UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q/A-1
(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, 1998
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 November 10, 1998, the
Registrant had the following number of shares of common stock, $0.01 par value
per share, outstanding: 14,141,205.
EXPLANATORY NOTE
This Form 10-Q/A-1 is being filed by JB Oxford Holdings, Inc., a Utah
corporation (the "Company"), as an amendment to its Quarterly Report on Form
10-Q for the quarterly period ended September 30, 1998, filed November 16,
1998, to re-file the Company's unaudited Consolidated Statement of Cash Flows
for the nine months ended September 30, 1998 to correct a document conversion
error contained therein. The "payable to cutomers" was incorrectly reported
as $2,617,625 when that figure is correctly reported as $12,617,625. All
subtotals and totals were stated correctly. A corrected Consolidated Statement
of Cash Flows is filed herewith.
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
<TABLE>
JB OXFORD HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
September 30, December 31,
1998 1997
(Unaudited)
<S> <C> <C>
ASSETS:
Cash and cash equivalents $ 9,667,897 $ 2,598,062
Cash segregated under federal and other regulations 67,022,981 34,903,262
Receivable from broker-dealers and clearing
organizations (net of allowance for doubtful
accounts of $2,103,802 for both periods) 5,891,590 4,682,908
Receivable from customers (net of allowance for
doubtful accounts of $4,231,102 and $4,231,016,
respectively) 244,727,902 280,287,735
Other receivables (net of allowance for doubtful
accounts of $1,979,793 for both periods) 2,149,702 2,233,321
Securities owned - at market value 2,074,023 3,737,661
Furniture, equipment, and leasehold improvements
(at cost - net of accumulated depreciation and
amortization of $4,771,460 and $4,051,672,
respectively) 3,225,424 3,460,467
Income taxes refundable 1,372,645 717,396
Deferred income taxes 1,076,529 918,358
Clearing deposits 6,672,180 6,728,590
Other assets 1,397,976 2,044,588
TOTAL ASSETS $345,278,849 $342,312,348
</TABLE>
See accompanying notes to Consolidated Financial Statements.
<TABLE>
JB OXFORD HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
September 30, December 31,
1998 1997
(Unaudited)
<S> <C> <C>
LIABILITIES AND STOCKHOLDERS' EQUITY:
LIABILITIES:
Payable to broker-dealers and clearing
orgnaizations $ 80,002,086 $ 90,222,450
Payable to customers 233,650,681 221,033,056
Securities sold, not yet purchased - at market value 500,792 1,148,706
Accounts payable and accrued liabilities 6,435,708 5,791,409
Income taxes payable -- 182,028
Loans from stockholders 9,138,811 7,288,811
Notes payable 177,112 22,894
Subordinated borrowings 1,250,000 1,500,000
TOTAL LIABILITIES 331,155,190 327,189,354
COMMITMENTS AND CONTINGENT LIABILITIES
STOCKHOLDERS' EQUITY:
Common stock ($.01 par value, 100,000,000 shares
authorized; 14,141,205 shares issued and outstanding) 141,412 141,412
Additional paid-in capital 13,375,316 12,815,316
Retained earnings 606,931 2,166,266
TOTAL STOCKHOLDERS' EQUITY 14,123,659 15,122,994
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $345,278,849 $342,312,348
</TABLE>
See accompanying notes to Consolidated Financial Statements.
<TABLE>
JB OXFORD HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
For The Nine Months Ended
September 30,
1998 1997
<S> <C> <C>
REVENUES:
Clearing and execution $ 7,363,702 $14,931,784
Trading profits 3,477,360 1,871,828
Commissions 19,352,676 19,003,452
Interest 17,225,031 17,627,762
Other 413,004 425,244
Total Revenues 47,831,773 53,860,070
EXPENSES:
Employee compensation 7,040,970 7,375,896
Commission expense 7,550,817 7,531,871
Clearing and floor brokerage 2,754,781 2,324,898
Communications 4,648,675 4,699,389
Occupancy and equipment 4,114,405 3,024,469
Interest 10,805,624 10,387,351
Data processing charges 4,241,868 3,946,683
Professional services 2,449,008 3,202,684
Promotional 2,890,308 2,968,586
Bad debts 1,042,319 2,780,162
Other operating expenses 1,920,333 1,812,827
Total Expenses 49,459,108 50,054,816
Income (Loss) From Operations (1,627,335) 3,805,254
Non-cash interest expense on convertible notes 560,000 --
Income (Loss) Before Income Taxes (2,187,335) 3,805,254
Income Tax Provision (Benefit) (628,000) 1,548,258
Net Income (Loss) $(1,559,335) $ 2,256,996
Basic Net Income (Loss) Per Share $(0.11) $0.19
Diluted Net Income (Loss) Per Share $(0.11) $0.13
Weighted average number of shares
Basic 14,141,205 11,725,670
Diluted 14,141,205 18,183,723
</TABLE>
See accompanying notes to Consolidated Financial Statements.
<TABLE>
JB OXFORD HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
For The Three Months Ended
September 30,
1998 1997
<S> <C> <C>
REVENUES:
Clearing and execution $ 2,688,632 $ 5,169,659
Trading profits (losses) 540,803 (470,537)
Commissions 6,049,287 7,828,323
Interest 5,892,308 7,250,647
Other 138,711 248,681
Total Revenues 15,309,741 20,026,773
EXPENSES:
Employee compensation 2,385,554 2,594,815
Commission expense 2,299,298 2,890,168
Clearing and floor brokerage 704,934 926,644
Communications 1,652,740 1,881,740
Occupancy and equipment 1,379,383 1,130,522
Interest 3,747,720 4,238,132
Data processing charges 1,670,228 1,467,473
Professional services 684,759 1,232,160
Promotional 844,794 617,875
Bad debts 369,330 1,052,198
Other operating expenses 552,832 474,826
Total Expenses 16,291,572 18,506,553
Income (Loss) From Operations Before Income (981,831) 1,520,220
Taxes
Income Tax Provision (Benefit) (378,000) 633,258
Net Income (Loss) $ (603,831) $ 886,962
Basic Net Income (Loss) Per Share $(0.04) $0.06
Diluted Net Income (Loss) Per Share $(0.04) $0.05
Weighted average number of shares
Basic 14,141,205 14,044,194
Diluted 14,141,205 18,612,957
</TABLE>
See accompanying notes to Consolidated Financial Statements.
<TABLE>
JB OXFORD HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
For The Nine Months Ended
September 30,
1998 1997
<S> <C> <C>
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS:
CASH FLOWS PROVIDED BY (USED IN) OPERATING
ACTIVITIES:
Net income (loss) $ (1,559,335) $ 2,256,996
Adjustments to reconcile net income (loss) to cash
used in operating activities:
Depreciation and amortization 1,092,894 936,921
Deferred rent (83,256) (38,271)
Provision for bad debts -- 628,214
Non-cash interest expense on convertible
debentures 560,000 --
Subordinated debt -- (500,000)
Changes in assets and liabilities:
Cash segregated under federal and other regulations (32,119,719) 3,620,874
Receivable from broker-dealers and clearing (1,208,682) (3,991,426)
organizations
Receivable from customers 35,559,833 (139,810,774)
Other receivables 83,619 (881,866)
Securities owned 1,663,638 2,688,079
Deferred taxes receivable (158,171) --
Clearing deposits 56,410 (4,996,577)
Other assets 646,612 (482,409)
Payable to broker-dealers and clearing organizations (10,220,364) 36,404,144
Payable to customers 12,617,625 110,249,533
Securities sold, not yet purchased (647,914) 538,843
Accounts payable and accrued liabilities 727,555 (965,596)
Income taxes payable/receivable (837,277) 584,622
Net cash provided by operating activities 6,173,468 6,241,307
CASH FLOWS USED IN INVESTING ACTIVITIES:
Long term investments -- (1,125,000)
Capital expenditures (857,851) (1,284,880)
Net cash used in investing activities (857,851) (2,409,880)
CASH FLOWS FROM FINANCING ACTIVITIES:
Increase in notes payable 265,943 --
Payments on notes payable (111,725) (6,120,087)
Loans from stockholders 2,000,000 3,402,500
Payments on loans from stockholders (150,000) (135,000)
Payments on subordinated borrowings (250,000) --
Issuance of common stock -- 1,327,630
Payment of cash dividends - preferred stock -- (85,479)
Net cash provided by (used in) financing activities 1,754,218 (1,610,436)
NET INCREASE IN CASH AND CASH EQUIVALENTS 7,069,835 2,220,991
CASH AND CASH EQUIVALENTS AT BEGINNING OF THE YEAR 2,598,062 969,871
CASH AND CASH EQUIVALENTS AT END OF THE PERIOD $ 9,667,897 $ 3,190,862
</TABLE>
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 its subsidiaries (the "Company") for the periods presented.
The accompanying financial information should be read in conjunction with the
Company's 1997 Annual Report on Securities and Exchange Commission ("SEC") 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.
Two of the Company's subsidiaries, JB Oxford & Company ("JBOC") and
Stocks4Less, Inc. ("S4L"), are consolidated in the quarterly financial
information as of September 25, 1998 and September 26, 1997, respectively,
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.
NOTE 2. 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 3. CONVERTIBLE NOTES
In June 1998, the Company completed the sale of newly issued 9% Secured
Convertible Notes in the principal amount of $2.0 million due December 31, 1999.
The notes are convertible into the Company's $0.01 par value common stock (the
"Common Stock")at a rate of $0.70 per share. The notes will be converted into a
new issue of voting preferred stock of the Company if such new issue is approved
by the Company's shareholders. The new preferred stock will be convertible into
Common Stock on the same terms as newly issued 9% Secured Convertible Notes.
In conjunction with the above transaction, the purchasers of the newly
issued 9% Secured Convertible Notes and another investor also acquired
approximately $3.9 million in outstanding principal amount of the Company's 9%
Senior Secured Convertible Notes. The Company agreed to reduce the conversion
ratio from $1.00 to $0.70 per share of the Company's Common Stock for the entire
$4,421,311 of outstanding 9% Senior Secured Convertible Notes. The maturity
date of the notes was extended to December 31, 1999, and they are immediately
convertible into common shares.
The Company incurred a non-cash interest charge of $560,000 in the second
quarter of 1998 as a result of the discount conversion feature on the debt
instruments discussed above. The discount is based on the difference of the
conversion ratio to the fair value of the underlying Common Stock after
applying certain discounts that management believes are appropriate under
the circumstances.
NOTE 4. EARNINGS PER SHARE
The following table reconciles the numerators and denominators of the basic
and diluted earnings per share computation:
<TABLE>
For The Nine Months Ended
September 30,
1998 1997
<S> <C> <C>
BASIC EARNINGS PER SHARE
Net income (loss) $(1,559,335) $ 2,256,996
Preferred stock dividends -- (85,479)
Income (loss) available to common stockholders
(numerator) $(1,559,335) $ 2,171,517
Weighted average common shares outstanding
(denominator) 14,141,205 11,725,670
Basic Earnings (Loss) Per Share $(0.11) $0.19
DILUTED EARNINGS PER SHARE
Net income (loss) $(1,559,335) $ 2,256,996
Interest on convertible debentures, net of income
tax -- 179,064
Income (loss) available to common stockholders plus
assumed conversions (numerator) $(1,559,335) $ 2,436,060
Weighted average common shares outstanding 14,141,205 11,725,670
Weighted average options outstanding -- 1,300,585
Weighted average convertible debentures -- 4,421,311
Weighted average convertible preferred stock -- 1,494,505
Stock acquired with proceeds -- (758,348)
Weighted average common shares and assumed
conversions outstanding (denominator) 14,141,205 18,183,723
Diluted Earnings (Loss) Per Share $(0.11) $0.13
</TABLE>
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 2,055,000 and 405,000 shares of Common Stock at
September 30, 1998 and 1997, were not included in the computation of diluted
earning per share because the options' exercise price was greater then the
average market price of the Common Stock during the respective periods. The
options carry exercise prices ranging from $1.08 to $3.00 at September 30, 1998,
and 1997. The options outstanding at September 30, 1998 expire at various dates
through July 9, 2007. Additionally, there are 9,856,531 of shares of Common
Stock (6,495,889 weighted average shares outstanding for the nine months ended
September 30, 1998), which may be converted from the convertible debentures that
are not included in the computation because their inclusion would reduce the
loss per share. Quarter ending September 30, 1997 earnings (loss) per
share have been restated to conform with Statement of Financial Accounting
Standards No. 128 "Earnings per Share" ("SFAS 128").
Basic earnings per share, in accordance with SFAS 128, are $0.01 higher
than primary earnings per share calculated in accordance with APB 15 at
September 30, 1997. There was no change in the amount reported as fully diluted
earnings per share at September 30, 1997.
NOTE 5. REGULATORY REQUIREMENTS
JBOC and S4L are subject to the SEC's Uniform Net Capital Rule (Rule
15c3-1), 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
2% 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 5% of aggregate
debits. S4L is a fully disclosed non-clearing broker-dealer, which is required
to maintain minimum net capital, as defined, equal to the greater of $5,000 or 6
2/3% of aggregate indebtedness, as defined by the Rule.
At September 30, 1998, JBOC had net capital of $15,201,643, which was 6.1%
of aggregate debit balances and $10,255,139 in excess of the minimum amount
required. At December 31, 1997, JBOC had net capital of $14,380,292, which was
5.1% of aggregate debit balances and $8,728,676 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
$71,055,109 and $34,554,930 at September 30, 1998 and December 31, 1997,
respectively. Securities purchased are U.S. Treasury instruments having a
market value of 102% of cash tendered.
NOTE 6. CONTINGENT LIABILITIES
The Company and/or its subsidiaries are defendants in several lawsuits and
arbitrations, descriptions of the most significant of which follow:
a) In a District Court action commenced in November 1997, in the Third
Judicial District Court of the State of Utah. The claim is brought by a
former officer and director of the Company, William R. Stratton, and alleges
breach of an employment agreement with OTRA Clearing Inc. (a subsidiary of the
Company, later known as Reynolds Kendrick Stratton, Inc., which has been
inactive since July 1994, but formerly operated as a broker-dealer), which
claimant alleges is binding on the Company. Mr. Stratton alleges that he is
owed damages of not less than $1.2 million, comprised of additional
compensation, insurance benefits, and vacation pay. The Company has filed an
answer denying that Mr. Stratton is owed any additional amounts. Discovery
has commenced. The ultimate outcome and range of possible loss, if any, is
not determinable at this stage. Management intends to vigorously contest
this matter. Accordingly, no provision for any liability that might result
has been made in the accompanying financial statements.
b) On August 19, 1997, a search warrant was served at the Beverly Hills,
California corporate offices of the Company and its subsidiary, JBOC,
pursuant to a request made by the Federal Bureau of Investigation. The
Company and certain of its officers and employees were also served with Grand
Jury subpoenas. The search warrant and subpoenas were issued in connection
with an investigation being conducted by the U.S. Attorney's Office in Los
Angeles. A focus of the investigation appears to be the prior relationship
and activities of Irving Kott and Oeri Finance, Inc. with the Company and
possible market manipulation. The Company cannot, however, say with any
certainty that these are the only issues involved in the investigation. Mr.
Kott is an individual who had been retained through an entity named Turret
Consultants as a consultant to the Company. In connection with this
investigation, the Swiss branch office of JBOC as well as the offices of Oeri
Finance, Inc. were searched by French and Swiss authorities pursuant to a
request made by the U.S. Justice Department. Felix A. Oeri, the former
Chairman of the Board of Directors of the Company, serves as President of
Oeri Finance, Inc.
On or about the same date, the Company, its directors, JBOC and certain
of its officers and employees were served with subpoenas duces tecum issued
by the SEC in connection with an investigation conducted by that agency
entitled In the matter of Reynolds Kendrick Stratton, Inc. The subpoenas
generally call for the production of documents relating apparently to the
same issues which are the subject of the Grand Jury investigation.
The Company has retained counsel in the above matters and has
cooperated with the U.S. Attorney's Office and the SEC in their on-going
investigations. Pursuant to the subpoenas served by the U.S. Attorney's
Office and the SEC, the Company has and is continuing to produce various
documents responsive to such subpoenas. At this stage of both
investigations, it is not possible to predict their ultimate outcome or the
financial impact on the Company, if any. In September of 1997, the Company
ended its consulting relationship with Turret Consultants and Mr. Kott.
Under an existing Directors' and Officers' liability insurance policy
held by the Company, a claim was filed with the insurer for the reimbursement
of legal fees incurred in connection with the federal investigations. The
policy calls for a maximum reimbursement to the Company of $2 million. The
insurance company preliminarily denied the Company's claim under their
interpretation of the terms of the policy. The Company believes that the
insurance company has improperly denied the Company's claim and has filed an
action alleging breach of contract. The Company believes that it currently
can fund the ongoing legal costs associated with the investigations
regardless of the outcome of the Company's claim.
NOTE 7. SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
<TABLE>
For the Nine Months Ended
September 30,
1998 1997
(Unaudited) (Unaudited)
<S> <C> <C>
Supplemental Disclosures Of Cash Flow Information
Cash paid during the period for:
Interest $10,862,685 $10,322,652
Income taxes 346,829 869,378
Supplemental schedule of noncash investing and
financing activities:
In September 1997, a subordinated loan was
assigned due to a correspondent's early
termination agreement. -- 500,000
In April 1997, 200,000 shares of $10 par value
non-voting convertible preferred stock was
exchanged for 4,000,000 shares of $0.01 par value
common stock. -- 2,000,000
</TABLE>
NOTE 8. COMPREHENSIVE INCOME
Comprehensive income (as defined by SFAS 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
Forward Looking Statements
Certain statements in this Report on Form 10-Q, particularly under Item 2,
constitute "forward-looking statements" within the meaning of the Private
Securities Litigation Reform Act of 1995. Such forward-looking statements
involve known and unknown risks, uncertainties, and other factors 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. Many factors could
cause the Company's actual results to differ materially from those in the
forward looking statements, including, but not limited to, the Company's listing
on the Nasdaq SmallCap market.
General
JB Oxford Holdings, Inc. was incorporated in Delaware on March 31, 1987,
and relocated its state of incorporation to Utah in 1990. The Company is a
holding company and operates in a single industry segment. The most significant
subsidiary of the Company is JB Oxford & Company, a registered broker-dealer
offering the following services: (i) full service discount brokerage services to
the investing public through its registered representatives; (ii) proprietary
electronic and touch tone telephonic trading services; (iii) clearing,
settlement, execution, safekeeping, cash, and margin account services for
regional broker-dealers ("correspondents") on a fully-disclosed basis; and (iv)
market maker services in Nasdaq and listed securities. The Company is
headquartered in Beverly Hills, and has branch locations in Basel, Switzerland,
New York, Boston, Miami, and San Gabriel, California. Additionally, in 1997 the
Company began offering deep discount electronic services through another
brokerage subsidiary, Stocks4Less, Inc. ("S4L").
Recent Expansions and Developments
During the third quarter, the Company made key management changes in the
organizational structure of JBOC. Stephen Rubenstein, who had been the
President of JBOC since 1994, resigned from employment with JBOC and resigned
his board positions with JBOC and S4L. In his stead, Albert R. Laubenstein, who
had been Executive Vice President, was named acting President and Chief
Executive Officer.
JBOC's search for a Director of Operations successfully concluded with the
hiring of Ron Roberts to fill that position. Mr. Roberts brings with him to
JBOC over fifteen years of experience in the financial services industry, most
recently as a corporate operations officer with another Beverly Hills brokerage
firm.
Also during the third quarter, the Company acted to consolidate JBOC's
Dallas, Texas office into JBOC's other branch offices located throughout the
United States. Management reviewed the costs associated with maintaining this
branch, as well as the expiration of the existing lease, and determined that the
consolidation of the Dallas branch was the most economically sound decision.
All brokers from the Dallas branch were offered the option of relocating to any
other branch office.
In the area of correspondent clearing, JBOC continued in its efforts to
increase correspondent revenues by actively seeking to add new correspondents.
During the third quarter of 1998, four new correspondents signed clearing
agreements.
Changes in Financial Condition
The Company's total assets have remained relatively stable during 1998.
Total assets have increased by 1% to $345,278,849 for the nine months ended
September 30, 1998 from $342,312,348 at December 31, 1997. However, total
assets have declined 2% from June 30, 1998. The most significant change in the
components of assets is an increase in cash segregated under federal and other
regulations, which increased $32,119,719, or 92%, to $67,022,981 from December
31, 1997 to September 30, 1998. This was offset by a decrease in Receivables
from customers in the amount of $35,559,833, or 13%, to $244,727,902. The
changes in the above two items are related to each other, as customers sell
security positions and reduce debit balances, the resulting proceeds are
deposited in segregated cash.
Total liabilities increased $3,965,836, or 1%, to $331,155,190 for the nine
months ended September 30, 1998. Payables to customers increased $12,617,625,
or 6%, to $233,650,681. At September 30, 1998 customer payables represented 71%
of the total liabilities of the Company. Payables to broker-dealers and
clearing organizations decreased $10,220,364, or 11%, to $80,002,086. This
represents a decrease in securities loaned.
Comparison of Operations
The Company recorded a net loss of $603,831 for the quarter ended September
30, 1998. This compares to net income of $886,962 for the quarter ended
September 30, 1997, and a net loss of $869,604 for the quarter ended June 30,
1998. An unrealized loss of approximately $470,000 ($282,000 after tax) in
certain security positions the Company is holding was charged during the
quarter. Subsequent to September 30, 1998, the Company liquidated the majority
of these positions.
Total revenues for the third quarter of 1998 were $15,309,741, a decrease
of $4,717,032 from the comparable 1997 quarter and an decrease of $1,209,867
from the second quarter of 1998. Total expenses for the third quarter of 1998
were $16,291,572, a decrease of $2,214,981 from the comparable quarter in 1997,
and a decrease of $735,011 from the second quarter of 1998.
The following table presents comparisons of significant components of
revenues and expenses between the current quarter, the comparable quarter in
1997, and the trailing quarter:
<TABLE>
For the Three Months Ended
Sept. 1998 Sept. 1997 June 1998
<S> <C> <C> <C>
Revenues (000's):
Clearing $2,689 $5,170 $2,388
Trading 541 (471) 1,134
Commissions 6,049 7,828 7,058
Interest Income 5,892 7,251 5,926
Other 139 249 14
Expenses (000's):
Commissions 2,299 2,890 2,919
Salaries 2,386 2,595 2,309
Interest 3,748 4,238 3,608
Communications &
Data Processing 3,323 3,349 2,728
Promotional 845 618 1,214
Professional Fees 685 1,232 731
Clearing 705 927 1,091
</TABLE>
Nine Months Ended September 30, 1998 Compared to Nine Months Ended September 30,
1997
The Company recorded a loss of $1,559,335 for the nine months ended
September 30, 1998 compared to net income of $2,256,996 for the comparable
period ended September 30, 1997, the most significant contributor being the
decrease in clearing revenue, discussed below. Total revenue decreased
$6,028,297, or 11%, to $47,831,773 for the nine months ended September 30, 1998
when compared to $53,860,070 for the same period in 1997.
Commission revenue increased by $349,224, or 2%, from $19,352,676 during
the first nine months of 1998 compared to the first nine months of 1997. Net
commissions (commission revenue less commission expense) increased $330,278
during the same period.
Clearing revenue declined $7,568,082, or 51%, during the nine months ended
September 30, 1998 compared to the period ended September 30, 1997. This
decline is the result of a reduction in the number of trades executed for
correspondent brokers in the first nine months of 1998. A significant portion
of this decline resulted from the Company not renewing the clearing agreement
with a major correspondent broker in the fourth quarter of 1997.
Interest revenue decreased $402,731, or 2%, to $17,225,031 during the nine
months of 1998 compared to the nine months of 1997. Net interest income
decreased $821,044, or 3%, during the first nine months of 1998 over the first
nine months of 1997. Included in this decrease of net interest income is a non-
cash accounting charge for interest of $560,000. This one time non-cash
accounting charge (which has no impact on the Company's net worth) represents
the difference between the estimated fair value of the Company's Common Stock
and the exercise value of such stock underlying convertible notes either issued
during the second quarter of 1998 or on existing convertible notes where the
exercise value was reduced during the second quarter of 1998 in connection with
certain transactions. Revenue from trading profits increased $1,605,532, or
86%, during the nine months ended September 30, 1998 compared to the nine months
ended September 30, 1997.
The Company's total expenses decreased by $595,708, or 1%, to $49,459,108
for the nine months ended September 30, 1998 compared to $50,054,816 for the
nine months ended September 30, 1997. Clearing expense increased $429,883, or
18%, during the first nine months of 1998 compared to the first nine months of
1997. This increase was primarily due to making markets in listed securities,
which resulted in higher execution and floor brokerage costs.
The most significant decrease was bad debts and errors, which decreased
$1,737,843, or 63%, to $1,042,319 for the nine months ended September 30, 1998.
This decrease is directly related to litigation that was settled in the second
quarter of 1997, and the related expense being reported at that time. Occupancy
and equipment costs have increased $1,089,936, or 36%, to $4,114,405 during the
first nine months of 1998 compared to the same period of 1997. This increase
relates directly to the Company upgrading its communication and other
information systems. Equipment lease costs increased $802,570 and depreciation
increased $158,493 in the first nine months of 1998. There should be some
reduction of occupancy costs in future quarters due to the closing of the
Company's Dallas office during the third quarter of 1998.
Liquidity and Capital Resources
The Company's liquidity and financial condition remain sound. The
Company's equity to total assets ratio decreased during the third quarter of
1998 from 4.2% to 4.1%. This ratio will increase upon conversion of the newly
issued 9% Secured Convertible Notes (the "New Notes") into a new issue of
preferred stock, if approved by the shareholders. Additionally, Management
continues to assess the need for, and timing of, an infusion of additional
capital into the Company. Third Capital Partners, LLC ("Third Capital
Partners") has agreed to undertake to obtain additional equity capital for the
Company. However, management believes that completing an equity offering at
this time would be dilutive to the Company's existing shareholders. Management
will continue to assess whether the Company needs additional capital and the
benefits and detriments of raising additional equity capital.
The increase in cash of $7,069,835 from $2,598,062 at December 31, 1997 to
$9,667,897 for the nine months ended September 30, 1998 resulted from a normal
fluctuation in the settlement cycle; the Company collected from the settlement
of trades at the end of the quarter, whereas at the end of 1997, the Company was
paying for the settlement of trades. Additionally, the Company received cash in
the amount of $1,754,218 from financing activities. The most significant
portion was the $2.0 million proceeds from the issuance of the New Notes in June
1998.
Cash of $6,173,468 was provided from operating activities during the first
nine months of 1998. The most significant source of operating cash was from the
change in amounts due to/from customers in the amount of $48,177,458. The
largest use of operating cash was from the change in cash segregated under
federal and other regulations in the amount of $32,119,719.
The Company used cash of $857,851 for investing activities in the
acquisition of property and equipment, of which only $29,518 represents
expenditures in third quarter of 1998. The Company does not have any
significant commitments for capital expenditures.
Year 2000 Compliance
The Company utilizes and is dependent upon various data processing,
trading, communication, and information systems and software to conduct its
business. The Company has initiated a review and assessment of all hardware and
software to confirm that it will function properly in the year 2000 and beyond.
Included in these systems, such as the Company's back office accounting and
regulatory system, are applications developed and maintained by third party
vendors. These systems run on the Company's data network. Third party vendor
testing has begun and will continue through February 1999. All mission-critical
system testing is scheduled to be completed by June 30, 1999. Street-wide
testing is scheduled to start in February 1999, and be completed in October
1999. Based on the results of these tests the Company will formulate a
contingency plan as deemed appropriate. Current costs of the survey and testing
have not been significant to date and are not estimated to be significant in the
future. The Company does not have a current cost estimate for remediation, if
any is required.
The Company is not aware of any system that is not or cannot be made year
2000 compliant by June 30, 1999. Additionally, the Company is not aware of any
system, in Management's opinion, that creates a material risk of disruption of
operations. Evaluation of these issues is ongoing and there can be no assurance
that issues not presently known to the Company will not be discovered, nor can
the Company be assured that its third party vendors will be year 2000 compliant,
which could present a material risk of disruption to the Company's operations.
Nasdaq Listing Requirements
The securities of the Company currently trade on the Nasdaq SmallCap
Market. Effective February 1998, Nasdaq implemented revised continued listing
requirements, including the maintenance of a minimum bid price of $1.00. The
Company was notified by Nasdaq that the Company did not meet the minimum bid
price requirement. Management is currently addressing various options to bring
the Common Stock back into compliance, including, but not limited to, a reverse
split of the Company's Common Stock. If the Company is unable to satisfy the
listing requirements, the Company's stock is subject to delisting and may be
lowered to a bulletin board stock. On November 10, 1998, the Company requested
an oral hearing before Nasdaq to present the Company's business plan to remedy
the current price deficiency. This procedure will stay the delisting action
temporarily. There can be no assurance that the Company will be successful in
maintaining its SmallCap listing. If the Company's Common Stock is delisted,
there would likely be a negative impact on the trading market, liquidity and
price of the Common Stock.
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The Company and/or its subsidiaries are a party to a number of pending
legal or administrative proceedings, all of which have arisen in the ordinary
conduct of its business. The Company has disclosed matters that may have a
significant impact on the Company in previous filings. (See Note 6 to the
Consolidated Financial Statements.)
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 5 to the Consolidated Financial Statements.) These requirements may
restrict the payment of dividends.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
In November, the Company received from Oeri Finance, Inc. ("Oeri"), a Swiss
investment firm headed by Felix A. Oeri, a former board member of the Company, a
demand for payment of $728,125 of the total $2,667,500 allegedly owed to Oeri by
the Company. However, the Company's Board of Directors has determined that, in
light of the federal investigation which apparently focuses on Oeri's and Irving
Kott's prior involvement with the Company as well as Irving Kott's involvement
due to the search of Oeri's office in connection with the investigation (see
Note 6 to the Consolidated Financial Statements), it may not be in the best
interest of the Company's shareholders to pay the alleged debt at present.
Instead, the Board had decided to delay payment on all alleged debt owed to
Oeri. The Company's Management is not aware of any wrongdoing, but believes
that if the Company should suffer a loss as a result of the actions or omissions
of Oeri, then such loss may be used to offset the debt it allegedly owes to
Oeri. At present, Management intends to continue to pay interest on the alleged
debt to Oeri.
ITEM 4. SUBMISSION OF MATTERS TO VOTE OF SECURITY HOLDERS
There have been no matters submitted to a vote of security holders during
this reporting period.
ITEM 5. OTHER INFORMATION
There have been no matters during this reporting period that require
disclosure under this item.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Letter from BDO Seidman, LLP, dated October 30, 1998, pursuant to
Item 304 (a) (3) of Regulation S-K.
(b) A Report on Form 8-K was filed on October 27, 1998, reporting under
Item 4. Changes in Registrant's Certifying Accountant, the appointment of
Arthur Andersen LLP as the Company's independent public accountants for the
fiscal year ending December 31, 1998 to replace the firm of BDO Seidman,
LLP, who was dismissed as auditors of the Company effective October 20,
1998.
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
November 16, 1998
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