UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1996
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ______________________ to _______________
Commission File # 0-15187
Jack Carl/312-Futures, Inc.
- ------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
Delaware 36-3399452
- ------------------------------------------------------------------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
200 West Adams Street, Suite 1500, Chicago, Illinois 60606
- ------------------------------------------------------------------------------
(Address of principal executive offices) (Zip Code)
(312) 407-5726
- -------------------------------------------------------------------------------
(Registrant's telephone number, including area code)
Not Applicable
- -------------------------------------------------------------------------------
(Former name, former address and former fiscal year, if changed since last
report)
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 past 90 days.
X Yes No
----- ____
As of the date of this report, the issuer had outstanding 33,624,530 shares of
common stock, $.004 par value per share.
This is page 1 of 30 sequentially numbered pages.
JACK CARL/312-FUTURES, INC. AND SUBSIDIARIES
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
Immediately following this page, the following financial information of the
Registrant is filed as part of this Report.
Page
----
Consolidated statements of financial condition
as of September 30, 1996 and June 30, 1996. 3
Consolidated statements of operations for the
three months ended September 30, 1996 and 1995. 4
Consolidated statement of changes in stockholders'
equity for the three months ended September 30,
1996. 5
Consolidated statements of changes in liabilities
subordinated to claims of general creditors for
the three months ended September 30, 1996 and 1995. 6
Consolidated statements of cash flows for the
three months ended September 30, 1996 and 1995. 7-8
Notes to consolidated financial statements. 9
2
JACK CARL/312-FUTURES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
SEPTEMBER 30, 1996 AND JUNE 30, 1996
ASSETS
September 30, June 30,
1996 1996
------------- -------------
(Unaudited) (Audited)
Cash $ 2,404,100 $ 1,587,300
Cash segregated or secured under Commodity Exchange Act 5,000 2,009,500
U.S. Government obligations 4,985,800 144,328,800
Other short term investments 16,163,800 28,856,100
Deposits with clearing organizations 2,233,100 43,488,500
Warehouse receipts - 959,500
Receivables:
Brokers and dealers 3,037,200 2,291,900
Clearing organizations - 12,383,200
September 30, June 30,
1996 1996
------------ ----------
Customers $ 539,400 $1,138,400
Affiliates - 1,000
Other 1,458,600 1,061,800
Less - Allowance for doubtful accounts (415,100) (409,300) 1,582,900 1,791,900
---------- ----------
Notes receivable 625,100 627,200
Exchange memberships, at cost (market value of $937,000
and $960,400 at September 30, 1996 and June 30, 1996,
respectively) 743,000 781,300
Furniture, equipment, and leasehold improvements, net of
accumulated depreciation and amortization of $2,235,800
and $2,213,400 at September 30, 1996 and June 30, 1996,
respectively 221,800 279,500
Other assets 227,600 503,000
----------- ------------
Total $32,229,400 $239,887,700
=========== ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Bank overdrafts $ 212,600 $ -
Payables:
Clearing organizations - 165,900
Customers 18,577,300 216,705,300
Officers and employees - 2,865,000
Affiliates 18,100 -
Accounts payable and accrued expenses 1,480,700 3,545,000
Notes payable 5,490,000 6,390,000
----------- -----------
Total 25,778,700 229,671,200
----------- -----------
Liabilities subordinated to claims of general creditors - 4,000,000
----------- ------------
Stockholders' equity:
Class A preferred stock, $1 par value; 10% cumulative,
redeemable, 400,000 shares authorized and outstanding 400,000 400,000
Common stock, $.004 par value; 150,000,000 shares authorized,
33,624,530 shares issued and outstanding at September 30, 1996 and
June 30, 1996 134,500 134,500
Paid-in capital 8,395,300 8,395,300
Retained deficit (2,433,400) (2,698,800)
Cumulative translation adjustment (45,700) (14,500)
----------- ------------
Total stockholders' equity 6,450,700 6,216,500
----------- ------------
Total $32,229,400 $239,887,700
=========== ============
The accompanying notes are an integral part of the consolidated financial
statements.
3
JACK CARL/312-FUTURES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE MONTHS ENDED SEPTEMBER 30, 1996 AND 1995
(UNAUDITED)
Three Months Ended
September 30,
---------------------------
1996 1995
---- ----
Revenues:
Commissions $ 61,300 $ 7,803,200
Interest 532,600 1,818,900
Trading gains, net 957,400 55,100
Other 1,033,700 41,200
----------- -----------
Total revenues 2,585,000 9,718,400
----------- -----------
Expenses:
Commission, floor brokerage and clearing costs 54,900 4,254,400
Compensation and related benefits 927,900 2,525,400
Communications 174,200 428,600
Interest 474,900 911,800
Rent and other occupancy costs 152,200 380,500
Business promotion 87,500 478,400
Professional and consulting fees 155,100 198,500
Depreciation 22,000 69,800
Amortization of goodwill - 13,400
Other 118,700 467,900
----------- -----------
Total expenses 2,167,400 9,728,700
----------- -----------
Income before income taxes 417,600 (10,300)
Income tax expense 152,200 44,400
----------- -----------
Net income 265,400 (54,700)
Assumed cumulative dividend on Class A preferred stock (10,000) (10,000)
----------- -----------
Net income applicable to common stock $ 255,400 $ (64,700)
=========== ===========
Primary earnings per common share:
Net income $ .01 $ (.00)
=========== ===========
Weighted average number of common shares outstanding 33,624,530 33,688,308
=========== ===========
Fully diluted earnings per common share:
Net income $ .01 $ (.00)
=========== ===========
Weighted average number of common shares outstanding 33,624,530 33,688,308
=========== ===========
The accompanying notes are an integral part of the consolidated financial
statements.
4
JACK CARL/312-FUTURES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
FOR THE THREE MONTHS ENDED SEPTEMBER 30, 1996
(UNAUDITED)
Class A Common Stock Cumulative
Preferred ------------ Paid-In Retained Translation
Stock Shares Amount Capital Deficit Adjustment Total
--------- ------ ------ ------- -------- ----------- ------
Balance, July 1, 1996 $400,000 33,624,530 $134,500 $8,395,300 $(2,698,800) $(14,500) $6,216,500
Net income - - - - 265,400 - 265,400
Foreign currency
translation - - - - - (31,200) (31,200)
-------- ---------- -------- ---------- ----------- -------- ----------
Balance,
September 30, 1996 $400,000 33,624,530 $134,500 $8,395,300 $(2,433,400) $(45,700) $6,450,700
======== ========== ======== ========== =========== ======== ==========
The accompanying notes are an integral part of the consolidated financial
statements.
5
JACK CARL/312-FUTURES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN LIABILITIES
SUBORDINATED TO CLAIMS OF GENERAL CREDITORS
FOR THE THREE MONTHS ENDED SEPTEMBER 30, 1996 AND 1995
(UNAUDITED)
Three Months Ended
September 30,
------------------------
1996 1995
---- ----
Liabilities subordinated to claims of
general creditors, at beginning of
period $ 4,000,000 $1,690,000
New borrowings - 1,750,000
Repayments (4,000,000) -
----------- ----------
Liabilities subordinated to claims of
general creditors, at end of period $ - $3,440,000
=========== ==========
The accompanying notes are an integral part of the consolidated financial
statements.
6
JACK CARL/312-FUTURES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE THREE MONTHS ENDED SEPTEMBER 30, 1996 AND 1995
(UNAUDITED)
Three Months Ended
September 30,
-----------------------------
1996 1995
---- ----
Cash Flows From Operating Activities:
Net income (loss) $ 265,400 $ (54,700)
Adjustments to reconcile net income (loss) to net cash
provided by (used in) operating activities:
Depreciation and amortization 22,000 83,200
Deferred taxes (9,800) (30,700)
Doubtful accounts benefit (56,500) (45,000)
Equity in net gain of affiliated partnerships - (8,500)
Loss on the sale of exchange memberships 22,300 -
Gain on the sale of clearing corporation stock (664,000) -
Changes in:
Cash segregated or secured under
Commodity Exchange Act, net 2,140,900 (572,900)
U.S. Government obligations 139,343,000 (21,145,800)
Other short term investments 12,692,300 -
Deposits with clearing organizations 40,895,400 8,094,000
Warehouse receipts 959,500 637,600
Receivables 11,903,400 1,082,100
Other assets 285,200 (238,900)
Payables (201,140,800) 12,689,300
Accounts payable and accrued expenses (2,064,300) (1,767,400)
------------- ------------
Cash provided by (used in) operating activities 4,594,000 (1,277,700)
------------- ------------
Cash Flows From Investing Activities:
Investments in and advances to affiliated partnerships, net - (900)
Decrease in notes receivable 2,100 1,200
Purchase of furniture, equipment and leasehold
improvements (43,900) (86,800)
Proceeds from the sale of exchange memberships 16,000 -
Proceeds from the sale of clearing corporation stock 1,024,000 -
Proceeds from the sale of furniture and equipment 79,600 -
------------- ------------
Cash provided by (used in) investing activities 1,077,800 (86,500)
------------- ------------
Cash Flows From Financing Activities:
Increase in short term advance - 1,000,000
Repayment of short term advance - (1,000,000)
Repayment of notes payable (900,000) -
Increase in liabilities subordinated to
claims of general creditors - 1,750,000
Repayment of liabilities subordinated to
claims of general creditors (4,000,000) -
------------- ------------
Cash provided by (used in) financing activities (4,900,000) 1,750,000
------------- ------------
Effect of exchange rate changes on cash (31,200) (14,500)
------------- ------------
Increase in cash 740,600 371,300
Cash, beginning of period 1,587,300 1,034,900
------------- ------------
Cash, end of period $ 2,327,900 $ 1,406,200
============= ============
The accompanying notes are an integral part of the consolidated financial
statements.
7
JACK CARL/312-FUTURES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE THREE MONTHS ENDED SEPTEMBER 30, 1996 AND 1995
(UNAUDITED)
(CONTINUED FROM PAGE 7)
Supplemental Schedule of Non-Cash Investing
and Financing Activities
Three Months Ended September 30, 1996
- -------------------------------------
(NONE)
Three Months Ended September 30, 1995
- -------------------------------------
(NONE)
8
JACK CARL/312-FUTURES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1996
(UNAUDITED)
NOTE 1 - ORGANIZATION OF JACK CARL/312-FUTURES, INC.
Jack Carl/312-Futures, Inc. ("JC/312") and Subsidiaries, (the "Company"),
until July 1, 1996, engaged principally in the business of effecting
transactions in futures and options on futures contracts for the accounts of
customers and the operation of commodity pools. Effective July 1, 1996, Index
sold, transferred and assigned substantially all of its brokerage accounts
("Sale of Assets") to E.D. & F. Man International Inc. ("MINC"). Index Futures
Group, Inc. ("Index"), until July 1, 1996, was the principal operating
subsidiary of JC/312. Index remains a registered futures commission merchant
with the Commodity Futures Trading Commission ("CFTC"). Index FX, Ltd. ("Index
FX"), a British corporation and a subsidiary of JC/312, continues to conduct
foreign exchange business. Another subsidiary of JC/312 is a registered broker-
dealer.
The results of operations for interim periods are not necessarily
indicative of the results to be expected for the full year.
It is suggested that these financial statements be read in connection with
the consolidated financial statements and notes included in the Report on Form
10-K of the Company for the year ended June 30, 1996.
The consolidated financial statements include the accounts of the Company
and its wholly-owned subsidiaries as well as those of its majority-owned
subsidiary. All material intercompany accounts and transactions are eliminated
in consolidation. In the opinion of management, all adjustments necessary for a
fair presentation of the interim financial statements have been reflected.
Certain amounts previously reported have been reclassified to conform to
the current method of presentation.
Assets and liabilities of non-U.S. operations are translated into U.S.
dollars at period-end exchange rates. Revenues and expenses are translated using
monthly average exchange rates. The resulting translation adjustment is reported
as a separate component of stockholders' equity. Gains and losses from non-U.S.
transactions are included in results of operations.
9
JACK CARL/312-FUTURES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1996
(UNAUDITED)
NOTE 2 - ASSETS SEGREGATED AND SECURED UNDER COMMODITY EXCHANGE ACT
Under the Commodity Exchange Act, as amended, Index is required to
segregate all balances due to customers in connection with transactions in
regulated commodities. In addition, in accordance with CFTC Regulation 30.7,
Index is required to secure all balances due to U.S. customers for activities in
foreign futures or options. Effective July 1, 1996, pursuant to the Sale of
Assets, Index transferred all such balances to MINC.
NOTE 3 - OTHER SHORT TERM INVESTMENTS
Other short term investments consist of $16,163,800 of time deposits at
September 30, 1996, due at various dates through October 24, 1996, and
$28,856,100 of time deposits at June 30, 1996, due July 1, 1996.
NOTE 4 - DEPOSITS WITH CLEARING ORGANIZATIONS
Deposits with clearing organizations are as follows:
September 30, June 30,
1996 1996
------------- -----------
U.S. Government obligations $ - $37,961,600
Guarantee deposits 1,835,600 1,232,300
Stock in exchange clearing
organization at cost (market
value of $1,024,000 at
June 30, 1996) - 360,000
Cash margins 397,500 3,934,600
---------- -----------
Total $2,233,100 $43,488,500
========== ===========
10
JACK CARL/312-FUTURES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1996
(UNAUDITED)
NOTE 5 - CUSTOMER OWNED SECURITIES
Customer-owned securities are reflected at market value in the consolidated
statements of financial condition. This presentation has no effect on
stockholders' equity. The total market value of customer-owned securities
included in the consolidated statements of financial condition as both assets
and liabilities at September 30, 1996 and June 30, 1996 is $0 and $48,891,300,
respectively.
NOTE 6 - NOTES PAYABLE
Notes payable consist of the following:
September 30, June 30,
1996 1996
------------- ----------
Principal stockholder,
interest at prime plus 4%, due:
January 31, 1997 $ 540,000 $ 540,000
January 31, 1997 400,000 400,000
Affiliates and other related parties,
interest at prime plus 4%, due:
January 31, 1997 - 150,000
January 31, 1997 2,000,000 2,000,000
January 31, 1997 1,800,000 1,800,000
January 31, 1997 - 750,000
January 31, 1997 750,000 750,000
---------- ----------
Total $5,490,000 $6,390,000
========== ==========
Interest expense on notes payable during the three months ended September
30, 1996 and 1995 was $187,700 and $205,600, respectively, all of which was
earned by related parties.
In September, 1996, the Company repaid $900,000 of notes payable to its
former President and a former Director.
In August, 1995, the principal stockholder made a $1,000,000 short term
advance to the Company. The Company repaid the advance in September, 1995.
11
JACK CARL/312-FUTURES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1996
(UNAUDITED)
NOTE 7 - LIABILITIES SUBORDINATED TO CLAIMS OF GENERAL CREDITORS
Liabilities subordinated to claims of general creditors were borrowed in
accordance with the terms of a revolving subordinated debt line totalling
$4,000,000. The full amount of the borrowing was repaid in August, 1996, and the
line was canceled.
Interest expense on liabilities subordinated to claims of general creditors
during the three months ended September 30, 1996 and 1995 was $38,100 and
$53,300, respectively.
NOTE 8 - STOCKHOLDERS' EQUITY
RIGHTS OFFERING
In July, 1994, the Company offered to its common stockholders the non-
transferable right to purchase, at a subscription price of $.02 per share, two-
thirds of a share of common stock for each one share of common stock owned of
record on July 15, 1994. 53,799,304 shares of common stock were available and
purchased in the Rights Offering. The gross proceeds of the Rights Offering were
$1,076,000.
CLASS A PREFERRED STOCK
The Company has issued 400,000 shares of Class A preferred stock, 10%
cumulative, to its principal stockholder. The shares are redeemable at par, with
accumulated dividends, at the option of the Company. At September 30, 1996,
cumulative dividends in arrears amounted to $423,300 or $1.06 per share. No
liability for these dividends has been recorded as dividends are not payable
until declared.
COMMON STOCK
Effective at the close of business November 4, 1994, the Company effected a
one-for-four reverse split of its common stock, par value $.001. Each four
shares of such common stock were reclassified and changed into one share of
common stock having a par value of $.004. Pursuant to the reverse split, the
Company is obligated to pay any holder of fractional shares resulting from the
reverse split $.05 per share of common stock up to a maximum of $.15 for three
shares. At the close of business on November 4, 1994, the outstanding shares of
common
12
JACK CARL/312-FUTURES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1996
(UNAUDITED)
NOTE 8 - STOCKHOLDERS' EQUITY (CONTINUED)
stock were reduced to approximately 33,624,565 shares from 134,498,260 shares
before the reverse split. As the result of the repurchase of fractional shares,
there are outstanding as of September 30, 1996, 33,624,530 shares of common
stock.
STOCK OPTION PLAN
In March, 1986, the Company adopted an incentive stock option plan
reserving 500,000 shares of common stock. In March, 1990, the Company, pursuant
to the incentive stock option plan, granted options for 410,000 shares at the
then market price exercisable through March, 2000. The Company also has granted
options, other than in accordance with the March 1986 incentive stock option
plan. In November, 1996, the Board of Directors authorized the reissuance of
options for 1,250,000 shares of common stock at $.24 per share, terminating June
30, 1998. The options were originally issued in February, 1994 and terminated
upon the former President accepting employment with MINC.
13
JACK CARL/312-FUTURES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1996
(UNAUDITED)
NOTE 8 - STOCKHOLDERS' EQUITY (CONTINUED)
The following summarizes, after restatement for the November 4, 1994 one-
for-four reverse stock split, all outstanding options at September 30, 1996.
Shares Shares Shares Shares Shares
Granted Price Exercisable Forfeited Cancelled Remaining
--------- ----- ----------- ---------- --------- ---------
Dec.
1990 410,000 $.60 70,000 320,469 19,531 70,000
Feb.
1992 125,000 $.25 - 125,000 - -
May
1992 75,000 $.60 - 75,000 - -
Sep.
1992 125,000 $.375 125,000 - - 125,000
Feb.
1994 1,250,000 $.24 - 1,250,000 - -
Jan.
1995 250,000 $.125 - 250,000 - -
--------- ------- --------- ------ -------
Total 2,235,000 195,000 2,020,469 19,531 195,000
========= ======= ========= ====== =======
NOTE 9 - RELATED PARTY TRANSACTIONS
A note receivable in the amount of $625,100 arose in connection with
advances made by the Company to an affiliated entity. This receivable was
converted into a note bearing interest at 8%, and was subsequently changed to
the prime rate of interest. The Company earned interest income on this note in
the amounts of $12,900 and $13,800 during the three months ended September 30,
1996 and 1995, respectively.
The Company, until July 1, 1996, rented, from an officer and a director, an
exchange membership. Rent expense for the three months ended September 30, 1996,
and 1995 was $0 and $18,000, respectively.
14
JACK CARL/312-FUTURES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1996
(UNAUDITED)
NOTE 9 - RELATED PARTY TRANSACTIONS (CONTINUED)
The Company receives funds, in the form of loans and advances, from its
principal shareholder and an affiliated company. See Note 6 for the terms and
balances at September 30, 1996 and June 30, 1996.
NOTE 10 - SALE OF ASSETS
On July 1, 1996, Index sold, transferred and assigned to MINC substantially
all of the brokerage accounts maintained by Index, together with all positions,
securities and other assets held in or for such accounts and other agreed-upon
assets used in the conduct of the brokerage activities. MINC is a unit of E.D. &
F. Man Group, plc, a London-based international trading and finance
conglomerate. Shortly after the sale, Index ceased being a clearing member at
all exchanges, though it remains a registered futures commission merchant.
The purchase price payable by MINC in connection with this transaction is
based on a percentage of the net income (as defined in the sales agreement) of
the transferred activities during the sixty-six month period following the sale.
As the purchase price is contingent upon the future earnings of the customer
accounts sold, none of which is guaranteed, no gain on the sale was reflected in
the financial statements for the year ended June 30, 1996. Rather, income will
be recognized as earned over the next five and one-half years. A condition of
the sales agreement required the principal shareholder to sign a non-competition
agreement. As compensation for providing such an agreement, a portion of the
purchase price will be allocated to the principal shareholder and recorded by
the Company concurrently with its recognition of income as described above.
Management does not believe this amount will be significant.
During the three months ended September 30, 1996, the Company earned
$375,500 from this transaction which is included in other income.
15
JACK CARL/312-FUTURES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1996
(UNAUDITED)
NOTE 11 - COMMITMENTS AND CONTINGENCIES
The Company has a noncancellable lease for office space which expires in
the year 2002. Minimum annual rentals, excluding escalations and increases in
operating expenses and taxes, are as follows:
Year Ending June 30, Amount
-------------------- ------
1997 $ 255,500
1998 350,500
1999 362,300
2000 374,000
2001 and thereafter 849,900
---------
Total $2,192,200
=========
The Company has entered into employment agreements which expire at varying
dates through fiscal 1998 with certain of its employees, providing for aggregate
minimum annual payment for the years ending 1997 and 1998 of approximately
$252,300 and $204,500, respectively.
Related to the Sale of Assets, if certain conditions occur over the next
two years, the Company may be subject to additional severance payments of up to
$517,400.
The Company had guaranteed performance under the Commodity Exchange Act of
certain introducing brokers with respect to their customer accounts. These
introducing broker guarantees were transferred to MINC effective July 1, 1996.
Index issued a limited indemnification agreement to MINC related to the
Sale of Assets. This agreement covers potential customer claims arising from
activity prior to the sale. No such claims are currently outstanding.
16
JACK CARL/312-FUTURES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1996
(UNAUDITED)
NOTE 11 - COMMITMENTS AND CONTINGENCIES (CONTINUED)
The Company is a defendant in, and may be threatened with, various legal
proceedings arising from its regular business activities. Management, after
consultation with legal counsel, is of the opinion that the ultimate liability,
if any, resulting from any pending action or proceedings will not have a
material effect on the financial position or results of operations of the
Company.
The Company was defending against an arbitration filed by a former client
to recover damages of $1,000,000 alleging misrepresentation of risk and
unauthorized trading. The client's actual losses were approximately $850,000. In
July, 1996, an arbitration panel entered an award of no damages for the
claimant.
In April, 1994, Index, without admitting or denying the allegations, paid
$100,000 to the CFTC, settling an administrative action, filed on September 29,
1992. In a related action, the equity receiver of an alleged commodity pool
operator brought an action to recover losses of approximately $600,000, alleging
various theories such as constructive trust, negligence, breach of fiduciary
duty and conversion. On May 29, 1996, the district judge dismissed the complaint
in its entirety. Supplemental Plaintiff filed a Notice of Appeal with the U.S.
Court of Appeals for the Seventh Circuit on June 28, 1996. The Seventh Circuit
has rejected the appeal on procedural grounds, however, the Supplemental
Plaintiff may file another appeal.
A former officer of Index whose employment was terminated as a result of
the Sale of Assets has rejected Index's severance payment offer. The officer has
made a demand for $500,000, and has threatened litigation, if a satisfactory
offer of settlement is not made. The Company believes that its original
severance offer was reasonable and the officer's claims are without merit.
17
JACK CARL/312-FUTURES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1996
(UNAUDITED)
NOTE 12 - INCOME TAXES
Effective July 1, 1993, the Company adopted Statement of Financial
Accounting Standards No. 109 - Accounting for Income Taxes. Under this standard,
deferred tax is recognized using the liability method, whereby tax rates are
applied to cumulative temporary differences based on when and how they are
expected to affect the tax return. Deferred tax assets and liabilities are
adjusted for tax rate changes. The primary components of the Company's deferred
tax assets and liabilities are as follows:
September 30, June 30,
1996 1996
------------- --------
Deferred income tax assets:
Bad debt reserve $ 40,600 $ 38,600
Book and tax depreciation
difference 239,200 235,800
Commission accrual 38,600 37,500
Bonus accrual 4,400 4,400
-------- --------
Total deferred tax assets $322,800 $316,300
-------- --------
Deferred income tax liabilities:
Unrealized gain on U.S.
Government obligations $ - $ (4,500)
Partnership income (34,900) (34,900)
Prepaid rent - (4,900)
Other, net (8,900) (2,800)
-------- --------
Total deferred tax liabilities $(43,800) $(47,100)
-------- --------
Net deferred tax assets
(liabilities) $279,000 $269,200
======== ========
No valuation allowance has been provided as management believes deferred
taxes are realizable.
18
JACK CARL/312-FUTURES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1996
(UNAUDITED)
NOTE 13 - FINANCIAL INSTRUMENTS WITH OFF BALANCE SHEET RISK AND
CONCENTRATION OF CREDIT RISK
The Company, through Index, until July 1, 1996, was in the business of
clearing and executing futures contracts and options on futures contracts for
the accounts of its customers. As such, Index guaranteed to the respective
clearinghouses its customers' performance under those contracts. To reduce its
risk, Index required its customers to meet, at a minimum, the margin requirement
established by each of the exchanges at which the contract was traded. This
margin was a good faith deposit from the customer which reduced the risk to
Index of failure on behalf of the customer to fulfill any obligation under the
contract. To minimize its exposure to risk of loss due to market variation,
Index adjusted these margin requirements, as needed, due to daily fluctuations
in the values of the underlying positions. If necessary, certain positions may
have been liquidated to satisfy resulting changes in margin requirements.
Management believed that the margin deposits held at September 30, 1995, were
adequate to minimize the risk of material loss which could have been created by
the positions held at that time. At September 30, 1996, Index held no long or
short proprietary financial futures positions or customer foreign currency
forward contracts. At September 30, 1995 Index held long proprietary financial
futures positions and customer foreign currency forward contracts with an
aggregate notional value of $200,681,900 and proprietary short financial futures
positions and customer foreign currency forward contracts with an aggregate
notional value of $200,676,900.
The exchange upon which financial futures and options on futures contracts
were traded acted as the counterparty and, accordingly, bore the risk of
performance. At September 30, 1995, Index's open financial contracts were
transacted at the Chicago Mercantile Exchange, Chicago Board of Trade, Commodity
Exchange, Inc. and MidAmerican Commodity Exchange. At September 30, 1995,
foreign currency forward contracts were transacted at the First National Bank of
Chicago.
Index FX conducts business for its customers in foreign currencies on the
spot market in which trades generally settle on the next business day. Index FX
offsets its customer positions to manage its currency risk. It also requires
certain customers to post margin deposits. Management believes that with the
19
JACK CARL/312-FUTURES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1996
(UNAUDITED)
NOTE 13 - FINANCIAL INSTRUMENTS WITH OFF BALANCE SHEET RISK AND
CONCENTRATION OF CREDIT RISK (CONTINUED)
trades settling the next business day, and the margin policy it employs, its
credit risk is reduced substantially. At September 30, 1996, Index FX held long
foreign currency positions with an aggregate notional value of $3,052,757,900
and short foreign currency positions with an aggregate notional value of
$3,052,508,700. Index FX held no long or short foreign currency positions at
September 30, 1995.
At September 30, 1996, the Index FX foreign currency business was
transacted with various counterparties including several international financial
institutions.
NOTE 14 - CAPITAL REQUIREMENTS
Index is subject to the minimum capital requirements adopted and
administered by the Commodity Futures Trading Commission ("CFTC") and by certain
exchanges of which Index is a member. As of September 30, 1996, adjusted net
capital, as defined of approximately $4,403,400 is approximately $4,153,400 in
excess of the minimum required under the regulations of the CFTC and exchanges.
The net capital requirements may effectively restrict the payment of cash
dividends and the repayment of subordinated borrowings.
A subsidiary of JC/312 is subject to the Uniform Net Capital Rule adopted
and administered by the Securities and Exchange Commission. At September 30,
1996, the subsidiary was in compliance with those requirements.
NOTE 15 - CASH FLOWS
For purposes of reporting cash flows, cash includes non-segregated cash and
bank overdrafts, and does not include net segregated or secured cash, as
defined, in the Commodity Exchange Act. Interest paid during the three months
ended September 30, 1996 and 1995 amounted to $690,400 and $920,600,
respectively. The Company made income tax payments in the amount of $35,000 and
$1,100,000 during the three months ended September 30, 1996, and 1995,
respectively.
20
JACK CARL/312-FUTURES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1996
(UNAUDITED)
NOTE 16 - SUBSEQUENT EVENT
The Board of Directors is exploring various business opportunities for the
Company, now that Index no longer acts as a futures broker. Inventory financing
is one of the businesses currently under consideration. In November, 1996, the
Company entered into a one-time inventory financing transaction.
21
JACK CARL/312-FUTURES, INC. AND SUBSIDIARIES
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations for the Period Ended September 30, 1996.
Jack Carl/312-Futures, Inc. (the "Company") is a holding company and
operates its business through its subsidiaries. Effective July 1, 1996, Index
sold, transferred and assigned substantially all of its brokerage accounts
("Sale of Assets") to E.D. & F. Man International, Inc. ("MINC"). Index Futures
Group, Inc. ("Index"), until July 1, 1996, the Company's principal operating
subsidiary, provided a full range of futures brokerage, clearing and back office
services for institutional and public commodity traders. It was a clearing
member of all major U.S. commodity exchanges. As a result of the Sale of Assets,
Index no longer acts as a futures broker for public customers and has withdrawn
as a clearing member from all commodity exchanges, where there no longer will be
any necessity for it to maintain such status, though it remains a registered
futures commission merchant. Index also acted as a registered commodity pool
operator through one of its subsidiaries. Index FX, Ltd. ("Index FX"), a British
corporation and a subsidiary of Jack Carl/312-Futures, Inc., continues to
conduct foreign exchange business. Index FX commenced trading operations in
October, 1995. The other subsidiaries of Jack Carl/312-Futures, Inc. and Index
currently have minimal operations.
Liquidity and Capital Resources
- -------------------------------
Index, because it remains a non-clearing futures commission merchant, is
still subject to minimum capital requirements adopted and administered by
various exchanges and regulatory bodies. Among these are requirements for non-
clearing futures commission merchants, that do not hold customer funds, to
maintain $250,000 minimum net capital. Throughout the three months ended
September 30, 1996, Index exceeded the net capital requirements of the Commodity
Futures Trading Commission ("CFTC"). As of September 30, 1996, Index's
regulatory capital exceeded the minimum net capital requirement by $4,153,400.
The Company, at September 30, 1996, had $5,490,000 in notes payable to
related parties maturing January 31, 1997. The Company during the quarter repaid
$900,000 of notes payable. The Company also had a $4,000,000 revolving
subordinated debt line of credit which was repaid in full in August, 1996, and
the line was cancelled. The ability to refinance its debt depends on the
lenders' desire to continue such loans with the Company.
22
JACK CARL/312-FUTURES, INC. AND SUBSIDIARIES
The Company has historically satisfied its capital needs from subordinated
loans, notes payable and proceeds from the issuance of stock. The Company, since
inception through September 30, 1996, has realized approximately $8,930,000 from
the issuance of stock. It is anticipated that the Company's short-term and long-
term capital needs will be primarily satisfied through loans and operations as
well as from the proceeds of the issuance of stock.
The Company, during the three months ended September 30, 1996, generated
approximately $4,594,000 cash from operating activities and $1,077,800 from
investing activities. The majority of the cash generated by operations and
investing activities is due to the Sale of Assets. Such cash was primarily used
to repay subordinated loans and notes payable.
Total stockholders' equity increased $234,200 to $6,450,700 at September
30, 1996, from $6,216,500 at June 30, 1996. The increase in stockholders' equity
is the result of the net income and the foreign currency translation adjustment
for the period.
The majority of the Company's assets are liquid in nature and are not
significantly affected by inflation. However, the rate of inflation affects the
Company's expenses, such as employee compensation and other operating expenses.
Results of Operations
- ---------------------
Effective July 1, 1996, Index sold, transferred and assigned to MINC
substantially all of the brokerage accounts maintained by Index together with
all positions, securities, and other assets held in or for such accounts and
other agreed-upon assets used in the conduct of the brokerage activities. As a
result of this transaction, Index no longer acts as a futures broker for public
customers. Therefore, comparisons of operations for the periods ending September
30, 1996 and 1995 are of little value. The purchase price payable by MINC in
connection with this transaction is based on a percentage of the net income, as
defined in the sales agreement, of the transferred activities during the sixty-
six month period following the sale. Such revenue is recorded as other income.
The Company, during the period ended September 30, 1995, organized Index
FX, located in London, England to conduct foreign exchange business. Index FX
commenced trading operations in October, 1995; however, it incurred start up
costs during the three months ended September 30, 1995. Due to international tax
23
JACK CARL/312-FUTURES, INC. AND SUBSIDIARIES
laws, the income tax benefit resulting from the loss generated by Index FX
during the three months ended September 30, 1995, cannot be consolidated to
reduce the Company's overall tax liability. The revenue generated by Index FX is
recorded as trading gains.
Total revenues for the quarter ended September 30, 1996 are $2,585,000
compared to $9,718,400 for the quarter ended September 30, 1995.
Commission revenue and interest income decreased because Index no longer
acts as a futures broker and transferred to MINC the assets related to such
business.
Trading gains increased by $900,000 during the quarter ended September 30,
1996, compared to the same period a year ago. Included in trading gains in 1996
is the revenue from Index FX which began trading operations in October, 1995.
Other revenue also increased, by $992,500 during the quarter ended
September 30, 1996, compared to the same period a year ago. Included in other
revenue in 1996 is a one time gain of $664,000 on the sale of clearing
corporation stock, a $22,300 loss from the sale of exchange memberships, and
$375,500 from the Sale of Assets. The revenue from the Sale of Assets is based
on a percentage of net income of the transferred activities for the quarter
ended September 30, 1996. The Company is in the process of selling its remaining
exchange memberships and will record gains or losses from such sales in future
periods.
Total expenses for the quarter ended September 30, 1996, are $2,167,400
compared to $9,728,700 for the quarter ended September 30, 1995. The decrease in
all expense classifications is the result of the Sale of Assets and because
Index no longer acts as a futures broker. The expenses for the quarter ended
September 30, 1996, reflect the ongoing expenses of Index FX, ongoing expenses
for Jack Carl/312-Futures, Inc. and Index, transitional expenses from the Sale
of Assets and minimal expenses for other subsidiaries. Management believes that
certain expenses will decrease further in the future as the transitional
employees leave the Company.
24
JACK CARL/312-FUTURES, INC. AND SUBSIDIARIES
The Board of Directors is exploring various business opportunities for the
Company, now that Index no longer acts as a futures broker. Inventory financing
is one of the businesses currently under consideration. In November, 1996, the
Company entered into a one-time inventory financing transaction.
Also, subsequent to September 30, 1996 and pursuant to the Sale of Assets
agreement, Index FX, Ltd. has changed its name to IFX, Ltd. Jack Carl/312-
Futures, Inc. and Index Futures Group, Inc., also pursuant to the Sale of Assets
agreement, must change their names. However, new names have yet to be selected
for these entities.
As a result of the aforementioned revenues and expenses, net income for the
quarter ended September 30, 1996 is $265,400 or less than $.01 per share
compared to a net loss of $54,700 or less than $.01 per share for the same
period a year ago.
25
Exhibit 11.1
JACK CARL/312-FUTURES, INC. AND SUBSIDIARIES
COMPUTATION OF EARNINGS PER COMMON SHARE
Three Months Ended
September 30,
-------------------------
1996 1995
----------- -----------
PRIMARY
- -------
EARNINGS (LOSS)
Net income (loss) $ 265,400 $ (54,700)
Deduct assumed dividends on Class A
preferred stock (10,000) (10,000)
----------- -----------
Net income (loss) applicable to
common stock $ 255,400 $ (64,700)
=========== ===========
SHARES
Weighted average number of common
shares outstanding 33,624,530 33,688,308
=========== ===========
Primary earnings (loss) per common share:
Net income (loss) $ .01 $ (.00)
=========== ===========
26
Exhibit 11.1
JACK CARL/312-FUTURES, INC. AND SUBSIDIARIES
COMPUTATION OF EARNINGS PER COMMON SHARE
Three Months Ended
September 30,
-------------------------
1996 1995
----------- -----------
ASSUMING FULL DILUTION
- ----------------------
EARNINGS (LOSS)
Net income (loss) $ 265,400 $ (54,700)
=========== ===========
SHARES
Weighted average number of common
shares outstanding 33,624,530 33,688,308
=========== ===========
Earnings (loss) per common share
assuming full dilution:
Net income (loss) $ .01 $ (.00)
=========== ===========
27
JACK CARL/312-FUTURES, INC. AND SUBSIDIARIES
PART II - OTHER INFORMATION
SEPTEMBER 30, 1996
Item 6. Exhibits and Reports on Form 8-K
(a) Immediately following this page is an Exhibit Index setting forth the
exhibits to this Quarterly Report on Form 10-Q and the page number in
the sequential numbering system where such exhibits can be found.
(b) Reports on Form 8-K - There were no reports filed on Form 8-K for the
three months ended September 30, 1996.
28
JACK CARL/312-FUTURES, INC. AND SUBSIDIARIES
EXHIBIT INDEX
Page
-----
(11) Statement re: Computation of per share earnings 26-27
29
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.
Jack Carl/312-Futures, Inc.
---------------------------
(Registrant)
Dated: November 13, 1996 By: /S/ ALLYSON LAACKMAN
------------------------------
Allyson Laackman
Chief Financial Officer
30