<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 June 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 August 11, 2000, the
Registrant had the following number of shares of common stock, $0.01 par value
per share, outstanding: 14,191,086.
<PAGE>
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
JB Oxford Holdings, Inc. and Subsidiaries
Consolidated Statements of Financial Condition
<TABLE>
<CAPTION>
June 30, 2000 December 31, 1999
(Unaudited)
------------------- -------------------
<S> <C> <C>
Assets:
Cash and cash equivalents (including securities purchased
under agreements to resell of $106,310 and $0) $ 952,822 $ 6,023,095
Cash and securities purchased under agreements to resell,
segregated under federal and other regulations 6,891,672 27,173,659
Receivable from broker-dealers and clearing organizations 4,944,958 7,717,643
Receivable from customers (net of allowance for doubtful
accounts of $2,833,261 and $1,601,178) 478,498,038 438,208,683
Other receivables 1,486,729 1,614,254
Marketable securities owned - at market value 432,978 223,034
Furniture, equipment, and leasehold improvements (at cost -
net of accumulated depreciation and amortization of
$7,154,999 and $6,296,033) 3,145,140 3,024,193
Income taxes receivable 1,183,308 1,012,881
Deferred income taxes 1,669,425 1,479,425
Clearing deposits 8,442,182 9,598,797
Other assets 1,494,537 1,663,442
------------------- -------------------
Total assets $509,141,789 $497,739,106
=================== ===================
</TABLE>
See accompanying notes to Consolidated Financial Statements.
2
<PAGE>
JB Oxford Holdings, Inc. and Subsidiaries
Consolidated Statements of Financial Condition - continued
<TABLE>
<CAPTION>
June 30, 2000 December 31, 1999
(Unaudited)
----------------- ----------------------
<S> <C> <C>
Liabilities and shareholders' equity:
Liabilities:
Short-term borrowings $ 49,213,705 $ --
Payable to broker-dealers and clearing organizations 177,617,653 137,300,388
Payable to customers 233,310,808 313,354,154
Securities sold, not yet purchased - at market value 73,046 96,904
Accounts payable and accrued liabilities 10,182,817 12,303,092
Loans from shareholders 5,418,696 5,418,696
Notes payable 2,889,375 2,895,124
---------------- ----------------------
Total liabilities 478,706,100 471,368,358
----------------- ----------------------
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 15,839,193 10,772,290
Treasury stock at cost, 947,140 and 704,040 shares (1,786,667) (784,705)
----------------- ----------------------
Total shareholders' equity 30,435,689 26,370,748
----------------- ----------------------
Total liabilities and shareholders' equity $509,141,789 $497,739,106
================= ======================
</TABLE>
See accompanying notes to Consolidated Financial Statements.
3
<PAGE>
JB Oxford Holdings, Inc. and Subsidiaries
Consolidated Statements Of Operations
(Unaudited)
<TABLE>
<CAPTION>
For The Six Months Ended
June 30,
-----------------------------
2000 1999
----------- -----------
<S> <C> <C>
Revenues:
Clearing and execution $ 4,909,977 $11,003,967
Trading profits 9,792,012 8,955,639
Commissions 23,787,094 16,197,944
Interest 20,826,480 13,330,441
Other 797,142 377,454
----------- -----------
Total revenues 60,112,705 49,865,445
----------- -----------
Expenses:
Employee compensation 7,401,167 4,682,597
Commission expense 9,666,722 6,222,159
Clearing and floor brokerage 1,682,844 1,843,361
Communications 4,091,019 3,382,627
Occupancy and equipment 3,040,972 2,326,657
Interest 12,269,505 7,199,846
Data processing charges 4,920,740 4,802,295
Professional services 2,297,655 2,057,036
Promotional 3,703,286 1,751,256
Bad debts 916,114 1,045,858
Other operating expenses 1,225,779 1,188,558
----------- -----------
Total expenses 51,215,803 36,502,250
----------- -----------
Income before income taxes and extraordinary item 8,896,902 13,363,195
Income tax provision 3,830,000 5,750,000
----------- -----------
Income before extraordinary item 5,066,902 7,613,195
Extraordinary item: Forgiveness of debt, net of taxes -- 436,875
----------- -----------
Net Income $ 5,066,902 $ 8,050,070
=========== ===========
</TABLE>
See accompanying notes to Consolidated Financial Statements.
4
<PAGE>
JB Oxford Holdings, Inc. and Subsidiaries
Consolidated Statements Of Operations - continued
(Unaudited)
<TABLE>
<CAPTION>
For The Six Months Ended
June 30,
-------------------------------------
2000 1999
----------- -----------
<S> <C> <C>
Basic Net Income Per Share:
Income before income taxes and extraordinary item $ 0.35 $ 0.54
Extraordinary item: Forgiveness of debt, net of taxes -- 0.03
------ ------
Basic Net Income Per Share $ 0.35 $ 0.57
====== ======
Diluted Net Income Per Share:
Income before income taxes and extraordinary item $ 0.22 $ 0.31
Extraordinary item: Forgiveness of debt, net of taxes -- 0.02
------ ------
Basic Net Income Per Share $ 0.22 $ 0.33
====== ======
Weighted average number of shares
Basic 14,334,765 14,209,705
Diluted 23,596,854 24,667,476
</TABLE>
See accompanying notes to Consolidated Financial Statements.
5
<PAGE>
JB Oxford Holdings, Inc. and Subsidiaries
Consolidated Statements Of Operations
(Unaudited)
<TABLE>
<CAPTION>
For The Three Months Ended
June 30,
------------------------------------
2000 1999
----------- -----------
<S> <C> <C>
Revenues:
Clearing and execution 1,632,890 $ 5,878,275
Trading profits 4,357,187 4,933,948
Commissions 8,699,931 8,457,912
Interest 10,503,025 7,424,994
Other 426,000 176,717
----------- -----------
Total revenues 25,619,033 26,871,846
----------- -----------
Expenses:
Employee compensation 3,717,675 2,401,250
Commission expense 3,618,027 3,369,577
Clearing and floor brokerage 792,543 891,525
Communications 2,095,690 1,711,319
Occupancy and equipment 1,505,994 1,221,306
Interest 6,770,331 3,938,784
Data processing charges 2,241,700 2,390,862
Professional services 1,265,712 877,363
Promotional 1,719,741 947,914
Bad debts 383,184 640,422
Other operating expenses 597,030 603,762
----------- -----------
Total expenses 24,707,627 18,994,084
----------- -----------
Income before income taxes 911,406 7,877,762
Income tax provision 400,000 3,530,792
----------- -----------
Net Income 511,406 $ 4,346,970
=========== ===========
Basic net income per share $0.04 $0.31
Diluted net income per share $0.02 $0.18
Weighted average number of shares
Basic 14,285,343 14,264,463
Diluted 23,398,693 24,624,056
</TABLE>
See accompanying notes to Consolidated Financial Statements.
6
<PAGE>
JB Oxford Holdings, Inc. and Subsidiaries
Consolidated Statements Of Cash Flows
(Unaudited)
<TABLE>
<CAPTION>
For The Six Months Ended
June 30,
----------------------------------
2000 1999
------------ -------------
<S> <C> <C>
Increase (decrease) in cash and cash equivalents:
Cash flows provided by operating activities:
Net income $ 5,066,903 $ 8,050,070
Adjustments to reconcile net income to cash used in
operating activities:
Depreciation and amortization 858,966 638,898
Deferred rent (74,484) (60,733)
Provision for bad debts 916,114 1,045,858
Forgiveness of debt -- (728,125)
Changes in assets and liabilities:
Cash segregated under federal and other regulations 20,281,987 93,330,797
Receivable from broker-dealers and clearing organizations 2,772,685 (933,156)
Receivable from customers (41,205,469) (129,114,578)
Other receivables 127,525 (73,742)
Securities owned (209,944) 2,551,743
Clearing deposits 1,156,615 (689,943)
Deferred income taxes receivable (190,000) (179,107)
Other assets 168,905 214,548
Payable to broker-dealers and clearing organizations 40,317,265 68,924,666
Payable to customers (80,043,346) (33,838,342)
Securities sold, not yet purchased (23,858) (798,864)
Accounts payable and accrued liabilities (2,045,791) (1,414,950)
Income taxes payable/receivable (170,427) 378,643
------------ -------------
Net cash provided by (used in) operating activities (52,296,354) 7,303,683
------------ -------------
Cash flows from investing activities:
Capital expenditures (979,913) (197,765)
------------ -------------
Net cash used in investing activities (979,913) (197,765)
------------ -------------
Cash flows from financing activities:
Repayments of notes payable (5,749) (56,931)
Advances on short term borrowing 49,213,705
Issuance of common stock -- 246,300
Purchase of treasury stock (1,001,962) (586,925)
Payment of subordinated loans -- (250,000)
------------ -------------
Net cash provided by (used in) financing activities 48,205,994 (647,556)
------------ -------------
Net increase (decrease) in cash and cash equivalents (5,070,273) 6,458,362
Cash and cash equivalents at beginning of the period 6,023,095 2,496,572
------------ -------------
Cash and cash equivalents at end of the period $ 952,822 $ 8,954,934
============ =============
</TABLE>
See accompanying notes to Consolidated Financial Statements.
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 June 30, 2000 and June 25, 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.
Note 3. Earnings per Share
The following table reconciles the numerators and denominators of the basic
and diluted earnings per share computation:
8
<PAGE>
<TABLE>
<CAPTION>
For The Six Months Ended For The Three Months Ended
June 30, June 30,
2000 1999 2000 1999
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Basic earnings per share
Net income $ 5,066,902 $ 8,050,070 $ 511,406 $ 4,346,970
----------- ----------- ----------- -----------
Income available to common
stockholders (numerator) $ 5,066,902 $ 8,050,070 $ 511,406 $ 4,346,970
=========== =========== =========== ===========
Weighted average common shares
outstanding (denominator) 14,334,765 14,209,705 14,285,343 14,264,463
=========== =========== =========== ===========
Basic earnings per share $ 0.35 $ 0.57 $ 0.04 $ 0.31
=========== =========== =========== ===========
Diluted earnings per share
Net income $ 5,066,902 $ 8,050,070 $ 511,406 $ 4,346,970
Interest on convertible debentures, net
of income tax 145,904 147,587 72,952 72,952
----------- ----------- ----------- -----------
Income available to common stockholders
plus assumed conversions (numerator) $ 5,212,806 $ 8,197,657 $ 584,358 $ 4,419,922
=========== =========== =========== ===========
Weighted average common shares
outstanding 14,334,765 14,209,705 14,285,343 14,264,463
Weighted average options outstanding 2,018,923 2,181,291 2,019,346 2,146,085
Weighted average convertible debentures 7,740,994 8,602,058 7,740,994 8,455,280
Stock acquired with proceeds (497,828) (325,578) (646,991) (241,772)
----------- ----------- ----------- -----------
Weighted average common shares and
assumed conversions outstanding
(denominator) 23,596,854 24,667,476 23,398,693 24,624,056
=========== =========== =========== ===========
Diluted earnings per share $0.22 $0.33 $0.02 $0.18
=========== =========== =========== ===========
</TABLE>
Options to purchase 553,500 shares of common stock at June 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 June 30, 2000 and 1999. The options outstanding at June
30, 1999 expire at various dates through June 23, 2010 and were still
outstanding as of June 30, 2000. Subsequent to June 30, 2000 options to
purchase 50,000 additional shares were exercised for $97,000.
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
9
<PAGE>
subordinated borrowings or the repurchase of capital stock if the resulting
excess net capital would fall below 5% of aggregate debits.
At June 30, 2000, JBOC had net capital of $32,500,118, which was
$22,959,871 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
$2,468,784 and $27,142,338 at June 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 has 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. 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 related 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 $1.0 million or more
to the SEC, the USAO has agreed that the Company's obligation to the USAO would
be reduced by $500,000.
Note 6. Supplemental Disclosures of Cash Flow Information
<TABLE>
<CAPTION>
For the Six Months Ended June 30,
-----------------------------------------------
2000 1999
(Unaudited) (Unaudited)
-------------------- --------------------
<S> <C> <C>
Supplemental Disclosures of Cash Flow Information
Cash paid during the period for:
Interest $12,128,269 $7,230,326
Income taxes 4,129,428 5,834,400
</TABLE>
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 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 during the period. Additionally, the
10
<PAGE>
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:
(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 2000 due to its ability to provide high
quality, flexible, and customer-sensitive
11
<PAGE>
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
---------------------
Six Months Ended June 30, 2000 compared to Six Months Ended June 30, 1999
-------------------------------------------------------------------------
Revenues
--------
The Company's total revenues were $60,112,705 in the first half of 2000, an
increase of 21% from $49,865,445 in the first half of 1999. The primary reason
for the increase was a rise in commission and interest revenues. Commission
revenue increased 47% to $23,787,094 in the current period from $16,197,944 in
the first half of 1999. Interest revenue increased 56% to $20,826,480 in the
first half of 2000 from $13,330,441 in the first half of 1999. Additionally,
trading profits increased 9% to $9,792,012 in the first half of 2000 from
$8,955,639 in the first half of 1999.
Commission revenue was the largest single source of revenue to the Company
during the comparable periods, consisting of 40% for the first half of 2000 and
32% for the first half 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 40% from $6,130,595 in the first half 1999 to
$8,556,975 in the first half 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.
12
<PAGE>
Clearing and execution revenues decreased $6,093,990 or 55% to $4,909,977
in the first half 2000 compared to $11,003,967 in the first half 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, and the declining volumes that
occurred in the securities industry in general.
Expenses
--------
Expenses totaled $51,215,803 for the first half of 2000, an increase of 40%
from $36,502,250 in the first half 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. Interest expense increased 70% to $12,269,505 in
the first half of 2000 from $7,199,846 in the first half 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 73% in the
first half of 1999 to 85% in the first half of 2000. Commission expense
increased by 55% in the first half of 2000 to $9,666,722 from $6,222,159 in the
first half of 1999. Salaries and employment costs increased 58% to $7,401,167 in
the first half of 2000 from $4,682,597 in the first half of 1999. A substantial
portion of the salaries increase, in the amount of $1,479,370, relates to
temporary employees the Company has hired to prepare for a conversion to a
different back office system vendor in the fall of 2000. 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 $1,952,030 or 111% to $3,703,286 in the
first half of 2000 from $1,751,256 in the first half 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 half of 2000 were 85% 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 June 30, 2000 compared to Quarter Ended June 30, 1999
-------------------------------------------------------------------
The Company recorded a net profit of $511,406 for the quarter ended June
30, 2000. This compares to a net profit of $4,346,970 for the quarter ended
June 30, 1999.
Total revenues for the second quarter of 2000 were $25,619,033, a decrease
of $1,252,813 or 5% from the comparable quarter of 1999 and a decrease of
$8,874,639 or 26% from the first quarter
13
<PAGE>
of 2000. Commission revenue increased $242,019 or 3% during the second quarter
of 2000 compared to the second quarter of 1999. Commission revenues declined
$6,387,232 or 42% from the first quarter of 2000 as trade volumes declined in
the second quarter. This decline was typical for the industry during the second
quarter of 2000. These declining volumes also affected trading profits and
clearing revenues for the same periods.
Clearing revenues decreased $4,245,385 or 72% during the second quarter of
2000 compared to the second quarter of 1999, and $1,644,197 or 50% compared to
the first 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 second quarter of 2000 from the first quarter of 2000
is related to the decline in market volumes, discussed above.
Interest revenue increased $3,078,031 or 41% to $10,503,025 from $7,424,994
for the second quarter of 1999. Additionally, interest revenue increased
$179,570 or 2% over the first quarter of 2000. Net interest income increased
$246,484 or 7% to $3,732,694 in the second quarter of 2000 from $3,486,210 in
the second quarter of 1999. Net interest income declined $1,091,587 or 23% from
the first quarter of 2000.
Total expenses for the second quarter of 2000 were $24,707,627, an increase
of $5,713,543 or 30% from the comparable quarter of 1999, and a decrease of
$1,800,549 or 7% from the first quarter of 2000. Interest expense increased
$2,831,547 or 72% during the second quarter of 2000 compared to the second
quarter of 1999 and $1,271,157 or 23% compared to the first quarter of 2000.
Interest costs increased in relation to increasing interest revenues.
Additionally, the cost to finance customer debits increased as the Company
utilized higher interest short term borrowings to replace the loss of customer
credits during the second quarter of 2000.
Salary costs increased $1,316,425 or 55% to $3,717,675 in the second
quarter of 2000 from $2,401,250 during the second quarter of 1999. Temporary
employee costs of $893,521 created much of this increase as discussed above.
There was no significant change in salary cost from the first to second quarter
of 2000. Promotional costs increased $771,827 or 81% in the second quarter of
2000 compared to the second quarter of 1999, while these cost decreased $263,804
or 13% from the first 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 $140,000,000. 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, 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.
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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 June 30, 2000
--------------------------
The Company's cash position decreased during the first half of 2000 by
$5,070,273 to $952,822. This compares with a net increase in cash and cash
equivalents of $6,458,362 in the first half 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.
Cash Flows From Operating Activities
------------------------------------
Net cash used in operating activities was $52,296,354 for the first half of
2000, compared to cash of $7,303,683 provided from operations during the first
half 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 half of 2000, the most significant use of cash was the
reduction of payables to customers of $80,043,346; additionally, an increase in
receivables from customers used cash of $41,205,469. This use of cash was funded
by the decrease in cash segregated under federal and other regulations of
$20,281,987 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 $40,317,265. 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 half of 2000 was
$979,913 compared with $197,765 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 $48,205,994 in the first half of
2000, compared to $647,556 cash used in financing activities in the first half
of 1999. The most significant source of cash for this activity were advances on
short-term borrowings in the net amount of $49,213,705.
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During the first half of 2000 the Company used $1,001,962 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.
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
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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 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.
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
17
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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
The Company held its Annual Meeting of Stockholders on June 23, 2000. 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 2001. The following individuals were so
elected: Christopher L. Jarratt, receiving 13,936,439 votes for election, no
votes against and 142,929 abstentions; James G. Lewis, receiving 13,936,439
votes for election, no votes against and 142,929 abstentions; Mark D.
Grossi, receiving 13,936,439 votes for election, no votes against and
142,929 abstentions; David G. Mahood, receiving 13,936,439 votes for
election, no votes against and 142,929 abstentions.
2. The Stockholders ratified the appointment of Arthur Andersen LLP as the
independent public accountants of the Company for fiscal year ending
December 31, 2000. The proposal was approved with 13,982,597 votes in favor
of the appointment, 85,671 votes against and 11,100 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.
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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
August 11, 2000
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