000
Legal and professional ...................... 784,398 286,558
Other ....................................... 973,542 850,678
Employee compensation and benefits ............ 2,259,563 3,760,907
Execution fees ................................ 1,612,466 1,384,044
Communications and data processing ............ 496,597 365,348
Advertising ................................... 63,202 -
Interest ...................................... 13,727 35,997
------------ ------------
11,486,209 9,559,458
------------ ------------
Net (loss) income ................................ $ (1,711,898) $ 495,959
============ ============
Basic and diluted (loss) earnings per share: ..... $ (.36) $ .11
============ ============
Unaudited pro forma information: (Note 7)
(Loss) income before income taxes ............. $ (1,711,898) $ 495,959
(Provision)for income taxes ................... - (187,024)
------------ ------------
Pro forma (loss) income after income taxes .... $ (1,711,898) $ 308,935
============ ============
Pro forma basic and diluted (loss)
earnings per share: ......................... $ (.36) $ .07
============ ============
Weighted average shares outstanding .............. 4,796,087 4,372,101
============ ============
The accompanying notes are an integral part of these financial statements.
5
EMPIRE FINANCIAL HOLDING COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Six Months Ended June 30,
2003 2002
---- ----
Operating activities:
Net (loss) income ............................................. $(1,711,898) $ 495,959
Adjustments to reconcile net (loss) income to net cash provided by
operating activities:
Non-cash charge for options issued for services ............. 629,460 413,000
Depreciation ................................................ 43,050 31,075
Amortization of customer list ............................... 94,500 325,000
Changes in assets and liabilities:
Receivables from customers .................................. (5,717,103) 4,828,229
Receivable from broker dealers and clearing organizations ... (1,743,876) 1,867,979
Deposits at clearing organizations .......................... 116,589 25,237
Deferred tax asset .......................................... - (400,000)
Other assets ................................................ 301,051 (367,038)
Accounts payable, accrued expenses and other liabilities .... (672,843) 1,088,946
Payables to customers ....................................... 9,146,244 (3,628,618)
Payable to broker dealers and clearing organizations ........ 403,690 (23,393)
----------- -----------
Net cash provided by operating activities ........................ 888,864 4,656,376
----------- -----------
Investing activities:
Purchase of furniture and equipment ......................... (11,728) -
Purchase of assets .......................................... - (16,004)
----------- -----------
Net cash used in investing activities ............................ (11,728) (16,004)
----------- -----------
Net cash provided by financing activities:
Proceeds from sale of common stock .......................... - 5,153,479
Purchase of treasury stock .................................. - (1,117,198)
Payment on contract payable ................................. - (1,786,182)
Payment on short term borrowings from bank .................. - (826,000)
Shareholder distributions for personal taxes ................ - (600,000)
----------- -----------
Net cash provide by financing activities ......................... - 824,099
----------- -----------
Net increase in cash and cash equivalents ........................ 877,136 5,464,471
Cash and cash equivalents at beginning of year ................... 4,146,857 2,427,029
----------- -----------
Cash and cash equivalents at end of period ....................... $ 5,023,993 $ 7,891,500
=========== ===========
Supplemental disclosures of cash flow information:
Cash paid during the period for interest ...................... $ 13,727 $ 35,997
=========== ===========
Cash paid during the period for income taxes .................. $ - $ -
=========== ===========
Supplemental disclosures of non cash investing and
financing activities:
Issuance of common stock and options in exchange for services . $ 760,960 $ 413,000
=========== ===========
The accompanying notes are an integral part of these financial statements.
6
EMPIRE FINANCIAL HOLDING COMPANY AND SUBSIDIARIES
SELECTED NOTES TO
CONSOLIDATE FINANCIAL STATEMENTS (unaudited)
FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2003 AND 2002
1. NATURE OF BUSINESS AND BASIS OF PRESENTATION
The accompanying interim consolidated financial statements of Empire
Financial Holding Company and its subsidiaries (collectively, the "Company") are
unaudited; however, in the opinion of management, the interim financial
statements reflect all adjustments, consisting only of normal recurring
adjustments, necessary for a fair presentation of the results for the interim
periods. All intercompany balances and transactions have been eliminated in
consolidation. 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 the
applicable rules and regulations of the Securities and Exchange Commission. 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 these estimates.
The results of operations for the three and six months ended June 30, 2003, are
not necessarily indicative of the results to be expected for the year ended
December 31, 2003. These consolidated financial statements should be read in
conjunction with the consolidated financial statements and notes for the year
ended December 31, 2002, appearing in the Company's Annual Report on Form 10-K
for the year ended December 31, 2002, as filed with the Securities and Exchange
Commission.
Restatement - In previously issued interim financial statements for the
six months ended June 30, 2002, the Company did not record a non-cash charge for
options issued to consultants. On April 9, 2002, the Company issued 87,500
options to consultants and charged operations for the fair value of the options
in the amount of $413,000. The options vest over five years and expire in ten
years from the date of grant.
The fair value for these options was estimated at the date of grant using the
Black-Scholes option-pricing model with the following assumptions:
Risk free interest rate ............................. 5.22%
Expected lives ...................................... 10
Expected volatility ................................. 92.00%
Expected dividend yield ............................. --
The accompanying financial statements for the six months ended June 30,
2002, have been restated for the non-cash charge and reflects a decrease of
$413,000 in net income and a decrease of $.09 per share.
2. PRO FORMA INFORMATION
The Company's S corporation election automatically terminated on April
9, 2002, with the completion of its public offering. Prior to that date, the
Company, with the consent of its shareholders, elected to be taxed as an S
corporation, which provides for taxable income of the Company to be included in
the income tax returns of the individual shareholders. The pro forma adjustments
shown in the consolidated statements of operations 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 three and six months ending June 30,
2002.
7
EMPIRE FINANCIAL HOLDING COMPANY AND SUBSIDIARIES
SELECTED NOTES TO
CONSOLIDATE FINANCIAL STATEMENTS (unaudited)(continued)
FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2003 AND 2002
3. 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 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.
Options for all periods presented were not included in the computation of net
income per share because the effect of inclusion would be anti-dilutive.
4. ACCOUNTS PAYABLE, ACCRUED EXPENSES AND OTHER LIABILITIES
Accounts payable, accrued expenses and other liabilities consisted of
the following:
June 30, December 31,
2003 2002
---- ----
(unaudited)
Accounts payable ................. $ 487,116 $ 479,596
Bank overdrafts .................. 1,289,859 1,092,139
Accrued payroll and payroll taxes 397,327 565,442
Accrued rent ..................... 150,454 150,454
Other ............................ 192,407 606,176
Deferred revenue ................. 92,038 519,237
---------- ----------
$2,609,201 $3,413,044
========== ==========
5. EQUITY AND STOCK OPTION TRANSACTIONS
On June 19, 2003, 100,000 restricted shares of stock were granted to
the President of the Company. The Company recorded an expense of $131,000 for
the restricted stock. Also, on that same date, 200,000 stock options granted to
the President of the Company were cancelled and reissued. These options were
accounted for as variable according to FIN 44, and accordingly, a charge of
$565,600 was made to the financial statements.
The Company has a stock option plan under which employees, directors
and consultants may be granted options to purchase shares of the Company's
common stock at the fair market value at the date of grant. Options vest
annually over a five-year term to all directors and certain officers and expire
in ten years from date of grant.
The Company complies with statement of SFAS 123, "Accounting For
Stock-Based Compensation". This statement defines a fair value based method
whereby compensation cost is measured at the grant date based on the fair value
of the award. Under SFAS No. 123, companies are encouraged, but are not
required, to adopt the fair value method of accounting for employee stock-based
transactions. The Company accounts for such transactions under Accounting
Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees", but
discloses pro forma net loss as if the Company had applied the SFAS No. 123
method of accounting.
8
EMPIRE FINANCIAL HOLDING COMPANY AND SUBSIDIARIES
SELECTED NOTES TO
CONSOLIDATE FINANCIAL STATEMENTS (unaudited)(continued)
FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2003 AND 2002
5. EQUITY AND STOCK OPTION TRANSACTIONS (continued)
Pro forma information, assuming the Company had accounted for its
employee and director stock options granted under the fair value method
prescribed by SFAS No. 123, as amended by Financial Accounting Standards
Statement No. 148, "Accounting for Stock Based Compensation - Transition and
Disclosure, an Amendment of FASB Statement No. 123", is presented below. The
fair value of each option grant is estimated on the date of each grant using the
Black-Scholes option-pricing model. There were no stock options granted in the
first quarter of fiscal 2003, and 405,000 stock options were granted in the
second quarter of fiscal 2003. Of the options, 280,000 were below market value
and accordingly, a charge of $63,860 was made to the financial statements. There
were 590,350 stock options granted in the second quarter of 2002.
Three months ended Six months ended
June 31, June 31,
-------- --------
2003 2002 2003 2002
---- ---- ---- ----
Net (loss) income: ............. $(1,312,621) $(405,738) $(1,711,898) $ 495,959
Total stock based employee and
director compensation expense
determined under fair value
based method for all awards . (143,980) (139,261) (238,241) (139,261)
----------- --------- ----------- ---------
Pro forma net income (loss) .... $(1,456,601) $(544,999) $(1,950,139) $ 356,698
=========== ========= =========== =========
Earning per share:
Basic and diluted - as reported $ (.27) $ (.09) $ (.36) $ .11
=========== ========= =========== =========
Basic and diluted - pro forma .. $ (.30) $ (.11) $ (.41) $ .08
=========== ========= =========== =========
6. 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, 2003:
Advantage: ......................................... 12%
Net capital as a percentage of aggregate debit items
Net capital ........................................ $1,777,474
Required net capital ............................... $ 304,458
Empire:
Net capital as a percentage of aggregate debit items 40%
Net capital ........................................ $ 315,768
Required net capital ............................... $ 250,000
9
EMPIRE FINANCIAL HOLDING COMPANY AND SUBSIDIARIES
SELECTED NOTES TO
CONSOLIDATE FINANCIAL STATEMENTS (unaudited)(continued)
FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2003 AND 2002
6. 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 broker 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, 2003, Advantage had $1,761,069
deposited in the Special Reserve Account to meet these requirements.
7. FINANCIAL INFORMATION BY BUSINESS SEGMENT
The Company operates in two business segments, retail brokerage
services and clearing 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. Clearing and 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 broker dealers.
Information concerning operations in these segments of business was as
follows for the three months ended June 30:
2003 2002
---- ----
Revenue:
Clearing and order execution services ........ $ 1,454,396 $ 1,383,841
Retail brokerage services .................... 4,205,183 3,220,248
Corporate .................................... - 738
------------ ------------
$ 5,659,579 $ 4,604,827
============ ============
Net (loss):
Clearing and order execution services ........ $ (55,741) $ 238,998
Retail brokerage services .................... (289,716) (20,985)
Corporate .................................... (967,164) (623,751)
------------ ------------
$ (1,312,621) $ (405,738)
============ ============
Identifiable assets:
Clearing and order execution services ........ $ 19,898,444 $ 11,081,741
Retail brokerage services .................... 2,187,964 4,235,529
Corporate .................................... 7,235,800 1,953,897
Eliminations ................................. (7,768,274) (474,735)
------------ ------------
$ 21,553,934 $ 16,796,432
============ ============
10
EMPIRE FINANCIAL HOLDING COMPANY AND SUBSIDIARIES
SELECTED NOTES TO
CONSOLIDATE FINANCIAL STATEMENTS (unaudited)(continued)
FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2003 AND 2002
7. FINANCIAL INFORMATION BY BUSINESS SEGMENT (continued)
Information concerning operations in these segments of business was as
follows for the six months ended June 30:
2003 2002
---- ----
Revenue:
Clearing and order execution services (gross) $ 2,372,776 $ 3,116,364
Retail brokerage services .................... 7,401,535 6,938,315
Corporate .................................... - 738
------------ ------------
$ 9,774,311 $ 10,055,417
============ ============
Net (loss) income:
Clearing and order execution services (gross) $ (363,015) $ 336,525
Retail brokerage services .................... (146,460) 943,186
Corporate .................................... (1,202,423) (783,752)
------------ ------------
$ (1,711,898) $ 495,959
============ ============
Identifiable assets:
Clearing and order execution services ........ $ 19,898,444 $ 11,081,741
Retail brokerage services .................... 2,187,964 4,235,529
Corporate .................................... 7,235,800 1,953,897
Eliminations ................................. (7,768,274) (474,735)
------------ ------------
$ 21,553,934 $ 16,796,432
============ ============
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, and intercompany advances and repayments between the Company and its
subsidiaries.
11
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
included in the Company's Annual Report on Form 10-K for the year ended December
31, 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 Annual Report on Form 10-K for the year ended December 31,
2002, as filed with the Securities and Exchange Commission.
The terms "we" and "us" as used in this report refer to Empire
Financial Holding Company and its operating subsidiaries.
Our significant accounting policies are disclosed in the Notes to
Consolidated Financial Statements for the year ended December 31, 2002, found in
our Annual Report on Form 10-K for the year ended December 31, 2002. As of
January 1, 2003 we have adopted Statement of Financial Accounting Standards No.
148, "Accounting for stock-based compensation - transition and disclosure("SFAS
148"). SFAS No. 148 amends the disclosure requirements of statements to require
prominent disclosure in our annual and interim financial statements about the
method of accounting for stock-based employee compensation and the effects of
the method used on reported results.
In July, 2002 the FASB issued SFAS 146, which addresses significant
issues regarding the recognition, measurement, and reporting of costs that are
associated with exit and disposal activities, including restructuring activities
that are currently accounted for pursuant to the guidance that the Emerging
Issues Task Force ("EITF") has set forth in EITF Issue No. 94-3, "Liability
Recognition for certain Employee Termination Benefits and Other Costs to Exit an
Activity (Including Certain Costs Incurred in a Restructuring)". SFAS 146
revises the accounting for certain innate termination costs and employee
termination benefits, which are generally recognized in connection with
restructuring charges.
Results of Operations:
Three Months Ended June 30, 2003 Compared to Three Months Ended June
30, 2002
Total revenues for the three months ended June 30, 2003 were
$5,659,579, an increase of $1,054,752, or 23%, over the same period in 2002.
This increase was primarily due to the reasons described below:
Order execution trading revenue for the three months ended June 30,
2003 was $1,355,922, an increase of $110,480 or 9%, over the same period in
2002, due to an approximate 15% increase in the number of order execution
transactions. Offsetting this increase in transactions was a decrease of
profitability per transaction of approximately 6%.
12
Commission and fee revenue for the three months ended June 30, 2003 was
$4,197,523, an increase of $999,468 or 31%, over the same period in 2002. This
was due to revenue from independent registered representatives processing
securities transactions through us who had previously not used our services.
During the current period our mix of revenue changed. Independent registered
representatives accounted for approximately 77% of commission and fee revenue
compared to approximately 49% over the same period in 2002.
Interest and dividends for the three months ended June 30, 2003 were
$98,474, a decrease of $40,663, or 29%, over the same period in 2002, primarily
due to a decrease in the average interest rates charged to customers and also a
decrease in the amount of interest paid to us.
Other revenue for the three months ended June 30, 2003 was $7,660, a
decrease of $14,533, or 65%, over the same period in 2002.
Total expenses for the three months ended June 30, 2003 were
$6,972,200, an increase of $1,961,635, or 39%, over the same period in 2002,
primarily due to the reasons described below:
Employee compensation and benefit costs for the three months ended June
30, 2003 were $1,025,072 a decrease of 698,165 or 41% over the same period in
2002. 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 51 people compared to 66 people at June
30, 2002, a decrease of 23%.
Commissions for the three months ended June 30, 2003 were $3,018,990 an
increase of $1,667,350, or 123%, over the same period in 2002. This increase was
primarily attributable to commissions paid to independent registered
representatives who had previously not been affiliated with us and the increased
trading done by these registered representatives. Revenues from these registered
representatives increased approximately 118% over the same period in 2002.
Execution fee expense for the three months ended June 30, 2003 was
$1,147,723, an increase of $507,896, or 79% versus the same period in 2002, due
to an increase in the number of trade transactions requiring execution fees, as
well as an increase in the amount of execution fees paid per transaction.
Interest expense for the three months ended June 30, 2003 was $1,445, a
decrease of $12,038, or 89%, over the same period in 2002, due to a reduction in
loans required to fund the margin debit balances as well as not incurring any
interest expense on average loan balances. For the three months ended June 30,
2003 we had no loan balance. This compares to average loan balances of $206,000
for the three months ended June 30, 2002.
Communications expense for the three months ended June 30, 2003 was
$256,446 an increase of $39,628, or 18%, over the same period in 2002, due to an
increase in clearing operation transactions.
General and administrative expenses for the three months ended June 30,
2003 were $1,498,877, an increase of $433,327 or 41% over the same period in
2002, primarily due to (i) an increase in a non-cash charge in the amount of
$216,460 with respect to options and restricted common stock granted for
services to employees, (ii) an increase of $142,570 in legal fees due to a
dispute between the Company and one of its major shareholders and (iii) an
increase in general office expenses.
Six Months Ended June 30, 2003 Compared to Six Months Ended June 30, 2002
Total revenues for the six months ended June 30, 2003 were $9,774,311,
a decrease of $281,106, or 3%, from the same period in 2002. This decrease was
primarily due to the reasons described below:
13
Order execution trading revenue for the six months ended June 30, 2003
was $2,183,930, a decrease of $658,418 or 23%, over the same period in 2002 due
to an approximate 18% decrease in the number of order execution transactions and
an approximate 5% decrease in profitability per transaction.
Commission and fee revenue for the six months ended June 30, 2003 was
$7,382,400, an increase of $480,391 or 7%, over the same period in 2002, due to
increased revenues from independent registered representatives who had increased
trade volume. During the current period our mix of revenue changed. Independent
registered representatives accounted for approximately 72% of commission and fee
revenue compared to approximately 42% over the same period in 2002.
Interest and dividends for the six months ended June 30, 2003 were
$188,846, a decrease of $85,838, or 31%, over the same period in 2002, primarily
due to a decrease in the average interest rates charged to customers and also a
decrease in the amount of interest paid to us.
Other revenue for the six months ended June 30, 2003 was $19,135, a
decrease of $17,170, a decrease of approximately 47% over the same period in
2002.
Total expenses for the six months ended June 30, 2003 were $11,486,209,
an increase of $1,926,751 or 20%, over the same period in 2002, primarily due to
the reasons described below:
Employee compensation and benefit costs for the six months ended June
30, 2003 were $2,259,563 a decrease of 1,501,344 or 40%, over the same period in
2002. This decrease was primarily due to a reduction in employees resulting from
lower trading volumes and reduced commissions, bonuses, and other personnel
costs paid to employees. At June 30, we employed 51 people compared to 66 people
at June 30, 2002, a decrease of 23%. Executive compensation also decreased by
approximately $75,000.
Commissions for the six months ended June 30, 2003 were $4,653,254 an
increase of $2,190,329, or 89%, over the same period in 2002. 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 trading volume from these representatives. Revenues from these
registered representatives increased approximately 85% over the same period in
2002.
Execution costs for the six months ended June 30, 2003 was $1,612,466,
an increase of $228,421, or 17% over the same period in 2002. This was due to an
increase in the number of trade transactions which increased execution costs.
Interest expense for the six months ended June 30, 2003 was $13,727, a
decrease of $22,270, or 62%, over the same period in 2002, 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. There was no loan balance for the six months
ended June 30, 2003 compared to average loan balances of $206,000 for the six
months ended June 30, 2002.
Communications expense for the six months ended June 30, 2003 was
$496,597 an increase of $131,249, or 36%, over the same period in 2002, due to
an increase in clearing operation transactions.
General and administrative expenses for the six months ended June 30,
2003 were $2,387,400, an increase of $837,164, or 54%, over the same period in
2002, due to (i) an increase of $441,192 in legal fees with respect to a dispute
between the Company and one of its major shareholders, (ii) an increase of
approximately $58,000 for accounting fees, (iii) an increase in a non-cash
charge in the amount of $216,460 with respect to options and restricted common
stock granted to employees and (iv) an increase of approximately $121,000 with
respect to increased costs for insurance and office expense.
14
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
marketable securities for sale in the open market. Total assets at June 30, 2003
were $21,553,934, which consisted of approximately $5,539,091 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
June 30, 2003, our broker and dealer subsidiaries regulatory net capital for the
combined subsidiaries was $2,093,242 with a minimum combined net capital
requirement of $554,458. Combined excess net capital was $1,538,784.
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, as necessary.
As a fundamental part of our brokerage business we hold short-term
interest earning assets primarily in short-term fixed-rate U.S. Treasury Bills.
We earn a net interest spread on the difference between amounts earned on margin
loans made to clients and amounts paid on balances in client accounts. Since we
establish the rate paid on client accounts, 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. As of June 30, 2003, the Company's broker
dealer subsidiaries had financial instruments in an inventory short position
valued at $104,045.
Item 4. Controls and Procedures
As required by Rule 13a-15(b), management, including the Chief
Executive Officer and Chief Financial Officer, conducted an evaluation as of the
end of the period covered by this report, of the effectiveness of the company's
disclosure controls and procedures as defined in Exchange Act Rule 13a-15(e).
Based on that evaluation, the Chief Executive Officer and Chief Financial
Officer concluded the company's disclosure controls and procedures were
effective as of the end of the period covered by this report. As required by
Rule 13a-15(d), management, including the Chief Executive Officer and Chief
Financial Officer, also conducted an evaluation of the company's internal
control over financial reporting to determine whether any changes occurred
during the quarter covered by this report that have materially affected, or are
reasonably likely to materially affect, the company's internal control over
financial reporting. Based on that evaluation, there has been no such change
during the quarter covered by this report.
16
Part II OTHER INFORMATION
Item 1. Legal Proceedings
ITEM 1. LEGAL PROCEEDINGS
In connection with the termination for cause by the Company of Richard
L. Goble as an officer and employee of the Company, the Company instituted
litigation against Mr. Goble on May 28, 2003 in the Circuit Court of Seminole
County, Florida and obtained an injunction which prevents Mr. Goble from
entering the business premises of the Company, from misappropriating any
confidential information of the Company, from soliciting any employees of the
Company to compete with the Company and from disbursing funds from the Company.
Subsequently, the injunction was modified to permit Mr. Goble a limited right of
inspection of the physical premises of the Company in connection with his rights
as an indirect owner of the landlord of the premises.
In June 2003, Mr. Goble filed an answer and affirmative defenses,
counterclaim and third party complaint, on behalf of himself individually, as
trustee of the Goble First Revocable Trust and derivatively on behalf of the
Company. The counterclaim and third party complaint was filed against the
Company and each of its directors (other than Mr. Goble). In Mr. Goble's
counterclaim and third party complaint he is seeking (a) to enjoin the Company
from engaging in any ultra vires acts and to set aside all unauthorized and
ultra vires acts committed by the Company and its board of directors, (b)
mandatory injunctive relief reinstating Mr. Goble as an officer and employee of
the Company and its subsidiaries, (c) a mandatory injunction requiring the board
of directors to call and hold a shareholders meeting of the Company, (d) an
injunction enjoining Kevin M. Gagne from breaching Mr. Gagne's employment
agreement with the Company, (e) an injunction enjoining the individual directors
from breaching their fiduciary duties, (f) permanent injunctive relief
restraining the Company from violating the provisions of the Florida Whistle
Blower Act, (g) unspecified damages related to violations of the Florida RICO
Statute, libel and slander, abuse of process and intentional infliction of
emotional distress, (h) to dissolve the Company and appoint a receiver or
custodian to manage the Company, (i) to declare Mr. Goble's employment agreement
dated December 27, 2001 as null and void and to declare certain restrictive
covenants contained in the employment agreement as unenforceable, (j) unpaid
wages, including $31,250 for May 2003 and for $4,318.13 for reimbursement of
out-of-pocket expenses, (k) reimbursement of his attorneys costs and (l) such
other and further relief the court deems proper.
The Company has not yet filed an answer to Mr. Goble's counterclaim and
third party complaint, but believes that Mr. Goble's claims are without merit
and intends to vigorously contest his claims.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
In connection with the execution of an employment agreement between the Company
and Donald A. Wojnowski Jr., effective as of June 19, 2003, the Company issued
to Mr. Wojnowski as compensation 100,000 shares of common stock, $.01 par value,
of the Company, one-third of which shall vest in equal yearly installments on
the anniversary of the date of the issuance of the these shares. These shares of
common stock were issued pursuant to the Company's Amended and Restated 2000
Incentive Compensation Plan and were not registered pursuant to an exemption
contained in Section 4(2) of the Securities Act of 1933, as amended. The Company
did not receive any proceeds from this transaction. Mr. Wojnowski's employment
agreement is attached as an exhibit to this Quarterly Report on Form 10-Q.
17
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
10.1 Employment Agreement dated July 23, 2003 between the
Company and Donald A. Wojnowski Jr.
31.1 Certification of Chief Executive Officer pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002
31.2 Certification of Chief Financial Officer pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002
32.1 Principal Executive Officer Certification Pursuant to
18 U.S.C. Section 1350, as Adopted Pursuant to
Section 906 of The Sarbanes-Oxley Act of 2002.
32.2 Principal Financial Officer Certification Pursuant to
18 U.S.C. Section 1350, as Adopted Pursuant to
Section 906 of The Sarbanes-Oxley Act of 2002.
(b) Reports on Form 8-K
The following report was filed on Form 8-K during the three months
ended June 30, 2003. The company filed a Current Report on Form 8-K,
dated May 28, 2003, with the Securities and Exchange Commission reporting an
"Other Events" pursuant to Item 5. No financial statements were filed with this
Current Report on Form 8-K.
18
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, 2003 Empire Financial Holding Company
By: /s/ Kevin M. Gagne
Kevin M. Gagne
Chief Executive Officer
By: /s/ George R. Cupples
George R. Cupples
Chief Financial Officer
(Principal Accounting Officer)
EMPIRE FINANCIAL HOLDING COMPANY
Exhibits Index
10.1 Employment Agreement dated July 23, 2003 between the Company
and Donald A. Wojnowski Jr.
31.1 Certification of Chief Executive Officer pursuant to Section
302 of the Sarbanes-Oxley Act of 2002
31.2 Certification of Chief Financial Officer pursuant to Section
302 of the Sarbanes-Oxley Act of 2002
32.1 Principal Executive Officer Certification Pursuant to 18
U.S.C. Section 1350, as Adopted Pursuant to Section 906 of The
Sarbanes-Oxley Act of 2002.
32.2 Principal Financial Officer Certification Pursuant to 18
U.S.C. Section 1350, as Adopted Pursuant to Section 906 of The
Sarbanes-Oxley Act of 2002.
19