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 SEPTEMBER 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 November 11, 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 NINE MONTH PERIODS ENDED SEPTEMBER 30, 2004
INDEX
PART I
FINANCIAL INFORMATION
Page No.
Item 1. Financial Statements .............................................. 3
Consolidated Statements of Financial Condition,
September 30, 2004 (unaudited) and December 31, 2003 .............. 3
Consolidated Statements of Operations for the Three Months
Ended September 30, 2004 and 2003 (unaudited) ..................... 4
Consolidated Statements of Operations for the Nine Months
Ended September 30, 2004 and 2003 (unaudited) ..................... 5
Consolidated Statements of Cash Flows for the Nine Months
Ended September 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
Item 4. Controls and Procedures .............................................13
Part II
OTHER INFORMATION
Item 1. Legal Proceedings ................................................. 14
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 .................................. 15
Signatures ................................................................. 16
2
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
EMPIRE FINANCIAL HOLDING COMPANY AND SUBSIDIARIES
CONSOLIDATED FINANCIAL STATEMENTS OF FINANCIAL CONDITION
SEPTEMBER 30, DECEMBER 31,
2004 2003
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ASSETS (UNAUDITED)
Cash ........................................... $ 59,982 $ 393,283
Receivables from broker dealers and
clearing organizations ....................... 899,667 637,279
Deposits at clearing organizations ............. 253,977 304,468
Property and equipment ......................... 104,063 15,678
Customer lists.................................. 11,570 145,393
Prepaid expenses and other assets .............. 292,496 269,620
----------- -----------
TOTAL ASSETS ............................... $ 1,621,755 $ 1,765,721
=========== ===========
LIABILITIES AND STOCKHOLDERS' DEFICIT
Liabilities:
Notes payable .................................. $ 1,151,719 $ 790,741
Notes payable - related party .................. 363,426 488,426
Accounts payable, accrued expenses and
other liabilities ............................ 1,839,108 1,208,893
Payable to brokers and dealers and
clearing organizations ....................... 77,203 78,844
----------- -----------
TOTAL LIABILITIES .......................... 3,431,456 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, 100,000,000
shares authorized; 3,217,525 shares issued
and outstanding .............................. 32,175 31,945
Additional paid-in capital ..................... 5,833,558 5,763,374
Accumulated deficit ............................ (7,600,935) (6,462,774)
Deferred compensation .......................... (74,599) (133,828)
----------- -----------
TOTAL STOCKHOLDERS' DEFICIT ................ (1,809,701) (801,183)
----------- -----------
TOTAL LIABILITIES AND STOCKHOLDERS' DEFICIT $ 1,621,755 $ 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
SEPTEMBER 30,
---------------------------
2004 2003
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Revenues:
Commissions and fees ........................... $ 3,188,026 $ 5,424,185
Equities market making and trading revenues, net 941,291 -
Interest ....................................... 39,144 37,714
Other .......................................... 30,000 2,162
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TOTAL REVENUES ................................... 4,198,461 5,464,061
------------ ------------
Expenses:
Commissions and clearing costs ................. 3,108,009 3,945,325
Employee compensation and benefits ............. 943,537 983,350
General and administrative ..................... 339,022 751,833
Communications and data processing ............. 35,985 78,136
Order flow payments ............................ 76,769 -
Advertising .................................... 6,134 17,071
Interest ....................................... 13,895 2,740
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TOTAL EXPENSES ................................... 4,523,351 5,778,455
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Loss from continuing operations .................. (324,890) (314,394)
Loss from discontinued operations ................ - (291,888)
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Net loss ......................................... (324,890) (606,282)
Preferred stock dividend ......................... (6,750) -
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Net loss applicable to common stockholders ....... $ (331,640) $ (606,282)
============ ============
Basic and diluted loss per share
applicable to common stockholders:
Continuing operations ........................ $ (0.10) $ (0.06)
============ ============
Discontinued operations ...................... $ - $ (0.06)
============ ============
Net loss applicable to common
stockholders ............................... $ (0.10) $ (0.12)
============ ============
Weighted average shares outstanding:
Basic and diluted .............................. 3,206,605 4,925,428
============ ============
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,
---------------------------
2004 2003
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Revenues:
Commissions and fees ........................... $ 11,939,214 $ 12,419,159
Equities market making and trading revenues, net 3,075,912 -
Interest ....................................... 122,204 80,121
Other .......................................... 102,454 21,045
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TOTAL REVENUES ................................... 15,239,784 12,520,325
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Expenses:
Commissions and clearing costs ................. 10,934,260 8,853,191
Employee compensation and benefits ............. 2,758,475 2,449,972
General and administrative ..................... 2,218,021 2,648,461
Communications and data processing ............. 83,263 149,655
Order flow payments ............................ 286,259 -
Advertising .................................... 27,732 79,584
Interest ....................................... 69,935 2,740
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TOTAL EXPENSES ................................... 16,377,945 14,183,603
------------ ------------
Loss from continuing operations .................. (1,138,161) (1,663,278)
Loss from discontinued operations ................ - (654,903)
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Net loss ......................................... (1,138,161) (2,318,181)
Preferred stock dividend ......................... (20,250) -
------------ ------------
Net loss applicable to common stockholders ....... $ (1,158,411) $ (2,318,181)
============ ============
Basic and diluted loss per share
applicable to common stockholders:
Continuing operations ........................ $ (0.36) $ (0.34)
============ ============
Discontinued operations ...................... $ - $ (0.14)
============ ============
Net loss applicable to common
stockholders ............................... $ (0.36) $ (0.48)
============ ============
Weighted average shares outstanding:
Basic and diluted .............................. 3,204,838 4,839,675
============ ============
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,
-------------------------
2004 2003
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Operating activities:
Net loss from contining operations ............................. $(1,138,161) $(1,663,278)
Adjustments to reconcile net loss to net cash
provided by (used in) operating activities:
Depreciation ................................................... 18,315 23,771
Amortization ................................................... 133,823 162,757
Non-cash charge for stock issued for services .................. 26,018 800,456
Net loss on sale of marketable securities ...................... 107,710 -
Change in assets and liabilities:
Receivables from broker dealers and clearing organizations ... (262,388) (629,565)
Deposits at clearing organizations ........................... 50,491 (333,481)
Income tax receivable ........................................ - 351,000
Prepaid expenses and other assets ............................ (22,876) (123,908)
Due from related parties ..................................... - (55,632)
Accounts payable and accrued expenses ........................ 608,841 93,935
Payable to broker dealers and clearing organizations ......... (1,641) 173,646
Payable to related party ..................................... - 262,919
Deferred revenue ............................................. - (519,237)
----------- -----------
Net cash used in continuing operations from operating
activities .................................................. (479,868) (1,456,617)
Net cash provided by discontinued operations ................. - 721,365
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Net cash used in operating activities ........................ (479,868) (735,252)
----------- -----------
Investing activities:
Proceeds from sale of marketable securities .................... 117,290 -
Purchases of property and equipment ............................ (106,701) (33,348)
----------- -----------
Net cash provided by (used in) investing activities .......... 10,589 (33,348)
----------- -----------
Financing activies:
Proceeds from notes payable .................................... 272,089 -
Payments on notes payable--related party ....................... (125,000) -
Payments on notes payable ...................................... (11,111) -
----------- -----------
Net cash provided by financing operations .................... 135,978 -
----------- -----------
Net decrease in cash and cash equivalents ........................ (333,301) (768,600)
Cash and cash equivalents at beginning of period ................. 393,283 1,144,778
----------- -----------
Cash and cash equivalents at end of period ....................... $ 59,982 $ 376,178
=========== ===========
Supplemental cash flow information:
Interest payments .............................................. $ 45,531 $ 2,740
=========== ===========
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 NINE MONTHS ENDED SEPTEMBER 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 nine months ended September 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. 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 nine and three month periods ended
September 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:
September 30, December 31,
2004 2003
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Accounts payable ......... $ 755,679 $ 376,750
Accrued commissions ...... 131,141 340,390
Accrued payroll .......... 297,994 206,160
Accrued rent ............. 62,739 26,230
Accrued severance payments 340,000 -
Other .................... 251,555 259,363
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$1,839,108 $1,208,893
========== ==========
7
EMPIRE FINANCIAL HOLDING COMPANY AND SUBSIDIARIES
SELECTED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 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.
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:
September 30, September 30,
2004 2003
------------- -------------
Net loss applicable to common stockholders:
As reported ................................ $(1,158,411) $(2,318,181)
Add stock--Stock-based employee compensation
expense related to stock options determine
under fair method ......................... (34,648) (463,237)
Deduct amounts charged to expense .......... (87,786) 390,480
----------- -----------
Pro forma .................................. $(1,280,845) $(2,390,578)
=========== ===========
Net income applicable to common stockholder
per share:
As reported ................................ $ (0.36) $ (0.48)
=========== ===========
Pro forma .................................. $ (0.40) $ (0.49)
=========== ===========
8
EMPIRE FINANCIAL HOLDING COMPANY AND SUBSIDIARIES
SELECTED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2004 AND 2003
(CONTINUED)
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. The Company realized a $107,710 loss on the sale of these marketable
securities.
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
September 30, 2004.
EMPIRE FINANCIAL GROUP, INC.:
Ratio of aggregate indebtedness to net capital .. 3.17 to 1
Net capital ..................................... $ 302,757
Required net capital ............................ $ 250,000
6. 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 $1,809,701 as of
September 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.
9
EMPIRE FINANCIAL HOLDING COMPANY AND SUBSIDIARIES
SELECTED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2004 AND 2003
(CONTINUED)
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.
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. 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 or the year ended December 31, 2003, found in
our Annual Report on Form 10-K/A for the year ended December 31, 2003.
10
RESULTS OF OPERATIONS:
THREE MONTHS ENDED SEPTEMBER 30, 2004 COMPARED TO THREE MONTHS ENDED
SEPTEMBER 30, 2003:
Total revenues for the three months ended September 30, 2004 were
$4,198,461, a decrease of $1,265,600, or 23%, from the same period in 2003. This
decrease is primarily due to reasons described below:
Commissions and fee revenues for the three months ended September 30,
2004 decreased $2,236,159, or 41%, to $3,188,026 from $5,424,185 for the
comparable period in 2003, primarily due a change in business mix, market
conditions, and business interruption due to weather related conditions, which
affected all aspects of our business, and a decline in revenues associated with
lower trading volume of our discount securities business. Commission and fee
revenues account for approximately 76% and 99% of total revenues reported for
the three months ended September 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 $941,291,
or 22%, of our total revenues for the three months ended September 30, 2004.
Total operating expenses for the three months ended September 30, 2004
and 2003 were $4,523,351, a decrease of $1,255,104, or 22%, from the same period
in 2003. This decrease is primarily due to reasons described below:
Commissions and clearing costs decreased $837,316, or 21%, to
$3,108,009 from $3,945,325 for the comparable period in 2003, primarily due to
the decrease in commissions and fees revenues during the three months ended
September 30, 2004, partially offset by greater commissions incurred for 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. The number of independent
registered representatives processing securities transactions with us increased
to 193 at September 30, 2004 from 185 at September 30, 2003, an increase of 8,
or 4%. As a percentage, commissions and clearing costs accounted for 69% and 68%
of total expenses for the three months ended September 30, 2004 and 2003,
respectively.
Employee compensation and benefit costs for the three months ended
September 30, 2004 decreased $39,813, or 4%, to $943,537 from $983,350 for the
comparable period in 2003, primarily due to the a decrease in the number of
lower paid administrative and non-registered personnel, partially offset by the
addition of higher paid personnel required to support our market-making and
trading operations. At September 30, 2004, we employed 39 people compared to 52
people at June 30, 2003, a decrease of 25%.
General and administrative expenses for the three months ended
September 30, 2004 decreased $412,811, or 55%, to $339,022 from $751,833 for the
comparable period in 2003. This decrease is primarily attributable to a
reduction of $144,977 for non-cash charges incurred with respect to stock
options and restricted stock granted to employees for services and a $542,771
decrease in professional fees, partially offset by a $48,000 increase in systems
processing expenses, and a $18,000 increase in insurance costs. As a percentage
of total expenses, general and administrative expenses were 7% and 13% for the
three months ended September 30, 2004 and 2003, respectively.
For the three months ended September 30, 2004, the Company reported net
loss applicable to common stockholders of $331,640, or $.10 per basic and
diluted share, as compared to a net loss applicable to common stockholders of
$606,282, or $.12 per basic and diluted share for the same period in 2003.
11
NINE MONTHS ENDED SEPTEMBER 30, 2004 COMPARED TO NINE MONTHS ENDED SEPTEMBER 30,
2003:
Total revenues for the nine months ended September 30, 2004 were
$15,239,784, an increase of $2,719,459, or 22% over the same period in 2003.
This increase is primarily due to reasons described below:
Commissions and fee revenues for the nine months ended September 30,
2004 decreased $479,945, or 4%, to $11,939,214 from $12,419,159 for comparable
period in 2003, primarily due a change in business mix, market conditions, and
business interruption due to weather related conditions, which affected all
aspects of our business, and a decline in the revenues associated with lower
trading volume of our discount securities business, partially offset by greater
commissions derived from the processing of securities transactions for
independent registered representatives who had not previously processed
securities transactions with us. The number of independent representatives
processing securities transactions with us increased to 193 at September 30,
2004 from 185 at September 30, 2003, an increase of 8, or 4%. Commission and fee
revenues account for approximately 78% and 99% of total revenues reported for
the nine months ended September 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
$3,075,912, or 20%, of our total revenues for the nine months ended September
30, 2004.
Total operating expenses for the nine months ended September 30, 2004
were $16,377,945, an increase of $2,194,342, or 15% over the same period in
2003. This increase is primarily due to reasons described below:
Commissions and clearing costs increased $2,081,069, or 24%, to
$10,934,260 from $8,853,191 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, partially offset by the decrease in commissions and fees
revenues during the nine months ended September 30, 2004. The number of
independent registered representatives processing securities transactions with
us increased to 193 at September 30, 2004 from 185 at September 30, 2003, an
increase of 8, or 4%. As a percentage, commissions and clearing costs accounted
for 67% and 62% of total expenses for the nine months ended September 30, 2004
and 2003, respectively.
Employee compensation and benefit costs for the nine months ended
September 30, 2004 increased $308,503, or 13%, to $2,758,475 from $2,449,972 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 39 people
compared to 52 people at September 30, 2003, a decrease of 25%.
General and administrative expenses for the nine months ended September
30, 2004 decreased $403,440, or 15%, to $2,218,021 from $2,648,461 for the same
period in 2003. This decrease is primarily due to a reduction of $70,000 in
professional fees and a $774,000 reduction 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. As a
percentage of total expenses, general and administrative expenses were 14% and
19% for the nine months ended September 30, 2004 and 2003, respectively.
12
For the nine months ended September 30, 2004, the Company reported net
loss applicable to common stockholders of $1,158,411, or $.36 per basic and
diluted share, as compared to a net loss applicable to common stockholders of
$2,318,181, or $.48 per basic and diluted share for the same period in 2003. The
2003 net loss applicable to common stockholders included a loss from
discontinued operations of $654,903, or $.14 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 September 30, 2004, we had $1,621,755 in assets, 59% 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.
Total stockholders' deficit increased $1,008,518 to a deficit of
$1,809,701 at September 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 nine months ended
September 30, 2004 was $479,868, and net cash used for continuing operations for
the same period in 2003 was $1,456,617.
Net cash provided by investing activities for the nine months ended
September 30, 2004 was $10,589, attributable to $117,290 in proceeds from the
sale of marketable securities, partially offset by $106,701 for the purchase of
property and equipment. Net cash used in investing activities, for the purchase
of property and equipment, was $33,348 for the same period in 2003. The
furniture and equipment purchased in 2004 was acquired in connection with the
relocation of the corporate offices to its current location.
Net cash provided in financing activities was $135,978 for the nine
months ended September 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,
$136,000 was used to pay down the principal balance of two long-term notes
issued in connection the sale of a discontinued subsidiary.
Based on our current rate of cash outflows, we believe that our net
cash of $59,982 at September 30, 2004 will not be sufficient to meet our
anticipated cash needs for working capital and capital expenditures for the next
12 months. Management has implemented a plan, which it believes will return the
Company to profitability; however, 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.
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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 September 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
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/A filed for the year ended December 31, 2003. As of September 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/A
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.
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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.
(b) Reports on Form 8-K.
The following reports were filed on Form 8-K during the three months
ended September 30, 2004:
(i) The Company filed a Current Report on Form 8-K, dated July 25,
2004, with the Securities and Exchange Commission reporting an
"Other Event" pursuant to Item 5, regarding the notification
from the American Stock Exchange that the Company's plan for
continued listing was accepted and the exemption was extended
until November 18, 2004. In the same Form 8-K, the Company
reported "Financial Statements, Pro Forma Financial
Information and Exhibits" pursuant to Item 7, regarding the
Company's press release relating to the American Stock
Exchange continued listing exemption. No financial statements
were filed with the current report on Form 8-K.
(ii) The Company filed a Current Report on Form 8-K/A, Amendment
No. 1, dated July 29, 2004, with the Securities and Exchange
Commission reporting an "Other Event" pursuant to Item 8.01,
regarding a typographical error contained in the original Item
5 "Other Event" disclosure on Form 8-K, dated July 25, 2004.
This Amendment No. 1 corrects the date from "November 18,
2004" to "November 12, 2005" which is consistent with the
Press Release dated July 29, 2004. In the same Form 8-K/A, the
Company's reported "Financial Statements and Exhibits"
pursuant to Item 9.01, regarding the Company's press release
dated July 29, 2004, relating to the American Stock Exchange
continued listing exemption. No financial statements were
filed with this Current Report on Form 8-K/A.
(iii) The Company filed a Current Report on Form 8-K dated August
20, 2004, with the Securities and Exchange Commission
reporting "Financial Statements, Pro Forma Financial
Information and Exhibits" pursuant to Item 7, regarding the
Company's press release relating to the results of operations
for the quarter ended June 30, 2004. In the same Form 8K, the
Company reported "Results of Operations and Financial
Condition" pursuant to Item 12, regarding the Company's press
release relating to results of operations for the quarter
ended June 30, 2004. 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.
EMPIRE FINANCIAL HOLDING COMPANY
Date: November 15, 2004 /s/ Donald A. Wojnowski Jr.
---------------------------
Donald A. Wojnowski Jr.
President
(Principal Executive Officer)
Date: November 15, 2004 /s/ Patrick E. Rodgers
----------------------
Patrick E. Rodgers
Chief Financial Officer
(Principal Accounting Officer)
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