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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, 2002
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 8,
2002, the Registrant had the following number of shares of common stock, $0.01
par value per share, outstanding: 14,579,985.
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
JB OXFORD HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
June 30, 2002 December 31, 2001
(Unaudited)
-------------- -----------------
ASSETS:
Cash and cash equivalents (including securities purchased under
agreements to resell of $0 and $6,034,839) $3,394,711 $6,694,332
Cash and cash equivalents segregated under federal and other regulations
(including securities purchased under agreements to
resell of $0 and $1,695,974) 147,712,853 79,399,917
Receivable from broker-dealers and clearing organizations 13,533,165 52,368,663
Receivable from customers (net of allowance for doubtful accounts of
$2,608,589 and $2,625,178) 86,770,153 101,641,363
Other receivables 681,658 1,348,285
Marketable securities owned - at market value 935,076 1,352,840
Related party notes receivable 2,500,000 2,500,000
Furniture, equipment, and leasehold improvements (at cost - net of
accumulated depreciation and amortization of $4,751,666 and
$3,523,365) 2,610,291 3,310,758
Income taxes receivable 5,716,797 3,751,429
Deferred income taxes 1,470,058 1,470,058
Clearing deposits 5,357,402 5,199,277
Other assets 5,122,060 3,402,495
------------ ------------
TOTAL ASSETS $275,804,224 $262,439,417
============ ============
See accompanying notes to consolidated financial statements.
2
JB OXFORD HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
June 30, 2002 December 31, 2001
(Unaudited)
------------- -----------------
LIABILITIES AND SHAREHOLDERS' EQUITY:
LIABILITIES:
Payable to broker-dealers and clearing organizations $ 60,180,900 $ 51,334,581
Payable to customers 178,044,236 169,935,902
Securities sold, not yet purchased - at market value 57,041 846,585
Accounts payable and accrued liabilities 7,141,186 6,491,471
Loans from shareholders 5,418,696 5,418,696
Notes payable 5,209,375 5,629,375
------------ ------------
TOTAL LIABILITIES 256,051,434 239,656,610
------------ ------------
COMMITMENTS AND CONTINGENCIES (NOTE 4)
SHAREHOLDERS' EQUITY:
Common stock ($.01 par value, 100,000,000 shares authorized;
15,884,925 and 15,193,226 shares issued) 158,849 151,932
Additional paid-in capital 17,335,464 16,446,381
Retained earnings 4,877,705 8,803,722
Treasury stock at cost, 1,304,940 shares (2,619,228) (2,619,228)
------------ ------------
TOTAL SHAREHOLDERS' EQUITY 19,752,790 22,782,807
------------ ------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $275,804,224 $262,439,417
============ ============
See accompanying notes to consolidated financial statements.
3
JB OXFORD HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
For The Six Months Ended
June 30,
-----------------------------------
2002 2001
----------- -----------
REVENUES:
Commissions $ 3,725,463 $ 8,020,364
Interest 4,320,926 9,658,455
Trading profits 741,988 2,218,386
Clearing and execution 1,975,130 2,335,421
Other 474,347 456,057
----------- -----------
Total revenues 11,237,854 22,688,683
----------- -----------
EXPENSES:
Employee compensation 4,279,693 7,178,571
Clearing and floor brokerage 410,663 1,124,007
Communications 1,426,573 2,517,443
Occupancy and equipment 2,696,169 2,839,808
Interest 1,149,557 5,355,973
Data processing charges 973,347 2,076,716
Professional services 1,695,757 2,525,941
Promotional 1,126,024 886,404
Bad debts 155,705 506,536
Other operating expenses 3,150,383 1,137,376
----------- -----------
Total expenses 17,063,871 26,148,775
----------- -----------
Loss before income taxes (5,826,017) (3,460,092)
Income tax benefit (1,900,000) (1,487,000)
----------- -----------
Net loss $(3,926,017) $(1,973,092)
=========== ===========
Basic net loss per share $(0.28) $(0.14)
Diluted net loss per share $(0.28) $(0.14)
Weighted average number of shares
Basic 14,102,415 14,055,086
Diluted 14,102,415 14,055,086
See accompanying notes to consolidated financial statements.
4
JB OXFORD HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
For The Three Months Ended
June 30,
------------------------------------------------
2002 2001
---------------------- ------------------------
REVENUES:
Commissions $ 1,699,521 $ 3,331,993
Interest 2,418,353 4,066,619
Trading profits 389,289 850,605
Clearing and execution 1,156,487 1,010,243
Other 298,083 162,570
---------------------- ------------------------
Total revenues 5,961,733 9,422,030
---------------------- ------------------------
EXPENSES:
Employee compensation 2,104,388 3,000,447
Clearing and floor brokerage 225,036 488,367
Communications 644,449 1,198,794
Occupancy and equipment 1,538,701 1,522,796
Interest 613,039 2,190,478
Data processing charges 504,202 667,157
Professional services 973,026 1,296,137
Promotional 712,410 286,169
Bad debts 91,373 268,765
Other operating expenses 3,763,250 549,888
---------------------- ------------------------
Total expenses 11,169,874 11,468,998
---------------------- ------------------------
Loss before income taxes (5,208,141) (2,046,968)
Income tax benefit (1,690,000) (877,000)
---------------------- ------------------------
Net loss $(3,518,141) $ (1,169,968)
====================== ========================
Basic net income (loss) per share $(0.25) $(0.08)
Diluted net income (loss) per share $(0.25) $(0.08)
Weighted average number of shares
Basic 14,241,837 14,055,086
Diluted 14,241,837 14,055,086
See accompanying notes to consolidated financial statements.
5
JB OXFORD HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
For The Six Months Ended
June 30,
--------------------------------------------
2002 2001
---------------------- ---------------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (3,926,017) $ (1,973,092)
Adjustments to reconcile net loss to cash used in operating activities:
Depreciation and amortization 1,351,553 820,772
Deferred rent -- (96,178)
Provision for bad debts 155,705 506,536
Deferred income tax provision (benefit) -- 61,999
Changes in assets and liabilities:
Cash segregated under federal and other regulations (68,312,936) (13,352,073)
Receivable from broker-dealers and clearing organizations 38,835,498 (113,652,249)
Receivable from customers 14,715,505 105,038,410
Other receivables 666,627 (158,057)
Securities owned 417,764 (63,016)
Clearing deposits (158,125) 1,310,234
Other assets 17,766 (102,325)
Payable to broker-dealers and clearing organizations 8,846,319 20,749,498
Payable to customers 8,108,334 4,293,452
Securities sold, not yet purchased (789,544) (19,011)
Accounts payable and accrued liabilities 649,715 (3,041,802)
Income taxes receivable (1,965,368) (1,619,303)
---------------------- ---------------------
Net cash used in operating activities (1,387,204) (1,296,205)
---------------------- ---------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (180,398) (698,431)
Acquisitions of customer accounts (1,312,019) (2,510,000)
---------------------- ---------------------
Net cash used in investing activities (1,492,417) (3,208,431)
---------------------- ---------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Repayments of notes payable (420,000) (504,000)
---------------------- ---------------------
Net cash used in financing activities (420,000) (504,000)
---------------------- ---------------------
NET DECREASE IN CASH AND CASH EQUIVALENTS (3,299,621) (5,008,636)
CASH AND CASH EQUIVALENTS AT BEGINNING OF THE PERIOD 6,694,332 8,004,000
---------------------- ---------------------
CASH AND CASH EQUIVALENTS AT END OF THE PERIOD $3,394,711 $ 2,995,364
====================== =====================
See accompanying notes to consolidated financial statements.
6
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. JB
Oxford & Company ("JBOC"), a register securities broker-dealer, is the Company's
most significant operating subsidiary. The accompanying financial information
should be read in conjunction with the Company's 2001 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.
NOTE 2. EARNINGS PER SHARE
The following table reconciles the numerators and denominators of the
basic and diluted earnings per share computation:
For The Six Months Ended For The Three Months Ended
June 30, June 30,
---------------------------- ----------------------------
2002 2001 2002 2001
------------ ------------ ------------ ------------
BASIC EARNINGS PER SHARE:
Net loss $ (3,926,017) $ (1,973,092) $ (3,518,141) $ (1,169,968)
------------ ------------ ------------ ------------
Loss available to common stockholders
(numerator) $ (3,926,017) $ (1,973,092) $ (3,518,141) $ (1,169,968)
============ ============ ============ ============
Weighted average common shares outstanding
(denominator) 14,102,415 14,055,086 14,241,837 14,055,086
============ ============ ============ ============
Basic earnings per share $ (0.28) $ (0.14) $ (0.25) $ (0.08)
============ ============ ============ ============
DILUTED EARNINGS PER SHARE:
Net Loss $ (3,926,017) $ (1,973,092) $ (3,518,141) $ (1,169,968)
Interest on convertible debentures, net of
income tax -- -- -- --
------------ ------------ ------------ ------------
Loss available to common stockholders plus
assumed conversions (numerator) $ (3,926,017) $ (1,973,092) $ (3,518,141) $ (1,169,968)
============ ============ ============ ============
Weighted average common shares outstanding 14,102,415 14,055,086 14,241,837 14,055,086
Weighted average options outstanding -- -- -- --
Weighted average convertible debentures -- -- -- --
Stock acquired with proceeds -- -- -- --
------------ ------------ ------------ ------------
Weighted average common shares and assumed
conversions outstanding (denominator) 14,102,415 14,055,086 14,241,837 14,055,086
============ ============ ============ ============
Diluted earnings per share $ (0.28) $ (0.14) $ (0.25) $ (0.08)
============ ============ ============ ============
7
The assumed conversions have been excluded in computing the diluted
earnings per share when there is a net loss for the period. They have been
excluded because their inclusion would reduce the loss per share or be
anti-dilutive. If the assumed conversions had been used, the fully diluted
shares outstanding for the six months and quarter ended June 30, 2002 would have
been 21,938,106 and 21,998,787, respectively.
The options carry exercise prices ranging from $0.63 to $9.00 at June
30, 2002 and 2001. The options outstanding at June 30, 2002 expire at various
dates through December 5, 2011.
NOTE 3. 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 June 30, 2002, JBOC had net capital of $12,260,868, which was 13.1%
of aggregate debit items and $10,396,361 in excess of the minimum amount
required. At December 31, 2001, JBOC had net capital of $18,975,361, which was
18.2% of aggregate debit items and $16,891,455 in excess of the minimum amount
required.
NOTE 4. CONTINGENT LIABILITIES
The Company and/or its subsidiaries are defendants in several lawsuits
and arbitrations, the most significant of which follows:
In May 2002, the staff of the Pacific Regional Office of the Securities
and Exchange Commission informed JB Oxford Holdings and JB Oxford & Company
(collectively, "JB Oxford") that the staff does not intend to recommend any
enforcement action against JB Oxford arising out of the SEC investigation. JB
Oxford had previously disclosed that it had entered into a tentative settlement
of the SEC investigation with the SEC staff. Because the SEC staff has decided
not to recommend any action against JB Oxford, the terms and conditions that had
been a part of the proposed settlement will not be imposed. The staff's decision
effectively closes the SEC's investigation into JB Oxford.
Also in May 2002, the Company amended its agreement with the Los
Angeles office of the United States Attorney's Office (the "USAO") extending the
payment schedule for the balance owing under the settlement agreement. No
payment will be made in fiscal year 2002, and the balance will be paid in equal
annual installments of $500,000 in February 2003 and February 2004.
The Company originally accrued payments to the USAO and SEC totaling
approximately $3.0 million. Because the SEC investigation closed without action
or monetary assessment, the amount accrued was reduced by approximately $1.0
million, reflected in the Company's first quarter 2002 earnings in other
operating expenses.
In August 2000, EBC Trust, as assignee and holder of two of the demand
notes originally payable by the Company to Oeri Finance Inc., in the principal
face amount of $1,939,375, filed to collect the amounts due under the notes as
well as seek return of certain securities seized by the government. The Company
filed an answer and asserted defenses to payment including, among other
defenses, a right of set-off for certain expenses incurred by the Company in
connection with the governmental investigation described above and related
matters. In February 2002, the US District
8
Court, Central District of California, issued an Order granting the assignee's
application for writ of pre-judgment attachment against the assets of JB Oxford
Holdings, Inc. A final determination of these issues on the merits has yet to be
made. The notes and underlying obligations have previously been disclosed by the
Company and are recorded on the Company's balance sheet in notes payable in its
Annual Reports on Form 10-K and Quarterly Reports on Form 10-Q since the
issuance of the notes in July 1997. The Company believes that it has valid
defenses and set-offs to the claims and intends to vigorously defend itself,
although no assurance can be given as to the outcome of this matter.
In August 2002, JBOC, jointly and severally with several other
unrelated respondents, has been ordered by an arbitration panel to pay an award
of $3.0 million in an arbitration matter conducted before the National
Association of Securities Dealers (NASD) Dispute Resolution.
The arbitration matter, Secured Equity Title and Appraisal Agency
Corporation, Stanley J. Cohen, Receiver v. Monroe Parker Securities, Inc., et
al, was filed in September 1998 and JBOC's sole involvement was limited to being
the clearing broker for Monroe Parker Securities, Inc. JBOC intends to appeal
the decision. While JBOC believes that it has a good basis for appeal, there can
be no assurance that it will be successful in overturning the arbitration award.
This decision may also impact other litigation in which the Company is
involved. As previously reported the Company has refused to pay approximately
$1.9 million in promissory notes allegedly due EBC Trust and $1.0 million in
subordinated debt allegedly due Oeri Finance, Inc., both of whom were named
respondents in the Secured Equity Title matter and who the NASD ruled jointly
and severally liable together with JBOC in the award. In its refusal to pay, the
Company has asserted defenses and counterclaims, including a right of set-off
related to other litigation, including the claims filed by Secured Equity. As
stated above, the Company has previously recorded liabilities of approximately
$2.9 million on its balance sheet in notes payable and will seek to offset these
payables by any amount ultimately paid pursuant to the NASD award. However,
there can be no assurance that the Company will be successful in obtaining an
offset of these payables.
While the $2.9 million notes payable has been reflected on its balance
sheet since 1997, the Company had not previously reserved for this recent NASD
ruling and accrued $3.0 million in the 2002 second quarter, which is included in
other expenses, to reflect this decision.
NOTE 5. SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
For the Six Months Ended June 30,
-------------------------------------------------
2002 2001
(Unaudited) (Unaudited)
----------------------- -----------------------
Supplemental Disclosures of Cash Flow Information
Cash paid during the period for:
Interest $984,140 $5,248,374
Income taxes 58,308 70,000
Common stock issued for acquisition of customer accounts in the amount of
$896,000 for the six months ended June 30, 2002.
NOTE 6. ACQUISITION OF CUSTOMER ACCOUNTS
9
During the quarter ended June 30, 2002, the Company acquired certain
customer accounts from two securities broker dealers. The cost of these
acquisitions have been included in other assets as an intangible asset. The
Company is amortizing this intangible asset over four years, which is the
estimated useful life.
NOTE 7. NOTES PAYABLE AND COMMITTED LINES
The Company currently has outstanding a bank note payable in the amount
of $2,320,000 as of June 30, 2002. The bank note payable carries an interest
rate of prime plus 1%. Principal payments of $84,000, plus interest, are due
monthly, with a balloon payment due on September 5, 2002. For the quarter ended
June 30, 2002, the Company was not in compliance with the net worth covenants of
its bank note payable agreement which require that the Company maintain net
assets of at least $21 million. In the event that the Company is deemed to be in
default of the covenants, the interest rate on the note will increase from Prime
plus 1% to Prime plus 3%. To date, the Company has made all of its required
payments under the bank note payable.
NOTE 8. SUBSEQUENT EVENTS
The Company signed an agreement to purchase the customer accounts and
website of a San Francisco based discount brokerage firm in June, 2002. Under
the terms of the cash and stock transaction, JB Oxford & Company will acquire
the firm's proprietary options trading software in addition to the right to
service approximately $80 million in customer assets and 8,000 customer accounts
located throughout the United States. This transaction is expected to close in
the third quarter of 2002.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Business Overview
Through our wholly-owned subsidiaries, we are engaged in the business
of providing brokerage and related financial services to retail customers and
broker-dealers nationwide. We are a fully integrated brokerage firm, providing
retail brokerage services, clearing services and market making services to our
customers. Our business is headquartered in Los Angeles and we have additional
branches in New York, Miami and Minneapolis.
Our primary subsidiary is JB Oxford & Company. JB Oxford is a
registered broker-dealer offering the following services: (i) providing discount
and electronic brokerage services to the investing public; (ii) providing
clearing and execution services to independent broker-dealers ("correspondents")
on a fully-disclosed basis; and (iii) acting as a market maker in stocks traded
on NASDAQ National Market System and other national exchanges. For 2001, our
annual consolidated revenues were $35,347,821, which consisted primarily of
commission and interest income from our discount and electronic brokerage
division.
Discount and Electronic Brokerage Services
10
JB Oxford 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.
We continue to upgrade and improve our brokerage technologies in order to
provide our customers with the resources necessary to conveniently and
economically execute securities transactions and access related financial
information. In addition to our trading capabilities, JB Oxford's Internet site
(www.jboxford.com) provides market quotes, charts, company research, and
customer account information, such as cash balances, portfolio balances and
similar information.
We believe that the Company can recover from the volume declines in the
market and grow our discount and electronic brokerage division into 2003, due in
part to our ability to provide high quality, flexible, and customer-sensitive
responses and services. We continually upgrade our computer systems and services
within each of our divisions to utilize and take advantage of the most recent
technological developments.
Clearing and Execution Services
JB Oxford is self-clearing and provides clearing and execution services
to independent broker-dealers. The clearing business offers a high return on
capital, and we believe that by careful selection and monitoring of JB Oxford's
correspondents, this business segment will remain profitable.
Market Making Activities
In order to facilitate the execution of security transactions for our
own customers and the customers of our correspondents, JB Oxford acts as a
market maker for approximately 300 public corporations whose stocks are traded
on the NASDAQ National Market System, NYSE or other national exchanges. The
number of companies in which JB Oxford acts as a market maker fluctuates
depending upon various factors, including trading volume and the number of
employees in a trading capacity. Our 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
Six Months Ended June 30, 2002 Compared with Six Months Ended June 30, 2001
Revenues
The Company's total revenues were $11,237,854 in the first half 2002, a
decrease of 50% from $22,688,683 in the first half of 2001. The primary reason
for the decrease was a decline in interest revenue of 55% to $4,320,926 in the
current period from $9,658,455 in the first half of 2001. Additionally,
commission revenue decreased 54% to $3,725,463 in the first half of 2002 from
$8,020,364 in the first half of 2001. Trading profits decreased 67% to $741,988
in the first half of 2002 from $2,218,386 in the first half of 2001.
Commission revenue decreased $4,294,901 or 54% to $3,725,463 in the
first half 2002 compared with $8,020,364 in the first half of 2001. This decline
is the direct result of the decline in trading volume, which is down 53% in the
first half of 2002, compared with the first half of 2001. In
11
the first half of 2002, the Company acquired approximately 17,000 active
customer accounts from other broker dealers, as compared 11,000 accounts
acquired in the first half of 2001. The Company has entered into a transaction
to acquire additional accounts that will close in the third quarter of 2002. The
Company intends to continue to look for opportunities to grow its business
through acquisitions of accounts from compatible discount and on-line brokerage
operations of other firms. There can be no assurance that the Company will
complete any acquisitions in the future, or if completed, that they will be
successful.
Interest revenue decreased $5,337,529 or 55% to $4,320,926 in the first
half 2002 compared with $9,658,455 in the first half of 2001. Net interest
income decreased 26% to $3,171,369 in the first half 2002 from $4,302,482 in the
first half 2001. The changes in interest revenue are consistent with the 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
decline in margin balances has been the most significant factor for the
decrease.
Trading profits decreased 67% to $741,988 in the first half of 2002
from $2,218,386 in the first half of 2001. The decrease in trading profits
resulted from a decrease in trading volume from the Company's discount and
on-line brokerage operations. Volumes in the inventory accounts have decrease
57% in the first half of 2002 compared to the first half of 2001. Management
anticipates trading profits will continue to track the volumes of the discount
and on-line brokerage operation for 2002; however, management is also exploring
new sources of order flow for the Company to utilize.
Clearing and execution revenue decreased $360,291 or 15% to $1,975,130
in the first half of 2002 compared with $2,335,421 in the first half of 2001.
The decrease reflects the decrease in correspondent trades cleared by the
Company, and the trend tracks the overall volume trend of the Company.
Expenses
Expenses totaled $17,063,871 in the first half of 2002, a decrease of
35% from $26,148,775 in the first half of 2001. This decrease in expenses is
primarily a result of the decline in trading volume in the Company's discount
and on-line brokerage divisions. The decrease also reflects the impact of cost
containment measures taken by management during the past year. Many of the
Company's expenses, including commission expense, interest expense,
communications and data processing charges are directly related to commission
revenue, interest revenue and trading revenue, which are all down from the first
half of 2001. Data processing expense decreased 53% to $973,347 in the first
half of 2002 from $2,076,716 in the first half of 2001. This decrease is the
result of the decline in commission and trading volumes and the renegotiation of
a data processing contract in the spring of 2001.
The most significant increase in expense is in other expenses. Other
expense increased $2,013,007 or 177% to $3,150,383 in the first half of 2002
from $1,137,376 in the first half of 2001. The Company accrued an arbitration
award of $3 million that is included in other expenses. See Note 4 to the
financial statements for more detailed information about the award.
Employee compensation decreased by 40% in the first half of 2002 to
$4,279,693 from $7,178,571 in the first half of 2001. This decrease is related
to the reductions in work force and the decrease in commission paid to brokers.
The Company has been replacing its commissioned sales
12
force with a salaried sales force. Interest expense decreased 79% to $1,149,557
in the first half of 2002 from $5,355,973 in the first half of 2001. This
decrease is in line with the interest revenue decrease discussed above.
Promotional expense increased $239,620 or 27% to $1,126,024 in the
first half of 2002 from $886,404 in the first half of 2001. Management has
focused on more efficient means of advertising. The Company is currently running
a print campaign with an estimated annual budget of $1,800,000. Management will
continue advertising as a means of name branding while also looking to increase
customer accounts through acquisitions.
Management continues to examine ways to contain costs and improve
efficiencies. The Company will continue to seek ways to cut costs and add
revenues.
Quarter Ended June 30, 2002 Compared with Quarter Ended June 30, 2001
The Company recorded a net loss of $3,518,141 for the quarter ended
June 30, 2002. This compares with a net loss of $1,169,968 for the quarter ended
June 30, 2001.
Total revenues for the second quarter of 2002 were $5,961,733, a
decrease of $3,460,297 or 37% from the comparable quarter of 2001 and an
increase of $685,612 or 13% from the first quarter of 2002. Commission revenue
decreased $1,632,472 or 49% during the second quarter of 2002 compared with the
second quarter of 2001 and $326,421 or 16% from the first quarter of 2002, as
trade volumes declined in the second quarter. These declining volumes also
affected trading profits for the same periods.
Clearing revenue increased $146,244 or 14% during the second quarter of
2002 compared with the second quarter of 2001, and $337,844 or 41% compared with
the first quarter of 2002.
Interest revenue decreased $1,648,266 or 41% to $2,418,353 from
$4,066,619 for the second quarter of 2002 compared with the second quarter of
2001. Interest revenue increased $515,780 or 27% over the first quarter of 2002.
Net interest income decreased $70,827 or 4% to $1,805,314 in the second quarter
of 2002 from $1,876,141 in the second quarter of 2001. Net interest income
increased $436,259 or 311% from the first quarter of 2002. The increase in the
second quarter of 2002 is due in part to the company increasing its securities
lending activities and investing the proceeds of the loans in higher yielding
instruments.
Total expenses for the second quarter of 2002 were $11,169,874, a
decrease of $299,124 or 3% from the comparable quarter of 2001, and an increase
of $5,275,877 or 90% from the first quarter of 2002. Interest expense decreased
$1,577,439 or 72% during the second quarter of 2002 compared with the second
quarter of 2001 and increased $76,521 or 14% compared with the first quarter of
2002. Interest costs decreased due to declining customer credit balances and
lower interest rates, however, increased during the second quarter due to the
increase in securities loaned.
Employee compensation decreased $896,059 or 30% to $2,104,388 in the
second quarter of 2002 from $3,000,447 during the second quarter of 2001, and
$70,917 or 3% from the first quarter of 2002. Reductions in the company's
workforce resulted in the reduced salary costs. Promotional costs
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increased $426,241 or 149% in the second quarter of 2002 compared with the
second quarter of 2001, and increased $298,796 or 72% from the first quarter of
2002.
Other expenses increased $3,213,362 or 584% in the second quarter of
2002 compared with the second quarter of 2001, and increased $4,376,117 or 714%
from the first quarter of 2002. The increase over the prior periods primarily
related to an arbitration award of $3.0 million that has been accrued. See Note
4 to the financial statements for more detailed information about the award.
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. 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. Certain of these
credit facilities are subject to financial covenants and restrictions, which
could limit the amount the Company could borrow at any given time in the event
of changes in financial ratios and continuing losses.
The majority of the Company's corporate assets at June 30, 2002, 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 3, "Regulatory
Requirements," to the financial statements for regulatory requirements of the
Company.
One measurement of the Company's liquidity is JBOC's excess net
capital. During the most recent four fiscal quarters, JBOC's excess net capital
has declined an average of approximately $2.5 million per quarter. The greatest
decrease occurred during the second quarter of 2002, due primarily to the
arbitration award rendered against JBOC, resulting in a $3.0 million reduction
in excess net capital. See Note 4, "Contingent Liabilities," to the financial
statements. If this trend continues, the Company's liquidity could further
decrease and the Company may need to raise additional capital. If capital is
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.
Notwithstanding this trend, the Company currently expects 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, if future positive cash flow is not realized, or
expenses increase due to adverse results in legal or arbitration proceedings or
for other unanticipated reasons, the Company may need to raise additional funds
in order to expand its business, respond to competitive pressures, develop
additional products and services, or take advantage of strategic opportunities.
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The Company currently has outstanding a bank note payable in the amount
of $2,320,000 as of June 30, 2002. The bank note payable carries an interest
rate of prime plus 1%. Principal payments of $84,000, plus interest, are due
monthly, with a balloon payment due on September 5, 2002. For the quarter ended
June 30, 2002, the Company was not in compliance with the net worth covenants of
its bank note payable agreement which require that the Company maintain net
assets of at least $21 million. In the event that the Company is deemed to be in
default of the covenants, the interest rate on the note will increase from Prime
plus 1% to Prime plus 3%. To date, the Company has made all of its required
payments under the bank note payable.
Liquidity at June 30, 2002
The Company's cash position decreased during the first half of 2002 by
$3,299,621 to $3,394,711. This compares with a net decrease in cash and cash
equivalents of $5,008,636 in the first half of 2001. 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.
Cash Flows From Operating Activities
Net cash used in operating activities was $1,387,204 for the first half
of 2002, compared with cash of $1,296,205 used in operations during the first
half of 2001. 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 2002, the most significant source of cash was
the decrease in receivables from broker-dealers and clearing organizations of
$38,835,498 and a decrease in receivables from customers of $14,715,505.
Increases in payables to broker-dealers and clearing organizations and payables
to customers of $8,846,319 and 8,108,334 respectively provided cash from
operations. These sources of cash were used to fund the increase in cash
segregated under federal and other regulations of $68,312,936.
Cash Flows Used In Investing Activities
The net cash used in investing activities during the first half of 2002
was $1,492,417 compared with $3,208,431 during the same period of 2001. The
Company has invested cash of $1,312,019 during the first half of 2002 in
acquiring customer accounts from other broker dealers, as compared to $2,510,000
used for the same purpose in the first half 2001. The remaining $180,398 of cash
uses are a direct result of capital expenditures made by the Company during the
first half of 2002 as compared with $698,431 for the first half of 2001.
Incidental to its acquisition of customer assets, the Company has opened one
additional office in Minneapolis, Minnesota and plans to open one additional
office in San Francisco, California to accommodate the new regional base of
customer accounts acquired. The Company presently has no plans to open
additional offices and no significant commitments for capital expenditures. The
Company continues to look for opportunities to grow its business through
additional acquisition of customer accounts, and if additional acquisitions are
made, the Company may expend its resources on such an investment.
Cash Flows From Financing Activities
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Financing activities used cash of $420,000 in the first half of 2002,
compared with $504,000 cash provided by financing activities in the first half
of 2001. The cash used was for the repayment of notes payable for both periods.
Recent Accounting Pronouncements
In June 2001, the FASB issued SFAS No. 141, "Business Combinations" and
SFAS No. 142, "Goodwill and Other Intangible Assets." The Company was required
to adopt SFAS No. 141 upon issuance. As such, all business combinations for
which the Company may prospectively enter must be accounted for as purchase
transactions. The Company adopted SFAS No. 142 on January 1, 2002. The adoption
of SFAS No. 142 ceases the current amortization of goodwill and will instead be
subject to at least an annual assessment for impairment by applying a
fair-value-based test. The adoption of this statement did not have a material
effect on the Company's financial position or results of operations.
In August 2001, the FASB issued SFAS No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets." This statement addresses financial
accounting and reporting for the impairment or disposal of long-lived assets and
supercedes or amends previous pronouncements including SFAS No. 121, Accounting
Principles Board Opinion No. 30, and Accounting Research Board No. 51. The
Company adopted this statement on January 1, 2002. The adoption of this
statement did not have a material effect on the Company's financial position or
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, as well as certain information provided periodically in
writing or orally by us, 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.
You should carefully consider the risks described below and all other
information contained in this report and in our other filings with the SEC,
including but not limited to information under the heading "Business Overview -
Forward Looking Statements and Risk Factors" in our Form 10-K for the year ended
December 31, 2001 before making an investment decision in the Company. These
risks include, among others, the following:
o inability to generate positive cash flows and continuance of, or
increased, negative cash flows;
o the significant demands on our resources as a result of our rapidly
evolving business;
o lack of demand or market acceptance as a result of the market for
discount and electronic brokerage services being at an early stage of
development;
o rapid and significant fluctuation in both value and volume of the U.S.
securities markets;
o financial risks from our clearing operations that exceed the simple
risk of loss of business if a correspondent fails;
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o delays in the introduction of new services and products;
o increased competition;
o any adverse effect caused by or inability to comply with government and
other regulation;
o inability to meet net capital requirements;
o inability to successfully identify, fund or integrate future
acquisitions;
o inability to successfully integrate recent acquisitions;
o inability to maintain network security and customer privacy;
o continued decline in market activity and trade volume;
o continued poor general economic and market conditions;
o credit risks associated with customer margin accounts;
o any adverse effects resulting from recent downsizing;
o the adverse impact of decimalization;
o significant loss of customers or inability to generate new customers;
o systems failures;
o stock price volatility;
o inability to successfully defend legal, arbitration and administrative
proceedings;
o the impact on our liquidity if our excess net capital continues to
decrease; and
o inability to maintain the listing of the Company's common stock on the
Nasdaq SmallCap Market.
These risks and uncertainties are not the only ones facing the Company,
and there may be additional risks of which we do not presently know or that we
currently deem immaterial. If any of the risks actually occur, these risks could
have a materially adverse effect on our business, financial condition or results
of operations. In that case, the trading price of our stock could decline, and
you may lose all or part of your investment. We undertake no obligation to
update or revise the forward-looking statements or risks and uncertainties to
reflect events or circumstances occurring after the date of this Form 10-Q or to
reflect the occurrence of unanticipated events.
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.
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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 customer 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 customer'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 back money market funds and bank certificates of deposit . These
agreements have maturity dates ranging from one to 365 days and do not present a
material interest rate risk.
Equity Price Risk
JBOC acts as a market maker for approximately 300 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 correspondents' 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, arbitration or administrative proceedings incidental to its business,
including customer brokerage transactions claims as well as matters related to
our clearing services resulting from the failure of certain correspondents. All
of the legal, arbitration and administrative proceedings have arisen in the
ordinary conduct of its business. To date, these proceedings have not had a
material effect on the Company's financial condition or results of operations.
However, there can be no assurance that in future periods these proceedings will
not have a material adverse effect on our financial condition or results of
operations. Those proceedings that management believes may have a significant
impact on the Company have been previously disclosed in the Company's most
recent Form 10-K and Form 10-Q and is described in Note 4 to the financial
statements of this Form 10-Q. The following is a description of any material
developments or changes in such legal proceedings.
In August 2002, JBOC, jointly and severally with several other
unrelated respondents, has been ordered by an arbitration panel to pay an award
of $3 million in an arbitration matter conducted before the National Association
of Securities Dealers (NASD) Dispute Resolution.
The arbitration matter, Secured Equity Title and Appraisal Agency
Corporation, Stanley J. Cohen, Receiver v. Monroe Parker Securities, Inc., et
al, was filed in September 1998 and JBOC's sole involvement was limited to being
the clearing broker for Monroe Parker Securities, Inc. JBOC intends to appeal
the decision. While JBOC believes that it has a good basis for appeal, there can
be no assurance that it will be successful in overturning the arbitration award.
This decision may also impact other litigation in which the Company is
involved. As previously reported the Company has refused to pay approximately $2
million in promissory notes allegedly due EBC Trust and $1 million in
subordinated debt allegedly due Oeri Finance, Inc., both of whom were named
respondents in the Secured Equity Title matter and who the NASD ruled jointly
and severally liable together with JBOC in the award. In its refusal to pay, the
Company. has asserted defenses and counterclaims, including a right of set-off
related to other litigation, including the claims filed by Secured Equity. As
stated above, the Company has previously recorded liabilities of $3 million on
its balance sheet in notes payable and will seek to offset these payables by any
amount ultimately paid pursuant to the NASD award. However, there can be no
assurance that the Company will be successful in obtaining an offset of these
payables.
While the $3 million notes payable is reflected on its balance sheet,
the Company has not previously reserved for this recent NASD ruling and accrued
$3 million in the 2002 second quarter, which is included in other operating
expenses, to reflect this decision.
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 3, "Regulatory Requirements," to the financial
statements. These requirements may restrict the payment of dividends.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
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(a) 99.1 Certification of Christopher L. Jarratt, Chief Executive Officer,
pursuant to Section 906 of Sarbanes-Oxley Act of 2002.
99.2 Certification of Michael J. Chiodo, Chief Financial Officer,
pursuant to Section 906 of Sarbanes-Oxley Act of 2002.
(b) During the second quarter, the Company filed a Report on Form 8-K,
dated June 28, 2002, reporting a change in the Company's certifying
accountant.
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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 14, 2002
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