As filed with the Securities and Exchange Commission on September 1, 1999
Registration No. 333-
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U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM SB-2
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
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EMPIRE FINANCIAL HOLDING COMPANY
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(Name of Small Business Issuer in Its Charter)
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Florida 6211 applied for
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(State or Jurisdiction of (Primary Standard Industrial (IRS Employer Identification
Incorporation or Organization) Classification Code Number) Number)
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1385 West State Road 434
Longwood, Florida 32750
(407) 774-1300
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(Address and Telephone Number of Principal Executive Offices)
1385 West State Road 434, Longwood, Florida 32750
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(Address of principal place of business or intended principal place of business)
Kevin M. Gagne and Richard L. Goble
Co-Chief Executive Officers
Empire Financial Holding Company
1385 West State Road 434
Longwood, Florida 32750
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(Name, Address and Telephone Number of Agent for Service)
Copies of communications to:
Phillip J. Kushner, Esq. Daniel Lampert, Esq.
Greenberg Traurig, P.A. Berger Davis & Singerman, P.A.
1221 Brickell Avenue 200 South Biscayne Blvd., Suite 2950
Miami, Florida 33131 Miami, Florida 33131
Telephone No.: (305) 579-0500 Telephone No.: 305-714-4380
Facsimile No.: (305) 579-0717 Facsimile No.: 305-714-4340
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Approximate date of commencement of proposed sale to the public:
As soon as practicable after this Registration Statement becomes effective.
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If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule
462(c) under the Securities Act, check the following box and list the Securities
Act registration statement number of the earlier effective registration
statement for the same offering.[ ]
If this Form is a post-effective amendment filed pursuant to Rule
462(d) under the Securities Act, check the following box and list the Securities
Act registration statement number of the earlier effective registration
statement for the same offering.[ ]
If delivery of the prospectus is expected to be made pursuant to
Rule 434, please check the following box.[ ]
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CALCULATION OF REGISTRATION FEE
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Proposed Maximum Proposed Maximum
Title of each Class of Securities Amount to be Offering Price Aggregate Offering Amount of Registration
to be Registered Registered Per Share (1) Price(1) Fee
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Common Stock, $.01 par value.............. 2,300,000(2) $15.00 $34,500,000 $9,591.00
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Common Stock, par value $.01 per share,
issuable upon exercise of the 200,000 $18.75 $3,750,000 $1,042.50
Underwriter's Warrants(3)..............
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Total $10,633.50
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(1) Estimated solely for the purpose of calculating the registration fee and
pursuant to Rule 457.
(2) Includes 300,000 shares of Common Stock which may be issued upon exercise of
a 45-day option granted to the underwriters solely to cover over-allotments,
if any.
(3) Pursuant to Rule 416 under the Securities Act, this Registration Statement
also covers additional shares as may become issuable as a result of the
anti-dilution provisions contained in the warrants.
The Registrant hereby amends this Registration Statement on such date
or dates as may be necessary to delay its effective date until the Registrant
shall file a further amendment which specifically states that this Registration
Statement shall thereafter become effective in accordance with Section 8(a) of
the Securities Act of 1933 or until this Registration Statement shall become
effective on such date as the Commission, acting pursuant to said Section 8(a),
may determine.
<PAGE>
Information contained in this prospectus is not complete and may be changed.
These securities may not be sold until the registration statement filed with the
Securities and Exchange Commission is effective. This prospectus is not an offer
to sell these securities and is not soliciting an offer to buy these securities
in any state where the offer or sale is not permitted.
<PAGE>
SUBJECT TO COMPLETION, DATED SEPTEMBER 1, 1999 PRELIMINARY PROSPECTUS
The words "Empire Financial Holding Company" beneath a logo consisting of a
darkened square with horizontal lines, and a series of light and dark geometric
shapes arranged top form a triangle shape superimposed on the square.
2,000,000 shares of common stock
$____ per share
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EMPIRE FINANCIAL HOLDING COMPANY
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This is our initial public offering. Prior to this offering there has
been no public market for our shares. Our proposed NASDAQ National Market
trading symbol is EFHC.
We expect that the price to the public in the offering will be between
$10.00 and $15.00 per share. The market price of the shares after the offering
may be higher or lower than the offering price.
An investment in our shares involves certain risks. See Risk Factors
beginning on page 5 of this prospectus.
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The Offering
Per Share Total
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Public offering price.................................. $ $
Underwriting discounts and commissions................. $ $
Proceeds to us......................................... $ $
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Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of these securities or determined if this
prospectus is truthful or complete. Any representation to the contrary is a
criminal offense.
We have entered into a firm commitment underwriting agreement with LM
Capital Securities, Inc. for the sale of the shares in this offering. We have
granted to the underwriters a 45-day option to purchase up to an additional
300,000 shares of common stock to cover over-allotments. One of our
subsidiaries, Empire Financial Group, Inc. will be one of the underwriters
participating in this offering.
The underwriters expect to deliver the shares to purchasers on
_____________, 1999.
LM CAPITAL SECURITIES, INC. EMPIRE FINANCIAL GROUP, INC.
The date of this prospectus is __________, 1999
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TABLE OF CONTENTS
Page Page
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Summary...........................................1 Business.........................................26
Summary Consolidated Financial Information........4 Management.......................................37
Risk Factors......................................5 Principal Shareholders...........................41
Determination of Offering Price..................12 Certain Transactions.............................42
Use of Proceeds..................................13 Description of Capital Stock.....................43
Dividend Policy..................................14 Shares Eligible for Future Sale..................46
Dilution.........................................15 Underwriting.....................................47
Capitalization...................................16 Legal Matters....................................49
Management's Discussion and Analysis of Financial Experts..........................................49
Condition and Results of Operations...........17 Where You Can Find More Information..............49
Index to Consolidated Financial Statements......F-1
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As used in this prospectus, the terms "we," "us," "our," the "Company"
and "Empire" mean Empire Financial Holding Company and its subsidiaries
Advantage Trading Group, Inc., Empire Financial Group, Inc. and Empire
Investment Advisors, Inc. (unless the context indicates a different meaning) and
the term "common stock" means Empire's common stock, $.01 par value per share.
You should rely only on the information contained in this prospectus.
We have not authorized anyone to provide you with information different from
that contained in this prospectus. We are offering to sell, and seeking offers
to buy, shares of common stock only in jurisdictions where offers and sales are
permitted. The information contained in this prospectus is accurate only as of
the date of this prospectus, regardless of the time of delivery of this
prospectus or of any sale of our common stock.
CAUTIONARY NOTE ON FORWARD-LOOKING STATEMENTS
Certain important factors may affect our actual results and could cause
those results to differ materially from any forward-looking statements made in
this prospectus or that are otherwise made by us or on our behalf.
Forward-looking statements are not based on historical facts and are typically
phrased using words such as "may," "will," "expect," "believe," "anticipate,"
"intend," "could," "estimate" or "continue" and similar expressions or
variations.
Investing in our common stock is risky. You should carefully consider
the preceding risks before making an investment decision. These risks are not
the only ones that we face. Additional risks that generally apply to publicly
traded companies and companies in our industry that we have not yet identified
or that we think are immaterial may also harm our business. Our business,
operating results and financial condition could be adversely affected by any of
the preceding risks. The trading price of our common stock could decline due to
any of these risks, and you could lose all or part of your investment. You
should also refer to the other information set forth in this prospectus,
including our financial statements and the related notes.
(i)
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SUMMARY
Because this is a summary, it does not contain all of the information
that may be important to you. You should read the entire prospectus carefully,
and you should consider the risk factors and our financial statements and
accompanying notes that appear later in this prospectus. Except as otherwise
indicated, all information in this prospectus (1) assumes no exercise of the
underwriters' over-allotment option; (2) does not give effect to up to 500,000
shares of common stock issuable upon the exercise of options that may be granted
under our 1999 Stock Option Plan; and (3) assumes an initial public offering
price of $10.00 per share.
About Us
General
Empire Financial Holding Company is a full-service, self-clearing,
financial services firm that provides discount brokerage and other financial
services to retail and institutional customers. We also provide trade execution
services for approximately 80 independent broker dealers, as well as for some of
our customers' trades. Our trade execution and clearing capabilities position us
to offer clearing services and online trade execution services to other broker
dealers.
Our retail customers can place their securities orders online through
our secure website located at www.empirenow.com, or over the telephone at
1-800-lowfees (569-3337). We give our retail customers access to useful
financial products and services, such as real time quotes and portfolio
tracking, as well as access to their funds through free check writing and debit
cards. Our retail customers can also use our website links to obtain market
commentary, analysis and research, news and investment charting. We realize
significant cost savings by clearing our own trades that allow us to
competitively price our services to our customers.
Our business has grown significantly during the past year:
o Our active customer accounts increased 54% to approximately 10,000
at June 30, 1999 from approximately 6,500 at June 30, 1998;
o Our average trades per day increased 45% to approximately 1,600 for
the six months ended June 30, 1999 from approximately 1,100 for the
comparable period in 1998;
o Our total revenues increased 140% to $8,528,693 for the six
months ended June 30, 1999 from $3,546,401 for the comparable
period in 1998; and
o Our net income increased 241% to $2,595,790 for the six months
ended June 30, 1999 from $760,506 for the comparable period in
1998.
We were incorporated in Florida in September 1999 and have three wholly
owned subsidiaries: Empire Financial Group, Inc., Advantage Trading Group, Inc.
and Empire Investment Advisors, Inc., that were incorporated in Florida in 1990,
1995 and 1999, respectively.
The Financial Services Industry
Today's financial services industry is a dynamic marketplace, where all
kinds of financial services can be provided, in many combinations, to various
types of customers. For example, investors can now separate financial advisory
services from securities trading. With the development of electronic
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securities trading services, investors can substantially reduce transactional
charges compared to traditional full-commissioned brokerage firms. Investors can
now shop for the best rates and services.
Individual investors have become increasingly knowledgeable about
investing, and the large amount of financial information online allows investors
to be more self-reliant and have more control over their investment decisions.
Many investors now prefer to invest without paying for personal interaction with
financial services professionals. As a result, many discount brokerage firms now
provide online trading facilities with low commissions. However, discount
brokerage firms do not typically provide the more sophisticated products and
services offered by full-service firms, such as market analysis and information,
recommendations and personalized portfolio tracking, with broker advice
available when desired.
Our Market Opportunities
Stock market activity has grown dramatically in recent years, with
equity market capitalization doubling in the past five years to over $15
trillion, accompanied by large increases in average daily trading volumes as
well. Additionally, as a result of the growth of the Internet as a tool to
obtain information, online trading is now the fastest growing segment of the
brokerage industry and is expected to continue to grow significantly. Online
trades of retail customers accounted for over 25% of all retail stock trades in
the U.S. in the first quarter of 1999 and are expected to grow to 50% by 2002.
Current market research projections indicate that the number of online investor
accounts will jump from approximately 6.7 million at the end of 1998 to over 24
million by the end of 2002. The value of assets held by customers in accounts
with online brokerage firms is projected to grow from $324 billion in the U.S.
at the end of 1998 to over $3 trillion in 2003. This rapid growth has brought
with it increased competition among financial service providers as they seek to
attract consumers using these new investment methods.
Our Business Strategy
In order to succeed in the financial services industry, we believe that
brokerage firms will have to provide competitive pricing as well as a
comparative advantage in services, including online services. We plan to
effectively compete by implementing the following business strategy:
o Increase online transactions. Because today's investors
increasingly use the Internet to invest, capitalizing on an online
presence is imperative. The proceeds from this offering will allow
us to embark on an aggressive marketing campaign highlighting our
online presence and to continue developing our transaction
execution capabilities. We are also continually seeking strategic
relationships with leading technology providers to support our
services with the latest features to offer superior services to our
customers, empowering them and thereby increasing our volume of
online transactions.
o Become a leading clearing and execution services firm for
independent broker dealers. Our trade execution and clearing
capabilities permit us to expand our business by marketing our
clearing and execution capabilities to independent broker dealers.
By controlling the costs of these services we expect to diversify
our revenue base, realize efficiencies and achieve greater
flexibility. Assuming that we receive the necessary regulatory
approvals, we intend to market our clearing services to other
broker dealers by the end of 1999. We also plan to strengthen our
relationship with these independent broker dealers by creating an
online
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systems connection to our trade execution services and
offering them online trade execution services in addition to our
current telephone order capabilities.
o Expand our customer base by acquiring independent broker dealers.
Independent broker dealers with established customer bases may lack
the necessary capital and other resources to expand their client
base. We believe that our ability to provide broker dealers with
the resources they need to meet client demands, including online
trade execution capabilities, will attract broker dealers to us and
allow us to expand our customer base through acquisitions.
o Establish expertise in investment advisory services. We have
established a subsidiary that will offer investment advisory
services to our customers, which will assist us in establishing a
stronger relationship with our customers. We believe this approach
distinguishes us from many of our competitors.
o Offer services to fee-based financial planners and registered
investment advisors. We plan to increase our customer base and
assets under management by establishing working relationships with
fee-based financial planners and registered investment advisors. We
plan to attract these planners and advisors by providing low cost
trade execution and support services.
o Combine the use of technology with personal interaction to
establish and increase customer service, loyalty and retention. We
understand our technology-based marketplace. However, we believe
that our ability to offer a human touch to compliment electronic
investing will help establish our success and result in customer
retention. To meet these dual needs, we plan to establish both a
Internet financial and investment portal site and expand our
national call center with client support representatives to handle
customer inquiries and requests.
How to Contact Us
Our principal executive offices are located at 1385 West State Road
434, Longwood, Florida 32750, and our telephone number is 800-lowfees
(569-3337). Our website is located at www.empirenow.com. Information on our
website is not part of this prospectus.
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About the Offering
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Common stock offered ..................................................2,000,000 shares
Common stock to be outstanding after the offering .....................10,000,000 shares
Use of net proceeds....................................................Approximately $17,400,000 for advertising,
net capital, new products and services, strategic
alliances and acquisitions and other general
corporate purposes. See "Use of Proceeds."
Proposed NASDAQ Symbol.................................................EFHC
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Prior to this offering there has been no public market for our common
stock. We cannot assure you that a trading market for the common stock will
develop or how liquid that market might be. You may not be able to resell your
shares at or above the initial public offering price.
Summary Consolidated Financial Information
The following is a summary of our Financial Statements for the years
ended December 31, 1998 and 1997 and the six months ended June 30, 1999 and
1998, and should be read in conjunction with "Management's Discussion and
Analysis of Financial Condition and Results of Operations" and the Financial
Statements including the related notes included in this prospectus.
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Year Ended Six Months Ended
December 31, June 30,
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1998 1997 1999 1998
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(unaudited)
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Statement of Operations Data:
Commissions and fees........................ $ 7,373,073 $ 5,737,356 $ 8,133,046 $ 3,304,728
Total revenues.............................. 7,933,999 6,325,073 8,528,693 3,546,401
Net income.................................. $ 1,090,584 $ 696,678 $ 2,595,790 $ 760,506
Pro forma information: (1)
Pro forma income taxes...................... $ 410,000 $ 262,000 $ 977,000 $ 286,000
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Pro forma net income ....................... $ 680,584 $ 434,678 $ 1,618,790 $ 474,506
============= ============= ============= ============
Pro forma net income per share.............. $ 0.09 $ 0.05 $ 0.20 $ 0.06
============= ============= ============= ============
Pro forma weighted average number of common
shares outstanding ....................... 8,000,000 8,000,000 8,000,000 8,000,000
============= ============= ============= ============
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December 31, 1998 June 30, 1999
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Actual Actual As Adjusted(2)
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(unaudited)
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Balance Sheet Data:
Cash and cash equivalents.................... $ 367,825 $ 1,201,864 $ 18,601,864
Total assets................................. $ 8,860,788 $ 14,627,135 $ 32,027,135
Total liabilities............................ $ 6,921,498 $ 11,291,932 $ 13,505,932
Shareholders' equity......................... $ 1,939,290 $ 3,335,203 $ 18,521,203
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(1) Empire and its subsidiaries have operated as Subchapter S corporations,
and, accordingly, their taxable income has been taxed directly to their
shareholders. Pro forma net income amounts assume that Empire was subject
to federal income taxes and taxed as a C corporation at the tax rates in
effect for the periods presented. On the effective date of this offering,
our election to be treated as a Subchapter S corporation will automatically
terminate, and we will be subject to federal income taxes. See Note 3 to
the financial statements.
(2) Adjusted to reflect (a) the sale of the shares of common stock in this
offering (based on an initial public offering price of $10.00 per share)
and the receipt of the estimated $17,400,000 net proceeds therefrom, (b)
the distributions of $463,690 made to Empire's existing shareholders after
June 30, 1999 (which were funded from operating cash flow) and (c) the
payment of an additional estimated $1,750,000 to Empire's existing
shareholders related to their tax liability for the net income of Empire
during the period January 1, 1999 to the date of this offering. We
anticipate funding this $1,750,000 payment from operating cash flow. See
"Dividend Policy" and Note 3 to the financial statements.
4
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RISK FACTORS
You should carefully consider the risks and uncertainties described
below before making an investment decision. Our business, financial condition
and operating results could be adversely affected by any of the factors listed
below, which could cause the trading price of our common stock to decline, and
you could lose all or part of your investment. The risks and uncertainties
described below are not the only ones we face. Additional risks and
uncertainties not presently known to us, or that we currently think are
immaterial, may also impair our business operations.
Volatility in the securities business could directly harm our business.
The securities business is volatile and is directly affected by the
following factors, most of which are completely beyond our control:
o national and international political and economic conditions;
o broad trends in business and finance;
o fluctuations in volume and price levels of securities transactions;
o client default on commitments (such as margin obligations);
o litigation;
o employee misconduct, errors and omissions;
o regulation at federal and state levels; and
o increased reliance on technology.
Losses associated with these risks could harm our business.
We are subject to securities regulation and failure to comply could subject us
to penalties or sanctions that could harm our business.
The securities industry in the United States is subject to extensive
regulation under both federal and state laws. In addition, the Securities and
Exchange Commission or the SEC, the National Association of Securities Dealers,
Inc. or the NASD and other self-regulatory organizations, as well as the various
stock exchanges and state securities commissions, require strict compliance with
their rules and regulations. Broker dealers are subject to regulations covering
all aspects of the securities business, including sales methods, trade practices
among broker dealers, use and safekeeping of clients' funds and securities,
capital structure, record keeping and the conduct of directors, officers and
employees. Failure to comply and disputes concerning compliance with any of
these laws, rules or regulations could result in substantial expenses as well as
censure, fines, the issuance of cease and desist orders or the suspension or
expulsion as a broker dealer, any of which could harm our business.
Potential governmental regulation of the Internet and online commerce could harm
our business.
Our business could be harmed by future legislation or regulation, the
application of laws and regulations from jurisdictions whose laws do not
currently apply to our business or the application of existing laws and
regulations to the Internet and other online services. 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, content
copyrights, and quality of services and are also considering imposing sales or
other taxes on Internet transactions. Furthermore, the growth and development of
the market for online commerce may prompt more stringent consumer protection
laws that may impose additional burdens on
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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, NASD and other
regulatory agencies. The adoption of any additional laws or regulations may
decrease the growth of the Internet or other online services, which could, in
turn, decrease the demand for our trading systems and services and increase our
cost of doing business. Moreover, the applicability to the Internet and other
online services of existing laws in various jurisdictions governing issues such
as property ownership, sales and other taxes and personal privacy is uncertain
and may take years to resolve. In addition, as our services are available over
the Internet in multiple states and foreign countries, and as we have numerous
clients residing in these states and foreign countries, these jurisdictions may
claim that we are required to comply with the laws of these states and foreign
countries.
Failure to comply with net capital requirements could subject us to suspension
or revocation by the SEC or expulsion by the NASD.
The SEC, the NASD and various other regulatory agencies have stringent
rules with respect to the maintenance of specific levels of net capital by
securities brokers. Failure to maintain the required net capital may subject a
firm to suspension or revocation of registration by the SEC and suspension or
expulsion by the NASD and other regulatory bodies and ultimately could require
our liquidation. In addition, a change in the net capital rules, the imposition
of new rules or any unusually large charge against our net capital could limit
our operations that require the intensive use of capital, such as the financing
of client account balances. A significant operating loss or any unusually large
charge against our net capital could adversely affect our ability to expand or
even maintain our present levels of business, which could harm our business.
Intense competition from existing and new brokerage services may adversely
affect our revenues and profitability.
We cannot assure you that we will be able to compete effectively with
current or future competitors or that the competitive pressures faced by us will
not harm our business. The market for brokerage services and, particularly,
online brokerage services, is relatively new, rapidly evolving, intensely
competitive and has few barriers to entry. We expect competition to continue and
intensify in the future. Some of our competitors have significantly greater
financial, technical, marketing and other resources, offer a wider range of
products and services and have more extensive client bases than us. These
competitors may be able to respond more quickly to new or changing
opportunities, technologies, and client requirements than us and may be able to
undertake more extensive promotional activities, offer more attractive terms to
clients, and adopt more aggressive pricing policies than us. 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.
Employee misconduct could harm our business.
Employee misconduct could result in unknown and unmanaged risks or
losses. There have been highly publicized cases involving fraud, theft and other
misconduct by employees in the financial services industry, and we run the risk
that employee misconduct could occur. Misconduct by employees could also include
binding us to transactions that exceed authorized limits or present unacceptable
risks, or hiding from us unauthorized or unsuccessful activities. Employee
misconduct could also involve the improper use of confidential information,
which could result in regulatory sanctions and serious harm to our reputation
and business.
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We face risks associated with paying order flow rebates.
We have arrangements with various NASDAQ market makers and third market
firms to make cash payments in exchange for routing trade orders to us from
these firms for execution. Loss of the ability to have orders routed to us in
this manner could adversely effect our business, financial condition and
operating results. This practice of paying for order flow is widespread in the
securities industry. However, there can be no assurance that the SEC, the NASD,
courts or other regulatory agencies will continue to permit payments for order
flow.
We face risks that our clients may not repay us for credit we extend to them.
We are subject to the risks inherent in extending credit to the extent
that we permit our clients to purchase securities on a margin basis. A portion
of our clients' securities activities are transacted on a margin basis (through
our subsidiary clearing firm and Bear Stearns Securities Corp., our independent
clearing broker which we have agreed to indemnify), pursuant to which credit is
extended to clients and secured by cash and securities in the client's account.
Periods of volatile markets increase these risks because the value of the
collateral held by us could fall below the amount borrowed by the client. In
such circumstances, we may be required to sell or buy securities at prevailing
market prices and incur losses to satisfy client obligations. As of July 31,
1999, we have approximately $11,934,281 in credit extended to our clients
through our subsidiary clearing firm, and $22,191,961 in credit extended to our
clients through Bear Stearns Securities Corp.
We face risks associated with trade execution and our clearing operations.
Our failure to perform trade execution and our clearing operations
accurately and cost effectively could have a material adverse effect on our
business, financial condition and results of operations. Trade execution
services involve the processing of securities orders. Clearing services include
the confirmation, receipt, settlement and delivery functions involved in
securities transactions. Clearing securities firms are subject to substantially
more regulatory control and examination than non-clearing firms because clearing
operations involve substantial risks of liability to customers due to clerical
errors related to the handling of customer funds and securities. Errors in
performing trade execution and clearing functions and related regulatory
requirements could create liabilities to affected customers and lead to civil
penalties imposed by the SEC or the NASD. Any liability or penalty that arises
as a result of clearing operations could harm our business, financial condition
and operating results. We are also seeking approval to provide clearing services
for other broker dealers as part of our strategy to expand our business. Our
future growth could be hampered if we are unable to obtain this approval.
We may not be prepared for the Year 2000 and/or third-parties on which we rely
may not be prepared which could harm our business.
Because we depend to a very substantial degree upon the proper
functioning of our computer systems, a failure of our systems to be Year 2000
compliant could harm our business. Failure of this kind could, for example,
cause settlement of trades to fail, lead to incomplete or inaccurate accounting,
recording or processing of trades in securities, currencies, commodities and
other assets; result in generation of erroneous results; or give rise to
uncertainty about our exposure to trading risks and our need for liquidity. If
not remedied, potential risks include business interruption or shutdown,
financial loss, regulatory actions, harm to our reputation and legal liability.
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In addition, we depend upon the proper functioning of third-party
computer and non-information technology systems. If third parties with whom we
interact have Year 2000 problems that are not remedied, the following problems
could result:
o in the case of vendors, in disruption of important services upon
which we depend, such as telecommunications and electrical power;
o in the case of third-party data providers, in the receipt of
inaccurate or out-of-date information that would impair our ability
to perform critical data functions;
o in the case of financial intermediaries such as exchanges and
clearing agents, in failed trade settlements, an inability to trade
in certain markets;
o in the case of banks and other lenders, in the disruption of capital
flows potentially resulting in liquidity stress; and
o in the case of counterparties and customers, in financial and
accounting difficulties for those parties that expose us to
increased credit risk and lost business.
Disruption or suspension of activity in the world's financial markets
is also possible. In addition, uncertainty about the success of remediation
efforts generally may cause many market participants to reduce the level of
their market activities temporarily as they assess the effectiveness of these
efforts during a "phase-in" period beginning in late 1999. This in turn could
result in a general reduction in trading and other market activities (and lost
revenues) as well as reduced funding availability in late 1999 and early 2000.
We cannot predict the impact that any of the above-mentioned matters would have
on our business.
We may not be able to keep up in a cost-effective way with rapid technological
changes.
Our future success will depend, in part, on our ability to develop and
use new technologies, respond to technological advances, enhance our existing
services and products, and develop new services and products in a timely and
cost-effective manner. The market for brokerage services and, particularly,
electronic brokerage services over the Internet, is characterized by rapid
technological change, changing client requirements, frequent service and product
enhancements and introductions, and emerging industry standards. The
introduction of services or products embodying new technologies and the
emergence of new industry standards can render existing services or products
obsolete and unmarketable. We cannot assure you that we will be successful in
pursuing new opportunities or will compete successfully in any new markets.
We may not be able to keep up in a cost-effective way with our evolving market.
The market for brokerage services is rapidly evolving. As a result, the
level of demand for new forms of brokerage services including online brokerage
services is uncertain. Intensive marketing and sales efforts may be necessary to
educate prospective clients regarding the uses and benefits of our brokerage
services and products. If the market for online brokerage services does not
develop as we expect, our business could suffer.
8
<PAGE>
We depend heavily on computer systems and system failures could harm our
business.
We rely heavily on various electronic media. We receive trade orders
using the Internet and telephone. In addition, we process trade orders through
our own systems and those of Bear Stearns Securities Corp., ABN Amro
Incorporated, Mercantile Bank, N.A., The Vantra Group, Inc. and SunGard
Financial Systems, Inc. These methods of trading are heavily dependent on the
integrity of the electronic systems supporting them. Heavy system traffic during
peak trading times could cause our systems to operate at unacceptably low speeds
or fail altogether. Any significant degradation or failure of our computer
systems, those of our vendors, or any other systems in the trading process
(e.g., online service providers, record keeping and data processing functions
performed by third parties and third-party software such as Internet browsers)
could cause clients to suffer delays in trading. These delays could cause
substantial losses for our clients and could subject us to claims from clients
for losses, including litigation claiming fraud or negligence. Our computer
systems are also vulnerable to damage or interruption from human error, natural
disasters, power loss, sabotage or computer viruses.
Compromises of our systems' security could harm our business.
Any compromise of our systems' security could harm our business. The
secure transmission of confidential information over public networks is a
critical element of our operations. We rely on encryption and authentication
technology to provide the security and authentication necessary to effect secure
transmission of confidential information over the Internet. Moreover, we
continually evaluate advanced encryption technology to ensure the continued
integrity of our systems. However, we cannot assure you that advances in
computer capabilities, new discoveries in the field of cryptography or other
events or developments will not result in a compromise of the technology or
other means our vendors and we use to protect client transaction and other data.
We may face claims of infringement.
Other parties may in the future claim that we infringe their
intellectual property rights. Regardless of whether any such claims are valid,
claims of infringement could be time-consuming and expensive to defend, divert
our management's attention and could harm our business.
We may need additional capital and may not be able to obtain it.
We currently anticipate that our available cash resources, combined
with the net proceeds from the offering, will be sufficient to meet our
presently anticipated working capital and capital expenditure requirements.
However, if we need to raise additional funds in order to support further
expansion, develop new or enhanced services and products, respond to competitive
pressures, acquire complementary businesses or technologies or respond to
unanticipated requirements, we cannot assure you that additional financing will
be available when needed on terms favorable to us or on terms that will not
result in dilution to our existing shareholders.
Kevin M. Gagne and Richard L. Goble own most of our common stock and control the
company.
Upon completion of this offering, our co-chief executive officers and
co-chairmen of the board, Kevin M. Gagne and Richard L. Goble, will beneficially
own approximately 80% of our common stock. Accordingly, following completion of
this offering, these two individuals will control us and have the power to,
among other matters, elect all directors, increase our authorized capital stock
or cause our dissolution, merger or the sale of our assets.
9
<PAGE>
Investors will experience immediate and substantial dilution.
This offering involves an immediate and substantial dilution of $8.15
per share (81.5%) between the net tangible book value per share after the
offering and the initial public offering price per share, assuming an initial
public offering price of $10.00 per share.
There was no prior public market for our common stock and our stock price may be
volatile.
Prior to this offering, there has been no public market for our common
stock. We anticipate that our common stock will be listed on The NASDAQ National
Market; however, we cannot assure you that an active trading market will develop
or be sustained. The initial public offering price will be determined by
negotiations between us and LM Capital Securities, Inc. (the representative of
the underwriters), and may not be indicative of the actual value of the common
stock and may bear no relationship to the price at which the common stock will
trade after completion of this offering. The market price of our common stock is
subject to wide fluctuations in response to variations in operating results,
general trends in our industry, actions taken by competitors, the overall
performance of the stock market (and Internet stocks in particular) and other
factors.
There are many shares eligible for future sale and sales of those shares could
reduce the market price.
The 2,000,000 shares of common stock offered hereby will be freely
tradable without restriction or further registration under the Securities Act of
1933, as amended, by persons other than "affiliates" within the meaning of Rule
144 under the Securities Act. The holders of the remaining 8,000,000 shares of
common stock generally will be entitled to sell these shares in the public
securities market commencing in September 2000 without registration under the
Securities Act to the extent permitted by Rule 144 under the Securities Act. In
addition, the holders of these restricted shares have agreed not to sell or
dispose of those shares for a period of 12 months from the date of this
prospectus without the written consent of LM Capital Securities, Inc. Future
sales of a substantial amount of our common stock in the public market, or the
perception that future sales may occur, could reduce the market price of our
common stock.
Delisting our securities from The NASDAQ Stock Market could subject us to the
penny stock rules which could affect the liquidity of the securities.
We expect that our common stock will be eligible for listing on The
NASDAQ National Market upon the completion of this offering. In order to
continue to be listed on The NASDAQ National Market, however, we must maintain
$4,000,000 in net tangible assets, at least $750,000 market value of the public
float, have two market makers, a minimum bid price of $1.00 per share, and
maintain a minimum of two independent directors on our Board of Directors.
Although we believe that we will be able to satisfy these maintenance criteria,
failure to do so in the future may result in the delisting of our securities
from The NASDAQ National Market and would likely make us ineligible to be listed
on the NASDAQ SmallCap Market as well. Trading, if any, in our securities would
thereafter be conducted in the OTC Bulletin Board. As a result of any delisting,
an investor could find it more difficult to dispose of, or to obtain accurate
quotations as to the market value of, our securities. In addition, if the common
stock were to become delisted from trading on NASDAQ and the trading price of
the common stock were to fall below $5.00 per share on the date our securities
were delisted, trading in these securities would also be subject to the
requirements of certain rules promulgated under the Securities Exchange Act of
1934, as amended, which require additional disclosure by broker dealers in
connection with any
10
<PAGE>
trades involving a stock defined as a penny stock (generally, any non-NASDAQ
equity security that has a market price of less than $5.00 per share, subject to
certain exceptions). These rules require the delivery, prior to any penny stock
transaction, of a disclosure schedule explaining the penny stock market and the
risks associated therewith, and impose various sales practice requirements on
broker dealers who sell penny stocks to persons other than established clients
and accredited investors (generally institutions). For these types of
transactions, the broker dealer must make a special suitability determination
for the purchaser and have received the purchaser's written consent to the
transaction prior to sale. The additional burdens imposed upon broker dealers by
these requirements may discourage broker dealers from effecting transactions in
our securities, which could severely limit the market price and liquidity of our
securities and the ability of purchasers in this offering to sell their
securities in the secondary market.
We may issue additional preferred stock with preferential rights that may
adversely affect your rights.
The rights of the holders of common stock will be subject to and may be
adversely affected by the rights of holders of any preferred stock that may be
issued in the future. Our articles of incorporation authorize our board of
directors to issue 1,000,000 shares of preferred stock and to fix the rights,
preferences, privileges and restrictions, including voting rights, of these
shares, without further shareholder approval. Additionally, our articles of
incorporation authorize us to issue 20,000 shares of Series A Junior Preferred
Stock; each share of Series A Junior Preferred Stock entitles its holder to
1,000 votes on all matters submitted to a vote of our shareholders, as well as
preferential dividend and liquidation rights. The holders of preferred stock
will have a preference on the receipt of dividends and payment upon liquidation
compared to the holders of common stock.
Our preferred stock and certain provisions of Florida law may discourage, delay
or prevent a change of control which might otherwise be beneficial to our
shareholders.
Preferred stock could be issued to discourage, delay or prevent a
change in our control. Our articles of incorporation authorize us to issue
preferred stock with designations, rights and preferences determined by our
board of directors. Accordingly, the board of directors can, without shareholder
approval, issue shares of preferred stock with dividend, liquidation,
conversion, voting or other rights that could adversely affect the voting power
or other rights of the holders of our common stock. Additionally, our articles
of incorporation authorize us to issue up to 20,000 shares of Series A Junior
Preferred Stock. Each share of Series A Junior Preferred Stock entitles its
holder to 1,000 votes on all matters submitted to a vote of our shareholders, as
well as preferential dividend and liquidation rights. Series A Junior Preferred
Stock is available for the purpose of preventing a change in control.
There are also certain provisions of the Florida Business Corporation
Act that could delay, defer or impede the removal of incumbent directors and
could make more difficult a merger, tender offer or proxy contest involving us,
even if these events could be beneficial to our shareholders. These provisions
could also limit the price that certain investors might be willing to pay in the
future for our common stock. In addition, Florida has certain laws that may
deter or frustrate takeovers of Florida corporations, although we have at the
present time opted out of these statutes.
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<PAGE>
DETERMINATION OF OFFERING PRICE
Prior to this offering, there has been no public market for our common
stock. As a result, the offering price for our common stock has been determined
by negotiations between us and the representative of the underwriters and is not
necessarily related to our asset value, net worth, or other established criteria
of value. The factors considered in such negotiations, in addition to prevailing
market conditions, include the history of and prospects for the industry in
which we compete, an assessment of our management, our prospects, our capital
structure and other factors as were deemed relevant.
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<PAGE>
USE OF PROCEEDS
We estimate we will receive approximately $17,400,000 from the sale of
2,000,000 shares of common stock offered at an initial public offering price of
$10.00 per share after deducting the underwriting discount, underwriters'
non-accountable expense allowance and additional offering expenses payable by us
(estimated to be approximately $1,000,000). The net proceeds are expected to be
used as follows:
<TABLE>
<CAPTION>
Approximate Approximate
Amount Percentage
------ ----------
<S> <C> <C> <C>
o Advertising............ $4,000,000 23% o Represents costs associated with a national
marketing and advertising campaign, including
advertisements on television, in national
newspapers and other publications, on the
Internet, and in other media of national
circulation.
o New Products and
Services............... 3,000,000 17% o Represents expenses associated with developing
and/or purchasing investment advisory services
and web-based technologies, increasing in-house
investor training and investment information
publishing capabilities, hiring and training
additional client support representatives and
registered representatives and establishing a
financial services portal and expanding our
national call center offering financial advisory
services.
o Strategic Alliances
and Acquisitions....... 3,000,000 17% o We are continually evaluating potential
acquisitions and strategic alliances with other
businesses that are complementary to ours,
including relationships with independent broker
dealers for their clearing and trade execution
business, discount broker dealers for their
retail client base, and investment advisory firms
to provide advisory content for our products and
services. We currently have no firm plans,
commitments or agreements with respect to any
such acquisitions or alliances.
o Increase Net Capital... 7,400,000 43% o Represents amounts for compliance with net
------------ ---------- capital requirements imposed under securities
broker dealer regulations, including the
increased net capital requirements imposed on
firms engaging in clearing operations, which
amounts are necessary to accommodate our planned
expansion and growth.
$17,400,000 100%
============ ==========
</TABLE>
If the underwriters exercise their over-allotment option in full, we
will realize additional net proceeds of approximately $2,760,000 which will
initially be added to our net capital.
13
<PAGE>
The foregoing represents our best estimate of the allocation of the net
proceeds of this offering based upon the current status of our business. This
estimate is based on certain assumptions, including continued expansion of our
client base and corresponding increases in revenues and that the proposed
expansion of our products and services can be completed without unanticipated
delays or costs. If any of these factors change, we may find it necessary to
reallocate a portion of the proceeds within the above-described categories or
use portions of the proceeds for other purposes. Our estimates may prove to be
inaccurate, we may undertake new programs or activities that will require
considerable additional expenditures, or unforeseen expenses may occur.
Based on currently proposed plans and assumptions relating to
implementing our business plans, we believe that the proceeds of this offering,
combined with cash flow from operations, will enable us to fund our presently
anticipated operations. However, we cannot assure you that cash flow from
operations will be sufficient for these purposes. If our plans change, our
assumptions change or prove to be inaccurate or if the proceeds of this offering
and our operating cash flow otherwise prove to be insufficient to implement our
business plans, we may find it necessary or desirable to reallocate a portion of
the proceeds within the above-described categories, use proceeds for other
purposes, seek additional financing or curtail our operations. We cannot assure
you that any additional financing will be available to us on acceptable terms,
or at all.
Proceeds not immediately required for the purposes described above will
be invested principally in United States government securities, short-term
certificates of deposit, money market funds or other short-term interest-bearing
investments.
DIVIDEND POLICY
We paid dividends to our shareholders in the past. Subsequent to June
30, 1999, we paid our shareholders distributions aggregating to $463,690. We are
currently a subchapter S corporation for federal tax purposes and our taxable
income is a direct liability of our current shareholders. We will make a final
distribution to our existing shareholders not later than April 15, 2000 to help
them pay their income taxes arising from our earnings from January 1999 until
the consummation of this offering. We will distribute to them 40% of our
earnings for this period. We estimate that this dividend will be approximately
$1,750,000.
We will become a C corporation effective with the consummation of this
offering and we do not intend to pay any other dividends to our shareholders for
the foreseeable future. We intend to retain any earnings to finance the
development and expansion of our business. Payment of dividends in the future
will be subject to the discretion of our board of directors and will depend upon
our ability to generate earnings, our need for capital and our overall financial
condition among other factors.
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<PAGE>
DILUTION
The difference between the initial public offering price per share of
common stock and the pro forma net tangible book value per share after this
offering constitutes the dilution to investors in this offering. Pro forma net
tangible book value per share of common stock is determined by dividing our net
tangible book value (total tangible assets less total liabilities) by the number
of shares of common stock outstanding.
As of June 30, 1999, our pro forma net tangible book value was
$1,121,203 or $.14 per share of common stock. Pro forma net tangible book value
represents the amount of our total assets, less any intangible assets, total
liabilities and subchapter S corporation distributions to be made in the
estimated aggregate amount of approximately $2,214,000. After giving effect to
the sale of the 2,000,000 shares of common stock offered through this
prospectus, and after deducting the underwriting discount and other estimated
expenses of the offering, our adjusted pro forma net tangible book value as of
June 30, 1999, would have been $18,521,203 or $1.85 per share. This represents
an immediate increase in net tangible book value of $1.71 per share to existing
shareholders and an immediate dilution of $8.15 per share to investors in the
offering. The following table illustrates this per share dilution:
<TABLE>
<CAPTION>
<S> <C> <C>
Initial public offering price........................................ $10.00
Pro forma net tangible book value before offering............... $0.14
Increase attributable to investors in this offering............. $1.71
-----------------
Net tangible book value after offering.......................... $1.85
---------------
Dilution to new investors............................................ $8.15
===============
</TABLE>
If the underwriters exercise their over-allotment option in full, the
pro forma adjusted net tangible book value per share of common stock after the
offering would be $2.07, which would result in dilution to your investment of
$7.93 per share of common stock.
The following table shows, at June 30, 1999, a comparison of the total
number of shares of common stock purchased from us, the total consideration paid
and the average price paid per share by existing common shareholders and to be
paid by investors who purchase shares of common stock in this offering:
<TABLE>
<CAPTION>
Shares Purchased Total Consideration Average
---------------- ------------------- Price
Number Percent Dollars Percent Per Share
------ ------- ------- ------- ---------
<S> <C> <C> <C> <C> <C>
Existing Shareholders............ 8,000,000 80% $ 1,121,203 5.3% $ 0.14
New Investors.................... 2,000,000 20% $20,000,000 94.7 $10.00
----------- ------ ------------ ------ ---------
Total..................... 10,000,000 100% $21,121,203 100%
=========== ====== ============ ======
</TABLE>
The above table assumes completion of the offering and the contribution
of $856,824 of undistributed Subchapter S corporation earnings to additional
paid in capital. Our existing shareholders originally paid $264,379 or $.03 per
share. The above table assumes no exercise of the underwriters' over-allotment
option. If this option is exercised in full, the new investors will have paid
$23,000,000 for 2,300,000 shares of common stock, representing approximately 22%
of the total number of shares of common stock outstanding.
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<PAGE>
CAPITALIZATION
The following table sets forth our capitalization as of June 30, 1999,
adjusted to give effect to the sale of 2,000,000 shares of common stock offered
in this offering at an assumed public offering price of $10.00 per share and the
receipt of the net proceeds from the sale. The table also reflects the
distribution of approximately $464,000 paid subsequent to June 30, 1999 and also
an estimated $1,750,000 to be paid to our existing shareholders to cover their
tax liabilities relating to Subchapter S corporation income from January 1, 1999
through completion of this offering. The table also reflects the conversion of
Empire from a Subchapter S corporation to a C corporation upon completion of
this offering. You should read this table in conjunction with our financial
statements and the notes included elsewhere in this prospectus.
<TABLE>
<CAPTION>
June 30, 1999
-------------
As
Actual Adjusted(1)(2)
------ --------------
<S> <C> <C>
Short-term borrowings........................................ $ 2,474,000 $ 2,474,000
Shareholders' equity:
Preferred stock, $.01 par value, 1,000,000
shares authorized, no shares
issued and outstanding............................
-- --
Series A Junior Preferred Stock, $.01 par value per
share, 20,000 shares authorized, no shares issued
and outstanding...................................
Common stock, $.01 par value, 100,000,000 shares
authorized; 8,000,000 shares (actual), 10,000,000
shares (as adjusted) issued and outstanding.......
80,000 100,000
Additional paid-in capital............................ 184,379 18,421,203
Retained earnings..................................... 3,070,824 --
--------------- -----------------
Total shareholders' equity................................... 3,335,203 18,521,203
--------------- -----------------
Total capitalization......................................... $ 5,809,203 $ 20,995,203
--------------- -----------------
</TABLE>
- -----------------
(1) Adjusted to reflect the sale of 2,000,000 shares of common stock in this
offering at an initial public offering price of $10.00 per share and the
application of the net proceeds therefrom (after deducting the underwriting
discount, non-accountable expense allowance and the estimated expenses of
this offering).
(2) Adjusted to reflect the payment of a distribution paid to our existing
shareholders after June 30, 1999 in the amount of approximately $464,000
and an estimated payment of $1,750,000 to our existing shareholders related
to their tax liability for our net income during the period January 1, 1999
to the date of this offering. As in prior years, we anticipate funding the
distributions from operating cash flow, not from the offering proceeds.
Does not reflect earnings subsequent to July 1, 1999. Also includes an
increase in the amount of $856,824 from undistributed retained earnings to
additional paid-in capital by our existing shareholders and the reduction
of retained earnings by the same amount, as a result of the required
conversion to a C corporation upon completion of this offer. See "Dividend
Policy" and Note to the financial statements.
16
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Introduction
We were incorporated in September 1999 and acquired all of the
outstanding capital stock of Empire Financial Group, Inc. and Advantage Trading
Group, Inc. from our Co-Chief Executive Officers and Co-Chairmen of the Board,
Messrs. Kevin M. Gagne and Richard L. Goble, the former co-owners of these
entities. In exchange, we issued an aggregate of 8,000,000 shares of our common
stock, half of these shares to Mr. Gagne and the other half to Mr. Goble. Our
business is conducted entirely through our wholly owned subsidiaries.
Accordingly, the following discussion and analysis of our financial condition
and results of operations are based on the combined results of these businesses.
We are a full-service, self-clearing, financial services firm that
provides discount brokerage and other financial services to retail and
institutional customers. We also provide trade execution services for
approximately 80 independent broker dealers, as well as for some of our
customers' trades. Our trade execution and clearing capabilities position us to
offer clearing services and online trade execution services to other broker
dealers.
Our retail customers can place their securities orders online through
our automated website located at www.empirenow.com, or over the telephone at
1-800-lowfees (569-3337). We give our retail customers access to useful
financial products and services, such as real time quotes and portfolio
tracking, by telephone or online at our website, as well as access to their
funds through check writing and debit cards. Our retail customers can also use
our website links to obtain market commentary, analysis and research, news and
investment charting. We realize significant cost savings by clearing our own
trades that allow us to competitively price our services to our customers.
We implemented our proprietary equity self-clearing operations in 1996
and customer self-clearing operations in 1998. Prior to that time, we cleared
all of our customer equity and option transactions as a fully-disclosed
correspondent through third parties. Clearing services include the confirmation,
receipt, settlement, custody and delivery functions involved in securities
transactions. We began hiring associates to perform these functions in August
1997 and incurred significant non-recurring costs to hire and train our
associates, as well as systems integration costs during this period. The
conversion to self-clearing has allowed us to realize significant cost savings.
Our subsidiary, Advantage Trading Group, Inc., currently performs
clearing operations only for our subsidiary Empire Financial Group, Inc. We are
in the process of seeking approval to have Advantage Trading Group, Inc. perform
clearing services for other broker dealers and expect to receive this approval
by the end of 1999.
We now assume direct responsibility for the possession and control of
customer securities and other customer assets and the clearance of customers'
securities transactions. Having this responsibility requires us to record on our
balance sheet the customer receivables and customer payables to us that are a
result of customer margin loans (i.e., loans made to customers that are
collateralized by securities held in the customers' margin accounts with us) and
customer free credit balances (i.e., customer cash balances maintained by us),
respectively. In addition, to the extent that our customer debit balances exceed
customer free credit balances, we must obtain financing for any excess debit
balance. We recorded receivables from customers, broker dealers and clearing
organizations of $286,857 and payables to customers, brokers-dealers and
clearing organizations of $316,211 as of June 30, 1999. We contract with
17
<PAGE>
a third party service bureau, SunGard Financial Systems, Inc. for our customer
record keeping and data processing services.
Sources and Description of Revenues
Commissions and Fees
Most of our current revenues are derived from trade execution services
that we provide primarily to approximately 80 independent broker dealers. These
profits derive from bid and ask spreads for securities and the volatility of
stock prices. In addition, commissions and fees include transactional fees
charged to retail and institutional customers. Commission and fees are primarily
affected by changes in transaction volumes and changes in the commission or fee
rates charged per transaction. The significant growth in daily average trading
volumes in the U.S. and major global equities markets combined with our
introduction of online trading services has increased our trading volume.
Mutual fund income
Mutual fund revenue represents customary sales commissions and trailer
fees paid by third party mutual funds in the United States. Commissions relating
to the purchase and sale of mutual funds through our clearing operations are
also included in mutual fund income.
Interest sharing
Interest sharing revenues consist of profits deriving from customer
debit and credit balances.
Order flow payments
We also pay and receive order flow payments. We make order flow
payments to broker dealers to induce them to direct trades to us for execution.
Because of our desire to increase our profitable trade execution business, we
have been paying other broker dealers for their order flow.
Interest and dividends
Interest revenue consists of interest earned on our interest-earning
assets. Our interest income is affected by changes in prevailing interest rates.
Other income
Other income derives from miscellaneous items.
Description of Operating Expenses
Employee compensation and benefits
Our largest operating expense is employee compensation and benefits,
which includes salaries and wages, incentive compensation and related employee
benefits and taxes. Our sales representatives, which make up 21 of our 47
employees, are compensated on a commission basis; therefore, compensation and
benefits vary directly with the employee's individual performance as well as
overall operating results. Therefore, a significant portion of compensation and
benefits expense will fluctuate based on our operating results.
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<PAGE>
Order flow fees
As noted previously, because of our desire to increase our profitable
trade execution business, we have been paying other broker dealers for their
order flow.
Clearing and execution costs
Clearing and execution costs include 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. Execution and clearing costs generally fluctuate based on
transaction volume. Data processing services are generally provided under
longer-term fixed fee arrangements with the providers. Although we execute
trades for others and clear most of the trades we execute, we also still execute
and clear a portion of our trades with third parties and incur costs when doing
so.
Other operating expenses
Other operating expenses include general and administrative expenses
such as fees paid to consultants engaged to support our product, service and
systems development efforts, as well as legal and accounting fees. These
expenses generally fluctuate with overall changes in the level of our business
activities. These expenses also include other costs including postage, printing,
and supplies.
Advertising
Advertising expenses include television, online, print and direct mail
advertising expenses and other costs incurred to create brand awareness, promote
our product and service offerings and introduce new products and services. Due
to the rapid development of new products and services and increased competition,
advertising and promotion has increased significantly from period to period and
management expects this trend to continue in the future.
Occupancy expenses
Occupancy expenses include the costs of leasing and maintaining our
principal office space and storage areas. Occupancy expenses are primarily
affected by increases in the number of employees.
Interest
Interest expenses consist of interest charges associated with our
interest-bearing liabilities such as loans to cover customer margin accounts as
well as under our short-term bank loan. We are permitted to borrow up to
$15,000,000 under our short-term bank loan. This loan bears interest at 125
basis points above the federal funds rate.
Depreciation and amortization
Depreciation and amortization expenses are associated with our fixed
assets and leasehold improvements.
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<PAGE>
Variability of Results
We adjust our expenses in anticipation of and in response to changes in
financial market conditions and customer trading patterns. Certain of our
expenses (including employee compensation, order flow fees, and execution and
clearing costs and other operating expenses) vary directly with changes in
financial performance or customer trading activity. Expenses relating to the
level of temporary employees, contractors, overtime hours, professional
services, and advertising and marketing are adjustable over the short term to
help us achieve our financial objectives. Additionally, developmental spending
(including branch openings, product and service rollouts, and certain
information technology systems improvements) is discretionary and can be altered
in response to market conditions. However, a significant portion of our expenses
such as employee salary compensation, occupancy expenses and our depreciation
and amortization expenses do not vary directly, at least in the short term, with
fluctuations in revenues or securities trading volumes. Also, we view our
developmental spending as essential to our future growth, and therefore attempt
to avoid major adjustments in such spending unless faced with a sustained
slowdown in customer trading activity. Given the nature of our revenues and
expenses, and the economic and competitive factors present in our industry, our
earnings may be subject to significant volatility from period to period. Our
results for any interim period are not necessarily indicative of results for a
full year.
We have experienced substantial changes in and expansion of our
business and operations since we began offering our online Internet investing
services. We expect to continue to experience periods of rapid change in the
future. Our past expansion has placed, and any future expansion would place,
significant demands on our administrative, operational, financial and other
resources.
We expect to experience significant fluctuations in future quarterly
operating results that may be caused by many factors, including the following:
o the timing of introductions or enhancements to online investing
services and products by us or our competitors; market acceptance
of online investing services and products;
o the pace of development of the market for online commerce;
o changes in trading volume in securities markets;
o trends in securities markets;
o domestic and international regulation of the brokerage industry;
o changes in pricing policies by us or our competitors;
o changes in strategy;
o the success of or costs associated with acquisitions, joint
ventures or other strategic relationships;
o changes in key personnel;
o seasonal trends;
o changes in the level of operating expenses to support projected
growth; and
o general economic conditions
Because of the foregoing factors, in addition to other factors that
affect our operating results and financial position, you should not consider
past financial performance or our management's expectations to be reliable
indicators of future performance. You should not use historical trends to
anticipate results or trends in future periods. In that regard, results of
operations and financial condition could be adversely affected by a number of
factors in addition to those discussed above, including overall economic
conditions and lower than expected demand. In addition, our stock price could be
adversely
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affected if our revenues or earnings in any quarter fail to meet the investment
community's expectations, or if there are broader, negative trends in the stock
market in general or Internet stocks in particular.
Results of Operations
Year Ended December 31, 1998 Compared with Year Ended December 31, 1997
Our total revenue for the fiscal year ended December 31, 1998 was
$7,933,999, a 25% increase over the total revenue of $6,325,073 for the fiscal
year ended December 31, 1997. Total revenue increased primarily as a result of
approximately $1.6 million more in commissions and fees in 1998 compared to
1997. Our commission and fee income and mutual fund income have grown since 1997
due to increased trading volume and stock price volatility brought about by new
Securities and Exchange Commission order handling requirements that came into
effect in 1997. Our order flow income decreased by $60,276 in 1998 to $149,246,
compared to $209,522 in 1997, reflecting reductions both in the rate of order
flow payments and in the number of transactions for which payments were paid.
Our interest and dividend revenues increased from $33,681 in 1997 to
$56,350 in 1998 due to increased net capital on which interest accrued.
Our total expenses increased by approximately $1.2 million in 1998 to
$6,843,415, compared to $5,628,395 in 1997 due primarily to increased trading
volume, leading to increased employee compensation as well as greater clearing
and execution costs and other operating expenses. Employee compensation and
benefits increased $299,579 in 1998 to $2,715,069, compared to $2,415,490 in
1997. Our employee expenses tend to increase with increased commissions and fees
because employee compensation is largely performance based.
Our order flow fee expenses remained relatively stable, $1,661,488 in
1998, compared to $1,617,153 in 1997. Our clearing and execution costs increased
by $243,062 to $1,345,528 in 1998 as compared to $1,102,466 in 1997. Although
our subsidiary Advantage Trading Group, Inc. provides execution and clearing
services for us, we still execute most of our customer orders, including all of
our online orders, through third parties.
Other operating expenses, including general and administrative
expenses, increased by $425,983 to $696,341 as compared to $270,358 in 1997 due
to increased operations. We doubled our advertising expenses in 1998 to
$269,293, compared to $134,458 in 1997. Our interest expense increased by
$43,003 in 1998 to $44,363, compared to $1,360 in 1997, due to interest charges
on loans taken to cover customer margin accounts. Depreciation and amortization
was $33,224 in 1998, compared to $28,560 in 1997.
As a result of all of the foregoing factors, net income increased by
nearly 57% in 1998 to $1,090,584 compared to $696,678 in 1997.
Six Months Ended June 30, 1999 Compared with Six Months Ended June 30,
1998.
Total revenues for the six months ended June 30, 1999 were $8,528,693,
increasing by $4,982,292 or 140%, as compared to $3,546,401 in total revenues
for the six months ended June 30, 1998. The significant increase was primarily
due to more than doubling our trade execution services revenues and commissions
as a result of increased trading volume and stock price volatility. Our trade
execution services revenues totaled $5,956,513 for the six months ended June 30,
1999, compared to $2,486,194 for the six months ended June 30, 1998, an increase
of 140%. Our retail brokerage operation
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revenues totaled $1,919,786 for the six months ended June 30, 1999 as compared
to $767,163 for the six months ended June 30, 1998, an increase of 150%.
Our total expenses for the six months ended June 30, 1999 were
$5,932,903, representing an increase of $3,147,008 over the comparable period in
1998. The increase was due primarily to increased trading volume, leading to
increased employee compensation as well as greater order flow fees and other
operating expenses. Employee compensation and benefits increased by $1,773,569
to $2,890,457 for the six months ended June 30, 1999 as compared to $1,116,888
for the six months ended June 30, 1998. Order flow fees increased by $813,160 to
$1,515,982 for the six months ended June 30, 1999, compared to $702,822 for the
six months ended June 30, 1998. Our other operating expenses, which include
general and administrative expenses, increased by $292,488 to $516,646 for the
six months ended June 30, 1999, as compared to $224,158 for the six months ended
June 30, 1998 due to increased operations. We increased our advertising expenses
by $50,817 to $160,455 for the six months ended June 30, 1999 as compared to
$109,638 for the six months ended June 30, 1998. Our interest expense was
$123,388 for the six months ended June 30, 1999 as compared to $784 for the six
months ended June 30, 1998. The increase was due to interest charges on loans
taken to cover customer margin accounts.
As a result of all of the foregoing factors, net income increased by
241% to $2,595,790 for the six months ended June 30, 1999 compared to $760,506
for the six months ended June 30, 1998.
Liquidity and Capital Resources
Cash and cash equivalents at December 31, 1998 were $367,825 compared
to $968,576 at December 31, 1997. Cash and cash equivalents at June 30, 1999
were $1,201,864, compared to $1,332,716 at June 30, 1998.
Pursuant to the SEC's Net Capital Rule, our subsidiaries Empire
Financial Group, Inc. and Advantage Trading Group, Inc. are each currently
required to maintain minimum net capital of $250,000 and a ratio of aggregate
indebtedness to net capital (the "net capital ratio") not to exceed 15 to 1. The
following table provides further information about our compliance with the Net
Capital Rule:
<TABLE>
<CAPTION>
December 31, June 30,
1998 1999
---- ----
(unaudited)
<S> <C> <C>
Empire Financial Group:
Net Capital.............................................. $335,281 $580,789
Minimum Net Capital Requirement.......................... 250,000 250,000
----------- ------------
Excess Net Capital....................................... $ 85,281 $330,789
=========== ============
Aggregate Indebtedness to Net Capital.................... .37 to 1 .62 to 1
=========== ============
Advantage Trading Group:
Net Capital.............................................. $1,392,009 $2,539,428
Minimum Net Capital Requirement.......................... 250,000 250,000
----------- ------------
Excess Net Capital....................................... 1,142,009 2,289,428
=========== ============
Aggregate Indebtedness to Net Capital.................... 4.94 to 1 4.36 to 1
=========== ============
</TABLE>
Net cash used in operating activities was $1,161,424 in 1998 and
$843,177 in 1997. The 38% increase in 1998 compared to 1997 was due to expansion
of our operations and customer transactions.
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Net cash used in operating activities was $1,304,372 for the six months
ended June 30, 1999, compared to $620,055 for the six months ended June 30,
1998, also due to expanded operations and increased transaction volume.
Net cash used in investing activities increased approximately 19% to
$77,086 during 1998 as compared to $65,000 during 1997, primarily due to
increased expenditures for the purchase of property and equipment. Net cash used
in investing activities was $802,456 for the six months ended June 30, 1999,
compared to $6,935 for the six months ended June 30, 1998 due mainly to the
purchase of treasury bills in 1999.
Net cash provided by financing activities was $637,759 in 1998 and
$252,033 used in 1997. The increase in 1998 was due to $942,000 in draws on
our short-term bank loan less $304,241 distributed to our shareholders. Net cash
provided by financing activities was $332,123 for the six months ended June 30,
1999 compared to $50,928 used for the six months ended June 30, 1998, due
primarily to $1,532,000 in draws on our short-term bank loan less $1,199,877 in
distributions to our shareholders. We are currently permitted to borrow up to
$15,000,000 under a short-term loan agreement with Mercantile Bank, N.A. The
loan bears interest at 125 basis points above the federal funds rate of interest
(approximately 6.0% and 6.4% at December 31, 1998 and June 30, 1999,
respectively) and is payable on demand. The short term bank loan balance was
$942,000 at December 31, 1998 and $2,474,000 at June 30, 1999, and was
collateralized by approximately $3,000,000 of customers' margin account
securities. Our current loan agreement expires on September 30, 1999. We plan
to negotiate an extension of this loan agreement.
Based on currently proposed plans and assumptions relating to the
implementation of our business plan, we believe that the proceeds of this
offering, combined with cash flow from operations, will enable us to fund our
presently anticipated planned operations. However, we cannot assure you that we
will realize cash flow from operations or that the cash flow will be sufficient.
If not, or if our plans change, our assumptions change or prove to be
inaccurate, or if the proceeds of this offering and our operating cash flow
otherwise prove 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 or other sources. We cannot assure you that additional
funds will be available in adequate amounts or on acceptable terms. If funds are
needed but are not available, our business would be harmed.
Accounting Standards
We intend to grant stock options to certain employees and consultants
with an exercise price not less than the fair market value at the date of grant.
Certain of these options will be granted as of the date of this prospectus. In
accordance with Statement of Financial Accounting Standards ("SFAS") No. 123,
"Accounting for Stock-Based Compensation," issued by the Financial Accounting
Standards Board, we will apply the intrinsic value method of accounting for
employee stock compensation plans prescribed by Accounting Principles Opinion
No. 25 rather than the fair value method of accounting prescribed by SFAS No.
123. If the fair value method of accounting under SFAS 123 was followed, income
would be reduced by the amortization of the grant date fair value of the options
over the vesting period of the options.
In June 1998, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 133, "Accounting for Derivative
Instruments and Hedging Activities" ("SFAS 133"). SFAS 133 establishes
accounting and reporting standards for derivative instruments, including certain
derivative instruments embedded in other contracts (collectively referred to as
derivatives), and for hedging activities. SFAS 133, as amended by SFAS 137, is
effective for all fiscal quarters of all
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fiscal years beginning after June 15, 2000, with earlier application encouraged.
We do not currently use derivative instruments and, therefore, do not expect
that the adoption of SFAS 133 will have any impact on our financial position or
results of operations.
In March 1998, the Accounting Standards Executive Committee of the
American Institute of Certified Public Accountants or AICPA, issued Statement of
Position No. 98-1, "Accounting for the Costs of Computer Software Developed or
Obtained for Internal Use" ("SOP No. 98-1"), which provides guidance regarding
when software developed or obtained for internal use should be capitalized. SOP
No. 98-1 is effective for fiscal years beginning after December 15, 1998. The
adoption of SOP No. 98-1 in the six months ended June 30, 1999, did not have a
material impact on our financial position or results of operations.
In April 1998, the Accounting Standards Executive Committee of the
AICPA issued Statement of Position 98-5, "Reporting on the Costs of Start-up
Activities" ("SOP 98-5"). SOP 98-5 requires that start-up costs, including
organizational costs be expensed as incurred. We have accepted early adoption of
SOP 98-5 and have expensed all start-up costs.
Year 2000 Readiness
The Year 2000 issue arose from the fact that many existing computer
systems and microprocessors with data functions (including those in
non-information technology equipment and systems) use only two digits to
identify a year in the date field with the assumption that the first two digits
of the year are always "19." Consequently, on January 1, 2000, computers that
are not Year 2000 compliant may read the year as 1900. Systems that calculate,
compare or sort using the incorrect date may malfunction.
We have conducted an assessment of the Year 2000 issue and the
potential effect it will have on us and our business. We have determined that we
will not be required to materially modify or replace our information and
non-information technology systems to properly recognize and utilize dates
beyond December 31, 1999. We presently believe that with modifications
previously made to existing software, conversions to new software and
replacement of some hardware, the Year 2000 issue will be satisfactorily
resolved in our own systems. However, even if these changes are successful,
failure of third parties, to which we are financially or operationally linked,
to address their own system problems could have a material adverse effect on us.
Furthermore, the investing and trading patterns of clients may be affected by
Year 2000 issues as clients become concerned about the Year 2000 issue and the
effect it will have on the U.S. and international stock markets and the
securities industry generally. Changes in these patterns may harm our business.
We continue to monitor and review the Year 2000 issue and, as
appropriate, modify or replace the software (and replace some hardware) in our
computer systems in our main and branch offices. We continue to monitor our own
internal systems to prepare for Year 2000 compliance. Our testing is expected to
involve major market participants, including competing firms and financial
intermediaries, such as stock exchanges and clearing agencies that are prominent
in the U.S. We have also initiated communications with counter-parties,
intermediaries and vendors with whom we have important financial and operational
relationships to determine the extent to which they are vulnerable to the Year
2000 issue. We have not yet received sufficient information from these parties
about their remediation plans to predict the outcome of their efforts.
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To date, Year 2000 readiness has cost us an estimated $25,000
(including upgrades to existing systems) and will cost approximately $12,500
more to complete. We cannot assure you that these estimates will be correct and
actual results could differ materially from our plans.
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BUSINESS
Overview
Empire Financial Holding Company is a full-service, self-clearing,
financial services firm that provides discount brokerage and other financial
services to retail and institutional customers. We also provide trade execution
services for approximately 80 independent broker dealers, as well as for some of
our customers' trades. Our trade execution and clearing capabilities position us
to offer clearing services and online trade execution services to other broker
dealers.
Our retail customers can place their securities orders online through
our secure automated website located at www.empirenow.com, or over the telephone
at 1-800-lowfees (569-3337). We give our retail customers access to useful
financial products and services, such as real time quotes and portfolio tracking
as well as access to their funds through check writing and debit cards. Our
retail customers can also use our website links to obtain market commentary,
analysis and research, news and investment charting. We realize significant cost
savings by clearing our own trades that allow us to competitively price our
services to our customers.
We intend to use the Internet in various ways to help expand our
business. First, we intend to use the Internet to help our existing brokers
serve our clients better. The Internet will help our brokers disseminate
information to clients simultaneously, thereby allowing our brokers to
efficiently serve more clients. Second, we intend to use the Internet to serve
an ever growing number of investors who want to make their trading and
investment decisions on their own. Prior to providing this service, based upon
express representations and qualifications of prospective clients, we
pre-qualify these prospective clients to help ensure that they are capable of
making their own trading and investing decisions.
We were incorporated in Florida in September 1999 and have three wholly
owned subsidiaries: Empire Financial Group, Inc., Advantage Trading Group, Inc.
and Empire Investment Advisors, Inc., that were incorporated in Florida in 1990,
1995 and 1999, respectively. Each of these companies were owned by our two
principal shareholders and in September 1999 we acquired Empire Financial Group,
Inc. and Advantage Trading Group, Inc. from these individuals solely in exchange
for our stock. We conduct our discount/full service brokerage business through
Empire Financial Group and Advantage Trading Group provides trade execution
services for independent broker dealers as well as trade execution and clearing
services for Empire Financial Group. We plan to offer investment advisory
services to our customers through Empire Investment Advisors, Inc.
Recent Trends in the Financial Services Industry
Today's financial services industry is a dynamic marketplace, where all
kinds of financial services can be provided, in many combinations, to various
types of customers. For example investors can now separate financial advisory
services from securities trading. With the development of electronic securities
trading services, investors can substantially reduce transactional charges
compared to traditional full-commissioned brokerage firms. Investors can now
shop for the best rates and services.
Individual investors have become increasingly knowledgeable about
investing, and the large amount of financial information online allows investors
to be more self-reliant and have more control
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over their investment decisions. Many investors now prefer to invest without
paying for personal interaction with financial services professionals. As a
result, many discount brokerage firms now provide online trading facilities with
low to no commissions. Like full service brokerage firms, discount brokerage
firms are covered by the government-sponsored Securities Investor Protection
Corporation, or SIPC, that insures accounts up to $100,000 in cash and up to
$400,000 in other assets. However, discount brokerage firms do not typically
provide the more sophisticated products and services offered by full-service
firms, such as market analysis and information, recommendations and personalized
portfolio tracking with broker advice available when desired.
Our Market Opportunities
Stock market activity has grown dramatically in recent years, with
equity market capitalization doubling in the past five years to over $15
trillion, with large increases in average daily trading volumes as well.
Additionally, as a result of the growth of the Internet as a tool to obtain
information, online trading is now the fastest growing segment of the brokerage
industry and is expected to continue to grow significantly. Online trades of
retail customers accounted for over 25% of all retail stock trades in the U.S.
in the first quarter of 1999 and are expected to grow to 50% by 2002. Current
market research projections indicate that the number of online investor accounts
will jump from approximately 6.7 million at the end of 1998 to over 24 million
by the end of 2002. The value of assets held by customers in accounts with
online brokerage firms is projected to grow from $324 billion in the U.S. at the
end of 1998 to over $3 trillion in 2003. This rapid growth has brought with it
increased competition among financial service providers as they seek to attract
consumers using these new investment methods.
Our Business Strategy
In order to succeed in the financial services industry, we believe that
brokerage firms will have to provide competitive pricing as well as a
comparative advantage in services, including online services. We plan to
effectively compete by implementing the following business strategy:
o Increase online transactions. Because today's investors
increasingly use the Internet to invest, capitalizing on an online
presence is imperative. The proceeds from this offering will allow
us to embark on an aggressive marketing campaign highlighting our
online presence and to continue developing our transaction
execution capabilities. We are also continually seeking strategic
relationships with leading technology providers to support our
services with the latest features to offer superior services to our
customers, empowering them and thereby increasing our volume of
online transactions.
o Become a leading clearing and execution services firm for
independent broker dealers. Our trade execution and clearing
capabilities permit us to expand our business by marketing our
clearing and execution capabilities to independent broker dealers.
By controlling the costs of these services we expect to diversify
our revenue base, realize efficiencies and achieve greater
flexibility. Assuming that we receive the necessary regulatory
approvals, we intend to market our clearing services to other
broker dealers by the end of 1999. We also plan to strengthen our
relationship with these independent broker dealers by creating an
online systems connection to our trade execution services and
offering them online trade execution services in addition to our
current telephone order capabilities.
o Expand our customer base by acquiring independent broker dealers.
Independent broker dealers with established customer bases may lack
the necessary capital and other resources to
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expand their client base. We believe that our ability to provide
broker dealers with the resources they need to meet client demands,
including online trade execution capabilities, will attract broker
dealers to us and allow us to expand our customer base through
acquisitions.
o Establish expertise in investment advisory services. We have
established a subsidiary that will offer investment advisory
services to our customers, which will assist us in establishing a
stronger relationship with our customers. We believe this approach
distinguishes us from many of our competitors.
o Offer services to fee-based financial planners and registered
investment advisors. We plan to increase our customer base and
assets under management by establishing working relationships with
fee-based financial planners and registered investment advisors. We
plan to attract these planners and advisors by providing low cost
trade execution and support services.
o Combine the use of technology with personal interaction to
establish and increase customer service, loyalty and retention. We
understand our technology-based marketplace. However, we believe
that our ability to offer a human touch to compliment electronic
investing will help establish our success and result in customer
retention. To meet these dual needs, we plan to establish both a
Internet financial and investment portal site and expand our
national call center with client support representatives to handle
customer inquiries and requests.
In addition to the above, we are continually exploring strategic
alliances, acquisitions and other opportunities to provide our clients with the
best possible service and products. We do not currently have any understandings,
commitments, arrangements or agreements with respect to any of those types of
arrangements.
Our Business
Securities Trading Services
We provide trade execution services for approximately 80 independent
broker dealers. Our current trade execution capabilities allow us to handle
orders via telephone, and we intend to expand our trade execution capabilities
to include online orders. Our revenues consist primarily of profits that are
derived from these trade execution services. These profits are generated from
bid and ask spreads for securities and the volatility of stock prices. Trade
execution currently accounts for most of our revenues and increased 140% for the
six months ended June 30, 1999 compared to the comparable period in 1998.
Clearing Operations
We implemented proprietary equity self-clearing operations in 1996 and
customer self-clearing operations in 1998. Clearing operations include the
confirmation, receipt, settlement, custody and delivery functions involved in
securities transactions. Performing our own clearing operations allows us to
retain customer free credit balances and securities for use in margin lending
activities subject to SEC and NASD rules. In August 1998, we entered into a
three-year agreement with SunGard Financial Systems, Inc. for the provision of
computer services to support order entry, order routing, securities processing,
customer statements, tax reporting, regulatory reporting, and other services
necessary to the management of a brokerage clearing business.
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We currently provide clearing services only for our own operations. We
are currently seeking regulatory approval for to provide clearing services for
other broker dealers, and expect to obtain this approval by the end of 1999.
After this approval is obtained, we plan to begin marketing and implementing
expanded clearing services. We are also working to connect our trade execution
system so that it will accommodate online trading. We expect that providing
clearing services combined with online trade execution services will strengthen
existing relationships with independent broker dealers and attract additional
broker/dealer clients seeking low cost online trade execution and clearing
services.
Since our conversion to self-clearing, customers' securities typically
are held by us in nominee name on deposit at one or more of the recognized
securities industry depository trust companies, to facilitate ready
transferability. We collect dividends and interest on securities held in nominee
name and make the appropriate credits to customer accounts. We also facilitate
exercise of subscription rights on securities held for our customers. We arrange
for the transmittal of proxy, annual report and tender offer materials to
customers. We rely upon certificate counts and microfilming procedures as
deterrents to theft of securities and, as required by the NASD and certain other
regulatory authorities, carry fidelity bonds covering loss or theft. Our failure
to perform self-clearing accurately and cost-effectively could have a material
adverse effect on our business, financial condition and operating results.
The retail customer accounts we self-clear are carried on a "fully
disclosed" basis, pursuant to a clearing agreement. This agreement provides that
our clients' securities positions and credit balances carry $2,000,000 insurance
coverage through Lloyds of London that is supplemental to standard SIPC
protection for clients' accounts up to $500,000 subject to a limitation of
$100,000 for claims for cash balances. All customer credit balances are subject
to immediate withdrawal from our clearing firm, at the discretion of the
customer.
General Financial Brokerage Services
We also provide financial brokerage services to investors, including
both individuals and small to mid-sized institutions (such as hedge funds, money
managers, mutual funds and pension funds). We charge our customers an agreed
upon commission. Our trading division consists of 21 employees, of which 10 are
registered representatives and registered principals. Commissions revenues
increased 150% for the six months ended June 30, 1999 compared to the comparable
period in 1998.
We also provide our clients with direct access to our trading desks
which are online directly or indirectly with the various stock exchanges and
institutional buyers and sellers via various electronic networks. Our brokers
are committed to using their trading desks to obtain for our clients the fastest
execution of their order at the best possible price at the time the order is
given. In addition, as a result of the technology we use, we can access the most
up-to-date electronic news information and research reports.
Customers can directly place orders to buy and sell NASDAQ and
exchange-listed securities, as well as equity and index options, through our
automated order processing system. We support a range of order types, including
market orders, limit orders (good-till-cancelled or day), stop orders and short
sales. System intelligence automatically checks the parameters of an order,
together with the customer's buying power and positions held, prior to executing
an order. All listed market orders (subject to certain size limitations) are
executed at the National Best Bid/Offer ("NBBO") or better at the time of
receipt by the third market firm or exchange. The NBBO is a dynamically updated
representation of the combined highest bid and lowest offer quoted across all
United States stock exchanges and market makers registered in a specific stock.
Eligible orders are exposed to the marketplace for possible price improvement,
but in no case are orders executed at a price inferior to the NBBO. Limit orders
are
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executed based on an indicated price and time priority. All NASDAQ market orders
(subject to certain size limitations) are executed at the Best Bid/Offer (Inside
Market) or better at the time of receipt by the market-maker.
All transaction and portfolio records are automatically updated to
reflect trading activity. Buy and sell orders placed when the markets are closed
are automatically submitted prior to the next day's market opening. Account
holders receive electronic notification of order executions, printed trade and
confirmations and detailed monthly statements. We also provide for the
transmittal of proxy, annual report and tender offer materials to customers.
Access to Our Services
Our services are widely accessible to our brokerage customers through
multiple gateways, with automated order placement available 24 hours a day,
seven days a week by personal computer. In addition, customers can access our
systems by touch-tone telephone and traditional voice telephone communications.
o Personal Computer. Customers using personal computers can access
our brokerage services through the Internet by direct modem access.
Our website combines an easy-to-use interface with the trading
capabilities that experienced investors demand.
o Voice Telephone. We allow customers to call a toll-free number to
access our brokers and other customer service representatives.
o Touch-tone Telephone. We are also in the process of implementing
touch-tone telephone system to provide an alternate delivery
channel for customers to access automated quote information, place
stock and option orders, review account balances and check messages
from any touch-tone telephone.
We, like other securities firms, are directly affected by national and
international economic and political conditions, broad trends in business and
finance and substantial fluctuations in volume and price levels of securities
and futures transactions. Severe market fluctuations in the future could have a
material adverse effect on our business, financial condition and operating
results. Certain of our competitors with more diverse product and service
offerings may be better positioned to withstand such a downturn in the
securities industry.
Market Data and Financial Information
During trading hours, we continually receive a direct feed of detailed
quote data, market information and news. Customers can create their own personal
lists of stocks and options for quick access to current pricing information. We
provide our customers free access to delayed quotes, including stocks, options,
major market indices, most active issues, and largest gainers and losers for the
major exchanges. Real-time quotes are also available for a small fee. Through
our alliances and website links, we have expanded our services to include
immediate access to breaking news, charts, market commentary and analysis and
company financial information.
Upon placing an order, the customer is provided with a real-time bid
and ask quote, at no extra charge. We also offer our customers a real time quote
service for $14.95 per month, which entitles the customer to receive 250 free
real-time quotes per month (plus $.05 for each additional real-time quote).
Customers who purchase this service also receive 100 free real-time quotes with
each trade placed
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through us. Our website provides links to other business and financial websites,
including the Zacks Financial Research website, which provides comprehensive
investment research content, and the EDGAR database, which provides access to
SEC filings of public companies, among others.
Portfolio Tracking and Records Management
Customers have online access to a listing of all their portfolio assets
held with us, including data on the date of purchase, cost basis, current price
and current market value. The system automatically calculates unrealized profits
and losses for each asset held. Information provided to our customers also
includes total short-term or long-term gain/loss and commissions paid. Detailed
account balance and transaction information include cash and money fund
balances, buying power, net market portfolio value, dividends paid, interest
earned, deposits and withdrawals. Customers can also create watchlists to
include any number of stocks, options, mutual funds and other financial
investments a customer is interested in tracking - for example, assets held at
another brokerage firm.
Cash Management Services
Customer payments are received through the mail or federal wire system
and are credited to customer accounts upon receipt. We also provide other cash
management services to our customers. For example, uninvested funds earn
interest in a credit interest program or can be invested in money market funds.
In addition, we provide free checking services and debit cards for our customer
accounts through a commercial bank and are exploring the expansion of these
services.
Account Security
We use 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. We rely on encryption and authentication technology to provide
the security and authentication necessary to effect the secure exchange of
information.
Lending and Borrowing Activities
o Margin Lending. We make loans to customers collateralized by
customer securities. Margin lending is subject to the margin
requirements and our internal policies, which are more stringent
than the Federal Reserve and NASD requirements. In permitting
customers to purchase securities on margin, we take the risk of a
market decline that could reduce the value of the collateral held
by us to below the customers' indebtedness before the collateral
can be sold, which could result in losses to us. Under applicable
NASD rules, in the event of a decline in the market value of the
securities in a margin account, we are obligated to require the
customer to deposit additional securities or cash in the account so
that at all times the customer's equity in the account is at least
25% of the value of the securities in the account. Our current
internal requirement, however, is that the customer's equity not
fall below 30%. If it does, the customer will be required to
increase the account's equity to 35%. Margin lending to customers
constitutes the major portion of the basis on which our net capital
requirements are determined under the SEC's Net Capital Rule. To
the extent these activities expand, our net capital requirements
will increase.
o Securities Lending and Borrowing. We borrow securities both to
cover short sales and to complete customer transactions in the
event a customer fails to deliver securities by the
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required settlement date. We collateralize such borrowings by
depositing cash or securities with the lender and receive a rebate
(in the case of cash collateral) or pay a fee calculated to yield a
negotiated rate of return. When lending securities, we receive cash
or securities and generally pay a rebate (in the case of cash
collateral) to the other party in the transaction. Securities
lending and borrowing transactions are executed pursuant to written
agreements with counterparties that require that the securities
borrowed by "marked to market" on a daily basis and that excess
collateral be refunded or that additional collateral be furnished
in the event of changes in the market value of the securities. The
securities usually are "marked to market" on a daily basis through
the facilities of the various national clearing organizations.
Strategic Relationships
We have established a strategic alliance with Wit Capital Corporation
to participate as a dealer in certain public offerings in which Wit is the
manager or a co-manager. Wit, with Goldman Sachs & Co. as a major shareholder,
has pioneered the business of online retail distribution of public offerings.
Since commencing operations in September, 1997, Wit has participated in over
ninety public equity offerings, including at least seventy initial public
offerings. These offerings were lead managed by established investment banking
firms, including BancBoston Robertson Stephens Inc., Bear, Stearns & Co, Inc.,
BT Alex Brown, Donaldson Lufkin & Jenrette Securities, Goldman Sachs & Co.,
Hambrecht & Quist LLC, Salomon Smith Barney Inc., and Schroeders, Inc.
Wit Offers participation in such offerings to other online investment
firms who have entered into E*Dealer(TM) Agreements with Wit brokers such as
Empire. Upon Empire's completion of its new website it will complete its
interface with Wit's electronic book for such offerings. Recent offerings in
which Wit was a co-manager include Blockbuster Inc., drkoop.com, Inc., Hoovers,
Inc., Mail.com, and Medscape, Inc.
Prospects for our clearing services include more than 3,000 broker
dealers who have net capital less than $1 million and clear their trades through
traditional broker dealers. Such clearing firms typically do not have cost
structures that support discount commission rates and cannot accommodate online
accounts.
We are actively pursuing additional alliances with various companies to
increase trading volume and operational efficiencies and to further enhance name
recognition. In addition, we regularly examine new ways to provide additional
products and services to our clients.
Product Development
We plan to distinguish ourselves from our competitors and thereby
attract customers through our continual product development. Among our current
plans are the creation of a financial portal or Internet gateway site,
www.myempirenow.com, and the establishment of a financial advisory subsidiary.
o www.myempirenow.com. Our financial portal is in its early stages of
development and is expected to be available to our customers by
December 31, 2000. www.myempirenow.com will provide access to a
full range of financial and investment information and services,
including customer account information, order entry and execution
as well as online training and investor tools, news, online banking
and loan processing, insurance and other financial products and
services. We expect to diversify and increase our revenues through
cross-marketing opportunities created by our portal presence.
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o Investment advisory services. We have established a subsidiary that
will offer investment advisory services to our customers, which
will assist us in establishing a stronger relationship with our
customers.
Sales and Marketing
We plan to increase our brand recognition to attract new customers and
broker dealers. We are developing a comprehensive marketing plan to attract more
clients, experienced broker dealer correspondents, as well as build market
awareness, educate the investing public and develop brand name recognition and
loyalty. We believe that our approach to doing business will create a loyal
client base. We intend to expand our market share through, among other things,
television, direct-response advertising, advertising on our own and other
websites, a public relations program and live seminars. We plan to launch a
national advertising campaign to establish consumer awareness of our deep
discount prices plus other services.
Competition
The market for brokerage services, particularly over the Internet, is
new, rapidly expanding and extremely competitive. There are currently at least
100 online brokerage firms and there are few barriers to entry. This competition
is expected to continue to grow in the future. Major competitors include Charles
Schwab & Co. Inc., E-Trade Group, Inc., TD Waterhouse Group, Inc., Ameritrade
Holding Corporation and Fidelity Brokerage Services, Inc., among many others. In
addition, we compete with financial institutions and investing services. Empire
believes the major factors involved with this competition are costs, service,
quality, ease of use and customer satisfaction. With over 100 discount brokerage
firms, commission rates are also dropping, with companies continuing to reduce
their commissions, sometimes drastically, to compete.
Some of the strongest competition comes from companies who have greater
marketing, financial and technical resources than ours. Because of this, these
competitors can offer a wider range of services and financial products at the
current time. Some of our 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. We expect that new
competitors or alliances among competitors will emerge and may acquire
significant market share.
There can be no assurance that we will be able to compete effectively
with current or future competitors or that the competitive pressures we face
will not harm our business.
Government Regulation
Broker Dealer Regulation
The securities industry is subject to extensive regulation under
federal and state law. The 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"). We are a broker dealer registered with the SEC.
Under the Exchange Act, every registered broker
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dealer that does business with the public is required to be a member of and is
subject to the rules of the NASD. The NASD 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. The NASD 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. The
NASD administers qualification testing for all securities principals and
registered representatives for its own account and on behalf of the state
securities authorities.
We are also subject to regulation under state law. We are currently
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 which 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 or from
sanctioning these broker dealers for engaging in misconduct.
Net Capital Requirements; Liquidity
As a registered broker dealer and member of the NASD, we are subject to
the Net Capital Rule. The Net Capital Rule, which specifies minimum net capital
requirements for registered brokers-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 conservatively certain other assets.
Among these deductions are adjustments (called "haircuts"), which reflect the
possibility of a decline in the market value of an asset prior to disposition.
Failure to maintain the required net capital may subject a firm to
suspension or revocation of registration by the SEC and suspension or expulsion
by the NASD and other regulatory bodies and ultimately could require the firm'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.
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 shareholders, employees or affiliates ("capital withdrawal") 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.
A change in the Net Capital Rule, the imposition of new rules or any
unusually large charge against net capital (from operating losses or otherwise)
could limit those of our operations that require the intensive use of capital,
such as the financing of client account balances, and also could restrict our
ability to pay dividends, repay debt and repurchase shares of our outstanding
stock. A significant
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operating loss or any unusually large charge against net capital could adversely
affect our ability to expand or even maintain our present levels of business,
which could harm our business.
We are a member of SIPC 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. We also carry $2,000,000
additional insurance on client accounts that we clear through Lloyds of London.
Additional Regulation
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, content 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,
NASD and other regulatory agencies.
Furthermore, the applicability to the Internet and other online
services of existing laws in various jurisdictions governing issues such as
property ownership, sales and other taxes and personal privacy is uncertain and
may take years to resolve. Finally, as our services are available over the
Internet in multiple states and foreign countries, and as we have numerous
clients residing in these states and foreign countries, these jurisdictions may
claim that our company is required to qualify to do business as a foreign
corporation in each such state and foreign country.
While our subsidiaries Advantage Trading Group, Inc. and Empire
Financial Group, Inc. are both currently registered as broker dealers in all 50
states as well as Puerto Rico, they are qualified to do business as a foreign
corporation in only a few states; failure by them to qualify as a broker dealer
in other jurisdictions or as an out-of-state or "foreign" corporation in a
jurisdiction where it is required to do so could subject them to taxes and
penalties for the failure to qualify. Our business could be harmed by any new
legislation or regulation, the application of laws and regulations from
jurisdictions whose laws do not currently apply to our business or the
applications of existing laws and regulations to the Internet and other online
services.
Employees
We currently have 47 full-time employees, of which 25 are registered
representatives. We have 26 people in management and operations and 21 in
trading. No employee is covered by a collective bargaining agreement or is
represented by a labor union. We consider our employee relations to be
excellent. We also have entered into independent contractor arrangements with
other individuals on an as-needed basis to assist with programming and
developing proprietary technologies.
Facilities
We are in the process of relocating our principal executive offices to
an approximately 11,800 square foot facility in Longwood, Florida. This facility
is owned by G&G Holding, Inc., an entity owned by Messrs. Gagne and Goble, and
is occupied pursuant to a ten year lease with G&G Holding, Inc. expiring May 31,
2009 at a current rent of $18,576 per month, plus sales and property taxes. Our
principal executive offices were previously located at an approximately 2,400
square foot facility also located in Longwood,
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Florida, under a three-year lease expiring January 31, 2000 at a current rent of
approximately $3,460 per month, plus sales tax. We also have a branch office in
Delray Beach, Florida, and a branch office in Cocoa Beach, Florida. We do not
have lease agreements for our branch offices; the rent for these facilities is
paid by the broker-dealers who are located at these facilities.
Legal Proceedings
We are not a party to any material legal proceedings.
MANAGEMENT
The following table sets forth the names, ages and positions held with
respect to each director and executive officer:
<TABLE>
<CAPTION>
Name Age Position
---- --- --------
<S> <C> <C>
Kevin M. Gagne.......................... 39 Co-Chief Executive Officer and Co-Chairman of the
Board
Richard L. Goble........................ 38 Co-Chief Executive Officer and Co-Chairman of the
Board
Donald A. Wojnowski Jr. ................ 39 Vice President - New Business Development
_____________________................... Director
_____________________................... Director
_____________________................... Director
</TABLE>
Kevin M. Gagne is our co-chief executive officer and co-chairman of the
board. He is also the President of Empire Financial Group, Inc., which he
co-founded in 1990, and the chief executive officer of Advantage Trading Group,
Inc. Mr. Gagne was responsible for the creation of Empire's online trading model
and development of our institutional trading desk. From August 1989 to August
1990, Mr. Gagne was employed by American Express Financial. From September 1988
to August 1989, Mr. Gagne was employed by Thompson McKinnon Securities.
Richard L. Goble is our co-chief executive officer and co-chairman of
the board. He is also the chief executive officer of Empire Financial Group,
Inc., which he co-founded in 1990, and President of Advantage Trading Group,
Inc. Mr. Goble was responsible for the creation of Empire's trading and clearing
operations. From 1987 to 1989 Mr.
Goble was president of Metta Financial Group.
Donald A. Wojnowski Jr. will become our vice president-new business
development effective upon completion of this offering. Mr. Wojnowski joined
Empire Financial Group, Inc. in March 1993 and was the managing principal of our
Cocoa Beach, Florida branch from March 1993 until 1999. From 1987 to March 1993,
Mr. Wojnowski was vice president of Investments with Dean Witter Reynolds, Inc.
Mr. Wojnowski has served as a director of Eckler Industries, Inc. and Smart
Choice Automotive Group, Inc., both publicly traded companies.
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Other Key Employees
George R. Cupples joined Empire in August 1999 and is our chief
compliance officer and controller. From 1990 to 1999 Mr. Cupples worked for the
SEC as an examiner of broker dealers for compliance with various federal and
NASD rules and regulations. His activities also included reviewing litigation
involving broker dealers in enforcement proceedings. From 1982 to 1990 he worked
for the NASD examining broker dealers for compliance with net capital
requirements, customer protection, sales practices and supervisory procedures.
There is no family relationship between any of the officers, key
employees and directors.
The Company's audit and compensation committees are comprised of
_____________ and _________.
Directors hold their offices until the next annual meeting of our
shareholders and until their successors have been duly elected and qualified or
their earlier resignation, removal from office or death. There are currently no
committees of the board of directors.
Officers serve at the pleasure of the board of directors and until the
first meeting of the board of directors following the next annual meeting of our
shareholders and until their successors have been chosen and qualified.
Director Compensation
We do not currently pay our directors any fees for attending board
meetings. We anticipate that following this offering we will pay non-employee
directors $_______ per meeting plus travel reimbursements. In addition, each
non-employee director has received stock options covering __________ shares of
common stock at an exercise price equal to the initial offering price.
Executive Compensation
The following table summarizes all compensation paid by us during the
last three completed fiscal years for our co-chief executive officers and each
other executive officer whose annual compensation exceeded $100,000 during the
fiscal year ended December 31, 1998. Our directors do not receive compensation
for serving as directors.
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<TABLE>
<CAPTION>
Summary Compensation Table
---------------------------------------------------------------------
Other Annual
Annual Compensation Compensation (1)
------------------- ----------------
Name and Principal Position Fiscal Year Salary Bonus $ $
--------------------------- ----------- ------ ------- ---------------
<S> <C> <C> <C> <C>
Kevin M. Gagne, 1998 254,879 -- 566,681
Co-Chief Executive Officer and 1997 416,846 -- 346,900
Co-Chairman of the Board 1996 142,663 -- 111,778
Richard L. Goble, 1998 254,879 -- 566,681
Co-Chief Executive Officer and 1997 416,846 -- 346,900
Co-Chairman of the Board 1996 142,663 -- 111,778
Donald A Wojnowski Jr. 1998 171,850 -- --
Vice President - New Business 1997 199,769 -- --
Development (2) 1996 139,061 -- --
</TABLE>
- ---------------------
(1) Consists of distributions to these individual as shareholders of the
company.
(2) Mr. Wojnowski's compensation was earned as an independent broker dealer
during the years specified and not as an employee of Empire.
Mr. Wojnowski will become an executive officer of Empire upon
completion of this offering.
Employment Agreements
We have entered into five-year employment agreements, effective as of
the date of this offering, with each of Messrs. Gagne, Goble and Wojnowski which
provide for an annual base compensation of $250,000, $250,000, and $60,000,
respectively, and bonuses as the board of directors may in its sole discretion
from time to time determine. Mr. Wojnowski will also receive ___% of commission
revenues generated from his client base and will be paid $300,000 from the
proceeds of this offering as a finder's fee for introducing the representative
of the underwriters to us. Additionally, on the date of this prospectus Mr.
Wojnowski will be granted immediately exercisable options to purchase _______
shares of our common stock at an exercise price equal to the offering price.
Each of the employment agreements provide for employment on a full-time
basis and contain confidentiality and _______-year non-competition provisions.
Indemnification Agreements
We have entered into an indemnification agreement with each of our
directors and executive officers. Each indemnification agreement provides that
we will indemnify such person against certain liabilities (including
settlements) and expenses actually and by him or her in connection with any
threatened or pending legal action, proceeding or investigation (other than
actions brought by us or in our right) to which he or she is, or is threatened
to be, made a party by reason of his or her status as a director, officer or
agent of ours, provided that such director or executive officer acted in good
faith and in a manner he or she reasonably believed to be in or not opposed to
our best interests and, with respect to any criminal proceedings, had no
reasonable cause to believe his or her conduct was unlawful. With respect to any
action brought by us or in our right, a director or executive officer will also
be indemnified, to the extent not prohibited by applicable law, against expenses
and amounts paid in
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settlement, and certain liabilities if so determined by a court of competent
jurisdiction, actually and reasonably incurred by him or her in connection with
such action if he or she acted in good faith and in a manner he or she
reasonably believed to be in or not opposed to our best interests.
Stock Option Plan
Under our 1999 Stock Option Plan (the "1999 Plan"), 500,000 shares of
common stock are reserved for issuance upon exercise of the options. The 1999
Plan is designed to serve as an incentive for retaining qualified and competent
directors, employees, consultants and independent contractors. Options will be
granted to certain persons in proportion to their contributions to the overall
success of the company as determined by the board of directors and our
compensation committee in their sole discretion.
Our board of directors, or a committee thereof, administers and
interprets the 1999 Plan and is authorized to grant options thereunder to all
eligible employees, including our directors and executive officers (whether
current or former employees), as well as consultants and independent
contractors. The 1999 Plan provides for the granting of both "incentive stock
options" (as defined in Section 422 of the Internal Revenue Code of 1986, as
amended) and nonstatutory stock options. Incentive stock options may only be
granted, however, to employees. Options can be granted under the 1999 Plan on
the terms and at the prices determined by the board of directors, or a committee
thereof, except that the per share exercise price of incentive stock options
granted under the 1999 Plan will not be less than the fair market value of the
common stock on the date of grant and, in the case of an incentive stock option
granted to a 10% shareholder, the per share exercise price will not be less than
110% of the fair market value as defined in the 1999 Plan.
Options under the 1999 Plan that would otherwise qualify as incentive
stock options will not be treated as incentive stock options to the extent that
the aggregate fair market value of the shares covered by the incentive stock
options which are exercisable for the first time by any individual during any
calendar year exceeds $100,000.
Options granted under the 1999 Plan will be exercisable after the
period or periods specified in the option agreement. Incentive stock options
granted to employees may vest immediately or in installments over a period of up
to five years commencing on the first anniversary of the date of grant. Options
granted under the 1999 Plan are exercisable no later than ten years from the
date of the grant. Incentive stock options are not transferable. Nonstatutory
stock options may be transferred to the spouse or children of the optionee or
trusts in which the optionee or the optionee's spouse or children are the
beneficiaries as well as by will or by the laws of descent and distribution.
Adjustments in the number of shares subject to options granted under the 1999
Plan can be made by the Board of Directors or the appropriate committee in the
event of a stock dividend or recapitalization resulting in a stock split-up,
combination or exchange of shares.
As of the date of this prospectus, we have granted options under the
1999 Plan to purchase ________ shares of common stock. These options will be
exercisable at a price equal to the initial public offering price per share of
the shares of common stock offered hereby and will expire no later than ten
years from the date of grant. In addition, exercise of the options is contingent
on the optionee's continued employment by us.
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<PAGE>
1999 Incentive Compensation Plan
In September 1999, we adopted our 1999 incentive compensation plan. Our
officers, employees, directors and consultants are eligible to participate in
this plan. The purpose of this plan is to attract and retain persons eligible to
participate in the plan, motivate participants to achieve our long-term goals
and further align the interests of participants with those of our other
shareholders through compensation that is directly linked to the profitability
of our business and increases in shareholder value. Under this plan, we have
reserved ________ shares of our common stock for awards. Our compensation
committee will administer the 1999 incentive compensation plan. This plan
provides our compensation committee with broad discretion to select the
officers, employees and consultants to whom awards may be granted, as well as
the type, size and terms and conditions of each award. The 1999 incentive
compensation plan will permit grants of non-qualified and incentive stock
options, stock appreciation rights and other stock-based awards. Stock option
exercise prices cannot be less than the fair market value of our common stock on
the date the options are issued.
Under the 1999 incentive compensation plan, we have reserved
___________ shares of our common stock for stock options to be granted to
non-employee directors. The 1999 incentive compensation plan provides for the
automatic grant of an option to purchase shares of common stock to each
non-employee director on the date of this prospectus or, for any director who
joins our board after that date, upon joining and an option to purchase shares
of common stock on the date of each later annual shareholders meeting to each
person who continues to serve as a non-employee director on that date, except in
the year that the non-employee director joins our board of directors. Options
granted to non-employee directors on the date that we complete this offering or
upon joining the board will become exercisable in ____ equal installments: on
the date of grant and each of the first ____ anniversaries after that date, as
long as the director continues to serve on our board. Half of the options
granted to non-employee directors at each annual meeting will become exercisable
on the date of grant and the other half will become exercisable on the first
anniversary of that date, as long as the director continues to serve on our
board. Stock options granted to non-employee directors will expire ten years
after their date of grant.
1999 Employee Stock Purchase Plan
In September 1999, we adopted our 1999 employee stock purchase plan
under which a total of __________ shares of common stock are available for sale
to our employees. Our compensation committee will administer the stock purchase
plan. The stock purchase plan permits our eligible employees to purchase common
stock through payroll deductions. The stock purchase plan operates on a calendar
year basis. The stock purchase plan will be implemented in a series of
consecutive offering periods, each approximately three months long. Each
participant will be granted an option to purchase our common stock on the first
day of the three-month period, and the option will be automatically exercised on
the last day of each offering period. The purchase price of each share of common
stock under the stock purchase plan will equal 85% of the lesser of (1) the fair
market value of our common stock on the first date of the offering period or (2)
the fair market value on the date of purchase. Payroll deductions may not exceed
$_______ for any employee in any offering period. No more than ________ shares
in the aggregate may be issued to all participants in any offering period. No
person can purchase common stock under the stock purchase plan if that person,
immediately after the purchase, would own stock possessing 5% or more of the
total combined voting power or value of all outstanding shares of all classes of
our capital stock.
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PRINCIPAL SHAREHOLDERS
The following table sets forth information regarding beneficial
ownership of our common stock as of the date of this prospectus, by (1) each
person who owns beneficially more than 5% of our outstanding common stock, (2)
each of our executive officers, and (3) all directors and executive officers as
a group.
<TABLE>
<CAPTION>
Percent Beneficially Owned
--------------------------
Number of Shares Prior to After
Name and Address of Beneficial Owner(1) Beneficially Owned Offering Offering
--------------------------------------- ------------------ -------- --------
<S> <C> <C> <C>
Kevin M. Gagne............................ 4,000,000 --% --%
Richard L. Goble.......................... 4,000,000 --% --%
_____________________..................... 0 -- --
_____________________..................... 0 -- --
_____________________..................... 0 -- --
Donald A. Wojnowski, Jr.(2) -- -- --
-------------- --------- -------
All directors and executive officers as a
group (7 persons)......................... 8,000,000 100.0% 80%
</TABLE>
- -----------------
(1) The business address of all directors and executive officers is c/o the
Company, 1385 West State Road 434, Longwood, Florida 32750.
(2) Consists of shares purchasable at the public offering price upon
exercise of vested options under the 1999 Plan.
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<PAGE>
CERTAIN TRANSACTIONS
We currently lease the facilities where our principal offices are
located from G&G Holding, Inc., a corporation owned by our principal
shareholders, co-chairmen of the board and co-chief executive officers, Messrs.
Gagne and Goble. The lease has a term of ten years expiring May 31, 2009 and has
a current rent of $18,576 per month, plus sales and property taxes. Our Cocoa
Beach, Florida branch facility is owned by Donald A. Wojnowski, our vice
president-new business development. Rent for this facility is paid by the
broker-dealers who are located at this facility, including Mr. Wojnowski.
In August 1999 we acquired all of the outstanding capital stock of each
of Advantage Trading Group, Inc. and Empire Financial Group, Inc. from Messrs.
Gagne and Goble in exchange for a total of 8,000,000 shares of our common stock,
issued in equal amounts to Messrs. Gagne and Goble. We have also agreed to issue
to Mr. Wojnowski, on the date of this prospectus, immediately exercisable
options to purchase _____ shares of our common stock at an exercise price equal
to the offering price. We have also agreed to pay Mr. Wojnowski $300,000 from
the proceeds of this offering as a finder's fee for introducing the
representative of the underwriters to Empire.
We paid dividends to Messrs. Gagne and Goble in the past. Subsequent to
June 30, 1999, Messrs. Gagne and Goble received distributions in the aggregate
amount of $463,690. We are currently a subchapter S corporation for federal tax
purposes and our taxable income was a direct liability of our shareholders. As a
final payment to Messrs. Gagne and Goble to assist them in the payment of their
income tax liability related to our 1999 earnings prior to the offering, we have
agreed to make a final distribution to them no later than April 15, 2000 equal
to 40% of our net income from January 1, 1999 through the completion of the
offering. We estimate that this dividend will be approximately $1,750,000.
Approval of Affiliated Transactions
We believe that each of the foregoing transactions were on terms no
less favorable than those which could have been obtained from unaffiliated third
parties. Following completion of this offering, all transactions between us and
our directors, executive officers and principal shareholders will be on terms no
less favorable than could be obtained from unaffiliated third parties and will
be approved by a majority of our independent outside directors.
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DESCRIPTION OF CAPITAL STOCK
After this offering, our authorized capital stock will consist of
100,000,000 shares of common stock, par value $.01 per share, 10,000,000 shares
of which will be issued and outstanding, 1,000,000 shares of preferred stock,
par value $.01 per share, no shares of which are issued and outstanding, and
20,000 shares of Series A Junior Preferred Stock, par value $.01 per share, no
shares of which are issued and outstanding.
Common Stock
Subject to the rights of the holders of any preferred stock that may be
outstanding and that may have preferential dividend rights, each holder of
common stock on the applicable record date is entitled to receive the dividends
declared by the Board of Directors out of funds legally available therefor, and,
in the event of liquidation, to share pro rata in any distribution of our assets
after payment or providing for the payment of liabilities and the liquidation
preference of any outstanding preferred stock.
Each holder of common stock is entitled to one vote for each share held
of record on the applicable record date on all matters presented to a vote of
shareholders, including, subject to the rights of holders of our Series A
Preferred Stock described below, the election of directors. Holders of common
stock have no cumulative voting rights or preemptive rights to purchase or
subscribe for any stock or other securities, and there are no conversion rights
or redemption or sinking fund provisions with respect to this stock. All
outstanding shares of common stock are, and the shares of common stock offered
hereby will be, when issued, fully paid and nonassessable.
Preferred Stock
Our board of directors has the authority to issue 1,000,000 shares of
preferred stock in one or more series and to fix, by resolution, conditional,
full, limited or no voting powers, and the designations, preferences and
relative, participating, optional or other special rights, if any, and the
qualifications, limitations or restrictions thereof, if any, including the
number of shares in the series (which the board of directors may increase or
decrease as permitted by Florida law), liquidation preferences, dividend rates,
conversion or exchange rights, redemption provisions of the shares constituting
any series and such other special rights and protective provisions with respect
to any class or series as the board of directors may deem advisable without any
further vote or action by the shareholders. Any shares of preferred stock so
issued could have priority over the common stock with respect to dividend or
liquidation rights or both and could have voting and other rights of
shareholders.
Our articles of incorporation also authorize us to issue 20,000 shares
of Series A Junior preferred stock, none of which are outstanding. Each share of
Series A Junior Preferred Stock entitles its holder to 1,000 votes on all
matters submitted to a vote of our stockholders, as well as quarterly dividends
equal to the greater of $1.00 or 1,000 times the total per share amount of all
cash dividends and 1,000 times the total per share amount of all non-cash
dividends other than a dividend payable in shares of common stock, declared on
our common stock since the prior quarterly dividend payment date. Each share of
Series A Junior Preferred Stock also carries with it the right to receive, if we
are dissolved or liquidated, $1.00 per share plus accrued but unpaid dividends,
plus 1,000 times the per share amount to be distributed to holders of our common
stock.
One of the effects of the existence of our unissued preferred stock and
particularly, our authorized, but unissued, shares of Series A Junior Preferred
Stock, is to render it more difficult and discourage an
43
<PAGE>
attempt to obtain control of Empire through a merger, tender offer, proxy
contest or otherwise. This could result in delay or prevention of a change in
control even if some of our shareholders believe that a change in control is in
their best interests.
We have no present plans to issue any shares of preferred stock.
Anti-takeover Effects of Our Articles of incorporation and Bylaws
General
Certain provisions of our articles of incorporation and bylaws may be
deemed to have an anti-takeover effect and may delay, defer or prevent a tender
offer or takeover attempt, including attempts that might result in a premium
being paid over the market price for the shares held by shareholders. The
following provisions may not be amended in our articles of incorporation or
bylaws without the affirmative vote of the holders of two-thirds of the
outstanding shares of common stock.
Special Meetings of Shareholders
Our articles of incorporation and bylaws provide that special meetings
of our shareholders be called only by a majority of the board of directors, our
co-chief executive officers or holders of not less than two-thirds of our
outstanding voting stock.
Advance Notice Requirements for Shareholder Proposals and Director
Nominations
Our articles of incorporation and bylaws provide that shareholders
seeking to bring business before an annual meeting of shareholders, or to
nominate candidates for election as directors at an annual or special meeting of
shareholders, must provide timely notice thereof in writing. To be timely, a
shareholder's notice must be delivered to or mailed and received at our
principal executive offices not less than 60 days nor more than 90 days prior to
the meeting; provided, however, that in the event that less than 70 days' notice
or prior public disclosure of the date of the meeting is given or made to
shareholders, notice by the shareholder, to be timely, must be received no later
than the close of business on the 10th day following the day on which the notice
of the date of the meeting was mailed or the public disclosure was made,
whichever is first. The bylaws also specify certain requirements as to the
content and form of a shareholder's notice. These provisions may preclude
shareholders from bringing matters before the shareholders at an annual or
special meeting or from making nominations for directors at an annual or special
meeting.
Amendment of Bylaws
The bylaws may only be altered, amended or repealed by the majority
vote of the board of directors or the affirmative vote of the holders of at
least a majority of our outstanding shares of common stock.
Anti-takeover Effects of Florida Law
Florida has enacted legislation that may deter or frustrate takeovers
of Florida corporations. The Florida Control Share Act generally provides that
shares acquired in a "control share acquisition" will not possess any voting
rights unless such voting rights are approved by a majority of the corporation's
disinterested shareholders. A "control share acquisition" is an acquisition,
directly or indirectly, by any person of ownership of, or the power to direct
the exercise of voting power with respect to, issued and
44
<PAGE>
outstanding "control shares" of a publicly held Florida corporation. "Control
shares" are shares, which, except for the Florida Control Share Act, would have
voting power that, when added to all other shares owned by a person or in
respect to which such person may exercise or direct the exercise of voting
power, would entitle such person, immediately after acquisition of such shares,
directly or indirectly, alone or as a part of a group, to exercise or direct the
exercise of voting power in the election of directors within any of the
following ranges: (i) at least 20% but less than 33-1/3% of all voting power;
(ii) at least 33-1/3% but less than a majority of all voting power; or (iii) a
majority or more of all voting power.
At the present time we have opted out of both of these statutes as
permitted thereunder.
The Florida Affiliated Transactions Act generally requires
supermajority approval by disinterested shareholders of certain specified
transactions between a public corporation and holders of more than 10% of the
outstanding voting shares of the corporation (or their affiliates).
Additionally, Florida law and our articles and bylaws also authorize us
to indemnify our directors, officers, employees and agents. In addition, our
articles of incorporation and Florida law presently limit the personal liability
of corporate directors for monetary damages, except where the directors (i)
breach their fiduciary duties, and (ii) such breach constitutes or includes
certain violations of criminal law, a transaction from which the directors
derived an improper personal benefit, certain unlawful distributions or certain
other reckless, wanton or willful acts or misconduct.
Transfer Agent
The transfer agent for our common stock is American Stock Transfer and
Trust Company, New York, New York.
45
<PAGE>
SHARES ELIGIBLE FOR FUTURE SALE
Upon completion of the offering, we will have 10,000,000 shares of
common stock outstanding. Of these shares, the 2,000,000 shares of common stock
sold in the offering will be freely tradeable without restriction under the
Securities Act. The remaining 8,000,000 shares of common stock will be
"restricted securities" as defined in Rule 144 and will become eligible for
public sale subject to the restrictions of Rule 144 commencing in September
2000.
In general, under Rule 144, if a period of at least one year has
elapsed since the later of the date the "restricted shares" (as that phrase is
defined in Rule 144) were acquired from us and the date they were acquired from
an "affiliate" of ours, as that term is defined in Rule 144 (an "Affiliate"),
then the holder of the restricted shares (including an Affiliate) is entitled to
sell a number of shares within any three-month period that does not exceed the
greater of 1% of the then outstanding shares of the common stock or the average
weekly reported volume of trading of the common stock on The NASDAQ National
Market during the four calendar weeks preceding the sale. The holder may only
sell the shares through unsolicited brokers' transactions or directly to market
makers. Sales under Rule 144 are also subject to certain requirements pertaining
to the manner of the sales, notices of the sales and the availability of current
public information concerning us. An Affiliate may sell shares not constituting
restricted shares in accordance with the foregoing volume limitations and other
requirements but without regard to the one-year holding period.
Under Rule 144(k), if a period of at least two years has elapsed
between the later of the date restricted shares were acquired from us and the
date they were acquired from an Affiliate, as applicable, a holder of these
restricted shares who is not an Affiliate at the time of the sale and has not
been an Affiliate for at least three months prior to the sale would be entitled
to sell the shares immediately without regard to the volume limitations and
other conditions described above.
Our directors, executive officers and shareholders who own an aggregate
of 8,000,000 shares of common stock (representing all of the issued and
outstanding shares prior to this offering) have entered into written agreements
not to sell or otherwise dispose of the shares of common stock beneficially
owned by them for 12 months after the date of this prospectus without the
consent of the Representative.
We can make no predictions as to the effect, if any, that sales of
shares or the availability of shares for sale will have on the market price
prevailing from time to time. Nevertheless, sales of significant amounts of the
common stock in the public market, or the perception that these sales may occur,
could adversely affect prevailing market prices.
46
<PAGE>
UNDERWRITING
Subject to certain terms and conditions contained in the Underwriting
Agreement among us, LM Capital Securities, Inc., as the representative of the
underwriters (the "Representative"), the underwriters named below have severally
agreed to purchase from us, and we have agreed to sell to the several
underwriters, the number of shares of common stock set forth opposite their
names below:
<TABLE>
<CAPTION>
Name of Underwriter Number of Shares
- ------------------- ----------------
<S> <C>
LM Capital Securities, Inc.......................................................
Empire Financial Group, Inc......................................................
Total...................................................................
</TABLE>
Empire Financial Group, Inc., a subsidiary of the company, will
participate upon the same terms and condition in the offering as the other
underwriters.
The Underwriting Agreement provides that the obligations of the several
underwriters to purchase the common stock are subject to approval of certain
legal matters by counsel and to various other conditions. If any of the shares
of common stock are purchased by the underwriters pursuant to the Underwriting
Agreement, all the shares of common stock (other than shares of common stock
covered by the over-allotment option described below) must be so purchased.
We have agreed to indemnify the underwriters against certain
liabilities, including liabilities under the Securities Act, or to contribute to
certain payments that the underwriters may be required to make in respect
thereof. Insofar as indemnification for liabilities arising under the Securities
Act may be permitted to our directors, officers or controlling persons, we have
been advised that in the opinion of the SEC the indemnification is against
public policy as expressed in the Securities Act and is therefore unenforceable.
The underwriters propose to offer the shares of common stock directly
to the public at $10.00 per share. The underwriters may allow certain dealers,
who are members of the NASD, concessions, not in excess of $.80 per share of
common stock of which not in excess of $___ per share of common stock may be
reallowed to other dealers who are members of the NASD. The offering prices,
reallowances and concessions will not be changed until after this offering has
been completed.
We have granted a 45-day over-allotment option to the underwriters to
purchase up to 300,000 additional shares of common stock at the offering price
less the underwriting discount. If the underwriters exercise such over-allotment
option, then each of the underwriters will be committed, subject to certain
conditions, to purchase the additional shares in approximately the same
proportion as set forth in the above table. The underwriters may exercise this
option only to cover over-allotments made in connection with the sale of the
shares of common stock offered hereby.
We have agreed to pay the Representative a nonaccountable expense
allowance of 2% of the gross proceeds of this offering, of which $100,000 has
been paid as of the date of this prospectus. We have also agreed to pay all
expenses in connection with qualifying the shares of common stock offered hereby
for sale under the laws of the states the Representative designates, including
expenses of counsel retained for that purpose by the Representative.
47
<PAGE>
We have agreed to sell to the Representative and its designees for an
aggregate of $200.00, warrants (the "Underwriters' Warrants") to purchase up to
200,000 shares (10% of shares sold in the offering) of common stock at an
exercise price of $12.50 per share (125% of the public offering price per
share). The Underwriters' Warrants may not be sold, transferred, assigned or
hypothecated for one year from the date of this prospectus, except to the
officers and partners of the Representative and members of the underwriting
syndicate and selling group and are exercisable at any time and from time to
time, in whole or in part, during the five-year period commencing on the date of
this prospectus (the "Warrant Exercise Term"). During the Warrant Exercise Term,
the holders of the Underwriters' Warrants are given, at nominal cost, the
opportunity to profit from a rise in the market price of the common stock. To
the extent that the Underwriters' Warrants are exercised, dilution to the
interests of our shareholders will occur. Further, the terms upon which we will
be able to obtain additional equity capital may be adversely affected since the
holders of the Underwriters' Warrants can be expected to exercise them at a time
when we would, in all likelihood, be able to obtain any needed capital on terms
more favorable to us than those provided in the Underwriters' Warrants. Any
profit realized by the underwriters on the sale of the Underwriters' Warrants or
the underlying shares of common stock may be deemed additional underwriting
compensation.
This offering is being conducted in accordance with Rule 2720 of the
NASD. That rule requires, among other things, that the initial public offering
price can be no higher than that recommended by a "qualified independent
underwriter," as defined by the NASD, which underwriter has served in that
capacity and performed due diligence investigations and reviewed and
participated in the preparation of the registration statement of which this
prospectus forms a part. The Representative in this offering served as the
qualified independent underwriter and received no additional compensation for
serving in this capacity.
Our directors, executive officers and our shareholders who own an
aggregate of 8,000,000 shares of common stock have entered into written
agreements not to sell or otherwise dispose of any of their common stock for a
period of 12 months from the date of this prospectus, without the prior written
consent of the Representative.
Prior to this offering, there has been no public market for the common
stock. Consequently, the initial public offering price for the common stock has
been determined by negotiations between us and the Representative and is not
necessarily related to our asset value, net worth or other established criteria
of value. The factors considered in these negotiations, in addition to
prevailing market conditions, included the history of and prospects for the
industry in which we compete, an assessment of our management, our prospects,
our capital structure and certain other factors as were deemed relevant.
In connection with this offering, certain underwriters and selling
group members and their respective affiliates may engage in transactions that
stabilize, maintain or otherwise affect the market price of the common stock.
These transactions may include stabilization transactions effected in accordance
with Rule 104 of Regulation M, pursuant to which the underwriters or selling
group members may bid for or purchase common stock for the purpose of
stabilizing its market price.
The underwriters also may create a short position for the account of
the underwriters by selling more common stock in connection with the offering
than they are committed to purchase from us and in that a case may purchase
common stock in the open market following completion of the offering to cover
all or a portion of that short position.
The underwriters may also cover all or a portion of that short
position, up to 300,000 shares of common stock, by exercising the over-allotment
option. In addition, the Representative may impose
48
<PAGE>
"penalty bids" under contractual arrangements with the underwriters, whereby it
may reclaim from an underwriter (or dealer participating in the offering) for
the account of other underwriters, the selling concession with respect to common
stock that is distributed in any offering but subsequently purchased for the
account of the underwriters in the open market. Any of the transactions
described in this paragraph may result in the maintenance of the price of the
common stock at a level above that which might otherwise prevail in the open
market. None of the transactions described in this paragraph is required, and,
if they are undertaken, they may be discontinued at any time.
Under the securities laws of certain states, the shares may be sold in
those states only through registered or licensed broker dealers or pursuant to
available exemptions from such requirements. In addition, in certain states the
securities may not be sold unless the securities have been registered or
qualified for sale in that state or an exemption from that requirement is
available and is complied with.
LEGAL MATTERS
Greenberg Traurig, P.A., a professional association, Miami, Florida
will give an opinion regarding the validity of the common stock offered under
this prospectus. Certain legal matters relating to the offering will be passed
upon for the Representative by Berger Davis & Singerman, P.A., a professional
association, Miami, Florida.
EXPERTS
The statements of financial condition of Empire as of December 31, 1998
and the related statements of income, changes in shareholders' equity and cash
flows for the two years then ended included in this prospectus and incorporated
by reference in the registration statement, have been audited by Sweeney, Gates
& Co., independent certified public accountants, as stated in their report
appearing herein and incorporated by reference in the registration statement,
and are included and incorporated by reference in reliance upon the reports of
such firm given upon their authority as experts in accounting and auditing.
WHERE YOU CAN FIND MORE INFORMATION
We have filed with a registration statement containing this prospectus
with the Securities and Exchange Commission with respect to the common stock
being offered in this offering. This prospectus does not contain all the
information set forth in the registration statement and the exhibits and
schedules thereto, certain portions of which are omitted as permitted by
Securities and Exchange Commission rules and regulations. Statements made in
this prospectus as to the contents of any contract, agreement or other document
referred to are not necessarily complete; with respect to any contract,
agreement or other document filed as an exhibit to the registration statement,
please refer to the exhibit for a more complete description of the matter
involved. Each statement in this prospectus is deemed qualified in its entirety
by reference to the registration statement and to the financial statements,
schedules and exhibits filed as a part of it.
The registration statement filed by us with the Securities and Exchange
Commission can be inspected and copied at the public reference facilities
maintained by the Securities and Exchange Commission at Room 1024, Judiciary
Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549 and the Regional Offices
of the SEC located in the Citicorp Center, 500 West Madison Street, Suite 1400,
Chicago, Illinois 60661, and at 7 World Trade Center, 13th Floor, New York, New
York 10048: filings may also be obtained from the Securities and Exchange
Commission's website at www.sec.gov. You may also call the Securities and
Exchange Commission at 1-800-SEC-0330 for more information.
49
<PAGE>
As of the date of this prospectus, we will become subject to the
reporting requirements of the Securities Exchange Act of 1934 and will file
reports, proxy statements and other information with the Securities and Exchange
Commission. These reports, proxy statements and other information can be
inspected and copied at the public reference facilities of the Securities and
Exchange Commission set forth above, and copies of these materials can be
obtained from the Securities and Exchange Commission's Public Reference Section
at prescribed rates. We intend to furnish our shareholders with annual reports
containing audited financial statements and any other periodic reports we deem
appropriate or as may be required by law.
50
<PAGE>
EMPIRE FINANCIAL HOLDING COMPANY AND SUBSIDIARIES
CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1998 AND 1997
AND
FOR THE SIX MONTHS ENDED JUNE 30, 1999 AND 1998 (UNAUDITED)
<TABLE>
<CAPTION>
TABLE OF CONTENTS
<S> <C>
Report of Independent Certified Public Accountants F-2
Financial Statements:
Consolidated Statement of Financial Condition F-3
Consolidated Statements of Income F-4
Consolidated Statement of Changes in Shareholders' Equity F-5
Consolidated Statement of Cash Flows F-6
Footnotes to Financial Statements F-7
</TABLE>
F-1
<PAGE>
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
The Shareholders and Board of Directors
Empire Financial Holding Company
We have audited the accompanying consolidated balance sheet of Empire
Financial Holding Company and subsidiaries as of December 31, 1998, and the
related statement of income and changes in shareholders' equity and cash flows
for the two years ended December 31, 1998. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audit.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits to obtain
reasonable assurance about whether the financial statements are free from
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the 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 audits provide a reasonable basis for our
opinion.
In our opinion, the financial statements referred to above present
fairly, in all material respects, the financial position of Empire Financial
Holding Company and subsidiaries at December 31, 1998, and the results of its
operations and its cash flows for the two years ended December 31, 1998 in
conformity with generally accepted accounting principles.
Sweeney, Gates & Co.
Ft. Lauderdale, Florida
February 19, 1999
F-2
<PAGE>
<TABLE>
<CAPTION>
EMPIRE FINANCIAL HOLDING COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
DECEMBER 31, 1998 AND
JUNE 30, 1999 (UNAUDITED)
Pro Forma
December 31, June 30, (Note 3)
1998 1999 June 30, 1999
---- ---- -------------
(Unaudited)
<S> <C> <C> <C>
ASSETS
Cash and cash equivalents........................................... $ 367,825 $ 1,201,864 $ 1,201,864
Cash and Treasury Bills segregated in compliance with regulations... 1,343,622 800,000 800,000
Deposits with clearing organizations and others..................... 1,445,941 711,419 711,419
Receivables from broker dealers and clearing organizations.......... 508,835 670,447 670,447
Receivables from customers.......................................... 5,000,391 10,310,034 10,310,034
Investment in Treasury Bills........................................ 6,894 797,334 797,334
Other current assets................................................ 9,284 13,396 13,396
Securities purchased, not yet sold, at market value................. 33,750 -- --
Property and equipment, net of accumulated depreciation............. 111,575 103,369 103,369
Other assets and deposits........................................... 32,671 19,272 19,272
----------- ----------- ------------
Total assets $8,860,788 $14,627,135 $14,627,135
=========== =========== ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities:
Short-term bank loan............................................. $ 942,000 $ 2,474,000 $ 2,474,000
Drafts payable................................................... 341,134 387,458 387,458
Payable to customers............................................. 4,384,361 7,096,223 7,096,223
Payable to broker dealers and clearing organizations............. 582,484 489,011 489,011
Securities sold, not yet purchased, at market value.............. 7,725 -- --
Commissions payable.............................................. 78,935 250,874 250,874
Accounts payable and accrued expenses............................ 584,859 594,366 594,366
Distribution payable to shareholders............................. -- -- 2,214,000
----------- ----------- ------------
Total liabilities 6,921,498 11,291,932 13,505,932
Shareholders' equity:
Preferred stock, $.01 par value, 1,000,000 shares authorized;
none issued and outstanding.................................... -- -- --
Series A Junior preferred stock, $.01 par value, 20,000 shares
authorized; none issued and outstanding........................ -- -- --
Common stock, $.01 par value, 100,000,000 shares authorized;
8,000,000 shares issued and outstanding 80,000 80,000 80,000
Additional paid-in capital....................................... 184,379 184,379 1,041,203
Retained earnings................................................ 1,674,911 3,070,824 --
----------- ----------- ------------
Total shareholders' equity............................... 1,939,290 3,335,203 1,121,203
----------- ----------- ------------
$8,860,788 $14,627,135 $14,627,135
=========== =========== ============
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-3
<PAGE>
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF INCOME
FOR THE YEARS ENDED DECEMBER 31, 1998 AND 1997 AND
FOR THE SIX MONTHS ENDED JUNE 30, 1999 AND 1998 (UNAUDITED)
Year ended December 31, Six months ended June 30,
----------------------- -------------------------
1998 1997 1999 1998
---- ---- ---- ----
(Unaudited)
<S> <C> <C> <C> <C>
Revenues:
Commissions and fees................... $7,373,073 $5,737,356 $8,133,046 $3,304,728
Mutual fund income..................... 258,318 215,320 188,314 111,335
Interest sharing....................... 83,259 -- 94,565 31,880
Order flow income...................... 149,246 209,522 55,575 65,743
Interest and dividends................. 56,350 33,681 28,002 26,041
Other income........................... 13,753 129,194 29,191 6,674
----------- ------------ ----------- -----------
7,933,999 6,325,073 8,528,693 3,546,401
----------- ------------ ----------- -----------
Expenses:
Employee compensation and benefits..... 2,715,069 2,415,490 2,890,457 1,116,888
Order flow fees........................ 1,661,488 1,617,153 1,515,982 702,822
Clearing and execution costs........... 1,345,528 1,102,466 664,452 578,989
Other operating expenses............... 696,341 270,358 516,646 224,158
Advertising............................ 269,293 134,458 160,455 109,638
Occupancy expense...................... 78,109 58,550 41,229 34,262
Interest............................... 44,363 1,360 123,388 784
Depreciation and amortization.......... 33,224 28,560 20,294 18,354
----------- ------------ ----------- -----------
6,843,415 5,628,395 5,932,903 2,785,895
----------- ------------ ----------- -----------
Net Income................................ $1,090,584 $ 696,678 $2,595,790 $ 760,506
=========== ============ =========== ===========
Pro forma information (unaudited)
Net income (historical) before income
taxes (see Note 3)................... $1,090,584 $ 696,678 $2,595,790 760,506
Income taxes........................... 410,000 262,000 977,000 286,000
----------- ------------ ----------- -----------
Net income............................. $680,584 $434,678 $1,618,790 $474,506
=========== ============ =========== ===========
Earnings per share - basic and diluted. $ 0.09 $ 0.05 $ 0.20 $ 0.06
=========== ============ =========== ===========
Weighted average shares outstanding....
8,000,000 8,000,000 8,000,000 8,000,000
=========== ============ =========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-4
<PAGE>
<TABLE>
<CAPTION>
EMPIRE FINANCIAL HOLDING COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1998 AND 1997 AND
FOR THE SIX MONTHS ENDED JUNE 30, 1999 AND 1998 (UNAUDITED)
Series A Junior Additional
Preferred Stock Preferred Stock Common Stock Paid-in Retained
Shares Amount Shares Amount Shares Amount Capital Earnings
------ ------ ------ ------ ------ ------ ------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance, January 1, 1997 - $ - - $ - 8,000,000 $80,000 $184,379 $ 443,923
Net income - - - - - - - 696,678
Shareholders' distributions - - - - - - - (252,033)
--- --- --- --- ----------- ------- --------- -----------
Balance, December 31, 1997 - - - - 8,000,000 80,000 184,379 888,568
Net income - - - - - - - 1,090,584
Shareholders' distributions - - - - - - - (304,241)
--- --- --- --- ----------- ------- --------- -----------
Balance, December 31, 1998 - - - - 8,000,000 80,000 184,379 1,674,911
Net income - - - - - - - 2,595,790
Shareholders' distributions - - - - - - - (1,199,877)
--- --- --- --- ----------- ------- --------- -----------
Balance, June 30, 1999 (unaudited) - $ - - $ - 8,000,000 $80,000 $184,379 $3,070,824
=== === === === =========== ======= ========= ===========
Pro forma statement of additional
paid-in capital and retained
earnings (unaudited)
Balance, June 30, 1999 184,379 $3,070,824
Distributions to shareholders - (2,214,000)
Transfer of undistributed
earnings to additional
paid-in capital 856,824 856,824
----------- -----------
Pro forma balance, June 30, 1999 $ 1,041,203 $ -
=========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-5
<PAGE>
<TABLE>
<CAPTION>
EMPIRE FINANCIAL HOLDING COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Six months ended
December 31, June 30,
------------ --------
1998 1997 1999 1998
---- ---- ---- ----
(Unaudited)
<S> <C> <C> <C> <C>
Cash flows from operating activities:
Net income............................................ $ 1,090,584 $ 696,678 $ 2,595,790 $ 760,506
Depreciation and amortization......................... 33,224 32,782 20,294 18,354
Loss on disposal of assets............................ 16,081 1,461 -- --
Unrealized gain or loss............................... -- -- (72) 2,715
Adjustments to reconcile net income to net cash
provided by operating activities:
(Increase) decrease in segregated cash............ (1,343,622) -- 543,622 --
(Increase) decrease in clearing deposits.......... (1,062,782) 118,659 734,522 (97,360)
(Increase) decrease in broker dealer receivables.. (460,953) (30,234) (161,612) 47,882
(Increase) in order flow receivables.............. (1,800) -- -- (1,283)
(Increase) in customer receivables................ (5,000,391) -- (5,309,643) --
(Increase) decrease in securities purchased, not
yet sold........................................ (33,750) -- 33,750 --
(Increase) in other current assets................ (8,174) (1,110) (4,112) (24,199)
(Increase) decrease in other assets............... (20,484) 663 13,399 2,362
Increase in drafts payable........................ 341,134 -- 46,324 --
Increase in customer payables..................... 4,384,361 -- 2,711,862 --
Increase (decrease) in securities sold, not yet
purchased....................................... 7,725 -- (7,725) --
Increase (decrease) in payable to broker dealers.. 412,958 -- (93,473) (72,596)
Increase (decrease) in commissions payable........ 56,775 (26,928) 171,893 50,410
Increase (decrease) in accounts payable and
accrued expenses................................ 427,690 51,206 9,553 (66,736)
------------- ----------- ------------ -----------
Total adjustments........................................ (2,301,313) 112,256 (1,311,640) (161,520)
------------- ----------- ------------ -----------
Total cash flows provided by (used in) operating
activities...................................... (1,161,424) 843,177 1,304,372 620,055
------------- ----------- ------------ -----------
Cash flows provided by (used in) investing activities:
Purchase of Treasury Bills............................ -- -- (790,440) --
Purchase of property and equipment.................... (77,086) (65,000) (12,016) (6,935)
------------- ----------- ------------ -----------
Total cash flows provided by (used in) investing
activities...................................... (77,086) (65,000) (802,456) (6,935)
------------- ----------- ------------ -----------
Cash flows provided by (used in) financing activities:
Proceeds from short-term bank loan.................... 942,000 -- 1,532,000 --
Distributions to shareholders......................... (304,241) (252,033) (1,199,877) (50,928)
------------- ----------- ------------ -----------
Total cash flows provided by (used in) financing
activities...................................... 637,759 (252,033) 332,123 (50,928)
------------- ----------- ------------ -----------
Net increase (decrease) in cash and cash equivalents..... (600,751) 526,144 834,039 562,192
Cash and cash equivalents, beginning of period........... 968,576 442,432 367,825 968,576
------------- ----------- ------------ -----------
Cash and cash equivalents, end of period................. $ 367,825 $ 968,576 $ 1,201,864 $ 1,530,768
============= =========== ============ ===========
Supplemental disclosure of cash flow information:
Cash paid during the period for interest.............. $ 43,363 $ 1,360 $ 123,388 $ 784
============= =========== ============ ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-6
<PAGE>
EMPIRE FINANCIAL HOLDING COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1998 AND 1997
AND
FOR THE SIX MONTHS ENDED JUNE 30, 1999 AND 1998 (UNAUDITED)
1. BUSINESS AND BASIS OF PRESENTATION
Business - Empire Financial Holding Company ("the Company"), a Florida
corporation, was formed in September 1999, and during that same month it
acquired Empire Financial Group, Inc. ("Group"), Advantage Trading Group, Inc.
("Advantage") and Empire Investment Advisors, Inc. ("Advisors"). Since all
companies have common ownership the acquisitions have been accounted for in a
manner similar to a pooling of interest. Group was incorporated in Florida on
August 20, 1990. Advantage was incorporated in Florida in July 1995. Advisors
was incorporated in September 1999. The Company is a full-service, self-clearing
financial services firm that provides discount brokerage services to retail and
institutional customers. The Company also provides trade execution services for
independent broker dealers as well as for some of its own customer's trades. Its
principal executive office is headquartered in Longwood, Florida and maintains
branch offices in Cocoa Beach and Delray Beach, Florida.
Unaudited interim financial statements - The accompanying consolidated
financial statements of the Company for the six months ended June 30, 1999 and
1998 are unaudited, but, in the opinion of management, reflect the adjustments
all of which are of a normal recurring nature, necessary for a fair presentation
of such financial statements in accordance with generally accepted accounting
principles. The results of operations for an interim period are not necessarily
indicative of results for a full year.
Principles of consolidation - The consolidated financial statements
include the accounts of Group and Advantage. All material intercompany accounts
and transactions have been eliminated.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Cash and cash equivalents - The Company considers all unrestricted
deposits and highly liquid investments, readily convertible to known amounts,
with an original maturity of three months or less to be cash equivalents.
Treasury Bills - Treasury Bills are carried at market value, which
approximates cost. The resulting difference between cost and market is included
in income.
Property and equipment - Property and equipment are stated at cost.
Depreciation is provided over the estimated useful lives of the respective
assets using the straight-line method.
Drafts payable - Drafts payable represent amounts drawn by Advantage
against a bank, and sight overdrafts under sweep agreements with banks for both
Group and Advantage.
Revenue recognition and trading expenses - Revenue and clearing
expenses of the company are recorded on a settlement-date basis as securities
transactions occur. Order flow expenses for Advantage are recorded on a trade
date basis as securities transactions occur.
Advertising costs - Advertising costs are charged to operations as
incurred.
F-7
<PAGE>
EMPIRE FINANCIAL HOLDING COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1998 AND 1997
AND
FOR THE SIX MONTHS ENDED JUNE 30, 1999 AND 1998 (UNAUDITED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES(Continued)
Fair value of financial instruments - The financial instruments of the
Company are reported in the statement of financial condition at market or fair
values, or at carrying amounts that approximate fair values because of the short
maturity of the instruments.
Use of estimates - The preparation of financial statements in
conformity with generally accepted accounting principles requires management to
make estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosures of contingent assets and liabilities at the date of
the financial statement and the reported amounts of revenues and expenses during
the report period. Actual results could differ from those estimates.
Income taxes - Group and Advantage, individually, with the consent of
their shareholders, elected to be S corporations under the Internal Revenue
Code. All taxable income or loss flows through to the shareholders. Accordingly,
no income tax expense or liability has been recorded on a historical basis in
the accompanying financial statements. The Company and its subsidiaries will be
required to terminate their S elections at the date of the offering.
Impairment of long-lived assets - The Company evaluates the
recoverability of its property and equipment, and other assets in accordance
with Statement of Financial Accounting Standards Board ("FASB") No. 121,
"Accounting for the Impairment of Long-Lived Assets to be Disposed of" ("SFAS
121"). SFAS 121 requires recognition of impairment of long-lived assets in the
event the net book value of such assets exceeds the estimated future
undiscounted cash flows attributable to such assets or the business to which
such intangible assets relate. No impairments were recognized during the years
ended December 31, 1998 and 1997 and the six months ended June 30, 1999.
Segment reporting - In June 1997, the FASB issued Statement of
Financial Accounting Standards No. 131, "Disclosures about Segments of an
Enterprise and Related Information" ("SFAS 131"). This statement requires
companies to report information about operating segments in interim and annual
financial statements. It also requires segment disclosures about products and
services, geographic areas and major customers. The Company has determined that
it did not have any separately reportable operating segments as of December 31,
1998 or 1997, or as of June 30, 1999.
Comprehensive income - In June 1997, FASB issued Statement of Financial
Accounting Standards No. 130, "Reporting Comprehensive Income" ("SFAS 130").
SFAS 130 establishes standards for reporting and display of comprehensive income
and its components in a full set of general-purpose financial statements. SFAS
130 is effective for financial statements for fiscal years beginning after
December 15, 1997. Its adoption did not impact the Company's financial position,
results of operations, or cash flows as the Company had no items of other
comprehensive income during the years ended December 31, 1998 and 1997, or the
six months ended June 30, 1999.
Recent accounting pronouncements - In June 1998, FASB issued Statement
of Financial Accounting Standards No. 133, "Accounting for Derivative
Instruments and Hedging
F-8
<PAGE>
EMPIRE FINANCIAL HOLDING COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1998 AND 1997
AND
FOR THE SIX MONTHS ENDED JUNE 30, 1999 AND 1998 (UNAUDITED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES(Continued)
Activities" ("SFAS 133"). SFAS 133 establishes accounting and reporting
standards for derivative instruments, including certain derivative instruments
embedded in other contracts (collectively referred to as derivatives), and for
hedging activities. SFAS 133, as amended by SFAS 137, is effective for all
fiscal quarters of all fiscal years beginning after June 15, 2000, with earlier
application encouraged. The Company does not currently use derivative
instruments and, therefore, does not expect that the adoption of SFAS 133 will
have any impact on its financial position or results of operations.
In March 1998, the Accounting Standards Executive Committee of the American
Institute of Certified Public Accountants ("AICPA"), issued Statement of
Position No. 98-1, "Accounting for the Costs of Computer Software Developed or
Obtained for Internal Use" ("SOP No. 98-1"), which provides guidance regarding
when software developed or obtained for internal use should be capitalized. SOP
No. 98-1 is effective for fiscal years beginning after December 15, 1998. The
adoption of SOP No. 98-1 in the six months ended June 30, 1999, did not have a
material impact on its financial position or results of operations.
In April 1998, the Accounting Standards Executive Committee of the AICPA issued
Statement of Position 98-5, "Reporting on the Costs of Start-up Activities"
("SOP 98-5"). SOP 98-5 requires that start-up costs, including organizational
costs be expensed as incurred. The Company has accepted early adoption of SOP
98-5 and has expensed all start-up costs.
3. PRO FORMA INFORMATION
Pro forma income tax - The objective of the unaudited pro forma income
statement information is to show what the significant effects on the historical
financial information might have been had the Company not been treated as an S
corporation for income tax purposes through June 30, 1999. The pro forma
adjustments reflect provisions for income taxes computed based upon statutory
tax rates as if the Company had been subject to federal and state taxation
during 1999, 1998 and 1997.
Pro forma deferred tax assets and liabilities for the periods were
immaterial.
Pro forma earnings per share - For pro forma purposes, the Company has
utilized FASB No. 128, "Earnings Per Share" ("SFAS No. 128"). SFAS No. 128
replaced the calculation of primary and fully diluted earnings per share with
basic and diluted earnings per share. Since the Company has no potential
dilutive shares outstanding, basic and diluted earnings per share are the same.
Pro forma statement of financial condition - The Company's presentation
of the unaudited pro forma statement of financial condition and statement of
shareholders' equity at June 30, 1999 reflects the effect on historical retained
earnings of a planned S corporation
F-9
<PAGE>
EMPIRE FINANCIAL HOLDING COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1998 AND 1997
AND
FOR THE SIX MONTHS ENDED JUNE 30, 1999 AND 1998 (UNAUDITED)
distribution to the existing shareholders of approximately $2,214,000. As in
prior years, the Company anticipates funding the distributions from operating
cash flow, not from the proceeds of the offering. It does not reflect the
receipts of any proceeds from the Company's initial public offering or earnings
from July 1, 1999 through the date of the initial public offering. Since the
distributions will not be funded from the offering, no shares are deemed to be
sold by the Company to fund the distributions. The pro forma also reflects the
reclassification of undistributed earnings as additional paid-in capital.
4. DEPOSITS WITH CLEARING AGENTS (RESTRICTED CASH)
The Company maintains deposits with clearing agents as follows:
<TABLE>
<CAPTION>
December 31, June 30,
1998 1999
---- ----
(Unaudited)
<S> <C> <C>
Cash and cash equivalents $ 997,902 $ 612,604
Treasury Bills (market value) 448,039 98,815
------------ ------------
$1,445,941 $ 711,419
============ ============
</TABLE>
5. RECEIVABLES FROM AND PAYABLE TO BROKER DEALERS AND CLEARING
ORGANIZATIONS
Amounts receivable from and payable to broker dealers and clearing
organizations consist of the following:
<TABLE>
<CAPTION>
December 31, 1998 June 30, 1999 (Unaudited)
-------------------------------- -------------------------------
Receivable Payable Receivable Payable
---------- ------- ---------- -------
<S> <C> <C> <C> <C>
Securities failed-to-deliver/receive $ 74,499 $ 42,685 $ 379,290 $ 172,800
Broker dealers and clearing organizations 195,067 501,421 286,857 316,211
Other 239,269 38,378 4,300 -
-------------- -------------- --------------- -----------
$ 508,835 $ 582,484 $ 670,447 $489,011
============== ============== =============== ===========
</TABLE>
The Company clears certain of its customer transactions through other
clearing organizations.
6. RECEIVABLE FROM AND PAYABLE TO CUSTOMERS
Accounts receivable and payable to customers include amounts due on
cash and margin transactions. Securities owned by customers are held as
collateral for receivables. Such collateral is not reflected in the financial
statements. Payable to customers represents free credit balances and other
customer funds pending completion of securities transactions. The Company pays
interest on certain customer credit balances.
F-10
<PAGE>
EMPIRE FINANCIAL HOLDING COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1998 AND 1997
AND
FOR THE SIX MONTHS ENDED JUNE 30, 1999 AND 1998 (UNAUDITED)
7. SECURITIES OWNED AND SOLD, NOT YET PURCHASED
Marketable securities owned and sold, not yet purchased, consist of
trading securities at market value. At December 31, 1998 marketable securities
owned, not yet purchased, totaled $33,750 and securities sold, not yet
purchased, totaled $7,725. Amounts at June 30, 1999 were immaterial.
8. PROPERTY AND EQUIPMENT
Property and equipment consists of the following:
<TABLE>
<CAPTION>
December 31, June 30 Useful
1998 1999 Lives
---- ---- -----
(Unaudited)
<S> <C> <C> <C>
Equipment $ 16,963 $ 17,728 5-7 years
Computers 130,096 140,007 5 years
Furniture and fixtures 10,305 10,305 7 years
------------- --------------
157,364 168,040
Less: accumulated depreciation (45,789) (64,671)
------------- --------------
$ 111,575 $ 103,369
============= ==============
</TABLE>
Depreciation expense charged to income was $31,966 and $27,588 for the
years ended December 31, 1998 and 1997, respectively, and $18,883 and $15,992
for the six months ended June 30, 1999 and 1998, respectively.
9. SHORT TERM BANK LOAN
Short term bank loan at December 31, 1998, and June 30, 1999 in the
amount of $942,000 and $2,474,000, respectively, was collateralized by
approximately $3,000,000 of customers' margin account securities. The Company is
permitted to borrow up to $15,000,000 per its lending agreements. The loan bears
interest at 125 basis points above the federal funds rate of interest
(approximately 6.0% and 6.4% at December 31, 1998 and June 30, 1999,
respectively), and is payable on demand. The current bank agreement expires on
September 30, 1999.
10. LEASES
The Company has a non-cancelable operating lease for office facilities
that expires in January 2000. The following is a schedule of future minimum
lease payments for the operating lease:
F-11
<PAGE>
EMPIRE FINANCIAL HOLDING COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1998 AND 1997
AND
FOR THE SIX MONTHS ENDED JUNE 30, 1999 AND 1998 (UNAUDITED)
Year ending December 31,
------------------------
1999 $ 72,101
2000 6,028
----------------
$ 78,129
================
Rental expense was $78,109 and $58,550 for the years ended December 31,
1998 and 1997, respectively, and $41,229 and $34,262 for the six months ended
June 30, 1999 and 1998, respectively.
11. OFF BALANCE SHEET RISK AND CONCENTRATION OF CREDIT RISK
In the normal course of business, the Company through its subsidiaries,
executes, settles and finances customer and proprietary securities transactions.
These activities expose the Company to off balance sheet risk in the event that
customers or other parties fail to satisfy their obligations.
Securities transactions are recorded on settlement date, generally
three business days after trade date. Should a customer or broker fail to
deliver cash or securities as agreed, the Company may be required to purchase or
sell securities at unfavorable market prices.
The Company extends credit to customers, collateralized by cash and
securities, subject to regulatory and internal requirements. Customer margin
transactions include purchases of securities, sale of securities not yet
purchased and option contracts. The Company continually monitors margin
requirements and requests customers to deposit additional collateral or reduce
positions when necessary. Such transactions expose the Company to risk in the
event those margin requirements are insufficient to fully cover customer losses.
During the year, the Company maintains cash balances and money market
funds in excess of the federally insured limits. The funds are primarily with
major money center banks and one major regional bank. Consequently, the Company
does not believe that there is a significant risk in having these balances
exceed $100,000 in various accounts.
12. NET CAPITAL PROVISION OF RULE 15c3-1
The Company, through its subsidiaries individually, is subject to the
Securities and Exchange Commission Uniform Net Capital Rule (SEC rule 15c3-1),
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. Group was required to maintain a minimum net capital of $250,000
at December 31, 1998 and $250,000 at June 30, 1999. Advantage was required to
maintain a minimum net capital of $250,000 at December 31, 1998 and $250,000 at
June 30, 1999. Details of the net capital requirements are as follows:
F-12
<PAGE>
<TABLE>
<CAPTION>
EMPIRE FINANCIAL HOLDING COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1998 AND 1997
AND
FOR THE SIX MONTHS ENDED JUNE 30, 1999 AND 1998 (UNAUDITED)
December 31, June 30
1998 1999
---- ----
(Unaudited)
<S> <C> <C>
Group:
Net capital $ 335,281 $ 580,789
Minimum net capital requirement 250,000 250,000
---------------- ----------------
Excess net capital $ 85,281 $ 330,789
================ ===============
Aggregate indebtedness to net capital .37 to 1 .62 to 1
================ ===============
Advantage:
Net capital $ 1,392,009 $ 2,539,428
Minimum net capital requirement 250,000 250,000
---------------- ----------------
Excess net capital $ 1,142,009 $ 2,289,428
================ ===============
Aggregate indebtedness to net capital 4.94 to 1 4.36 to 1
================ ===============
</TABLE>
13. SUBSEQUENT EVENTS
Subsequent to year-end, the Company executed a ten-year lease for
offices in Longwood, Florida. The facility is owned by G&G Holding, Inc., an
entity owned by the Company's shareholders. Rent expense will be $18,756 per
month, plus applicable sales and property taxes.
F-13
<PAGE>
<TABLE>
<CAPTION>
==================================================================== ===========================================================
<S> <C>
No dealer, salesperson, or any other person has been authorized to give EMPIRE FINANCIAL
any information or to make any representations in connection with this offering HOLDING COMPANY
other than those contained in this prospectus, and, if given or made, the
information or representations must not be relied upon as having been authorized
by us or the underwriters. Neither the delivery of this prospectus nor any sale
made hereunder shall, under any circumstances, create any implication that there
has been no change in our affairs since the date hereof or since the dates as of
which information is set forth herein. This prospectus does not constitute an
offer to sell or a solicitation of an offer to buy any of the securities offered
hereby in any jurisdiction to any person to whom it is unlawful to make an offer 2,000,000 SHARES OF
in such jurisdiction.
COMMON STOCK
PROSPECTUS
Until __________, 1999 (25 days after the date of this LM CAPITAL SECURITIES, INC.
prospectus), all dealers effecting transactions in the shares
of common stock, whether or not participating in this distribution, EMPIRE FINANCIAL GROUP, INC.
may be required to deliver a prospectus. This is in addition to the
obligation of dealers to deliver a prospectus when acting as
underwriters and with respect to their unsold allotments or subscriptions.
____________, 1999
==================================================================== ===========================================================
</TABLE>
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
Item 24. Indemnification of Directors and Officers.
The Registrant has authority under the Florida Business Corporation Act
to indemnify its directors and officers to the extent provided for in such
statute. The Registrant's Articles of incorporation and Bylaws provide that the
Registrant may insure, shall indemnify and shall advance expenses on behalf of
its officers and directors to the fullest extent not prohibited by law. The
Registrant is also a party to indemnification agreements with each of its
directors and officers.
Item 25. Other Expenses of Issuance and Distribution
The Registrant estimates that expenses payable by the Registrant in
connection with the offering described in this registration statement (other
than underwriting discounts and commissions) will be as follows:
<TABLE>
<CAPTION>
<S> <C>
Securities and Exchange Commission registration fee.................................. $10,633.50
NASD filing fee...................................................................... $ 3950.00
NASDAQ National Market listing fee*..................................................
Printing expenses*...................................................................
Accounting fees and expenses*........................................................
Legal fees and expenses*.............................................................
Blue Sky fees and expenses*..........................................................
Transfer Agent's fees and expenses*..................................................
Miscellaneous*.......................................................................
----------
TOTAL....................................................................... $
==========
</TABLE>
- -------------------
*To be included by amendment.
All amounts except the Securities and Exchange Commission registration
fee and the NASD filing fee are estimated.
Item 26. Recent Sales of Unregistered Securities.
In August 1999 the Registrant issued 4,000,000 shares of its common
stock to each of Messrs. Kevin M. Gagne and Richard L. Goble in exchange for all
of the outstanding capital stock of each of Empire Financial Group, Inc. and
Advantage Trading Group, Inc. pursuant to the terms of a Share Exchange
Agreement among the Registrant, Mr. Gagne and Mr. Goble. We have also agreed to
issue to Mr. Donald A. Wojnowski, on the date of this prospectus, immediately
exercisable options to purchase _____ shares of our common stock at an exercise
price equal to the offering price.
In connection with the above-referenced issuances, the Registrant
relied on Section 4(2) under the Securities Act of 1933, as amended, as
transactions by an issuer not involving any public offering. Each of the above
investors had full access to information relating to the Registrant and
represented to
II-1
<PAGE>
the Registrant that he had the required investment intent. In addition, the
above-referenced securities will bear appropriate restrictive legends, and stop
transfer orders will be placed against such securities.
Item 27. Exhibits.
<TABLE>
<CAPTION>
Exhibit Description
- ------- -----------
<S> <C>
1.1 Form of Underwriting Agreement(2)
2.1 Share Exchange Agreement between the Registrant, Kevin M. Gagne and Richard L. Goble(2)
3.1 Registrant's Articles of incorporation, as amended(2)
3.2 Registrant's Bylaws(2)
4.1 Form of Underwriter's Warrant Agreement, including Form of Warrant Certificate*(2)
4.2 Form of Registrant's Common Stock Certificate(2)
4.3 Form of Registrant's Series A Junior Preferred Stock Certificate(2)
5.1 Opinion of Greenberg Traurig, P.A.(2)
10.1 1999 Stock Option Plan*(2)
10.2 Employment Agreement with Kevin M. Gagne*(2)
10.3 Employment Agreement with Richard L. Goble*(2)
10.4 Employment Agreement with Donald A. Wojnowski, Jr.*(2)
10.5 Office Lease dated June 1, 1999 between Registrant and G&G Holdings, Inc. relating to principal offices of
Registrant(2)
10.6 Office Lease dated November 22, 1996 between Empire Financial Group, Inc. and Phoenix Home Life Mutual Insurance
Company relating to prior principal executive offices location at 220 Crown Oak Center Drive, Longwood, Florida(2)
10.7 Form of Indemnification Agreement between the Registrant and each of its directors and executive officers*(2)
10.8 Clearing Agreement between Bear Stearns Securities Corp.(2)
10.9 Clearing Agreement between Empire Financial Group, Inc. and Advantage Trading Group, Inc.(2)
10.10 1999 Incentive Compensation Plan (2)
10.11 1999 Employee Stock Purchase Plan (2)
21.1 Subsidiaries of the Registrant(2)
23.1 Consent of Greenberg Traurig, P.A. (included in its opinion filed as Exhibit 5.1)(2)
23.2 Consent of Sweeney, Gates & Co.(1)
25.1 Power of Attorney (included on the signature page of this Registration Statement)
27.1 Financial Date Schedule(1)
</TABLE>
- ---------------------------
* Compensation Plan or Arrangement
(1) Filed herewith.
(2) To be filed by amendment.
Item 28. Undertakings
(1) To file, during any period in which it offers or sells securities,
a post-effective amendment to this Registration Statement to:
(2) For determining liability under the Securities Act, treat each
post-effective amendment as a new registration statement of the securities
offered, and the offering of the securities at that time to be the initial bona
fide offering.
II-2
<PAGE>
(3) To file a post-effective amendment to remove from registration any
of the securities that remain unsold at the end of the offering.
(4) To provide to the Underwriters at the closing specified in the
Underwriting Agreement certificates in such denominations and registered in such
names as required by the Underwriters to permit prompt delivery to each
purchaser.
Insofar as indemnification for liabilities arising under the Securities
Act may be permitted to directors, officers and controlling persons of the
Registrant pursuant to the foregoing provisions, or otherwise, the Registrant
has been advised that, in the opinion of the Securities and Exchange Commission,
such indemnification is against public policy as expressed in the Securities Act
and is, therefore, unenforceable. In the event that a claim for indemnification
against such liabilities (other than the payment by the Registrant of expenses
incurred or paid by a director, officer or controlling person of the Registrant
in the successful defense or any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the Registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Securities Act and will be governed by the final
adjudication of such issue.
For purposes of determining any liability under the Securities Act, the
information omitted from the form of prospectus filed as part of this
registration statement in reliance upon Rule 430A and contained in a form of
prospectus filed by the registrant pursuant to Rule 424(b)(1) or (4) or 497(h)
under the Securities Act shall be deemed to be part of this registration
statement as of the time it was declared effective.
For the purpose of determining any liability under the Securities Act,
each post-effective amendment that contains a form of prospectus shall be deemed
to be a new registration statement relating to the securities offered therein,
and the offering of such securities at that time shall be deemed to be the
initial bona fide offering thereof.
II-3
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as amended,
the Registrant has duly caused this Registration Statement to be signed on its
behalf by the undersigned, thereto duly authorized, in the City of Longwood,
State of Florida, on September 1, 1999.
EMPIRE FINANCIAL HOLDING COMPANY
By: /s/ Kevin M. Gagne
-----------------------
Kevin M. Gagne
Co-Chief Executive Officer
By: /s/ Richard L. Goble
------------------------
Richard L. Goble
Co-Chief Executive Officer
POWER OF ATTORNEY
Each person whose signature appears below constitutes and appoints
Kevin M. Gagne and Richard L. Goble or either one of them, as his or her true
and lawful attorneys-in-fact and agents with full power of substitution and
resubstitution for him or her and in his or her name, place and stead in any and
all capacities to execute in the name of each person who is then an officer or
director of the Registrant any and all amendments (including post-effective
amendments) to this Registration Statement, and any registration statement
relating to the offering hereunder pursuant to Rule 462 under the Securities Act
of 1933, as amended, and to file the same with all exhibits thereto and other
documents in connection therewith with the Securities and Exchange Commission,
granting unto said attorneys-in-fact and agents and each of them full power and
authority to do and perform each and every act and thing required or necessary
to be done in and about the premises as fully as he or she might or could do in
person, hereby ratifying and confirming all that said attorneys-in-fact and
agents, or any of them, or their or his substitute or substitutes, may lawfully
do or cause to be done by virtue thereof.
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed by the following persons in the
capacities and on the date indicated.
<TABLE>
<CAPTION>
Signatures Title Date
---------- ----- ----
<S> <C> <C>
Co-Chief Executive Officer and Director September 1, 1999
/s/ Kevin M. Gagne (Co-Principal Executive and Accounting Officer)
- ------------------
Kevin M. Gagne
Co-Chief Executive Officer and Director September 1, 1999
/s/ Richard L. Goble (Co-Principal Executive and Accounting Officer)
- --------------------
Richard L. Goble
</TABLE>
II-4
CONSENT OF INDEPENDENT
CERTIFIED PUBLIC ACCOUNTANTS
Empire Financial Holding Corporation
Longwood, Florida
We hereby consent to the use in this Registration Statement on Form SB-2 of
our report dated February 19, 1999, relating to the consolidated financial
statements of Empire Financial Holding Corporation and subsidiaries.
We also consent to the reference to our firm under the caption "Experts" in the
Prospectus.
Sweeney, Gates & Co.
Fort Lauderdale, Florida
September 1, 1999
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> DEC-31-1998
<CASH> 3,157,388
<SECURITIES> 40,644
<RECEIVABLES> 5,509,226
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 0
<PP&E> 157,364
<DEPRECIATION> 45,789
<TOTAL-ASSETS> 8,860,788
<CURRENT-LIABILITIES> 0
<BONDS> 0
0
0
<COMMON> 80,000
<OTHER-SE> 1,859,290
<TOTAL-LIABILITY-AND-EQUITY> 8,860,788
<SALES> 7,933,999
<TOTAL-REVENUES> 7,933,999
<CGS> 0
<TOTAL-COSTS> 6,799,052
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 44,363
<INCOME-PRETAX> 1,090,584
<INCOME-TAX> 0
<INCOME-CONTINUING> 1,090,584
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,090,584
<EPS-BASIC> 0
<EPS-DILUTED> 0
</TABLE>
