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 MARCH 31, 1999
OR
[] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
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
Identification
No.)
9665 Wilshire Blvd., Suite 300; Beverly Hills, California 90212
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (310) 777-8888
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 ___
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date. As of May 11, 1999, the
Registrant had the following number of shares of common stock, $0.01 par
value per share, outstanding: 14,284,375.
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
JB OXFORD HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
March 31,
1999 December 31,
(Unaudited)
ASSETS:
Cash and cash equivalents (including securities
purchased under agreements to resell of $54,003
and $140,516) $ 2,844,490 $ 2,496,572
Cash and securities purchased under agreements to
resell, segregated under federal and other
regulations 51,476,275 110,151,075
Receivable from broker-dealers and clearing
organizations (net of allowance for doubtful
accounts of $0 and $2,103,802) 7,865,106 7,321,066
Receivable from customers (net of allowance for
doubtful accounts of $1,329,023 and $5,354,864) 361,525,633 268,608,125
Other receivables (net of allowance for doubtful
accounts of $0 and $1,979,793) 1,548,628 1,591,482
Marketable securities owned - at market value 417,806 2,927,071
Furniture, equipment, and leasehold improvements
(at cost - net of accumulated depreciation and
amortization of $5,497,410 and $5,389,576) 2,663,085 2,860,100
Income taxes refundable 717,396 717,396
Deferred income taxes 1,138,947 1,079,840
Clearing deposits 7,869,752 6,833,171
Other assets 1,357,830 1,404,455
TOTAL ASSETS $439,424,948 $405,990,353
See accompanying notes to Consolidated Financial Statements.
JB OXFORD HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
March 31, December 31,
1999 1998
(Unaudited)
LIABILITIES AND SHAREHOLDERS' EQUITY:
LIABILITIES:
Payable to broker-dealers and clearing organizations $125,843,289 $58,064,209
Payable to customers 277,296,058 311,958,515
Securities sold, not yet purchased - at market value 90,025 868,085
Accounts payable and accrued liabilities 6,079,014 9,010,480
Income taxes payable 2,370,354 552,648
Loans from shareholders 8,308,071 8,538,811
<PAGE>
Notes payable 96,839 130,997
Subordinated borrowings -- 1,250,000
TOTAL LIABILITIES 420,083,650 390,373,745
COMMITMENTS AND CONTINGENT LIABILITIES
SHAREHOLDERS' EQUITY:
Common stock ($.01 par value, 100,000,000 shares
authorized; 14,914,226 and 14,141,205 shares issued) 149,142 141,412
Additional paid-in capital 15,946,101 15,345,316
Retained earnings 4,030,760 327,660
Treasury stock at cost, 704,040 and 234,500 shares
respectively (784,705) (197,780)
TOTAL SHAREHOLDERS' EQUITY 19,341,298 15,616,608
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $439,424,948 $405,990,353
See accompanying notes to Consolidated Financial Statements.
JB OXFORD HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
For The Three Months Ended
March 31,
1999 1998
REVENUES:
Clearing and execution $ 5,125,692 $ 2,286,827
Trading profits 4,021,691 1,802,884
Commissions 7,740,032 6,245,651
Interest 5,905,447 5,407,147
Other 200,737 259,915
Total Revenues 22,993,599 16,002,424
EXPENSES:
Employee compensation 2,281,347 2,345,990
Commission expense 2,852,582 2,332,182
Clearing and floor brokerage 951,836 958,537
Communications 1,671,308 1,399,023
Occupancy and equipment 1,105,351 1,371,334
Interest 3,261,062 3,449,937
Data processing charges 2,411,433 1,440,447
Professional services 1,179,673 1,032,948
Promotional 803,342 831,618
Bad debts 405,436 367,199
Other operating expenses 584,796 611,738
Total Expenses 17,508,166 16,140,953
Income (loss) before income taxes and 5,485,433 (138,529)
extraordinary item
Income tax (benefit) provision 2,219,208 (52,629)
Income (loss) before extraordinary item 3,266,225 (85,900)
Extraordinary item: Forgiveness of debt,
net of taxes 436,875 --
NET INCOME $ 3,703,100 $ (85,900)
See accompanying notes to Consolidated Financial Statements.
JB OXFORD HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS - CONTINUED
(UNAUDITED)
For The Three Months Ended
March 31,
1999 1998
BASIC NET INCOME (LOSS) PER SHARE:
Income (loss) before income taxes and
extraordinary item $0.23 $(0.01)
Extraordinary item: Forgiveness of debt,
net of taxes 0.03 --
Basic Net Income (Loss) Per Share $0.26 $(0.01)
DILUTED NET INCOME (LOSS) PER SHARE:
Income (loss) before income taxes and
extraordinary item $0.13 $(0.01)
Extraordinary item: Forgiveness of debt,
net of taxes 0.02 --
Basic Net Income (Loss) Per Share $0.15 $(0.01)
Weighted average number of shares
Basic 14,154,338 14,141,205
Diluted 24,629,176 14,141,205
See accompanying notes to Consolidated Financial Statements.
JB OXFORD HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
For The Three Months Ended
March 31,
1999 1998
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS:
CASH FLOWS PROVIDED BY OPERATING ACTIVITIES:
Net income (loss) $ 3,703,100 $ (85,900)
Adjustments to reconcile net income (loss) to
cash used in operating activities:
Depreciation and amortization 314,845 350,209
Deferred rent (30,366) (28,249)
Provision for bad debts 405,436 21
Forgiveness of debt (728,125) --
Changes in assets and liabilities:
Cash segregated under federal and other regulations 58,674,800 (41,329,429)
Receivable from broker-dealers and clearing
organizations (544,040) (6,235,282)
Receivable from customers (93,322,944) 10,569,569
Other receivables 42,854 753,635
Securities owned 2,509,265 902,625
Clearing deposits (1,036,581) (2,077,181)
Other assets 46,625 606,076
Payable to broker-dealers and clearing
organizations 67,779,080 126,393
Payable to customers (34,662,457) 43,592,309
Securities sold not yet purchased (778,060) (732,425)
Accounts payable and accrued liabilities (2,901,100) 2,313,413
Income taxes payable/receivable 1,758,599 (110,277)
Net cash provided by operating activities 1,230,931 8,615,507
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (117,830) (692,941)
Net cash used in investing activities (117,830) (692,941)
CASH FLOWS FROM FINANCING ACTIVITIES:
Repayments of notes payable (34,158) --
Advances on short term borrowing -- 111,113
Issuance of common stock 105,900 --
Purchase of treasury stock (586,925) --
Payment subordinated loans (250,000) --
Net cash provided by (used in) financing
activities (765,183) 111,113
NET INCREASE IN CASH AND CASH EQUIVALENTS 347,918 8,033,679
CASH AND CASH EQUIVALENTS AT BEGINNING OF THE
QUARTER 2,496,572 2,598,062
CASH AND CASH EQUIVALENTS AT END OF THE QUARTER $ 2,844,490 $ 10,631,741
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
In the opinion of Management, the accompanying unaudited financial
statements contain all adjustments (all of which are normal and recurring in
nature) necessary to present fairly the financial statements of JB Oxford
Holdings, Inc. and subsidiaries ("the Company") for the periods presented. The
accompanying financial information should be read in conjunction with the
Company's 1998 Annual Report on Securities and Exchange Commission ("SEC") Form
10-K. Footnote disclosures that substantially duplicate those in the Company's
Annual Report on Form 10-K, including significant accounting policies, have been
omitted.
Two of the Company's subsidiaries, JB Oxford & Company ("JBOC") and
Stocks4Less, Inc. ("S4L"), are consolidated in the quarterly financial
information as of March 26, 1999 and March 27, 1998 because the last settlement
Friday of each month is consistently treated as month end. Accordingly, this is
reflected in the consolidated financial statements of the Company. (The
operations of S4L were consolidated into the on-line division of JBOC in
December 1998.)
NOTE 2. ALLOWANCE FOR DOUBTFUL ACCOUNTS
In the first quarter 1999, the Company deducted various receivable items
from the allowance for doubtful accounts. These receivable items were being
carried in an inactive subsidiary Reynolds Kendrick Stratton, Inc., and had been
specifically reserved for in prior years.
NOTE 3. DEFERRED INCOME TAXES
Deferred income taxes are recorded at the amount Management believes to be
realizable. No valuation allowance has been recorded, as Management believes
the deferred income taxes will be realized through future profits of the
Company.
NOTE 4. EARNINGS PER SHARE
The following table reconciles the numerators and denominators of the basic
and diluted earnings per share computation:
For The Three Months Ended
March 31,
1999 1998
BASIC EARNINGS PER SHARE
Net income (loss) $3,703,100 $(85,900)
Income (loss) available to common stockholders
(numerator) $3,703,100 $(85,900)
Weighted average common shares outstanding
(denominator) 14,154,338 14,141,205
Basic Earnings (Loss) Per Share $0.26 $(0.01)
For The Three Months Ended
March 31,
1999 1998
DILUTED EARNINGS PER SHARE
Net income (loss) $3,703,100 $(85,900)
Interest on convertible debentures, net of income
tax 74,635 --
Income (loss) available to common stockholders
plus assumed conversions (numerator) $3,777,735 $(85,900)
Weighted average common shares outstanding 14,154,338 14,141,205
Weighted average options outstanding 2,216,778 --
Weighted average convertible debentures 8,750,467 --
Stock acquired with proceeds (492,407) --
Weighted average common shares and assumed
conversions outstanding (denominator) 24,629,176 14,141,205
Diluted Earnings (Loss) Per Share $0.15 $(0.01)
The assumed conversions have been excluded in computing the diluted
earnings per share when there is a net loss for the period. They have been
excluded because their inclusion would reduce the loss per share, or be
antidilutive.
Options to purchase 965,000 shares of common stock at March 31, 1998, were
not included in the computation of diluted earnings per share because the
options' exercise price was greater then the average market price of the common
share during the period. The options carry exercise prices ranging from $0.63
to $2.32 at March 31, 1999 and $1.08 to $3.00 at March 31, 1998. The options at
March 31, 1999 expire at various dates through November 15, 2008 and were still
outstanding as of March 31, 1999. Subsequent to March 31, 1999, options to
purchase 74,189 additional shares were exercised for $117,877.
NOTE 5. RELATED PARTY TRANSACTIONS
In February 1999, Hareton Sales & Marketing, Inc. ("Hareton"), the holder
of $502,615 in face value of 9% Senior Secured Convertible Notes, exercised its
right to convert this debt into common stock of the Company. The Company issued
718,021 shares of common stock in full satisfaction of this debt.
In February 1999, the Company established the JB Oxford Revocable
Government Trust (the "Trust") to purchase common stock of the Company. Third
Capital Partners serves as trustee of the Trust, without compensation.
Christopher L. Jarratt, the Company's Chairman, is the Chief Manager and Chief
Executive Officer, and Mark D. Grossi, a member of the Company's Board of
Directors, is a member, of Third Capital Partners. The Company loaned the Trust
$586,915, which the Trust used to purchase 469,540 shares of the Company's
Common Stock for an average price of $1.25 per share. Pursuant to the terms of
the Trust, Third Capital Partners has the right to vote the shares held by the
Trust, but has no right to dispose of them except upon termination of the Trust.
The Trust will terminate on February 18, 2001, or, if sooner, the completion of
the investigation relating to the Company being conducted by the U.S. Attorney's
Office, the Federal Bureau of Investigation and the SEC. See Note 7,
"Contingent Liabilities," to the financial statements for a description of the
investigation. Concurrent with the transaction, the Company relinquished its
right of first refusal as to any remaining shares held by Felix Oeri and Oeri
Finance, Inc.; and Oeri Finance, Inc. forgave $728,125 in demand debt owed by
the Company. Subsequently, Oeri Finance Inc., Felix Oeri and Hareton filed 13D
Statements with the SEC indicating ownership of less than 5% of the Company's
stock.
A subordinated loan agreement, payable to Oeri Finance, Inc., matured on
March 31, 1999 in the amount of $1,000,000. The Company has decided to delay
payment on the debt in light of the ongoing federal investigation (see Note 7,
"Contingent Liabilities"). The Company is not aware of any wrongdoing by Oeri
Finance, Inc. and is continuing to pay the interest on the debt.
NOTE 6. REGULATORY REQUIREMENTS
JBOC is subject to Rule 15c3-1 of the Securities Exchange Act of 1934, as
amended, which requires the maintenance of minimum net capital. JBOC has
elected to use the alternative method permitted by the rule, which requires it
to maintain minimum net capital, as defined, equal to the greater of $250,000 or
two percent of aggregate debit balances arising from customer transactions, as
defined. The rule also provides, among other things, for a restriction on the
payment of cash dividends, payments on subordinated borrowings or the repurchase
of capital stock if the resulting excess net capital would fall below five
percent of aggregate debits.
At March 31, 1999, JBOC had net capital of $19,334,024, which was
$12,116,659 in excess of the minimum amount required. At December 31, 1998,
JBOC had net capital of $17,754,370, which was $12,352,063 in excess of the
minimum amount required.
Cash is segregated in special reserve bank accounts for the exclusive
benefit of customers under Rule 15c3-3 of the Securities Exchange Act of 1934,
as amended. Included in the special reserve bank account are securities
purchased under agreements to resell on an overnight basis in the amount of
$51,235,532 and $104,469,048 at March 31, 1999 and December 31, 1998
respectively. Securities purchased are U.S. Treasury instruments having a
market value of approximately 102% of cash tendered.
NOTE 7. CONTINGENT LIABILITIES
The Company and/or its subsidiaries are defendants in several lawsuits and
arbitrations the most significant of which follows:
The Company is under investigation by the Securities and Exchange Commission
(the "SEC") and the Los Angeles office of the United States Attorney's Office
(the "USAO"). Management believes the investigations arise out of the
activities of a former consultant to the Company and the activities of a company
affiliated with the former Chairman of the Board of Directors of the Company,
and have been reported in the Company's prior filings. The Company has
continued to cooperate with the authorities with respect to these
investigations. To date, no charges have been brought against the Company as a
result of the SEC's investigation or the USAO's investigation. Presently, it is
not possible to predict the ultimate outcome nor financial impact, if any, of
the investigations on the Company; however, at this time, the Company cannot
rule out the possibility that the outcome of the matter may have a material
adverse impact upon the Company.
NOTE 8. SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
For the Three Months Ended
March 31,
1999 1998
Supplemental Disclosures of Cash Flow
Information
Cash paid during the quarter for:
Interest $3,283,373 $3,324,483
Income taxes 746,400 54,829
Supplemental disclosure of non-cash investing and financing activities:
Hareton, the holder of $502,615 in face value of convertible debentures,
converted this debt to common stock during the first quarter. In February
1999, the Company executed an agreement with Oeri Finance, Inc. that resulted
in the forgiveness of notes payable to shareholders in the amount of $728,125,
which is included in net income during the period. Additionally, the Company
reclassified a subordinated borrowing to loans from shareholders in the amount
of $1,000,000.
NOTE 9. COMPREHENSIVE INCOME
Comprehensive income (as defined by Statement of Financial Accounting
Standards No. 130) is the change in the Company's equity during the period from
transactions and events other than those resulting from investments by, and
distributions to owners. Net income is the only component of comprehensive
income recorded by the Company for the periods presented. Therefore, all
elements of comprehensive income are presented in the statement of operations.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Special Note Regarding Forward-Looking Statements
Certain statements in this Quarterly Report on Form 10-Q, particularly under
Items 2 and 3, constitute "forward-looking statements" within the meaning of the
Private Securities Litigation Reform Act of 1995. These forward-looking
statements involve known and unknown risks, uncertainties, and other factors
which 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. See
"Risk Factors," below.
Business Overview
JB Oxford Holdings, Inc. (together with its consolidated subsidiaries, the
"Company"), through its wholly-owned subsidiaries, is engaged in the business of
providing brokerage and related financial services to retail customers and
broker-dealers nationwide. The Company's primary subsidiary is JB Oxford &
Company ("JBOC"), a registered broker-dealer offering the following services:
(i) discount and electronic brokerage services to the investing public; (ii)
clearing and execution services to correspondents on a fully-disclosed basis;
and (iii) acting as a market maker in NASDAQ National Market System, New York
Stock Exchange ("NYSE") and other national exchange listed securities.
Discount and Electronic Brokerage Services
JBOC provides a full line of brokerage services and products to customers,
including the ability to buy and sell securities, security options, mutual
funds, fixed income products, annuities and other investment securities. The
Company continues to upgrade and improve its brokerage technologies in order to
provide its customers with the resources necessary to conveniently and
economically execute securities transactions and access related financial
information. In addition to its trading capabilities, the Company's Internet
site (www.jboxford.com) currently provides market quotes, charts, company
research, and customer account information, such as cash balances, portfolio
balances and similar information.
Management believes that the Company can continue to grow its discount and
electronic brokerage division in 1999 due to its ability to provide high
quality, flexible, and customer-sensitive responses and services. The Company
continually upgrades computer systems and services within each of its divisions
to utilize and take advantage of the most recent technological developments.
Clearing and Execution Services
JBOC is self-clearing and provides clearing and execution services to
independent broker-dealers. This division was historically profitable for JBOC
but experienced some profit erosion in recent years as a result of increased
competition that has affected operating margins. However, during the last 2
quarters, trading volume has significantly increased, resulting in greater
revenues and increased profitability from clearing operations. The clearing
business offers a high return on capital, and management believes that by
careful selection and monitoring of the Company's correspondents, this business
segment will remain profitable.
Market Making Activities
In order to facilitate the execution of security transactions for its own
customers and the customers of its correspondents, JBOC acts as a market maker
for approximately 500 public corporations whose stocks are traded on the NASDAQ
National Market System, NYSE or other national exchanges. The Company's market
making activities concentrate on the execution of unsolicited transactions for
customers and are required to be in compliance with the National Association of
Securities Dealers, Inc.'s ("NASD") rules regarding best execution.
Results of Operations
Revenues
The Company's total revenues were $22,993,599 in the first quarter 1999, an
increase of 44% from $16,002,424 in the first quarter of 1998. The primary
reason for the increase was a rise in clearing and execution revenue of 124% to
$5,125,692 in the current quarter from $2,286,827 in the first quarter of 1998.
Additionally, trading profits increased 123% to $4,021,691 in the first quarter
of 1999 from $1,802,884 in the first quarter of 1998.
Commission revenues increased 24% to $7,740,032 in the first quarter of 1999
from $6,245,651 in the first quarter of 1998. Commission revenue was the
largest single source of revenue to the Company during the comparable periods,
consisting of 33% for the first quarter 1999 and 39% for the first quarter of
1998. For 1999, the Company anticipates increased commission revenue as the
Company experiences growth in its discount and on-line brokerage divisions and
as these revenues track the overall growth in trading volume experienced during
recent years.
Interest revenues increased 9% to $5,905,447 in the first quarter of 1999
compared with $5,407,147 in the first quarter of 1998. Changes in interest
revenues are consistent with usual fluctuation of debit balances in brokerage
margin accounts as well as changes in broker-call rates on which the interest
charged to customers is calculated. Net interest income increased 35% from
$1,957,210 in the first quarter 1998 to $2,644,385 in the first quarter 1999.
Revenues from trading profits increased as discussed above. These increases
resulted from an increase in trading volume from the Company's discount and on-
line brokerage operations, from the discontinuance of proprietary trading
positions and investment banking activities which had negatively affected
trading profits, and from an increase in the Company's market-making activities
in listed securities initiated in the fourth quarter of 1997. Management
anticipates additional growth in trading profits for 1999.
Expenses
Expenses totaled $17,508,166 for the first quarter of 1999, an increase of 8%
from $16,140,953 in the first quarter of 1998. Many of the Company's expenses,
including commission expense, interest expense, and data processing charges are
directly related to commission revenues, trading revenues, which are all up from
the fourth quarter of 1998. Data processing expense increased 67% to $2,411,433
in the first quarter of 1999 from $1,440,447 in the first quarter of 1998. This
increase is the result of growth in correspondent clearing activities in
addition to commission and trading volumes. The increase in expenses since 1998
is primarily a result of the growth in the Company's discount and on-line
brokerage divisions.
Operating expenses decreased as a percent of total revenues from 101% in the
first quarter of 1998 to 74% in the first quarter of 1999. Expenses for
salaries decreased by 3% in the first quarter of 1999 to $2,281,347 from
$2,345,990 in the first quarter of 1998. Occupancy and equipment costs
decreased 19% to $1,105,351 in the first quarter of 1999 from $1,371,334 in the
first quarter of 1998. These decreases reflect new management's concerted effort
to contain costs and improve efficiency. These efforts began to produce
positive results as total expenses were 74% of total revenues in the first
quarter of 1999. Total expenses were 98%, 96%, and 89% of total revenues during
the years ended 1998, 1997, and 1996, respectively.
Extraordinary Item
In February 1999, the company executed an agreement with Oeri Finance, Inc. that
resulted in the forgiveness of notes payable to shareholders in the amount of
$728,125, which is included in net income ($436,875 net) and has been reflected
as an extraordinary item during the period.
Liquidity and Capital Resources
The Company finances its growth through the use of funds generated from the
business operations of its subsidiaries, mainly JBOC. Additionally, JBOC has
established omnibus/financing accounts and lines of revolving credit with other
broker-dealers and banking institutions with an aggregate borrowing limit
approximating $30,000,000. Further, the Company has available stock loan
financing when necessary. Amounts borrowed bear interest at a fluctuating rate
based on the broker call and prime rates.
The majority of the Company's corporate assets at March 31, 1999, were held by
its subsidiary, JBOC, and consisted of cash or assets readily convertible to
cash. The Company's statement of financial condition reflects this largely
liquid financial position. Receivables with other brokers and dealers primarily
represent current open transactions that typically settle within a few days, or
stock borrow-and-loan transactions where the contracts are adjusted to market
values daily. Additionally, JBOC is subject to the requirements of the NASD and
the SEC relating to liquidity, net capital standards and the use of customer
cash and securities. See Note 6, "Regulatory Requirements," to the financial
statements for regulatory requirements of the Company.
The Company currently anticipates that its cash resources and available credit
facilities will be sufficient to fund its expected working capital and capital
expenditure requirements for the foreseeable future. However, in order to more
aggressively expand its business, respond to competitive pressures, develop
additional products and services, or take advantage of strategic opportunities,
the Company may need to raise additional funds. If funds are raised through the
issuance of equity securities, or securities which are convertible into equity
securities, the Company's existing shareholders may experience additional
dilution in ownership percentages or book value. Additionally, such securities
may have rights, preferences and privileges senior to those of the holders of
the Company's common stock. If such funds are needed, there can be no assurance
that additional financing will be available or whether it will be available on
terms satisfactory to the Company.
Liquidity at March 31, 1999
The Company's cash position increased during the first quarter of 1999 by
$347,918 to $2,844,490. This compares with a net decrease in cash and cash
equivalents of $7,171,325 in the last quarter of 1998. The fluctuation in the
Company's cash position can be impacted by the settlement cycles of the business
which relate directly to the cash provided from or used in operations.
In February 1999, Hareton Sales & Marketing, Inc. ("Hareton"), the holder of
$502,615 in face value of 9% Senior Secured Convertible Notes, exercised its
right to convert this debt into common stock of the Company and the Company
issued 718,021 shares of common stock in full satisfaction of this debt.
In February 1999, the Company established the JB Oxford Revocable Government
Trust (the "Trust") to purchase common stock of the Company. Third Capital
Partners serves as trustee of the Trust, without compensation. Christopher L.
Jarratt, the Company's Chairman, is the Chief Manager and Chief Executive
Officer, and Mark D. Grossi, a member of the Company's Board of Directors, is a
member, of Third Capital Partners. The Company loaned the Trust $586,915, which
the Trust used to purchase 469,540 shares of the Company's Common Stock for an
average price of $1.25 per share. Pursuant to the terms of the Trust, Third
Capital Partners has the right to vote the shares held by the Trust, but has no
right to dispose of them except upon termination of the Trust. The Trust will
terminate on February 18, 2001, or, if sooner, the completion of the
investigation relating to the Company being conducted by the U.S. Attorney's
Office, the Federal Bureau of Investigation and the SEC. See Note 7,
"Contingent Liabilities," to the financial statements for a description of the
investigation. Concurrent with the transaction, the Company relinquished its
right of first refusal as to any remaining shares held by Felix Oeri and Oeri
Finance, Inc.; and Oeri Finance, Inc. forgave $728,125 in demand debt owed by
the Company. Subsequently, Oeri Finance Inc., Felix Oeri and Hareton filed 13D
Statements with the SEC indicating ownership of less than 5% of the Company's
stock.
A subordinated loan agreement, payable to Oeri Finance, Inc., matured on March
31, 1999 in the amount of $1,000,000. The Company has decided to delay payment
on the debt in light of the ongoing federal investigation (see Note 7,
"Contingent Liabilities," to the financial statements). The Company is not
aware of any wrongdoing by Oeri Finance, Inc. and is continuing to pay the
interest on the debt.
Cash Flows From Operating Activities
Net cash provided by operating activities was $1,230,931 for the first quarter
of 1999, compared to cash of $8,615,807 provided from operations during the
first quarter of 1998. The Company's net cash provided by or used in operating
activities is impacted by changes in the brokerage-related assets and
liabilities of JBOC.
During the first quarter of 1999, the most significant use of cash was the
increase in receivables from customers of $93,322,944; additionally, a decline
in payables to customers used cash of $34,662,457. This use of cash was funded
by the decrease in cash segregated under federal and other regulations of
$58,674,800 for the same period. The additional use of cash was financed through
an increase in stock loan, this is represented in the increase in payables to
broker-dealers and clearing organizations of $67,779,080.
Cash Flows Used In Investing Activities
The net cash used in investing activities during the first quarter of 1999 was
$117,830 compared with $692,941 during the same quarter of 1998. These cash
uses are a direct result of capital expenditures made by the Company during
these periods. The Company's requirement for capital resources is not material
to the business as a whole. The Company presently has no plans to open
additional offices. The Company has been in the process of upgrading its
information and communication systems, along with testing for year 2000
compliance. See "Year 2000 Compliance" below. Future expenditures for
upgrading of the Company's various information and communication systems are not
estimated to be material to the operation of the Company. The Company has no
significant commitments for capital expenditures.
Cash Flows From Financing Activities
Financing activities used cash of $765,183 in the first quarter of 1999,
compared to $111,113 cash provided from financing activities in the first
quarter of 1998. The most significant use of cash for this activity was the
purchase of treasury stock in the amount of $586,925.
Year 2000 Compliance
The Year 2000 problem arises when computer programs have been written using two
digits rather than four to define the applicable year. As a result, date-
sensitive hardware and software may recognize a date using "00" as the year 1900
rather than the year 2000. This could result in a system failure or other
disruption of operations and impede normal business activities.
Recently, the SEC amended Rule 17a-5 under the Securities Exchange Act of 1934
to require certain broker-dealers to file with the SEC and their designated
examining authorities a report prepared by an independent public accountant
regarding the broker-dealer's process for preparing for the year 2000. The
report will provide valuable information on the existence and sufficiency of a
broker-dealer's process for addressing Year 2000 problems; provide an
independent verification of the accuracy of the information contained in the
broker-dealer's second Form BD-Y2K; aid the SEC in obtaining a more complete
understanding of the industry's overall Year 2000 preparations; and identify
firm-specific and industry-wide problems.
The Company has developed a comprehensive plan to deal with the Year 2000 issue.
The Company believes the plan, if properly implemented, will result in timely
and adequate modifications of its systems and technology and those of its
outside vendors to address Year 2000 issues appropriately. The plan has five
phases:
. Awareness _ defining the Year 2000 problem, gaining support and resources,
developing a plan and establishing a project team.
. Assessment _ assessing the size and complexity of the project and identifying
all systems affected by the Year 2000 date change.
. Renovation _ obtaining hardware and software upgrades and outside vendor
certifications.
. Validation _ testing systems including connections with other systems and
acceptance of such by internal and external users.
. Implementation _ developing a contingency plan.
Except as indicated hereafter, the Company has substantially completed the five
phases of its plan. However, to ensure success, the Company plans to:
. Engage in ongoing discussions with outside vendors to determine if they have
been successful in validating their compliance with their Year 2000 plans;
. Use its best efforts to ensure that new systems or subsequent changes in
existing systems are verified as Year 2000 compliant;
. Test certain third-party systems which have computerized interfaces with the
Company's systems; and
. Continue to refine its contingency plan.
The Company relies substantially on outside vendors to provide computer hardware
and software systems for its operations. Consequently, the Year 2000 plan
places heavy emphasis on compliance by outside vendors. The plan prioritizes
outside vendors by the degree of dependence on the computer systems they
provide. The plan also addresses customer capabilities to become Year 2000
compliant. Finally, the plan requires review of non-information technology
systems, such as the alarm systems.
The Company has engaged the services of independent consultants to review the
overall Year 2000 project, the cost of which is not material. The independent
consultant has been requested to emphasize testing of vendor-reliant, mission-
critical systems and to assist in the development of a contingency plan.
To determine the readiness of outside vendors, the Company has solicited written
communications from each major outside vendor about its compliance with Year
2000. Most outside vendors have responded that they are Year 2000 compliant.
For those outside vendors who provide mission-critical systems and have
certified these systems as Year 2000 compliant, the Company has conducted in-
house testing of these systems, using various Year 2000-critical dates.
For those outside vendors that have responded they are working toward Year 2000
compliance and that the Company has determined to be significant, the Company
will follow-up on a regular basis throughout 1999. These outside vendors have
advised the Company that they expect to be Year 2000 compliant prior to December
31, 1999, and there are no Year 2000 compliance issues which appear to be
uncorrectable by that date. For such outside vendors that provide mission-
critical systems, the Company will be conducting ongoing testing to validate
Year 2000 compliance.
The Company has determined that other outside vendors will not have a material
impact on its operations, whether or not they are Year 2000 compliant.
The Company has sent a questionnaire to each of its significant customers to
determine the extent of risk created by any failure by them to remediate their
own Year 2000 issues. Most customers have responded. Each customer is
categorized according to its state of readiness based on its response to the
questionnaire and the Company's review of the customer. The Company will make a
reassessment on each customer's risk on a regular basis. The Company has tested
its non-information technology systems, such as microprocessors controlling its
environmental and alarm systems and found them to be Year 2000 compliant.
Some of the Company's computer hardware and software applications were modified
or replaced in order to maintain their functionality as the Year 2000
approaches. The total direct costs of the Year 2000 effort were less then
$250,000 in 1998 and is expected to be less then $250,000 in 1999.
Management believes that it is likely that its year 2000 compliance efforts will
be successful. However, it is possible that necessary remediation of vendor-
reliant systems may not be completed in a timely manner, or third-party systems
with which the Company has computerized interfaces may create Year 2000 issues.
It is also possible that the expenses or liabilities to which the Company may
become subject as a result of such issues could be material. Any such event or
occurrence could have a material adverse effect on the Company's business,
prospects, operating results and financial condition. Ultimately, the potential
impact of the Year 2000 issue on the Company will depend on a series of complex
factors, including the following:
. The corrective measures undertaken by the Company itself;
. The measures undertaken by outside vendors to become Year 2000 compliant;
. The accuracy of representations made by outside vendors to the Company
concerning their state of readiness;
. The degree of compliance by governmental agencies, businesses (including
telephone and other utility companies) and other entities which engage in
essential communications or third-party computerized interfaces with the
Company and its customers; and
. The degree of compliance by customers.
At worst, the Company's customers and outside vendors will face severe Year 2000
issues. Large on-line customers or day traders negatively affected by Year 2000
issues could lead to increased risk of the inability to execute securities
transactions. The Company may also be required to replace non-compliant outside
vendors with more expensive Year 2000 compliant outside vendors.
The Company has taken steps to avail itself of the safe harbor provision of the
newly-enacted Year 2000 Information and Readiness Disclosure Act by clearly
labeling written communications to customers and vendors as a "Year 2000
Readiness Disclosure," thereby prompting a prompt, candid and thorough exchange
of information on Year 2000 readiness and limiting liability for any errors.
The Company has created a contingency plan to take effect should there be
circumstances preventing timely implementation. If those outside vendors do not
demonstrate compliance by a certain date, the Company will seek alternatives in
accordance with its contingency plan. Outside vendors of mission-critical
systems are major U.S. companies, and management has assessed the relevant
financial and operational capabilities of its hardware and software to provide
Year 2000 processing. The time frame to convert to another outside vendor in
the Year 2000 is relatively long and therefore the ability to obtain replacement
outside vendors will be limited.
In addition, for each mission-critical system, the Company has identified
alternate procedures to achieve a successful resumption of business in case its
computer systems, or those of its mission-critical outside vendors, fail. The
alternative procedures include development of a manual process for implementing
the system and identifying alternative outside vendors.
Recent Accounting Pronouncements
In 1998, the Company adopted Statement of Financial Accounting Standards No.
131, Disclosure About Segments of an Enterprise and Related Information ("SFAS
131"), the adoption of which had no significant impact on the Company's
financial statements.
In 1998, the Financial Accounting Standards Board issued Statement of Financial
Accounting Standards No. 133, Accounting for Derivative Instruments and Hedging
Activities ("SFAS 133"). The Company is required to and will implement the
provision of this new standard effective with its 2000 fiscal year. SFAS 133
establishes accounting and reporting standards requiring that every derivative
instrument be recorded in the statement of condition as either an asset or as a
liability measured at its fair value and that changes in the fair value be
recognized currently in the statement of operations. The Company has not yet
quantified the impact of adopting SFAS 133 on its financial statements but does
not believe it will have a material effect on the Company's financial position
or results of operations.
Risk Factors
In accordance with "plain English" guidelines provided by the SEC, the Risk
Factors have been written in the first person.
You should carefully consider the risks described in the Company's Form 10-Q for
the quarter ended March 31, 1999 before making an investment decision in the
Company. These risks include the fact that our business is ever-changing; the
market for discount and electronic brokerage services is at an early stage of
development; the U.S. securities markets are subject to fluctuation; our
clearing operations expose us to risks that exceed the simple risk of loss of
business; possible delays in the introduction of new services and products;
competition; government regulation; net capital requirements; systems
failures; stock price volatility; and the Year 2000 problem. These risks and
uncertainties are not the only ones facing the Company and there may be
additional risks that we do not presently know of or that we currently deem
immaterial. All of these risks may impair our business operations. This
document also contains forward-looking statements that involve risks and
uncertainties and actual results may differ materially from the results we
discuss in the forward-looking statements. If any of the risks actually occur,
our business, financial condition or results of operations could be materially
adversely affected. In that case, the trading price of our stock could decline,
and you may lose all or part of your investment.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Market Risk Disclosures
The following discussion about the Company's market risk disclosures involves
forward-looking statements. Actual results could differ materially from those
projected in the forward-looking statements. See Item 2 "Special Note Regarding
Forward-Looking Statements" above. The Company is exposed to market risk
related to changes in interest rates and equity security price risk. The
Company does not have derivative financial instruments for speculative or
trading purposes.
Retail broker-dealers with clearing operations, such as the Company, are exposed
to risks that exceed the simple risk of loss of business due to the loss of
retail customers and/or correspondents. Broker-dealers engaged in clearing
operations for other correspondent broker-dealers are exposed to losses beyond
the loss of business in the event that the correspondent fails. These risks
result where the total assets, securities held in inventory, and cash of the
failed correspondent are insufficient to cover the unpaid customer debits,
together with losses which may be generated in the correspondent's trading
account. The Company has established procedures to review a correspondent's
inventory and activities in an effort to prevent such losses in the event of a
correspondent's failure.
Areas outside the control of the Company which affect the securities market,
such as severe downturns or declines in market activity, may cause substantial
financial exposure. This is particularly true with regard to the receivables
that are carried in customers' margin accounts. A significant decline in market
value may decrease the value of securities pledged in the margin accounts to a
point that the margin loans would exceed such value. While the Company is
authorized to liquidate the securities and to utilize the correspondent's
account balances to cover any shortfall, in a worst case scenario, such
collateral may not be sufficient to cover all losses.
Interest Rate Sensitivity and Financial Instruments
For its working capital and reserves that are required to be segregated under
federal or other regulations, the Company invests primarily in U.S. Treasury
securities under agreements to resell. These agreements have maturity dates
ranging from one to seven days, and do not present a material interest rate
risk.
Equity Price Risk
JBOC acts as a market maker for approximately 500 public corporations whose
stocks are traded on the NASDAQ National Market System, NYSE or other national
exchanges. The Company selects companies in which it makes a market based on a
review of the current market activity, and also to facilitate trading activity
of its own and correspondent's clients. Market making may result in a
concentration of securities which may expose the Company to additional risk;
however, the Company does not maintain an inventory of equity securities.
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The Company and its subsidiaries are a party to a number of pending legal or
administrative proceedings, including suits involving various customers that
allege damages arising as a result of brokerage transactions by the Company.
All of the legal and administrative proceedings have arisen in the ordinary
conduct of its business. Those that may have a significant impact on the
Company have been disclosed in previous filings. See also Note 7, "Contingent
Liabilities," to the financial statements for a discussion regarding the federal
investigation.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
There has been no material modification of ownership rights of securities
holders. Certain subsidiary companies, as part of their normal broker-dealer
activities, have minimum capital requirements imposed by regulatory agencies.
See Note 4, "Earnings Per Share," to the financial statements. These
requirements may restrict the payment of dividends.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(b) A Report on Form 8-K was filed on March 8, 1999, reporting under Item 5.
Other Events, the establishment of the JB Oxford Revocable Government Trust
pursuant to a trust agreement between the Company and Third Capital Partners,
LLC, as trustee.
Pursuant to the requirements 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/ Michael J. Chiodo
Michael J. Chiodo
Chief Financial Officer
May 14, 1999
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