UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
FORM 10-QSB
QUARTERLY REPORT UNDER SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2005
COMMISSION FILE NUMBER 1-31292
EMPIRE FINANCIAL HOLDING COMPANY
--------------------------------
(Exact name of small business issuer as specified in its charter)
FLORIDA 56-3627212
------- ----------
(State or Other Jurisdiction (I.R.S. Employer
of Incorporation or Organization) Identification No.)
2170 WEST STATE ROAD 434, Suite 100 LONGWOOD, FL 32779
------------------------------------------------------
(Address of Principal Executive Offices) (Zip Code)
407-774-1300
------------
(Registrant's Telephone Number, Including Area Code)
Check whether the registrant has (1) 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 [ ]
As of August 12, there were 6,370,170 shares of common stock, par value $.01 per
share, outstanding.
PART I
FINANCIAL INFORMATION
PAGE NO.
Item 1. Financial Statements .......................................... 3
Consolidated Statement of Financial Condition, June 30, 2005... 3
Consolidated Statement of Income, Three Months Ended
June 30, 2005 and 2004 ........................................ 4
Consolidated Statement of Income, Six Months Ended
June 30, 2005 and 2004 ........................................ 5
Consolidated Statement of Cash Flows, Six Months Ended
June 30, 2005 and 2004 ........................................ 6
Selected Notes to Unaudited Consolidated Financial Statements.. 7
Item 2. Management's Discussion and Analysis or Plan of Operation ..... 11
Item 3. Controls and Procedures ....................................... 13
PART II
OTHER INFORMATION
Item 1. Legal Proceedings ............................................. 14
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds ... 14
Item 3. Defaults Upon Senior Securities ............................... 14
Item 4. Submission of Matters to a Vote of Security Holders ........... 14
Item 5. Other Information ............................................. 14
Item 6. Exhibits ...................................................... 14
Signatures ............................................................. 15
2
EMPIRE FINANCIAL HOLDING COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF FINANCIAL CONDITION (Unaudited)
JUNE 30, 2005
ASSETS
Cash ............................................................. $ 1,704,819
Trading account securities purchased not yet sold, at fair value . 2,325,799
Receivables from brokers and dealers and clearing organizations .. 1,371,590
Deposits at clearing organization ................................ 608,728
Furniture and equipment, net of accumulated depreciation ......... 151,110
Prepaid expenses and other assets ................................ 84,194
-----------
TOTAL ASSETS ............................................. $ 6,246,240
===========
LIABILITIES AND SHAREHOLDERS' EQUITY
LIABILITIES:
Notes payable .................................................. $ 914,880
Notes payable-10% convertible debt ............................. 472,089
Accounts payable, accrued expenses and other liabilities ....... 1,074,146
Trading account securities, sold not yet bought, at fair value . 1,157,350
Payable to brokers, dealers and clearing organization .......... 1,223,061
-----------
TOTAL LIABILITIES ........................................ 4,841,526
-----------
SHAREHOLDERS' EQUITY:
Convertible preferred stock, series B, C, and D $.01 par value,
1,000,000 shares authorized;
16,062 issued and outstanding ............................... 161
Common stock, $.01 par value,
100,000,000 shares authorized;
6,370,170 shares issued and outstanding ..................... 63,700
Additional paid-in capital ..................................... 9,110,485
Deferred compensation .......................................... (41,849)
Accumulated deficit ............................................ (7,727,783)
-----------
TOTAL SHAREHOLDERS' EQUITY .............................. 1,404,714
-----------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY ........... $ 6,246,240
===========
See accompanying notes to the selected consolidated financial statements
3
EMPIRE FINANCIAL HOLDING COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
THREE MONTHS
THREE MONTHS ENDED
ENDED JUNE 30,2004
JUNE 30, 2005 (RESTATED)
------------- ------------
REVENUES:
Commissions and fees .................... $ 3,931,694 $ 4,336,120
Order execution trading revenues, net ... 1,054,214 1,159,528
Interest ................................ 37,812 43,857
Other ................................... 114,238 31,190
----------- -----------
5,137,958 5,570,695
----------- -----------
EXPENSES:
Employee compensation and benefits ...... 1,082,488 1,006,089
Commissions and clearing costs .......... 2,747,511 4,051,419
Interest ................................ 53,390 28,191
Communications and data processing ...... 129,647 14,431
Regulatory provision .................... 275,000 -
General and administrative .............. 780,943 1,368,955
----------- -----------
5,068,979 6,469,085
----------- -----------
NET INCOME (LOSS) ............................. 68,979 (898,390)
Accrued preferred stock dividend ........ (11,887) (6,750)
----------- -----------
Net income (loss) applicable to common
shareholders ................................. $ 57,092 $ (905,140)
=========== ===========
Basic and diluted earnings per share applicable
to common shareholders:
Earnings (loss) per share-basic and diluted ... $ 0.01 $ (0.28)
=========== ===========
Weighted average shares outstanding:
Basic ................................... 4,335,233 3,194,450
=========== ===========
Diluted ................................. 5,506,593 3,194,450
=========== ===========
See accompanying notes to the selected consolidated financial statements
4
EMPIRE FINANCIAL HOLDING COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
SIX MONTHS
SIX MONTHS ENDED
ENDED JUNE 30,2004
JUNE 30, 2005 (RESTATED)
------------- ------------
REVENUES:
Commissions and fees .................... $ 8,017,084 $ 8,751,188
Order execution trading revenues, net ... 2,738,901 2,088,669
Interest ................................ 87,122 83,060
Other ................................... 231,611 72,454
----------- -----------
11,074,718 10,995,371
----------- -----------
EXPENSES:
Employee compensation and benefits ...... 2,386,832 1,814,938
Commissions and clearing costs .......... 6,593,625 7,826,251
Interest ................................ 82,550 56,040
Communications and data processing ...... 185,156 47,278
Regulatory provision .................... 275,000 -
General and administrative .............. 1,244,992 2,110,087
----------- -----------
10,768,155 11,854,594
----------- -----------
NET INCOME (LOSS) ............................. 306,563 (859,223)
Accrued preferred stock dividend ........ (18,637) (13,500)
----------- -----------
Net income (loss) applicable to common
shareholders ................................. $ 287,926 $ (872,723)
=========== ===========
Basic and diluted earnings per share applicable
to common shareholders:
Earnings (loss) per share-basic................ $ 0.07 $ (0.27)
=========== ===========
Earnings (loss) per share-diluted ............. $ 0.06 $ (0.27)
=========== ===========
Weighted average shares outstanding:
Basic ................................... 3,959,769 3,194,450
=========== ===========
Diluted ................................. 4,539,281 3,194,450
=========== ===========
See accompanying notes to the selected consolidated financial statements
5
EMPIRE FINANCIAL HOLDING COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS (UNAUDITED)
SIX MONTHS
SIX MONTHS ENDED
ENDED JUNE 30, 2004
JUNE 30, 2005 (RESTATED)
------------- -------------
OPERATING ACTIVITIES:
Net income (loss) ..................................................... $ 306,563 $ (859,223)
Adjustments to reconcile net income (loss) to net cash
(used in) by operating activities:
Depreciation ........................................................ 27,775 14,678
Amortization ........................................................ - 92,999
Reversal of non-cash charge for stock ............................... (240,000) -
Non-cash charge for stock issued for services ....................... 21,634 76,282
Changes in assets and liabilities:
Trading account securities, at fair value ......................... (1,766,756) (551,048)
Receivable from brokers and dealers and clearing organizations .... 777,531 (243,067)
Deposits at clearing organizations ................................ (203,958) 143
Prepaid expenses and other assets ................................. 104,407 986
Cash overdraft .................................................... (144,202) -
Accounts payable, accrued expenses and other liabilities .......... (1,060,349) 423,484
Payable to brokers and dealers and clearing organizations ......... 952,694 617,552
----------- -----------
NET CASH USED IN OPERATING ACTIVITIES ............................. (1,224,661) (427,214)
----------- -----------
INVESTING ACTIVITIES:
Purchases of furniture and equipment .................................. (13,538) (94,218)
----------- -----------
NET CASH USED IN INVESTING ACTIVITIES ............................. (13,538) (94,218)
----------- -----------
FINANCING ACTIVITIES:
Payments on notes payable ......................................... (514,752) (94,441)
Proceeds from issuance of notes payable ........................... 800,000 272,089
Proceeds from sale of common stock ................................ 2,613,890 -
----------- -----------
NET CASH PROVIDED BY FINANCING ACTIVITIES ......................... 2,899,138 177,648
----------- -----------
NET INCREASE IN CASH .................................................... 1,660,939 (343,786)
CASH AT BEGINNING OF YEAR ............................................... 43,880 393,283
----------- -----------
CASH AT END OF YEAR ..................................................... $ 1,704,819 $ 49,497
=========== ===========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the year for:
Interest ............................................................ $ 82,550 $ 18,842
=========== ===========
Supplemental disclosures of Non-cash financing activities:
Conversion of debt to equity ........................................ $ 471,759 $ -
=========== ===========
Marketable securities acquired through issuance
of notes payable and warrants ..................................... - $ 225,000
=========== ===========
Conversion of accounts payable to preferred stock and warrants ...... $ 200,000 $ -
=========== ===========
Conversion of accounts payable to debt .............................. $ 100,000 $ -
=========== ===========
See accompanying notes to the selected consolidated financial statements
6
EMPIRE FINANCIAL HOLDING COMPANY AND SUBSIDIARIES
SELECTED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
FOR THE SIX MONTHS ENDED JUNE 30, 2005 AND 2004
1. NATURE OF BUSINESS AND BASIS OF PRESENTATION
The accompanying interim consolidated financial statements of Empire
Financial Holding Company and its subsidiaries (collectively, the "Company") are
unaudited; however, in the opinion of management, the interim consolidated
financial statements reflect all adjustments, consisting only of normal
recurring adjustments, necessary for a fair presentation of the results for the
interim periods. All intercompany balances and transactions have been eliminated
in consolidation. Certain footnote disclosures normally included in financial
statements prepared in accordance with accounting principles generally accepted
in the United States of America have been condensed or omitted pursuant to the
applicable rules and regulations of the Securities and Exchange Commission. The
preparation of financial statements requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities at the
date of the financial statements and the reported amount of revenue and expense
during the reporting period. Actual results could differ from these estimates.
The results of operations for the six months ended June 30, 2005, are not
necessarily indicative of the results to be expected for the year ending
December 31, 2005. These consolidated financial statements should be read in
conjunction with the consolidated financial statements and notes for the year
ended December 31, 2004 appearing in the Company's Annual Report on Form 10-KSB
for the year ended December 31, 2004, as filed with the Securities and Exchange
Commission.
2. UNCERTAINTY
The Company is subject to pending federal and state investigations
relating to its role in the trading of mutual fund shares on behalf of its
customers. As of this time, the Company cannot determine the nature or severity
of any legal or other regulatory sanctions that may be imposed in connection
with these investigations, but the sanctions may include fines and penalties and
disgorgement of profits. For the quarter ended June 30, 2005, the Company
recorded a provision of $275,000 in connection with the pending investigation by
the Securities and Exchange Commission.
3. NOTES PAYABLE
At June 30, 2005, the Company had the following unsecured notes
payable:
Note-interest at prime plus 2%, principal
and interest paid monthly, due February 2006 .............. $ 133,333
Note-12% interest principal and interest paid monthly,
due September 2006 ........................................ 270,833
Note-12% interest only paid monthly,
due on demand ............................................. 50,000
Note-12% principal and interest paid monthly,
due February 2006 .......................................... 375,000
Non-Interest Bearing note-principal paid monthly,
due December 2005........................................... 85,714
---------
$ 914,880
=========
4. ACCOUNTS PAYABLE, ACCRUED EXPENSES AND OTHER LIABILITIES
At June 30,2005 accounts payable, accrued expenses and other
liabilities consisted of the following:
Accounts payable ........... $ 104,717
Accrued commissions ........ 223,262
Accrued payroll ............ 381,971
Regulatory provision ....... 275,000
Other ...................... 89,196
----------
$1,074,146
==========
7
EMPIRE FINANCIAL HOLDING COMPANY AND SUBSIDIARIES
SELECTED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
FOR THE SIX MONTHS ENDED JUNE 30, 2005 AND 2004
5. EQUITY AND STOCK OPTION TRANSACTIONS
During the quarter ending June 30, 2005, the Company sold 2,384,849
shares of common stock and 7,000 shares of Series B convertible preferred stock
for $2,373,890 in cash. The Company issued 7,062 shares of Series C convertible
preferred stock in exchange for cancellation of debt, 10,000 shares of Series A
preferred stock and a severance obligation to a previous executive officer of
the Company. The Company issued 2,000 shares of Series D convertible preferred
stock for cancellation of a prior accounts payable balance.
For the year ended December 31, 2004, the Company had recorded an
expense of $240,000 related to the issuance of 200,000 shares to an unrelated
third party as an inducement for that party to associate his Office of
Supervisory Jurisdiction with the Company. The Company determined, during the
quarter ending June 30, 2005, that the business relationship was not in the best
interest of the Company and has cancelled the issuance of these shares and has
recorded as a reduction in expense in the amount of $240,000.
During the quarter ending June 30, 2005, an officer of the Company
exercised options covering 55,629 shares of the Company's common stock, granted
under the stock option plan, in a cashless exercise by delivering to the Company
options covering 200,000 shares of the Company's common stock.
The Company has a stock option plan under which employees, directors
and consultants may be granted options to purchase shares of the Company's
common stock at the fair market value at the date of grant. Options vest
annually over a five-year term for all directors, certain officers, and
consultants, and expire in ten years from date of grant.
The Company granted options to purchase 1,170,000 shares of the
Company's common stock to officers and key employees during the quarter. The
options have a two year vesting period and are exercisable at $2.00 per share.
During the quarter ending June 30,2005, we sold to 3 individuals a
total 300,000 shares of our common stock at $1.00 for $300,000 and 151,515
shares of our common stock to an unaffiliated limited partnership at $1.65 for
$250,000.
The Company accounts for its employee stock option plans under the
intrinsic value method, in accordance with the provisions of Accounting
Principles Board ("APB") Opinion No. 25, "Accounting for Stock Issued to
Employees" and related interpretations. Compensation expense related to the
granting of employee stock options is recorded over the vesting period only if,
on the date of grant, the fair value of the underlying stock exceeds the
option's exercise price. The Company has adopted the disclosure-only
requirements of SFAS No. 123, "Accounting For Stock-Based Compensation," which
allows entities to continue to apply the provisions of APB No. 25 for
transactions with employees and provide pro forma net income (loss) and pro
forma earnings (loss) per share disclosures for employee stock grants made as if
the fair value based method of accounting in SFAS No. 123 had been applied to
these transactions.
Had the Company determined compensation expense of employee stock
options based on the estimated fair value of the stock options at the grant
date, consistent with the guidelines of SFAS 123, its net income (loss) for the
six months ended June 30, 2005 and 2004 would be as follows:
8
EMPIRE FINANCIAL HOLDING COMPANY AND SUBSIDIARIES
SELECTED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
FOR THE SIX MONTHS ENDED JUNE 30, 2005 AND 2004
June 30, June 30
2005 2004
(Restated)
--------- ---------
Net income (loss) applicable to common stockholders:
As reported .......................................... $ 287,926 $(872,723)
--------- ---------
Deduct stock-based employee compensation related to
stock options determined under fair value method ..... $(214,207) $(110,600)
Amounts charged to expense............................ - 26,580
--------- ---------
Pro forma according to SFAS 123 ...................... $ 73,719 $(956,743)
========= =========
Net income (loss) applicable to common stockholders per share as reported:
Basic ....................................... $ 0.07 $ (.27)
========= =========
Diluted ..................................... $ 0.06 $ (.27)
========= =========
Pro forma according to SFAS 123:
Basic ....................................... $ 0.02 $ (.30)
========= =========
Diluted ..................................... $ 0.02 $ (.30)
========= =========
6. NET CAPITAL AND RESERVE REQUIREMENTS
Empire Financial Group, Inc., the broker dealer subsidiary of the
Company, is subject to the Securities and Exchange Commission Uniform Net
Capital Rule 15c3-1 and the requirements of the securities exchanges of which
they are members.
Net capital positions of the Company's broker dealer subsidiary were as
follows at June 30, 2005:
Ratio of aggregate indebtedness to net capital ..... 2.58 to 1
Net capital ........................................ $ 1,307,450
Required net capital ............................... $ 545,000
7. EARNINGS PER SHARE
Basic earnings per share are computed by dividing income available to
common shareholders by the weighted-average number of common shares outstanding
for the period. Diluted earnings per share considers the potential dilution that
could occur if securities or other contracts to issue common stock were
exercised or converted into common stock or resulted in the issuance of common
stock that shared in the earnings of the entity.
Six months ended Three months ended
Calculation of diluted net income per share: June 30, June 30,
-------- --------
Numerator: 2005 2004 2005 2004
---- ---- ---- ----
Net income (loss) ............................ 306,563 (859,223) 68,979 (898,390)
Accrued preferred stock dividends ............ (18,637) (13,500) (11,887) (6,750)
---------- ---------- ---------- ----------
Income attributable to common shareholders ... 287,926 (872,723) 57,092 (905,140)
Plus: preferred stock dividends-Series B and D 2,333 - 2,333 -
---------- ---------- ---------- ----------
Income attributable to common-
shareholders-diluted ......................... 290,259 (872,723) 59,425 (905,140)
========== ========== ========== ==========
9
EMPIRE FINANCIAL HOLDING COMPANY AND SUBSIDIARIES
SELECTED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
FOR THE SIX MONTHS ENDED JUNE 30, 2005 AND 2004
Six months ended Three months ended
June 30, June 30,
-------- --------
Denominator: 2005 2004 2005 2004
---- ---- ---- ----
Basic weighted average shares ................ 3,959,769 3,194,450 4,335,233 3,194,450
Outstanding options .......................... - - 12,336 -
Outstanding warrants ......................... 257,290 - 514,580 -
Series B convertible preferred stock ......... 248,148 - 496,296 -
Series D convertible preferred stock ......... 74,074 - 148,148 -
---------- ---------- ---------- ----------
Diluted weighted average shares .............. 4,539,281 3,194,450 5,506,593 3,194,450
========== ========== ========== ==========
Basic and diluted income per share:
Basic income per share ....................... 0.07 (0.27) 0.01 (0.28)
========== ========== ========== ==========
Diluted income per share ..................... 0.06 (0.27) 0.01 (0.28)
========== ========== ========== ==========
Due to their anti-dilutive effect, the following potential common shares have
been excluded from the computation of diluted earnings per share:
Six months ended Three months ended
June 30, June 30,
-------- --------
2005 2004 2005 2004
---- ---- ---- ----
Warrants ..................................... 370,000 - 370,000 -
Stock options ................................ 1,935,000 695,000 1,750,000 695,000
Series A convertible preferred stock ......... 353,100 - 353,100 -
Series D convertible preferred stock ......... - 150,000 - 150,000
Convertible Notes ............................ 236,045 236,045 236,045 236,045
8. INCOME TAX EXPENSE
The Company has not recorded income tax expense for the six months
ended June 30, 2005, due to utilization of net operating losses generated in
prior years. Based on ownership changes that have occurred, future utilization
of the net operating loss carry forwards may be limited.
9. RESTATEMENT OF JUNE 30, 2004 FINANCIAL STATEMENTS
The Company has restated its balance sheet as of June 30, 2004 to
reflect its previously unrecorded trading account securities positions at June
30, 2004. As a result, the Company's assets as of June 30, 2004 increased by
$893,537 and the Company's liabilities as of June 30, 2004 increased by
$939,489. The restatement reduced the Company's net income for the six months
ended June 30, 2004 by $45,952 and increased the Company's accumulated deficit
by the same amount at June 30, 2004.
10
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion of our financial condition and results of
operations should be read in conjunction with the Selected Consolidated
Financial Data and the Consolidated Financial Statements and Notes thereto
included in our Annual Report on Form 10-KSB for the year ended December 31,
2004, as previously filed with the Securities and Exchange Commission. Our
significant accounting policies are disclosed in the Notes to Consolidated
Financial Statements for the year ended December 31, 2004, found in our Annual
Report on Form 10-KSB for the year ended December 31, 2004.
This Form 10-QSB contains statements about future events and
expectations which are, "forward looking statements". Any statement in this Form
10-QSB 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, technological changes, management disagreements and other factors
described under the heading "Factors affecting our operating results, business
prospects, and market price of stock" contained in our Annual Report on Form
10-KSB for the year ended December 31, 2004, as previously filed with the SEC.
Based upon changing conditions, should any one or more of these risks or
uncertainties materialize, or should any underlying assumptions prove incorrect,
actual results may vary materially from those described in this report as
anticipated, believed, estimated or intended. We undertake no obligation to
update, and we do not have a policy of updating or revising, these
forward-looking statements. Except where the context otherwise requires, the
terms "we," "us," or "our" refer to the business of Empire Financial Holding
Company and its wholly-owned subsidiaries as previously filed with the
Securities and Exchange Commission.
The terms "we" and "us" as used in this report refer to Empire
Financial Holding Company and its operating subsidiaries.
RESULTS OF OPERATIONS:
Three months ended June 30, 2005 compared to three months ended June
30, 2004:
Total revenues for the three months ended June 30, 2005 were
$5,137,958, a decrease of $432,737, or 8%, over the same period in 2004. This
increase is primarily due to reasons described below:
Commissions and fee revenues for the three months ended June 30, 2005
were $3,931,694, a decrease of $404,426 or 9%, from our commission and fee
revenues of $4,336,120 for the comparable period in 2004. The decrease was
primarily due to a decrease in the number of retail client transactions
processed by us on behalf of our independent registered representatives and a
reduction in discount brokerage trading volume. Commission and fee revenues
accounted for approximately 77% and 78% of our revenues for the three months
period ended June 30, 2005 and 2004, respectively.
11
Order execution trading revenues, net, for the three months ended June
30, 2005 were $1,054,214, a decrease of $105,314, or 9%, from our order
execution trading revenues, net of $1,159,528, restated, for the comparable
period in 2004. The decrease was primarily due to a reduction in the number of
stocks in which we made a market and a decrease in securities transactions
processed for unaffiliated broker dealers. Order execution, trading revenues,
net, accounted for approximately 21% of our revenues for the three month periods
ended June 30, 2005 and 2004.
Total operating expenses for the three months ended June 30, 2005 and
2004 were $5,068,979 and $6,469,085 restated, respectively, a decrease of
$1,400,106 or 22%, compared to the same period in 2004. This decrease was
primarily due to less commissions paid to independent registered representatives
in connection with lower sales and a 55% reduction in legal expenses from
$383,821 during the three months ended June 30, 2004 to $172,633 for the
comparable period in 2005. This decrease was partially offset by a provision of
$275,000 established by us in connection with a pending investigation by the
Securities and Exchange Commission relating to our role in the trading of mutual
fund shares on behalf of our customers.
For the year ended December 31, 2004, we recorded a general and
administrative expense of $240,000 related to the issuance of 200,000 shares of
our common stock to an unrelated third party as an inducement to him to
associate his Office of Supervisory Jurisdiction with us. We determined, during
the quarter ended June 30, 2005, that this business relationship was not in our
best interest and have cancelled the issuance of these shares and recorded the
item as a reduction in expense.
For the three months ended June 30, 2005, we reported net income
applicable to common stockholders of $57,092, or $.01 per basic and diluted
share as compared to a restated net loss applicable to common stockholders of
$905,140 restated, or $0.28 loss per basic and diluted share for the same period
in 2004.
Six months ended June 30, 2005 compared to six months ended June 30, 2004:
Total revenues for the six months ended June 30, 2005 were $11,074,718,
an increase of $79,347, or 1%, over $10,995,371, restated, for the same period
in 2004. This increase is primarily due to reasons described below:
Commissions and fee revenues for the six months ended June 30, 2005
were $8,017,084 a decrease of $734,104 or 8%, from our commission and fee
revenues of $8,751,188 for the comparable period in 2004. The decrease was
primarily due to a decrease in the number of retail client transactions
processed by us on behalf of our independent registered representatives and a
reduction in discount brokerage trading volume. Commission and fee revenues
accounted for approximately 71% and 79% of our revenues for the six months ended
June 31, 2005 and 2004, respectively.
Order execution trading revenues, net, for the six months ended June
30, 2005 were $2,738,901, a decrease of $650,232, or 31%, from our order
execution trading revenues, net of $2,088,669, restated, for the comparable
period in 2004. The decrease was primarily due to fewer transactions processed
for unaffiliated broker dealers and a decrease in the number of markets in which
we made a market. Order execution, trading revenues, net accounted for
approximately 25% and 19% of our revenues for the six months ended June 30, 2005
and 2004, respectively.
Other income for the six months ended June 30, 2005 increased 219% from
$72,454 for the six months ended June 2004 to $231,611 for the same period in
2005 primarily due to an increase in fees earned from our investment banking
activities.
Total operating expenses for the six months ended June 30, 2005 and
2004 were $10,768,155 and $11,854,594 restated, respectively, a decrease of
$1,086,439 or 9%, over the same period in 2004.
12
This decrease was primarily due to less commissions paid to independent
registered representatives in connection with lower sales and a 43% reduction in
legal expenses from $499,310 during the six months ended June 30, 2004 to
$283,653 for the comparable period in 2005. This decrease was partially offset
by a reserve of $275,000 established by us in connection with a pending
investigation by the Securities and Exchange Commission relating to our role in
the trading of mutual fund shares on behalf of our customers. The overall
decrease in expenses was also partially offset by an increase in our
communications expense during the six month period ended 2005 compared to the
same period in 2004 by $137,878 due to increased costs associated with the
addition of the New York City location and new line usage needed for the
addition of an Internet based back office operations software.
For the six months ended June 30, 2005, we reported net income
applicable to common stockholders of $287,926, or $.07 per basic and $.06
diluted shares as compared to a restated net loss applicable to common
stockholders of $872,723 restated, or $.27 per basic and diluted share for the
same period in 2004.
LIQUIDITY AND CAPITAL RESOURCES
We maintain a highly liquid balance sheet, with the majority of our
assets consisting of cash and cash equivalents and receivables from brokers,
dealers, and clearing brokers arising from customer-related securities
transactions.
At June 30, 2005, we had $6,246,240 in assets, 59% of which consisted
of cash or assets readily convertible into cash, principally interest bearing
receivables from our clearing broker dealer and fund managers. We finance our
business primarily through cash generated by operations, as well as follow-on
private placements of stock and debt offerings.
Stockholders' equity increased $3,302,321, or 174%, to $1,404,714 at
June 30, 2005, compared to a deficit of $1,897,607 at December 31, 2004. This
increase is primarily due to the sale of 2,390,478 shares of our common stock
for $1,550,000, the sale of 16,062 shares of our convertible preferred stock for
$823,890 and net income of $287,926 for the six months ended June 30, 2005.
Net cash used in continuing operations for the six months ended June
30, 2005 was $1,224,661 and net cash used for operations for the same period in
2004 was $427,216 restated.
Based on the implementation of our business plan during the quarter
ended June 30,2005, we believe that our cash flow from operations and cash on
hand will enable us to fund our planned operations for the foreseeable future.
If not, or if market conditions change, or our assumptions change or prove to be
inaccurate, or if our operating cash flow otherwise proves to be insufficient to
implement our business plans, we may require additional financing and may seek
to raise funds through subsequent equity or debt financings. We cannot assure
you that additional funds will be available in adequate amounts or on acceptable
terms. If funds are needed but not available, our business would be harmed.
ITEM 3. CONTROLS AND PROCEDURES
Management, including our President and Chief Financial Officer,
evaluated our controls and procedures related to our reporting and disclosure
obligations as of June 30, 2005. These officers have concluded that, based on
these evaluations, these disclosure controls and procedures (as defined in Rules
13(a)-15(e) and 15(d)-15(e) under the Securities Exchange Act of 1934, as
amended, or the Exchange Act) were effective to ensure that (i) material
information relating to us is known to these officers, particularly material
information related to the period for which this period report is being
prepared; and (ii) this information is recorded, processed, summarized,
evaluated and reported, as applicable, within the time periods specified in the
rules and forms promulgated by the Securities and Exchange Commission. There
have been no significant changes in our internal control over financial
reporting during the three months ended June 30, 2005, that have materially
affected, or are reasonably likely to materially affect, our internal control
over financial reporting.
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PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Not applicable.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
On May 20, 2005, we sold to three individuals a total 300,000 shares of
our common stock at $1.00 per share for aggregate consideration of $300,000 and
we sold 151,515 shares of our common stock to an unaffiliated limited
partnership at $1.65 per share for an aggregate consideration for $250,000.
In connection with the issuance of our securities by the Company as
described above, we relied on the exemption from registration contained in
Section 4(2) of the Securities act of 1933, as amended, since each transaction
did not involve any public offering of securities.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
ITEM 5. OTHER INFORMATION
None.
ITEM 6. EXHIBITS
31.1 Certification of Chief Executive Officer Certification
pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2 Certification of Chief Financial Officer Certification
pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32.1 Principal Executive Officer Certification pursuant to 18
U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
32.2 Principal Financial Officer Certification pursuant to 18
U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
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SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
Date: August 15, 2005 EMPIRE FINANCIAL HOLDING COMPANY
/s/ Donald A. Wojnowski Jr.
---------------------------
Donald A. Wojnowski Jr.
President/CEO
(Principal Executive Officer)
/s/ Rodger E. Rees
------------------
Rodger E. Rees
Chief Financial Officer
(Principal Accounting Officer)
15