Attached files
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EX-31.1 - SECTION 302 CEO CERTIFICATION - SUMMIT FINANCIAL SERVICES GROUP INC | d333191dex311.htm |
EXCEL - IDEA: XBRL DOCUMENT - SUMMIT FINANCIAL SERVICES GROUP INC | Financial_Report.xls |
EX-31.2 - SECTION 302 CFO CERTIFICATION - SUMMIT FINANCIAL SERVICES GROUP INC | d333191dex312.htm |
EX-32.2 - SECTION 906 CFO CERTIFICATION - SUMMIT FINANCIAL SERVICES GROUP INC | d333191dex322.htm |
EX-32.1 - SECTION 906 CEO CERTIFICATION - SUMMIT FINANCIAL SERVICES GROUP INC | d333191dex321.htm |
Table of Contents
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
x | Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 |
For the quarterly period ended March 31, 2012.
OR
¨ | Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 |
For the transition period from to
Commission File No: 333-108818
SUMMIT FINANCIAL SERVICES GROUP, INC.
(Exact name of registrant as specified in its charter)
Florida | 05-0577932 | |
(State or other jurisdiction of incorporation or organization) |
(I.R.S. Employer Identification No.) |
595 South Federal Highway
Suite 500
Boca Raton, FL 33432
(Address of principal executive offices)
(Zip Code)
(561) 338-2800
(Registrants telephone number, including area code)
(Former name, former address and former fiscal year, if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No ¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes x No ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of large accelerated filer, accelerated filer and smaller reporting company in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer | ¨ | Accelerated filer | ¨ | |||
Non-accelerated filer | ¨ (Do not check if a smaller reporting company) | Smaller reporting company | x |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨ No x
State the number of shares outstanding of each of the issuers classes of common equity, as of the latest practicable date:
Class |
Outstanding as of May 5, 2012 | |
Common Stock Par value $0.0001 per share |
26,627,098 |
Table of Contents
SUMMIT FINANCIAL SERVICES GROUP, INC.
INDEX
Page | ||||||
Part I. Financial Information | ||||||
Item 1. |
3 | |||||
3 | ||||||
4 | ||||||
5 | ||||||
Notes to Unaudited Condensed Consolidated Financial Statements |
6 | |||||
Item 2. |
Managements Discussion and Analysis of Financial Condition and Results of Operations |
8 | ||||
Item 4. |
11 | |||||
12 | ||||||
Item 6. |
12 | |||||
13 |
FORWARD LOOKING STATEMENTS
This Report contains forward-looking statements within the meaning of Section 21E of the Securities Exchange Act of 1934, as amended, and Section 27A of the Securities Act of 1933, as amended. When used in this Report, the words may, will, expect, anticipate, continue, estimate, project or intend and similar expressions identify forward-looking statements regarding events, conditions and financial trends in connection with our future plan of operations, business strategy, operating results and financial position. Discussions containing such forward-looking statements may be found in Managements Discussion and Analysis of Financial Condition and Results of Operations. Shareholders and prospective investors are cautioned that any forward-looking statements are not guarantees of future performance. Such forward-looking statements by their nature involve substantial risks and uncertainties, certain of which are beyond our control, and actual results for future periods could differ materially from those discussed in this Report, depending on a variety of important factors, including: any adverse effect on the stock market and investor confidence in general, as a result of the economic recession, the sustainability and magnitude of the economic recovery, high unemployment and/or global events, including economic instability among members of the European Union (including Greece), continued unrest in the Middle East, and the increase in oil prices; the success or failure of our managements efforts to implement our business strategy, including the net addition of financial advisors; the level of acquisition opportunities available to us and our ability to price and negotiate such transactions on a favorable basis; declining and/or volatile interest rates; our ability to properly manage growth and successfully integrate acquired companies and operations; our ability to compete with major established companies; our ability to attract and retain qualified personnel in a highly competitive environment; our ability to comply in a cost effective manner with increased regulation, and other risks which are described in our filings with the Securities and Exchange Commission (the SEC), including the Companys annual report on Form 10-K for the fiscal year ended December 31, 2011.
Table of Contents
Item 1. | Financial Statements |
SUMMIT FINANCIAL SERVICES GROUP, INC. AND SUBSIDIARIES
Condensed Consolidated Statements of Financial Condition
March 31, 2012 |
December 31, 2011 |
|||||||
(Unaudited) | ||||||||
ASSETS | ||||||||
Cash and cash equivalents |
$ | 11,420,665 | $ | 10,786,669 | ||||
Deposits held at clearing brokers |
128,791 | 128,779 | ||||||
Commissions receivable, net |
2,354,445 | 1,865,118 | ||||||
Notes receivable, net |
366,850 | 388,841 | ||||||
Other receivables, net |
486,350 | 445,676 | ||||||
Securities owned, at fair value |
45,933 | 8,587 | ||||||
Prepaid expenses and other assets |
772,210 | 791,401 | ||||||
Property and equipment, net |
505,412 | 546,821 | ||||||
Goodwill |
500,714 | 500,714 | ||||||
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|
|
|
|||||
TOTAL ASSETS |
$ | 16,581,370 | $ | 15,462,606 | ||||
|
|
|
|
|||||
LIABILITIES AND STOCKHOLDERS EQUITY | ||||||||
LIABILITIES |
||||||||
Accounts payable and accrued expenses |
$ | 2,103,811 | $ | 2,150,638 | ||||
Accrued commissions expense |
2,860,694 | 2,475,754 | ||||||
|
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|
|
|||||
TOTAL LIABILITIES |
4,964,505 | 4,626,392 | ||||||
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|
|||||
COMMITMENTS AND CONTINGENCIES |
||||||||
STOCKHOLDERS EQUITY |
||||||||
Preferred stock, undesignated; par value $0.0001 per share; authorized 4,850,000 shares; none issued and outstanding |
| | ||||||
Preferred stock, Series A, 12% cumulative convertible; par value $0.0001 per share; authorized 150,000 shares; 125,000 issued and outstanding (liquidation preference of $125,000) |
13 | 13 | ||||||
Common stock, par value $0.0001 per share; authorized 100,000,000 shares; 26,642,010 issued and 26,627,098 outstanding at March 31, 2012 and 26,548,971 issued and 26,534,059 outstanding at December 31, 2011 |
2,664 | 2,656 | ||||||
Additional paid-in capital |
13,261,638 | 13,122,572 | ||||||
Unearned stock-based compensation |
(1,714,709 | ) | (1,942,657 | ) | ||||
Treasury stock (14,912 shares, at cost) |
(10,884 | ) | (10,884 | ) | ||||
Retained earnings (accumulated deficit) |
78,143 | (335,486 | ) | |||||
|
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|
|||||
TOTAL STOCKHOLDERS EQUITY |
11,616,865 | 10,836,214 | ||||||
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TOTAL LIABILITIES AND STOCKHOLDERS EQUITY |
$ | 16,581,370 | $ | 15,462,606 | ||||
|
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|
See accompanying notes to unaudited condensed consolidated financial statements.
3
Table of Contents
SUMMIT FINANCIAL SERVICES GROUP, INC. AND SUBSIDIARIES
Condensed Consolidated Statements of Operations
For The Three Months Ended March 31, |
||||||||
2012 | 2011 | |||||||
(Unaudited) | (Unaudited) | |||||||
Revenues |
||||||||
Commissions |
$ | 17,047,989 | $ | 16,463,818 | ||||
Interest and dividends |
272,441 | 290,186 | ||||||
Other |
838,923 | 817,075 | ||||||
|
|
|
|
|||||
18,159,353 | 17,571,079 | |||||||
Expenses |
||||||||
Commissions and related costs |
14,511,496 | 14,096,845 | ||||||
Employee compensation and benefits |
1,743,348 | 1,764,134 | ||||||
Occupancy and equipment |
190,414 | 166,196 | ||||||
Communications |
114,254 | 118,670 | ||||||
Depreciation and amortization |
50,340 | 44,924 | ||||||
Other operating expenses |
792,047 | 780,212 | ||||||
|
|
|
|
|||||
17,401,899 | 16,970,981 | |||||||
|
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|
|
|||||
Income before income taxes |
757,454 | 600,098 | ||||||
Provision for income taxes |
340,075 | 262,969 | ||||||
|
|
|
|
|||||
Net income |
$ | 417,379 | $ | 337,129 | ||||
|
|
|
|
|||||
Basic income per common share |
$ | .02 | $ | .01 | ||||
|
|
|
|
|||||
Diluted income per common share |
$ | .01 | $ | .01 | ||||
|
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|
|
|||||
Weighted average common shares outstanding: |
||||||||
Basic |
26,550,142 | 26,809,301 | ||||||
|
|
|
|
|||||
Diluted |
31,798,363 | 32,087,978 | ||||||
|
|
|
|
See accompanying notes to unaudited condensed consolidated financial statements.
4
Table of Contents
SUMMIT FINANCIAL SERVICES GROUP, INC. AND SUBSIDIARIES
Condensed Consolidated Statements of Cash Flows
For The Three Months Ended March 31, |
||||||||
2012 | 2011 | |||||||
(Unaudited) | (Unaudited) | |||||||
Cash flows from operating activities: |
||||||||
Net income |
$ | 417,379 | $ | 337,129 | ||||
Adjustments to reconcile net income to net cash provided by operating activities: |
||||||||
Depreciation and amortization |
50,340 | 44,924 | ||||||
Stock-based compensation, net |
311,884 | 297,254 | ||||||
Amortization of advisor notes |
35,812 | 79,120 | ||||||
Changes in: |
||||||||
Deposits held at clearing brokers |
(11 | ) | (11 | ) | ||||
Commissions receivable |
(489,327 | ) | (1,303,544 | ) | ||||
Notes receivable |
(13,821 | ) | (41,380 | ) | ||||
Other receivables |
(40,674 | ) | 163,269 | |||||
Prepaid expenses and other |
(37,346 | ) | (49,115 | ) | ||||
Securities owned |
19,191 | (16,908 | ) | |||||
Accounts payable and accrued expenses |
(46,827 | ) | 379,700 | |||||
Accrued commission expense |
384,939 | 198,604 | ||||||
|
|
|
|
|||||
Net cash provided by operating activities |
591,539 | 89,042 | ||||||
Cash flows from investing activities: |
||||||||
Purchase of property and equipment |
(8,930 | ) | (40,118 | ) | ||||
Cash flows from financing activities: |
||||||||
Payment of preferred stock dividend |
(3,750 | ) | (3,750 | ) | ||||
Proceeds from exercise of stock options and warrants |
55,137 | 3,864 | ||||||
|
|
|
|
|||||
Net cash provided by financing activities |
51,387 | 114 | ||||||
|
|
|
|
|||||
Net increase in cash and cash equivalents |
633,996 | 49,038 | ||||||
Cash and cash equivalents at beginning of period |
10,786,669 | 9,439,672 | ||||||
|
|
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|
|||||
Cash and cash equivalents at end of period |
$ | 11,420,665 | $ | 9,488,710 | ||||
|
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|
|
See accompanying notes to unaudited condensed consolidated financial statements.
5
Table of Contents
SUMMIT FINANCIAL SERVICES GROUP, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
March 31, 2012
NOTE 1GENERAL
The accompanying unaudited condensed consolidated financial statements reflect all adjustments (consisting only of normal, recurring adjustments) which are, in the opinion of management, necessary for a fair presentation of the financial position and operating results for the periods indicated. The condensed consolidated financial statements herein should be read in conjunction with the audited consolidated financial statements and notes thereto, together with Managements Discussion and Analysis of Financial Condition and Results of Operations, contained in the Annual Report on Form 10-K (the Form 10-K) for the fiscal year ended December 31, 2011 for Summit Financial Services Group, Inc. (the Company or SFSG). The results of operations for the three- month period ended March 31, 2012 are not necessarily indicative of the results for the entire fiscal year ending December 31, 2012. Furthermore, actual results for future periods could differ materially from those reported in this Form 10-Q, depending on a variety of factors, including: any adverse effect on the stock market and investor confidence in general, as a result of the economic recession, the sustainability and magnitude of the economic recovery, high unemployment and/or global events, including economic instability among members of the European Union (including Greece), continued unrest in the Middle East, and the increase in oil prices; the success or failure of our managements efforts to implement our business strategy, including the net addition of financial advisors; the level of acquisition opportunities available to us and our ability to price and negotiate such transactions on a favorable basis; declining and/or volatile interest rates; our ability to properly manage growth and successfully integrate acquired companies and operations; our ability to compete with major established companies; our ability to attract and retain qualified personnel in a highly competitive environment; our ability to comply in a cost-effective manner with increased regulation, and other risks. Additionally, certain sources of revenues that have historically been available to the Company have been or may be reduced or eliminated in the future, including 12b-1 fees, or trail commissions, from the sale of mutual fund shares, as well as remuneration paid by our clearing brokers. Our results may also be negatively impacted by recent and future reductions in interest rates, as well as from decreases in certain compensation amounts paid by insurance companies and mutual funds with whom we do business. Additionally, increased regulations, and the related cost of compliance therewith, could also impact our margins. A proposal to treat financial advisors licensed with independent broker-dealers as employees, rather than as independent contractors, could also adversely affect our business.
NOTE 2STOCKHOLDERS EQUITY
Basic earnings per share is computed by dividing the net income available to common shareholders for the relevant period by the weighted average number of shares of common stock issued and outstanding during the period. For purposes of calculating diluted earnings per share, the denominator includes both the weighted average number of shares of common stock and the number of dilutive common stock equivalents (CSEs). The number of dilutive CSEs includes the effect of stock options, warrants, and deferred stock calculated using the treasury stock method and the number of issuable common shares upon the conversion of preferred stock using the if converted method. For purposes of computing the diluted earnings per share for the three-month period ended March 31, 2012 and 2011, the Company has assumed the exercise, delivery or conversion of those securities, as follows:
(Shares in 000s)
For The Three Months Ended March 31, |
||||||||||||||||||||||||
2012 | 2011 | |||||||||||||||||||||||
Total | Dilutive | Non- Dilutive |
Total | Dilutive | Non- Dilutive |
|||||||||||||||||||
Options |
17,859 | 12,548 | 5,311 | 16,730 | 12,152 | 4,578 | ||||||||||||||||||
Warrants |
559 | 509 | 50 | 559 | 509 | 50 | ||||||||||||||||||
Deferred Stock |
2,800 | 800 | 2,000 | 2,800 | 400 | 2,400 | ||||||||||||||||||
Preferred Stock |
144 | | 144 | 144 | | 144 | ||||||||||||||||||
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Total CSEs |
21,362 | 13,857 | 7,505 | 20,233 | 13,061 | 7,172 | ||||||||||||||||||
Shares Deemed Repurchased |
(8,609 | ) | (7,782 | ) | ||||||||||||||||||||
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Net Shares Deemed Issued |
5,248 | 5,279 | ||||||||||||||||||||||
Basic Weighted Avg. Shares |
26,550 | 26,809 | ||||||||||||||||||||||
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Total Shares and CSEs |
31,798 | 32,088 |
As of March 31, 2012, the Company had options, warrants and deferred stock outstanding entitling the holders thereof to purchase a total of approximately 21.2 million shares of common stock. The Company also had outstanding shares of preferred stock convertible into approximately 144,000 shares of common stock.
Stock-Based Awards
The Company accounts for stock-based compensation using a fair market value method. Most often, options are granted for the provision of future services, such as continued employment or, in the case of independent financial advisors, their affiliation with the Company. Consequently, the options typically provide for vesting over a period of years, with a certain percentage of the options
6
Table of Contents
vesting each year upon the anniversary date of the grant, if the grantee is then still affiliated with the Company. Any unearned stock compensation is generally amortized over the period the underlying options are earned, which is typically the vesting period. The fair value of each option grant is estimated at the date of grant using the Black-Scholes option pricing model. The Black-Scholes model was developed for use in estimating the fair value of traded options, which have no vesting restrictions and are fully transferable. The amortization of earned stock expense related to issuances to employees is included in the accompanying condensed consolidated statements of operations under the caption Employee Compensation and Benefits, while the amortization of earned stock expense related to issuances to non-employees is included under the caption Other Operating Expenses.
The following schedule is intended to reflect the total fair market values of options and warrants issued to both employees and non-employees during the three-month periods ended March 31, 2012 and 2011, respectively, as well as the net amortization expense recognized by the Company during those periods related to the issuance of options and warrants in the current and prior period:
For The Three
Months Ended March 31, |
||||||||
2012 | 2011 | |||||||
Fair market value of options issuedemployees, net |
$ | 80,682 | $ | 133,854 | ||||
Fair market value of options and warrants issuednon-employees, net |
$ | 3,254 | $ | 11,532 | ||||
Fair market value of deferred stock issued, net |
$ | | $ | | ||||
Net amortization expenseoptions issued to employees |
$ | 258,600 | $ | 254,393 | ||||
Net amortization expenseoptions issued to non-employees |
$ | 53,284 | $ | 42,681 |
NOTE 3INCOME TAXES
For the three-month period ended March 31, 2012, the Companys provision for income taxes reflects an estimated income tax expense of approximately $340,000, based on the Companys estimated effective tax rate for the year ending December 31, 2012. For the three-month period ended March 31, 2011, the Companys provision for income taxes reflects an estimated income tax expense of approximately $263,000, based on the Companys estimated effective tax rate for the year ended December 31, 2011. The Companys income tax provision in any period will be affected by, among other things, permanent, as well as timing differences in the deductibility of certain items, including stock-based compensation and the amortization of intangible assets. As a result, the Company may experience significant fluctuations in the effective book tax rate (that is, its current tax expense divided by pre-tax book income) from period to period.
NOTE 4NET CAPITAL REQUIREMENT
Summit Brokerage Services, Inc., the Companys wholly-owned broker-dealer subsidiary (Summit Brokerage or SBS), is subject to the SEC 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. At March 31, 2012, Summit Brokerage had net capital of approximately $3.4 million, which was approximately $3.0 million in excess of its SEC-required minimum net capital of $0.3 million. Under SEC Rule 15c3-1, Summit Brokerages aggregate indebtedness to net capital ratio was 1.50 to 1 at March 31, 2012. The amount of net capital during any period will fluctuate based on a number of factors, including the operating results for SBS. Net capital will also be impacted by contributions of capital to SBS from the Company, as well as distributions of capital from SBS to SFSG. During the three-month period ended March 31, 2012, SBS distributed $1,000,000 to SFSG. No such distributions were made in the quarter ended March 31, 2011.
NOTE 5CONTINGENCIES
The Company is, or may become, a party to legal proceedings relating to various claims and lawsuits arising in the normal course of business. Management has provided an accrual for estimated probable losses which could result from asserted matters. Management believes that, to the best of its knowledge, the range of potential net losses resulting from the currently asserted proceedings in excess of the accrued amount, if any, will not be material to the Companys financial position or results of operations.
NOTE 6RECLASSIFICATIONS
The Company has reclassified certain administrative and service fees that were previously offset against related expenses, as reflected in the following table to conform to the current-year presentation. The reclassifications had no impact on previously reported net income.
7
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Three Months Ended March 31, 2011 | ||||||||||||
As Originally Presented | Reclassification | As Reclassified | ||||||||||
Other Revenue |
$ | 343,528 | $ | 473,547 | $ | 817,075 | ||||||
Commissions and clearing costs |
13,899,781 | 197,064 | 14,096,845 | |||||||||
Communications |
78,310 | 40,360 | 118,670 | |||||||||
Other operating expenses |
544,089 | 236,123 | 780,212 | |||||||||
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$ | 14,522,180 | $ | 473,547 | $ | 14,995,727 | |||||||
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Item 2. | Managements Discussion and Analysis of Financial Condition and Results of Operations |
The following discussion and analysis of the Companys financial condition and results of its operations for the three-month periods ended March 31, 2012 and 2011 should be read in conjunction with the Companys condensed consolidated financial statements included as Item 1 herein. When used in the following discussions, the words believes, anticipates, intends, expects, and similar expressions are intended to identify forward-looking statements. As further explained in the section entitled Forward Looking Statements on page 2 herein, such statements are subject to certain risks and uncertainties, which could cause results to differ materially from those projected.
Overview
The Company is a Florida-based financial services holding company that provides, through its Summit Brokerage Services, Inc. (Summit Brokerage) operating subsidiary, a broad range of securities brokerage and investment services primarily to individual investors. Summit Brokerage also sells insurance products, predominantly fixed and variable annuities and life insurance, under licenses held by its SBS Insurance Agency of Florida, Inc. (SBSIA) subsidiary (or by SBSIAs subsidiary entities). Summit Brokerage also provides, through its SEC-registered investment advisor subsidiary, Summit Financial Group, Inc. (SFG), asset management and investment advisory services. SFSG was incorporated under the laws of the State of Florida in 2003.
Summit Brokerage is registered as a broker-dealer with the SEC, is a member of the Financial Industry Regulatory Authority (FINRA) (f/k/a National Association of Securities Dealers, Inc. (NASD)), the Municipal Securities Rule Making Board (MSRB), the National Futures Association (NFA) and the Securities Investor Protection Corporation (SIPC), and is licensed to conduct its brokerage activities in all 50 states, plus the District of Columbia. SFG is registered or eligible to conduct business as an investment advisor in 37 states and the District of Columbia. SBSIA, directly or through its subsidiary entities, is licensed to sell insurance, or is not required to be so licensed, in all jurisdictions where the Company conducts its brokerage activities.
As of March 31, 2012, we had approximately 300 financial advisors operating from approximately 210 offices located throughout the United States. Our financial advisors service retail, and to a much lesser extent, institutional clients. The number of financial advisors in each affiliate office typically ranges from one to five, although the number of financial advisors in certain offices may exceed this amount. With the exception of our Boca Raton, Florida branch (the Boca Branch), all of our branch offices and satellite locations are owned and operated by independent owners, whom we refer to as affiliates, who maintain all appropriate licenses and are responsible for all of their respective office overhead and expenses. Our financial advisors offer a broad range of investment products and services. These products and services allow us to generate both commissions (from transactions in securities and other investment products) and fee income (for providing investment advisory services, namely managing a clients account). The investment products and services offered include mutual funds, annuities, insurance, individual stocks and bonds, and managed money accounts. Historically, many of our affiliates have also provided financial planning services to their clients, wherein the financial advisor evaluates a clients financial needs and objectives, develops a detailed plan, and then implements the plan with the clients approval. When the implementation of such objectives involves the purchase or sale of securities (including the placement of assets within a managed account) such transactions are effected through Summit Brokerage, for which we earn either a commission or a fee. The following table reflects the various sources of revenue and the percentage of total revenues for the three-month periods ended March 31, 2012 and 2011:
For The Three Months Ended March 31, |
||||||||||||||||
2012 | 2011 | |||||||||||||||
Insurance-related products |
$ | 6,103,307 | 34 | % | $ | 5,984,896 | 34 | % | ||||||||
Investment advisory fees |
3,380,013 | 19 | 3,414,906 | 20 | ||||||||||||
Mutual funds |
2,457,576 | 13 | 2,482,026 | 14 | ||||||||||||
Equities |
2,553,734 | 14 | 3,170,127 | 18 | ||||||||||||
Other commission income |
2,553,359 | 14 | 1,411,863 | 8 | ||||||||||||
Miscellaneous |
1,111,364 | 6 | 1,107,261 | 6 | ||||||||||||
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Total |
$ | 18,159,353 | 100 | % | $ | 17,571,079 | 100 | % | ||||||||
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8
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We do not hold any funds or securities of our customers, but instead utilize, on a fully disclosed basis, the services of First Clearing, LLC (an affiliate of Wells Fargo & Company) and Pershing, LLC (an affiliate of the Bank of New York Mellon) as our clearing brokers (the Clearing Brokers). Our clearing arrangements provide us with back-office support, transaction processing services on all principal national and international securities exchanges, and access to many other financial services and products. These arrangements allow us to offer a range of products and services that are generally offered only by firms that are larger and have more capital than Summit Brokerage.
By their nature, our business activities are highly competitive and are subject to, among other things, general market conditions, including the volatility of the trading markets and the attractiveness of various forms of investment products. Consequently, our revenues and net income or loss are subject to substantial positive and negative fluctuations due to a variety of factors that cannot be determined from period to period. Furthermore, our mix of business in any particular period will be impacted by several factors, including the attractiveness of any particular type of investment when compared with other types of investments, and the types of investments sold by newly added financial advisors to our Company, many of whom specialize in the sale of specific types of investment products.
In general, our financial results can be impacted by a number of factors, including general market conditions and volatility, as well as our ability to recruit and retain financial advisors. During the three-month period ended March 31, 2012, our revenues were positively impacted by an increase in the average production per financial advisor, when compared with the comparable 2011 period.
Although we expect our results, in general, to be impacted by macroscopic forces, such as the state of the economy, as well as overall market conditions and investor confidence, we may experience fluctuations in our revenue that do not follow such trends, or mirror trends experienced by the financial services industry as a whole. This is because, given our size, we may add, or lose, financial advisors who generate a significant amount of commissions from the sale of a particular type of investment product. As we grow larger, we anticipate that the ability of any branch office to impact the overall revenue mix will be diminished. However, due to our size, it is possible that the addition or loss of financial advisors (and their clients), who focus on certain products over other products, will be a factor in causing fluctuations in our revenue and/or revenue mix from period to period, which may not be representative of results in other periods or reflective of general market conditions or economic trends.
Broker-dealers, and their affiliated registered representatives, operate in a highly regulated industry. For 2012 and beyond, we expect our operating results to be impacted by the continued increase in the rules and regulations that govern how we and our advisors are required to conduct business. Many of these new rules, which were designed in response to the factors leading up to the market turmoil of 2008, as well as the Madoff scandal and other instances of corporate fraud, will require Summit Brokerage to devote considerable resources to their implementation, and subsequent monitoring. Significant new rules and regulations are likely to arise as a result of the Dodd-Frank Wall Street Reform and Consumer Protection Act (the Dodd-Frank Act), which was enacted in July 2010. Compliance with these provisions, as well as other regulatory initiatives, has resulted in, and is likely to continue to result in, increased costs. Moreover, to the extent the Dodd-Frank Act and other legislation or regulations impacts the operations, financial condition, liquidity and capital requirements of financial institutions with which we do business, those institutions may seek to pass on increased costs, or otherwise modify their interactions with us. The ultimate impact that the Dodd-Frank Act will have on us, the financial industry and the economy cannot be known until all such applicable regulations called for under the Dodd-Frank Act have been finalized and implemented. In addition, several of these rules, as well as other regulatory initiatives, may ultimately have the effect of reducing certain types of compensation received by Summit Brokerage, such as the SECs consideration of a rule that would limit the amount of 12b-1 fees that could be paid to a broker-dealer.
We continue to focus our business plan on increasing our network of affiliated financial advisors, primarily through recruiting efforts. Although we will continue to attempt to recruit those financial advisors who serve as financial planners (who sell primarily annuities, insurance, mutual funds and fee-based products), we also intend to pursue the addition of financial advisors who focus on the sale of different types of securities, namely equities, fixed income and investment advisory products. There can be no assurance that we will be successful in our recruiting efforts. By focusing our business plan on increasing our network of affiliated financial advisors, we believe we can expand our base of revenue and our network for the retail brokerage of securities without the capital expenditures that would be required to open Company-owned offices and the additional administrative and other costs of hiring financial advisors as in-house employees. As was the case with the Boca Branch, however, we may evaluate potential acquisitions, including those that would result in acquired financial advisors becoming employees of Summit Brokerage. Historically, Summit Brokerage has recruited offices comprised of between one and three financial advisors. Prospectively, we expect to continue to recruit smaller offices, although we will also target larger offices comprised of many financial advisors. Because of the size of these larger offices, we may be required to pay a greater percentage of the offices commissions than we would pay to a smaller office. As a result, if we are successful, of which no assurance can be given, we may experience a potential decline in our gross margin percentage.
We may also pursue mergers with, or the acquisition of the assets of, other brokerage firms. Our ability to realize growth through acquisitions, however, will depend on the availability of suitable broker-dealer candidates and our ability to successfully negotiate favorable terms (from both sellers, as well as financing sources, if necessary), and there can be no assurance that we will be able to consummate any such acquisitions. Further, there are costs associated with the integration of new businesses and personnel, which may be more than we anticipate at that time. Thus, there is no assurance that we will be able to successfully execute such growth strategy.
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As we continue to grow, we may also incur increases in expenses related to, among other things, marketing and recruiting, personnel, office space, and the amortization of forgivable loans provided to newly-recruited financial advisors. There can be no assurance that any increased revenue from growth will be sufficient to offset any increased expenses. In addition, the Company may elect to expand the types of trading activities in which it serves as a principal, which transactions are inherently more risky than transactions in which the Company serves as an agent. Furthermore, the Company has determined that its long-term growth strategy can best be maximized through the reinvestment of its earnings into the development of its infrastructure and its recruiting and business development efforts, including through the payment of upfront amounts to financial advisors. As a result, the Companys future earnings may be significantly less than in prior years should our revenue growth be less than anticipated.
For our current level of operating activities, we believe that our operations and current capital resources will be sufficient to fund our working capital needs through 2012. The Company may, however, seek additional capital within the next 12 months, should it elect to continue pursuing a strategy that incorporates the use of both forgivable and non-forgivable loans to induce newly-recruited financial advisors to affiliate with the Company. In addition, we anticipate that our strategy of growth through acquisitions may necessitate additional debt and/or equity financing, although there can be no assurances that this will happen. Our failure to obtain sufficient financing for either of these purposes could have a materially adverse affect on our ability to execute our growth strategy to the extent desired.
Results of Operations
The following discussion relates to the results of operations for the three months ended March 31, 2012 (the 2012 Quarter) and the comparable period in the prior year (the 2011 Quarter). All amounts are approximate, unless otherwise indicated.
Comparison of Three Months Ended March 31, 2012 and March 31, 2011
Revenue:
Commission revenue of approximately $17.1 million for the 2012 Quarter represents an increase of $0.6 million, or 3%, over the approximately $16.5 million of commission revenue reported for the 2011 Quarter. For the 2012 Quarter, our revenues were positively impacted by an increase in the average production per financial advisor affiliated with the Company during the 2012 Quarter compared with the 2011 Quarter.
In any period, our mix of business will be impacted by several factors, including, among other things, investor confidence, as reflected by the movements of the equities markets and the attractiveness of non-equity related investment products, such as fixed income securities. Additionally, during any period, we may add, or lose, a significant number of financial advisors who focus only on the sale of a particular type or types of investment product(s) (e.g., insurance, equities, fixed income, etc.).
Interest and dividends decreased by approximately $18,000 or 7% from approximately $290,000 in the 2011 Quarter to approximately $272,000 in the 2012 Quarter. Interest and dividend income is comprised primarily of that portion of the interest income earned from, and the interest expense charged to, clients of Summit Brokerage that are received from our Clearing Brokers. Beginning in December 2010, one of our Clearing Brokers reduced the applicable percentage used to determine interest income paid to Summit Brokerage related to client balances. As a result, the amounts received by Summit Brokerage have declined over amounts received in prior periods. The effect of any such reductions by our Clearing Brokers will vary depending upon the aggregate amount of the client balances upon which such amounts are based. Any further significant reduction in our interest and dividend income could materially adversely affect our operating results.
Other revenue increased by approximately $22,000, or 3%, from approximately $817,000 in the 2011 Quarter to approximately $839,000 in the 2012 Quarter. This increase is due primarily to an increase in transactional fees.
Expenses:
Commissions and related costs increased to $14.5 million in the 2012 Quarter, which represents an increase of $.4 million, or 3%, from the $14.1 million reported for the 2011 Quarter. In general, commissions and clearing costs are directly related to commission revenue, and will typically increase or decrease proportionately as commission revenue rises or falls. The Company also includes within commissions and related costs the amortization related to the issuance of forgivable advisor notes, which amounts decreased by approximately $43,000 during the 2012 Quarter when compared to the 2011 Quarter. Commissions and clearing costs, as a percentage of commission revenue, decreased in the 2012 Quarter to 85.1% from 85.6% in 2011. Prospectively, we would expect this percentage to increase as we recruit more independent financial advisors. Because our independent financial advisors are responsible for the payment of all costs associated with operating their offices, we must pay them a higher percentage of the commissions they generate (typically 80% to 90%), than we pay to those financial advisors working from the Boca Branch, where Summit pays the costs associated with operating the Boca Branch. In addition to the commission expense we pay to our financial advisors, we also include certain costs that are either billed, or credited, to Summit Brokerage, other than those related to clearance and execution.
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Employee compensation and benefits decreased to $1.74 million in the 2012 Quarter, which represents a decrease of $30,000, from the $1.77 million reported for the 2011 Quarter. This decrease was due primarily to a decrease in the average number of administrative employees for the 2012 Quarter when compared with the 2011 Quarter. Additionally, we include within employee compensation and benefits net expenses related to the issuance of common stock and common stock equivalents to our employees. For the 2012 and 2011 Quarters, a total of $259,000 and $254,000, respectively, was expensed (net of recaptured amortization), all of which related to the amortization of unearned stock compensation for employees.
Occupancy and equipment costs increased by 13%, or $24,000, to $190,000 in the 2012 Quarter from $166,000 in the 2011 Quarter. This increase was due primarily to the absence in the 2012 Quarter refunds received related to common area maintenance, as well as the reversal of an accrual related to the Companys prior corporate headquarters.
Communications expenses were approximately the same between the 2012 Quarter and the 2011 Quarter.
Depreciation and amortization expense increased by $5,000, or 11%, to $50,000 for the 2012 Quarter. This increase is due primarily to the addition of leasehold improvements in connection with the Companys relocation.
Other operating expenses include the general and administrative costs incurred by the Company, to the extent such costs are not included elsewhere. Other operating expenses increased by $12,000, or 1%, to $792,000 during the 2012 Quarter from $780,000 for the 2011 Quarter. This increase was due primarily to an increase in legal, accounting and arbitration-related costs of $53,000 offset by decreases in the amounts that we pay to retain advisors. Additionally, we include within other operating expenses those net expenses related to the issuance of common stock and common stock equivalents, such as options to non-employees. For the 2012 and 2011 Quarters, a total of $53,000 and $43,000, respectively, was expensed (net of recaptured amortization) for such issuances, all of which related to the amortization of unearned stock compensation.
Net Income:
For the 2012 Quarter, we generated net income of $417,000, or $0.02 per basic and $0.01 diluted share, as compared to net income for the 2011 Quarter of $337,000, or $0.01 per basic and diluted share.
Liquidity and Capital Resources
Net cash provided by operating activities totaled $592,000 for the 2012 Quarter compared to $89,000 for the 2011 Quarter. The increase during the 2012 Quarter was due to not only an increase in net income, but also as a result of the net changes in certain balance sheet accounts, as well as certain non-cash items, such as stock-based compensation expense.
During the 2012 Quarter, we purchased $9,000 of property and equipment, compared to $40,000 purchased during the 2011 Quarter.
Financing activities resulted in net proceeds of cash of $51,000 during the 2012 Quarter, compared to net proceeds of $-0- for the 2011 Quarter. During the 2012 Quarter, options were exercised for aggregate consideration of $55,000, which proceeds were partially offset by the payment and accrual of $4,000 in Preferred Stock dividends. This compares with aggregate proceeds from the exercise of options and warrants of $4,000 during the 2011 Quarter, which was offset by the payment and accrual of $4,000 in Preferred Stock dividends.
Overall, cash and cash equivalents increased during the 2012 Quarter by approximately $634,000 to approximately $11.4 million at March 31, 2012 from approximately $10.8 million at December 31, 2011. This increase was due primarily to cash provided by operations, as previously described.
Item 4. | Controls and Procedures |
The Companys Chief Executive Officer and the Companys Chief Financial Officer evaluated the Companys disclosure controls and procedures as of March 31, 2012. Based upon this evaluation, the Companys Chief Executive Officer and the Companys Chief Financial Officer concluded that the Companys disclosure controls and procedures are effective in ensuring that material information required to be disclosed is included in the reports that it files with the SEC.
During the quarter ended March 31, 2012, there were no changes in our internal controls over financial reporting that materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
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Item 6. | Exhibits |
Number |
Name | |
31.1 | Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. | |
31.2 | Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. | |
32.1 | Certification of Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. | |
32.2 | Certification of Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. | |
101.INS | XBRL Instance Document | |
101.SCH | XBRL Schema Document | |
101.CAL | XBRL Calculation Linkbase Document | |
101.DEF | XBRL Definition Linkbase Document | |
101.LAB | XBRL Label Linkbase Document | |
101.PRE | XBRL Presentation Linkbase Document |
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SUMMIT FINANCIAL SERVICES GROUP, INC.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
Date: May 15, 2012 | Summit Financial Services Group, Inc. | |||
(Registrant) | ||||
/S/ MARSHALL T. LEEDS | ||||
Marshall T. Leeds, | ||||
Chairman of the Board, Chief Executive Officer and President | ||||
(Principal Executive Officer) | ||||
Date: May 15, 2012 | /S/ STEVEN C. JACOBS | |||
Steven C. Jacobs, | ||||
Executive Vice President and Chief Financial Officer | ||||
(Principal Accounting Officer) |
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EXHIBIT INDEX
EXHIBIT NUMBER |
DESCRIPTION | |
31.1 | Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. | |
31.2 | Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. | |
32.1 | Certification of Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. | |
32.2 | Certification of Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. | |
101.INS | XBRL Instance Document | |
101.SCH | XBRL Schema Document | |
101.CAL | XBRL Calculation Linkbase Document | |
101.DEF | XBRL Definition Linkbase Document | |
101.LAB | XBRL Label Linkbase Document | |
101.PRE | XBRL Presentation Linkbase Document |
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