<PAGE>
UNITED STATES 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 September 30, 1998
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from ________ to________
Commission file number 001-14205
JWGENESIS FINANCIAL CORP.
------------------------------------------------------
(Exact name of registrant as specified in its charter)
Florida 65-0811010
------------------------------- ------------------------------------
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
980 North Federal Highway - Suite 310
Boca Raton, Florida 33432
--------------------------------------- ----------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (561) 338-2600
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 last 90
days. Yes /x/ No / /
Indicate the number of shares outstanding of each of the issuer's
classes of common stock, as of the latest practicable date.
Class Outstanding at November 12, 1998
- - --------------------------------------- --------------------------------
Common stock, $.001 par value per share 5,306,622
<PAGE>
<TABLE>
<CAPTION>
JWGENESIS FINANCIAL CORP.
INDEX
Page
----
<S> <C>
Part I. Financial Information
Item 1. Financial Statements.
Consolidated Condensed Statements of Financial Condition
at September 30, 1998 and December 31, 1997 3
Consolidated Condensed Statements of Income for the Three Month and
Nine Month Periods Ended September 30, 1998 and 1997 4
Consolidated Condensed Statements of Cash Flows for the Nine Month Periods
Ended September 30, 1998 and 1997 5
Notes to Consolidated Condensed Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations 8
Part II. Other Information
Item 6. Exhibits and Reports on Form 8-K 13
</TABLE>
Page 2<PAGE>
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
- - ----------------------------
<TABLE>
<CAPTION>
JWGENESIS FINANCIAL CORP. AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF FINANCIAL CONDITION
September 30, December 31,
1998 1997(*)
----------------------------------
(Unaudited)
<S> <C> <C>
ASSETS
- - ------
Cash and cash equivalents $ 12,709,000 $ 11,512,000
Receivable from customers, net 114,712,000 107,507,000
Receivable from brokers and dealers 9,876,000 5,248,000
Securities owned, at market value 13,724,000 9,010,000
Cost in excess of the value of net assets acquired 12,973,000 -
Furniture, equipment and leasehold improvements, net of accumulated
depreciation and amortization of $2,106,000 and $1,433,000 3,314,000 1,742,000
Deferred tax asset 1,669,000 1,621,000
Other, net 5,593,000 4,092,000
---------------------------------
$ 174,570,000 $ 140,732,000
=================================
LIABILITIES AND STOCKHOLDERS' EQUITY
- - ------------------------------------
Liabilities:
Short-term borrowings from banks $ 38,101,000 $ 29,423,000
Accounts payable, accrued expenses and other liabilities 12,917,000 12,043,000
Payable to customers 18,498,000 35,055,000
Payable to brokers and dealers 55,683,000 32,975,000
Securities sold, not yet purchased, at market value 267,000 567,000
Lines of credit 3,000,000 890,000
Notes payable to affiliates - 5,113,000
Income taxes payable 1,576,000 -
---------------------------------
130,042,000 116,066,000
---------------------------------
Commitments and contingencies
Stockholders' equity:
Preferred stock, $.001 par value - authorized 5,000,000 shares; no shares issued
or outstanding - -
Common stock, $.001 par value authorized 9,056,000 shares; issued
and outstanding 5,306,622 and 3,690,743 5,000 4,000
Additional paid-in capital 20,327,000 4,018,000
Retained earnings 24,203,000 20,651,000
Treasury stock, at cost, 900 shares (7,000) (7,000)
---------------------------------
Total stockholders' equity 44,528,000 24,666,000
---------------------------------
$ 174,570,000 $ 140,732,000
=================================
* - Derived from audited financial statements contained in JW Charles
Financial Services, Inc. Annual Report on Form 10-K/A for the
fiscal year ended December 31, 1997. See Note 2.
(The accompanying Notes to Consolidated Condensed Financial Statements
are an integral part of these financial statements.)
</TABLE>
Page 3<PAGE>
<TABLE>
<CAPTION>
JWGENESIS FINANCIAL CORP. AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF INCOME
(Unaudited)
Three Months Ended Nine Months Ended
September 30, September 30,
---------------------------- ------------------------------
1998 1997 1998 1997
---------------------------- ------------------------------
<S> <C> <C> <C> <C>
REVENUES:
Commissions $ 16,793,000 $ 14,450,000 $ 43,974,000 $ 36,516,000
Market making and principal transactions, net 5,769,000 4,763,000 16,255,000 14,808,000
Interest 3,834,000 2,774,000 10,814,000 7,889,000
Clearing fees 2,164,000 3,312,000 6,625,000 7,693,000
Other 1,299,000 750,000 3,332,000 3,280,000
---------------------------- ------------------------------
29,859,000 26,049,000 81,000,000 70,186,000
---------------------------- ------------------------------
EXPENSES:
Commissions and clearing costs 14,620,000 13,846,000 41,077,000 36,331,000
Employee compensation and benefits 5,962,000 4,297,000 14,847,000 12,566,000
Selling, general and administrative 6,751,000 3,352,000 14,881,000 11,257,000
Interest 1,564,000 1,033,000 4,277,000 3,095,000
---------------------------- ------------------------------
28,897,000 22,528,000 75,082,000 63,249,000
---------------------------- ------------------------------
Income before income taxes 962,000 3,521,000 5,918,000 6,937,000
Provision for income taxes 456,000 1,326,000 2,366,000 2,522,000
---------------------------- ------------------------------
Net income $ 506,000 $ 2,195,000 $ 3,552,000 $ 4,415,000
============================ ==============================
Earnings per common share:
Basic $ .10 $ .66 $ .81 $ 1.34
============================ ==============================
Diluted $ .09 $ .58 $ .72 $ 1.15
============================ ==============================
Weighted average common shares outstanding:
Basic 5,324,990 3,342,437 4,395,018 3,307,148
============================ ==============================
Diluted 5,739,114 3,812,997 4,938,635 3,848,348
============================ ==============================
(The accompanying Notes to Consolidated Condensed Financial Statements
are an integral part of these financial statements.)
</TABLE>
Page 4
<PAGE>
<TABLE>
<CAPTION>
JWGENESIS FINANCIAL CORP. AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(Unaudited)
Nine Months Ended September 30,
----------------------------------
1998 1997
----------------------------------
<S> <C> <C>
OPERATING ACTIVITIES
Net income $ 3,552,000 $ 4,415,000
Adjustments to reconcile net income to net cash
used by operating activities:
Depreciation and amortization 422,000 249,000
Change in assets and liabilities, net of effect of acquisition:
Receivable from customers (7,205,000) (6,463,000)
Receivable from brokers and dealers (1,475,000) (4,947,000)
Securities owned (4,685,000) (3,513,000)
Deferred tax asset (48,000) 16,000
Other assets (1,534,000) (1,892,000)
Accounts payable, accrued expenses and other liabilities (1,721,000) 1,842,000
Payable to customers (16,557,000) (25,151,000)
Payable to brokers and dealers 22,316,000 13,407,000
Securities sold, not yet purchased (300,000) 593,000
Income taxes payable 1,576,000 569,000
Minority interest - 430,000
----------------------------------
Net cash used in operating activities (5,659,000) (20,445,000)
----------------------------------
INVESTING ACTIVITIES
----------------------------------
Purchases of furniture, equipment and leasehold improvements (866,000) (731,000)
----------------------------------
FINANCING ACTIVITIES
Change in short-term borrowings from banks 8,678,000 22,515,000
Change in notes payable to affiliate (5,113,000) (3,262,000)
Change in lines of credit 2,110,000 -
Issuance of common stock 2,047,000 3,129,000
----------------------------------
Net cash provided by financing activities 7,722,000 22,382,000
----------------------------------
Net increase (decrease) in cash and cash equivalents 1,197,000 1,206,000
Cash and cash equivalents at beginning of period 11,512,000 11,836,000
----------------------------------
Cash and cash equivalents at end of period $ 12,709,000 $ 13,042,000
==================================
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the period for income taxes $ 954,000 $ 1,055,000
==================================
Cash paid during the period for interest $ 4,363,000 $ 3,095,000
==================================
SUPPLEMENTAL DISCLOSURE OF NON-CASH INVESTING AND FINANCING ACTIVITIES:
On June 12, 1998, the Company issued 1,500,000 shares of common stock in
connection with its acquisition of Genesis Merchant Group Securities, LLC (Note 5).
(The accompanying Notes to Consolidated Condensed Financial Statements
are an integral part of these financial statements.)
</TABLE>
Page 5<PAGE>
JWGENESIS FINANCIAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Unaudited)
1. BASIS OF PRESENTATION
As discussed elsewhere in this Report, on June 12, 1998, JW Charles
Financial Services, Inc. ("JWCFS") consummated a series of
transactions (the "Combination") in which it acquired Genesis Merchant
Group Securities LLC ("Genesis"), and combined the two firms into a
new company that was renamed "JWGenesis Financial Corp." (the
"Company") pursuant to an exchange offer of one share of JWGenesis
common stock for each outstanding share of JWCFS common stock. As a
result of the Combination, JWGenesis has now succeeded to the business
and operations of JWCFS, including as the acquirer of Genesis, and
Genesis and JWCFS are wholly-owned subsidiaries of the Company.
Additionally , in connection with the Combination, JW Charles
Securities, Inc., JW Charles Clearing Corp. and Genesis Merchant Group
Securities, LLC changed their names to JWGenesis Securities, Inc.,
JWGenesis Clearing Corp. and JWGenesis Capital Markets, LLC,
respectively. The information in the Financial Section of this Report
relating to periods prior to June 12, 1998 is derived solely from
information and financial statements of JW Charles Financial Services,
Inc. and, except as otherwise expressly indicated, relates to matters
prior to the Combination.
The interim financial information included herein is unaudited;
however, such information reflects all adjustments, which are, in the
opinion of management, necessary for a fair presentation of the
periods indicated.
The accompanying consolidated condensed financial statements include
the accounts of the Company and its subsidiaries. Certain information
and footnote disclosures normally included in financial statements
prepared in conformity with generally accepted accounting principles
have been condensed or omitted pursuant to the rules and regulations
of the Securities and Exchange Commission. These consolidated
condensed financial statements should be read in conjunction with the
consolidated condensed financial statements and related notes
contained in the JWCFS 1997 Annual Report on Form 10-K/A.
Because of seasonal and other factors, the results of operations for
the three month and nine month periods ended September 30, 1998 are
not necessarily indicative of the results of operations to be expected
for the fiscal year ending December 31, 1998.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Consolidation
- - ----------------------
The accompanying consolidated financial statements include the
accounts of the Company and its subsidiaries which are: Corporate
Securities Group, Inc. ("CSG"), JWGenesis Securities, Inc. ("JWG
Securities"), JWGenesis Clearing Corp. ("JWG Clearing"), CMG Capital
Corp. ("CMGCC"), First Investors Life Agency, Inc. ("FILA"), DMG
Securities, Inc. ("DMG") and Discount Securities Group, Inc. ("DSG").
In addition, the accompanying consolidated financial statements
include the accounts of JWGenesis Capital Markets, LLC ("JWG Capital")
(effective June 12, 1998) (See Note 5, "Acquisitions") and The
Americas Growth Fund, Inc. ("AGRO") (effective September 22, 1997)
(See Note 5, "Acquisitions"). All significant intercompany
transactions have been eliminated in consolidation.
<PAGE>
Reclassifications
- - -----------------
Certain amounts in the prior period's consolidated condensed financial
statements have been reclassified to conform to the current period's
presentation. These reclassifications are not material to the
consolidated condensed financial statements.
3. CONTINGENCIES
The Company is involved in various claims and possible actions arising
out of the normal course of its business. Although the ultimate
outcome of these claims cannot be ascertained at this time, it is the
opinion of the Company, based on knowledge of facts and advice of
counsel, that the resolution of such actions will not have a material
adverse effect on the Company's financial condition and results of
operations.
6
<PAGE>
4. NET CAPITAL
The broker-dealer subsidiaries of the Company are subject to the
requirements of Rule 15c3-1 under the Securities Exchange Act of 1934.
This rule requires that aggregate indebtedness, as defined, not exceed
fifteen times net capital, as defined. Rule 15c3-1 also provides for
an "alternative net capital requirement" which, if elected, requires
that net capital be equal to the greater of $250,000 or two percent of
aggregate debit items computed in applying the formula for
determination of reserve requirements. The New York Stock Exchange,
Inc. ("NYSE") may require a member organization to reduce its business
if its net capital is less than four percent of aggregate debit items
and may prohibit a member firm from expanding its business if its net
capital is less than five percent of aggregate debit items. At
September 30, 1998, the net capital positions of the Company's broker-
dealer subsidiaries were as follows:
JWG Clearing (alternative method elected):
Net capital as a percent of aggregate debit items 9.77
Net capital $12,211,000
Required net capital $2,501,000
CSG:
Ratio of aggregate indebtedness to net capital 3.01
Net capital $2,068,000
Required net capital $250,000
JWG Securities:
Ratio of aggregate indebtedness to net capital 2.09
Net capital $1,628,000
Required net capital $250,000
JWG Capital:
Ratio of aggregate indebtedness to net capital 2.17
Net capital $1,293,000
Required net capital $187,000
DMG:
Ratio of aggregate indebtedness to net capital .16
Net capital $427,000
Required net capital $100,000
5. ACQUISITIONS
On June 12, 1998, the Company completed the acquisition of JWG
Capital, formerly known as Genesis Merchant Group Securities, LLC, a
San Francisco-based investment banking firm. The acquisition (which
was accounted for under the purchase method) was accomplished by the
Company though the issuance of 1,500,000 shares of its authorized but
unissued common stock in exchange for a 100% ownership in JWG Capital.
The purchase price of $16,600,000 exceeded the fair value of net
assets acquired by approximately $12,911,000, which is being amortized
on a straight-line basis over 20 years. The results of operations of
JWG Capital are included in the accompanying financial statements from
the date of acquisition.
7
<PAGE>
The following unaudited pro forma financial information presents the
Company's results of operations as though JWG Capital had been
acquired as of the beginning of each of the nine month periods ended
September 30, 1998 and 1997:
Nine Months Ended
September 30, (Unaudited)
1998 1997
Revenues $ 93,364,000 $ 94,826,000
Net income $ 3,832,000 $ 5,929,000
Earnings per common share:
Basic $ .67 $ 1.23
Diluted $ .61 $ 1.11
The pro forma results of operations are not necessarily indicative of
what actually would have occurred if the acquisition of JWG Capital
had been completed as of the beginning of each of the fiscal period
presented, nor are they necessarily indicative of future consolidated
results.
On September 22, 1997, JWCFS completed its exchange tender offer (the
"Exchange Offer") for all (but not less than 51%) of the outstanding
shares of common stock of AGRO not already owned by the Company.
Prior to the commencement of the Exchange Offer, the Company owned 26%
of the outstanding shares of common stock of AGRO. A total of
approximately 823,000 shares of AGRO common stock, representing
approximately 65% of the outstanding shares of AGRO common stock, were
tendered pursuant to the Exchange Offer. All shares of AGRO common
stock tendered were accepted for exchange by the Company according to
the terms of the Exchange Offer on the basis of .431 shares of the
Company's common stock for each share of AGRO, resulting in the
issuance by JWCFS of 354,851 shares of its authorized but unissued
common stock. The tendered shares together with the shares already
owned by JWCFS represent approximately 91% of the outstanding shares
of AGRO common stock, with the remaining 9% of AGRO shares held by
minority shareholders (the "AGRO"). The AGRO acquisition was
accounted for under the purchase method of accounting. The Company
has consolidated the accounts of AGRO in the accompanying financial
statements effective as of September 22, 1997. The AGRO Minority
Shareholders' interests in these accounts is reflected as accounts
payable, accrued expenses and other liabilities in the accompanying
financial statements.
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations
---------------------------------------------
FORWARD LOOKING STATEMENTS
From time to time, information provided by the Company or
statements made by its directors, officers or employees may constitute
"forward-looking statements" under the meaning of the Private
Securities Litigation Reform Act of 1995. Any statements made in this
Form 10-Q, including any statements incorporated herein by reference,
that are not statements of historical fact are forward-looking
statements. Such forward-looking statements and other forward-looking
statements made by the Company or its representatives are based upon a
number of assumptions and involve a number of risks and uncertainties,
and, accordingly, actual results could differ materially. Factors
that may cause such differences include, but are not limited to, those
set forth under the heading "Risk Factors" contained in the JW Charles
Financial Services, Inc. Annual Report on Form 10-K/A for the year
ended December 31, 1997.
8<PAGE>
RESULTS OF OPERATIONS
THREE MONTHS ENDED SEPTEMBER 30, 1998 (THE "1998 PERIOD") VS. 1997
(THE "1997 PERIOD")
<TABLE>
<CAPTION>
Three Months Ended September 30,
----------------------------------------------------------
1998 1997 1996
(000's) % Change (000's) % Change (000's)
----------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Revenues:
Commissions $16,793 16 $14,450 57 $9,186
Market making and principal
transactions, net 5,769 21 4,763 8 4,429
Interest 3,834 38 2,774 8 2,562
Clearing fees 2,164 (35) 3,312 2 3,233
Other 1,299 73 750 (53) 1,598
---------------------------------------------------------
$29,859 15 $26,049 24 $21,008
=========================================================
Three Months Ended September 30,
----------------------------------------------------------
1998 1997 1996
(000's) % Change (000's) % Change (000's)
----------------------------------------------------------
Expenses:
Commissions and clearing costs $14,620 6 $13,846 43 $9,677
Employee compensation and benefits 5,962 39 4,297 (4) 4,499
Selling, general and administrative 6,751 101 3,352 4 3,209
Interest 1,564 51 1,033 5 987
---------------------------------------------------------
$28,897 28 $22,528 23 $18,372
=========================================================
</TABLE>
Total revenues of $29,859,000 recorded in the 1998 Period
increased by 15% compared to last year's $26,049,000. JWG Capital
added $5,323,000 to the revenues which otherwise would have been
$24,536,000 or a 6% decrease. In particular, commissions increased by
16% to $16,793,000 from $14,450,000, of which 1998 Period total JWG
Capital contributed $5,090,000. Without JWG Capital, commission
revenues would have been $11,703,000 resulting in a 19% decrease.
This decrease in commissions without JWG Capital can be attributed to
the industry wide slowdown in market activity in the third quarter of
1998 as a result of weakness in the general securities market. Market
making and principal transactions, net increased 21%. The increase in
market making and principal transactions, net is primarily due to
the inclusion of an unrealized gain of $2 million related to the
Company's investment in Knight/Trimark Group, Inc. (NASDAQ: NITE).
Exclusive of this unrealized gain, market making and principal
transactions, net would have decreased by $1,034,000 or 22%, which is
due to the industry wide slowdown discussed above. Clearing fees
decreased by $1,148,000 or 35% as a result of the industry wide
slowdown in the third quarter of 1998. Interest income and interest
expense increased by 38% and 51%, or $1,060,000 and $531,000,
respectively, primarily as a result of increased customer margin
balances and the related cost of funding customer margin balances.
Without JWG Capital, the increase in interest income would have been
31% or $869,000; Interest expense would have been essentially
unchanged.
Commissions and clearing costs, which represent the portion of
fee income payable by the Company to registered representatives or
other broker-dealers as a result of securities transactions (and the
related costs associated with the execution of such trades), increased
by $774,000 due to JWG Capital. Without including JWG Capital,
commissions and clearing costs would have decreased by 19%, relates
directly to the decrease in commission revenue that would have
resulted without JWG Capital as discussed above. Employee
compensation and benefits increased by 39% or $1,785,000 as a result
of the inclusion of JWG Capital, which accounted for $1,905,000 of the
total. Excluding JWG Capital, employee compensation and benefits
decreased by 3% or $120,000 due to the industry wide slowdown
discussed above, which caused employees who receive incentive
compensation related to sales activity and profitability to receive
lesser amounts in the 1998 Period. Selling, general and
administrative costs increased by $3,399,000 or 101% primarily as a
result of the inclusion of JWG Capital, which contributed $2,125,000
of the total amount.
RESULTS OF OPERATIONS
NINE MONTHS ENDED SEPTEMBER 30, 1998 (THE "1998 PERIOD") VS. 1997 (THE
"1997 PERIOD")
The Company's results for the nine months in the 1998 Period also
reflect the effects of the industry wide slowdown in market activity
9<PAGE>
in the third quarter of 1998 as a result of weakness in the general
securities market, which is described above in discussing the three-
month comparisons. The effects are less pronounced in nine-month
period because they were not present for the first six months of 1998.
<TABLE>
<CAPTION>
Nine Months Ended September 30,
----------------------------------------------------------
1998 1997 1996
(000's) % Change (000's) % Change (000's)
----------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Revenues:
Commissions $43,974 20 $36,516 12 $32,580
Market making and principal
transactions, net 16,255 10 14,808 (12) 16,913
Interest 10,814 37 7,889 12 7,044
Clearing fees 6,625 (14) 7,693 (6) 8,218
Other 3,332 2 3,280 4 3,139
---------------------------------------------------------
$81,000 15 $70,186 3 $67,894
=========================================================
Nine Months Ended September 30,
----------------------------------------------------------
1998 1997 1996
(000's) % Change (000's) % Change (000's)
----------------------------------------------------------
Expenses:
Commissions and clearing costs $41,077 13 $36,331 2 $35,651
Employee compensation and benefits 14,847 18 12,566 7 11,769
Selling, general and administrative 14,881 32 11,257 -1 11,339
Interest 4,277 38 3,095 6 2,920
---------------------------------------------------------
$75,082 19 $63,249 3 $61,679
=========================================================
</TABLE>
Total revenues of $81,000,000 recorded in the 1998 Period
increased by 15% compared to last year's $70,186,000; JWG Capital
contributed $6,366,000 or 9% to the total. In particular, commissions
increased by approximately 20%. However, without JWG Capital,
commissions would have increased by 4% or $1,629,000. Market making
and principal transactions, net increased by 10% or $1,447,000. The
increase in market making and principal transactions, net is
primarily due to the inclusion of an unrealized gain of $2 million
related to an investment in Knight/Trimark Group, Inc. (NASDAQ: NITE).
Exclusive of this unrealized gain, market making and principal
transactions, net would have decreased by $593,000 or 4%.
Commissions and clearing costs increased, reflecting the
Company's overall business growth. A large portion of these costs
can be attributed to JWG Capital which represents $3,702,000 or 10% of
the increase. Employee compensation and benefits increased by
$2,281,000 or 18% or which $2,206,000 is directly related to JWG
Capital. Excluding JWG Capital, employee compensation and benefits
increased by less than 1%. Selling, general and administrative costs
increased by $3,624,000 or 32%, of which $2,484,000 is attributable to
JWG Capital. Excluding JWG Capital, selling, general and
administrative costs increased by $1,140,000 or 10% primarily as a
result of the Company's expansion efforts and other costs related to
an overall upgrade of the Company's technology and communications
networks.
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
The Company maintains a highly liquid balance sheet with the
majority of the Company's assets consisting of cash and cash
equivalents, securities owned, which are marked to market, and
receivable from customers, brokers, dealers and clearing brokers
arising from customer related securities transactions. Receivable
from customers consist primarily of collateralized customer margin
loans, which are typically secured with marketable corporate debt and
equity securities. The nature of the Company's business as a market
maker and securities dealer requires it to carry significant levels of
securities inventories in order to meet its customer and internal
trading needs. Additionally, the Company's role as a financial
intermediary for customer activities, which it conducts on a principal
basis, results in significant levels of customer related balances.
Accordingly, the Company's total assets and financial leverage can
fluctuate significantly depending largely upon general economic and
market conditions, volume of activity, customer demand and
underwriting commitments. The Company's ability to support increases
in its total assets is a function of its ability to generate funds
internally and obtain short-term borrowings from banks.
At September 30, 1998, the Company had stockholders' equity of
$44,528,000, representing an increase of $19,862,000 from December 31,
1997, and the Company had cash and cash equivalents of $12,709,000.
The increase in stockholders' equity is primarily related to the
acquisition of JWG Capital and net income of $3,552,000 recorded for
the nine month period ended September 30, 1998. At September 30,
1998, the Company had an aggregate of $2,000,000 of additional
borrowing capacity available under its committed bank lines of credit
10<PAGE>
described in the JW Charles Financial Services, Inc. Annual Report on
Form 10-K/A for the year ended December 31, 1997. The Company
presently owns approximately 300,000 shares of common stock of
Knight/Trimark Group, Inc. which are subject to a lock up agreement
until January 3, 1999 and are unregistered. These securities, which
have a historical cost of $18,000, are included in securities owned,
at market value in the accompanying Consolidated Condensed Statements
of Financial Condition at their estimated fair market value of
$2,058,000.
IMPACT OF YEAR 2000 ISSUE
Generally, the year 2000 risk involves computer programs and
computer hardware that are not able to perform without interruption
into the year 2000. The arrival of the year 2000 poses a unique
worldwide challenge to the ability of all systems to correctly
recognize the date change from December 31, 1999 to January 1, 2000.
If the Company's systems did not correctly recognize such a date
change, computer applications that rely on the date field could fail
or create erroneous results. Such erroneous results could affect the
Company's ability to conduct retail securities brokerage and brokerage
processing operations, or could cause the temporary inability to send
trade confirmations, customer statements or engage in similar normal
business activities. If it is not adequately addressed by the Company
or its suppliers and correspondents, the year 2000 issue could result
in a material adverse impact on the Company's financial condition and
results of operations.
JWGenesis' State of Readiness
The Company has been assessing its Year 2000 readiness since
1977. It has formed a committee charged with the task of identifying
and remediating date recognition problems in both information
technology ("IT") and non-IT systems that include microcontrollers and
other embedded computer technology. Guided by requirements of and
examination by securities regulators, the committee has developed a
comprehensive plan to assess the Company's year 2000 readiness with
respect to both IT and non-IT systems. Its inventory of both types of
systems is complete, and the Company has either repaired or replaced,
or is in the process of repairing or replacing, all noncompliant
systems. The Company believes that most mission-critical systems have
been remediated or are nearing completion of remediation. The Company
expects that all noncompliant systems will be repaired, replaced or
otherwise remediated by June 30, 1999, although there can be no
assurance that the Company's year 2000 remediation program will be
complete by then.
Testing has occurred in 1998, and further testing will occur
during 1999 of systems that have been or will be remediated. The
Company believes that it has identified all major internal business
and operational functions that will be impacted by the year 2000 date
change.
Costs to Address Year 2000 Issues
The Company does not anticipate that the year 2000 related costs
will be material to its financial condition or results of operations.
The Company estimates that its total costs for the evaluation,
remediation and testing of its IT and non-IT systems in connection
11<PAGE>
with the year 2000 issue will range from $1 million to $1.25 million,
$500,000 of which has been incurred to date. All of the expected
expenditures are present in the Company's 1998 and 1999 internal
capital expenditures budgets.
Risks of Third-Party Year 2000 Issues
The impact of year 2000 noncompliance by outside parties with
whom the Company transacts business cannot be accurately gauged. The
Company has surveyed its major business partners to ascertain their
year 2000 readiness. Although all are not year-2000 compliant at this
date, the Company has received certain assurances that such third
parties will be ready for the year 2000 date change by the end of
1999. Moreover, securities regulators have prescribed year 2000-
related programs for many of the Company's major business partners,
and monitored those companies' progress in remediating their
noncompliant systems.
If the systems of major business correspondents were not
compliant and suffered serious year 2000-related failures, the
Company's brokerage processing operations would be materially impeded.
Electronic ordering and clearing of securities transactions might fail
or be interrupted.
JWGenesis' Contingency Plans
If the Company's transaction processing systems suffer year 2000-
related failures, retail brokerage and communication of orders might
be processed telephonically or by other means. If major business
partners with whom the Company maintains clearing arrangements suffer
systems failures, the Company could clear securities transactions
through other businesses with compliant systems. If vendors or
suppliers suffer failures, the Company will seek alternative vendors
and suppliers with compliant systems. Contingency plans in the event
of widespread failures in the securities industry are difficult to
formulate, but in such event the Company would seek to conduct its
operations via methods not dependent on noncompliant systems, and
cooperate with any industry-wide contingency plans.
RECENT DEVELOPMENTS
The Company incurred a pre-tax loss at JWG Capital of
approximately $2.0 million for the three-month period ended September
30, 1998, of which approximately $1.0 million was the result of
trading losses, and reductions in JWG Capital's institutional sales
volume and costs associated with its institutional sales effort. In
August, 1998, the Company began a detailed analysis of JWG Capital's
operations, which resulted in the Company making several significant
changes in those operations. These changes included: (i) a reduction
in JWG Capital's institutional sales effort, (ii) a reduction in
securities inventory positions and other activities that require the
firm to put its capital at risk, (iii) a reduction in the number of
industries covered by the JWG Capital research department, (iv)
consolidation of certain redundant activities conducted at JWG Capital
that are performed at other subsidiaries, and (v) staff and expense
reductions and compensation adjustments reflecting the impact of these
changes.
12<PAGE>
The Company has focused JWG Capital's resources on brokerage
processing services and corporate finance, the two areas of its
business that management believes are most beneficial to the Company's
operation as a whole. As a result of these changes, JWG Capital has
returned to profitability for the month of October, 1998, and
management believes that its strategy for the ongoing conduct of
operations by JWG Capital will permit it to sustain long term
profitable operations at that business unit, consistent with the
Company's strategies for profitability of its business generally.
II - OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits:
Exhibit 27 - Financial Data Schedule (for SEC use only)
(b) Reports on Form 8-K:
None.
13<PAGE>
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.
JWGENESIS FINANCIAL CORP.
Date: November 13, 1998 /s/ Marshall T. Leeds
---------------------------------------
(President and Chief Executive Officer)
(Duly Authorized Officer)
Date: November 13, 1998 /s/ Joel E. Marks
---------------------------------------
(Joel E. Marks, Principal Financial and
Accounting Officer)
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