Back to GetFilings.com
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(MARK ONE)
|X| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 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 November 8, 2002, the
Registrant had the following number of shares of common stock, $0.01 par value
per share, outstanding 1,457,999.
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
JB OXFORD HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
Sept 30, 2002 December 31,
(Unaudited) 2001
------------- -------------
ASSETS:
Cash and cash equivalents (including securities purchased
under agreements to resell of $0 and $6,034,839) $ 6,782,106 $ 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) 173,086,602 79,399,917
Receivable from broker-dealers and clearing organizations 14,207,813 52,368,663
Receivable from customers (net of allowance for doubtful
accounts of $2,677,470 and $2,625,178) 69,484,714 101,641,363
Other receivables 1,088,585 1,348,285
Marketable securities owned - at market value 974,465 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
$5,124,232 and $3,523,365) 3,100,877 3,310,758
Income taxes receivable 2,866,534 3,751,429
Deferred income taxes 1,470,058 1,470,058
Clearing deposits 4,366,756 5,199,277
Intangible assets net of accumulated amortization of
$1,123,650 and $313,750 5,730,672 2,196,250
Other assets 1,206,911 1,206,245
------------ ------------
TOTAL ASSETS $286,866,093 $262,439,417
============ ============
See accompanying notes to consolidated financial statements.
2
JB OXFORD HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
Sept 30, 2002 December 31,
(Unaudited) 2001
-------------- -------------
LIABILITIES AND SHAREHOLDERS' EQUITY:
LIABILITIES:
Payable to broker-dealers and clearing organizations $ 44,557,116 $ 51,334,581
Payable to customers 205,820,928 169,935,902
Securities sold, not yet purchased - at market value 13,463 846,585
Accounts payable and accrued liabilities 9,499,355 6,491,471
Loans from shareholders 5,418,696 5,418,696
Notes payable 2,889,375 5,629,375
------------- -------------
TOTAL LIABILITIES 268,198,933 239,656,610
------------- -------------
COMMITMENTS AND CONTINGENCIES (NOTE 4)
SHAREHOLDERS' EQUITY:
Common stock ($.01 par value, 100,000,000 shares authorized;
1,588,493 and 1,519,323 shares issued) 15,885 15,193
Additional paid-in capital 17,478,428 16,583,120
Retained earnings 3,792,075 8,803,722
Treasury stock at cost, 130,494 shares (2,619,228) (2,619,228)
------------- -------------
TOTAL SHAREHOLDERS' EQUITY 18,667,160 22,782,807
------------- -------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 286,865,693 $ 262,439,417
============= =============
See accompanying notes to consolidated financial statements.
3
JB OXFORD HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
For The Nine Months Ended
September 30,
------------------------------
2002 2001
------------ ------------
REVENUES:
Commissions $ 5,629,757 $ 10,212,588
Interest 6,202,683 12,970,423
Trading profits 1,036,232 2,404,686
Clearing and execution 3,103,571 3,104,366
Other 757,646 584,325
------------ ------------
Total revenues 16,729,889 29,276,388
------------ ------------
EXPENSES:
Employee compensation 6,360,693 9,693,010
Clearing and floor brokerage 714,063 1,541,858
Communications 2,064,649 3,642,121
Occupancy and equipment 3,846,852 4,192,302
Interest 1,693,594 6,888,794
Data processing charges 1,635,648 2,680,964
Professional services 2,543,534 3,309,500
Promotional 1,194,312 1,076,954
Bad debts 53,622 604,359
Other operating expenses 4,204,570 2,162,375
------------ ------------
Total expenses 24,311,537 35,792,237
------------ ------------
Loss before income taxes (7,581,648) (6,515,849)
Income tax benefit (2,570,000) (2,740,000)
------------ ------------
Net loss (5,011,648) $ (3,775,849)
============ ============
Basic net loss per share $ (3.51) $ (2.69)
Diluted net loss per share $ (3.51) $ (2.69)
Weighted average number of shares
Basic 1,426,335 1,405,203
Diluted 1,426,335 1,405,203
See accompanying notes to consolidated financial statements.
4
JB OXFORD HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
For The Three Months Ended
September 30,
---------------------------
2002 2001
---------- -----------
REVENUES:
Commissions 1,904,294 $ 2,192,224
Interest 1,881,757 3,311,968
Trading profits 294,244 186,300
Clearing and execution 1,128,441 768,945
Other 283,299 128,268
---------- -----------
Total revenues 5,492,035 6,587,705
---------- -----------
EXPENSES:
Employee compensation 2,081,000 2,514,439
Clearing and floor brokerage 303,400 417,851
Communications 638,076 1,124,678
Occupancy and equipment 1,150,683 1,352,494
Interest 544,037 1,532,821
Data processing charges 662,301 604,248
Professional services 847,777 933,559
Promotional 68,288 190,550
Bad debts 18,175 167.689
Other operating expenses 933,929 805,133
---------- -----------
Total expenses 7,247,666 9,643,462
---------- -----------
Loss before income taxes (1,755,631) (3,055,757)
Income tax benefit (670,000) (1,253,000)
---------- -----------
Net loss (1,085,631) $(1,802,757)
========== ===========
Basic net income (loss) per share $ (0.74) $ (1.28)
Diluted net income (loss) per share $ (0.74) $ (1.28)
Weighted average number of shares
Basic 1,457,999 1,404,602
Diluted 1,457,999 1,404,602
See accompanying notes to consolidated financial statements.
5
JB OXFORD HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
For The Nine Months Ended
September 30,
-------------------------------
2002 2001
------------ -------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (5,011,648) $ (3,775,849)
Adjustments to reconcile net loss to cash used in operating
activities:
Depreciation and amortization 1,262,116 1,174,566
Amortization of intangible assets 809,900 150,000
Deferred rent -- (138,534)
Provision for bad debts 53,622 604,359
Deferred income tax provision -- 75,999
Changes in assets and liabilities:
Cash segregated under federal and other regulations (93,686,685) (26,733,961)
Receivable from broker-dealers and clearing organizations 38,160,850 (15,150,049)
Receivable from customers 32,103,027 162,219,834
Other receivables 259,700 (86,308)
Marketable securities owned 378,375 (51,910)
Clearing deposits 832,521 1,834,256
Other assets (667) 15,506
Payable to broker-dealers and clearing organizations (6,777,465) (92,987,936)
Payable to customers 35,885,026 (9,014,150)
Securities sold, not yet purchased (833,122) 107,429
Accounts payable and accrued liabilities 3,007,884 (4,027,294)
Income taxes receivable 884,895 (2,886,303)
------------ -------------
Net cash provided by operating activities 7,328,330 11,329,655
------------ -------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (1,052,235) (913,043)
Acquisitions of customer accounts (3,448,321) (2,510,000)
------------ -------------
Net cash used in investing activities (4,500,556) (3,423,043)
------------ -------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Repayments of notes payable (2,740,000) (672,000)
Purchase of treasury stock -- (167,080)
------------ -------------
Net cash used in financing activities (2,740,000) (839,080)
------------ -------------
NET INCREASE IN CASH AND CASH EQUIVALENTS 87,774 7,067,532
CASH AND CASH EQUIVALENTS AT BEGINNING OF THE PERIOD 6,694,332 8,004,000
------------ -------------
CASH AND CASH EQUIVALENTS AT END OF THE PERIOD $ 6,782,106 $ 15,071,532
============ =============
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 registered 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. The financial information
presented herein has been retroactively adjusted to reflect the reverse stock
split approved by the shareholders on October 4, 2002.
For The Nine Months Ended For The Three Months Ended
September 30, September 30,
2002 2001 2002 2001
------------ ----------- ----------- -----------
BASIC EARNINGS PER SHARE:
Net loss $ (5,011,648) $(3,775,849) $(1,085,631) $(1,802,757)
------------ ----------- ----------- -----------
Loss available to common stockholders
(numerator) $ (5,011,648) $(3,775,849) $(1,085,631) $(1,802,757)
============ =========== =========== ===========
Weighted average common shares
outstanding (denominator) 1,426,335 1,405,203 1,457,999 1,404,602
============ =========== =========== ===========
Basic earnings per share $ (3.51) $ (2.69) $ (0.74) $ (1.28)
============ =========== =========== ===========
DILUTED EARNINGS PER SHARE:
Net Loss $ (5,011,648) $(3,775,849) $(1,085,631) $(1,802,757)
Interest on convertible debentures, net of
income tax -- -- -- --
------------ ----------- ----------- -----------
Loss available to common stockholders
plus assumed conversions (numerator) $ (5,011,648) $(3,775,849) $(1,085,631) $(1,802,757)
============ =========== =========== ===========
Weighted average common shares
outstanding 1,426,335 1,405,203 1,457,999 1,404,602
Weighted average options outstanding -- -- -- --
Weighted average convertible debentures -- -- -- --
Stock acquired with proceeds -- -- -- --
------------ ----------- ----------- -----------
Weighted average common shares and
assumed conversions outstanding
(denominator) 1,426,335 1,405,203 1,457,999 1,404,602
============ =========== =========== ===========
Diluted earnings per share $ (3.51) $ (2.69) $ (0.74) $ (1.28)
============ =========== =========== ===========
7
The assumed conversions have been excluded in computing the diluted
earnings per share. They have been excluded because their inclusion would reduce
the loss per share or be anti-dilutive when there is a net loss for the period.
If the assumed conversions had been used, the fully diluted shares outstanding
for the nine months and quarter ended September 30, 2002 would have been
2,218,713 and 2,232,098, respectively.
The options carry exercise prices ranging from $6.25 to $90.00 at
September 30, 2002 and 2001. The options outstanding at September 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 September 30, 2002, JBOC had net capital of $11,019,295, which was
13.9% of aggregate debit items and $9,434,639 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 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 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 July 2002, JBOC, jointly and severally with several other unrelated
respondents, was 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 Company accrued $3.0 million related to
this matter in the second quarter of 2002. 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
8
the clearing broker for Monroe Parker Securities, Inc. In November 2002, the
Company entered into a tentative settlement agreement with Secured Equity Title
and Appraisal Agency Corporation, Stanley J. Cohen, Receiver (the "Receiver"),
resolving the pending litigation between the Company, its subsidiary JBOC and
the Receiver.
NOTE 5. SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
For the Nine Months Ended Sept 30,
----------------------------------
2002 2001
(Unaudited) (Unaudited)
----------- -----------
Supplemental Disclosures of Cash Flow Information
Cash paid during the period for:
Interest $1,622,087 $6,703,443
Income taxes 330,308 70,000
Common stock issued for acquisition of customer accounts in the amount of
$896,000 for the nine months ended September 30, 2002.
NOTE 6. ACQUISITION OF CUSTOMER ACCOUNTS
During the nine months ended September 30, 2002, the Company acquired
certain customer accounts from three securities broker dealers. The cost of
these acquisitions is included in balance sheet as an intangible asset. The
Company is amortizing this intangible asset over four years, which is the
estimated useful life. Total amortization expense for 2002 and 2001, is $809,900
and $150,000, respectively. Estimated aggregate amortization expense for the
five succeeding fiscal years is as follows:
2003 $1,432,668
2004 1,432,668
2005 1,432,668
2006 1,074,501
2007 --
NOTE 7. NOTES PAYABLE
During the quarter ended September 30, 2002, the Company satisfied its
bank note payable in the amount of $2,320,000.
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.
Approximately 8,000 customer accounts, with approximately $80 million in
customer assets, and the website were transferred to the Company in late-August
2002, and an initial payment was made to the seller.
On October 4, 2002 the Company's shareholders approved a one for ten
reverse stock split, which became effective on October 15, 2002. The financial
information presented herein has been retroactively adjusted to reflect the
reverse stock split.
9
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, 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
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 continue 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
10
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
Nine Months Ended September 30, 2002 Compared with Nine Months Ended September
30, 2001
Revenues
The Company's total revenues were $16,729,889 in the first nine months of
2002, a decrease of 43% from $29,276,388 in the first nine months of 2001. The
primary reason for the decrease was a decline in interest revenue of 52% to
$6,202,683 in the current period from $12,970,423 in the first nine months of
2001. Additionally, commission revenue decreased 45% to $5,629,757 in the first
nine months of 2002 from $10,212,588 in the first nine months of 2001. Trading
profits decreased 57% to $1,036,232 in the first nine months of 2002 from
$2,404,686 in the first nine months of 2001.
Commission revenue decreased $4,582,831 or 45% to $5,629,757 in the first
nine months of 2002 compared with $10,212,588 in the first nine months of 2001.
This decline is the direct result of the decline in trading volume, which is
down 44% in 2002, compared with the same period of 2001. In the first nine
months of 2002, the Company acquired approximately 25,000 active customer
accounts from other broker dealers, as compared 11,000 accounts acquired in the
first nine months of 2001.
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 $6,767,740 or 52% to $6,202,683 in the first
nine months of 2002 compared with $12,970,423 in the first nine months of 2001.
Net interest income decreased 26% to $4,509,089 in the first nine months of 2002
from $6,081,629 in the first nine months of 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 57% to $1,036,232 in the first nine months of
2002 from $2,404,686 in the first nine months 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 50% in the first nine months of 2002 compared to the first nine months
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 $795 or 0% to $3,103,571 in the
first nine months of 2002 compared with $3,104,366 in the first nine months of
2001. There has been a decrease in the volume of trades for correspondent
business, however this was offset by the increase in the average price charged
by the Company. The increase in execution fees and order flow also offset the
decline in trade volume.
11
Expenses
Expenses totaled $24,311,537 in the first nine months of 2002, a decrease
of 32% from $35,792,237 in the first nine months 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 broker salaries, 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
nine months of 2001. Data processing expense decreased 39% to $1,635,648 in the
first nine months of 2002 from $2,680,964 in the first nine months of 2001. This
decrease is the result of the decline in customer retail and Company 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 $2,042,195 or 94% to $4,204,570 in the first nine months of
2002 from $2,162,375 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.
Amortization of customer accounts is also include in other expenses. This
amounted to $809,900 for the nine months ended September 30, 2002 as compare to
$150,000 for the same period of 2001.
Employee compensation decreased by 34% in the first nine months of 2002 to
$6,360,693 from $9,693,010 in the first nine months of 2001. This decrease is
related to the reductions in work force and the decrease in commission paid to
brokers. The Company has replaced its commissioned sales force with a salaried
sales force. Interest expense decreased 75% to $1,693,594 in the first nine
months of 2002 from $6,888,794 in the first nine months of 2001. This decrease
is in line with the interest revenue decrease discussed above.
Promotional expense increased $117,358 or 11% to $1,194,312 in the first
nine months of 2002 from $1,076,954 in the first nine months of 2001. Management
has focused on more efficient means of advertising. The Company ran a print
campaign early in the year, this campaign has been currently discontinued.
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 September 30, 2002 Compared with Quarter Ended September 30, 2001
The Company recorded a net loss of $1,085,631 for the quarter ended
September 30, 2002. This compares with a net loss of $1,802,757 for the quarter
ended September 30, 2001.
Total revenues for the third quarter of 2002 were $5,492,035, a decrease
of $1,095,670 or 17% from the comparable quarter of 2001 and a decrease of
$469,698 or 8% from the second quarter of 2002. Commission revenue decreased
$287,930 or 13% during the third quarter of 2002 compared with the third quarter
of 2001 while it increase $204,773 or 12% from the second quarter of 2002. The
changes in commission revenue track the volume of the respective periods.
12
Clearing revenue increased $359,496 or 47% during the third quarter of
2002 compared with the third quarter of 2001, while it decreased $28,046 or 2%
compared with the second quarter of 2002.
Interest revenue decreased $1,430,211 or 43% to $1,881,757 from $3,311,968
for the third quarter of 2002 compared with the third quarter of 2001. Interest
revenue decreased $536,596 or 22% from the second quarter of 2002. Net interest
income decreased $441,427 or 25% to $1,337,720 in the third quarter of 2002 from
$1,779,147 in the third quarter of 2001. Net interest income decreased $467,594
or 26% from the second quarter of 2002.
Total expenses for the third quarter of 2002 were $7,247,666, a decrease
of $2,395,796 or 25% from the comparable quarter of 2001, and an decrease of
$3,922,208 or 35% from the second quarter of 2002. Interest expense decreased
$988,784 or 65% during the third quarter of 2002 compared with the third quarter
of 2001 and decreased $69,002 or 11% compared with the second quarter of 2002.
Interest costs decreased due to declining customer credit and stock loan
balances, and lower interest rates.
Employee compensation decreased $433,439 or 17% to $2,081,000 in the third
quarter of 2002 from $2,514,439 during the third quarter of 2001, and $23,388 or
1% from the second quarter of 2002. Reductions in the company's workforce
resulted in the reduced salary costs. Promotional costs decreased $122,262 or
64% in the third quarter of 2002 compared with the third quarter of 2001, and
$644,122 or 90% from the second quarter of 2002.
Other expenses increased $128,796 or 16% in the third quarter of 2002
compared with the third quarter of 2001, and decreased $2,885,247 or 49% from
the second quarter of 2002. The decrease from the second quarter of 2002 relates
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 operations through the use of funds generated
from the business 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 September 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.
13
One measurement of the Company's liquidity is JBOC's excess net capital.
(See Note 3. Regulatory Requirements.) 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 will 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 will need to raise additional funds
in order to continue or expand its business, respond to competitive pressures,
develop additional products and services, or take advantage of strategic
opportunities.
The Company satisfied the bank note payable in the amount of $2,320,000
during the quarter ended September 30, 2002.
Liquidity at September 30, 2002
The Company's cash position increased during the first nine months of 2002
by $87,774 to $6,782,106. This compares with a net increase in cash and cash
equivalents of $7,067,532 in the first nine months 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 provided by operating activities was $7,328,330 for the first
nine months of 2002, compared with cash of $11,329,655 provided by operations
during the first nine months 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 nine months of 2002, the most significant source of cash
was the decrease in receivables from broker-dealers and clearing organizations
of $38,160,850 and a decrease in receivables from customers of $32,103,027.
Additionally, an increase in payables payables to customers of $35,885,026
provided cash from operations. These sources of cash were used to fund the
increase in cash segregated under federal and other regulations of $93,686,685
and the decrease in payables to broker-dealers and clearing organizations of
$6,777,465.
Cash Flows Used In Investing Activities
14
The net cash used in investing activities during the first nine months of
2002 was $4,500,556 compared with $3,423,043 during the same period of 2001. The
Company has invested cash of $3,448,321 during the first nine months 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 $1,052,235 of
cash uses are a direct result of capital expenditures made by the Company during
the first half of 2002 as compared with $913,043 for the first nine months 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. In
addition, the Company exercised its option on an early termination right for its
Miami office, thereby ending its lease obligation in March 2003. 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
Financing activities used cash of $2,740,000 in the first nine months of
2002, compared with cash used of $839,080 by financing activities in the first
nine months of 2001. The cash used was for the repayment of notes payable the
period ended in 2002. Cash of $672,000 was used for the repayment of notes
payable and $167,080 for the purchase of treasury stock in the period ended
2001.
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
15
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:
- - inability to generate positive cash flows and continuance of, or
increased, negative cash flows;
- - the significant demands on our resources as a result of our rapidly
evolving business;
- - 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;
- - rapid and significant fluctuation in both value and volume of the U.S.
securities markets;
- - financial risks from our clearing operations that exceed the simple risk
of loss of business if a correspondent fails;
- - delays in the introduction of new services and products;
- - increased competition;
- - any adverse effect caused by or inability to comply with government and
other regulation;
- - inability to meet net capital requirements;
- - inability to successfully identify, consummate, fund or integrate future
acquisitions;
- - inability to successfully integrate recent acquisitions;
- - inability to maintain network security and customer privacy;
- - continued decline in market activity and trade volume;
- - continued poor general economic and market conditions;
- - credit risks associated with customer margin accounts;
- - any adverse effects resulting from recent downsizing;
- - the adverse impact of decimalization;
- - significant loss of customers or inability to generate new customers;
- - systems failures;
- - stock price volatility;
- - inability to successfully defend legal, arbitration and administrative
proceedings;
- - the impact of any inability to repay our secured convertible notes to
Third Capital Partners, LLC or otherwise obtain an extension of time for
repayment
- - the impact on our liquidity if our excess net capital continues to
decrease; and
- - inability to maintain the listing of the Company's common stock on the
Nasdaq Small Cap 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.
16
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Market Risk Disclosures
The following discussion about the Company's market risk disclosures
involves forward-looking statements. Actual results could differ materially from
those projected in these forward-looking statements. See Item 2 "Management's
Discussion and Analysis of Financial Condition and Results of Operations -
Special Note Regarding Forward-Looking Statements" above. The Company is exposed
to market risk related to changes in interest rates and equity security price
risk. The Company does not have derivative financial instruments for speculative
or trading purposes.
Retail broker-dealers with clearing operations, such as the Company, are
exposed to risks that exceed the simple risk of loss of business due to the loss
of retail customers and/or correspondents. Broker-dealers engaged in clearing
operations for other correspondent broker-dealers are exposed to losses beyond
the loss of business in the event that the correspondent fails. These risks
result where the total assets, securities held in inventory, and cash of the
failed correspondent are insufficient to cover the unpaid customer debits,
together with losses which may be generated in the correspondent's trading
account. The Company has established procedures to review a correspondent's
inventory and activities in an effort to prevent such losses in the event of a
correspondent's failure.
Areas outside the control of the Company which affect the securities
market, such as severe downturns or declines in market activity, may cause
substantial financial exposure. This is particularly true with regard to the
receivables that are carried in 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.
17
ITEM 4. CONTROLS AND PROCEDURES
Based on their most recent review, which was completed within 90 days of
the filing of this report, the Company's principal executive officer and
principal financial officer have concluded that the Company's disclosure
controls and procedures are effective to ensure that information required to be
disclosed by the Company in the reports that it files or submits under the
Securities Exchange Act of 1934, as amended, is accumulated and communicated to
the Company's management, including its principal executive officer and
principal financial officer, as appropriate to allow timely decisions regarding
required disclosure and are effective to ensure that such information is
recorded, processed, summarized and reported within the time periods specified
in the SEC's rules and forms. There were no significant changes in the Company's
internal controls or in other factors that could significantly affect those
controls subsequent to the date of their evaluation.
18
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 $3.0
million in an arbitration matter conducted before the National Association of
Securities Dealers (NASD) Dispute Resolution. The Company accrued $3.0 million
related to this matter in the second quarter of 2002. 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. The Company has entered into a tentative settlement
agreement Secured Equity Title and Appraisal Agency Corporation, Stanley J.
Cohen, Receiver (the "Receiver"), resolving the pending litigation between the
Company, its subsidiary JBOC and the Receiver
This matter 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 settled with 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.
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.
19
ITEM 5. OTHER INFORMATION
On October 4, 2002 the Company's shareholders approved a one for ten
reverse stock split which became effective on October 15, 2002.
On August 13, 2002, the Company received notice from Nasdaq warning that
the Company's common stock failed to comply with the Nasdaq Small Cap rules for
continued listing as a result of closing below the $1.00 minimum bid price
requirement for the prior 30 consecutive trading days. The Company was given 180
calendar days, or until February 23, 2002, to regain compliance. On October 28,
2002, the Company regained compliance with the minimum bid price requirement
when the bid price of the Company's common stock reached at least $1.00 for 10
consecutive trading days. The Company was notified by the Nasdaq that it had
regained compliance by letter dated October 29, 2002.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(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 third quarter, the Company did not file a Report on Form 8-K.
20
Pursuant to the requirements of the Securities Exchange Act of 1934, JB
Oxford Holdings, Inc. has duly caused this report to be signed on its behalf by
the undersigned thereunto duly authorized.
JB Oxford Holdings, Inc.
/s/ Michael J. Chiodo
Michael J. Chiodo
Chief Financial Officer
November 12, 2002
21
CERTIFICATIONS OF PRINCIPAL EXECUTIVE OFFICER
AND PRINCIPAL FINANCIAL OFFICER REQUIRED
PURSUANT TO SECTION 302 OF THE
SARBANES-OXLEY ACT OF 2002
I, Christopher L. Jarratt, certify that:
1. I have reviewed this quarterly report on Form 10-Q of JB Oxford
Holdings, Inc.;
2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact necessary
to make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by this
quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this quarterly report is
being prepared;
b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to the filing
date of this quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):
a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have identified
for the registrant's auditors any material weaknesses in internal
controls; and
b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
Dated: November 12, 2002 By: /s/ Christopher L. Jarratt
------------------------------------
Christopher L. Jarratt
Chief Executive Officer
22
I, Michael J. Chiodo, certify that:
1. I have reviewed this quarterly report on Form 10-Q of JB Oxford
Holdings, Inc.;
2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact necessary
to make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by this
quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this quarterly report is
being prepared;
b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to the filing
date of this quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):
a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have identified
for the registrant's auditors any material weaknesses in internal
controls; and
b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
Dated: November 12, 2002 By: /s/ Michael J. Chiodo
------------------------------------
Michael J. Chiodo
Chief Financial Officer
23