UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 3l, 2000
OR
[] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from ______________ to _______________
Commission File Number 0-16240
JB Oxford Holdings, Inc.
(Exact name of registrant as specified in its charter)
UTAH 95-4099866
(State of incorporation or organization) (I.R.S.
Employer
Identification
No.)
9665 Wilshire Blvd., Suite 300; Beverly Hills, 90212
California
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area (310) 777-8888
code
Indicate by check mark whether the Registrant: (l) has filed
all reports required to be filed by Section l3 or l5(d) of the
Securities Exchange Act of l934 during the preceding 12 months;
and (2) has been subject to such filing requirements for the
past 90 days. Yes X No ___
Indicate the number of shares outstanding of each of the
issuer's classes of common stock, as of the latest practicable
date. As of May 5, 2000, the Registrant had the following
number of shares of common stock, $0.01 par value per share,
outstanding: 14,384,186.
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
JB Oxford Holdings, Inc. and Subsidiaries
Consolidated Statements of Financial Condition
March 31, 2000 December 31,
(Unaudited) 1999
Assets:
Cash and cash equivalents (including
securities purchased under agreements to
resell of $104,747 and $0) $2,694,128 $6,023,065
Cash and securities purchased under
agreements to resell, segregated under
federal and other regulations 5,815,761 27,173,659
Receivable from broker-dealers and
clearing organizations 8,380,102 7,717,643
Receivable from customers (net of
allowance for doubtful accounts of
$2,609,101 and $1,601,178) 639,920,131 438,208,683
Other receivables 1,686,385 1,614,254
Marketable securities owned
- at market value 369,109 223,034
Furniture, equipment, and leasehold
improvements (at cost - net of
accumulated depreciation and
amortization of $6,714,923 and
$6,296,033) 3,114,938 3,024,193
Income taxes receivable -- 1,012,881
Deferred income taxes 1,574,425 1,479,425
Clearing deposits 11,612,168 9,598,797
Other assets 1,763,162 1,663,442
Total assets $676,930,309 $497,739,106
See accompanying notes to Consolidated Financial Statements.
JB Oxford Holdings, Inc. and Subsidiaries
Consolidated Statements of Financial Condition
March 31, December 31,
2000 1999
(Unaudited)
Liabilities and shareholders' equity:
Liabilities:
Short-term borrowings $75,198,831 $ --
Payable to broker-dealers and
clearing organizations 231,099,785 137,300,388
Payable to customers 309,654,580 313,354,154
Securities sold, not yet purchased
- at market value 150,797 96,904
Accounts payable and accrued
liabilities 19,201,452 12,303,092
Income taxes payable 2,390,549 --
Loans from shareholders 5,418,696 5,418,696
Notes payable 2,889,375 2,895,124
Total liabilities 646,004,065 471,368,358
Commitments and contingent liabilities
Shareholders' equity:
Common stock ($.01 par value,
100,000,000 shares authorized;
15,088,226 shares issued) 150,882 150,882
Additional paid-in capital 16,232,281 16,232,281
Retained earnings 15,327,786 10,772,290
Treasury stock at cost, 704,040 shares (784,705) (784,705)
Total shareholders' equity 30,926,244 26,370,748
Total liabilities and shareholders'
equity $676,930,309 $497,739,106
See accompanying notes to Consolidated Financial Statements.
JB Oxford Holdings, Inc. and Subsidiaries
Consolidated Statements Of Operations
(Unaudited)
For The Three Months
Ended
March 31,
2000 1999
Revenues:
Clearing and execution $3,277,087 $ 5,125,692
Trading profits 5,434,825 4,021,691
Commissions 15,087,163 7,740,032
Interest 10,323,455 5,905,447
Other 371,142 200,737
Total Revenues 34,493,672 22,993,599
Expenses:
Employee compensation 3,683,492 2,281,347
Commission expense 6,048,695 2,852,582
Clearing and floor brokerage 890,301 951,836
Communications 1,995,329 1,671,308
Occupancy and equipment 1,534,978 1,105,351
Interest 5,499,174 3,261,062
Data processing charges 2,679,040 2,411,433
Professional services 1,031,943 1,179,673
Promotional 1,983,545 803,342
Bad debts 532,930 405,436
Other operating expenses 628,749 584,796
Total Expenses 26,508,176 17,508,166
Income before income taxes and 7,985,496 5,485,433
extraordinary item
Income tax provision 3,430,000 2,219,208
Income before extraordinary item 4,555,496 3,266,225
Extraordinary item: Forgiveness
of debt, net of taxes -- 436,875
Net Income $4,555,496 $3,703,100
See accompanying notes to Consolidated Financial Statements.
JB Oxford Holdings, Inc. and Subsidiaries
Consolidated Statements Of Operations - continued
(Unaudited)
For The Three Months Ended
March 31,
2000 1999
Basic Net Income Per Share:
Income before income taxes and
extraordinary item $0.32 $0.23
Extraordinary item: Forgiveness
of debt, net of taxes -- 0.03
Basic Net Income Per Share $0.32 $0.26
Diluted Net Income Per Share:
Income before income taxes and
extraordinary item $0.19 $0.13
Extraordinary item: Forgiveness
of debt, net of taxes -- 0.02
Basic Net Income Per Share $0.19 $0.15
Weighted average number of shares
Basic 14,384,186 14,154,338
Diluted 23,739,204 24,629,176
See accompanying notes to Consolidated Financial Statements.
JB Oxford Holdings, Inc. and Subsidiaries
Consolidated Statements Of Cash Flows
(Unaudited)
For The Three Months Ended
March 31,
2000 1999
Increase (decrease) in cash and cash
equivalents:
Cash flows provided by operating
activities:
Net income $4,555,496 $3,703,100
Adjustments to reconcile net income to
cash used in operating activities:
Depreciation and amortization 430,966 314,845
Deferred rent (28,455) (30,366)
Provision for bad debts 532,930 405,436
Forgiveness of debt -- (728,125)
Changes in assets and liabilities:
Cash segregated under federal and
other regulations 21,357,898 58,674,800
Receivable from broker-dealers and
clearing organizations (662,459) (544,040)
Receivable from customers (202,244,378) (93,322,944)
Other receivables (72,131) 42,854
Securities owned (146,075) 2,509,265
Clearing deposits (2,013,371) (1,036,581)
Other assets (99,720) 46,625
Payable to broker-dealers and clearing
organizations 93,799,397 67,779,080
Payable to customers (3,699,574) (34,662,457)
Securities sold not yet purchased 53,893 (778,060)
Accounts payable and accrued
liabilities 6,926,815 (2,901,100)
Income taxes payable/receivable 3,308,430 1,758,599
Net cash provided by (used in) operating
activities (78,000,338) 1,230,931
Cash flows from investing activities:
Capital expenditures (521,711) (117,830)
Net cash used in investing activities (521,711) (117,830)
Cash flows from financing activities:
Repayments of notes payable (5,749) (34,158)
Advances on short term borrowing 75,198,831 --
Issuance of common stock -- 105,900
Purchase of treasury stock -- (586,925)
Payment subordinated loans -- (250,000)
Net cash provided by (used in)
financing activities 75,193,082 (765,183)
Net increase (decrease) in cash
and cash equivalents (3,328,967) 347,918
Cash and cash equivalents at beginning
of the quarter 6,023,095 2,496,572
Cash and cash equivalents at end of the
quarter $2,694,128 $2,844,490
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 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 March 31, 2000 and March
27, 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. The
operations of S4L were consolidated into the on-line division of
JBOC in December 1998.
Note 2. Allowance for Doubtful Accounts
In the first quarter 1999, the Company deducted various
receivable items from the allowance for doubtful accounts. These
receivable items were being carried in an inactive subsidiary,
Reynolds Kendrick Stratton, Inc., and had been specifically
reserved for in prior years.
Note 3. Deferred Income Taxes
Deferred income taxes are recorded at the amount Management
believes to be realizable. No valuation allowance has been
recorded, as Management believes the deferred income taxes will
be realized through future profits of the Company.
Note 4. Earnings Per Share
The following table reconciles the numerators and
denominators of the basic and diluted earnings per share
computation:
For The Three Months
Ended March 31,
2000 1999
Basic Earnings Per Share
Net income $4,555,496 $3,703,100
Income available to common stockholders
(numerator) $4,555,496 $3,703,100
Weighted average common shares
outstanding (denominator) 14,384,186 14,154,338
Basic Earnings Per Share $0.32 $0.26
For The Three Months
Ended March 31,
2000 1999
Diluted Earnings Per Share
Net income $4,555,496 $3,703,100
Interest on convertible debentures, net
of income tax 72,952 74,635
Income available to common stockholders
plus assumed conversions (numerator) $4,628,448 $3,777,735
Weighted average common shares
outstanding 14,384,186 14,154,338
Weighted average options outstanding 2,018,500 2,216,778
Weighted average convertible debentures 7,740,994 8,750,467
Stock acquired with option proceeds (404,476) (492,407)
Weighted average common shares and
assumed conversions outstanding
(denominator) 23,739,204 24,629,176
Diluted Earnings Per Share $0.19 $0.15
Options to purchase 553,500 shares of common stock at March
31, 2000, were not included in the computation of diluted
earnings per share because the options' exercise price was
greater then the average market price of the common share during
the period. The options carry exercise prices ranging from $0.63
to $9.00 at March 31, 2000 and $0.63 to $2.32 at March 31, 1999.
The options at March 31, 2000 expire at various dates through
November 3, 2009.
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. The Company
loaned the Trust $586,915, which the Trust used to purchase
469,540 shares of the Company's Common Stock for an average price
of $1.25 per share. Pursuant to the terms of the Trust, Third
Capital Partners has the right to vote the shares held by the
Trust, but has no right to dispose of them except upon
termination of the Trust. The Trust will terminate on February
18, 2001, or, if sooner, the completion of the investigation
relating to the Company being conducted by the federal
government. See Note 7, "Contingent Liabilities," to the
financial statements for a description of the investigation.
Concurrent with the transaction, the Company relinquished its
right of first refusal as to any remaining shares held by Felix
Oeri and Oeri Finance, Inc.; and Oeri Finance, Inc. forgave
$728,125 in demand debt owed by the Company. Subsequently, Oeri
Finance, Inc., Felix Oeri and Hareton filed 13D Statements with
the SEC indicating ownership of less than 5% of the Company's
stock.
A subordinated loan agreement, payable to Oeri Finance,
Inc., matured on March 31, 1999 in the amount of $1,000,000. The
Company has decided to delay payment on the debt in light of the
ongoing federal investigation (see Note 7, "Contingent
Liabilities"). The Company has reclassified the $1,000,000
subordinated loan to notes payable.
Note 6. Regulatory Requirements
JBOC is subject to Rule 15c3-1 of the Securities Exchange
Act of 1934, as amended, which requires the maintenance of
minimum net capital. JBOC has elected to use the alternative
method permitted by the rule, which requires it to maintain
minimum net capital, as defined, equal to the greater of $250,000
or two percent of aggregate debit balances arising from customer
transactions, as defined. The rule also provides, among other
things, for a restriction on the payment of cash dividends,
payments on subordinated borrowings or the repurchase of capital
stock if the resulting excess net capital would fall below five
percent of aggregate debits.
At March 31, 2000, JBOC had net capital of $33,572,116,
which was $20,830,178 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 account are securities purchased under
agreements to resell on an overnight basis in the amount of
$2,432,493 and $27,142,338 at March 31, 2000 and December 31,
1999 respectively. Securities purchased are U.S. Treasury
instruments having a market value of approximately 102% of cash
tendered.
Note 7. Contingent Liabilities
The Company and/or its subsidiaries are defendants in
several lawsuits and arbitrations the most significant of which
follows:
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 has
agreed to pay a total of $2,000,000 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.
The Company does not believe that current management was the
subject of the investigation and the USAO did not bring charges
against the Company. The Company paid $500,000 of the settlement
amount in the first quarter of 2000 and the remainder will be
paid in equal annual installments over three years. While the
settlement brings a resolution to the USAO's investigation, the
investigation by the SEC remains ongoing. Management continues
to cooperate with the SEC and is hopeful that this investigation
will be settled, but can make no assurance as to if or when it
might be resolved. If on or before February 14, 2001 the Company
enters into a settlement with the SEC that involves a payment of
$1,000,000 or more to the SEC, the USAO has agreed that the
Company's obligation to the USAO would be reduced by $500,000.
Note 8. Supplemental Disclosures of Cash Flow Information
For the Three Months Ended
March 31,
2000 1999
Supplemental Disclosures of Cash Flow
Information
Cash paid during the quarter for:
Interest $5,437,874 $3,283,373
Income taxes 120,500 746,400
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 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 during the period.
Additionally, the Company reclassified a subordinated borrowing
to loans from shareholders in the amount of $1,000,000 in 1999.
Note 9. Comprehensive Income
Comprehensive income (as defined by Statement of Financial
Accounting Standards No. 130) is the change in the Company's
equity during the period from transactions and events other than
those resulting from investments by, and distributions to owners.
Net income is the only component of comprehensive income recorded
by the Company for the periods presented. Therefore, all
elements of comprehensive income are presented in the statement
of operations.
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations
Special Note Regarding Forward-Looking Statements
Certain statements in this Quarterly Report on Form 10-Q,
particularly under Items 2 and 3, constitute "forward-looking
statements" within the meaning of the Private Securities
Litigation Reform Act of 1995. These forward-looking statements
involve known and unknown risks, uncertainties, and other factors
which may cause the actual results, performance, or achievements
of the Company to be materially different from any future
results, performance, or achievements, expressed or implied by
such forward-looking statements. See "Risk Factors," below.
Business Overview
JB Oxford Holdings, Inc. (together with its consolidated
subsidiaries, the "Company"), through its wholly-owned
subsidiaries, is engaged in the business of providing brokerage
and related financial services to retail customers and broker-
dealers nationwide. The Company's primary subsidiary is JB
Oxford & Company ("JBOC"), a registered broker-dealer offering
the following services: (1) discount and electronic brokerage
services to the investing public; (2) clearing and execution
services to correspondents on a fully-disclosed basis; and (3)
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 2000 due to its
ability to provide high quality, flexible, and customer-sensitive
responses and services. The Company continually upgrades
computer systems and services within each of its divisions to
utilize and take advantage of the most recent technological
developments.
Clearing and Execution Services
JBOC is self-clearing and provides clearing and execution
services to independent broker-dealers. 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 750 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 rules of the National Association of Securities Dealers,
Inc. ("NASD") regarding best execution.
Results of Operations Revenues
The Company's total revenues were $34,493,672 in the first
quarter 2000, an increase of 50% from $22,993,599 in the first
quarter of 1999. The primary reason for the increase was a rise
in commission revenue of 95% to $15,087,163 in the current
quarter from $7,740,032 in the first quarter of 1999.
Additionally, interest revenue increased 75% to $10,323,455 in
the first quarter of 2000 from $5,905,447 in the first quarter of
1999. Trading profits increased 35% to $5,434,825 in the first
quarter of 2000 from $4,021,691 in the first quarter of 1999.
Commission revenue was the largest single source of revenue to
the Company during the comparable periods, consisting of 44% for
the first quarter 2000 and 34% for the first quarter of 1999.
For 2000, 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.
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 82% from $2,644,385 in the first
quarter 1999 to $4,824,281 in the first quarter 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 $1,848,605 or 36% to
$3,277,087 in the first quarter 2000 compared to $5,125,692 in
the first quarter 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.
Expenses
Expenses totaled $26,508,176 for the first quarter of 2000, an
increase of 51% from $17,508,166 in the first quarter 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 first quarter of 1999. Data
processing expense increased 11% to $2,679,040 in the first
quarter of 2000 from $2,411,433 in the first quarter of 1999.
This increase is the result of growth in commission and trading
volumes.
Operating expenses increased slightly as a percent of total
revenues from 76% in the first quarter of 1999 to 77% in the
first quarter of 2000. Commission expense increased by 112% in
the first quarter of 2000 to $6,048,695 from $2,852,582 in the
first quarter of 1999. Interest expense increased 69% to
$5,499,194 in the first quarter of 2000 from $3,261,062 in the
first quarter of 1999. These increases are in line with the
revenue increases discussed above, where commission revenue
increased 95% and interest revenue increased 75%.
Promotional expenses increase $1,180,203 or 147% to $1,983,545 in
the first quarter of 2000 from $803,342 in the first quarter 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 quarter 2000 were 77%
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) and has been reflected as an
extraordinary item during 1999.
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 $140,000,000; at March 31, 2000 the
Company had accessed $75,000,000 of these credit lines. Further,
the Company has available stock loan financing when necessary.
Amounts borrowed bear interest at a fluctuating rate based on the
broker call and prime rates.
The majority of the Company's corporate assets at March 31, 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 standards and the use of
customer cash and securities. See Note 6, "Regulatory
Requirements," to the financial statements for regulatory
requirements of the Company.
The Company currently anticipates that its cash resources and
available credit facilities will be sufficient to fund its
expected working capital and capital expenditure requirements for
the foreseeable future. However, in order to more aggressively
expand its business, respond to competitive pressures, develop
additional products and services, or take advantage of strategic
opportunities, the Company may need to raise additional funds.
If funds are raised through the issuance of equity securities, or
securities which are convertible into equity securities, the
Company's existing shareholders may experience additional
dilution in ownership percentages or book value. Additionally,
such securities may have rights, preferences and privileges
senior to those of the holders of the Company's common stock. If
such funds are needed, there can be no assurance that additional
financing will be available or whether it will be available on
terms satisfactory to the Company.
Liquidity at March 31, 2000
The Company's cash position decreased during the first quarter of
2000 by $3,328,967 to $2,694,128. This compares with a net
increase in cash and cash equivalents of $347,918 in the first
quarter of 1999. The fluctuation in the Company's cash position
is 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. The Company
loaned the Trust $586,915, which the Trust used to purchase
469,540 shares of the Company's Common Stock for an average price
of $1.25 per share. Pursuant to the terms of the Trust, Third
Capital Partners has the right to vote the shares held by the
Trust, but has no right to dispose of them except upon
termination of the Trust. The Trust will terminate on February
18, 2001, or, if sooner, the completion of the investigation
relating to the Company being conducted by the federal
government. See Note 7, "Contingent Liabilities," to the
financial statements for a description of the investigation.
Concurrent with the transaction, the Company relinquished its
right of first refusal as to any remaining shares held by Felix
Oeri and Oeri Finance, Inc.; and Oeri Finance, Inc. forgave
$728,125 in demand debt owed by the Company. Subsequently, Oeri
Finance, Inc., Felix Oeri and Hareton filed 13D Statements with
the SEC indicating ownership of less than 5% of the Company's
stock.
A subordinated loan agreement, payable to Oeri Finance, Inc.,
matured on March 31, 1999 in the amount of $1,000,000. The
Company has decided to delay payment on the debt in light of the
ongoing federal investigation (see Note 7, "Contingent
Liabilities," to the financial statements). The Company has
reclassified the $1,000,000 subordinated loan to notes payable.
Cash Flows From Operating Activities
Net cash used in operating activities was $78,000,338 for the
first quarter of 2000, compared to cash of $1,230,931 provided
from operations during the first quarter 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 quarter of 2000, the most significant use of
cash was the increase in receivables from customers of
$202,244,378. This use of cash was funded in part by the
increase in stock loans, which is reflected in the increase of
payables to broker-dealers and clearing organizations of
$93,799,397. The additional use of cash was also financed through
a decrease in cash segregated under federal and other regulations
of $21,357,898, and the short term loans discussed below under
"Cash Flows From Financing Activities."
Cash Flows Used In Investing Activities
The net cash used in investing activities during the first
quarter of 2000 was $521,711 compared with $117,830 during the
same quarter 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 $75,193,082 in the first
quarter of 2000, compared to $765,183 cash used in financing
activities in the first quarter of 1999. The primary source of
cash provided was an increase of $75,198,831 on short term loans.
These loans are used to finance the growth in the receivables
from customers and are secured by securities held in the
customers accounts.
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 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 is 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 133 on its financial statements but
does not believe it will have a material effect on the Company's
financial position or results of operations.
Risk Factors
In accordance with "plain English" guidelines provided by the
SEC, the Risk Factors have been written in the first person.
You should carefully consider the risks described 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 these forward-
looking statements. See Item 2 "Management's Discussion and
Analysis of Financial Condition and Results of Operations -
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 750 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 6. Exhibits and Reports on Form 8-K
On February 17, 2000, the Company filed with the SEC a Report on
Form 8-K, dated February 14, 2000, relating to the Company's
settlement with the United States Attorney's Office for the
Central District of California.
Pursuant to the requirements of the Securities Exchange Act
of 1934, JB Oxford Holdings, Inc. has duly caused this report to
be signed on its behalf by the undersigned thereunto duly
authorized.
JB Oxford Holdings, Inc.
/s/ Michael J. Chiodo
Michael J. Chiodo
Chief Financial Officer
May 12, 2000
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