UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
/x/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 1998
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from ________ to _______
Commission file number 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 Identification No.)
incorporation or organization)
980 North Federal Highway - Suite 310
Boca Raton, Florida 33432
--------------------------------------- -----------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (561) 338-2600
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities
Exchange Act of 1934 during the preceding 12 months (or for such shorter
period that the registrant was required to file such reports), and (2)
has been subject to such filing requirements for the last 90 days. Yes No
Indicate the number of shares outstanding of each of the issuer's
classes of common stock, as of the latest practicable date.
Class Outstanding at April 15, 1998
- --------------------------------------- --------------------------------
Common stock, $.001 par value per share 3,730,104
<PAGE>
JW CHARLES FINANCIAL SERVICES, INC.
INDEX
Part I. Financial Information
Item 1. Financial Statements.
Consolidated Condensed Statements of Financial Condition
at March 31, 1998 and December 31, 1997 3
Consolidated Condensed Statements of Income for the Three
Month Periods Ended March 31, 1998 and 1997 4
Consolidated Condensed Statements of Cash Flows for the Three
Month Periods Ended March 31, 1998 and 1997 5
Notes to Consolidated Condensed Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations 8
Part II. Other Information
Item 1. Legal Proceedings 10
Item 5. Other Information 10
Item 6. Exhibits and Reports on Form 8-K 10
-2-<PAGE>
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
- ----------------------------
JW CHARLES FINANCIAL SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF FINANCIAL CONDITION
<TABLE>
<CAPTION>
March 31, December 31,
1998 1997(*)
------------ ------------
<S> <C> <C>
ASSETS (Unaudited)
Cash and cash equivalents $ 14,120,000 $ 11,512,000
Receivable from customers, net 118,822,000 107,507,000
Receivables from brokers and dealers 10,291,000 5,248,000
Securities owned, at market value 10,373,000 9,010,000
Furniture, equipment and leasehold improvements, net of accumulated
depreciation and amortization of $1,541,000 and $1,433,000 1,922,000 1,742,000
Deferred tax asset 1,627,000 1,621,000
Other, net 3,979,000 4,092,000
------------- -------------
$ 161,134,000 $ 140,732,000
============= =============
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Short-term borrowings from banks $ 33,905,000 $ 29,423,000
Accounts payable, accrued expenses and other liabilities 10,815,000 12,043,000
Payable to customers 22,573,000 35,055,000
Payable to brokers and dealers 59,509,000 32,975,000
Securities sold, not yet purchased, at market value 588,000 567,000
Lines of credit 1,890,000 890,000
Notes payable to affiliate 4,863,000 5,113,000
Income taxes payable 877,000 -
------------- -------------
135,020,000 116,066,000
------------- -------------
Commitments and contingencies
Stockholders' equity:
Preferred stock, $.001 par value - authorized 5,000,000 shares no shares issued
or outstanding - -
Common stock, $.001 par value - authorized 9,056,000 shares; issued
and outstanding 3,730,104 and 3,690,743 4,000 4,000
Additional paid-in capital 4,196,000 4,018,000
Retained earnings 21,921,000 20,651,000
Treasury stock, at cost, 900 shares (7,000) (7,000)
------------- -------------
Total stockholders' equity 26,114,000 24,666,000
------------- -------------
$ 161,134,000 $ 140,732,000
=================================
</TABLE>
* - Derived from audited financial statements contained in Registrant's
Annual Report on Form 10-K/A for the fiscal year ended December 31, 1997.
(The accompanying Notes to Consolidated Condensed Financial Statements
are an integral part of these financial statements.)
-3-
<PAGE>
JW CHARLES FINANCIAL SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF INCOME
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended March 31,
-----------------------------------
1998 1997
-----------------------------------
<S> <C> <C>
REVENUES:
Commissions $13,129,000 $11,538,000
Market making and principal transactions, net 4,868,000 4,646,000
Interest 3,162,000 2,334,000
Clearing fees 1,819,000 1,808,000
Other 1,295,000 1,806,000
-----------------------------------
24,273,000 22,132,000
-----------------------------------
EXPENSES:
Commissions and clearing costs 12,675,000 11,558,000
Employee compensation and benefits 4,448,000 4,155,000
Selling, general and administrative 3,853,000 3,849,000
Interest 1,255,000 985,000
-----------------------------------
22,231,000 20,547,000
-----------------------------------
Income before income taxes 2,042,000 1,585,000
Provision for income taxes 772,000 573,000
-----------------------------------
Net income $ 1,270,000 $ 1,012,000
===================================
Net income per common share:
Basic $0.34 $0.31
===================================
Diluted $0.30 $0.26
===================================
Weighted average common shares outstanding:
Basic 3,716,000 3,305,000
===================================
Diluted 4,301,000 3,857,000
===================================
</TABLE>
(The accompanying Notes to Consolidated Condensed Financial Statements
are an integral part of these financial statements.)
-4-<PAGE>
JW CHARLES FINANCIAL SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended March 31,
-------------------------------
1998 1997
-------------------------------
<S> <C> <C>
OPERATING ACTIVITIES
Net income $1,270,000 $1,012,000
Adjustments to reconcile net income to net cash
used by operating activities:
Depreciation and amortization 108,000 75,000
Change in assets and liabilities, net of effect from acquisition:
Receivable from customers (11,315,000) 3,152,000
Receivables from brokers and dealers (5,043,000) 666,000
Securities owned (1,363,000) (1,090,000)
Deferred tax asset (6,000) (16,000)
Other assets 113,000 (59,000)
Accounts payable, accrued expenses and other liabilities (1,228,000) (1,677,000)
Payable to customers (12,482,000) (25,089,000)
Payable to brokers and dealers 26,534,000 5,631,000
Securities sold, not yet purchased 21,000 568,000
Income taxes payable 877,000 540,000
-------------------------------
Net cash used by operating activities (2,514,000) (16,287,000)
-------------------------------
INVESTING ACTIVITIES
Purchases of furniture, equipment and leasehold improvements (288,000) (323,000)
-------------------------------
FINANCING ACTIVITIES
Change in short-term borrowings from banks 4,482,000 14,495,000
Change in notes payable to affiliate (250,000) (250,000)
Change in lines of credit 1,000,000
Issuance of common stock 178,000
Net cash provided by financing activities 5,410,000 14,245,000
Net increase (decrease) in cash and cash equivalents 2,608,000 (2,365,000)
Cash and cash equivalents at beginning of period 11,512,000 11,836,000
-------------------------------
Cash and cash equivalents at end of period $14,120,000 $9,471,000
===============================
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the period for income taxes $0 $0
==============================
Cash paid during the period for interest $1,255,000 $985,000
==============================
SUPPLEMENTAL DISCLOSURE OF NON-CASH INVESTING AND FINANCING ACTIVITIES:
On September 22, 1997, the Company issued 345,851 shares
of common stock in connection with the acquisition of The
Americas Growth Fund, Inc. (Note 5).
</TABLE>
(The accompanying Notes to Consolidated Condensed Financial Statements
are an integral part of these financial statements.)
-5-<PAGE>
JW CHARLES FINANCIAL SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Unaudited)
1. BASIS OF PRESENTATION
The interim financial information included herein is unaudited;
however, such information reflects all adjustments, which are, in
the opinion of management, necessary for a fair presentation of
the periods indicated.
The accompanying consolidated condensed financial statements
include the accounts of the Company and its subsidiaries. Certain
information and footnote disclosures normally included in
financial statements prepared in conformity with generally
accepted accounting principles have been condensed or omitted
pursuant to the rules and regulations of the Securities and
Exchange Commission. These consolidated condensed financial
statements should be read in conjunction with the consolidated
condensed financial statements and related notes contained in the
Company's 1997 Annual Report on Form 10-K/A.
Because of seasonal and other factors, the results of operations
for the three month period ended March 31, 1998 are not necessarily
indicative of the results of operations to be expected for the
fiscal year ending December 31, 1998.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Consolidation
- ----------------------
The accompanying consolidated financial statements include the
accounts of JW Charles Financial Services, Inc. and its
subsidiaries which are: 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. In addition, the accompanying
consolidated financial statements include the accounts of The
Americas Growth Fund, Inc. ("AGRO") (effective September 22,
1997) (See Note 5, "Acquisition"). All significant intercompany
transactions have been eliminated in consolidation.
Reclassifications
- -----------------
Certain amounts in the prior period's consolidated condensed
financial statements have been reclassified to conform to the
current period's presentation. These reclassifications are not
material to the consolidated condensed financial statements.
3. CONTINGENCIES
The Company is involved in various claims and possible actions
arising out of the normal course of its business. Although the
ultimate outcome of these claims cannot be ascertained at this
time, it is the opinion of the Company, based on knowledge of
facts and advice of counsel, that the resolution of such actions
will not have a material adverse effect on the Company's
financial condition and results of operations.
-6-<PAGE>
4. NET CAPITAL
The broker-dealer subsidiaries of the Company are subject to the
requirements of Rule 15c3-1 under the Securities Exchange Act of
1934. This rule requires that aggregate indebtedness, as
defined, not exceed fifteen times net capital, as defined. Rule
15c3-1 also provides for an "alternative net capital requirement"
which, if elected, requires that net capital be equal to the
greater of $250,000 or two percent of aggregate debit items
computed in applying the formula for determination of reserve
requirements. The New York Stock Exchange, Inc. ("NYSE") may
require a member organization to reduce its business if its net
capital is less than four percent of aggregate debit items and
may prohibit a member firm from expanding its business if its net
capital is less than five percent of aggregate debit items. At
March 31, 1998, the net capital positions of the Company's
broker-dealer subsidiaries were as follows:
JWC Clearing (alternative method elected):
Net capital as a percent of aggregate debit items 9.04%
Net capital $11,904,000
Required net capital $2,634,000
CSG:
Ratio of aggregate indebtedness to net capital 2.49
Net capital $1,768,000
Required net capital $293,000
JWC Securities:
Ratio of aggregate indebtedness to net capital 3.84
Net capital $1,096,000
Required net capital $281,000
DMG:
Ratio of aggregate indebtedness to net capital .69
Net capital $358,000
Required net capital $100,000
5. ACQUISITION
On September 22, 1997, the Company completed its exchange tender
offer (the "Exchange Offer") for all (but not less than 51%) of
the outstanding shares of common stock of AGRO not already owned
by the Company. Prior to the commencement of the Exchange Offer,
the Company owned 26% of the outstanding shares of common stock
of AGRO. A total of approximately 823,000 shares of AGRO common
stock, representing approximately 65% of the outstanding shares
of AGRO common stock, were tendered pursuant to the Exchange
offer. All shares of AGRO common stock tendered were accepted
for exchange by the Company according to the terms of the
Exchange Offer on the basis of .431 shares of the Company's
common stock for each share of AGRO resulting in the issuance by
the Company of 354,851 shares of its authorized but unissued
common stock. The tendered shares together with the shares
already owned by the Company represent approximately 91% of the
outstanding shares of AGRO common stock, with the remaining 9% of
AGRO shares held by minority shareholders (the "AGRO Minority
Shareholders'"). The AGRO acquisition was accounted for under
the purchase method of accounting.
-7-<PAGE>
The Company has consolidated the accounts of AGRO in the
accompanying financial statements effective as of September 22,
1997. The AGRO Minority Shareholders' interests in these
accounts is reflected as accounts payable, accrued expenses and
other liabilities in the accompanying financial statements.
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations
----------------------------------------------
FORWARD LOOKING STATEMENTS
From time to time, information provided by the Company or
statements made by its directors, officers or employees may constitute
"forward-looking statements" under the meaning of the Private Securities
Litigation Reform Act of 1995. Any statements made in this Form 10-Q,
including any statements incorporated herein by reference, that are not
statements of historical fact are forward-looking statements. Such
forward-looking statements and other forward-looking statements made by
the Company or its representatives are based upon a number of assumptions
and involve a number of risks and uncertainties, and, accordingly, actual
results could differ materially. Factors that may cause such differences
include, but are not limited to, those set forth under the heading "Risk
Factors" contained in the Company's Annual Report on Form 10-K/A for the
year ended December 31, 1997.
RESULTS OF OPERATIONS -- THREE MONTHS ENDED MARCH 31, 1998 (THE "1998
PERIOD") VS. 1997 (THE "1997 PERIOD")
<TABLE>
<CAPTION>
Three Months Ended March 31,
--------------------------------------------------------
1998 1997 1996
(000's) % Change (000's) % Change (000's)
--------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Revenues:
Commissions $13,129 14 $11,538 13 $10,168
Market making and principal
transactions, net 4,868 5 4,646 -15 5,436
Interest 3,162 35 2,334 8 2,160
Clearing fees 1,819 1 1,808 11 1,631
Other 1,295 -28 1,806 12 1,616
--------------------------------------------------------
$24,273 10 $22,132 5 $21,011
========================================================
Three Months Ended March 31,
--------------------------------------------------------
1998 1997 1996
(000's) % Change (000's) % Change (000's)
--------------------------------------------------------
Expenses:
Commissions and clearing costs $12,675 10 $11,558 2 $11,308
Employee compensation and benefits 4,448 7 4,155 16 3,573
Selling, general and administrative 3,853 0 3,849 0 3,846
Interest 1,255 27 985 12 878
--------------------------------------------------------
$22,231 8 $20,547 5 $19,605
========================================================
-8-<PAGE>
Three Months Ended March 31,
-------------------------------------------------------
1998 % Change 1997 % Change 1995
-------------------------------------------------------
Clearing Factor 70% -1 71% -1 72%
=======================================================
</TABLE>
Total revenues of $24,273,000 recorded in the 1998 Period
increased by 10% compared to last year's $22,132,000. In
particular, commissions increased by 14% to $13,129,000 from
$11,538,000. The substantial increase in commissions is
primarily due to the Company's expanded operations and generally
favorable market conditions experienced in the 1998 Period.
Market making and principal transactions, net and clearing fees
both experienced increases, although not as significant as the
increase in commission income. The increase in these revenue
categories was a result of generally favorable market conditions
experienced during the 1998 Period. Interest income and interest
expense increased by 35% and 27%, respectively primarily as a
result of increased customer margin activity and the related cost
of funding customer margin balances. Other income decreased as a
result of the completion of a co-managed underwriting in the 1997
Period and none occurring the 1998 Period.
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 increase in third
quarter 1998 commissions and market making and principal
transactions, net. Commissions and clearing costs as a
percentage of commissions and market making and principal
transactions, net (the "Clearing Factor") decreased slightly to
approximately 70% in the 1998 Period as compared to 71% in the
1997 Period. Employee compensation and benefits increased by 7%
as a result of annual salary adjustments and increase in the
number of personnel to accommodate the Company's continuing
growth.
LIQUIDITY AND CAPITAL RESOURCES
The Company maintains a highly liquid balance sheet with the
majority of the Company's assets consisting of cash and cash
equivalents, securities owned, which are marked to market, and
receivables from customers, brokers, dealers and clearing brokers
arising from customer related securities transactions.
Receivables from customers consist primarily of collateralized
customer margin loans, which are typically secured with marketable
corporate debt and equity securities. The nature of the Company's
business as a market maker and securities dealer requires it to carry
significant levels of securities inventories in order to meet its
customer and internal trading needs. Additionally, the Company's
role as a financial intermediary for customer activities, which it
conducts on a principal basis, results in significant levels of
-9-<PAGE>
customer related balances. Accordingly, the Company's total
assets and financial leverage can fluctuate significantly
depending largely upon general economic and market conditions,
volume of activity, customer demand and underwriting commitments.
The Company's ability to support increases in its total assets is
a function of its ability to generate funds internally and obtain
short-term borrowings from banks.
At March 31, 1998, the Company had stockholders' equity of
$26,114,000, representing an increase of $1,448,000 from December
31, 1997, and the Company had cash and cash equivalents of
$14,120,000. At March 31, 1998, the Company had an aggregate of
$3,110,000 of additional borrowing capacity available under its
committed bank lines of credit described in its Annual Report on
Form 10-K/A for the year ended December 31, 1997.
II - OTHER INFORMATION
Item 1. Legal Proceedings
- ---------------------------
There are no material legal proceedings pending or
threatened in which the Company is party or of which the
Company's property is the subject. The Company has been named in
various arbitration and legal proceedings arising in 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 and results of operations.
Item 5. Other Information
- ---------------------------
None.
Item 6. Exhibits and Reports on Form 8-K
- -------------------------------------------
(a) Exhibits:
Exhibit 27 Financial Data Schedule (for SEC use only)
(b) Reports on Form 8-K:
Form 8-K reporting date - January 21, 1998
Items Reported - Item 5, Other Events and Item 7,
Financial Statements and Exhibits
-10-
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of
1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
JW CHARLES FINANCIAL SERVICES, INC.
Date: April 15, 1998 /s/ Marshall T. Leeds
(President and Chief Executive Officer)
(Duly Authorized Officer)
Date: April 15, 1998 /s/ Joel E. Marks
(Joel E. Marks, Principal Financial and
Accounting Officer)
<TABLE> <S> <C>
<ARTICLE> 5
<CIK> 0000741557
<NAME> JW CHARLES FINANCIAL SERVICES, INC.
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> MAR-31-1998
<CASH> 14,120,000
<SECURITIES> 10,373,000
<RECEIVABLES> 129,113,000
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 0
<PP&E> 3,463,000
<DEPRECIATION> 1,541,000
<TOTAL-ASSETS> 161,134,000
<CURRENT-LIABILITIES> 0
<BONDS> 0
0
0
<COMMON> 4,000
<OTHER-SE> 24,662,000
<TOTAL-LIABILITY-AND-EQUITY> 161,134,000
<SALES> 0
<TOTAL-REVENUES> 24,273,000
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 20,976,000
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1,255,000
<INCOME-PRETAX> 2,042,000
<INCOME-TAX> 772,000
<INCOME-CONTINUING> 1,270,000
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,270,000
<EPS-PRIMARY> .34
<EPS-DILUTED> .30
</TABLE>
