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 SEPTEMBER 30, 2003
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 October 31, 2003, there were 5,070,000 shares of common stock outstanding,
par value $0.01 per share.
EMPIRE FINANCIAL HOLDING COMPANY AND SUBSIDIARIES
FORM 10-Q
FOR THE THREE AND NINE MONTHS PERIODS ENDED SEPTEMBER 30, 2003
INDEX
PART I
FINANCIAL INFORMATION
Page No.
Item 1. Financial Statements .................................................3
Consolidated Statement of Financial Condition,
September 30, 2003 (unaudited) and December 31, 2002 .................3
Consolidated Statements of Operations for the Three Months
Ended September 30, 2003 and 2002 (unaudited) ........................4
Consolidated Statements of Operations for the Nine Months Ended
September 30, 2003 and 2002 (unaudited) ..............................5
Consolidated Statements of Cash Flows for the Nine Months Ended
September 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 ..........16
Item 4. Controls and Procedures .............................................17
Part II
OTHER INFORMATION
Item 1. Legal Proceedings ...................................................17
Item 2. Changes in Securities and Use of Proceeds ...........................18
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
Exhibit Index ................................................................19
2
FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
EMPIRE FINANCIAL HOLDING COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
September 30, December 31,
2003 2002
----------- ------------
(unaudited)
ASSETS
Cash and cash equivalents ........................................ $ 1,890,204 $ 4,146,857
Receivable from customers ........................................ 3,777,419 5,772,216
Receivables from broker dealers and clearing organizations ....... 2,064,077 1,723,621
Deposits at clearing organizations ............................... 675,168 631,687
Property, furniture and equipment, net of accumulated
depreciation of $225,086 and $163,962, respectively ........... 93,831 109,879
Customer lists, net .............................................. 168,633 331,390
Income taxes receivable .......................................... - 351,000
Other assets ..................................................... 202,380 427,983
Due from related parties ......................................... 66,647 -
----------- ------------
Total assets ............................................ $ 8,938,359 $ 13,494,633
=========== ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities:
Accounts payable, accrued expenses and other liabilities .... $ 1,901,353 $ 3,413,044
Payable to customers ........................................ 3,326,429 5,661,667
Payable to broker dealers and clearing organizations ........ 1,028,645 472,436
Due to related parties ...................................... - 61,353
----------- ------------
Total liabilities ....................................... 6,256,427 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 authorized;
5,282,200 and 5,000,000, respectively, issued ............. 52,822 50,000
Additional paid-in capital .................................. 9,584,973 8,350,095
Deferred Compensation ....................................... (123,722) -
Retained earnings (deficit) ................................. (5,696,944) (3,378,765)
Treasury stock, at cost, 212,200 shares ..................... (1,135,197) (1,135,197)
----------- ------------
Total shareholders' equity .............................. 2,681,932 3,886,133
----------- ------------
Total liabilities and shareholders' equity .............. $ 8,938,359 $ 13,494,633
=========== ============
The accompanying notes are an integral part of these
consolidated financial statements.
3
EMPIRE FINANCIAL HOLDING COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
Three Months Ended
September 30,
---------------------------
2003 2002
----------- -----------
Revenues:
Commissions and fees ........................ $ 5,083,118 $ 3,313,863
Order execution trading revenues, net ....... 2,034,985 1,041,337
Interest .................................... 120,226 139,585
Other ....................................... 17,343 55,649
----------- -----------
7,255,672 4,550,434
----------- -----------
Expenses:
Commissions ................................. 3,879,523 1,198,843
General and administrative .................. 1,136,204 510,966
Employee compensation and benefits .......... 813,864 2,246,525
Execution fees .............................. 1,768,544 812,025
Communications and data processing .......... 242,846 185,938
Advertising ................................. 17,774 21,551
Interest .................................... 3,199 29,629
----------- -----------
7,861,954 5,005,477
----------- -----------
Net loss ....................................... $ (606,282) $ (455,043)
=========== ===========
Basic and diluted loss per share ............... $ (.12) $ (.09)
=========== ===========
Weighted average shares outstanding ............ 4,925,428 4,802,800
=========== ===========
The accompanying notes are an integral part of these
consolidated financial statements.
4
EMPIRE FINANCIAL HOLDING COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
Nine Months Ended
September 30,
---------------------------
2003 2002
----------- -----------
Revenues:
Commissions and fees ........................ $12,465,518 $10,584,949
Order execution trading revenues, net ....... 4,218,915 3,514,680
Interest .................................... 309,072 414,269
Other ....................................... 36,478 91,954
----------- -----------
17,029,983 14,605,852
----------- -----------
Expenses:
Commissions ................................. 8,532,777 3,661,769
General and administrative: ................. 3,523,604 2,019,152
Employee compensation and benefits .......... 3,073,427 6,007,432
Execution fees .............................. 3,381,010 2,196,068
Communications and data processing .......... 739,443 551,286
Advertising ................................. 80,977 63,601
Interest .................................... 16,926 65,627
----------- -----------
19,348,164 14,564,935
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Net (loss) income .............................. $(2,318,181) $ 40,917
=========== ===========
Basic and diluted (loss) earnings per share .... $ (.48) $ .01
=========== ===========
Weighted average shares outstanding ............ 4,839,675 4,517,245
=========== ===========
The accompanying notes are an integral part of these
consolidated financial statements.
5
EMPIRE FINANCIAL HOLDING COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
Nine Months Ended
September 30,
-------------------------
2003 2002
----------- -----------
Operating activities:
Net (loss) income .................................................. $(2,318,181) $ 40,917
Adjustments to reconcile net (loss) income to net cash provided by
operating activities:
Non-cash charge for stock and options issued for services ........ 800,456 413,000
Depreciation ..................................................... 61,123 52,792
Amortization of customer list .................................... 162,757 491,478
Changes in assets and liabilities:
Receivables from customers ....................................... 1,994,797 3,116,833
Receivable from broker dealers and clearing organizations ........ (340,456) 1,243,114
Deposits at clearing organizations ............................... (43,481) 25,235
Deferred tax asset ............................................... - (400,000)
Income tax receivable ............................................ 351,000 -
Other assets ..................................................... 225,603 (379,884)
Due from related parties ......................................... 66,647 -
Accounts payable, accrued expenses and other liabilities ......... (1,511,691) 418,911
Payables to customers ............................................ (2,335,238) (487,080)
Payable to broker dealers and clearing organizations ............. 556,209 (116,152)
----------- -----------
Net cash (used in) provided by operating activities ................... (2,330,455) 4,419,164
----------- -----------
Investing activities:
Additions to property, furniture and equipment ................... (38,198) (61,451)
Purchase of assets ............................................... - (196,491)
----------- -----------
Net cash used in investing activities ................................. (38,198) (257,942)
----------- -----------
Net cash provided by financing activities:
Proceeds from sale of common stock ............................... 112,000 5,153,479
Purchase of treasury stock ....................................... - (1,117,198)
Payment on contract payable ...................................... - (1,735,155)
Payment on short term borrowings from bank ....................... - (1,032,000)
Payment on due to related party shareholders ..................... - (334,000)
Shareholder distributions for personal taxes ..................... - (600,000)
----------- -----------
Net cash provided by financing activities ............................. 112,000 335,126
----------- -----------
Net (decrease) increase in cash and cash equivalents .................. (2,256,653) 4,496,348
Cash and cash equivalents at beginning of year ........................ 4,146,857 2,327,029
----------- -----------
Cash and cash equivalents at end of period ............................ $ 1,890,204 $ 6,823,377
=========== ===========
Supplemental disclosures of cash flow information:
Cash paid during the period for interest ........................... $ 16,926 $ 35,997
=========== ===========
Supplemental disclosures of non-cash investing and financing activites:
Issuance of common stock and options in exchange for services ...... $ 800,456 $ 413,000
=========== ===========
The accompanying notes are an integral part of these
consolidated financial statements.
6
EMPIRE FINANCIAL HOLDING COMPANY AND SUBSIDIARIES
SELECTED NOTES TO
CONSOLIDATE FINANCIAL STATEMENTS (UNAUDITED)
FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 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 nine months ended September 30,
2003, are not necessarily indicative of the results to be expected for the year
ending 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
nine months ended September 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 nine months ended
September 30, 2002, have been restated for the non-cash charge and reflect a
decrease of $413,000 in net income and a decrease in basic and diluted earnings
of $.09 per share.
2. EARNINGS PER SHARE
Basic earnings per share is 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 resulted in the issuance of common stock. Basic and dilutive
earnings (loss) per share were the same for the nine-month periods ended
September 30, 2003 and 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 dilutive net income
(loss) per share because the effect of inclusion would be antidilutive.
7
3. 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 FASB Interpretation ("FIN 44"),
"Accounting for Certain Transactions involving Stock Compensation," and
accordingly, a charge of $565,600 and $64,300 was made to the financial
statements during the quarters ended June 30, 2003 and September 30, 2003,
respectively.
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 for all directors, certain officers, and
consultants, and these options expire in ten years from date of grant.
On May 28, 2003, the board of directors authorized the Company to make
an exchange offer to all holders of outstanding options (with an exercise price
of $6.00 per share), to allow holders to exchange their options into shares of
common stock of the Company on a ratio of five options for each share of common
stock. Effective September 12, 2003, these holders exchanged 411,000 options for
82,200 shares of common stock. Half of the shares vest in 90 days from the date
of issuance, and the balance vest one year from date of issuance. In connection
with the exchange of options for common stock by employees and directors,
compensation expense of $105,900 was recorded in the quarter ended September 30,
2003.
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.
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. For the nine-month period ended September
30, 2003, 405,000 stock options were granted, all in the second quarter of the
year. Of the 405,000 options granted, 280,000 were below market value and,
accordingly, a charge of $63,860 was recorded in the second quarter of 2003. For
the nine-month period ended September 30, 2002, 590,350 stock options were
granted, all in the second quarter of the year.
8
Three Months Ended Nine Months Ended
September 30, September 30,
----------------------- -------------------------
2003 2002 2003 2002
--------- --------- ----------- ---------
Net (loss) income: ......................... $(606,282) $(455,043) $(2,318,181) $ 40,917
Total stock based employee and Director
compensation expense determined under
fair value based method for all awards .. (113,469) (139,261) (396,710) (278,522)
--------- --------- ----------- ---------
Pro forma net income (loss) ................ $(719,751) $(594,304) $(2,714,891) $(237,605)
========= ========= =========== =========
Earning per share:
Basic and diluted - as reported ............ $ (.12) $ (.09) $ (.48) $ .01
========= ========= =========== =========
Basic and diluted - pro forma .............. $ (.15) $ (.12) $ (.56) $ (.05)
========= ========= =========== =========
4. NET CAPTIAL 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 September 30, 2003:
Advantage: ......................................... 35%
Net capital as a percentage of aggregate debit items
Net capital ........................................ $1,366,833
Required net capital ............................... $ 250,000
Empire:
Percentage of aggregate indebtedness to net capital 114%
Net capital ........................................ $ 861,485
Required net capital ............................... $ 250,000
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 September 30, 2003, Advantage had
$657,985 deposited in the Special Reserve Account to meet these requirements.
5. 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 20 retail branches of the Company. 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 performs clearing functions for other broker
dealers.
9
Information concerning operations in these segments of business was as
follows for the three months ended September 30:
2003 2002
------------ ------------
Revenue:
Clearing and order execution services $ 2,188,531 $ 1,627,708
Retail brokerage services ........... 5,063,751 2,922,726
Corporate ........................... 3,390 -
------------ ------------
$ 7,255,672 $ 4,550,434
============ ============
Net (loss) income:
Clearing and order execution services $ (419,593) $ (286,389)
Retail brokerage services ........... 68,978 87,199
Corporate ........................... (255,667) (255,853)
------------ ------------
$ (606,282) $ (455,043)
============ ============
Identifiable assets:
Clearing and order execution services $ 6,728,319 $ 13,185,747
Retail brokerage services ........... 2,384,616 3,787,883
Corporate ........................... 7,259,830 2,006,349
Eliminations ........................ (7,434,406) (799,845)
------------ ------------
$ 8,938,359 $ 18,180,134
============ ============
Information concerning operations in these segments of business was as
follows for the nine months ended September 30:
2003 2002
------------ ------------
Revenue:
Clearing and order execution services,
(gross) ............................. $ 4,429,620 $ 4,744,071
Retail brokerage services ........... 12,596,973 9,861,041
Corporate ........................... 3,390 740
------------ ------------
$ 17,029,983 $ 14,605,852
============ ============
Net (loss) income:
Clearing and order execution services,
(gross) ............................. $ (782,608) $ 50,137
Retail brokerage services ........... (77,482) 1,030,385
Corporate ........................... (1,458,091) (1,039,605)
------------ ------------
$ (2,318,181) $ 40,917
============ ============
Identifiable assets:
Clearing and order execution services $ 6,728,319 $ 13,185,747
Retail brokerage services ........... 2,384,616 3,787,883
Corporate ........................... 7,259,830 2,006,349
Eliminations ........................ (7,434,406) (799,845)
------------ ------------
$ 8,938,359 $ 18,180,134
============ ============
10
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.
6. SUBSEQUENT EVENT
GOBLE SETTLEMENT
----------------
On October 31, 2003, the Company, Kevin Gagne, chairman and CEO of the
Company, its board members, Richard L. Goble, former co-chairman and co-CEO, and
the Richard L. Goble First Revocable Trust dated 5/13/1999 (the "Goble Trust")
entered into a Stock Purchase and Settlement Agreement ("Settlement Agreement"),
wherein certain controversies between and among the parties were settled on
November 6, 2003.
Pursuant to the Settlement Agreement, among other things, on November
6, 2003, (i) the Company purchased from the Goble Trust and Mr. Goble an
aggregate of 2,088,000 shares (the "Goble Shares") of the Company's common
stock, and (ii) the parties executed a Mutual Release, which provides for
the mutual release of all claims and dismissal of all pending lawsuits between
and among the parties.
Pursuant to the Settlement Agreement (i) Mr. Goble and the Goble Trust
will receive from the Company all of the issued and outstanding capital stock of
Advantage Trading Group, Inc. and a three year unsecured promissory note (the
"Goble Note") in the principal amount of $400,000 and (ii) the Company agreed to
assume Mr. Goble's obligation to pay the Gagne First Revocable Trust (the "Gagne
Trust") on November 6, 2003 all of the Assumed G&G Purchase Price (as defined
below). The Goble Note bears interest at 6% through December 31, 2004 and nine
percent thereafter, payable in monthly installments of $11,111.11 until the
earlier of full repayment or November 15, 2006. Additionally, the Goble Note
includes provisions for certain mandatory principal repayment.
On November 6, 2003, Mr. Goble, Mr. Gagne, and the Gagne Trust also
entered into a Stock Purchase Agreement, wherein Mr. Goble purchased from
Gagne Trust all of the outstanding capital stock of G&G Holdings, Inc. ("G&G"),
Florida corporation jointly owned by Messrs. Gagne and Goble, for partial
consideration paid to Gagne Trust on November 6, 2003, which principally
includes (i) $250,000 in cash, (ii) a three year unsecured promissory note in
the principal amount of $500,000 (the "Gagne Note"), and (iii) 10,000 shares of
Series A Convertible Preferred Stock, $.01 par value per share (the "Series A
Preferred Stock"), of the Company (collectively, the "Assumed G&G Purchase
Price"). The Gagne Note bears interest at six percent through December 31, 2004
and nine percent thereafter, payable in monthly installments of $13,888.89 until
the earlier of full repayment or November 15, 2006.
The Stock Purchase Agreement provides that, in the event the Company
receives any proceeds from the issuance of any equity security (with certain
exceptions) or in connection with the incurrence of any indebtedness for money
borrowed (with certain exceptions), the Company is required to make principal
payments in an aggregate amount equal to 50% of the net proceeds to the Gagne
Trust and to the payee of the Goble Note in an amount proportional to the then
outstanding principal amount of the Gagne Note and the Goble Note. The Stock
Purchase Agreement further provides that, in the event the Company receives any
proceeds from the sale, assignment or transfer of its customer accounts, the
Company shall make principal payments to the Gagne Trust and to the payee of the
Goble Note simultaneously with the receipt of such proceeds in an amount equal
to the net proceeds received by the Company, in an amount proportional to the
outstanding principal amount of the Gagne Note and Goble Note.
11
In connection with the Company's assumption of Mr. Goble's obligation
to pay the Gagne Trust the Assumed G&G purchase Price, the Company has
authorized the designation of Series A Preferred Stock up to a maximum of 10,000
shares and issued 10,000 shares of Series A Preferred Stock to the Gagne Trust.
The Series A Preferred Stock ranks prior to the Company's Common Stock and is
convertible into shares of Common Stock as determined by dividing the Series A
Preferred Stock issue price of $30.00 per share (the "Series A Preferred Stock
Issue Price") by Series A Preferred Stock conversion price, which is initially
$2.00 at November 6, 2003 and is subject to adjustments at later dates. Holders
of Series A Preferred Stock are entitled to receive cumulative dividends at the
annual rate of nine percent of the Series A Preferred Stock Issue Price.
Additionally, upon liquidation, dissolution, or winding up the Company, the
holders of Series A Preferred Stock shall be entitled to be paid $30.00 per
share of such stock (as adjusted for any stock dividends, combinations, splits
or similar events on the Series A Preferred Stock), plus a cash amount equal to
all accrued and unpaid dividends on such shares. Subject to earlier conversion,
on November 1, 2008, the Company at its sole option may redeem shares of the
Series A Preferred Stock.
In connection with the Settlement Agreement, the Company and G&G, the
landlord of the space currently leased by the Company, entered into an amendment
of the Lease Agreement dated August 13, 1999, as amended (the "Lease
Agreement"). The amendment to the Lease Agreement is dated November 6, 2003, and
provides that the following terms, among others, of the Lease Agreement have
been modified as follows: (i) the current leasable square footage of the
premises has been subdivided into Space A, Space B, and Space C; (ii) the
expiration date of the Lease Agreement becomes April 30, 2005; (iii) the rent
payments have been modified and allocated among each of the three spaces; (iv)
the calculation of operating expenses has been amended; (v) G&G may not enter
into any lease agreement of space in the building with a company that is a
broker-dealer, investment adviser or any entity whose business shall consist of
the sale, trading, or clearing of securities, except Advantage Trading Group,
Inc. (vi) the calculation and allocation of utilities, sales tax, property taxes
and insurance has been amended; and (vii) the company may terminate the Lease
Agreement with respect to any or all of Space A, Space B, and Space C at will
upon giving G&G 60 days' prior written notice.
The Company reported this settlement and related transactions in a
Current Report on Form 8-K, dated November 6, 2003, which contains additional
information regarding the settlement. Filed as exhibits to this Current Report
on Form 8-K are copies of the relevant agreements.
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.
12
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 termination costs and employee termination
benefits, which are generally recognized in connection with restructuring
charges.
RESULTS OF OPERATIONS:
Three Months Ended September 30, 2003 Compared to Three Months Ended
September 30, 2002:
Total revenues for the three months ended September 30, 2003 increased
$2,705,238, or 59%, to $7,255,672 from $4,550,434 reported for the same period
in 2002. This increase was primarily due to the reasons described below:
Commissions and fee revenues for the three months ended September 30,
2003 increased $1,769,255, or 54%, to $5,038,118 from $3,313,863 for the same
period in 2002, primarily due an increase in retail trading volume and a change
in revenue mix, which resulted from increased processing of securities
transactions by independent registered representatives already affiliated with
us, and the processing securities transactions from independent registered
representatives who had not previously used our services. Commission and fee
revenues for the three months ended September 30, 2003 from independent
registered representatives increased approximately $2,669,000, or 186%, to
$4,101,000 from $1,432,000 for the same period in 2002. Independent registered
representatives accounted for approximately 81% and 43% of commissions and fee
revenues for the three-month periods ended September 2003 and 2002,
respectively.
Order execution trading revenue for the three months ended September
30, 2003 increased $993,648, or 95%, to $2,034,985 from $1,041,337 for the same
period in 2002, primarily due to an increase of approximately 71% in the number
of order execution transactions and a 14% increase in average fee received for
each order execution transaction. For the three-month periods ended September
30, 2003 and 2002, the average fee for each order execution transaction was
$29.37 and $25.70, respectively.
Interest revenues for the three months ended September 30, 2003
decreased $19,359, or 14%, to $120,226 from $139,585 for the same period in
2002, primarily due to a decrease in the average interest rates charged to
customers, partially offset by an increase in the average month-end retail
customer margin balances. The average month-end customer margin balance for the
three-month periods ended September 30, 2003 and 2002 was $6,382,000 and
$4,732,000, respectively, an increase of $1,650,000, or 35%.
Other revenues for the three months ended September 30, 2003 decreased
$38,306, or 69%, to $17,343 from $55,649 for the same period in 2002, primarily
as a result of a decrease in miscellaneous income and fee revenues.
13
Total operating expenses for the three months ended September 30, 2003
and 2002 were $7,861,954 and $5,005,477, respectively, an increase of
$2,854,477, or 57%, over the same period in 2002, primarily due to the reasons
described below:
Commissions for the three months ended September 30, 2003 increased
$2,680,680, or 224%, to $3,879,523 from $1,198,843 for the same period in 2002.
This increase was primarily attributable to an increase in commissions paid to
independent registered representatives already affiliated with us, as a result
of increased volume, and commissions paid to independent registered
representatives not previously affiliated with our Company. Revenues from
independent registered representatives for the three-month period ended
September 30, 2003 increased approximately 186% over the same period in 2002.
General and administrative expenses for the three months ended
September 30, 2003 increased $625,238, or 122%, to $1,136,204 from $510,966 for
the same period in 2002. This increase is primarily attributable to $170,966
non-cash charge incurred with respect to options and restricted stock granted to
employees for services and common stock issued in exchange for stock options
originally issued to employees in 2002, an increase of $265,539 in professional
and legal fees incurred in connection with a dispute between the Company and one
of the majority shareholders, and a $188,703 increase in general office
expenses.
Employee compensation and benefit costs for the three months ended
September 30, 2003 decreased $1,432,661, or 64%, to $813,864 from $2,246,525 for
the same period in 2002, primarily due to a decrease in the number of employees.
At September 30, 2003, we employed 52 people compared to 65 people at September
30, 2002, a decrease of 25%. The decrease in employees is primarily attributable
to a reduction of employees working in clearing operations and our increased
relationship with independent registered representatives, which increased by 52,
or 57%, to 142 at September 30, 2003 from 90 at September 30, 2002.
Execution fee expense for the three months ended September 30, 2003
increased $956,519, or 118%, to $1,768,544 from $812,025 for the same period in
2002, primarily attributable to an increase in the number of trade transactions
requiring execution fees and a 27% increase in execution fees paid per
transaction. The average execution fee paid per transaction was $25.53 and
$20.04 for the three-month periods ended September 30, 2003 and 2002,
respectively.
Communications and data processing expense for the three months ended
September 30, 2003 increased $56,908, or 31%, to $242,846, from $185,938 for the
same period in 2002, due to an increase in clearing operation transactions.
Advertising expenses for the three months ended September 30, 2003
decreased $3,777, or 18%, to $17,744 from $21,551 for the same period in 2002.
As a percentage of revenue, advertising expenses were less than 1% of total
revenues for the three-month periods ended September 30, 2003 and 2002.
Interest expense for the three months ended September 30, 2003 decrease
$26,430, or 89%, to $3,199 from $29,629 for the same period in 2002, primarily
due to a reduction in interest incurred on short-term borrowings, partially
offset by a .23% increase in interest paid on customer credit balances. The
increase is attributable to higher customer credit balances, for which we pay
interest. The average outstanding month-end customer balance for the three
months ended September 30, 2003 and 2002 was $11,391,000 and $7,204,000,
respectively. The decrease is attributable to decreased borrowings. We had no
short-term loan balances outstanding during the three months ended September 30,
2003, as compared to an average short-term loan balance outstanding of $22,667
for the comparable period in 2002.
14
Nine months ended September 30, 2003 Compared to Nine months ended September 30,
2002:
Total revenues for the nine months ended September 30, 2003 increased
$2,424,131, or 17%, to $17,029,983 from $14,605,852 reported for the same period
in 2002. This increase was primarily due to the reasons described below:
Commissions and fee revenues for the nine months ended September 30,
2003 increased $1,880,569, or 18%, to $12,465,518 from $10,584,949 for the same
period in 2002, primarily due an increase in retail trading volume and a change
in revenue mix, which resulted from increased processing of securities
transactions by independent registered representatives already affiliated with
us, and the processing of securities transactions from independent registered
representatives who had not previously used our services. Commissions and fee
revenues for the nine-month period ended September 30, 2003 from independent
registered representatives increased approximately $5,367,000 to $9,676,000, or
124% from $4,309,000 for the same period in 2002. Independent registered
representatives accounted for approximately 78% and 41% of commissions and fee
revenues for the nine-month periods ended September 30, 2003 and 2002,
respectively.
Order execution trading revenue for the nine months ended September 30,
2003 and 2002 was $4,218,915 and $3,351,680, respectively, an increase of
$867,235, or 26%, over the same period in 2002, primarily due to an increase of
approximately 31% in the number of order execution transactions, partially
offset by a 3% decrease in the average fee received for each order execution
transaction. For the nine-month periods ended September 30, 2003 and 2002, the
average fee for each order execution transaction was $22.85 and $23.75,
respectively.
Interest and dividends for the nine months ended September 30, 2003
decreased $105,197, or 25% to $309,072 from $414,269 for the same period in
2002, primarily due to a decrease in the average interest rates charged to
customers, partially offset by an increase in average month-end retail customer
margin balances. The average month-end customer margin balance for the
nine-month periods ended September 30, 2003 and 2002 was $7,763,363 and
$5,859,270, respectively, an increase of $1,904,093, or 33%.
Other revenues for the nine months ended September 30, 2003 decreased
$218,476, or 86%, to $36,478 from $254,954 for the same period in 2002,
primarily as result of a decrease in miscellaneous income and fee revenues.
Total expenses for the nine months ended September 30, 2003 increased
$4,783,228, or 33% to $19,348,163 from $14,564,935 for the same period in 2002,
primarily due to the reasons described below:
Commissions for the nine months ended September 30, 2003 increased
$4,871,008, or 133%, to $8,532,777 from $3,661,769 for the same period in 2002.
This increase was primarily attributable to an increase in commissions paid to
independent registered representatives already affiliated with us, as a result
of increased volume, and commissions paid to independent registered
representatives not previously affiliated with our Company. Revenues from these
registered representatives increased approximately 124% over the same period in
2002.
General and administrative expenses for the nine months ended September
30, 2003 increased $1,504,452, or 74%, to $3,523,604 from $2,019,152 for the
same period in 2002. This increase is primarily attributable to an increase of
approximately $727,000 in professional and legal fees incurred in connection
with a dispute between the Company and one of the majority shareholders, an
increase of $387,000 for non-cash charges incurred with respect to options and
restricted stock granted to employees for services and common stock issued in
exchange for stock options originally issued to employees in 2002, an increase
of approximately $86,000 for insurance expense, and a 38% increase in other
general and administrative expenses.
15
Employee compensation and benefit costs for the nine months ended
September 30, 2003 decreased $2,934,005, or 49% to $3,073,427 from $6,007,432
for the same period in 2002. This decrease was primarily due to a reduction in
employees. At September 30, 2003 and 2002, we employed 52 and 65 people,
respectively, a decrease of 25%. The decrease in employees is primarily
attributable to a reduction of employees working in clearing operations and our
increased relationship with independent registered representatives, which
increased by 52, or 57%, to 142 at September 30, 2003 from 90 at September 30,
2002. During the comparison period, executive compensation decreased by
approximately $188,000.
Execution fee expense for the nine months ended September 30, 2003
increased $1,184,942, or 54%, to $3,381,010 from $2,196,068 for the same period
in 2002, primarily due to an increase in the number of trade transactions
requiring execution fees and a 17% increase in execution fees paid per
transaction. The average execution fee paid per transaction was $18.31 and
$15.56 for the nine-month periods ended September 30, 2003 and 2002,
respectively.
Communications and data processing expense for the nine months ended
September 30, 2003 increased $188,157, or 34%, to $739,443 from $551,286 for
same period in 2002, primarily due to an increase in clearing operation
transactions.
Advertising expenses for the nine-month period ended September 30, 2003
increased $17,376, or 27%, to $80,977, from $63,601 for the same period in 2002.
As a percentage of revenue, advertising expenses were less than 1% of total
revenues for the nine-month periods ended September 30,2003 and 2002.
Interest expense for the nine months ended September 30, 2003 decreased
$48,701, or 74%, to $16,926 from $65,627 for the same period in 2002, primarily
due to a reduction in interest incurred on short-term borrowings, partially
offset by an increase in interest paid on customer credit balances. The increase
is attributable to higher customer credit balances, for which we pay interest.
The average outstanding month-end customer balance for the nine months ended
September 30, 2003 and 2002 was $13,491,982 and $7,325,027, respectively. The
decrease is attributable to decreased borrowings. We had no short-term loan
balances outstanding during the nine months ended September 30, 2003, as
compared to an average short-term loan balance outstanding of $257,556 for the
comparable period in 2002.
LIQUIDITY AND CAPITAL RESOURCES:
Our broker dealer subsidiaries, Advantage and Empire Group have certain
assets, which are highly liquid, consisting generally of cash, money market
funds and marketable securities for sale in the open market. Total assets at
September 30, 2003 were $9,054,773, which consisted of approximately $2,565,372
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, 2003, our broker and dealer subsidiaries regulatory net capital
for the combined subsidiaries was $2,228,318 with a minimum combined net capital
requirement of $500,000. Combined excess net capital was $1,728,318.
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.
16
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 September 30, 2003, the Company's broker
dealer subsidiaries had no financial instruments in an inventory short position.
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.
PART II OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
As described under Note 8 of the Notes to Consolidated Financial
Statements of the Company, on October 31, 2003, the Company, Kevin Gagne,
chairman and CEO of the Company, its board members, Richard L. Goble, former
co-chairman and co-CEO, and the Richard L. Goble First Revocable Trust dated
5/13/1999 entered into a Stock Purchase and Settlement Agreement, wherein
certain controversies between and among the parties were settled on November 6,
2003.
The Company reported this settlement and related transactions in a
Current Report on Form 8-K dated November 6, 2003, which contains additional
information regarding the settlement. Filed as exhibits to this Current Report
on Form 8-K are copies of the relevant agreements.
17
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
On May 28, 2003, the board of directors authorized the Company to make
an exchange offer to all holders of outstanding option grants (with an exercise
price of $6.00 per share), to allow holders to exchange their options into
shares of common stock of the Company on a ratio of five options for each share
of common stock. Effective September 12, 2003, these holders exchanged 411,000
options for 82,200 shares of common stock. Half of the shares vest in 90 days
from the date of issuance, and the balance vest one year from date of issuance.
In connection with the exchange of options for common stock by employees and
directors, compensation expense of $105,900 was recorded in the quarter ended
September 30, 2003. These shares of common stock were issued pursuant to a
private placement offering 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.
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
31.1 Certification of Chief Executive Officer Certification
pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2 Certification of Chief Financial Officer pursuant to Section
302 of 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 Office 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 reports were filed on Form 8-K during the three months
ended September 30, 2003:
(i) The Company filed a Current Report on Form 8-K, dated August
18, 2003, with the Securities and Exchange Commission
reporting a "Financial Statement, Proforma Financial
Information and Exhibits" pursuant to Item 7, regarding the
Company's press release relating to results of operations for
the quarter ended June 30, 2003. No financial statements were
filed with this Current Report on Form 8-K.
(ii) The Company filed a Current Report on Form 8-K, dated August
20, 2003, with the Securities and Exchange Commission
reporting an "Other Event" pursuant to Item 5, regarding the
Company's election to purchase the shares beneficially owned
by Richard L. Goble. 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: November 14, 2003 Empire Financial Holding Company
/s/ Kevin M. Gagne
Kevin M. Gagne
Chief Executive Officer
/s/ George R. Cupples
George R. Cupples
Chief Financial Officer
(Principal Accounting Officer)
EMPIRE FINANCIAL HOLDING COMPANY
Exhibits Index
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