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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 3L, 1998
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
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Name of each
Title of each class exchange on which
registered
Common stock, $0.01 par 14,679,726 shares NASDAQ
value: outstanding at March 24,
1999
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 by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to
the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K [ ].
The aggregate market value of the voting stock held by non-affiliates of the
registrant at March 24, 1999 was approximately $105,627,000; such amount
computed as the average bid and asked prices of stock as of March 24, 1999.
PART I
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
Certain statements in this Annual Report on Form 10-K, particularly under Items
1 through 8, constitute "forward-looking statements" within the meaning of the
Private Securities Litigation Reform Act of 1995 (the "Reform Act"). Such
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.
ITEM 1. BUSINESS OVERVIEW
JB Oxford Holdings, Inc. (together with its consolidated subsidiaries, the
"Company" or "JBOH"), through its wholly-owned subsidiaries, is engaged in the
business of providing brokerage and related financial services to retail
customers and broker-dealers nationwide. The Company is fully integrated,
providing retail brokerage services, clearing services and market making
services to its customers.
The Company was incorporated in Delaware on March 31, 1987, and made an initial
public offering in September 1987. The Company changed its state of
incorporation to Utah in 1990.
The Company's business is conducted out of offices located in Los Angeles, New
York and Miami. During 1998, the Company also had offices in Boston; Dallas;
and Basel, Switzerland. These offices have been consolidated into the Company's
remaining offices as part of new management's focus on cost containment. See
"New Management" below.
The Company's primary subsidiary is JB Oxford & Company ("JBOC"), 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 1998, the Company's consolidated revenues were $67,268,325, which consisted
primarily of commission and interest income from the Company's discount and
electronic brokerage division.
New Management
In May 1998, the Company entered into a transaction with Third Capital Partners,
LLC and other investors which resulted in a change of control of the Company.
The Company's new Board of Directors appointed new management to the Company in
June 1998. New management's focus has been on containing costs and implementing
a growth plan to capitalize on the significant expansion expected within the
discount and electronic brokerage industry.
As part of new management's cost containment measures, the Company closed its
offices in Boston (effective February 26, 1999), Basel, Switzerland (effective
December 31, 1998) and Dallas (effective September 30, 1998). Customers
previously served by these offices are now served by the Company's remaining
offices in Los Angeles, New York and Miami. New management also consolidated
the operations of the Company's other broker-dealer subsidiary, Stocks4Less,
Inc., into the on-line division of JBOC in December 1998. This allows
management to concentrate the Company's advertising budget and Internet
development efforts as well as reduce administrative expenses associated with
operating Stocks4Less, Inc.
New management's cost containment strategy, combined with an overall increase in
market volumes, had a positive effect on the Company's financial results as the
Company returned to profitability in the fourth quarter of 1998. See Item 7
"Management's Discussion and Analysis Of Financial Condition and Results Of
Operations" below.
In 1999, management intends to concentrate its efforts on growing the Company's
discount and electronic brokerage business through a variety of means including:
strategic alliances, acquisitions of other broker-dealers, web site enhancement
and aggressive marketing initiatives.
Discount and Electronic Brokerage Services
In 1994, the Company began its strategy of providing retail investors a full
line of brokerage services at discount prices. This strategy proved successful
as few brokerage firms provided brokerage services at discount prices at that
time. The Company was able to capitalize on this early position by providing
customer service and attention comparable to that being offered by larger full-
service brokerage firms charging higher fees. Today, JBOC offers a menu of
services and products to customers, which includes the ability to buy and sell
securities, security options, mutual funds, fixed income products, annuities and
other investment securities. JBOC customers are offered the choice of being
assigned a personal account representative or calling directly to the Company's
trading desk for order placement and account information. The marketing
strategy implemented in recent years emphasizes this higher level of service
compared to other discount brokerages and has successfully generated growth for
the Company.
In 1995, in order to continue its commitment to providing a full line of
brokerage services to its customers, the Company began providing electronic
brokerage services. These services initially included computer trading through
a dial-up networking connection and automated telephonic trading services.
Since that time, the Company has made many improvements to these services,
including the launch of Internet trading in 1996. The Company continues to
upgrade and improve its electronic brokerage technologies in order to provide
its customers with the resources necessary to conveniently and economically
execute securities transactions and access related financial information. In
addition to its trading capabilities, the Company's Internet site
(www.jboxford.com) currently provides market quotes, charts, company research,
and customer account information, such as cash balances, portfolio balances and
similar information.
In recent years, the general public has become more comfortable dealing with
financial matters through electronic means. Several brokerage firms that
compete directly with the Company have positioned themselves to take advantage
of this opportunity. The growth of firms providing the electronic delivery of
financial services, particularly those on the Internet, have been strong in
recent years. The Company intends to capitalize on this trend through its
marketing efforts and by continually improving its electronic brokerage
technologies, while continuing to provide the level of service customers have
come to expect from JBOC.
The Company also caters to customers within niche markets by providing services
that address the particular needs of these customer bases. Examples of these
markets include the Company's efforts to develop divisions that cater
specifically to Asian, Latin American and European customers. The Company
serves the needs of the Asian American community through its two locations in
the Los Angeles area, and has recently launched efforts to focus on serving the
Latin American community through its office in Miami. The Company launched its
European division in 1995 by opening an office in Basel, Switzerland. Although
this office was closed effective December 31, 1998, the Company continues to
provide discount brokerage services throughout Europe from its New York office
and its Internet trading site. These niche-marketing efforts initially began as
an outgrowth of the Company's commitment to meeting the needs of its domestic
U.S. customers, such as providing account representatives who are fluent in a
customer's preferred language. With the growth in the electronic delivery of
financial services, it is becoming economically feasible to provide such
services to both domestic and international customers using Internet technology.
The Company intends to continue this niche marketing strategy; however, these
markets are not expected to constitute a material portion of the Company's
business in 1999.
Management believes that the Company can continue to grow its discount and
electronic brokerage division in 1999 due to its ability to provide high
quality, flexible, and customer-sensitive responses and services. The Company
continually upgrades computer systems and services within each of its divisions
to utilize and take advantage of the most recent technological developments.
Clearing and Execution Services
JBOC is self-clearing and as of March 15, 1999, JBOC provided clearing and
execution services for 37 correspondents. This division was historically
profitable for JBOC but has experienced substantial profit erosion in recent
years as a result of increased competition. However, the clearing business
offers a high return on capital, and management believes by careful selection
and monitoring of its correspondents, this business segment will remain
profitable.
The clearing relationship involves the sharing of broker-dealer responsibilities
between the introducing broker and the clearing broker. JBOC's correspondents
(i.e., introducing brokers) are responsible for all customer contact, including
opening customer accounts, determining customer suitability, placing customer
orders, and responding to customer inquiries. JBOC, acting as the clearing
broker, generally provides clearing and execution services including the
receipt, confirmation, settlement, delivery and record-keeping functions
involved in a securities transactions as well as providing back office functions
such as: maintaining customer accounts; extending credit (in a margin account)
to the customer; settling security transactions with the Depository Trust
Company ("DTC") and the National Securities Clearing Corporation ("NSCC");
preparing customer trade confirmations and statements; performing certain
cashiering and safe keeping functions; transmitting tax information to the
customer and tax authorities; forwarding proxies and other shareholder
information to customers; and similar activities.
In providing clearing and execution services to correspondents, JBOC assumes
certain responsibilities for the possession or control of customer securities
and assets. As a result, JBOC's statements of financial condition reflect
amounts receivable from customers on margin loans as well as amounts payable to
customers and correspondents related to free credit balances held by JBOC for
the benefit of its customers and correspondents.
There are inherent risks in operating as a clearing agent. See "Forward-Looking
Statements and Risk Factors _ Clearing Operations" below. Since JBOC makes
loans to customers collateralized by customer securities, JBOC incurs the risk
of a market decline that could reduce the value of the customer's underlying
collateral securities below the customer's loan amount. For this reason, credit
exposure must be monitored and actions must be taken on a timely basis to
mitigate and minimize JBOC's exposure to these risks. JBOC mitigates its credit
exposure by monitoring the adequacy of collateral from both individual customers
and correspondents. Additionally, JBOC is subject to the margin rules
established by the Board of Governors of the Federal Reserve System and the
National Association of Securities Dealers, Inc. ("NASD").
Acting as a clearing agent in the securities business requires both working
capital and capital for regulatory requirements. See "Net Capital Requirements"
below, for a more extensive discussion of capital requirements.
Market Making Activities
In order to facilitate the execution of security transactions for its own
customers and the customers of its correspondents, JBOC acts as a market maker
for approximately 500 public corporations whose stocks are traded on the NASDAQ
National Market System, New York Stock Exchange ("NYSE") or other national
exchanges.
Generally, the Company does not maintain inventories of securities for sale to
its customers. However, the Company does engage in certain principal
transactions where, in response to a customer order, the Company will go at risk
to the marketplace to attempt to capture the spread between the bid and offer.
Most of the Company's larger competitors are engaged in similar market making
activities through subsidiaries or receive order flow payments from companies
engaged in such market making activities. The Company believes it can maintain
better control and be assured of proper executions of customer trades by
providing these market making services directly to its customers.
The Company's market making activities concentrate on the execution of
unsolicited transactions for customers and are required to be in compliance with
the NASD rules regarding best execution.
Interest Income
The Company derives a portion of its income from interest generated on the
margin accounts of its customers and, to a lesser extent, those of its
correspondents. A margin account allows the customer to deposit less than the
full cost of the security purchased while the Company lends the balance of the
purchase price to the customer, secured by the purchased securities. Customers
are charged interest on the amount borrowed to finance their margin transactions
ranging from 0.25% below to 2.75% above the broker call rate, which is the rate
at which brokers can generally obtain financing using margined and firm owned
securities as collateral. As of December 31, 1998, the total of all debit
balances held in active margin accounts was approximately $263,000,000. The
Company finances its margin lending business primarily through customer free
credit balances and existing credit lines with commercial lenders.
Pursuant to written agreements with customers, broker-dealers are permitted by
the Securities and Exchange Commission's ("SEC") regulations to lend customer
securities held as collateral in margin accounts. Customer free credit balances
were approximately $297,000,000 at December 31, 1998. These credit balances are
available to finance customer margin balances subject to the requirements of SEC
Rule 15c3-3, Customer Protection _ Reserves and Custody of Securities.
In addition to the above financing, JBOC has established omnibus/financing
accounts and lines of revolving credit with other broker-dealers and banking
institutions with an aggregate borrowing limit approximating $30,000,000.
Securities Industry Practices
JBOC is registered with the SEC and the NASD and is a member of the following
organizations: Chicago Stock Exchange, Pacific Stock Exchange, Cincinnati Stock
Exchange, DTC, NSCC and Options Clearing Corporation ("OCC"). JBOC is
registered as a securities broker-dealer in all 50 states and the District of
Columbia. JBOC is also a member of the Securities Investors Protection
Corporation ("SIPC"), which provides JBOC's customers with insurance protection
for amounts of up to $500,000 each, with a limitation of $100,000 on claims for
cash balances. JBOC has also acquired an additional $10,000,000 in insurance
coverage through National Union Fire Insurance Company of Pittsburgh, a
subsidiary of AIG, as added protection for individual customers' securities,
covering all clients of JBOC's fully-disclosed correspondents and discount
customers.
JBOC is subject to extensive regulation by federal and state laws. The SEC is
the federal agency charged with administration of the federal securities laws.
Much of the regulation of broker-dealers, however, has been delegated to
self-regulatory organizations, principally the NASD and the national securities
exchanges. These self-regulatory organizations adopt rules, subject to approval
by the SEC, which govern the industry and conduct periodic reviews of member
broker-dealers. Securities firms are also subject to regulation by state
securities commissions in the states in which they do business. The SEC,
self-regulatory organizations, and state securities commissions may conduct
administrative proceedings which can result in censure, fine, suspension, or
expulsion of a broker-dealer, its officers or employees. The principal purpose
of regulation and discipline of broker-dealers is the protection of customers
and the securities markets, rather than protection of creditors and shareholders
of broker-dealers. See "Forward-Looking Statements and Risk Factors _
Government Regulation" below.
Net Capital Requirements
JBOC is subject to SEC Rule 15c3-1, Net Capital Requirements For Brokers or
Dealers (the "Rule"), which establishes minimum net capital requirements for
broker-dealers. The Rule is designed to measure financial integrity and
liquidity in order to assure the broker-dealer's financial stability within the
securities market. The net capital required under the Rule depends in part upon
the activities engaged in by the broker-dealer.
In computing net capital under the Rule, various adjustments are made to exclude
assets not readily convertible into cash and to reduce the value of other
assets, such as a firm's position in securities. A deduction is made against
the market value of the securities to reflect the possibility of a market
decline prior to sale. Compliance with the Rule could require intensive use of
capital and could limit JBOC's ability to pay dividends to the Company, which in
turn could limit the Company's ability to pay dividends to its shareholders.
Failure to comply with the Rule could require the Company to infuse additional
capital into JBOC, could limit the ability of the Company to pay its debts
and/or interest obligations, and may subject JBOC to certain restrictions which
may be imposed by the SEC, the NASD, and other regulatory bodies. Moreover, in
the event that the Company could not or elected not to infuse the additional
capital or otherwise bring the JBOC into compliance, JBOC would ultimately be
forced to cease operations. See "Forward-Looking Statements and Risk Factors _
Net Capital Requirements" below.
At December 31, 1998, and 1997 JBOC elected to use the alternative method
permitted by the Rule, which requires it to maintain minimum net capital, as
defined, equal to the greater of $250,000 or 2% of aggregate debit balances
arising from customer transactions, as defined. At December 31, 1998, JBOC had
net capital of $17,754,370, which was $12,352,063 in excess of the minimum
amount required. At December 31, 1997, JBOC had net capital of $14,380,292,
which was $8,728,676 in excess of the minimum amount required.
Employees
As of March 15, 1999, the Company and its subsidiaries had approximately 255
employees. The Company considers its employee relationships to be satisfactory.
FORWARD-LOOKING STATEMENTS AND RISK FACTORS
You should carefully consider the risks described below before making an
investment decision in the Company. The risks and uncertainties described below
are not the only ones facing the Company and there may be additional risks that
we do not presently know of or that we currently deem immaterial. All of these
risks may impair our business operations. This document also contains
forward-looking statements that involve risks and uncertainties and actual
results may differ materially from the results we discuss in the forward-looking
statements. If any of the following risks actually occur, our business,
financial condition or results of operations could be materially adversely
affected. In that case, the trading price of our stock could decline, and you
may lose all or part of your investment.
In accordance with "plain English" guidelines provided by the SEC, the Forward-
Looking Statements and Risk Factors have been written in the first person.
Managing a Changing Business
Our business and operations have changed substantially since we began offering
brokerage services, and we expect the pace of change in the brokerage business
to continue. This rapid change places significant demands on our
administrative, operational, financial and other resources.
We rely on a number of third parties to assist in the processing of our
transactions, including online and Internet service providers, back office
processing organizations, service providers and market makers. Any problems
caused by these third parties could have a material adverse effect on our
business, financial condition and operating results.
Early Stage of Market Development
The market for discount and electronic brokerage services, particularly over the
Internet, is at an early stage of development and is rapidly evolving.
Consequently, demand and market acceptance for recently introduced services and
products are subject to a high level of uncertainty.
Much of our growth will depend on consumers adopting the Internet as a method of
doing business. The Internet could lose its viability due to slow development
or adoption of standards and protocols to handle increased activity, or due to
increased governmental regulation. Moreover, several key issues including
security, reliability, cost, ease of use, accessibility and quality of service
continue to be concerns and may negatively affect the growth of Internet use or
commerce on the Internet.
The Securities Industry; Concentration of Services
We, like other securities firms, are directly affected by economic and political
conditions, broad trends in business and finance and changes in volume and price
levels of securities transactions. In recent years, the U.S. securities markets
have fluctuated considerably and a downturn in these markets could adversely
affect our operating results. In October 1987 and October 1998, the stock
market suffered major declines, as a result of which many firms in the industry
suffered financial losses, and the level of individual investor trading activity
decreased after these events. Reduced trading volume and prices have
historically resulted in reduced transaction revenues. When trading volume is
low, our profitability may be adversely affected because our overhead remains
relatively fixed. Severe market fluctuations in the future could have a
material adverse effect on our business, financial condition and operating
results. Some of our competitors with more diverse product and service
offerings might withstand such a downturn in the securities industry better than
we would. See "Forward-Looking Statements and Risk Factors -- Substantial
Competition" below.
Our brokerage business, by its nature, is subject to various other risks,
including customer default and employee misconduct and error. We sometimes
allow customers to purchase securities on margin, therefore we are subject to
risks inherent in extending credit. This risk is especially great when the
market is rapidly declining and the value of the collateral we hold could fall
below the amount of a customer's indebtedness. Under specific regulatory
guidelines, any time we borrow or lend securities, we must correspondingly
disburse or receive cash deposits. If we fail to maintain adequate cash deposit
levels at all times, we run the risk of loss if there are sharp changes in
market values of many securities and parties to the borrowing and lending
transactions fail to honor their commitments. Any such losses could have a
material adverse effect on our business, financial condition and operating
results.
Clearing Operations
Our clearing operations expose us to risks that exceed the simple risk of loss
of business due to loss of retail customers or correspondent. Broker-dealers
engaged in clearing operations for other correspondent broker-dealers are
exposed to losses beyond the loss of business. If the correspondent fails,
possible losses include its obligations to customers and other third parties,
and any losses in the correspondent's own trading accounts. We have established
procedures to review correspondent's own customer and firm accounts and
activities in an effort to prevent such losses if a correspondent fails. Any
such losses could have a material adverse effect on our business, financial
condition and operating results. See "Clearing and Execution Services" above.
Delays In Introduction of New Services and Products
Our future success depends in part on our ability to develop and enhance our
services and products. There are significant risks in the development of new
services and products or enhanced versions of existing services and products,
particularly in our electronic brokerage business. We may also experience
difficulties that could delay or prevent the development, introduction or
marketing of these services and products. Additionally, these new services and
products may not adequately meet the requirements of the marketplace or achieve
market acceptance. If we are unable to develop and introduce enhanced or new
services and products quickly enough to respond to market or customer
requirements, or if they do not achieve market acceptance, our business,
financial condition and operating results will be materially adversely affected.
Substantial Competition
The market for discount and electronic brokerage services is rapidly evolving
and intensely competitive. We face direct competition from firms offering
discount and electronic brokerage services such as Charles Schwab & Co., Inc.,
Fidelity Brokerage Services, Inc., Waterhouse Securities, Inc., Ameritrade,
Inc. (a subsidiary of Ameritrade Holding Corporation), and E*TRADE Group, Inc.
We also encounter competition from established full commission brokerage firms
such as PaineWebber Incorporated, Merrill Lynch, Pierce, Fenner & Smith
Incorporated and Solomon Smith Barney, Inc., among others. In addition, we
compete with financial institutions, mutual fund sponsors and other
organizations. Further, the Company has seen a substantial increase in the
number of companies providing discount and electronic brokerage services in
recent years, and this trend is expected to continue.
Many of our competitors have longer operating histories and significantly
greater financial, technical, marketing and other resources than we do. In
addition, many of our competitors have greater name recognition and larger
customer bases that could be leveraged, thereby gaining market share from us.
Our competitors may conduct more extensive promotional activities and offer
better terms and lower prices to customers than we do. There can be no assurance
that we will be able to compete effectively with current or future competitors
or that such competition will not have a material adverse effect on our
business, financial condition and operating results.
Customer Concentration
While no single correspondent broker-dealer or customer represents more than 10%
of the Company's consolidated revenues, the Company has several significant
customers whose loss, in the aggregate, could be material to the Company. The
Company believes that the likelihood of losing a significant number of such
customers is remote.
Acquisitions
We may acquire other companies or technologies in the future, and we regularly
evaluate such opportunities. Acquisitions entail numerous risks, including
difficulties in the assimilation of acquired operations and products, diversion
of management's attention from other business concerns, amortization of acquired
intangible assets and potential loss of key employees of acquired companies. We
have limited experience in assimilating acquired organizations into our
operations. No assurance can be given as to our ability to integrate
successfully any operations, personnel, services or products that might be
acquired in the future. Failure to successfully assimilate acquired
organizations could have a material adverse effect on our business, financial
condition and operating results.
Strategic Relationships
We have established a number of strategic relationships with online and Internet
service providers and software and information service providers. There can be
no assurance that any such relationships will be maintained, or that if they are
maintained, they will be successful or profitable. Additionally, we may not
develop any new such relationships in the future.
Government Regulation
The securities industry in the United States is subject to extensive regulation
under both federal and state laws. See "Securities Industries Practices" above.
Broker-dealers are subject to regulations covering all aspects of the securities
business. Because we are a self-clearing broker-dealer and provide clearing and
execution services for our correspondents, we have to comply with many complex
laws and rules relating to possession and control of customer funds and
securities, margin lending and execution and settlement of transactions.
The SEC, the NASD or other self-regulatory organizations and state securities
commissions can censure, fine, issue cease-and-desist orders or suspend or expel
a broker-dealer or any of its officers or employees. Our ability to comply with
all applicable laws and rules is largely dependent on our establishment and
maintenance of a compliance system to ensure such compliance, as well as our
ability to attract and retain qualified compliance personnel. We could be
subject to disciplinary or other actions due to claimed noncompliance in the
future, which could have a material adverse effect on our business, financial
condition and operating results. As previously reported, the Company is
currently the subject of a federal investigation relating to prior management
that could have such a material adverse effect. See Item 3 "Legal Proceedings"
below.
Our mode of operation and profitability may be directly affected by additional
legislation, changes in rules promulgated by the SEC, the NASD, the Board of
Governors of the Federal Reserve System, the various stock exchanges and other
self-regulatory organizations, or changes in the interpretation or enforcement
of existing laws and rules.
We have initiated an aggressive marketing campaign designed to bring brand name
recognition to JBOC. All marketing activities by JBOC are regulated by the
NASD, and JBOC compliance officers review all marketing materials prior to
release. The NASD can impose certain penalties for violations of its
advertising regulations, including censures or fines, suspension of all
advertising, the issuance of cease-and-desist orders or the suspension or
expulsion of a broker-dealer or any of its officers or employees.
There can be no assurance that other federal, state or foreign agencies will not
attempt to regulate our business. If such regulations are enacted, our business
or operations would be rendered more costly or burdensome, less efficient or
even impossible or otherwise have a material adverse effect on our business,
financial condition and operating results.
Net Capital Requirements
The SEC, the NASD and various other regulatory agencies have stringent rules
with respect to the maintenance of specific levels of net capital by securities
broker-dealers. Net capital is the net worth of a broker or dealer (assets
minus liabilities), less deductions for certain types of assets. If a firm
fails to maintain the required net capital it may be subject to suspension or
revocation of registration by the SEC and suspension or expulsion by the NASD,
and could ultimately lead to the firm's liquidation. If such net capital rules
are changed or expanded, or if there is an unusually large charge against net
capital, operations that require the intensive use of capital would be limited.
Such operations may include trading activities and the financing of customer
account balances. Also, our ability to withdraw capital from brokerage
subsidiaries could be restricted, which in turn could limit our ability to pay
dividends, repay debt and redeem or purchase shares of our outstanding stock. A
large operating loss or charge against net capital could adversely affect our
ability to expand or even maintain our present levels of business, which could
have a material adverse effect on our business, financial condition and
operating results. See "Net Capital Requirements" above.
Systems Failure
We receive and process trade orders through internal trading software, the
Internet, and touch-tone telephone. Thus, we depend heavily on the integrity of
the electronic systems supporting this type of trading. Heavy stress placed on
our systems during peak trading times could cause our systems to operate too
slowly or fail. If our systems or any other systems in the trading process slow
down significantly or fail even for a short time, our customers would suffer
delays in trading, potentially causing substantial losses and possibly
subjecting us to claims for such losses or to litigation claiming fraud or
negligence. During a systems failure, we may be able to take orders by
telephone, however, only associates with securities broker's licenses can accept
telephone orders, and an adequate number of associates may not be available to
take customer calls in the event of a systems failure. In addition, a hardware
or software failure, power or telecommunications interruption or natural
disaster could cause a systems failure. Any systems failure that interrupts our
operations could have a material adverse effect on our business, financial
condition and operating results.
Encryption Technology
A significant barrier to online commerce is the secure transmission of
confidential information over public networks. We rely on encryption and
authentication technology to provide secure transmission of confidential
information. There can be no assurance that advances in computer and
cryptography capabilities or other developments will not result in a compromise
of the algorithms we use to protect customer transaction data. If a compromise
of our security were to occur, it could have a material adverse effect on our
business, financial condition and operating results.
The Year 2000 Problem
Because many computer systems were not designed to handle dates beyond the year
1999, computer hardware and software may need to be modified prior to the year
2000 in order to remain functional. We do not expect our financial results to be
materially affected by the need to address year 2000 issues, but if the costs
associated with addressing these issues are greater than planned, our earnings
and results of operations could be affected. We must rely on outside vendors to
address year 2000 issues for their hardware and software. Contingency plans are
being developed in the event that our key vendors or internal systems will not
be year 2000 capable, but any such noncompliance may have a negative effect on
our financial results. Our business depends heavily on the integrity of
electronic systems outside of our control, such as third-party hardware and
software. Due to our dependence on computer technology to conduct our business,
the nature and impact of year 2000 processing failures on our business,
financial condition and operating results could be materially adverse. See Item
7 "Management's Discussion and Analysis of Financial Condition and Results of
Operations _ Year 2000 Compliance" below.
Stock Price Volatility
The trading price of our common stock has been and may continue to be subject to
wide fluctuations. For example, during the twelve months ended March 31, 1999,
our common stock closed as low as $0.38 and as high as $25.75. Our stock price
may fluctuate in response to a number of events and factors, such as quarterly
variations in operating results, announcements of technological innovations or
new products by the Company or its competitors, changes in financial estimates
and recommendations by securities analysts, the operating and stock price
performance of other companies that investors may consider comparable, and news
reports relating to trends in our markets. In addition, the stock market in
general, and the market prices for Internet related companies in particular,
have experienced extreme volatility that has often been unrelated to operating
performance. These broad market and industry fluctuations may adversely affect
the price of our common stock, regardless of our operating performance.
ITEM 2. PROPERTIES
The principal offices of the Company and JBOC are located at 9665 Wilshire
Boulevard, 3rd Floor, Beverly Hills, California 90212. As of April 8, 1999, the
Company and its subsidiaries lease or conduct their operations from and have
their administrative offices at the following locations:
Location Area (Sq. Principal Use Lease
Feet)
9665 Wilshire Blvd., 3rd, 8th 19,263 JBOH and JBOC Leased to Oct. 2002
Floors, Beverly Hills, CA 90212
9665 Wilshire Blvd., 2nd Floor 3,459 JBOC Leased to Oct. 2002
Floor Beverly Hills, CA 90212
One Exchange Plaza, 19th Floor 7,023 JBOC Leased to Jun. 2006
New York, NY 10006
801 Brickell Ave. Suite 2450 6,993 JBOC Leased to Feb. 2003
Miami, FL 33131
140 West Valley Blvd., Suite 2,017 JBOC Leased to May 2002
220/1 San Gabriel, CA 91776
The Company's office, and the offices and facilities of its subsidiaries, are
considered by management to be generally suitable and adequate for their
intended purposes.
ITEM 3. LEGAL PROCEEDINGS
The Company and its subsidiaries are a party to a number of pending legal or
administrative proceedings, including suits involving various customers that
allege damages arising as a result of brokerage transactions by the Company. In
addition to these matters, the Company is named in the following two matters.
All of the legal and administrative proceedings have arisen in the ordinary
conduct of its business.
Federal Investigation
The Company is under investigation by the Securities and Exchange Commission
(the "SEC") and the Los Angeles office of the United States Attorney's Office
(the "USAO"). Both investigations appear to arise out of the activities of a
former consultant to the Company and the activities of a company affiliated with
the former Chairman of the Board of Directors of the Company, and have been
reported in the Company's prior filings. The Company has continued to cooperate
with the authorities with respect to these investigations. To date, no charges
have been brought against the Company as a result of the SEC's investigation or
the USAO's investigation. Presently, it is not possible to predict the ultimate
outcome nor financial impact, if any, of the investigations on the Company;
however, at this time, the Company cannot rule out the possibility that the
outcome of the matter may have a material adverse impact upon the Company.
William R. Stratton vs. JB Oxford Holdings, Inc. (Case No. 970908225CN)
This action was commenced in November 1997 in the Third Judicial District Court
of the State of Utah. The claim is brought by a former officer and director of
the Company and alleges damages under an employment agreement of not less than
$1,200,000. The Company believes that it has paid all compensation due under
said agreement, and the Company does not believe that the matter will have a
material adverse impact upon the Company. Management intends to vigorously
contest this matter.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
There were no matters submitted to a vote of the shareholders during the fourth
quarter of 1998.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY & RELATED SHAREHOLDER
MATTERS
The Company's common stock is traded in the over-the-counter market with prices
quoted on the NASD's Automated Quotation System SmallCap market ("NASDAQ") under
the trading symbol "JBOH." Quotations given are from NASDAQ and represent
prices between dealers exclusive of a retail mark-up, mark-down, or commission.
They do not necessarily represent actual transactions.
STOCK PRICE AND DIVIDEND DATA
Month Ended
1-31-99 2-28-99 3-31-99
Price range of common
stock
High $3.28 $25.75 $10.31
Low 1.41 2.72 6.56
Close at end of period 2.59 10.06 7.25
Quarter Ended
3-31-98 6-30-98 9-30-98 12-31-98
Price range of common
stock
High $0.84 1.75 1.31 4.50
Low 0.59 .69 .38 .44
Close at end of period 0.72 .81 .69 1.81
Quarter Ended
3-31-97 6-30-97 9-30-97 12-31-97
Price range of common
stock
High $2.28 $2.56 $2.00 $1.63
Low 1.25 1.50 0.81 0.81
Close at end of period 1.75 1.94 1.63 0.84
The number of record holders of the Company's common stock as of March 24, 1999
was 262. The Company believes the number of beneficial holders of the Company's
common stock as of the same date to be approximately 23,900.
Dividends
JBOH has not declared or paid cash dividends on its common stock. It is
Management's position that, given the Company's past expansion and overall
business growth, it has been prudent to retain and increase its capital base.
The Company does not currently anticipate paying cash dividends. Future payments
of dividends will depend upon, among other factors, regulatory restrictions, the
Company's consolidated earnings, overall financial condition, and cash and
capital requirements. In June 1998, the Company issued $2,000,000 in
convertible notes to Third Capital Partners, LLC. See Item 7 "Management
Discussion and Analysis of Financial Condition _ Liquidity and Capital
Resources" below. The issuance of these notes was exempt from registration
under section 4(2) of the Securities Act of 1933.
ITEM 6. SELECTED FINANCIAL DATA
The information set forth below should be read and reviewed in conjunction with
the Management's discussion and analysis, consolidated financial statements, and
related notes, included under Items 7 and 8 of this report.
JB OXFORD HOLDINGS, INC.
SELECTED CONSOLIDATED FINANCIAL INFORMATION
(Amounts in thousands, except per share data)
1998 1997 1996 1995 1994
Income Statement Data
Revenues $67,268 $69,962 $57,599 $39,605 $16,511
Net Income (Loss) (1,839) 1,523 4,040 5,225 (7,588)
Basic Earnings (Loss) Per (0.13) 0.12 0.44 0.62 (1.33)
Share
Diluted Earnings (Loss) Per (0.13) 0.09 0.23 0.40 (1.33)
Share
Dividends -- -- -- -- --
Balance Sheet Data
Total Assets $405,990 $341,586 $330,336 $175,764 $87,533
Long-term and Subordinated 1,250 1,500 2,000 6,623 451
Debt
Liabilities (Excluding Long- 390,374 326,463 315,978 160,697 87,681
Term)
Total Shareholders' Equity 15,617 15,123 12,358 8,444 (599)
(Deficit)
Book Value Per Share* 1.12 1.07 1.18 0.74 (0.09)
* Computed using shareholders' equity less preferred stock with the result
divided by total outstanding common stock.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Forward-Looking Statements
Certain statements in this section are forward-looking statements involving
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 these forward-looking statements. Any potential investor in the
Company should carefully consider the matters discussed in Item 1 "Business
Overview _ Forward-Looking Statements and Risk Factors" above.
Business Overview
The Company, through its wholly-owned subsidiaries, is engaged in the business
of providing brokerage and related financial services to retail customers and
broker-dealers nationwide.
The Company's primary subsidiary is JBOC, 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
correspondents on a fully-disclosed basis; and (iii) acting as a market maker in
NASDAQ, NYSE and listed securities.
The financial services industry is a dynamic and ever-changing industry.
Management believes that improvements in technology and the widespread use of
technology, including the Internet, will dramatically change the way financial
services are provided in the future. The ability to obtain quotes, make trades,
and obtain account information instantly through the Internet has come to be
expected by many investors. Management believes that additional technologies,
products and services will become common place in the not too distant future.
Management's strategy is to position the Company to take advantage of the
opportunities presented by the changes expected in the financial services
industry.
New Management
In May 1998, the Company entered into a transaction with Third Capital Partners,
LLC and other investors, which resulted in a change of control of the Company.
The Company's new Board of Directors appointed new management to the Company in
June 1998. New management's focus has been on containing costs and implementing
a growth plan to capitalize on the significant expansion expected within the
discount and electronic brokerage industry. See Item 1 "Business Overview --New
Management" above.
New management's cost containment strategy, combined with an overall increase in
market volumes, had a positive effect on the Company's financial results as the
Company returned to profitability in the fourth quarter of 1998.
In 1999, management intends to concentrate its efforts on growing the Company's
discount and electronic brokerage business through a variety of means including:
strategic alliances, acquisitions of other broker-dealers, web site enhancement,
aggressive marketing initiatives, and other means.
Discount and Electronic Brokerage Services
JBOC provides a full line of brokerage services and products to customers,
including the ability to buy and sell securities, security options, mutual
funds, fixed income products, annuities and other investment securities. The
Company continues to upgrade and improve its brokerage technologies in order to
provide its customers with the resources necessary to conveniently and
economically execute securities transactions and access related financial
information. In addition to its trading capabilities, the Company's Internet
site (www.jboxford.com) currently provides market quotes, charts, company
research, and customer account information, such as cash balances, portfolio
balances and similar information.
Management believes that the Company can continue to grow its discount and
electronic brokerage division in 1999 due to its ability to provide high
quality, flexible, and customer-sensitive responses and services. The Company
continually upgrades computer systems and services within each of its divisions
to utilize and take advantage of the most recent technological developments.
Clearing and Execution Services
JBOC is self-clearing and provides clearing and execution services to
independent broker-dealers. This division was historically profitable for JBOC
but has experienced substantial profit erosion in recent years as a result of
increased competition that has affected operating margins. However, the
clearing business offers a high return on capital, and management believes by
careful selection and monitoring of the Company's correspondents, this business
segment will remain profitable. See
Item 1 "Business Overview _ Clearing and Execution Services" above.
Market Making Activities
In order to facilitate the execution of security transactions for its own
customers and the customers of its correspondents, JBOC acts as a market maker
for approximately 500 public corporations whose stocks are traded on the NASDAQ
National Market System, NYSE or other national exchanges. The Company's market
making activities concentrate on the execution of unsolicited transactions for
customers and are required to be in compliance with the NASD rules regarding
best execution. See Item 1 "Business Overview _ Market Making Activities"
above.
Results of Operations
Years Ended December 31, 1998, 1997 and 1996
Revenues
The Company's total revenues were $67,268,325 in 1998, a decrease of 4% from
$69,961,623 in 1997, which was up 21% from $57,599,380 in 1996. The primary
reason for the decrease from 1997 to 1998 was a decrease in clearing and
execution revenue of 34% to $11,565,427 in 1998 from $17,442,407 in 1997, which
is a 10% decrease from $19,452,650 in 1996. The operating margins within the
clearing and execution industry segments have declined during recent years,
leading management to focus on growing its discount and on-line brokerage
divisions. The strategy has been successful in limiting the impact of the
decrease in clearing and execution revenues, as the growth within the Company's
discount and on-line brokerage divisions has had a positive impact on the
Company's trading profits, and commission and interest revenues.
Commission revenues increased 3% to $26,600,214 in 1998 from $25,939,576 in
1997, which was up 38% from $18,814,468 in 1996. Commission revenue was the
largest source of revenue to the Company during 1998 and 1997, consisting of 40%
and 37%, respectively, of total revenues during these years. During 1996, the
largest source of revenue was clearing and execution revenues, 34%, while
commission revenue totaled 33% of all revenues. For 1999, the Company
anticipates increased commission revenue as the Company experiences growth in
its discount and on-line brokerage divisions and as these revenues track the
overall growth in trading volume experienced during recent years.
Interest revenues decreased 1% to $23,260,659 in 1998 compared with $23,601,341
in 1997, which was up 63% from $14,519,507 in 1996. Changes in interest
revenues are consistent with usual fluctuation of debit balances in brokerage
margin accounts as well as changes in broker-call rates on which the interest
charged to customers is calculated. The increase in 1997 compared to 1996
relates directly to an increase in customer account balances, as customer
receivables increased by $69,833,907 or 33% to $279,560,970 in 1997. In the
fourth quarter of 1998, management was able to improve the spread between the
interest charged on debit balances in customer brokerage accounts and the
interest paid on credit balances in customer accounts and therefore anticipates
that the net interest income (interest revenues less interest expenses) will
increase in 1999.
Revenues from trading profits increased 155% to $5,747,187 in 1998 from
$2,250,940 in 1997, which was up 144% from $922,795 in 1996. These increases
resulted from an increase in trading volume from the Company's discount and on-
line brokerage operations, from the discontinuance of proprietary trading
positions and investment banking activities which had negatively affected
trading profits, and from an increase in the Company's market-making activities
in listed securities initiated in the fourth quarter of 1997. Management
anticipates additional growth in trading profits for 1999.
Other revenues declined 87 % to $94,838 in 1998 from $727,359 in 1997, which was
down 81% from $3,889,960 in 1996. The decrease in 1998 is attributable to a
one-time gain of $500,000 recognized in 1997 as compensation from a
correspondent prematurely terminating its clearing contract with the Company.
The decrease from 1996 is primarily attributable to changes in the marketplace
that significantly decreased order-flow payments received by the Company from
other market makers. Management anticipates that other revenues will continue
to account for a negligible percentage of revenues in the future.
Expenses
Expenses totaled $66,055,680 in 1998, a decrease of 2% from $67,339,066 in 1997,
which was an increase of 31% from $51,391,497 in 1996. Many of the Company's
expenses, including commission expense, clearing and floor brokerage expense,
interest expense and data processing charges, are directly related to commission
revenues, trading revenues, and interest revenues. The increase in expenses
since 1996 is primarily a result of the growth in the Company's discount and on-
line brokerage divisions, including an increase of $5,732,528 or 68% in interest
expenses from 1996 to 1997, and no significant change in interest expenses from
1997 to 1998. Settlement expense increased by 157% in 1997 from 1996 as
discussed below.
The slight decrease in total expenses in 1998 reflects the effect of new
management's concerted effort to contain costs and improve efficiency. These
efforts began to produce positive results in the fourth quarter of 1998, as
total expenses were 85% of total revenues during that quarterly period. Total
expenses were 98%, 96%, and 89% of total revenues during the years ended 1998,
1997 and 1996, respectively. For 1999, management anticipates that total
expenses will increase as the Company continues to grow its discount and on-line
divisions; however, total expenses (excluding advertising expenditures) as a
percentage of total revenues should decrease from 1998 results, improving pre-
advertising operating margins. The Company intends to increase its advertising
budget substantially in 1999, which will increase total expenses accordingly.
Expenses for professional services decreased 27% to $3,346,260 in 1998 from
$4,585,781 in 1997, which was an increase of 11% from $4,141,721 in 1996. The
decrease from 1997 to 1998 was due to a 24% decline in fees paid to outside
consultants and a 39% decline in legal expenses arising from cost saving
measures enacted by the Company. $407,216 of the increase in 1997 from 1996 was
associated with legal fees in the resolution of litigation matters described
below.
Bad debt expense increased 51% to $2,019,454 in 1998 from $1,335,412 in 1997,
which was an increase of 52% from $875,743 in 1996. Settlement expense declined
78% to $630,539 in 1998 from $2,897,313 in 1997, which was an increase of 157%
from $1,127,607 in 1996. The increase in 1997, and the decrease in 1998, was
primarily the result of the settlement of a litigation matter during 1997 in
which the Company paid $1,500,000 to settle this, as well as resolutions of
other matters, related to an inactive subsidiary of the Company, Reynolds
Kendrick Stratton, Inc.
Non-cash interest expense was $2,530,000 in 1998, reflecting the charge taken
with respect to the change of control transaction that occurred in the second
quarter of 1998.
The Company's effective tax rate varied from its statutory federal rate due to
changes in state taxes net of federal benefit and other temporary differences.
See Note 11 of the Notes to Consolidated Financial Statements, below.
Liquidity and Capital Resources
The Company completed an initial public offering of its common stock in 1987 and
has made several private placements of its securities since that time, including
a $2,000,000 private placement of convertible notes completed in June 1998.
In May 1998, the holders of the Company's 9% Senior Secured Convertible Notes
agreed to extend the maturity date until December 31, 1999, and the Company
agreed to modify certain conversion features associated with this debt. The
most significant modification was a decrease in the price at which this debt can
be converted into common stock from $1.00 to $0.70 per share.
In June 1998, the Company issued $2,000,000 in convertible secured notes to
Third Capital Partners, LLC. These notes have substantially the same terms as
the 9% Senior Secured Convertible Notes. Interest accrues at 9% per annum and
is paid monthly. The debt is convertible into the Company's common stock at
$0.70 per share. Christopher L. Jarratt, the Company's Chairman and Chief
Executive Officer, is the Chief Manager and Chief Executive Officer of Third
Capital Partners, LLC. Mark D. Grossi, a director of the Company, is a member
of Third Capital Partners, LLC.
As a result of these transactions, the Company reported a non-cash interest
charge of $2,530,000 in the second quarter of 1998 because the market price for
the Company's publicly-traded common stock exceeded the $0.70 per share
conversion price at the time of these transactions.
During the fourth quarter of 1998, the Company used cash in the approximate
amount of $750,000 to repurchase various securities of the Company, including
common stock, convertible notes, demand debt, options and other securities.
Included in these repurchases was the purchase in December 1998 of $500,000 in
face value of 9% Senior Secured Convertible Notes from 3421643 Canada Inc. for
$500,000; as well as the repurchase of 234,500 shares of common stock for an
aggregate purchase price of $197,780.
In addition to the sources of capital described above, the Company has financed
its growth through the use of funds generated from the business operations of
its subsidiaries, mainly JBOC. JBOC has established omnibus/financing accounts
and lines of revolving credit with other broker-dealers and banking institutions
with an aggregate borrowing limit approximating $30,000,000. Further, the
Company has available stock loan financing when necessary. Amounts borrowed
bear interest at a fluctuating rate based on the broker call and prime rates.
The majority of the Company's corporate assets at December 31, 1998, 1997 and
1996, were held by its subsidiary, JBOC, and consisted of cash or assets readily
convertible to cash. The Company's statement of financial condition reflects
this largely liquid financial position. Receivables with other brokers and
dealers primarily represent current open transactions that typically settle
within a few days, or stock borrow-and-loan transactions where the contracts are
adjusted to market values daily. Additionally, JBOC is subject to the
requirements of the NASD and the SEC relating to liquidity, net capital
standards and the use of customer cash and securities. See Item 1 "Business
Overview -- Net Capital Requirements" above. At December 31, 1998, JBOC had
regulatory net capital of $17,754,370, which exceeded the minimum requirement by
$12,352,063.
The Company currently anticipates that its cash resources and available credit
facilities will be sufficient to fund its expected working capital and capital
expenditure requirements for the foreseeable future. However, in order to more
aggressively expand its business, respond to competitive pressures, develop
additional products and services, or take advantage of strategic opportunities,
the Company may need to raise additional funds. If funds are raised through the
issuance of equity securities, or securities which are convertible into equity
securities, the Company's existing shareholders may experience additional
dilution in ownership percentages or book value. Additionally, such securities
may have rights, preferences and privileges senior to those of the holders of
the Company's common stock. The Company cannot give any assurance that
additional funds will not be needed to respond to industry changes, competitive
pressures and unforeseen events. If such funds are needed, there can be no
assurance that additional financings will be available.
Liquidity at December 31, 1998, 1997 and 1996
The Company's cash position decreased during 1998 by $101,490 to $2,496,572 at
year-end. This compares with a net increase in cash and cash equivalents of
$1,628,191 in 1997 and a net decrease of $14,979,706 in 1996. The fluctuation
in the Company's cash position is reflective of the substantial differences in
the net cash provided by (used in) operating activities during the periods
stated.
Cash Flows From Operating Activities
Net cash provided by (used in) operating activities was $(136,340), $5,848,138
and $(18,492,426) for 1998, 1997 and 1996, respectively. The Company's net cash
provided by (used in) operating activities is materially impacted by changes in
the brokerage-related assets and liabilities of JBOC.
During 1998, the most significant use of cash was the increase in cash
segregated under federal regulations to $110,151,075 in 1998 from $34,903,262 in
1997. This use of cash was caused by the increase in payables to customers for
the same period. As a result of a decrease in securities loaned at
December 31, 1998, payables to broker dealers and clearing organizations
decreased to $58,064,209 in 1998 from $90,222,450 in 1997, or $32,158,241. The
most significant source of cash in operations was the change in customer
payables of $90,925,459. This source of cash was offset by the uses of cash
indicated above.
During 1997, the most significant source of cash was the decrease in cash
segregated under federal regulations in the amount of $60,773,200. As a result
of an increase in securities loaned at December 31, 1997, payables to broker
dealers and clearing organizations increased by $54,655,744. The most
significant use of cash in operations was the change in payables to/receivables
from customers of $112,156,260. This use of cash was offset by the sources of
cash indicated above. The Company also generated cash from net income in the
amount of $1,522,685.
Cash Flows Used In Investing Activities
The net cash flow used in investing activities during 1998, 1997 and 1996 was
$875,473, $1,732,405 and $2,030,942, respectively. These cash uses are a direct
result of capital expenditures made by the Company during such periods. The
Company's requirement for capital resources is not material to the business as a
whole. The Company presently has no plans to open additional offices. The
Company has been in the process of upgrading its information and communication
systems, along with testing for year 2000 compliance. See "Year 2000
Compliance" above. Future expenditures for upgrading of the Company's various
information and communication systems are not estimated to be material to the
operation of the Company. The Company has no significant commitments for
capital expenditures.
Cash Flows From Financing Activities
Financing activities provided $910,323 in cash during 1998, primarily through
the issuance of additional debt securities which are convertible into the
Company's common stock. See "Liquidity and Capital Resources" above. This
compares with a net use of cash in financing activities during 1997 of
$2,487,542 and net cash provided from financing activities of $5,543,662 during
1996.
In 1997, the primary use of cash was the liquidation of short term borrowing of
$6,097,193. The Company obtained cash in financing activities through
additional loans from shareholders of $2,867,500 in 1997. Additionally, the
Company issued shares of its common stock during 1997 in the amount of
$1,327,630 and increased shareholder loans by $2,867,500.
JB OXFORD & COMPANY
SHORT TERM BORROWING
(Amounts in thousands)
Category of aggregate
short-term a b c d e
borrowings
Year Ended December 31, 1998
collateralized by:
Customer securities $ -- -- $ 6,005 $1,366 8.4%
Year Ended December 31, 1997
collateralized by:
Customer securities $ -- -- $12,262 $4,264 6.9%
Firm securities -- -- $1,500 $ 308 8.5%
Year Ended December 31, 1996
collateralized by:
Customer securities $ 4,497 7.7% $4,497 $ 746 7.4%
Firm securities $ 1,500 8.4% $1,500 $ 208 8.4%
a)Balance at end of period
b)Weighted average interest rate at end of the period
c)Maximum amount outstanding during the period
d)Average amount outstanding during the period
e)Weighted average interest rate during the period
The weighted average interest rate during the period was calculated by factoring
the balances at the end of each month at the various rates, and computing a
weighted average on the results.
Management believes that existing capital available, together with the
established revolving credit lines, provides the Company with adequate financial
resources to meet its capital needs at the present operating level. However, in
order for the Company to assure continued growth and stability, and to protect
against the potential impact which could result from the failure of any
combination of its correspondent broker-dealer clients, management is exploring
additional sources of capital to increase the Company's liquidity and capital
base.
Impact of Inflation
Inflation has had a minimal impact on the operations and financial condition of
the Company in recent years. The Company will continue to monitor costs and
productivity constantly and will adjust prices and operations as necessary to
meet inflationary impacts or market changes.
Subsequent Events
In February 1999, Hareton Sales & Marketing, Inc., ("Hareton") the holder of
$502,615.35 in face value of 9% Senior Secured Convertible Notes exercised its
right to convert such debt into common stock of the Company and the Company
issued 718,021 shares of common stock in full satisfaction of this debt.
Also in February 1999, the Company established an affiliate in the form of a
trust to purchase stock from certain shareholders. The Company made a loan to
the trust in the amount of $586,915, which through a series of transactions was
used to acquire 469,540 shares of the Company's common stock at an effective
price of $1.25 per share. Concurrent with the transaction, the Company
relinquished its right of first refusal as to any remaining shares held by Oeri
Finance, Inc.; and Oeri Finance, Inc. forgave $728,000 in demand debt owed by
the Company.
Both Oeri Finance Inc. and Hareton filed 13D Statements with the SEC indicating
ownership of less than 5% of the Company's stock.
Year 2000 Compliance
The Year 2000 problem arises when computer programs have been written using two
digits rather than four to define the applicable year. As a result, date-
sensitive hardware and software may recognize a date using "00" as the year 1900
rather than the year 2000. This could result in a system failure or other
disruption of operations and impede normal business activities.
Recently, the SEC amended Rule 17a-5 under the Securities Exchange Act of 1934
to require certain broker-dealers to file with the SEC and their designated
examining authorities a report prepared by an independent public accountant
regarding the broker-dealer's process for preparing for the year 2000. The
report will provide valuable information on the existence and sufficiency of a
broker-dealer's process for addressing Year 2000 problems; provide an
independent verification of the accuracy of the information contained in the
broker-dealer's second Form BD-Y2K; aid the SEC in obtaining a more complete
understanding of the industry's overall Year 2000 preparations; and identify
firm-specific and industry-wide problems.
The Company has developed a comprehensive plan to deal with the Year 2000 issue.
The Company believes the plan, if properly implemented, will result in timely
and adequate modifications of its systems and technology and those of its
outside vendors to address Year 2000 issues appropriately. The plan has five
phases:
o Awareness _ defining the Year 2000 problem, gaining support and resources,
developing a plan and establishing a project team.
o Assessment _ assessing the size and complexity of the project and identifying
all systems affected by the Year 2000 date change.
o Renovation _ obtaining hardware and software upgrades and outside vendor
certifications.
o Validation _ testing systems including connections with other systems and
acceptance of such by internal and external users.
o Implementation _ developing a contingency plan.
Except as indicated hereafter, the Company has substantially completed the five
phases of its plan. However, to ensure success, the Company plans to:
o Engage in ongoing discussions with outside vendors to determine if they have
been successful in validating their compliance with their Year 2000 plans;
o Use its best efforts to ensure that new systems or subsequent changes in
existing systems are verified as Year 2000 compliant;
o Test certain third-party systems which have computerized interfaces with the
Company's systems; and
o Continue to refine its contingency plan.
The Company relies substantially on outside vendors to provide computer hardware
and software systems for its operations. Consequently, the Year 2000 plan
places heavy emphasis on compliance by outside vendors. The plan prioritizes
outside vendors by the degree of dependence on the computer systems they
provide. The plan also addresses customer capabilities to become Year 2000
compliant. Finally, the plan requires review of non-information technology
systems, such as the alarm systems.
The Company has engaged the services of independent consultants to review the
overall Year 2000 project, the cost of which is not material. The independent
consultant has been requested to emphasize testing of vendor-reliant, mission-
critical systems and to assist in the development of a contingency plan.
To determine the readiness of outside vendors, the Company has solicited written
communications from each major outside vendor about its compliance with Year
2000. Most outside vendors have responded that they are Year 2000 compliant.
For those outside vendors who provide mission-critical systems and have
certified these systems as Year 2000 compliant, the Company has conducted in-
house testing of these systems, using various Year 2000-critical dates.
For those outside vendors that have responded they are working toward Year 2000
compliance and that the Company has determined to be significant, the Company
will follow-up on a regular basis throughout 1999. These outside vendors have
advised the Company that they expect to be Year 2000 compliant prior to December
31, 1999, and there are no Year 2000 compliance issues which appear to be
uncorrectable by that date. For such outside vendors that provide mission-
critical systems, the Company will be conducting ongoing testing to validate
Year 2000 compliance.
The Company has determined that other outside vendors will not have a material
impact on its operations, whether or not they are Year 2000 compliant.
The Company has sent a questionnaire to each of its significant customers to
determine the extent of risk created by any failure by them to remediate their
own Year 2000 issues. Most customers have responded. Each customer is
categorized according to its state of readiness based on its response to the
questionnaire and the Company's review of the customer. The Company will make a
reassessment on each customer's risk on a regular basis. The Company has tested
its non-information technology systems, such as microprocessors controlling its
environmental and alarm systems and found them to be Year 2000 compliant.
Some of the Company's computer hardware and software applications were modified
or replaced in order to maintain their functionality as the Year 2000
approaches. The total direct costs of the Year 2000 effort were less then
$250,000 in 1998 and should be less then $250,000 in 1999.
Management believes that it is likely that its year 2000 compliance efforts will
be successful. However, it is possible that necessary remediation of vendor-
reliant systems may not be completed in a timely manner, or third-party systems
with which the Company has computerized interfaces may create Year 2000 issues.
It is also possible that the expenses or liabilities to which the Company may
become subject as a result of such issues could be material. Any such event or
occurrence could have a material adverse effect on the Company's business,
prospects, operating results and financial condition. Ultimately, the potential
impact of the Year 2000 issue on the Company will depend on a series of complex
factors, including the following:
o The corrective measures undertaken by the Company itself;
o The measures undertaken by outside vendors to become Year 2000 compliant;
o The accuracy of representations made by outside vendors to the Company
concerning their state of readiness;
o The degree of compliance by governmental agencies, businesses (including
telephone and other utility companies) and other entities which engage in
essential communications or third-party computerized interfaces with the
Company and its customers; and
o The degree of compliance by customers.
At worst, the Company's customers and outside vendors will face severe Year 2000
issues. Large on-line customers or day traders negatively affected by Year 2000
issues could lead to increased risk of the inability to execute securities
transactions. The Company may also be required to replace non-compliant outside
vendors with more expensive Year 2000 compliant outside vendors.
The Company has taken steps to avail itself of the safe harbor provision of the
newly-enacted Year 2000 Information and Readiness Disclosure Act by clearly
labeling written communications to customers and vendors as a "Year 2000
Readiness Disclosure," thereby prompting a prompt, candid and thorough exchange
of information on Year 2000 readiness and limiting liability for any errors.
The Company has created a contingency plan to take effect should there be
circumstances preventing timely implementation. If those outside vendors do not
demonstrate compliance by a certain date, the Company will seek alternatives in
accordance with its contingency plan. Outside vendors of mission-critical
systems are major U.S. companies, and management has assessed the relevant
financial and operational capabilities of its hardware and software to provide
Year 2000 processing. The time frame to convert to another outside vendor in
the Year 2000 is relatively long and therefore the ability to obtain replacement
outside vendors will be limited.
In addition, for each mission-critical system, the Company has identified
alternate procedures to achieve a successful resumption of business in case its
computer systems, or those of its mission-critical outside vendors, fail. The
alternative procedures include development of a manual process for implementing
the system and identifying alternative outside vendors.
Recent Accounting Pronouncements
In 1998, the Company adopted Statement of Financial Accounting Standards No.
131, Disclosure About Segments of an Enterprise and Related Information ("SFAS
131"), the adoption of which had no significant impact on the Company's
financial statements.
In 1998, the Financial Accounting Standards Board issued Statement of Financial
Accounting Standards No. 133, Accounting for Derivative Instruments and Hedging
Activities ("SFAS 133"). The Company is required to and will implement the
provision of this new standard effective with its 2000 fiscal year. SFAS 133
establishes accounting and reporting standards requiring that every derivative
instrument be recorded in the statement of condition as either an asset or as a
liability measured at its fair value and that changes in the fair value be
recognized currently in the statement of operations. The Company has not yet
quantified the impact of adopting SFAS 133 on its financial statements but does
not believe it will have a material effect on the Company's financial position
or results of operations.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Market Risk Disclosures
The following discussion about the Company's market risk disclosures involves
forward-looking statements. Actual results could differ materially from those
projected in the forward-looking statements. See Item 1 "Business Overview _
Forward-Looking Statements and Risk Factors" above. The Company is exposed to
market risk related to changes in interest rates and equity security price risk.
The Company does not have derivative financial instruments for speculative or
trading purposes.
Retail broker-dealers with clearing operations, such as the Company, are exposed
to risks that exceed the simple risk of loss of business due to the loss of
retail customers and/or correspondents. Broker-dealers engaged in clearing
operations for other correspondent broker-dealers are exposed to losses beyond
the loss of business in the event that the correspondent fails. These risks
result where the total assets, securities held in inventory, and cash of the
failed correspondent are insufficient to cover the unpaid customer debits,
together with losses which may be generated in the correspondent's trading
account. The Company has established procedures to review a correspondent's
inventory and activities in an effort to prevent such losses in the event of a
correspondent's failure.
Areas outside the control of the Company which affect the securities market,
such as severe downturns or declines in market activity, may cause substantial
financial exposure. This is particularly true with regard to the receivables
that are carried in customers' margin accounts. A significant decline in market
value may decrease the value of securities pledged in the margin accounts to a
point that the margin loans would exceed such value. While the Company is
authorized to liquidate the securities and to utilize the correspondent's
account balances to cover any shortfall, in a worst case scenario, such
collateral may not be sufficient to cover all losses.
Interest Rate Sensitivity and Financial Instruments
For its working capital and reserves that are required to be segregated under
federal or other regulations, the Company invests primarily in U.S. Treasury
securities under agreements to resell. These agreements have maturity dates
ranging from one to seven days, and do not present a material interest rate
risk.
Equity Price Risk
JBOC acts as a market maker for approximately 500 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 an inventory of equity securities.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The financial statements and schedules required to be filed by Item 8 of this
form and paragraph (d) are contained herein as follows:
Page
Report of Independent Public Accountants 26
Report of Independent Certified Public Accountants 27
Consolidated Statements of Financial Condition December 31, 1998, and 28-29
1997
Consolidated Statements of Operations Years Ended December 31, 1998, 30
1997, and 1996
Consolidated Statements of Changes in Shareholders' Equity 31
(Deficit)Years Ended December 31, 1998, 1997, and 1996
Consolidated Statements of Cash Flows Years Ended December 31, 1998, 32
1997, and 1996
Notes to Consolidated Financial Statements 33-48
Financial Statement Schedule I - Condensed Financial Statements (Parent 52-56
Company Only)
Financial Statement Schedule II - Valuation and Qualifying Accounts 57
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To JB Oxford Holdings, Inc.:
We have audited the accompanying consolidated statement of financial condition
of JB Oxford Holdings, Inc. (a Utah corporation) and subsidiaries (the
"Company") as of December 31, 1998, and the related consolidated statements of
operations, changes in shareholders' equity (deficit) and cash flows for the
year then ended. These financial statements, and the schedules referred to
below, are the responsibility of the Company's management. Our responsibility
is to express an opinion on these financial statements and schedules based on
our audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of JB Oxford Holdings, Inc. and
subsidiaries as of December 31, 1998, and the results of their operations and
their cash flows for the year then ended in conformity with generally accepted
accounting principles.
Our audit was made for the purpose of forming an opinion on the basic financial
statements taken as a whole. The Financial Statement Schedules I and II are
presented for purposes of additional analysis and are not a required part of the
basic financial statements. This information has been subjected to the auditing
procedures applied in our audit of the basic financial statements and, in our
opinion, is fairly stated in all material respects in relation to the basic
financial statements taken as a whole.
ARTHUR ANDERSEN LLP
Los Angeles, California
February 26, 1999
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
Board of Directors
JB Oxford Holdings, Inc.
We have audited the accompanying consolidated statement of financial condition
of JB Oxford Holdings, Inc. and Consolidated Subsidiaries, as of December 31,
1997, and the related consolidated statements of operations, changes in
shareholders' equity (deficit), and cash flows for each of the two years ended
December 31, 1997. We have also audited the schedules listed in the
accompanying index through December 31,1997. These financial statements and
schedules are the responsibility of the Company's management. Our responsi-
bility is to express an opinion on these financial statements and schedules
based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements and schedules are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements and
schedules. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
presentation of the financial statements and schedules. We believe that our
audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of JB Oxford Holdings,
Inc. and Consolidated Subsidiaries at December 31, 1997, and the results of
their operations and cash flows for each of the two years ended December 31,
1997, in conformity with generally accepted accounting principles.
Also, in our opinion, the schedules present fairly, in all material respects,
the information set forth therein through December 31,1997.
BDO SEIDMAN, LLP
Los Angeles, California
March 27, 1998
JB OXFORD HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
December 31,
1998 1997
ASSETS:
Cash and cash equivalents (including securities
purchased under agreements to resale of $140,516
and $101,246) (Note 3) $ 2,496,572 $ 2,598,062
Cash and securities purchased under agreements to 110,151,075 34,903,262
resell, segregated under federal and other
regulations (Note 4)
Receivable from broker-dealers and clearing
organizations (net of allowance for doubtful
accounts of $2,103,802 for both years) (Note 5) 7,321,066 4,682,908
Receivable from customers (net of allowance for
doubtful accounts of $5,354,864 and $4,957,781) 268,608,125 279,560,970
(Note 6)
Other receivables (net of allowance for doubtful
accounts of $1,979,793 for both years) 1,591,482 2,233,321
Marketable securities owned - at market value 2,927,071 3,737,661
(Note 7)
Furniture, equipment, and leasehold improvements
(at cost - net of accumulated depreciation and
amortization of $5,389,576 and $4,051,672) (Note 8) 2,860,100 3,460,467
Income taxes refundable 717,396 717,396
Deferred income taxes (Note 12) 1,079,840 918,358
Clearing deposits 6,833,171 6,728,590
Other assets 1,404,455 2,044,588
TOTAL ASSETS $405,990,353 $341,585,583
See accompanying notes to Consolidated Financial Statements.
JB OXFORD HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
December 31,
1998 1997
LIABILITIES AND SHAREHOLDERS' EQUITY:
LIABILITIES:
Payable to broker-dealers and clearing organizations
(Note 5) $ 58,064,209 $ 90,222,450
Payable to customers (Note 6) 311,958,515 221,033,056
Securities sold, not yet purchased - at market value 868,085 1,148,706
(Note 7)
Accounts payable and accrued liabilities 9,010,480 5,064,644
Income taxes payable (Note 12) 552,648 182,028
Loans from shareholders (Note 13) 8,538,811 7,288,811
Notes payable (Note 9) 130,997 22,894
Subordinated borrowings (Note 10) 1,250,000 1,500,000
TOTAL LIABILITIES 390,373,745 326,462,589
COMMITMENTS AND CONTINGENT LIABILITIES (NOTE 16)
SHAREHOLDERS' EQUITY:
Common stock ($.01 par value, 100,000,000 shares
authorized; 14,141,205 shares issued for both years) 141,412 141,412
Additional paid-in capital 15,345,316 12,815,316
Retained earnings 327,660 2,166,266
Treasury stock, 234,500 shares at cost (197,780) --
TOTAL SHAREHOLDERS' EQUITY 15,616,608 15,122,994
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $405,990,353 $341,585,583
See accompanying notes to Consolidated Financial Statements.
JB OXFORD HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
For The Years Ended December 31,
1998 1997 1996
REVENUES:
Clearing and execution $11,565,427 $17,442,407 $19,452,650
Trading profits 5,747,187 2,250,940 922,795
Commissions 26,600,214 25,939,576 18,814,468
Interest 23,260,659 23,601,341 14,519,507
Other 94,838 727,359 3,889,960
Total Revenues 67,268,325 69,961,623 57,599,380
EXPENSES:
Employee compensation 9,725,313 10,231,818 9,013,089
Commission expense 9,259,410 9,169,351 7,588,287
Clearing and floor brokerage 3,621,816 2,954,415 2,144,686
Communications 5,983,039 6,560,425 5,181,392
Occupancy and equipment 4,819,812 4,108,926 2,822,846
Interest 13,960,009 14,191,646 8,459,118
Data processing charges 6,168,764 5,214,148 4,143,197
Professional services 3,346,260 4,585,781 4,141,721
Promotional 3,929,062 3,709,631 3,912,089
Bad debt expense 2,019,454 1,335,412 875,743
Settlement expense 630,539 2,897,313 1,127,607
Other operating expenses 2,592,202 2,380,200 1,981,722
Total Expenses 66,055,680 67,339,066 51,391,497
Income From Operations 1,212,645 2,622,557 6,207,883
Non-cash interest expense on 2,530,000 -- --
convertible notes
Income (Loss) Before Income Taxes (1,317,355) 2,622,557 6,207,883
Income tax provision 521,251 1,099,872 2,168,309
Net Income (Loss) $(1,838,606) $1,522,685 $4,039,574
Basic Net Income (Loss) Per Share (0.13) 0.12 0.44
Diluted Income (Loss) Per Share (0.13) 0.09 0.23
Weighted average number of shares of
common stock and assumed conversions
Basic 14,127,800 12,334,517 8,704,235
Diluted 14,127,800 18,746,264 18,380,780
See accompanying notes to Consolidated Financial Statements.
JB OXFORD HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY (DEFICIT)
Preferred Stock Common Stock
Additional Retained
Paid-in Earnings Treasury
Shares Amount Shares Amount Capital (Deficit) Stock Total
Balance at
January 1, 1996 200,000 $2,000,000 8,655,205 $ 86,552 $ 9,447,296 $(3,089,911) $ -- 8,443,937
Exercise of
warrants -- -- 105,000 1,050 94,200 -- -- 95,250
Net Income -- -- -- -- -- 4,039,574 -- 4,039,574
Cash Dividends -
preferred stock -- -- -- -- -- (220,603) -- (220,603)
Balance at
December 31, 1996 200,000 2,000,000 8,760,205 87,602 9,541,496 729,060 -- 12,358,158
Issuance of common
stock -- -- 65,000 650 124,150 -- -- 124,800
Exercise of
warrants -- -- 1,316,000 13,160 1,189,670 -- -- 1,202,830
Conversion of
preferred stock (200,000) (2,000,000) 4,000,000 40,000 1,960,000 -- -- --
Net Income -- -- -- -- -- 1,522,685 -- 1,522,685
Cash Dividends -
preferred stock -- -- -- -- -- (85,479) -- (85,479)
Balance at
December 31, 1997 -- -- 14,141,205 141,412 12,815,316 2,166,266 -- 15,122,994
Non-cash interest
expense -- -- -- -- 2,530,000 -- -- 2,530,000
Net (Loss) -- -- -- -- -- (1,838,606) -- (1,838,606)
Treasury stock -- -- -- -- -- -- (197,780) (197,780)
Balance at
December 31, 1998 -- $ -- 14,141,205 $141,412 $15,345,316 $ 327,660 $(197,780) $15,616,608
See accompanying notes to Consolidated Financial Statements.
JB OXFORD HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
For The Years Ended December 31,
1998 1997 1996
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $(1,838,606) $1,522,685 $4,039,574
Adjustments to reconcile net income
(loss) to net cash provided by (used in)
operating activities:
Depreciation and amortization 1,475,840 1,259,147 882,773
Disposal of property and equipment -- -- 204,807
Deferred rent (111,693) (62,700) 70,079
Provision for bad debts 2,019,454 1,335,412 875,743
Provision (benefit) for deferred income (127,415) (228,563) 689,375
taxes
Non-cash interest expense for 2,530,000 -- --
convertible debentures
Changes in assets and liabilities:
Cash segregated under federal and other (75,247,813) 60,773,200 (95,632,760)
regulations
Receivable from broker-dealers and
clearing organizations (2,638,158) 2,351,805 (427,160)
Receivable from customers 8,933,391 (71,169,319) (67,433,222)
Other receivables 641,839 (829,733) (534,989)
Marketable securities owned 810,590 1,342,485 (492,724)
Clearing deposits (104,581) (1,755,344) (4,540,383)
Other assets 640,133 (1,099,722) (262,891)
Payable to broker-dealers and clearing (32,158,241) 54,655,744 5,486,596
organizations
Payable to customers 90,925,459 (40,986,941) 140,436,810
Securities sold not yet purchased (280,621) 904,842 19,701
Accounts payable and accrued liabilities 4,057,529 (2,478,854) (403,302)
Income taxes payable/refundable 336,553 313,594 (1,470,453)
Net cash provided by (used in) operating (136,340) 5,848,138 (18,492,426)
activities
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (875,473) (1,732,405) (2,030,942)
Net cash used in investing activities (875,473) (1,732,405) (2,030,942)
CASH FLOWS FROM FINANCING ACTIVITIES:
Advances (repayments) of notes payable 108,103 -- (328,110)
Advances (repayments) on short term -- (6,097,193) 5,997,125
borrowing
Payment of subordinated loans (250,000) (500,000) --
Loans from shareholders 1,250,000 2,867,500 --
Issuance of stock -- 1,327,630 95,250
Treasury stock (197,780) -- --
Payment of cash dividends - preferred -- (85,479) (220,603)
stock
Net cash provided by (used in) financing 910,323 (2,487,542) 5,543,662
activities
NET INCREASE (DECREASE) IN CASH AND CASH (101,490) 1,628,191 (14,979,706)
EQUIVALENTS
CASH AND CASH EQUIVALENTS AT BEGINNING OF 2,598,062 969,871 15,949,577
YEAR
CASH AND CASH EQUIVALENTS AT END OF YEAR $2,496,572 $2,598,062 $969,871
See accompanying notes to Consolidated Financial Statements.
JB OXFORD HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1. BASIS OF PRESENTATION
Reporting Entity
The accompanying consolidated financial statements for 1998, 1997 and 1996
include the accounts of JB Oxford Holdings, Inc., a Utah Corporation, and its
wholly-owned subsidiaries, JB Oxford & Company ("JBOC"), Stocks4Less, Inc.
("S4L"), JB Oxford Insurance Services, Inc. ("JBOI"), Reynolds Kendrick
Stratton, Inc. ("RKSI"); and its 90% owned subsidiary, Prolyx Data Systems, Inc.
("Prolyx") (collectively referred to as "the Company" or "JBOH"). The Company
operates in a single geographic and industry segment, the Securities Industry.
The Company derives its revenues primarily from its correspondent clearing
services, discount operation, and market making activities at JBOC. No
individual customer or correspondent accounts for 10% or more of consolidated
revenues. Intercompany balances have been eliminated in the consolidated
financial statements. Additionally, minority shareholders' interests are not
separately presented, as the amounts are not significant.
The Company and JBOC have their principal offices in Beverly Hills, California.
JBOC's discount division has branches in Beverly Hills, California; New York,
New York; Miami, Florida; and San Gabriel, California.
NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Use of Estimates
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect reported amounts of assets and liabilities and disclosure of contingent
assets and liabilities at the date of the financial statements and the reported
amounts of revenues and expenses during the year. Actual results may differ
from those estimates.
Cash and Cash Equivalents
The Company considers all highly liquid investments purchased with maturities of
three months or less when purchased to be cash equivalents. Highly liquid
investments are both readily convertible to known amounts of cash and are so
near their maturity that they present insignificant risk of changes in value
because of interest rate changes.
Securities Purchased Under Agreement to Resell
Transactions involving purchases of securities under agreements to resell are
accounted for as collateralized financings except where the Company does not
have an agreement to sell the same or substantially the same securities before
maturity at a fixed or determinable price. It is the policy of the Company to
obtain possession of collateral with a market value equal to or in excess of the
principal amount loaned under resale agreements. Collateral is valued daily,
and the Company may require counterparties to deposit additional collateral or
return collateral pledged when appropriate.
Allowance for Doubtful Accounts
On an ongoing basis, the Company reviews its allowance for doubtful accounts on
receivables from broker-dealer and clearing organizations, customer receivables
and other receivables. The Company establishes allowances to cover known and
inherent losses. As of December 31, 1998 and 1997, the Company believes the
allowance for doubtful accounts on receivables from broker-dealers and clearing
organizations, customer receivables and other receivables are adequate.
Securities Transactions
Customers' securities transactions are recorded on a settlement date basis, with
related commission income and expenses recorded on a trade date basis.
Marketable securities owned and securities sold, not yet purchased are recorded
on a trade date basis.
Securities Lending Activities
Securities borrowed and securities loaned transactions are generally reported as
collateralized financings except where letters of credit or other securities are
used as collateral. Securities borrowed transactions require the Company to
deposit cash, letters of credit, or other collateral with the lender. With
respect to securities loaned, the Company receives collateral in the form of
cash or other collateral in an amount generally in excess of the market value of
securities loaned. The Company monitors the market value of securities borrowed
and loaned on a daily basis, with additional collateral obtained or refunded as
necessary.
Marketable Securities Owned
Marketable securities and securities sold, not yet purchased are reported at
prevailing market prices as of December 31, 1998. Realized and unrealized gains
and losses on marketable securities owned and securities sold, not yet purchased
are included in trading profits, net.
Collateral
The Company continues to report assets it has pledged as collateral in secured
borrowing and other arrangements when the secured party cannot sell or repledge
the assets or the Company can substitute collateral or otherwise redeem it on
short notice. The Company generally does not report assets received as
collateral in secured lending and other arrangements because the debtor
typically has the right to redeem the collateral on short notice.
Income Taxes
Income taxes are accounted for under the asset and liability method. Deferred
tax assets and liabilities are recognized for future tax consequences
attributable to differences between the financial statements carrying amounts of
existing assets and liabilities and their respective tax bases. Deferred tax
assets and liabilities are measured using enacted tax rates expected to apply to
taxable income in the years in which those temporary differences are expected to
be recovered or settled. A valuation allowance is provided when management
cannot determine whether or not it is more likely that the net deferred tax
asset will be realized. The effect on deferred tax assets and liabilities of a
change in the rates is recognized in income in the period that includes the
enactment date.
Furniture, Equipment and Leasehold Improvements
Furniture, equipment and leasehold improvements are carried at cost.
Depreciation on furniture and equipment is provided for on accelerated and
straight-line bases using an estimated useful life of three to five years.
Leasehold improvements are amortized over the lesser of the useful life of the
improvement or the term of the lease. Expenditures for repairs and maintenance
that do not significantly increase the life of the assets are charged to
operations as incurred.
Fair Value of Financial Instruments
Substantially all of the Company's financial assets and liabilities are carried
at market or estimated fair value or are carried at amounts that approximate
current fair value because of their short-term nature. Estimates are made at a
specific point in time, based on relevant market information and information
about the financial instruments.
Promotional
Advertising costs are expensed as incurred.
Earnings Per Share
Basic earnings per share of common stock are computed by dividing net earnings,
after deducting the preferred dividend requirements, by the weighted average
number of common shares outstanding.
Diluted earnings per share are computed based on the weighted average number of
shares of common stock and dilutive securities outstanding during the period.
Dilutive securities are options that are freely exercisable into common stock at
less than market prices, the convertible debentures (after giving retroactive
effect to the elimination of interest expense, net of tax) and convertible
preferred stock. Dilutive securities are not included in the weighted average
number of shares when the inclusion would increase the earnings per share or
decrease the loss per share.
Statement of Financial Accounting Standard No. 128, "Earnings per Share" ("SFAS
128") issued by the Financial Accounting Standards Board ("FASB") is effective
for financial statements with fiscal years and interim periods ending after
December 15, 1997 with retroactive statement for prior periods. SFAS 128
provides for the calculation of Basic and Diluted earnings per share. Basic
earnings per share includes no dilution and is computed by dividing income
available to common shareholders by the weighted average number of common shares
outstanding for the period. Diluted earnings per share reflects the potential
dilutions of securities that could share in the earnings of an entity, such as
stock options, warrants or convertible debentures. The Company adopted SFAS 128
on December 15, 1997.
The following table reconciles the numerators and denominators of the basic and
diluted earnings per share computation:
For The Years Ended December 31,
1998 1997 1996
BASIC EARNINGS PER SHARE
Net income (loss) $(1,838,606) $1,522,685 $4,039,574
Preferred stock dividends -- (85,479) (220,603)
Income available to common shareholders
(numerator) $(1,838,606) $1,437,206 $3,818,971
Weighted average common shares
outstanding (denominator) 14,127,800 12,334,517 8,704,235
Basic Earnings Per Share $(0.13) $0.12 $0.44
DILUTED EARNINGS PER SHARE
Net income (loss) $(1,838,606) $1,522,685 $4,039,574
Interest on convertible debentures, net
of income tax -- 238,752 242,162
Income available to common shareholders
plus assumed conversions (numerator) $(1,838,606) $1,761,437 $4,281,736
Weighted average common shares 14,127,800 12,334,517 8,704,235
outstanding
Weighted average options outstanding -- 1,379,805 1,903,304
Weighted average convertible debentures -- 4,421,311 4,548,487
Weighted average convertible preferred -- 1,494,505 4,000,000
stock
Stock acquired with proceeds -- (883,874) (775,246)
Weighted average common shares and
assumed conversions outstanding 14,127,800 18,746,264 18,380,780
(denominator)
Diluted Earnings Per Share $(0.13) $0.09 $0.23
Options to purchase 2,222,500 and 700,000 shares of common stock at December 31,
1998, and 1997, were not included in the computation of diluted EPS because the
options' exercise price was greater that the average market price of the common
share during the respective periods. The options carry exercise prices ranging
from $0.63 to $2.32 at December 31, 1998, and $1.59 to $3.00 at December 31
1997. The options at December 31, 1998 expire at various dates through 2008 and
were still outstanding at the end of 1998.
Stock-Based Compensation
As of January 1, 1996 the Company adopted Statement of Financial Accounting
Standards No. 123, "Accounting for Stock-Based Compensation" ("SFAS 123"). SFAS
123 allows an entity to elect to continue to measure compensation cost under
Accounting Principles Board Opinion No. 25. "Accounting for Stock Issued to
Employees" ("APB No. 25"), but requires pro forma disclosure of net earnings and
earnings per share as if the fair-valued-based method of accounting had been
applied. In accordance with SFAS 123, the Company elected to continue to
measure compensation cost under APB No. 25 and comply with the pro forma
disclosure requirements.
Reclassifications
Certain reclassifications have been made to the 1997 and 1996 financial
statements to conform with presentation in the 1998 financial statements.
Recent Accounting Pronouncements
In 1998, the Company adopted Statement of Financial Accounting Standards No.
131, Disclosure About Segments of an Enterprise and Related Information ("SFAS
131"), the adoption of which had no significant impact on the Company's
financial statements.
In 1998, the FASB issued Statement of Financial Accounting Standards No. 133,
"Accounting for Derivative Instruments and Hedging Activities" ("SFAS 133").
The Company is required to and will implement the provision of this new standard
effective with its 2000 fiscal year. SFAS 133 establishes accounting and
reporting standards requiring that every derivative instrument be recorded in
the statement of condition as either an asset or as a liability measured at its
fair value and that changes in the fair value be recognized currently in the
statement of operations. The Company has not yet quantified the impact of
adopting SFAS 133 on its financial statements but does not believe it will have
a material effect on the Company's financial position or results of operations.
NOTE 3. CASH AND CASH EQUIVALENTS
Included in cash and cash equivalents are securities purchased under agreements
to resell on an overnight basis in the amount of $140,516 and $101,246 at
December 31, 1998 and 1997. Securities purchased are U.S. Treasury instruments
which must be at least 102% of the cash tendered. The market value of these
securities is $143,326 and $103,271 at December 31, 1998 and 1997.
NOTE 4. CASH SEGREGATED UNDER FEDERAL AND OTHER REGULATIONS
Cash and securities purchased under agreement to resell of $110,151,075 and
$34,903,262 have been segregated in a special reserve bank account for the
exclusive benefit of customers under Rule 15c3-3 of the Securities Exchange Act
of 1934, as amended. Securities purchased under agreements to resell on an
overnight basis represent $104,469,048 and $34,554,930 of the above amounts at
December 31, 1998 and 1997, respectively. Securities purchased are U.S.
Treasury instruments having a market value of $106,558,427 and $35,246,028,
respectively. The Company had excess funds of $6,227,712 and $1,182,611 at
December 31, 1998 and 1997.
NOTE 5. RECEIVABLE FROM AND PAYABLE TO BROKER-DEALERS AND CLEARING
ORGANIZATIONS
At December 31, amounts receivable from and payable to broker-dealers and
clearing organizations result from the Company's normal trading activities and
consist of the following:
1998 Receivable Payable
Deposits for securities borrowed/loaned $4,666,656 $49,872,550
Securities failed to deliver/receive 2,628,410 2,620,379
Receivable from/payable to correspondents 25,990 4,694,127
Receivable from/payable to clearing organizations 10 877,153
Total $7,321,066 $58,064,209
1997 Receivable Payable
Deposits for securities borrowed/loaned $3,919,001 $86,627,666
Securities failed to deliver/receive 629,050 285,476
Payable to correspondents -- 3,309,308
Receivable from clearing organizations 89,745 --
Other 45,112 --
Total $4,682,908 $90,222,450
Securities borrowed and securities loaned represent securities borrowed or
loaned from other broker-dealers. The equivalent value in money is deposited by
the borrower. All open positions are adjusted to market values daily. These
deposits approximate the market value of the underlying securities.
Securities failed to deliver and receive represent the contract value of
securities that have not been delivered or received subsequent to settlement
date. At December 31, 1998 the market value of the securities failed to deliver
was $2,571,214 and failed to receive was $2,604,528. At December 31, 1997 the
market value of the securities failed to deliver was $624,455 and failed to
receive was $273,263.
The amounts receivable from and payable to clearing organizations represents
securities failed to deliver and failed to receive on a continuous net
settlement basis. All open positions are adjusted to market daily.
The Company clears security transactions for correspondent broker-dealers.
Settled securities and related transactions for these correspondents are
included in payable to correspondents.
NOTE 6. RECEIVABLE FROM AND PAYABLE TO CUSTOMERS
Receivables from customers include amounts due on cash and margin transactions.
Payables to customers represent debit balances in the customer accounts.
Securities owned by customers are held as collateral for receivables. Such
collateral is not reflected in the financial statements.
NOTE 7. MARKETABLE SECURITIES OWNED AND SECURITIES SOLD, NOT YET
PURCHASED
Marketable securities owned and sold, not yet purchased consist of trading and
investment securities at quoted market values, as illustrated below:
Sold, But Not
Owned Yet Purchased
Balances as of December 31, 1998:
Equity securities $1,870,572 $859,374
U.S. government and other securities 1,056,499 8,711
Total $2,927,071 $868,085
Balances as of December 31, 1997:
Equity securities $3,722,870 $1,139,722
Other securities 14,791 8,984
Total $3,737,661 $1,148,706
As a part of its ongoing trading activities the Company may hold derivative
financial instruments for trading purposes. These instruments consist of
options and warrants and are not used as hedge instruments to reduce financial
market risks. The Company does not trade futures, forward, swap or any other
derivative financial instruments except options and warrants. The market value
of warrants at December 31, 1998, and 1997, is $375 and $14,791, respectively.
Trading gains or losses relating to options and warrants are not material to the
operations of the Company.
NOTE 8. FURNITURE, EQUIPMENT AND LEASEHOLD IMPROVEMENTS
The following summarizes the Company's furniture, equipment and leasehold
improvements at December 31:
1998 1997
Furniture and equipment $6,726,258 $6,238,756
Leasehold improvements 1,523,418 1,273,383
Less: Accumulated depreciation and amortization (5,389,576) (4,051,672)
$2,860,100 $3,460,467
For the years ended December 31, 1998, 1997 and 1996, occupancy and equipment
expense includes depreciation and amortization expense of $1,475,840,
$1,259,147, and $882,773 respectively.
NOTE 9. NOTES PAYABLE
JBOC maintains firm and customer financing arrangements with an aggregate
borrowing limit approximating $30,000,000. Amounts loaned bear interest at a
fluctuating rate based on broker call and prime and are fully collateralized by
marketable securities. The Company had no such loans outstanding at December
31, 1998 and 1997.
At December 31, notes payable consisted of the following:
Balance at
end of a b c d
period
1998
Collateralized by:
Customer securities $ -- -- $6,004,856 $1,365,507 8.4%
Other 130,997 9.5% 265,943 195,805 9.5%
$130,997
1997
Collateralized by:
Customer securities $ -- -- $12,262,000 $4,264,000 6.9%
Firm securities -- -- 1,500,000 308,000 8.5%
Other 22,894 9.5% 122,962 56,197 9.5%
$22,894
a)Weighted average interest rate.
b)Maximum amount outstanding during the period.
c)Average amount outstanding during the period.
d)Weighted average interest rate during the period. This amount was calculated
by factoring the balances at the end of each month at the various rates, and
computing a weighted average on the results.
Interest expense was $117,557, $162,550 and $71,252 for the years ended December
31, 1998, 1997 and 1996, respectively.
See Note 13: Related Party Transactions for disclosure relating to shareholder
loans outstanding at December 31, 1998, and 1997.
NOTE 10. SUBORDINATED BORROWINGS
The borrowings under subordinated loan agreements at December 31, 1998 and 1997
consist of three separate loans totaling $1,250,000 and $1,500,000,
respectively. Each agreement carries interest at broker call plus 2%, not to
exceed 9% payable monthly. All agreements are due March 31, 1999. The fair
value of the debt approximates carrying value. The subordinated loan agreements
have been approved by the NASD and are thus available in computing regulatory
net capital.
NOTE 11. CONVERTIBLE PREFERRED STOCK
The Company has been authorized to issue 10,000,000 shares of $10 par value
convertible preferred stock. The preferred shares shall carry a minimum of a 6%
cumulative dividend and shall have a liquidation preference of $10 per share,
any other preference given to be determined by the Board of Directors at the
time of issuance. On June 5, 1995, $2,000,000 of the convertible debentures
were exchanged for 200,000 shares of $10 par value non-voting convertible
preferred stock. The preferred stock was convertible to common stock at the
rate of $.50 per share of common stock based on the par value of the preferred
stock. In accordance with a provision of the preferred stock agreement, the
conversion rate changed from $0.90 to $0.50 due to an ownership change during
1996. The preferred stock paid a quarterly dividend of 11%. The convertible
preferred stock was converted to common stock in April of 1997.
NOTE 12. INCOME TAXES
The income tax provision in the Consolidated Statements of Operations consists
of the following components:
Years Ended December 31,
1998 1997 1996
Current
Federal $440,619 $916,955 $749,851
State 208,047 411,480 729,083
648,666 1,328,435 1,478,934
Deferred
Federal (79,668) (174,101) 670,169
State (47,747) (54,462) 19,206
(127,415) (228,563) 689,375
Total $521,251 $1,099,872 $2,168,309
The major components of Deferred tax assets _ net, included in the Consolidated
Statements of Financial Condition are as follows:
December 31,
1998 1997
Deferred tax assets:
Bad debts reserve $ 956,888 $703,153
Depreciation 73,189 19,713
Deferred rent 54,623 55,589
State taxes -- 139,903
Total deferred tax assets 1,084,700 918,358
Deferred tax liabilities:
State taxes (4,860) --
Total deferred tax liabilities (4,860) --
Deferred tax asset - net $1,079,840 $918,358
Reconciliations of the provision for income taxes to the expected income tax
based on statutory rates are as follows:
Years Ended December 31,
1998 1997 1996
Provision (Benefit)- Federal statutory $(447,900) $891,669 $2,110,680
rate
Increase (decrease) in income taxes
resulting from:
Valuation allowance -- -- (500,000)
State taxes net of Federal tax benefit 105,798 271,576 742,240
Amendment of tax return -- -- (102,127)
Non cash interest charge 860,200 -- --
Other 3,153 (63,373) (82,484)
Total $521,251 $1,099,872 $2,168,309
NOTE 13. RELATED PARTY TRANSACTIONS
In March, 1995 the Company restructured 100% of its $5,031,000 demand debt to
term debt in the form of senior secured convertible notes (loans from
shareholders) with an original thirty month term, amortized over 10 years, at an
annual interest rate of 9%. As part of the restructuring, an additional
$2,000,000 of senior secured convertible notes were issued by the Company under
identical terms to the restructured demand debt.
In June 1998, the Company completed the sale of newly issued 9% Secured
Convertible Notes in the principal amount of $2,000,000 due December 31, 1999.
The notes are convertible into the Company's $0.01 par value common stock at a
rate of $0.70 per share. In conjunction with the above transaction, the
purchasers of the newly issued 9% Secured Convertible Notes and another investor
also acquired approximately $3,900,000 in outstanding principal amount of the
Company's 9% Senior Secured Convertible Notes. The Company agreed to reduce the
conversion ratio from $1.00 to $0.70 per share of the Company's common stock for
the entire $4,421,311 of outstanding 9% Senior Secured Convertible Notes. The
maturity date of the notes was extended to December 31, 1999, and they are
immediately convertible into common shares. The Company incurred a one time
non-cash interest charge of $2,530,000 in the second quarter of 1998 as a result
of the discount conversion feature on the debt instruments discussed above. The
discount is based on the difference between the conversion ratio and the fair
value of the underlying common stock at the time. Management fee expense of
$210,000 was paid to an affiliate of the holders of the new notes in 1998.
Additionally, the Company obtained $2,867,500 in demand notes from shareholders
during 1997. This debt bears interest at 8.25%, which is payable quarterly.
The following summarizes loans form shareholders outstanding at December 31:
1998 1997
Senior secured convertible notes $5,921,311 $4,421,311
Demand shareholder notes 2,617,500 2,867,500
Total $8,538,811 $7,288,811
Related interest expense for 1998, 1997 and 1996 was $496,730, $397,918 and
$403,603 for the convertible notes. Interest expense for 1998 and 1997 were
$235,778 and $129,324 for the demand notes. Related Due to the related party
nature and terms of the shareholder loans, the fair market value of such
financial instruments cannot be estimated.
NOTE 14. OPTIONS AND WARRANTS
At December 31, 1998, 1997 and 1996, the Company had two stock option plans,
each of which is described below. The Company applies APB Opinion 25,
"Accounting for Stock Issued to Employees," and related Interpretations in
accounting for the plan. Under APB Opinion 25, because the exercise price of
the Company's employee stock options equals the market price of the underlying
stock on the date of grant, no compensation cost is recognized.
The Company has adopted an employee stock option plan (the "Plan") pursuant to
which 920,000 shares of common stock have been reserved for issuance to officers
and full-time employees of the Company. The Plan is administered by the
Company's Board of Directors which determines, among other things, the persons
to be granted options under the Plan, the number of shares subject to each
option and the option price, which shall not be less than market value.
The Company has adopted a non-employee directors' stock option plan (the
"Director's Plan") pursuant to which 950,000 shares of common stock have been
reserved for issuance to directors who are not employees of the Company. The
Director's Plan is administered by the Company's Board of Directors which
determines, among other things, the persons to be granted options under the
Director's Plan, the number of shares subject to each option and the option
price, which shall not be less than market value. In addition, any action under
the Director's Plan, any action thereunder must be approved by the affirmative
vote of a majority of the directors who are not then eligible to participate in
the Director's Plan.
In addition, the Company has issued, subject to shareholder approval, 1,550,000
options to executive officers of the Company pursuant to the 1998 Stock Option
and Award Plan (the "1998 Plan"). In the event the shareholders do not approve
the 1998 Plan, the optionees under the 1998 Plan will receive stock appreciation
rights on the same terms and conditions as if the 1998 Plan had been approved.
The Company has reserved 1,550,000 shares of common stock for issuance under the
1998 Plan.
SFAS 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 123. The
Company estimates the fair value of each stock option at the grant date by using
the Black-Scholes option-pricing model with the following weighted-average
assumptions used for grants in 1998, 1997, and 1996, respectively: expected
dividend yield of 0%; expected volatility ranging from 22% to 38%; risk-free
interest rates ranging from 5.09% to 6.89%; and expected life ranging from 3 to
10 years. The weighted average fair value of options granted during 1998, 1997
and 1996 was $0.78, $0.60, and $1.40, respectively.
Under the accounting provisions of SFAS 123, the Company's net income and
earnings per share would have been reduced to the pro forma amounts indicated
below:
For The Years Ended December 31,
1998 1997 1996
Net income (loss):
As reported $(1,838,606) $1,522,685 $4,039,574
Pro forma (2,624,276) 1,501,085 3,871,374
Basic earnings per share:
As reported $(0.13) $0.12 $0.44
Pro forma (0.19) 0.11 0.42
Diluted earnings per share:
As reported $(0.13) $0.09 $0.23
Pro forma (0.19) 0.09 0.22
Due to the fact that many of the Company's stock options vest over a number of
years and additional awards are made each year, the above pro forma numbers are
not indicative of the financial impact had the disclosure provisions of FASB 123
been applicable to all years of previous option grants. The above numbers do
not include the effect of options granted prior to 1996 that vested in 1996,
1997, and 1998.
A summary of the status of the Company's stock options as of December 31, 1998,
1997, and 1996, and changes during the years ending on those date is presented
below:
December 31, 1998 December 31, 1997 December 31, 1996
Weighted Weighted Weighted
Shares average Shares average Shares average
Outstanding at
beginning of 965,000 $1.82 2,271,692 $1.28 1,956,692 $1.05
year
Granted 1,685,000 1.29 205,000 1.79 420,000 2.30
Exercised -- -- (1,275,000) 0.90 (105,000) 1.05
Forfeited (402,500) 1.59 (236,692) 1.64 --
Outstanding at
end of year 2,247,500 1.47 965,000 1.82 2,271,692 1.28
Options
exercisable
at year-end 600,000 $1.93 800,000 $1.82 2,221,692 $1.25
Weighted-average
fair value of
options granted
during the year $0.78 $0.60 $1.40
Information relating to stock options and warrants at December 31, 1998,
summarized by exercise price are as follows:
Options Outstanding Options Exercisable
Number Weighted- Weighted- Number Weighted-
Outstanding Average Average Exercisable Average
Exercise at 12/31/98 Contractual Exercise at 12/31/98 Exercise
Prices Life Price Price
$0.63 25,000 10 $0.63 12,500 $0.63
1.06 50,000 3 1.06 -- 1.06
1.08 50,000 6 1.08 50,000 1.08
1.13 15,000 3 1.13 15,000 1.13
1.22 50,000 10 1.22 25,000 1.22
1.31 1,550,000 10 1.31 -- 1.31
1.32 10,000 10 1.32 -- 1.32
1.78 22,500 9 1.78 22,500 1.78
1.94 200,000 4 1.94 200,000 1.94
1.97 15,000 9 1.97 15,000 1.97
2.25 210,000 8 2.25 210,000 2.25
2.32 50,000 9 2.32 50,000 2.32
Total 2,247,500 7 $1.47 600,000 $1.93
NOTE 15. REGULATORY REQUIREMENTS
JBOC is subject to the Securities and Exchange Commission's Uniform Net Capital
Rule (Rule 15c3-1), which requires the maintenance of minimum net capital. JBOC
has elected to use the alternative method permitted by the Rule, which requires
it to maintain minimum net capital, as defined, equal to the greater of $250,000
or 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
5% of aggregate debits.
At December 31, 1998, JBOC had net capital of $17,754,370, which was $12,352,063
in excess of the minimum amount required. At December 31, 1997, JBOC had net
capital of $14,380,292, which was $8,728,676 in excess of the minimum amount
required.
NOTE 16. COMMITMENTS AND CONTINGENT LIABILITIES
The Company offers its employees participation in a 401(k) savings plan.
Eligible employees are able to contribute a portion of their compensation. The
Company matches 25% of these contributions up to 6% of the employee's wage.
This expense for 1998, 1997, and 1996 amounted to $40,799, $43,731 and $76,917.
The Company and/or its subsidiaries are defendants in several lawsuits and
arbitrations the most significant of which follow:
a) In November 1997, in the Third Judicial District Court of the State of
Utah, a claim was filed by a former officer and director of the Company, Mr.
Stratton, alleging breach of an employment agreement with OTRA Clearing Inc.
(a subsidiary of the Company, later known as Reynolds Kendrick Stratton,
Inc., which as been inactive since July 1994, but formerly operated as a
broker-dealer). Mr. Stratton alleges the agreement is binding on the Company
and claims that he is owed damages of not less than $1,200,000, comprised of
additional compensation, insurance benefits, and vacation pay. The Company
has filed an answer denying that Mr. Stratton is owed any additional amounts.
The Company believes that it has paid all compensation due under said
agreement, and the Company does not believe that the matter will have a
material adverse impact upon the Company. Accordingly, no provision for any
liability that might result has been made in the accompanying financial
statements.
b) On August 19, 1997, a search warrant was served at the Beverly Hills,
California corporate offices of the Company and its subsidiary, JBOC,
pursuant to a request made by the Federal Bureau of Investigation. The
Company and certain of its officers and employees were also served with Grand
Jury subpoenas. The search warrant and subpoenas were issued in connection
with an investigation being conducted by the U.S. Attorney's Office in Los
Angeles. Management is of the opinion that the focus of the investigation
appears to be the prior relationship and activities of Irving Kott and Oeri
Finance Inc. with the Company and possible market manipulation. The Company
cannot, however, say with any certainty that these are the only issues
involved in the investigation. Mr. Kott is an individual who had been
retained through an entity named Turret Consultants as a consultant to the
Company. In connection with this investigation, the Swiss branch office of
JBOC as well as the offices of Oeri Finance, Inc. were searched by French and
Swiss authorities pursuant to a request made by the U.S. Justice Department.
Felix A. Oeri, former Chairman of the Board of Directors of the Company, also
serves as President of Oeri Finance, Inc.
On or about the same date, the Company, its directors, JBOC and certain
of its officers and employees were served with subpoenas duces tecum issued
by the SEC in connection with an investigation conducted by that agency
entitled In the matter of Reynolds Kendrick Stratton, Inc. The subpoenas
generally call for the production of documents relating apparently to the
same issues which are the subject of the Grand Jury investigation.
The Company has retained counsel in the above matters and has
cooperated with the U.S. Attorney's Office and the SEC in their on-going
investigations. Pursuant to the subpoenas served by the U.S. Attorney's
Office and the SEC, the Company has and is continuing to produce various
documents responsive to such subpoenas. At this stage of both
investigations, it is not possible to predict their ultimate outcome or the
financial impact on the Company, if any. In September of 1997, the Company
ended its consulting relationship with Turret Consultants. In December 1998,
the Company closed its Swiss office; and in March 1999, Felix Oeri and Oeri
Finance Inc. filed 13D Statements with the SEC indicating ownership of less
than 5% of the Company's common stock.
Under an existing Directors and Officers liability insurance policy held by
the Company, a claim was filed with the insurer for the reimbursement of legal
fees incurred in connection with the federal investigations. The policy calls
for a maximum reimbursement to the Company of $2,000,000. The insurance
company preliminarily denied the Company's claim under their interpretation of
the terms of the policy. The Company believes that the insurance company has
improperly denied the Company's claim and has filed an action alleging breach
of contract. The Company believes that it currently can fund the ongoing
legal costs associated with the investigations regardless of the outcome of
the Company's claim.
Future annual minimum rental payments required under operating leases that have
initial or remaining non-cancelable lease terms in excess of one year as of
December 31, 1998, were as follows:
Year ending December 31:
1999 $2,308,563
2000 2,311,481
2001 1,845,359
2002 1,432,145
2003 275,238
Thereafter 408,375
Total $8,581,161
The Company received certain concessions for a lease included above which is
being amortized ratably over the lease term.
Rent expense was as follows:
Year ending December 31:
1998 $2,279,026
1997 1,995,852
1996 1,185,303
The Company has an Employee Stock Ownership Plan which covers employees of the
Company. Contributions to the Plan are determined annually by the Board of
Directors of the Company. No contributions have been made for the years ended
December 31, 1998, 1997, and 1996.
NOTE 17. FINANCIAL INSTRUMENTS WITH OFF-BALANCE SHEET RISK
In the normal course of business, the Company's customer and correspondent
clearing activities involve the execution, settlement and financing of various
customer securities transactions. These activities may expose the Company to
off-balance-sheet credit risk in the event that the customer is unable to
fulfill their contracted obligations. The Company's customer securities
activities are transacted on either a cash or margin basis. In margin
transactions, the Company extends credit to the customer, subject to various
regulatory and internal margin requirements, collateralized by cash and
securities in the customer's account. The Company monitors collateral and
required margin levels daily and, pursuant to such guidelines, requests
customers to deposit additional collateral or
reduce securities positions when necessary. The Company is also exposed to
credit risk when its margin accounts or a margin account is collateralized by a
concentration of a particular security and when that security decreases in
value.
In addition, the Company executes and clears customer short sale transactions.
Such transactions may expose the Company to off-balance sheet risk in the event
that margin requirements are not sufficient to fully cover losses that customers
may incur. In the event that the customer fails to satisfy their obligations,
the Company may be required to purchase financial instruments at prevailing
market prices in order to fulfill the customer's obligations.
In accordance with industry practice, the Company records customer transactions
on a settlement date basis, which is generally three business days after trade
date. The Company is therefore exposed to risk of loss on these transactions in
the event of the customer's or broker's inability to meet the terms of their
contractual obligations, in which case the Company may have to purchase or sell
financial instruments at prevailing market prices. Settlement of these
transactions is not expected to have a material effect on the Company's
statement of financial condition.
As a securities broker-dealer, the Company provides services to both individual
investors and correspondents. The Company's exposure to credit risk associated
with the nonperformance of these customers in fulfilling their contractual
obligations pursuant to securities transactions can be directly impacted by
volatile trading markets.
The Company is a market maker for approximately 500 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 off-
balance sheet risk.
NOTE 18. SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
1998 1997 1996
Cash paid during the year for:
Interest $14,431,512 $14,128,501 $8,428,614
Income taxes 287,892 1,008,672 3,204,726
Supplemental disclosure of non-cash investing and financing activities:
The Company incurred a non-cash interest charge of $2,530,000 as a result of the
discount conversion feature on the subordinated convertible debt instruments
issued and re-priced during the year.
NOTE 19. UNAUDITED SUPPLEMENTAL QUARTERLY FINANCIAL INFORMATION
Below is selected quarterly financial data for each fiscal quarter during the
years ended December 31, 1998 and 1997. The table below includes a restatement
of non-cash interest expense reported in the second quarter 1998 Form 10-Q. The
original filing reported non-cash interest expense of $560,000, this was
subsequently restated to $2,530,000. This information should be read in
conjunction with the consolidated financial statements included elsewhere
herein.
First Second Third Fourth
Quarter Quarter Quarter Quarter
1998
Revenues $16,002,424 $16,519,608 $15,309,741 $19,436,552
Income (loss) before taxes (138,529) (3,036,975) (981,831) 2,839,981
Net income (loss) (85,900) (2,839,604) (603,831) 1,690,730
Basic earnings (loss) per (0.01) (0.20) (0.04) 0.12
share
Diluted earnings (loss) (0.01) (0.20) (0.04) 0.08
per share
1997
Revenues $15,617,638 $18,215,659 $20,026,773 $16,101,553
Income (loss) before 2,104,862 180,172 1,520,220 (1,182,697)
taxes
Net income (loss) 1,264,862 105,172 886,962 (734,311)
Basic earnings per share 0.14 0.01 0.06 (0.05)
Diluted earnings per share 0.07 0.01 0.05 (0.05)
NOTE 20. SUBSEQUENT EVENTS (UNAUDITED)
In February 1999, Hareton Sales & Marketing, Inc. ("Hareton"), the holder of
$502,615 in face value of 9% Senior Secured Convertible Notes exercised its
right to convert such debt into common stock of the Company and the Company
issued 718,021 shares of common stock in full satisfaction of this debt.
Also in February 1999, the Company established an affiliate in the form of a
trust to purchase stock from certain shareholders. The Company made a loan to
the trust in the amount of $586,915, which through a series of transactions was
used to acquire 469,540 shares of the Company's common stock at an effective
price of $1.25 per share. Concurrent with the transaction, the Company
relinquished its right of first refusal as to any remaining shares held by Oeri
Finance, Inc. and Oeri Finance, Inc. forgave $728,000 in demand debt owed by the
Company.
Both Oeri Finance Inc. and Hareton filed 13D Statements with the SEC indicating
ownership of less than 5% of the Company's stock.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURES
As reported on Form 8-K dated October 27, 1998 and Form 8-K/A dated December 11,
1998, the Company appointed Arthur Andersen LLP as its independent auditors for
the fiscal year ending December 31, 1998 to replace the firm of BDO Seidman, LLP
which was dismissed as auditors of the Company effective October 20, 1998.
There were no disagreements with BDO Seidman, LLP on any matters of accounting
principles or practices, financial statement disclosure, or auditing scope and
procedures which, if not resolved to the satisfaction of BDO Seidman, LLP, would
have caused BDO Seidman, LLP to make reference to the matter in their report.
In the current fiscal year, the Company was advised by BDO Seidman, LLP ("BDO")
that BDO believes additional documentation will be needed to support the fair
value used to establish the Company's non-cash interest expense charged upon (I)
the issuance of new convertible debt, and (ii) the modification of existing
convertible debt, during the second quarter of 1998. The Company used a
discounted market price in its computation of non-cash interest expense. BDO
informed the Company that the SEC has expressed a position that there should
be no discount off the publicly quoted fair market value used in such
computations. BDO recommended the Company obtain an independent valuation
expert's opinion on the value of the equity instruments underlying the
convertible debt. In accordance with Regulation S-K Item 304(a)(1)(v)(D)(1),
BDO reported this event because it could not resolve the issue as BDO was not
reappointed as the Company's certified independent auditors at the Company's
fiscal year end.
Form 10-Q for the second quarter of 1998 originally reported non-cash interest
expense of $560,000, this was subsequently restated to $2,530,000.
PART III
ITEMS 10, 11, 12 AND 13. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT;
EXECUTIVE COMPENSATION; SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT; AND CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by these Items is omitted because the Company will
file, by April 30, 1999, a definitive proxy statement pursuant to Regulation
14A, which information, other than the section entitled "Board of Directors
Report on Executive Compensation" or matters related to such report contained
therein, is incorporated herein by reference as if set out in full.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
The financial statements and schedules required to be filed by Item 8 of this
form and paragraph (d) are contained herein as follows:
Page
Report of Independent Public Accountants 26
Report of Independent Certified Public Accountants 27
Consolidated Statements of Financial Condition December 31, 1998, and 28-29
1997
Consolidated Statements of Operations Years Ended December 31, 1998, 30
1997, and 1996
Consolidated Statements of Changes in Shareholders' Equity 31
(Deficit)Years Ended December 31, 1997, 1996, and 1995
Consolidated Statements of Cash Flows Years Ended December 31, 1998, 32
1997, and 1996
Notes to Consolidated Financial Statements 33-48
Financial Statement Schedule I - Condensed Financial Statements (Parent 52-56
Company Only)
Financial Statement Schedule II - Valuation and Qualifying Accounts 57
Listed below are exhibits as required by Item 601 of Regulation S-K:
Exhibit No. Description
2.1 Purchase Agreement dated as of May 21, 1998 by and among the Company, Third
Capital Partners, LLC, a Tennessee limited liability company, 3421643
Canada Inc., a Canadian corporation, Felix A. Oeri and Oeri Finance Inc.
(incorporated herein by reference to Exhibit 2.1 of JBOH's Current Report
on Form 8-K, dated June 18, 1998, filed with the SEC).
3.1 Articles of Incorporation of JBOH, as amended, October 16, 1990
(incorporated herein by reference to Exhibit 1 of JBOH's Current Report on
Form 8-K, dated October 30, 1990, filed with the SEC).
3.2 By-Laws of JBOH, as amended, October 16, 1990 (incorporated herein by
reference to Exhibit 1 of JBOH's Current Report on Form 8-K dated October
30, 1990, filed with the SEC).
4.1 9% Secured Convertible Note Due December 31, 1999 in the principal amount
of $2,000,000 between the Company and Third Capital Partners, LLC
(incorporated herein by reference to Exhibit 4.1 of JBOH's Current Report
on Form 8-K, dated June 18, 1998, filed with the SEC).
10.1 Standard Office Lease between St. George Beverly Hills, Inc. and OTRA
Clearing, Inc., dated January 31, 1992, to lease Beverly Hills office space
(incorporated herein by reference to Exhibit 10.3 of JBOH's Annual Report
on Form 10-K for the year ended December 31, 1991, filed with the SEC).
10.2 Data Service Agreement between Securities Industry Software Corp. and OTRA
Clearing, Inc., dated June 8, 1992 (incorporated herein by reference to
Exhibit 10 of JBOH's Quarterly Report on Form 10-Q for the period ended
June 30, 1992, filed with the SEC).
10.3 Assignment and Assumption Agreement for Beverly Hills office space between
JBOH and RKSI, executed as of December 31, 1993 (incorporated herein by
reference to Exhibit 10.8 of the JBOH Form 10-K filed with the SEC for the
year ended December 31, 1993).
10.4 Commercial office lease Agreement between Bank of Communications. and JB
Oxford & Company, executed as of June, 1995, to lease New York office space
(incorporated herein by reference to Exhibit 10.1 of the JBOH Form 10-Q
filed with the SEC for the quarter ended June 30, 1995).
10.5 Commercial office lease Agreement between Brickell Square Corporation
Limited and JB Oxford Holdings, Inc., executed as of February 21, 1996, to
lease Miami office space, (incorporated herein by reference to Exhibit
10.16 of the JBOH Form 10-K filed with the SEC for the year ended December
31, 1995).
10.6 JB Oxford Revocable Government Trust Agreement, dated as of February 18,
1999, by and between JB Oxford Holdings, Inc. and Third Capital Partners,
LLC, as Trustee (incorporated herein by reference to Exhibit 10.1 of the
JBOH Current Report on Form 8-K, dated March 8, 1999, filed with the SEC).
10.7 * Stock Rights Appreciation Agreement dated as of June 8, 1998 by and
between the Company and Christopher L. Jarratt, filed herewith.
10.8 * Stock Rights Appreciation Agreement dated as of June 8, 1998 by and
between the Company and James G. Lewis, filed herewith.
21 List of subsidiaries, filed herewith (Page 58).
27 Financial Data Schedule, filed herewith (Page 52)
28 Employee Stock Ownership Plan (incorporated herein by reference to Exhibit
28 of JBOH's Annual Report on Form 10-K for the year ended December 31,
1988, filed with the SEC).
* Indicates that exhibit is a management contract or compensatory plan or
arrangement.
REPORTS ON FORM 8-K
A Report on Form 8-K was filed on October 27, 1998, reporting under Item 4.
Changes in Registrant's Certifying Accountant, the appointment of Arthur
Andersen LLP as the Company's independent public accountants for the fiscal year
ending December 31, 1998 to replace the firm of BDO Seidman, LLP, who was
dismissed as auditors of the Company effective October 20, 1998.
A Report on Form 8-K/A was filed on December 11, 1998, filing Exhibit 16.1,
letter from BDO Seidman, LLP, dated November 2, 1998, pursuant to Regulation S-K
Item 304(a)(3) regarding the change in the Company's certifying accountants.
A Report on Form 8-K was filed on March 8, 1999, reporting under Item 5. Other
Events, the establishment of the JB Oxford Revocable Government Trust pursuant
to a trust agreement between JBOH and Third Capital Partners, LLC, as trustee.
SCHEDULE I. CONDENSED FINANCIAL INFORMATION (PARENT COMPANY ONLY)
JB OXFORD HOLDINGS, INC. STATEMENTS OF FINANCIAL CONDITION
December 31,
1998 1997
ASSETS:
Cash and cash equivalents $ 1,026,599 $250,023
Investment in subsidiaries 23,048,220 20,908,327
Receivables from subsidiaries 1,925,283 1,778,991
Income taxes refundable 717,396 717,396
Deferred income taxes 1,079,840 918,358
Other assets 540,193 1,601,857
TOTAL ASSETS $28,337,531 $26,174,952
LIABILITIES AND SHAREHOLDERS' EQUITY:
LIABILITIES:
Accounts payable and accrued liabilities $ 949,703 $ 1,270,995
Net payables to subsidiaries 2,505,336 2,276,735
Income taxes payable 596,076 181,827
Loans from shareholders 8,538,811 7,288,811
Notes payable 130,997 33,590
TOTAL LIABILITIES 12,720,923 11,051,958
COMMITMENTS AND CONTINGENT LIABILITIES
SHAREHOLDERS' EQUITY :
Common stock ($.01 par value 100,000,000 shares 141,412 141,412
authorized; 14,141,205 shares issued)
Additional paid-in capital 15,345,316 12,815,316
Retained earnings 327,660 2,166,266
Treasury stock, 234,500 shares at cost (197,780) --
TOTAL SHAREHOLDERS' EQUITY 15,616,608 15,122,994
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $28,337,531 $26,174,952
See accompanying notes to Condensed Financial Information.
JB OXFORD HOLDINGS, INC. STATEMENTS OF OPERATIONS
For The Years Ended December 31
1998 1997 1996
REVENUES $ 1,608,053 $1,534,48 $2,119,756
EXPENSES
General and administrative 2,400,291 1,120,941 870,728
Interest expense 736,668 559,664 799,133
Bad debt and settlement expense 46,014 1,837,209 (458,472)
Total Expenses 3,182,973 3,517,814 1,211,389
Income (Loss) before equity interest
in subsidiary income (1,574,920) (1,983,331) 908,367
Equity interest in subsidiary income 2,787,565 4,605,888 5,299,516
(loss)
Income (Loss) Before Income Taxes 1,212,645 2,622,557 6,207,883
Non cash interest charge 2,530,000 -- --
Income Tax Provision (Benefit) 521,251 1,099,872 2,168,309
Net Income (Loss) $(1,838,606) $1,522,685 $4,039,574
JB OXFORD HOLDINGS, INC. STATEMENTS OF CASH FLOWS
For The Years Ended December 31
1998 1997 1996
Net cash provided by (used in) operating $(304,243) $(3,466,659) $790,706
activities
Cash flows from investing activities:
Investment in subsidiaries -- (450,000) --
Capital expenditures (266,588) -- 16,000
Net cash provided by (used in) investing (266,588) (450,000) 16,000
activities
Cash flows from financing activities:
Notes payable 97,407 (100,068) (1,031,379)
Loans from shareholders 1,250,000 2,867,500 (201,232)
Issuance of stock -- 1,327,630 95,250
Payment of cash dividends - preferred -- (85,479) (220,603)
stock
Net cash provided by (used in) financing 1,347,407 4,009,583 (1,357,964)
activities
Net increase (decrease) in cash and cash 776,576 92,924 (551,258)
equivalents
Cash and cash equivalents at beginning of 250,023 157,099 708,357
year
Cash and cash equivalents at end of year $1,026,599 $250,023 $157,099
See accompanying notes to Condensed Financial Information.
JB OXFORD HOLDINGS, INC. NOTES TO CONDENSED FINANCIAL INFORMATION
NOTE 1. BASIS OF PRESENTATION
The parent company only financial statements present JB Oxford Holdings, Inc.'s
statements of financial condition, operations and cash flows by accounting for
the investment in its consolidated subsidiaries on the equity method.
The accompanying condensed financial information should be read with the
consolidated financial statements and notes to consolidated financial
statements.
NOTE 2. REVENUES
The Company receives substantially all of its revenues from its subsidiaries.
Management fees of $1,200,000, $1,300,000 and $1,400,000 were received from JBOC
in 1998, 1997 and 1996, respectively. The balance of the revenues for 1998,
1997 and 1996 consists of rents received from subsidiaries for office space and
furniture and equipment.
NOTE 3. RESTRICTIONS ON THE TRANSFER OF FUNDS FROM SUBSIDIARY TO THE
PARENT
JBOC, as part of its normal broker-dealer activity has minimum capital
requirements as imposed by regulatory agencies which restricts the amount of
funds that can be transferred to the Parent Company. See Note 14 to the
consolidated financial statements for discussion of these requirements.
NOTE 4. LOANS FROM SHAREHOLDERS
In March, 1995, the Company restructured 100% of its $5,031,000 demand debt to
term debt in the form of senior secured convertible notes (loans from
shareholders) with an original thirty month term, amortized over 10 years, at an
annual interest rate of 9%. As part of the restructuring, an additional
$2,000,000 of senior secured convertible notes were issued by the Company under
identical terms to the restructured demand debt.
In June 1998, the Company completed the sale of newly issued 9% Secured
Convertible Notes in the principal amount of $2,000,000 due December 31, 1999.
The notes are convertible into the Company's $0.01 par value common stock at a
rate of $0.70 per share. In conjunction with the above transaction, the
purchasers of the newly issued 9% Secured Convertible Notes and another investor
also acquired approximately $3,900,000 in outstanding principal amount of the
Company's 9% Senior Secured Convertible Notes. The Company agreed to reduce the
conversion ratio from $1.00 to $0.70 per share of the Company's common stock for
the entire $4,421,311 of outstanding 9% Senior Secured Convertible Notes. The
maturity date of the notes was extended to December 31, 1999, and they are
immediately convertible into common shares. The Company incurred a one time
non-cash interest charge of $2,530,000 in the second quarter of 1998 as a result
of the discount conversion feature on the debt instruments discussed above. The
discount is based on the difference between the conversion ratio and the fair
value of the underlying common stock at the time. Management fee expense of
$210,000 was paid to an affiliate of the holders of the new notes in 1998.
Additionally, the Company obtained $2,867,500 in demand notes from shareholders
during 1997. This debt bears interest at 8.25%, which is payable quarterly.
The following summarizes loans from shareholders outstanding at December 31:
1998 1997
Senior secured convertible notes $5,921,311 $4,421,311
Demand shareholder notes 2,617,500 2,867,500
Total $8,538,811 $7,288,811
Related interest expense for 1998, 1997 and 1996 was $496,730, $397,918 and
$403,603 for the convertible notes. Interest expense for 1998 and 1997 were
$235,778 and $129,324 for the demand notes. Related Due to the related party
nature and terms of the shareholder loans, the fair market value of such
financial instruments cannot be estimated.
NOTE 5. COMMITMENTS AND CONTINGENT LIABILITIES
The Company is a defendant in several lawsuits and arbitrations. The most
significant of which is a District Court action commenced in November 1997, in
the Third Judicial District Court of the State of Utah. The claim is brought by
a former officer and director of the Company and alleges breach of an employment
agreement with OTRA Clearing Inc., which Mr. Stratton alleges is binding on the
Company. Mr. Stratton alleges that he is owed damages of not less than
$1,200,000, comprised of additional compensation, insurance benefits and
vacation pay. The Company believes that it has paid all compensation due under
said agreement, and the Company does not believe that the matter will have a
material adverse impact upon the Company. Accordingly, no provision for any
liability that might result has been made in the accompanying financial
statements.
On August 19, 1997, a search warrant was served at the Beverly Hills, California
corporate offices of the Company and its subsidiary, JBOC, pursuant to a request
made by the Federal Bureau of Investigation. The Company and certain of its
officers and employees were also served with Grand Jury subpoenas. The search
warrant and subpoenas were issued in connection with an investigation being
conducted by the U.S. Attorney's Office in Los Angeles. Management is of the
opinion that the focus of the investigation appears to be the prior relationship
and activities of Irving Kott and Oeri Finance Inc. with the Company and
possible market manipulation. The Company cannot, however, say with any
certainty that these are the only issues involved in the investigation. Mr.
Kott is an individual who had been retained through an entity named Turret
Consultants as a consultant to the Company. In connection with this
investigation, the Swiss branch office of JBOC as well as the offices of Oeri
Finance, Inc. were searched by French and Swiss authorities pursuant to a
request made by the U.S. Justice Department. Felix A. Oeri, former Chairman of
the Board of Directors of the Company, also serves as President of Oeri Finance,
Inc.
On or about the same date, the Company, its directors, JBOC and certain of its
officers and employees were served with subpoenas duces tecum issued by the SEC
in connection with an investigation conducted by that agency entitled In the
matter of Reynolds Kendrick Stratton, Inc. The subpoenas generally call for the
production of documents relating apparently to the same issues which are the
subject of the Grand Jury investigation.
The Company has retained counsel in the above matters and has cooperated with
the U.S. Attorney's Office and the SEC in their on-going investigations.
Pursuant to the subpoenas served by the U.S. Attorney's Office and the SEC, the
Company has and is continuing to produce various documents responsive to such
subpoenas. At this stage of both investigations, it is not possible to predict
their ultimate outcome or the financial impact on the Company, if any. In
September of 1997, the Company ended its consulting relationship with Turret
Consultants. In December 1998, the Company closed its Swiss office; and in
March 1999, Felix Oeri and Oeri Finance Inc. filed 13D Statements with the SEC
indicating ownership of less than 5% of the Company's common stock.
Under an existing Directors and Officers liability insurance policy held by the
Company, a claim was filed with the insurer for the reimbursement of legal fees
incurred in connection with the federal investigations. The policy calls for a
maximum reimbursement to the Company of $2,000,000. The insurance company
preliminarily denied the Company's claim under their interpretation of the terms
of the policy. The Company believes that the insurance company has improperly
denied the Company's claim and has filed an action alleging breach of contract.
The Company believes that it currently can fund the ongoing legal costs
associated with the investigations regardless of the outcome of the Company's
claim.
The ultimate outcome of these uncertainties discussed above is unknown.
Moreover, due to the nature of arbitration matters, it is impossible to predict
the ultimate outcome and/or range of loss. Accordingly, no provision for any
liability that might result has been made in the accompanying financial
statements.
Future annual minimum rental payments required under operating leases that have
initial or remaining non-cancelable lease terms in excess of one year as of
December 31, 1998, were as follows:
Year ending December 31:
1999 $ 517,903
2000 517,903
2001 271,837
2002 271,837
Thereafter --
Total $1,579,480
NOTE 6. SUBSEQUENT EVENTS (UNAUDITED)
In February 1999, Hareton Sales & Marketing, Inc. ("Hareton"), the holder of
$502,615 in face value of 9% Senior Secured Convertible Notes exercised its
right to convert such debt into common stock of the Company and the Company
issued 718,021 shares of common stock in full satisfaction of this debt.
Also in February 1999 the Company established an affiliate in the form of a
trust to purchase stock from certain shareholders. The Company made a loan to
the trust in the amount of $586,915, which through a series of transactions was
used to acquire 469,540 shares of the Company's common stock at an effective
price of $1.25 per share. Concurrent with the transaction, the Company
relinquished its right of first refusal as to any remaining shares held by Oeri
Finance, Inc.; and Oeri Finance, Inc. forgave $728,000 in demand debt owed by
the Company.
Both Oeri Finance Inc. and Hareton filed 13D Statements with the SEC indicating
ownership of less than 5% of the Company's stock.
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
Additions
Balance at charged to
beginning costs and Balance at
of period expenses Deductions end of
period
1998
Allowance for:
Receivable from broker/
dealers and clearing
organizations $2,103,802 $ -- $ -- $2,103,802
Receivable from customers 4,957,781 2,019,454 (1,622,371) 5,354,864
Other Receivables 1,979,793 -- -- 1,979,793
1997
Allowance for:
Receivable from broker/
dealers and clearing
organizations $2,103,802 $ -- $ -- $2,103,802
Receivable from customers 3,931,080 1,335,412 (308,711) 4,957,781
Other Receivables 1,979,793 -- -- 1,979,793
1996
Allowance for:
Receivable from broker/
dealers and clearing
organizations $2,103,802 $ -- $ -- $2,103,802
Receivable from customers 4,333,291 875,743 (1,277,954) 3,931,080
Other Receivables 1,979,793 -- -- 1,979,793
Deferred tax asset 500,000 -- (500,000) --
Deductions represent amounts written off.
EXHIBIT 10.7
STOCK APPRECIATION RIGHTS AGREEMENT
THIS AGREEMENT is entered into as of the 8th day of June, 1998 by and
between CHRISTOPHER L. JARRATT, an individual residing in the State of
Tennessee, and JB OXFORD HOLDINGS, INC., a Utah corporation ("JB Oxford").
RECITALS
WHEREAS, Mr. Jarratt is the Chief Executive Officer and Chairman of the
Board of JB Oxford;
WHEREAS, on June 8, 1998, the Board of Directors of JB Oxford granted Mr.
Jarratt the option to purchase 800,000 shares of JB Oxford's common stock, par
value $0.01 per share (the "Common Stock") at an exercise price equal to the
market closing price of the Common Stock on June 5, 1998, or $1.3125 per share;
WHEREAS, the 1994 JB Oxford Holdings, Inc. Stock Option Plan (the "Plan")
currently does not have adequate shares available for the grant to Mr. Jarratt;
WHEREAS, approval of the shareholders of JB Oxford would be necessary to
amend the Plan to increase the number of shares available for grant under the
Plan or, alternatively, the shareholders could adopt a new stock option plan
with enough options available for grant to include Mr. Jarratt's options;
WHEREAS, the Board of Directors resolved at the June 8, 1998 Board meeting
that JB Oxford wanted to provide a formula to grant Mr. Jarratt phantom-stock or
other comparable compensation in the event that shareholder approval is not
obtained for either of the above alternatives (the "Resolution"); and
WHEREAS, Mr. Jarratt and JB Oxford desire to set forth the terms of the
Resolution in further detail.
NOW, THEREFORE, in consideration for the premises and the reciprocal
obligations set forth in this Agreement, and for other good and valuable
consideration, the receipt and sufficiency of which the parties hereby
acknowledge, and intending to bind themselves, the parties agree as follows:
AGREEMENT
1. JB Oxford hereby grants to Mr. Jarratt stock appreciation rights
with respect to the equivalent of 800,000 shares of Common Stock (collectively,
the "Share Units"). Each Share Unit shall have an initial value of $1.3125 per
share (the "Initial Value Per Share"). The stock appreciation rights granted
under this Agreement mean the right to receive cash or Common Stock as described
in Paragraph 4 of this Agreement.
2. JB Oxford shall keep a record of the Share Units granted to Mr.
Jarratt, the Initial Value Per Share thereof, the vesting of each Share Unit and
any adjustments to the number of Share Units or the Initial Value Per Share (the
"Account").
3. To exercise any or all of the stock appreciation rights granted
under this Agreement, Mr. Jarratt shall notify JB Oxford in writing of the
number of Share Units and the date on which he would like such Share Units
valued (the "Determination Date"). Mr. Jarratt shall only include in such
notice Share Units which have vested in accordance with the terms of the Share
Units and this Agreement.
4. JB Oxford agrees to pay Mr. Jarratt, calculated only with respect to
the Share Units identified in the notice in Section 3 hereof, the product of (a)
the excess, if any, of the closing price per share of Common Stock as of the
Determination Date on the Nasdaq National Market system, or such other national
securities exchange or association on which the Common Stock is then listed (the
"Maturity Value Per Share"), over the Initial Value Per Share of such Share
Units in the Account, subject to adjustment as set forth in this Agreement, and
(b) the number of Share Units identified in the notice in Section 3 hereof, less
any amount which JB Oxford is required to withhold with respect to such payment
under the then applicable provisions of the Internal Revenue Code of 1986, as
amended (the "Code"), and state or local income tax laws. Payment shall be made
in cash unless, at Mr. Jarratt's option, Mr. Jarratt elects to receive such cash
amount in shares of Common Stock. In such event, JB Oxford shall issue to Mr.
Jarratt the number of shares of Common Stock that the cash amount less any
required withholding could buy at the Maturity Value Per Share (without regard
to any commissions).
5. The amount payable to Mr. Jarratt under Section 4 shall be paid by
JB Oxford within 5 days after the Determination Date unless Mr. Jarratt elects
to receive such cash amount in shares of Common Stock, in which case delivery of
the shares shall be within 15 days after the Determination Date.
6. The Share Units shall be subject to the following terms and
conditions:
(a) The Share Units shall vest in three equal installments beginning on
the first anniversary of June 8, 1998, the date of grant; provided, however,
that the Share Units will become immediately fully vested upon the occurrence of
a Change in Control. "Change in Control" means the occurrence of any of the
following events:
i. If there occurs any transaction (which shall include a series of
transactions occurring within 60 days or occurring pursuant to a plan),
that has the result that shareholders of JB Oxford immediately before such
transaction cease to own at least 51% of the voting stock of JB Oxford or
of any entity that results from the participation of JB Oxford in a
reorganization, consolidation, merger, liquidation or any other form of
corporate transaction;
ii. If the shareholders of JB Oxford approve a plan of
merger, consolidation, reorganization, liquidation or
dissolution in which JB Oxford does not survive (unless the
approved merger, consolidation, reorganization, liquidation
or dissolution is subsequently abandoned);
iii. If the shareholders of JB Oxford approve a plan for the
sale, lease, exchange, transfer, assignment or other
disposition of all or substantially all the property and
assets of JB Oxford (unless such plan is subsequently
abandoned); or
iv. If the Board of Directors of JB Oxford does not consist
of a majority of "Continuing Directors." "Continuing
Directors" means the directors of JB Oxford on the date of
this Agreement and each other director, if such other
director's nomination for election to the board of directors
of JB Oxford is recommended by a majority of the then
Continuing Directors.
(b) In the event that (a) the number of outstanding shares of
Common Stock shall be changed by reason of split-ups, combinations of shares,
recapitalizations, stock dividends or otherwise, or (b) the Common Stock is
converted into or exchanged for other shares as a result of any merger or
consolidation (including a sale of assets) or other recapitalization, the number
of Share Units then credited to the Account and the Initial Value Per Share
included therein shall be appropriately adjusted so as to reflect the change.
(c) No Share Units or amounts payable under this Agreement shall be
transferable by Mr. Jarratt other than by will or by the laws of descent and
distribution and during Mr. Jarratt's lifetime may be exercised only by him.
(d) The unexercised portion, if any, of the Share Units shall
automatically and without notice terminate and become null and void at the time
of the earliest to occur of the following:
(i) three (3) months after the date that Mr. Jarratt's employment
with the Company or any of its Subsidiaries is terminated for any reason other
than by reason of (A) "Cause," which, solely for purposes of this Agreement,
shall mean the termination of Mr. Jarratt's employment by reason of (x) the
final conviction of Mr. Jarratt of a felony under the laws of the United States
or any state thereof which results or was intended to result directly or
indirectly in gain or personal enrichment by Mr. Jarratt at the expense of JB
Oxford, or (y) the participation by Mr. Jarratt as an employee, officer or
holder of more than five percent of the equity in any business engaged in
activities in direct competition with JB Oxford without the prior written
consent of JB Oxford, or (z) willful misconduct, (B) the mental or physical
disability (within the meaning of S22(e)(3) of the Code) of Mr. Jarratt as
determined by a medical doctor satisfactory to the Board of Directors of JB
Oxford or (C) the death of Mr. Jarratt;
(ii) immediately upon the termination of Mr. Jarratt's employment
with JB Oxford for Cause;
(iii) one (1) year after the date that Mr. Jarratt's employment with
the Company is terminated by reason of a mental or physical disability (within
the meaning of S22(e)(3) of the Code) as determined by a medical doctor
satisfactory to the Board of Directors of JB Oxford;
(iv) (A) one (1) year after the date of termination of Mr.
Jarratt's employment with the Company by reason of death of Mr. Jarratt, or (B)
three (3) months after the date that Mr. Jarratt dies if such death occurs
during the one (1) year period specified in Section 6(d)(iii); or
(v) June 8, 2008.
7. No dividend or other distribution paid by JB Oxford upon issued and
outstanding Common Stock shall be payable to or for the Share Units held by Mr.
Jarratt.
8. Mr. Jarratt represents and warrants that:
(a) Mr. Jarratt is aware that no federal or state agency has made
any findings or determination as to the fairness for public or private
investment in, nor any recommendation or endorsement of, the Share Units or
Common Stock that may be issuable at Mr. Jarratt's election; and
(b) Mr. Jarratt is aware that neither the Share Units nor the
Common Stock that may be issuable at Mr. Jarratt's election are registered under
the securities or "blue sky" laws of any state or jurisdiction (the "Blue Sky
Laws") as of the date of this Agreement, and JB Oxford is under no obligation to
cause the Share Units or such Common Stock to be registered under the Securities
Act of 1933, as amended (the "Act"), or the Blue Sky Laws; and that in the event
that the Share Units and such Common Stock are not registered under the Act or
the Blue Sky Laws for any reason at a time when Mr. Jarratt desires to elect to
receive Common Stock, then, in addition to the other terms and conditions of
this Agreement, such exercise shall be conditioned upon determination by the
Board of Directors of JB Oxford that the Share Units and such Common Stock may
be issued to Mr. Jarratt without registration under the Act or the Blue Sky
Laws. The Board of Directors of JB Oxford may require Mr. Jarratt to deliver to
JB Oxford an agreement or undertaking setting forth any factual information that
the Board of Directors of JB Oxford deems necessary to determine whether the
Share Units and such Common Stock may be issued to Mr. Jarratt without
registration under the Act or the Blue Sky Laws, including, without limitation,
a representation and warranty that Mr. Jarratt is acquiring such Common Stock
for investment and not with a view to, or for sale in connection with, the
distribution of any such Common Stock.
9. Nothing contained in this Agreement shall require JB Oxford to
register any Common Stock that may be issuable at Mr. Jarratt's election under
the Act or the Blue Sky Laws or to continue any such registration which may be
in effect on or after the date of this Agreement. If any such Common Stock is
not so registered when issued hereunder, then the certificate(s) for the Common
Stock shall bear a legend, in a form satisfactory to the Board of Directors of
JB Oxford, restricting the transfer of such Common Stock unless such transfer is
registered or exempt from registration under the Act or the Blue Sky Laws, and
such Common Stock shall not be transferred except in accordance with such
legend.
10. JB Oxford and Mr. Jarratt agree that in the event the shareholders
of JB Oxford either (a) approve an increase in the number of shares available
for grant under the Plan or (b) adopt a new plan with sufficient shares of
Common Stock available for Mr. Jarratt's grant of 800,000 stock options by June
8, 1999 this Agreement will be null and void and of no further effect. At the
time of such approval or adoption, JB Oxford will provide Mr. Jarratt with a
stock option agreement(s) evidencing the grant of such stock options.
11. (a) No change or modification of this Agreement shall be valid
unless the same is in writing and signed by both Mr. Jarratt and JB Oxford.
(b) This Agreement and all rights hereunder shall be governed by,
and construed and interpreted in accordance with, the laws of the State of
California applicable to contracts made and to be performed entirely within that
State.
(c) This Agreement sets forth all of the agreements, warranties
and representations among the parties hereto and thereto with respect to the
Share Units, and there are no other promises, agreements, conditions
understandings, representations or warranties, oral or written, express or
implied, with respect to those Share Units.
(d) The provisions of this Agreement relate solely to granting of
the Share Units to Mr. Jarratt as of the date hereof and do not address or
relate to any conditions of Mr. Jarratt's employment with JB Oxford.
(e) This Agreement may be executed in any number of counterparts,
each of which, when executed, shall be deemed to be an original and all of which
together shall be deemed to be one and the same instrument.
(f) If a compensation committee of the Board of Directors of JB
Oxford is formed after the date of this Agreement, such compensation committee
shall be entitled to exercise the powers of the Board of Directors contained in
this Agreement.
IN WITNESS WHEREOF, the parties have caused this Agreement to be executed
as of the date first written above.
JB OXFORD HOLDINGS, INC.
/s/ James G. Lewis
By: James G. Lewis
Its: President
/s/ Christopher L Jarratt
CHRISTOPHER L. JARRATT
EXHIBIT 10.8
STOCK APPRECIATION RIGHTS AGREEMENT
THIS AGREEMENT is entered into as of the 8th day of June, 1998 by and
between JAMES G. LEWIS, an individual residing in the State of Tennessee, and JB
OXFORD HOLDINGS, INC., a Utah corporation ("JB Oxford").
RECITALS
WHEREAS, Mr. Lewis is the President and a director of JB Oxford;
WHEREAS, on June 8, 1998, the Board of Directors of JB Oxford granted Mr.
Lewis the option to purchase 750,000 shares of JB Oxford's common stock, par
value $0.01 per share (the "Common Stock") at an exercise price equal to the
market closing price of the Common Stock on June 5, 1998, or $1.3125 per share;
WHEREAS, the 1994 JB Oxford Holdings, Inc. Stock Option Plan (the "Plan")
currently does not have adequate shares available for the grant to Mr. Lewis;
WHEREAS, approval of the shareholders of JB Oxford would be necessary to
amend the Plan to increase the number of shares available for grant under the
Plan or, alternatively, the shareholders could adopt a new stock option plan
with enough options available for grant to include Mr. Lewis' options;
WHEREAS, the Board of Directors resolved at the June 8, 1998 Board meeting
that JB Oxford wanted to provide a formula to grant Mr. Lewis phantom-stock or
other comparable compensation in the event that shareholder approval is not
obtained for either of the above alternatives (the "Resolution"); and
WHEREAS, Mr. Lewis and JB Oxford desire to set forth the terms of the
Resolution in further detail.
NOW, THEREFORE, in consideration for the premises and the reciprocal
obligations set forth in this Agreement, and for other good and valuable
consideration, the receipt and sufficiency of which the parties hereby
acknowledge, and intending to bind themselves, the parties agree as follows:
AGREEMENT
1. JB Oxford hereby grants to Mr. Lewis stock appreciation rights with
respect to the equivalent of 750,000 shares of Common Stock (collectively, the
"Share Units"). Each Share Unit shall have an initial value of $1.3125 per
share (the "Initial Value Per Share"). The stock appreciation rights granted
under this Agreement mean the right to receive cash or Common Stock as described
in Paragraph 4 of this Agreement.
2. JB Oxford shall keep a record of the Share Units granted to Mr.
Lewis, the Initial Value Per Share thereof, the vesting of each Share Unit and
any adjustments to the number of Share Units or the Initial Value Per Share (the
"Account").
3. To exercise any or all of the stock appreciation rights granted
under this Agreement, Mr. Lewis shall notify JB Oxford in writing of the number
of Share Units and the date on which he would like such Share Units valued (the
"Determination Date"). Mr. Lewis shall only include in such notice Share Units
which have vested in accordance with the terms of the Share Units and this
Agreement.
4. JB Oxford agrees to pay Mr. Lewis, calculated only with respect to
the Share Units identified in the notice in Section 3 hereof, the product of (a)
the excess, if any, of the closing price per share of Common Stock as of the
Determination Date on the Nasdaq National Market system, or such other national
securities exchange or association on which the Common Stock is then listed (the
"Maturity Value Per Share"), over the Initial Value Per Share of such Share
Units in the Account, subject to adjustment as set forth in this Agreement, and
(b) the number of Share Units identified in the notice in Section 3 hereof, less
any amount which JB Oxford is required to withhold with respect to such payment
under the then applicable provisions of the Internal Revenue Code of 1986, as
amended (the "Code"), and state or local income tax laws. Payment shall be made
in cash unless, at Mr. Lewis' option, Mr. Lewis elects to receive such cash
amount in shares of Common Stock. In such event, JB Oxford shall issue to Mr.
Lewis the number of shares of Common Stock that the cash amount less any
required withholding could buy at the Maturity Value Per Share (without regard
to any commissions).
5. The amount payable to Mr. Lewis under Section 4 shall be paid by JB
Oxford within 5 days after the Determination Date unless Mr. Lewis elects to
receive such cash amount in shares of Common Stock, in which case delivery of
the shares shall be within 15 days after the Determination Date.
6. The Share Units shall be subject to the following terms and
conditions:
(a) The Share Units shall vest in three equal installments beginning on
the first anniversary of June 8, 1998, the date of grant; provided, however,
that the Share Units will become immediately fully vested upon the occurrence of
a Change in Control. "Change in Control" means the occurrence of any of the
following events:
i. If there occurs any transaction (which shall include a series of
transactions occurring within 60 days or occurring pursuant to a plan),
that has the result that shareholders of JB Oxford immediately before such
transaction cease to own at least 51% of the voting stock of JB Oxford or
of any entity that results from the participation of JB Oxford in a
reorganization, consolidation, merger, liquidation or any other form of
corporate transaction;
ii. If the shareholders of JB Oxford approve a plan of
merger, consolidation, reorganization, liquidation or
dissolution in which JB Oxford does not survive (unless the
approved merger, consolidation, reorganization, liquidation
or dissolution is subsequently abandoned);
iii. If the shareholders of JB Oxford approve a plan for the
sale, lease, exchange, transfer, assignment or other
disposition of all or substantially all the property and
assets of JB Oxford (unless such plan is subsequently
abandoned); or
iv. If the Board of Directors of JB Oxford does not consist
of a majority of "Continuing Directors." "Continuing
Directors" means the directors of JB Oxford on the date of
this Agreement and each other director, if such other
director's nomination for election to the board of directors
of JB Oxford is recommended by a majority of the then
Continuing Directors.
(b) In the event that (a) the number of outstanding shares of
Common Stock shall be changed by reason of split-ups, combinations of shares,
recapitalizations, stock dividends or otherwise, or (b) the Common Stock is
converted into or exchanged for other shares as a result of any merger or
consolidation (including a sale of assets) or other recapitalization, the number
of Share Units then credited to the Account and the Initial Value Per Share
included therein shall be appropriately adjusted so as to reflect the change.
(c) No Share Units or amounts payable under this Agreement shall be
transferable by Mr. Lewis other than by will or by the laws of descent and
distribution and during Mr. Lewis' lifetime may be exercised only by him.
(d) The unexercised portion, if any, of the Share Units shall
automatically and without notice terminate and become null and void at the time
of the earliest to occur of the following:
(i) three (3) months after the date that Mr. Lewis' employment
with the Company or any of its Subsidiaries is terminated for any reason other
than by reason of (A) "Cause," which, solely for purposes of this Agreement,
shall mean the termination of Mr. Lewis' employment by reason of (x) the final
conviction of Mr. Lewis of a felony under the laws of the United States or any
state thereof which results or was intended to result directly or indirectly in
gain or personal enrichment by Mr. Lewis at the expense of JB Oxford, or (y) the
participation by Mr. Lewis as an employee, officer or holder of more than five
percent of the equity in any business engaged in activities in direct
competition with JB Oxford without the prior written consent of JB Oxford, or
(z) willful misconduct, (B) the mental or physical disability (within the
meaning of S22(e)(3) of the Code) of Mr. Lewis as determined by a medical doctor
satisfactory to the Board of Directors of JB Oxford or (C) the death of Mr.
Lewis;
(ii) immediately upon the termination of Mr. Lewis' employment with
JB Oxford for Cause;
(iii) one (1) year after the date that Mr. Lewis' employment with
the Company is terminated by reason of a mental or physical disability (within
the meaning of S22(e)(3) of the Code) as determined by a medical doctor
satisfactory to the Board of Directors of JB Oxford;
(iv) (A) one (1) year after the date of termination of Mr. Lewis'
employment with the Company by reason of death of Mr. Lewis, or (B) three (3)
months after the date that Mr. Lewis dies if such death occurs during the one
(1) year period specified in Section 6(d)(iii); or
(v) June 8, 2008.
7. No dividend or other distribution paid by JB Oxford upon issued and
outstanding Common Stock shall be payable to or for the Share Units held by Mr.
Lewis.
8. Mr. Lewis represents and warrants that:
(a) Mr. Lewis is aware that no federal or state agency has made
any findings or determination as to the fairness for public or private
investment in, nor any recommendation or endorsement of, the Share Units or
Common Stock that may be issuable at Mr. Lewis' election; and
(b) Mr. Lewis is aware that neither the Share Units nor the Common
Stock that may be issuable at Mr. Lewis' election are registered under the
securities or "blue sky" laws of any state or jurisdiction (the "Blue Sky Laws")
as of the date of this Agreement, and JB Oxford is under no obligation to cause
the Share Units or such Common Stock to be registered under the Securities Act
of 1933, as amended (the "Act"), or the Blue Sky Laws; and that in the event
that the Share Units and such Common Stock are not registered under the Act or
the Blue Sky Laws for any reason at a time when Mr. Lewis desires to elect to
receive Common Stock, then, in addition to the other terms and conditions of
this Agreement, such exercise shall be conditioned upon determination by the
Board of Directors of JB Oxford that the Share Units and such Common Stock may
be issued to Mr. Lewis without registration under the Act or the Blue Sky Laws.
The Board of Directors of JB Oxford may require Mr. Lewis to deliver to JB
Oxford an agreement or undertaking setting forth any factual information that
the Board of Directors of JB Oxford deems necessary to determine whether the
Share Units and such Common Stock may be issued to Mr. Lewis without
registration under the Act or the Blue Sky Laws, including, without limitation,
a representation and warranty that Mr. Lewis is acquiring such Common Stock for
investment and not with a view to, or for sale in connection with, the
distribution of any such Common Stock.
9. Nothing contained in this Agreement shall require JB Oxford to
register any Common Stock that may be issuable at Mr. Lewis' election under the
Act or the Blue Sky Laws or to continue any such registration which may be in
effect on or after the date of this Agreement. If any such Common Stock is not
so registered when issued hereunder, then the certificate(s) for the Common
Stock shall bear a legend, in a form satisfactory to the Board of Directors of
JB Oxford, restricting the transfer of such Common Stock unless such transfer is
registered or exempt from registration under the Act or the Blue Sky Laws, and
such Common Stock shall not be transferred except in accordance with such
legend.
10. JB Oxford and Mr. Lewis agree that in the event the shareholders of
JB Oxford either (a) approve an increase in the number of shares available for
grant under the Plan or (b) adopt a new plan with sufficient shares of Common
Stock available for Mr. Lewis' grant of 750,000 stock options by June 8, 1999
this Agreement will be null and void and of no further effect. At the time of
such approval or adoption, JB Oxford will provide Mr. Lewis with a stock option
agreement(s) evidencing the grant of such stock options.
11. (a) No change or modification of this Agreement shall be valid
unless the same is in writing and signed by both Mr. Lewis and JB Oxford.
(b) This Agreement and all rights hereunder shall be governed by,
and construed and interpreted in accordance with, the laws of the State of
California applicable to contracts made and to be performed entirely within that
State.
(c) This Agreement sets forth all of the agreements, warranties
and representations among the parties hereto and thereto with respect to the
Share Units, and there are no other promises, agreements, conditions
understandings, representations or warranties, oral or written, express or
implied, with respect to those Share Units.
(d) The provisions of this Agreement relate solely to granting of
the Share Units to Mr. Lewis as of the date hereof and do not address or relate
to any conditions of Mr. Lewis' employment with JB Oxford.
(e) This Agreement may be executed in any number of counterparts,
each of which, when executed, shall be deemed to be an original and all of which
together shall be deemed to be one and the same instrument.
(f) If a compensation committee of the Board of Directors of JB
Oxford is formed after the date of this Agreement, such compensation committee
shall be entitled to exercise the powers of the Board of Directors contained in
this Agreement.
IN WITNESS WHEREOF, the parties have caused this Agreement to be executed
as of the date first written above.
JB OXFORD HOLDINGS, INC.
/s/ Christopher L. Jarratt
By: Christopher L. Jarratt
Its: Chief Executive Officer
/s/ James G. Lewis
JAMES G. LEWIS
EXHIBIT 21
State Or Percentage Voting
Jurisdiction Of Securities Owned
Name Incorporation By Parent
JB Oxford & Company Utah 100%
JB Oxford Insurance Services California 100%
Stocks4Less, Inc. Delaware 100%
The subsidiaries listed above are all of the significant subsidiaries owned by
JB Oxford Holdings, Inc.
Pursuant to the requirements of Section 13 of 15(d) 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/Christopher L. Jarratt______ ____/s/James G. Lewis________
Christopher L. Jarratt James G. Lewis, Director
Chief Executive Officer
___/s/Michael J. Chiodo________ ____/s/Mark M. Grossi________
Michael J. Chiodo Mark M. Grossi, Director
Chief Financial Officer, Treasurer,
Chief Accounting Officer
____/s/David G. Mahood______
David G. Mahood, Director
April 12, 1999