ITEM 1. BUSINESS
Background and General
JWGenesis Financial Corp. (the "Company" or "JWGenesis") is a diversified financial services holding company whose principal operating subsidiaries Corporate Securities Group, Inc. ("CSG"), JWGenesis Clearing Corp. ("JWG Clearing"), JWGenesis Securities, Inc. ("JWG Securities"), JWGenesis Capital Markets, Inc. ("JWG Capital") and GSG Securities, Inc. ("GSG") (formerly Discount Securities Groups, Inc.) on a combined basis operate a full-service securities brokerage and investment banking business that offers "one-stop- shopping" to the Company's customers and clients. The Company provides a wide range of securities brokerage and investment services to a diversified client base, delivers a broad range of clearing services to affiliated and independent broker-dealers, including affiliates of commercial banks, and provides investment banking services to corporate and institutional clients and high net worth individuals.
JWGenesis was incorporated as a Florida corporation in January 1998; however, as a result of the Share Exchange on June 12, 1998 described elsewhere herein, JWGenesis succeeded to the business and operations of JW Charles Financial Services, Inc. ("JWCFS"), which was incorporated as a Florida corporation in December 1983. Also on June 12, 1998, as a result of the Combination described elsewhere herein (of which the Share Exchange was a part), JWGenesis acquired 100% of Genesis Merchant Group Securities, LLC ("Genesis") and succeeded to its business, which had commenced in 1989. On March 3, 1999, the Company divested itself of Genesis in a transaction that resulted in the Company's continued ownership and operation, through JWG Capital, of Genesis's New York City-based operations, which consist of corporate finance, capital markets, and certain institutional research and sales capabilities. As a result of a merger in 1990, JWCFS acquired operations, which are now conducted as parts of JWG Securities and JWG Clearing, that date back to 1973. In July 1998, JWCFS changed its name to JWGenesis Financial Services, Inc. ("JWGFS").
JWG Securities is a New York Stock Exchange ("NYSE") member firm with branch offices in South Florida, California, Georgia, and New York. JWG Securities' branches are owned as well as managed by the Company, and its brokers are "full-service" oriented and receive compensation packages that are competitive with most regional and national wire-house brokerage firms. JWG Capital is a New York firm that specializes in investment banking services and institutional research and sales. CSG, a National Association of Securities Dealers, Inc. ("NASD") member firm, is a general securities broker dealer that offers a full array of investment products and services to a variety of clients through a national network of independently owned offices. CSG offices can vary in size from one investment professional to many. JWG Clearing is a NYSE member firm that provides clearing services, including on a fully disclosed basis for a variety of correspondents (such as broker dealers, banks, and other financial institutions) who are engaged in the securities brokerage business but who lack the back office or other support capabilities to process and clear securities transactions for their clients. JWG Securities and CSG clear trades through JWG Clearing as well as through an outside clearing arrangement with Bear Stearns Securities Corp. GSG, a NASD member firm, is a general securities broker dealer
that offers a full array of investment products and services primarily through its branch offices located in Colorado, California, Florida, Illinois and New York. GSG brokers, many of whom enter the business through GSG's in-house training program, are "full-service" oriented and receive compensation packages that are competitive with most similarly situated firms. A sixth subsidiary of the Company, DMG Securities, Inc. ("DMG"), is also engaged in the securities brokerage business. All of JWGenesis' operating subsidiaries are owned through its wholly-owned subsidiary, JWGFS.
The Company's activities generate revenue for the Company primarily 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 corporate finance transactions, insurance brokerage services, and consulting services. The following table indicates the percentage of total revenues represented by each of these activities during the past three years:
Percentage of Total Revenues -------------------------------- Year Ended December 31, -------------------------------- 1998 1997 1996 ---- ---- ---- Commissions ............................... 53% 51% 47% Market making and principal transactions, net ..................................... 21% 21% 27% Interest .................................. 12% 12% 10% Clearing fees ............................ 11% 13% 13% Other (including corporate finance and consulting) ............................. 3% 3% 3%
[FN] Excludes the results of Genesis for the periods prior to June 12, 1998.
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:
JWGenesis Securities, Inc.
JWG Securities is a NYSE member organization and a member of the NASD. JWG 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. JWG Securities has clearing agreements with JWG Clearing and Bear Stearns Securities Corp. ("Bear Stearns"), both NYSE member organizations, under which agreements they provide JWG 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 JWG Securities to offer a range of products and services that is generally offered only by firms that are larger and have more capital than JWG Securities.
JWG Securities' registered representatives, have, prior to their employment with JWG Securities, prior industry experience and licenses and each is an in-house employee at JWG Securities. Through its retail branch network, JWG Securities markets a wide variety of investment products, including 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 JWG 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, JWG Clearing and Fiserv Correspondent Services, Inc. ("FISERV") , 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.
All of CSG's branch offices 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 that would be paid to registered representatives working at a branch office owned by CSG) and provides other support for the operations, including required home office supervisory functions and access to CSG's securities transaction clearing agreements with Bear Stearns, JWG Clearing and FISERV. All registered representatives who are associated with CSG are licensed with the NASD and all such persons have prior industry experience prior to opening their own office or working at one of CSG's independently owned affiliated 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.
GSG Securities, Inc.
GSG, a general securities broker-dealer, provides products and services similar to those offered by JWG Securities for the accounts of its customers and for its own account. GSG is a member of the NASD and has clearing agreements with FISERV and JWG Clearing, under which agreements they provide GSG 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 GSG to offer a range of products and services that is generally offered only by firms that are larger and have more capital than GSG.
All of GSG's registered representatives are in-house employees. Through its retail branch network, GSG markets a wide variety of investment products, including common and preferred equities, tax-free and taxable bonds, unit trusts, mutual funds, insurance and annuity products, and options. Unlike JWG Securities and CSG, GSG operates an in-house recruitment and training program whereby it offers a comprehensive training and development program for qualified individuals who lack sufficient industry experience or are otherwise unlicensed and new to the industry.
GSG's principal business activities commenced in January, 1999. See "Recent Developments The GSG Acquisition".
DMG Securities, Inc.
DMG, also a NASD member firm, conducts its brokerage operations from a single location in Virginia. DMG's 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. The office is responsible for its own overhead and other operational expenses, and operates in a manner similar to that described for affiliated branch offices of CSG. DMG also has a clearing agreement with JWG Clearing that provides DMG with back office support, execution services on all principal national securities exchanges, and access to many of its 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.
Capital Markets
The acquisition of Genesis on June 12, 1998 substantially enhanced the Company's capital markets capabilities - from general corporate finance and investment banking - transactions to research and related services - over the level that had previously existed at JWCFS. At the time of the Combination, Genesis functioned principally as an investment banking boutique, offering corporate finance, institutional sales and trading, and institutionally focused research and investment advisory services. Its corporate finance services included equity underwriting and merger and acquisition advisory services, and its customer base was comprised principally of institutional, corporate, and high-net worth individual clients. These operations were retained by the Company, and transferred to JWG Capital, when Genesis was subsequently divested in March 1999. See " Recent Developments - The Genesis Divestiture". While certain capital markets functions are performed by personnel of JWG Securities and JWG Clearing (and to a more limited extent, CSG), the Company uses JWG Capital as its principal arm for capital market services.
Corporate Finance
The Company's Corporate Finance Department is involved in a variety of activities, including public and private debt and equity financing for corporate clients, merger and acquisition advisory services, fairness opinions, business analyses and evaluations, and general financial consulting services. Such activities include securing the Company's participation in the distribution of securities both initial public offerings ("IPOs") and secondary offerings. The Company has traditionally concentrated its underwriting efforts in the IPO marketplace, seeking out emerging enterprises in industries that it believes offer reasonable opportunities for future growth. Following an offering, the Company (through a subsidiary) maintains after-market support by providing research analysis, after-market trading, and sponsorship in the investment community.
The Corporate Finance Department has experience in each stage of a merger, acquisition, divestiture, buyout, and recapitalization transaction, including the identification of potential acquisitions and/or acquirors, the optimal "packaging" of a client for a transaction, the preparation of client meetings, the structuring of merger and sale transactions, and the negotiation of sale and purchase terms. The Corporate Finance Department also renders valuation and fairness opinions for both private and public companies. Its work generally includes a comprehensive operational and financial review of a client and the development of financial analyses that incorporate both quantitative and qualitative factors.
Compensation for the Company's corporate finance services and capital markets includes cash fees in the form of underwriting commissions, retainers, and success fees and, in certain situations, stock purchase warrants, direct equity positions, or consulting fees.
Research
The Company maintains a Research Department (i) to provide coverage on a select but broad range of companies, daily market commentary, and trading ideas, (ii) to complement the Corporate Finance Department by offering their services as an added benefit to attracting and retaining corporate finance clients, and (iii) 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, and Corporate Finance Departments. The Research Department provides comprehensive coverage of a select group of industries and companies that in many instances are not otherwise widely followed by the investment community. The Research Department publishes numerous materials for its clients, including quarterly earnings reports, company updates, company reports, which initiate research coverage, industry overviews, and emphasis lists, which encompass all covered industries. The Research Department follows in the following principal areas: business services and outsourcing, regional banking, retailing, communications, technology, electronic commerce, health care, leisure and entertainment, and special situations.
Syndicate
The 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 underwritings managed by the Company. Over the past years, the Company has participated in a diverse range of offerings, primarily as an underwriter, or selling group member. These offerings included both initial and secondary offerings of common and preferred equity and fixed income and closed-end funds offerings.
Fixed Income
Through its 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 a principal and participates as an underwriter, dealer and selling group member for corporate, municipal taxable and non-taxable unit trusts offerings.
Market Making and Principal Transactions
Prior to the Divestiture on March 3, 1999, the Company conducted these activities using both JWG Clearing and Genesis. Activities related to research recommendations, institutional order flow and Genesis's brokerage processing services unit were conducted through Genesis, while activities related to the Company's retail brokerage and fully disclosed clearing business were conducted through JWG Clearing. All of the Company's market making and principal transaction activities are currently conducted exclusively through JWG Clearing. JWG Clearing currently acts as a market maker for approximately 70 securities that are traded in the over-the-counter securities market, including those followed by the Research Department.
In its capacity as a market maker, the Company 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 attempts to derive profits through its market making activities by buying stock at its quoted bid price and then either selling the stock at its quoted market price or holding the stock in inventory for future sale at a higher price. If the market for such securities declines, however, or if the Company otherwise is unable to resell the securities at a favorable price, the Company could suffer losses and such losses could be substantial. Additionally, the Company 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 historically has been 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 historically have accounted for a significant portion of its revenues, and, from the Company's inception through June 1998, losses incurred in connection with these activities were not significant. During July, August and September, 1998, however, the securities markets in general experienced a significant correction which resulted in significant market volatility. Also, the historical policy of Genesis with respect to amounts and holding periods for securities acquired in market making had been less conservative than the Company's general policy, and the Company had not yet changed that policy for Genesis's ongoing operations following the Combination. As a result of Genesis's inventory and trading strategies during this period of market correction and volatility, Genesis experienced pre-tax trading losses in excess of historical levels and the Company reevaluated its inventory and trading strategies at Genesis. Such procedures included (i) reducing the level of Genesis's securities inventory and (ii) curtailing other intra-day trading strategies that required the Company's capital to be placed at significant risk. As discussed elsewhere herein, the Company has subsequently divested Genesis. See "--Recent Developments - The Genesis Divestiture". The Company anticipates that market making and principal transaction activities will continue to be a significant factor in the Company's operations and its prospects for profitability.
Brokerage Processing Operations
The Company provides a variety of brokerage processing services, through JWG Clearing, including on a fully disclosed basis for a variety of customers ("Correspondents") which are engaged in the securities brokerage business but which lack the back office or other support capacities to process and clear securities transactions for their clients. Correspondents include broker-dealers, banks, and other financial institutions. In a fully disclosed transaction, the identity of the Correspondent's client is known to JWG Clearing, and JWG 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. JWG Clearing has approximately 90 Correspondents.
Between the time of the Combination on June 12, 1998 and the Divestiture on March 3, 1999, the Company also provided brokerage processing services through Genesis, which served two primary types of organization investment partnerships and fee-based investment advisors. As a result of the Divestiture, the Company no longer provides any significant amount of services to those types of organizations.
Recent Developments
The Genesis Divestiture
On March 3, 1999, the Company divested Genesis - which at the time consisted primarily of the Company's San Francisco-based brokerage processing services unit that had been acquired in the Combination on June 12, 1998 to an investor group of certain of the former owners of Genesis (the "Stapleton Group") led by its Chief Operating Officer, Phillip C. Stapleton ("Stapleton") and its Vice Chairman, Will K. Weinstein ("Weinstein") contingent only upon the receipt of certain regulatory approvals for the transfer of Genesis to the Stapleton Group (the "Divestiture"). As part of the Divestiture, the Stapleton Group conveyed to the Company an aggregate of 284,375 shares of Common Stock of the Company that had been issued in the Combination, and Genesis transferred its corporate finance operations (based in its New York office) to another Company subsidiary, JWG Capital, so that those operations would be retained by the Company; the Company also assumed responsibility for and retained occupancy of that New York City office. As divested, Genesis' operatings consisted of brokerage processing services and related activities that were being conducted through its San Francisco office.
The overall transaction for the Divestiture was closed pursuant to an Equity Exchange and Conciliation Agreement among the parties dated as of March 3, 1999 (the "Conciliation Agreement"), pursuant to which the Company's employment agreements with Messrs. Weinstein and Stapleton were terminated; Messrs. Weinstein and Stapleton both resigned from the Board of Directors of the Company and all other positions they held with the Company or its affiliates; Harvey Heller, who had been designated by Mr. Weinstein for election to the Board of Directors of the Company, resigned as a director; the Company agreed to register for resale all remaining shares of its Common Stock held
by members of the Stapleton Group and to pay potential penalties if such registration is not effected within prescribed time periods; and the Company agreed to pay Mr. Weinstein as past salary and severance a lump sum payment of approximately $325,000, and (a) paid Stapleton $62,500 as severance and (b) agreed to pay Mr. Stapleton as bonus compensation for the period of his employment an amount equal to 3% of the Company's net income, pre-tax, during the period from June 12, 1998 through and including February 28, 1999 (which bonus is estimated to be approximately $175,000). The respective payments to Messrs. Weinstein and Stapleton constitute satisfaction in full of any and all obligations of the Company to each of them as a result of his employment by the Company or its affiliates.
In addition, as part of the Conciliation Agreement, a voting agreement between Mr. Weinstein and Marshall T. Leeds, the Company's Chairman and Chief Executive Officer, pursuant to which Mr. Weinstein was entitled to designate persons for election to the Company's Board of Directors, was terminated; each Stapleton Group member agreed not to seek a position on the Company's Board of Directors for ten years, unless Mr. Leeds and Joel E. Marks are no longer directors of the Company; and the Stapleton Group members agreed either to vote their remaining shares of Common Stock (unless and until sold to other persons) for the slate of nominees for directors approved by the Company's Board of Directors or to abstain from such a vote. Also, the Company and the Stapleton Group members executed mutual releases with respect to all matters related to their association since the Combination, except for their respective rights to enforce the terms of the Conciliation Agreement.
As discussed elsewhere herein, management does not expect the Divestiture to have a material effect on the Company's operational results or financial condition. Moreover, the overall terms for the Divestiture removed the principal sources of internal discord, which potentially could have disrupted the Company's management of its affairs for the foreseeable future. Management believes, therefore, that the Company is better situated as a result of the Divestiture to conduct its business and pursue possible opportunities in the best interest of all its shareholders.
The Americas Growth Fund, Inc.
In December 1998, the Company completed its acquisition of the remaining 9% of the outstanding shares of common stock of The Americas Growth Fund, Inc. ("AGRO"), a publicly held investment company, that were not owned by the Company. Previously, in September 1997, when the Company owned 26% of the outstanding shares of common stock of AGRO, the Company conducted an exchange tender offer to acquire all of the other outstanding shares, and it received shares in that offer that brought the Company's ownership of AGRO shares to 91%. All AGRO shares acquired by the Company in either transaction were acquired based on an exchange ratio of .431 share of the Company's Common Stock for each share of AGRO, resulting in the issuance by the Company of an aggregate of 49,828 and 354,851 shares of common stock in the December 1998 and September 1997 transactions, respectively. The AGRO acquisition was accounted for under the purchase method of accounting.
The GSG Acquisition
On January 1, 1999, GSG Securities, Inc. acquired certain assets of six retail securities branch offices (and three satellite offices) from Chatfield Dean Holdings, Inc. ("CDH"). As a result of this transaction, GSG added approximately 206 registered representatives and approximately 50 salaried management and support personnel. Prior to January 1, 1999, GSG, formerly known as Discount Securities Group, Inc., was inactive. In connection with this asset purchase, GSG paid CDH approximately $2.3 million in cash ($1.0 million of which was used to repay an earlier loan from the Company to CDH); JWGFS issued to CDH shares of its Series C Redeemable Preferred Stock that are redeemable, in the aggregate, for up to $2.5 million based upon the financial performance of the acquired branch offices over the three years in the period ending December 31, 2001; and the Company issued to CDH a warrant for the purchase of up to 104,167 shares of its common stock at an exercise price of $24 per share which may only be exercised using redemptions of the Series C Preferred Stock, if any, and a three-year, fully vested option to purchase 50,000 shares of its common stock at an exercise price of $24 per share. The Company also agreed to issue to designated members of CDH's former senior management options to purchase an aggregate of 250,000 shares of its common stock at an exercise price of $12 per share, exercisable
through December 31, 2003 (the "Senior Management Options"). The Senior Management Options vest over a three-year period based upon a formula tied to the performance of the acquired branch offices. An additional 100,000 options, with a three-year term and a $24 per share exercise price, were made available by the Company to selected branch managers and registered representatives employed in the acquired branch offices.
Competition
The Company competes with numerous investment banking and brokerage firms, consulting firms, and financial service companies that are larger, better financed, have longer operating histories, 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 experience and reputation of the firm, the relative prices of services and products offered, the scope of such services and products (increasingly the ability to offer "one-stop- shopping" to customers and clients), and the efficiency of back office operations. The Company has tried to position itself competitively by targeting its investment banking services to middle-market companies, providing competitively priced products and services, and developing one-stop-shopping 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.
Employees and Registered Representatives
As of December 31, 1998, the Company and its subsidiaries had a total of approximately 350 salaried employees and 500 registered representatives. Of these totals, 278 registered representatives are independent contractors affiliated with one of the 108 affiliated, but independently owned and operated, CSG and DMG branch offices which existed at such time. In the asset purchase transaction with CDH on January 1, 1999, GSG, a subsidiary of the Company, acquired six branch offices and three satellite offices, which offices employed a total of approximately 50 salaried employees and 206 registered representatives.
Regulation
The securities industry in the United States is subject to extensive regulation under various federal and state laws and regulations. The SEC is the federal agency charged with the administration of most of the federal securities laws. Much of the regulation of the securities industry, however, has been assigned to various self regulatory organizations ("SROs"), principally the NASD, and in the case of NYSE member firms, the NYSE. The SROs, 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 Commission and the SROs 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 Commission and SROs, 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.
Certain Matters Regarding Forward Looking Statements
Certain statements included in this Form 10-K, including without limitation statements containing the words "believes," "anticipates," "intends," "expects" and words of similar import, constitute "forward- looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995. Such forward-looking statements involve known and unknown risks, uncertainties and other factors that may cause the actual results, performance or achievements of the Company to be materially different from any future results, performance or achievements expressed or implied by such forward-looking statements. Such factors include, among others, the following: the impact of general economic conditions on the capital markets; changes in or amendments to regulatory authorities' capital requirements or other regulations applicable to the Company or its subsidiaries; fluctuations in interest rates; increased levels of competition; and other factors referred to in this Form 10-K. Given these uncertainties, undue reliance should not be placed on such forward- looking statements. The Company disclaims any obligation to update any such factors or to publicly announce the results of any revisions to any of the forward-looking statements included herein to reflect future events or developments.
Volatile Nature of the Securities Business
The securities business is, by its nature, subject to significant risks particularly in volatile or illiquid markets. These risks include the risks of:
Our principal business activities are retail securities brokerage, investment banking, and clearing and execution services. These businesses are highly competitive and subject to various risks, volatile trading markets, and fluctuations in the volume of market activity. The securities business is directly affected by many broad factors, including
These and other factors can contribute to lower price levels for securities and illiquid markets. Lower price levels of securities may result in:
* reduced securities transactions volumes, with a correlative reduction in commission revenues; * losses from declines in the market value of securities held in trading, investment, and underwriting positions; and
* reduced management fees calculated as a percentage of assets managed.
In low volume periods, profitability levels are further adversely affected because certain expenses remain relatively fixed. Sudden sharp declines in securities' market values and the failure of issuers and counterparties to perform their obligations can result in illiquid markets. This in turn can make it difficult for us to sell securities, hedge our securities positions, and invest funds under our management. These negative market conditions, if prolonged, may also lower our revenues from investment banking and other activities. As a result of the varied risks associated with the securities business, which are beyond our control, our commissions and other revenues could be adversely affected. Revenue reductions and losses resulting from securities underwriting or ownership could have a material adverse effect on our results of operations and financial condition. In addition, our revenues and operating results may fluctuate from quarter to quarter and from year to year because of these risks.
Significant Competition
All aspects of our business are highly competitive. We compete directly with national and regional full service broker-dealers and, to a lesser extent, with discount brokers, dealers, investment banking firms, investment advisors, and certain commercial banks. The financial services industry has become considerably more concentrated as numerous securities firms have either ceased operations or have been acquired by or merged into other firms. These mergers and acquisitions have increased competition from these firms, many of which have significantly greater equity capital and financial and other resources than we do. With respect to retail brokerage activities, certain regional firms with which we compete have operated in certain markets longer than we have and have established long- standing client relationships. In addition, we expect competition from commercial banks to increase because of recent and anticipated legislative and regulatory initiatives in the United States to remove or relieve certain restrictions on commercial banks' securities activities. We also compete with others in the financial services industry in recruiting new employees and retaining current employees.
We expect to face increasing competition from companies offering electronic brokerage services, which is a rapidly developing industry. These competitors may have lower costs or provide fewer services, and may offer certain customers more attractive pricing or other terms, than we offer. We also anticipate competition from underwriters which attempt to conduct public offerings for emerging growth companies through new means of distribution, including transactions using electronic media such as the Internet. In addition, disintermediation may occur as issuers attempt to sell their securities directly to purchasers, including sales using electronic media such as the Internet. To the extent that issuers and purchasers of securities transact business without the assistance of financial intermediaries like us, our operating results could be adversely affected.
Dependence on Key Personnel
Most aspects of the our business are dependent on highly skilled individuals. We devote considerable resources to recruiting, training, and compensating these individuals. In addition, one
component of our strategy is to increase market penetration by recruiting experienced investment consultants. We cannot assure that these recruiting efforts will be successful or, if successful, that they will enhance our business, results of operations, or financial condition.
Competition for Professional Employees. From time to time, our employees may leave to pursue other opportunities. We have experienced losses of research, investment banking, and sales and trading professionals. Competition for key personnel is intense. We cannot assure that losses of key personnel due to such competition, or for other reasons, will not occur in the future. The loss of an investment banking, research, or sales and trading professional, particularly a senior professional with a broad range of contacts in an industry, could materially and adversely affect our operating results.
Limitations of Employee Retention Mechanisms. We depend on many key employees, and in particular on our senior executive officers: Marshall T. Leeds, our Chairman, President, and Chief Executive Officer; and Joel E. Marks, our Chief Financial Officer each of whom has an employment agreement with us.
The loss of any key employee could materially and adversely affect JWGenesis. While we generally do not have employment agreements with our employees, we attempt to retain employees with incentives such as long-term deferred compensation plans, stock issuances conditioned on continued employment, and options to buy stock that vest over a number of years of employment. These incentives, however, may be insufficient in light of the increasing competition for experienced professionals in the securities industry, particularly if our stock price were to decline, or fail to appreciate sufficiently. If that happened, our long-term deferred compensation plans might no longer be a competitive incentive for our key employees to stay with us.
Dependence on Outside Sources of Financing
Like others companies in the securities industry, we rely on external sources to finance a significant portion of our day-to-day operations, principally customer margin account balances and certain transactions. Our principal cash and liquidity sources are commissions, trading profits and collateralized bank loans. Liquidity management includes the monitoring of assets available to hypothecate or pledge against short-term borrowings. We maintain working capital credit lines with banks aggregating approximately $5.0 million. The financing available to us varies depending on market conditions, the volume of certain trading activities, credit ratings, credit capacity, and the overall availability of credit to the financial services industry. We cannot assure that adequate financing to support our business will be available in the future on attractive terms, or at all.
Net Capital Requirements; Holding Company Structure
The SEC, the NYSE, the NASD, and various other regulatory bodies in the United States have rules with respect to net capital requirements that affect us. These rules require that at least a substantial portion of a broker-dealer's assets be kept in cash or highly liquid investments. Our broker-dealer subsidiaries must comply with the net capital requirements, which could limit operations that require intensive use of capital, such as underwriting or trading activities. These rules could also restrict our ability to withdraw capital from our broker-dealer subsidiaries, even in circumstances where these subsidiaries have more than the minimum amount of required capital. This, in turn, could limit our ability to pay dividends, implement our strategies and pay interest on and repay the principal of our debt. In addition, a change in these rules, or the imposition of new rules, affecting the scope, coverage, calculation, or amount of the net capital requirements, could have similar adverse effects. Significant operating losses or any unusually large charge against net capital could also have a similar material adverse effect.
Dependence on Systems
Our business is highly dependent on communications and information systems. If these systems fail or are interrupted, our securities trading activities could experience delays, and we might be unable to execute client transactions. This could have a material adverse effect on our operating results. We cannot assure that we will not suffer any systems failures or interruptions. These failures or interruptions could have many causes, including earthquakes, fires, other natural disasters, power or telecommunications failures, acts of God, or acts of war. Nor can we assure that our back-up procedures and capabilities will be adequate if any failures or interruptions occur.
Year 2000
The "year 2000 issue" arises from the widespread use of computer programs that rely on two-digit date codes to perform computations or decision-making functions. Many of these programs may fail due to an inability to properly interpret date codes beginning January 1, 2000. For example, such programs may misinterpret "00" as the year 1900 rather than 2000. In addition, some equipment controlled by microprocessor chips may not deal appropriately with the year "00." We are evaluating our computer systems to determine which modifications and expenditures will be necessary to make our systems compatible with year 2000 requirements. We believe that our systems will be year 2000-compliant upon implementation of such modifications. See Item 7, "JWGenesis Management's Discussion and Analysis of Financial Condition and Results of Operations Impact of Year 2000".
We currently estimate that the total cost of such modifications will not be significant. However, we can not assure that all necessary modifications will be identified and corrected or that unforeseen difficulties or costs will not arise. In addition, we cannot assure that the systems of other companies on which our systems rely will be modified on a timely basis, or that the failure by another company to properly modify its systems will not negatively impact our systems or operations.
RISK OF REDUCED REVENUES DUE TO DECLINE IN TRADING OF GROWTH COMPANY SECURITIES
Our brokerage transaction revenues are generally substantially lower when public offering levels and trading activities of emerging growth company securities declines. We derive a significant portion of our revenues from brokerage transactions in growth company securities. In the past, brokerage transaction revenues have declined when underwriting activities in these industry sectors declined, the volume of trading on Nasdaq declined or when industry sectors or individual companies reported results below investors' expectations.
Risks Associated with Regulation
The securities industry and our business is extensively regulated by the SEC, state securities regulators, and other governmental regulatory authorities. Industry self-regulatory organizations ("SROs"), including the NASD, the New York Stock Exchange, the American Stock Exchange and other exchanges, also regulate our broker- dealer subsidiaries. Compliance with many of the regulations applicable to our company and our subsidiaries involves a number of risks, particularly in areas where applicable regulations may be subject to varying interpretation. If we do not comply with an applicable regulation, governmental regulators and SROs may institute administrative or judicial proceedings. In that event, we face many penalties, including
* censure * cease-and-desist orders * civil penalties (including * the deregistration or treble damages in the case suspension of the non- of insider trading compliant broker-dealer's violations) officers or employees * fines
Our operating results and financial condition may suffer material adverse consequences if these penalties or orders are imposed on us.
The regulatory environment could also change. We may be adversely affected by new or revised legislation or regulations imposed by the SEC, other federal or state governmental regulatory authorities, or SROs. We also may be adversely affected by changes in the interpretation or enforcement of existing laws and rules by these governmental authorities and SROs.
Risk of Losses From Underwriting and Trading
We conduct our underwriting, securities trading, and market- making activities as a principal. These activities subject our capital to significant risks, including market, credit, counterparty, and liquidity risks. These activities often involve purchasing, selling, or short-selling securities as a principal in relatively illiquid markets or markets that suffer from rapidly fluctuating liquidity. From time to time, we have large position concentrations in a single issuer's securities, or commitments to a single issuer, or issuers in a specific industry, particularly as a result of underwriting activities. Our trading positions and underwriting activities are concentrated in a more limited number of industry sectors and portfolio companies than many other investment banks, which might result in higher trading losses than would occur if our positions and activities were less concentrated. In addition, there is a trend in all major capital markets for competitive and other reasons toward larger commitments from lead underwriters. This means that, from time to time, an underwriter (including a co-manager) may retain significant position concentrations in individual securities.
Unfavorable financial or economic conditions would likely reduce the number and size of transactions in which we provide underwriting, mergers and acquisitions advisory services and other related services. Our investment banking revenues, in the form of underwriting discounts and financial advisory fees, are directly related to the number and value of the transactions in which we participate and would therefore be adversely affected by a market downturn.
Risk of Losses Associated With Litigation and Securities Laws
Many aspects of our business involve substantial liability risks. Underwriters are exposed to substantial liability under federal and state securities laws and other federal and state laws. Court decisions, including decisions on underwriters' liability and limitations on indemnification of underwriters by issuers, also expose us to liability. For example, an underwriter may be held liable for material misstatements or omissions of fact in a prospectus used to offer securities, or for statements made by its securities analysts or other personnel.
Increasing Frequency of Securities Litigation. In recent years, ---------------------------------------------- litigation involving the securities industry has increased, including class actions in which substantial damages are at stake. Our underwriting activities usually involve offerings of emerging and mid- size growth company securities, which often involve higher risk and are more volatile than the securities of more established companies. In comparison with more established companies, emerging and mid-size growth companies are also more likely to be defendants in securities
class actions, to carry directors and officers liability insurance policies with lower limits (or no such insurance), and to become insolvent. These factors increase the likelihood that a company underwriting an emerging or mid-size growth company's securities will be required to contribute to an adverse judgment or settlement of a securities lawsuit.
Frequent Claims Against Underwriters. The plaintiffs' attorneys ------------------------------------ in securities class action lawsuits frequently name the managing underwriters of a public offering as defendants. We have not been a named defendant in any class action lawsuit relating to public offerings in which we were a managing underwriter. Plaintiffs' attorneys also may name investment banks providing advisory services in corporate finance transactions as defendants. We are not a defendant in any such lawsuit. We anticipate, however, that securities class action lawsuits naming us as a defendant may be filed from time to time in the future, particularly if we increase our activity as managing underwriters or corporate finance advisors. In such lawsuits, all members of the underwriting syndicate typically are included as defendant class members or are required by law, or pursuant to the terms of the underwriting agreement, to bear a portion of any expenses or losses (including amounts paid in settlement of the litigation) incurred by the underwriters as a group in litigating the claim, to the extent not covered by the securities issuer's indemnification obligation. If we became a party to such a lawsuit, our assets would be subject to risks. If the plaintiffs in any suits against us were successful, or if we settled such suits by making significant payments to the plaintiffs, our operating results and financial condition could be materially and adversely affected. As is common in the securities industry, we do not carry insurance that would cover any such payments. In addition, our charter documents allow indemnification of our officers, directors, and agents to the maximum extent permitted under Florida law. If our officers, directors, or agents are named as defendants in securities litigation, they may demand indemnification from us under these charter document provisions.
In addition, the laws relating to securities class actions are currently in a state of flux. The eventual impact of the Private Securities Litigation Reform Act of 1995 on securities class action litigation is not known.
Diversion of Management Attention. In addition to these --------------------------------- financial costs and risks, defending litigation can, to a certain extent, divert the efforts and attention of our management and staff. Our management and other employees may have to devote substantial time defending litigation, which might materially divert their attention from other responsibilities. Securities class action litigation in particular is highly complex and can extend for a protracted period of time, consuming substantial management time and effort and substantially increasing the cost of such litigation.
Risks Associated with Other Disputes. In the normal course of ------------------------------------ business, we are defendants in various civil actions and arbitrations arising out of our broker-dealer and underwriting activities, in our role as an employer, and as a result of other business activities. We have made significant payments to resolve disputed claims in the past, and we cannot assure that we will not make significant payments to resolve disputed claims in the future.
Risks Associated with Management of Growth
Over the past several years, we have experienced significant growth in our business activities and size, and we expect we will continue to grow in the future. Our growth requires and will continue to require increased investments in management personnel, financial and management systems and controls, and facilities. If our revenue did not also continue to grow, our operating margins would decline due to these increased expenses. In addition, as is common in the securities industry, we depend on the effective and reliable operation of our communications and information systems. We believe that our
current and anticipated future growth will require us to implement new and enhanced communications and information systems, and to train our personnel to operate the new systems. Any difficulty or significant delay in implementing or operating our existing systems or any new ones, or in training our personnel, could adversely affect our ability to manage growth.
ITEM 2.
ITEM 2. PROPERTIES.
The Company owns no real property. The Company currently leases its corporate offices and operations facilities, located at 980 North Federal Highway, Boca Raton, Florida 33432, where it occupies approximately 19,500 square feet of space. JWG Securities branch offices are also leased premises, comprising an aggregate of approximately 46,000 square feet of office space in several cities. JWG Capital leases 5,400 square feet of space in New York. GSG branch offices are also leased premises, comprising an aggregate of approximately 86,000 square feet of office space in several cities. The Company believes that its office facilities are adequate for its current and reasonably foreseeable operations.
ITEM 3.
ITEM 3. LEGAL PROCEEDINGS.
There are no material legal proceedings pending or threatened in which JWGenesis is party or of which its property is the subject. The Company or its subsidiaries have 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, JWGenesis 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. The Company or its subsidiaries may be involved from time to time in other litigation arising in the normal course of business.
ITEM 4.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
At the Company's special shareholders meeting on October 13, 1998, the shareholders voted to elect nine directors to hold office until the 1999 annual meeting of stockholders and to approve and adopt the Company's 1998 Stock Option and Award Plan and its Management Incentive Bonus Plan.
Item 1. Election of Directors:
Item 2. Approval and Adoption of the 1998 Stock Option and Award Plan:
Item 3. Approval and Adoption of the Management Incentive Bonus Plan:
PART II
ITEM 5.
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
The Company's common stock trades on The American Stock Exchange (the "AMEX") under the symbol "JWG". 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 (and for the period prior to the Company's replacement of JWGFS as the public company on June 12, 1998, as a result of the statutory share exchange, the shares of common stock of JWGFS) on the AMEX or on The Nasdaq Small-Cap Market (where such shares were previously traded prior to the listing on the AMEX on May 8, 1997). Such information has been obtained from AMEX or Nasdaq, respectively. All per share prices have been adjusted to reflect the Company's three-for-two stock split effected in the form of a 50% stock dividend on February 7, 1997.
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ITEM 7.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
General
As a diversified financial services company, JWGenesis operates a full-service securities brokerage and investment banking business that offers "one-stop-shopping" for its customers and clients. The Company's varied activities generate revenue primarily 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 corporate finance and other capital markets transactions, insurance brokerage services, and consulting services. The following discussions present the more significant factors affecting the Company's results of operations and financial condition during the years ended December 31, 1998, 1997 and 1996.
On June 12, 1998, the Company and JWGFS effected the Share Exchange, and the Company acquired Genesis, as part of the Combination. See Item 1, "Business The Share Exchange and Combination". As a result of the Combination, the Company succeeded
to the respective businesses and operations of JWGFS and Genesis. The discussions relating to periods prior to June 12, 1998, however, reflect the operations of JWGFS as if it were the Company during such periods, and do not reflect any operations of Genesis before the Combination. The results of all of Genesis' operations during the period from the Combination on June 12, 1998 to December 31, 1998, however, are included in the Company's financial data and have some impact on the analysis of such data.
On March 3, 1999, the Company divested Genesis in a transaction in which the Company nonetheless retained the corporate finance services operations that it had been conducting through Genesis, while divesting Genesis' brokerage processing services business unit. Management does not believe the effects of the divestiture will be material for the Company's operations.
In these discussions, most percentages and dollar amounts have been rounded to aid presentation; as a result, all such figures are approximations. References to such approximations have generally been omitted.
Results of Operations - Three Years Ended December 31, 1998
1998 represented the Company's fourteenth consecutive year of record revenues, notwithstanding the significant correction experienced by the securities markets in general during the third quarter of 1998, which had followed a vibrant and rising stock market during 1997 and 1996, that had buoyed the Company's results of operations for those earlier years.
Marshall T. Leeds, a co-founder of JWGFS, the predecessor of the Company, in 1983, also serves as President and Chief Executive Officer of certain of the Company's wholly-owned subsidiaries. Mr. Leeds is a past Chairman of Regional Investment Association, Inc. ("RIBA"), the country's largest association of independent broker-dealers involved in the underwriting of debt and equity securities, and he currently serves on the Independent Contractor Firm Committee of the Securities Industries Association.
Joel E. Marks, the other co-founder of JWGFS, also serves as Executive Vice President of certain of the Company's wholly-owned subsidiaries. Mr. Marks is a Certified Public Accountant, and, prior to 1983, he was employed in various capacities in both the audit and tax departments of the international accounting and consulting firm of Deloitte & Touche LLP. From 1987 to 1994, he served as Senior Vice President and Chief Financial Officer of Automobile Protection Corporation-APCO, an unaffiliated public corporation. From 1996 to 1998, Mr. Marks served as the Chairman of RIBA.
Sanford B. Cohen has been a director of the Company since February, 1999. In 1985, Mr. Cohen founded Prescott Valley Broadcasting Co., Inc., owner of KIHX-FM and KQNA-AM radio stations in Prescott Valley, Arizona, and has been its President since its inception. From 1982 to 1984, Mr. Cohen was Vice President of National Phonecasting Co., a joint venture with Gannett Broadcasting Corp., a private company engaged in telephone broadcasting of financial information. Mr. Cohen received his B.A. degree in Economics in 1979 from Michigan State University.
Wm. Dennis Ferguson also serves as Executive Vice President of certain of the Company's wholly-owned subsidiaries. From July 21, 1990 to October 31, 1990, prior to its acquisition by Company, Mr. Ferguson served as acting President and Chief Executive Officer of the predecessor company ("Old JWC Financial") which was acquired by the Company on November 1, 1990. From 1981 to 1990, he held various executive positions at Old JWC Financial. Mr. Ferguson received a Bachelor of Science degree from Florida Southern College and attended Florida Atlantic University Graduate School. From 1978 to 1980, Mr. Ferguson was Area Vice President and Office Manager for the investment banking firm of Dean Witter Reynolds.
Gregg S. Glaser also serves as Executive Vice President and Treasurer of certain of the Company's wholly-owned subsidiaries. Mr. Glaser graduated with a Bachelor of Science degree in accounting from the University of Florida. From 1981 to 1986, when he joined Old JWC Financial, Mr. Glaser was a senior auditor with the Fort Lauderdale office of the international accounting and consulting firm of Price Waterhouse LLP.
Jeffrey H. Lehman is also Executive Vice President of the Company and Director of Corporate Finance of JWG Capital. From 1984 to 1996 he was employed by Ladenburg, Thalmann & Co. Inc., most recently as Managing Director of Corporate Finance and Director of Mergers and Acquisitions. Mr. Lehman also served as a member of the Board of Directors and Management Committee of Ladenburg, Thalmann. He received his Masters in Business Administration with distinction from the Wharton School of the University of Pennsylvania in 1983.
Board Committees
Audit Committee. The Audit Committee's principal functions include reviews of audit plans, scope of examinations and findings of the Company's independent public accountants; significant legal matters; internal controls; and the adequacy of insurance coverage. Further, it is the responsibility of this committee to recommend to the Board the annual appointment of the independent public accountants; to review the findings of external regulatory agencies; and to oversee the accounting policies used in preparing the Company's financial statements. The Audit Committee also supervises independent audits of the Company and its subsidiaries and oversees the establishment of appropriate policies and internal accounting controls. Messrs. Cohen and Glaser are presently the only members of the Audit Committee; the Company expects to add to its Board of Directors another independent director, who will become a member of this committee as well.
Compensation Committee. The Compensation Committee oversees the Company's compensation policies and programs. Messrs. Cohen and Marks are presently the only members of the Compensation Committee; the Company expects to add to its Board of Directors another independent director, who will become a member of this committee as well.
Compliance with Section 16(a) of the Exchange Act
Section 16(a) of the Securities Exchange Act of 1934, as amended, requires the Company's officers and directors and persons who beneficially own more than ten percent of the Company's Common Stock
("ten-percent stockholders") to file reports of ownership and changes in ownership with the Securities and Exchange Commission (the "SEC") and with the National Association of Securities Dealers, Inc. ("NASD"). Officers, directors and ten-percent stockholders are required by SEC regulations to furnish the Company with copies of all Section 16(a) forms they file.
Based solely on its review of the copies of such forms received by it and information furnished to the Company by such persons, the Company believes that during the Company's fiscal year ended December 31, 1998, all its officers, directors and ten-percent stockholders complied with the Section 16(a) reporting requirements.
Arrangements For Board
In connection with the series of transactions between JWGFS and Wilmington Trust Company ("Wilmington"), as more fully described under "Certain Relationships and Related Transactions" herein, JWGFS granted Wilmington the right to appoint one person to serve on its Board of Directors. The Company has agreed to honor that agreement. Wilmington has not yet exercised such right.
ITEM 11. EXECUTIVE COMPENSATION.
The following tables show, as to the Company's Chief Executive Officer and Named Executive Officers, certain information with respect to options granted to them. No stock appreciation rights ("SARs") have been granted. ____________
Directors who are not employees of the Company receive an annual retainer of $5,000, and receive $750 and $500, respectively, for their attendance at Board of Directors or Board committee meetings. Directors who are employees of the Company are not compensated for their service on the Board or Board committees. Each director is also reimbursed for travel expenses incurred in connection with attending meetings.
The following tables show, as to the Company's Chief Executive Officer and Named Executive Officers, certain information with respect to options granted to them. No stock appreciation rights ("SARs") have been granted.
Option/SAR Grants In Last Fiscal Year (Individual Grants)
The following table sets forth further information on grants of stock options during 1998 to each of the Named Executive Officers, if any were granted, pursuant to the Company's 1990 Stock Option Plan. No stock appreciation rights were granted during 1998.
Aggregated Option Exercises In Last Fiscal Year And Fiscal Year-End Option Values
The following table sets forth further information with respect to option exercises during 1998 and unexercised stock options held by each of the Named Executive Officers at December 31, 1998, if he exercised or held any.
Stock on The American Stock Exchange was $5.9375.
Employment Agreement
Messrs. Leeds, Marks, and Glaser. The Company has entered into an employment agreement with each of Messrs. Leeds, Marks, and Glaser pursuant to which Mr. Leeds is employed as Chairman of the Board, President, and Chief Executive Officer of the Company, Mr. Marks is employed as Executive Vice President and Chief Financial Officer of the Company and Mr. Glaser is employed as Executive Vice President of the Company.
The term of the agreement for each of Messrs. Leeds, Marks and Glaser extends to December 31, 2001 and each agreement is automatically extended for successive one-year terms thereafter unless either party gives six-months' prior written notice to the other party of its election not to extend the term. Messrs. Leeds', Marks', and Glaser's base annual salaries are $500,000, $250,000, and $250,000, respectively, with an annual cost of living increase, if applicable.
In addition, the agreements for Messrs. Leeds and Marks require the Company to establish an executive bonus pool (the "Executive Bonus Pool"), which has been established in the form of the Company's shareholder approved Management Incentive Bonus Plan, pursuant to which an aggregate of 15% of the Company's annual pre-tax profits will be paid to Messrs. Leeds and Marks. Messrs. Leeds and Marks will be eligible to receive 50% and 21.5%, respectively, of the Executive Bonus Pool as determined by the committee of the Board of Directors responsible for the Executive Bonus Pool of the Company, subject to downward adjustment to 35% and 5%, respectively, at the discretion of such committee. Pursuant to Mr. Glaser's agreement, the Company will pay an annual bonus to him equal to 0.616% of the Company's consolidated pre-tax income. In addition, the Company has issued to Mr. Glaser options to purchase 60,000 shares of Company common stock at an exercise price of $10.50 per share. Options for 20,000 shares vested on the date of grant, and options for an additional 20,000 shares will vest on each of June 16, 1999 and 2000.
If the Company (i) terminates the employment of Messrs. Leeds, Marks, or Glaser other than for cause or as a result of the death or disability of any such person; (ii) reduces his authority, duties, or standing within the Company without his consent; or (iii) experiences a change of control (as defined) without his consent and he subsequently terminates his employment, then the Company will pay to such person an amount equal to his aggregate base annual salary for the remainder of the term of his employment agreement (or a minimum of 12 months) and bonus payments to which he would have been entitled for the remainder of the term had his employment not terminated, and all outstanding stock options held by such person will become fully vested.
Nonsolicitation Agreements
Messrs. Leeds and Marks have entered into nonsolicitation agreements with the Company for a period of seven years from June 12, 1998 (the "Nonsolicitation Agreements"). In connection with those agreements and in consideration for Messrs. Leeds' and Marks' agreements to terminate the financial terms of their employment agreements with JWCFS in connection with the Share Exchange, the Company agreed to make certain payments to each of them (the "Special Payments"). Messrs. Leeds and Marks agreed to accept their respective Special Payments in the form of one-half cash and one-half restricted shares of JWGenesis Common Stock.
The cash portion of the Special Payments consists of four equal installments, the first paid in July 1998 and the remaining installments to be paid on January 15, 1999, 2000 and 2001, in the amounts of $533,750 and $215,000 each for Messrs. Leeds and Marks, respectively. If the employment of either Messrs. Leeds or Marks is terminated for any reason other than cause, any unpaid cash installment to him must be paid within 30 days of termination. The restricted shares portion of the Special Payments will be paid by the issuance to Messrs. Leeds and Marks of 255,689 shares and 109,994 shares, respectively, of JWGenesis Common Stock, subject to forfeiture as described below. (Such numbers of shares were derived from a formula to yield a value (based on 80% of the average closing price of the JWCFS Common Stock for the 10 consecutive trading days immediately preceding consummation of the Combination, or $8.35 per share) equal to $2,135,000 in the case of Mr. Leeds and $860,000 in the case of Mr. Marks.) Twenty-five percent of the shares issued to Messrs. Leeds and Marks will vest on January 15, 2002 and an additional 25% on each January 15 in 2003 through 2005. All unvested shares of Messrs. Leeds or Marks will be subject to forfeiture at any time there is a violation of his respective Nonsolicitation Agreement. In the event of a change in control of the Company, all such shares become immediately vested, and the forfeiture provisions with respect to such shares will no longer be in force.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
The following table sets forth the holdings of Common Stock, which is the Company's only class of voting securities, by the only stockholders who, as of March 10, 1999, were known by the Company to own beneficially more than five percent of the Company's outstanding Common Stock, by all directors, by each of the Named Executive Officers, and by all directors and executive officers of the Company as a group, as of the same date. Unless otherwise indicated, the person or entity has sole power to vote and dispose of the shares. The address for each of Messrs. Leeds, Marks, Ferguson, Glaser, and Cohen is c/o the Company at 980 North Federal Highway, Suite 310, Boca Raton, Florida 33432; the address for Mr. Lehman is 599 Lexington Avenue, New York, New York 10022; the address for Mr. Weinstein is c/o Jackson Square Partners, 909 Montgomery Street, Suite 600, San Francisco, California 94133; and the address for WT Investments, Inc. is 1100 N. Market Street, Wilmington, Delaware 19890.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
In January 1996, JWGFS obtained an unsecured $2,500,000 revolving line of credit from Wilmington Trust Company ("Wilmington") 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 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 nine-quarter period. In connection with the Share Exchange, the Company assumed the obligations of JWGFS under the Wilmington Facility, including obligations of JWGFS with respect to board membership, the Wilmington Warrant and the Wilmington Marketing Agreement, all described in the next paragraph. At December 31, 1998, the balance outstanding under the Wilmington Facility was $1,500,000.
In connection with the Wilmington Facility, Wilmington has the right to designate one person to serve on the Company's Board of Directors, which right Wilmington has not yet exercised. In addition, JWGFS entered into a Marketing Agreement with Wilmington Trust FSB (the "Wilmington Marketing Agreement") and granted W T Investments, Inc. a warrant, which has been assumed by the Company and now relates to the purchase of up to 400,000 shares of the Company's Common Stock at any time prior to December 31, 2002 (the "Wilmington Warrant") at an exercise price of $11.30. The Wilmington 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.
In connection with the Combination, the Company entered into the Nonsolicitation Agreements with Messrs. Leeds and Marks, which are described above under "Executive Compensation - Nonsolicitation Agreements". These agreements were approved by the shareholders of JWGFS in connection with their approval of the Share Exchange and the Combination.
On March 3, 1999, pursuant to the Conciliation Agreement, the Company consummated the Divestiture and its related series of arrangements with Messrs. Stapleton and Weinstein, each of whom was an executive officer and director of the Company until such consummation. See "Business - Recent Developments - The Genesis Divestiture".
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 JWGENESIS FINANCIAL CORP. and subsidiaries are included in Part II - Item 8