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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 SEPTEMBER 30, 2003
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, 2003, the
Registrant had the following number of shares of common stock, $0.01 par value
per share, outstanding: 1,626,695.
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
JB OXFORD HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
Sept 30, 2003 December 31, 2002
(Unaudited)
-------------------- --------------------
ASSETS:
Cash and cash equivalents $ 4,074,507 $ 5,579,755
Cash and cash equivalents segregated under federal and other
regulations 142,288,198 146,180,567
Receivable from broker-dealers and clearing organizations 20,820,916 8,349,233
Receivable from customers (net of allowance for doubtful accounts of
$2,756,469 and $2,701,183) 69,631,664 82,418,263
Other receivables 556,731 950,278
Marketable securities owned - at market value 32,683 629,083
Notes receivable from shareholder 2,500,000 2,500,000
Furniture, equipment, and leasehold improvements (at cost - net of
accumulated depreciation and amortization of $6,053,302 and $5,088,794) 1,829,990 2,624,147
Income taxes receivable 1,750,178 3,742,244
Deferred income taxes 982,019 1,862,019
Clearing deposits 9,752,991 4,507,266
Intangible assets (net of accumulated amortization of
$3,217,739 and $2,115,771) 3,298,776 4,756,918
Other assets 550,935 484,872
------------ ------------
TOTAL ASSETS $258,069,588 $264,584,645
============ ============
See accompanying notes.
2
JB OXFORD HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
Sept 30, 2003 December
(Unaudited) 31, 2002
------------- -------------
LIABILITIES AND SHAREHOLDERS' EQUITY:
LIABILITIES:
Payable to broker-dealers and clearing organizations $ 28,567,456 $ 38,813,043
Payable to customers 199,173,514 193,595,006
Securities sold, not yet purchased - at market value 2,664,103 138,484
Accounts payable and accrued liabilities 5,598,345 7,507,410
Loans from shareholders 5,418,696 5,418,696
Notes payable 3,500,486 2,889,375
------------- -------------
TOTAL LIABILITIES 244,922,600 248,362,014
------------- -------------
COMMITMENTS AND CONTINGENCIES
SHAREHOLDERS' EQUITY:
Common stock ($.01 par value, 100,000,000 shares
authorized; 1,709,939 and 1,589,939 shares issued) 17,099 15,899
Additional paid-in capital 17,883,996 17,496,396
Retained earnings (deficit) (3,083,264) 1,329,564
Treasury stock at cost, 83,244 and 130,494 shares (1,670,843) (2,619,228)
------------- -------------
TOTAL SHAREHOLDERS' EQUITY 13,146,988 16,222,631
------------- -------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 258,069,588 $ 264,584,645
============= =============
See accompanying notes.
3
JB OXFORD HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
For The Three Months Ended
September 30,
------------------------------
2003 2002
----------- -----------
REVENUES:
Commissions 2,193,145 $ 1,904,294
Interest 1,309,569 1,881,757
Trading profits (losses) (265,874) 294,244
Clearing and execution 716,849 1,128,441
Other 15,893 283,299
----------- -----------
Total revenues 3,969,582 5,492,035
----------- -----------
EXPENSES:
Employee compensation 1,593,313 2,081,000
Clearing and floor brokerage 249,418 303,400
Communications 531,684 638,076
Occupancy and equipment 973,675 1,150,683
Interest 250,563 544,037
Data processing charges 614,275 662,301
Professional services 436,853 847,777
Promotional 46,997 68,288
Bad debts 20,208 18,175
Other operating expenses 966,976 933,929
----------- -----------
Total expenses 5,683,962 7,247,666
----------- -----------
Loss before income taxes (1,714,380) (1,755,631)
Income tax benefit (574,989) (670,000)
----------- -----------
Net loss $(1,139,391) $(1,085,631)
=========== ===========
Basic net income (loss) per share $ (0.73) $ (0.74)
Diluted net income (loss) per share $ (0.73) $ (0.74)
Weighted average number of shares
Basic 1,557,565 1,457,999
Diluted 1,557,565 1,457,999
See accompanying notes.
4
JB OXFORD HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
For The Nine Months Ended
September 30,
--------------------------------
2003 2002
------------ ------------
REVENUES:
Commissions $ 6,325,195 $ 5,629,757
Interest 4,238,758 6,202,683
Trading profits 1,002,314 1,036,232
Clearing and execution 2,153,758 3,103,571
Other 285,068 757,646
------------ ------------
Total revenues 14,005,093 16,729,889
------------ ------------
EXPENSES:
Employee compensation 5,267,946 6,360,693
Clearing and floor brokerage 767,465 714,063
Communications 1,592,257 2,064,649
Occupancy and equipment 3,199,936 3,846,852
Interest 902,155 1,693,594
Data processing charges 1,720,871 1,635,648
Professional services 1,748,248 2,543,534
Promotional 167,083 1,194,312
Bad debts 55,285 53,622
Other operating expenses 3,875,708 4,204,570
------------ ------------
Total expenses 19,296,954 24,311,537
------------ ------------
Loss before income taxes (5,291,861) (7,581,648)
Income tax benefit (1,684,722) (2,570,000)
------------ ------------
Net loss $ (3,607,139) (5,011,648)
============ ============
Basic net loss per share $ (2.37) $ (3.51)
Diluted net loss per share $ (2.37) $ (3.51)
Weighted average number of shares
Basic 1,523,665 1,426,335
Diluted 1,523,665 1,426,335
See accompanying notes.
5
JB OXFORD HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
For The Nine Months Ended
September 30,
--------------------------------
2003 2002
------------ ------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (3,607,139) $ (5,011,648)
Adjustments to reconcile net loss to cash used in operating activities:
Depreciation and amortization 2,066,476 1,262,116
Deferred rent -- 809,900
Provision for bad debts 55,285 --
Deferred income tax provision 880,000 53,622
Changes in assets and liabilities:
Cash and cash equivalents segregated under federal and other
regulations 3,892,369 (93,686,685)
Receivable from broker-dealers and clearing organizations (12,471,683) 38,160,850
Receivable from customers 12,731,314 32,103,027
Other receivables 393,547 259,700
Securities owned 596,400 378,375
Clearing deposits (5,245,725) 832,521
Other assets (66,063) (667)
Payable to broker-dealers and clearing organizations (10,245,587) (6,777,465)
Payable to customers 5,578,508 35,885,026
Securities sold, not yet purchased 2,525,619 (833,122)
Accounts payable and accrued liabilities (410,284) 3,007,884
Income taxes receivable 1,992,066 884,895
------------ ------------
Net cash provided by (used in) operating activities (1,334,897) 7,328,330
------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (170,351) (1,052,235)
Acquisitions of customer accounts -- (3,448,321)
------------ ------------
Net cash used in investing activities (170,351) (4,500,556)
------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Repayments of notes payable -- (2,740,000)
------------ ------------
Net cash used in financing activities -- (2,740,000)
------------ ------------
NET DECREASE IN CASH AND CASH EQUIVALENTS (1,505,248) 87,774
CASH AND CASH EQUIVALENTS AT BEGINNING OF THE PERIOD 5,579,755 6,694,332
------------ ------------
CASH AND CASH EQUIVALENTS AT END OF THE PERIOD $ 4,074,507 $ 6,782,106
============ ============
See accompanying notes.
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.
National Clearing Corp, dba as 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 2002 Annual Report on Securities and Exchange Commission
("SEC") Form 10-K filed with the SEC on April 15, 2003. 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 Nine Months Ended For The Three Months Ended
September 30, September 30,
2003 2002 2003 2002
----------- ----------- ----------- -----------
BASIC EARNINGS PER SHARE:
Net loss $(3,607,139) $(5,011,648) $(1,139,391) $(1,085,631)
----------- ----------- ----------- -----------
Loss available to common stockholders $(3,607,139) $(5,011,648) $(1,139,391) $(1,085,631)
(numerator)
=========== =========== =========== ===========
Weighted average common shares outstanding 1,523,665 1,426,335 1,557,565 1,457,999
(denominator)
=========== =========== =========== ===========
Basic earnings per share $ (2.37) $ (3.51) $ (0.73) $ (0.74)
=========== =========== =========== ===========
DILUTED EARNINGS PER SHARE:
Net Loss $(3,607,139) $(5, 011,648 $(1,139,391) $(1,085,631)
Interest on convertible debentures, net of
income tax -- -- -- --
----------- ----------- ----------- -----------
Loss available to common stockholders plus $(3,607,139) $(5, 011,648 $(1,139,391) $(1,085,631)
assumed conversions (numerator)
=========== =========== =========== ===========
Weighted average common shares outstanding 1,523,665 1,426,335 1,557,565 1,457,999
Weighted average options outstanding -- -- -- --
Weighted average convertible debentures -- -- -- --
Stock acquired with proceeds -- -- -- --
----------- ----------- ----------- -----------
Weighted average common shares and assumed 1,523,665 1,426,335 1,557,565 1,457,999
conversions outstanding (denominator)
=========== =========== =========== ===========
Diluted earnings per share $ (2.37) $ (3.51) $ (0.73) $ (0.74)
=========== =========== =========== ===========
7
The assumed conversions have been excluded in computing the diluted
earnings per share when there is a net loss for the period. They have been
excluded because their inclusion would reduce the loss per share or be
anti-dilutive. If the assumed conversions would have been used, the fully
diluted shares outstanding for the nine months ended September 30, 2003 and 2002
would be 1,726,859 and 2,218,713, respectively.
The options carry exercise prices ranging from $2.20 to $91.25 at
September 30, 2003 and 2002. Options to purchase 256,825 shares of common stock
at September 30, 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 nine months ended September 30, 2003
and 2002; therefore there is no proforma net income or earnings per share to
report for those respective periods.
A summary of the status of the Company's stock options as of September 30, 2003
and 2002, and changes during the periods ending on those dates is presented
below:
September 30, 2003 September 30, 2002
Weighted Weighted
Shares average Shares average
-------- -------- -------- --------
Outstanding at 257,200 $ 15.72 383,120 $ 26.88
be-ginning of period
-------- -------- -------- --------
Granted -- -- -- --
Exercised -- -- -- --
Forfeited (375) 32.37 (7,325) 15.53
-------- --------
Outstanding at end of
period 256,825 15.66 375,795 26.96
======== ========
Options exercisable 255,725 15.88 318,441 $ 27.60
at quarter-end
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
8
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, 2003, JBOC had net capital of $9,562,900, which was
12.5% of aggregate debit items and $8,035,933 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.
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 Company is currently in negotiations for
a further extension of the $450,000 balance of this payment. The final payment
of $500,000 remains due on February 14, 2004. The Company originally accrued
payments to the USAO and SEC totaling approximately $3,000,000. 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.
In the course of the ongoing mutual fund investigations, which is
impacting many brokerage firms throughout the country, by the New York Attorney
General, the SEC, and the NASD, National Clearing Corp (a wholly owned
subsidiary of JB Oxford Holdings, Inc. (Nasdaq:JBOH)) has provided documents and
testimony in response to subpoenas regarding mutual fund trading practices. The
Company has cooperated fully in these investigations. On November 6, 2003, the
Company received a "Wells Notice" from the staff of the SEC's Los Angeles
office, stating its intention to recommend that the SEC institute civil and
administrative proceedings against the Company related to the SEC investigation.
Under the Wells procedure, the Company has an opportunity to respond to the SEC
before any action is taken. The Company intends to respond promptly and will
seek a resolution of these matters, although there is no assurance that such
resolution can be reached or that the ultimate impact on the Company will not be
material.
9
NOTE 6. SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
For The Nine Months Ended Sept 30,
----------------------------------
2003 2002
-------- --------
Supplemental Disclosures of Cash Flow Information
Cash paid during the period for:
Interest $784,545 $1,622,087
Income taxes 71,977 330,308
Supplemental disclosure of non-cash investing and
financing activities:
Treasury stock bonus issued to employees in the
amount of $948,385 for 2003.
Note payable of $611,111 and 120,000 shares of
common stock in the amount of $388,800 issued in
exchange for the release of the lease commitment
for the Oakland California property for 2003.
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 consisting 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 National Association of
Securities Dealers, Inc.("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.
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
net capital has declined an average of approximately $400,000 per quarter. If
this trend continues, our liquidity could further decrease and we will need to
raise additional capital. Capital is raised through the issuance of equity
securities, or securities which are convertible into equity securities. This
would cause existing shareholders to 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 downward trend in excess net capital, we currently expect
that our cash resources and available bank and stock loan credit facilities will
be sufficient to fund our 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, we are unable to obtain an extension of time for
repayment of the notes payable to Third Capital Partners LLC due December 31,
2003, or for other unanticipated reasons, we will need to raise additional funds
in order to continue our business, respond to competitive pressures, develop
additional products and services, or take advantage of strategic opportunities.
NOTE 8. RECENT ACCOUNTING PRONOUNCEMENTS
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
10
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 did not have a
significant impact on our 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 results. This Statement is effective for fiscal
years beginning after December 15, 2002. We plan 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 3 of the Notes to Consolidated Financial
Statements.
In January 2003, the FASB issued Interpretation No. 46, "Consolidation of
Variable Interest Entities, an interpretation of ARB No. 51." This
Interpretation addresses the consolidation be business enterprises of variable
interest entities as defined in the interpretation. The Interpretation applies
immediately to variable interests in variable interest entities created or
obtained after January 31, 2003. The Interpretation requires certain disclosures
in the financial statements issued after January 31, 2003 if it is reasonably
possible that we will consolidate or disclose information about variable
interest entities when the Interpretation becomes effective. We do not have
variable interests in variable interest entities.
NOTE 9. SUBSEQUENT EVENTS
Our main operating subsidiary, JB Oxford recently received permission
from the NASD to transfer its name and retail accounts to another of our wholly
owned subsidiaries, Stocks 4 Less, Inc. Stocks 4 Less will be renamed JB Oxford
& Company and will become an introducing retail broker. The existing JB Oxford &
Company has been renamed National Clearing Corp. and will continue to provide
clearing and execution services and market making activities, but will no longer
maintain retail accounts. National Clearing Corp. will continue to use the JB
Oxford name until the split is effectuated. We believe that separating 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. The transfer of business occurred on October 1, 2003.
11
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 National Clearing Corp, dba JB Oxford & Company ("JB
Oxford"). JB Oxford is a registered broker-dealer providing discount and
electronic brokerage services to the investing public; clearing and execution
services to independent broker-dealers ("correspondents") on a fully-disclosed
basis; and acts 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 recently received permission from the
NASD to transfer its name and retail accounts to another of our wholly owned
subsidiaries, Stocks 4 Less, Inc. Stocks 4 Less will be renamed JB Oxford &
Company and will become an introducing retail broker. The existing JB Oxford &
Company has been renamed National Clearing Corp. and will continue to provide
clearing and execution services and market making activities, but will no longer
maintain retail accounts. National Clearing Corp. will continue to use the JB
Oxford name until the split is effectuated. We believe that separating 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. The transfer of business occurred on October 1, 2003.
Between 2002 and 2003, JB Oxford had several institutional clients and
correspondent brokerage firms that engaged in mutual fund trading. The Company
has provided documents and/or testimony to the SEC and the New York State
Attorney General's Office under subpoena regarding mutual fund trading by these
former clients and/or correspondent brokerage firms. The Company is continuing
to cooperate with the SEC and all applicable regulatory organizations.
In the course of the ongoing mutual fund investigations, which is impacting many
brokerage firms throughout the country, by the New York Attorney General, the
SEC, and the NASD, National Clearing Corp (a wholly owned subsidiary of JB
Oxford Holdings, Inc. (Nasdaq:JBOH)) has provided documents and testimony in
response to subpoenas regarding mutual fund trading practices. The Company has
cooperated fully in these investigations. On November 6, 2003, the Company
received a "Wells Notice" from the staff of the SEC's Los Angeles office,
stating its intention to recommend that the SEC institute civil and
administrative proceedings against the Company related to the SEC investigation.
Under the Wells procedure, the Company has an opportunity to respond to the SEC
before any action is taken. The Company intends to respond promptly and will
seek a resolution of these matters, although there is no assurance that such
resolution can be reached or that the ultimate impact on the Company will not be
material.
On September 4, 2003 we entered into a settlement and release agreement with OCC
Venture, LLC ("OCC") associated with the abandonment of the lease in Oakland,
California. During the first half of 2003 the Company reserved approximately
$1,500,000 for expenses related to abandonment of the lease. The amount of the
reserve was sufficient to cover the total cost of the abandonment. Payment to
OCC consisted of a combination of cash, common stock and promissory note. The
lease obligation arose as a
12
part of the acquisition of customer accounts from Mr. Stock and had a remaining
term through August 2010. As of July 1, 2003, the total financial obligation
prior to the settlement under the lease was approximately $4,400,000 over seven
years. The abandonment of lease was charged to earnings in the second quarter of
2003.
In August 2003 we resolved our dispute with Stock King LLC (formerly Mr. Stock,
Inc.) The settlement includes a $400,000 cash payment, made in the third quarter
of 2003, and $1.4 million in future issuances of common stock and/or cash
payments to complete the transactions. The resolution of issues resulted in no
cost adjustment of the original purchase price of assets acquired.
Discount Brokerage Services
We provide 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, 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
We provide 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 our 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, we act 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 we act 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 NASD regarding best execution.
13
Results of Operations
Nine Months Ended September 30, 2003 Compared with Nine Months Ended
September 30, 2002
Revenues
Our total revenues were $14,005,093 in the nine months ended September 30, 2003,
a decrease of 16% from $16,729,889 in the nine months ended September 30, 2002.
The primary reason for the decrease was a decline in interest revenue of 32% to
$4,238,758 in the current period from $6,202,683 in the nine months ended
September 30, 2002. Additionally, clearing and execution revenues decreased 31%
to $2,153,758 in the nine months ended September 30, 2003 from $3,103,571 in the
nine months ended September 30, 2002. Commission revenues increased 12% to
$6,325,195 in the nine months ended September 30, 2003 from $5,629,757 in the
nine months ended September 30, 2002. Trading profits decreased 3% to $1,002,314
in the nine months ended September 30, 2003 from $1,036,232 in the nine months
ended September 30, 2002.
Commission revenue increased $695,438 or 12% to $6,325,195 in nine months ended
September 30, 2003 compared to $5,629,757 in the nine months ended September 30,
2002. Trading volumes and commission revenue rebounded during the third quarter
of 2003. The number of trades executed for customers is up approximately 28%
from the nine months ended September 30, 2003 compared to the nine months ended
September 30, 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 our business through acquisitions of accounts from
compatible discount and on-line brokerage operations of other firms. Although we
have completed acquisitions in the past, there can be no assurance that we will
complete any additional acquisitions, or if completed, that they will be
successful.
Interest revenues decreased $1,963,925 or 32% to $4,238,758 in the nine months
ended September 30, 2003 compared to $6,202,683 in the nine months ended
September 30, 2002. Net interest income decreased 26% from $4,509,089 in the
nine months ended September 30, 2002 to $3,336,603 in the nine months ended
September 30, 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.
Interest rates were down 0.25% during the second quarter of 2003. This change
and declining margin balances have been the most significant factor for the
decrease.
Trading profits decreased $33,918 or 3% to $1,002,314 in the nine months ended
September 30, 2003 compared to $1,036,232 in the nine months ended September 30,
2002. The decrease in trading profits resulted from our utilization of outside
sources of order flow during 2003, offset by having taken positions in certain
securities we believed would be profitable. However, certain of these positions
proved to be unprofitable during the third quarter 2003 (see quarter ended
September 30 discussion for detail). Trading volumes in the inventory accounts
have decreased 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 operations for 2003, however, management is continuing to
explore new sources of order flow. We will also look at opportunities to earn
potential profits by taking proprietary positions.
Clearing and execution revenues decreased $949,813 or 31% to $2,153,758 in the
first nine months 2003 compared to $3,103,571 in the nine months ended September
30, 2002. The decrease represents the decrease in correspondent trades cleared
by us resulting from declining volumes over the past three years and a decline
in the number of correspondents. We are in the process of developing technology
to provide correspondent customers with a turnkey front-end trade system.
14
We believe this will help attract additional correspondents. We will continue to
search for opportunities to attract new correspondent broker business.
Expenses
Expenses totaled $19,296,954 for the nine months ended September 30, 2003, a
decrease of 21% from $24,311,537 in the nine months ended September 30, 2002.
Included in the expense of 2003 is a $1,500,000 charge for the abandonment of
leased property in Oakland, California related to the acquisition of the Mr.
Stock accounts. 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. Also included in 2002 is a settlement
expense of $3,000,000. To exclude these one time items from the analysis would
indicate that expenses decreased $4,474,583 or 20% during the nine months ended
September 30, 2003 compared to the nine months ended September 30, 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 17% in the nine months ended September 30,
2003 to $5,267,946 from $6,360,693 in the nine months ended September 30, 2002.
Reductions in the company's workforce resulted in the reduced salary costs.
Interest expense decreased 47% to $902,155 in the nine months ended September
30, 2003 from $1,693,594 in the nine months ended September 30, 2002. This
decrease is the result of declining customer credit balances and interest rate
decreases.
Promotional expenses decreased $1,027,229 or 86% to $167,083 in the nine months
ended September 30, 2003 from $1,194,312 in the nine months ended September 30,
2002. These costs have decreased as management has focused on more efficient
means of advertising. During the first half 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 decreased by $328,862 during the nine months ended September 30,
2003 compared to the nine months ended September 30, 2002. The most significant
reason for the change is due to the settlement expense of $3,000,000 recorded in
the second quarter of 2002, this was offset in part by 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. This
reduction has, in part, been offset by a one-time charge in the amount of
$1,500,000 for the abandonment of leased property in Oakland, California related
to the acquisition of the Mr. Stock accounts. Additionally, amortization expense
of intangible assets increased $270,553 to $1,101,968 during the nine months
ended September 30, 2003 from $809,900 for the nine months ended September 30,
2002.
Quarter Ended September 30, 2003 Compared with Quarter Ended September 30, 2002
We recorded a net loss of $1,139,391 for the quarter ended September 30, 2003.
This compares with a net loss of $1,085,631 for the quarter ended September 30,
2002.
15
Total revenues for the third quarter of 2003 were $3,969,582, a decrease of
$1,522,453 or 28% from the comparable quarter of 2002. Commission revenue
increased $288,851 or 15% during the third quarter of 2003 compared with the
third quarter of 2002 and increased $73,711 or 3% from the second quarter of
2003, as trade volumes increased in the third quarter of 2003.
Clearing revenue decreased $411,592 or 36% during the third quarter of 2003
compared with the third quarter of 2002, and increased $69,323 or 11% compared
with the second quarter of 2003.
Trading profits decreased $560,118 or 190% to a loss of $265,874 during the
third quarter of 2003 compared to a gain of $294,244 during the third quarter of
2002. The decrease in trading profits resulted from our utilization of outside
sources of order flow during 2003, and by having taken positions in certain
securities that resulted in a loss of $781,077 of which consisted of a realized
loss of $146,916 and an unrealized loss of $634,161. Management has taken steps
to close out unprofitable positions and tighten proprietary trading procedures
while continuing to look at opportunities to earn profits by taking proprietary
positions.
Interest revenue decreased $572,188 or 30% to $1,309,569 from $1,881,757 for the
third quarter of 2003 compared with the third quarter of 2002. Interest revenue
decreased $97,723 or 7% from the second quarter of 2003. Net interest income
decreased $278,714 or 21% to $1,059,006 in the third quarter of 2003 from
$1,337,720 in the third quarter of 2002. Net interest income decreased $29,774
or 3% from the second quarter of 2003.
Total expenses for the third quarter of 2003 were $5,683,962, a decrease of
$1,563,704 or 22% from the comparable quarter of 2002, and a decrease of
$1,938,045 or 25% from the second quarter of 2003. Interest expense decreased
$293,474 or 54% during the third quarter of 2003 compared with the third quarter
of 2002 and $67,534 or 21% compared with the second quarter of 2003. Interest
costs decreased due to declining customer credit balances and lower interest
rates.
Employee compensation decreased $487,687 or 23% to $1,593,313 in the third
quarter of 2003 from $2,081,000 during the third quarter of 2002, and decreased
$146,581 or 8% from the second quarter of 2003. Reductions in the company's
workforce resulted in the reduced salary costs. Promotional costs decreased
$21,291 or 31% in the third quarter of 2003 compared with the third quarter of
2002, and decreased$7,025 or 13% from the second quarter of 2003.
Other expenses increased $33,047 or 4% in the third quarter of 2003 compared
with the third quarter of 2002, and increased $130,770 or 16% from the second
quarter of 2003 (excluding the $1,500,000 charge for the abandoned lease in
Oakland).
Management continues to examine ways to cut costs and improve efficiencies but
there can be no assurance that we will be able to do so.
Liquidity and Capital Resources
We finance our operations through the use of funds generated from the business
of our subsidiaries, mainly JBOC. JBOC holds the majority of our corporate
assets consisting 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
16
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 additional information regarding
regulatory requirements.
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
net capital has declined an average of approximately $400,000 per quarter. The
greatest decrease occurred during the second quarter of 2002, due primarily to
the arbitration award rendered against JBOC, resulting in a $3,000,000 reduction
in excess net capital. If this downward trend in excess net capital continues,
our liquidity could further decrease and we will need to raise additional
capital. If we are able to raise capital 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 the downward trend in net capital, we currently anticipate that
our cash resources and available bank and stock loan credit facilities will be
sufficient to fund our 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 we are unable to obtain an extension of time for
repayment of the notes payable to Third Capital Partners LLC due December 31,
2003 or for other unanticipated reasons, we will need to raise additional funds
in order to continue our business, respond to competitive pressures, develop
additional products and services, or take advantage of strategic opportunities.
We owe Third Capital Partners $5,418,696 on the secured convertible notes. The
notes bear interest at 9% and are convertible into our common stock at $2.67 per
share. Interest payments are made monthly and the notes mature on December 31,
2003. We anticipate being able to renegotiate and/or extend the notes , but
there can be no assurance the it will be successful or that the new terms will
not have a material negative impact on the Company or its shareholders.
Liquidity at June 30, 2003
Our cash position decreased during the nine months ended September 30, 2003 by
$1,505,248 to $4,074,507. This compares with a net increase in cash and cash
equivalents of $87,774 in the nine months ended September 30, 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 Used In Operating Activities
Net cash used in operating activities was $1,334,897 for the nine months ended
September 30, 2003, compared to cash of $7,328,330 provided by operating
activities during the nine months ended September 30, 2002. Our net cash
provided by or used in operating activities is impacted by changes in the
brokerage-related assets and liabilities of JBOC.
17
During the nine months ended September 30, 2003, the most significant source of
cash was the decrease in receivables from customers of $12,731,314.
Additionally, payables to customers increased to provide cash of $5,578,508. An
additional source of cash was provided by the increase in cash segregated under
federal and other regulations of $3,892,369. These sources of cash were offset
by cash used by the increase in receivables from broker-dealer and clearing
organizations of $12,471,683, and the decrease in payables to broker-dealers and
clearing organizations of $10,245,587.
Cash Flows Used In Investing Activities
The total cash used in investing activities during the nine months ended
September 30, 2003 was $170,351 compared with $4,500,556 during the same period
of 2002. Cash used in the nine months ended September 30, 2003 consisted of
$170,351 used for capital expenditures, as compared to $1,052,235 used for
capital expenditures in the nine months ended September 30, 2002. We used
additional cash of $3,448,321 to acquire the right to service certain customer
accounts during the nine months ended September 30, 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 continue to look for opportunities to grow our
business through acquisition and if acquisitions are made, we may expend
resources on an investment in such an acquisition.
Cash Flows Used In Financing Activities
We had no cash transactions for financing activities in the nine months ended
September 30, 2003, compared to $2,740,000 cash used by financing activities in
the nine months ended September 30, 2002. The cash used in 2002 was for the
repayment of notes payable.
Recent Accounting Pronouncements
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 did not have a significant impact on our 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
18
method of accounting for stock-based compensation and the effect of the method
used on reported results. This Statement is effective for fiscal years beginning
after December 15, 2002. We plan 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.
In January 2003, the FASB issued Interpretation No. 46, "Consolidation of
Variable Interest Entities, an interpretation of ARB No. 51." This
Interpretation addresses the consolidation be business enterprises of variable
interest entities as defined in the interpretation. The Interpretation applies
immediately to variable interests in variable interest entities created or
obtained after January 31, 2003. The Interpretation requires certain disclosures
in the financial statements issued after January 31, 2003 if it is reasonably
possible that we will consolidate or disclose information about variable
interest entities when the Interpretation becomes effective. We do not have
variable interests in variable interest entities.
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 our actual results, performance, or achievements
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. 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 regulations;
o any adverse effect cause by negative publicity generated by such claims of
noncompliance
o inability to meet net capital requirements;
o inability to successfully identify, consummate, fund or integrate future
acquisitions;
19
o the likelihood of significant dilution to shareholders for shares committed
to be issued related to the Mr. Stock account acquisition;
o inability to successfully integrate recent acquisitions;
o inability to maintain network security and customer privacy;
o continued decline in market activity and trade volume;
o continued poor general economic and market conditions;
o credit risks associated with customer margin accounts;
o any adverse effects resulting from recent downsizing;
o the adverse impact of decimalization;
o significant loss of customers or inability to generate new customers;
o systems failures;
o stock price volatility;
o inability to successfully defend legal, arbitration and administrative
proceedings and any inability to pay any damages and costs awarded in such
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 significant dilution to shareholders if the Third Capital Partners, LLC
notes are converted into common stock;
o any concession in terms made by the Company I renegotiating with Third
Capital Partners, LLC
o the impact on our liquidity if our 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,
o any sanctions imposed on us by the SEC or NASD as a result of the mutual
fund trading investigation,
o any inability by us to comply with SEC or NASD rules and regulations in the
future,
o any inability to borrow funds or obtain financing, and
o market risk associated with our investments.
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.
We do not have derivative financial instruments for speculative or trading
purposes.
20
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.
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
We act 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 us to additional risk; however, we
do not maintain a significant inventory of equity securities.
ITEM 4. CONTROLS AND PROCEDURES
EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES
In order to ensure that the information required to be disclosed in this report
is recorded, processed, summarized and reported on a timely basis, we have
adopted internal controls and procedures. We conducted an evaluation (the
"Evaluation"), under the supervision and with the participation of our 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") as of September 30, 2003. Based on the
Evaluation, our CEO and CFO concluded that our Disclosure Controls are effective
as of the end of the period covered by this report.
21
CHANGES IN INTERNAL CONTROL
We have also evaluated our internal control over financial reporting, and there
have been no changes in our internal control over financial reporting or during
the quarter ended September 30, 2003 that has materially affected, or is
reasonably likely to materially affect, our internal control over financial
reporting.
CEO AND CFO CERTIFICATIONS
In Exhibits 31.1 and 31.2 of this report there are Certifications of the CEO and
the CFO. The Certifications are required in accordance with the Securities
Exchange Act 1934 and 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 Company is currently in negotiations for a
further extension of the $450,000 balance of this payment. The final payment of
$500,000 remains due on February 14, 2004. We originally accrued payments to the
USAO and SEC totaling approximately $3,000,000. 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.
In the course of the ongoing mutual fund investigations, which is impacting many
brokerage firms throughout the country, by the New York Attorney General, the
SEC, and the NASD, National Clearing Corp (a wholly owned subsidiary of JB
Oxford Holdings, Inc. (Nasdaq:JBOH)) has provided documents and testimony in
response to subpoenas regarding mutual fund trading practices. The Company has
cooperated fully in these investigations. On November 6, 2003, the Company
received a "Wells Notice" from the staff of the SEC's Los Angeles office,
stating its intention to recommend that the SEC institute
22
civil and administrative proceedings against the Company related to the SEC
investigation. Under the Wells procedure, the Company has an opportunity to
respond to the SEC before any action is taken. The Company intends to respond
promptly and will seek a resolution of these matters, although there is no
assurance that such resolution can be reached or that the ultimate impact on the
Company will not be material.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
We owe Third Capital Partners $5,418,696 on the secured convertible notes. The
notes bear interest at 9% and are convertible into our common stock at $2.67 per
share. Interest payments are made monthly and the notes mature on December 31,
2003.
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.
During the third quarter we issued 120,000 shares of our common stock to OCC
Venture LLC in a private transaction in connection with the settlement of a
lease. We issued these securities in reliance upon the exemption from
registration provided by Section 4(2) of the Securities Act of 1933 as a
transaction not involving any public offering.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
31.1 Certification of Christopher L. Jarratt, Chief Executive Officer,
pursuant to Rule 13a-14 of the Securities Exchange Act of 1934.
31.2 Certification of Michael J. Chiodo, Chief Financial Officer,
pursuant to Rule 13a-14 of the Securities Exchange Act of 1934.
32.1 Certification of Christopher L. Jarratt, Chief Executive Officer,
pursuant to Section 906 of Sarbanes-Oxley Act of 2002, filed herewith.
32.2 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 third quarter, we filed a Report on Form 8-K, dated August
18, 2003 reporting our issuance of a press release relating to our second
quarter 2003 financial results.
23
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, 2003
24