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 QUARTERLY PERIOD ENDED JUNE 30, 2004
COMMISSION FILE NUMBER 1-31292
EMPIRE FINANCIAL HOLDING COMPANY
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(Exact name of registrant as specified in its charter)
FLORIDA 56-3627212
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(State or Other Jurisdiction (I.R.S. Employer
of Incorporation or Organization) Identification No.)
2170 WEST STATE ROAD 434, Suite 100 LONGWOOD, FL 32779
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(Address of Principal Executive Offices) (Zip Code)
407-774-1300
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(Registrant's Telephone Number, Including Area Code)
Indicate by check whether the registrant has (1) filed all reports required to
be filed by Section 13 or 5(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the registrant was required
to file such reports) and (2) has been subject to such filing requirements for
the past 90 days. Yes [X] No [ ]
Indicate by check mark, whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act). Yes [ ] No [X]
As of August 19, 2004, there were 3,217,525 shares of common stock, par value
$.01 per share, outstanding.
EMPIRE FINANCIAL HOLDING COMPANY AND SUBSIDIARIES
FORM 10-Q
FOR THE THREE AND SIX MONTH PERIODS ENDED JUNE 30, 2004
INDEX
PART I
FINANCIAL INFORMATION
Page No.
Item 1. Financial Statements .............................................. 3
Consolidated Statements of Financial Condition,
June 30, 2004 (unaudited) and December 31, 2003 ................... 3
Consolidated Statements of Operations for the Three Months
Ended June 30, 2004 and 2003 (unaudited) .......................... 4
Consolidated Statements of Operations for the Six Months
Ended June 30, 2004 and 2003 (unaudited) .......................... 5
Consolidated Statements of Cash Flows for the Six Months
Ended June 30, 2004 and 2003 (unaudited) .......................... 6
Selected Notes to Consolidated Financial Statements ............... 7
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations ......................................... 10
Item 3. Quantitative and Qualitative Disclosures About Market Risk ........ 13
Part II
OTHER INFORMATION
Item 1. Legal Proceedings ................................................. 13
Item 2. Changes in Securities, Use of Proceeds and Issuer Purchases
of Equity Securities .............................................. 14
Item 3. Defaults Upon Senior Securities ................................... 14
Item 4. Submission of Matters to a Vote of Security Holders ............... 14
Item 5. Other Information ................................................. 14
Item 6. Exhibits and Reports on Form 8-K .................................. 14
Signatures ................................................................. 16
2
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
EMPIRE FINANCIAL HOLDING COMPANY AND SUBSIDIARIES
CONSOLIDATED FINANCIAL STATEMENTS OF FINANCIAL CONDITION
JUNE 30,
2004 DECEMBER 31,
(UNAUDITED) 2003
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ASSETS
Cash and cash equivalents ........................... $ 49,496 $ 393,283
Marketable securities ............................... 225,000 -
Receivables from broker dealers and
clearing organizations ............................ 880,345 637,279
Deposits at clearing organizations .................. 304,325 304,468
Property and equipment, net of accumulated
depreciation of $130,975 and $116,297, respectively 94,092 15,678
Customer lists, net ................................. 52,394 145,393
Prepaid expenses and other assets ................... 268,635 269,620
----------- -----------
TOTAL ASSETS .................................. $ 1,874,287 $ 1,765,721
=========== ===========
LIABILITIES AND STOCKHOLDERS' (DEFICIT)
Liabilities:
Notes payable ....................................... $ 1,151,719 $ 790,741
Notes payable - related party ....................... 405,093 488,426
Accounts payable, accrued expenses and
other liabilities ................................. 1,645,876 1,208,893
Payable to brokers and dealers and
clearing organizations ............................ 99,396 78,844
----------- -----------
TOTAL LIABILITIES ............................. 3,302,084 2,566,904
----------- -----------
Stockholders' (deficit):
Series A Preferred stock, $.01 par value,
1,000,000 shares authorized; 10,000 issued
and outstanding ................................... 100 100
Common stock, $.01 par value,
100,000 shares authorized;
3,217,525 shares issued and outstanding ........... 32,175 31,945
Additional paid-in capital .......................... 5,901,488 5,763,374
Accumulated deficit ................................. (7,276,045) (6,462,774)
Deferred compensation ............................... (85,515) (133,828)
----------- -----------
Total stockholders' deficit ................... (1,427,797) (801,183)
----------- -----------
TOTAL LIABILITIES AND STOCKHOLDERS' DEFICIT $ 1,874,287 $ 1,765,721
=========== ===========
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
JUNE 30,
-------------------------
2004 2003
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Revenues:
Commissions and fees ........................... $ 4,336,120 $ 3,908,916
Equities market making and trading revenues, net 1,205,480 -
Interest ....................................... 43,857 14,091
Other .......................................... 31,190 11,958
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TOTAL REVENUES ...................................... 5,616,647 3,934,965
----------- -----------
Expenses:
Commissions and clearing costs ................. 4,051,419 3,143,389
Employee compensation and benefits ............. 1,006,089 647,783
General and administrative ..................... 1,235,189 1,423,185
Communications and data processing ............. 14,431 29,416
Order flow payments ............................ 113,116 -
Advertising .................................... 20,650 23,615
Interest ....................................... 28,191 (317)
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TOTAL EXPENSES ...................................... 6,469,085 5,267,071
----------- -----------
Net loss from continuing operations ................. (852,438) (1,332,106)
Income from discontinued operations ................. - 19,486
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Net loss ............................................ (852,438) (1,312,620)
Preferred stock dividend ............................ (6,750) -
----------- -----------
Net loss applicable to common stockholders .......... $ (859,188) $(1,312,620)
=========== ===========
Basic and diluted loss per share applicable to common
stockholders:
Continuing operations ...................... $ (0.27) $ (0.27)
=========== ===========
Discontinued operations .................... $ - $ 0.00
=========== ===========
Net loss applicable to common stockholders . $ (0.27) $ (0.27)
=========== ===========
Weighted average shares outstanding:
Basic and diluted .............................. 3,206,605 4,796,087
=========== ===========
The accompanying notes are an integral part of these
consolidated financial statements
4
EMPIRE FINANCIAL HOLDING COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
SIX MONTHS ENDED
JUNE 30,
-------------------------
2004 2003
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Revenues:
Commissions and fees ........................... $ 8,751,188 $ 6,994,974
Equities market making and trading revenues, net 2,134,621 -
Interest ....................................... 83,060 42,407
Other .......................................... 72,454 18,883
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TOTAL REVENUES ...................................... 11,041,323 7,056,264
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Expenses:
Commissions and clearing costs ................. 7,826,251 4,907,866
Employee compensation and benefits ............. 1,814,938 1,466,622
General and administrative ..................... 1,878,999 1,896,628
Communications and data processing ............. 47,278 71,519
Order flow payments ............................ 209,490 -
Advertising .................................... 21,598 62,512
Interest ....................................... 56,040 -
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TOTAL EXPENSES ...................................... 11,854,594 8,405,147
----------- -----------
Net loss from continuing operations ................. (813,271) (1,348,883)
Loss from discontinued operations ................... - (363,015)
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Net loss ............................................ (813,271) (1,711,898)
Preferred stock dividend ............................ (13,500) -
----------- -----------
Net loss applicable to common stockholders .......... $ (826,771) $(1,711,898)
=========== ===========
Basic and diluted loss per share applicable to common
stockholders:
Continuing operations ...................... $ (0.26) $ (0.28)
=========== ===========
Discontinued operations .................... $ - $ (0.08)
=========== ===========
Net loss applicable to common stockholders . $ (0.26) $ (0.36)
=========== ===========
Weighted average shares outstanding:
Basic and diluted .............................. 3,198,425 4,796,087
=========== ===========
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)
SIX MONTHS ENDED
JUNE 30,
------------------------
2004 2003
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Operating activities:
Net loss ......................................... $(813,271) $(1,711,898)
Less: Loss from discontinued operations ........ - 363,015
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Loss from continuing operations: ................... (782,521) (1,348,883)
Adjustments to reconcile net loss to net cash
provided by (used in) operating activities:
Depreciation ..................................... 14,678 17,877
Amortization ..................................... 92,999 94,500
Non-cash charge for stock issued for services .... 76,282 629,460
Change in assets and liabilities:
Receivables from broker dealers and
clearing organizations ....................... (243,067) (238,871)
Deposits at clearing organizations ............. 143 16,589
Prepaid expenses and other assets .............. 986 67,973
Accounts payable and accrued expenses .......... 423,484 (115,927)
Payable to broker dealers
and clearing organizations ................... 20,552 20,589
Payable to related party ....................... - (61,353)
Deferred revenue ............................... - (427,199)
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Net cash used in operating activities .......... (427,214) (1,345,245)
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Investing activities:
Purchases of property and equipment .............. (94,218) -
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Net cash used in investing activities .......... (94,218) -
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Financing activies:
Proceeds from notes payable ...................... 272,089 -
Payments on notes payable - related .............. (83,333) -
Payments on notes payable ........................ (11,111) -
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Net cash provided by financing operations ...... 177,645 -
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Discontinued operations:
Net cash provided by discontinued operations ..... - 400,805
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Net decrease in cash and cash equivalents .......... (343,787) (944,440)
Cash and cash equivalents at beginning of period ... 393,283 1,144,778
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Cash and cash equivalents at end of period ......... $ 49,496 $ 200,338
========= ===========
Supplemental cash flow information:
Interest payments ................................ $ 18,842 $ 291
========= ===========
Non-cash financing activity:
Marketable securities acquired through issuance
of notes payable valued at $100,000 and warrants
valued at $125,000 ............................... $ 225,000 $ -
========= ===========
The accompanying notes are an integral part of these
consolidated financial statements
6
EMPIRE FINANCIAL HOLDING COMPANY AND SUBSIDIARIES
SELECTED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2004 AND 2003
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 consolidated
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, 2004, are
not necessarily indicative of the results to be expected for the year ending
December 31, 2004. In November 2003, we sold all of the outstanding capital
stock of Advantage Trading Group, Inc. and we therefore no longer own Advantage.
Accordingly, the accompanying financial statements do not include Advantage.
These consolidated financial statements should be read in conjunction with the
consolidated financial statements and notes for the year ended December 31, 2003
appearing in the Company's Annual Report on Form 10-K/A for the year ended
December 31, 2003, as filed with the Securities and Exchange Commission.
2. LOSS PER SHARE
Basic loss per share is computed by dividing income available to common
shareholders by the weighted-average number of common shares outstanding for the
period. Diluted loss 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.
Options, convertible notes and convertible preferred stock were not included in
the computation of net loss per share for the six and three month periods ended
June 30, 2004 and 2003, because the effect of inclusion would be anti-dilutive.
3. ACCOUNTS PAYABLE, ACCRUED EXPENSES AND OTHER LIABILITIES
Accounts payable, accrued expenses and other liabilities consisted of
the following:
June 30, December 31,
2004 2003
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Accounts payable ................. $ 692,097 $ 376,750
Accrued commissions .............. 117,187 340,390
Accrued payroll .................. 319,150 206,160
Accrued rent ..................... 42,760 26,230
Accrued severance payments ....... 360,000 -
Other ............................ 114,682 259,363
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$1,645,876 $1,208,893
========== ==========
7
EMPIRE FINANCIAL HOLDING COMPANY AND SUBSIDIARIES
SELECTED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2004 AND 2003
(CONTINUED)
4. EQUITY AND STOCK OPTION TRANSACTIONS
Stock Options
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.
The Company accounts for its employee stock option plans under the
intrinsic value method, in accordance with the provisions of Accounting
Principles Board ("APB") Opinion No. 25, "Accounting for Stock Issued to
Employees" and related interpretations. Compensation expense related to the
granting of employee stock options is recorded over the vesting period only if,
on the date of grant, the fair value of the underlying stock exceeds the
option's exercise price. The Company has adopted the disclosure-only
requirements of SFAS No. 123, "Accounting For Stock-Based Compensation," which
allows entities to continue to apply the provisions of APB No. 25 for
transactions with employees and provide pro forma net loss and pro forma loss
per share disclosures for employee stock grants made as if the fair value based
method of accounting in SFAS No. 123 had been applied to these transactions.
In December 2002, the Financial Accounting Standards Board the ("FASB")
issued Statement of Financial Accounting Standard ("SFAS") No. 148 "Accounting
for Stock-Based Compensation-Transition and Disclosure" which amends SFAS No.
123 "Accounting for Stock-Based Compensation."
Had the Company determined compensation expense of employee stock
options based on the estimated fair value of the stock options at the grant
date, consistent with the guidelines of SFAS 123, its net loss would have been
increased to the pro forma amount indicated below:
June 30, June 30,
2004 2003
--------- ------------
Net loss applicable to common stockholders:
As reported .......................................... $(826,771) $ (1,711,889)
--------- ------------
Stock-based employee compensation expense
Related to stock options determine under fair method . (110,600) (238,241)
Amounts charged to expense ........................... (26,580) -
--------- ------------
Pro forma according to SFAS 123 ...................... (910,791) (1,950,139)
========= ============
Net income applicable to common stockholder per share: $ (.26) $ (.36)
========= ============
Pro forma according to SFAS 123 ...................... $ (.28) $ (.41)
========= ============
Warrants
On June 29, 2004, the Company acquired marketable securities from an
unrelated third party in exchange for a $100,000 promissory note. The note bears
interest at 6% and is due and payable on the earlier of December 31, 2004 or the
close of business on the 30th day after the Company publicly announces that it
has entered into an agreement with the Securities and Exchange Commission
relating to the Company's trading in mutual fund shares on behalf of its
customers. In addition, the Company issued a warrant to purchase 50,000 shares
of common stock at $1.50 per share until June 30, 2009. In connection with the
issuance of the warrant, the Company has credited additional paid-in capital for
$125,000.
8
EMPIRE FINANCIAL HOLDING COMPANY AND SUBSIDIARIES
SELECTED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2004 AND 2003
(CONTINUED)
5. NET CAPITAL AND RESERVE REQUIREMENTS
Empire Financial Group, Inc., the broker dealer subsidiary of the
Company, is 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.
Net capital of the Company's broker dealer subsidiary was follows at
June 30, 2004.
EMPIRE FINANCIAL GROUP, INC.:
Ratio of aggregate indebtedness to net capital .. 2.12 to 1
Net capital ..................................... $ 383,726
Required net capital ............................ $ 250,000
6. FINANCIAL INFORMATION BY BUSINESS SEGMENT
The Company operates within one reportable segment, which includes
financial brokerage services and market making and order execution services.
Financial brokerage services (including the sale of equities, mutual funds,
fixed income products and investment advisory services) are provided directly to
retail and institutional customers via the Internet and by telephone trading.
Our market making and order execution services involve acting as principal in
securities transactions for unaffiliated broker dealers. market making and order
execution services also includes executing securities transactions for the
Company's account, customers and unaffiliated broker dealers.
7. GOING CONCERN AND MANAGEMENT PLANS
The Company's continued existence is dependent upon its ability to
return to profitability and to generate cash either from operations or from new
financings. The Company had losses from continuing operations in recent years
and current quarter, and had a stockholders' deficit of $1,427,797 as of June
30, 2004. Also, the Company is subject to pending federal and state
investigations relating to the Company's involvement in trading in mutual fund
shares by its customers, the outcome of which is uncertain. These factors raise
substantial doubt about the Company's ability to continue as a going concern.
Management has implemented a plan, which it believes will return the
Company to profitability. As part of the plan, the Company has reduced general
and administrative overhead and operating expenses primarily by relocating and
consolidating its offices and personnel, by entering into a new clearing
arrangement with a third party at lower rates and by settling substantially all
of its controversies with its former co-CEO. The Company has also hired
additional personnel to enhance its market making and order execution
capabilities. As a result of the foregoing and the sale of Advantage, the
Company has focused its efforts on its core business. Additionally, the Company
plans to raise additional capital through debt and equity financings and intends
to rely on vendors, service providers, and management for periodic payment
deferrals and cost reductions to improve liquidity and sustain operations.
There is no assurance that the Company will achieve profitability or be
able to generate cash from either operations or from debt or equity financings.
The financial statements do not include any adjustments that might result from
the outcome of these uncertainties.
9
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
The following discussion of the financial condition and results of
operations of the Company should be read in conjunction with the Selected
Consolidated Financial Data and the Consolidated Financial Statements and Notes
thereto included in the Company's Annual Report on Form 10-K/A for the year
ended December 31, 2003, as previously filed with the Securities and Exchange
Commission.
This Form 10-Q contains statements about future events and expectations
which are, "forward looking statements". Any statement in this Form 10-Q that is
not a statement of historical fact may be deemed to be a forward looking
statement. Forward-looking statements represent our judgment about the future
and are not based on historical facts. These statements include: forecasts for
growth in the number of customers using our service, statements regarding our
anticipated revenues, expense levels, liquidity and capital resources and other
statements including statements containing such words as "may," "will,"
"expect," "believe," "anticipate," "intend," "could," "estimate," "continue" or
"plan" and similar expressions or variations. These statements reflect the
current risks, uncertainties and assumptions related to various factors
including, without limitation, our ability to continue as a going concern,
fluctuations in market prices, competition, changes in securities regulations or
other applicable governmental regulations, technological changes, management
disagreements and other factors described under the heading "Factors affecting
our operating results, business prospects, and market price of stock" contained
in our Annual Report on Form 10-K/A for the year ended December 31, 2003, as
previously filed with the SEC. Based upon changing conditions, should any one or
more of these risks or uncertainties materialize, or should any underlying
assumptions prove incorrect, actual results may vary materially from those
described in this report as anticipated, believed, estimated or intended. We
undertake no obligation to update, and we do not have a policy of updating or
revising, these forward-looking statements. Except where the context otherwise
requires, the terms "we," "us," or "our" refer to the business of Empire
Financial Holding Company and its wholly-owned subsidiaries.
In November 2003, we sold all of the outstanding capital stock of
Advantage Trading Group, Inc. and we therefore no longer own Advantage.
Accordingly, the following discussion and analysis of our financial condition
and results of operations does not include Advantage.
Our significant accounting policies are disclosed in the Notes to
Consolidated Financial Statements for the year ended December 31, 2003, found in
our Annual Report on Form 10-K/A for the year ended December 31, 2003.
RESULTS OF OPERATIONS:
THREE MONTHS ENDED JUNE 30, 2004 COMPARED TO THREE MONTHS ENDED JUNE
30, 2003:
Total revenues for the three months ended June 30, 2004 were
$5,616,647, an increase of $1,681,682, or 43%, over the same period in 2003.
This increase is primarily due to reasons described below:
Commissions and fee revenues for the three months ended June 30, 2004
increased $427,204, or 11%, to $4,336,120 from $3,908,916 for the comparable
period in 2003, primarily due to greater commissions derived from the processing
of securities transactions for independent registered representatives who had
not previously processed securities transactions with us, partially offset by a
decline in revenues associated with lower trading volume of our discount
10
securities business. Independent registered representatives processing
securities transactions with us increased to 207 at June 30, 2004 from 180 at
June 30, 2003, an increase of 27, or 15%. Commission and fee revenues account
for approximately 77% and 99% of total revenues reported for the three months
ended June 30, 2004 and 2003, respectively.
We established our market-making and trading operations during the
third quarter of 2003. Market-making and trading revenue accounted for
$1,205,480, or 21%, or our total revenues for the three months ended June 30,
2004.
Total operating expenses for the three months ended June 30, 2004 and
2003 were $6,469,085 an increase of $1,202,014, or 23%, over the same period in
2003. This increase is primarily due to reasons described below:
Commissions and clearing costs increased $908,030, or 29%, to
$4,051,419 from $3,143,389 for the comparable period in 2003, primarily due to
greater commissions derived from the processing of securities transactions for
registered representatives and the clearing costs associated with our
market-making and trading activities, which commenced operations during the
third quarter of 2003. Independent registered representatives processing
securities transactions with us increased to 207 at June 30, 2004 from 180 at
June 30, 2003, an increase of 27, or 15%. As a percentage, commissions and
clearing costs accounted for 63% and 60% of total expenses for the three months
ended June 30, 2004 and 2003, respectively.
Employee compensation and benefit costs for the three months ended June
30, 2004 increased $358,306, or 55%, to $1,006,089 from $647,783 for the
comparable period in 2003, primarily due to the addition of higher paid
personnel required to support our market-making and trading operations,
partially offset by a decrease in the number of lower paid administrative and
non-registered personnel. At June 30, 2004, we employed 40 people compared to 51
people at June 30, 2003, a decrease of 22%.
General and administrative expenses for the three months ended June 30,
2004 decreased $187,996, or 13% to $1,235,189 from $1,423,185 for the comparable
period in 2003. This decrease is primarily attributable to a reduction of
$733,384 for non-cash charges incurred with respect to stock options and
restricted stock granted to employees for services, partially offset by a
$360,000 one-time charge for severance costs incurred in connection with the
severance of our former chief executive officer and a $173,000 increase in
professional fees. As a percentage of total expenses, general and administrative
expenses were 19% and 27% for the three months ended June 30, 2004 and 2003,
respectively.
For the three months ended June 30, 2004, the Company reported net loss
applicable to common stockholders of $859,188, or $.27 per basic and diluted
share, as compared to a net loss applicable to common stockholders of
$1,312,620, or $.27 per basic and diluted share for the same period in 2003.
SIX MONTHS ENDED JUNE 30, 2004 COMPARED TO SIX MONTHS ENDED JUNE 30,
2003:
Total revenues for the six months ended June 30, 2004 were $11,041,323,
an increase of $3,985,059, or 56% over the same period in 2003. This increase is
primarily due to reasons described below:
Commissions and fee revenues for the six months ended June 30, 2004
increased $1,756,214, or 25%, to $8,751,188 from $6,994,974 for comparable
period in 2003, primarily due to greater commissions derived from the processing
of securities transactions for independent registered representatives who had
not previously processed securities transactions with us, partially offset by a
11
decline in the revenues associated with lower trading volume of our discount
securities business. Independent representatives processing securities
transactions with us increased to 207 at June 30, 2004 from 180 at June 30,
2003, an increase of 27, or 15%. Commission and fee revenues account for
approximately 79% and 99% of total revenues reported for the six months ended
June 30, 2004 and 2003, respectively.
We established our market-making and trading operations during the
third quarter of 2003. Market-making and trading revenue accounted for
$2,134,621, or 19%, of our total revenues for the six months ended June 30,
2004.
Commissions and clearing costs increased $2,918,385, or 59%, to
$7,826,251 from $4,907,866 for the comparable period in 2003, primarily due to
greater commissions derived from the processing of more securities transactions
for registered representatives and the clearing costs associated with our
market-making and trading activities, which commenced operations during the
third quarter of 2003. Independent registered representatives processing
securities transactions with us increased to 207 at June 30, 2004 from 180 at
June 30, 2003, an increase of 27, or 15%. As a percentage, commissions and
clearing costs accounted for 66% and 58% of total expenses for the six months
ended June 30, 2004 and 2003, respectively.
Employee compensation and benefit costs for the six months ended June
30, 2004 increased $348,316, or 24%, to $1,814,938 from $1,466,622 for the
comparable period in 2003, primarily due to the addition of higher paid
personnel required to support our market-making and trading operations,
partially offset by a decrease in the number of lower paid administrative and
non-registered support personnel. At June 30, 2004, we employed 40 people
compared to 51 people at June 30, 2003, a decrease of 22%.
General and administrative expenses for the six months ended June 30,
2004 decreased $17,629, or 1%, to $1,878,999 from $1,896,628 for the same period
in 2003. This decrease is primarily due to a reduction of $150,000 in
professional fees, $553,178 reduction for non-cash charges incurred with respect
to stock options and restricted stock granted to employees for services, and a
$56,000 reduction in rent expense, partially offset by a $360,000 one-time
charge for severance costs incurred in connection with the severance of our
former chief executive officer. As a percentage of total expenses, general and
administrative expenses were 16% and 23% for the six months ended June 30, 2004
and 2003, respectively.
For the six months ended June 30, 2004, the Company reported net loss
applicable to common stockholders of $826,771, or $.26 per basic and diluted
share, as compared to a net loss applicable to common stockholders of
$1,711,898, or $.36 per basic and dilutive share for the same period in 2003.
The 2003 net loss applicable to common stockholders included a loss from
discontinued operations of $363,015, or $.08 per basic and diluted share.
LIQUIDITY AND CAPITAL RESOURCES
We maintain a highly liquid balance sheet, with the majority of our
assets consisting of cash and cash equivalents and receivables from brokers,
dealers, and clearing brokers arising from customer-related securities
transactions.
At June 30, 2004, we had $1,874,287 in assets, 62% of which consisted
of cash or assets readily convertible into cash, principally receivables from
clearing brokers, which include interest bearing cash balances held with
clearing brokers. Historically, we have financed our business primarily through
cash generated by operations and follow-on private placements of stock and debt.
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Total stockholders' deficit increased $626,614, to a deficit of
$1,427,797 at June 30, 2004, compared to a deficit of $801,183 at December 31,
2003, primarily due to our losses.
Net cash used in continuing operations for the six months ended June
30, 2004 was $427,214, and net cash used for continuing operations for the same
period in 2003 was $1,345,245.
Net cash used in investing activities, for the purchase of property
and equipment, was $94,218 for the six months ended June 30, 2004. The furniture
and equipment was acquired in connection with the relocation of the corporate
offices to its current location.
Net cash provided in financing activities was $177,645 for the six
months ended June 30, 2004. Financing activities include $72,089 of proceeds
from the issuance of convertible notes (10%) due in December 2006 and proceeds
from a short-term loan of $200,000 due March 31, 2005; also, in 2004, $94,444
was used to pay down the principal balance of two long-term notes issued in
connection the sale of a discontinued subsidiary.
Based on currently proposed plans and assumptions relating to the
implementation of our business plan, we believe that our cash flow from
operations and cash on hand will enable us to fund our planned operations for at
least 12 months and thereafter. If not, or if our plans change, or our
assumptions change or prove to be inaccurate, or if our available cash otherwise
proves to be insufficient to implement our business plans, we may require
additional financing and may seek to raise funds through subsequent equity or
debt financings. We cannot assure you that additional funds will be available in
adequate amounts or on acceptable terms. If funds are needed but not available,
our business would be harmed.
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.
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.
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, 2004, the Company's broker
dealer subsidiary had no financial instruments in an inventory short position.
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
On March 17, 2004, Richard L. Goble and the Richard L. Goble First
Revocable Trust filed suit against the Company in Case No. 04-CA-680-15-G, in
the Circuit Court in and for Seminole County Florida. The lawsuit alleges that
the Company has breached the terms and conditions of an outstanding unsecured
note payable to the plaintiffs in the original principal amount of $400,000,
which note requires monthly installments of $11,111, plus interest. Since March
1, 2004, the Company believes that it has paid the installments on this
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unsecured note by offsetting the installments against amounts owed to the
Company by the plaintiffs and their affiliates. The plaintiffs seek a judgment
for the full amount of the unpaid principal of the note, plus interest,
litigation costs and expenses and attorneys' fees. The Company has filed an
answer to the compliant that denies that the Company is in default under the
terms and conditions of the note. This lawsuit has been consolidated with
certain other pending litigation among the Company, the plaintiffs and their
respective affiliates that was disclosed in the Company's Annual Report on Form
10-K filed for the year ended December 31, 2003. As of August 15, 2004, there
has been no determination as to the outcome of this lawsuit.
In addition, reference is made to our Annual Report on Form 10-K filed
for the year ended December 31, 2003.
ITEM 2. CHANGES IN SECURITIES, USE OF PROCEEDS AND ISSUER PURCHASES OF EQUITY
SECURITIES.
None.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
See Item 1. - Legal Proceedings
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 Certification
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.
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(b) Reports on Form 8-K.
The following reports were filed on Form 8-K during the three months
ended June 30, 2004:
(i) The Company filed a Current Report on Form 8-K, dated May 18,
2004, with the Securities and Exchange Commission reporting a
"Financial Statement, Pro Form Financial Information, and
Exhibits" pursuant to Item 7, regarding the Company's press
release relating to results of operations for the quarter
ended March 31, 2004. 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 May 27,
2004, with the Securities and Exchange Commission reporting
"Results of Operations and Financial Condition" pursuant to
Item 12, regarding the Company's press release announcing its
receipt of a Wells Notice from the SEC and leave of absence,
resignation and/or termination of certain employees. No
financial statements were filed with this Current Report on
Form 8-K.
(iii) The Company filed a Current Report on Form 8-K dated June 25,
2004, with the Securities and Exchange Commission reporting an
"Other Event" pursuant to Item 5, regarding the execution of a
Severance Agreement between the Company and Kevin M. Gagne,
the Company's former chief executive officer. In the same Form
8-K, the Company reported "Financial Statements, Pro Forma
Financial Information and Exhibits" pursuant to Item 12,
regarding the Company's press release announcing Mr. Gagne's
resignation from the Company and Donald A. Wojnowski Jr.'s
election to the board of directors of the Company. No
financial statements were filed with this Current Report on
Form 8-K.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Date: August 20, 2004 EMPIRE FINANCIAL HOLDING COMPANY
/s/ Donald A. Wojnowski Jr.
---------------------------
Donald A. Wojnowski Jr.
President
(Principal Executive Officer)
/s/ Patrick E. Rodgers
----------------------
Patrick E. Rodgers
Chief Financial Officer
(Principal Accounting Officer)
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