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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 March 31, 2003
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ______________ to _______________
Commission File Number 0-16240
JB Oxford Holdings, Inc.
- --------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
UTAH 95-4099866
- ---- ----------
(State of incorporation or organization) (I.R.S. Employer Identification No.)
9665 Wilshire Blvd., Suite 300; Beverly Hills, 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 May 8, 2003, the
Registrant had the following number of shares of common stock, $0.01 par value
per share, outstanding: 1,506,695.
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
JB Oxford Holdings, Inc. and Subsidiaries
Consolidated Statements of Financial Condition
March 31, 2003 December 31,
(Unaudited) 2002
------------ ------------
Assets:
Cash and cash equivalents $ 983,181 $ 5,579,755
Cash and cash equivalents segregated under federal and other
regulations 156,885,420 146,180,567
Receivable from broker-dealers and clearing organizations 27,940,773 8,349,233
Receivable from customers (net of allowance for doubtful accounts of
$2,716,761 and $2,701,183) 69,440,744 82,418,263
Other receivables 1,034,111 950,278
Marketable securities owned - at market value 2,480,087 629,083
Notes receivable from shareholder 2,500,000 2,500,000
Furniture, equipment, and leasehold improvements (at cost - net of
accumulated depreciation and amortization of $5,427,914 and $5,088,794) 2,359,694 2,624,147
Income taxes receivable 4,077,244 3,742,244
Deferred income taxes 1,862,019 1,862,019
Clearing deposits 4,555,674 4,507,266
Intangible assets (net of accumulated amortization of $2,486,391
and $2,115,771) 4,386,297 4,756,918
Other assets 707,275 484,872
------------ ------------
Total assets $279,212,519 $264,584,645
============ ============
See accompanying notes.
2
JB Oxford Holdings, Inc. and Subsidiaries
Consolidated Statements of Financial Condition
March 31, 2003 December 31,
(Unaudited) 2002
------------- -------------
Liabilities and shareholders' equity:
Liabilities:
Payable to broker-dealers and clearing organizations $ 48,115,580 $ 38,813,043
Payable to customers 196,793,214 193,595,006
Securities sold, not yet purchased - at market value 193,800 138,484
Accounts payable and accrued liabilities 10,117,799 7,507,410
Loans from shareholders 5,418,696 5,418,696
Notes payable 2,889,375 2,889,375
------------- -------------
Total liabilities 263,528,464 248,362,014
------------- -------------
Commitments and contingencies
Shareholders' equity:
Common stock ($.01 par value, 100,000,000 shares authorized; 1,589,939
shares issued) 15,899 15,899
Additional paid-in capital 17,496,396 17,496,396
Retained earnings (deficit) (157,397) 1,329,564
Treasury stock at cost, 83,244 and 130,494 shares (1,670,843) (2,619,228)
------------- -------------
Total shareholders' equity 15,684,055 16,222,631
------------- -------------
Total liabilities and shareholders' equity $ 279,212,519 $ 264,584,645
============= =============
See accompanying notes.
3
JB Oxford Holdings, Inc. and Subsidiaries
Consolidated Statements Of Operations
(Unaudited)
For The Three Months Ended
March 31,
--------------------------
2003 2002
----------- -----------
Revenues:
Clearing and execution $ 789,383 $ 818,643
Trading profits 560,992 352,699
Commissions 2,012,616 2,025,942
Interest 1,522,312 1,902,573
Other 104,022 176,264
----------- -----------
Total Revenues 4,989,325 5,276,121
----------- -----------
Expenses:
Employee compensation 1,934,739 2,175,305
Clearing and floor brokerage 258,550 185,627
Communications 543,256 782,124
Occupancy and equipment 1,143,311 1,157,468
Interest 333,495 536,518
Data processing charges 532,399 469,145
Professional services 591,067 722,731
Promotional 66,064 413,614
Bad debts 15,578 64,332
Other operating expenses 572,526 (612,867)
----------- -----------
Total Expenses 5,990,985 5,893,997
----------- -----------
Loss before income taxes (1,001,660) (617,876)
Income tax benefit (320,389) (210,000)
----------- -----------
Net Loss $ (681,271) $ (407,876)
=========== ===========
Basic Net Loss Per Share $ (0.45) $ (0.29)
Diluted Net Loss Per Share $ (0.45) $ (0.29)
Weighted average number of shares
Basic 1,506,170 1,396,144
Diluted 1,506,170 1,396,144
See accompanying notes.
4
JB Oxford Holdings, Inc. and Subsidiaries
Consolidated Statements Of Cash Flows
(Unaudited)
For The Three Months Ended
March 31,
------------------------------
2003 2002
------------- -------------
Increase (decrease) in cash and cash equivalents:
Cash flows from operating activities:
Net loss $ (681,271) $ (407,876)
Adjustments to reconcile net loss to net cash provided by (used in)
operating activities:
Depreciation and amortization 709,741 377,606
Deferred rent -- (40,003)
Provision for bad debts 15,578 64,332
Benefit for deferred taxes -- --
Changes in assets and liabilities:
Cash segregated under federal and other regulations (10,704,853) (108,572,009)
Receivable from broker-dealers and clearing organizations (19,591,540) 28,274,149
Receivable from customers 12,961,941 (44,136,057)
Other receivables (83,833) 843,504
Securities owned (1,851,004) 44,982
Clearing deposits (48,408) 425,925
Other assets (222,403) 21,779
Payable to broker-dealers and clearing organizations 9,302,537 94,205,490
Payable to customers 3,198,208 31,087,989
Securities sold not yet purchased 55,316 (774,084)
Accounts payable and accrued liabilities 2,753,084 (2,462,303)
Income taxes payable/receivable (335,000) (210,731)
------------- -------------
Net cash used in operating activities (4,521,907) (1,257,307)
------------- -------------
Cash flows from investing activities:
Acquisitions of customer accounts -- (1,050,000)
Capital expenditures (74,667) (33,496)
------------- -------------
Net cash used in investing activities (74,667) (1,083,496)
------------- -------------
Cash flows from financing activities:
Repayments of notes payable -- (168,000)
------------- -------------
Net cash used in financing activities -- (168,000)
------------- -------------
Net (decrease) in cash and cash equivalents (4,596,574) (2,508,803)
Cash and cash equivalents at beginning of the quarter 5,579,755 6,694,332
------------- -------------
Cash and cash equivalents at end of the quarter $ 983,181 $ 4,185,529
============= =============
See accompanying notes.
5
JB Oxford Holdings, Inc. and Subsidiaries
Notes To Consolidated Financial Statements
(Unaudited)
Note 1. Company's Quarterly Report Under Form 10-Q
In the opinion of Management, the accompanying unaudited financial
statements contain all adjustments (all of which are normal and recurring in
nature) necessary to present fairly the financial statements of JB Oxford
Holdings, Inc. and subsidiaries (the "Company") for the periods presented. The
accompanying financial information should be read in conjunction with the
Company's 2002 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 Three Months Ended March 31,
2003 2002
----------- -----------
Basic Earnings Per Share
Net loss $ (681,271) $ (407,876)
----------- -----------
Income available to common stockholders (numerator) (681,271) $ (407,876)
=========== ===========
Weighted average common shares outstanding (denominator) 1,506,170 1,396,144
=========== ===========
Basic Earnings Per Share $ (0.45) $ (0.29)
=========== ===========
Diluted Earnings Per Share
Net loss $ (681,271) $ (407,876)
Interest on convertible debentures, net of income tax -- --
----------- -----------
Income available to common stockholders plus assumed conversions
(numerator) $ (681,271) $ (407,876)
=========== ===========
Weighted average common shares outstanding 1,506,170 1,396,144
Weighted average options outstanding -- --
Weighted average convertible debentures -- --
Stock acquired with option proceeds -- --
----------- -----------
Weighted average common shares and assumed conversions outstanding 1,506,170 1,396,144
(denominator)
=========== ===========
Diluted Earnings Per Share $ (0.45) $ (0.29)
=========== ===========
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 would have been used, the fully
diluted shares outstanding for the quarters ended March 31, 2003 and 2002 would
be 1,709,400 and 2,203,993, respectively.
6
The options carry exercise prices ranging from $2.20 to $91.25 at March 31,
2003 and 2002. Options to purchase 254,725 shares of common stock at March 31,
2003 expire at various dates through October 4, 2012.
Note 3. Stock Options
SFAS No.123, "Accounting for Stock-Based Compensation," requires the Company to
provide pro forma information regarding net income and earnings per share in
accordance with the compensation based method prescribed in SFAS No. 123. SFAS
No 148 Accounting for Stock-Based Compensation - Transition and Disclosure"
requires the Company to provide information required by SFAS 123 on a quarterly
basis. No options were issued during the quarters ended March 31, 2003 and 2002,
therefore there is no proforma net income or earnings per share to reports for
those respective periods.
A summary of the status of the Company's stock options as of March 31 2003, and
2002, and changes during the periods ending on those dates is presented below:
March 31, 2002 March 31, 2001
Weighted Weighted
Shares average Shares average
----------- ------------ ------------- ---------
Outstanding at
be-ginning of period 256,200 $26.88 383,120 $26.88
Granted -- -- -- --
Exercised -- -- -- --
Forfeited (1,475) 11.06 (4,015) 19.29
Outstanding at end of
period 254,725 15.75 379,105 26.96
Options exercisable
at quarter-end 253,225 15.88 318,441 $27.60
Weighted-average fair
value of options
granted during the
period $ -- $ --
Note 4. Regulatory Requirements
JBOC is subject to Rule 15c3-1 of the Securities Exchange Act of 1934, as
amended, which requires the maintenance of minimum net capital. JBOC has elected
to use the alternative method permitted by the rule, which requires it to
maintain minimum net capital, as defined, equal to the greater of $250,000 or
two percent of aggregate debit balances arising from customer transactions, as
defined. The rule also provides, among other things, for a restriction on the
payment of cash dividends, payments on subordinated borrowings or the repurchase
of capital stock if the resulting excess net capital would fall below five
percent of aggregate debits.
At March 31, 2003, JBOC had net capital of $8,444,661, which was 10.2% of
aggregate debit items and $6,790,990 in excess of the minimum amount required.
At December 31, 2002, JBOC had net capital of $9,452,719, which was 10.5% of
aggregate debit items and $7,656,245 in excess of the minimum amount required.
7
Note 5. Contingent Liabilities
The Company and its subsidiaries are a party to a number of pending legal
or administrative proceedings incidental to the Company's business, including
customer brokerage transactions claims as well as matters related to the
Company's clearing services. All of the legal, arbitration and administrative
proceedings have arisen in the ordinary conduct of its business. Those that may
have a significant impact on the Company have been reported in previous filings.
There has been no significant change in legal and administrative proceedings
reports in the Company's Form 10-K at December 31, 2002, except as follows:
In February 2003, the Los Angeles office of the United States Attorney's
Office (the "USAO") agreed to extend the due date on the $500,000 payment then
due under the Settlement Agreement. The Company made a partial payment of
$50,000 on March 31, 2003, and the USAO has extended the time for any further
payment until June 2, 2003. The final payment of $500,000 remains due on
February 14, 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 and due to the payments made to date, the
amount accrued has been reduced to $950,000.
Note 6. Supplemental Disclosures of Cash Flow Information
For The Three Months Ended March 31,
------------------------------------
2003 2002
-------- --------
Supplemental Disclosures of Cash Flow Information
Cash paid during the quarter for:
Interest $281,102 $546,485
Income taxes 9,233 --
Supplemental disclosure of non-cash investing and financing activities:
- -----------------------------------------------------------------------
Treasury stock bonus issued to employees in the amount of $948,385 for 2003.
Common stock issued and future payable incurred for acquisition of customer
accounts in the amount of $911,000 for 2002.
Note 7. Liquidity
We finance our operations through the use of funds generated from the business
of its subsidiaries, mainly JBOC. JBOC holds the majority of our corporate
assets consisted of cash or assets readily convertible to cash. Our 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 4,
"Regulatory Requirements," to the financial statements for regulatory
requirements of the Company.
8
One measurement of our liquidity is JBOC's excess net capital. (See Note 4.
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 5, "Contingent Liabilities,"
to the financial statements. If this trend continues, our liquidity could
further decrease and we will need to raise additional capital. If capital is
raised through the issuance of equity securities, or securities which are
convertible into equity securities, our 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 our 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 us.
Notwithstanding this trend, we currently expects that our 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, we will need to raise additional funds in order to
continue its business, respond to competitive pressures, develop additional
products and services, or take advantage of strategic opportunities.
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 2002, our annual
consolidated revenues were $22,387,879, which consisted primarily of commission
and interest income from our discount and electronic brokerage division.
Recent Developments
- -------------------
Our main operating subsidiary, JB Oxford & Company has filed for permission from
the NASD to transfer its name and retail accounts to another of our wholly owned
subsidiaries, Stocks 4 Less, Inc. If approved, Stocks 4 Less will be renamed JB
Oxford & Company and will become an introducing retail broker. The existing JB
Oxford & Company will be renamed National Clearing Corp. and will continue to
provide clearing and execution services and market making activities, but will
no longer maintain retail accounts. believe that splitting the retail discount
and electronic brokerage services from the clearing and execution services will
better position us to provide clearing services to other retail brokerage firms
that may compete with JB Oxford's retail brokerage services.
9
On April 30, 2003, as required by applicable SEC rules, we filed the following
notice with the SEC and the NASD: In accordance with SEC Rule 15c3-3(i), 17
C.F.R. 240.15c3-3(i), please be advised that the firm has been notified by the
SEC, in the course of a routine examination, that certain of the securities in
its reserve deposit accounts constitute non-qualified securities and that
accordingly, the firm has had a historical deficiency in its required reserve
deposits since in or about September 2002. The range of the deficiencies has
been between approximately $120 and $145 million dollars.
Discount 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 sites
(www.jboxford.com and www.mrstock.com) provide market quotes, charts, company
research, and customer account information, such as cash balances, portfolio
balances and similar information.
The discount brokerage division has suffered substantially with the downturn in
the brokerage industry over the past three years. We believe that the Company
can recover from the volume declines in this business line, through 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 division will make a positive contribution to our
overall brokerage operations.
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 200 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.
10
Results of Operations
- ---------------------
Revenues
- --------
Our total revenues were $4,989,325 in the first quarter 2003, a decrease of 5%
from $5,276,121 in the first quarter of 2002. The primary reason for the
decrease was a decline in interest revenue of 20% to $1,522,312 in the current
quarter from $1,902,573 in the first quarter of 2002. Additionally, commissions
decreased 1% to $2,012,616 in the first quarter of 2002 from $2,025,942 in the
first quarter of 2002. Trading profits increased 59% to $560,992 in the first
quarter of 2003 from $352,699 in the first quarter of 2002.
Commission revenue decreased $13,326 or 1% to $2,012,616 in the first quarter
2003 compared to $2,025,942 in the first quarter of 2002. Trading volumes and
commission revenue appear to be leveling out. The number of trades executed for
customers is approximately the same in the first quarter of 2003 compared to the
first quarter of 2002. For 2003, we anticipate commission revenue will continue
to track the overall trading volumes within the industry. We are continuing to
look for opportunities to grow its business through acquisitions of accounts
from compatible discount and on-line brokerage operations of other firms.
Although the we have completed acquisitions in the past year, there can be no
assurance that the Company will complete any additional acquisitions, or if
completed, that it will be successful.
Interest revenues decreased $380,261 or 20% to $1,522,312 in the first quarter
2003 compared to $1,902,573 in the first quarter of 2002. Net interest income
decreased 13% from $1,366,055 in the first quarter 2002 to $1,188,817 in the
first quarter 2003. The changes in interest revenues are consistent with usual
fluctuation of debit balances in brokerage margin accounts as well as changes in
broker-call rates on which the interest charged to customers is calculated.
Rates have not changed significantly over the past year, declining margin
balances has been the most significant factor for the decrease.
Trading profits increased 59% to $560,992 in the first quarter of 2003 from
$352,699 in the first quarter of 2002. The increase in trading profits resulted
from our utilization of outside sources of order flow during the 2003. Volumes
in the inventory accounts have decrease slightly, however this has resulted from
our combining certain transactions for accounting purposes to reduce transaction
costs. Management anticipates trading profits will continue to track the volumes
of the discount and on-line brokerage operation for 2003, however, management is
continuing to exploring new sources of order flow for us to utilize.
Clearing and execution revenues decreased $29,260 or 4% to $789,383in the first
quarter 2003 compared to $818,643 in the first quarter of 2002. The decrease
represents the decrease in correspondent trades cleared by us, as a result of
declining volumes over the past three years the number of correspondent brokers
have declined. It is anticipated that these revenues will track the transaction
volume of the industry. we will continue to search for opportunities to attract
new correspondent broker business.
11
Expenses
- --------
Expenses totaled $5,990,985 for the first quarter of 2003, an increase of 2%
from $5,893,997 in the first quarter of 2002. Included in the 2002 expenses is
the reversal of an accrual of $960,000 for an anticipated payment to the
Securities and Exchange Commission. This reduced the total expenses for 2002. To
exclude this reversal from the analysis would indicate that expenses decreased
$863,012 or 15% during the first quarter of 2003 compared to the first quarter
of 2002. The decreases in certain expense items reflect the impact of cost
containment measures taken by management during the past several years. Many of
our expenses, including clearing expense, interest expense, and data processing
charges are directly related to commission revenues, interest revenues and
trading revenues.
Employee compensation decreased by 11% in the first quarter of 2003 to
$1,934,739 from $2,175,305 in the first quarter of 2002. Interest expense
decreased 38% to $333,495 in the first quarter of 2003 from $536,518 in the
first quarter of 2002. These decreases are in line with the revenue decreases
discussed above.
Promotional expenses decreased $347,550 or 84% to $66,064 in the first quarter
of 2003 from $413,614 in the first quarter of 2002. These costs have decreased
as management has focused on more efficient means of advertising. During the
first quarter of 2002 we ran a print campaign, which was subsequently
discontinued. Management will continue to look at advertising as a means of name
branding while also looking to increase customer accounts through acquisitions.
Other expense increased by $1,185,393 during the first quarter of 2003 compared
to the first quarter of 2002. The most significant reason for the increase is
due to the reversal of the amount accrued for an anticipated payment to the
Securities and Exchange Commission of $960,000 which occurred in the first
quarter of 2002. Additionally, amortization expense of intangible assets
increased $343,121 to $370,621 during the first quarter of 2003 from $27,500 for
the first quarter of 2002.
Management continues to examine ways to contain costs and improve efficiencies.
We will continue to seek ways to cut costs and add revenues.
Liquidity and Capital Resources
- -------------------------------
We finance our operations through the use of funds generated from the business
of its subsidiaries, mainly JBOC. JBOC holds the majority of our corporate
assets consisted of cash or assets readily convertible to cash. Our 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 4,
"Regulatory Requirements," to the financial statements for regulatory
requirements of the Company.
12
One measurement of our liquidity is JBOC's excess net capital. (See Note 4.
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 5, "Contingent Liabilities,"
to the financial statements. If this trend continues, our liquidity could
further decrease and we will need to raise additional capital. If capital is
raised through the issuance of equity securities, or securities which are
convertible into equity securities, our 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 our 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 us.
Notwithstanding this trend, we currently expects that our 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, we will need to raise additional funds in order to
continue its business, respond to competitive pressures, develop additional
products and services, or take advantage of strategic opportunities.
Liquidity at March 31, 2003
- ---------------------------
Our cash position decreased during the first quarter of 2003 by $4,596,574 to
$983,181. This compares with a net decrease in cash and cash equivalents of
$2,508,803 in the first quarter of 2002. The fluctuation in our 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 $4,521,907 for the first quarter of
2003, compared to cash of $1,257,307 used in operations during the first quarter
of 2002. Our net cash provided by or used in operating activities is impacted by
changes in the brokerage-related assets and liabilities of JBOC.
During the first quarter of 2003, the most significant source of cash was the
increase in payables to broker-dealers and clearing organizations of $9,302,537
and was the result of increased stock loan activity. Additionally, payables to
customers increased to provide cash of $3,198,208. These sources of cash was
used by the increase in cash segregated under federal and other regulations
which increased $10,704,853 and an increase in receivable from broker-dealer and
clearing organizations of $19,591,540.
Cash Flows Used In Investing Activities
- ---------------------------------------
The net cash used in investing activities during the first quarter of 2003 was
$74,667 compared with $1,083,496 during the same quarter of 2002. Cash used in
the first quarter of 2003 consisted of $74,667 used for capital expenditures, as
compared to $33,496 used for capital expenditures in the first quarter of 2002.
We used additional cash of $1,050,000 to acquire the right to service certain
customer accounts during the first quarter of 2002. We presently have no plans
to open additional offices and no significant commitments for capital
expenditures, therefore, our requirement for capital resources is not material
to the business as a whole. We continues to look for opportunity to grow its
business through acquisition and if acquisitions are made, we may expend its
resources on an investment in such an acquisition.
13
Cash Flows From Financing Activities
- ------------------------------------
We had no cash transactions for financing activities in the first quarter of
2003, compared to $168,000 cash used by financing activities in the first
quarter of 2002. The cash used in 2002 was for the repayment of notes payable.
Recent Accounting Pronouncements
- --------------------------------
In June 2001, the FASB issued SFAS No. 141, "Business Combinations" and SFAS No.
142, "Goodwill and Other Intangible Assets." We were required to adopt SFAS No.
141 upon issuance. As such, all business combinations for which we may
prospectively enter must be accounted for as purchase transactions. We 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. We did not have
any goodwill as of December 31, 2002. The adoption of this statement did not
have a material effect on our 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. We adopted this
statement on January 1, 2002. The adoption of this statement did not have a
material effect on our financial position or results of operations.
In November 2002, the Financial Accounting Standards Board issued Interpretation
No. 45, "Guarantor's Accounting and Disclosure Requirements for Guarantees,
Including Indirect Guarantees of Indebtedness of Others, (FIN 45) to clarify
accounting and disclosure requirements relating to a guarantor's issuance of
certain types of guarantees." FIN 45 requires entities to disclose additional
information about certain guarantees, or groups of similar guarantees, even if
the likelihood of the guarantor's having to make any payments under the
guarantee is remote. The disclosure provisions are effective for financial
statements for fiscal years ended after December 15, 2002. For certain
guarantees, the interpretation also requires that guarantors recognize a
liability equal to the fair value of the guarantee upon its issuance. This
initial recognition and measurement provision is to be applied only on a
prospective basis to guarantees issued or modified after December 31, 2002. The
adoption of FIN 45 is not expected to have a significant impact on the Company's
financial position or results of operations.
In December 2002, the FASB issued SFAS No. 148 "Accounting for Stock Based
Compensation -Transition and Disclosure-an amendment of FASB No.123." This
Statement amends SFAS No.123 "Accounting for Stock-Based Compensation" (SFAS No.
123) to provide alternative methods of transition for a voluntary change to the
fair value based method of accounting for stock-based employee compensation. In
addition, the Statement amends the disclosure requirements of SFAS No. 123 to
require prominent disclosures in both annual and interim financial statements
about the method of accounting for stock-based compensation and the effect of
the method used on reported
14
results. This Statement is effective for fiscal years beginning after December
15, 2002. The Company plans to continue to account for stock-based employee
compensation under APB 25 to provide disclosure of the impact of the fair value
based method on reported income. Employee stock options have characteristics
that are significantly different from those of traded options, including vesting
provisions and trading limitations that impact their liquidity. Therefore, the
existing option pricing models, such as Black-Scholes, do not necessarily
provide a reliable measure of the fair value of employee stock options. Refer to
Note 13 of the Notes to Consolidated Financial Statements for proforma
disclosure of the impact of stock options utilizing the Black-Scholes valuation
method.
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, 2002 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;
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, consummate, 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;
15
o stock price volatility;
o inability to successfully defend legal, arbitration and administrative
proceedings;
o 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
o the impact on our liquidity if our excess net capital continues to
decrease;
o inability to maintain the listing of our common stock on the Nasdaq Small
Cap Market;
o Any sanctions imposed on us by the SEC or NASD as a result of our recent
failure to comply with the reserve account requirements of SEC Rule 15c3-3;
and
o any inability by us to comply with SEC or NASD rules and regulations in the
future.
These risks and uncertainties are not the only ones we face, 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 our 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. we are 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 ourselves, 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. We have 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. However, there can be no assurance that our procedures
will be effective in avoiding losses.
Areas outside of our control which affect the securities market, such as severe
downturns or declines in market activity, may cause substantial financial
exposure. This is particularly true with regard to the receivables that are
carried in customers' margin accounts. A significant decline in market value may
decrease the value of securities pledged in the margin accounts to a point that
the margin loans would exceed such value. While we are authorized to liquidate
the securities and to utilize the correspondent's account balances to cover any
shortfall, in a worst case scenario, such collateral may not be sufficient to
cover all losses.
16
Interest Rate Sensitivity and Financial Instruments
- ---------------------------------------------------
For its working capital and reserves that are required to be segregated under
federal or other regulations, the Company invests primarily in U.S. Treasury
securities under agreements to resell. These agreements have maturity dates
ranging from one to seven days, and do not present a material interest rate
risk.
Equity Price Risk
- -----------------
JBOC acts as a market maker for approximately 200 public corporations whose
stocks are traded on the NASDAQ National Market System, NYSE or other national
exchanges. The Company selects companies in which it makes a market based on a
review of the current market activity, and also to facilitate trading activity
of its own and correspondent's clients. Market making may result in a
concentration of securities which may expose the Company to additional risk;
however, the Company does not maintain a significant inventory of equity
securities.
Item 4. CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
Within 90 days prior to the date of this report, we carried out an evaluation
(the "Evaluation"), under the supervision and with the participation of our
President and Chief Executive Officer ("CEO") and Chief Financial Officer
("CFO"), of the effectiveness of the design and operation of our disclosure
controls and procedures ("Disclosure Controls"). Based on the Evaluation, our
CEO and CFO concluded that, subject to the limitations noted below, our
Disclosure Controls are effective in timely alerting them to material
information required to be included in our periodic SEC reports.
Changes in Internal Controls
We have also evaluated our internal controls for financing reporting, and there
have been no significant changes in our internal controls or in other factors
that could significantly affect those controls subsequent to the date of their
last evaluation.
Limitations on the Effectiveness of Controls
Our management, including our CEO and CFO, does not expect that our Disclosure
Controls and internal controls will prevent all error and all fraud. A control
system, no matter how well conceived and operated, can provide only reasonable,
not absolute, assurance that the objectives of the control system are met.
Further, the design of a control system must reflect the fact that there are
resource constraints, and the benefits of controls must be considered relative
to their costs. Because of the inherent limitations in all control systems, no
evaluation of controls can provide absolute assurance that all control issues
and instances of fraud, if any, within the company have been detected. These
inherent limitations include the realities that judgments in decision-making can
be faulty, and that breakdowns can occur because of simple error or mistake.
Additionally, controls can be circumvented by the individual acts of some
persons, by collusion of two or more people, or by management or board override
of the control.
17
The design of any system of controls also is based in part upon certain
assumptions about the likelihood of future events, and there can be no assurance
that any design will succeed in achieving its stated goals under all potential
future conditions; over time, control may become inadequate because of changed
in conditions, or the degree of compliance with the policies or procedures may
deteriorate. Because of the inherent limitations in a cost-effective control
system, misstatements due to error or fraud may occur and not be detected.
CEO and CFO Certifications
Appearing immediately following the Signatures section of this report there are
Certifications of the CEO and the CFO. The Certifications are required in
accordance with Section 302 of the Sarbanes-Oxley Act of 2002 (the Section 302
Certifications). This Item of this report, which you are currently reading is
the information concerning the Evaluation referred to in the Section 302
Certifications and this information should be read in conjunction with the
Section 302 Certifications for a more complete understanding of the topics
presented.
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
We and our subsidiaries are a party to a number of pending legal, arbitration or
administrative proceedings, including suits involving various customers that
allege damages arising as a result of brokerage transaction claims as well as
matter related to our clearing services. All of the legal, arbitration and
administrative proceedings have arisen in the ordinary conduct of our business.
Those that may have a significant impact on us have been reported in previous
filings and the following is a description of any material developments or
changes in such legal proceedings.
In May 2002, we amended our 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 entered into by us in 2001 to
settle certain charges brought against it related alleged conduct which occurred
in or about 1997 or earlier. Information regarding the charges and settlement
have been previously reported in our Form 10-Q for the quarter ended March 31,
2002 and our Form 10-K for the year ended December 31, 2002. In February 2003,
the Los Angeles office of the USAO agreed to extend the due date on the $500,000
payment then due under the Settlement Agreement. We made a partial payment of
$50,000 on March 31, 2003, and the USAO has extended the time for any further
payment until June 2, 2003. The final payment of $500,000 remains due on
February 14, 2004. We originally accrued payments to the USAO and SEC totaling
approximately $3.0 million. Because the SEC investigation closed without action
or monetary assessment and due to the payments made to date, the amount accrued
has been reduced to $950,000.
Item 2. Changes in Securities and Use of Proceeds
In February 2003, we reported on Form 8-K that we had entered into a Note
Extension Agreement whereby the maturity dates of our $3,418,696 Senior Secured
Convertible Note and our $2,000,000 Secured Convertible Note, both held by Third
Capital Partners, LLC, were extended for an additional
18
year to December 31, 2003. As consideration for the extension, and to reflect
the effect of the reverse split which occurred in October 2002, the conversion
rate on the Notes was adjusted to $2.67 per share, which was the closing price
of our common stock on the Nasdaq SmallCap Market on December 31, 2002. Under
the adjusted conversion rate, the Notes are convertible into 2,029,474 shares of
common stock. The issuance of the convertible notes was not registered under the
Securities Act of 1933 in reliance upon the exemption set forth in Section 4(2)
of that Act relating to transactions by an issuer not involving a public
offering.
Certain subsidiary companies, as part of their normal broker-dealer activities,
have minimum capital requirements imposed by regulatory agencies. See Note 4,
"Regulatory Requirements," to the financial statements. These requirements may
restrict the payment of dividends.
Item 5. Other Events
On April 30, 2003, as required by applicable SEC rules, we filed the following
notice with the SEC and the NASD: In accordance with SEC Rule 15c3-3(i), 17
C.F.R. 240.15c3-3(i), please be advised that the firm has been notified by the
SEC, in the course of a routine examination, that certain of the securities in
its reserve deposit accounts constitute non-qualified securities and that
accordingly, the firm has had a historical deficiency in its required reserve
deposits since in or about September 2002. The range of the deficiencies has
been between approximately $120 and $145 million dollars.
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, filed herewith.
99.2 Certification of Michael J. Chiodo, Chief Financial Officer,
pursuant to Section 906 of Sarbanes-Oxley Act of 2002, filed herewith.
(b) Reports on Form 8-K.
During the first quarter, we filed a Report on Form 8-K, dated February
13, 2003,. reporting the note extension agreement between us and Third Capital
Partners, LLC.
19
Pursuant to the requirements of the Securities Exchange Act of 1934, JB
Oxford Holdings, Inc. has duly caused this report to be signed on its behalf by
the undersigned thereunto duly authorized.
JB Oxford Holdings, Inc.
/s/ Michael J. Chiodo
Michael J. Chiodo
Chief Financial Officer
May 13, 2002
20
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: May 13, 2003 By: /s/ Christopher L. Jarratt
---------------------------
Christopher L. Jarratt
Chief Executive Officer
21
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: May 13, 2003 By: /s/ Michael J. Chiodo
-------------------------------
Michael J. Chiodo
Chief Financial Officer
22