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 March 31, 1999
/ / 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.
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(Exact name of registrant as specified in its charter)
Florida 65-0811010
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(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
980 North Federal Highway - Suite 310
Boca Raton, Florida 33432
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(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 May 11, 1999
--------------------------------------- ---------------------------
Common stock, $.001 par value per share 5,755,379
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JWGENESIS FINANCIAL CORP.
INDEX
Page
Part I. Financial Information
Item 1. Financial Statements.
Consolidated Condensed Statements of Financial Condition
at March 31, 1999 and December 31, 1998 3
Consolidated Condensed Statements of Income for the Three
Month Periods Ended March 31, 1999 and 1998 4
Consolidated Condensed Statements of Cash Flows for the Three
Month Periods Ended March 31, 1999 and 1998 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
2<PAGE>
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PART I FINANCIAL INFORMATION
Item 1. Financial Statements
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JWGENESIS FINANCIAL CORP. AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF FINANCIAL CONDITION
--------------------------------------------------------
March 31, December 31,
1999 1998
----------------------------------
(Unaudited)
<S> <C> <C>
ASSETS
Cash and cash equivalents $ 25,195,000 $ 16,978,000
Receivable from customers, net 167,582,000 117,579,000
Receivable from brokers and dealers 18,018,000 6,915,000
Securities owned, at estimated fair value 13,297,000 13,746,000
Cost in excess of the fair value of net assets acquired 13,768,000 14,838,000
Furniture, equipment and leasehold improvements, net of accumulated
depreciation and amortization of $3,237,000 and $3,035,000 3,036,000 3,386,000
Deferred tax asset 619,000 -
Other, net 11,158,000 6,952,000
---------------------------------
$ 252,673,000 $ 180,394,000
=================================
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Short-term borrowings from banks $ 65,882,000 $ 16,988,000
Accounts payable, accrued expenses and other liabilities 20,030,000 17,319,000
Payable to customers 29,054,000 49,218,000
Payable to brokers and dealers 77,866,000 42,283,000
Securities sold, not yet purchased, at estimated fair value 1,523,000 305,000
Lines of credit 5,000,000 3,000,000
Deferred tax liabilities - 356,000
Income taxes payable 1,111,000 656,000
--------------------------------
200,466,000 130,125,000
--------------------------------
Commitments and contingencies
Stockholders' equity:
Preferred stock, $.001 par value B authorized 5,000,000 shares; no shares issued
or outstanding - -
Common stock, $.001 par value B authorized 9,056,000 shares; issued
and outstanding 5,755,379 and 5,501,054 6,000 6,000
Additional paid-in capital 24,346,000 22,987,000
Retained earnings 31,061,000 27,283,000
Treasury stock, at cost, 285,275 and 900 shares (3,206,000) (7,000)
---------------------------------
Total stockholders' equity 52,207,000 50,269,000
---------------------------------
$ 252,673,000 $ 180,394,000
=================================
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(The accompanying Notes to Consolidated Condensed Financial Statements
are an integral part of these financial statements.)
3
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JWGENESIS FINANCIAL CORP. AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF INCOME
-------------------------------------------
(Unaudited)
Three Months Ended March 31,
------------------------------
1999 1998
------------------------------
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Revenues:
Commissions $ 28,043,000 $ 13,129,000
Market making and principal transactions, net 6,749,000 4,868,000
Interest 3,621,000 3,162,000
Clearing fees 3,205,000 2,138,000
Other 1,751,000 976,000
------------------------------
43,369,000 24,273,000
------------------------------
Expenses:
Commissions and clearing costs 20,332,000 12,675,000
Employee compensation and benefits 6,744,000 4,448,000
Selling, general and administrative 8,592,000 3,853,000
Interest 1,479,000 1,255,000
------------------------------
37,147,000 22,231,000
------------------------------
Income before income taxes 6,222,000 2,042,000
Provision for income taxes 2,444,000 772,000
------------------------------
Net income $ 3,778,000 $ 1,270,000
==============================
Earnings per common share:
Basic $ 0.64 $ 0.34
==============================
Diluted $ 0.60 $ 0.30
==============================
Weighted average common shares outstanding:
Basic 5,858,000 3,716,000
==============================
Diluted 6,315,000 4,301,000
==============================
(/TABLE>
(The accompanying Notes to Consolidated Condensed Financial Statements
are an integral part of these financial statements.)
4<PAGE>
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</TABLE>
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JWGENESIS FINANCIAL CORP. AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(Unaudited)
Three Months Ended March 31,
---------------------------------
1999 1998
---------------------------------
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OPERATING ACTIVITIES
Net income $ 3,778,000 $ 1,270,000
Adjustments to reconcile net income to net cash
used by operating activities:
Depreciation and amortization on furniture,
equipment and leasehold improvements 202,000 108,000
Amortization of costs in excess of fair value of
net assets acquired and other 190,000 -
Change in assets and liabilities, net of effect of acquisition:
Receivable from customers (50,003,000) (11,315,000)
Receivable from brokers and dealers (13,551,000) (5,043,000)
Securities owned 449,000 (1,363,000)
Deferred tax asset (619,000) (6,000)
Other assets (5,265,000) 113,000)
Accounts payable, accrued expenses and other liabilities 5,391,000 (1,228,000)
Payable to customers (20,164,000) (12,482,000)
Payable to brokers and dealers 36,312,000 26,534,000
Securities sold, not yet purchased 1,218,000 21,000
Income taxes payable 455,000 877,000
Deferred tax liabilities (356,000) -
---------------------------------
Net cash used in operating activities (40,019,000) (2,514,000)
---------------------------------
INVESTING ACTIVITIES
Purchases of furniture, equipment and leasehold improvements (818,000) (288,000)
---------------------------------
FINANCING ACTIVITIES
Change in short-term borrowings from banks 48,894,000 4,482,000
Change in notes payable to affiliate - (250,000)
Change in lines of credit 2,000,000 1,000,000
Acquisition of treasury stock (1,434,000) -
Issuance of common stock 1,359,000 178,000
---------------------------------
Net cash provided by financing activities 49,054,000 5,410,000
---------------------------------
Net increase in cash and cash equivalents 8,217,000 2,608,000
Cash and cash equivalents at beginning of period 16,978,000 11,512,000
---------------------------------
Cash and cash equivalents at end of period $ 25,195,000 $ 14,120,000
=================================
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the period for income taxes $ 954,000 $ -
=================================
Cash paid during the period for interest $ 4,363,000 $ 1,255,000
=================================
SUPPLEMENTAL DISCLOSURE OF NON-CASH INVESTING AND FINANCING ACTIVITIES:
On March 3, 1999, the Company acquired 284,375 shares of treasury
stock in connection with its divestiture of JWGenesis Capital
Markets, LLC. In exchange for these treasury shares, the Company
transferred $1,434,000 of cash and net assets of $1,765,000.
(/TABLE>
(The accompanying Notes to Consolidated Condensed Financial
Statements
are an integral part of these financial statements.)
5
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JWGENESIS FINANCIAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Unaudited)
1. BASIS OF PRESENTATION
As discussed elsewhere herein and in the Company's 1998 Annual Report
on Form 10-K, on June 12, 1998, JWGenesis Financial Corp. ("JWGensis" or
the "Company") and its predecessor JW Charles Financial Services, Inc.
("JWCFS") consummated a series of transactions (the "Combination") in
which the Company acquired Genesis Merchant Group Securities LLC ("Genesis")
and JWCFS, the latter pursuant to a statutory share exchange of one share
of JWGenesis common stock for each outstanding share of JWCFS common
stock. As a result of the Combination, JWGenesis succeeded to the business
and operations of JWCFS and Genesis, with both becoming 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 Company's 1998 Annual Report on Form 10-K.
Because of seasonal and other factors, the results of operations for
the three month period ended March 31, 1999 are not necessarily
indicative of the results of operations to be expected for the fiscal
year ending December 31, 1999.
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: JWGenesis
Financial Services, Inc. formerly JW Charles Financial Services, Inc.
("JWGFS") Corporate Securities Group, Inc. ("CSG"), JWGenesis
Securities, Inc. ("JWG Securities"), JWGenesis Clearing Corp. ("JWG
Clearing"), JWGenesis Capital Markets, Inc. formerly JWGenesis Capital
Corp. ("JWG Markets"), JWGenesis Insurance Services, Inc. formerly
First Investors Life Agency, Inc. ("JWG Insurance"), DMG Securities,
Inc. ("DMG") and GSG Securities, Inc. formerly Discount Securities
Group, Inc. ("GSG"). 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 Divestitures"). All significant intercompany
transactions have been eliminated in consolidation.
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>
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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 March
31, 1999, 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 7.43
Net capital $14,212,000
Required net capital $3,827,000
CSG:
Ratio of aggregate indebtedness to net capital 2.30
Net capital $2,226,000
Required net capital $341,000
JWG Securities:
Ratio of aggregate indebtedness to net capital 2.63
Net capital $1,546,000
Required net capital $271,000
GSG:
Ratio of aggregate indebtedness to net capital 2.81
Net capital $644,000
Required net capital $121,000
DMG:
Ratio of aggregate indebtedness to net capital .44
Net capital $255,000
Required net capital $100,000
5. ACQUISITIONS AND DIVESTITURES
On June 12, 1998, the Company acquired 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 through 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 $18,650,000 exceeded the fair value of net assets acquired by
approximately $15,250,000, which is being amortized on a straight-line
basis over 20 years.
On March 3, 1999, the Company divested JWG Capital, along with certain
of its operations which consisted primarily of the Company's San
Francisco-based brokerage processing services unit that had been
acquired in the Combination on June 12, 1998, to an investor group led
by its former Chief Operating Officer and its former Vice Chairman in
exchange for 284,375 shares of common stock of the Company and various
mutual releases. As part of the Divestiture, JWG Capital transferred
7<PAGE>
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its investment banking, corporate finance and portions of its capital
markets business to JWGenesis Capital Markets, Inc., formerly
JWGenesis Capital Corp., so that those operations would be retained by
the Company. The Company assumed responsibility for and retained
occupancy of the New York City office of JWG Capital Markets.
6. RECENT DEVELOPMENT
On April 16, 1999, the Company entered into a Stock Purchase Agreement
with Fiserv, Inc. ("Fiserv") and its wholly owned subsidiary Fiserv
Clearing, Inc. ("Fiserv Clearing") for the sale of JWG Clearing to
Fiserv Clearing for approximately $58 million in cash. JWG Clearing
currently functions primarily as the Company's securities clearing,
execution, and back office services unit, and only those operations
will comprise JWG Clearing at the time the sale is consummated. The
sale and related transactions described above have been approved by
the Board of Directors, and no further corporate approvals are
necessary. The closing is expected to occur on or about May 31, 1999.
In connection with the sale, (i) the Company will enter into a
Transition Services Agreement pursuant to which, following the sale,
it will continue to provide certain assistance and services to JWG
Clearing and Fiserv Clearing, and will permit JWG Clearing and Fiserv
Clearing to use certain facilities during a transition period for a
monthly fee approximating actual costs; (ii) the Company will agree
not to compete for ten years in the securities clearing and execution
business and not to solicit personnel of JWG Clearing or Fiserv and
its affiliates; and (iii) the Company will agree, subject to certain
limitations and exclusions (primarily related to independent
contractor registered representatives, possible future acquisitions,
and a one-year phase-in period), to use and cause its subsidiaries and
affiliates to use the clearing services of designated Fiserv
affiliates for at least 90% of their securities brokerage
transactions, and, in the case of independent contractor registered
representatives, to impose a surcharge on certain such transactions
that are not cleared through a Fiserv affiliate, during the 10-year
period following the sale. The Company will have the right, however,
to be released from the above obligations to use Fiserv affiliates or
to impose a surcharge by repaying to Fiserv a portion of the sales
price based on a prescribed formula that takes into account the price
paid in the sale and the amount of clearing services business then
being generated by the Company or its affiliate seeking the release.
As a result of the sale and the above agreements, the Company will
cease providing clearing services, both to third party correspondents
(such as broker dealers, banks, and other financial institutions) and
for its own securities brokerage transactions.
7. SEGMENT ANALYSIS
The Company's reportable segments are: captive retail distribution,
independently owned retail distribution, clearing and trading, capital
markets and other. The captive retail distribution segment includes
the 12 retail branches of JWG Securities located in Florida,
California, Georgia and New York. These branches provide securities
brokerage services including the sale of equities, mutual funds, fixed
income products and insurance to their retail clients. The
independently owned retail distribution segment includes the 102 CSG
offices and one DMG office, all of which are located in the U.S.,
providing securities brokerage services including the sale of
equities, mutual funds, fixed income products and insurance to their
8<PAGE>
<PAGE>
retail clients. The clearing and trading segment comprises primarily
JWG Clearing's operations which are providing clearing services
primarily on a fully disclosed basis to small broker dealers, the
trading of equities and fixed income products as principal, and
investments in trading firms including Knight/Trimark Group, Inc. and
Strike Technologies LLC. The capital markets segment includes
management and participation in underwritings (exclusive of sales
credits, which are included in the distribution segments), mergers and
acquisitions, public finance, institutional trading, institutional
research and market making for institutional research. Segment data
includes charges allocating corporate overhead to each segment.
Intersegment revenues and charges are eliminated between segments.
The Company evaluates the performance of its segments and allocates
resources to them based on return on investment.
The Company has not disclosed asset information by segment as the
information is not produced internally. All long-lived assets are
located in the U.S.
The Company's business is predominantly in the U.S.
Information concerning operations in these segments of business is as
follows:
Three Months Ended March 31,
---------------------------------
1999 1998
---------------- --------------
Revenue:
Captive retail distribution $ 15,982,000 $ 8,092,000
Independently owned distribution 11,532,000 10,386,000
Clearing and trading 12,312,000 5,646,000
Capital markets 3,519,000 -
Other 24,000 149,000
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Total $ 43,369,000 $ 24,273,000
Pre-tax income:
Captive retail distribution $ 446,000 $ 303,000
Independently owned distribution 856,000 1,002,000
Clearing and trading 5,451,000 686,000
Capital markets (164,000) -
Other (367,000) 51,000
Total $ 6,222,000 $ 2,042,000
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 JWGenesis
Financial Corp. Annual Report on Form 10-K for the year ended December 31,
1998.
9<PAGE>
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GENERAL
As discussed in detail in the Company's Annual Report on Form 10-K for
the 1998 fiscal year (the "1998 10-K"), on June 12, 1998, the Company
acquired Genesis as part of the Combination and succeeded to the
respective businesses and operations of both JWGFS and Genesis. The
discussions relating to any period prior to June 12, 1998, however,
reflect the operations of JWGFS only as if it were the Company during
such period, and do not reflect any operations of Genesis before the
Combination. The results of all of Genesis' operations are reflected
in the Company's results for the portion of the fiscal year 1999
period through March 3, 1999, on which date the Company divested
Genesis in a transaction in which the Company nonetheless retained the
corporate finance services operations that it had been conducting
through Genesis, while divesting Genesis' brokerage processing
services business unit. Management does not believe the effects of
the divestiture will be material for the Company's operations.
However, the inclusion of Genesis' operations for most of the 1999
period does have some impact on the Company's data and this analysis.
As discussed in the 1998 10-K, on January 1, 1999, the Company used
its subsidiary GSG to acquire certain assets of six retail securities
branch offices (and three satellite offices) from Chatfield Dean
Holdings, Inc. ("CDH"). As a result of this transaction, the Company
added approximately 200 registered representatives and approximately
50 salaried management and support personnel. Results from the activities
of these additional registered representatives and related support
personnel from CDH are included only in the Company's results from the
1999 period and not in the results from any period prior to January 1,
1999; such inclusion does have some impact on the Company's data
and this analysis.
RESULTS OF OPERATIONS
Three Months Ended March 31, 1999 (The "1999 Period") Vs. 1998 (The
"1998 Period")
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Three Months Ended March 31,
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1999 1998 1997
(000's) % Change (000's) % Change (000's)
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Revenues:
Commissions $28,043 114 $13,129 14 $11,538
Market making and principal
transactions, net 6,749 39 4,868 5 4,646
Interest 3,621 15 3,162 35 2,334
Clearing fees 3,205 50 2,138 18 1,808
Other 1,751 79 976 -46 1,806
---------------------------------------------------------
$43,369 79 $24,273 10 $22,132
=========================================================
<CAPTION>
Three Months Ended March 31,
----------------------------------------------------------
1999 1998 1997
(000's) % Change (000's) % Change (000's)
----------------------------------------------------------
Expenses:
Commissions and clearing costs $20,332 60 $12,675 10 $11,558
Employee compensation and benefits 6,744 52 4,448 7 4,155
Selling, general and administrative 8,592 123 3,853 0 3,849
Interest 1,479 18 1,255 27 985
$37,147 67 $22,231 8 $20,547
</TABLE>
Total revenues of $43,369,000 recorded in the 1999 Period increased by
79% compared to last year's $24,273,000. JWG Capital added $3,158,000
to the revenues and GSG added $6,010,000 to the revenues which
otherwise would have been $34,201,000 or a 41% increase. In
particular, commissions increased by 114% to $28,043,000 from
$13,129,000, of which in the 1999 Period total GSG contributed
$5,644,000 and JWG Capital contributed $3,032,000. Without GSG and JWG
Capital, commission revenues would have been $19,367,000 resulting in
a 48% increase. This increase in commissions without GSG and JWG
10<PAGE>
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Capital can be attributed to the industry wide increase in market
activity in the first quarter of 1999 as a result of strength in the
general securities market. Market making and principal transactions,
net increased 39%. The increase in market making and principal
transactions, net is primarily due to the inclusion of realized and
unrealized gains totaling $4,432,000 related to the Company's
investment in Knight/Trimark Group, Inc. (NASDAQ: NITE). Exclusive of
this gain, market making and principal transactions, net would have
decreased by $2,551,000 or 52%, which is due to the Company's
emphasis away from market making activities. Clearing fees increased
by $1,067,000 or 50% as a result of the industry wide increase in
market activity in the first quarter of 1999. Other revenues
increased $775,000 primarily due to GSG and JWG Capital in the amounts
of $298,000 and $361,000, respectively.
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
$3,738,000 and $1,615,000 due to GSG and JWG Capital, respectively.
Without including GSG and JWG Capital, commissions and clearing costs
would have increased by 18% to $14,979,000, which relates directly to
the increase in combined commission and principal transaction revenue
that would have resulted without GSG and JWG Capital as discussed
above. Employee compensation and benefits increased by 52% or
$2,296,000 as a result of the inclusion of GSG and JWG Capital, which
accounted for $1,204,000 of the total. Excluding GSG and JWG Capital,
employee compensation and benefits increased by 25% or $1,092,000 due
to the industry wide increase in market activity discussed above,
which caused employees who receive incentive compensation related to
sales activity and profitability to receive greater amounts in the
1999 Period. Selling, general and administrative costs increased by
$4,739,000 or 123% primarily as a result of the inclusion of GSG and
JWG Capital, which contributed $3,049,000 of the total amount. The
remaining increase of $1,690,000 is primarily due to amortization of
cost in excess of the value of net assets acquired, amortization of
the nonsolicit and non compete agreements entered into with certain
officers, and increased advertising expenditures to gain name
recognition, in addition to a general increase related to the
Company's increase in activity.
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 March 31, 1999, the Company had stockholders' equity of
$52,207,000, representing an increase of $1,938,000 from December 31,
1998, and the Company had cash and cash equivalents of $25,195,000.
The increase in stockholders' equity is primarily related to net
income of $3,778,000 recorded for the three month period ended March
31, 1999, plus the proceeds from option exercises in the amount of
$1,359,000 less treasury stock acquired in connection with the
divestiture of JWG Capital in the amount of $3,199,000. At March 31,
1999, the Company had no additional borrowing capacity available under
its committed bank lines of credit described in the JW Charles
Financial Services, Inc. Annual Report on Form 10-K for the year ended
December 31, 1998. The Company presently owns approximately 75,000
shares of common stock of Knight/Trimark Group, Inc. which are subject
to a lock up agreement until June 3, 1999 and are unregistered.
Approximately 15,000 of these shares are allocated to Company
management. These securities, which have a historical cost of $5,000,
are included in securities owned, at market value in the accompanying
Consolidated Condensed Statements of Financial Condition at their
estimated fair market value of $4,500,000.
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
11<PAGE>
<PAGE>
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 1998. 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 commenced in 1998, and further testing has occurred and will
continue to 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 with the year
2000 issue will range from $1.25 million to $1.5 million, $1 million
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
The Company is in the process of developing a formal contingency plan
which is being designed to ensure the continuation of normal business
operations of mission-critical systems in the event of one or more
year 2000 related failures. The contingency plan is being designed to
facilitate the Company in providing uninterrupted services to its
internal users and external customers until a normal level of services
can be restored. 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
12<PAGE>
<PAGE>
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 DEVELOPMENT
On May 31, 1999, or shortly thereafter, the Company expects to close
the sale of JWG Clearing, whose results of operations as the Company's
securities clearing and execution services business unit are reflected
in the above discussions of the Company's historical financial
results. That sale will impact the Company's near-term operating
results, at least until the net proceeds from the sale can be
reinvested successfully. However, in deciding to proceed with the
sale and to cease providing clearing services, management concluded
that for the Company to remain competitive in the clearing services
business would require (i) large capital expenditures and resource
concentration to maintain the technology and infrastructure necessary
to service the securities clearing requirements of the more desirable
clients, (ii) higher levels of capital to satisfy increasing
regulatory capital requirements resulting from margin transactions in
certain securities that experience rapid increases in trading prices,
and (iii) a significant amount of management time and other Company
resources to meet the challenge of increasing competition in the
securities clearing business, including from firms with substantially
greater financial resources. In addition, the Company's future profit
margins on its clearing business would likely decline as competitive
pricing pressures increase.
While the Company's clearing services operations have been profitable
historically, management believes the sale of JWG Clearing in these
circumstances is in the long-term best interests of the Company. Not
only is the impact on the Company's future profitability from its
remaining overall operations not expected to be material beyond the
near-term, but the net proceeds from the sale, which are estimated to
be approximately $40 million after tax, will provide a substantial
infusion of capital that can be used to fund expanded levels of
operations in the Company's other business units. The interim
reinvestment of such net proceeds, pending longer-term capital
applications, will also offset in part earnings that might have
continued to be realized from the Company's clearing service business
before the factors described above began to significantly erode such
earnings. Most importantly, however, the sale will permit the Company
to focus more management time and other resources on its retail
brokerage and investment banking businesses, as well as to use the
newly available capital to pursue possible new opportunities that
management believes have greater potential to enhance value for all
shareholders.
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:
Form 8-K Reporting Date - March 3, 1999
Item Reported - "Item 2. Acquisition or Disposition of Assets."
Form 8-K Reporting Date - April 16, 1999
Item Reported - "Item 5. Other Events"
13<PAGE>
<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: May 14, 1999 /s/ Marshall T. Leeds
(Duly Authorized Officer)
(President and Chief Executive Officer)
Date: May 14, 1999 /s/ Gregg S. Glaser
(Duly Authorized Officer)
(Principal Financial and Accounting Officer)
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