Attached files
file | filename |
---|---|
EX-32.1 - JESUP & LAMONT, INC. | v178870_ex32-1.htm |
EX-32.2 - JESUP & LAMONT, INC. | v178870_ex32-2.htm |
EX-31.2 - JESUP & LAMONT, INC. | v178870_ex31-2.htm |
EX-31.1 - JESUP & LAMONT, INC. | v178870_ex31-1.htm |
UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
Washington,
D.C. 20549
FORM
10-K
x
|
ANNUAL
REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31,
2009
|
Commission
File No.: 1-31292
JESUP
& LAMONT, INC.
(Name of
small business issuer in its charter)
Florida
|
56-3627212
|
|
(State
or other jurisdiction of
|
(I.R.S.
Employer
|
|
incorporation
or organization)
|
Identification
No.)
|
650 Fifth
Avenue
New York,
New York 10019
(Address
of principal executive offices) (Zip Code)
(800)
356-2092
(Issuer's
telephone number)
Securities
registered under Section 12(b) of the Exchange Act:
Title of Each Class
|
Name of Each Exchange on Which
Registered
|
|
Common
Stock, $.01 Par Value
|
NYSE
Amex
|
Securities
Registered Pursuant to Section 12(g) of the Act:
None
Indicate
by check mark if the registrant is a well-known seasoned issuer, as defined in
Rule 405 of the Securities Act. Yes ¨ No
x
Indicate
by check mark if the registrant is not required to file reports pursuant to
Section 13 or 15(d) of the Exchange Act. Yes ¨ No
x
Indicate by check mark whether the
registrant (1) has filed all reports required to be filed by Section 13 or 15(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 has submitted electronically and posted on
its corporate Web site, if any, every Interactive Data File required to be
submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding
12 months (or for such shorter period that the registrant was required to submit
and post such files).
Yes ¨ No
¨
Indicate
by check mark if disclosure of delinquent filers pursuant to Item 405 of
Regulation S-K is not contained herein, and will not be contained, to the best
of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. x
Indicate
by check mark whether the registrant is a large accelerated filer,
an accelerated filer, a non-accelerated filer, or a smaller reporting
company. See the definitions of “large accelerated filer,” “accelerated filer”
and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
Large
accelerated filer ¨
Non-accelerated
filer ¨
Accelerated
filer ¨
Smaller
reporting company x
Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act). Yes ¨ No
x
The
aggregate market value of the voting and non-voting common equity held by
non-affiliates of the Issuer as of June 30, 2009, the last business day of the
Issuer’s most recently completed second fiscal quarter, computed by reference to
the closing price of Issuer's common stock reported on the NYSE Amex on such
date was $6,637,021.
The
number of shares of outstanding Issuer's common stock, $.01 par value per share,
as of March 15, 2010 was 32,639,212.
DOCUMENTS
INCORPORATED BY REFERENCE
None.
TABLE OF
CONTENTS
Page
|
|||
PART
I
|
|||
Item
1
|
Description
of Business
|
4
|
|
Item
1A
|
Risk
Factors
|
10
|
|
Item
1B
|
Unresolved
Staff Comments
|
16
|
|
Item
2
|
Description
of Property
|
17
|
|
Item
3
|
Legal
Proceedings
|
17
|
|
Item
4
|
[REMOVED
AND RESERVED]
|
17
|
|
PART
II
|
|||
Item
5
|
Market
for Common Equity, Related Stockholder Matters and Issuer Purchases of
Equity Securities
|
18
|
|
Item
6
|
Selected
Financial Data
|
19
|
|
Item
7
|
Management's
Discussion and Analysis of Financial Condition and Results of
Operation
|
19
|
|
Item
7A
|
Quantitative
and Qualitative Disclosure about Market Risk
|
32
|
|
Item
8
|
Financial
Statements
|
32
|
|
Item
9
|
Changes
in and Disagreements With Accountants on Accounting and Financial
Disclosure
|
33
|
|
Item
9A(T)
|
Controls
and Procedures
|
33
|
|
Item
9B
|
Other
Information
|
34
|
|
Part
III
|
|||
Item
10
|
Directors,
Executive Officers, Promoters, Control Persons and Corporate Governance;
Compliance With Section 16(a) of the Exchange Act
|
35
|
|
Item
11
|
Executive
Compensation
|
38
|
|
Item
12
|
Security
Ownership of Certain Beneficial Owners, Management and Related Stockholder
Matters
|
41
|
|
Item
13
|
Certain
Relationships, Related Transactions and Director
Independence
|
44
|
|
Item
14
|
Principal
Accountant Fees and Services
|
44
|
|
Part
IV
|
|||
Item
15
|
Exhibits
|
46
|
2
Forward
Looking Statement
This
Annual Report on Form 10-K contains statements about future events and
expectations which are "forward-looking statements." Any statement in this 10-K
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, fluctuations in market prices, competition,
changes in securities regulations or other applicable governmental regulations,
capital impairments, technological changes, management disagreements and other
factors described under the heading "Factors affecting our operating results,
business prospects, and market price of stock" and elsewhere in this report and
in other filings made by us 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. Risks affecting our business are
described throughout this Form 10-K and especially in the section “Risk
Factors.” This entire Annual Report on Form 10-K, including the consolidated
financial statements and the notes and any other documents incorporated by
reference into this Form 10-K should be read for a complete understanding of our
business and the risks associated with that business.
Except
where the context otherwise requires, the terms "we," "us," or "our" refer to
the business of Jesup & Lamont, Inc. (formerly Empire Financial Holding
Company) ("JLI" or the "Company") and our wholly-owned subsidiaries: Empire
Financial Group, Inc. ("EFG"), Empire Investment Advisors, Inc. ("EIA"), and
Jesup & Lamont Securities Corporation ("JLSC").
3
PART
I
ITEM
1. DESCRIPTION OF BUSINESS
Overview
The
Company provides securities brokerage, investment banking, market making
research, investment advisory, asset management services and order execution
services in all 50 states, Europe, Asia and other locations through Jesup &
Lamont Securities Corporation (JLSC). Brokerage services are provided
to both retail and institutional customers. During 2008, the Company through
Empire Financial Group (EFG), which ceased doing business on November 12, 2008,
conducted these same businesses. See Note 24 to the Financial
Statements. In addition during 2008, the Company through Empire Investment
Advisors provided investment advisory and asset management services to retail
customers. In 2010, the Company is transitioning all of its
investment advisory and asset management services to Empire Investment Advisors
which will be doing business as Jesup & Lamont Advisors.
Growth
Strategy
The Company’s current
growth strategy is a combination of growth by acquisition and organic growth of
the existing and acquired businesses. The Company plans to build a mix of
financial services and products that provide a varied and continuing revenue
stream, not solely dependent on market conditions, that builds stable
profitability. During 2009, the Company continued its strategic initiative that
would emphasize growth in high margin businesses and curtailed those that have
been determined to be at lower margins. As part of that strategy, the Company
began a fixed income department and anticipates that this business will continue
to be a growth area for the Company. The Company’s strategy is
to develop fixed income capabilities and to market fixed income products through
its existing retail broker network, and customer base. The leveraging
of the Company’s Jesup & Lamont brand name and its long standing operating
history helped to expedite its entrance into this business line. The Company
believes that this strategic initiative is beneficial to its customer base since
it provides additional investment products with less volatility and at the same
time provides the Company with higher gross margins. This will assist
the Company’s return to profitability and will help diversify its revenue base
away from being overly reliant on retail and institutional
equities.
As part
of the Company’s internal growth plan we look to add incremental revenue to the
existing and acquired businesses. The Company will continue to
recruit entrepreneurial financial advisors with established customer bases who
generate substantial income and who desire independence and an entrepreneurial
atmosphere in which to conduct their business. These financial advisors are
comprised of both independent contractors and employees. The Company is focusing
on hiring and retaining employees not independent contractors. In
focusing on this strategy, the payout rates for employees versus independent
contractors is lower which is partially offset by the capital commitment of
opening and operating branch offices. However, this will provide the
Company with higher margins and greater profitability.
The
Company has invested in back office and field operations systems along with an
integrated accounting system to enhance ability to grow and provide the
independent and employee financial advisor base and their clients with
up-to-date on-line information management. These systems provide the Company’s
back office support personnel with the tools to greatly increase productivity
without significantly increasing personnel and other service costs. This will
allow the Company to service a significantly larger volume of business through a
greater number of financial advisors.
The
Company also intends to continue to service other broker dealers as well as the
independent and employee financial advisor base. The Company plans to expand the
number of securities for which it makes a market and aggressively market the
established order execution capabilities to additional domestic and
international broker dealers, hedge funds and institutions. The
Company intends to capitalize by focusing on the underserved small to mid-size
institutions. The Company intends to provide services that are usually reserved
for larger institutional clients. The Company will continue to strengthen
relationships with customers utilizing technology and a high degree of service.
Continued implementation of these strategies will increase the transaction
volume thus increasing the net trading revenues. The Company also believes that
a return to profitability will allow the Company to provide a platform that will
increase the number of transactions processed for unaffiliated broker dealers
and institutions.
4
Brokerage
Services
Full Service Brokerage
Services
Through
it’s wholly owned subsidiary (JLSC) the Company provides full service brokerage
services directly to the retail customers, including individuals and small to
mid-sized institutions such as banks, credit unions, hedge funds, money
managers, mutual funds and pension funds. Experienced registered representatives
execute buy and sell orders for customers for stocks, bonds, traded options,
commodities, and financial derivatives and, where requested, provide account
management, advisory information and oversight services. The Company’s customers
also receive back office support, client statements and reports, branch office
regulatory compliance support and advisory services.
Approximately
35% and 72% of the Company’s revenue for the years ended December 31, 2009 and
2008, respectively, were derived from our retail financial brokerage
services.
Ancillary Services
The
Company supports the full service brokerage operation and the network of
affiliated and unaffiliated broker dealers by offering the following ancillary
services:
|
·
|
MARKET
DATA AND FINANCIAL INFORMATION. The Company continually receives a direct
line, or feed, of detailed quote data, market information and news. The
Company’s retail customers can create their own personal watch list of
stocks and options for quick access to current pricing information. The
Company provides customers with access to various real-time quotes
services.
|
|
·
|
PORTFOLIO
TRACKING AND RECORDS MANAGEMENT. Customers have online access to a listing
of all their portfolio assets held with the Company, cost basis (if
purchased through the Company), current price and current market value.
The system offers the ability to transfer data to popular software
programs such as Microsoft Money and Quicken to allow the customers to
calculate unrealized profits and losses for each asset held in addition to
the many other features these programs may offer. Online account holders
may elect to receive electronic confirmations and detailed monthly
statements. All clients receive printed confirmations and statements
unless they elect to receive confirmations and statements electronically.
The Company’s clearing firms provide for the transmittal of proxy, annual
report and tender offer materials to
customers.
|
|
·
|
CASH
MANAGEMENT SERVICES. Customer dividends, interest, sales proceeds and
deposits are credited to customer accounts. The Company also provides cash
management services to its customers. For example, funds not invested in
securities earn interest in a credit interest program or can be invested
in money market funds. In addition, the Company provides checking services
and debit cards for its customer accounts through a commercial
bank.
|
|
·
|
ACCOUNT
SECURITY. The Company uses a combination of proprietary and industry
standard security measures to protect customers' assets. Customers are
assigned unique account numbers, user identifications and passwords that
must be used each time they log on to the system. The Company relies on
encryption and authentication technology to provide the security necessary
to effect the confidential exchange of information. The Company does not
plan to share customer data with third
parties.
|
5
Fixed Income Business
During
2008, the Company made a strategic decision to enter the fixed income segment of
the business. As part of that effort, the firm, through its Jesup and Lamont
Securities Corp. subsidiary, developed expertise in three major areas; municipal
bond trading, corporate/high yield bond trading and certificate of deposit
underwritings. These businesses were initially established with a focus on
institutional clients with the anticipation that the desks would have a liaison
to the Company’s retail operations. By the end of 2008, all desks were fully
staffed and operational.
Strategically,
the fixed income business unit should provide for more stable earnings as its
business tends to be stronger when equities are under pressure. Additionally,
margins in the Company’s fixed income unit tend to be higher, on average, than
margins in the equity side of the business. Finally during the current difficult
economic environment, the fixed income business has been seen as a flight to
quality and has helped offset the weakness seen in the equities business
units.
Approximately
30% and less than 5% of the Company’s revenue for the years ended December 31,
2009 and 2008, respectively, were derived from these services.
Market Making And Order Execution
Services
The
Company provides market making and order execution services for affiliated and
unaffiliated broker dealers and institutions. The Company’s systems allow it to
receive orders telephonically or electronically. The Company’s services consist
of filling orders received from independent broker dealers to buy securities or
sell securities in domestic or foreign securities. As a market maker, the
Company offers to buy shares from, or sell shares to, broker dealers. The
Company displays the prices at which it is willing to buy and sell these
securities and adjusts the prices in response to market conditions. The Company
sometimes commits its own capital and typically derives revenue from the
difference between the prices at which the Company buys and sells shares. The
Company generally receives a fee or commission for providing institutional
execution services. The Company’s trading revenues are dependent on its ability
to take advantage of daily stock price fluctuations and institutional order
flow. Thus, the Company must be able to evaluate and act rapidly on market
trends and manage risk successfully. The Company’s methodology focuses on the
dynamic, real-time analysis of market activity and price movements, which
enables the Company to increase its revenues and manage risk better. The Company
utilizes state of the art industry standard execution and compliance systems to
manage its risk and seamlessly process and settle transactions with unaffiliated
broker dealers. The Company maintains strict inventory management procedures and
seeks to reduce it’s exposure from market volatility.
Approximately
6% and 22% of the Company revenues for the years ended December 31, 2009 and
2008, respectively, were derived from these services.
Investment Banking
Services
The
Company’s investment banking clients are primarily served from offices in New
York City and San Francisco. These offices provide services to small and medium
sized companies that seek capital to expand their businesses and further
implement their business plans. There are numerous companies that are too small
to obtain services from the larger investment banks. The Company has employed
personnel who have had substantial experience with larger firms who initiate,
negotiate and place much needed capital to these smaller and medium sized
companies from institutions and retail sources.
The
Company’s New York office engages in institutional trading utilizing experienced
securities licensed professionals who both support its investment banking
operations and provide institutional clients with trading and execution
services.
Approximately
12% and 6% of the Company’s revenue for the years ended December 31, 2009 and
2008, respectively, were derived from these services.
6
Investment Advisory
Services
The
Company offers fee-based investment advisory services to its customers,
independent registered investment advisors and unaffiliated broker dealers
through its wholly owned subsidiaries, Empire Investment Advisors, Inc. ("EIA"
d/b/a Jesup & Lamont Advisors) and JLSC. EIA and JLSC are registered as
investment advisors in all 50 states under the Investment Company Act of 1940.
These services are delivered through a platform that uses a variety of
independent third party providers. The Company believes these services enable
more comprehensive relationships with its customers. The investment advisory
services the Company provides include:
|
·
|
Investment
portfolio planning with recommendations on asset allocations on customers’
risk tolerances and long term
needs;
|
|
·
|
Recommendations
and separate account management and mutual fund research and due
diligence;
|
|
·
|
Portfolio
performance review and reallocation;
and
|
|
·
|
All-inclusive
wrap accounts for registered investment
advisors
|
These
services are provided for an all-inclusive fee based on assets under
management.
The
Company’s investment advisory services provide a competitive advantage to
capital markets. The independent registered representatives and employee
representatives can offer the product and services of EIA (d/b/a/ Jesup &
Lamont Advisors) and JLSC to their retail clients upon affiliating with EIA
(d/b/a/ Jesup & Lamont Advisors) and JLSC allowing them to compete with bank
and trust companies in offering investment advisory services to high net worth
clients.
Less than
5% of the Company’s revenue for the years ended December 31, 2009 and 2008,
respectively, were derived from these services. These revenues are
included in the revenues of fees earned from retail customer
business.
Competition
The
market for brokerage services is extremely competitive with many large national
firms and numerous smaller regional and local firms providing services. This
competition is expected to continue to grow in the future. Many competitors are
significantly larger and can advertise and promote their services in ways that
are closed to the Company. The Company believes that the major competitive
factors for brokerage services include cost, service, and quality, ease of use
and customer satisfaction.
The
Company provides market making and execution services for equity securities to
unaffiliated broker dealers. The market for these services is rapidly evolving
and intensely competitive. The Company expects competition to continue to
intensify in the future. The Company competes primarily with wholesale, national
and regional broker dealers and trade execution firms, as well as electronic
communications networks, which provide a direct trading venue to institutional
and retail investors. The Company competes primarily on the basis of execution
quality, customer service and technology.
In
investment banking the Company competes primarily with larger regional and
national firms who offer similar services, but sometimes on a larger
scale.
Technology
The
Company believes the use of traditional and proprietary systems and software
allows it to maintain low fixed processing and labor costs in the retail and
market making businesses. The Company utilizes direct and Internet-based order
systems that link the retail, broker dealer and institutional customers to the
back office and market making services. The Company systems allow processing and
reconciling transactions more effectively by maximizing the use of execution and
clearing services in trade orders received.
7
The
Company utilizes third party technology vendors, employees, and local
consultants to support technology efforts. The Company continually evaluates
technology systems and will either outsource software or technology development
or use third party packages when it is deemed more cost effective than building
the technology.
Government
Regulation
Broker Dealer Regulation
The
securities industry is subject to extensive regulation under federal and state
law. The Securities and Exchange Commission ("SEC") is the federal agency
responsible for administering the federal securities laws. In general, broker
dealers are required to register with the SEC under the Securities Exchange Act
of 1934, as amended (“the Exchange Act”). The Company’s subsidiaries, EFG and
JLSC, are broker dealers registered with the SEC. Under the Exchange Act, every
registered broker dealer that does business with the public is required to be a
member of and is subject to the rules of the Financial Industry Regulatory
Authority ("FINRA"). Securities professionals associated with a broker-dealer
also are subject to registration and supervision by FINRA. FINRA has established
conduct rules for all securities transactions among broker dealers and private
investors, trading rules for the over-the-counter markets and operational rules
for its member firms. FINRA conducts examinations of member firms, investigates
possible violations of the federal securities laws and its own rules, and
conducts disciplinary proceedings involving member firms and associated
individuals. FINRA administers qualification testing for all securities
principals and registered representatives in accordance with its rules and on
behalf of the state securities authorities which apply the same or additional
examination requirements.
The
Company is also subject to regulation under state law. JLSC is registered as a
broker-dealer in all 50 states and in Puerto Rico. An amendment to the federal
securities laws prohibits the states from imposing substantive requirements on
broker-dealers that exceed those imposed under federal law. This amendment,
however, does not preclude the states from imposing registration requirements on
broker-dealers that operate within their jurisdiction, from sanctioning these
broker-dealers for engaging in misconduct or from supervising associated persons
that operate within a state.
Net Capital
Requirements and Liquidity
As a
registered broker-dealer and members of FINRA, JLSC is, and EFG was, subject to
the Net Capital Rule (Rule 15c3-1) under the Securities Exchange Act of 1934.
The Net Capital Rule, which specifies minimum net capital requirements for
registered broker-dealers, is designed to measure the general financial
integrity and liquidity of a broker-dealer and requires that at least a minimum
part of its assets be kept in relatively liquid form. In general, net capital is
defined as net worth (assets minus liabilities), plus qualifying subordinated
borrowings and certain discretionary liabilities, and less certain mandatory
deductions that result from excluding assets that are not readily convertible
into cash and from valuing security positions conservatively. Among these
deductions are adjustments which reflect the possibility of a decline in the
market value of securities prior to disposition.
The Net
Capital Rule also provides that the SEC may restrict for up to 20 business days
any withdrawal of equity capital, or unsecured loans or advances to
stockholders, employees or affiliates if the capital withdrawal, together with
all other net capital withdrawals during a 30-day period, exceeds 30% of excess
net capital and the SEC concludes that the capital withdrawal may be detrimental
to the financial integrity of the broker-dealer. In addition, the Net Capital
Rule provides that the total outstanding principal amount of certain of a
broker-dealer's subordinated indebtedness, the proceeds of which are included in
its net capital, may not exceed 70% of the sum of the outstanding principal
amount of all subordinated indebtedness included in net capital, par or stated
value of capital stock, paid in capital in excess of par, retained earnings and
other capital accounts for a period in excess of 90 days.
8
On
November 12, 2008, EFG was out of compliance with the SEC's Net Capital Rule
15c3-1 and, accordingly, ceased conducting a securities business, other than
liquidating transactions, while remaining out of compliance with this rule.
EFG's out of compliance condition was caused by an arbitration award against it
for $772,000 plus costs and fees of approximately $100,000, notice of which was
received by EFG on November 12, 2008. Accordingly, EFG withdrew its
membership with FINRA and immediately ceased conducting regulated
business. See Note 21 to the financial statements for further
details.
JLSC is a
member of the Securities Investor Protection Corporation which provides, in the
event of the liquidation of a broker-dealer, protection for clients' accounts up
to $500,000, subject to a limitation of $100,000 for claims for cash
balances.
Investment Company Act
The
Company subsidiaries, EIA (d/b/a Jesup & Lamont Advisors) and JLSC are
registered with the SEC as investment advisors under the Investment Company Act
of 1940. EIA and JLSC must comply with rules that govern the way they conduct
their business, including the information that must be given to clients, records
that must be maintained, compliance procedures and ethical requirements that
must be enforced, and terms that must be included in advisory agreements. As
investment advisors, EIA and JLSC are fiduciaries for their clients, and must
act with loyalty and care in the performance of their duties.
Additional Regulations
Due to
the increasing popularity and use of the Internet and other online services,
various regulatory authorities are considering laws and/or regulations with
respect to the Internet or other online services covering issues such as user
privacy, pricing, copyrights and quality of services. The growth and development
of the market for online commerce may prompt more stringent consumer protection
laws that may impose additional burdens on those companies conducting business
online. Moreover, the recent increase in the number of complaints by online
traders could lead to more stringent regulations of online trading firms and
their practices by the SEC, FINRA and other regulatory agencies.
Furthermore,
the applicability to the Internet and other online services of existing laws in
various jurisdictions governing issues such as other taxes and personal privacy
is uncertain and may take years to resolve. Inasmuch as the Company services are
available over the Internet in multiple states and foreign countries, and as the
Company has numerous clients residing in these states and foreign countries,
these jurisdictions may claim that the Company is required to qualify to do
business as a foreign corporation in each such state and foreign
country.
Employees
As of
December 31, 2009, the Company had 215 full-time employees of which 63 were
retail registered representatives, 38 were institutional fixed income
registered representatives, 49 registered representatives provided order
execution, market making services and research to the institutional client base,
20 provided investment banking and advisory services, 5 were in management, 23
provided operation and client support for it’s retail, institutional and order
execution services businesses, 7 provided accounting and administrative
services, 6 provided compliance and legal services, and 4 provided information
technology and facilities services. We also supported a network of 11
independently owned offices or OSJ's (Office of Supervisory Jurisdiction) with a
total of 43 independent contractors. The independent contractors provide retail
services to our customers. No employee is covered by a collective bargaining
agreement or is represented by a labor union. We consider our employee and
independent contractor relations to be good.
9
Our
Company
Jesup
& Lamont, Inc. is organized as a corporation under the laws of the State of
Florida and serves as the parent of Empire Financial Group, Inc., Empire
Investment Advisors, Inc., and Jesup & Lamont Securities Corporation. The
Company’s principal executive offices are located at 650 Fifth Avenue, 3rd Floor,
New York, NY 10019. Our shares are listed on the NYSE Amex, quoted under the
symbol "JLI," and began trading in April of 2002. Our Web site is located at
www.jesuplamont.com. Information contained in or connected to our Web sites are
not a part of this report.
The
Company’s periodic filings are available on the Company Web site. Hard copies of
the Company’s periodic filings can be requested directly in writing (Attn:
Investor Relations). The Company will provide free of charge it’s Annual Reports
on Form 10-K, Quarterly Reports on Form 10-Q and Current Reports on Form 8-K,
and amendments to these reports, proxy statements and/or reports filed by
officers and directors with the Securities and Exchange Commission under Section
16(a) of the Securities Exchange Act. These reports are also available on the
Securities Exchange Commission website at www.sec.gov by searching the EDGAR
database for the Company's filings under the name "Jesup & Lamont, Inc.".
You may also read and copy, for a copying fee, the Company’s filed reports at
the SEC’s Public Reading Room at 100 F Street, N.E., Washington, D.C. 20549.
Please call the SEC at 1-800-SEC-0330 for more information on its Public
Reference Room.
ITEM
1A. RISK FACTORS
The
Company faces a number of risks that may adversely affect the business,
financial condition and operating results. The risks described below are not the
only risks facing the Company. Additional risks and uncertainties not currently
known to the Company or that the Company currently deems to be immaterial also
may materially adversely affect business, financial condition and/or operating
results.
|
·
|
THE
EXISTENCE AND TERMS OF OUTSTANDING OPTIONS, WARRANTS, CONVERTIBLE
PREFERRED STOCK, STOCK SUBSCRIBED AND CONVERTIBLE DEBT IMPAIRS THE
COMPANY’S ABILITY TO RAISE CAPITAL THROUGH SUBSEQUENT DEBT OR EQUITY
OFFERINGS AND COULD IMPAIR ABILITY TO OBTAIN ANY FINANCING ON FAVORABLE
TERMS.
|
The
existence and the terms of outstanding options, warrants, convertible preferred
stock, stock subscribed and convertible debt may adversely affect the terms at
which the Company can obtain capital through additional equity financings. In
addition, the terms of the Company’s convertible debt impose restrictions on its
ability to obtain capital through debt financing. The holders of the options,
warrants and convertible preferred stock have the opportunity to profit from a
rise in the value or market price of the Company common stock and to exercise or
convert them at a time when the Company could obtain equity capital on more
favorable terms than those contained in these securities. The existence of these
securities impairs the Company ability to raise capital through subsequent
equity and debt offerings.
|
·
|
FAILURE
OF SECURITIES BROKERAGE SUBSIDIARIES TO MAINTAIN REQUIRED MINIMUM NET
CAPITAL MAY SUBJECT THEM TO FINES, PENALTIES AND OTHER SANCTIONS INCLUDING
SUSPENSION OR EXPULSION AS
BROKER-DEALERS.
|
The
Company’s active securities brokerage subsidiary, JLSC, is subject to SEC
Uniform Net Capital Rule 15c3-l, which requires the maintenance of minimum net
capital and requires that the ratio of aggregate indebtedness to net capital,
both as defined, shall not exceed 15 to 1. Net capital and the related ratio of
aggregate indebtedness to net capital, as defined, may fluctuate on a daily
basis.
Failure
to maintain the required net capital may subject JLSC to suspension or
revocation of registration by the SEC and suspension or expulsion by FINRA and
other regulatory bodies and ultimately could require JLSC's liquidation. The Net
Capital Rule prohibits payments of dividends, redemption of stock, the
prepayment of subordinated indebtedness and the making of any unsecured advance
or loan to a shareholder, employee or affiliate, if the payment would reduce the
Firm's net capital below a certain level.
10
At
December 31, 2009, EFG had withdrawn its membership with FINRA and is currently
not conducting business. See Note 24 to the financial
statements. At December 31, 2009, JLSC reported net capital of
$614,413, which was $280,283 above the minimum required net capital of
$334,130.
|
·
|
FAILURE
TO MAINTAIN NYSE AMEX LISTING.
|
The
Company cannot assure you that it will be able to continue to satisfy the
requirements necessary to remain listed on the NYSE Amex or that the NYSE Amex
will change its rules or that the NYSE Amex will not take additional actions to
delist the Company’s common stock. If for any reason, the Company’s
stock were to be delisted from the NYSE Amex, the Company may not be able to
list its common stock on another national exchange or market. If the Company’s
common stock is not listed on a national exchange or market, the trading market
for the Company’s common stock may become illiquid. Upon any such delisting, the
Company’s common stock could become subject to the penny stock rules of the SEC,
which generally are applicable to equity securities with a price of less than
$5.00 per share, other than securities registered on certain national securities
exchanges provided that current price and volume information with respect to
transactions in such securities is provided by the exchange or system. The penny
stock rules require a broker-dealer, before a transaction in a penny stock not
otherwise exempt from the rules, to deliver a standardized risk disclosure
document prepared by the SEC that provides information about penny stocks and
the nature and level of risks in the penny stock market. The broker-dealer also
must provide the customer with bid and ask quotations for the penny stock, the
compensation of the broker-dealer and its salesperson in the transaction and
monthly account statements showing the market value of each penny stock held in
the customer's account. In addition, the penny stock rules require that, before
a transaction in a penny stock that is not otherwise exempt from such rules, the
broker-dealer must make a special written determination that the penny stock is
a suitable investment for the purchaser and receive the purchaser's written
agreement to the transaction. As a result of these requirements, if the Company
common stock were to become subject to the penny stock rules, it is likely that
the price of the Company common stock would decline and that the Company’s
stockholders would find it more difficult to sell their shares.
|
·
|
THE
COMPANY IS AT COMPETITIVE DISADVANTAGES TO A NUMBER OF
COMPANIES.
|
The
Company competitors generally have greater marketing, financial and technical
resources. These competitors can offer a wider range of services and financial
products than the Company can. The Company competitors also have greater name
recognition and more extensive client bases. These competitors may be able to
respond more quickly to new or changing opportunities, technologies and client
requirements and may be able to undertake more extensive promotional activities,
offer more attractive terms to clients and adopt more aggressive pricing
policies. Moreover, current and potential competitors have established or may
establish cooperative relationships among themselves or with third parties or
may consolidate to enhance their services and products. The Company expects that
new competitors or alliances among competitors will emerge and may acquire
significant market share. The Company cannot operate successfully, and may not
be able to continue to operate, unless the Company can overcome these
competitive disadvantages.
11
|
·
|
THE
OCCURRENCE OF LOSSES NOT REFLECTED ON THE STATEMENT OF FINANCIAL CONDITION
COULD REDUCE THE COMPANY’S OPERATING RESULTS AND IMPAIR THE COMPANY’S
LIQUIDITY WITHOUT ADEQUATE PRIOR NOTICE TO
INVESTORS.
|
Customer
transactions are cleared through the Company’s clearing brokers on a fully
disclosed basis. In the event that customers default in payments of funds or
delivery of securities, the clearing brokers may charge the Company for any loss
incurred in satisfying the customer's obligations. Additional credit risk may
occur if the clearing brokers do not fulfill their obligations. Though the
Company regularly monitors the activity in customer accounts for compliance with
margin requirements, rapid change in market value or lack of liquidity for
securities held in margin accounts could impose losses. In addition, the Company
has sold securities which are not currently owned and therefore will be
obligated to purchase the securities at a future date. The Company has recorded
these obligations in its financial statements at December 31, 2009 at the market
values of the securities and may incur a loss if the market value increases
subsequent to December 31, 2009. The occurrence of these off balance sheet
losses could impair the Company’s liquidity and force reduction or curtailment
of its business operations.
|
·
|
CONCENTRATIONS
OF CREDIT RISK INCREASE THE RISK OF MATERIAL HARM FROM
DEFAULTS.
|
The
Company is engaged in various trading and brokerage activities in which
counterparties primarily include broker-dealers, banks and other financial
institutions. In the event counterparties do not fulfill their obligations, the
Company may be exposed to counter-party risk. The risk of default depends on the
creditworthiness of the counterparty. In addition, the Company is subject to
issuer default, such issuer risk depends on the creditworthiness of the
issuer.
It is the
Company’s policy to review, as necessary, the credit standing of each
counterparty and issuer.
The
Company’s cash in bank accounts, at times, exceeds the Federal Deposit Insurance
Corporation ("FDIC") insurable limit of $250,000. The Company has not
experienced any previous losses due to this policy. The concentration of these
credit risks increases the magnitude of the harm the Company would suffer in the
event of default.
|
·
|
POTENTIAL
LOSSES OR SANCTIONS AS A RESULT OF EMPLOYEE
MISCONDUCT.
|
Employee
misconduct could result in regulatory sanctions and unanticipated costs to the
Company. Because the Company’s business involves handling cash and marketable
securities on behalf of customers, employee misconduct could result in unknown
and unmanaged risks or losses. Misconduct by employees could also include
binding the Company to transactions that exceed authorized limits or present
unacceptable risks or unauthorized or unsuccessful activities. To limit these
risks the Company has obtained insurance products which cover up to certain
limits acts of errors and omissions or employee misconduct.
If losses
related to employee misconduct exceeded such insurance products, they could
materially reduce the Company income and impair its liquidity
|
·
|
MARKET
PRICE FLUCTUATIONS COULD RESULT IN LOST REVENUES TO THE COMPANY AND
ADVERSELY AFFECT PROFITABILITY.
|
The
Company order execution services involve the purchase and sale of securities
predominantly as principal, instead of buying and selling securities as an agent
or as a riskless principal for its customers. As a result, the Company is
subject to principal risk which may require the Company to buy or sell
securities at market prices which could result in lost revenues and adversely
affect profitability and impair its liquidity.
|
·
|
TERMINATION
OF BUSINESS RELATIONSHIPS BY THE COMPANY NETWORK OF INDEPENDENT REGISTERED
REPRESENTATIVES.
|
The
Company currently conducts a portion of its business through the hiring and
retention of independent registered representatives. Such independent
registered representatives could terminate their relationship with the Company
on little or no notice and could associate with another broker-dealer. The
independent registered representatives can transfer their client accounts which
could adversely affect the Company revenues.
12
|
·
|
REGULATORY
AND LEGAL UNCERTAINTIES COULD HARM THE COMPANY
BUSINESS
|
The
financial services industry in the United States is subject to extensive
oversight under federal, state and applicable international laws as well as SRO
rules. Broker-dealers and financial services firms are subject to regulations
concerning all aspects of their business, including trade practices, best
execution practices, capital structure, record retention and the conduct of
their officers, supervisors and registered employees. The Company operations,
liquidity and profitability may be directly affected by, among other things,
additional legislation or regulation; changes in rules promulgated by the SEC,
CFTC, FSA, SFC, FINRA, NYSE, MSRB, NFA and other regulatory bodies or SROs; and
changes in the interpretation or enforcement of existing laws, regulations and
rules. Failure to comply with these laws, rules or regulations could result in,
among other things, administrative or court proceedings, censure, fines, the
issuance of cease-and-desist orders or injunctions, loss of membership, or the
suspension or disqualification of the market participant, broker-dealer or
financial clearing merchant, and/or their officers, supervisors or registered
employees. The Company ability to comply with applicable laws, regulations and
rules is largely dependent on its internal systems to ensure compliance, as well
as the Company’s ability to attract and retain qualified compliance personnel.
The Company is currently the subject of regulatory reviews and investigations
that may result in disciplinary actions in the future due to alleged
noncompliance.
Various
regulatory and enforcement agencies have been reviewing regulatory reporting
obligations and best execution and trading practices as they relate to the
financial services and capital markets industries. These reviews could result in
enforcement actions or new regulations which could adversely affect the Company
operations.
The SEC,
CFTC, FSA, SFC, FINRA, NYSE, MSRB, NFA and other regulatory bodies and SROs are
constantly proposing, or enacting, new regulations for the marketplace. For
example, FINRA enacted rules in November 2008 regarding the OTC Bulletin Board
markets which require that all non-Nasdaq securities be subject to limit order
protection. It is difficult to assess what the market structure implications
will be from any such new regulations, but there could be significant
technological and compliance costs associated with the obligations that derive
from such new regulations.
Regulatory
or legal actions or proceedings, changes in legislation or regulation, and
changes in market customs and practices could have a material adverse effect on
the Company’s business, financial condition and operating results.
|
·
|
FUTURE
SALES OR THE POTENTIAL FOR SALE OF A SUBSTANTIAL NUMBER OF SHARES OF THE
COMPANY COMMON STOCK COULD CAUSE THE TRADING PRICE OF THE COMPANY’S COMMON
STOCK TO DECLINE.
|
Sales of
a substantial number of shares of the Company’s common stock in the public
markets, or through PIPES (Private Investment in Public Equities) or the
perception that these sales may occur, could cause the market price of the
Company’s stock to decline and could materially impair the Company’s ability to
raise future capital through the sale of additional equity securities. The
Company has 32,548,715 shares of common stock issued and 32,024,597 outstanding
at December 31, 2009 and an additional 21,484,430 shares of common stock
underlying options, warrants, convertible securities, and common stock and
warrants subscribed. The exercise or conversion of these securities and the sale
of the underlying shares could depress the price of the Company common
stock.
|
·
|
THE
COMPANY MAY ISSUE SHARES OF PREFERRED STOCK IN THE FUTURE, WHICH COULD
DEPRESS THE PRICE OF THE COMPANY’S
STOCK.
|
The
Company’s corporate charter authorizes it to issue shares of "blank check"
preferred stock. The Company’s Board of Directors has the authority to fix and
determine the relative rights and preferences of preferred shares, as well as
the authority to issue such shares, without further shareholder
approval.
13
|
·
|
THE
COMPANY MAY EXPERIENCE SIGNIFICANT FLUCTUATIONS IN QUARTERLY OPERATING
RESULTS DUE TO THE NATURE OF IT’S BUSINESS AND THEREFORE MAY FAIL TO MEET
PROFITABILITY EXPECTATIONS.
|
The
Company’s revenue and operating results may fluctuate from quarter to quarter
and from year to year due to a combination of factors, including fluctuating
gains and losses in the Company’s trading income, turnover in the Company
brokers, and the level of investment banking transactions completed by the
Company and the level of fees received from those transactions. Accordingly, the
Company’s operating results may fluctuate significantly in any particular
quarter or year.
|
·
|
THE
COMPANY MAY INCUR SIGNIFICANT LOSSES FROM TRADING AND INVESTMENT
ACTIVITIES DUE TO MARKET FLUCTATIONS AND
VOLATILITY.
|
The
Company may maintain trading and investment positions in the equity markets as a
market maker or as principal in fixed income transactions. To the extent that
the Company owns securities, i.e., long positions, a downturn in those markets
could result in losses from a decline in the value of those long positions.
Conversely, to the extent that the Company has sold securities that it does not
own, i.e., short positions, an upturn in those markets could expose the Company
to potentially unlimited losses as it attempts to cover short positions by
acquiring assets in a rising market.
The
Company may from time to time have a trading strategy consisting of holding a
long position in one security and a short position in another security from
which the Company expects to earn revenues based on changes in the relative
value of the two securities. If, however, the relative value of the two
securities changes in a direction or manner that the Company did not anticipate
or against which the Company is not hedged, the Company might realize a loss in
those paired positions. In addition, the Company maintains trading positions
that can be adversely affected by the level of volatility in the financial
markets, i.e., the degree to which trading prices fluctuate over a particular
period, in a particular market, regardless of market levels.
|
·
|
THE
COMPANY BUSINESS COULD BE ADVERSELY AFFECTED BY A DOWNTURN IN THE
FINANCIAL MARKETS.
|
Over the
past eighteen months, the United States economy has retracted sharply and begun
to stabilize as the United States government provided stimulus measures to the
economy and reduced borrowing costs significantly as the country plunged into a
recession. Whereby the economy has been negatively impacted by a
variety of factors including, but not limited to, significant asset quality
issues in the securities industry. These issues have had an adverse effect on
professional institutional investors as well as retail investors. The issues are
complex and it is unsure when the issues surrounding the financial services
industry will be resolved. Continued weakness in the financial services arena, a
poor economic environment and weak consumer confidence could hurt the Company’s
abilities to generate revenues.
As a
securities broker-dealer, the Company’s business can be materially affected by
conditions in the financial markets and economic conditions generally, both in
the United States and elsewhere around the world. Many factors or events could
lead to a downturn in the financial markets including war, terrorism, natural
catastrophes and other types of disasters. These types of events could cause
people to begin to lose confidence in the financial markets and their ability to
function effectively. If the financial markets are unable to effectively prepare
for these types of events and ease public concern over their ability to
function, the Company revenues are likely to decline and operations will be
adversely affected.
14
|
·
|
THE
COMPANY INVESTMENT BANKING REVENUES MAY DECLINE IN ADVERSE MARKET OR
ECONOMIC CONDITIONS.
|
The
Company investment banking revenues, in the form of financial advisory and
underwriting fees, are directly related to the number and size of the
transactions in which the Company participates and therefore may be adversely
affected by any downturn in the securities markets. Additionally, downturn in
market conditions may lead to a decline in the volume of transactions that the
Company executes for its customers and, therefore, to a decline in the revenues
the Company would otherwise receive from commissions and spreads. Should these
adverse financial and economic conditions appear and persist for any extended
period of time, the Company will incur a further decline in transactions and
revenues that the Company receives from commissions and spreads.
|
·
|
THE
COMPANY DEPENDS ON KEY EMPLOYEES AND THE LOSS OF THEIR SERVICES COULD HARM
THE COMPANY BUSINESS.
|
The
Company success is dependent in large part upon the services of several of its
senior executives and key employees. The Company does not maintain and does not
intend to obtain key man insurance on the life of any executive or key employee.
If the Company’s senior executives or key employees terminate their employment
and the Company is unable to find suitable replacements in relatively short
periods of time, the revenues may be materially and adversely
affected.
|
·
|
THE
COMPANY’S RISK MANAGEMENT POLICIES AND PROCEDURES MAY LEAVE THE COMPANY
EXPOSED TO UNIDENTIFIED RISKS OR AN UNANTICIPATED LEVEL OF
RISK.
|
The
policies and procedures the Company employs to identify, monitor and manage
risks may not be fully effective. Some methods of risk management are based on
the use of observed historical market behavior. As a result, these methods may
not predict future risk exposures, which could be significantly greater than the
historical measures indicate. Other risk management methods depend on evaluation
of information regarding markets, clients or other matters that are publicly
available or otherwise accessible by the Company. This information may not be
accurate, complete, up-to-date or properly evaluated. Management of operational,
legal and regulatory risk requires, among other things, policies and procedures
to properly record and verify a large number of transactions and events. The
Company cannot assure you that its policies and procedures will effectively and
accurately record and verify this information.
The
Company seeks to monitor and control its risk exposure through a variety of
separate but complementary financial, credit, operational and legal reporting
systems. The Company believes that it effectively evaluates and manages the
market, credit and other risks to which it is exposed. Nonetheless, the
effectiveness of the Company ability to manage risk exposure can never be
completely or accurately predicted or fully assured. For example, unexpectedly
large or rapid movements or disruptions in one or more markets or other
unforeseen developments can have a material adverse effect on the Company
results of operations and financial condition.
The
consequences of these developments can include losses due to adverse changes in
inventory values, decreases in the liquidity of trading positions, higher
volatility in earnings, and increases in the Company credit risk to customers as
well as to third parties and increases in general systemic risk.
|
·
|
CREDIT
RISK EXPOSES THE COMPANY TO LOSSES CAUSED BY FINANCIAL OR OTHER PROBLEMS
EXPERIENCED BY THIRD PARTIES.
|
The
Company is exposed to the risk that third parties that owe it money, securities
or other assets will not perform their obligations. These parties
include:
|
·
|
trading
counterparties;
|
|
·
|
customers;
|
|
·
|
clearing
agents;
|
|
·
|
exchanges;
|
15
|
·
|
clearing
houses; and
|
|
·
|
other
financial intermediaries as well as issuers whose securities the Company
holds.
|
These
parties may default on their obligations owed to the Company due to bankruptcy,
lack of liquidity, operational failure or other reasons. This risk may arise,
for example, from:
|
·
|
holding
securities of third parties;
|
|
·
|
executing
securities trades that fail to settle at the required time due to
non-delivery by the counterparty or systems failure by clearing agents,
exchanges, clearing houses or other financial intermediaries;
and
|
|
·
|
extending
credit to clients through bridge or margin loans or other
arrangements.
|
Significant
failures by third parties to perform their obligations owed to the Company could
adversely affect its revenues and perhaps its ability to borrow in the credit
markets.
|
·
|
INTENSE
COMPETITION FROM EXISTING AND NEW ENTITIES MAY ADVERSELY AFFECT THE
COMPANY’S REVENUES AND
PROFITABILITY.
|
The
securities industry is rapidly evolving, intensely competitive and has few
barriers to entry. The Company expects competition to continue and intensify in
the future. Many of the Company’s competitors have significantly greater
financial, technical, marketing and other resources than the Company does. Some
of the Company competitors also offer a wider range of services and financial
products than the Company does and have greater name recognition and a larger
client base. These competitors may be able to respond more quickly to new or
changing opportunities, technologies and client requirements. They may also be
able to undertake more extensive promotional activities, offer more attractive
terms to clients, and adopt more aggressive pricing policies. The Company may
not be able to compete effectively with current or future competitors and
competitive pressures faced by the Company may harm its
business.
ITEM 1B. UNRESOLVED STAFF
COMMENTS
JLI is a
“smaller reporting company,” as defined by Regulation S-K, and as such, is not
required to provide the information contained in this item pursuant to
Regulation S-K.
16
ITEM
2. DESCRIPTION OF PROPERTY
The
Company does not own and does not plan to own any real estate. All of the
Company offices are leased and are listed below.
Location
|
Approx.
Sq.
Feet
|
Lease
Expires
|
|||
Corporate
Headquarters, Sales, Investment Banking Office
|
|||||
650
Fifth Avenue, 3rd
Floor, New York, NY 10019
|
19,020 |
Month
to Month
|
|||
Sales
Offices
|
|||||
2170
West S.R. 434, Suite 100, Longwood, Florida
32779 (1)
|
6,500 |
3/31/2012
|
|||
60
State St, 18th Floor, Boston Massachusetts 02109
|
7,000 |
6/30/2013
|
|||
150
California Street, Suite 2100, San Francisco, California
94111
|
5,700 |
9/30/2011
|
|||
2500
N. Military Trail, 1st Floor, Boca Raton, Florida 33431
|
5,000 |
8/31/2014
|
|||
888
E. Las Olas Blvd, Suite 600, Ft. Lauderdale, Florida 33301
|
3,500 |
9/30/2012
|
|||
325
5th
Ave, Suite 103, Indialantic, Florida 32903
|
2,600 |
4/30/2014
|
|||
1011
High Ridge Rd, Stamford, Connecticut 06905
|
1,500 |
12/31/2011
|
|||
111
S. Wacker Dr, Chicago, Illinois 60606
|
3,700 |
06/30/2010
|
|||
299
Cherry Hill Rd., Parsippany, New Jersey 07054
|
5,600 |
4/30/2015
|
|||
5
Marine View Plaza, Suite 316, Hoboken, New Jersey 07030
|
2,500 |
9/30/2013
|
|||
190
North Canon Dr., Suite 204, Beverly Hills, California
90210
|
1,800 |
11/30/2012
|
(1) Certain of the Company’s administrative
and back office functions are performed at this location
In
addition, the Company is still obligated on leases of the following offices
which it has vacated as follows.
Location
|
Approx.
Sq.
Feet
|
Lease
Expires
|
|||
3
Mill Road, Suite 304, Wilmington, DE 19806
|
2,800 |
7/31/2010
|
|||
399
Thornhall Street, Edison, NJ 08818
|
4,300 |
3/31/2011
|
|||
EAB
Plaza, Uniondale, New York
|
5,900 |
1/31/2011
|
Due to
the large amounts of travel between the New York area and significant costs
associated with overnight hotel rooms, the Company maintains an apartment for
senior management traveling to New York at 418 Central Park West in New York
City. The apartment is approximately 500 square feet with monthly rentals of
$2,950.
As of
December 31, 2009 JLSC also serviced 11 fully independent offices throughout The
United States. The Company does not have any lease agreements or any direct
financial commitments to these locations.
ITEM 3. LEGAL
PROCEEDINGS
The
information under the heading “Regulatory and Legal Matters” contained in
Note 20 to our consolidated financial statements included in Part II,
Item 8 of this annual report on Form 10-K is incorporated by reference
in this Item 3.
ITEM 4. [REMOVED
AND RESERVED]
17
PART
II
ITEM
5. MARKET FOR COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER
PURCHASES OF EQUITY SECURITIES
The
Company’s common stock began trading on the NYSE Amex (formerly, the American
Stock Exchange) on April 9, 2002, and trades under the symbol "JLI". Set forth
below is high and low price information for the common stock as reported on the
NYSE Amex for each period presented.
MARKET
PRICES
2008
|
HIGH SALES PRICE
|
LOW SALES PRICE
|
||||||
First
Quarter
|
$ | 1.20 | $ | 0.50 | ||||
Second
Quarter
|
1.60 | 0.44 | ||||||
Third
Quarter
|
1.20 | 0.82 | ||||||
Fourth
Quarter
|
0.95 | 0.26 | ||||||
2009
|
HIGH SALES PRICE
|
LOW SALES PRICE
|
||||||
First
Quarter
|
$ | 0.71 | $ | 0.27 | ||||
Second
Quarter
|
0.43 | 0.26 | ||||||
Third
Quarter
|
0.74 | 0.29 | ||||||
Fourth
Quarter
|
0.67 | 0.40 |
As of
February 26, 2010, there were approximately 700 stockholders of record of the
Company’s common stock.
DIVIDEND
INFORMATION.
The
Company did not pay any dividends to its common stockholders in 2009 and the
Company does not anticipate paying any dividends to its common stockholders in
the foreseeable future. The Company intends to retain earnings to finance the
development and expansion of the Company’s business. Payment of dividends to
common stockholders in the future will be subject to the discretion of the
Company board of directors and will depend on the Company’s ability to generate
earnings, need for capital and its overall financial condition.
EQUITY
COMPENSATION PLANS.
The
Company adopted the 2000 Incentive Compensation Plan and the 2007 Incentive
Compensation Plan (collectively the "Plans"). The Plans are designed to serve as
an incentive for retaining directors, employees, consultants and advisors. Stock
options, stock appreciation rights and restricted stock options may be granted
to certain persons in proportion to their contributions to the overall success
of the Company as determined by the Board of Directors.
The
following table provides information as of December 31, 2009 with respect to
compensation plans (including individual compensation arrangements) under which
the Company equity securities are authorized for issuance.
18
Equity
Compensation Plan Information
Number of
|
||||||||||||
securities
|
||||||||||||
remaining available
|
||||||||||||
Number of
|
for future issuance
|
|||||||||||
securities to
|
under equity
|
|||||||||||
be issued upon
|
Weighted-average
|
compensation plans
|
||||||||||
exercise of
|
exercise price
|
(excluding
|
||||||||||
outstanding
|
of outstanding
|
securities reflected
|
||||||||||
options,
|
options,
|
in column (a)
|
||||||||||
Plan Category
|
(a)
|
(b)
|
(c)
|
|||||||||
Equity
Compensation plans approved by stockholders
|
8,000,000 | $ | 2.83 | 3,164,334 |
ITEM 6. SELECTED
FINANCIAL DATA
The
Company is a “smaller reporting company,” as defined by Regulation S-K, and as
such, is not providing the information contained in this item pursuant to
Regulation S-K.
ITEM
7. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF
OPERATION.
INTRODUCTION
We were
incorporated in Florida during February 2000. Our business is conducted through
our wholly owned subsidiary, Jesup & Lamont Securities Corporation (JLSC).
In 2010, the Company is transitioning its investment advisory and asset
management services to Empire Investment Advisors (EIA) which will be doing
business as Jesup & Lamont Advisors. During the year ended
December 31, 2009 the Company’s wholly owned subsidiaries, Empire Financial
Group, Inc. (EFG) and EIA did not conduct business.
EFG was
acquired by Jesup & Lamont Inc. (JLI) (formerly known as Empire Financial
Holding Company) in 2000. On November 12, 2008, EFG was out of compliance with
the SEC's Net Capital Rule 15c3-1 and, accordingly, ceased conducting a
securities business, other than liquidating transactions, while remaining out of
compliance with this rule. See Note 24 to the financial statements
for further details. On November 10, 2006, effective as of November
1, 2006, the Company acquired JLSC. Effective January 2, 2008, the Company
changed the name of Empire Financial Holding Company to Jesup & Lamont, Inc.
accordingly, the following discussion and analysis of our financial condition
and results of operations is based on the combined results of these
businesses.
JLSC is
our financial brokerage services subsidiary providing brokerage services to full
service retail and institutional customers. We provide employees and independent
registered representatives and advisors back office, clearance, compliance,
accounting and administrative services. We provide retail customers access to
useful financial products and services through our website, by telephone and
electronic systems. Our customers may, upon request, also receive advice from
our brokers regarding equities, fixed income products, mutual funds and fixed
and variable insurance products. We also provide securities execution and market
making services to both institutional and retail customers. Execution
services involve buying or selling securities in a stock market and providing
such filled orders to purchase or sell securities received from unaffiliated
broker dealers on behalf of their retail customers. We typically act as riskless
principal in these transactions and derive our net trading revenues from the
difference between the price paid when a security is bought and the price
received when that security is sold. Market price fluctuations could
result in reduced revenues or trading losses which could adversely affect the
Company’s profitability.
19
The
Company’s equity market making activities involves the purchase or sale of
securities acting as a principal to the transaction instead of buying and
selling securities as an agent or riskless principal for its
customers. For additional information please see EQUITY MARKET MAKING
TRADING REVENUES.
Additionally
we offer fee-based investment advisory services to our retail customers, and
independent registered investment advisors. These services are web-based and are
delivered through a platform that combines a variety of independent third party
providers.
Services
include access to separate account money managers, managed mutual fund
portfolios, asset allocation tools, separate account manager and mutual fund
research, due diligence and quarterly performance reviews. We charge the
customer an all-inclusive fee for these services, which is based on the
customer’s assets under management. As of December 31, 2009, we earned fees of
approximately $1.0 million based upon a monthly average of $240 million of
assets under management.
CRITICAL
ACCOUNTING POLICIES
Our
discussion and analysis of our financial condition and results of operations is
based on our consolidated financial statements which have been prepared in
conformity with accounting principles generally accepted in the United States of
America. Because we operate in the financial services industry, we follow
certain accounting guidance used by the brokerage industry. Our consolidated
balance sheet is not separated into current and non-current assets and
liabilities. Certain financial assets, such as marketable and non-marketable
securities are carried at fair market value on our consolidated statements of
financial condition while other assets are carried at historical
cost.
INCOME
TAXES
We
account for income taxes on an asset and liability approach to financial
accounting and reporting. Deferred income tax assets and liabilities are
computed annually for differences between the financial and tax basis of assets
and liabilities that will result in taxable or deductible amounts in the future,
based on enacted tax laws and rates applicable to the periods in which the
differences are expected to affect taxable income. A valuation allowance is
recognized if, based on the weight of available evidence, it is more likely than
not that some portion or all of the deferred asset will not be realized. Income
tax expense is the tax payable or refundable for the period, plus or minus the
change during the period in deferred tax assets and liabilities.
ACCOUNTING
FOR CONTINGENCIES
We accrue
for contingencies in accordance with Generally Accepted Accounting Principles
(“GAAP”) when it is probable that a liability or loss has been incurred and the
amount can be reasonably estimated. Contingencies by their nature relate to
uncertainties that require our exercise of judgment both in assessing whether or
not a liability or loss has been incurred and estimating the amount of probable
loss.
USE OF
ESTIMATES
Note 2 to
our consolidated financial statements contains a summary of our significant
accounting policies, many of which require the use of estimates and assumptions
that affect the amounts reported in the consolidated financial statements for
the periods presented. Certain of our significant accounting policies are based
on estimates and assumptions that require complex, subjective judgments which
can materially impact reported results.
20
GOODWILL
AND OTHER INTANGIBLE ASSETS
Management
performs an annual impairment analysis to determine the fair value of goodwill
based upon the fair value of its business reporting unit. The fair
value of the Company’s only business reporting unit is determined using a
variety of business valuation methods, including a discounted cash flow
analysis, giving careful consideration to the quality or degree of reliability
of the valuation assumptions used. Application of the goodwill
impairment test requires significant judgments including estimation of future
cash flows, which is dependent on internal forecasts, estimation of the
long-term rate of growth of the Company’s business, the useful life over which
cash flows will occur, and determination of the Company’s weighted average cost
of capital. Changes in these estimates and assumptions could
materially affect the determination of fair value and potential goodwill
impairment.
If we
subsequently determine our goodwill and other intangible assets have been
impaired, we may have to write off a portion or all of such goodwill and other
intangible assets. If all goodwill and other intangible assets were written off,
we would record a non cash loss approximating $17.4 million to operations and
stockholders' equity.
Identifiable
intangible assets with indefinite lives are not subject to amortization but are
tested for impairment annually or whenever events or changes in circumstances
indicate that the asset might be impaired. Other intangible assets
with finite lives are subject to amortization, and impairment reviews are
performed annually, or more frequently if there are indications that the asset’s
usefulness might have changed, to determine whether events and circumstances
warrant a revision to the remaining period of amortization.
We
performed an impairment test of our intangible assets as of December 31, 2009,
and determined we had no impairment of intangible assets at that
date. We have determined we have one reporting unit for the test of
impairment. Summary information from our impairment tests is set
forth in the following table.
December 31, 2009
|
||||||||||||||||
Reporting
Unit
|
Carrying
Value
|
Estimated
Fair Value
|
Excess
Estimated Fair
Value Over
Carrying Value
|
Percent
Excess
Value
|
||||||||||||
JLSC
|
$ | 17,711,508 | $ | 25,911,000 | $ | 8,199,492 | 45 | % |
The
principal assumptions used in forecasting future cash flows are outlined
below:
2010
|
2011
|
2012
|
2013
|
2014
|
2015
|
|||||||||||||||||||
Nominal
revenue growth rate*
|
30.0 | % | 7.9 | % | 8.0 | % | 8.5 | % | 9.2 | % | 7.5 | % | ||||||||||||
Direct
costs - variable
|
61.0 | % | 61.0 | % | 61.0 | % | 61.0 | % | 61.0 | % | 61.0 | % | ||||||||||||
Direct
costs – fixed ($000s)
|
$ | 10,617 | $ | 10,872 | $ | 11,133 | $ | 11,400 | $ | 11,674 | $ | 11,964 | ||||||||||||
Operating
expenses - variable
|
5.0 | % | 5.0 | % | 5.0 | % | 5.0 | % | 5.0 | % | 5.0 | % | ||||||||||||
Operating
expenses ($000’s)
|
$ | 5,160 | $ | 5,283 | $ | 5,410 | $ | 5,540 | $ | 5,673 | $ | 5,809 |
2016
|
2017
|
2018
|
2019
|
Residual
|
||||||||||||||||
Nominal
revenue growth rate
|
6.2 | % | 5.3 | % | 4.5 | % | 4.0 | % | 3.4 | % | ||||||||||
Direct
costs - variable
|
61.0 | % | 61.0 | % | 61.0 | % | 61.0 | % | 61.0 | % | ||||||||||
Direct
costs – fixed ($000s)
|
$ | 12,241 | $ | 12,535 | $ | 12,836 | $ | 13,144 | $ | 13,459 | ||||||||||
Operating
expenses - variable
|
5.0 | % | 5.0 | % | 5.0 | % | 5.0 | % | 5.0 | % | ||||||||||
Operating
expenses ($000’s)
|
$ | 5,948 | $ | 6,091 | $ | 6,238 | $ | 6,387 | $ | 6,541 |
* the
Nominal revenue growth rate includes an inflation factor of 2.4% each year and
for the residual period.
21
Basis
used to develop forecasts
|
|
Years
that cash flow is projected
|
10
|
Derivation
of residual value at end of projection period
|
Gordon
growth model applied to the last year of projection
period
|
Weighted
average cost of capital
|
14.9%
|
As part
of our impairment tests, we performed sensitivity analyses with our principal
assumptions. The impact on our estimated fair values of a 1% change in our
principal assumptions approximated the following:
Principal Assumption
|
Range of Impact
|
|||||
Nominal
revenue growth rates
|
$ | 850,000 - |
$
|
950,000 | ||
Direct
Costs
|
$ | 3,550,000 - |
$
|
3,800,000 | ||
Operating
Expenses
|
$ | 3,550,000 - |
$
|
3,800,000 | ||
Derivation
of Residual Value at End of Period
|
$ | 1,300,000 - |
$
|
1,500,000 | ||
Weighted
average cost of capital
|
$ | 3,500,000 - |
$
|
3,700,000
|
FAIR
VALUE
Financial
and non-financial assets and liabilities are measured at their fair
value. Assets are valued at fair value determined based on the assets
highest and best use. Non-financial assets are valued based on the
price that would be received in a current exchange transaction. The
fair value of liabilities is generally determined assuming the liability is
transferred to a market participant. When quoted market prices for
liabilities are not available, the Company measures such liabilities at their
present value. The Company categorizes its assets and liabilities
that are measured at fair value into a three-level fair value hierarchy as set
forth below.
Level 1 —
inputs to the valuation methodology are quoted prices (unadjusted) for
identical assets or liabilities in active markets.
Level 2 —
inputs to the valuation methodology include quoted prices for similar assets and
liabilities in active markets, and inputs that are observable for the asset or
liability, either directly or indirectly, for substantially the full term of the
financial instrument.
Level 3 —
inputs to the valuation methodology are unobservable and significant to the fair
value measurement. They are based on best information available in the absence
of level 1 and 2 inputs.
The
Company’s Level 1 Assets which include marketable securities owned and our
securities sold, but not yet purchased, are valued at fair value using quoted
market prices in active markets for identical securities. Gains or
losses are recorded on a trade date basis and are included in the Company’s
consolidated statements of operations in “Equity market making trading, revenue,
net”.
The
Company has no Level 2 Assets at December 31, 2009 or 2008. The
Company had no material changes in its valuation techniques for the years ended
December 31, 2009 and 2008.
The
Company’s Level 3 Assets which include securities not readily marketable are
valued at fair value using listed market prices, where possible. If
listed market prices are not available or if the liquidation of the Company’s
positions would reasonably be expected to impact market prices, then fair value
is determined based on other relevant factors, including dealer price quotations
and marketability.
Warrants
received from investment banking engagements are generally valued using the
Black-Scholes option valuation model and the Company may reduce the value if
there is a restriction as to when the warrants may be exercised. The
Black-Scholes method uses assumptions such as volatility, interest rates, and
dividend yields to determine value. Realized gains or losses are
recorded on a settlement date basis and unrealized gains or losses are recorded
on the valuation date. Realized and unrealized gains or losses are
included in our consolidated statements of operations in “Net gain (loss) on
securities received for banking services”.
22
DEFERRED
TAX ASSETS AND VALUATION ALLOWANCE
The
Company has recorded net deferred tax assets of $2,117,000, due primarily to net
operating loss carryforwards of $38,600,000, expiring in years 2022 through
2030. The discounted cash flow analysis used in the impairment test
indicates that the Company will generate future profits that will allow the
Company to utilize its NOLs. The schedule set forth below summarizes
by year of expiration the amount of operating loss carryforwards.
Operating
Loss Carryforwards by Year of Expiration
Year
|
Amount
|
|||
2010
|
$ | - | ||
2011
|
- | |||
2012
|
- | |||
2013
|
- | |||
2014
|
- | |||
Thereafter
|
38,600,000 | |||
Total
|
$ | 38,600,000 |
As stated
above the Company’s net operating loss carryforwards expire in years 2022
through 2030. The discounted cash flow analysis assumed total pretax
income for the ten year period through December 31, 2018 of approximately $29
million. Our net deferred tax asset recorded at December 31, 2009
totaled $2,117,000, which at the 40% income tax rate they were based upon,
represents $5,292,500 of pre-tax income that would need to be earned to realize
the deferred tax benefit which represents less than 20% of the projected income.
Based on this, management believes that it is more likely than not that the
deferred tax asset will be realized. If our combined future taxable
income through approximately 2030 does not equal at least $5,292,500, our net
recorded deferred tax asset would be reduced accordingly.
EXPENSE
RECOGNITION OF EMPLOYEE STOCK OPTIONS
Effective
January 1, 2006, the Company adopted the provisions of ASC 718 “Compensation –
Stock Compensation” formerly SFAS No. 123(R). Statement of Financial
Standards No. 123 (revised 2004), Share-Based Payment ("SFAS No. 123 (R)"),
which is a revision of SFAS No. 123. SFAS No. 123 (R) supersedes APB Opinion No.
25, Accounting for Stock Issued to Employees, and amends FASB Statement No. 95,
Statement of Cash Flows. Generally, the approach to accounting for share-based
payments in SFAS No. 123(R) is similar to the approach described in SFAS No.
123. However, ASC 718 requires all new share-based payments to employees,
including grants of employee stock options, to be recognized in the financial
statements based on their fair values.
The
Black-Scholes option valuation model is used to estimate the fair value of the
options granted. The model includes subjective input assumptions that can
materially affect the fair value estimates. The model was developed for use in
estimating the fair value of traded options that have no vesting restrictions
and that are fully transferable. Options issued under the Company's option plan
have characteristics that differ from traded options. Principal assumptions used
in applying the Black-Scholes model are outlined below. In selecting these
assumptions, we considered the guidance for estimating expected volatility as
set forth in SFAS No. 123(R). Volatility is a measure of the amount by which the
Company's common stock price has fluctuated (historical volatility) or is
expected to fluctuate (expected volatility).
23
2009
|
2008
|
|||
Risk
free interest rate:
|
0.2
to 2.7%
|
0.3
to 1.6%
|
||
Volatility:
|
58%
- 112%
|
58%
- 119%
|
||
Dividend
rate:
|
None
|
None
|
||
Expected
life:
|
1 –
5 years
|
1 –
5 years
|
CUSTOMER
CLAIMS, LITIGATION AND REGULATORY MATTERS
A former
employee has filed a claim against the Company in the amount of $5 million
alleging employee discrimination. The Company intends to defend this
claim vigorously and in the opinion of management, based on its discussions with
legal counsel, the outcome of this claim will not result in a material adverse
affect on the financial position or results of operations of the Company or its
subsidiaries.
On
November 12, 2008, EFG received notice from FINRA that an arbitration award had
been awarded against EFG for $772,000 plus costs and fees of approximately
$80,000. On December 31, 2008, EKN and EFG entered into a settlement
agreement which addressed the payment and satisfaction of the
award. EFG and EKN agreed that the terms of that settlement would
remain confidential. Such settlement agreement was amended in 2010,
see Note 27 below.
The
Company's subsidiaries' business involves substantial risks of liability,
including exposure to liability under federal and state securities laws in
connection with the underwriting or distribution of securities and claims by
dissatisfied clients for fraud, unauthorized trading, churning, mismanagement
and breach of fiduciary duty. In recent years there has been an
increasing incidence of litigation involving the securities industry, including
class actions which generally seek rescission and substantial
damages. In the ordinary course of business, the Company operating
through its subsidiaries and its principals are, and may become a party to
additional legal or regulatory proceedings or arbitrations. The
Company is not currently involved in any additional legal or regulatory
proceeding or arbitrations, the outcome of which is expected to have a material
adverse impact on the Company's business.
SOURCES
AND DESCRIPTION OF REVENUES
COMMISSIONS AND FEES.
Approximately
82% of our 2009 revenues and approximately 77% of our 2008 revenues consisted of
commissions and fees. Commissions and fees include revenues generated from
transactional fees charged to retail and institutional customers. Commissions
and fees also include mutual fund transaction commissions and trailer fees,
which are periodic fees paid by mutual funds as an incentive to keep assets
invested with them over time. Transactional fees charged to retail and
institutional customers are primarily affected by changes in transaction volumes
and changes in the commission or fee rates charged per transaction. Also
included are commissions generated from our fixed income activities. Commissions
were generated in municipal bond trading, corporate bond trading and certificate
of deposit underwritings.
For
the Year Ended
|
||||||||||||||||
December 31
|
%
|
|||||||||||||||
2009
|
2008
|
Difference
|
Change
|
|||||||||||||
Commissions
and fees
|
$ | 30,543,894 | $ | 29,342,615 | $ | 1,201,279 | 4 | % | ||||||||
Less:
Independent Sales Groups
|
$ | (2,578,624 | ) | $ | (5,883,850 | ) | $ | (3,305,226 | ) | -56 | % | |||||
Commissions
and fees, net
|
$ | 27,965,270 | $ | 23,458,765 | $ | 4,506,505 | 19 | % |
24
The
Company has grown it’s core revenue of commissions and fees by 19%
in 2009 as compared to 2008, primarily through permanent employees
rather than by independent contractors. This increase is due to the
change in the mix of business away from independent contractors to permanent
employees with a focus on fixed income and institutional
equities. During 2009 the Company generated in excess of $8 million
in growth in institutional fixed income activities while also entering a new
business activity of equity derivatives in October 2009 which earned commissions
and fees of approximately $1 million.
EQUITY MARKET MAKING TRADING
REVENUES.
Approximately
6% of our 2009 and 17% of our 2008 revenues consist of equity market-making
trading revenues. Equity market-making trading revenues are generated from the
difference between the prices we pay to buy securities and the price we are paid
when we sell those securities. Volatility of stock prices, which can result in
significant price fluctuations in short periods of time, may result in trading
gains or losses. The Company’s equity market-making trading revenues are
dependent on our ability to evaluate and act rapidly on market trends and manage
risk successfully. We typically act as principal in these transactions and do
not receive a fee or commission for providing order execution
services. Due to the Company growth in commissions and fees along
with re-focusing of its business model the Company reduced its principal risk,
whereby the Company decreased the number of stocks it is involved in making
markets.
INVESTMENT BANKING.
Our
investment banking business has been significantly impacted by the overall
United States economy and the lack of ability by emerging companies to gain
access to the capital markets. We benefited from the sale of warrants
earned from prior investment banking transactions which resulted in a gain on
such warrants of $1,552,000 in 2009. In addition, we earned cash and
income from warrants valued from investment banking transactions in 2009 of
approximately $470,000. Such revenue was approximately 12% and 6% of our 2009
and 2008 revenues, respectively.
DESCRIPTION
OF OPERATING EXPENSES
EMPLOYEE COMPENSATION AND
BENEFITS.
Employee
compensation and benefits, which include salaries and wages, incentive
compensation, stock compensation and related employee benefits and payroll taxes
accounted for approximately 53% of our expenses during 2009 and approximately
42% of our expenses during 2008. Approximately 60% of our employees are
compensated primarily on a performance basis. Therefore, a significant portion
of compensation and benefits expense will fluctuate based on our operating
revenue.
COMMISSIONS, CLEARING AND EXECUTION
COSTS.
Commissions
and clearing and execution costs were $12,220,000 and $20,063,213 for the year
ended December 31, 2009 and 2008, respectively. This expense includes
commissions paid to independent brokers, fees paid to floor brokers and
exchanges for trade execution costs, fees paid to third-party vendors for data
processing services and fees paid to clearing entities for certain clearance and
settlement services. The decrease in the costs was primarily due to
the decrease in number of independent contractors associated with us, which was
43 and 252 as of December 31, 2009 and 2008, respectively.
25
For
the Year Ended
|
||||||||||||||||
December 31
|
%
|
|||||||||||||||
2009
|
2008
|
Difference
|
Change
|
|||||||||||||
Commissions,
clearing and execution costs
|
$ | 12,220,000 | $ | 20,063,213 | $ | (7,843,213 | ) | -39 | % | |||||||
Less:
Independent Sales Groups
|
$ | (2,193,332 | ) | $ | (5,157,424 | ) | $ | (2,964,092 | ) | -57 | % | |||||
Commissions,
clearing and execution costs, net
|
$ | 10,026,668 | $ | 14,905,789 | $ | (4,879,121 | ) | -33 | % |
In
addition we have entered into a long term clearing arrangement in which the cost
per transaction is less than previous clearing firms.
GENERAL AND
ADMINISTRATIVE.
Our
general and administrative expenses were $7,094,118 and $9,969,048 for the years
ended December 31, 2009 and 2008, respectively. These costs consist
primarily of executive stock compensation, legal, accounting and other
professional fees, software consulting fees, travel and entertainment expenses,
insurance coverage, depreciation, occupancy expenses, and other similar
operating expenses. These expenses accounted for approximately 15% and 19% of
our expenses for 2009 and 2008, respectively.
COMMUNICATIONS AND DATA
PROCESSING.
Our
communications and data processing expenses were $732,288 and $898,428 for the
years ended December 31, 2009 and 2008, respectively. Such costs
consist primarily of telecommunication costs, network connectivity costs,
connectivity costs between the offices, costs of software and hardware for
infrastructure and facilities support. These expenses accounted for less than 5%
of our expenses in both 2009 and 2008.
OTHER INCOME AND
EXPENSES.
Other
income and expenses include items which are not considered to be from operating
activities due to there nature and/or infrequency. Included in this category are
interest income and expense, gain on settlement with former officer, forgiveness
of debt, abandonment of property and other expenses.
RESULTS
OF OPERATIONS - DECEMBER 31, 2009 COMPARED WITH DECEMBER 31, 2008
The year
ended December 31, 2009 was a re-building year for the Company. The Company
completed its shut down of EFG in late 2008 and moved to transition remaining
EFG personnel and their clients to JLSC. In so doing, revenues were
negatively affected, however, the Company was in a position to reduce
costs and to allocate capital more efficiently. In addition, given
the downturn in the economy, management focused on immediate cost reductions
throughout the Company during the early part of 2009. Meanwhile the
Company entered into a relationship with a new clearing firm and became focused
on utilizing that relationship for growing institutional fixed income activities
that was commenced in 2008 and institutional equities activities which began in
2009. This was our first step in a strategy of diversification from
retail brokerage and equity market making. During the first three
months of 2009 the Company’s revenues hit a low of $6.5 million while the
economy of the United States hit its low. The stock markets in March
2009 hit its year’s low and began the recovery process as institutional
investors began to see bargains in the markets and retail investors became
comfortable that the stimulus provided by the United States government gave the
economy a boost and the financial markets and the institutions that support
those markets were no longer considered in dire straits. The US stock
markets then began to climb and ended the year with gains from the lows reached
in March 2009.
26
As larger
financial service firms struggled and in the process alienated quality revenue
producers, the Company began to hire personnel to exploit the
opportunity. In re-building the Company’s retail network, the Company
hired new registered representatives as employees versus independent contractors
as had been the previous business model. Because of the malaise in
the financial markets in general and at large ‘supermarket’ firms in particular,
the Company was able to attract a quality of personnel that was unavailable to
the Company previously without having to pay the large guaranteed up-front
advance payments that had come to be characteristic of the
industry. In moving to having retail brokers as employees rather than
independent contractors provided the Company with higher margins on their fee
and commission income in exchange for covering increased fixed overhead
expenses. The Company also continued to gain traction in the fixed
income business and entered the institutional equities business to complement
the Company’s institutional fixed income and retail business. The
Company focused on hiring institutional equity sales traders who had client
relationships and hired research personnel to differentiate ourselves from our
competitors.
Total
revenues for the year ended December 31, 2009 decreased $975,241 or 3%, to
$37,095,420 from $38,070,661 for the year ended December 31, 2008. Imbedded in
these numbers was significant growth among the Company’s registered
representatives. Since the Company changed its focus and moved away
from independent contractors in effect the Company has reduced the reliance on a
low margin business line. In addition the Company has reduced its
reliance on outside revenue from Independent Sales groups. The
Company’s revenue, net of independent contractors and sales groups, has
increased as shown in the table below.
December 31
|
%
|
|||||||||||||||
2009
|
2008
|
Difference
|
Change
|
|||||||||||||
Revenues
|
$ | 37,095,420 | $ | 38,070,661 | $ | (975,241 | ) | -3 | % | |||||||
Less:
Independent Contractors
|
$ | (8,048,343 | ) | $ | (7,012,258 | ) | $ | 1,036,085 | 15 | % | ||||||
Less:
Independent Sales Groups
|
$ | (2,578,624 | ) | $ | (5,883,850 | ) | $ | (3,305,226 | ) | -56 | % | |||||
Revenues,
net
|
$ | 26,468,453 | $ | 25,174,553 | $ | 1,293,900 | 5 | % |
The
Company’s revenue growth, net of independent contractors and sales groups was
$1.3 million or 5%. The breakdown of the mix of 2009 revenues between
business lines is more balanced then a year ago with no one business
unit contributing more than 50% of the revenues.
Operating
expenses in 2009 decreased $10,452,648, or approximately 20%, to $42,966,874
from $53,419,522 in 2008 as described in more detail below:
Commissions,
clearing and execution costs in 2009 decreased $7,843,213, or approximately 39%,
to $12,220,000 from $20,063,213 in 2008. This decrease was primarily due to the
decrease in the commissions paid to independent contractors and independent
sales groups, both of whom, on average, have higher percentage payouts in the
industry than employees. The following table compares these costs for
2009 and 2008, removing the payments to independent contractors and independent
sales groups:
December 31
|
%
|
|||||||||||||||
2009
|
2008
|
Difference
|
Change
|
|||||||||||||
Commissions,
clearing and execution costs
|
$ | 12,220,000 | $ | 20,063,213 | $ | (7,843,213 | ) | -39 | % | |||||||
Less:
Independent Contractors
|
$ | (5,719,634 | ) | $ | (6,892,258 | ) | $ | (1,172,624 | ) | -17 | % | |||||
Less:
Independent Sales Group
|
$ | (2,193,332 | ) | $ | (5,157,424 | ) | $ | (2,964,092 | ) | -57 | % | |||||
Commissions,
clearing and execution costs, net
|
$ | 4,307,034 | $ | 8,013,531 | $ | (3,706,497 | ) | -46 | % |
The
remaining commissions, clearing and execution costs have decreased by $3.7
million or 46% versus prior year. Such decrease is due to the shift
of business from retail and equity market making to institutional business
(fixed income and equities). It is common in the industry that
institutional trades will be larger in size and there will be fewer of them with
higher commissions per trade versus retail. Market making requires
the Company to purchase or sell in small quantities which will lead to higher
execution and settlement costs.
27
Employee
compensation and benefits in 2009 increased $314,635, or less than 2%, to
$22,803,468 from $22,488,833 in 2008. This increase was primarily due to the
addition of branch managers in retail, salaried personnel for fixed income and
institutional equities trading business lines and accelerated payouts for retail
registered representative’s incentives. To partial offset these increases, 2009
included a charge for employee compensation of $177,417 for stock option expense
required under GAAP as compared to $933,651 in 2008.
General
and administrative and communication and data processing expenses decreased
$2,807,070 or approximately 26%, to $7,826,406 from $10,867,476 in 2008. This
decrease was primarily due to reduction in arbitration awards against the
Company of $0.9 million, reduction in professional fees of $0.3 million and cost
cutting efforts implemented in 2009 by management. As a percentage of
total expenses, general and administrative expenses were 19% and 20% for 2009
and 2008, respectively.
Other
income (expenses) was ($1,319,589) in 2009 as compared to ($424,630) in 2008 an
increase in net expense of ($894,959) or 183%. The principal reasons
for the increase in net expense is as follows:
In 2009,
interest expense increased $277,328 or approximately 26% to $1,354,489 as
compared to $1,077,161 in 2008. This was due mainly to higher average debt
outstanding due to increased borrowings in 2008 and 2009 at higher interest
rates. See Note 8 for details of debt obligations.
In 2009,
a former owner and officer of JLSC forgave indebtedness of $311,220 under a note
payable. This forgiveness was made under a legal agreement with such
party to facilitate additional cost reductions.
For the
year ended December 31, 2009, the Company abandoned the premises of two offices
located in Delaware and New Jersey. We have continued to accrue the
obligations under the lease agreements on such office spaces.
In May
2008, we entered into settlement agreements with two former officers. The
agreements included offsetting receivables owed to us totaling $675,297 against
the note payable by the Company to the former officers totaling $861,105. As
part of his settlement agreement, one of the former officers also received the
rights to certain investment banking engagements and transferred 524,118 shares
of JLI's common stock owned by him to JLI. We recorded the stock received as
$733,765 of treasury stock valued at the closing market price ($1.40 per share)
on the date we entered into the settlement agreement. The gain recognized on
these transactions totaled $806,744 after deduction of $112,829 of accelerated
discount amortization related to the canceled notes payable.
For the
year ended December 31, 2009, we reported a net loss applicable to common
stockholders of $(7,381,869), or ($0.24) per basic and diluted share, as
compared to a net loss applicable to common stockholders of $(16,046,084), or
($0.82) per basic and diluted share for the year ended December 31,
2008.
LIQUIDITY
AND CAPITAL RESOURCES
As of
December 31, 2009, we had $31,326,022 in total assets, of which, $3,941,951 or
approximately 13% consisted of cash or assets readily convertible into cash,
principally securities owned and receivables from clearing brokers, which
include interest bearing cash balances held with our clearing organization. At
December 31, 2009, we had liabilities due within one year totaling $13,801,368.
Historically, we have financed our operating cash deficits from private
placements of stock and debt offerings as discussed below.
During
2009 cash used by operations was $5,091,796 as compared to $11,480,946 cash used
in 2008. The major uses of cash from operations for the year ended December 31,
2009 resulted from the net loss of $7,074,043, which was partially offset from
non cash expenses related to depreciation, amortization of notes receivable from
employees, abandonment of premises, deferred rent on new office space obtained
in 2009 and issuance of stock to pay vendors which was offset by non-marketable
securities received in investment banking transactions, forgiveness of
indebtedness on a note to a former officer of the Company and changes in working
capital totaling $1,982,247.
28
Net cash
used by investing activities for 2009 was $3,002,024, related to a purchase of a
certificate of deposit of $2,000,000 to increase capital in JLSC, purchases of
furniture and equipment, net of sales, totaling $380,929 and issuances of notes
receivable, net of payments, to newly hired personnel in the retail and
institutional businesses totaling $632,935. Cash used by investing activities
for 2008 was $947,033, related to cash paid for the purchases of furniture and
equipment of $305,533, and issuances of notes receivable totaling
$641,500.
Net cash
provided by financing activities was $8,028,150 and $12,303,283 in 2009 and
2008, respectively. During 2009 the Company raised additional debt of
$5,500,000 from existing shareholders or debt holders. In addition,
we raised additional $3,550,000 for common stock subscriptions through PIPES
(private investment in public equity). Such amounts were utilized by
the Company as cash infusions as equity capital or repayment of inter-company
advances with its subsidiary, JLSC. Of the total 7,327,796 common
shares represented by these subscriptions, 4,027,697 were issued in 2009 with
the remaining 3,300,099 shares to be issued in 2010.
During
2009, JLI entered into binding Subscription Agreements to sell an aggregate
subscription amount of $3,550,000 to purchase a total of 7,305,548 shares of
common stock, par value $0.01 per share along with five-year warrants to
purchase a total of 2,257,024 shares of common stock. The shares of common stock
were priced during the year at prices ranging from $0.31 to $0.55 per share,
which were based upon the closing price on the subscription agreements. The
warrants are exercisable after six months from the date of issue at prices
ranging from $0.32 to $0.61 per share, subject to limited anti-dilution
protection for capital changes and similar events. The subscribers are to
receive one warrant, priced at $0.125 per warrant, for each of the four shares
of Common Stock subscribed.
The above
new investments were made by accredited investors and will be issued without
registration under the Securities Act of 1933, as amended, pursuant to the
exemptions provided under sections 4(6) and 4(2) thereof, and pursuant to the
exemption provided by Regulation D. All the securities are restricted securities
and will bear a restrictive legend and be subject to stop transfer restrictions.
None of the shares of common stock included in and underlying the units will be
issued until the shares have been approved for listing.
During
2008 we raised $2,000,000 and $6,038,106 from the sale of preferred stock and
common stock respectively, and $2,894,996 from the subscription of common stock,
and made payments of $1,994,137 against notes payable.
As of
August 7, 2008, JLI entered into binding Subscription Agreements having an
aggregate subscription amount of $175,000 to sell a total of 205,554 shares of
common stock, par value $0.01 per share along with five-year warrants to
purchase a total of 51,388 shares of common stock. Each share of common stock
was priced at $0.8201 per share, the closing price on May 12, 2008. The warrants
became exercisable after six months from the date of issue at a price of $0.9841
per share, subject to limited anti-dilution protection for capital changes and
similar events. The subscribers received one warrant, priced at $0.125 per
warrant, for each four shares of Common Stock subscribed. The Subscription
Agreements were entered into pursuant to a private placement to accredited
investors.
In July
2008, JLI entered into binding Subscription Agreements aggregating $1,162,497 to
sell a total of 1,096,695 shares of common stock, par value $0.01 per share at
$1.06 per share, the closing price on July 11, 2008.
29
On June
12, 2008, JLI entered into binding Subscription Agreements aggregating
$1,000,000 to sell a total of 969,696 shares of common stock, par value $0.01
per share, and five-year warrants to purchase a total of 242,424 shares of
common stock. Each share of common stock was priced at $1.00 per share, the
closing price on June 11, 2008. The warrants are exercisable after six months
from the date of issue at a price of $1.20 per share, subject to limited
anti-dilution protection for capital changes and similar events. The subscribers
are to receive one warrant, priced at $0.125 per warrant, for each of the four
shares of Common Stock subscribed. The Subscription Agreements were entered into
pursuant to a private placement to accredited investors. Pursuant to the terms
of the agreements, the investors have demand rights to register the purchased
shares for resale. None of the shares of common stock were issued until the NYSE
Amex approved their listing.
On May
13, 2008, JLI entered into binding Subscription Agreements aggregating
$1,038,105 to sell a total of 1,219,363 shares of common stock, par value $0.01
per share along with five-year warrants to purchase a total of 304,841 shares of
common stock. Each share of common stock was priced at $0.8201 per share, the
closing price on May 12, 2008. The warrants are exercisable after six months
from the date of issue at a price of $0.9841 per share, subject to limited
antidilution protection for capital changes and similar events. The investors
received one warrant, priced at $0.125 per warrant, for each four shares of
Common Stock received. The agreements were entered into pursuant to a private
placement to accredited investors. Pursuant to the terms of the agreements, the
investors have demand rights to register the purchased shares for
resale.
On April
9, 2008, JLI entered into binding Subscription Agreements to sell 7,739,938
shares of common stock, par value $0.01 per share, at a price of $0.646 per
share, the closing price on April 9, 2008, for an aggregate amount of
$5,000,000. The agreements were entered into pursuant to a private placement to
accredited investors. Pursuant to the terms of the agreements, the investors
have demand rights to register the purchased shares for resale.
As of
March 3, 2008, JLI entered into binding Subscription Agreements to sell
$2,000,000 of units in a private placement to accredited investors. Each unit
consists of one share of Series G 10% Subordinated Cumulative Convertible
Preferred Stock, par value $0.01 per share, and five-year warrants to purchase
1,470 shares of our Common Stock, par value $0.01 per share. Each share of
Series G Preferred Stock is initially convertible into 1,470 shares of Common
Stock, subject to limited antidilution protection for capital changes and
similar events. The warrants became exercisable after six months from the date
of issue at a price of $0.816 per share, subject to limited antidilution
protection for capital changes and similar events. The initial conversion price
of the Series G Preferred Stock was $0.68 per share, the closing price of our
common stock on March 3, 2008. The Subscription Agreements also includes JLI's
agreement to register all shares of the common stock underlying the units.
Pursuant to the terms of the transaction, we must pay partial liquidated damages
in the amount of 1% per month of the purchase price, subject to a cap of an
overall aggregate payment of 6% of the purchase price, upon any failure to (a)
file a registration statement with the Securities and Exchange Commission within
30 days after the closing date of the transaction, or 30 days after filing its
annual report on Form 10-K, whichever is later, or (b) register all shares of
common stock underlying the units within 120 days of the closing date. None of
the shares of common stock underlying the units will be issued until they have
been approved for listing on the NYSE AMEX.
On March
19, 2008, effective as of January 29, 2008, Fifth Third Bank converted its
credit line to a note payable. Under this note payable, 100% of EFG's and JLSC's
stock is pledged as collateral. The note carries certain restrictions and
requires pre-approval from Fifth Third Bank for certain events, including but
not limited to, divesture of business assets. The note was further extended and
converted to a demand note on July 2, 2009. Principal is payable at
$30,000 per month. The note carries interest at the LIBOR rate plus
10% (currently 10.29%) which is payable monthly.
Our plan
for future operations has several different aspects. In 2009, we have cut our
overhead costs by combining tasks which helped eliminate positions, restructured
various contracts with vendors to lower general and administrative expenses and
reworked payout percentages to improve profit margin in our retail unit. In
addition, we have taken several steps to increase revenues and/or reduce costs
as outlined below:
30
|
·
|
expanding
our trading capabilities by hiring experienced personnel in fixed income
that serve both institutional and retail
clients;
|
|
·
|
expanding
our institutional trading activities by continuing to add quality research
and sales personnel with existing institutional
clients;
|
|
·
|
continuing
to recruit quality registered
representatives;
|
|
·
|
expanding
our offering of financial products to our retail and institutional
customer;
|
|
·
|
negotiating
reductions from our clearing organizations in ticket charges and system
charges
|
We have
resolved several outstanding regulatory issues which has enabled us to focus on
operating our business in full compliance with all applicable laws and
regulations.
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 through subsequent equity or debt
financings. We cannot predict whether additional funds will be available in
adequate amounts or on acceptable terms. If funds are needed but not available,
our business may be jeopardized.
The
Company has raised additional capital in early 2010 of $1,651,000 and is
continuing its fund raising efforts. As discussed in Note 27 the
Company has entered into an agreement to merge with Tri-Artisan Partners LLC as
part of this proposed transaction it is anticipated the Company will
successfully raise a minimum of $8 million.
We have
implemented many operating changes which are expected to benefit operations in
the future. The more notable of these changes have been to reduce the Company’s
equity market making business and continue growing the Company’s institutional
efforts in fixed income and equities.
NET
CAPITAL REQUIREMENTS
Our
broker dealer subsidiary, JLSC, is subject to the requirements of the Net
Capital Rule (Rule 15c3-1) under the Securities Exchange Act of 1934, which
requires the maintenance of minimum net capital and requires that the ratio of
aggregate indebtedness to net capital, both as defined, should not exceed 15 to
1. Net capital and related ratio of aggregate indebtedness to net capital, as
defined, may fluctuate on a daily basis.
At
December 31, 2009, JLSC reported net capital of $614,413, which was $280,283 in
excess of the minimum net capital requirement. The ratio of aggregate
indebtedness to net capital was 8.15 to 1 for JLSC. We claim exemption from Rule
15c3-3 under Paragraph (k)(2)(ii) of the Rule as all customer transactions are
cleared through other broker-dealers on a fully-disclosed basis.
OFF-BALANCE
SHEET ARRANGEMENTS
Clearing Arrangements. We do
not carry accounts for customers or perform custodial functions related to
customers' securities. We introduce all of our customer transactions, to our
clearing brokers, who maintain our customers' accounts and clear such
transactions. Additionally, the clearing brokers provide the clearing and
depository operations for our equity market making transactions. These
activities may expose us to off-balance-sheet risk in the event that customers
do not fulfill their obligations with the primary clearing brokers, as we have
agreed to indemnify our clearing brokers for any resulting losses. We
continually assess risk associated with each customer who is on margin credit
and record an estimated loss when we believe collection from the customer is
unlikely.
Customer Claims, Litigation and
Regulatory Matters. In the normal course of business, we have been and
continue to be the subject of civil actions and arbitrations arising out of
customer complaints relating to our broker dealer activities, as an employer and
as a result of other business activities.
31
We have
sold securities which we do not currently own and therefore will be obligated to
purchase the securities at a future date. We have recorded these obligations in
our financial statements at December 31, 2009, in the amount of $170,892, at the
market values of the securities and will incur a loss if the market value
increases subsequent to December 31, 2009. Occurrence of these off-balance sheet
losses could impair our liquidity and force us to reduce or curtail
operations.
Tabular
Disclosure of Contractual Obligations
The table
below presents the Company’s long-term debt obligations, operating lease
obligations, purchase obligations and other long-term liabilities reflected on
our Statement of Financial Condition as of December 31, 2009.
Payment Due by Period
|
||||||||||||||||||||
Contractual
Obligations
|
Total
|
Less than 1
year
|
1-3 years
|
4-5 years
|
After 5
years
|
|||||||||||||||
Long-term
debt obligations
|
$ | 16,447,330 | $ | 3,970,597 | $ | 10,463,672 | $ | 2,013,061 | $ | - | ||||||||||
Operating
lease obligations
|
4,756,873 | 2,065,736 | 1,710,419 | 934,224 | 46,494 | |||||||||||||||
Total
|
$ | 21,204,203 | $ | 6,036,333 | $ | 12,174,091 | $ | 2,947,285 | $ | 46,494 |
FACTORS
AFFECTING OUR OPERATIONS, BUSINESS PROSPECTS AND MARKET PRICE OF
STOCK
For the
year ending December 31, 2009, we had a net loss attributable to common
stockholders of $7,381,869.
Our
continued existence is dependent upon our ability to generate cash either from
operations or from new financings. We will continue implementing our plan, which
we believe will allow us to be profitable.
However,
there is no assurance that we will be profitable or be able to generate cash
from either operations or from issuance of additional debt or equity
financings. Consequently our plans for expansion may be
hindered.
RECENTLY
ISSUED ACCOUNTING PRONOUNCEMENTS NOT YET EFFECTIVE
We do not
expect that the adoption of any recently issued but not yet effective accounting
pronouncements would or will have any material effect on the Company’s present
or future financial statements.
ITEM 7A. QUANTITATIVE AND QUALITATIVE
DISCLOSURE ABOUT MARKET RISK.
JLI is a
“smaller reporting company,” as defined by Regulation S-K, and as such, is not
required to provide the information contained in this item pursuant to
Regulation S-K.
ITEM 8. FINANCIAL
STATEMENTS.
The
consolidated financial statements of JLI, the accompanying notes thereto and the
independent registered public accounting firm's report are included as part of
this Annual Report on Form 10-K and immediately follow the signature page of
this Annual Report on Form 10-K on page F-1.
32
ITEM
9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
None.
ITEM
9A(T). CONTROLS AND PROCEDURES.
(a) Management's
Annual Report on Internal Control Over Financial Reporting
The
management of the Company is responsible for establishing and maintaining
adequate internal control over financial reporting for the Company. Internal
control over financial reporting is defined in Rule 13a-15(f) or 15d-15(f)
promulgated under the Exchange Act as a process designed by, or under the
supervision of, the Company's principal executive and principal financial
officers and effected by the Company's board of directors, management and other
personnel, to provide reasonable assurance regarding the reliability of
financial reporting and the preparation of financial statements for external
purposes in accordance with generally accepted accounting principles and
includes those policies and procedures that:
Pertain
to the maintenance of records that in reasonable detail accurately and fairly
reflect the transactions and dispositions of the assets of the
Company;
Provide
reasonable assurance that transactions are recorded as necessary to permit
preparation of financial statements in accordance with generally accepted
accounting principles, and that receipts and expenditures of the Company are
being made only in accordance with authorizations of management and directors of
the Company; and provide reasonable assurance regarding prevention or timely
detection of unauthorized acquisition, use or disposition of the Company's
assets that could have a material effect on the financial
statements.
The
Company's internal control system was designed to provide reasonable assurance
to the Company's management and Board of Directors regarding the preparation and
fair presentation of published financial statements. All internal control
systems, no matter how well designed, have inherent limitations which may not
prevent or detect misstatements. Therefore, even those systems determined to be
effective can provide only reasonable assurance with respect to financial
statement preparation and presentation. Projections of any evaluation of
effectiveness to future periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree of compliance
with the policies or procedures may deteriorate.
Management
conducted an evaluation of the effectiveness of the Company's internal control
over financial reporting based on the framework in "Internal Control-Integrated
Framework issued by the Committee of Sponsoring Organizations of the Treadway
Commission". Based on this evaluation, management concluded that the Company's
internal control over financial reporting was effective as of December 31,
2009.
This
annual report does not include an attestation report of the Company's registered
public accounting firm regarding internal control over financial reporting.
Management's report was not subject to attestation by the Company's registered
public accounting firm pursuant to temporary rules of the Securities and
Exchange Commission that permit the Company to provide only management's report
in this annual report.
(b) Changes in Internal Control Over
Financial Reporting
There
were no changes in our internal controls over financial reporting which occurred
during the most recent fiscal quarter covered by this report that have
materially affected, or are reasonably likely to materially affect our internal
controls over financial reporting.
33
(c) Evaluation of Disclosure Controls
and Procedures
Disclosure
controls and procedures are our controls and other procedures that are designed
to ensure that information required to be disclosed by us in the reports that we
file or submit under the Exchange Act is recorded, processed, summarized and
reported, within the time periods specified in the Securities and Exchange
Commission's rules and forms. Disclosure controls and procedures include,
without limitation, controls and procedures designed to ensure that information
required to be disclosed by us in the reports that we file or submit under the
Exchange Act is accumulated and communicated to our management, including our
principal executive officer and principal financial officer, as appropriate to
allow timely decisions regarding disclosure.
A review
and evaluation of Jesup & Lamont’s Sarbanes-Oxley compliance standards was
performed internally as of year-end 2009. Based on this review and
evaluation, management concluded that its disclosure controls were
effective.
ITEM
9B. OTHER INFORMATION
None
34
PART
III
ITEM
10. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS, CONTROL PERSONS, AND
CORPORATE GOVERNANCE; COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE
ACT
Our
executive officers and directors and their respective ages as of March 26,
2010 are as follows:
Director
|
||||||
Name
|
Age
|
Since
|
Position
|
|||
Donald
A. Wojnowski Jr.
|
50
|
2004
|
President
and Director
|
|||
Alan
Weichselbaum
|
45
|
2008
|
Chief
Executive Officer, Chief Financial Officer and Director
|
|||
James
B. Fellus
|
44
|
Chief
Executive Officer of Jesup & Lamont Securities
Corporation
|
||||
William
C. Holub
|
46
|
Chief
Financial Officer of Jesup & Lamont Securities
Corporation
|
||||
Steven
M. Rabinovici
|
57
|
2005
|
Chairman
of the Board
|
|||
John
C. Rudy
|
67
|
2005
|
Director
|
|||
Benjamin
J. Douek
|
59
|
2008
|
Director
|
|||
Mark
A. Wilton
|
63
|
2009
|
Director
|
Donald A.
Wojnowski Jr. is our President and a member of the Board of Directors. Mr.
Wojnowski is also the President and Chief Executive Officer of our wholly-owned
subsidiaries, EFG and EIA. Mr. Wojnowski was elected Chief Executive Officer in
July of 2005 and has served as our President since June 2004. Prior to holding
his current position, Mr. Wojnowski was our Vice President of Business
Development, a position he held from September 1999 until February 2004. Mr.
Wojnowski joined us in 1993.
Alan
Weichselbaum became our Chief Financial Officer in February 2009 and
subsequently appointed the Company’s Chief Executive
Officer. Mr. Weichselbaum has held multiple senior positions in
the asset management and financial services industries. Since March 2006 he
has served as a founder and managing member of Gimmel Partners L.P., a limited
partnership that invests in US equities with a concentration in the small cap
and micro cap sectors. From February 2001 until December 2005 he was
an analyst and asset manager at Fulcrum Global Partners. Before that
Mr. Weichselbaum worked at Gerard Klauer Mattison, Arbor Partners, NatWest
Securities, Phillip Morris Capital Corporation and Price Waterhouse. He holds an
MBA and is a CPA.
James B.
Fellus was elected by the Board of Directors of JLI as Chief Executive Officer
of JLSC on May 1, 2008. Mr. Fellus joined Jesup & Lamont
Securities Corp. in May 2008. Mr. Fellus has held various senior
executive positions within the broker-dealer and financial services industry
from 2004 until he joined the Company in 2008. He was Senior Managing
Director of Capital Markets for Sterne Agee, Inc., where he assisted in building
their Fixed Income and Capital Markets business. Prior to that, from 2006 to
2008 he was Senior Managing Director of Fixed Income at Platinum Partner L.P., a
hedge fund, where he established the Fixed Income Department. He also served as
Senior Managing Director of Capital Markets at Advest, Inc. and Societe Generale
Securities respectively.
35
William
C. Holub was elected by the Board of Directors of JLI as Chief Financial Officer
of JLSC effective November 2009. Before that from September 2007
until October 2009, he was Chief Financial Officer of Louis Capital Markets LP,
an institutional equities and options broker dealer. Before that,
from January 2006 until September 2007, he was Chief Financial Officer of
Advanced Financial Applications, Inc. Previous to then, from October
1995 until April 2005, he held various positions at Tullett Liberty Investment
Corp. (now known as Tullett Prebon) of which his last position was as Chief
Financial Officer – North America. His previous experience includes
work as an auditor with Ernst & Young LLP. He graduated from Pace
University with a BBA in Public Accounting.
Steven M.
Rabinovici was elected Chairman of the Board in July 2005. Mr. Rabinovici has
over 25 years experience as a senior executive in both the profit and non-profit
sectors. From 1992 through 2004, Mr. Rabinovici was the chief executive officer
of Complete Management Inc., a physician practice management
company.
John C.
Rudy serves as Chairman of the audit committee and also serves on the
compensation and nominating committees. Mr. Rudy is the founder and principal of
Beacon Business Services, Inc. in Matawan, New Jersey, a consulting firm
specializing in providing financial, accounting and business advisory services
to small companies since 1992. From August 1998 through April 2000 he served as
interim chief financial officer of Hometown Auto Retailers, Inc., a publicly
traded automobile dealership. From August 2005 until May 2007 he served as
interim chief financial officer of Sona Mobile Holdings Corp., a publicly traded
wireless technology company. From July 2005 to August 2008 Mr. Rudy served as a
director of AdStar, Inc., a publicly-traded company engaged in internet ad
placement products and services and from May 2005 to April 2008 he served as a
director of Trey Resources, Inc., a publicly-traded software reseller. Mr. Rudy
currently serves as Chief Financial Officer and member of the Board of Directors
of Zunicom, Inc., a publicly traded company installing and maintaining business
centers in hotels through a wholly owned subsidiary located in Toronto, Canada.
Mr. Rudy qualifies as an "Audit Committee Financial Expert" as that term is
defined under SEC regulations. Mr. Rudy received an M.B.A. from Emory University
and a B.S. in economics from Albright College, and has been a Certified Public
Accountant in New York State since 1972.
Benjamin
J. Douek serves as Chairman of the Company’s compensation committee and also
serves on the audit and nominating committees. Mr. Douek has served on
boards of directors, has been CEO, CFO or CRO of companies in a wide array
of corporations providing financial services, crisis and turnaround management,
consulting and diverse internet media services. Currently he is President of
Reins Financial Group, a company he founded in 2009 that provides products to
enable individuals to direct investment and management of their tax-deferred
retirement funds in a wide range of asset classes. Since 2006,
Mr. Douek has served as a consultant to financial institutions engaged in
general securities operations and wealth management; and advisor to two consumer
goods companies. From 2002 to 2005 he co-headed the New York office of
Buccino & Associates, Inc., a consulting firm that specialized in
restructuring and crisis management of companies with a diverse range of
businesses. Earlier in his career, he served as Executive Vice President
and Director of Investment Banking and as a member of the Board of Directors and
Management and Commitment Committees of Ladenburg Thalmann and Co. Inc.; as a
Managing Director, head of a distressed asset group and member of the Fairness
Committee of Bankers Trust Company; and as a Managing Director and Principal of
Donaldson, Lufkin & Jenrette Securities Corporation. He is a lawyer by
training and practiced at Sullivan & Cromwell in New York.
Mark A.
Wilton serves as the Chairman of the nominating committee and also serves on the
compensation and audit committees. He currently serves as the
President and CEO of MarWil Investments GMBh – Co-KG, an international
corporation that has owned and managed European commercial real estate since
1976. Mr. Wilton also serves as the sole director of MarWil
Investments USA, a company he founded in 1978 that owns, develops and manages
residential income properties. From 1978 to 1985, Mr. Wilton served
as President and CEO of Marlind Inc., a general contracting and development
company that he also founded. Mr. Wilton has also held directorships
with several banks. From 1976 to 1980, Mr. Wilton was a director of
Centennial Bank, from its organization through its bank
certification. From 2000 to 2008, Mr. Wilton was a director of
Greater Bay Bank, the successor to Bay Bank of Commerce, for which he also
served as a director from 1981 to 2000, from its organization and bank
certification until its sale to Greater Bay Bank. Greater Bay Bank
was subsequently sold to Wells Fargo Bank in 2008. Mr. Wilton is a
graduate of the American College of Switzerland with a B.B.S. in both
International Economics and International Business.
36
All
directors hold office until the next annual meeting of stockholders and until
their successors are duly elected and qualified. Officers are elected to serve,
subject to the discretion of the Board of Directors, until their successors are
elected.
DIRECTOR
INDEPENDENCE
We have a
separately-designated standing audit committee established in accordance with
Section 3(a)(58)(A) of the Exchange Act. Our Audit Committee is currently
comprised of three non-employee members of our Board of Directors, John C. Rudy,
Benjamin J. Douek and Mark A. Wilton. The Board of Directors has determined
that:
(1) Messrs. Rudy, Douek and Wilton
qualify as "Audit Committee Financial Experts" as that term is defined in the
instructions to Item 407 (d)(5) of Regulation S-K;
(2) Messrs. Rudy, Douek and Wilton
are "independent" as that term is defined in the applicable rules and
regulations of the NYSE Amex and the Securities and Exchange Commission (SEC);
and,
(3) Messrs. Rudy, Douek and Wilton
are financially literate.
On
February 11, 2008, the Company received notice from the NYSE Amex that it was
not in compliance with certain standards for continued listing contained in
Section 121(B)(2)(c) of the NYSE Amex Company Guide, which require that the
Company must maintain a Board of Directors comprised of a majority of
independent directors, and an audit committee of at least two members, comprised
solely of independent directors who also meet the requirements of Rule 10A-3
under the Securities Exchange Act of 1934.
The
Company has filled vacancies on its Board of Directors and audit committee
caused by the resignations of two independent directors during January, 2008,
and has continued now to be in compliance with the NYSE Amex standards described
above.
COMPLIANCE
WITH SECTION 16(A) OF THE SECURITIES EXCHANGE ACT OF 1934
Section
16(a) of the Exchange Act requires our officers and directors, and persons who
own more than ten percent (10%) of a registered class of our equity securities
to file reports of ownership and changes in ownership with the SEC. Officers,
directors and greater than ten percent (10%) stockholders are required by SEC
regulations to furnish us with copies of all Section 16(a) forms they file. To
the best of our knowledge, based solely on review of the copies of such forms
furnished to us or amendments thereto, or written representations that no other
forms were required, we believe that all Section 16(a) filing requirements
applicable to its officers, directors and greater than ten percent (10%)
stockholders were complied with during 2009. With respect to any of our former
directors, officers, and ten percent (10%) stockholders, we do not have any
knowledge of any known failures to comply with the filing requirements of
Section 16(a).
CODE OF
ETHICS
We
adopted a Code of Ethical Conduct, effective July 2004, which is applicable to
all of our directors, executive officers, and employees, including our President
and Chief Financial Officer. The Code of Ethical Conduct includes provisions
applicable to our senior executive officers consistent with the Sarbanes-Oxley
Act of 2002. Our Code of Ethical Conduct has been filed with the SEC and is
posted on our website at www.jesuplamont.com under the "Corporate Governance"
section. We will also provide at no charge a copy of the Code of Ethical Conduct
to any person upon written request addressed to our President, Donald Wojnowski,
or Chief Executive Officer, Alan Weichselbaum, at our principal executive
office, located at Jesup & Lamont, Inc., 650 5TH Ave.
New York, NY 10019.
37
ITEM
11. EXECUTIVE COMPENSATION
The
following Summary Compensation Table sets forth all compensation earned, in all
capacities, during the fiscal years ended December 31, 2009 and 2008 by our (i)
principal executive officer, (ii) executive officers other than the principal
executive officer, whose salaries for 2009 fiscal year as determined by
Regulation S-K, Item 402, exceeded $100,000 and (iii) one additional individual
for whom disclosure would have been provided within category (ii), except that
the individual was not serving as an executive officer at the end of 2009 (the
individuals falling within categories (i) and (ii) are collectively referred to
as the "Named Executive Officers"). No other compensation was paid to any such
officers, other than the compensation set forth below.
SUMMARY COMPENSATION TABLE
Name and
Principal
Position
|
YEAR
|
SALARY
|
Bonus and
Commissions
|
Stock
Awards
|
Option
Awards
|
All Other
Compensation
|
Total
|
|||||||||||||||||||
Steven
Rabinovici, Chairman
|
2009
|
$ | 120,000 | $ | - | $ | - | $ | - | $ | 7,180 | $ | 127,180 | |||||||||||||
2008
|
120,000 | 5,464 | 125,464 | |||||||||||||||||||||||
Donald
Wojnowski Jr. President, & Director (1)
|
2009
|
184,333 | 133,550 | - | - | 11,401 | 329,284 | |||||||||||||||||||
2008
|
300,000 | 67,806 | - | - | 8,730 | 376,536 | ||||||||||||||||||||
Alan
Weichselbaum CEO, CFO & Secretary (2)
|
2009
|
218,750 | - | - | - | - | 218,750 | |||||||||||||||||||
2008
|
- | - | - | - | - | - | ||||||||||||||||||||
James
Fellus, Chief Executive Officer of JLSC (3)
|
2009
|
318,750 | 9,349 | - | - | 11,485 | 339,584 | |||||||||||||||||||
2008
|
300,000 | - | - | - | 4,876 | 304,876 |
(1) Mr.
Wojnowski was elected President in June 2004. The bonus amount for Mr. Wojnowski
includes trading commissions of $133,550 and $67,806 for 2009 and 2008,
respectively. All other compensation for Mr. Wojnowski consists of Company paid
health care insurance.
(2) Mr.
Weichselbaum was elected Chief Executive Officer, and Chief Financial Officer,
and Secretary in 2009.
(3) Mr.
Fellus was elected the Chief Executive Officer of JLSC in May
2008. Other compensation for Mr. Fellus consists of Company paid
health care insurance.
EMPLOYMENT
AGREEMENTS
On
September 21, 2007, the Company entered into an employment agreement with Donald
A. Wojnowski. The employment agreement extends through May 31, 2010 and
automatically renews on a monthly basis thereafter. Pursuant to his employment
agreement, Donald A. Wojnowski was retained as President and his total
compensation is $300,000 per year plus bonus, which may be correlated to trading
income, and annual stock grant. The agreement calls for the Company to also
provide health care, 401K and any other benefits that the Company may provide to
its employees.
38
On August
2, 2006, the Company entered into a one year employment agreement with Steven M.
Rabinovici. The employment agreement extended through June 1, 2007 and
automatically renews on a monthly basis. The agreement can be terminated by
either party with 90 days notice. Pursuant to his employment agreement, Steven
M. Rabinovici was retained as a director and Chairman of the Board and his total
compensation is $120,000 per year plus bonus. The agreement was amended in
January 2007 to increase the annual compensation to $240,000 per year plus
bonus, and re-amended May 2007 to reduce the annual compensation to $120,000 per
year plus bonus. The agreement calls for the Company to also provide health
care, 401K and any other benefits that the Company may provide to its
employees.
OUTSTANDING
EQUITY AWARDS AT DECEMBER 31, 2009
The
following table includes certain information with respect to the value of all
unexercised options previously awarded, stock that has not vested, and equity
incentive plan awards to our Named Executive Officers.
OUTSTANDING EQUITY AWARDS AT
YEAR-END
OPTION AWARDS
|
STOCK AWARDS
|
|||||||||||||||||||||||||||||||||||
Number of
Securities
Underlying
Unexercised
Options
(#)
Exercisable
|
Number of
Securities
Underlying
Unexercised
Options
(#)
Unexercisable
(1)
|
Equity
incentive
Plan
Awards:
Number of
Securities
underlying
Unexercised
Unearned
Options
|
Option
Exercise
Price
($)
|
Option
Expiration
Date
|
Number
of
Shares
or units
of Stock
That
Have Not
Vested
(#)
|
Market
Value of
Shares
or Units
of Stock
That
Have Not
Vested
($)
(2)
|
Equity
Incentive
Plan
Awards:
Number of
unearned
Shares,
Units or
Other
Rights
That Have
Not
Vested
(#)
|
Equity
Incentive
Plan
Awards:
Market or
Payout
Value of
Unearned
Shared,
Units or
Other
Rights
That Have
Not
Vested
(#)
|
||||||||||||||||||||||||||||
Donald
A. Wojnowski
|
125,000 | 2.00 |
6/15/2013
|
64,844 | 29,180 | |||||||||||||||||||||||||||||||
300,000 | 2.00 |
6/1/2015
|
||||||||||||||||||||||||||||||||||
Steven
Rabinovici
|
200,000 | 2.00 |
5/30/2015
|
|||||||||||||||||||||||||||||||||
Alan
Weichelsbaum
|
100,000 | 1.07 |
4/30/2013
|
|||||||||||||||||||||||||||||||||
James
Fellus
|
- |
(1) The
un-exercisable options generally vest over a 2 - 3 year period from date of
grant.
(2) The
market value is based on $0.45 per share which was the closing price of the
Company's stock on December 31, 2009. The unvested portion of stock awards vest
from 1 - 3 years.
The
following table presents a summary of the compensation paid to the members of
our Board of Directors during the fiscal year ended December 31, 2009. Except as
listed below, no other compensation was paid to our Directors.
39
DIRECTOR
COMPENSATION
Name
|
Fees
Earned
or Paid
in Cash
($)
|
Stock
Awards
($)
|
Option
Awards
($) (1)
|
Non-Equity
Incentive
Plan
Compensation
($)
|
Non-
Qualified Deferred
Compensation
Earnings
($)
|
All Other
Compensation
($)
|
Total
($)
|
|||||||||||||||||||||
Donald
A. Wojnowski, Jr.
|
- | - | - | - | - | - | - | |||||||||||||||||||||
John
C. Rudy
|
39,500 | - | 65,208 | - | - | - | 104,708 | |||||||||||||||||||||
Benjamin
J. Douek
|
19,500 | - | 5,208 | - | - | - | 24,708 | |||||||||||||||||||||
Alan
Weichselbaum(2)
|
- | - | 65,208 | - | - | - | 65,208 | |||||||||||||||||||||
Mark
A. Wilton
|
19,500 | - | - | - | - | - | 19,500 | |||||||||||||||||||||
Steven
Rabinovici
|
- | - | - | - | - | - | - |
(1) The
amounts in this column reflect the expense recognized for financial statement
reporting purposes for the fiscal year ended December 31, 2009, in accordance
with GAAP, of outstanding stock options granted as part of the stock option
plan. The assumptions used in calculating these amounts, as well as a
description of our stock option plan, are set forth in the Footnotes to our
Financial Statements for the year ended December 31, 2009, of our Annual Report
on Form 10-K. Compensation cost is generally recognized over the vesting period
of the award.
(2) Mr.
Weichselbaum became an employee of the Company in December 2008.
Our
directors’ compensation plan through April 30, 2008 was as follows:
COMPENSATION.
Non-affiliated directors receive annual compensation in the amount of (i) $5,000
per year in cash to be paid by the Company quarterly in arrears (pro-rated for
partial periods served by any non-affiliate director), (ii) $500 in cash for
attendance at meetings of the Board of Directors and (iii) $250 in cash for
attendance at meetings of any committees of the Board of Directors. However,
neither affiliated directors nor directors who are also employed by the Company
receive any fee or compensation for their services as directors. All members of
the Board of Directors receive reimbursement for reasonable travel-related
expenses actually incurred in connection with their attendance at meetings of
the Board of Directors.
OPTIONS.
Directors are eligible to receive options under our Amended and Restated 2000
Incentive Compensation Plan and 2007 Incentive Compensation Plan. Additionally,
upon a person's election as a non-affiliated director, such non-affiliated
director is automatically granted an option to purchase 25,000 shares of our
common stock or more, at the discretion of management, as well as an automatic
annual grant of an option to purchase 25,000 shares of our common stock on each
anniversary of the date such non-affiliated director was first elected as one of
our directors.
Effective
May 1, 2008, our directors' compensation plan is as follows:
COMPENSATION.
Non-affiliated directors receive annual compensation in the amount of (i)
$10,000 per year in cash to be paid by the Company quarterly in arrears
(pro-rated for partial periods served by any non-affiliate director), (ii)
$1,000 in cash for attendance at meetings of the Board of Directors and (iii)
$500 in cash for attendance at meetings of any committees of the Board of
Directors. The Chairman of the Audit Committee receives an additional $20,000
per year in cash to be paid by the Company quarterly in arrears. However,
neither affiliated directors nor directors who are also employed by the Company
receive any fee or compensation for their services as directors. All members of
the Board of Directors receive reimbursement for reasonable travel-related
expenses actually incurred in connection with their attendance at meetings of
the Board of Directors.
40
OPTIONS.
Directors are eligible to receive options under our Amended and Restated 2000
Incentive Compensation Plan and 2007 Incentive Compensation Plan. Upon a
person's election as a non-affiliated director, such non-affiliated director is
automatically granted an option to purchase 100,000 shares of our common stock
or more, at the discretion of management, as well as an automatic annual grant
of an option to purchase 100,000 shares of our common stock on each anniversary
of the date such non-affiliated director was first elected as one of our
directors.
ITEM
12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED
STOCKHOLDER MATTERS
VOTING
SECURITIES
Our
voting securities on March 15, 2010 consisted of 33,163,330 shares of common
stock, 32,639,212 of which were outstanding; 7,062 shares of Series C Preferred
Stock, entitled to an aggregate of 353,100 votes; 719,825 shares of Series F
Preferred Stock, entitled to an aggregate of 719,825 votes; and 1,688 shares of
Series G Preferred Stock, entitled to an aggregate of 2,481,360
votes.
The
following table lists, as of December 31, 2009, the number of shares of our
Common Stock beneficially owned by (i) each person or entity known to us to be
the beneficial owner of more than 5% of our outstanding Common Stock; (ii) each
officer and director; and (iii) all officers and directors as a
group. Information relating to beneficial ownership of Common Stock
by our principal stockholders and management is based upon information furnished
by each person using “beneficial ownership” concepts under the rules of the U.S.
Securities and Exchange Commission (“SEC”). Under these rules, a
person is deemed to be a beneficial owner of a security if that person has or
shares voting power, which includes the power to vote or direct the voting of
the security, or investment power, which includes the power to vote or direct
the voting of the security. The person is also deemed to be a
beneficial owner of any security of which that person has a right to acquire
beneficial ownership within 60 days of December 31, 2009. Under the
SEC rules, more than one person may be deemed to be a beneficial owner of the
same securities, and a person may be deemed to be a beneficial owner of
securities as to which he or she may not have any pecuniary beneficial
interest.
Name and Address of
Beneficial Owner(1)
|
Amount and Nature of
Beneficial
Ownership(2)
|
Percent of Class
|
||||||
Donald
A. Wojnowski Jr. (3)
|
489,845 | 1.5 | % | |||||
Steven
M. Rabinovici (9)
|
3,649,422 | 11.2 | % | |||||
John
C. Rudy (4)
|
335,000 | 1.0 | % | |||||
Benjamin
J. Douek (5)
|
200,000 | 0.6 | % | |||||
Alan
Weichselbaum (6)
|
5,164,264 | 15.5 | % | |||||
Mark
A. Wilton (7)
|
3,005,139 | 8.6 | % | |||||
James
B. Fellus (8)
|
4,476,029 | 13.7 | % | |||||
EFH
Partners, LLC (10)
|
3,449,422 | 10.7 | % | |||||
Wexus
Capital
|
3,869,969 | 12.1 | % | |||||
Joab
Capital (11)
|
4,476,029 | 13.7 | % | |||||
Steven
A. Horowitz (12)
|
3,589,422 | 11.1 | % | |||||
Paul
H. Brown (13)
|
3,665,564 | 10.4 | % | |||||
Legent
Group LLC (14)
|
4,000,000 | 11.1 | % | |||||
Officers
and Directors as a group
(7
persons)
|
17,319,699 | 45.2 | % |
41
(1) The
addresses of the persons named in this table are as follows: Donald A.
Wojnowski, 2170 West State Road 434, Suite 100, Longwood, Florida 32779; Steven
M. Rabinovici, Alan Weichselbaum, James B. Fellus, Wexus Capital and Joab
Capital, c/o Jesup & Lamont, Inc., 650 Fifth Avenue, 3rd Floor,
New York, New York 10019; John C. Rudy, 245 Main Street, Suite 2N, Matawan, NJ
07747; Benjamin J. Douek, 650 Fifth Ave., 17th Floor,
New York, NY 10019; Mark A. Wilton, 1314 East Las Olas Boulevard, Suite 45, Fort
Lauderdale, FL 33301; EFH Partners, LLC, c/o Morse Zelnick Rose & Lander,
LLP, 405 Park Avenue, Suite 1401, New York, NY 10022; Steven A. Horowitz, 400
Garden City Plaza, Garden City, NY 11530; Paul H. Brown, Le Panorama AB, 57 Rue
Grimaldi, MC 98000, Monaco; Daniel J. Barnett, 297 Asharoken Avenue, Northport,
NY 11768; and Harvey McGrath, c/o Windels Marx Lane & Mittendorf LLP, 156
West 56th Street, New York, NY 10019.
(2) A
person is deemed to be a beneficial owner of securities that can be acquired by
such person within 60 days from December 31, 2009 upon the exercise of options
and warrants or conversion of convertible securities. Each beneficial owner's
percentage ownership is determined by assuming that options, warrants and
convertible securities that are held by such person (but not held by any other
person) and that are exercisable or convertible within 60 days from December 31,
2009 have been exercised or converted. Except as otherwise indicated, and
subject to applicable community property and similar laws, each of the persons
named has sole voting and investment power with respect to the shares shown as
beneficially owned. All percentages are determined based on the number of all
shares, including those underlying options, warrants and convertible securities
exercisable or convertible within 60 days from December 31, 2009 held by the
named individual, divided by 32,024,597 outstanding shares on December 31, 2009
plus those shares underlying options, warrants and convertible securities
exercisable or convertible within 60 days from December 31, 2009 held by the
named individual or the group.
(3) Mr.
Wojnowski’s beneficial ownership includes shares underlying options that are
currently exercisable to purchase 425,000 shares of our common stock at $2.00
per share.
(4) Mr.
Rudy’s beneficial ownership includes shares underlying options that are
currently exercisable to purchase 50,000 shares of our common stock at $2.05 per
share, 10,000 shares of our common stock at $2.82 per share, 75,000 shares of
our common stock at $1.42 per share, 100,000 shares of our common stock at $1.07
per share and 100,000 shares of our common stock at $0.29 per
share.
(5) Mr. Douek’s
beneficial ownership includes shares underlying options that are currently
exercisable to purchase 100,000 shares of our common stock at $1.07 per share
and 100,000 shares of our common stock at $0.29 per share.
(6) Mr. Weichselbaum’s
beneficial ownership includes the following securities: (a) 3,869,969 shares of
our common stock owned by Wexus Capital LLC; (b) 484,848 shares of our common
stock owned by Gimmel Partners LP; (c) shares underlying warrants that are
currently exercisable to purchase 121,212 shares of our common stock at $1.20
per share owned by Gimmel Partners LP; and (d) shares underlying warrants that
are currently exercisable to purchase 117,647 shares of our common stock at
$0.55 per share, owned directly. Mr. Weichselbaum disclaims
beneficial ownership of securities owned by Gimmel Partners LP, except to the
extent of his pecuniary interest therein, if any.
(7) Mr.
Wilton’s beneficial ownership includes the following securities: (a) shares
underlying options that are currently exercisable to purchase 100,000 shares of
our common stock at $0.29 per share; and (b) shares underlying warrants that are
currently exercisable to purchase 397,878 shares of our common stock at $0.49
per share and 183,150 shares of our common stock at $0.34 per
share.
(8) Mr. Fellus’s
beneficial ownership includes the following securities: (a) 4,354,817 shares of
common stock owned by Joab Capital LLC; and (b) shares underlying warrants that
are currently exercisable to purchase 121,212 shares of our common stock at
$1.20 per share. Mr. Fellus disclaims beneficial ownership of securities
owned by Joab Capital LLC, except to the extent of his pecuniary interest
therein, if any.
42
(9) Mr.
Rabinovici’s beneficial ownership includes shares underlying options that are
currently exercisable to purchase 200,000 shares of our common stock at $2.00
per share. As one of two managing members of EFH Partners, LLC, jointly with
Steven M. Horowitz, Mr. Rabinovici also has shares dispositive and voting power
with respect to 3,189,422 shares of our common stock owned of record by EFH
Partners, LLC, and shares dispositive power with respect to (a) warrants
currently exercisable to purchase 60,000 shares of our common stock at $1.50 per
share; and (b) warrants currently exercisable to purchase 200,000 shares of our
common stock at $2.00 per share. Mr. Rabinovici disclaims beneficial ownership
of any share beneficially owned by EFH Partners, LLC, except to the extent of
his pecuniary interest in such shares.
(10) Includes
warrants currently exercisable to purchase 60,000 shares of our common stock at
$1.50 per share and warrants currently exercisable to purchase 200,000 shares of
our common stock at $2.00 per share. EFH Partners, LLC is an affiliated entity
and a major shareholder. Steven M. Rabinovici, our Chairman, is one of its two
managing members. Investment making authority for the EFH Partners, LLC is
vested in Steven M. Rabinovici and Steven M. Horowitz, managing members. EFH
Partners, LLC, purchased the stock in the ordinary course of business, and at
the time of purchase of the stock to be resold, had no agreements or
understandings directly or indirectly with any person to sell the
stock.
(11) Includes
share underlying warrants that are currently exercisable to purchase 121,212
shares of our common stock at $1.20 per share.
(12) Steven
A. Horowitz, as one of two managing members of EFH Partners, LLC, jointly with
Steven M. Rabinovici, shares dispositive and voting power with respect to
3,189,422 shares of our common stock owned of record by EFH Partners, LLC, and
shares dispositive power with respect to (a) warrants currently exercisable to
purchase 60,000 shares of our common stock at $1.50 per share; and (b) warrants
currently exercisable to purchase 200,000 shares of our common stock at $2.00
per share. Mr. Horowitz, as a trustee of 3111 Broadway Reality Corp. Charitable
Remainder Trust and ARF Trust, has dispositive power with respect to warrants,
currently exercisable to purchase 100,000 shares of our common stock at $3.10
per share, beneficially owned by 3111 Broadway Reality Corp. Charitable
Remainder Trust, and 40,000 shares of our common stock at $3.10 per share,
beneficially owned by ARF Trust. Mr. Horowitz disclaims beneficial ownership of
any shares beneficially owned by EFH Partners, LLC, 3111 Broadway Reality Corp.
Charitable Remainder Trust and ARF Trust, except to the extent of his pecuniary
interest in such shares.
(13) Mr.
Brown’s beneficial ownership includes the following securities: (a) 574,416
shares of our common stock owned by Sofisco Nominees Limited; (b) shares
underlying warrants that are currently exercisable to purchase 287,208 shares of
our common stock at $1.40 per share, owned by Sofisco Nominees Limited; (c) 844
shares of Series G Preferred Stock, currently convertible into 1,240,680 shares
of our common stock, owned by Impala Nominees Limited; (d) shares underlying
warrants that are currently exercisable to purchase 1,240,680 shares of our
common stock at $0.816 per share, owned by Impala Nominees Limited; (e) 258,064
shares of our common stock owned by OIC Nominees Limited; and (f) shares
underlying warrants that are currently exercisable to purchase 64,516 shares of
our common stock at $0.61 per share, owned by OIC Nominees Limited. Mr. Brown,
as the sole director of Sofisco Nominees Limited, Impala Nominees Limited and
OIC Nominees Limited, has voting and investment authority with respect to
securities owned by those entities, and therefore may be deemed to be the
indirect beneficial owner of those securities. Mr. Brown disclaims beneficial
ownership of securities owned by Sofisco Nominees Limited, Impala Nominees
Limited and OIC Nominees Limited, except to the extent of his pecuniary interest
therein, if any.
(14) Includes
shares underlying a convertible debenture, currently convertible into 4,000,000
shares of our common stock at an initial conversion price of $0.50 per
share.
We know of no arrangements, including
pledges, by or among any of the forgoing persons, the operation of which could
result in a change of control of the Company.
43
For information regarding securities
authorized under our equity compensation plan, see Item 5, "Equity Compensation
Plan Information".
ITEM
13. CERTAIN RELATIONSHIPS, RELATED TRANSACTIONS AND DIRECTOR
INDEPENDENCE
Note 25
to the Company’s consolidated financial statements contains a summary of related
party transactions.
DIRECTOR
INDEPENDENCE
The Board
has determined that John C. Rudy, Benjamin J. Douek and Mark A. Wilton (the
"Independent Directors") are independent as that term is defined in the listing
standards of the NYSE Amex. As disclosed above, the Independent Directors are
the sole members of the Audit Committee and are independent pursuant to the
standards applicable to audit committee members under NYSE Amex listing
standards. The Independent Directors are the sole members of the Compensation
Committee and are independent pursuant to the standards applicable to
compensation committee members under NYSE Amex listing standards.
In
determining director independence, the Board considered the option awards to the
Independent Directors for the year ended December 31, 2009, disclosed in "Item
11 - Executive Compensation - Director Compensation" above, and determined that
such awards were compensation for services rendered to the Board and therefore
did not impact their ability to continue to serve as Independent
Directors.
ITEM
14. PRINCIPAL ACCOUNTANTS FEES AND SERVICES
We have
retained Rosen Seymour Shapss Martin & Company, successor to Miller, Ellin
& Company, LLP) to perform our annual audit, review our quarterly and annual
SEC filings and prepare our tax returns.
AUDIT
FEES.
The
aggregate fees billed for professional services rendered by Rosen Seymour Shapss
Martin & Company for the audit of our annual financial statements and for
the review of our interim financial statements, which are included in our Annual
Report on Form 10-K and in our Quarterly Reports on Form 10-Q, and services that
are normally provided in connection with statutory and regulatory filings or
engagements were $356,377 and $276,907 for fiscal years 2009 and 2008,
respectively.
AUDIT-RELATED
FEES.
The
aggregate fees billed for assurance and related services rendered by Rosen
Seymour Shapss Martin & Company for consulting services on regulatory
matters were $81,557 and $0 for fiscal years 2009 and 2008,
respectively.
TAX
FEES.
The
aggregate fees billed for professional services rendered by Rosen Seymour Shapss
Martin & Company for tax compliance, tax advice and tax planning were
$60,645 and $63,853 for fiscal years ending 2009 and 2008,
respectively.
ALL OTHER
FEES.
There
were no other fees billed by Rosen Seymour Shapss Martin & Company for
products and services other than the above for fiscal years ending 2009 and
2008, respectively.
44
AUDIT
COMMITTEE PRE-APPROVAL POLICIES AND PROCEDURES
The Audit
Committee charter provides that the Audit Committee will pre-approve audit
services and non-audit services to be provided by our independent auditors
before the accountant is engaged to render these services. The Audit Committee
may consult with management in the decision-making process, but may not delegate
this authority to management. The Audit Committee may delegate its authority to
pre-approve services to one or more committee members, provided that the
designees present the pre-approvals to the full committee at the next committee
meeting. All audit and non-audit services performed by our independent
accountants have been pre-approved by our Audit Committee to assure that such
services do not impair the auditors' independence from us.
45
PART
IV
ITEM
15. EXHIBITS
Exhibit No.
|
Description of Exhibit
|
|
3(i)(a)
|
Articles
of Incorporation (1)
|
|
3(i)(b)
|
Amendment
to Articles of Incorporation effective January 2, 2008 (18)
|
|
3(ii)
|
Bylaws,
as amended (2)
|
|
4.1
|
Form
of Common Stock Certificate (1)
|
|
4.2
|
Articles
of Amendment designating Series B Convertible Preferred Stock, Series C
Convertible Preferred Stock, and Series D Convertible Preferred Stock
dated May 19, 2005 (3)
|
|
4.3
|
Articles
of Amendment designating Series F Convertible Preferred Stock dated March
13, 2007 (4)
|
|
4.4
|
Articles
of Amendment designating Series G Convertible Preferred Stock, effective
March 28, 2008 (13)
|
|
10.1
|
Amended
and Restated 2000 Incentive Compensation Plan (5)
|
|
10.2
|
2007
Incentive Compensation Plan (6)
|
|
10.4+
|
Employment
Agreement between the Company and Donald A. Wojnowski Jr. dated as of
September 21, 2007(2)
|
|
10.5
|
Form
of Indemnification Agreement between the Company and each of its Directors
and executive officers(1)
|
|
10.6
|
Form
of Securities Purchase Agreement dated as of March 10, 2006 (4)
|
|
|
||
10.7
|
Form
of Warrant to be issued in connection with Securities Purchase Agreement
dated as of March 10, 2006 (4)
|
|
10.8
|
Stock
Purchase Agreement, dated September 14, 2006, among Empire Financial
Holding Company, Jesup & Lamont Securities Corporation, and Jesup
& Lamont Holding Corporation. (8)
|
|
10.9
|
Amendment
No. 1 to Stock Purchase Agreement, dated November 10, 2006
(9)
|
|
10.10
|
Amendment
No. 2 to Stock Purchase Agreement, dated November 10, 2007
(9)
|
|
10.11
|
Form
of Securities Purchase Agreement dated March 6,
2007(10)
|
|
10.12
|
Form
of Registration Rights Agreement dated March 6,
2007(10)
|
|
10.13
|
Form
of Debenture issuable in connection with Securities Purchase Agreement
dated March 6, 2007 (10)
|
|
10.14
|
Form
of Warrant issuable in connection with Securities Purchase Agreement dated
March 6, 2007
(10)
|
46
10.15
|
Form
of Subscription Agreement dated August 20, 2007 (11)
|
|
10.16
|
Form
of Warrant issuable in connection with Subscription Agreement dated August
20, 2007 (11)
|
|
10.17
|
Form
of Subscription Agreement dated as of March 3, 2008
(12)
|
|
10.18
|
Form
of Subscription Agreement dated as of April 9, 2008
(14)
|
|
10.19
|
Form
of Amendment No.1 to Subscription Agreement dated as of April 9,2008
(14)
|
|
10.20
|
Form
of Securities Purchase Agreement dated as of February 27, 2009
(15)
|
|
10.21
|
Form
of Debenture issuable in connection with Securities Purchase Agreement
dated as of February 27, 2009 (15)
|
|
10.22
|
Form
of Subscription Agreement dated February 2009 (15)
|
|
10.23
|
Form
of Warrant issuance in connection with Subscription Agreement dated
February 2009 (15)
|
|
14.1
|
Code
of Ethical Conduct(7)
|
|
21.1
|
Subsidiaries
of the Company (13)
|
|
31.1
|
Certification
by Principal Executive Officer pursuant to Rule 13a-14(a) or 15d-14(a) of
the Securities and Exchange Act of 1934, as amended *
|
|
31.2
|
Certification
by Principal Financial Officer pursuant to Rule 13a-14(a) or 15d-14(a) of
the Securities and Exchange Act of 1934, as amended *
|
|
32.1
|
Principal
Executive Officer Certification pursuant to Rule 13a-14(a) or Rule
15d-14(a) of the Securities and Exchange Act of 1934, as amended, and 18
U.S.C. Section 1350 *
|
|
32.2
|
Principal
Executive Officer Certification pursuant to Rule 13a-14(a) or Rule
15d-14(a) of the Securities and Exchange Act of 1934, as amended, and 18
U.S.C. Section 1350 *
|
* Filed herewith
+ Indicates
management contract or compensatory plan or arrangement
47
(1)
|
Incorporated
by reference from the exhibits filed with the Company's Registration
Statement on Form S-1 Registration No. 333-86365.
|
|
|
||
(2)
|
Incorporated
by reference from the exhibits filed with the Company's Quarterly Report
on Form 10-QSB for the quarter ended September 30,
2007.
|
|
(3)
|
Incorporated
by reference from the exhibits filed with the Company's Current Report on
Form 8-K filed May 26, 2005.
|
|
(4)
|
Incorporated
by reference from the exhibits filed with the Company's Current Report on
Form 8-K filed on March 17, 2006.
|
|
(5)
|
Incorporated
by reference from Appendix A to the Company's definitive Proxy Statement
on Schedule 14A filed on August 1, 2006.
|
|
(6)
|
Incorporated
by reference from Appendix A to the Company's definitive Proxy Statement
on Schedule 14A filed on August 23, 2007.
|
|
(7)
|
Incorporated
by reference from the exhibits filed with the Company's Annual Report on
Form 10-K for the fiscal year ended December 31, 2003.
|
|
(8)
|
Incorporated
by reference from the exhibits filed with the Company's Current Report on
Form 8-K filed September 19, 2006.
|
|
(9)
|
Incorporated
by reference from the exhibits filed with the Company's Current Report on
Form 8-K filed November 16, 2006.
|
|
(10)
|
Incorporated
by reference from the exhibits filed with the Company's Current Report on
Form 8-K filed on March 13, 2007.
|
|
(11)
|
Incorporated
by reference from the exhibits filed with the Company's Current Report on
Form 8-K filed on August 24, 2007.
|
|
(12)
|
Incorporated
by reference from the exhibits filed with the Company's Current Report on
Form 8-K/A filed on March 12, 2008.
|
|
(13)
|
Incorporated
by reference from the exhibits filed with the Company's Annual Report on
Form 10-KSB filed on March 31, 2008.
|
|
(14)
|
Incorporated
by reference from the exhibits filed with the Company's Current Report on
Form 8-K filed on April 15, 2008.
|
|
(15)
|
Incorporated
by reference from the exhibits filed with the Company's Current Report on
Form 8-K filed on March 5,
2009.
|
48
SIGNATURES
In
accordance with Section 13 or 15(d) of the Securities Exchange Act, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
JESUP
& LAMONT, INC.
|
||
Dated
March 26, 2010
|
By:
|
/s/ Alan Weichselbaum
|
Alan
Weichselbaum, Chief Executive Officer and
|
||
Chief
Financial Officer
|
||
(Principal
Executive Officer, Principal Financial
|
||
Officer
and Principal Accounting
Officer)
|
In
accordance with the Exchange Act, this report has been signed below by the
following persons on behalf of the registrant in the capacities and on the dates
indicated.
Signatures
|
Title
|
Date
|
||
/s/ Alan Weichselbaum
|
Chief
Executive Officer,
|
March
26, 2010
|
||
Alan
Weichselbaum
|
Chief
Financial Officer
|
|||
(Principal
Executive Officer,
|
||||
Principal
Financial Officer, and
|
||||
Principal
Accounting Officer)
|
||||
/s/ Steven M. Rabinovici
|
Director
|
March
26, 2010
|
||
Steven
M. Rabinovici
|
||||
/s/ Donald A. Wojnowski Jr.
|
Director,
|
March
26, 2010
|
||
Donald
A. Wojnowski Jr.
|
||||
/s/ John C. Rudy
|
Director
|
March
26, 2010
|
||
John
C. Rudy
|
||||
/s/ Mark A. Wilton
|
Director
|
March
26, 2010
|
||
Mark
A. Wilton
|
||||
/s/ Benjamin J. Douek
|
Director
|
March
26, 2010
|
||
Benjamin
J. Douek
|
49
JESUP
& LAMONT, INC. AND SUBSIDIARIES
(FORMERLY
EMPIRE FINANCIAL HOLDING COMPANY)
CONSOLIDATED
FINANCIAL STATEMENTS
FOR THE
YEARS ENDED DECEMBER 31, 2009 AND 2008
TABLE OF
CONTENTS
Page
|
||
Report
of Independent Registered Public Accounting Firm
|
F-2
|
|
Consolidated
Statement of Financial Condition December 31, 2009 and
2008
|
F-3
|
|
Consolidated
Statements of Operations for the Years Ended December 31, 2009and
2008
|
F-4
|
|
Consolidated
Statements of Cash Flows for the Years Ended December 31, 2009 and
2008
|
F-5
|
|
Consolidated
Statements of Changes in Stockholders' Equity for the Years Ended December
31, 2009 and 2008
|
F-7
|
|
Notes
to Consolidated Financial Statements
|
F-9
|
F-1
REPORT OF
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the
Board of Directors and Stockholders of
Jesup
& Lamont, Inc. and Subsidiaries
(Formerly
Empire Financial Holding Company)
We have
audited the accompanying consolidated statement of financial condition of
Jesup & Lamont, Inc. and subsidiaries (formerly Empire
Financial Holding Company) as of December 31, 2009 and 2008, and the related
consolidated statements of operations, changes in stockholders' equity , and
cash flows for the years then ended. These consolidated financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audit.
We
conducted our audit in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require
that we plan and perform the audit to obtain reasonable assurance about whether
the consolidated financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the consolidated financial
statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe
that our audit provides a reasonable basis for our opinion.
In our
opinion, the 2009 and 2008 consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Jesup &
Lamont, Inc. and subsidiaries (formerly Empire Financial Holding Company) at
December 31, 2009 and 2008, and the results of its operations and its cash flows
for the years ended December 31, 2009 and 2008, in conformity with accounting
principles generally accepted in the United States of America.
ROSEN
SEYMOUR SHAPSS MARTIN & COMPANY LLP
New York,
New York
March 26,
2010
F-2
JESUP
& LAMONT, INC. AND SUBSIDIARIES
CONSOLIDATED
STATEMENTS OF FINANCIAL CONDITION
December 31,
|
||||||||
2009
|
2008
|
|||||||
Assets
|
||||||||
Cash
and cash equivalents
|
$ | 345,170 | $ | 410,840 | ||||
Bank
certificate of deposit
|
2,014,102 | - | ||||||
Marketable
securities owned, at market value
|
23,288 | 37,027 | ||||||
Securities
not readily marketable, at estimated fair value
|
946,080 | 531,265 | ||||||
Commissions
and other receivables from clearing organizations
|
1,559,391 | 1,033,520 | ||||||
Other
receivables
|
2,437,989 | 1,849,816 | ||||||
Securities
borrowed under a secured demand note
|
225,000 | - | ||||||
Deposits
at clearing organizations
|
1,312,294 | 655,359 | ||||||
Prepaid
expenses and other assets
|
959,710 | 513,393 | ||||||
Notes
receivable, net of allowance of $561,000
|
1,370,984 | 1,310,889 | ||||||
Deferred
tax asset
|
2,117,000 | 2,117,000 | ||||||
Furniture
and equipment, net
|
669,974 | 527,692 | ||||||
Goodwill
|
13,272,165 | 13,272,165 | ||||||
Intangible
assets - customer lists and trademarks
|
4,072,875 | 4,143,601 | ||||||
Total
assets
|
$ | 31,326,022 | $ | 26,402,567 | ||||
Liabilities
and Stockholders' Equity
|
||||||||
Accounts
payable, accrued expenses and other liabilities
|
8,360,666 | 5,240,367 | ||||||
Due
to clearing organizations
|
1,314,213 | 1,180,108 | ||||||
Accrued
preferred stock dividends
|
753,394 | 445,568 | ||||||
Securities
sold, but not yet purchased, at market value
|
170,892 | 170,603 | ||||||
Secured
demand note payable
|
225,000 | - | ||||||
Notes
payable
|
16,332,091 | 12,552,317 | ||||||
Total
liabilities
|
27,156,256 | 19,588,963 | ||||||
Stockholders'
equity
|
||||||||
Convertible
preferred stock, series C, F, and G $.01 par value, 1,000,000 shares
authorized 728,575 issued and outstanding
|
$ | 7,285 | $ | 7,902 | ||||
Common
stock, $.01 par value 100,000,000 shares authorized 32,548,715 shares
issued and outstanding
|
325,487 | 223,978 | ||||||
Less:
Treasury Stock
|
(733,765 | ) | (733,765 | ) | ||||
Capital
stock subscribed
|
1,635,000 | 2,894,996 | ||||||
Additional
paid-in capital
|
43,225,707 | 37,328,572 | ||||||
Accumulated
deficit
|
(40,289,948 | ) | (32,908,079 | ) | ||||
Total
stockholders' equity
|
4,169,766 | 6,813,604 | ||||||
Total
liabilities and stockholders' equity
|
$ | 31,326,022 | $ | 26,402,567 |
See
accompanying notes to the consolidated financial statements.
F-3
JESUP
& LAMONT, INC. AND SUBSIDIARIES
CONSOLIDATED
STATEMENTS OF OPERATIONS
Years ended December 31,
|
||||||||
2009
|
2008
|
|||||||
Revenues
|
||||||||
Commissions
and fees
|
$ | 30,543,894 | $ | 29,342,615 | ||||
Equity
market making trading revenues, net
|
2,231,211 | 6,369,618 | ||||||
Investment
banking income
|
2,297,885 | 2,778,153 | ||||||
Net
gain (loss) on securities received for banking services
|
2,022,430 | (419,725 | ) | |||||
37,095,420 | 38,070,661 | |||||||
Expenses
|
||||||||
Employee
compensation and benefits
|
22,803,468 | 22,488,833 | ||||||
Commissions,
clearing and execution costs
|
12,220,000 | 20,063,213 | ||||||
General
and administrative
|
7,094,118 | 9,969,048 | ||||||
Communications
and data processing
|
732,288 | 898,428 | ||||||
42,849,874 | 53,419,522 | |||||||
Loss
from operations
|
(5,754,454 | ) | (15,348,861 | ) | ||||
Other
income (expenses)
|
||||||||
Gain
on settlement
|
- | 806,744 | ||||||
Interest
income
|
20,002 | 45,787 | ||||||
Forgiveness
of indebtedness
|
311,220 | - | ||||||
Abandonment
of premises
|
(292,230 | ) | - | |||||
Interest
expense
|
(1,354,489 | ) | (1,077,161 | ) | ||||
Other
expense
|
(4,092 | ) | (200,000 | ) | ||||
(1,319,589 | ) | (424,630 | ) | |||||
Net
loss
|
(7,074,043 | ) | (15,773,491 | ) | ||||
Accrued
preferred stock dividends
|
(307,826 | ) | (272,593 | ) | ||||
Loss
applicable to common shareholders
|
$ | (7,381,869 | ) | $ | (16,046,084 | ) | ||
Basic
and diluted loss per share applicable to common
shareholders:
|
||||||||
Loss
per share-basic
|
$ | (0.24 | ) | $ | (0.82 | ) | ||
Loss
per share diluted
|
$ | (0.24 | ) | $ | (0.82 | ) | ||
Weighted
average shares outstanding:
|
||||||||
Basic
|
30,365,265 | 19,506,828 | ||||||
Diluted
|
30,365,265 | 19,506,828 |
See
accompanying notes to the consolidated financial statements.
F-4
JESUP
& LAMONT, INC. AND SUBSIDIARIES
CONSOLIDATED
STATEMENTS OF CASH FLOWS
Years ended December 31,
|
||||||||
2009
|
2008
|
|||||||
Cash
flows from operating activities
|
||||||||
Net
loss
|
$ | (7,074,043 | ) | $ | (15,773,491 | ) | ||
Adjustments
to reconcile net loss to net cash used by operating
activities:
|
||||||||
Depreciation
and amortization
|
372,217 | 944,154 | ||||||
Unrealized
loss on securities
|
69,106 | 450,497 | ||||||
Stock
compensation expense
|
177,417 | 933,651 | ||||||
Allowance
for notes receivable
|
561,000 | - | ||||||
Abandonment
of premises
|
292,230 | - | ||||||
Deferred
rent
|
127,534 | 14,136 | ||||||
Gain
on settlement with former officer
|
- | (806,744 | ) | |||||
Forgiveness
of note payable
|
(311,220 | ) | - | |||||
Non-marketable
securities earned as income
|
(469,573 | ) | - | |||||
Issuance
of stock to pay legal expenses
|
330,000 | 180,000 | ||||||
Accrued
interest income on certificate of deposit
|
(14,102 | ) | - | |||||
(Increase)
decrease in operating assets:
|
||||||||
Commissions
receivable from clearing organizations
|
(525,871 | ) | 638,808 | |||||
Deposits
at clearing organizations
|
(656,935 | ) | 3,522,478 | |||||
Other
receivables
|
(588,173 | ) | (1,054,786 | ) | ||||
Marketable
trading account securities, net
|
(609 | ) | 5,389,859 | |||||
Prepaid
expenses and other assets
|
(446,317 | ) | 482,525 | |||||
Increase
(decrease) in operating liabilities:
|
||||||||
Accounts
payable, accrued expenses and other liabilities
|
2,931,149 | 459,856 | ||||||
Payable
to clearing organizations
|
134,105 | (6,509,721 | ) | |||||
Securities
sold, not yet purchased
|
289 | (352,168 | ) | |||||
Total
adjustments
|
1,982,247 | 4,292,545 | ||||||
Cash
used by operating activities
|
(5,091,796 | ) | (11,480,946 | ) | ||||
Cash
flows from investing activities
|
||||||||
Purchases
of certificate of deposit
|
(2,000,000 | ) | - | |||||
Purchases
of furniture and equipment
|
(472,391 | ) | (305,533 | ) | ||||
Sale
of furniture and equipment
|
91,462 | - | ||||||
Repayment
of notes receivable
|
513,020 | - | ||||||
Issuance
of notes receivable
|
(1,134,115 | ) | (641,500 | ) | ||||
Total
cash used by investing activities
|
(3,002,024 | ) | (947,033 | ) |
Continued
on next page
See
accompanying notes to the consolidated financial statements.
F-5
JESUP
& LAMONT, INC. AND SUBSIDIARIES
CONSOLIDATED
STATEMENTS OF CASH FLOWS
Years ended December 31,
|
||||||||
2009
|
2008
|
|||||||
Cash
flows from financing activities
|
||||||||
Payments
of notes payable
|
(1,131,992 | ) | (1,994,136 | ) | ||||
Proceeds
from 9% convertible debenture
|
2,000,000 | - | ||||||
Proceeds
from new loans
|
3,535,142 | 3,452,500 | ||||||
Proceeds
from sale of preferred stock
|
- | 2,000,000 | ||||||
Proceeds
from common stock subscribed
|
3,550,000 | 2,894,996 | ||||||
Proceeds
from sale of common stock
|
6,038,106 | |||||||
Proceeds
from Clearing organization loan
|
75,000 | - | ||||||
Fees
and commissions paid for sale of stock
|
- | (88,183 | ) | |||||
Total
cash provided by financing activities
|
8,028,150 | 12,303,283 | ||||||
Net
increase (decrease) in cash and cash equivalents
|
(65,670 | ) | (124,696 | ) | ||||
Cash
and cash equivalents at beginning of period
|
410,840 | 535,536 | ||||||
Cash
and cash equivalents at end of period
|
$ | 345,170 | $ | 410,840 | ||||
Supplemental
cash flow information:
|
||||||||
Interest
paid
|
$ | 929,816 | $ | 851,362 | ||||
Supplemental
disclosures of non-cash investing and financing
activities:
|
||||||||
Converted
debenture note to common stock
|
$ | 450,000 | - | |||||
Accrued
preferred stock dividends, net of payments
|
$ | 307,826 | $ | 272,593 | ||||
Line
of credit converted to note payable
|
- | $ | 1,999,450 | |||||
Note
payable forgiven
|
$ | 311,220 | $ | 861,105 | ||||
Other
assets offset against notes payable
|
- | $ | 675,297 | |||||
Securities
borrowed under a secured demand note
|
$ | 225,000 | - | |||||
Secured
demand note payable
|
$ | (225,000 | ) | - | ||||
Issuance
of note to pay liability
|
- | $ | 50,640 | |||||
Acquisition
of treasury stock
|
- | $ | 733,765 | |||||
Issuance
of stock to pay liability
|
$ | 330,000 | $ | 170,000 | ||||
Conversion
of Series F preferred stock to common
|
$ | 615 | $ | 385 | ||||
Issuance
of stock to pay preferred dividends
|
- | $ | 52,965 | |||||
Note
interest forgiven by stockholders
|
$ | 230,613 | $ | - |
See
accompanying notes to the consolidated financial statements.
F-6
JESUP
& LAMONT, INC. AND SUBSIDIARIES
CONSOLIDATED
STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY
YEARS
ENDED DECEMBER 31, 2009 AND 2008
Series C
|
Series F
|
Series G
|
||||||||||||||||||||||||||||||
Preferred Stock
|
Preferred Stock
|
Preferred Stock
|
Common Stock
|
|||||||||||||||||||||||||||||
Shares
|
Amount
|
Shares
|
Amount
|
Shares
|
Amount
|
Shares
|
Amount
|
|||||||||||||||||||||||||
Balance
at December 31, 2007
|
7,062 | $ | 71 | 819,987 | $ | 8,199 | - | $ | - | 11,106,442 | $ | 111,065 | ||||||||||||||||||||
Sale
of common stock
|
- | - | - | - | - | - | 8,959,301 | 89,593 | ||||||||||||||||||||||||
Exercise
of options on common stock
|
- | - | - | - | - | - | 214,844 | 2,148 | ||||||||||||||||||||||||
Issuance
of subscribed stock
|
- | - | - | - | - | - | 1,622,718 | 16,227 | ||||||||||||||||||||||||
Exercise
of warrants to common stock
|
- | - | - | - | - | - | 38,568 | 386 | ||||||||||||||||||||||||
Issuance
of Series G preferred stock
|
- | - | - | - | 1,688 | 17 | - | - | ||||||||||||||||||||||||
Conversion
of Series F preferred stock
|
- | (38,460 | ) | (385 | ) | 38,460 | 385 | |||||||||||||||||||||||||
Payment
of dividends in stock
|
- | - | - | - | - | - | 113,497 | 1,135 | ||||||||||||||||||||||||
Stock
compensation
|
- | - | - | - | - | - | - | - | ||||||||||||||||||||||||
Payment
of fees with common stock
|
- | - | - | - | - | - | 303,870 | 3,039 | ||||||||||||||||||||||||
Payment
of fees for sale of stock
|
- | - | - | - | - | - | - | - | ||||||||||||||||||||||||
Treasury
shares received in connection with settlement with former
officer
|
- | - | - | - | - | - | (524,118 | ) | - | |||||||||||||||||||||||
Preferred
stock dividends
|
- | - | - | - | - | - | - | - | ||||||||||||||||||||||||
Net
loss
|
- | - | - | - | - | - | - | - | ||||||||||||||||||||||||
Balance
at December 31, 2008
|
7,062 | $ | 71 | 781,527 | $ | 7,814 | 1,688 | $ | 17 | 21,873,582 | $ | 223,978 | ||||||||||||||||||||
Sale
of common stock
|
- | - | - | - | - | - | - | - | ||||||||||||||||||||||||
Issuance
of subscribed stock
|
- | - | - | - | - | - | 8,857,666 | 88,576 | ||||||||||||||||||||||||
Conversion
of Series F preferred stock to common stock
|
- | - | (61,702 | ) | $ | (617 | ) | - | - | 302,618 | 3,026 | |||||||||||||||||||||
Stock
compensation
|
- | - | - | - | - | - | - | - | ||||||||||||||||||||||||
Payment
of fees with common stock
|
- | - | - | - | - | - | 802,447 | 8,024 | ||||||||||||||||||||||||
Conversion
of debenture to common stock
|
- | - | - | - | - | - | 188,284 | 1,883 | ||||||||||||||||||||||||
Note
interest forgiven by stockholders
|
- | - | - | - | - | - | - | - | ||||||||||||||||||||||||
Preferred
stock dividends
|
- | - | - | - | - | - | - | - | ||||||||||||||||||||||||
Net
loss
|
- | - | - | - | - | - | - | - | ||||||||||||||||||||||||
Balance
at December 31, 2009
|
7,062 | $ | 71 | 719,825 | $ | 7,197 | 1,688 | $ | 17 | 32,024,597 | $ | 325,487 |
Continued
on next page
See
accompanying notes to the consolidated financial statements.
F-7
JESUP
& LAMONT, INC. AND SUBSIDIARIES
CONSOLIDATED
STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY
YEARS
ENDED DECEMBER 31, 2009 AND 2008
Additional
|
Less:
|
|||||||||||||||||||
paid-in
|
Stock
|
Treasury
|
Accumulated
|
|||||||||||||||||
capital
|
subscriptions
|
Shares
|
deficit
|
Totals
|
||||||||||||||||
Balance
at December 31, 2007
|
$ | 26,324,579 | $ | 2,000,000 | - | $ | (16,861,995 | ) | $ | 11,581,919 | ||||||||||
Sale
of common stock
|
5,948,512 | 2,894,996 | - | 8,933,101 | ||||||||||||||||
Exercise
of options on common stock
|
(2,148 | ) | - | - | - | - | ||||||||||||||
Issuance
of subscribed stock
|
1,983,773 | (2,000,000 | ) | - | - | - | ||||||||||||||
Exercise
of warrants to common stock
|
(386 | ) | - | - | - | - | ||||||||||||||
Issuance
of Series G preferred stock
|
1,999,983 | - | - | - | 2,000,000 | |||||||||||||||
Conversion
of Series F preferred stock
|
- | - | - | - | ||||||||||||||||
Payment
of dividends in stock
|
51,830 | - | - | - | 52,965 | |||||||||||||||
Stock
compensation
|
933,651 | - | - | - | 933,651 | |||||||||||||||
Payment
of fees with common stock
|
176,961 | - | - | - | 180,000 | |||||||||||||||
Payment
of fees for sale of stock
|
(88,183 | ) | - | - | - | (88,183 | ) | |||||||||||||
Treasury
shares received in connection with settlement with former
officer
|
- | - | (733,765 | ) | (733,765 | ) | ||||||||||||||
Preferred
stock dividends
|
- | - | - | (272,593 | ) | (272,593 | ) | |||||||||||||
Net
loss
|
- | - | - | (15,773,491 | ) | (15,773,491 | ) | |||||||||||||
Balance
at December 31, 2008
|
$ | 37,328,572 | $ | 2,894,996 | $ | (733,765 | ) | $ | (32,908,079 | ) | $ | 6,813,604 | ||||||||
Sale
of common stock
|
- | 3,550,000 | - | - | 3,550,000 | |||||||||||||||
Issuance
of subscribed stock
|
4,721,420 | (4,809,996 | ) | - | - | - | ||||||||||||||
Conversion
of Series F preferred stock to common stock
|
(2,409 | ) | - | - | - | - | ||||||||||||||
Stock
compensation
|
177,418 | - | - | - | 177,418 | |||||||||||||||
Payment
of fees with common stock
|
321,976 | - | - | - | 330,000 | |||||||||||||||
Conversion
of debenture to common stock
|
448,117 | - | - | - | 450,000 | |||||||||||||||
Note
interest forgiven by stockholders
|
230,613 | - | - | - | 230,613 | |||||||||||||||
Preferred
stock dividends
|
- | - | - | (307,826 | ) | (307,826 | ) | |||||||||||||
Net
loss
|
- | - | - | (7,074,043 | ) | (7,074,043 | ) | |||||||||||||
Balance
at December 31, 2009
|
$ | 43,225,707 | $ | 1,635,000 | $ | (733,765 | ) | $ | (40,289,948 | ) | $ | 4,169,766 |
See
accompanying notes to the consolidated financial statements.
F-8
JESUP
& LAMONT, INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
FOR THE
YEARS ENDED DECEMBER 31, 2009 AND 2008
1. NATURE
OF BUSINESS
ORGANIZATION
AND OPERATIONS - The accompanying financial statements include the accounts of
Jesup & Lamont, Inc. ("JLI" or the "Company"), (Formerly Empire Financial
Holding Company) a Florida corporation, and its consolidated subsidiaries,
Empire Financial Group, Inc. ("EFG"), Empire Investment Advisors, Inc. ("EIA"),
and Jesup & Lamont Securities Corporation ("JLSC"). Effective
January 2, 2008, we changed the name of the Company to Jesup & Lamont,
Inc. All intercompany transactions and accounts have been eliminated
in consolidation.
JLSC is
an introducing securities broker-dealer which provide brokerage and advisory
services to retail and institutional customers and a trading platform, order
execution services and market making services for domestic and international
securities to its customers and network of independent registered
representatives. EIA and JLSC provide fee-based investment advisory
services to their customers. Until November 12, 2008, EFG was an
introducing securities broker-dealer which provided brokerage and advisory
services to retail and institutional customers and a trading platform, order
execution services and market making services for domestic and international
securities to its customers and network of independent registered
representatives. At that time EFG withdrew its membership in the
Financial Industry Regulatory Authority (“FINRA”), an independent regulator for
all securities firms conducting securities business in the United States, and
ceased conducting business.
The
Company's executive offices are located at 650 Fifth Ave., New York, NY with
independent registered representatives throughout the United
States. JLSC's main offices are in New York City.
2.
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES
OF CONSOLIDATION – The Consolidated Financial Statements include the accounts of
JLI and its operating and non-operating subsidiaries, all of which are wholly
owned. All intercompany balances and transactions have been
eliminated.
SECURITIES
TRANSACTIONS - Securities transactions and the related revenues and expenses are
recorded on a trade date basis.
TRADING
INCOME - Consists of net realized and net unrealized gains and losses on
securities traded for the Company's own account. Trading revenues are
generated from the difference between the price paid to buy securities and the
amount received from the sale of securities. Significant security
price fluctuations (volatility) in short periods of time, may result in trading
gains or losses. Gains or losses are recorded on a trade date
basis.
MARKET-MAKING
ACTIVITIES - Securities owned and securities sold, not yet purchased, which
primarily consist of listed, over-the-counter, American Depository Receipts and
foreign ordinary stocks, are carried at market value and are recorded on a trade
date basis. Market value is estimated daily using market quotations
available from major securities exchanges and dealers.
CLEARING
ARRANGEMENTS. - We do not carry accounts for customers or perform custodial
functions related to customers' securities. We introduce all of our
customer transactions, to our clearing brokers, who maintain our customers'
accounts and clear such transactions. Additionally, the clearing
brokers provide the clearing and depository operations for our proprietary
securities transactions. These activities may expose us to
off-balance-sheet risk in the event that customers do not fulfill their
obligations with the primary clearing brokers, as we have agreed to indemnify
our clearing brokers for any resulting losses. We continually assess
risk associated with each customer who is on margin credit and record an
estimated loss when we believe collection from the customer is
unlikely.
F-9
JESUP
& LAMONT, INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
FOR THE
YEARS ENDED DECEMBER 31, 2009 AND 2008
SHARE-BASED
COMPENSATION is accounted for under the fair value
method. Share-based payments to employees, including grants of stock
options, are charged to expense over the requisite service period based on the
grant date fair value of the awards. The Company uses the
Black-Scholes option valuation model to determine the fair value of the options
granted. The model includes subjective input assumptions that can materially
affect the fair value estimates. The model was developed for use in estimating
the fair value of traded options that have no vesting restrictions and that are
fully transferable. Options issued under the Company's option plan have
characteristics that differ from traded options. Principal
assumptions used in applying the Black-Scholes model are outlined below. In
selecting these assumptions, we considered the guidance for estimating expected
volatility as set forth in ASC 718 “Compensation – Stock Compensation” formerly
SFAS No. 123(R). Volatility is a measure of the amount by which the Company's
common stock price has fluctuated (historical volatility) or is expected to
fluctuate (expected volatility).
CASH AND
CASH EQUIVALENTS consist of highly liquid investments that are readily
convertible into cash. We consider securities with original
maturities of three months or less, when purchased, to be cash
equivalents. The carrying amount of these securities approximates
fair value because of the short-term maturity of these instruments.
MARKETABLE
SECURITIES AND SECURITIES SOLD, BUT NOT YET PURCHASED are carried at market
value, with related unrealized gains and losses reported in our results of
operations.
SECURITIES
THAT ARE NOT READILY MARKETABLE are carried at fair value, with related
unrealized gains and losses reported in our results of
operations. The determination of fair value is fundamental to our
financial condition and results of operations and requires management to make
complex judgments. Fair values are based on listed market prices,
where possible. If listed market prices are not available or if the liquidation
of our positions would reasonably be expected to impact market prices, fair
value is determined based on other relevant factors, including dealer price
quotations, and marketability. Warrants received from investment
banking engagements are generally valued using the Black-Scholes option
valuation model and management may reduce the value if there is a restriction as
to when the warrants may be exercised. The Black-Scholes method uses
assumptions such as volatility, interest rates, and dividend yields to determine
the value.
FAIR
VALUE MEASUREMENT – Financial and non-financial assets and liabilities are
measured at their fair value. Assets are valued at fair value
determined based on the assets highest and best use. Non-financial
assets are valued based on the price that would be received in a current
exchange transaction. The fair value of liabilities is generally
determined assuming the liability is transferred to a market
participant. When quoted market prices for liabilities are not
available, the Company measures such liabilities at their present
value. The Company categorizes its assets and liabilities that are
measured at fair value into a three-level fair value hierarchy as set forth
below.
Level 1 —
inputs to the valuation methodology are quoted prices (unadjusted) for
identical assets or liabilities in active markets.
Level 2 —
inputs to the valuation methodology include quoted prices for similar assets and
liabilities in active markets, and inputs that are observable for the asset or
liability, either directly or indirectly, for substantially the full term of the
financial instrument.
Level 3 —
inputs to the valuation methodology are unobservable and significant to the fair
value measurement. They are based on best information available in the absence
of level 1 and 2 inputs.
F-10
JESUP
& LAMONT, INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
FOR THE
YEARS ENDED DECEMBER 31, 2009 AND 2008
The
Company’s Level 1 Assets which include marketable securities owned and our
securities sold, but not yet purchased, are valued at fair value using quoted
market prices in active markets for identical securities. Gains or
losses are recorded on a trade date basis and are included in the Company’s
consolidated statements of operations in “Equity market making trading, revenue,
net”.
The
Company has no Level 2 Assets at December 31, 2009 or 2008. The
Company had no material changes in its valuation techniques for the years ended
December 31, 2009 and 2008.
The
Company’s Level 3 Assets which include securities not readily marketable are
valued at fair value using listed market prices, where possible. If
listed market prices are not available or if the liquidation of the Company’s
positions would reasonably be expected to impact market prices, then fair value
is determined based on other relevant factors, including dealer price quotations
and marketability. Warrants received from investment banking
engagements are generally valued using the Black-Scholes option valuation model
and the Company may reduce the value if there is a restriction as to when the
warrants may be exercised. The Black-Scholes method uses assumptions
such as volatility, interest rates, and dividend yields to determine
value. Realized gains or losses are recorded on a settlement date
basis and unrealized gains or losses are recorded on the valuation
date. Realized and unrealized gains or losses are included in our
consolidated statements of operations in “Net gain (loss) on securities received
for banking services”.
COMMISSIONS
AND OTHER RECEIVABLES FROM CLEARING ORGANIZATIONS - Receivables from broker
dealers and clearing organizations represent monies due to the Company from its
clearing agents for transactions processed.
FURNITURE
AND EQUIPMENT, NET - Property and equipment are recorded at cost. Depreciation
on property and equipment is provided utilizing the straight-line method over
the estimated useful lives of the related assets, which range from five to seven
years. Upon the sale or retirement of an asset, the related costs and
accumulated depreciation are removed from the accounts and any gain or loss is
recognized in our results of operations.
GOODWILL
AND OTHER INTANGIBLE ASSETS. Goodwill represents the excess of acquisition costs
over the fair value of net assets of businesses purchased. The
reported amounts of goodwill are reviewed for impairment on an annual basis and
more frequently when negative conditions such as significant current or
projected operating losses exist. The annual impairment test for
Goodwill and Other Intangible Assets is a two-step process and involves
comparing the estimated fair value of each reporting unit to the reporting
unit's carrying value, including goodwill. If the fair value of the
reporting unit exceeds its carrying amount, goodwill of the reporting unit is
not considered impaired, and the second step of the impairment test is
unnecessary. If the carrying amount of a reporting unit exceeds its
fair value, the second step of the goodwill impairment test would be performed
to measure the amount of impairment loss to be recorded, if any. Our annual
impairment tests resulted in no goodwill impairment
INCOME
TAXES - The Company accounts for income taxes using the liability method in
accordance with generally accepted accounting principles in the United States of
America (“GAAP”). Tax benefits or expenses are recognized based on
the temporary differences between the tax basis and financial basis of its
assets and liabilities. Therefore deferred income tax assets and
liabilities represent the tax effects differences between the financial and tax
basis of assets and liabilities that will result in taxable or deductible
amounts in the future, based on enacted tax laws and rates applicable to the
periods in which the differences are expected to affect taxable
income. A valuation allowance is recognized if, based on the weight
of available evidence, it is more likely than not that some portion or all of
the future tax benefits from deferred tax assets will not be
realized.
F-11
JESUP
& LAMONT, INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
FOR THE
YEARS ENDED DECEMBER 31, 2009 AND 2008
The
Company evaluates tax positions to determine whether the benefits of tax
positions will more likely than not be sustained upon audit based on the
technical merits of the tax position. For such tax positions, the Company
recognizes the largest amount of the benefit that will likely be realized upon
ultimate settlement. The Company does not recognize any portion of
the benefit in the financial statements related to tax positions that are not
likely of being sustained upon audit..
USE OF
ESTIMATES - The preparation of financial statements in conformity with GAAP
requires management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of contingent assets and
liabilities at the date of the financial statements and the reported amounts of
revenues and expenses during the reporting period. Actual results
could differ from those estimates.
EARNINGS
(LOSS) PER SHARE - Basic earnings (loss) per share is computed by dividing net
income (loss) available to common stockholders by the weighted-average number of
common shares outstanding for the period. Diluted earnings (loss) per
share considers the potential dilution that could occur if securities or other
contracts to issue common stock were exercised or could otherwise cause the
issuance of common stock. Diluted earnings (loss) per share reflects
the potential dilution that could occur if securities or other contracts to
issue common stock, such as options, convertible notes and convertible preferred
stock, were exercised or converted into common stock or could otherwise cause
the issuance of common stock that then shared in earnings
(loss). Such potential additional common shares are included in the
computation of diluted earnings per share. Diluted loss per share is
not computed because any potential additional common shares would reduce the
reported loss per share and therefore have an antidilutive effect.
RECLASSIFICATIONS
- Certain prior year items have been reclassified to conform to the current
period’s presentation.
3.
SECURITIES BORROWED UNDER A SECURED DEMAND NOTE AND SECURED DEMAND NOTE
PAYABLE
In August
2009, the Company entered into a $225,000 secured demand note with an employee
in which the employee has pledged securities to the Company which fully
collateralize the secured demand note payable. As of December 31,
2009 such securities had an approximate value of $316,000. The
secured demand note matures on October 2, 2012 and accrues interest at 5% per
annum to be paid quarterly.
4.
MARKETABLE SECURITIES OWNED AND SECURITIES SOLD, BUT NOT YET
PURCHASED
Marketable
securities owned and securities sold, but not yet purchased, are carried at fair
value, which is defined as the price that would be received to sell an asset or
paid to transfer a liability in an orderly transaction between market
participants at the measurement date. A fair value measurement
assumes that the transaction to sell the asset or transfer the liability occurs
in the principal market for the asset or liability or, in the absence of a
principal market, the most advantageous market. Valuation techniques
that are consistent with the market, income or cost approach are used to measure
fair value in accordance with GAAP. GAAP has established a framework
for measuring fair value that is based on a hierarchy which prioritizes the
inputs to valuation techniques according to the degree of objectivity
necessary. The fair value hierarchy of the inputs to valuation
techniques used to measure fair value is divided into three broad levels of
objectivity:
|
·
|
Level
1 inputs are quoted prices (unadjusted) in active markets for identical
assets or liabilities the Company has the ability to
access.
|
|
·
|
Level
2 inputs are inputs (other than quoted prices included within level 1)
that are observable for the asset or liability, either directly or
indirectly.
|
F-12
JESUP
& LAMONT, INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
FOR THE
YEARS ENDED DECEMBER 31, 2009 AND 2008
|
·
|
Level
3 are unobservable inputs for the asset or liability and rely on
management’s own assumptions about the assumptions that market
participants would use in pricing the asset or liability. (The
unobservable inputs should be developed based on the best information
available in the circumstances and may include the Company’s own
data.)
|
The
following tables present the Company’s fair value hierarchy for those assets
measured at fair value on a recurring basis as of December 31, 2009 and
2008.
Fair
Value Measurements
As of
December 31, 2009
Level 1
|
Level 2
|
Level 3
|
Total
|
|||||||||||||
Assets
|
||||||||||||||||
Marketable
securities owned
|
$ | 23,288 | $ | - | $ | - | $ | 23,288 | ||||||||
Securities
not readily marketable
|
- | - | 946,080 | 946,080 | ||||||||||||
Totals
|
$ | 23,288 | $ | - | $ | 946,080 | $ | 969,368 | ||||||||
Liabilities
|
||||||||||||||||
Securities
sold, but not yet purchased
|
$ | 170,892 | $ | - | $ | - | $ | 170,892 |
Fair
Value Measurements
As of
December 31, 2008
Level 1
|
Level 2
|
Level 3
|
Total
|
|||||||||||||
Assets
|
||||||||||||||||
Marketable
securities owned
|
$ | 37,027 | $ | - | $ | - | $ | 37,027 | ||||||||
Securities
not readily marketable
|
- | - | 531,265 | 531,265 | ||||||||||||
Totals
|
$ | 37,027 | $ | - | $ | 531,265 | $ | 568,292 | ||||||||
Liabilities
|
||||||||||||||||
Securities
sold, but not yet purchased
|
$ | 170,603 | $ | - | $ | - | $ | 170,603 |
F-13
JESUP
& LAMONT, INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
FOR THE
YEARS ENDED DECEMBER 31, 2009 AND 2008
The
following is a reconciliation of the beginning and ending balances for assets
and liabilities measured at fair value on a recurring basis using significant
unobservable (level 3) during the year ended December 31, 2009 and
2008.
Level 3
Financial Assets and Liabilities
Principle
Transaction
Year Ended
December 31,
|
Beginning
Balance
|
Unrealized Gains and
(Losses) Related to
Assets Held at Year
End
|
Purchases,
Issuances, and
Settlements
|
Ending Balance
|
||||||||||||
2009
|
||||||||||||||||
Assets
|
||||||||||||||||
Marketable
securities owned
|
$ | 531,265 | $ | (152,906 | ) | $ | 567,721 | $ | 946,080 | |||||||
2008
|
||||||||||||||||
Assets
|
||||||||||||||||
Marketable
securities owned
|
$ | 1,229,659 | $ | (698,394 | ) | $ | - | $ | 531,265 |
5. SHARE
BASED COMPENSATION
The
Black-Scholes option valuation model is used to estimate the fair value of the
options granted. The model includes subjective input assumptions that
can materially affect the fair value estimates. The model was
developed for use in estimating the fair value of traded options that have no
vesting restrictions and that are fully transferable. Options issued
under the Company's option plan have characteristics that differ from traded
options. There were no stock options granted for the year ended
December 31, 2009. The principal assumptions used in applying the
Black-Scholes model for options granted during the twelve months ending December
31, 2008 are outlined below.
The
assumptions used were as follows:
2009
|
2008
|
|||
Expected
dividend yield:
|
None
|
None
|
||
Risk
free interest rate:
|
3.5%
|
3.5%
|
||
Expected
life:
|
4 –
8 years
|
4 –
8 years
|
||
Expected
volatility:
|
58%
- 112%
|
58
- 119%
|
Volatility
is a measure of the amount by which the Company's common stock price has
fluctuated (historical volatility) or is expected to fluctuate (expected
volatility).
During
the year ended December 31, 2008, the Company granted 100,000 shares of common
stock and options to acquire 625,000 shares of common stock, having exercise
prices ranging from $1.03 to $1.50 per share, which had an aggregate fair value
of $428,520. The Company recorded compensation charges of $177,417
and $933,649 for the years ended December 31, 2009 and 2008, respectively,
relating to the amortization of the fair value associated with the vesting of
options and stock granted. The Company will amortize the remaining
values over the remaining vesting periods of the options and
stock.
F-14
JESUP
& LAMONT, INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
FOR THE
YEARS ENDED DECEMBER 31, 2009 AND 2008
6.
PROPERTY AND EQUIPMENT
At
December 31, 2009 and 2008, property and equipment consists of the
following:
Estimated
|
||||||||||
2009
|
2008
|
Useful Life
|
||||||||
Equipment
|
$ | 325,081 | $ | 290,418 |
5-7
years
|
|||||
Computers
|
1,409,581 | 1,198,215 |
5
years
|
|||||||
Furniture
and fixtures
|
519,929 | 436,620 |
7
years
|
|||||||
Leasehold
improvements
|
373,805 | 322,214 |
Life
of lease
|
|||||||
2,628,396 | 2,247,467 | |||||||||
Less
accumulated depreciation
|
(1,958,422 | ) | (1,719,775 | ) | ||||||
$ | 669,974 | $ | 527,692 |
Depreciation
expense charged to operations was $293,475 in 2009 and $396,992 in
2008.
7. NOTES
RECEIVABLE
The
Company has made advances to certain registered representatives in various
offices. The resulting notes receivable balance at December 31, 2009
and 2008 was $1,370,984 and $1,310,889, respectively. Some of these
notes receivable are forgivable based on the employees attaining certain defined
revenue production levels and/or being employed by the Company on a future
date. Of such amounts currently on the books, $765,583 is due from
representatives no longer employed by the Company, of which $400,000 is due by
one employee with a repayment date of January 12, 2019. The Company
has provided an allowance of $561,000 on notes receivable for the year ended
December 31, 2009. No allowance was provided in 2008.
8.
INTANGIBLE ASSETS
At
December 31, 2009 and 2008, intangible assets consisted of the
following:
December 31,
|
||||||||
2009
|
2008
|
|||||||
Goodwill
(indefinite useful life)
|
$ | 13,272,165 | $ | 13,272,165 | ||||
Trademarks
(indefinite useful life)
|
$ | 3,282,077 | $ | 3,282,077 | ||||
Customer
List (10 year life)
|
$ | 1,157,266 | $ | 1,157,266 | ||||
Less:
accumulated amortization
|
(366,468 | ) | (295,742 | ) | ||||
Net
Customer list
|
$ | 790,798 | $ | 861,524 |
Amortization
expense for intangible assets totaled $70,726 and $160,727 for the years ended
December 31, 2009 and 2008, respectively.
F-15
JESUP
& LAMONT, INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
FOR THE
YEARS ENDED DECEMBER 31, 2009 AND 2008
The
estimated annual aggregate amortization expense related to amortizable
intangible assets for the five succeeding fiscal years is as
follows:
Year ending
December 31,
|
Amortization
|
|||
2010
|
$ | 115,727 | ||
2011
|
115,727 | |||
2012
|
115,727 | |||
2013
|
115,727 | |||
2014
|
115,727 |
We
performed an impairment test of our intangible assets as of December 31, 2009,
and determined we had no impairment of intangible assets at that
date. We have determined we have one reporting unit for the test of
impairment. Summary information from our impairment tests is set
forth in the following table.
December 31, 2009
|
||||||||||||||||
Reporting
Unit
|
Carrying
Value
|
Estimated
Fair Value
|
Excess
Estimated Fair
Value Over
Carrying Value
|
Percent
Excess
Value
|
||||||||||||
JLSC
|
$ | 17,711,508 | $ | 25,911,000 | $ | 8,199,492 | 45 | % |
The
principal assumptions used in forecasting future cash flows are outlined
below:
2010
|
2011
|
2012
|
2013
|
2014
|
2015
|
|||||||||||||||||||
Nominal
revenue growth rate*
|
30.0 | % | 7.9 | % | 8.0 | % | 8.5 | % | 9.2 | % | 7.5 | % | ||||||||||||
Direct
costs - variable
|
61.0 | % | 61.0 | % | 61.0 | % | 61.0 | % | 61.0 | % | 61.0 | % | ||||||||||||
Direct
costs – fixed ($000s)
|
$ | 10,617 | $ | 10,872 | $ | 11,133 | $ | 11,400 | $ | 11,674 | $ | 11,964 | ||||||||||||
Operating
expenses - variable
|
5.0 | % | 5.0 | % | 5.0 | % | 5.0 | % | 5.0 | % | 5.0 | % | ||||||||||||
Operating
expenses ($000’s)
|
$ | 5,160 | $ | 5,283 | $ | 5,410 | $ | 5,540 | $ | 5,673 | $ | 5,809 |
2016
|
2017
|
2018
|
2019
|
Residual
|
||||||||||||||||
Nominal
revenue growth rate
|
6.2 | % | 5.3 | % | 4.5 | % | 4.0 | % | 3.4 | % | ||||||||||
Direct
costs - variable
|
61.0 | % | 61.0 | % | 61.0 | % | 61.0 | % | 61.0 | % | ||||||||||
Direct
costs – fixed ($000s)
|
$ | 12,241 | $ | 12,535 | $ | 12,836 | $ | 13,144 | $ | 13,459 | ||||||||||
Operating
expenses - variable
|
5.0 | % | 5.0 | % | 5.0 | % | 5.0 | % | 5.0 | % | ||||||||||
Operating
expenses ($000’s)
|
$ | 5,948 | $ | 6,091 | $ | 6,238 | $ | 6,387 | $ | 6,541 |
* the
Nominal revenue growth rate includes an inflation factor of 2.4% each year and
for the residual period.
Bases
used to develop forecasts
|
|
Years
that cash flow is projected
|
10
|
Derivation
of residual value at end of projection period
|
Gordon
growth model applied to the last year of projection
period
|
Weighted
average cost of capital
|
14.9%
|
As part
of our impairment tests, we performed sensitivity analyses with our principal
assumptions. The impact on our estimated fair values of a 1% change in our
principal assumptions approximated the following:
F-16
JESUP
& LAMONT, INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
FOR THE
YEARS ENDED DECEMBER 31, 2009 AND 2008
Principal Assumption
|
Range of Impact
|
|||||
Nominal
revenue growth rates
|
$ | 850,000 - |
$
|
950,000 | ||
Direct
Costs
|
$ | 3,550,000 - |
$
|
3,800,000 | ||
Operating
Expenses
|
$ | 3,550,000 - |
$
|
3,800,000 | ||
Derivation
of Residual Value at End of Period
|
$ | 1,300,000 - |
$
|
1,500,000 | ||
Weighted
average cost of capital
|
$ | 3,500,000 - |
$
|
3,700,000
|
9. NOTES
PAYABLE
Notes
payable at December 31, 2009 and 2008, consisted of the following:
2009
|
2008
|
|||||||
·
Convertible notes payable to investors, interest payable quarterly
at an annual rate of 6.5%. The notes mature March 28, 2012 and
are convertible into common stock at $2.39 per share.
|
$ | 5,757,158 | $ | 6,207,158 | ||||
·
Unsecured note payable to a bank, interest payable monthly at an
annual rate of 3.8%, with a maturity of May 28, 2010.
|
2,100,000 | - | ||||||
·
Unsecured note payable to Legent Clearing LLC, interest at a base
annual rate of 4.25% plus prime, with a maturity of November 3,
2018. Principal repaid at $55,000 per month (increased to
$75,000 per month in January 2010)
|
1,697,997 | 2,000,000 | ||||||
·
Convertible debenture payable to Legent Clearing, LLC at an annual
rate of 9%. The note matures February 26, 2014, and is
convertible into common stock at $0.50 per share.
|
2,000,000 | - | ||||||
·
Unsecured notes payable to the stockholders of Jesup & Lamont
Holding Corporation (former parent of JLSC). The notes accrues
interest at an annual rate of 4.0%. Interest is payable annually, and the
principal is payable at maturity on October 1, 2011.
|
1,327,675 | 1,638,895 | ||||||
· Note
payable to bank at an annual rate of LIBOR plus 10% (currently 10.29%) due
on demand with monthly principal payments of $30,000. Converted
from a line of credit as explained in Note 9 below.
|
779,449 | 1,149,450 | ||||||
·
Unsecured note payable with no interest currently charged to a
shareholder was due December 3, 2009, and which has been amended
subsequent to year end to become due in April 2011
|
900,000 | - | ||||||
· Short
term note payable to a shareholder, with interest at an annual rate of 8%,
originally due on April 2, 2009 but extended to December 31, 2009; has
since become payable on demand
|
850,000 | 1,000,000 | ||||||
·
Unsecured note payable, interest is payable quarterly at an annual
rate of 10%, with a maturity of June 7, 2010.
|
265,000 | - | ||||||
·
Unsecured note payable to a shareholder, principal and interest at
an annual rate of 15%, due at maturity date of January 16, 2009; has since
become payable on demand.
|
400,000 | 400,000 |
F-17
JESUP
& LAMONT, INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
FOR THE
YEARS ENDED DECEMBER 31, 2009 AND 2008
· Subordinated
note payable to EFH Partners, a shareholder, with interest at an annual
rate of 20%, originally payable at maturity on February 17,
2007. The note was extended to April 1, 2009 at a 4% annual
interest rate and then modified to become due on demand and is
subordinated to notes payable to banks.
|
222,500 | 222,500 | ||||||
·
Unsecured note payable which accrues interest at an annual rate of
5%. Principal and interest payable on demand.
|
66,534 | 66,534 | ||||||
· Unsecured
operating notes payable to various vendors at prevailing market
rates. Due dates range from 2010 to
2013
|
81,017 | 45,863 | ||||||
Total
principal payable
|
16,447,330 | 12,730,400 | ||||||
Less:
unamortized discount on note to stockholders of Jesup & Lamont Holding
Corporation
|
(115,239 | ) | (178,083 | ) | ||||
Total
notes payable net of discount
|
$ | 16,332,091 | $ | 12,552,317 |
The
annual maturities of principal on the notes payable are as follows:
Year ending December 31
|
Principal
|
Interest
|
||||||
2010
|
$ | 3,970,597 | $ | 965,506 | ||||
2011
|
3,306,265 | 806,340 | ||||||
2012
|
7,157,407 | 702,972 | ||||||
2013
|
13,061 | 366,519 | ||||||
Thereafter
|
2,000,000 | 693,292 | ||||||
Total
|
$ | 16,447,330 | $ | 3,534,629 |
Interest
on these notes totaled $929,816 and $851,362 for the years ended December 31,
2009 and 2008, respectively.
10. NOTE
PAYABLE TO BANK
On
January 31, 2007, the Company obtained a $2 million credit line from Fifth Third
Bank. As part of that credit line agreement, we pledged 100% of EFG's
and JLSC's stock as collateral. At December 31, 2007 the Company had
drawn $1,999,450 of the line. The line expired on February 1, 2008
and was converted to a note payable due January 31, 2009 and then extended to
April 2, 2009. The note was further extended and converted to a
demand note on July 2, 2009. Principal is payable at $30,000 per
month. All prior requirements of the original note still exist and
100% of JLSC’s stock is pledged as collateral. Should this note be
called for payment and the Company is not able to obtain an extension or
alternative financing, it could impair the Company’s liquidity and force it to
reduce or curtail operations. See Note 8.
F-18
JESUP
& LAMONT, INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
FOR THE
YEARS ENDED DECEMBER 31, 2009 AND 2008
11.
ACCOUNTS PAYABLE, ACCRUED EXPENSES AND OTHER LIABILITIES
At
December 31, 2009 and 2008, accounts payable, accrued expenses and other
liabilities consisted of the following:
Year
ended December 31,
|
||||||||
2009
|
2008
|
|||||||
Trade
accounts payable
|
$ | 1,311,874 | $ | 1,101,366 | ||||
Accrued
payroll
|
2,088,489 | 1,282,490 | ||||||
Payroll
taxes payable
|
2,287,834 | 112,298 | ||||||
EKN
settlement accrual
|
534,517 | 872,000 | ||||||
Accrued
legal
|
233,124 | 564,135 | ||||||
Accrued
interest on notes payable
|
647,728 | 356,899 | ||||||
Other
accrued expenses and liabilities
|
1,482,100 | 951,179 | ||||||
TOTAL
|
$ | 8,585,666 | $ | 5,240,367 |
12. DUE
TO CLEARING ORGANIZATIONS
At
December 31, 2009 the balance due to clearing organizations includes $1,276,205
owed to EFG's former clearing firm under a promissory note with the clearing
broker. A total of $500,000 of this amount represents a fee charged
by the clearing firm to enter into the promissory note
agreement. This promissory note memorialized our previous agreement
with the clearing broker which precludes them from collecting this note from
EFG. The note bears interest at the Broker's Call Rate plus 2.45%.
The note may be paid at anytime but has no defined maturity. The note
is personally guaranteed the Company’s Chairman and President and
CEO. The note is also collateralized by warrants held by the Company
and by all of the share ownership currently held by EFH Partners,
Inc.
13.
EQUITY MARKET MAKING TRADING REVENUES, NET
Trading
revenues, net includes equity market making revenues which consist of net
realized and net unrealized gains and losses on securities traded for the
Company's own account. Trading revenues, net are generated from the
difference between the price paid to buy securities and the amount received from
the sale of securities. Volatility of stock prices, which can result
in significant price fluctuations in short periods of time, may result in
trading gains or losses. Gains or losses are recorded on a trade date
basis. Trading revenues, net consisted of the following.
Year
ended December 31,
|
||||||||
2009
|
2008
|
|||||||
Net
realized gains and losses
|
$ | 2,245,559 | $ | 6,121,720 | ||||
Unrealized
gain/(loss)
|
(14,348 | ) | 247,898 | |||||
Trading
income, net
|
$ | 2,231,211 | $ | 6,369,618 |
14.
INVESTMENT BANKING INCOME
Investment
banking income consists of cash fees and warrants or other securities received
as payment for our investment banking services. The Black-Scholes
valuation model is used to estimate the fair value of the warrants
received. The assumptions for the Black-Scholes valuations are as
follows.
F-19
JESUP
& LAMONT, INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
FOR THE
YEARS ENDED DECEMBER 31, 2009 AND 2008
2009
|
2008
|
|||
Risk
free interest rate:
|
0.2
to 2.7%
|
0.3
to 1.6%
|
||
Volatility:
|
66%
-785%
|
5%
-735%
|
||
Dividend
rate:
|
None
|
None
|
||
Expected
life:
|
1 –
5 years
|
1 –
5 years
|
The
volatility of stock prices underlying these warrants can result in significant
price fluctuations in short periods of time. These fluctuations in
the value of the warrants results in warrant gains or
losses. Investment banking revenues consisted of the
following:
Year ended December 31,
|
||||||||
2009
|
2008
|
|||||||
Investment
banking fees
|
$ | 2,297,885 | $ | 2,778,153 | ||||
Gains/(Loss)
from warrants
|
2,022,430 | (419,725 | ) | |||||
$ | 4,320,315 | $ | 2,358,428 | |||||
Gains
and losses:
|
||||||||
Realized
gains
|
$ | 1,552,857 | $ | 281,516 | ||||
Unrealized
Gain/(losses)
|
469,573 | (701,241 | ) | |||||
$ | 2,022,430 | $ | (419,725 | ) |
15. GAIN
ON SETTLEMENTS
In May
2008, the Company entered into settlement agreements with two former
officers. The agreements included offsetting receivables owed to us
totaling $675,297 against the note payable by us to the former officers totaling
$861,105. As part of his settlement agreement one of the former
officers also received the rights to certain investment banking engagements and
transferred 524,118 shares of our common stock to the Company. The
Company recorded the stock received as $733,765 of treasury stock valued at the
closing market price ($1.40 per share) on the date it entered into the
settlement agreement. The gain recognized on these transactions
totaled $806,744 after deduction of $112,829 of accelerated discount
amortization related to the canceled notes payable.
F-20
JESUP
& LAMONT, INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
FOR THE
YEARS ENDED DECEMBER 31, 2009 AND 2008
16.
EARNINGS (LOSS) PER SHARE
The
calculation of net income (loss) per share is as follows:
Year
Ended December 31,
|
||||||||
2009
|
2008
|
|||||||
Numerator
for loss per share:
|
||||||||
Net
loss
|
$ | (7,074,043 | ) | $ | (15,773,491 | ) | ||
Preferred
stock dividends
|
(307,826 | ) | (272,593 | ) | ||||
Loss
attributable to common stockholders
|
$ | (7,381,869 | ) | $ | (16,046,084 | ) | ||
Denominator
for loss per share:
|
||||||||
Basic
and diluted weighted-average shares:
|
30,365,265 | 19,506,828 | ||||||
Basic
and diluted loss per share:
|
||||||||
Basic
loss per share
|
$ | (0.24 | ) | $ | (0.82 | ) | ||
Diluted
loss per share
|
$ | (0.24 | ) | $ | (0.82 | ) |
The
Company’s loss attributable to common stockholders, along with the dilutive
effect of potentially issuable common stock due to outstanding options,
warrants, and convertible securities causes the normal computation of diluted
loss per share to be smaller than the basic loss per share; thereby yielding a
result that is counterintuitive. Consequently, the diluted loss per
share amount presented does not differ from basic loss per share due to this
“anti-dilutive” effect.
At
December 31, 2009 and 2008, the Company had potentially dilutive common shares
attributable to the following:
Year
Ended December 31,
|
||||||||
2009
|
2008
|
|||||||
Warrants
|
9,231,266 | 7,024,242 | ||||||
Stock
options
|
1,989,522 | 3,611,366 | ||||||
Convertible
preferred stock Series C,F and G
|
3,554,285 | 3,615,987 | ||||||
Convertible
notes
|
6,408,840 | 2,597,124 | ||||||
Warrants
subscribed
|
648,821 | 293,812 | ||||||
21,832,734 | 17,142,531 |
17.
EQUITY
For the
year ended December 31, 2009 and 2008, the Company recorded the following stock,
option and warrant transactions:
During
2009, JLI entered into binding Subscription Agreements to sell a total of
7,305,548 shares of common stock, par value $0.01 per share along with five-year
warrants to purchase a total of 1,715,099 shares of common stock for an
aggregate subscription amount of $3,550,000. The shares of common stock were
priced during the year at prices ranging from $0.33 to $0.58 per share, which
were based upon the closing price on the dates of the subscription agreements.
The warrants are exercisable after six months from the date of issue at prices
ranging from $0.38 to $0.63 per share, subject to limited anti-dilution
protection for capital changes and similar events. The subscribers are to
receive one warrant, priced at $0.125 per warrant, for each of the four shares
of Common Stock subscribed.
F-21
JESUP
& LAMONT, INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
FOR THE
YEARS ENDED DECEMBER 31, 2009 AND 2008
In
November and December 2009 the Company issued 8,652,114 shares of stock
subscribed in 2008 and 2009, along with warrants to purchase an additional
2,257,024 shares.
During
2009 the Company issued a total of 802,447 shares of common stock in exchange
for legal services valued at $330,000.
From
August through October 2008 the Company received stock subscriptions for common
stock totaling $732,499 for a stock offering to be completed during the second
quarter of 2009.
As of
August 7, 2008, the Company entered into binding Subscription Agreements to sell
205,554 shares of common stock, par value $0.01 per share along with five-year
warrants to purchase a total of 51,388 shares of common stock for an aggregate
subscription amount of $175,000. Each share of common stock was priced at
$0.8201 per share, the closing price on May 12, 2008. The warrants
are exercisable after six months from the date of issue at a price of $0.9841
per share, subject to limited anti-dilution protection for capital changes and
similar events. The subscribers are to receive one warrant, priced at
$0.125 per warrant, for each four shares of Common Stock
subscribed. The Subscription Agreements were entered into pursuant to
a private placement to accredited investors.
In July
2008, the Company entered into binding Subscription Agreements to sell 1,096,695
shares of common stock, par value $0.01 per share at $1.06 per share, the
closing price on July 11, 2008 for an aggregate subscription amount of
$1,162,497.
On June
12, 2008, the Company entered into binding Subscription Agreements to sell
969,696 shares of common stock, par value $0.01 per share, and five-year
warrants to purchase a total of 242,424 shares of common stock for an aggregate
subscription amount of $1,000,000. Each share of common stock was
priced at $1.00 per share, the closing price on June 11, 2008. The
warrants are exercisable after six months from the date of issue at a price of
$1.20 per share, subject to limited anti-dilution protection for capital changes
and similar events. The subscribers are to receive one warrant,
priced at $0.125 per warrant, for each four shares of Common Stock
subscribed. The Subscription Agreements were entered into pursuant to
a private placement to accredited investors. Pursuant to the terms of
the agreements, the investors have demand rights to register the purchased
shares for resale. None of the shares of common stock will be issued
until the American Stock Exchange has approved their listing.
On May
13, 2008, the Company entered into binding Subscription Agreements to sell
1,219,363 shares of common stock, par value $0.01 per share along with five-year
warrants to purchase a total of 304,841 shares of common stock for an aggregate
subscription amount of $1,038,105. Each share of common stock was
priced at $0.8201 per share, the closing price on May 12, 2008. The
warrants are exercisable after six months from the date of issue at a price of
$0.9841 per share, subject to limited antidilution protection for capital
changes and similar events. The investors received one warrant,
priced at $0.125 per warrant, for each four shares of Common Stock
received. The agreements were entered into pursuant to a private
placement to accredited investors. Pursuant to the terms of the
agreements, the investors have demand rights to register the purchased shares
for resale.
On April
9, 2008, the Company entered into binding Subscription Agreements to sell
7,739,938 shares of common stock, par value $0.01 per share, at a price of
$0.646 per share, the closing price on April 9, 2008, for an aggregate amount of
$5,000,000. The agreements were entered into pursuant to a private
placement to accredited investors. Pursuant to the terms of the
agreements, the investors have demand rights to register the purchased shares
for resale.
F-22
JESUP
& LAMONT, INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
FOR THE
YEARS ENDED DECEMBER 31, 2009 AND 2008
As of
March 3, 2008, the Company entered into agreements to sell $1,997,495 of units
in a private placement to accredited investors. Each unit consisted
of one share of Series G 10% Subordinated Cumulative Convertible Preferred
Stock, par value $0.01 per share, and five-year warrants to purchase 1,470
shares of the Company's Common Stock, par value $0.01 per share. Each
share of Series G Preferred Stock is initially convertible into 1,470 shares of
Common Stock, subject to limited antidilution protection for capital changes and
similar events. The warrants became exercisable after six months from
the date of issue at a price of $0.816 per share, subject to limited
antidilution protection for capital changes and similar events. The
initial conversion price of the Series G Preferred Stock is $0.68 per share, the
closing price of the Company's common stock on March 3, 2008. The
agreement also includes our agreement to register all shares of the common stock
underlying the units. Pursuant to the terms of the transaction, the
Company may pay partial liquidated damages in the amount of 1% per month of the
purchase price, subject to a cap of an overall aggregate payment of 6% of the
purchase price, upon any failure to (a) file a registration statement with the
Securities and Exchange Commission within 30 days after the closing date of the
transaction, or 30 days after filing its annual report on Form 10-K, whichever
is later, or (b) register all shares of common stock underlying the units within
120 days of the closing date.
The above
sales were made for investment by accredited investors and will be issued
without registration under the Securities Act of 1933, as amended, pursuant to
the exemptions provided under sections 4(6) and 4(2) thereof, and pursuant to
the exemption provided by Regulation D. All the securities are restricted
securities and will bear a restrictive legend and be subject to stop transfer
restrictions.
In May
2008, the Company received 524,118 shares of its common stock which we recorded
as $733,765 of treasury stock valued at $1.40 per share.
During
2008 we issued a total of 303,870 shares of our common stock in exchange for
legal services valued at $180,000.
During
2008 we issued a total of 214,844 shares of our common stock to employees under
our stock option plan.
A
preferred stockholder and ex-officer of the Company was issued 113,497 shares of
common stock at $0.99 per share. The stock was issued as payment for dividends
owed from 2007.
During
2008, 38,568 shares of our common stock were issued for warrants
exercised.
During
2008, we incurred expenses related to our stock offerings totaling
$88,183.
F-23
JESUP
& LAMONT, INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
FOR THE
YEARS ENDED DECEMBER 31, 2009 AND 2008
The table
below outlines the conversion price of all outstanding convertible issues, both
debt and equity:
Convertible Issues
|
Outstanding
Shares
|
Preferred
Dividend
Rate
|
Convertible
to Common
Shares
|
Conversion
Price
|
||||||||||||
Series
C participating, cumulative convertible preferred stock, 8000 shares
authorized, liquidation preference at the $100 per share stated
value.
|
7,062 | 7.5 | % | 353,100 | $ | 2.00 | ||||||||||
Series
F participating, cumulative convertible preferred stock, 877,000 shares
authorized, liquidation preference at the $3.25 per share stated
value.
|
719,825 | 4.0 | % | 719,825 | $ | 3.25 | ||||||||||
Series
G participating, cumulative convertible preferred stock, 4000 shares
authorized, liquidation preference at the $1000 per share stated
value.
|
1,688 | 10.0 | % | 2,481,360 | $ | 0.68 | ||||||||||
Totals
|
728,575 | 3,554,285 |
18. STOCK
OPTIONS
The
Company currently has two stock option plans in effect, the Amended and Restated
2000 Incentive Compensation Plan and the 2007 Incentive Compensation Plan
(collectively the "Plans"). The Plans are designed to serve as
incentives for retaining directors, key employees, and other outside advisors or
consultants. Stock options, stock appreciation rights and restricted
stock options may be granted to certain persons in proportion to their
contributions to the overall success of the Company as determined by the Board
of Directors.
F-24
JESUP
& LAMONT, INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
FOR THE
YEARS ENDED DECEMBER 31, 2009 AND 2008
The
following table summarizes stock option activity for the years ended December
31, 2009 and 2008:
2009
|
2008
|
|||||||||||||||
Shares
|
Weighted
Average
Exercise
Price
|
Shares
|
Weighted
Average
Exercise
Price
|
|||||||||||||
Outstanding
at beginning of year
|
2,962,522 | $ | 2.20 | 4,360,822 | $ | 2.83 | ||||||||||
Granted
|
- | - | 625,000 | 1.28 | ||||||||||||
Exercised
|
- | - | - | - | ||||||||||||
Cancelled
|
(973,000 | ) | 2.48 | (2,023,300 | ) | 2.94 | ||||||||||
Outstanding
at end of year
|
1,989,522 | 2.17 | 2,962,522 | 2.20 | ||||||||||||
Exercisable
at end of year
|
1,897,855 | 2.17 | 2,345,402 | 2.23 | ||||||||||||
Weighted
average fair value of options granted during the year
|
$ | 0.00 | $ | 0.84 |
Of the
stock options outstanding at December 31, 2009, 730,000 vested immediately upon
grant, 566,522 vest over a two year period from the date of grant, and 693,000
vest over a three year period from the date of grant. Of the stock
options outstanding at December 31, 2008, 865,000 vested immediately upon grant,
1,065,000 vest over a two year period from the date of grant, 1,029,000 vest
over a three year period from the date of grant and 3,000 vest over a five year
period from the date of grant. At December 31, 2009 there were 957,500 stock
options that were offered to employees but not approved and granted by the
Company’s Board of Directors.
The
Company did not grant any options during 2009. The Company granted
options to purchase 625,000 shares of the Company's common stock to officers and
key employees during 2008, at a weighted average exercise price of
$1.88. Of the 625,000 options granted in 2008, 325,000 options were
granted to employees, 100,000 were granted to an officer who was a member of the
Board of Directors, and 200,000 were granted to outside members of the Board of
Directors. A total of 425,000 options vest immediately and 200,000
options vest annually over a two year period.
F-25
JESUP
& LAMONT, INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
FOR THE
YEARS ENDED DECEMBER 31, 2009 AND 2008
The
following table summarizes stock options at December 31, 2009:
Outstanding Stock Options
|
Exercisable Stock Options
|
||||||||||||||||||||||||
Exercise
Price
Range
|
Shares
|
Weighted
Average
Remaining
Contractual
Life
|
Weighted
Average
Exercise
Price
|
Shares
|
Weighted
Average
Remaining
Contractual
Life |
Weighted
Average
Exercise
Price
|
|||||||||||||||||||
$ |
1.01
– 2.00
|
1,380,000 | 7.46 | $ | 1.66 | 1,321,667 | 7.57 | $ | 1.66 | ||||||||||||||||
2.01
– 3.00
|
315,000 | 8.41 | 2.40 | 281,667 | 8.82 | 2.36 | |||||||||||||||||||
3.01
– 4.00
|
8,522 | 6.62 | 3.38 | 8,522 | 6.62 | 3.38 | |||||||||||||||||||
4.01
– 5.00
|
286,000 | 5.66 | 4.34 | 286,000 | 5.66 | 4.34 |
19.
EMPLOYEE BENEFIT PLANS
The
Company has a savings plan (the "Plan"), provided to our employees, that
qualifies as a deferred salary arrangement under Section 401(d) of the Internal
Revenue Code of 1986. To participate in the Plan, an employee of the
Company must have at least three months of full time service with the Company
and be at least 18 years old. The amount of salary deferral during
any year for a Plan participant cannot exceed the dollar limit imposed by
applicable federal law. The Plan also provides that the Company may
match employee contributions to the Plan. The Company did not make
any contributions to the Plan during the years ended December 31, 2009 and
2008.
The
Company has a second Plan which is provided to the employees of
JLSC. The JLSC 401(k) retirement plan conforms to and qualifies under
articles 401 and 501 of the Internal Revenue Code of 1986. Employees
are able to elect to reduce their salary by a specific percentage or dollar
amount and have that amount contributed on a pre-tax basis as a salary
deferral. Employees are eligible to participate as of date of hire
but must wait for "entry" until the first day of the next Plan year quarter
after eligibility. The amount of salary deferral during any year for
a Plan Participant cannot exceed the dollar limit imposed by applicable federal
law. The Plan also provides that JLSC may match employee
contributions to the plan. JLSC has not made any contributions to the Plan since
its acquisition by the Company.
20.
INCOME TAXES
The
federal and state income tax provision (benefit) for the years ended December
31, 2009 and 2008 is summarized as follows:
2009
|
2008
|
|||||||
Current:
|
||||||||
Federal
|
$ | - | $ | - | ||||
State
|
- | - | ||||||
- | - | |||||||
Deferred:
|
||||||||
Federal
|
- | - | ||||||
State
|
- | - | ||||||
- | - | |||||||
Total
provision (benefit) for income taxes
|
$ | - | $ | - |
F-26
JESUP
& LAMONT, INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
FOR THE
YEARS ENDED DECEMBER 31, 2009 AND 2008
Based on
current operations and future projections management believes that the potential
future tax benefits represented by the deferred tax assets of $16,001,000 will
be realized. However, in light of the current economic environment,
management believes it is prudent to provide an additional valuation allowance
of $3,685,000 at December 31, 2009.
The
components of the Company's deferred tax assets at December 31, 2009 and 2008
were as follows:
Years ended December 31,
|
||||||||
2009
|
2008
|
|||||||
Deferred
tax assets:
|
||||||||
Net
operating loss carryforwards
|
$ | 15,425,000 | $ | 11,572,000 | ||||
Stock
compensation
|
433,000 | 362,000 | ||||||
Unrealized
gains (losses) on warrants received for investment banking
services
|
143,000 | 187,000 | ||||||
Deferred
tax assets
|
16,001,000 | 12,121,000 | ||||||
Deferred
tax liabilities:
|
||||||||
Depreciation
and amortization
|
(55,000 | ) | (68,000 | ) | ||||
Amortization
of intangibles
|
(1,496,000 | ) | (1,288,000 | ) | ||||
Deferred
tax liabilities
|
(1,551,000 | ) | (1,356,000 | ) | ||||
Net
deferred tax assets before valuation allowance
|
14,450,000 | 10,765,000 | ||||||
Less:
Valuation allowance
|
(12,333,000 | ) | (8,648,000 | ) | ||||
Net
deferred tax assets
|
$ | 2,117,000 | $ | 2,117,000 |
The
Company has net operating and capital loss carryforwards for federal tax
purposes of approximately $38,600,000 which expire in years 2022 through
2030. The amount deductible per year is limited to approximately
$576,000 on carryforward losses of approximately $4.4 million and unlimited on
the remaining carryforward losses under current tax regulations.
A
reconciliation of the statutory federal income tax rate to the effective income
tax rate for the years ended December 31 consists of the following:
2009
|
2008
|
|||||||
Computed
tax at the federal statutory rate of 34%
|
$ | (2,405,000 | ) | $ | (5,218,000 | ) | ||
State
taxes, net of federal benefit
|
(157,000 | ) | (332,000 | ) | ||||
Operating
loss carryforwards
|
2,491,000 | 317,000 | ||||||
Valuation
allowance
|
109,000 | 2,558,000 | ||||||
Amortization
of intangibles
|
(181,000 | ) | (59,000 | ) | ||||
Non-deductible
compensation
|
60,000 | 317,000 | ||||||
Unrealized
gains (losses) on warrants received for investment banking
services
|
37,000 | 237,000 | ||||||
Other
non-deductible expenses
|
46,000 | 116,000 | ||||||
$ | - | $ | - |
F-27
JESUP
& LAMONT, INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
FOR THE
YEARS ENDED DECEMBER 31, 2009 AND 2008
21.
COMMITMENTS AND CONTINGENCIES
Lease
Commitments
The
Company and its subsidiaries lease branch offices and office facilities under
operating lease agreements. Lease expense totaled $2,071,740 and $2,298,045 for
the years ended December 31, 2009 and 2008, respectively. In
addition, the Company has various equipment operating leases.
The
following is a schedule by year of future lease commitments:
Year Ending
|
||||||||||||
December 31,
|
Offices
|
Equipment
|
Total
|
|||||||||
2010
|
$ | 1,964,838 | $ | 100,898 | $ | 2,065,736 | ||||||
2011
|
1,050,501 | 19,878 | 1,070,379 | |||||||||
2012
|
629,629 | 10,410 | 640,039 | |||||||||
2013
|
508,010 | - | 508,010 | |||||||||
2014
|
426,214 | - | 426,214 | |||||||||
Thereafter
|
46,494 | - | 46,494 | |||||||||
$ | 4,625,686 | $ | 131,186 | $ | 4,756,872 |
Regulatory
and Legal Matters
A former
employee has filed a claim against the Company in the amount of $5 million
alleging employee discrimination. The Company intends to defend this
claim vigorously and in the opinion of management, based on its discussions with
legal counsel, the outcome of this claim will not result in a material adverse
affect on the financial position or results of operations of the Company or its
subsidiaries.
On
November 12, 2008, EFG received notice from FINRA that an arbitration award had
been awarded against EFG for $772,000 plus costs and fees of approximately
$80,000. On December 31, 2008, EKN and EFG entered into a settlement
agreement which addressed the payment and satisfaction of the
award. EFG and EKN agreed that the terms of that settlement would
remain confidential. Such settlement agreement was amended in 2010,
see Note 27 below.
Customer
Complaints and Arbitration
The
Company's subsidiaries' business involves substantial risks of liability,
including exposure to liability under federal and state securities laws in
connection with the underwriting or distribution of securities and claims by
dissatisfied clients for fraud, unauthorized trading, churning, mismanagement
and breach of fiduciary duty. In recent years there has been an
increasing incidence of litigation involving the securities industry, including
class actions which generally seek rescission and substantial
damages. In the ordinary course of business, the Company operating
through its subsidiaries and its principals are, and may become a party to
additional legal or regulatory proceedings or arbitrations. The
Company is not currently involved in any additional legal or regulatory
proceeding or arbitrations, the outcome of which is expected to have a material
adverse impact on the Company's business.
Empire
Financial Group, Inc. vs Penson Financial Services, Inc.
On
January 15, 2009, the Company announced that EFG had filed a $25 million
arbitration claim against one of its clearing brokers, Penson Financial
Services, Inc., a NASDAQ listed company, its CEO, Phil Pendergraft, its
President, Daniel Son and its Chairman, Roger Engemoen. Empire’s
causes of action include extortion, civil theft, conspiracy, tortuous
interference with contractual relationships and aiding and abetting breach of
fiduciary duty. The claims relate to the assistance Penson provided
in connection with a fraud perpetrated upon Empire, Penson’s collusion with a
“raid” of Empire’s global execution services business, and Penson’s
inappropriate demands for payments in connection with EFG’s closure by FINRA in
April 2008. Penson has filed various counterclaims seeking damages,
collections, etc.
F-28
JESUP
& LAMONT, INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
FOR THE
YEARS ENDED DECEMBER 31, 2009 AND 2008
Empire
further alleges that Penson sought to profit by making false statements to
FINRA, Empire’s primary regulator, in the interest of closing the
firm. Thereafter, Penson demanded payments of over $1 million before
Empire could reopen. Penson has also seized a $1.6 million clearing
deposit of Empire’s as well as commission revenue. As a result of these acts,
the brokerage firm has sustained significant harm. EFG has sued to
recover the clearing deposit.
Jesup
& Lamont Securities, Inc. vs Penson Financial Services, Inc.
On
February 12, 2009 the Company filed a $500,000 claim against Penson Financial
Services, Inc. seeking temporary restraining order against use of JLSC clearing
deposit and return of such funds.
American
Stock Exchange Listing
On
February 11, 2008, the Company received notice from the American Stock Exchange
that it is not in compliance with certain standards for continued listing
contained in Section 121(B)(2)(c) of the AMEX Company Guide, which require that
the Company must maintain a Board of Directors comprised of at least 50%
independent directors, and an audit committee of at least two members, comprised
solely of independent directors who also meet the requirements of Rule 10A-3
under the Securities Exchange Act of 1934. In its notice, the
American Stock Exchange gave the Company until May 12, 2008 to regain compliance
with continued listing standards. The Company has complied with this
requirement.
22. OFF
BALANCE SHEET RISKS
Clearing
Arrangements.
The
Company does not carry accounts for customers or perform custodial functions
related to customers' securities. The Company introduces all of its
customer transactions to its clearing brokers, who maintain the customers'
accounts and clear/settle such transactions. Additionally, the
clearing brokers provide the clearing and depository operations for the
Company’s market making and proprietary securities
transactions. These activities may expose the Company to
off-balance-sheet risk in the event that customers do not fulfill their
obligations with the primary clearing brokers, as the Company has agreed to
indemnify its clearing brokers for any resulting losses. The Company
continually assesses risk associated with each customer who is on margin credit
and evaluates the recognition of an estimated loss when the collection from the
customer is doubtful.
Customer
Claims, Litigation and Regulatory Matters.
In the
normal course of business, the Company has been and continues to be the subject
of civil actions and arbitrations arising out of customer complaints relating to
normal business activities of its subsidiaries, or as an employer resulting from
operational business activities.
The
Company has sold securities which it does not currently own and therefore will
be obligated to purchase the securities at a future date. The Company
has recorded these obligations in the financial statements at December 31, 2009
and 2008 at the market values of the securities and may incur a loss if the
market value increases subsequent to December 31, 2009 or 2008,
respectively. The occurrence of any off-balance sheet losses could
impair the Company’s liquidity and force it to dramatically alter or curtail
operations.
F-29
JESUP
& LAMONT, INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
FOR THE
YEARS ENDED DECEMBER 31, 2009 AND 2008
23.
CONCENTRATION OF CREDIT RISKS
The
Company is engaged in various trading, market making and brokerage activities in
which counterparties primarily include broker-dealers, banks and other financial
institutions. In the event counterparties do no fulfill their
obligations, the Company may be exposed to risk. The risk of default
depends on the creditworthiness of the counterparty or issuer of the
instrument. It is the Company’s policy to review, as necessary, the
credit standing of each counter party.
The
Company’s cash in bank accounts, at times, may exceed the Federal Deposit
Insurance Corporation ("FDIC") insurable limit of $250,000. The
Company has not experienced any previous losses due to this
condition.
24. NET
CAPITAL REQUIREMENTS AND VIOLATIONS OF BROKER DEALER SUBSIDIARIES
Currently,
the Company’s operating broker-dealer subsidiary, JLSC, is subject to the
requirements of the Net Capital Rule (Rule 15c3-1) under the Securities Exchange
Act of 1934, which requires the maintenance of minimum net capital and requires
that the ratio of aggregate indebtedness to net capital, both as defined, does
not exceed 15 to 1. Net capital and related ratio of aggregate
indebtedness to net capital, as defined, may fluctuate on a daily
basis.
In
November, 2008, EFG was out of compliance with the above Net Capital Rule and,
accordingly, EFG immediately ceased conducting a securities business, other than
liquidating transactions. EFG’s out of compliance condition was
caused by an arbitration award against it for $772,000 plus related costs and
fees of approximately $100,000. In March 2009 EFG filed a Broker
Dealer withdrawal with FINRA.
At
December 31, 2009, JLSC had net capital of $614,413, which was $280,283 in
excess of the minimum net capital requirement. JLSC’s ratio of
aggregate indebtedness to net capital was 8.15 to 1 as of December 31,
2009. JLSC is exempt from Rule 15c3-3 because all customer
transactions are cleared through other broker-dealers on a fully-disclosed
basis.
25.
RELATED PARTY TRANSACTIONS
The
following is a discussion of certain relationships and related transactions for
the year ended December 31, 2009. In the opinion of management, the
terms of these transactions were as fair to the Company as could have been made
with unrelated parties.
One of
the Company stockholders made a short term loan to the Company of $900,000 in
November, 2009. This note is guaranteed by another Company
stockholder, whose Managing Director is JLSC Chief Executive
Officer. See Note 9 above.
We
extended a $1 million short term note that was originally issued on March 1,
2006 to EFH Partners, LLC. During 2008, certain payments were made
against the note and the balance remaining at December 31, 2009, was
$222,500. This note was extended to a new maturity date of April 1,
2009 and then modified to become due on demand. The note bears
interest at 4%, and is subordinated to all other debt.
In April
2008, the Company entered into a short tem note with a Company
stockholder. The note was for $1 million and the interest rate on the
note was 8%. The initial term of the loan was six months but was
extended at year end. The maturity date for the loan was December 31,
2009 and has since become payable upon demand. The balance of the
note at December 31, 2009 was $850,000.
F-30
JESUP
& LAMONT, INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
FOR THE
YEARS ENDED DECEMBER 31, 2009 AND 2008
In 2009,
two stockholders of the Company forgave the interest due to them on notes
payable in the amount of $230,613. This is reflected as an increase in
additional paid in capital on the accompanying statement of changes in
stockholders equity.
26.
LIQUIDITY MATTERS/GOING CONCERN CONSIDERATIONS
The
Company incurred losses and negative cash flows from operations for the year
ended December 31, 2009 and 2008. The results of the Company’s
operations have been adversely impacted due to the general downturn of the
market and economic conditions; the ceasing of business of EFG in November 2008
due to an adverse litigation settlement; the migration of activity from one
clearing firm to another; the start-up of fixed income activities; the costs of
rebuilding a retail branch network and costs of building an equity research
platform.
The
Company’s plan for future operations has several different
aspects. The Company has reduced its overhead costs by combining
tasks which helped eliminate positions, restructured various contracts with
vendors to lower general and administrative expenses and reworked
compensation arrangements to improve profit margins . In addition,
the
Company has taken and will continue to take steps to increase
revenues as outlined below:
•
|
Increase
the Company’s trading revenue by adding additional stocks in which we
make
a market;
|
•
|
Expand
the Company’s trading capabilities by establishing fixed income trading
desks
that serve both institutional and retail
clients;
|
•
|
Expand
the Company’s institutional trading activities by continuing to add
quality
trading personnel with existing institutional
clients;
|
•
|
Continue
to recruit quality registered
representatives;
|
•
|
Expand
the Company’s offering of proprietary financial products to its retail
and
institutional customers;
|
•
|
Continue
to look for and close acquisitions of similar
businesses;
|
•
|
Added
an option team in the late part of
2009
|
In
addition, the Company plans to raise additional capital through either equity or
debt offerings. In 2009 and 2008 the Company was able to raise
approximately $9 million and $15
million, respectively through a combination of equity and debt offerings and has
raised an additional $1,651,000 in 2010. In connection
with its proposed merger (see note 27), the Company intends to raise
$8 million of additional equity capital, which it believes will protect itself
against any further negative consequences.
If the
Company’s plans change, or its assumptions change or prove to be inaccurate, or
if available cash otherwise proves to be insufficient to implement
its business plans, the Company may require additional equity or debt
financing. Given the uncertain economic environment and the pressure
that the financial sector has been under, the Company cannot predict whether
additional funds will be available in adequate amounts. If funds are
needed but not available, the Company’s business may need to be altered or
curtailed.
F-31
JESUP
& LAMONT, INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
FOR THE
YEARS ENDED DECEMBER 31, 2009 AND 2008
27.
SUBSEQUENT EVENTS
The
following are material subsequent events reflected in the accompanying financial
statements.
During
the first quarter of 2010 the Company offered a private placement financing of a
maximum of $4,000,000 to purchase units at $1.40 consisting of 4 shares of
common stock and 1 warrant to purchase 1 share of common stock at
$0.35. As of March 26, 2010 $1,651,000 has been subscribed for and
has been remitted to the Company.
During
February 2010 the Company announced a plan of merger with Tri-Artisan Partners
LLC. The transaction is subject to the approval of the Company’s
Board of Directors, Securities and Exchange Commission, the NYSE Amex and
FINRA. The transaction is expected to close in the third quarter
2010.
During
February 2010 the Company settled for $600,000 a dispute with a current note
holder and shareholder where the Company has agreed to repurchase the note
payable to shareholder of $400,000, stock that had been subscribed to of
$125,000, and accrued interest of $75,000. The Company has received a
subscription of $75,000 from another party to purchase a portion of the original
stock subscribed.
During
February 2010 EKN, a counterparty to a settled arbitration matter with EFG
attempted to obtain a temporary restraining order on the Company and JLSC to
collect the monies due on its settlement with EFG of $667,000. In
March 2010 the Company settled this matter with EKN for $500,000.
During
March 2010 the Company entered into a lease for office space in New York,
NY. The Company expects to relocate its business in April
2010. The lease term is from March 3, 2010 through August 31,
2017. The Company is obligated to pay a fixed minimum rent at the
following annual rates: (i) $941,590 per annum from March 3, 2010 to August 31,
2013 and (ii) $999,534 per annum from September 1, 2013 through August 31,
2017.
F-32