UNITED STATES[JO1]
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, 1995
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
-------------- ---------------
Commission File Number 0-16240
JB OXFORD HOLDINGS, INC.
------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
UTAH 95-4099866
(State of incorporation or organization) (I.R.S. Employer ID No.)
9665 Wilshire Blvd., Suite 300; Beverly 90212
Hills, California
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including (310) 777-8888
area code
Securities registered pursuant to Section None
12(b) of the Act:
Securities registered pursuant to Section Common stock, $0.01 par
12(g) of the Act: value 8,655,272 shares
outstanding at November 3,
1995
Name of each exchange on which registered NASDAQ
Indicate by check mark whether the Registrant (l) has filed all
reports required to be filed by Section l3 or l5(d) of the Securities
Exchange Act of l934 during the preceding 12 months and (2) has been
subject to such filing requirements for the past 90 days. Yes X No
-----
The aggregate market value of the voting stock held by non-affiliates
of the registrant at November 3, 1995 was approximately $23,554,021, such
amount computed as the average bid and asked prices of stock as of
November 3, 1995.
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
JB OXFORD HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
September 30, December 31,
1995 1994
(Unaudited)
ASSETS: -------------- --------------
Cash and cash equivalents $ 1,449,171 $ 156,984
Cash and cash equivalents segregated
under federal and other regulations 34,968 9,669,533
Receivable from broker/dealers and
clearing organizations
(Net of allowance for doubtful accounts
of $2,103,802 and $2,103,802) 16,038,794 16,492,065
Receivable from customers
(Net of allowance for doubtful accounts
of $4,097,694 and $4,119,204) 195,765,248 54,685,994
Other receivables
(Net of allowance for doubtful accounts
of $1,979,793 and $1,815,014) 1,510,357 636,730
Securities owned - at market value 4,372,568 1,467,545
Furniture, equipment and leasehold
improvements (At cost - less accumulated
depreciation of $1,792,882 and
$1,472,158) 1,666,806 1,381,386
Income taxes refundable -- 359,000
Deferred income taxes
(Net of valuation allowance of
$1,615,618 and $1,615,618) 1,374,652 1,774,652
Other assets 814,972 909,557
-------------- --------------
TOTAL ASSETS $ 223,027,536 $ 87,533,446
============== ==============
See accompanying notes to Consolidated Financial Statements.
JB OXFORD HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
September 30, December 31,
1995 1994
(Unaudited)
-------------- --------------
LIABILITIES AND STOCKHOLDERS' EQUITY
(DEFICIT)
LIABILITIES:
Payable to broker/dealers and clearing $ 29,912,798 $ 10,926,802
organizations
Payable to customers 168,647,396 55,030,181
Securities sold not yet purchased - at 2,825,296 160,760
market value
Accounts payable and accrued 5,778,334 4,006,078
liabilities
Income taxes payable 964,000 --
Notes payable 2,535,282 13,917,802
Loans from stockholders 4,672,853 4,090,905
Loans subordinated to the claims of 2,000,000 --
-------------- --------------
general creditors
TOTAL LIABILITIES 217,335,959 88,132,528
-------------- --------------
COMMITMENTS AND CONTINGENT LIABILITIES
STOCKHOLDERS' EQUITY (DEFICIT):
Common stock ($.01 par value
100,000,000 shares authorized
8,655,205 shares issued and
outstanding at September 30, 1995 and
6,432,983 shares issued and
outstanding at December 31, 1994) 86,552 64,330
Convertible preferred stock ($10 par
value 200,000 shares issued and
outstanding at September 30, 1995) 2,000,000 --
Additional paid-in capital 9,447,296 7,525,074
Accumulated deficit (5,842,271) (8,188,486)
-------------- --------------
TOTAL STOCKHOLDERS' EQUITY (DEFICIT) 5,691,577 (599,082)
-------------- --------------
TOTAL LIABILITIES AND STOCKHOLDERS'
EQUITY $ 223,027,536 $ 87,553,446
-------------- --------------
See accompanying notes to consolidated financial statements
JB OXFORD HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
For the nine months ended
September 30
1995 1994
--------------- ---------------
REVENUES:
Clearing and execution $ 10,893,443 $ 8,073,452
Trading profit (loss) 3,359,662 (1,567,120)
Commission 5,665,536 3,150,974
Valuation -- 1,236,319
Interest 4,978,722 2,364,419
Other 898,861 1,602,804
--------------- ---------------
Total revenues 25,796,224 14,860,848
--------------- ---------------
EXPENSES:
Employee compensation 3,807,451 5,088,673
Commission expense 3,288,372 2,064,989
Clearing and floor brokerage 2,005,213 1,915,419
Communications 2,192,567 1,925,417
Occupancy and equipment 1,496,628 1,439,147
Interest 3,100,667 1,212,814
Data processing charges 2,161,247 1,768,342
Professional services 1,541,181 2,690,512
Promotional 1,245,901 949,896
Bad debts 242,275 1,006,262
Other operating expenses 804,507 956,614
--------------- ---------------
Total expenses 21,886,009 21,018,085
--------------- ---------------
Income (loss) before income taxes 3,910,215 (6,157,237)
Income tax provision (benefit) 1,564,000 (2,155,000)
--------------- ---------------
NET INCOME (LOSS) $ 2,346,215 $ (4,002,237)
=============== ===============
Primary earnings per share 0.27 (0.69)
Fully diluted earnings per share 0.23 (0.69)
Weighted average number of shares of
common stock and common stock
equivalents 8,756,238 6,091,067
See accompanying notes to Consolidated Financial Statements.
JB OXFORD HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
For The Three Months Ended
September 30
1995 1994
--------------- ---------------
REVENUES:
Clearing and execution $ 4,853,582 $ 2,234,461
Trading profits 1,592,983 (1,607,915)
Commissions 2,700,459 253,679
Valuation -- 345,460
Interest 2,307,736 850,574
Other 458,063 968,764
--------------- ---------------
Total Revenues 11,912,823 3,045,023
--------------- ---------------
EXPENSES:
Employee compensation 1,371,085 1,753,061
Commission expense 1,570,858 70,640
Clearing and floor brokerage 887,078 487,310
Communications 898,896 554,212
Occupancy 766,043 475,963
Interest 1,270,503 427,474
Data processing charges 811,904 539,157
Professional services 848,807 980,029
Promotional 478,843 490,307
Bad debts 155,553 843,763
Other operating expenses 362,449 365,488
--------------- ---------------
Total Expenses 9,422,019 6,987,404
--------------- ---------------
Income (loss) before income taxes 2,490,803 (3,942,381)
Income tax provision (benefit) 996,000 (1,382,000)
--------------- ---------------
NET INCOME (LOSS) $ 1,494,804 $ (2,560,381)
=============== ===============
Primary earnings per share 0.13 (0.42)
Fully diluted earnings per share 0.10 (0.42)
Weighted average number of shares of
common stock and common stock
equivalents 11,633,172 6,091,067
See accompanying notes to Consolidated Financial Statements.
JB OXFORD HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
For The Nine months Ended
September 30
1995 1994
--------------- ---------------
Increase (decrease) in cash and cash
equivalents:
Cash flows from operating activities:
Net income (loss) $ 2,346,215 $ (4,002,237)
Adjustments to reconcile net income
(loss) to cash provided by operating
activities:
Depreciation and amortization 327,037 285,457
Deferred rent 1,877 273,825
Provision for bad debts 242,275 1,003,354
Gain recognized in the sale of -- 67,726
subsidiary (Note 12)
Changes in assets and liabilities:
Cash segregated under federal and 9,634,565 (5,537,577)
other regulations
Receivable from broker/dealers and 453,271 (10,626,685)
clearing organizations
Receivable from customers (141,057,743) 10,981,870
Other receivables (1,137,413) (1,266,242)
Securities owned (2,905,023) (2,697,588)
Other assets 88,269 (82,382)
Payable to broker/dealers and clearing 18,985,996 2,332,447
organizations
Payable to customers 113,617,215 19,348,714
Securities sold not yet purchased 2,664,536 626,125
Accounts payable and accrued 1,770,381 (574,423)
liabilities
Income taxes payable/receivable 1,723,000 (1,866,593)
-------------- --------------
Net cash provided by operating activities 6,754,458 8,265,791
-------------- --------------
Cash flows from investing activities:
Capital expenditures (606,143) (411,503)
Sale of subsidiary -- (73,840)
-------------- --------------
Net cash used in investing activities (606,143) (485,343)
-------------- --------------
Cash flows from financing activities:
Payments on notes payable (154,661) (155,649)
Short term borrowing (11,227,859) (10,364,825)
Subordinated loans 2,000,000 --
Loans from stockholders 2,581,948 1,155,000
Issuance of stock -- 1,000,000
Exercise of warrants 1,944,444 --
-------------- --------------
Net cash used in financing activities (4,856,128) (8,365,474)
-------------- --------------
Net increase (decrease) in cash and cash 1,292,187 (585,026)
equivalents
Cash and cash equivalents at beginning of 156,984 613,062
period -------------- --------------
Cash and cash equivalents at end of
period $ 1,449,171 $ 28,036
-------------- --------------
See accompanying notes to Consolidated Financial Statements.
JB OXFORD HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 1. COMPANY'S QUARTERLY REPORT UNDER FORM 10-Q
The accompanying financial information should be read in conjunction with
the Company's 1994 Annual Report on Form 10-K. Footnote disclosures that
substantially duplicate those in the Company's Annual Audited Report on Form 10-
K, including significant accounting policies, have been omitted.
NOTE 2. EARNINGS (LOSS) PER COMMON SHARE
Earnings per common share for the periods presented have been computed
based upon the weighted average number of shares outstanding. Fully diluted
earnings per share are presented because of the dilutive effect of the
convertible debentures.
NOTE 3. RECEIVABLE FROM AND PAYABLE TO BROKER/DEALERS AND CLEARING
ORGANIZATIONS
Amounts receivable from and payable to broker/dealers and clearing
organizations result from the Company's normal trading activities and consist of
the following:
September 30, December 31,
1995 1994
(Unaudited)
--------------- ---------------
Receivable:
Securities borrowed $ 15,376,338 $ 15,682,300
Securities failed to deliver 662,456 51,030
Net settlements with clearing
organizations
-- 758,735
--------------- ---------------
$ 16,038,794 $ 16,492,065
=============== ===============
Payable:
Securities failed to receive $ 933,889 $ 809,744
Securities loaned 20,134,267 9,849,000
Correspondents 6,771,068 268,058
Omnibus accounts and net settlements
with clearing organizations
2,073,574 --
--------------- ---------------
$ 29,912,798 $ 10,926,802
=============== ===============
Securities failed to deliver and failed to receive represent the contract
value of securities that have not been delivered or received subsequent to
settlement date. At September 30, 1995 and at December 31, 1994, there were no
significant differences between the contract and market value of the underlying
securities.
The receivable from clearing organizations represents failed to deliver and
failed to receive on a continuous net settlement basis. All open positions are
adjusted to market daily.
Securities borrowed and securities loaned represent deposits made or
received from other broker/dealers and relate to securities failed to deliver or
failed to receive transactions. The Company also participates in the lending
and borrowing of securities other than those of customers. All open positions
are adjusted to market values weekly. These deposits approximate the market
value of the underlying securities.
The Company clears security transactions for correspondent broker/dealers.
Settled securities and related transactions for these correspondents are
included in Payable to Correspondents.
NOTE 4. RECEIVABLE FROM AND PAYABLE TO CUSTOMERS AND OTHERS
Accounts receivable from and payable to customers include amounts due on
cash and margin transactions. Securities owned by customers are held as
collateral for receivables. Such collateral is not reflected in the financial
statements.
Included in other receivables at September 30, 1995 and December 31, 1994
are judgment receivables of $50,000, which are net of amounts deemed to be
uncollectible. Included in other assets at September 30, 1995 and December 31,
1994 are amounts receivable from officers totaling $88,515 and $10,610,
respectively.
NOTE 5. NOTE PAYABLE
JB Oxford & Company (``BOC'') maintains firm and customer financing
arrangements with an aggregate borrowing limit of $22,000,000. Amounts loaned
bear interest at a fluctuating rate based on broker call and prime and are fully
collateralized by marketable securities.
At September 30, 1995 and December 31, 1994 notes payable consist of the
following:
Maximum Average Weighted
Weighted amount amount average
average outstanding outstanding interest
Balance at interest during the during the rate
end of period rate period period during
the
period
------------- -------- ------------ ----------- --------
September 30, 1995
- ------------------
(Unaudited)
- -----------
Collateralized by:
Customer $ 2,238,856 7.5% $ 4,100,000 $ 1,909,000 7.5%
securities
Firm securities -- -- % 1,000,000 -- 8.5%
Other 296,426 9.5% 297,000 287,000 9.5%
------------
$ 2,535,282
============
December 31, 1994
- -----------------
Collateralized by:
Customer $ 12,480,662 7.8% $ 12,481,000 $ 6,331,000 6.5%
securities
Firm securities 986,054 8.5% 2,030,000 1,471,000 7.1%
Other 451,086 9.5% 781,000 616,000 9.5%
------------
$ 13,917,802
============
NOTE 6. LOANS FROM STOCKHOLDERS
At September 30, 1995 and December 31, 1994 loans from stockholders consist
of the following:
Interest
Balance Rate
----------- --------
September 30, 1995 (Unaudited)
- ------------------------------
Demand debt $ 1,853 9%
Convertible Debentures 4,671,000 9%
-------------
$ 4,672,853
=============
December 31, 1994
- -----------------
Demand debt $ 3,500,000 11%
Demand debt 590,905 9%
-------------
$ 4,090,905
=============
See Note 9 for further discussion of the convertible debentures.
NOTE 7. LOANS SUBORDINATED TO THE CLAIMS OF GENERAL CREDITORS
At September 30, 1995, loans subordinated to the claims of general
creditors totaled $2,000,000 which consists of four separate agreements each
with identical terms. All the loans have a scheduled maturity date of March 31,
1998 and bear interest at the broker call rate plus 2%, not to exceed 9%.
Interest payments are due on the last day of each calendar month until the
scheduled maturity date.
NOTE 8. ADJUSTMENT
The Company's major subsidiary, JBOC, has a policy of using the last
settled Friday of the month as its month end. Accordingly, JBOC's quarter end
may not be the last day of the month. This policy does not have a significant
effect on the consolidated financial statements of the Company.
In the opinion of Management, all adjustments which are necessary to a fair
statement of the results for the interim periods have been made.
NOTE 9. RELATED PARTY TRANSACTIONS
In March, 1995, the Company restructured $5,031,000 of its demand debt to
term debt in the form of senior secured convertible notes with a thirty month
term, amortized over 10 years, at an annual interest rate of 9%. The notes may
be converted, in whole or part, but in no event in an amount less than $100,000,
to fully paid and non-assessable shares of the Company's common stock. The
conversion price is $.90 per share in the event of a default, $1.00 per share in
the case of a merger or maturity of the notes, and $1.25 per share in the event
of a public offering of common shares. Stock options with a strike price of
$.90 a share totaling 1,200,000 shares of common stock were awarded to the
lenders as additional consideration for restructuring its demand debt. As part
of this transaction, an additional $2,000,000 of senior secured convertible
notes were issued under identical terms. As an additional inducement for the
convertible note, the Company has agreed to pay any refunds received from the
Internal Revenue Service as a prepayment on the note. This refund in the amount
of $359,000 was received and used to reduce the principal. The parties further
agreed to negotiate in good faith to extend the maturity date up to 60 months.
In conjunction with the restructuring of the note, JBOC and Prolyx stocks were
pledged as collateral by the Company.
In June, 1995, the Company authorized and approved the issuance of a series
of Convertible Preferred Stock ("Preferred Stock"). The non-voting Preferred
Stock has a $10 par value and is convertible to common stock at the rate of
$0.90 per share of common stock, based upon the par value of the Preferred
Stock. The Preferred Stock currently pays a quarterly dividend of 11%, which
will increase periodically to a maximum of 15%. Dividends are cumulative, and
the Company has certain redemption rights.
Concurrently, the Company negotiated and approved an Exchange Agreement
with a shareholder and note holder of the Company to exchange a portion of its
9% Senior Secured Convertible Notes, pursuant to the Senior Secured Convertible
Note Purchase Agreement dated March 10, 1995, for Preferred Stock. Pursuant to
the Exchange Agreement, the Company
reduced its term debt in the aggregate principal amount of $2,000,000, in
exchange for the issuance of 200,000 shares of Preferred Stock. This
transaction had the effect of increasing stockholders' equity by $2,000,000.
Also, in June, 1995, all of the outstanding A and B Warrants, issued
pursuant to the Regulation-S offering by the Company in August 1994, were
exercised and converted to common stock. The A Warrants, totaling 1,111,111
were exercised at a price of $0.85 per share, and resulted in $944,444
additional paid-in capital to the Company. The B Warrants, totaling 1,111,111,
were exercised at a price of $0.90 per share, bringing in $1,000,000 of
additional paid-in capital to the Company.
At September 30, 1995 and December 31, 1994, loans from shareholders
totaled $4,672,853 and $4,090,905. Future annual payments, including interest,
required under the terms of the senior secured convertible notes are as follows:
Year ending
December 31:
1995 $ 177,511
1996 710,043
1997 4,668,437
------------
$ 5,555,991
============
The Company has borrowed marketable securities from certain shareholders.
The obligations accrue interest at 9% per annum compounded monthly, based on the
average closing bid price each Friday. The marketable securities are used to
collateralize inter-company balances due from the Company to JBOC for net
capital purposes. On September 11, 1995, the remaining borrowed securities were
returned.
NOTE 10. REGULATORY REQUIREMENTS
JBOC is subject to the Securities and Exchange Commission's Uniform Net
Capital Rule (Rule 15c3-1), which requires the maintenance of minimum net
capital.
At September 30, 1995 JBOC had net capital of $11,149,853 which was 7.5% of
aggregate debit balances and $7,139,101 in excess of the minimum amount
required. At December 31, 1994 JBOC had net capital of $2,676,782, which was
3.8% of aggregate debit balances and $1,274,386 in excess of the minimum amount
required.
NOTE 11. COMMITMENTS, CONTINGENT LIABILITIES AND OTHER
The Company and/or its subsidiaries are defendants in several lawsuits and
arbitrations the most significant of which follows:
(a) In a class action lawsuit against RKSI, plaintiff class representatives
have alleged wrongdoing in charging a maintenance fee on its customer
accounts and in its practice of liquidating customer accounts if the
customer failed to pay the fee. The class has been certified and RKSI has
contested the form of the notice. JBOH has been named as the parent company
to RKSI. Those customers subject to an arbitration clause have been
excluded from the class. The lawsuit is presently in the discovery stage
and the ultimate outcome and range of possible loss, if any, is not
determinable at this stage. Management intends to vigorously contest this
matter.
(b) In an arbitration matter the claimant seeks rescission of certain sales
in his customer account and damages of $750,000. The claimant alleged that
RKSI and former principals breached fiduciary duties and failed to disclose
material information. The ultimate outcome is not determinable at this
stage and Management intends to vigorously contest this matter.
(c) In an arbitration matter filed with the NASD, the claimants are a group
of investors who sold short certain stock. Claimants did not have an
account with RKSI, however, they have alleged that RKSI is responsible for
the damages Claimants realized when their short positions in FCMI were
bought in. JBOH has been named as the parent company. Claimants are
seeking damages in the amount of $740,000, plus punitive damages. The
ultimate outcome is not determinable at this stage and Management intends to
vigorously contest this matter.
(d) In an arbitration matter filed in October 1994, the claimants allege that
RKSI and former principals breached fiduciary duties, recommended non
suitable investments, fraud, and failure to disclose material information.
JBOC has been named as an alleged successor to RKSI; JBOH has been named as
the parent company. Claimants seek damages in the amount of $482,000. The
ultimate outcome is not determinable at this stage and Management intends to
vigorously contest this matter.
(e)In an arbitration matter, the claimant alleges that RKSI and former
principals breached fiduciary duties, recommended non suitable investments,
fraud, failure to disclose material information, and failure to supervise.
JBOH has been named as the parent company to RKSI. Claimant seeks damages
in the amount of $525,000. The ultimate outcome is not determinable at this
stage and Management intends to vigorously contest this matter.
(f) In a consolidated class action against RKSI and JBOH, pending in the
United States District Court for the Northern District of Texas, Dallas
Division, plaintiffs have requested an unspecified amount of punitive and
compensatory damages. The claim arises out of the purchase and sale by the
plaintiffs and the Class of certain stock. The class has been certified and
the lawsuit is presently in the discovery stage. The ultimate outcome and
range of possible loss, if any, is not determinable at this stage.
Management intends to vigorously contest this matter.
(g) In an action commenced in October 1993 against RKSI and JBOH, pending in
the United States District Court for the Southern District of New York, the
Complaint alleges that the defendant made materially false and misleading
statements concerning a specified stock, for which RKSI was a market maker.
The claim was brought by and on behalf of a purported class of persons who
purchased the common stock of a specified stock in order to cover short
sales after May 17, 1993 and before August 31, 1993. Plaintiffs have
requested an unspecified amount of punitive and compensatory damages. The
lawsuit is in the preliminary stages. The ultimate outcome and range of
possible loss, if any, is not determinable at this stage. Management
intends to vigorously contest this matter.
(h) In an action commenced in March 1995, in the United States District Court
of New York. A claim was brought by former counsel for the Company and
alleges payment due for professional services in the amount of $681,217. An
answer by the Company was filed asserting among other claims that the
Company was overcharged for services. The ultimate outcome and range of
possible loss, if any, is not determinable at this stage. Management
intends to vigorously contest this matter.
The ultimate outcome of these uncertainties discussed above is unknown.
Accordingly, no provision for any liability that might result has been made in
the accompanying financial statements.
NOTE 12. SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
For the Nine months Ended
September 30,
1995 1994
(Unaudited) (Unaudited)
Supplemental disclosure of cash flow
information
Cash paid year to date for interest: $ 3,155,381 $ 1,135,973
Supplemental schedule of noncash investing and financing
activities:
Market value of stock borrowed from -- $ 1,125,000
shareholders
On June 5, 1995 $2,000,000 of the 9%
Senior Secured Convertible Note was
exchanged for 200,000 shares of $10 par
value non-voting convertible preferred
stock. See Note 9: Related Party
Disclosures.
Increase in equity through the reduction$ 2,000,000 --
of debt
The Company sold Oxford Transfer &
Registrar Agency, Inc., a subsidiary, on
May 31, 1994. In conjunction with the
sale, the following schedules the cash and
non-cash portion of the transaction:
Fair value of assets sold $ -- $ (25,562)
Cash proceeds from the sale -- 32,465
Note receivable -- 40,000
------------- ------------
Gain recognized on the sale $ -- $ 46,903
============= ============
In August 1994 the Company reverted
ownership of the five Houlihan Valuation
subsidiaries to the individual valuation
personnel. In conjunction with the
subsidiary dispositions, the following
schedules the cash and non-cash portion of
the transaction:
Fair value of assets sold $ -- $ 69,853
Cash given up -- (49,030)
------------- -------------
Gain recognized on the sale $ -- $ 20,823
============= ============
Certain amounts in 1994 have been reclassified to conform with the 1995
presentation.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
CHANGES IN FINANCIAL CONDITION
- ------------------------------
The Company's financial condition changed significantly during the nine
months ended September 30, 1995. Total assets at September 30, increased in
excess of $135 million. This was growth of more than 154% in terms of the
Company's total assets. This growth in assets is primarily a result of an
increase of over $141 million in receivables from customers and a decrease of
over $9 million in cash segregated under federal regulations. This increase in
customer receivables is attributed to several different sources, the most
significant of which is over $67 million in existing correspondent business.
The Discount operation has increased customer receivables by over $61 million
during the nine months ended September 30, 1995. Additionally, $13 million of
this growth was related to the new business acquired from Adler Coleman
(acquired in March, 1995).
The Company issued 2,222,222 of common stock in connection with the
exercise of warrants outstanding. The proceeds from this issuance amounted to
$1,944,444. The Company also converted $2 million of its convertible debentures
to 200,000 shares of $10 par preferred stock. The effect of these two
transactions increased stockholders' equity of the Company by almost $4 million.
COMPARISON OF OPERATIONS
- ------------------------
The Company was in the process of downsizing during 1994 and assessing its
various operations. In 1994, the Company ceased or sold operations in its
retail broker/dealer, transfer agency and valuation companies. This process
continued into 1995, and in April, the Company closed its San Carlos, California
office of Prolyx Data Systems, Inc. and relocated the office to its Beverly
Hills facility. The continuing operations of Prolyx are currently being
reassessed by Management.
The Company's overall operations began to stabilize during the first nine
months of 1995 with the financial impact of the growth of the discount operation
taking effect during the second and third quarters of 1995. The Company
realized a pre-tax profit of $3,910,215 for the nine months ended September
30,1995 which was an increase of $10,067,452 over the pre-tax loss of $6,157,237
during the same period for 1994. Total revenue increased $10,935,376 or 74% to
$25,796,224 for the nine months ended September 30, 1995 compared to the same
nine months of 1994.
Clearing and execution revenue increased by $2,819,991 or 35% to
$10,893,443 during the third quarter of 1995 compared to the third quarter of
1994. This was due to the increase in trade transactions processed, although the
amount charged per transaction has been reduced. The ticket volume for the same
period increased by 46%. However, 45% of this increase in ticket volume relates
to the discount operation, on which there is no clearing revenue generated.
Trading profits increased by $4,929,782 to $3,359,662 during the first nine
months of 1995 compared to the same period of 1994. This area has become more
stable in light of the significant losses occurring during the later part of
1994.
Commission revenue increased by $2,514,562 or 80% to $5,665,536 during the
first nine months of 1995 compared to the first nine months of 1994. Net
commissions (commission revenue less commission expense) increased $1,085,985
during the same period. It is anticipated that commission revenue will continue
to grow throughout 1995 as the Company is focusing on the development of its
deep discount retail division of JBOC. The subsidiary company will open a
branch office in New York City in December of 1995, with plans to open
additional branches in Boston and Miami by the end of the first quarter of 1996.
Interest revenue increased by $2,614,303 or 111% to $4,978,722 during the
first nine months of 1995 compared to the first nine months of 1994. This
increase is the result of increased margin balances and interest rates during
the respective periods. Net interest income increased $726,450 during the first
nine months of 1995 over 1994.
The Houlihan Valuation Subsidiaries where disposed of during 1994;
therefore related revenues have been eliminated during the nine months ended
September 30, 1995, compared to $1,236,319 for the nine months ended September
30, 1994.
The Company's total expenses increased $867,924 or 4% during the period
ended September 30, 1995 over the period ended September 30, 1994. This
increase is modest in comparison to the 74% increase in revenues.
The most significant reduction is in employee compensation of $1,281,222 or
25% to $3,807,451 during the period ended September 30, 1995 over the period
ended September 30, 1994. It should be noted that $725,736 of this decrease
relates directly to the disposition of Houlihan Valuation Subsidiaries explained
above.
The Company had a decrease in professional services of $1,149,331 or 43%.
This decrease relates directly to the resolution of many matters related to the
Reynolds Kendrick Stratton, Inc. subsidiary which was closed in July of 1994.
Data processing expense increased by $392,905 or 22% to $2,161,247 during
the first nine months of 1995 compared to the first nine months of 1994. There
is, however, a reduction of 10% in data processing costs per trade transaction.
JBOC entered into a new three year agreement with its computer service vender
during the second quarter, with more favorable pricing. The Company anticipates
a savings of approximately 20% of these costs in the future.
Promotional expenses increased by $296,005 or 31% to $1,245,901 during the
first nine months of 1995 compared to the first nine months of 1994. This
increase is the result of an increase in advertising for the deep discount
retail division of JBOC. Advertising expense increased $612,555 during these
periods while travel and entertainment have been reduced by $316,550.
Management believes it is spending its promotional dollars much more
effectively.
LIQUIDITY AND CAPITAL RESOURCES
- -------------------------------
The Company's liquidity improved significantly during 1995. Cash provided
from operations amounted to $6,754,458. The largest source of cash was
$18,985,996 of cash provided by net receivables/payables from broker dealer.
Cash provided from cash segregated under Federal regulations amounted to
$9,634,565. These sources of cash were offset however, by $27,440,528 cash used
for net customer receivables/payables.
The Company used cash in the amount $4,856,128 for various financing
activities. The Company reduced notes payable and short term borrowing of
$12,382,520 during the nine months ended September 30, 1995. Financing
activities provided cash in the amount of $6,526,392 from other sources.
Subordinated debt in the amount of $2,000,000 was issued. The Company issued
200,000 shares of $10 par preferred stock in exchange for $2,000,000 of
convertible debentures. Additionally, a shareholder of the Company exercised
2,222,222 common stock warrants with the proceeds being $1,944,444.
The Company is in the process of building out a new office in New York
City. It is anticipated that the capital expenditure for this office will not
exceed $500,000.
DEFERRED TAXES
- --------------
In accordance with applicable Internal Revenue Code Section 382 and as a
result of change in ownership of the Company's stock during 1995, a limitation
was placed on the use of the Company's net operating loss carryforward in any
one year. This limitation is based upon a published federal rate applied to the
fair market value of the Company immediately prior to the change in stock
ownership. The Company is in the process of obtaining such valuation and
believes the resulting limitation will not have a material adverse affect on the
Company's ability to fully utilize the entire net operating loss carryforward.
Further, the Company is in the process of reviewing the valuation allowance of
$1,615,000 established for deferred income taxes receivable. Adjustment, if
any, to this valuation allowance will be reflected in the fourth quarter of
1995. The Company currently believes any such adjustment will only reduce such
valuation allowance.
RECENT DEVELOPMENTS
The positive results in the third quarter mark the second successive
quarter of strong earnings progress for the Company. Management believes that
the earnings increase is substantially attributable to the success of the
discount brokerage activities, conducted by the Company's wholly-owned
subsidiary, JB Oxford & Company. During the coming fourth quarter and
continuing into early 1996, Management intends to offer a wider range of
products to its discount customer base, in addition to JBOC's core deep-discount
commission investing.
As the discount brokerage operations continue to gain exposure in the
investment community through its CNBC television and Investor Business Daily
advertising campaigns, the Company is also placing emphasis to expand its
product mix. Plans are currently under way to begin additional television
advertising on the Turner CNN cable network. Plans to emphasize mutual funds
and fixed-income products is under way. This includes the addition of a fixed-
income trading room unit to make available municipal, corporate and government
securities. Also, the addition of both variable and fixed rate annuities
through the formation of a JBOC insurance unit is under discussion. Expanding
JBOC's product mix and services should enable the Company to add value to its
current customer base as well as assist in attracting new business.
During 1995, JBOC, through its representative office in Basel Switzerland,
introduced deep-discount service to the European investment community. Due to
the positive reception that this service has received, JBOC reorganized the
representative office to a full service branch in Basel in October 1995. While
the Company has focused its initial efforts in Switzerland, Management believes
that other European countries, as well as Asian markets, represent significant
potential for the deep discount business.
Management has identified the Los Angeles Chinese community as a dynamic
group which the Company believes can benefit from its investment services. To
better serve the particular needs of the Chinese community, the Company has
entered into a consulting relationship with two prominent Chinese individuals
who have brought in Mandarin and Cantonese speaking personnel to assist in
providing a high level of service to all facets of the Chinese community.
Currently, the Company is advertising in Chinese daily newspapers and cable
television, as well as attending community meetings in an effort to increase the
Company's presence.
To facilitate discount trading in the U.S., JBOC offers customers the
opportunity to place orders through their personal computers in their homes.
Currently, JBOC offers computerized trading through a proprietary product, JB
On-LineO. This product is currently offered in DOS version. A Windows version
of JB On-LineO, with planned access through the Internet, is expected to be
ready in both the U.S. and Europe in early 1996.
To meet increased investor demand, JBOC continues its expansion efforts at
its Beverly Hills and Dallas branches. Desk space to accommodate additional
brokers has been added, and the Company is on schedule with previously announced
plans to open a new branch in New York City in early December. As reported in
the second quarter report, the office lease has been executed and build-out of
the space is in progress. Additional branch offices in Boston and Miami are
anticipated by the end of the first quarter in 1996.
As JB Oxford Discount continues to grow, JBOC's trading department has
likewise placed an emphasis on expansion. In August 1995, the trading
department moved to a new location, within the corporate headquarters, in order
to accommodate additional personnel. JBOC trading has increased its NASDAQ
market making stocks from 20 in 1994, to over 100 in 1995. A new automated
trading system was installed in September 1995, to facilitate the additional
volume from JB Oxford Discount and the additional market making stocks. A
listed trading department was formed, and a fixed income department will be
added in the fourth quarter of 1995.
Profitability of JBOC's correspondent clearing services continued to
increase during the third quarter of 1995. JBOC continues to review the quality
of its correspondent clearing services and its related risk factors which
include market making activity, credit worthiness, and the sufficiency of
collateral obtained from correspondents.
Management is also in the process of expanding and upgrading the clearing
broker-dealer operations of JBOC. JBOC is presently applying for membership in
three of the major clearing mechanisms for the securities clearing industry:
Depository Trust Company (DTC); National Securities Clearing Corporation (NSCC);
and the Options Clearing Corporation (OCC). Membership in these organizations
will enable JBOC to settle transactions more efficiently. It will also allow
JBOC to better utilize the latest technologies available to enhance the
Company's current clearing and execution system.
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
In the ordinary conduct of business, the Company and/or its subsidiaries
have been named as Defendants in several lawsuits and arbitration matters or
have instituted legal proceedings as Plaintiffs to recover moneys owing. There
have been no material pending legal proceedings other than ordinary routine
litigation incidental to the business. Those which may have a significant
impact on the Company have been disclosed in previous filings, unless listed
below. Additionally, the following previously reported matter has been
resolved:
The National Association of Securities Dealers, Inc., Market Surveillance
- -------------------------------------------------------------------------
Committee vs. Castleton Rhodes, et al.
- -------------------------------------
Complaint No. CMS920002
This matter was filed on January 15, 1992, and consisted of twenty-six
causes of action, naming twenty various respondents. After a full hearing, the
three causes of action regarding Reynolds Kendrick Stratton, Inc. and its former
officers have been dismissed in their entirety.
Olde Discount Corporation vs. JB Oxford & Company
- -------------------------------------------------
NASD Case No. 95-04710
- ----------------------
In an arbitration matter filed in October, 1995, the claimant alleges that
JB Oxford & Company induced breach of contract by former and current Olde
employees, misappropriated and converted confidential and providing Olde
information, and interfaced with Oldie's prospective business relationships.
Claimant is seeking an unspecified amount in excess of $10 million in damages.
Management believes that the claims are without merit; therefore, Management
will vigorously contest this matter. The ultimate outcome is not determinable
at this stage.
ITEM 2. CHANGES IN SECURITIES
There has been no material modification of ownership rights of securities
holders.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
There has been no default in payments of the Company.
ITEM 4. SUBMISSION OF MATTERS TO VOTE OF SECURITY HOLDERS
The Company held its Annual Meeting of Shareholders on September 29, 1995.
The following matters were submitted to a vote of security holders at that
meeting:
1. The election of a new Board of Directors to serve until the next
Annual Shareholders' meeting, to be held in 1996. The following individuals
were so elected:
Stephen Rubenstein John Broome
Mitchell S.T. Wine Jose Abadin
Richard Houlihan Timothy Tyrrell
2. The Shareholders ratified the appointment of BDO Seidman as the
independent public accountants of the Company for fiscal year ending December
31, 1995.
3. The Shareholders ratified all purchases, contracts, contributions,
compensations, acts, decisions, proceedings, elections and appointments of the
Board of Directors, as taken by the Board, since the last Shareholders' Meeting,
August 19, 1994, including but not limited to the conversion of significant
Company demand debt to term debt, the issuance of Senior Secured Convertible
Notes, and the issuance of a series of Convertible Preferred Stock.
ITEM 5. OTHER INFORMATION
None.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) There are no exhibits to be filed with this report as required by Item 601
of Regulation S-K.
(b) During this quarter, there were no events as required to be reported on
Form 8-K.
SIGNATURES
Pursuant to the requirements of Section 13 of 15(d) of the Securities
Exchange Act of 1934, JB OXFORD HOLDINGS, INC. has duly caused this report to be
signed on its behalf by the undersigned thereunto duly authorized.
JB OXFORD HOLDINGS, INC.
/ s / Stephen Rubenstein
By: Stephen Rubenstein
Chief Executive Officer
Date: November 13, 1995
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