<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2000
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, 2000, the
Registrant had the following number of shares of common stock, $0.01 par value
per share, outstanding: 14,130,086.
<PAGE>
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
JB Oxford Holdings, Inc. and Subsidiaries
Consolidated Statements of Financial Condition
<TABLE>
<CAPTION>
September 30, 2000 December 31, 1999
(Unaudited)
------------------- -------------------
Assets:
<S> <C> <C>
Cash and cash equivalents (including securities purchased
under agreements to resell of $107,894 and $0, respectively) $ 8,586,400 $ 6,023,095
Cash and securities purchased under agreements to resell,
segregated under federal and other regulations 5,985,896 27,173,659
Receivable from broker-dealers and clearing organizations 9,248,812 7,717,643
Receivable from customers (net of allowance for doubtful
accounts of $3,051,181 and $1,601,178, respectively) 473,411,943 438,208,683
Other receivables 1,714,308 1,614,254
Marketable securities owned - at market value 300,382 223,034
Furniture, equipment, and leasehold improvements (at cost -
net of accumulated depreciation and amortization of
$7,591,208 and $6,296,033, respectively) 3,410,708 3,024,193
Income taxes receivable 1,073,308 1,012,881
Deferred income taxes 1,759,425 1,479,425
Clearing deposits 6,913,212 9,598,797
Other assets 1,807,487 1,663,442
--------------- ---------------
Total assets $514,211,881 $497,739,106
=============== ===============
See accompanying notes to Consolidated Financial Statements.
</TABLE>
2
<PAGE>
JB Oxford Holdings, Inc. and Subsidiaries
Consolidated Statements of Financial Condition - continued
<TABLE>
<CAPTION>
September 30, December 31, 1999
2000
(Unaudited)
----------------- ----------------------
Liabilities and shareholders' equity:
Liabilities:
<S> <C> <C>
Short-term borrowings $ 25,062,359 $ --
Payable to broker-dealers and clearing organizations 207,294,623 137,300,388
Payable to customers 228,846,589 313,354,154
Securities sold, not yet purchased - at market value 76,472 96,904
Accounts payable and accrued liabilities 9,562,231 12,303,092
Loans from shareholders 5,418,696 5,418,696
Notes payable 7,889,375 2,895,124
-------------- --------------
Total liabilities 484,150,345 471,368,358
-------------- --------------
Commitments and contingent liabilities
Shareholders' equity:
Common stock ($.01 par value, 100,000,000 shares authorized;
15,138,226 and 15,088,226 shares issued, respectively) 151,382 150,882
Additional paid-in capital 16,330,046 16,232,281
Retained earnings 15,870,963 10,772,290
Treasury stock at cost, 1,063,140 and 704,040 shares,
respectively (2,290,855) (784,705)
-------------- --------------
Total shareholders' equity 30,061,536 26,370,748
-------------- --------------
Total liabilities and shareholders' equity $514,211,881 $497,739,106
============== ==============
See accompanying notes to Consolidated Financial Statements.
</TABLE>
3
<PAGE>
JB Oxford Holdings, Inc. and Subsidiaries
Consolidated Statements Of Operations
(Unaudited)
<TABLE>
<CAPTION>
For The Nine Months Ended
September 30,
----------------------------------------
2000 1999
------------------ -------------------
<S> <C> <C>
Revenues:
Clearing and execution $ 6,217,380 $17,842,532
Trading profits 12,318,518 10,830,672
Commissions 30,894,214 22,866,490
Interest 30,953,479 20,604,848
Other 870,196 635,538
------------------ -------------------
Total revenues 81,253,787 72,780,080
------------------ -------------------
Expenses:
Employee compensation 10,976,211 7,176,282
Commission expense 11,890,520 8,318,945
Clearing and floor brokerage 2,197,484 2,676,366
Communications 5,734,583 4,896,141
Occupancy and equipment 4,509,319 3,551,895
Interest 18,248,756 10,592,047
Data processing charges 6,883,686 7,259,591
Professional services 3,262,870 3,197,743
Promotional 5,634,166 3,630,788
Bad debts 1,187,662 1,380,088
Other operating expenses 1,779,858 1,697,284
------------------ -------------------
Total expenses 72,305,115 54,377,170
------------------ -------------------
Income before income taxes and extraordinary item 8,948,672 18,402,910
Income tax provision 3,850,000 7,969,100
------------------ -------------------
Income before extraordinary item 5,098,672 10,433,810
Extraordinary item: Forgiveness of debt, net of taxes -- 436,875
------------------ -------------------
Net Income $ 5,098,672 $10,870,685
================== ===================
See accompanying notes to Consolidated Financial Statements.
</TABLE>
4
<PAGE>
JB Oxford Holdings, Inc. and Subsidiaries
Consolidated Statements Of Operations - continued
(Unaudited)
<TABLE>
<CAPTION>
For The Nine Months Ended
September 30,
----------------------------------------------
2000 1999
-------------------- ----------------------
<S> <C> <C>
Basic Net Income Per Share:
Income before income taxes and extraordinary item $ 0.36 $ 0.73
Extraordinary item: Forgiveness of debt, net of taxes -- 0.03
----------- -----------
Basic Net Income Per Share $ 0.36 $ 0.76
=========== ===========
Diluted Net Income Per Share:
Income before income taxes and extraordinary item $ 0.23 $ 0.43
Extraordinary item: Forgiveness of debt, net of taxes -- 0.02
----------- -----------
Basic Net Income Per Share $ 0.23 $ 0.45
=========== ===========
Weighted average number of shares
Basic 14,249,245 14,265,949
Diluted 23,461,420 24,628,482
See accompanying notes to Consolidated Financial Statements.
</TABLE>
5
<PAGE>
JB Oxford Holdings, Inc. and Subsidiaries
Consolidated Statements Of Operations
(Unaudited)
<TABLE>
<CAPTION>
For The Three Months Ended
September 30,
---------------------------------------------
2000 1999
-------------------- ---------------------
<S> <C> <C>
Revenues:
Clearing and execution $ 1,307,403 $ 6,838,565
Trading profits 2,526,506 1,875,033
Commissions 7,107,120 6,668,546
Interest 10,126,999 7,274,407
Other 73,054 258,084
-------------------- ---------------------
Total revenues 21,141,082 22,914,635
-------------------- ---------------------
Expenses:
Employee compensation 3,575,044 2,493,685
Commission expense 2,223,798 2,096,786
Clearing and floor brokerage 514,640 833,005
Communications 1,643,564 1,513,514
Occupancy and equipment 1,468,347 1,225,238
Interest 5,979,251 3,392,201
Data processing charges 1,962,946 2,457,296
Professional services 965,215 1,140,707
Promotional 1,930,880 1,879,532
Bad debts 271,548 334,230
Other operating expenses 554,079 508,726
-------------------- ---------------------
Total expenses 21,089,312 17,874,920
-------------------- ---------------------
Income before income taxes 51,770 5,039,715
Income tax provision 20,000 2,219,100
-------------------- ---------------------
Net Income $ 31,770 $ 2,820,615
==================== =====================
Basic net income per share $0.00 $0.20
Diluted net income per share $0.00 $0.12
Weighted average number of shares
Basic 14,080,064 14,376,604
Diluted 23,164,086 24,554,370
See accompanying notes to Consolidated Financial Statements.
</TABLE>
6
<PAGE>
JB Oxford Holdings, Inc. and Subsidiaries
Consolidated Statements Of Cash Flows
(Unaudited)
<TABLE>
<CAPTION>
For The Nine Months Ended
September 30,
------------------------------------------
<S> <C> <C>
2000 1999
-------------------- ------------------
Cash flows from operating activities:
Net income $ 5,098,672 $ 10,870,685
Adjustments to reconcile net income to cash used in
operating activities:
Depreciation and amortization 1,307,250 985,358
Deferred rent (120,386) (91,099)
Provision for bad debts 1,187,662 1,380,088
Forgiveness of debt -- (728,125)
Changes in assets and liabilities:
Cash segregated under federal and other regulations 21,187,763 83,538,870
Receivable from broker-dealers and clearing organizations (1,531,169) 578,300
Receivable from customers (36,390,922) (113,240,641)
Other receivables (100,054) 25,699
Securities owned (77,348) 2,693,870
Clearing deposits 2,685,585 (1,486,025)
Deferred income taxes receivable (280,000) (254,107)
Other assets (144,045) (293,469)
Payable to broker-dealers and clearing organizations 69,994,235 48,125,987
Payable to customers (84,507,565) (36,663,683)
Securities sold, not yet purchased (20,432) (690,372)
Accounts payable and accrued liabilities (2,620,474) (854,759)
Income taxes payable/receivable (60,427) (694,257)
-------------------- ------------------
Net cash used in operating activities (24,391,655) (6,797,680)
-------------------- ------------------
Cash flows from investing activities:
Capital expenditures (1,693,765) (930,062)
-------------------- ------------------
Net cash used in investing activities (1,693,765) (930,062)
-------------------- ------------------
Cash flows from financing activities:
Repayments of notes payable (5,749) (91,089)
Advances on notes payable 5,000,000 --
Advances on short term borrowing 25,062,359 7,100,000
Issuance of common stock 98,265 393,820
Purchase of treasury stock (1,506,150) (586,925)
Payment of subordinated loans -- (250,000)
-------------------- ------------------
Net cash provided by financing activities 28,648,725 6,565,806
-------------------- ------------------
Net increase (decrease) in cash and cash equivalents 2,563,305 (1,161,936)
Cash and cash equivalents at beginning of the period 6,023,095 2,496,572
-------------------- ------------------
Cash and cash equivalents at end of the period $ 8,586,400 $ 1,334,636
==================== ==================
See accompanying notes to Consolidated Financial Statements.
</TABLE>
7
<PAGE>
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 1999
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 September 29, 2000 and September 24, 1999 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.
8
<PAGE>
Note 3. Earnings per Share
The following table reconciles the numerators and denominators of the basic
and diluted earnings per share computation:
<TABLE>
<CAPTION>
For The Nine Months Ended For The Three Months Ended
September 30, September 30,
2000 1999 2000 1999
------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Basic earnings per share
Income before extraordinary item $ 5,098,672 $10,433,810 $ 31,770 $ 2,820,615
Extraordinary item: Forgiveness of
debt, net of taxes -- 436,875 -- --
-------------- -------------- ------------- -------------
Income available to common stockholders
(numerator) $ 5,098,672 $10,870,685 $ 31,770 $ 2,820,615
============== ============== ============= =============
Weighted average common shares
outstanding (denominator) 14,249,245 14,265,949 14,080,064 14,376,604
============== ============== ============= =============
Basic earnings per share $0.36 $0.76 $0.00 $0.20
============== ============== ============= =============
Diluted earnings per share
Income before extraordinary item $ 5,098,672 $10,433,810 $ 31,770 $ 2,820,615
Extraordinary item: Forgiveness of
debt, net of taxes -- 436,875 -- --
Interest on convertible debentures,
net of income tax 218,857 221,341 72,952 73,754
-------------- -------------- ------------- -------------
Income available to common stockholders
plus assumed conversions (numerator) $ 5,317,529 $11,092,026 $ 104,722 $ 2,894,369
============== ============== ============= =============
Weighted average common shares
outstanding 14,249,245 14,265,949 14,080,064 14,376,604
Weighted average options outstanding 2,013,131 2,136,095 2,000,913 2,046,957
Weighted average convertible debentures 7,740,994 8,552,594 7,740,994 8,455,280
Stock acquired with proceeds (541,951) (326,156) (657,885) (324,471)
-------------- -------------- ------------- -------------
Weighted average common shares and
assumed conversions outstanding
(denominator) 23,596,854 24,628,482 23,164,086 24,554,370
============== ============== ============= =============
Diluted earnings per share $0.23 $0.45 $0.00 $0.12
============== ============== ============= =============
</TABLE>
Options to purchase 553,500 shares of common stock at September 30, 2000
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 September 30, 2000 and 1999. The options outstanding at
September 30, 1999 expire at various dates through June 23, 2010 and were still
outstanding as of September 30, 2000. Subsequent to September 30, 2000 options
to purchase 55,000 additional shares were exercised for $118,150.
9
<PAGE>
Note 4. Regulatory Requirements
JBOC is 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.
At September 30, 2000, JBOC had net capital of $31,351,923, which was
$21,860,595 in excess of the minimum amount required. At December 31, 1999,
JBOC had net capital of $27,491,404, which was $18,699,718 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 accounts are securities
purchased under agreements to resell on an overnight basis in the amount of
$2,505,586 and $20,786,005 at September 30, 2000 and December 31, 1999,
respectively. Securities purchased are U.S. Treasury instruments having a
market value of 102% of cash tendered.
Note 5. Contingent Liabilities
The Company and/or its subsidiaries are defendants in several lawsuits
and arbitrations the most significant of which is described below:
On February 14, 2000, the Company reached a settlement with the Los Angeles
office of the United States Attorney's Office (the "USAO") in the USAO's
investigation of the Company's prior management. While the Company maintains
its innocence, it agreed to pay a total of $2.0 million over three years to
settle the USAO matter and to reimburse the USAO for the substantial expense
associated with the two and a half-year investigation. If on or before February
14, 2001 the Company enters into a settlement with the SEC that involves a
payment of $1.0 million or more to the SEC, the USAO has agreed that the
Company's obligation to the USAO would be reduced by $500,000. On October
12, 2000, the Pacific Regional Office of the SEC advised the Company that it is
recommending that the SEC accept the Company's $1.5 million offer to settle the
SEC's investigation. If the proposed settlement is accepted, JBOC will also
agree to a censure, to refrain from any violations of securities laws, and to
take certain actions to ensure continued compliance with federal securities
laws. The Company paid $500,000 of the USAO settlement amount in the first
quarter of 2000 and the remainder will be paid in equal annual installments over
three years. If the SEC accepts the Regional Office's recommendation, payments
to the USAO and SEC would total $3.0 million. The Company does not believe that
current management was the subject of the investigation and the USAO did not
bring charges against the Company.
10
<PAGE>
Note 6. Supplemental Disclosures of Cash Flow Information
<TABLE>
<CAPTION>
For the Nine Months Ended September 30,
-----------------------------------------------
2000 1999
(Unaudited) (Unaudited)
-------------------- --------------------
<S> <C> <C>
Supplemental Disclosures of Cash Flow Information
Cash paid during the period for:
Interest $18,046,203 $10,621,732
Income taxes 4,129,428 7,201,400
</TABLE>
Supplemental disclosure of non-cash investing and financing activities:
-----------------------------------------------------------------------
Hareton Sales & Marketing, Inc., the holder of $502,615 in face value of
convertible debentures, converted this debt to common stock during the first
quarter of 1999. 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 of
income taxes) during the period. Additionally, the Company reclassified a
subordinated borrowing to loans from shareholders in the amount of $1.0 million.
Note 7. 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:
11
<PAGE>
(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 through the end of this year and into 2001, 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. 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 730 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
---------------------
Nine Months Ended September 30, 2000 compared to Nine Months Ended September 30,
--------------------------------------------------------------------------------
1999
----
Revenues
--------
The Company's total revenues were $81,253,787 in the first nine months of
2000, an increase of 12% from $72,780,080 in the first nine months of 1999. The
primary reason for the increase was a rise in commission and interest revenues
partially offset by a decrease in clearing
12
<PAGE>
revenue. Commission revenue increased 35% to $30,894,214 in the current period
from $22,866,490 in the first nine months of 1999. Interest revenue increased
50% to $30,953,479 in the first nine months of 2000 from $20,604,848 in the
first nine months of 1999. Additionally, trading profits increased 14% to
$12,318,518 in the first nine months of 2000 from $10,830,672 in the first nine
months of 1999.
The 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. The rise in
margin balances has been the most significant factor for the increase. Net
interest income increased 40% from $10,012,801 in the first nine months 1999 to
$12,704,723 in the first nine months of 2000. Interest revenue became the
largest source of revenue for the nine month period ended September 30, 2000,
providing slightly more than 38% of total revenues of the Company thus far in
the first nine months of 2000. Interest revenues represented 28% of the
revenues during the first nine months of 1999.
Commission revenue increased 35% to $30,894,214 in the first nine months of
2000 from $22,866,490 in the comparable period of 1999. For 2000, the Company
anticipates increased commission revenue over 1999 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.
However trading volumes have declined during the second and third quarters of
2000.
The increase in trading profits resulted from an increase in volume from
the Company's discount and on-line brokerage operations. Management anticipates
additional growth in trading profits for 2000.
Clearing and execution revenues decreased $11,625,152 or 65% to $6,217,380
in the first nine months 2000 compared to $17,842,532 in the first nine months
of 1999. The decrease represents the decrease in day trades cleared by the
Company. This decrease is primarily the result of an office of a correspondent
broker-dealer moving its business to another clearing firm in 1999, and the
declining volumes that occurred in the securities industry in general during the
second and third quarters of 2000.
Expenses
--------
Expenses totaled $72,305,115 for the first nine months of 2000, an increase
of 33% from $54,377,170 in the first nine months of 1999. The increase in
expenses since 1999 is primarily a result of the growth in the Company's
discount and on-line brokerage divisions. Many of the Company's expenses,
including commission expense, interest expense, and data processing charges are
directly related to commission revenues, interest revenues and trading revenues,
which are all up from the comparable periods of 1999. Interest expense
increased 72% to $18,248,756 in the first nine months of 2000 from $10,592,047
in the same period of 1999. This increase is the result of the increase in
interest revenues described above. Additionally, the Company has had to use
more costly financing as a result of the Company's reduction of customer credit
balances.
Operating expenses increased as a percent of total revenues from 75% in the
first nine months of 1999 to 89% in the same period of 2000. Commission expense
increased by 43% in the first nine months of 2000 to $11,890,520 from $8,318,945
in the first nine months of 1999. Salaries and employment costs increased 53%
to $10,976,211 in the first nine months of 2000 from $7,176,282 in the same
period of 1999. A substantial portion of the salaries increase, in the amount
of $2,339,871, relates to temporary employees the Company has hired to prepare
for a conversion to
13
<PAGE>
a different back office system. This conversion is currently scheduled to occur
at the end of February 2001. These costs are temporary and will be eliminated
after the conversion. Management believes the computer conversion will save the
Company approximately two to three million dollars a year in data processing
costs at current volume levels.
Promotional expenses increased $2,003,378 or 55% to $5,634,166 in the first
nine months of 2000 from $3,630,788 in the same period of 1999. These costs
have increased as management has increased name recognition through various
print and television ads.
Management continues to examine ways to contain costs and improve
efficiencies. Total expenses for the first nine months of 2000 were 89% of
revenues. Total expenses were 83%, 98%, and 96% of total revenues during the
years ended 1999, 1998, and 1997, 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 of income taxes) and
has been reflected as an extraordinary item during 1999.
Quarter Ended September 30, 2000 compared to Quarter Ended September 30, 1999
-----------------------------------------------------------------------------
The Company recorded a net profit of $31,770 for the quarter ended
September 30, 2000. This compares to a net profit of $2,820,615 for the quarter
ended September 30, 1999.
Total revenues for the third quarter of 2000 were $21,141,082, a decrease
of $1,773,553 or 8% from the comparable quarter of 1999 and a decrease of
$4,477,951 or 17% from the second quarter of 2000. Commission revenue increased
$438,574 or 7% during the third quarter of 2000 compared to the third quarter of
1999. Commission revenues declined $1,592,811 or 18% from the second quarter of
2000 as trade volumes declined in the third quarter. This decline was typical
for the industry during the third quarter of 2000. These declining volumes also
affected trading profits and clearing revenues for the third quarter.
Clearing revenues decreased $5,531,162 or 81% in the third quarter of 2000
compared to the third quarter of 1999, and $325,487 or 20% compared to the
second quarter of 2000. The decrease from the prior year is related to the
decrease in day trades cleared by the Company, primarily as the result of an
office of a correspondent broker-dealer moving its business to another clearing
firm. The decrease in the third quarter of 2000 from the second quarter of 2000
is related to the decline in market volumes, discussed above.
Interest revenue increased $2,852,592 or 39% to $10,126,999 from $7,274,407
for the third quarter of 1999. Interest revenue decreased $376,026 or 4% from
the second quarter of 2000. Net interest income increased $265,542 or 7% to
$4,147,748 in the third quarter of 2000 from $3,882,206 in the third quarter of
1999. Additionally, net interest income increased $415,054 or 11% from the
second quarter of 2000.
Total expenses for the third quarter of 2000 were $21,089,312, an increase
of $3,214,392 or 18% from the comparable quarter of 1999, and a decrease of
$3,618,315 or 15% from the second quarter of 2000. Interest expense increased
$2,587,050 or 76% during the third quarter of 2000 compared to the third quarter
of 1999 and decreased $791,080 or 12% compared to the second quarter of 2000.
Interest costs fluctuate in relation to interest revenues. Additionally, the
cost to
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finance customer debits increased as the Company utilized higher interest short
term borrowings to replace the reduction of customer credits during the second
and third quarters of 2000.
Salary costs increased $1,081,359 or 43% to $3,575,044 in the third quarter
of 2000 from $2,493,685 during the third quarter of 1999. Temporary employee
costs of $860,501 created much of this increase as discussed above. There was a
slight decrease in salary cost of $142,631 from the second to third quarter of
2000. Promotional costs increased $51,348 or 3% in the third quarter of 2000
compared to the third quarter of 1999. Promotional costs increased $211,139 or
12% from the second quarter of 2000.
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 $180,000,000. 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 September 30, 2000, 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 4, "Regulatory Requirements" to
the financial statements 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 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 that it will
be available on terms satisfactory to the Company.
Liquidity at September 30, 2000
-------------------------------
The Company's cash position increased during the first nine months of 2000
by $2,563,305 to $8,586,400. This compares with a net decrease in cash and cash
equivalents of $1,161,936 in the first nine months of 1999. 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.
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Cash Flows From Operating Activities
------------------------------------
Net cash used in operating activities was $24,391,655 for the first nine
months of 2000, compared to cash of $6,797,680 used in operations during the
first nine months of 1999. 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 nine months of 2000, the most significant use of cash was
the reduction of payables to customers of $84,507,565; additionally, an increase
in receivables from customers used cash of $36,390,922. This use of cash was
funded by the decrease in cash segregated under federal and other regulations of
$21,187,763 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 $69,994,235. For additional sources
of cash, see cash flow from financing activities below.
Cash Flows Used In Investing Activities
---------------------------------------
The net cash used in investing activities during the first nine months of
2000 was $1,693,765 compared with $930,062 during the same period of 1999.
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 and no significant commitments for capital expenditures.
Cash Flows From Financing Activities
------------------------------------
Financing activities provided cash of $28,648,725 in the first nine months
of 2000, compared to $6,565,806 cash provided by financing activities in the
first nine months of 1999. The most significant source of cash for this
activity were advances on short-term borrowings in the net amount of
$25,062,359. During the first nine months of 2000 the Company used $1,506,150 to
acquire treasury stock compared to $586,925 in 1999.
Recent Accounting Pronouncements
--------------------------------
The Financial Accounting Standards Board (FASB) issued Statement of
Financial Accounting Standards No. 133, "Accounting for Derivative Instruments
and Hedging Activities" ("SFAS 133"), as amended by SFAS No. 137, "Accounting
for Derivative Instruments and Hedging Activities-Deferred of the Effective Date
of FASB Statement No. 133." The Company is required to and will implement the
provision of this new standard on January 1, 2001. SFAS No. 133 establishes
accounting and reporting standards requiring that every derivative instrument be
recorded in the Statement of Financial 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 unless specific hedge
accounting criteria are met. The Company has not yet quantified the impact of
adopting SFAS No. 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.
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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 below and in the
Company's Form 10-K for the year ended December 31, 1999 before making an
investment decision in the Company. These risks include:
. the fact that the business is rapidly evolving;
. the market for discount and electronic brokerage services is at an early
stage of development;
. the U.S. securities markets are subject to rapid and significant 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; and
. stock price volatility.
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 the Company's
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.
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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 730 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 a significant inventory of equity
securities.
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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 5, "Contingent
Liabilities," to the financial statements for a discussion regarding the ongoing
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, "Regulatory Requirements," to the financial statements. These
requirements may restrict the payment of dividends.
Item 4. Submission of Matters to Vote of Security Holders
There were no matters submitted to a vote of security holders during the
quarter ended September 30, 2000.
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.
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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 10, 2000
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