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 June 30, 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 July 30, 1999, the
Registrant had the following number of shares of common stock, $0.01
par value per share, outstanding: 15,086,726.
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
JB Oxford Holdings, Inc. and Subsidiaries
Consolidated Statements of Financial Condition
June 30, 1999 December 31,
(Unaudited) 1998
Assets:
Cash and cash equivalents (including securities
purchased under agreements to resell of
$4,071,919 and $140,516) $ 8,954,934 $ 2,496,572
Cash and securities purchased under agreements
to resell,segregated under federal and
other regulations 16,820,278 110,151,075
Receivable from broker-dealers and clearing
organizations (net of allowance for doubtful
accounts of $0 and $2,103,802) 8,254,222 7,321,066
Receivable from customers (net of allowance
for doubtful accounts of $1,619,375
and $5,354,864) 396,676,845 268,608,125
Other receivables (net of allowance for
doubtful accounts of $0 and $1,979,793) 1,665,224 1,591,482
Marketable securities owned - at market value 375,328 2,927,071
Furniture, equipment, and leasehold improvements
(at cost -net of accumulated depreciation
and amortization of $5,596,589 and $5,389,576) 2,418,967 2,860,100
Income taxes refundable 717,396 717,396
Deferred income taxes 1,258,947 1,079,840
Clearing deposits 7,523,114 6,833,171
Other assets 1,189,907 1,404,455
Total assets $445,855,162 $405,990,353
See accompanying notes to Consolidated Financial Statements.
JB Oxford Holdings, Inc. and Subsidiaries
Consolidated Statements of Financial Condition
June 30, 1999 December 31,
(Unaudited) 1998
Liabilities and shareholders' equity:
Liabilities:
Payable to broker-dealers and clearing
organizations $126,988,875 $ 58,064,209
Payable to customers 278,120,173 311,958,515
Securities sold, not yet purchased
- at market value 69,221 868,085
Accounts payable and accrued liabilities 7,534,797 9,010,480
Income taxes payable 931,291 552,648
Loans from shareholders 8,308,071 8,538,811
Notes payable 74,066 130,997
Subordinated borrowings -- 1,250,000
Total liabilities 422,026,494 390,373,745
Commitments and contingent liabilities
Shareholders' equity:
Common stock ($.01 par value,
100,000,000 shares authorized;
14,999,226 and 14,141,205 shares issued) 149,992 141,412
Additional paid-in capital 16,085,651 15,345,316
Retained earnings 8,377,730 327,660
Treasury stock at cost, 704,040 and
234,500 shares respectively (784,705) (197,780)
Total shareholders' equity 23,828,668 15,616,608
Total liabilities and shareholders' equity $445,855,162 $405,990,353
See accompanying notes to Consolidated Financial Statements.
JB Oxford Holdings, Inc. and Subsidiaries
Consolidated Statements Of Operations
(Unaudited)
For The Six Months Ended
June 30,
1999 1998
Revenues:
Clearing and execution $11,003,967 $ 4,675,070
Trading profits 8,955,639 2,936,557
Commissions 16,197,944 13,303,389
Interest 13,330,441 11,332,723
Other 377,454 274,293
Total Revenues 49,865,445 32,522,032
Expenses:
Employee compensation 4,682,597 4,655,416
Commission expense 6,222,159 5,251,519
Clearing and floor brokerage 1,843,361 2,049,847
Communications 3,382,627 2,995,935
Occupancy and equipment 2,326,657 2,735,022
Interest 7,199,846 7,057,904
Data processing charges 4,802,295 2,571,640
Professional services 2,057,036 1,764,249
Promotional 1,751,256 2,045,514
Bad debts 1,045,858 672,989
Other operating expenses 1,188,558 1,367,501
Total Expenses 36,502,250 33,167,536
Income (Loss) From Operations 13,363,195 (645,504)
Non-cash interest expense on convertible notes -- 2,530,000
Income (loss) before income taxes and
extraordinary item 13,363,195 (3,175,504)
Income Tax Provision 5,750,000 (250,000)
Income (loss) before extraordinary item 7,613,195 (2,925,504)
Extraordinary item: Forgiveness
of debt, net of taxes 436,875 --
Net Income (Loss) $ 8,050,070 $ (2,925,504)
See accompanying notes to Consolidated Financial Statements.
JB Oxford Holdings, Inc. and Subsidiaries
Consolidated Statements Of Operations - continued
(Unaudited)
For The Six Months Ended
June 30,
1999 1998
Basic Net Income (Loss) Per Share:
Income (loss) before income taxes
and extraordinary item $0.54 $(0.21)
Extraordinary item: Forgiveness of debt,
net of taxes 0.03 --
Basic Net Income (Loss) Per Share $0.57 $(0.21)
Diluted Net Income (Loss) Per Share:
Income (loss) before income taxes
and extraordinary item $0.31 $(0.21)
Extraordinary item: Forgiveness of debt,
net of taxes 0.02 --
Basic Net Income (Loss) Per Share $0.33 $(0.21)
Weighted average number of shares
Basic 14,209,705 14,141,205
Diluted 24,667,476 14,141,205
See accompanying notes to Consolidated Financial Statements.
JB Oxford Holdings, Inc. and Subsidiaries
Consolidated Statements Of Operations
(Unaudited)
For The Three Months Ended
June 30,
1999 1998
Revenues:
Clearing and execution $ 5,878,275 $ 2,388,243
Trading profits 4,933,948 1,133,673
Commissions 8,457,912 7,057,738
Interest 7,424,994 5,925,576
Other 176,717 14,378
Total Revenues 26,871,846 16,519,608
Expenses:
Employee compensation 2,401,250 2,309,426
Commission expense 3,369,577 2,919,337
Clearing and floor brokerage 891,525 1,091,310
Communications 1,711,319 1,596,912
Occupancy and equipment 1,221,306 1,363,688
Interest 3,938,784 3,607,967
Data processing charges 2,390,862 1,131,193
Professional services 877,363 731,301
Promotional 947,914 1,213,896
Bad debts 640,422 305,790
Other operating expenses 603,762 755,763
Total Expenses 18,994,084 17,026,583
Income (Loss) From Operations 7,877,762 (506,975)
Non-cash interest expense on convertible notes -- 2,530,000
Income (Loss) Before Income Taxes 7,877,762 (3,036,975)
Income Tax Provision 3,530,792 (197,371)
Net Income (Loss) $ 4,346,970 $ (2,839,604)
Basic Net Income (Loss) Per Share $0.31 $(0.20)
Diluted Net Income (Loss) Per Share $0.18 $(0.20)
Weighted average number of shares
Basic 14,264,463 14,141,205
Diluted 24,624,056 14,141,205
See accompanying notes to Consolidated Financial Statements.
JB Oxford Holdings, Inc. and Subsidiaries
Consolidated Statements Of Cash Flows
(Unaudited)
For The Six Months Ended
June 30,
1999 1998
Increase (decrease) in cash and cash equivalents:
Cash flows provided by operating activities:
Net income (loss) $8,050,070 $(2,925,504)
Adjustments to reconcile net income
(loss) to cash used in operating activities:
Depreciation and amortization 638,898 719,788
Deferred rent 60,733) (55,378)
Provision for bad debts 1,045,858 86
Non-cash interest expense on convertible debentures -- 2,530,000
Forgiveness of debt (728,125) --
Changes in assets and liabilities:
Cash segregated under federal and
other regulations 93,330,797 (2,082,385)
Receivable from broker-dealers
and clearing organizations (933,156) (7,224,716)
Receivable from customers (129,114,578) 2,087,318
Other receivables (73,742) 882,089
Securities owned 2,551,743 668,767
Clearing deposits (689,943) (570,678)
Deferred income taxes receivable (179,107) (158,171)
Other assets 214,548 813,297
Payable to broker-dealers and
clearing organizations 68,924,666 (6,698,631)
Payable to customers (33,838,342) 11,579,233
Securities sold, not yet purchased (798,864) (444,711)
Accounts payable and accrued liabilities (1,414,950) 1,742,790
Income taxes payable/receivable 378,643 (182,028)
Net cash provided by operating activities 7,303,683 681,166
Cash flows from investing activities:
Capital expenditures (197,765) (828,333)
Net cash used in investing activities (197,765) (828,333)
Cash flows from financing activities:
Repayments of notes payable (56,931) (250,000)
Advances on short term borrowing -- 1,075,022
Loans from shareholders -- 2,000,000
Issuance of common stock 246,300 --
Purchase of treasury stock (586,925) --
Payment of subordinated loans (250,000) --
Net cash provided by (used in) financing activities (647,556) 2,825,022
Net increase in cash and cash equivalents 6,458,362 2,677,855
Cash and cash equivalents at beginning of the period 2,496,572 2,598,062
Cash and cash equivalents at end of the period $ 8,954,934 $ 5,275,917
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 June 25, 1999 and June 26, 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 Six Months Ended
June 30,
1999 1998
Basic Earnings Per Share
Net income (loss) $8,050,070 $(2,925,504)
Income (loss) available to common
stockholders (numerator) $8,050,070 $(2,925,504)
Weighted average common shares
outstanding (denominator) 14,209,705 14,141,205
Basic Earnings (Loss) Per Share $0.57 $(0.21)
Diluted Earnings Per Share
Net income (loss) $8,050,070 $(2,925,504)
Interest on convertible debentures,
net of income tax 147,587 --
Income (loss) available to common
stockholders plus assumed conversions (numerator) $8,197,657 $(2,925,504)
Weighted average common shares outstanding 14,209,705 14,141,205
Weighted average options outstanding 2,181,291 --
Weighted average convertible debentures 8,602,058 --
Stock acquired with proceeds (325,578) --
Weighted average common shares and assumed conversions
outstanding (denominator) 24,667,476 14,141,205
Diluted Earnings (Loss) Per Share $0.33 $(0.21)
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 June 30, 1998 were
not included in the computation of diluted earning per share because the
options' exercise price was greater than the average market price of the
common stock during the respective periods. The options carry exercise
prices ranging from $0.63 to $9.00 at June 30, 1999 and $1.08 to $3.00 at
June 30, 1998. The options outstanding at June 30, 1999 expire at various
dates through June 3, 2009 and were still outstanding as of June 30, 1999.
Subsequent to June 30,1999 options to purchase 87,500 additional shares were
exercised for $144,850.
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, LLC 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, LLC.
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, LLC
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 is included in loans from
shareholders. The Company has decided to delay payment on the debt in light
of the ongoing federal investigation (see Note 7, "Contingent Liabilities").
The Company continues to pay interest on the debt.
Note 6. 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, equal to the greater of $5,000 or 6 2/3% of aggregate
indebtedness, as defined by the rule. (The operations of S4L were
consolidated into the on-line division of JBOC in December 1998.)
At June 30, 1999, JBOC had net capital of $24,100,577, which was
$16,100,984 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 $13,552,820 and $104,469,048 at June 30, 1999 and December 31,
1998, respectively. Securities purchased are U.S. Treasury instruments having
a market value of 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 are described below:
The Company is under investigation by 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 Six Months Ended June 30,
1999 1998
(Unaudited) (Unaudited)
Supplemental Disclosures of Cash Flow Information
Cash paid during the quarter for:
Interest $7,230,326 $6,318,076
Income taxes 5,834,400 346,829
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.
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-
ooking 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 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 3 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
Six Months Ended June 30, 1999 compared to Six Months Ended June 30, 1998
Revenues
The Company's total revenues were $49,865,445 in the first half 1999, an
increase of 53% from $32,522,032 in the first half of 1998. A primary
reason for the increase was a rise in clearing and execution revenue of 135%
to $11,003,967 in the current period from $4,675,070 in the first half of
1998. Additionally, trading profits increased 205% to $8,955,639 in the
first half of 1999 from $2,936,557 in the first half of 1998.
Commission revenues increased 22% to $16,197,944 in the first half of 1999
from $13,303,389 in the first half of 1998. Commission revenue was the
largest single source of revenue to the Company during the comparable
periods, consisting of 32% for the first half 1999 and 41% for the first half
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 18% to $13,330,441 in the first half of 1999
compared with $11,332,723 in the first half 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 43% from
$4,274,819 in the first half 1998 to $6,130,595 in the first half 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 $36,502,250 for the first half of 1999, an increase of
10% from $33,167,536 in the first half 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 prior period. Data processing expense increased
87% to $4,802,295 in the first half of 1999 from $2,571,640 in the first half
of 1998. This increase is the result of growth in correspondent clearing
activities in addition to commission expenses 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 102% in
the first half of 1998 to 73% in the first half of 1999. Expenses for
salaries increased by 1% in the first half of 1999 to $4,682,597 from
$4,655,416 in the first half of 1998. Occupancy and equipment costs decreased
15% to $2,326,657 in the first half of 1999 from $2,735,022 in the first
half 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 73% of total revenues in the first
half of 1999. Total expenses were 98%, 96%, and 89% of total revenues during
the years ended 1998, 1997, and 1996, respectively.
As previously announced, the Company is preparing to launch a new
advertising campaign during the third quarter of 1999. It is anticipated the
Company could spend as much as $10,000,000 on advertising in the last half of
1999. The amount of spending could be influenced by market conditions and
revenue growth created from the campaign, among other factors. Management
expects this will have a negative effect on the Company's profitability in
the short term.
Quarter Ended June 30, 1999 compared to Quarter Ended June 30, 1998
The Company recorded a net profit of $4,346,970 for the quarter ended
June 30, 1999. This compares to a net loss of $2,839,604 for the quarter
ended June 30, 1998. The loss in 1998 includes a non-cash interest charge
of $2,530,000 relating to the change of control transaction that occurred
during the second quarter of 1998. The Company reported income from
operations of $7,877,762 for the quarter ended June 30, 1999, this compares
to a loss from operations of $506,975 for the quarter ended June 30, 1998.
Total revenues for the second quarter of 1999 were $ 26,871,846, an
increase of $10,352,238 or 63% from the comparable 1998 quarter and an
increase of $3,878,247 or 17% from the first quarter of 1999. Total expenses
for the second quarter of 1999 were $18,994,084, an increase of $1,967,501 or
12% from the comparable quarter of 1998, and an increase of $1,485,918 or 8%
from the first quarter of 1999.
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 June 30, 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
and the use of customer cash and securities. See Note 6, "Regulatory
Requirements," above 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
additional 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 June 30, 1999
The Company's cash position increased during the first half of 1999 by
$6,458,362 to $8,954,934. This compares with a net increase in cash and cash
equivalents of $2,677,855 in the first half 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, LLC 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, LLC.
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, LLC
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 is included in loans from
shareholder. 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 continues to pay interest on the debt.
Cash Flows From Operating Activities
Net cash provided by operating activities was $7,303,683 for the first
half of 1999, compared to cash of $681,166 provided from operations during
the first half 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 half of 1999, the most significant use of cash was the
increase in receivables from customers of $129,114,578; additionally, a
decline in payables to customers used cash of $33,838,342. This use of cash
was funded by the decrease in cash segregated under federal and other
regulations of $93,330,797 for the same period. The additional use of cash
was financed through an increase in stock loan, which is represented in the
increase in payables to broker-dealers and clearing organizations of
$68,924,666.
Cash Flows Used In Investing Activities
The net cash used in investing activities during the first half of 1999
was $197,765 compared with $828,333 during the same period 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 $647,556 in the first half of 1999,
compared to $2,825,022 cash provided from financing activities in the first
half of 1998. The most significant use of cash for this activity was the
purchase of treasury stock in the amount of $586,925. During 1998 the Company
received $2,000,000 in loan proceeds from shareholders and $1,075,022 from
short-term borrowings.
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 has engaged the services of independent consultants to
review the overall Year 2000 project, the cost of which has not been material
to the Company. The independent consultants have been requested to emphasize
testing of vendor-reliant, mission-critical systems and to assist in the
development of a 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.
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 testing of these systems, using various Year 2000-critical dates.
The Company will follow-up on a regular basis throughout 1999 with
those outside vendors that the Company has determined to be significant, and
have responded that they are working toward Year 2000 compliance. 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. All these 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 verified
that they are 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
than $250,000 in 1998 and is expected to be less than $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 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.
In June 1999, the FASB issued SFAS No. 137, "Accounting for Derivative
Instruments and Hedging Activities-deferred of the effective date of FASB
statement No. 133." This statement is an amendment to SFAS No. 133 and
modifies the effective date of the statement to fiscal years beginning after
June 15, 2000 and various initial application procedures.
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 our Form 10-K for
the year ended December 31, 1998 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 we
face 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 6, "Regulatory Requirements," to the
financial statements. These requirements may restrict the payment of dividends.
Item 4. Submission of Matters to Vote of Security Holders
The Company held its Annual Meeting of Stockholders on June 4, 1999.
The following matters were submitted to a vote of stockholders at that meeting:
1. The election of a new Board of Directors to serve until the next Annual
Stockholders' meeting,to be held in 2000. The following individuals were so
elected: Christopher L. Jarratt, receiving 13,829,620 votes for election, no
votes against and 91,195 abstentions; James G. Lewis, receiving 13,831,720
votes for election, no votes against and 89,095 abstentions; Mark D.
Grossi, receiving 13,830,220 votes for election, no votes against and 90,595
abstentions; David G. Mahood, receiving 13,830,870 votes for election, no
votes against and 89,945 abstentions.
2. The Stockholders ratified the Company's 1998 Stock Option and Award Plan.
The proposal was approved with 2,416,854 votes in favor of the plan, 546,080
votes against and 105,450 abstentions.
3. The Stockholders ratified the appointment of Arthur Andersen LLP as the
independent public accountants of the Company for fiscal year ending December
31, 1999. The proposal was approved with 13,829,549 votes in favor of the
appointment, 57,755 votes against and 33,511 abstentions.
Item 6. Exhibits and Reports on Form 8-K
(b) During the second quarter, the Company did not file a Report on Form 8-K.
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
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