<PAGE>
Washington, D.C. 20549
FORM 10-K
/x/ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1995
/ / 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 0-14772
JW CHARLES FINANCIAL SERVICES, INC.
(Exact name of registrant as specified in its charter)
Florida 58-1545984
------------------------------- ----------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
980 North Federal Highway -- Suite 210
Boca Raton, Florida 33432
--------------------------------------- ---------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (407) 338-2600
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock - Par Value $.001 per share
----------------------------------------
(Title of class)
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 by check mark if disclosure of delinquent filers
pursuant to Item 405 of Regulation S-K is not contained herein,
and will not be contained, to the best of the registrant's
knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. ____
On March 21, 1996, the Registrant had 3,914,748 outstanding
shares of Common Stock, $.001 par value, and at such date, the
aggregate market value of the shares of Common Stock held by non-
affiliates, based on the average of the bid and asked prices
($4.81) at the close of business on such date, was approximately
$6,173,000.
DOCUMENTS INCORPORATED BY REFERENCE
Part III - Portions of the Registrant's definitive Proxy
Statement relative to the 1996 Annual Meeting of Stockholders to
be held June 11, 1996. (The Registrant intends to file with the
Commission a definitive proxy statement pursuant to Regulation
14A prior to April 30, 1996.)<PAGE>
PART I
ITEM 1. BUSINESS
BACKGROUND AND GENERAL
JW Charles Financial Services, Inc. (the "Company"),
primarily through its three principal subsidiaries, Corporate
Securities Group, Inc. ("CSG"), JW Charles Clearing Corp. ("JWC
Clearing") and JW Charles Securities, Inc. ("JWC Securities"),
operates a full-service securities brokerage and investment
banking firm and provides securities transaction processing and
other related services (also referred to as "clearing services").
Its primary business is providing a wide range of securities
brokerage and investment services to a diversified client base,
delivering a broad range of clearing services to affiliated and
independent broker-dealers, including affiliates of commercial
banks, and providing investment banking services to corporate
clients. A fourth subsidiary of the Company, DMG Securities,
Inc. ("DMG"), is also engaged in the securities brokerage
business.
The Company was incorporated as a Florida corporation in
December, 1983. On November 1, 1990, the Company acquired by
merger 100% of a privately owned financial services holding
company then known as JW Charles Financial Services, Inc. ("Old
JWC Financial"). The principal subsidiaries of Old JWC Financial
encompassed the operations of what is now known as JWC Securities
and JWC Clearing. The operations of JWC Securities and JWC
Clearing date back to 1973.
The Company derives revenues primarily from two types of
activities: clearing services and brokerage and investment
banking services. These activities generate revenue for the
Company in the form of commission and fee income, market making
and principal transactions revenues, securities transaction
processing fees ("clearing fees") and interest income. The
Company also derives revenues from insurance brokerage services
and consulting services. The following table indicates the
percentage of total revenues represented by each of these
activities during the past two years:
<TABLE>
<CAPTION>
Percentage of Total Revenues
Year Ended December 31,
-------------------------------
1995 1994 1993
-------------------------------
<S> <C> <C> <C>
Commissions 51% 38% 45%
Market making and principal transactions, net 23% 36% 33%
Interest 9% 8% 7%
Clearing fees 13% 12% 11%
Other 4% 6% 4%
</TABLE>
The following table indicates the amounts and percentages of
total revenues generated by each of the Company's principal
investment banking and securities brokerage subsidiaries in each
of the past three years. JWC Clearing was not operated as a
separate subsidiary until January 3, 1994, when it was formed by
the Company's division and separation of the securities
transaction processing services function traditionally provided
by JWC Securities from its other brokerage and investment banking
function. See "Processing Operations" below.
<TABLE>
<CAPTION>
Revenues
(Amount in Millions of Dollars)
Year Ended December 31,
------------------------------------------------------
1995 1994 1993
------------------------------------------------------
Amount % Amount % Amount %
------ -- ------ -- ------ --
<S> <C> <C> <C> <C> <C> <C>
Corporate Securities Group, Inc. $31.3 39 $25.7 43 $22.3 45
JW Charles Securities, Inc. $24.8 31 $17.2 29 $27.1 54
JW Charles Clearing Corp. $20.6 26 $14.3 24 - -
DMG Securities, Inc. $2.9 4 $2.6 4 $.7 1
</TABLE>
2<PAGE>
BROKERAGE
The Company conducts its retail brokerage business through
three wholly-owned subsidiaries, CSG, JWC Securities and DMG.
The following table sets forth certain statistical information
concerning registered representatives and branch offices of each
of these subsidiaries:
<TABLE>
<CAPTION>
At December 31,
-----------------------------------------------------------------------------------------------------------
1995 1994 1993
-----------------------------------------------------------------------------------------------------------
Registered Registered Registered
Representatives Branch Offices Representatives Branch Offices Representatives Branch Offices
<S> <C> <C> <C> <C> <C> <C>
JWC Securities 225 13 212 16 100 10
CSG 266 66 248 50 290 56
DMG 20 2 51 5 16 4
TOTAL 511 81 511 71 406 70
</TABLE>
JW CHARLES SECURITIES, INC.
JWC Securities is a New York Stock Exchange ("NYSE") member
organization and a member of the National Association of
Securities Dealers, Inc. ("NASD"). JWC Securities' activities
primarily consist of retail securities brokerage, management and
participation in underwritings of equity and fixed income
securities, distribution of mutual funds and unit trusts and
research and investment advisory services. JWC Securities has
clearing agreements with JWC Clearing and Bear Stearns Securities
Corp. ("Bear Stearns"), both NYSE member organizations, under
which agreements they provide JWC Securities 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 agreements
allow JWC Securities to offer a range of products and services
that is generally offered only by firms that are larger and have
more capital than JWC Securities.
At February 29, 1996, JWC Securities had thirteen (13)
branch offices, ten of which are located in Broward, Dade and
Palm Beach Counties, Florida, and one each in Atlanta, Georgia,
New York City, New York and Shrewsbury, New Jersey. At February
29, 1996, it had approximately 240 registered representatives,
all of whom are in-house employees. Through its retail branch
network, JWC Securities markets a wide variety of investment
products. The products, around which categories the major
departments of the firm are organized, include common and
preferred equities, tax-free and taxable bonds, unit trusts,
mutual funds, insurance and annuity products and options.
CORPORATE SECURITIES GROUP, INC.
CSG, a general securities broker-dealer, provides products
and services similar to those offered by JWC Securities for the
accounts of its customers and for its own account. CSG is a
member of the NASD and has clearing agreements with Bear Stearns
and JWC Clearing under which agreements they provide CSG 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
agreements allow CSG to offer a range of products and services
that is generally offered only by firms that are larger and have
more capital than CSG.
At February 29, 1996, CSG operated seventy-two (72) branch
offices, of which two (2) are owned by the Company and the
remainder operate as independently owned affiliates. In
affiliated branch office situations, the office is owned and
operated by an independent person who obtains appropriate NASD
licenses to supervise or manage the branch office by virtue of
affiliating with CSG and being subject to its supervisory
jurisdiction. Each such office is responsible for its own
overhead and other operational expenses, although all of its
revenues from securities brokerage transactions accrue to CSG.
CSG, on the other hand, pays commissions to the branch offices on
the revenues generated by them (at higher rates than those paid
to registered representatives working at either of the two
3<PAGE>
offices owned by CSG) and provides other support for the
operations, including required supervisory functions and access
to CSG's securities transaction clearing agreements with Bear
Stearns and JWC Clearing. All registered representatives who are
associated with CSG, by working at either of the two offices
owned by CSG or any one of the affiliated branch offices, are
licensed with the NASD. At February 29, 1996, CSG had a total of
approximately 280 registered representatives, approximately 45 of
whom are employed in the two Company-owned CSG offices.
The affiliated branch office system permits the Company to
expand its base of revenue and its network for the retail
distribution of securities underwritten by the Company (and for
trading in connection with the Company's market making
activities), without the capital expenditures that would be
required to open company-owned offices and the additional
administrative and other costs of hiring in-house registered
representatives who are employees.
DMG SECURITIES, INC.
DMG is a NASD member firm which provides securities
brokerage and investment services for the accounts of customers.
DMG has a clearing agreement with JWC Clearing which provides DMG
with back office support, execution services on all principal
national and international securities exchanges, and access to
many of their in-house financial services and products. This
agreement allows DMG to offer a range of products and services
that is generally offered only by firms that are larger and have
more capital than DMG.
At February 29, 1996, DMG operated two (2) branch offices
with a total of approximately twenty (20) registered representatives.
Each DMG office is owned and operated by an independent person who
obtains appropriate NASD licenses to supervise or manage the branch
office by virtue of affiliating with DMG and being subject to its
supervisory jurisdiction. Each such office is responsible for
its own overhead and other operational expenses, and operates in
a manner similar to CSG.
INVESTMENT BANKING
For certain operations (primarily corporate finance,
research and syndicate) in which both JWC Securities and CSG are
involved, the Company uses "JWCharles/CSG" as a stylized
reference to both firms. The Company believes such usage, over
time, will enhance the Company's prominence in the securities
business, by promoting a single name that nonetheless draws upon
the strengths of both primary subsidiaries.
CORPORATE FINANCE
The JWCharles/CSG Corporate Finance Department is involved
in a variety of activities including public and private debt and
equity financing for corporate clients, merger and acquisition
consulting services, fairness opinions, evaluations and general
financial consulting services. Their activities include securing
the Company's participation in the distribution of securities --
both initial public offerings ("IPOs") and secondary offerings --
as the lead underwriter or co-manager. To date, JWCharles/CSG
has concentrated its underwriting efforts in the IPO marketplace,
seeking out emerging enterprises in industries that it believes
offer reasonable opportunities for future growth. Compensation
for corporate finance services includes cash fees in the form of
underwriting commissions and, in certain situations, stock
purchase warrants or direct equity positions, or consulting fees.
RESEARCH
In 1995, the Company made a strategic decision to expand the
scope of its Research Department (i) to provide coverage on a
broader range of companies and (ii) to increase the availability
and use of in-house research by the Company's retail oriented
registered representatives by fostering increased coordination
among the research, syndicate, sales and marketing and corporate
finance departments. This strategy was implemented in September
1995, through the hiring of a new Director of Research and the
expansion of our professional staff. In addition to the Director
of Research, JWCharles/CSG Research Department is currently
staffed by five research analysts.
4
<PAGE>
SYNDICATE
The JWCharles/CSG Syndicate Department coordinates the
Company's participation in underwriting syndicates or selling
groups of other underwriters and assists the Company in obtaining
participation from other firms in JWCharles/CSG managed
underwritings. During 1995 the Company primarily participated as
an underwriter, dealer or selling group member in a variety of
common and preferred equity offerings.
PRINCIPAL TRANSACTIONS
MARKET MAKING
The Company's market making activities are coordinated
through JWC Clearing, which currently acts as a market maker for
approximately 100 securities that are traded in the over-the-
counter securities market. In such capacity, it facilitates
trading in select securities by buying and selling securities as
a principal for its own account, rather than as an agent for the
accounts of its customers.
The Company, through its market making activities, attempts
to derive profits by buying stock at its quoted bid price and
then either selling the stock at the current ask price or holding
the stock in inventory for future sale at a higher price. If the
market for such securities declines, however, or if JWC Clearing
is otherwise unable to resell the securities at a favorable
price, the Company could suffer losses and such losses could be
substantial. Additionally, JWC Clearing engages in short sales,
primarily to fill customer orders. A short sale represents an
obligation of the Company to deliver specified securities at the
contracted price, thereby creating a liability to purchase the
securities at a future time at prevailing market prices.
Accordingly, these transactions result in off-balance-sheet risk
as the Company's ultimate obligation to satisfy the sale of these
securities may exceed the amount recognized by the Company at the
time the short sale was executed.
The Company's general policy is not to hold a substantial
volume of securities for any significant period of time, so as to
reduce the risk of losses from market declines or unfavorable
developments. The Company's market making activities have
historically accounted for a significant portion of its revenues,
and the Company anticipates that these activities will continue
to be a significant factor in the Company's operations and its
prospects for profitability.
FIXED INCOME
Through the JWCharles/CSG Fixed Income Department, the
Company distributes both taxable and tax-exempt fixed income
products (such as corporate, government and mortgage-backed
securities as well as municipal bonds and unit investment
trusts). The Company positions taxable fixed income securities
and municipal bonds in both the primary and secondary markets as
principal and participates as underwriter, dealer and selling
group member for corporate, municipal taxable and non-taxable
unit trusts offerings.
PROCESSING OPERATIONS
JWC Clearing provides clearing services on a fully disclosed
basis for a variety of customers ("Correspondents") who are
engaged in the securities brokerage business but who lack the
back office or other support capacities to process and clear
securities transactions for their clients. In a fully disclosed
transaction, the identity of the Correspondent's client is known
to JWC Clearing, and JWC Clearing physically maintains the
client's account and performs a variety of services as agent for
the Correspondent.
The execution and clearing process requires the performance
of a series of complex steps, many of which are accomplished with
the assistance of sophisticated data processing hardware and
software. JWC Clearing has approximately 60 Correspondents, none
of which accounted for more than ten percent of the Company's
revenues.
5<PAGE>
EMPLOYEES; REGISTERED REPRESENTATIVES; BRANCH OFFICES
As of December 31, 1995, the Company and it subsidiaries had
a total of approximately 280 salaried employees and 511
registered representatives. Of these totals, approximately 265
registered representatives are independent contractors affiliated
with one of the 53 affiliated, but independently owned and
operated, CSG and DMG branch offices.
The Company has chosen to focus on the development and
expansion of its retail brokerage business primarily through the
acquisition or establishment of additional CSG affiliated branch
offices and the recruitment of in-house employee registered
representatives for JWC Securities.
COMPETITION
The Company competes with numerous investment banking and
brokerage firms, consulting firms, and financial service
companies that are larger, better financed, more experienced,
and, in some instances, offer a range of financial and other
services to clients that exceed the services offered by the
Company. In addition, there is increasing competition from other
businesses that now offer financial services, such as commercial
banking and insurance companies and certain accounting firms.
The principal competitive factors in the securities industry are
the quality and ability of professional personnel, the relative
prices of services and products offered, and the efficiency of
back office operations. The Company has tried to position itself
competitively by targeting its investment banking services to
smaller companies and providing competitively priced products and
services. Additionally, the Company has targeted markets that it
believes are not adequately served by, and are not a primary
focus of, most of these other larger firms. The Company believes
that its clearing services and back office support agreements
with Bear Stearns provides it additional ability to compete with
larger firms.
REGULATION
The securities industry in the United States is subject to
extensive regulation under various federal and state laws and
regulations. The Securities and Exchange Commission is the
federal agency charged with the administration of the federal
securities laws. Much of the regulation of the securities
industry, however, has been assigned to various self regulatory
organizations ("SRO's"), principally the NASD, and in the case of
NYSE member firms, the NYSE. The SRO's, among other things,
promulgate regulations and provide oversight in areas of (i)
sales practices, (ii) trade practices among broker-dealers, (iii)
capital requirements, (iv) record keeping and (v) conduct of
employees and affiliates of member organizations. In addition to
promulgating regulations and providing oversight, the SEC and the
SRO's have the authority to conduct administrative proceedings
which can result in the censure, fine, suspension or expulsion of
a broker-dealer, its officers or employees. Furthermore, new
legislation, changes in the rules and regulations promulgated by
the SEC and SRO's, or changes in the interpretation or
enforcement of existing laws and rules often directly affect the
operation and profitability of broker-dealers. The stated
purpose of much of the regulation of broker-dealers is the
protection of customers and the securities markets rather than
the protection of creditors and shareholders of broker-dealers.
ITEM 2. PROPERTIES.
The Company owns no real property. The Company leases its
corporate offices and operations facilities from an unaffiliated
company. Its corporate offices and operations facilities are
located at 980 North Federal Highway, Boca Raton, Florida 33432,
where it occupies approximately 16,400 square feet of space. JWC
Securities branch offices and the two CSG-owned branch offices
are also leased premises, comprising an aggregate of
approximately 63,000 square feet of office space in several
cities. The Company believes that its office facilities are
adequate for its current and reasonably foreseeable operations.
6
<PAGE>
ITEM 3. LEGAL PROCEEDINGS.
In July 1994, a third amended complaint was filed in the
matter of Marilyn Norwood, as guardian for Samuel Laten v. JW
Charles Securities, Inc., et al., Case No. 93-19727, in the
Circuit Court for the Seventeenth Judicial Circuit In and For
Broward County, Florida (the "Norwood Matter") which raised
claims against JW Charles Securities, Inc. and certain of its
registered representatives. The Plaintiff alleges that JW
Charles Securities, Inc. and certain of its registered
representatives acted as accomplices in a scheme to defraud
Samuel Laten out of $2,700,000 which was deposited by Laten into
a joint account at JW Charles Securities, Inc. The Plaintiff
further alleges that Robert Ballard (the other joint account
owner) defrauded Laten by withdrawing the monies deposited into
the joint account and that JW Charles Securities, Inc. was
negligent in allowing this type of activity to occur. In
October, 1994, a hearing was held to rule on JW Charles
Securities, Inc. motion to compel arbitration. The Court granted
the Company's motion and the case was dismissed as to JW Charles
Securities, Inc. and its registered representatives. The
Plaintiff has since filed an arbitration claim alleging the same
acts. An answer has been filed and hearing dates have been
scheduled beginning on June 3, 1996. The Company expects that
the ultimate disposition of this case will not have a material
adverse impact upon its financial position or results of
operations.
Of Counsel Enterprises, Inc. (now Co-Counsel) has instituted
a civil proceeding in federal court in Houston, Texas against
eleven (11) different defendants alleging violations of state and
federal securities laws as well as Texas common law in connection
with the initial public offering and aftermarket activity in 1993
associated with the Of Counsel stock. The damages claimed are in
excess of $10 million. Plaintiffs allege that certain defendants
manipulated the price of the stock in the aftermarket, thereby
depriving Plaintiff of its rights to profits from the sale of the
stock. On January 10, 1996, a court order was entered permitting
Plaintiffs to file a Supplemental Complaint against JW Charles
Securities, Inc. and Corporate Securities Group, Inc.,
underwriters to the initial public offering. On February 29,
1996, JW Charles Securities, Inc. and Corporate Securities Group,
Inc. jointly filed a Motion to Dismiss the Supplemental
Complaint. The matter is currently scheduled for trial in
October 1996, however it is anticipated that joint motions to
amend the current scheduling order will be filed. The Company
intends to vigorously defend itself in this matter and expects
that the ultimate disposition of this case will not have a
material adverse impact upon its financial position or results or
operations.
In addition to these matters, the Company has been named in
various arbitration and legal proceedings arising out of the
ordinary course of its securities brokerage business. Although
arbitration and litigation involves contingencies that cannot be
definitively predicted, including the unpredictability of actions
that might be taken by an arbitration panel or jury on matters
that are submitted to them, the Company expects that the ultimate
disposition of arbitration and litigation arising from the
ordinary course of business will not have a material adverse
impact upon its financial position or results of operations.
7<PAGE>
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
No matter was submitted, during the fourth quarter of the
fiscal year covered by this report, to a vote of security holders
of the Company through the solicitation of proxies or otherwise.
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY
AND RELATED STOCKHOLDER MATTERS.
The Company's common stock trades on The Nasdaq Small-Cap
Market under the symbol "KORP." The following table sets forth
for the periods indicated the quarterly high and low sales price
information related to trading in the Company's common stock.
Such information has been obtained from Nasdaq.
<TABLE>
<CAPTION>
High Sales Price Low Sales Price
---------------- ---------------
<C> <C> <C>
1996:
First Quarter
(through February 29, 1996) $ 4.63 $ 4.13
1995:
First Quarter $ 5.13 $ 3.63
Second Quarter $ 4.13 $ 3.25
Third Quarter $ 4.13 $ 3.25
Fourth Quarter $ 4.75 $ 3.63
1994:
First Quarter $ 4.25 $ 3.00
Second Quarter $ 3.63 $ 3.00
Third Quarter $ 3.50 $ 2.75
Fourth Quarter $ 4.00 $ 2.75
</TABLE>
The closing bid price for the common stock on March 21, 1996
was $4.63
There were approximately 150 holders of record of the
Company's common stock as of March 21, 1996. Investors who
beneficially own common stock that is held in street name by
brokerage firms are not included in this number. Accordingly,
based upon the quantities of periodic reports requested by such
brokerage firms, the Company believes that the actual number of
individual beneficial owners of its common stock exceeds 750.
The Company is authorized to issue 9,056,000 shares of
common stock. The holders of shares of common stock are not
entitled to cumulative voting and do not have any pre-emptive
rights to subscribe to any securities of the Company.
No dividends have been declared or paid to date on the
Company's common stock, and the Company does not anticipate
payment of common stock dividends in the foreseeable future. The
Company has adopted a policy of cash preservation for future use
in the business, although the declaration and payment of
dividends on the common stock is not subject to legal
restrictions on the Board's authority.
8<PAGE>
ITEM 6. SELECTED FINANCIAL DATA.
<TABLE>
<CAPTION>
Year Ended December 31,
--------------------------------------------------------------------------------
1995 1994 1993 1992 1991
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Statement of Income Data:
Total revenues $ 80,041,000 $60,471,000 $50,066,000 $39,723,000 $28,929,000
Income before cumulative effect
of change in accounting $ 3,810,000 $ 3,300,000 $ 3,114,000 $ 3,135,000 $ 2,321,000
principle
Cumulative effect of change in
accounting principle $ - $ - $ 658,000 $ - $ -
Net income $ 3,810,000 $ 3,300,000 $ 3,772,000 $ 3,135,000 $ 2,321,000
PER SHARE:
Income before cumulative effect
of change in accounting $ .95 $ .82 $ .76 $ .71 $ .51
principle
Cumulative effect of change in
accounting principle $ - $ - $ .17 $ - $ -
Net income $ .95 $ .82 $ .93 $ .71 $ .51
Weighted average common
shares outstanding 4,016,734 3,938,591 3,960,673 4,105,398 4,409,698
At December 31,
--------------------------------------------------------------------------------
1995 1994 1993 1992 1991
---- ---- ---- ---- ----
STATEMENT OF FINANCIAL
CONDITION DATA:
Cash and cash equivalents $ 8,597,000 $ 5,401,000 $ 3,289,000 $ 2,884,000 $ 255,000
Total assets $115,214,000 $82,218,000 $77,564,000 $50,030,000 $40,969,000
Short-term borrowings from
banks $ 29,114,000 $ 7,303,000 $20,271,000 $10,936,000 $10,813,000
Notes payable to affiliates $ 3,500,000 $ 5,161,000 $ 2,661,000 $ 161,000 $ 193,000
Total liabilities $ 98,643,000 $69,459,000 $67,454,000 $42,897,000 $36,065,000
Redeemable preferred stock $ - $ - $ - $ 519,000 $ 2,100,000
Mandatorily redeemable common $ 7,013,000 $ - $ - $ - $ -
stock
Total stockholders' equity $ 9,558,000 $12,759,000 $10,110,000 $ 6,614,000 $ 2,803,000
</TABLE>
__________
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS.
The following discussion and analysis of financial condition
and results of operations presents the more significant factors
affecting the Company during the years ended December 31, 1995,
1994 and 1993. The discussion and analysis should be read in
conjunction with the Company's consolidated financial statements
and related notes, and with the other financial information
appearing herein. See Item 8.
9
<PAGE>
RESULTS OF OPERATIONS -- THREE YEARS ENDED DECEMBER 31, 1995
1995 represented the Company's twelfth consecutive year of
record revenues. The Company's results of operations for 1995
were buoyed by a vibrant and rising stock market. Substantially
all of the Company's business lines turned in strong
performances, particularly when compared to the corresponding
period of the prior year.
<TABLE>
<CAPTION>
Year Ended December 31.
---------------------------------------------------------
1995 % Increase 1994 % Increase 1993
(000's) (Decrease (000's) (Decrease) (000's)
----------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Revenues:
Commissions $40,566 76 $22,984 3 $22,331
Market making and principal
transactions, net 18,604 (15) 21,971 33 16,560
Interest 7,279 56 4,678 41 3,313
Clearing fees 10,176 38 7,371 26 5,852
Other 3,416 (1) 3,467 72 2,010
---------------------------------------------------------
Total Revenues $80,041 30 $60,471 23 $50,066
=========================================================
Number of registered representatives 511 - 511 26 406
Number of branch offices 81 14 71 1 70
Year Ended December 31.
----------------------------------------------------------
1995 % Increase 1994 % Increase 1993
(000's) (000's) (000's)
-----------------------------------------------------------
Expenses:
Commissions and clearing costs $42,160 41 $29,890 24 $24,170
Employee compensation and benefits 13,820 18 11,754 24 9,459
Occupancy and equipment rental 4,206 17 3,607 34 2,688
Communications 3,867 23 3,146 22 2,575
General and administrative 6,647 29 5,146 - 5,141
Interest 3,054 81 1,685 55 1,089
</TABLE>
Total revenues of $80,041,000 recorded in 1995, a record for
any fiscal year in the Company's history, increased 30% over last
year's $60,471,000. During 1995 the Company experienced
increases in almost all revenue categories; the exceptions being
market making and principal transactions and other income. The
reduction in market making and principal activities, which
represents the net realized and unrealized gain or loss
experienced from trading or otherwise acting as principal in
securities transactions, is primarily the result of a shift in
the mix of the Company's business. Market making and principal
transactions represented approximately 23%, 36% and 33% of total
revenues in 1995, 1994 and 1993, respectively. The reduction in
market making and principal transactions in both absolute and
percentage terms is primarily due to (i) changes in rules and
regulations governing this type of activity which made it less
profitable and (ii) an effort on the Company's part to reduce its
dependence on this type of activity. Other income, which
consists primarily of fee income, was lower in 1995 and 1993
primarily as a result of the Company managing or co-managing
fewer underwritings in those years as compared to 1994. Growth
in the other revenue categories was primarily due to heightened
client activity, both retail and clearing, associated with 1995's
vibrant and rising stock market.
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 reflecting the Company's overall
business growth. Commissions and clearing costs as a percentage
of commissions and market making and principal transactions,net
(the "Clearing Factor"), in 1995, 1994 and 1993 were 71%, 66% and
62%, respectively. The Company believes that the Clearing Factor
has increased over the past years as a result of (i) an increase
in the average production per registered representative which
results in a higher percentage payout and (ii) an increase in the
percentage of the Company's commission business being cleared
through Bear Stearns as compared to JWC Clearing. Clearing costs
paid to Bear Stearns are recorded as an expense whereas clearing
costs paid to JWC Clearing are eliminated in consolidation.
10<PAGE>
The Company believes that its Clearing Factor is
representative of the prevailing experience in the industry,
although sufficient industry data is not available to make a
precise comparison. The major component, however, is commission
rates, and the Company's commission rates for its independent
affiliated branch office registered representatives and its in-
house employee registered representatives are comparable with
that paid by other firms in the securities brokerage industry
(typically ranging from 80% to 90% for registered representatives
in affiliated branch offices and 30% to 50% for its in-house
employee registered representatives, depending upon production
levels). Affiliated branch office registered representatives
(who are not employees of the Company, and who comprise the
majority of the Company's registered representatives) receive
higher commissions from the Company than registered
representatives who are Company employees, which reflects that
each affiliated branch office is responsible for its own
overhead. Accordingly, the Company's overhead attributable to
non-employee registered representatives is less than the overhead
attributable to the Company's employee registered
representatives. As a result, the Company's margin is not
adversely affected by engaging additional affiliated branch
office, non-employee registered representatives (and paying them
higher commissions) as opposed to hiring in-house employee
registered representatives.
Comparative employee compensation and benefits, occupancy
and equipment rental, communications and general and
administrative expenses reflect the costs associated with the
Company's overall business growth.
Interest income consists primarily of interest earned on
receivables from customers, securities owned and customer money
market fund balances. Interest expense, which consists primarily
of interest incurred on short-term borrowings and notes payable
used to finance JWC Clearing receivables from customers and
securities owned has increased in each of the past three years.
The increase in both of these items is primarily a result of: (i)
a general increase in interest rates experienced from 1993
through most of 1995, and (ii) an increase in the average
outstanding loan balances used to fund increased customer
balances from 1993 to 1995 reflecting the Company's overall
business growth.
LIQUIDITY AND CAPITAL RESOURCES
The Company maintains a highly liquid balance sheet with the
majority of the Company's assets consisting of securities owned,
which are marked to market daily, and receivables from customers
arising from customer related securities transactions.
Receivables from customers consist primarily of collateralized
customer margin loans and securities borrowed, 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.
The Company has borrowed over the past few years an
aggregate of $5,000,000 from Gilman CMG, Inc. ("GCMG") or an
affiliate thereof, which owns approximately 49% of the Company's
outstanding shares of Common Stock. On May 15, 1995, the Company
and GCMG entered into a new loan agreement (the "Gilman Loan")
for a refinancing of that debt, pursuant to which the debt was
converted to a $5,000,000 term loan, bearing interest at a rate
of 10% per annum. On May 16, 1995, $1,000,000 of principal was
repaid, with repayment of the remaining $4,000,000 of principal
payable in equal quarterly installments of $250,000 due on July
15, October 15, January 15, and April 15, of each year until paid
in full. Interest accrues on the principal outstanding from time
to time and is payable quarterly on the same dates that principal
11
<PAGE>
payments are required. The Company has the option to prepay
principal, in whole or in part at any time, without premium or
penalty. At March 26, 1996, $3,250,000 was outstanding under the
Gilman Loan.
On May 15, 1995, the Company entered into a Stock Repurchase
Agreement (the "Agreement") with GCMG to repurchase all of the
approximately 49% of the Company's outstanding common stock held
by GCMG. Beginning April 15, 1996, the Company is obligated,
under the Agreement, to repurchase stock each year in an amount
equal to 50% of annual net income, as defined, until all the
Gilman stock is repurchased. For purposes of determining the
aggregate amount of stock required to be repurchased each year,
net income is reduced by principal payments on the Gilman Loan.
The repurchase price per share is a minimum of $3.00, subject to
certain adjustments each year based upon changes in the Company's
net tangible book value, as defined. On April 15, 1996, the
Company will be required to repurchase 315,510 shares of common
stock from GCMG at a price per share of $3.66 for total
consideration of $1,155,000. The Company must complete the
repurchase of all the GCMG stock by April 15, 2003 or pay a one
time penalty of $672,000.
On May 15, 1995, the Company reclassified $5,798,000,
representing $3.12 per share, from additional paid-in capital and
retained earnings to mandatorily redeemable common stock to
reflect the terms of the Agreement. The difference between the
initially recorded cost of the mandatorily redeemable stock and
the adjusted purchase price has been accreted to mandatorily
redeemable stock through a $1,035,000 direct charge to retained
earnings. In conjunction with the Agreement, the Company
purchased all of the Company's outstanding preferred stock from
GCMG for an aggregate price of $700.
On January 19, 1996, the Company obtained an unsecured
$2,500,000 revolving line of credit from Wilmington Trust Company
for general corporate purposes (the "Wilmington Facility"). The
Wilmington Facility matures on December 31, 2002, at which time
all outstanding borrowings plus all accrued and unpaid interest
will become due and immediately payable. Borrowing under the
Wilmington Facility bear interest at Wilmington's National
Commercial Rate, with interest payments due monthly in arrears.
The Company is required to maintain certain debt covenants,
including (i) minimum stockholders' equity equal to at least
$7,000,000, plus 30% of net income for all future fiscal
quarters, plus 75% of the net proceeds from any common stock
issuances and (ii) net income, as defined, in excess of
$1,500,000 for any four quarters within any consecutive six-
quarter period. At March 26, 1996, the balance outstanding under
the Wilmington Facility was $0.
In connection with the Wilmington Facility, the Company
entered into a Marketing Agreement with Wilmington Trust FSB and
granted W T Investments, Inc. a warrant to purchase up to 400,000
shares of the Company's common stock at any time prior to
December 31, 2002. The exercise price per share is the greater
of $5.50 or an amount equal to the sum of total (i) gross
revenues multiplied by .175 plus (ii) earnings before tax
multiplied by 2.5 and divided by the weighted average number of
common shares outstanding based upon the Company's audited
financial statements. The Marketing Agreement provides that the
Company will market certain products and services, initially
personal trust and asset management services, provided by
Wilmington Trust FSB to the Company's brokers, clients and
prospects.
The Company believes that its current borrowing
arrangements, combined with anticipated levels of internally
generated funds, will be sufficient to fund its financial
requirements for the foreseeable future. This estimate is based
on the Company's current level of operations and certain
assumptions relating to the Company's business and planned
growth. Should the Company significantly expand either its
market making activities or its underwriting of securities on a
"firm-commitment" basis, however, the Company may need to obtain
additional capital to support such activities and to comply with
regulatory requirements. The Company is not dependent upon
raising additional capital in order to maintain its current
levels of operations, and therefore does not propose to raise
12
<PAGE>
additional capital unless it is available on acceptable terms.
If the Company should find that its ability to generate funds
internally is insufficient to satisfy its future capital needs,
the Company will require additional financing from outside
sources.
At December 31, 1995, the Company had stockholders' equity
of $9,558,000, representing a decrease of $3,201,000 from
December 31, 1994. The decrease in stockholders' equity is
solely due to the reclassification of $7,013,000 from
stockholders' equity to mandatorily redeemable stock as discussed
above, net of reported net income of $3,810,000 for the period.
CSG , DMG, JWC Securities and JWC Clearing are subject to
the Securities and Exchange Commission's Uniform Net Capital Rule
(Rule 15c3-1 under the Securities Exchange Act of 1934), which
requires the maintenance of minimum net capital and requires that
CSG's, DMG's and JWC Securities' ratio of aggregate indebtedness
to net capital (excess net capital), as defined by the Rule, not
exceed 15 to 1. JWC Clearing has elected to comply with the
"alternative net capital requirement" of Rule 15c3-1, which
requires net capital equal to or greater than 2% of aggregate
debit items computed in applying the formula for determination of
reserve requirements. Additionally, JWC Clearing is subject to
the minimum net capital requirements of the NYSE, which provide
that equity capital may not be withdrawn or cash dividends paid
if the resulting net capital would be less than 5% of aggregate
debits. As of December 31, 1995, CSG, JWC Securities and DMG had
net capital and excess net capital of $2,160,000, $1,372,000 and
$453,000 and $1,910,000, $1,122,000 and $353,000, respectively,
each of which complied with the applicable requirements of Rule
15c3-1. At December 31, 1995, JWC Clearing's net capital was
10.1% of aggregate debit balances as compared with the minimum of
2%, and its Rule 15c3-1 net capital of $8,742,000 was $7,007,000
in excess of required net capital.
In its capacity as a co-general partner in an affiliated
real estate limited partnership, the Company has guaranteed
certain partnership indebtedness. Additionally, under applicable
partnership law, as a co-general partner, the Company is
contingently liable for any obligations of such limited
partnership that remain unpaid after any dissolution of the
partnership. The Company has not made any provision in its
financial statements for the possible effect on the Company's
financial condition of the above guarantees and the Company's
contingent liability as a general partner of its affiliated
partnership. The Company does not expect to incur any
significant losses or obligations that may materially affect the
Company's liquidity or financial condition as a result of these
matters.
EFFECTS OF RECENTLY ISSUED ACCOUNTING STANDARDS
The Company will adopt Statement of Financial Accounting
Standards No. 123 "Accounting for Stock-Based Compensation"
("SFAS 123") during 1996. The adoption of SFAS 123 is not
expected to have a material impact on the Company's financial
position or results of operations, but will require more
extensive disclosure of the pro forma effect of the Company's
stock based compensation on its results of operations.
IMPACT OF INFLATION
Although the precise effect of inflation on the present
operations of the Company cannot accurately be determined,
management believes that continuation of the general levels of
inflation experienced in recent years will not have a significant
impact on the Company's current and contemplated operations.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
The response to this item is included in a separate section
of this report.
13<PAGE>
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
ON ACCOUNTING AND FINANCIAL DISCLOSURE.
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
The information contained in the Company's Proxy Statement,
with respect to the identity and background of directors and
executive officers of the Company, is incorporated herein by
reference in response to this item.
ITEM 11. EXECUTIVE COMPENSATION.
The information contained in the Company's Proxy Statement,
with respect to executive compensation, is incorporated herein by
reference in response to this item.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
AND MANAGEMENT.
The information contained in the Company's Proxy Statement,
with respect to the ownership of common stock by certain
beneficial owners and management, is incorporated herein by
reference in response to this item.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
The information contained in the Company's Proxy Statement,
with respect to certain relationships and related transactions,
is incorporated herein by reference in response to this item.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS
ON FORM 8-K.
(a) The following documents are filed as part of this report:
(1) The following consolidated financial statements of JW
Charles Financial Services, Inc. and subsidiaries are
included in Part II - Item 8 of this Form 10-K and are included
on pages F-1 to F-19 of this report:
Consolidated Statements of Financial Condition as of
December 31, 1995 and 1994
Consolidated Statements of Income For the Years Ended
December 31, 1995, 1994 and 1993.
Consolidated Statements of Stockholders' Equity For the
Years Ended December 31, 1995, 1994 and 1993
Consolidated Statements of Cash Flows For the Years Ended
December 31, 1995, 1994 and 1993
Notes to Consolidated Financial Statements
(2) All schedules for which provision is made in the
applicable accounting regulations of the Securities and
Exchange Commission have been omitted because the required
information is not required under the related instructions,
is inapplicable, or is not present in amounts sufficient to
require submission of the schedules or because the
information required is included in the consolidated
financial statements or notes thereto.
14
<PAGE>
(3) Exhibits included herein:
Exhibit
Number Description Page
3(a) Restated Articles of Incorporation *
(incorporated by reference to
Exhibit 3 to the Company's Current
Report on Form 8-K dated November
1, 1990).
3(b) Articles of Amendment to Restated *
Articles of Incorporation
(incorporated by reference to
Exhibit 3(b) to the Company's
Annual Report on Form 10-K for the
fiscal year ended December 31,
1993).
3(c) Articles of Amendment to Restated *
Articles of Incorporation (incorporated
by reference to Exhibit 3(c) to the
Company's Annual Report on Form 10-K
for the fiscal year ended December 31,
1994).
3(d) By-Laws (incorporated by reference *
to Exhibit D to Amendment No. 1 to
Registrant's Registration Statement
of Form S-18 (File Number 2-897713-
A) filed with the Commission on May
2, 1984).
4(a) Article III - Capitalization of the *
Company's Articles of Incorporation
(See Exhibit Number 3(b) above).
10(a) Amended and Restated Agreement and *
Certificate of Limited Partnership
of The Depot Center, Ltd.
(incorporated by reference to
Exhibit 10(a) to the Company's
Annual Report on Form 10-K for the
fiscal year ended January 31,
1985).
10(b) Amended and Restated Agreement and *
Certificate of Limited Partnership
of Coleman Road/120 Associates,
Ltd. (incorporated by reference to
Exhibit 10(b) to the Company's
Annual Report on Form 10-K for the
fiscal year ended January 31,
1985).
10(c) Amended and Restated Agreement and *
Certificate of Limited Partnership
of Poppy Square Shopping Center,
Ltd. (incorporated by reference to
Exhibit 10(c) to the Company's
Annual Report on Form 10-K for the
fiscal year ended January 31,
1986).
10(d) Agreement for Securities Clearance *
Services between Corporate
Securities Group, Inc. and Bear
Stearns & Co., Inc. (incorporated
by reference to Exhibit 10(d) to
the Company's Amendment to
Application or Report on Form 8
dated October 3, 1990).
10(e) Amended and Restated Employment *
Agreement of Marshall T. Leeds
(incorporated by reference to
Exhibit 10(e) to the Company's
Annual Report on Form 10-K for the
fiscal year ended December 31,
1993).
15
<PAGE>
10(f) Agreement Between JW Charles *
Financial Services, Inc. and Gilman
CMG, Inc. dated December 21, 1992.
(incorporated by reference to
Exhibit 10(g) to the Company's
Annual Report on Form 10-K for the
fiscal year ended December 31,
1992).
10(g) Stock Repurchase Agreement dated *
May 15, 1995 by and among JWCharles
Financial Services, Inc., Gilman
CMG, Inc., Marshall T. Leeds and
Joel E. Marks (incorporated by reference
to Exhibit 10(a) to the Company's Quarterly
Report on Form 10-Q for the fiscal quarter
ended June 30, 1995).
10(h) Loan Agreement between Gilman CMG, *
Inc. and JWCharles Financial
Services, Inc. Dated May 15, 1995
(incorporated by reference to Exhibit 10(b)
to the Company's Quarterly Report on
Form 10-Q for the fiscal quarter ended
June 30, 1995).
10(i) Promissory Note and Loan Agreement
between JWCharles Financial
Services, Inc. and Wilmington Trust
Company dated January 19, 1996.
10(j) Common Stock Purchase Warrant
issued to W T Investments, Inc.
Dated January 19, 1996.
10(k) Marketing Agreement between Wilmington
Trust FSB and JW Charles Financial Services,
Inc. dated January 19, 1996
22 Subsidiaries of the Registrant.
27 Financial Data Schedule
* - Incorporated by reference to the referenced document
previously filed by the Registrant with the Commission.
(b) Reports on Form 8-K:
No reports on Form 8-K were filed during the fourth quarter
of the Registrant's fiscal year.
16
<PAGE>
JW Charles Financial Services, Inc. and Subsidiaries
Index to Consolidated Financial Statements
Page
------
Consolidated Financial Statements
Reports of Independent Certified Public Accountants
Year Ended December 31, 1995 .............................. F-2
Years Ended December 31, 1994 and 1993 .................... F-3
Consolidated Statements of Financial Condition ............... F-4
December 31, 1995 and 1994
Consolidated Statements of Income ............................ F-5
Years Ended December 31, 1995, 1994 and 1993
Consolidated Statements of Changes in Stockholders' Equity ... F-6
Years Ended December 31, 1995, 1994 and 1993
Consolidated Statements of Cash Flows ........................ F-7
Years Ended December 31, 1995, 1994 and 1993
Notes to Consolidated Financial Statements ................... F-8
Financial Statement Schedules
All schedules are omitted because they are either not applicable
or the required information is included in the Consolidated
Financial Statements or Notes thereto.
F-1
<PAGE>
Suite 2800 Telephone 813-223-7577
400 North Ashley Street
P.O. Box 2640
Tampa, Fl 33601-2640
Price Waterhouse LLP
Report of Independent Certified Public Accountants
To the Board of Directors and Stockholders of
JW Charles Financial Services, Inc.
In our opinion, the accompanying consolidated statements of
financial condition and the related consolidated statements of
income, of changes in stockholders' equity and of cash flows
present fairly, in all material respects, the financial position
of JW Charles Financial Services, Inc. and its subsidiaries at
December 31, 1995, and the results of their operations and their
cash flows for the year in conformity with generally accepted
accounting principles. These financial statements are the
responsibility of the Company's management; our responsibility is
to express an opinion on these financial statements based on our
audit. We conducted our audit of these statements in accordance
with generally accepted auditing standards which require that we
plan and perform the audit to obtain reasonable assurance about
whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and
significant estimates made by management, and evaluating the
overall financial statement presentation. We believe that our
audit provides a reasonable basis for the opinion expressed
above.
/s/ Price Waterhouse LLP
PRICE WATERHOUSE LLP
Tampa, Florida
March 7, 1996
F-2
<PAGE>
Report of Independent Auditors
The Board of Directors and Shareholders
JW Charles Financial Services, Inc.
We have audited the accompanying consolidated statement of
financial condition of JW Charles Financial Services, Inc. as of
December 31, 1994 and the related consolidated statements of
income, changes in stockholders' equity and cash flows for each
of the two years in the period ended December 31, 1994. These
financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted
auditing standards. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether
the financial statements are free of material misstatement. An
audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating
the overall financial statement presentation. We believe that
our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above
present fairly, in all material respects, the consolidated
financial position of JW Charles Financial Services, Inc. at
December 31, 1994 and the consolidated results of its operations
and its cash flows for each of the two years in the period ended
December 31, 1994, in conformity with generally accepted
accounting principles.
As discussed in Note 10 to the financial statements in 1993, JW
Charles Financial Services, Inc. changed its method of accounting
for income taxes.
/s/ Ernst & Young LLP
West Palm Beach, Florida
March 3, 1995, except for
Notes 7 and 14 as to which
the date is April 4, 1995.
F-3
<PAGE>
JW Charles Financial Services, Inc. and Subsidiaries
Consolidated Statements of Financial Condition
-----------------------------------------------------
<TABLE>
<CAPTION>
December 31,
1995 1994
<S> <C> <C>
ASSETS
Cash and cash equivalents $ 8,597,000 $ 5,401,000
Commissions and other receivables from clearing brokers 2,750,000 2,900,000
Receivable from customers, net of allowance for
doubtful accounts of $667,000 and $277,000 81,438,000 49,844,000
Receivable from brokers and dealers 5,752,000 5,984,000
Securities owned, at market value 11,486,000 11,338,000
Income taxes receivable - 79,000
Note receivable from affiliate - 161,000
Furniture, equipment and leasehold improvements, net
of accumulated depreciation and amortization of
$962,000 and $726,000 1,253,000 994,000
Deferred tax asset 1,011,000 360,000
Other, net of allowance for doubtful accounts
of $888,000 and $599,000 2,927,000 5,157,000
---------------- ----------------
$ 115,214,000 $ 82,218,000
================ ================
LIABILITIES, MANDATORILY REDEEMABLE COMMON
STOCK AND STOCKHOLDERS' EQUITY
Liabilities:
Short-term borrowings from banks $ 29,114,000 $ 7,303,000
Accounts payable, accrued expenses and other liabilities 7,935,000 5,604,000
Payable to customers 31,351,000 30,288,000
Payable to brokers and dealers 22,210,000 16,155,000
Securities sold, not yet purchased, at market value 4,074,000 4,948,000
Notes payable to affiliates 3,500,000 5,161,000
Income taxes payable 459,000 -
---------------- ----------------
98,643,000 69,459,000
---------------- ----------------
Mandatorily redeemable common stock 7,013,000 -
Commitments and contingencies (Note 9)
Stockholders' equity:
Preferred stock, $.001 par value--authorized 5,000,000
shares; issued or outstanding 700,000 shares at
December 31, 1994 - 1,000
Common stock, $.001 par value--authorized 9,056,000
shares; issued and outstanding 3,914,748 and 3,907,398
shares at December 31, 1995 and 1994, respectively 4,000 4,000
Additional paid-in capital 764,000 1,078,000
Retained earnings 8,790,000 11,676,000
---------------- ----------------
Total stockholders' equity 9,558,000 12,759,000
---------------- ----------------
$ 115,214,000 $ 82,218,000
================ ================
</TABLE>
The accompanying Notes to Consolidated Financial Statements are
an integral part of these financial statements.
F - 4
<PAGE>
JW Charles Financial Services, Inc. and Subsidiaries
Consolidated Statements of Income
<TABLE>
<CAPTION>
Year ended December 31,
1995 1994 1993
<S> <C> <C> <C>
Revenues:
Commissions $40,566,000 $22,984,000 $22,331,000
Market making and principal
transactions, net 18,604,000 21,971,000 16,560,000
Interest 7,279,000 4,678,000 3,313,000
Clearing fees 10,176,000 7,371,000 5,852,000
Other 3,416,000 3,467,000 2,010,000
----------- ---------- ----------
80,041,000 60,471,000 50,066,000
----------- ---------- ----------
Expenses:
Commissions and clearing costs 42,160,000 29,890,000 24,170,000
Employee compensation and benefits 13,820,000 11,754,000 9,459,000
Occupancy and equipment rental 4,206,000 3,607,000 2,688,000
Communications 3,867,000 3,146,000 2,575,000
General and administrative 6,647,000 5,146,000 5,141,000
Interest 3,054,000 1,685,000 1,089,000
----------- ---------- ----------
73,754,000 55,228,000 45,122,000
----------- ---------- ----------
Income before income taxes and cumulative
effect of change in accounting principle 6,287,000 5,243,000 4,944,000
Provision for income taxes 2,477,000 1,943,000 1,830,000
----------- ---------- ----------
Income before cumulative effect of change
in accounting principle 3,810,000 3,300,000 3,114,000
Cumulative effect of change in accounting
principle - - 658,000
----------- ----------- -----------
Net income $ 3,810,000 $ 3,300,000 $ 3,772,000
=========== =========== ===========
Earnings per common share:
Income before cumulative effect
of change in accounting principle $ .95 $ .82 $ .76
Cumulative effect of change in
accounting principle - - .17
----------- ----------- -----------
Net income $ .95 $ .82 $ .93
=========== =========== ===========
Weighted average common
shares outstanding 4,016,734 3,938,591 3,960,673
</TABLE>
The accompanying Notes to Consolidated Financial Statements are
an integral part of these financial statements.
F - 5
<PAGE>
JW Charles Financial Services, Inc. and Subsidiaries
Statement of Changes in Stockholders' Equity
- -----------------------------------------------------
<TABLE>
<CAPTION>
Additional Total
Preferred Stock Common Stock Paid-In Retained Stockholders'
Shares Amount Shares Amount Capital Earnings Equity
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at Decmber 31, 1992 700,000 $ 771,000 4,105,398 $4,000 $ 1,074,000 $ 4,765,000 $ 6,614,000
Contribution of common stock from
principal stockholder - - (200,000) - - - -
Net income - - - - - 3,772,000 3,772,000
Cash flow distributions - (200,000) - - - - (200,000)
Mandatory preferred stock dividend - - - - - (76,000) (76,000)
Balance at December 31, 1993 700,000 571,000 3,905,398 4,000 1,074,000 8,461,000 10,110,000
Issuance of common stock upon
exercise of stock options - - 2,000 - 4,000 - 4,000
Net income - - - - - 3,300,000 3,300,000
Cash flow distributions - (570,000) - - - - (570,000)
Mandatory preferred stock dividend - - - - - (85,000) (85,000)
Balance at December 31, 1994 700,000 1,000 3,907,398 4,000 1,078,000 11,676,000 12,759,000
Issuance of common stock upon
exercise of stock options - - 1,500 - 3,000 - 3,000
Reinstatement of forfeited common
stock - - 5,850 - - - -
Net income - - - - - 3,810,000 3,810,000
Redemption of preferred stock (700,000) (1,000) - - - - (1,000)
Reclassification of mandatorily
redeemable stock - - - - (317,000) (5,661,000) (5,978,000)
Accretion of mandatorily
redeemable stock - - - - - (1,035,000) (1,035,000)
Balance at December 31, 1995 $ - $ - 3,914,748 $4,000 $ 764,000 $ 8,790,000 $ 9,558,000
</TABLE>
The accompanying Notes to Consolidated Financial Statements are
an integral part of these financial statements.
F - 6
<PAGE>
JW Charles Financial Services, Inc. and Subsidiaries
Consolidated Statements of Cash Flows
- ------------------------------------------------------------
<TABLE>
<CAPTION>
Year ended December 31,
1995 1994 1993
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net income $ 3,810,000 $ 3,300,000 $ 3,772,000
Adjustments to reconcile net income to net
cash provided (used) by operating activities:
Depreciation and amortization on furniture,
equipment and leasehold improvements 246,000 183,000 185,000
Amortization of other assets 668,000 127,000 -
Provision for doubtful accounts 679,000 282,000 442,000
Cumulative effect of change in
accounting principle - - (658,000)
Change in operating assets and liabilities:
Commissions and other receivables from clearing brokers 150,000 (1,507,000) (766,000)
Receivable from customers (31,984,000) (2,546,000) (14,658,000)
Receivable from brokers and dealers 232,000 (14,000) (2,267,000)
Securities owned (148,000) 4,130,000 (7,646,000)
Income taxes receivable 79,000 (79,000) -
Note receivable from affiliate 161,000 - -
Deferred tax asset (651,000) 237,000 60,000
Other assets 1,273,000 (2,788,000) (1,461,000)
Accounts payable, accrued expenses and other liabilities 2,331,000 221,000 696,000
Payable to customers 1,063,000 7,317,000 7,061,000
Payable to brokers and dealers 6,055,000 2,118,000 7,724,000
Payables to clearing organizations - - (3,413,000)
Securities sold, not yet purchased (874,000) 2,964,000 991,000
Income taxes payable 459,000 (133,000) 50,000
----------- ---------- ----------
Net cash provided (used) by operating activities (16,451,000) 13,812,000 (9,888,000)
INVESTING ACTIVITIES
Purchases of furniture, equipment and leasehold improvements (529,000) (567,000) (361,000)
Disposition of furniture, equipment and leasehold improvements 24,000 - -
----------- ---------- ----------
Net cash used by investing activities (505,000) (567,000) (361,000)
----------- ---------- ----------
FINANCING ACTIVITIES
Short-term borrowings from banks 21,811,000 (12,968,000) 9,335,000
Notes payable to affiliates (1,661,000) 2,500,000 2,500,000
Issuance of common stock 3,000 4,000 -
Cash flow distributions and redemptions of preferred stock (1,000) (570,000) (1,119,000)
Mandatory preferred stock dividends paid - (99,000) (62,000)
----------- ---------- ----------
Net cash provided (used) by financing activities 20,152,000 (11,133,000) 10,654,000
----------- ---------- ----------
Net increase in cash and cash equivalents 3,196,000 2,112,000 405,000
Cash and cash equivalents at beginning of year 5,401,000 3,289,000 2,884,000
----------- ---------- ----------
Cash and cash equivalents at end of year $ 8,597,000 $ 5,401,000 $ 3,289,000
=========== =========== ===========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash paid during the year for:
Interest $ 2,885,000 $ 1,742,655 $ 877,000
Income taxes $ 2,404,000 $ 1,918,000 $ 1,650,000
</TABLE>
SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING AND FINANCING ACTIVITIES
On February 25, 1993, a former stockholder contributed 200,000
shares of common stock to the Company which were retired in 1993.
During fiscal 1995, the Company reinstated 5,850 shares of common
stock originally forfeited in fiscal 1992.
The accompanying Notes to Consolidated Financial Statements are
an integral part of these financial statements.
F - 7
<PAGE>
JW Charles Financial Services, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
- -----------------------------------------------------
1. NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING
PROCEDURES:
OPERATIONS
JW Charles Financial Services, Inc. ("JWCFS" and the
"Company"), formerly Corporate Management Group, Inc., was
incorporated in the State of Florida on December 19, 1983
and through its subsidiaries, is primarily engaged in the
securities brokerage and investment banking business.
BASIS OF CONSOLIDATION
The accompanying consolidated financial statements include
the accounts of JW Charles Financial Services, Inc. and its
subsidiaries, Corporate Securities Group, Inc. ("CSG"), JW
Charles Securities, Inc. ("JWC Securities"), JW Charles
Clearing Corp. ("JWC Clearing"), CMG Capital Corp., First
Investors Life Agency, Inc., DMG Securities, Inc. ("DMG")
and Discount Securities Group, Inc. JWCFS does not have any
significant assets or liabilities other than notes payable
to affiliates. JWCFS functions principally as a holding
company and, therefore, it does not have any operations that
are material to the consolidated financial statements. All
significant intercompany transactions and accounts have been
eliminated in consolidation.
MANAGEMENT ESTIMATES AND ASSUMPTIONS
The preparation of financial statements in conformity with
generally accepted accounting principles requires management
to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the
financial statements and the reported amounts of revenues
and expenses during the reporting period. Actual results
could differ from those estimates.
SECURITIES OWNED AND SECURITIES SOLD, NOT YET PURCHASED
Securities owned, which are readily marketable and
securities sold, not yet purchased are recorded at market
value with unrealized gains or losses reflected in income
currently. Securities sold, not yet purchased, represent
obligations to the Company to deliver specified securities
at the contracted prices, thereby creating a liability to
purchase the securities at prevailing market prices.
Securities owned, which are not readily marketable, are
valued at fair value as determined by management.
FURNITURE, EQUIPMENT AND LEASEHOLD IMPROVEMENTS
Furniture, equipment and leasehold improvements are recorded
at cost. Depreciation and amortization on furniture,
equipment and leasehold improvements is provided utilizing
the straight-line method over the estimated useful lives of
the related assets, which range from five to seven years.
TRANSACTION REPORTING
Securities transactions and the related revenues and
expenses are recorded in the accounts on trade date.
Clearing fees include service charges, execution fees and
commissions on order flow.
EARNING PER COMMON SHARE
Earnings per common share is based upon the weighted average
number of common stock and common stock equivalents
outstanding during the periods. The effect of common stock
equivalents on the Company's primary and fully diluted
earning per share is immaterial. Earnings available for
F - 8
<PAGE>
JW Charles Financial Services, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
- -----------------------------------------------------
common stockholders has been reduced by the amount of
mandatory preferred stock dividends, if any (see Note 13),
but has not been reduced by the amount of accretion of
mandatorily redeemable common stock (see Note 14). Stock
repurchasable pursuant to the mandatorily redeemable common
stock agreement is included in the weighted average number
of common shares outstanding until redeemed.
CASH AND CASH EQUIVALENTS
Cash and cash equivalents consist of cash, including cash in
banks and money market funds.
STOCK BASED COMPENSATION
The Company will adopt Statement of Financial
Accounting Standards No. 123, "Accounting for Stock
Based Compensation" ("SFAS 123") during 1996. Upon
adoption of SFAS 123, the Company intends to retain the
intrinsic value method of accounting for stock based
compensation and disclose pro forma net income and
earnings per share amounts.
INCOME TAXES
The Company utilizes the asset and liability approach
defined in Statement of Financial Accounting Standards No.
109, "Accounting for Income Taxes" ("SFAS 109"). SFAS 109
requires the recognition of deferred tax assets and
liabilities for the expected future tax consequences of
temporary differences between the financial statement
amounts and the tax bases of assets and liabilities.
RECLASSIFICATIONS
Certain amounts from prior years have been reclassified to
conform to the current year presentation. These
reclassifications are not material to the consolidated
financial statements.
2. CLEARING AGREEMENTS:
CSG, JWC Clearing and JWC Securities have clearing
agreements with an unaffiliated clearing broker. Under such
agreements, the clearing broker provides CSG, JWC Clearing
and JWC Securities with certain back-office support and
clearing services on all principal exchanges. In order to
facilitate transactions with this unaffiliated clearing
broker, CSG, JWC Clearing and JWC Securities maintain cash
balances of approximately $300,000 which earn interest at a
rate equal to 1% above the rate customarily paid on credit
balances to the clients of the clearing broker. The
$300,000 is included in commissions and other receivables
from clearing brokers on the accompanying consolidated
statements of financial condition.
Credit losses could arise should the clearing broker fail to
perform. The Company does not require collateral.
F - 9<PAGE>
JW Charles Financial Services, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
3. RECEIVABLE FROM AND PAYABLE TO BROKERS AND DEALERS:
Amounts receivable from and payable to brokers and dealers
consist of the following:
<TABLE>
<CAPTION>
December 31,
1995 1994
<S> <C> <C>
Receivable:
Securities failed to deliver $3,713,000 $ 3,076,000
Deposits on securities borrowed 977,000 2,908,000
Other amounts due from brokers and dealers 1,062,000 -
----------- -----------
$5,752,000 $ 5,984,000
=========== ===========
Payable:
Securities failed to receive $1,642,000 $ 1,859,000
Deposits on securities loaned 17,719,000 12,242,000
Other amounts due to brokers and dealers 2,849,000 2,054,000
----------- -----------
$22,210,000 $16,155,000
=========== ===========
</TABLE>
F - 10
<PAGE>
JW Charles Financial Services, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
- -----------------------------------------------------
Deposits on securities borrowed and securities loaned
represent cash on deposit with or received from other
brokers and dealers relating to securities borrowed and
securities loaned transactions, respectively. The Company
monitors the market value of securities borrowed and loaned
on a daily basis, with additional collateral obtained or
refunded as necessary.
4. RECEIVABLE FROM AND PAYABLE TO CUSTOMERS:
Receivable from and payable to customers arise from cash and
margin transactions executed by the Company on the
customer's behalf. Receivables are collateralized by
securities owned by customers. Such collateral is not
reflected in the accompanying consolidated statements of
financial condition.
5. SECURITIES OWNED AND SECURITIES SOLD, NOT YET PURCHASED:
Securities owned and securities sold, not yet purchased
consist of securities, at market value, as follows:
<TABLE>
<CAPTION>
December 31,
1995 1994
<S> <C> <C>
Securities owned:
U.S. Government obligations $3,843,000 $ 4,003,000
State and municipal government obligations 2,877,000 3,481,000
Corporate obligations 3,312,000 2,683,000
Corporate stocks 821,000 1,100,000
Non-marketable 560,000 -
Other 73,000 71,000
----------- -----------
$11,486,000 $11,338,000
=========== ===========
December 31,
1995 1994
Securities sold, not yet purchased:
U.S. Government obligations $3,175,000 $ 2,848,000
Corporate stocks 736,000 1,936,000
State and municipal government obligations 105,000 156,000
Other 58,000 8,000
----------- -----------
$4,074,000 $ 4,948,000
=========== ===========
</TABLE>
6. SHORT-TERM BORROWING FROM BANKS:
Borrowings under the Company's financing agreement with a
bank bear interest based upon the federal funds rate, are
restricted to a percentage of the market value of the
related collateral securities, and are due on demand. At
December 31, 1995, 1994 and 1993 approximately $28,138,000,
$5,862,000 and $18,804,000, respectively, were outstanding
under this arrangement. The market value of the collateral
relating to this arrangement was approximately $50,000,000,
$9,000,000 and $32,000,000 at December 31, 1995, 1994 and
1993, respectively, including customer margin account
securities of approximately $40,000,000, $7,000,000 and
$21,000,000 respectively. The maximum and average amount
outstanding during the year ended December 31, 1995 were
approximately $28,000,000 and $12,000,000, respectively
($18,000,000 and $10,000,000, respectively for the year
ended December 31, 1994 and $19,000,000 and $13,000,000,
respectively, for the year ended December 31, 1993). The
average interest rates during the same periods were 6.8%,
5.9% and 4.5%, respectively.
F - 11
<PAGE>
JW Charles Financial Services, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
- ----------------------------------------------------
7. NOTES PAYABLE TO AFFILIATES:
On May 24, 1993, the Company issued a $2,500,000 unsecured
promissory note to Gilman Securities Corporation ("Gilman"),
an affiliate of a principal stockholder of the Company and
on March 31, 1994, the Company issued a second $2,500,000
unsecured promissory note to Gilman (collectively, the
"Note"). The Note bears interest at the per annum rate of
1% above the prime rate of Morgan Guaranty & Trust Company
(8.5% at December 31, 1994). On May 15, 1995, the Company
and Gilman amended the terms of the Note. The amended Note
provided for a principal payment of $1,000,000 in May 1995
and quarterly principal payments beginning July 15, 1995.
Interest is payable quarterly at the per annum rate of 10%.
Under the terms of the Note, the Company is restricted from
entering into new commitments or borrowings, outside of the
ordinary course of business, over specified amounts. At
December 31, 1995 and 1994, $3,500,000 and $5,000,000,
respectively, was outstanding under the Note and is included
in notes payable to affiliate on the accompanying
consolidated statements of financial condition. Aggregate
annual future payments due on the Note are as follows:
1996 $ 1,000,000
1997 1,000,000
1998 1,000,000
1999 500,000
-----------
$ 3,500,000
===========
The Company recorded interest expense of approximately
$420,000, $365,000 and $105,000 for the years ended December
31, 1995, 1994 and 1993, respectively.
At December 31, 1994, notes payable to affiliates included a
$161,000 nonrecourse note payable to Poppy Square Associates
and note receivable from affiliate included a $161,000 note
receivable from Poppy Square Shopping Center, Ltd. Both are
due on June 17, 1995 with interest quarterly at 9%. Both
the note receivable and the note payable were recorded on
the Company's books at one-half of their respective face
values to reflect the Company's 50% interest as co-general
partner and were satisfied during fiscal 1995.
8. ESTIMATED FAIR VALUE OF FINANCIAL INSTRUMENTS:
Statement of Financial Accounting Standards No. 107,
"Disclosure about Fair Value of Financial Instruments,"
requires the disclosure of the fair value of financial
instruments, including assets and liabilities recognized and
not recognized in the consolidated statements of financial
condition.
The Company's securities owned and securities sold, not yet
purchased, are carried at market value.
Management estimates that the aggregate net fair value of
other financial instruments recognized on the consolidated
statements of financial condition (including cash and cash
equivalents, receivables and payables, and short-term
borrowings) approximates their carrying value, as such
financial instruments are short-term in nature, bear
interest at current market rates or are subject to
repricing.
The mandatorily redeemable common stock is being
accreted to its redemption value.
F - 12
<PAGE>
JW Charles Financial Services, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
- -----------------------------------------------------
9. COMMITMENTS AND CONTINGENCIES:
In the normal course of business, the Company enters into
underwriting commitments. There were no outstanding
underwriting commitments at December 31, 1995, 1994 and
1993.
The Company leases its operations headquarters, branch
offices and certain equipment under operating leases that
generally allow for renewal and are in effect for various
terms through 2001. Lease expense with respect to operating
leases for the years ended December 31, 1995, 1994 and 1993
approximated $1,559,000, $1,273,000 and $1,077,000,
respectively.
Based upon long-term noncancelable leases and other
contractual commitments, the future minimum rental
commitments as of December 31, 1995 are as follows:
1996 $1,481,000
1997 1,270,000
1998 1,160,000
1999 1,095,000
2000 1,103,000
Thereafter 385,000
----------
$6,494,000
==========
Included in other assets in the accompanying consolidated
statements of financial condition at December 31, 1995 and
1994, are investments in real estate partnerships of $43,000
and $38,000, respectively. Under applicable partnership
law, the Company, as co-general partner, is contingently
liable for any obligations of these real estate limited
partnerships (including Note 7) that remain unpaid after any
dissolution of the partnerships. The Company has not made
any provision in the consolidated financial statements for
the possible effect on the Company's financial condition of
the above guarantees or the Company's contingent liability
as a general partner of its affiliated partnerships. The
Company does not expect to incur any losses or obligations
that will have a material adverse effect on its financial
position or results of operations.
The Company is a defendant or co-defendant in various
lawsuits incidental to its securities business. The Company
is contesting the allegations of the complaints in these
cases and believes that there are meritorious defenses in
each of these lawsuits. In view of the number and diversity
of claims against the Company, the number of jurisdictions
in which litigation is pending and the inherent difficulty
of predicting the outcome of litigation and other claims,
the Company cannot state with certainty what the eventual
outcome of pending litigation or other claims will be. In
the opinion of management, based on discussions with
counsel, the outcome of the matters will not result in a
material adverse effect on the financial position or results
of operations of the Company.
10. INCOME TAXES:
Effective January 1, 1993, the Company changed its method of
accounting for income taxes and adopted SFAS 109. The
cumulative effect of adopting SFAS 109 as of January 1,
1993, was to increase net income by $658,000.
F - 13<PAGE>
JW Charles Financial Services, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
- -----------------------------------------------------
The provision (benefit) for income taxes consists of:
<TABLE>
<CAPTION>
Year Ended
December 31,
1995 1994 1993
<S> <C> <C> <C>
Current provision:
Federal $2,829,000 $1,457,000 $1,601,000
State 299,000 249,000 169,000
---------- ---------- ----------
3,128,000 1,706,000 1,770,000
---------- ---------- ----------
Deferred provision:
Federal (589,000) 202,000 54,000
State (62,000) 35,000 6,000
---------- ---------- ----------
(651,000) 237,000 60,000
---------- ---------- ----------
$2,477,000 $1,943,000 $1,830,000
========== ========== ==========
</TABLE>
At December 31, 1995, the Company has a net operating loss
carryforward of approximately $2,000,000 for income tax
purposes that expires in 2005. The net operating loss
("NOL") carryforward, which was acquired by merger in 1990,
is limited under the separate return limitation year rules.
Since it is more likely than not that the benefit of the NOL
will not be realized, a valuation allowance of $821,000 has
been recognized.
Deferred income taxes reflect the net tax effects of
temporary differences between the carrying amounts of assets
and liabilities for financial reporting purposes and the
amounts used for income tax purposes. Significant
components of the Company's deferred tax asset and liability
as of December 31, 1995 and 1994 are as follows:
<TABLE>
<CAPTION>
1995 1994
<S> <C> <C>
Reserve for bad debts $ 735,000 $ 324,000
Contingency accruals 438,000 183,000
Organizational costs 8,000 9,000
Net operating loss carryforward 821,000 821,000
----------- ----------
Gross deferred tax asset 2,002,000 1,337,000
----------- ----------
Advances to brokers (155,000) (142,000)
Book over tax depreciation (15,000) (14,000)
----------- ----------
Gross deferred tax liability (170,000) (156,000)
----------- ----------
Valuation allowance (821,000) (821,000)
----------- ----------
Net deferred tax asset $1,011,000 $ 360,000
=========== ==========
</TABLE>
The Company's effective tax rate on pre-tax income differs from
the statutory federal income tax rate due to the following:
<TABLE>
<CAPTION>
December 31,
1995 1994 1993
<S> <C> <C> <C>
Tax at statutory rates 34.0% 34.0% 34.0%
Increase (decrease) resulting from:
Effect of state income tax 3.6 3.6 3.6
Effect of nondeductible travel
and entertainment 1.3 - -
Other .5 (.6) (.6)
---- ---- ----
39.4% 37.0% 37.0%
==== ==== ====
</TABLE>
F - 14
<PAGE>
JW Charles Financial Services, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
11. NET CAPITAL AND RESERVE REQUIREMENTS:
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 ("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. Net capital positions of the
Company's broker-dealer subsidiaries were as follows:
<TABLE>
<CAPTION>
December 31,
1995 1994
<S> <C> <C>
JWC Clearing (alternative method elected):
Net capital as a percent of aggregate debit items 10.1% 10.4%
Net capital $ 8,742,000 $ 5,786,000
Required net capital $ 1,735,000 $ 1,116,000
CSG:
Ratio of aggregate indebtedness to net capital 1.46 1.34
Net capital $ 2,160,000 $ 2,448,000
Required net capital $ 250,000 $ 250,000
JWC Securities:
Ratio of aggregate indebtedness to net capital 1.91 1.44
Net capital $ 1,372,000 $ 1,469,000
Required net capital $ 250,000 $ 250,000
DMG:
Ratio of aggregate indebtedness to net capital .57 1.05
Net capital $ 453,000 $ 330,000
Required net capital $ 100,000 $ 100,000
</TABLE>
JWC Clearing is also subject to Rule 15c3-3 under the
Securities Exchange Act of 1934 which specifies certain
conditions under which brokers and dealers carrying customer
accounts are required to maintain cash or qualified
securities in a special reserve bank account for the
exclusive benefit of customers. Amounts to be maintained,
if required, are computed in accordance with a formula
defined in the rule and as required by the NYSE. At
December 31, 1995 and 1994, JWC Clearing had no requirement
to segregate funds under the rule.
JWC Securities, CSG and DMG are exempt from the provisions
of Rule 15c3-3, since they clear all transactions with and
for customers on a fully-disclosed basis.
Additionally, pursuant to Rule 15c3-1, JWC Clearing, JWC
Securities, CSG and DMG must notify and obtain approval from
the Securities and Exchange Commission and either the
National Association of Securities Dealers (CSG and DMG) or
the NYSE (JWC Clearing and JWC Securities) for any advances
or loans to JWCFS or any other affiliate, if such advances
or loans would exceed in the aggregate, in any 30 calendar
day period, 30% of that company's excess net capital and
$500,000. Rule 15c3-1 also provides that equity capital may
not be withdrawn or cash dividends paid if resulting net
capital would be less than 5% of aggregate debits or 120% of
the minimum net capital required by the Rule.
F - 15
<PAGE>
JW Charles Financial Services, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
- ----------------------------------------------------
12. OFF-BALANCE-SHEET RISK:
In the normal course of business, the Company's customer and
correspondent clearance activities involve the execution,
settlement, and financing of various customer securities
transactions. These activities may expose the Company to
off-balance-sheet risk in the event the customer or other
broker is unable to fulfill its contracted obligations and
the Company has to purchase or sell the financial instrument
underlying the contract at a loss.
In addition, the Company has sold securities that it does
not currently own and will therefore be obligated to
purchase such securities at a future date. The Company has
recorded these obligations in the financial statements at
the December 31, 1995 market values of the related
securities and will incur a loss if the market value of the
securities increases subsequent to December 31, 1995.
The Company's customer securities activities are transacted
on either a cash or margin basis. In margin transactions,
the Company extends credit to its customers, subject to
various regulatory and internal margin requirements,
collateralized by cash and securities in the customers'
accounts. In connection with these activities, the Company
executes and clears customer transactions involving the sale
of securities not yet purchased, substantially all of which
are transacted on a margin basis subject to individual
exchange regulations. Such transactions may expose the
Company to significant off-balance-sheet risk in the event
margin requirements are not sufficient to fully cover losses
that customers may incur. In the event the customer fails
to satisfy its obligations, the Company may be required to
purchase or sell financial instruments at prevailing market
prices to fulfill the customer's obligations.
The Company seeks to control the risks associated with its
customer activities by requiring customers to maintain
margin collateral in compliance with various regulatory and
internal guidelines. The Company monitors required margin
levels daily and, pursuant to such guidelines, requires the
customer to deposit additional collateral, or to reduce
positions, when necessary.
The Company's customer financing and securities settlement
activities require the Company to pledge customer securities
as collateral in support of various secured financing
sources such as bank loans and securities loaned. In the
event the counterparty is unable to meet its contractual
obligation to return customer securities pledged as
collateral, the Company may be exposed to the risk of
acquiring the securities at prevailing market prices in
order to satisfy its customer obligations. The Company
controls this risk by monitoring the market value of
securities pledged on a daily basis and by requiring
adjustments of collateral levels in the event of excess
market exposure. In addition, the Company establishes
credit limits for such activities and monitors compliance on
a daily basis.
13. PREFERRED STOCK:
On October 30, 1990, the Company's stockholders voted to
approve an amendment to the Company's Articles of
Incorporation to authorize 5,000,000 shares of $.001 par
value Special Stock and to designate 2,000,000 of such
shares as Series A Special Distribution Stock (the "Series A
Stock"). All of the Series A Stock was issued in 1990 in
connection with the acquisition of certain subsidiaries.
F - 16
<PAGE>
JW Charles Financial Services, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
- ----------------------------------------------------
Beginning November 1, 1990, each share of Series A Stock was
entitled to receive a cumulative quarterly dividend of
$.03025 per share ("Mandatory Dividends"). All outstanding
shares of Series A Stock, as a group, are entitled to
receive special cash distributions ("Cash Flow
Distributions") in the aggregate amount of $2,200,000
payable, when and as declared by the Board of Directors.
The Company was required to declare and pay as Cash Flow
Distributions, until the aggregate amount of Cash Flow
Distributions paid is equal to $2,200,000 (the "Maximum Cash
Flow Distributions"), not less than 80% of the Company's
cumulative excess cash flow, determined at the end of each
fiscal quarter of the Company ending after November 1, 1990,
minus the aggregate amount of Cash Flow Distributions
previously paid. Cumulative excess cash flow is equal to
excess cash flow for the period from November 1, 1990
through the calculation date. Excess cash flow, as of a
calculation date is equal to the Company's revenues from all
sources (excluding unrealized gains and similar noncash
items), minus all expenses of the Company (excluding
depreciation, amortization and similar noncash items, but
not excluding up to an aggregate of the principal payments
on indebtedness pursuant to the line-of-credit facility
formerly provided by the former stockholder of the acquired
subsidiaries); amounts necessary to comply with increased
net capital or aggregate debit requirements under rules of
the SEC or similar capital-related requirements of other
regulatory bodies; Mandatory Dividends paid or accrued; and
reasonable reserves for contingencies and working capital
purposes. Also, to the extent dividends are declared on
common stock, Series A Stock will be entitled to participate
in such dividends on a share-per-share basis with the shares
of common stock.
The Company recorded Mandatory Dividends of approximately
$85,000 and $76,000 during 1994 and 1993, respectively.
As Cash Flow Distributions were paid, the Company had the
right to redeem a number of outstanding shares of Series A
Stock equal to the amount of Cash Flow Distributions
previously paid divided by 1.1. The redemption price is
$.001 per share. Upon liquidation, after payment of any
unpaid Mandatory Dividends, the holders of Series A Stock
shall have no right or claim to any of the remaining assets
of the Company. During 1994 and 1993, the Company paid
$570,000 and $1,119,000, respectively, in Cash Flow
Distributions and redemptions. During 1993, the Company
redeemed 845,455 shares of Series A Stock.
In conjunction with a stock repurchase agreement entered
into with Gilman (described in detail in Note 14), the
Company purchased all of the Company's outstanding preferred
stock from Gilman for an aggregate price of $700.
14. MANDATORILY REDEEMABLE COMMON STOCK:
On May 15, 1995, the Company entered into a Stock Repurchase
Agreement (the "Agreement") with Gilman to repurchase all of
the approximately 49% of the Company's outstanding common
stock held by Gilman. The repurchase price per share is a
minimum of $3.00, subject to certain adjustments each year
based upon changes in the Company's net tangible book value,
as defined. Beginning April 15, 1996, the Company is
obligated under the Agreement to repurchase stock each year
in an amount equal to 50% of annual net income, as defined,
until all Gilman stock is repurchased. For purposes of
determining the aggregate amount of stock required to be
repurchased each year, net income is reduced by principal
repayments on the Note payable to Gilman (see Note 7). The
Company must complete the repurchase of all Gilman stock by
April 15, 2003 or pay a $672,000 penalty.
F - 17
<PAGE>
JW Charles Financial Services, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
- ----------------------------------------------------
On May 15, 1995, the Company reclassified $5,978,000,
representing $3.12 per share from additional paid-in capital
and retained earnings to mandatorily redeemable common stock
to reflect the terms of the Agreement.
On April 15, 1996, the Company will be required to
repurchase 315,510 shares of stock from Gilman at a price
per share of $3.66 for a total consideration of $1,155,000.
The difference between the initially recorded cost of the
mandatorily redeemable common stock and the adjusted
purchase price has been accreted to mandatorily redeemable
common stock through a $1,035,000 direct charge to retained
earnings.
15. EMPLOYEE BENEFIT PLANS:
On October 30, 1990, the Company adopted a stock option plan
("1990 Plan") pursuant to which 400,000 shares of common
stock have been reserved for issuance upon exercise of
options designated as "incentive stock options" or
"nonqualified options." During 1994, the Company increased
the number of shares of common stock reserved for issuance
under the 1990 Plan from 400,000 to 800,000 shares. These
options are to be issued to certain officers and employees
of the Company, and certain other key persons instrumental
to the success of the Company, and provide them a greater
personal interest in the success of the Company. The 1990
Plan is administered by the Board of Directors of the
Company, or a committee appointed by the Board of Directors,
which determines, among other things, the persons to be
granted options under the 1990 Plan, the number of shares
subject to each option and the option price. The options
are granted at fair market value. Options granted become
exercisable in equal annual installments over three years
and expire five years from the date of grant.
Information for the 1990 Plan for the years ended December
31, 1995, 1994 and 1993 is summarized as follows:
<TABLE>
<CAPTION>
1995 1994 1993
<S> <C> <C> <C>
Options outstanding at beginning of year 303,250 106,750 66,750
Granted 120,000 200,000 40,000
Exercised (1,500) (2,000) -
Forfeited (40,500) (1,500) -
------- ------- -------
Options outstanding at end of year 381,250 303,250 106,750
======= ======= =======
Prices of options outstanding at end of year 2.00-3.83 2.00-3.75 2.00-3.75
========= ========= =========
Options available for future grants
at end of year 263,250 383,250 183,250
======= ======= =======
</TABLE>
During 1993, the Company granted discretionary options to an
officer of the Company to purchase 150,000 shares of the
Company's common stock at an exercise price of $3.75 per
share. The exercise price was greater than the fair market
value of the common stock on the date of grant. The options
vest in increments of 50,000 shares on December 31, 1993,
1994 and 1995, and may be exercised in whole or in part,
with respect to such vested amounts of shares, until the
expiration of the options on December 31, 1997. None of the
options had been exercised at December 31, 1995.
At December 31, 1995, options to purchase 361,250 shares
were exercisable. The exercise price of options exercised
during the years ended December 31, 1995 and 1994 was $2.00
per share.
F - 18<PAGE>
JW Charles Financial Services, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
- ----------------------------------------------------
The Company has a restricted stock plan providing for the
issuance of up to 500,000 shares of its authorized but
unissued common stock to nonexecutive employees and
registered representatives. As of December 31, 1995 and
1994, 7,000 shares had been issued under the restricted
stock plan and 493,000 shares of common stock have been
reserved for future issuance.
The Company adopted a Pension and Profit Sharing Plan (the
"Plan") in 1986 which offers all full-time employees over
the age of 21 of the Company and its subsidiaries tax
advantages pursuant to Section 401(k) of the Internal
Revenue Code. Under the terms of the Plan, participants may
elect to defer up to 10% of their compensation. The Company
will make a matching contribution to the Plan of 50% of the
first 4% of compensation contributed by each participant who
is employed by the Company or qualified subsidiary on
December 31 of such year. Participant's contributions to
the Plan are fully vested at all times and are not subject
to forfeiture. The Company's matching contribution vests to
each participant over a five-year vesting schedule based
upon the participant's years of service with the Company.
Contributions are made by participants by means of a payroll
deduction program. Within specified limits, participants
have the right to direct their savings into certain kinds of
investments as specified in the Plan. Employee compensation
and benefits include approximately $197,000, $145,000 and
$145,000 of Company matching contributions made during 1995,
1994 and 1993, respectively.
16. SUBSEQUENT EVENT:
On January 19, 1996, the Company obtained an unsecured
$2,500,000 revolving line of credit from Wilmington
Trust Company for general corporate purposes (the
"Wilmington Facility"). The Wilmington Facility
matures on December 31, 2002, at which time all
outstanding borrowings plus all accrued and unpaid
interest will become due and immediately payable.
Borrowings under the Wilmington Facility bear interest
at Wilmington's national commercial rate, with interest
payments due monthly in arrears. The Company is
required to maintain certain debt covenants including
(i) minimum stockholders' equity equal to at least
$7,000,000, plus 30% of net income for all fiscal
quarter end periods, plus 75% of net proceeds from
common stock equity issuances and (ii) net income, as
defined, in excess of $1,500,000 for any four quarters
within any six consecutive quarterly periods.
In addition to the Wilmington Facility, the Company entered
into a marketing agreement with Wilmington Trust FSB and
granted W T Investments, Inc. a warrant to purchase up to
400,000 shares of the Company's common stock at any time
prior to December 31, 2002. The exercise price per share
shall be the greater of $5.50 or an amount equal to the sum
of total revenues multiplied by .175 plus earnings before
tax multiplied by 2.5 divided by the weighted average common
shares outstanding based on the Company's audited financial
statements. The marketing agreement provides that the
Company will market certain products and services, initially
personal trust and asset management services, provided by
Wilmington Trust FSB to the Company's brokers, clients and
prospects.
F - 19<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the
Securities Exchange Act of 1934, the Registrant has caused this
report to be signed on its behalf by the undersigned, thereunto
duly authorized.
Date: March 27, 1996 JW CHARLES FINANCIAL SERVICES, INC.
-----------------------------------
(Registrant)
By: /s/ Marshall T. Leeds
Marshall T. Leeds
President and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act
of 1934, this report has been signed below by the following
persons on behalf of the Registrant and in the capacities and on
the dates indicated.
/s/ Marshall T. Leeds Date: March 27, 1996
Marshall T. Leeds, Chairman, President
and Chief Executive Officer
(Principal Executive Officer)
and Director
/s/ Joel E. Marks Date: March 27, 1996
Joel E. Marks, Vice Chairman,
Secretary (Principal Financial
and Accounting Officer) and Director
/s/ Stephen W. Cropper Date: March 27, 1996
Stephen W. Cropper, Director
/s/ John R. Faiella Date: March 27, 1996
John R. Faiella, Director
/s/ D. Ferguson Date: March 27, 1996
Wm. Dennis Ferguson, Director
/s/ Gregg S.Glaser Date: March 27, 1996
Gregg S. Glaser, Director
/s/ Joseph P. Robilotto Date: March 27, 1996
Joseph P. Robilotto, Director
/s/ Michael B. Weinberg Date: March 27, 1996
Michael B. Weinberg, Director
<PAGE>
Exhibit Index
Exhibit No. Description
- ----------- ---------------------------------------
10(i) Promissory Note and Loan Agreement
between JWCharles Financial
Services, Inc. and Wilmington Trust
Company dated January 19, 1996.
10(j) Common Stock Purchase Warrant
issued to W T Investments, Inc.
Dated January 19, 1996.
10(k) Marketing Agreement between Wilmington
Trust FSB and JW Charles Financial Services,
Inc. dated January 19, 1996
22 Subsidiaries of the Registrant.
27 Financial Data Schedule
<PAGE>
Exhibit 10(i)
PROMISSORY NOTE AND LOAN AGREEMENT
Borrower: JW Charles Financial Services, Inc.
980 North Federal Highway
Boca Raton, Florida
Lender: Wilmington Trust Company
1100 N. Market Street
Wilmington, Delaware
I. LOAN TERMS
1.1. PROMISE TO PAY. JW Charles Financial Services, Inc.
("Borrower") promises to pay to Wilmington Trust Company
("Lender") the principal amount of Two Million Five Hundred
Thousand and 00/100 Dollars ($2,500,000) or so much as may be
outstanding, together with interest on the unpaid outstanding
principal balance of each advance (the "Loan"). Interest shall
be calculated from the date of each advance until repayment of
each advance.
1.2. LINE OF CREDIT. This Note and Loan Agreement ("Note")
evidences a revolving line of credit for the maximum amount of
Two Million Five Hundred Thousand and 00/100 Dollars
($2,500,000.00). The unpaid principal balance owing on this Note
at any time may be evidenced by Lender's internal records which
will be provided to Borrower from time to time upon Borrower's
request, including daily computer print-outs. Lender will have
no obligation to advance funds under this Note if Borrower has
failed to comply with the covenants of Section III or if the
Borrower is in default under the terms of Section IV of this
Note, or any agreement that Borrower has with Lender, including
any agreement made in connection with the signing of this Note.
1.3. PAYMENT. Borrower will pay all outstanding principal
plus all accrued and unpaid interest under this Loan on December
31, 2002. In addition, Borrower will pay regular monthly
payments of accrued and unpaid interest in arrears beginning
January 15, 1996, and all subsequent interest payments are due on
the same day of each month after that. Interest on this Note is
computed on a 365/360 simple interest basis; that is, by applying
the ratio of the annual interest rate over a year of 360 days,
multiplied by the outstanding principal balance, multiplied by
the actual number of days the principal balance is outstanding.
Borrower will make all payments to Lender at Lender's address
shown above or at such other place as Lender may designate in
writing. Unless otherwise agreed or required by applicable law,
payment will be applied first to accrued unpaid interest, then to
principal, and any remaining amount to any unpaid collection
costs and late charges.<PAGE>
1.4. VARIABLE INTEREST RATE. The interest rate on this Note
is subject to change from time to time based on changes in an
index which is the WILMINGTON TRUST COMPANY'S NATIONAL COMMERCIAL
RATE (the "Index"). The Index is not necessarily the lowest rate
charged by Lender on its loans and is set by Lender in its sole
discretion. If the Index becomes unavailable during the term of
this loan, Lender will utilize the prime lending rate as
published in the Wall Street Journal. Lender will tell Borrower
the current Index rate upon Borrower's request. Borrower
understands that Lender may make loans based on other rates as
well. The interest rate change will not occur more often than
each day. The Index currently is 8.50% per annum. The interest
rate to be applied to the unpaid principal balance of this Note
will be at a rate equal to the Index, resulting in an initial
rate of 8.50% per annum. NOTICE: Under no circumstances will
the interest rate on this Note be more than the maximum rate
allowed by applicable law.
1.5. PREPAYMENT. Borrower may prepay from time to time in
whole or in part without penalty or premium all or a portion of
the amount owed earlier than it is due. Early payments will not,
unless agreed to by Lender in writing, relieve Borrower of
Borrower's obligation to continue to make payments of accrued
unpaid interest on the principal which remains outstanding.
Rather, they will reduce the principal balance due.
1.6. LATE CHARGE. If a payment is not made within 15 days
of the date such payment becomes due, Borrower will be charged
5.000% of the unpaid portion of the regularly scheduled payment
or $5.00, whichever is greater.
1.7. NOTICE AND MANNER OF ADVANCES. Borrower shall give
Lender at least two business days' written notice of any request
for advances under this Note. Such notice shall constitute an
affirmative representation that Borrower is not in default of
this Agreement and that Borrower is in compliance with all of the
covenants in Section III hereof. Such Advances hereunder will
be made in immediately available funds by crediting the amount
thereof to the Borrower's account with the Wilmington Trust
Company.
Advances under this Note may be requested in writing by
Borrower or by an Authorized Person (as defined below). All
communications, instructions, or directions by telephone or
otherwise to Lender are to be directed to Lender's office shown
set forth in Section 5.1. The following party or parties are
authorized to request advances under the line of credit until
Lender receives from Borrower written notice of revocation of
their authority and\or the designation of the appointment of
other authorized persons: Joel Marks and Marshall Leeds
(individually, an "Authorized Person"). Borrower agrees to be
liable for all sums either: (a) advanced in accordance with the
instructions of an Authorized Person; or (b) credited to any of
Borrower's accounts with Lender upon the instructions of an
Authorized Person.
2
<PAGE>
1.8. STOCK WARRANTS. As additional consideration for
Lender's obligations hereunder, Borrower is providing Lender with
common stock warrants issued on the date hereof (the "Warrants").
Such warrants shall be exercisable according to their terms.
1.9. BOARD REPRESENTATION. As further consideration for the
Loan described herein, Borrower agrees to use its best efforts to
cause the Board of Directors of Borrower to include one
representative of the Lender, or representation equal to 10% of
the Board, whichever is greater, for such time as it holds the
Warrants or owns more than 4.9% of the common shares of Borrower.
1.10 MARKETING AGREEMENT. As further consideration for the
Loan described herein, Borrower has entered into a Marketing
Agreement with Wilmington Trust Company, dated the date hereof
(the "Marketing Agreement"), to market certain products of
Wilmington Trust Company.
II. BORROWER'S REPRESENTATIONS AND WARRANTIES
2.1. ORGANIZATION AND STANDING. Each of Borrower and its
Subsidiaries is a corporation duly organized, validly existing,
and in good standing under the laws of its state of incorporation
and is duly qualified to do business in each jurisdiction in
which the conduct of its business requires such qualification and
would be materially and adversely affected in the absence
thereof. Borrower and each of its Subsidiaries is in compliance
with all applicable law and regulations governing the conduct of
their respective businesses and governing consummation of the
transactions contemplated herein, except for any such failures to
so comply that will or do not, singly or in the aggregate, have a
material adverse effect on the business, assets, financial
conditions, operations, or prospects of Borrower and the
Subsidiaries taken as a whole. For the purposes of this
Agreement, a corporation or entity shall be considered to be a
"Subsidiary" of the Borrower if the Borrower owns shares of stock
or other ownership interests having the voting power (other than
stock or other ownership interests having such power only by
reason of the happening of a contingency) to elect a majority of
the directors of such corporation, or other persons performing
functions for such entity are owned, directly or indirectly, by
Borrower.
2.2. CORPORATE POWER AND AUTHORITY. The execution,
delivery, and performance hereof by Borrower are within its
corporate powers, have been duly authorized by all necessary
corporate action, and are not in contravention of law or the
terms of its Restated Articles of Incorporation or Bylaws or any
amendment thereto, or any indenture, agreement, or undertaking to
which Borrower is a party or by which it is bound.
3
<PAGE>
2.3. VALID AND BINDING OBLIGATION. This Agreement
constitutes the legal, valid, and binding obligations of
Borrower, enforceable in accordance with their respective terms,
subject to applicable bankruptcy and insolvency laws and laws
affecting creditors' rights and the enforcement thereof
generally.
2.4. NO LEGAL BAR. The execution, delivery, and performance
of this Agreement, and the borrowing contemplated by this
Agreement do not and will not violate any Requirement of Law or
any contractual obligation of Borrower and will not result in, or
require, the creation or imposition of any lien on any of its
properties or revenues pursuant to any Requirement of Law or any
contractual obligation, which violation or lien would have a
material adverse effect on the business, assets, financial
condition, operations, or prospects of Borrower. For the
purposes of this Section, "Requirement of Law" means the Restated
Articles of Incorporation and Bylaws or other organizational or
governing documents of a given entity and any law, treaty, rule
or regulation, or determination of any arbitrator or court or
other governmental authority, in each case applicable to or
binding upon such entity or any of its property or to which such
entity or any of its property is subject.
2.5. LITIGATION. There is not now pending against Borrower
or any of its Subsidiaries, nor to the knowledge of the officers
of Borrower or any of its Subsidiaries is there threatened by
written communication, any litigation, investigation, or
proceeding the outcome of which would, in any case or in the
aggregate, materially and adversely affect the assets or
financial condition of Borrower and any of its Subsidiaries,
taken as a whole, or seriously affect their continued material
operations, except as disclosed in public filings of Borrower
pursuant to Section 13 of the Securities Exchange Act of 1934, as
amended, or as otherwise specifically disclosed to Lender in
writing.
2.6. CONSENT OR FILING. No consent, approval, or
authorization of, any court, any governmental body or authority,
or any other person or entity is required in connection with the
valid execution, delivery, or performance of this Agreement or
any document required by this Agreement or in connection with any
of the transactions contemplated thereby.
2.7. DISCLOSURE. No representation or warranty made by
Borrower in this Agreement, in any of the other Loan Documents,
or in any other document furnished in connection herewith or
therewith contains any misrepresentation of a material fact or
omits to state any material fact necessary to make the statements
herein or therein not misleading with respect to any material
facts. There is no fact known to the Borrower (and not known to
Lender) that materially and adversely affects, or that in the
future could reasonably be expected to materially and adversely
affect, the business, assets, financial condition, operations, or
prospects of Borrower.
III. BORROWER'S COVENANTS
3.1. INDEBTEDNESS. Neither Borrower nor any of its
Subsidiaries, without prior written consent of Lender, will
create, incur, assume, or suffer to exist liability for,
4
<PAGE>
contingently or otherwise (including, without limitation, any
guaranty of the indebtedness of another person), any indebtedness
for borrowed money if Borrower's consolidated debt to equity
ratio, determined in accordance with GAAP but after giving effect
to such indebtedness and (whether or not in accordance with GAAP)
treating any guaranty of the indebtedness of another person as an
indebtedness of Borrower in the amount covered by such guaranty,
shall be greater than 3 to 1, except that the following shall be
permitted in any event and shall not be included in the
calculation of the above debt to equity ratio:
(a) current indebtedness of Borrower to Gilman CMG,
Inc.;
(b) unsecured current liabilities incurred with trade
creditors in the ordinary course of business other than those
which are for money borrowed or are evidenced by bonds,
debentures, notes or other similar instruments;
(c) Money borrowed from banks or other financial
institutions in the ordinary course of business and solely for
the purpose of purchasing securities for the account of (i) any
Subsidiary of Borrower that is registered as a broker/dealer
under the Securities Exchange Act of 1934, as amended, or (ii)
customer margin accounts of any such subsidiary;
(d) notes or similar written instruments executed in
the ordinary course of business and solely for the purpose of
providing fidelity bond insurance and insurance of customer
accounts in excess of the coverage provided by the Securities
Investor Protection Corporation (SIPC); and
(e) purchase money mortgage obligations incurred in
the ordinary course of business that do not exceed $1,000,000 in
the aggregate of Borrower and its Subsidiaries, on a consolidated
basis, at any time.
For purposes of this Section 3.1, equity and
shareholder's equity shall include all preferred stock, whether
redeemable or nonredeemable, regardless of such preferred stock's
treatment under GAAP.
3.2. MINIMUM SHAREHOLDERS' EQUITY. During the term of this
Note, shareholder equity, excluding outstanding preferred stock,
and calculated for each fiscal quarter end period, shall not be
less than a sum equal to $7,000,000, plus 30% of net income for
all fiscal quarter end periods, plus 75% of net proceeds from
common stock equity issuances.
3.3. MINIMUM EARNINGS. During the term of this Note,
Borrower's reported net income, as defined by GAAP, plus
amortization expenses reported for the amortization of intangible
expenses associated with the acquisition of assets or equity, for
any four quarters within any consecutive six quarterly periods
of time, shall in the aggregate exceed $1,500,000 for such four
quarters taken together.
5
<PAGE>
3.4 MAINTENANCE OF BROKERAGE BUSINESS. During the term of
this Note, Borrower will continue to operate retail securities
brokerage offices through locations owned by Borrower's
affiliates, and through independently owned offices which are
correspondents of an affiliate of Borrower, and such business
will remain a substantial part of Borrower's corporate strategy
for growth.
3.5. KEY MAN LIFE INSURANCE. During the term of this Note
or any extension thereof, Borrower agrees to maintain key man
life insurance on Marshall Leeds in the amount of $1,000,000.
Such insurance policy shall name Lender as beneficiary and such
policy shall only be cancelable upon 30 days written notice to
Lender.
3.6. CORPORATE EXISTENCE AND QUALIFICATION. Borrower shall
do, or cause to be done, all things necessary to preserve, renew,
and keep in full force and effect its corporate existence and the
corporate existence of its wholly-owned Subsidiaries Corporate
Securities Group, Inc., JW Charles Securities, Inc., and JW
Charles Clearing Corp. (collectively, the "Principal
Subsidiaries') and their respective rights, licenses, and
permits; shall comply, and cause the Principal Subsidiaries to
comply, with all material laws applicable to it, operate it and
the Principal Subsidiaries' business in a proper manner and
substantially as presently operated or proposed to be operated;
and at all times shall maintain, preserve, and protect its
franchises and trade names and preserve its property used or
useful in the conduct of its or the Principal Subsidiaries'
business, and keep the same in good repair, working order, and
condition, and from time to time make, or cause to be made, all
needful and proper repairs, renewals, replacements, betterments,
and improvements thereto, so that the business carried on in
connection therewith may be properly and advantageously conducted
at all times.
3.7. FINANCIAL STATEMENTS; SEC REPORTS. Borrower shall keep
its books of account in accordance with GAAP and shall furnish to
Lender within 120 days after the close of its fiscal year a
balance sheet as of the close of such year, and statements of
income and retained earnings and statements of cash flows for
such year. Such statements shall be consolidated statements of
Borrower and its Subsidiaries and shall be audited and certified
by Borrower's independent public accountants. Within 60 days
after each fiscal quarter, Borrower shall furnish to Lender a
balance sheet and income statement certified by the chief
financial officer of Borrower. Borrower, with reasonable
promptness, shall furnish to Lender such other data as Lender may
reasonably request and will at all times and from time to time
permit Lender by or through any of its officers, authorized
agents, employees, attorneys, or accountants to inspect and make
extracts from Borrower's books and records.
Borrower shall also furnish Lender, within five (5) days of
the filing or delivery described below, a copy of all reports on
Forms 10-K, 10-Q and 8-K, and of all proxy statements and annual
or quarterly reports to shareholders, that Borrower files with
(or is required to deliver to) the Securities and Exchange
Commission pursuant to applicable provisions of the Securities
6
<PAGE>
Exchange Act of 1934, as amended, or regulations promulgated
thereunder.
3.8. TAXES AND CLAIMS. Borrower shall promptly pay and
discharge and shall cause its Subsidiaries to promptly pay and
discharge; (a) all taxes, assessments, and governmental charges
upon or against Borrower, its Subsidiaries, or their assets,
including payroll taxes, prior to the date on which penalties
attach thereto, unless and to the extent that such taxes are
being diligently contested in good faith and by appropriate
proceedings and appropriate reserves therefor have been
established; and (b) all lawful claims, whether for labor,
materials, supplies, services, or anything else that reasonably
might or could, if unpaid, become a lien or charge upon the
properties or assets of Borrower or its Subsidiaries unless and
to the extent only that the same are transferred to bond, being
diligently contested in good faith and by appropriate
proceedings, and appropriate reserves therefor have been
established.
3.9. BOOKS AND RECORDS. Borrower shall: (a) maintain at
all times true and complete books, records, and accounts in which
true and correct entries shall be made of its transactions in
accordance with GAAP; and (b) by means of appropriate quarterly
entries reflected in its accounts and in all financial statements
furnished pursuant to Section 3.7 of this Agreement, establish
proper liabilities and reserves for all taxes and proper
reserves, for depreciation, renewal and replacement,
obsolescence, and amortization of its properties and bad debts,
all in accordance with GAAP.
3.10. INSPECTION BY LENDER; AUDITS. Borrower shall allow
any authorized representative of Lender to visit and inspect any
of the properties of Borrower and its Subsidiaries, to examine
the books of account and other records and files of Borrower or
any of its Subsidiaries, to make copies thereof and to discuss
the affairs, business, finances, and accounts of Borrower or any
of its Subsidiaries with its officers and employees, all at such
reasonable times and as often as Lender may reasonably request.
3.11. PAY INDEBTEDNESS TO LENDER AND PERFORM OTHER
COVENANTS. Borrower shall make full and timely payments of the
principal of and interest on this Note and all other indebtedness
of Borrower to Lender hereunder, whether now existing or
hereafter arising, and duly comply with all the terms and
covenants contained in each of the instruments and documents
given to Lender pursuant to this Agreement (including, but not
limited to, the Warrants and Marketing Agreement ) at the times
and places and in the manner set forth herein.
3.12. LITIGATION. Borrower will promptly notify Lender
upon the commencement of any action, suit, claim, counterclaim,
or proceeding against or investigation of Borrower or any of its
Subsidiaries where the damage claim is in excess of $500,000 or
where the litigation may materially and adversely affect the
Borrower's or any of its Subsidiaries' business (except when the
alleged liability is fully covered by insurance, excluding
application of any standard deductible). If any such action,
7
<PAGE>
suit, claim, counterclaim, proceeding (where the alleged
liability is not so covered by insurance) involves an amount in
excess of $1,000,000 or where the litigation could reasonably be
expected to materially and adversely affect Borrower's or any of
its Subsidiaries' business, Borrower shall also provide Lender,
upon request, with an opinion of counsel concerning the
litigation or investigation and the probable outcome thereof.
3.13. REGULATORY ENFORCEMENT ACTIONS. Borrower shall
promptly notify Lender of the institution of: any investigation,
any indictment, the filing of any complaint, the issuance of any
cease and desist order or injunction, or the imposition of any
fine or non-monetary sanction, by any civil or criminal, federal
or civil, regulatory enforcement agency, district attorney's
office, attorney general's office or U.S. Attorney's office which
involves Borrower or any of its affiliates and could reasonably
be expected to have a material adverse effect on Borrower or one
of its Subsidiaries. Such notification shall include a
description of the event that led to such action by such
enforcement agency.
3.14. DEFAULTS OR ASSESSMENTS. Borrower shall promptly
notify Lender in writing of: (a) any material assessment by any
taxing authority for unpaid taxes as soon as borrower has
knowledge thereof and shall supply Lender with copies of all
notices from the Internal Revenue Service or any other taxing
authority with respect to any such matter; and (b) any default by
Borrower or any of its Subsidiaries in the performance of (or any
material modification of, or waivers granted in connection with)
any of the terms or conditions contained in any agreement,
mortgage, indenture, or instrument to which Borrower or any of
its Subsidiaries is a party or which is binding upon Borrower,
including, but not limited to, any default in, material
modification of, or waiver granted in connection with, the
Borrower's compliance with any agreement with Gilman CMG, Inc.,
and of any default by Borrower in the payment of any of its
indebtedness which default may, singly or in the aggregate, have
a material adverse effect on the business, assets, financial
condition, operations, or prospects of Borrower and its
Subsidiaries taken as a whole.
3.15. CHANGE OF NAME, PRINCIPAL PLACE OF BUSINESS, ETC.
Borrower shall notify Lender immediately of any change in the
name of Borrower, the principal place of business of Borrower,
the office where the books and records of Borrower are kept, or
any change in the registered agent of Borrower for the purpose of
service process.
3.16. MERGERS, ETC. Without Lender's consent, Borrower
shall not wind up, liquidate or dissolve itself, reorganize,
merge or consolidate with or into, or convey, sell, assign,
transfer, lease, or otherwise dispose of all or substantially all
of its assets to any person.
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IV. DEFAULT, RIGHT TO FUTURE ADVANCES AND REMEDIES UPON DEFAULT
4.1. DEFAULT. Borrower will be in default if any of the
following happens: (a) Borrower fails to make any payment
within five (5) business days after the same becomes due to
Lender hereunder ; (b) Borrower fails to comply with or to
perform when due any other term, obligation, covenant, or
condition contained in this Note or any agreement related to this
Note, including, but not limited to the Warrants and the
Marketing Agreement, or in any other agreement or loan Borrower
has with Lender, and such failure continues for fifteen (15)
business days after written notice to Borrower that Lender
considers such failure to be a default. (c) Borrower defaults
under any loan, extension of credit, security agreement, purchase
or sales agreement, or any other agreement, in favor of any other
creditor, including, but not limited to any default under any
agreements with Gilman CMG, Inc., or any person that may
materially and adversely affect any of Borrower's property or
Borrower's ability to repay this Note or perform Borrower's
obligations under this Note and such default continues for
fifteen (15) business days after written notice to Borrower that
Lender considers such default to be a default hereunder; (d)
Borrower becomes insolvent, a receiver is appointed for any part
of Borrower's property, Borrower makes a general assignment for
the benefit of creditors or any proceeding is commenced either by
Borrower or against Borrower under any bankruptcy or insolvency
laws; (e) Borrower, or any of its affiliates, becomes subject to
any civil or criminal order or decree by any regulatory agency
and that action has a material adverse effect on Borrower, and
Borrower fails to have such action effectively stayed,
discharged, vacated or set aside within thirty (30) days of the
institution of such action; (f) Any representation or statement
made or furnished to Lender by Borrower or on Borrower's behalf
is determined to be false or misleading in any material respect
at the time made or furnished; or (g) A material adverse change
occurs in Borrower's financial condition, or Lender in good faith
reasonably believes the prospect of payment or performance of the
indebtedness is materially impaired, provided that Lender
notifies Borrower in writing of such default and Borrower fails
to cure such default within ten (10) business days of such
notice.
4.2. BORROWER'S RIGHT TO ADVANCES. Borrower shall not be
entitled to any further Advances under the Line of Credit
evidenced by this Note if any of the following happens: (a)
Borrower fails to make any payment after the same becomes due to
Lender hereunder ; (b) Borrower fails to comply with or to
perform when due any other term, obligation, covenant, or
condition contained in this Note or any agreement related to this
Note, including, but not limited to the Warrants and the
Marketing Agreement, or in any other agreement or loan Borrower
has with Lender, (c) Borrower defaults under any loan, extension
of credit, security agreement, purchase or sales agreement, or
any other agreement, in favor of any other creditor, including,
but not limited to any default under any agreements with Gilman
CMG, Inc., or any person that may materially and adversely affect
9
<PAGE>
any of Borrower's property or Borrower's ability to repay this
Note or perform Borrower's obligations under this Note; (d)
Borrower becomes insolvent, a receiver is appointed for any part
of Borrower's property, Borrower makes a general assignment for
the benefit of creditors or any proceeding is commenced either by
Borrower or against Borrower under any bankruptcy or insolvency
laws; (e) Borrower, or any of its affiliates, becomes subject to
any civil or criminal enforcement order or decree by any
regulatory agency and that action has a material adverse effect
on Borrower; (f) Any representation or statement made or
furnished to Lender by Borrower or on Borrower's behalf is
determined to be false or misleading in any material respect at
the time made or furnished; or (g) A material adverse change
occurs in Borrower's financial condition, or Lender in good faith
reasonably believes the prospect of payment or performance of the
indebtedness is materially impaired. If the conditions
described herein are addressed by the Borrower in such a way that
default under Section 4.1 is avoided or cured, Borrower shall
thereafter be entitled to advances under this Note until the
reoccurrence of a condition described herein.
4.3. LENDER'S RIGHTS. Upon default, as set forth in Section
4.1, Lender may declare the entire unpaid principal balance on
this Note and all accrued unpaid interest immediately due,
without notice, and then Borrower will pay that amount. Upon
default, including failure to pay upon final maturity, Lender, at
its option, may also, if permitted under applicable law, increase
the variable interest rate on this Note to 3.000 percent points
over the Index. The interest rate will not exceed the maximum
rate permitted by applicable law. Lender may hire or pay someone
else to help collect this Note if Borrower does not pay.
Borrower also will pay Lender that amount. This includes,
subject to any limits under applicable law, Lender's reasonable
attorney's fees and Lender's legal expenses whether or not there
is a lawsuit, including reasonable attorneys' fees and legal
expenses for bankruptcy proceedings (including efforts to modify
or vacate any automatic stay or injunction), appeals, and any
anticipated post-judgment collection services. If not prohibited
by applicable law, Borrower also will pay any court costs, in
addition to all other sums provided by law.
V. MISCELLANEOUS
5.1. NOTICES. Any notice, consent, request, or other
communication to a party required or permitted hereunder shall be
deemed to have been duly given or made (a) on the date delivered
in person, (b) on the date indicated on the return receipt if
mailed postage prepaid, by certified or registered mail, with
return receipt requested, (c) on the date transmitted by
facsimile, if sent by 2:30 P.M. Eastern Time, for purposes of
Advances, and 4:30 P.M. Eastern Time for all other purposes, and
confirmation of receipt thereof is reflected or obtained, or (d)
if sent by Federal Express or other nationally recognized
overnight courier or overnight express U.S. Mail, with service
charges prepaid, then on the next business day after delivery to
the courier of mail (in time for and specifying next day
delivery). Such notices shall be sent to a party at its address
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<PAGE>
or facsimile number as follows, unless otherwise designated in
writing:
If to Borrower: JW Charles Financial Services, Inc.
1117 Perimeter Center West
Suite 500E
Atlanta, Georgia 30338
Attn: Joel Marks, CFO
Telecopy No. (404) 353-5873
If to Lender: Wilmington Trust Company
1100 North Market Street
Wilmington, Delaware 19890
Attn: Douglas Cornforth
Telecopy No. (302) 651-8010
5.2. RIGHTS AND REMEDIES NOT WAIVED. Lender may delay or
forego enforcing any of its rights or remedies under this Note
without losing them.
5.3. GOVERNING LAW. This Note has been delivered to Lender
and accepted by Lender in the State of Delaware. This Note shall
be governed by and construed in accordance with the laws of the
State of Delaware.
5.4. JURISDICTION. If there is a lawsuit, Borrower agrees
upon Lender's request to submit to the jurisdiction of the courts
of New Castle County, the State of Delaware.
5.5. JURY TRIAL WAIVER. Lender and Borrower hereby waive
the right to any jury trial in any action, proceeding, or
counterclaim brought by either Lender or Borrower against the
other.
5.6. WAIVER OF PRESENTMENT. Borrower and any other person
who signs, guarantees or endorses this Note, to the extent
allowed by law, waive presentment, demand for payment, protest
and notice of dishonor.
5.7. AMENDMENTS. Upon any change in the terms of this Note,
and unless otherwise expressly stated in writing, no party who
signs this Note, whether as maker, guarantor, accommodation maker
or endorser, shall be released from liability. All such parties
agree that Lender may renew or extend (repeatedly and for any
length of time) this loan, or release any party or guarantor or
collateral; and take any other action deemed necessary by Lender
without the consent of or notice to anyone. All such parties
also agree that Lender may modify this loan without the consent
of or notice to anyone other than the party with whom the
modification is made.
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<PAGE>
5.8. INTEGRATION. The Note contains the entire agreement
between the parties relating to the subject matter hereof and
supersedes all oral statements and prior writings with respect
thereto.
IN WITNESS WHEREOF, the parties have caused this Note and
Loan Agreement to be executed by their respective duly authorized
officers.
LENDER BORROWER
By: /s/ Douglas J. Cornforth By: /s/ Joel Marks
Title: Vice President Title: Chief Financial Officer
Date: 1/19/96 Date: 1/19/96
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<PAGE>
Exhibit 10(j)
THIS WARRANT AND THE SHARES OF COMMON STOCK ISSUABLE UPON THE
EXERCISE HEREOF CAN BE TRANSFERRED ONLY IN COMPLIANCE WITH THE
SECURITIES ACT OF 1933, AS AMENDED, AND APPLICABLE STATE
SECURITIES LAWS. THIS WARRANT AND SUCH SHARES MAY NOT BE SOLD,
TRANSFERRED OR ASSIGNED IN THE ABSENCE OF AN EFFECTIVE
REGISTRATION STATEMENT, UNLESS, IN THE OPINION OF COUNSEL TO THE
COMPANY, SUCH REGISTRATION IS NOT THEN REQUIRED.
JWCHARLES FINANCIAL SERVICES, INC.
980 North Federal Highway
Boca Raton, Florida 33432
COMMON STOCK PURCHASE WARRANT
Date of Issuance: Right to Purchase
January ___, 1996 400,000 Shares
Expiration Date:
December 31, 2002
THIS CERTIFIES THAT, for value received, the person named
immediately below,
W T INVESTMENTS, INC.
or the registered assigns of such person (the "Registered
Holder"), is entitled to purchase from JWCHARLES FINANCIAL
SERVICES, INC., a Florida corporation (the "Company"), the number
of shares of the Company's common stock, $.001 par value per
share, set forth above, subject to adjustment pursuant to Section
5 hereof, at the Exercise Price (as defined in subsection 3.1)
per Share, subject to adjustment as set forth in Section 4 hereof
(the "Exercise Price').
The amount and kind of securities purchasable pursuant to
the rights granted under this Warrant and the purchase price for
such securities are subject to adjustment pursuant to the
provisions contained in this Warrant. This Warrant is also
subject to the following provisions:
1.
CERTAIN DEFINITIONS
As used in this Warrant, the following terms have the
meanings set forth below:
"AFFILIATE" means any corporation directly under common
control with the Registered Holder.
<PAGE>
"COMMISSION" means the Securities and Exchange Commission.
"COMMON STOCK" means the Company's common stock, $.001 par
value per share, as constituted on the Date of Issuance.
However, upon the occurrence of certain events prescribed herein
that affect the Common Stock otherwise issuable upon exercise of
this Warrant, Common Stock shall mean Warrant Stock.
"COMMON STOCK DEEMED OUTSTANDING" means, at any given time,
the Weighted Average Common Stock Outstanding plus the number of
shares of Common Stock deemed to be outstanding pursuant to
Section 3 of this Warrant
"DATE OF ISSUANCE" is the date set forth on the front page
of this Warrant, and the terms "date hereof," "date of this
Warrant," and similar expressions shall be deemed to refer to the
Date of Issuance of this Warrant.
"EBT" means earnings before income taxes determined in
accordance with GAAP.
"EXERCISE PERIOD" means the period of time commencing on the
Date of Issuance and ending at 12:00 Midnight, Eastern Time, on
December 31, 2002.
"GAAP" means generally accepted accounting principles as
applied in the United States and on a basis with respect to the
Company that is consistent for or within each period affected.
"MARKET PRICE" means as to any security (i) the average of
the closing prices of such security's sales on the principal
domestic securities exchange on which such security may at the
time be listed (but only if such exchange, as opposed to The
Nasdaq Stock Market, is the principal trading market for such
security), or (ii) if there have been no sales on any such
exchange on any day, the average of the highest bid and lowest
asked prices on such exchange at the end of such day, or (iii) if
on any day such security is not so listed and traded, the average
of the representative bid and asked prices quoted in The Nasdaq
Stock Market as of the close of trading in New York City on such
day, or, if on any day such security is not quoted in The Nasdaq
Stock Market, the average of the high and low bid and asked
prices on such day in the domestic over-the-counter market as
reported by the National Quotation Bureau, Incorporated, or any
similar successor organization, in each such case averaged over a
period of 20 consecutive business days consisting of the business
day immediately preceding the day as of which "Market Price" is
being determined and the 19 consecutive business days prior to
such day; PROVIDED that if such security is listed on any
domestic securities exchange or quoted in The Nasdaq Stock
Market, the term "business day" or "business days" as used in
this sentence means a day or days, as applicable, on which such
exchange or The Nasdaq Stock Market is open for trading or
quotation, as the case may be. If at any time such security is
not listed on any domestic securities exchange or quoted in The
Nasdaq Stock Market or the domestic over-the-counter market, the
"Market Price" will be the fair value thereof determined jointly
by the Company and the Registered Holder; PROVIDED that if such
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parties are unable to reach agreement, such fair value will be
determined by an appraiser jointly selected by the Company and
the Registered Holder.
"THE NASDAQ STOCK MARKET" means the Nasdaq Inter-Dealer
Quotation System or such other similar inter-dealer quotation
system as may in the future be used generally by members of the
National Association of Securities Dealers, Inc. for
over-the-counter transactions in securities.
"PERSON" means an individual, a partnership, a corporation,
a trust, a joint venture, an unincorporated organization, and a
government or any department or agency thereof.
"TOTAL REVENUES" mean the amount thereof for the Company
determined in accordance with GAAP.
"WARRANT STOCK" means shares of the Company's authorized but
unissued Common Stock issued or issuable upon exercise of this
Warrant or any other of the Warrants; PROVIDED that if there is a
change such that the securities issuable upon exercise of a
Warrant are issued by an entity other than the Company, or there
is a change in the class of securities so issuable, then the term
"Warrant Stock" will mean one share of the security issuable upon
exercise of the Warrant if such security is issuable in shares,
or will mean the smallest unit in which such security is issuable
if such security is not issuable in shares.
"WARRANT" mean this Warrant providing for the purchase of up
to 400,000 shares of Common Stock, subject to adjustment as
provided herein, and all common stock purchase warrants issued in
exchange or substitution for this Warrant or any such other
common stock purchase warrant issued pursuant to the terms hereof
or thereof, as the case may be.
"WEIGHTED AVERAGE COMMON STOCK OUTSTANDING" means, at any
given time, the number of shares of Common Stock deemed to be
outstanding in accordance with GAAP as of the end of the
Company's most recent fiscal quarter ended.
2.
EXERCISE OF WARRANT
2.1 EXERCISE PERIOD. The Registered Holder may exercise
this Warrant, in whole or in part (but not as to a fractional
share), at any time and from time to time, during the Exercise
Period.
2.2 EXERCISE PROCEDURE.
(a) This Warrant will be deemed to have been exercised
at such time as the Company has received all of the following
items (the "Exercise Date"):
(i) a completed Exercise Agreement, as described
below, executed by the Registered Holder
exercising all or part of the purchase rights
represented by this Warrant;
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<PAGE>
(ii) this Warrant (subject to delivery by the Company
of a new Warrant with respect to any unexercised
portion, as provided in Section 2.2(b)); and
(iii) a certified check or other certified funds
payable to the Company in an amount equal to the
product of the Exercise Price multiplied by the
number of shares of Warrant Stock being purchased
upon such exercise.
(b) Certificates for shares of Warrant Stock purchased
upon exercise of this Warrant will be delivered by the Company to
the Registered Holder within ten days after the Exercise Date.
Unless this Warrant has expired or all of the purchase rights
represented hereby have been exercised, the Company will prepare
a new Warrant representing the rights formerly represented by
this Warrant that have not expired or been exercised. The
Company will, within such ten-day period, deliver such new
Warrant to the Registered Holder.
(c) The Warrant Stock issuable upon the exercise of
this Warrant will be deemed to have been issued to the Registered
Holder on the Exercise Date, and the Registered Holder will be
deemed for all purposes to have become the record holder of such
Warrant Stock on the Exercise Date.
(d) The issuance of certificates for shares of Warrant
Stock upon exercise of this Warrant will be made without charge
to the Registered Holder for any issuance tax in respect thereof
or any other cost incurred by the Company in connection with such
exercise and the related issuance of shares of Warrant Stock;
PROVIDED, HOWEVER, that the Company shall not be required to pay
any tax that may be payable in respect of any transfer involved
in the issuance and delivery of any certificate or instrument in
a name other than that of the Registered Holder of this Warrant,
and the Company shall not be required to issue or deliver any
such certificate or instrument unless and until the Person or
Persons requesting the issue thereof shall have paid to the
Company the amount of such tax or shall have established to the
satisfaction of the Company that such tax has been paid.
(e) The Company will not close its books for the
transfer of this Warrant or of any of the securities issuable
upon the exercise of this Warrant in any manner that interferes
with the timely exercise of this Warrant. The Company will from
time to time take all such action as may be necessary to assure
that the par value per share of the unissued Warrant Stock
acquirable upon exercise of this Warrant is at all times equal to
or less than the Exercise Price then in effect.
2.3 EXERCISE AGREEMENT. The Exercise Agreement will be
substantially in the form set forth as Exhibit I hereto.
2.4 FRACTIONAL SHARES. If a fractional share of Warrant
Stock would be issuable upon exercise of the rights represented
by this Warrant, the Company will, within 20 days after the
Exercise Date, deliver to the Registered Holder a check payable
to the Registered Holder, in lieu of such fractional share, in an
amount equal to the Market Price of such fractional share as of
the close of business on the Exercise Date.
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<PAGE>
3.
EXERCISE PRICE
3.1 GENERAL.
(a) The exercise price per Share shall be the greater
of $5.50 or an amount, calculated on March 31 of each year during
the Exercise Period based on the Company's audited financial
statements for its immediately preceding fiscal year, equal to
(i) the sum of (A) Total Revenues multiplied by .175 PLUS (B) EBT
multiplied by 2.5 DIVIDED BY (ii) the number of shares of
Weighted Average Common Stock Outstanding. In order to prevent
dilution of the rights granted under this Warrant, the Exercise
Price will also be subject to adjustment from time to time
pursuant to this Section 3.
(b) If and whenever the Company issues or sells, or in
accordance with subsection 3.2 is deemed to have issued or sold,
any shares of its Common Stock for a consideration per share less
than the lesser of ninety percent (90%) of the Market Price per
share of Common Stock, on the one hand, and the Exercise Price in
effect immediately prior to the time of such issuance or sale, on
the other hand (such lesser price being hereinafter referred to
as the "Antidilution Strike Price"), then immediately upon such
issuance or sale the Exercise Price will be reduced to a price
determined by multiplying the Exercise Price in effect
immediately prior to the issuance or sale by a fraction, the
numerator of which shall be the sum of (i) the number of shares
of Common Stock outstanding prior to the issuance or sale PLUS
(ii) the number of shares of Common Stock (in terms of Warrant
Stock issuable upon an exercise of this Warrant) that the maximum
aggregate amount receivable by the Company upon such issuance or
sale would purchase at the Antidilution Strike Price effective
immediately prior to the issuance or sale, and the denominator of
which shall be the number of shares of Common Stock Deemed
Outstanding immediately after such issuance or sale.
(c) The following securities or transactions shall be
excluded from the operation of paragraph (b) of this subsection
3.1 and subsection 3.2:
(i) The existence and any exercise of any option,
warrant, or other right to purchase Common Stock,
or the conversion into or exchange for Common
Stock of any security of the Company, that is
outstanding on the Issuance Date.
(ii) Any grant or exercise of options for Common Stock
under the Company's 1990 Stock Option Plan.
3.2 EFFECT ON EXERCISE PRICE OF CERTAIN EVENTS. For
purposes of determining the adjusted Exercise Price under
subsection 3.1 above, the following provisions will be
applicable:
(a) ISSUANCE OF RIGHTS OR OPTIONS. If the Company in any
manner grants any rights or options to subscribe for or to
purchase Common Stock or any stock or other securities
convertible into or exchangeable for Common Stock (such rights or
options being herein called "Options" and such convertible or
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<PAGE>
exchangeable stock or securities being herein called "Convertible
Securities") and the price per share for which Common Stock is
issuable upon the exercise of such Options or upon conversion or
exchange of such Convertible Securities is less than the
Antidilution Strike Price effective immediately prior to the time
of the granting of such Options, then the total maximum number of
shares of Common Stock issuable upon the exercise of such Options
or upon conversion or exchange of the total maximum amount of
such Convertible Securities issuable upon the exercise of such
Options will be deemed to be outstanding and to have been issued
and sold by the Company for such price per share. For purposes
of this paragraph, the "price per share for which Common Stock is
issuable upon exercise of such Options or upon conversion or
exchange of such Convertible Securities" will be determined by
dividing (i) the total amount, if any, received or receivable by
the Company as consideration for the granting of such Options,
plus the minimum aggregate amount of additional consideration
payable to the Company upon exercise of all such Options, plus,
in the case of Options that relate to Convertible Securities, the
minimum aggregate amount of additional consideration, if any,
payable to the Company upon the issuance or sale of such
Convertible Securities and the conversion or exchange thereof, by
(ii) the total maximum number of shares of Common Stock issuable
upon the exercise of such Options or upon the conversion or
exchange of all Convertible Securities issuable upon the exercise
of such Options. Except as otherwise provided in paragraphs (c)
and (d) below, no adjustment of the Exercise Price will be made
when Convertible Securities are actually issued upon the exercise
of such Options or when Common Stock is actually issued upon the
exercise of such Options or the conversion or exchange of such
Convertible Securities.
(b) ISSUANCE OF CONVERTIBLE SECURITIES. If the
Company in any manner issues or sells any Convertible Securities,
and the price per share for which Common Stock is issuable upon
such conversion or exchange is less than the Antidilution Strike
Price effective immediately prior to the time of such issuance or
sale, then the maximum number of shares of Common Stock issuable
upon conversion or exchange of all such Convertible Securities
will be deemed to be outstanding and to have been issued and sold
by the Company for such price per share. For the purposes of
this paragraph, the "price per share for which Common Stock is
issuable upon such conversion or exchange" will be determined by
dividing (i) the total amount received or receivable by the
Company as consideration for the issuance or sale of such
Convertible Securities, plus the minimum aggregate amount of
additional consideration, if any, payable to the Company upon the
conversion or exchange thereof, by (ii) the total maximum number
of shares of Common Stock issuable upon the conversion or
exchange of all such Convertible Securities. Except as otherwise
provided in paragraphs (c) and (d) below, no adjustment of the
Exercise Price will be made when Common Stock is actually issued
upon the conversion or exchange of such Convertible Securities,
and if any such issuance or sale of such Convertible Securities
is made upon exercise of any Options for which adjustments of the
Exercise Price had been or are to be made pursuant to other
provisions of this Section 3, no further adjustment of the
Exercise Price will be made by reason of such issuance or sale.
(c) CHANGE IN OPTION PRICE OR CONVERSION RATE. If the
purchase price provided for in any Options, the additional
consideration, if any, payable upon the conversion or exchange of
any Convertible Securities, or the rate at which any Convertible
Securities are convertible into or exchangeable for Common Stock
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<PAGE>
changes at any time (other than under or by reason of provisions
that are designed to protect against dilution of the type set
forth in this Section 3 and that have no more favorable effect on
the holders of such Options or Convertible Securities than this
Section 3 would have if this Section 3 were included in such
Options or Convertible Securities), then the Exercise Price in
effect at the time of such change will be readjusted to the
Exercise Price that would have been in effect at such time had
such Options or Convertible Securities still outstanding provided
for such changed purchase price, additional consideration, or
changed conversion rate, as the case may be, at the time
initially granted, issued, or sold; such adjustment of the
Exercise Price will be made whether the result thereof is to
increase or reduce the Exercise Price then in effect under this
Warrant, provided that no such adjustment shall increase the
Exercise Price above the initial Exercise Price hereof.
(d) TREATMENT OF TERMINATED OR EXPIRED OPTIONS AND
CONVERTIBLE SECURITIES. Upon the expiration or the termination
of any Option or of any right to convert or exchange any
Convertible Security, without the exercise of such Option or
right, the Exercise Price then in effect hereunder will be
adjusted to the Exercise Price that would have been in effect at
the time of such expiration or termination had such Option or
Convertible Security never been issued, but such subsequent
adjustment shall not affect the number of shares of Common Stock
issued upon any exercise of this Warrant prior to the date such
adjustment is made.
(e) CALCULATION OF CONSIDERATION RECEIVED. If any
Common Stock, Options, or Convertible Securities are issued or
sold or deemed to have been issued or sold for consideration that
includes cash, then the amount of cash consideration actually
received by the Company will be deemed to be the cash portion
thereof. If any Common Stock, Options, or Convertible Securities
are issued or sold or deemed to have been issued or sold for a
consideration part or all of which is other than cash, then the
amount of the consideration other than cash received by the
Company will be the fair value of such consideration, except
where such consideration consists of securities, in which case
the amount of consideration received by the Company will be the
Market Price thereof as of the date of receipt. If any Common
Stock, Options, or Convertible Securities are issued in
connection with any merger or consolidation in which the Company
is the surviving corporation, then the amount of consideration
therefor will be deemed to be the fair value of such portion of
the net assets and business of the non-surviving corporation as
is attributable to such Common Stock, Options, or Convertible
Securities, as the case may be.
(f) INTEGRATED TRANSACTIONS. If any Option is issued
in connection with the issuance or sale of other securities of
the Company, together comprising one integrated transaction in
which no specific consideration is allocated to such Option by
the parties thereto, the Option will be deemed to have been
issued without consideration.
(g) TREASURY SHARES. The number of shares of Common
Stock Deemed Outstanding at any given time does not include
shares owned or held by or for the account of the Company, and
the disposition of any shares so owned or held will be considered
an issuance or sale of Common Stock.
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3.3 SUBDIVISION OR COMBINATION OF COMMON STOCK; AND STOCK
DIVIDENDS, ETC. If the Company shall at any time after the date
hereof (a) issue any shares of Common Stock or Convertible
Securities, or any rights to purchase Common Stock or Convertible
Securities, as a dividend or other distribution upon Common
Stock, (b) issue any shares of Common Stock, in subdivision of
outstanding shares of Common Stock by reclassification or
otherwise, or (c) combine outstanding shares of Common Stock, by
reclassification or otherwise, then the Exercise Price that would
apply if purchase rights hereunder were being exercised
immediately prior to such action by the Company shall be adjusted
by multiplying it by a fraction, the numerator of which shall be
the number of shares of Weighted Average Common Stock Outstanding
immediately prior to such dividend or other distribution,
subdivision, or combination and the denominator of which shall be
the number of shares of Weighted Average Common Stock Outstanding
immediately after such dividend, subdivision, or combination.
3.4 CERTAIN DIVIDENDS OR DISTRIBUTIONS. If the Company
shall declare a dividend or other distribution upon the Common
Stock payable otherwise than out of earnings or earned surplus
AND otherwise than in Common Stock or Convertible Securities, the
Exercise Price that would apply if purchase rights under the
Warrants were being exercised immediately prior to the
declaration of such dividend or distribution shall be reduced by
an amount equal, in the case of a dividend or other distribution
in cash, to the amount thereof payable per share of the Common
Stock or, in the case of any other dividend or distribution, to
the fair value of such dividend or distribution per share of the
Common Stock as determined in good faith by the Board of
Directors of the Company. For purposes of the foregoing, a
dividend or distribution other than in cash shall be considered
payable out of earnings or earned surplus only to the extent that
such earnings or earned surplus are charged with an amount equal
to the fair value of such dividend or distribution as determined
in good faith by the Board of Directors of the Company. Such
reductions shall take effect as of the date on which a record is
taken for the purpose of such dividend or distribution, or, if a
record is not taken, the date as of which the holders of Common
Stock of record entitled to such dividend or distribution are to
be determined.
3.5 NO DE MINIMIS ADJUSTMENTS. No adjustment of the
Exercise Price shall be made if the amount of such adjustment
would be less than five cents per share, but in such case any
adjustment that otherwise would be required to be made shall be
carried forward and shall be made at the time and together with
the next subsequent adjustment that, together with any adjustment
or adjustments so carried forward, shall amount to not less than
five cents per share.
4.
ADJUSTMENT OF NUMBER OF
SHARES ISSUABLE UPON EXERCISE
If the Company issues or sells, or, in accordance with
Section 3 hereof, is deemed to have issued or sold, any shares of
its Common Stock for a consideration per share below the
Antidilution Strike Price, then upon each adjustment of the
Exercise Price pursuant to Section 3 hereof, the Registered
Holder of this Warrant shall thereafter (until another such
adjustment) be entitled to purchase, at the adjusted Exercise
Price in effect on the date purchase rights under this Warrant
are exercised, the number of shares of Warrant Stock, calculated
to the nearest 1/100th share, determined by (a) multiplying the
-8-<PAGE>
number of shares of Warrant Stock purchasable hereunder
immediately prior to the adjustment of the Exercise Price by the
Exercise Price in effect immediately prior to such adjustment,
and (b) dividing the product so obtained by the adjusted Exercise
Price in effect on the date of such exercise. The provisions of
subsection 2.4 shall apply, however, so that no fractional share
of Warrant Stock shall be issued upon exercise of this Warrant.
5.
EFFECT OF REORGANIZATION, RECLASSIFICATION
CONSOLIDATION, MERGER, OR SALE
If at any time while this Warrant is outstanding there shall
be any reorganization or reclassification of the capital stock of
the Company (other than a subdivision or combination of shares
provided for in subsection 3.3 hereof), any consolidation or
merger of the Company with another corporation (other than a
consolidation or merger in which the Company is the surviving
entity and which does not result in any change in the Common
Stock), or any sale or other disposition by the Company of all or
substantially all of its assets to any other corporation, then
the Registered Holder of this Warrant shall thereafter upon
exercise of this Warrant be entitled to receive the number of
shares of stock or other securities or property of the Company,
or of the successor corporation resulting from such consolidation
or merger, as the case may be, to which the Common Stock (and any
other securities and property) of the Company, deliverable upon
the exercise of this Warrant, would have been entitled upon such
reorganization, reclassification of capital stock, consolidation,
merger, sale, or other disposition if this Warrant had been
exercised immediately prior to such reorganization,
reclassification of capital stock, consolidation, merger, sale,
or other disposition. In any such case, appropriate adjustment
(as determined in good faith by the Board of Directors of the
Company) shall be made in the application of the provisions set
forth in this Warrant with respect to the rights and interests
thereafter of the Registered Holder of this Warrant to the end
that the provisions set forth in this Warrant (including those
relating to adjustments of the Exercise Price and the number of
shares issuable upon the exercise of this Warrant) shall
thereafter be applicable, as near as reasonably may be, in
relation to any shares or other property thereafter deliverable
upon the exercise hereof as if this Warrant had been exercised
immediately prior to such reorganization, reclassification of
capital stock, consolidation, merger, sale, or other disposition
and the Registered Holder hereof had carried out the terms of the
exchange as provided for by such reorganization, reclassification
of capital stock, consolidation, or merger. If in any such
reorganization, reclassification, consolidation, or merger,
additional shares of Common Stock shall be issued in exchange,
conversion, substitution, or payment, in whole or in part, for or
of a security of the Company other than Common Stock, any such
issue shall be treated as an issue of Common Stock covered by the
provisions of Section 3, with the amount of the consideration
received upon the issue thereof being determined in good faith by
the Board of Directors of the Company. The Company shall not
effect any such reorganization, consolidation, or merger unless,
upon or prior to the consummation thereof, the successor
corporation shall assume by written instrument the obligation to
deliver to the Registered Holder hereof such shares of stock or
other securities, cash, or property as such Holder shall be
entitled to purchase in accordance with the foregoing provisions.
-9-<PAGE>
Notwithstanding any other provisions of this Warrant, in the
event of sale or other disposition of all or substantially all of
the assets of the Company as a part of a plan for liquidation of
the Company, all rights to exercise the Warrant shall terminate
60 days after the Company gives written notice to the Registered
Holder of this Warrant that such sale or other disposition has
been consummated.
6.
NOTICE OF ADJUSTMENT
Immediately upon any adjustment of the Exercise Price, or
increase or decrease in the number of shares of Common Stock
purchasable upon exercise of this Warrant, the Company will send
written notice thereof to the Registered Holder, stating the
adjusted Exercise Price and the increased or decreased number of
shares purchasable upon exercise of this Warrant and setting
forth in reasonable detail the method of calculation for such
adjustment and increase or decrease. When appropriate, such
notice may be given in advance and included as part of any notice
required to be given pursuant to Section 7 below.
7.
PRIOR NOTICE OF CERTAIN EVENTS
If at any time:
(a) the Company shall pay any dividend payable in
stock upon its Common Stock or make any distribution (other
than cash dividends) to the holders of its Common Stock;
(b) the Company shall offer for subscription PRO RATA
to the holders of its Common Stock any additional shares of
stock of any class or any other rights;
(c) there shall be any reorganization or
reclassification of the capital stock of the Company, any
consolidation or merger of the Company with another
corporation (other than a direct or indirect subsidiary of
the Company), or a sale or disposition of all or
substantially all its assets; or
(d) there shall be a voluntary or involuntary
dissolution, liquidation, or winding up of the Company,
then, in each such case, the Company shall give prior written
notice, by hand delivery or by certified mail, postage prepaid,
addressed to the Registered Holder of this Warrant at the address
of such holder as shown on the books of the Company, of the date
on which (i) the books of the Company shall close or a record
shall be taken for such stock dividend, distribution, or
subscription rights or (ii) such reorganization,
reclassification, consolidation, merger, sale, dissolution,
liquidation, or winding up shall take place, as the case may be.
A copy of each such notice shall be sent simultaneously to each
transfer agent of the Company's Common Stock. Such notice shall
also specify the date as of which the holders of Common Stock of
record shall participate in said dividend, distribution, or
subscription rights or shall be entitled to exchange their Common
-10-
<PAGE>
Stock for securities or other property deliverable upon such
reorganization, reclassification, consolidation, merger, sale,
dissolution, liquidation, or winding up, as the case may be.
Such written notice shall be given at least 30 days prior to the
record date or the effective date, whichever is earlier, of the
subject action or other event.
8.
RESERVATION OF COMMON STOCK
The Company will at all times reserve and keep available for
issuance upon the exercise of Warrants such number of its
authorized but unissued shares of Common Stock as will be
sufficient to permit the exercise in full of all outstanding
Warrants, and upon such issuance such shares of Common Stock will
be validly issued, fully paid, and nonassessable.
9.
NO STOCKHOLDER RIGHTS OR OBLIGATION
This Warrant will not entitle the holder hereof to any
voting rights or other rights as a stockholder of the Company.
No provision of this Warrant, in the absence of affirmative
action under Section 2.2 hereof by the Registered Holder to
purchase Warrant Stock, and no enumeration in this Warrant of the
rights or privileges of the Registered Holder, will give rise to
any obligation of such Holder for the Exercise Price of Warrant
Stock acquirable by exercise hereof or as a stockholder of the
Company.
10.
NON-TRANSFERABILITY
This Warrant and all rights hereunder are not transferable,
in whole or in part, except to an Affiliate. The Warrant Stock
issued upon exercise hereof may not be offered, sold, or
transferred except in compliance with the Securities Act of 1933,
as amended (the "Act"), and any applicable state securities laws,
and then only against receipt of an agreement of the Person to
whom such offer or sale is made to comply with the provisions of
this Section 10 with respect to any resale or other disposition
of such securities; PROVIDED that no such agreement shall be
required from any Person purchasing any security underlying this
Warrant pursuant to a registration statement effective under the
Act. The Registered Holder of this Warrant agrees that, prior to
the disposition of any security purchased on the exercise hereof
under circumstances that might require registration of such
security under the Act, or any similar statute then in effect,
the Registered Holder shall give written notice to the Company,
expressing its intention as to such disposition. Promptly upon
receiving such notice, the Company shall present a copy thereof
to its securities counsel. If, in the opinion of such counsel
(or of other securities counsel reasonably acceptable to the
Company), the proposed disposition does not require registration
of such security under the Act, or any similar statute then in
effect, the Company shall, as promptly as practicable, notify the
Registered Holder of such opinion, whereupon the Registered
Holder shall be entitled to dispose of such security in
accordance with the terms of the notice delivered by the
Registered Holder to the Company. The above agreement by the
-11-
<PAGE>
Registered Holder of this Warrant shall not be deemed to limit or
restrict in any respect the exercise of rights set forth in
Section 11 hereof.
11.
REGISTRATION RIGHTS
11.1 "PIGGYBACK RIGHTS". If at any time during the Exercise
Period, the Company shall prepare and file one or more
registration statements under the Act with respect to a public
offering of equity or debt securities of the Company, or of any
such securities of the Company held by its security holders, the
Company will include in any such registration statement such
information as is required, and such number of the Warrant Stock
issuable, or previously issued and then outstanding, pursuant to
the exercise of this Warrant (collectively, the "Warrant
Securities") held by the Registered Holders thereof or their
respective designees or transferees as may be requested, to
permit a public offering of the Warrant Securities so requested;
PROVIDED, HOWEVER, that if, in the written opinion of the
Company's managing underwriter, if any, for such offering, the
inclusion of the Warrant Securities requested to be registered,
when added to the securities being registered by the Company or
the selling security holder(s), would exceed the maximum amount
of the Company's securities that can be marketed without
otherwise materially and adversely affecting the entire offering,
then the Company may exclude from such offering all or any
portion of the Warrant Securities requested to be so registered,
but only if no securities are included in such registration
statement other than securities being sold for the account of the
Company or by Persons pursuant to the exercise of "demand"
registration rights or of "piggyback" registration rights granted
prior to the Issuance Date which are expressly senior to those of
the Registered Holder, and then only on a pro rata basis with
respect to all securities not being sold by the Company or by
Persons exercising such "demand" or senior "piggyback"
registration rights.. The Company shall bear all fees and
expenses incurred by it in connection with the preparation and
filing of such registration statement. In the event of such a
proposed registration, the Company shall furnish the then
Registered Holders of Warrant Securities with not less than
thirty (30) days' written notice prior to the proposed or
expected effectiveness date of such registration statement. Such
notice shall continue to be given by the Company to Registered
Holders of Warrant Securities, with respect to subsequent
registration statements filed by the Company, until such time as
all of the Warrant Securities have been registered or may be sold
by the Registered Holders thereof without registration under the
Act or applicable state securities laws and regulations, and
without limitation as to volume, pursuant to Rule 144 of the Act
or any succeeding provision. The holders of Warrant Securities
shall exercise the rights provided for in this subsection 11.1 by
giving written notice to the Company, within twenty (20) days of
receipt of the Company's notice provided for herein.
-12-
<PAGE>
11.2 CERTAIN PROCEDURES AND REQUIREMENTS OF REGISTERED
HOLDER.
(a) INFORMATION TO BE FURNISHED BY REGISTERED HOLDER. In
connection with the registration of the Warrant Securities, and
as a condition to the Company's obligations under subsection
11.1, the Registered Holder will furnish to the Company in
writing such information with respect to such Registered Holder
and its proposed disposition as shall be reasonably necessary in
order to assure compliance with the Act and with other federal
and applicable state securities laws. Without limiting the
generality of the foregoing, in connection with an underwritten
public offering, such Registered Holder electing such method of
disposition agrees to enter into, as required, a written
agreement with the managing underwriter in such form and
containing such provisions as is customary in the securities
business for such an arrangement, and to complete and execute all
questionnaires, powers of attorney, indemnities, and other
documents or instruments reasonably required under such terms of
the underwriting arrangements.
(b) EXPENSES OF REGISTERED HOLDER. All underwriting
discounts and selling commissions applicable to the sale of any
Warrant Securities as well as fees and expenses of any counsel,
accountant, or other advisor to the Registered Holder shall be
borne by the Registered Holder.
(c) CERTAIN RESTRICTIONS. Notwithstanding anything to the
contrary contained in this Section 11, if there is a firm
commitment underwritten offering of securities for the Company
pursuant to a registration covering shares of the Warrant
Securities, and if the Registered Holder does not elect to sell
its Warrant Securities to the underwriters of the Company's
securities in connection with such offering, then the Registered
Holder (if requested by the managing underwriter) shall agree to
refrain from selling any of its Warrant Securities that are
otherwise registered pursuant to this Section 11 during the
period in which the underwriting syndicate, as such, participates
in the after-market. Such Registered Holder shall, however, be
entitled to sell such securities, in any event, commencing on the
120th day after the effective date of such registration
statement, if then lawful to do so under applicable securities
laws and rules of the Commission.
(d) INDEMNIFICATION BY REGISTERED HOLDER. In connection
with a registration of the Warrant Securities under the Act
pursuant to this Section 11, the Company and the Registered
Holder shall enter into customary indemnification agreements with
regard to losses, claims, damages or liabilities arising
therefrom. In addition, if such registration relates to an
underwritten offering, such indemnification agreements shall
include the underwriters thereof as a party thereto.
11.3 SURVIVAL. The rights and obligations set forth in this
Section 11 shall survive the exercise and surrender of this
Warrant.
-13-
<PAGE>
12.
MISCELLANEOUS
12.1 AMENDMENT AND WAIVER. Except as otherwise provided
herein, the provisions of the Warrant may be amended, and the
Company may take any action herein prohibited or omit to perform
any act herein required to be performed by it, only if the
Company has obtained the prior written consent of the Registered
Holder.
12.2 NOTICES. Any notices required to be sent to a
Registered Holder of this Warrant or of any Warrant Stock
purchased upon the exercise hereof will be delivered to the
address of such Registered Holder shown on the books of the
Company. All notices referred to herein will be delivered in
person or sent by registered or certified mail, postage prepaid,
and will be deemed to have been given when so delivered in person
or on the third business day following the date so sent by mail.
12.3 DESCRIPTIVE HEADINGS; GOVERNING LAW. The descriptive
headings of the sections and paragraphs of this Warrant are
inserted for convenience only and do not constitute a part of
this Warrant. The construction, validity, and interpretation of
this Warrant will be governed by the laws of the State of
Florida.
IN WITNESS WHEREOF, the Company has caused this Warrant to
be executed and attested by its duly authorized officers under
its corporate seal.
JWCHARLES FINANCIAL SERVICES,
INC.
[SEAL] By: /s/ Marshall Leeds
Name: Marshall Leeds
Title: President
Attest:
/s/ Joel Marks
Secretary or Assistant Secretary
-14-<PAGE>
EXHIBIT I
EXERCISE AGREEMENT
To: Dated:
The undersigned Record Holder, pursuant to the
provisions set forth in the within Warrant, hereby subscribes for
and purchases _____ shares covered by such Warrant and herewith
makes full cash payment of $__________________ for such Warrant
Stock at the Exercise Price provided by such Warrant.
______________________________
(Signature)
______________________________
(Print or type name)
______________________________
(Address)
______________________________
______________________________
NOTICE: The signature on this Exercise Agreement must
correspond with the name as written upon the face of the within
Warrant, in every particular, without alteration, enlargement, or
any change whatsoever, and must be guaranteed by a bank, other
than a saving bank, having an office or correspondent in New
York, New York, Boca Raton or Miami, Florida, or Atlanta,
Georgia, or by a firm having membership on a registered national
securities exchange and an office in New York, New York, Boca
Raton or Miami, Florida, or Atlanta, Georgia.
SIGNATURE GUARANTEE
Authorized Signature:____________________________________________
Name of Bank or Firm:____________________________________________
Dated:___________________________________________________________
<PAGE>
Exhibit 10(k)
MARKETING AGREEMENT
OF
WILMINGTON TRUST FSB
AND
J W CHARLES FINANCIAL SERVICES, INC.
<PAGE>
MARKETING AGREEMENT
OF
WILMINGTON TRUST FSB
AND
J W CHARLES FINANCIAL SERVICES, INC.
This Marketing Agreement is entered into by and between
Wilmington Trust FSB ("WT") and JW Charles Financial Services,
Inc. ("JWC") as of the 19th day of January, 1996.
WHEREAS, WT is in the business of providing a variety of
services, including, but not limited to, precious metals,
fiduciary, mutual fund, banking, trust and investment services
(the "Products and Services");
WHEREAS, JWC has certain customers to whom WT would like to
offer Products and Services; and
WHEREAS, the parties desire to enter into an agreement
whereby JWC will refer the Products and Services to certain of
its customers;
NOW THEREFORE, in consideration of the mutual covenants
contained herein, and for other good and valuable consideration,
the sufficiency and adequacy of which are hereby acknowledged,
the parties agree as follows:
ARTICLE I
---------
Duties
------
1.1 WT warrants that it is and will continue to be
appropriately licensed and authorized to provide the types of
services anticipated by this agreement as required.
1.2 JWC warrants that it is and will continue to be
appropriately licensed to sell its products in those states where
it is required to be licensed.
1.3 JWC's referral duties hereunder may include, but
not be limited to, introducing appropriate personnel and services
to prospects for the purpose of providing investment management
and personal trust services. In connection with these
responsibilities, JWC agrees that prior to any such introductions
it will screen such prospective customers for the purpose of
assuring their suitability for referral.
1<PAGE>
1.4 Upon request, from time to time by WT, JWC will
provide WT with reasonable access to its broker network, allowing
the staff of WT and its affiliates to call on these brokers.
1.5 JWC will use commercially reasonable efforts to
introduce the Products and Services of WT to its brokers.
1.6 WT shall provide JWC and its brokers with written
information and materials pertaining to WT Products and Services
and JWC agrees to describe any WT Products and Services
consistent with such information and materials in any discussions
with their customers.
1.7 JWC will immediately notify WT if any JWC customer
complains about any aspect of services being provided by WT or
its affiliates to such customers.
ARTICLE II
----------
Compensation and Reports
------------------------
2.1 The parties will agree from time to time
concerning compensation to be paid by WT to JWC for each referral
of Products and Services hereunder. All payments by WT hereunder
will be made to JWC as soon as reasonably practical, not to any
individual broker.
2.2 Not less often than quarterly, WT shall supply JWC
with a written report reporting the total Products and Services
sold for such period and year to date, broken down by type,
customer and compensation due to JWC related thereto. During the
term of this Agreement and for 90 days after any expiration or
termination, WT shall maintain detailed, current, written books
and records of all of the Products and Services provided and
sold, broken down by type, customer and compensation due to JWC
hereunder. WT shall provide JWC and its authorized
representatives full access during normal business hours to such
books and records.
ARTICLE III
-----------
Confidentiality and Non-Solicitation
------------------------------------
3.1 (a) In connection with this Agreement, a party
hereto (the "Disclosing Party") may disclose Confidential
Information, as defined below, to the other party hereto (the
"Disclosee"). Each party agrees to maintain the
confidentiality of any and all Confidential Information of a
Disclosing Party and agrees not to use such Confidential
Information for financial gain in any manner adverse to the
Disclosing Party, provided, however, the forgoing obligations
shall not apply to (i) any information which was known by the
Disclosee prior to its disclosure by the Disclosing Party; (ii)
any information which was in the public domain prior to its
disclosure; (iii) any information which comes into the public
domain through no fault of the Disclosee; (iv) any information
which is disclosed to the Disclosee by a third party, other than
2<PAGE>
an affiliate, having the legal right to make such disclosure; or
(v) any information which is required to be disclosed by an order
of any forum. For the purposes of this Section, "Confidential
Information" shall mean any and all technical, business or other
information which (a) is possessed or hereafter acquired by a
Disclosing Party and disclosed to the Disclosee, and (b) derives
actual or potential economic value from not being generally known
to persons or entities other than the Disclosing Party,
including, but not limited to, data, compositions, devices,
methods, techniques, inventions, processes, financial data,
financial plans, product plans, business plans, or potential
customers and brokers, information with respect to various needs
of customers of JWC, provided that it shall not include
information that does not constitute a trade secret after the
fourth anniversary of any expiration or termination of this
Agreement.
3.2 WT agrees not to, directly or indirectly, for or
on behalf of any person or entity, solicit, call upon or attempt
to solicit the patronage of any customer of JWC that WT knows is
a customer of JWC, for the purpose of obtaining the patronage of
any such person for products and services other than Products and
Services. However, JWC recognizes that any person who becomes a
customer of WT or its affiliates will routinely receive sales and
promotional materials aimed at cross-selling WT services or the
services of its affiliates to that customer.
3.3 WT agrees not to, directly or indirectly, for or
on the behalf of any person, solicit or induce, or attempt to
solicit or induce, any person employed by JWC to leave such
employment. However, such prohibition shall not prevent WT from
considering the unsolicited employment application of any JWC
employee. JWC agrees not to, directly or indirectly, for or on
the behalf of any person, solicit or induce, or attempt to
solicit or induce, any person employed by WT to leave such
employment. However, such prohibition shall not prevent JWC from
considering the unsolicited employment application of any WT
employee.
ARTICLE IV
----------
Indemnification and Standard of Performance
-------------------------------------------
4.1 WT shall use its commercially reasonable best
efforts to perform its obligations hereunder and shall indemnify
and hold harmless JWC, its directors, officers, employees and
agents from and against any claims, demands, actions,
liabilities, penalties, taxes, losses or costs (including
reasonable attorneys fees) to which JWC or its directors,
officers, employees and agents may become subject which arise out
of WT's breach of the terms of this Agreement.
4.2 JWC shall use their commercially reasonable best
efforts to perform all JWC obligations hereunder and shall
indemnify and hold harmless WT and its affiliates and their
directors, officers, employees and agents from and against any
claims, demands, actions, liabilities, penalties, taxes, losses
or costs to which WT or its affiliates or their directors,
officers, employees and agents may become subject which arise out
of JWC's breach of the terms of this Agreement.
3<PAGE>
4.3 Each party agrees to perform its services
hereunder in accordance with the professional standards
recognized by their respective industries, whichever standard is
appropriate for the circumstances, and in accordance with all
applicable laws and regulations.
4.4 No provision of this Agreement shall be construed
to require WT to provide services to any customers that are
introduced to it pursuant to the terms hereof. No provision of
this Agreement shall be construed to require JWC to refer all of
its customers to WT pursuant to the terms hereof.
ARTICLE V
---------
Non-Exclusivity
---------------
5.1 Except as otherwise provided in Article III
hereof, no provision of this Agreement shall be construed to
limit the activities or business which either JWC or WT may carry
out or engage in outside of this Agreement and this Agreement is
not intended to create any exclusive arrangement between the
parties hereto.
ARTICLE VI
----------
Term
----
6.1 This Agreement shall be effective as of the date
hereof.
6.2 This Agreement shall be in force until December
31, 2002 unless otherwise terminated in accordance with he terms
hereof. This Agreement shall renew automatically for successive
one year terms unless terminated hereunder. This Agreement may be
terminated by either party upon thirty (30) days written notice
to the other. Each party shall have the right to terminate this
Agreement immediately if the other party files a petition in
bankruptcy, makes an assignment for the benefit of creditors, is
voluntarily or involuntarily adjudicated bankrupt, or if a
receiver is appointed for its business or assets. The payment of
compensation described by Article II, the confidentiality
provisions of Article III and the indemnification provisions of
Article IV shall survive any such termination or expiration under
this Agreement.
ARTICLE VII
-----------
Annual Meeting
--------------
7.1 The parties hereto agree to meet annually at a
place and time agreed upon by the parties. The purpose of this
meeting shall be to review business plans, budgets and the
progress of this Agreement and to discuss any modifications to
this Agreement that either party believes is necessary. Ten (10)
days before the scheduled meeting, each party shall notify the
other in writing of issues that it wishes to discuss at the
meeting.
4<PAGE>
ARTICLE VIII
------------
Insurance
---------
8.1 Each party agrees to maintain its own adequate
Errors and Omissions Insurance. Each party agrees to provide the
other with a certificate of insurance outlining its insurance
coverage upon request by the other party. Each party also agrees
to notify the other of any material change to its insurance
coverage.
ARTICLE IX
----------
WT Warranties
-------------
9.1 WT and its affiliates are not currently subject to
any judicial or administrative proceedings that would impair WT's
ability to perform its duties hereunder. WT will promptly notify
JWC if it or one of its affiliates becomes subject to such
proceedings.
9.2 WT warrants that it will not intentionally mislead
any of its customers about the nature of any JWC product.
ARTICLE X
---------
JWC Warranties
--------------
10.1 JWC and its affiliates are not currently subject
to any judicial or administrative proceedings that would impair
JWC's ability to perform its duties hereunder. JWC will promptly
notify WT if it or one of its affiliates becomes subject to such
proceedings.
10.2 JWC warrants that it will not intentionally
mislead any of its customers about the nature of any WT product.
ARTICLE XI
----------
General Terms
-------------
11.1 Neither this Agreement nor any of its terms may
be terminated, amended, supplemented, waived, or modified orally,
but only by an instrument in writing signed by the party against
which the enforcement of the termination, amendment, supplement,
waiver, or modification is sought. The headings or the various
sections of this Agreement are for reference only and shall not
modify, expand or limit any of the terms or provisions hereof.
11.2 Neither WT nor JWC shall assign, convey, or
otherwise transfer any of its right, title or interest in this
Agreement.
5<PAGE>
11.3 This Agreement shall in all respects be governed
by, and construed in accordance with, the laws of the State of
Delaware. Furthermore, the parties agree that jurisdiction and
venue for any action arising under this Agreement shall be
exclusively with the state or federal courts located in Delaware.
Each party agrees to waive its right to jury trial in any action
arising out of this Agreement. In the event of any dispute
between the parties under this Agreement, the parties agree to
submit such dispute to an arbitrator for binding arbitration.
Such arbitrator shall be a member of the American Arbitration
Association and the arbitration proceedings shall be conducted in
Washington, D.C. and governed by the rules of that Association.
11.4 This Agreement may be executed in separate
counterparts, each of which when so executed and delivered shall
be an original, but all such counterparts shall together
constitute but one of the same instrument.
11.5 All notices required or permitted by the terms
hereof shall be in writing, and any such notices shall become
effective when hand delivered to the other party, or, if in the
form of a telegram or telex, when received. All notices shall be
delivered or addressed as follows: (1) if to WT:
Wilmington Trust FSB
Suite 100
800 SE Monterey Commons Blvd.
Stuart, Florida 34996
ATTENTION: Mr. W. Craig Marshall
(2) if to JWC:
J W Charles Financial Services, Inc.
1117 Perimeter Center West
Suite 500E
Atlanta, Georgia 30338
Attention: Joel Marks
and
W. Randy Eaddy
Kilpatrick & Cody
100 Peachtree Street
Atlanta, Georgia 30309
Each party may from time to time change its address by written
notice to the other.
6<PAGE>
11.6 Neither party will use the name of the other party
in any promotional or advertising material without the written
consent of the other party.
11.7 JWC and its employees are not employees, agents or
authorized representatives of WT hereunder. WT and its employees
are not employees, agents or authorized representatives of JWC
hereunder. Each party is an independent contractor under this
Agreement and both parties agree that they will not represent
themselves to be agents of the other. Neither party has the
power to contractually obligate the other party.
11.8 The failure of one party to insist upon or enforce
strict performance of any terms of this Agreement shall not be
construed as a waiver of its right to enforce such terms in the
future.
IN WITNESS WHEREOF, THE PARTIES HAVE CAUSED THIS AGREEMENT TO BE
EXECUTED BY THEIR DULY AUTHORIZED OFFICERS.
WILMINGTON TRUST FSB
By:/s/ George _______, IV (Seal)
Title: Chairman
Date: 1/19/96
JW CHARLES FINANCIAL SERVICES, INC.
By: Joel Marks (Seal)
Title: Vice Chairman
Date: 1/19/96
7
Exhibit 22
Subsidiaries of the Registrant
Subsidiary State of Incorporation
DMG Securities, Inc. Florida
Corporate Securities Group, Inc. Florida
JW Charles Securities, Inc. Florida
JW Charles Insurance Services, Inc. Florida
JW Charles Capital Corp. Florida
JW Charles Clearing Corp. Iowa
Discount Securities Group, Inc. Florida
<TABLE> <S> <C>
<ARTICLE> 5
<CIK> 0000741557
<NAME> JW CHARLES FINANCIAL SERVICES, INC.
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-START> JAN-01-1995
<PERIOD-END> DEC-31-1995
<CASH> 8,594,000
<SECURITIES> 11,486,000
<RECEIVABLES> 87,190,000
<ALLOWANCES> 667,000
<INVENTORY> 0
<CURRENT-ASSETS> 0
<PP&E> 1,253,000
<DEPRECIATION> 962,000
<TOTAL-ASSETS> 115,214,000
<CURRENT-LIABILITIES> 0
<BONDS> 0
0
0
<COMMON> 4,000
<OTHER-SE> 9,554,000
<TOTAL-LIABILITY-AND-EQUITY> 115,214,000
<SALES> 0
<TOTAL-REVENUES> 80,041,000
<CGS> 0
<TOTAL-COSTS> 70,700,000
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 3,054,000
<INCOME-PRETAX> 6,287,000
<INCOME-TAX> 2,422,000
<INCOME-CONTINUING> 3,810,000
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 3,810,000
<EPS-PRIMARY> .95
<EPS-DILUTED> 0
</TABLE>
