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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, 2001
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM TO
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COMMISSION FILE NUMBER 0-16240
JB OXFORD HOLDINGS, INC.
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(Exact name of registrant as specified in its charter)
UTAH 95-4099866
(State or other jurisdiction 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
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Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Name of each exchange on
Title of each class which registered
Common stock, $0.01 par value: Nasdaq SmallCap Market
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 20, 2002 was approximately $22,634,488 computed based on
the average bid and asked prices of the stock as of March 20, 2002.
Indicate the number of shares outstanding of each of the registrant's
classes of common stock, as of the latest practicable date: 14,141,525 shares
outstanding at March 20, 2002.
Documents Incorporated by Reference: Portions of the registrant's
definitive proxy statement for the 2002 annual meeting, which will be filed on
ro before 120 days after December 31, 2001, are incorporated by reference into
Part III of this Form 10-K.
PART I
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
Some of the statements contained in this Annual Report on Form 10-K constitute
"forward-looking statements" within the meaning of the Private Securities
Litigation Reform Act of 1995 (the "Reform Act"). These forward-looking
statements involve known and unknown risks, uncertainties, and other factors
which may cause the actual results, performance, or achievements of JB Oxford
Holdings, Inc. and subsidiaries to be materially different from any future
results, performance, or achievements, expressed or implied by the
forward-looking statements. Such risks and uncertainties include, but are not
limited to, those discussed below in "Item 1. Business Overview -
Forward-Looking Statements and Risk Factors."
ITEM 1. BUSINESS
Overview
Through our wholly-owned subsidiaries, we are engaged in the business of
providing brokerage and related financial services to retail customers and
broker-dealers nationwide. We are a fully integrated brokerage firm, providing
retail brokerage services, clearing services and market making services to our
customers.
We were incorporated in Delaware on March 31, 1987, and completed our initial
public offering in September 1987. We changed our state of incorporation to Utah
in 1990. Our business is headquartered in Los Angeles and we have additional
offices in New York and Miami.
Our primary subsidiary is JB Oxford & Company. JB Oxford is a registered
broker-dealer offering the following services: (i) providing discount and
electronic brokerage services to the investing public; (ii) providing clearing
and execution services to independent broker-dealers ("correspondents") on a
fully-disclosed basis; and (iii) acting as a market maker in stocks traded on
NASDAQ National Market System and other national exchanges. For 2001, our
consolidated revenues were $35,347,821, which consisted primarily of commission
and interest income from discount and electronic brokerage division.
Discount and Electronic Brokerage Services
In 1994, we began our 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. We
were able to capitalize on this early position by providing customer service and
attention comparable to that offered by larger full-service brokerage firms
charging higher fees. Today, JB Oxford offers a full line of products and
services to customers, which includes the ability to buy and sell securities,
security options, mutual funds, fixed income products, annuities and other
investment securities. JB Oxford 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.
In 1995, in order to continue our commitment to providing a full line of
brokerage services to our customers, we 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, we made many improvements to these services, including the launch of
Internet trading in 1996. We continue to upgrade and improve our electronic
brokerage technologies in order to provide our customers with the resources
necessary to conveniently and economically execute securities transactions and
access relited financial
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information. In addition to our trading capabilities, our 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. To further enhance our brokerage services, JB Oxford began
offering extended trading hours to its customers, allowing the placement of
limit order trades (authorizing the purchase or sale of stock at a specified
price or better) 45 minutes before and after traditional market hours.
In recent years, the general public has become more comfortable dealing with
financial matters through electronic means. We are positioned to take advantage
of this growing market. Many brokerage firms that compete directly with us 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, has been strong in recent years. In September 1999, JB Oxford
unveiled its enhanced web site featuring n*power, an integrated financial
services account offering online trading and electronic financial services
including online bill payment and free ATM/check card for customers maintaining
a minimum account balance. In the second quarter of 2001, we began offering
online bond trading, joining only a handful of discount brokerages that offer
this service to customers. In early 2002 we redesigned our web site at
www.jboxford.com to include an upgraded navigational scheme and richer financial
content. The JB Oxford trading site provides integration of charts, market
quotes, company research, customer account information such as cash balances and
portfolio balances, and includes bond and mutual fund trading.
We also cater to customers within niche markets by providing services that
address the particular needs of these customer bases. Examples of these markets
include our efforts to develop divisions that cater specifically to Asian, Latin
American and European customers. We serve the needs of the Asian American
community through our offices in the Los Angeles and New York areas, and the
Latin American community through our office in Miami. We also provide discount
brokerage services throughout Europe from our New York office. These
niche-marketing efforts initially began as an outgrowth of our commitment to
meeting the needs of our 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 these services to both domestic and
international customers using the Internet. These markets did not constitute a
material portion of our business in 2001. We intend to continue this niche
marketing strategy in 2002.
Clearing and Execution Services
JB Oxford is self-clearing and as of March 20, 2002, JB Oxford provided clearing
and execution services for 20 correspondents. The clearing business offers a
high return on capital, and management believes by careful selection and
monitoring of its correspondents, this business can remain profitable. We
continue to look for opportunities to selectively add new correspondents, in an
effort to replace clearing business that has been lost through attrition and
decreasing market volumes.
The clearing relationship involves the sharing of broker-dealer responsibilities
between the introducing broker and the clearing broker. JB Oxford's
correspondents (i.e., introducing brokers) are responsible for all customer
relationships, including customer contact, opening customer accounts,
determining customer suitability, placing customer orders, and responding to
customer inquiries. JB Oxford, acting as the clearing broker, generally provides
clearing 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 Clearing Corporation ("DTCC"); 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.
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In providing clearing and execution services to correspondents, JB Oxford
assumes certain responsibilities for the possession or control of customer
securities and assets. As a result, JB Oxford'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 JB Oxford for the benefit of its customers and correspondents.
There are inherent risks in operating as a clearing agent. See "Risk Factors"
below. Since JB Oxford makes loans to customers collateralized by customer
securities, JB Oxford 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 JB Oxford's exposure to
these risks. JB Oxford mitigates its credit exposure by monitoring the adequacy
of collateral from both individual customers and correspondents. Additionally,
JB Oxford is subject to the margin rules established by the Board of Governors
of the Federal Reserve System and the 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, JB Oxford acts as a market
maker for approximately 350 public corporations whose stocks are traded on the
NASDAQ National Market System, NYSE or other national exchanges. The number of
companies for which we act as a market maker fluctuates depending upon various
factors, including trading volume ad the number of employees acting in a trading
capacity.
Generally, we do not maintain inventories of securities for sale to our
customers. However, we do engage in certain principal transactions where, in
response to a customer order, we will go at risk to the marketplace to attempt
to capture the spread between the bid and offer. Most of our larger competitors
are engaged in similar market making activities through subsidiaries or receive
order flow payments from companies engaged in such market making activities. We
believe we can maintain better control and be assured of proper best executions
of customer trades by providing these market making services directly to our
customers.
Our 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
We derive a portion of our income from interest generated on the margin accounts
of our customers and, to a lesser extent, those of our correspondents. A margin
account allows the customer to deposit less than the full cost of the security
purchased while we lend 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 generally 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, 2001, the total of all debit balances held in
active margin accounts was approximately $100,000,000. We finance our margin
lending business primarily through customer free credit balances, stock loan and
existing credit lines with commercial lenders.
4
Pursuant to written agreements with customers, broker-dealers are permitted by
the SEC's regulations to lend customer securities held as collateral in margin
accounts. Customer free credit balances were approximately $165,000,000 as of
December 31, 2001. These credit balances are available to finance customer
margin balances subject to the requirements of SEC rules. We also utilize stock
loan arrangements with other broker dealers to finance customer debit balances.
In addition to the above financing, JB Oxford has established committed lines of
revolving credit with banking institutions approximating $55,000,000 and
uncommitted lines with broker dealers based upon available loan collateral.
Securities Industry Practices
JB Oxford 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. JB Oxford
is registered as a securities broker-dealer in all 50 states and the District of
Columbia. JB Oxford is also a member of the Securities Investors Protection
Corporation, which provides JB Oxford's customers with insurance protection for
amounts of up to $500,000 each, with a limitation of $100,000 on claims for cash
balances. JB Oxford has also acquired an additional $10,000,000 per account,
$50,000,000 in the aggregate, in insurance coverage through Lloyds of London as
added protection for individual customers' securities, covering all clients of
JB Oxford's fully-disclosed correspondents and discount customers.
JB Oxford 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 that 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 "Risk Factors" below.
Net Capital Requirements
JB Oxford is subject to SEC Rule 15c3-1, Net Capital Requirements For Brokers or
Dealers, which establishes minimum net capital requirements for broker-dealers.
Rule 15c3-1 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 Rule 15c3-1 depends in part upon the activities
engaged in by the broker-dealer.
In computing net capital under Rule 15c3-1, 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 Rule 15c3-1 could require
intensive use of capital and could limit JB Oxford's ability to pay dividends to
us, which in turn could limit our ability to pay dividends to our shareholders.
Failure to comply with Rule 15c3-1 could require us to infuse additional capital
into JB Oxford, could limit our ability to pay our debts and/or interest
obligations, and may subject JB Oxford to certain restrictions which may be
imposed by the SEC, the NASD, and other regulatory bodies. Moreover, in the
event that we
5
can not or elect not to infuse the additional capital or otherwise bring JB
Oxford into compliance, JB Oxford would ultimately be forced to cease
operations. See "Risk Factors" above.
JB Oxford has elected to use the alternative method permitted by Rule 15c3-1,
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, 2001, JB Oxford had net capital of
$18,975,361, which was $16,891,455 in excess of the minimum amount required. At
December 31, 2000, JB Oxford had net capital of $28,860,901, which was
$23,275,591 in excess of the minimum amount required.
Employees
As of March 20, 2002, we had approximately 131 employees. Since January 1, 2001
we have reduced our workforce by approximately 50% due to market slowdown and
reduction in transaction volume. As demand for our products and services
increases in the future, we expect to need to correspondingly increase our
personnel and there can be no assurance that we will be able to hire and retain
qualified personnel. We consider our employee relationships to be good.
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. The forward-looking statements
described below and elsewhere in this document 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.
We Have Incurred Operation Losses in the Past and May incur Future Operation
Losses.
Although we achieved profitability in fiscal years 1999 and 2000, we incurred a
net operating losses of approximately $9 million for the year ended December 31,
2001. As direct result of the downturn in the U.S. securities markets that began
in early 2000 and has continued, we have suffered a significant reduction in
transaction volume, and consequently revenues. We recently implemented cost
containment measures that have significantly reduced our expenses. However, we
cannot assure you that our negative cash flow and net losses from operations
will not continue or increase for the foreseeable future. If we continue to
incur losses and negative cash flow we may need additional capital to fund
working capital and cash flow deficits. There can be no assurance that such
capital will be available to us, or if available, on terms acceptable to us.
Additionally, we could lose our stock loan lines and committed lines of credit,
which would greatly restrict our ability to finance our operations. We may never
generate sufficient revenues to achieve or sustain profitability or generate
positive cash flow.
Our Business is Adversely Affected by Downturns in the U.S. Securities Markets.
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 has adversely
affected our operating results. In October 1987 and October 1998, the stock
market suffered major declines, as a
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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 resulted in reduced transaction revenues.
In March 2000, the stock market entered into a protracted down-trend, resulting
in reduced transaction volume, and consequently, revenues. In 2001, the stock
markets were closed for four (4) days as a result of the events of September 11
which had a negative impact on our revenues. Any acts of terrorism, which
continue to impact the U.S. financial markets could have a material adverse
effect on our business, financial condition and operating results. When trading
volume is low, our profitability is likely to 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.
Demand and Market Acceptance for Our Services Are Subject to a High Level of
Uncertainty.
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.
We are Exposed to Certain Credit Risks with Our Customers.
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
falls 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 services could have a
material adverse effect on our business, financial condition and operating
results.
Our Clearing Operations Expose Us to Losses Beyond the Loss of Business.
Our clearing operations expose us to risks that exceed the simple risk of loss
of business due to loss of retail customers or correspondents. 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 a 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.
Our Success is Dependent upon the Development and Enhancement of Our Services
and Products.
Our future success depends in part on our ability to develop and enhance our
services and products. We recently introduced online bond trading and expanded
our market maker and money management services that has changed our business
mix. There can be no assurance that this change in our business mix will
increase our revenues or otherwise be successful. There are significant risks in
the development of new services and products or enhanced versions of existing
services and products, particularly in our electronic
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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.
The Discount and Electronic Brokerage Services Market is Highly Competitive
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 UBS PaineWebber, Merrill Lynch, Pierce, Fenner & Smith Incorporated and
Solomon Smith Barney, Inc., among other traditional firms which typically also
offer their customers on-line services. In addition, we compete with financial
institutions, mutual fund sponsors and other organizations. Further, the
industry is currently undergoing consolidation, which may strengthen our
competitors 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.
The Loss of Significant Customers could Adversely Affect Our Business.
While no single correspondent broker-dealer or customer represents more than 10%
of our revenues, we have several significant customers whose loss, in the
aggregate, could have a material adverse effect on our financial condition and
operating results. While we believe that the likelihood of losing a substantial
number of such customers is remote, there can be no assurance that such event
will not occur.
Our Plans to Expand Through Acquisitions of Other Companies May Have A Material
Adverse Effect on Our Business.
During 2001 and early 2002, we acquired approximately 22,500 customer accounts
from three other broker-dealers and we plan to continue to expand our business
through strategic acquisitions. Our industry is currently undergoing
consolidation and there is intensive competition for acquisitions which may make
acquisitions increasingly expensive. Any lack of capital for additional
acquisitions may limit our ability to grow. We will be competing for acquisition
opportunities with entities that have greater resources than we do and we plan
on using our previously authorized, unissued common stock as consideration which
may limit our opportunities. Any issuance of our equity securities in
acquisitions will have a dilutive effect on our current shareholders. We cannot
assure you that we will be able to successfully identify, negotiate and
consummate suitable acquisitions. Furthermore, completed acquisitions entail
numerous risks, including difficulties in the assimilation of acquired
operations and products, diversion of management's attention from other business
concerns, assumption of unknown material liabilities, amortization of acquired
intangible assets and potential loss of key employees and customers of acquired
companies. We have limited experience in assimilating acquired organizations
into our operations. We cannot assure you that we will be able to integrate
successfully any operations, personnel, services or products that might be
acquired in the
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future. Our failure to successfully complete and assimilate acquisitions could
have a material adverse effect on our business, financial condition and
operating results.
Our Business is Dependent on Strategic Relationships with Online and Internet
Service Providers and Software and Information Services Providers.
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.
Our Business is Subject to Extensive Regulation Under Both Federal and State
Laws.
The securities industry in the United States is subject to extensive regulation
under both federal and state laws. 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. In addition, because we offer on-line
trading to our customers we are subject to rules and regulations involving
systems capacity, advertising and investor education, investor suitability, best
execution, pricing of market data, day trading, customer privacy and electronic
books and records. Although we periodically conduct internal compliance reviews
of our systems and operations to identify and correct any deficiencies, there
can be no assurance that we will be considered by regulatory authorities to be
in full compliance with all of the rules and regulations applicable to us. See
"Business-Securities Industries Practices" below.
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.
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 had in the past an aggressive marketing campaign designed to bring brand
name recognition to our registered broker-dealer, JB Oxford. All marketing
activities by JB Oxford are regulated by the NASD, and JB Oxford 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
otherwise have a material adverse effect on our business, financial condition
and operating results.
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Our Failure to Maintain the Net Capital Levels Required by Various Regulators
could Adversely Affect Our Business.
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.
We Could Suffer Substantial Losses and be Subject to Customer Litigation if Our
Electronic Systems Which Support Online Trading Fail or Our Transactions Process
is Slow.
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 or interference from third parties over
the Internet could cause our systems to operate too slowly or to 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, natural disaster or act of terrorism 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.
Our Business Could Suffer if We Cannot Protect the Confidentiality of Customer
Information.
An important element of our operations is the secure transmission of
confidential information over public networks. We rely on encryption and
authentication technology to provide secure transmission of confidential
information. While we have not experienced problems in the past, there can be no
assurance that hackers, computer viruses and other problems will not result in a
breach of security. 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 Trading Price of Our Common Stock has Been and May Continue to be Subject to
Wide Fluctuations.
For example, during the twelve months ended December 31, 2001, our common stock
closed as low as $0.75 and as high as $3.00. 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
our company or our 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
10
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.
Your Interests as a Stockholder May Conflict with Our Controlling Shareholders,
Our Chief Executive Officer and Our President.
Our executive officers, directors and principal shareholders beneficially own
approximately 44% of our outstanding common stock, including shares issuable
upon conversion of certain debt. As a result, our controlling shareholders may
be able to control or direct our business affairs including matters requiring
stockholder approval. This concentration of ownership could effectively delay,
defer or prevent a change in control or other significant corporate transactions
that might give you the opportunity to realize a premium over our then
prevailing stock price. In addition, various conflicts of interest may arise in
the future as a result of our relationship with Third Capital Partners, LLC,
("Third Capital"), a company controlled by our Chief Executive Officer and our
President who also serve on our Board of Directors. Serving us as an officer and
director as well as Third Capital could result in our Chief Executive Officer
and our President being placed in a conflict of interest should they have to
make decisions which have materially different implications for us and for Third
Capital. Third Capital receives management fees from us which could influence
decisions. In addition, Third Capital is the beneficial owner of the aggregate
principal sum of $5,418,696 of our 9% Secured Convertible Notes (the "Notes").
Third Capital has extended the due date of the Notes from time to time but there
can be no assurance that they will continue to do so in the future. Our
inability to repay the Notes or otherwise obtain an extension from Third Capital
could have a material adverse effect on our financial condition.
The Loss of Certain Key Executive Officers Could Harm Our Business.
Our success is substantially dependent upon the continuing services of certain
key executive officers, especially our Chief Executive Officer and our
President. We do not have written employment agreements with our key executive
officers and do not maintain "key person" life insurance on any of our executive
officers. There can be no assurance that any of our executive officers will
continue to work for us nor can there be any assurance that upon ceasing to work
for us they will not compete against us. The loss of our Chief Executive Officer
or President could have a material adverse effect on our business, financial
condition and results of operations.
We May Be Unable to Maintain the Listing of Our Common Stock on the Nasdaq
SmallCap Market and Penny Stock Rules May Apply to the Sale of Our Common Stock
Which, in Each Case, Would Make it More Difficult for You to Dispose of Your
Common Stock.
Our common stock is listed on the Nasdaq SmallCap Market. We cannot guarantee
that it will always be listed. The Nasdaq SmallCap Market rules for continual
listing include minimum stock price and other requirements, which we may not
meet in the future, particularly if the price of our common stock declines.
If our common stock is delisted from the Nasdaq SmallCap Market, trading in our
common stock would be conducted, if at all, on the NASD's OTC Bulletin Board.
This would make it more difficult for shareholders to dispose of their common
stock and more difficult to obtain accurate quotations on our common stock. This
could have an adverse effect on the price of the common stock.
There are separate rules regulating broker-dealers who trade on behalf of
customers in unlisted stocks. These rules require broker-dealers to:
11
- sell common stock only to purchasers for which transactions in penny
stocks are suitable unless such purchasers are established customers as
defined in Rule 15g-9 of the Securities Exchange Act of 1934;
- sell common stock only to purchasers that have sufficient knowledge
and experience in financial matters that the person reasonably may be
expected to be capable of evaluating the risks of transactions in penny
stock; and
- receive the purchaser's written consent to the transaction prior to
sale.
The Securities and Exchange Commission has adopted regulations that define
"penny stock" to include common stock that has a market price of less than $5.00
per share, subject to certain exceptions. Broker-dealers engaging in the sale of
penny stocks must comply with the following requirements:
- delivery to purchasers, prior to the transaction, of a risk
disclosure statement prepared by the Securities and Exchange Commission
relating to the penny stock market;
- disclosure to purchasers of the commissions payable to the
broker-dealer and its registered representative;
- disclosure to purchasers of current quotations for the securities;
and
- delivery to customers with monthly statements disclosing recent price
information for all penny stock held in the customer's account and
information on the limited market in penny stocks.
These disclosure requirements may have the effect of reducing the level of
trading activity in the secondary market for a stock that becomes subject to the
penny stock rules because of the lack of ability or incentive of broker-dealers
to sell our common stock.
Many securities listed on the Nasdaq SmallCap Market would be covered by the
definition of penny stock, but transactions in a security listed on the Nasdaq
SmallCap Market are exempt from the foregoing requirements if:
- the customer is an institutional accredited investor; and
- the transaction is not recommended by the broker-dealer.
Our Board of Directors has the Authority to Issue Preferred Stock, Which Could
Deter Takeover Bids Even if Those Bids are in the Shareholders' Best Interests.
We have 10,000,000 shares of authorized preferred stock, of which 9,800,000
remain available for issuance to third parties selected by management or used as
the basis for a shareholders' rights plan, which could have the effect of
deterring potential acquirers. The ability of our Board of Directors to
establish the terms and provisions of different series of preferred stock could
discourage unsolicited takeover bids from third parties even if those bids are
in the shareholders' best interests.
Securities Litigation Could Adversely Affect Our Business.
The securities brokerage business involves substantial risks of liability and
corresponding litigation including class action and other suits that generally
seek substantial damages including punitive damages. Like other
12
securities brokerage firms, from time to time we are named as a defendant in
civil lawsuits and arbitrations. Any significant monetary judgments against us
in the course of litigation could have a material adverse effect on our
business, financial condition and operating results.
We May Be Unable to Hire and Retain Skilled Personnel.
The success of our business is dependent upon having adequate levels of
personnel with experience in the computer and brokerage business as well as
persons with the necessary broker-dealer licenses. As a result of the prolonged
market downturn, we have reduced our personnel by approximately 50% since
January 2001 and in the event that there is a significant increase in demand for
our products and services in the future we may not have adequate personnel to
handle the demand which could have a material adverse effect on our business,
financial condition and operating results. Further, there can be no assurance
that we can retain our existing personnel especially those whose stock options
are largely underwater and might have little long term incentive to stay with
us. We expect competition for qualified personnel to be intense in the event of
a sustained upswing in the stock markets and there can be no assurance that we
will be able to hire or retain skilled or licensed personnel to meet any
increased demand.
Recent Events Related to Our Independent Auditor, Arthur Andersen.
On March 14, 2002, our independent certified public accountant, Arthur Andersen,
LLP, was indicted on federal charges of obstruction of justice in connection
with the U.S. government's investigation of Enron. We are required to file
periodic financial statements with the SEC which have been audited or reviewed
by an independent, certified public accountant. The SEC has issued a release
stating that it will continue to accept financial statements audited by Arthur
Andersen, and interim financial statements reviewed by it, so long as Arthur
Andersen is able to make certain representations to us. While Arthur Andersen
has made the SEC required representations to us in connection with our audited
financial statements for 2001, there can be no assurance that Arthur Andersen
will be able to do so in the future, that the SEC will continue to accept
financial statements audited or reviewed by Arthur Andersen or that Arthur
Andersen will be able to perform the required services for us. In such case, we
will promptly seek to engage new independent certified public accountants to
perform audit-related services for us. Our ability to timely file our required
periodic reports could be impaired if Arthur Andersen becomes unable to make the
required representations to us, the SEC ceases accepting financial statements
audited or reviewed by Arthur Andersen or if for any other reason Arthur
Andersen is unable to perform audit-related services for us. If we are unable to
timely file our required periodic reports it could have a material adverse
effect on us.
13
ITEM 2. PROPERTIES
Our principal offices and the principal offices of JB Oxford are located at 9665
Wilshire Boulevard, 3rd Floor, Beverly Hills , California 90212. As of March 20,
2002, we lease or conduct our operations from, and have our administrative
offices at, the following locations:
Location Area (Sq. Feet) Principal Use Lease
-------- --------------- ------------- -----
9665 Wilshire Blvd., 3rd, 2nd , 5th and 27,240 JBOH and JBOC Expires Dec. 2010
8th Floors, Beverly Hills, CA 90212
One Exchange Plaza, 19th Floor 6,050 JBOC Expires Jun. 2006
New York, NY 10006
801 Brickell Ave. Suite 2450 6,993 JBOC Expires Feb. 2003
Miami, FL 33131
140 West Valley Blvd., Suite 220/1 San 2,017 JBOC Expires May 2002
Gabriel, CA 91776
9601 Wilshire Blvd., Suite GF-3, Beverly 8,258 JBOC Expires Jun. 2004
Hills, CA 90210
Our office, and the offices and facilities of our subsidiaries, are considered
by management to be generally suitable and adequate for their intended purpose.
ITEM 3. LEGAL PROCEEDINGS
We are a party to a number of pending legal, arbitration or administrative
proceedings incidental to our business, including customer brokerage
transactions claims as well as matters related to JB Oxford's clearing services
resulting from the failure of certain correspondents. All of the legal,
arbitration and administrative proceedings have arisen in the ordinary conduct
of our business. To date, these proceedings have not had a material effect on
our financial condition or results of operations. However, in the aggregate the
amount of these claims is substantial and there can be no assurance that in
future periods these proceedings will not have a material adverse effect on our
financial condition or results of operations. Those proceedings that management
believes may have a significant impact on us are described below.
On February 14, 2000, we reached a settlement with the Los Angeles office of the
United States Attorney's Office (the "USAO") in connection with the USAO's
investigation of our prior management. While we maintain our innocence, we
agreed to pay $2 million over three years to settle the USAO matter and to
reimburse the USAO for the substantial expense associated with the two-year
investigation. The agreement with the USAO stated that if, on or before February
14, 2001, we enter into a settlement with the SEC that involves a payment of $1
million or more to the SEC, the USAO has agreed that our obligation to the USAO
would be reduced by $500,000. Discussions are ongoing with the USAO regarding
extending this agreement, based upon the proposed SEC settlement. On October 12,
2000, the Pacific Regional Office of the SEC advised us that it is recommending
that the SEC accept our $1.5 million offer to settle the SEC's investigation. If
the proposed settlement is accepted, we will also agree to a censure, to refrain
from any violations of securities laws, and to take certain actions to ensure
continued compliance with federal securities law. We paid $500,000 of the USAO
settlement amount in the first quarter of 2000 and 2001, for a total of
$1,000,000 as of December 31, 2001.
14
In August 2000, the assignee and holder of two of the demand notes payable by us
to Oeri Finance Inc., in the principal face amount of $1,939,375, filed to
collect the amounts due under the notes as well as seek return of certain
securities seized by the government. We filed an answer and asserted defenses to
payment including, among other defenses, a right of set-off for certain expenses
incurred by us in connection with the governmental investigation described above
and related matters. In February 2002, the US District Court, Central District
of California, issued an Order granting the assignee's application for writ of
pre-judgment attachment against the assets of JB Oxford Holdings, Inc. A final
determination of these issues on the merits has yet to be made. The notes and
underlying obligations have previously been disclosed by us in our Annual
Reports on Form 10-K and Quarterly Reports on Form 10-Q since the issuance of
the notes in July 1997. We believe that we have valid defenses and set-offs to
the claims and intend to vigorously defend ourselves, although no assurance can
be given as to the outcome of 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 2001.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY & RELATED SHAREHOLDER
MATTERS
Our 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
1-31-02 2-28-02
-------------- -------------
Price range of common stock
High $2.05 $1.64
Low 0.99 1.35
Close at end of period 1.58 1.41
Quarter Ended
3-31-01 6-30-01 9-30-01 12-31-01
-------------- ------------- -------------- --------------
Price range of common stock
High $3.00 $2.14 $1.75 $1.38
Low 1.15 1.00 0.75 0.87
Close at end of period 1.21 1.74 1.05 1.02
Quarter Ended
3-31-00 6-30-00 9-30-00 12-31-00
-------------- ------------- -------------- --------------
Price range of common stock
High $9.38 $7.31 $5.50 $3.97
Low 5.59 2.63 3.56 1.47
Close at end of period 6.88 3.50 3.59 1.66
15
The number of record holders of our common stock as of March 20, 2002 was 445.
We believe the number of beneficial holders of our common stock as of June 8,
2001, the most recent date for which this data is available to us, was
approximately 13,400.
Dividends
We have not declared or paid cash dividends on our common stock. Given our past
expansion and overall business growth, Management believes it has been prudent
to retain and increase our capital base. We do not currently anticipate paying
cash dividends. Future payments of dividends will depend upon, among other
factors, regulatory restrictions, our consolidated earnings, overall financial
condition, and cash and capital requirements.
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)
2001 2000 1999 1998 1997
--------- -------- -------- --------- --------
Income Statement Data:
Revenues $ 35,348 $100,862 $104,212 $ 67,268 $ 69,962
Net Income (Loss) Before Extraordinary Item (6,942) 4,973 10,008 (1,839) 1,523
Net Income (Loss) (6,942) 4,973 10,445 (1,839) 1,523
Basic Earnings (Loss) Per Share Before
Extraordinary Item (0.50) 0.35 0.70 (0.13) 0.12
Basic Earnings (Loss) Per Share (0.50) 0.35 0.73 (0.13) 0.12
Diluted Earnings (Loss) Per Share Before
Extraordinary Item (0.50) 0.22 0.43 (0.13) 0.09
Diluted Earnings (Loss) Per Share (0.50) 0.22 0.45 (0.13) 0.09
Dividends -- -- -- -- --
Balance Sheet Data:
Total Assets $ 262,439 $352,254 $497,739 $ 405,990 $341,586
Long-term and Subordinated Debt -- 3,734 -- 1,250 1,500
Liabilities (Excluding Long-Term) 239,656 318,628 471,368 390,374 326,463
Total Shareholders' Equity 22,783 29,892 26,371 15,617 15,123
Book Value Per Share* 1.64 2.13 1.83 1.12 1.07
* Computed using shareholders' equity divided by total outstanding common stock.
16
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Special Note Regarding Forward-Looking Statements
Some of the statements contained in this section of the Annual Report on Form
10-K constitute "forward-looking statements" within the meaning of the Private
Securities Litigation Reform Act of 1995 (the "Reform Act"). These
forward-looking statements involve known and unknown risks, uncertainties, and
other factors which may cause our actual results, performance, or achievements
to be materially different from any future results, performance, or
achievements, expressed or implied by the forward-looking statements, including,
but not limited to, those risks and uncertainties discussed in Item 1. "Business
Overview - Forward Looking Statements and Risk Factors" above.
Business Overview
We, through our wholly owned subsidiaries, provide discount brokerage services
and related financial services to retail customers and broker-dealers
nationwide. Our primary subsidiary, JB Oxford & Company ("JB Oxford"), is a
registered broker-dealer offering services including (i) discount and electronic
brokerage services to the investing public, (ii) clearing and execution services
to correspondents on a fully-disclosed basis, and (iii) acting as a market maker
in NASDAQ National Market System, New York Stock Exchange ("NYSE") and other
national exchange-listed securities.
The financial services industry is a dynamic and ever-changing industry.
Management believes that continued improvements in technology and the widespread
use of technology, including the Internet, is dramatically changing the way
financial services are provided. 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 commonplace in the not too distant future.
Management's strategy is to position us to take advantage of the opportunities
presented by the expected changes in the financial services industry. JB Oxford
continually updates its web site at www.jboxford.com to improve speed, allow
easier navigation and expand selection of timely market information and research
tools. In early 2002 we redesigned our web site to include an upgraded
navigational scheme and richer financial content. The JB Oxford trading site
provides integration of charts, quotes and research, and includes bond and
mutual fund trading.
Results of Operations
Years Ended December 31, 2001, 2000 and 1999
Revenues
The Company's total revenues were $35,347,821 in 2001, a decrease of 65% from
$100,861,961 in 2000, which was an decrease of 3% from $104,211,781 in 1999.
Revenues are down in 2001 compared to 2000 as a result of the general decline of
business in the securities industry. All revenue sources are down dramatically,
with the largest declines in interest and commission revenues. The decrease in
total revenues from 1999 to 2000 was primarily attributable to a decrease in
clearing and execution revenues. This decrease was offset in part by an increase
in interest and commission revenue, primarily in the first three months of 2000.
Clearing and execution revenues decreased 48% to $3,985,922 in 2001, from
$7,607,517 in 2000, which was down 70% from $25,033,821 in 1999. The decrease in
2001 was the result of declining trade volume. Overall correspondent trades were
down 50% in 2001 from 2000. The decline in 2000
17
was the result of correspondent day-trading volumes declining by 89% in 2000
from 1999, due to the loss of day-trading correspondents and the reduction of
volumes in general from the downtrending market.
Interest revenues decreased 63% to $14,968,622 in 2001, from $40,154,797 in
2000, which was an increase of 39% from $28,930,515 in 1999. Interest revenue
continued to be the largest revenue source in 2001, accounting for 42% and 40%
of the Company's revenues in 2001 and 2000, respectively, as compared to 28% in
1999. Fluctuations in interest revenues are consistent with usual fluctuations
of debit balances in customers' brokerage margin accounts, as well as changes in
broker-call rates on which the interest charged to customers is calculated. It
is anticipated that interest revenues will stabilize in 2002 as we expect
balances and interest rates will stabilize.
Commission revenues decreased 66% to $12,498,400 in 2001, from $37,148,643 in
2000, which was up 10% from $33,827,615 in 1999. Commission revenue was the
largest source of revenue to the Company during 1999, consisting of 32% of total
revenues, while consisting of 35% and 37% of revenues in 2001 and 2000,
respectively. Commission revenue is directly related to trade volume generated
by our customers. The retail trade volume was down 60% in 2001 from 2000,
whereas trade volume increased 9% in 2000 from 1999. In 2002, management
anticipates commission revenue to stabilize as volume trends become more
consistent. Additionally, the Company will continue to search for opportunities
to acquire compatible discount and on-line brokerage operations of other firms,
in an effort to expand customer base and transaction volume.
Revenues from trading profits decreased 79% to $3,095,203 in 2001, from
$14,692,048 in 2000, which was down 5% from $15,517,700 in 1999. The decrease in
2001 is primarily the result of declining trade volumes and tightening trading
spreads. Trade volumes have declined 55% in 2001 from 2000. The decrease in 2000
is attributed to changes in the trading rules that have caused the trading
spreads to tighten, although trading volume for market making activities
increased 9% for the year 2000. Management anticipates trading revenues to track
the overall commission volumes of the discount and on-line operations of the
Company for 2002.
Other revenues decreased 36% to $799,674 in 2001, from $1,258,956 in 2000, which
was up 40% from $902,130 in 1999. The change in other revenue in 2001 and 2000
was not attributable to any significant or single factor. Management anticipates
that other revenues will continue to account for a negligible percentage of
total revenues in the future.
Expenses
Operating expenses totaled $44,401,627 in 2001, a decrease of 52% from
$92,203,973 in 2000, which was an increase of 6% from $86,980,546 in 1999. Many
of the Company's expenses, including commission expense, interest expense and
data processing charges, are directly related to commission and trading
revenues. The largest decrease in expense for 2001 was in interest expense,
which decreased 68% in 2001. This is directly related to the decrease in
interest revenue discussed above for the year 2001. During 2000, the cost to
finance customer debits increased as the Company utilized higher interest
bearing short-term borrowings to replace the reduction of customer credits
during the year 2000. The overall changes in total expenses during 2001, 2000
and 1999 is directly related to the volume levels in the Company's discount and
online brokerage divisions. As a percentage of total revenues, total operating
expenses accounted for 126%, 91% and 83% in 2001, 2000 and 1999, respectively.
Management continues to look at ways to contain costs and improve operating
efficiencies through technology, as well as provide for ways in which the
Company may grow total revenues.
18
Data processing expense decreased 60% to $3,484,346 in 2001, from $8,788,183 in
2000, which was down 13% from $10,114,145 in 1999. The decrease in data
processing expense for 2001 was the result of an overall decline the trade
volume for all activities of the Company, in addition to a new contract
negotiated with its back office service provider with more favorable terms. The
decrease in 2000 was the result of a decline of trade volume in correspondent
day-trading clearing activities. This decline was offset in part by an increase
in discount and market making volumes.
Expenses for salaries decreased 28% in 2001 to $8,325,869 from $11,533,833 in
2000, which was up 13% from $10,176,438 in 1999. The Company took steps in late
2000 to reduce its overall workforce by 12% and streamline operations. This
trend continued in 2001 as the Company has significantly reduced its workforce.
Occupancy and equipment costs decreased 2% to $5,838,467 in 2001, from
$5,988,058 in 2000, which was up 21% from $4,966,437 in 1999. These cost have
remained static during 2001, however management believes these costs will
decline in 2002 as lease commitments expire. The increases in 2000 were
primarily the result of new computer equipment and technology to improve the
informational systems of the Company.
Promotional expense decreased 86% in 2001 to $895,536 from $6,624,512 in 2000,
which was down 48% from $12,807,200 in 1999. In 2001, the Company discontinued
the use of television ads and began to use the print media as a source of name
branding. In 1999, JBOC launched a $10,000,000 national advertising campaign to
encourage consumers to "Put Your Money to Work." The Company discontinued this
campaign in 2000. In 2002, the Company expects to spend approximately $100,000
per month in promotional expenses, however, the Company will remain flexible in
its approach and may adjust its advertising budget and strategy to maximize the
effectiveness of advertising dollars spent.
Professional fees decreased 31% to $4,725,033 in 2001 from $6,831,981 in 2000,
which was an increase of 49% from $4,592,666 in 1999. Included in the increase
for 2000 is $2,679,508 of consulting expense to prepare for a conversion to a
different back office system. These same expenses were $319,567 in 2001. Bad
debt expense decreased 25% to $1,146,244 in 2001 from $1,524,655 in 2000, which
was a decrease of 17% from $1,829,102 in 1999.
The Company recorded settlement expense of $241,792 in 2001, which was a
decrease of 72% from $867,171 in 2000, which was a decrease of 66% from
$2,537,880 in 1999. The expense recorded in 1999 was the result of the Company
settling the investigation with USAO and the anticipated settlement with the SEC
(See Note 15. "Commitments and Contingencies"). The Company accrued an
additional $500,000 for the anticipated settlement with the SEC in 2000.
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 or permanent
differences. (See Note 11 of the Notes to Consolidated Financial Statements,
below.)
Extraordinary Items/One-time Charges
In February 1999, the Company executed an agreement with Oeri Finance, Inc. that
resulted in the forgiveness of notes payable to shareholders in the amount of
$728,125, which was included in 1999 net income of $10,444,630 as an
extraordinary item during 1999. In the fourth quarter of 1999, the Company
recorded one-time charges totaling $2,300,000 related to settlement with the
USAO and an anticipated settlement with the SEC. Additionally, in the fourth
quarter of 2000, the Company recorded an additional $500,000 for the anticipated
settlement with the SEC (See Note 15. "Commitments and Contingencies" to
consolidated financial statements, below).
19
Liquidity and Capital Resources
The Company finances its growth though the use of funds generated from the
business operations of its subsidiaries, mainly JBOC. Additionally, JBOC has
established committed lines of revolving credit with other banking institutions
with an aggregate borrowing limit of approximately $55,000,000 at December 31,
2001. 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,
2001, 2000 and 1999 were held by its subsidiary, JBOC, and consisted of cash or
assets readily convertible to cash, or receivables secured by marketable
securities. 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, and the use of customer cash and
securities. (See Item 1. "Business Overview - Net Capital Requirements" above.)
At December 31, 2001, JBOC had regulatory net capital of $18,975,361, which
exceeded the minimum requirement by $16,891,455.
The Company currently has outstanding a bank note payable in the amount of
$2,740,000 as of December 31, 2001. The bank note payable carries an interest
rate of prime plus 1%. Principal payments of $84,000, plus interest are due
monthly, with a balloon payment due on September 5, 2002. At December 31, 2001,
the Company was not in compliance with the net income and net worth covenants
of its bank note payable agreement which require that the Company earn net
income of at least $5 million per year and maintain net assets of at least $25
million. The Company reached an agreement with the bank in December 2001 to
amend the credit agreement by repaying $1 million of principal as well as
granting a first priority security interest in the Company's Federal and State
tax refunds. Based on management discussions with the bank, the Company
believes that this amendment to the credit agreement will lead to a waiver of
the debt covenants as of and for the year ended December 31, 2001, however, the
bank has not granted an official waiver. In the event that the Company is
deemed to be in default of the covenants, the interest rate on the note will
increase from Prime plus 1% to Prime plus 3%. To date, the Company has made
all of its required payments under the bank note payable.
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 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 through debt or equity offerings. 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. If additional funds are needed, there
can be no assurance that additional financing will be available or whether it
will be available on terms satisfactory to the Company.
In February 1999, Hareton Sales & Marketing, Inc. ("Hareton"), the holder of
$502,615 in face value of the Company's 9% Senior Secured Convertible Notes,
exercised its right to convert this debt into common stock of the Company, and
the Company issued 718,021 shares of common stock in full satisfaction of this
debt.
In February 1999, the Company established the JB Oxford Revocable Government
Trust (the "Trust"), a wholly-owned subsidiary, to purchase common stock of the
Company. Third Capital Partners, LLC served as trustee of the Trust, without
compensation. The Company loaned the Trust $586,915, which the Trust used to
purchase 469,540 shares of the Company's common stock for an average price of
$1.25 per share. The Trust terminated pursuant to its terms on February 18,
2001, and ownership of the trust shares was transferred to the Company in
satisfaction of the loan.
Concurrent with the Trust's purchase of shares, the Company relinquished its
right of first refusal as to any remaining shares held by Felix Oeri and Oeri
Finance, further, Oeri Finance forgave $728,125 in demand debt owed by the
Company. Subsequently, Oeri Finance, Felix Oeri and Hareton filed 13D Statements
with the SEC indicating ownership of less than 5% of the Company's stock. A
$1,000,000 subordinated loan agreement, payable to Oeri Finance, Inc., matured
on March 31, 1999, and is included in "Notes payable" in the Company's
consolidated financial statements included below. The Company has decided to
delay principal and interest payment on the debt in light of the ongoing federal
investigation (see Note 15, "Commitments and Contingencies," to the financial
consolidated statements).
20
On November 8, 1999, Third Capital Partners, LLC, the beneficial owner of two
secured convertible notes of the Company in the aggregate principal amount of
$5,418,696, maturing December 31, 1999, agreed to again extend the repayment of
both notes for a period of 12 additional months, to December 31, 2002. The
Company will continue to make interest payments only on each note, and no other
terms of the notes were affected by the extension agreements.
Liquidity at December 31, 2001, 2000 and 1999
The Company's cash position, including securities purchased under agreements to
resell, decreased during 2001 by $1,309,668 to $6,694,332 at year-end. This
compares with a net increase in cash and cash equivalents of $1,980,905 and
$3,526,523 in 2000 and 1999, respectively. The fluctuation in the Company's cash
position can be impacted by the settlement cycles of the business which relate
directly to the cash provided from, or used in, operations.
Cash Flows From Operating Activities
Net cash provided by operating activities was $4,700,100, $3,464,036 and
$5,607,036 for 2001, 2000 and 1999, respectively. The Company's net cash
provided by operating activities is impacted by changes in the brokerage-related
assets and liabilities of JBOC.
During 2001, the most significant use of cash in operations was a decrease in
payables to broker-dealers and clearing organizations of $59,505,496 and
increase in receivable from broker-dealers and clearing organizations of
$45,106,278. These changes relate to a decrease in stock loaned and an increase
in stock borrowed during 2001. An increase in Cash segregate under federal and
other regulations and payable to customers used cash of $41,855,227 and
18,125,486, respectively. The most significant source of cash in operations was
a decrease in receivable from customers of $175,723,929.
During 2000, the most significant use of cash was a decrease in payables to
customers of $125,292,766 and a decrease of $26,460,311 in payables to
broker-dealers and clearing organizations. The most significant source of cash
in operations was $158,172,492 provided from a decrease in receivables from
customers. This source of cash was offset by the uses of cash indicated above.
During 1999, the most significant use of cash was an increase in receivables
from customers of $171,429,660. The most significant source of cash in
operations was $82,977,416 provided from cash segregated under federal and other
regulations and $79,236,179 provided from payables to broker-dealers and
clearing organizations. This source of cash was offset by the uses of cash
indicated above.
Cash Flows Used In Investing Activities
The net cash used in investing activities during 2001, 2000 and 1999 was
$3,834,688, $4,773,089 and $1,512,160, respectively. Funds used in 2001 include
$2,510,000 used to acquire the right to service certain customer accounts. The
funds used in 2000 include a $2,500,000 loan to a stockholder (see Note 12 of
the Notes to Consolidated Financial Statements, below.) The remaining cash uses
are a direct result of capital expenditures made by the Company during these
periods. The Company's requirement for capital resources is not material to the
business as a whole. Although the Company continually upgrades its information
and communication systems, future expenditures for upgrading the Company's
various information and communication systems are not estimated to be material
to the operations of the Company. As technology advances, however, management
intends to remain competitive and may incur costs accordingly. The Company has
no plans to open additional offices and has no significant commitments for
capital expenditures.
21
Cash Flows From Financing Activities
Financing activities provided (used) cash of $(2,175,080), $3,289,958 and
$(568,353) in 2001, 2000 and 1999, respectively. In 2001, repayments of notes
payable of $2,008,000 was the most significant use of cash for financing
activities. In 2000, the most significant source of cash was from a bank loan in
the net amount of $4,742,251. The primary use of cash for financing activities
was the acquisition of treasury stock in the amount of $1,667,443. In 1999, the
most significant use of cash in financing activities was the acquisition of
treasury stock in the amount of $586,925.
JB OXFORD & COMPANY
SHORT TERM BORROWING
(Amounts in thousands)
Category of aggregate short-term
borrowings a b c d e
Year Ended December 31, 2001
collateralized by:
Customer securities $ -- $ -- $21,000 $ 700 5.8%
Year Ended December 31, 2000
collateralized by:
Customer securities $ -- $ -- $88,079 $31,688 8.9%
Year Ended December 31, 1999
collateralized by:
Customer securities $ -- $ -- $10,500 $ 1,475 7.3%
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.
In order for the Company to assure stability, management is continually
exploring additional sources of capital to increase the Company's liquidity and
capital base. Management will continue its efforts to increase liquidity and
capital.
Impact of Inflation
Inflation has had a minimal impact on the operations and financial condition of
the Company in recent years. The Company will continually monitor costs and
productivity and will adjust prices and operations as necessary to meet
inflationary impacts or market changes.
Recent Developments
During the first quarter of 2002, we entered into an agreement to purchase
certain assets from Stockwalk.com, Inc. Pursuant to that agreement, JB Oxford
acquired approximately $400 million in customer assets and 11,500 customer
accounts located throughout the United States. The
22
consideration paid by us in the transaction was a combination of cash and our
common stock. We expect to maintain a presence in Minneapolis, Minnesota, the
location of the former Stockwalk.com office. The purchase transaction closed
during the first quarter of 2002.
Recent Accounting Pronouncements
In June 2001, the FASB issued SFAS No. 141, "Business Combinations" and SFAS No.
142, "Goodwill and Other Intangible Assets." The Company was required to adopt
SFAS No. 141 upon issuance. As such, all business combinations for which the
Company may prospectively enter must be accounted for as purchase transactions.
The Company adopted SFAS No. 142 on January 1, 2002. The adoption of SFAS No.
142 ceases the current amortization of goodwill and will instead be subject to
at least an annual assessment for impairment by applying a fair-value-based
test. The adoption of this statement did not have a material effect on the
Company's financial position or results of operations.
In August 2001, the FASB issued SFAS No. 144, "Accounting for the Impairment or
Disposal of Long-Lived Assets." This statement addresses financial accounting
and reporting for the impairment or disposal of long-lived assets and supercedes
or amends previous pronouncements including SFAS No. 121, Accounting Principles
Board Opinion No. 30, and Accounting Research Board No. 51. The Company adopted
this statement on January 1, 2002. The adoption of this statement did not have a
material effect on the Company's financial position or results of operations.
23
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 risks 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 350 public corporations whose
stocks are traded on the NASDAQ National Market System, NYSE or other national
exchanges. The Company selects companies in which it makes a market based on a
review of the current market activity, and also to facilitate trading activity
of its own and correspondent's clients. Market making may result in a
concentration of securities which may expose the Company to additional risk;
however, the Company does not maintain a significant inventory of equity
securities.
24
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The financial statements and schedules required to be filed by Item 8 of this
form are contained herein as follows:
Page
-------
Report of Independent Public Accountants 27
Consolidated Statements of Financial Condition December 31, 2001, and 2000 28-29
Consolidated Statements of Operations Years Ended December 31, 2001, 2000, and 1999 30
Consolidated Statements of Changes in Shareholders' Equity Years Ended December 31, 2001, 2000, and 1999 31
Consolidated Statements of Cash Flows Years Ended December 31, 2001, 2000, and 1999 32
Notes to Consolidated Financial Statements 33-48
Financial Statement Schedule I - Condensed Financial Statements (Parent Company Only) 52-56
Financial Statement Schedule II - Valuation and Qualifying Accounts 57
25
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Shareholders and Board of Directors of
JB Oxford Holdings, Inc.:
We have audited the accompanying consolidated statements of financial condition
of JB Oxford Holdings, Inc. (a Utah corporation) and subsidiaries (the
"Company") as of December 31, 2001 and 2000, and the related consolidated
statements of operations, changes in shareholders' equity and cash flows for
each of the three years in the period ended December 31, 2001. 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 audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States. 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 audits provide 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, 2001 and 2000, and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 2001 in conformity with accounting principles generally accepted in
the United States.
Our audits were 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 audits 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 27, 2002
26
JB OXFORD HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
December 31,
2001 2000
------------- -------------
ASSETS:
Cash and cash equivalents (including securities purchased under
agreements to resell of $6,034,839 and $2,541,193) $ 6,694,332 $ 8,004,000
Cash segregated under federal and other regulations (including securities
purchased under agreements to resell of $1,695,974 and
$33,274,048) 79,399,917 37,544,690
Receivable from broker-dealers and clearing organizations 52,368,663 7,262,385
Receivable from customers (net of allowance for doubtful accounts of
$2,625,178 and $2,577,451) 101,641,363 278,511,536
Other receivables 1,348,285 2,101,578
Marketable securities owned - at market value 1,352,840 322,783
Note receivable from Shareholder 2,500,000 2,500,000
Furniture, equipment, and leasehold improvements (at cost - net of
accumulated depreciation and amortization of $3,523,365 and
$8,040,869) 3,310,758 3,540,370
Income taxes receivable 3,751,429 273,884
Deferred income taxes 1,470,058 2,760,848
Clearing deposits 5,199,277 7,871,717
Other assets 3,402,495 1,560,258
------------ ------------
TOTAL ASSETS $262,439,417 $352,254,049
============ ============
See accompanying notes to Consolidated Financial Statements.
27
JB OXFORD HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION - CONTINUED
December 31,
2001 2000
------------ ------------
LIABILITIES AND SHAREHOLDERS' EQUITY:
LIABILITIES:
Payable to broker-dealers and clearing organizations $ 51,334,581 $110,840,077
Payable to customers 169,935,902 188,061,388
Securities sold, not yet purchased - at market value 846,585 106,720
Accounts payable and accrued liabilities 6,491,471 10,298,150
Loans from shareholder 5,418,696 5,418,696
Notes payable 5,629,375 7,637,375
------------ ------------
TOTAL LIABILITIES 239,656,610 322,362,406
------------ ------------
COMMITMENTS AND CONTINGENCIES (NOTE 15)
SHAREHOLDERS' EQUITY:
Common stock ($0.01 par value, 100,000,000 shares authorized;
15,193,226 shares issued) 151,932 151,932
Additional paid-in capital 16,446,381 16,446,381
Retained earnings 8,803,722 15,745,478
Treasury stock, 1,304,940 and 1,138,140 shares at cost (2,619,228) (2,452,148)
------------ ------------
TOTAL SHAREHOLDERS' EQUITY 22,782,807 29,891,643
------------ ------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $262,439,417 $352,254,049
============ ============
See accompanying notes to Consolidated Financial Statements.
28
JB OXFORD HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
For The Years Ended December 31,
2001 2000 1999
------------ ------------ ------------
REVENUES:
Clearing and execution $ 3,985,922 $ 7,607,517 $ 25,033,821
Trading profits, net 3,095,203 14,692,048 15,517,700
Commissions 12,498,400 37,148,643 33,827,615
Interest 14,968,622 40,154,797 28,930,515
Other 799,674 1,258,956 902,130
------------ ------------ ------------
Total revenues 35,347,821 100,861,961 104,211,781
------------ ------------ ------------
EXPENSES:
Employee compensation 8,325,869 11,533,833 10,176,438
Commission expense 3,125,682 13,873,602 12,473,534
Clearing and floor brokerage 1,773,473 2,812,247 3,650,676
Communications 4,588,327 7,375,535 6,934,245
Occupancy and equipment 5,838,467 5,988,058 4,966,437
Interest 7,534,686 23,891,689 14,615,836
Data processing charges 3,484,346 8,788,183 10,114,145
Professional services 4,725,033 6,831,981 4,592,666
Promotional 895,536 6,624,512 12,807,200
Bad debt expense 1,146,244 1,524,655 1,829,102
Settlement expense 241,792 867,171 2,537,880
Other operating expenses 2,722,172 2,092,507 2,282,387
------------ ------------ ------------
Total expenses 44,401,627 92,203,973 86,980,546
------------ ------------ ------------
Income (loss) from operations (9,053,806) 8,657,988 17,231,235
Income tax provision (benefit) (2,112,050) 3,684,800 7,223,480
------------ ------------ ------------
Income (loss) before extraordinary item (6,941,756) 4,973,188 10,007,755
Extraordinary item:
Forgiveness of debt, net of taxes -- -- 436,875
------------ ------------ ------------
Net income (loss) $ (6,941,756) $ 4,973,188 $ 10,444,630
============ ============ ============
See accompanying notes to Consolidated Financial Statements.
29
JB OXFORD HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS - CONTINUED
For The Years Ended December 31,
2001 2000 1999
-------------- -------------- --------------
BASIC NET INCOME (LOSS) PER SHARE:
Income (loss) before income taxes and extraordinary item $ (0.50) $ 0.35 $ 0.70
Extraordinary item: forgiveness of debt -- -- 0.03
-------------- -------------- --------------
Basic net income (loss) per share $ (0.50) $ 0.35 $ 0.73
============== ============== ==============
DILUTED INCOME (LOSS) PER SHARE:
Income (loss) before income taxes and extraordinary item $ (0.50) $ 0.22 $ 0.43
Extraordinary item: forgiveness of debt -- -- 0.02
-------------- -------------- --------------
Diluted net income (loss) per share $ (0.50) $ 0.22 $ 0.45
============== ============== ==============
Weighted average number of shares of common stock and
assumed conversions
Basic 14,010,758 14,205,768 14,295,751
Diluted 14,010,758 23,406,905 23,902,717
See accompanying notes to Consolidated Financial Statements.
30
JB OXFORD HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
Common Stock
--------------------------
Additional
Paid-in Retained Treasury
Shares Amount Capital Earnings Stock Total
---------- -------- ----------- ------------ ----------- ------------
Balance at
January 1, 1999 14,141,205 $141,412 $15,345,316 $ 327,660 $ (197,780) $ 15,616,608
Issuance of common stock 947,021 9,470 886,965 -- -- 896,435
Net income -- -- -- 10,444,630 -- 10,444,630
Treasury stock -- -- -- -- (586,925) (586,925)
---------- -------- ----------- ------------ ----------- ------------
Balance at
December 31, 1999 15,088,226 150,882 16,232,281 10,772,290 (784,705) 26,370,748
Issuance of common stock 105,000 1,050 214,100 -- -- 215,150
Net income -- -- -- -- -- 4,973,188
Treasury stock -- -- -- -- (1,667,443) (1,667,443)
---------- -------- ----------- ------------ ----------- ------------
Balance at
December 31, 2000 15,193,226 151,932 16,446,381 15,745,478 (2,452,148) 29,891,643
Net (loss) -- -- -- (6,941,756) -- (6,941,756)
Treasury stock -- -- -- -- (167,080) (167,080)
---------- -------- ----------- ------------ ----------- ------------
Balance at
December 31, 2001 15,193,226 $151,932 $16,446,381 $ 8,803,722 $(2,619,228) $ 22,782,807
========== ======== =========== ============ =========== ============
See accompanying notes to Consolidated Financial Statements.
31
JB OXFORD HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
For The Years Ended December 31,
2001 2000 1999
------------- ------------- -------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ (6,941,756) $ 4,973,188 $ 10,444,630
Adjustments to reconcile net income (loss) to net cash
provided by (used in) operating activities:
Depreciation and amortization 1,868,052 1,756,912 1,348,067
Deferred rent (191,083) (168,197) (121,464)
Provision for bad debts 1,146,244 1,524,655 1,829,102
Provision (benefit) for deferred income taxes 1,290,790 (565,999) (399,585)
Forgiveness of debt -- -- (728,125)
Changes in assets and liabilities:
Cash segregated under federal and other regulations (41,855,227) (10,371,031) 82,977,416
Receivable from broker-dealers and clearing
organizations (45,106,278) 455,258 (396,577)
Receivable from customers 175,723,929 158,172,492 (171,429,660)
Other receivables 753,293 (487,324) (22,772)
Marketable securities owned (1,030,057) (99,749) 2,704,037
Clearing deposits 2,672,440 1,727,080 (2,765,626)
Other assets 354,012 103,184 (258,987)
Payable to broker-dealers and clearing organizations (59,505,496) (26,460,311) 79,236,179
Payable to customers (18,125,486) (125,292,766) 1,395,639
Securities sold not yet purchased 739,865 9,816 (771,181)
Accounts payable and accrued liabilities (3,615,596) (1,836,745) 3,414,076
Income taxes payable/refundable (3,477,546) 23,573 (848,133)
------------- ------------- -------------
Net cash provided by operating activities 4,700,100 3,464,036 5,607,036
------------- ------------- -------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Note receivable -- (2,500,000) --
Acquisitions of customer accounts (2,510,000)
Capital expenditures (1,324,688) (2,273,089) (1,512,160)
------------- ------------- -------------
Net cash used in investing activities (3,834,688) (4,773,089) (1,512,160)
------------- ------------- -------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Advances (repayments) of notes payable (2,008,000) 4,742,251 (125,248)
Payment of subordinated loans -- -- (250,000)
Issuance of common stock -- 215,150 393,820
Acquisition of treasury stock (167,080) (1,667,443) (586,925)
------------- ------------- -------------
Net cash provided by (used in) financing activities (2,175,080) 3,289,958 (568,353)
------------- ------------- -------------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (1,309,668) 1,980,905 3,526,523
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 8,004,000 6,023,095 2,496,572
------------- ------------- -------------
CASH AND CASH EQUIVALENTS AT END OF YEAR $ 6,694,332 $ 8,004,000 $ 6,023,095
============= ============= =============
See accompanying notes to Consolidated Financial Statements.
32
JB OXFORD HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1. BASIS OF PRESENTATION
Reporting Entity
The accompanying consolidated financial statements for 2001, 2000 and 1999
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 accounting
and reporting policies of the Company are in accordance with accounting
principles generally accepted in the United States ("GAAP"). The Company
operates in a single industry, the securities industry. The Company derives its
revenues primarily from its brokerage services operations, correspondent
clearing services and market making activities at JBOC. Inter-company 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 brokerage division has branches in Beverly Hills, California; New York,
New York; Miami, Florida; and San Gabriel, California.
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 these
customers is remote.
NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Use of Estimates
The preparation of financial statements in conformity with GAAP 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 original
maturities of three months or less 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
Included in cash and cash equivalents and cash segregated under federal and
other regulations are transactions involving purchases of securities under
agreements to resell which 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
33
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 counter-parties 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, 2001 and 2000, 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 (typically marketable securities) 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 and Securities Sold Not Yet Purchased
Marketable equity and other securities owned and securities sold, not yet
purchased, are reported at prevailing market prices. Other equity securities
included in securities owned that are not publicly traded are reported at
estimated fair value. Realized and unrealized gains and losses on securities
owned and securities sold, not yet purchased, are included in trading profits,
net.
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 statement 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
believes it is more likely than not that the net deferred tax asset will not 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 net of
accumulated depreciation and amortization. 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
34
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 Expense
Advertising costs are expensed as incurred.
Earnings Per Share
Basic earnings per share of common stock are computed by dividing net income by
the weighted average number of common shares outstanding.
Diluted earnings per share are computed by dividing net income adjusted for the
after-tax amount of interest associated with convertible debt and any other
charges resulting from assumed conversion of potential common shares by 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, and the convertible
debentures (after giving retroactive effect to the elimination of interest
expense, net of tax). Common shares and equivalents 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.
The following table reconciles the numerators and denominators of the basic and
diluted earnings per share computation:
For The Years Ended December 31,
2001 2000 1999
------------ ----------- -----------
BASIC EARNINGS PER SHARE
Net income (loss) $ (6,941,756) $ 4,973,188 $10,444,630
------------ ----------- -----------
Income available to common shareholders (numerator) $ (6,941,756) $ 4,973,188 $10,444,630
============ =========== ===========
Weighted average common shares outstanding (denominator) 14,010,758 14,205,768 14,295,751
============ =========== ===========
Basic Earnings (Loss) Per Share $ (0.50) $ 0.35 $ 0.73
============ =========== ===========
35
For The Years Ended December 31,
2001 2000 1999
------------ ----------- -----------
DILUTED EARNINGS PER SHARE
Net income (loss) $ (6,941,756) $ 4,973,188 $10,444,630
Interest on convertible debentures, net of income tax
-- 293,411 295,095
------------ ----------- -----------
Income available to common shareholders plus assumed
conversions (numerator) $ (6,941,756) $ 5,266,599 $10,739,725
============ =========== ===========
Weighted average common shares outstanding 14,010,758 14,205,768 14,295,751
Weighted average options outstanding -- 2,310,440 2,195,701
Weighted average convertible debentures -- 7,740,994 7,813,780
Stock acquired with proceeds -- (850,297) (402,515)
------------ ----------- -----------
Weighted average common shares and assumed conversions
outstanding (denominator) 14,010,758 23,406,905 23,902,717
============ =========== ===========
Diluted Earnings (Loss) Per Share $ (0.50) $ 0.22 $ 0.45
============ =========== ===========
Options to purchase 555,500 shares of common stock at December 31, 2000 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 assumed conversions have been excluded in computing the
diluted earnings per share when there is a net loss for the period. They have
been excluded because their inclusion would reduce the loss per share or be
anti-dilutive.
Stock-Based Compensation
The Company measures compensation cost under Accounting Principles Board Opinion
No. 25, "Accounting for Stock Issued to Employees" ("APB No. 25"), and provides
pro forma disclosure of net earnings and earnings per share as if the
fair-valued-based method of accounting had been applied.
Reclassifications
Certain reclassifications have been made to the 2000 and 1999 financial
statements to conform with presentation in the 2001 financial statements.
Recent Accounting Pronouncements
In June 2001, the FASB issued SFAS No. 141, "Business Combinations" and SFAS No.
142, "Goodwill and Other Intangible Assets." The Company was required to adopt
SFAS No. 141 upon issuance. As such, all business combinations for which the
Company may prospectively enter must be accounted for as purchase transactions.
The Company adopted SFAS No. 142 on January 1, 2002. The adoption of SFAS No.
142 ceases the current amortization of goodwill and will instead be subject to
at least an annual assessment for impairment by applying a fair-value-based
test. The adoption of this statement did not have a material effect on the
Company's financial position or results of operations.
In August 2001, the FASB issued SFAS No. 144, "Accounting for the Impairment or
Disposal of Long-Lived Assets." This statement addresses financial accounting
and reporting for the impairment or disposal of long-lived assets and supercedes
or amends previous pronouncements including SFAS No. 121, Accounting Principles
Board Opinion No. 30, and Accounting Research Board No. 51. The Company adopted
this statement on January 1, 2002. The adoption of this statement did not have a
material effect on the Company's financial position or results of operations.
36
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 $6,034,839 and $2,541,193 at
December 31, 2001 and 2000. Securities purchased are U.S. Treasury instruments
with market values at least equal to 102% of the cash tendered. The market value
of these securities is $6,157,171 and $2,593,853 at December 31, 2001 and 2000.
NOTE 4. CASH SEGREGATED UNDER FEDERAL AND OTHER REGULATIONS
Cash and securities purchased under agreement to resell of $79,399,917 and
$37,544,690 at December 31, 2001 and 2000, respectively, 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 $1,695,974 and
$33,274,048 of the above amounts at December 31, 2001 and 2000, respectively.
Securities purchased are U.S. Treasury instruments having a market value of
$1,732,797 and $33,939,733, respectively. The Company had excess funds of
$6,005,501,and $11,033,883 at December 31, 2001 and 2000.
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:
2001 Receivable Payable
----------- -------------
Deposits for securities borrowed/loaned $51,501,242 $ 48,509,300
Securities failed to deliver/receive 585,307 782,047
Receivable from/payable to correspondents -- 1,529,301
Receivable from/payable to clearing organizations 282,114 513,933
----------- -------------
Total $52,368,663 $ 51,334,581
=========== =============
2000 Receivable Payable
----------- -------------
Deposits for securities borrowed/loaned $ 4,050,621 $ 108,860,183
Securities failed to deliver/receive 406,400 360,448
Receivable from/payable to correspondents 61,657 1,619,446
Receivable from/payable to clearing organizations 2,743,707 --
----------- -------------
Total $ 7,262,385 $ 110,840,077
=========== =============
Securities borrowed and securities loaned represent cash paid or received for
securities borrowed or loaned from other broker-dealers. The equivalent value in
cash is deposited by the borrower. All open positions are adjusted to market
values daily. These deposits approximate the market value of the underlying
securities. The Company has received securities with a market value of
$45,170,759 in stock borrow transactions that has been repledged in stock loan
transactions.
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, 2001, the market value of the
37
securities failed to deliver was $566,692 and failed to receive was $768,195. At
December 31, 2000, the market value of the securities failed to deliver was
$405,792 and failed to receive was $341,793.
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 value 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 Yet
Owned Purchased
------------ ------------
Balances as of December 31, 2001:
Equity securities $ 1,185,638 $ 836,691
U.S. government and other securities 167,202 9,894
------------ ------------
Total $ 1,352,840 $ 846,585
============ ============
Balances as of December 31, 2000:
Equity securities $ 322,783 $ 97,344
U.S. government and other securities -- 9,376
------------ ------------
Total $ 322,783 $ 106,720
============ ============
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, forwards, swaps or any other
derivative financial instruments except options and warrants. The Company held
no options or warrants at December 31, 2001 and 2000. 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:
2001 2000
----------- -----------
Furniture and equipment $ 5,036,291 $ 9,514,321
Leasehold improvements 1,797,832 2,066,918
Less: Accumulated depreciation and amortization (3,523,365) (8,040,869)
----------- -----------
$ 3,310,758 $ 3,540,370
=========== ===========
38
For the years ended December 31, 2001, 2000 and 1999, occupancy and equipment
expense includes depreciation and amortization expense of $1,554,300, $1,756,912
and $1,348,067, respectively.
NOTE 9. NOTES PAYABLE AND COMMITTED LINES
JBOC maintains customer financing arrangements with an aggregate borrowing limit
approximating $55,000,000. Amounts loaned bear interest at a fluctuating rate
based on broker call and prime rates and are fully collateralized by marketable
securities. The Company had no such loans outstanding at December 31, 2001 and
2000.
At December 31, notes payable related to customer activity consisted of the
following (See Note 12 for discussion of related party notes reclassified to
notes payable):
Balance at end
of period a b c d
-------------------- ------------ ------------- -------------- --------------
2001
Collateralized by:
Customer securities $ -- -- $21,000,000 $ 700,000 5.8%
2000
Collateralized by:
Customer securities $ -- -- $88,079,279 $31,688,136 8.9%
Other -- -- 5,749 479 9.5%
-----------
$ --
===========
a) Weighted average interest rate at end of period.
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 related to these notes was $40,646, $2,845,393 and $217,447 for
the years ended December 31, 2001, 2000 and 1999, respectively.
At December 31, the detail of notes payable is as follows:
December 31,
2001 2000
---------- ----------
Demand notes payable (see note 12) $2,889,375 $2,889,375
Bank note payable 2,740,000 4,748,000
---------- ----------
Total notes payable $5,629,375 $7,637,375
---------- ----------
The above bank note payable carries an interest rate of prime plus 1%. Principal
payments of $84,000, plus interest are due monthly, with a balloon payment due
on September 5, 2002. At December 31, 2001, the Company was not in compliance
with the net income and net worth covenants of its bank note payable agreement
which require that the Company earn net income of at least $5 million per year
and maintain net assets of at least $25 million. The Company reached an
agreement with the bank in December 2001 to amend the credit agreement by
repaying $1 million of principal as well as granting a first priority security
interest in the Company's Federal and State tax refunds. Based on management
discussions with the bank, the Company believes that this amendment to the
credit agreement will lead to a waiver of the debt covenants as of and for the
year ended December 31, 2001, however, the bank has not granted an official
waiver. In the event that the Company is deemed to be in default of the
covenants, the interest rate on the note will increase from Prime plus 1% to
Prime plus 3%.
39
NOTE 10. CONVERTIBLE PREFERRED STOCK
The Company is authorized to issue 10,000,000 shares of $10 par value
convertible preferred stock, of which 9,800,000 remain. The preferred shares
carry a minimum of a 6% cumulative dividend and 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. There are no shares of convertible preferred
stock currently outstanding.
NOTE 11. INCOME TAXES
The income tax (benefit) provision in the Consolidated Statements of Operations
consists of the following components:
Years Ended December 31,
2001 2000 1999
------------ ------------ ------------
Current
Federal $ (3,402,840) $ 3,185,124 $ 5,901,568
State -- 1,065,675 1,721,497
------------ ------------ ------------
(3,402,840) 4,250,799 7,623,065
------------ ------------ ------------
Deferred
Federal 739,400 (407,609) (424,715)
State 551,390 (158,390) 25,129
------------ ------------ ------------
1,290,790 (565,999) (399,585)
------------ ------------ ------------
Total $ (2,112,050) $ 3,684,800 $ 7,223,480
============ ============ ============
The major components of Deferred tax assets - net, included in the Consolidated
Statements of Financial Condition are as follows:
December 31,
2001 2000
------------ -----------
Deferred tax assets:
Bad debts reserve $ 1,494,497 $ 1,670,521
Depreciation 420,576 469,807
Deferred rent 95,989 191,015
State taxes 275,504 88,725
Accrued liabilities 64,260 340,870
Less: Valuation allowance (880,768) --
------------ -----------
Total deferred tax assets $ 1,470,058 $ 2,760,848
------------ -----------
Reconciliations of the provision for income taxes to the expected income tax
based on statutory rates are as follows:
Years Ended December 31,
2001 2000 1999
------------ ----------- -----------
Provision (benefit)- Federal statutory rate $ (3,078,294) $ 2,943,716 $ 6,030,932
Increase (decrease) in income taxes resulting from:
State taxes (342,545) 630,008 1,179,894
Non cash interest charge -- -- --
Other 428,021 111,076 12,654
Valuation allowance 880,768 -- --
------------ ----------- -----------
Total $ (2,112,050) $ 3,684,800 $ 7,223,480
============ =========== ===========
A valuation allowance has been placed against 100% of the state net deferred
tax asset due to the uncertainty as to its ultimate realization. For tax
purposes, at December 31, 2001, the Company had a Federal net operating loss
(NOL) of $10.9 million which will be carried back to previous years and a state
NOL of $5.2 million which will expire in 2011.
40
NOTE 12. RELATED PARTY TRANSACTIONS
The Company obtained $2,867,500 in demand notes from former shareholders during
1997. This debt bears interest at 8.25%, which is payable quarterly. The Company
has decided to delay payment on the debt in light of the ongoing federal
investigation. In 1998, $250,000 was paid on the demand notes. In 1999, $728,125
was forgiven and $1,889,375 was reclassified to notes payable. See Note 15,
"Commitments and Contingencies," below.
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 initially due December
31, 1999, and extended to December 31, 2002. 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
the then outstanding 9% Senior Secured Convertible Notes. The maturity date of
the notes was extended to December 31, 2002, 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
$1,040,276, $1,020,000 and $525,000 was paid to an affiliate of the holders of
the new notes in 2001, 2000 and 1999.
In December 2000, the Company loaned $2,500,000 to Third Capital Partners, LLC
("Third Capital") pursuant to a Promissory Note, payable on or before December
31, 2002. The note bears interest at the rate of nine and one-quarter percent
per annum. The note may be prepaid in whole or in part at any time without
penalty. Additionally, the Company has borrowed $5,418,696 from Third Capital in
the form of Senior Secured Convertible Notes which are discussed above. The
amounts payable to Third Capital from the Senior Secured Convertible Notes as of
December 31, 2001 and 2000 is $5,418,696. Related interest expense for 2001,
2000 and 1999 was $486,943, $489,019 and $491,824 for the convertible notes. Due
to the related party nature and terms of the shareholder loans, the fair market
value of such financial instruments cannot be estimated.
In February 1999, Hareton Sales & Marketing, Inc., the holder of $502,615 in
face value of 9% Senior Secured Convertible Notes, exercised its right to
convert this debt into common stock of the Company and the Company issued
718,021 shares of common stock in full satisfaction of this debt.
In February 1999, the Company established the JB Oxford Revocable Government
Trust (the "Trust") a wholly owned subsidiary, to purchase common stock of the
Company. Third Capital serves as trustee of the Trust, without compensation. The
Company loaned the Trust $586,915, which the Trust used to purchase 469,540
shares of the Company's Common Stock for an average price of $1.25 per share.
The Trust terminated pursuant to its terms on February 18, 2001, and ownership
of the Trust shares was transferred to the Company in satisfaction of the loan.
41
Concurrent with the Trust's purchase of shares, the Company relinquished its
right of first refusal as to any remaining shares held by Felix Oeri and Oeri
Finance, Inc., and Oeri Finance, Inc. forgave $728,125 in demand debt owed by
the Company. Subsequently, Oeri Finance Inc., Felix Oeri and Hareton filed 13D
Statements with the SEC indicating ownership of less than 5% of the Company's
stock.
A $1,000,000 subordinated loan agreement, payable to Oeri Finance, Inc., matured
on March 31, 1999. The Company has decided to delay payment on the debt in light
of the ongoing federal investigation (see Note 15, "Commitments and
Contingencies"). The Company has reclassified the $1,000,000 subordinated loan
to notes payable.
NOTE 13. OPTIONS AND WARRANTS
At December 31, 2001, the Company had three stock option plans, each of which is
described below. Under APB Opinion 25, because the exercise price of the
Company's employee stock options equaled the market price of the underlying
stock on the date of grant, no compensation cost has been 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, 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.
The Company has adopted the 1998 Stock Option and Award Plan (the "1998 Plan"),
pursuant to which 3,500,000 shares of common stock have been reserved for
issuance to officers, employee directors and key employees of the Company. The
Plan is administered by the Company's Compensation Committee of the Board of
Directors which determines, among other things, the persons to be granted
options under the 1998 Plan, the number of shares subject to each option and the
option price, which shall not be less than market value for incentive options.
The Company has issued 2,103,500 options to executive officers of the Company
pursuant to the 1998 Plan.
SFAS No.123, "Accounting for Stock-Based Compensation," requires the Company to
provide pro forma information regarding net income and earnings per share in
accordance with the compensation based method prescribed in SFAS No. 123. 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 2001, 2000, and 1999, respectively: expected
dividend yield of 0% for all three years; computed volatility of 22%, 31% and
28%, respectively; risk-free interest rates of 3.5%, 5.5% and 6.5%,
respectively; and expected life of 5 years for all three years. The weighted
average fair value of options granted during 2001, 2000 and 1999 was $0.46,
$1.35 and $2.82, respectively.
42
Under the accounting provisions of SFAS No. 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,
2001 2000 1999
------------- ----------- ------------
Net income (loss):
As reported $ (6,941,756) $ 4,973,188 $ 10,444,630
Pro forma $ (7,136,110) 4,437,874 9,569,308
Basic earnings per share:
As reported $ (0.50) $ 0.35 $ 0.73
Pro forma $ (0.51) 0.31 0.67
Diluted earnings per share:
As reported $ (0.50) $ 0.22 $ 0.45
Pro forma $ (0.51) 0.20 0.41
A summary of the status of the Company's stock options as of December 31, 2001,
2000, and 1999, and changes during the years ending on those dates is presented
below:
December 31, 2001 December 31, 2000 December 31, 1999
Weighted Weighted Weighted
Shares average Shares average Shares average
----------- --------- --------- -------- --------- --------
Outstanding at 3,108,500 2.94 2,572,000 $ 2.74 2,247,500 $ 1.47
beginning of year
Granted 751,000 1.72 660,000 3.60 553,500 7.50
Exercised -- -- (105,000) 2.05 (229,000) 1.72
Forfeited (28,300) 3.74 (18,500) 4.76 -- --
----------- --------- ---------
Outstanding at end of
year 3,831,200 2.69 3,108,500 2.94 2,572,000 2.74
=========== ========= =========
Options exercisable at
year-end 3,202,997 $ 2.76 1,975,156 $ 2.81 1,177,996 $ 2.59
Weighted-average fair
value of options
granted during the
year $ 0.46 $ 1.35 $ 2.82
43
Information relating to stock options and warrants at December 31, 2001,
summarized by exercise price is as follows:
Options Outstanding Options Exercisable
Number Weighted-Average Number
Outstanding at Contractual Weighted-Average Exercisable at Weighted-Average
Exercise Prices 12/31/01 Life Exercise Price 12/31/01 Exercise Price
--------------- -------------- ---------------- ---------------- -------------- ----------------
$0.63 25,000 7 $0.63 25,000 $0.63
0.97 82,200 10 0.97 .97
1.08 50,000 3 1.08 50,000 1.08
1.22 50,000 7 1.22 50,000 1.22
1.31 1,550,000 8 1.31 1,550,000 1.31
1.78 13,500 6 1.78 13,500 1.78
1.82 660,000 9 1.82 330,000 1.82
1.97 15,000 6 1.97 15,000 1.97
2.25 150,000 5 2.25 150,000 2.25
2.32 50,000 6 2.32 50,000 2.32
3.59 627,000 9 3.59 417,999 3.59
3.69 21,000 8 3.69 13,998 3.69
7.44 527,000 8 7.44 527,000 7.44
9.00 10,500 7 9.00 10,500 9.00
--------- ---------
Total 3,831,200 8 $2.69 3,202,997 $2.76
========= =========
NOTE 14. REGULATORY REQUIREMENTS
JBOC is subject to the Securities and Exchange Commission's Uniform Net Capital
Rule (the Rule), 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, 2001, JBOC had net capital of $18,975,361, which was $16,891,455
in excess of the minimum amount required. At December 31, 2000, JBOC had net
capital of $28,860,901, which was $23,275,591 in excess of the minimum amount
required.
The Company performs a required computation for proprietary accounts of
introducing brokers ("PAIB") similar to the customer reserve computation set
forth in SEC Rule 15c3-3. As of December 31, 2001, PAIB debits aggregated
$251,267, and credits totaled $2,041,085. Included in the balance of cash
segregated under federal and other regulations as of December 31, 2001 was
$1,612,419 of cash held in a PAIB reserve account. The Company deposited an
additional $500,000 into the PAIB reserve account on January 3, 2002.
NOTE 15. COMMITMENTS AND CONTINGENCIES
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 2001, 2000 and 1999 amounted to $61,413, $130,236 and $65,042.
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, 2001, 2000 and 1999. This plan was terminated in 2001 and the
assets distributed to its participants.
44
The Company and/or its subsidiaries are a party to a number of pending legal,
arbitration or administrative proceedings incidental to its business, including
customer brokerage transactions claims as well as matters related to JB Oxford's
clearing services resulting from the failure of certain correspondents. All of
the legal, arbitration and administrative proceedings have arisen in the
ordinary conduct of the Company's business. To date, these proceedings have not
had a material effect on the Company's financial condition or results of
operations. However, in the aggregate the amount of these claims is substantial
and there can be no assurance that in future periods these proceedings will not
have a material adverse effect on the Company's financial condition or results
of operations. Those proceedings that management believes may have a significant
impact on the Company are described below.
On February 14, 2000, the Company reached a settlement with the Los Angeles
office of the United States Attorney's Office (the "USAO") in the USAO's
investigation of the Company's prior management. While the Company maintains its
innocence, it agreed to pay $2 million over three years to settle the USAO
matter and to reimburse the USAO for the substantial expense associated with the
two-year investigation. The agreement with the USAO stated that if on or before
February 14, 2001 the Company enters into a settlement with the SEC that
involves a payment of $1 million or more to the SEC, the USAO has agreed that
the Company's obligation to the USAO would be reduced by $500,000. Discussions
are ongoing with the USAO regarding extending this agreement, based upon the
proposed SEC settlement. On October 12, 2000, the Pacific Regional Office of the
SEC advised the Company that it is recommending that the SEC accept the
Company's $1.5 million offer to settle the SEC's investigation. If the proposed
settlement is accepted, the Company will also agree to a censure, to refrain
from any violations of securities laws, and to take certain actions to ensure
continued compliance with federal securities law. The Company paid $500,000 of
the USAO settlement amount in the first quarter of 2000 and 2001, for a total of
$1,000,000 as of December 31,2001. The remaining liability associated with these
agreements as of December 31, 2001 is $2 million, which has been accrued for, in
accounts payable and accrued liabilities.
In August 2000, the assignee and holder of two of the demand notes payable by
the Company to Oeri Finance Inc., in the principal face amount of $1,939,375,
filed to collect the amounts due under the notes as well as seek return of
certain securities seized by the government. The Company filed an answer and
asserted defenses to payment including, among other defenses, a right of set-off
for certain expenses incurred by us in connection with the governmental
investigation described above and related matters. In February 2002, the US
District Court, Central District of California, issued an Order granting the
assignee's application for writ of pre-judgment attachment against the assets of
JB Oxford Holdings, Inc. A final determination of these issues on the merits has
yet to be made. The notes and underlying obligations have previously been
disclosed by the Company in its Annual Reports on Form 10-K and Quarterly
Reports on Form 10-Q since the issuance of the notes in July 1997. The Company
believes that it has valid defenses and set-offs to the claims and intends to
vigorously defend itself, although no assurance can be given as to the outcome
of this matter.
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, 2001, were as follows:
45
Year ending December 31:
2002 $ 2,486,722
2003 2,045,939
2004 1,731,120
2005 1,450,264
2006 1,418,402
Thereafter 5,102,298
-----------
$14,234,745
===========
The Company received certain concessions for a lease included above which is
being amortized ratably over the lease term. Included in the above commitments
is a lease on the Boston office, which the Company has closed. This property has
been sublet for terms substantially the same as the original commitment. The
Boston office commitment is $42,422 for the year ended December 31, 2001. Rent
expense was as follows:
Year ending December 31:
2001 $ 2,698,264
2000 2,554,744
1999 2,335,472
NOTE 16. ACQUISITIONS OF CUSTOMER ACCOUNTS
During the year ended December 31, 2001 the Company acquired certain customer
accounts from other securities broker dealers. The cost of these acquisitions is
$2,510,000 and it has been included in other assets as an intangible asset net
of accumulated amortization of $313,750. The Company is amortizing these
intangible assets over four years, which is the estimated useful life.
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.
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
46
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 numerous 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
2001 2000 1999
Cash paid during the year for:
Interest $7,299,563 $23,715,632 $14,649,676
Income taxes 70,000 4,165,627 9,201,400
Supplemental disclosure of non-cash investing and financing activities:
Convertible debt in the amount of $502,615 was converted into common stock
during 1999.
NOTE 19. UNAUDITED SUPPLEMENTAL QUARTERLY FINANCIAL INFORMATION
Below is selected quarterly financial data for each fiscal quarter during the
years ended December 31, 2001 and 2000. This information should be read in
conjunction with the consolidated financial statements included elsewhere
herein.
First Second Third Fourth
Quarter Quarter Quarter Quarter
------------- ------------- ------------- -------------
2001
Revenues $ 13,266,653 $ 9,422,030 $ 6,587,705 $ 6,071,433
Income (loss) before taxes (1,413,124) (2,046,968) (3,055,757) (2,537,957)
Net income (loss) (803,124) (1,169,968) (1,802,757) (3,165,907)
Basic earnings per share (0.06) (0.08) (0.13) (0.23)
Diluted earnings per share (0.06) (0.08) (0.13) (0.23)
2000
Revenues $ 34,493,672 $ 25,619,033 $ 21,141,082 $ 19,608,174
Income (loss) before taxes 7,985,496 911,406 51,770 (290,684)
Net income (loss) 4,555,496 511,406 31,770 (125,484)
Basic earnings per share 0.32 0.04 0.00 (0.01)
Diluted earnings per share 0.19 0.02 0.00 (0.01)
47
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, 2002, 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 27
Consolidated Statements of Financial Condition December 31, 2001, and 2000 28-29
Consolidated Statements of Operations Years Ended December 31, 2001, 2000 and 1999 30
Consolidated Statements of Changes in Shareholders' Equity (Deficit) Years Ended December 31,
2001, 2000 and 1999 31
Consolidated Statements of Cash Flows Years Ended December 31, 2001, 2000 and 1999 32
Notes to Consolidated Financial Statements 33-48
Financial Statement Schedule I - Condensed Financial Statements (Parent Company Only) 52-56
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 November 24, 1998 (incorporated herein by
reference to Exhibit 3.2 of JBOH's Annual Report on Form 10-K for the
year ended December 31, 1999, 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).
48
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 Extension Agreement dated November 8, 1999, between the Company and
Third Capital Partners, LLC, extending the maturity date of the 9%
Senior Secured Convertible Note in the principal amount of $3,418,969
(incorporated herein by reference to Exhibit 4.3 of the JBOH Form 10-Q
filed with the SEC for the quarter ended September 30, 1999).
10.8 Extension Agreement dated November 8, 1999, between the Company and
Third Capital Partners, LLC, extending the maturity date of the 9%
Secured Convertible Note in the principal amount of $2,000,000
(incorporated herein by reference to Exhibit 4.4 of the JBOH Form 10-Q
filed with the SEC for the quarter ended September 30, 1999).
10.9 Amendment No. 6 to Commercial office lease Agreement between Arden
Realty Limited Partnership and JB Oxford & Company, executed as of
December 21, 2000, to lease Beverly Hills office space (incorporated
herein by reference to Exhibit 10.9 of the JBOH Form 10-K filed with
the SEC for the year ended December 31, 2000).
10.10 Amendment No. 7 to Commercial office lease Agreement between Arden
Realty Limited Partnership and JB Oxford & Company, executed as of
March 21, 2001, to lease Beverly Hills office space (incorporated
herein by reference to Exhibit 10.10 of the JBOH Form 10-K filed with
the SEC for the year ended December 31, 2000).
10.11 Commercial office lease Agreement between Kennedy-Wilson Properties,
Ltd. and JB Oxford & Company, executed as of January 18, 2001, to lease
Beverly Hills office space (incorporated herein by reference to Exhibit
10.11 of the JBOH Form 10-K filed with the SEC for the year ended
December 31, 2000).
10.12 Extension Agreement dated December 13, 2000, between the Company and
Third Capital Partners, LLC, extending the maturity date of the 9%
Senior Secured Convertible Note in the principal amount of $3,418,969
(incorporated herein by reference to Exhibit 10.12 of the JBOH Form
10-K filed with the SEC for the year ended December 31, 2000).
10.13 Extension Agreement dated December 13, 2000, between the Company and
Third Capital Partners, LLC, extending the maturity date of the 9%
Secured Convertible Note in the principal amount of $2,000,000
(incorporated herein by reference to Exhibit 10.13 of the JBOH Form
10-K filed with the SEC for the year ended December 31, 2000).
10.14 Extension Agreement dated December 31, 2001, between the Company and
Third Capital Partners, LLC, extending the maturity date of the 9%
Senior Secured Convertible Note in the Principal amount of $3,418,969,
filed herewith.
49
10.15 Extension Agreement dated December 31, 2001, between the Company and
Third Capital Partners, LLC, extending the maturity date of the 9%
Secured Convertible Note in the Principal amount of $2,000,000, filed
herewith.
23 Consent of Arthur Andersen LLP
24 Power of Attorney (appears on signature page of this report).
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).
99 Letter to SEC re: Arthur Andersen Assurances, filed herewith.
REPORTS ON FORM 8-K
During the fourth quarter, the Company did not file a Report on Form 8-K.
50
SCHEDULE I. CONDENSED FINANCIAL INFORMATION (PARENT COMPANY ONLY)
JB OXFORD HOLDINGS, INC. STATEMENTS OF FINANCIAL CONDITION
December 31,
2001 2000
------------- -------------
ASSETS:
Cash and cash equivalents $ 162,231 $ 1,043,744
Investment in subsidiaries 33,322,484 40,623,388
Receivables from subsidiaries 2,820,369 5,498,684
Note receivable 2,500,000 2,500,000
Income taxes receivable 3,751,429 273,884
Deferred income taxes 1,470,058 2,760,848
Other assets 2,575,269 606,540
------------- -------------
TOTAL ASSETS $ 46,601,840 $ 53,307,088
============= =============
LIABILITIES AND SHAREHOLDERS' EQUITY:
LIABILITIES:
Accounts payable and accrued liabilities $ 3,117,264 $ 3,419,984
Net payables to subsidiaries 10,653,698 7,939,390
Loans from shareholders 5,418,696 5,418,696
Notes payable 4,629,375 6,637,375
------------- -------------
TOTAL LIABILITIES 23,819,033 23,415,445
------------- -------------
COMMITMENTS AND CONTINGENCIES (NOTE 5)
SHAREHOLDERS' EQUITY :
Common stock ($.01 par value 100,000,000 shares authorized;
15,193,226 shares issued) 151,932 151,932
Additional paid-in capital 16,446,381 16,446,381
Retained earnings 8,803,722 15,745,478
Treasury stock, 1,304,940 and 1,138,140 shares at cost (2,619,228) (2,452,148)
------------- -------------
TOTAL SHAREHOLDERS' EQUITY 22,782,807 29,891,643
------------- -------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 46,601,840 $ 53,307,088
============= =============
See accompanying notes to Condensed Financial Information.
51
JB OXFORD HOLDINGS, INC. STATEMENTS OF OPERATIONS
For The Years Ended December 31
2001 2000 1999
------------ ------------ -------------
REVENUES $ 4,366,405 $ 4,550,797 $ 3,060,012
------------ ------------ -------------
EXPENSES
General and administrative 3,508,483 4,846,650 3,527,983
Interest expense 1,128,057 791,046 683,652
Bad debt and settlement expense 141,667 65,875 2,378,756
------------ ------------ -------------
Total expenses 4,778,207 5,703,571 6,590,391
------------ ------------ -------------
Income (loss) before equity interest in subsidiary
income (411,802) (1,152,774) (3,530,379)
Equity interest in subsidiary income (loss) (8,642,004) 9,810,762 20,761,614
------------ ------------ -------------
Income (loss) before income taxes and extraordinary
item (9,053,806) 8,657,988 17,231,235
Non cash interest charge -- -- --
Income tax provision (benefit) (2,112,050) 3,684,800 7,223,480
------------ ------------ -------------
Income (loss) before extraordinary item (6,941,756) 4,973,188 10,007,755
Extraordinary Item:
Forgiveness of debt, net of taxes -- -- 436,875
------------ ------------ -------------
Net income (loss) $ (6,941,756) $ 4,973,188 $ 10,444,630
============ ============ =============
JB OXFORD HOLDINGS, INC. STATEMENTS OF CASH FLOWS
For The Years Ended December 31
2001 2000 1999
------------ ------------ -------------
Net cash provided by (used in) operating activities $ 3,772,603 $ (358,191) $ 465,114
------------ ------------ -------------
Cash flows from investing activities:
Investment in subsidiaries (77,500) (225,000) --
Notes receivable -- (2,500,000) --
Acquisitions of customer accounts (2,400,000) -- --
Capital expenditures (1,536) (80,614) (255,769)
------------ ------------ -------------
Net cash used in investing activities (2,479,036) (2,805,614) (255,769)
------------ ------------ -------------
Cash flows from financing activities:
Notes payable (2,008,000) 4,742,251 (125,248)
Issuance of stock -- 215,150 393,820
Purchase of treasury stock (167,080) (1,667,443) (586,925)
------------ ------------ -------------
Net cash provided by (used in) financing activities (2,175,080) 3,289,958 (318,353)
------------ ------------ -------------
Net increase (decrease) in cash and cash equivalents (881,513) 126,153 (109,008)
Cash and cash equivalents at beginning of year 1,043,744 917,591 1,026,599
------------ ------------ -------------
Cash and cash equivalents at end of year $ 162,231 $ 1,043,744 $ 917,591
============ ============ =============
See accompanying notes to Condensed Financial Information.
52
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 using the equity method.
The accompanying condensed financial information should be read with the
consolidated financial statements and notes to the consolidated financial
statements.
NOTE 2. REVENUES
The Company receives substantially all of its revenues from its subsidiaries.
Management fees of $3,000,000, $3,050,000 and $1,650,000 were received from JBOC
in 2001, 2000 and 1999, respectively. The balance of the revenues for 2001, 2000
and 1999 consists of rents received from subsidiaries for office space and
furniture and equipment and interest earned on cash balances.
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 that 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
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 Company has
decided to delay payment on the debt in light of the ongoing federal
investigation (see Note 15, "Commitments and Contingencies," to the consolidated
financial statements).
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 initially due December
31, 1999, and extended to December 31, 2002. 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, 2002, 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 $1,040,276, $1,020,000 and
$525,000 was paid to an affiliate of the holders of the new notes in 2001, 2000
and 1999.
53
In February 1999, Hareton Sales & Marketing, Inc., the holder of $502,615 in
face value of 9% Senior Secured Convertible Notes, exercised it right to convert
this debt into common stock of the Company and the Company issued 718,021 shares
of common stock in full satisfaction of this debt.
In February 1999, the Company established the JB Oxford Revocable Government
Trust (the "Trust"), a wholly owned subsidiary, to purchase common stock of the
Company. Third Capital Partners, LLC serves as trustee of the Trust, without
compensation. The Company loaned the Trust $586,915, which the Trust used to
purchase 469,540 shares of the Company's Common Stock for an average price of
$1.25 per share. The Trust terminated pursuant to its terms on February 18,
2001, and ownership of the Trust shares was transferred to the Company in
satisfaction of the loan.
Concurrent with the transaction, the Company relinquished its right of first
refusal as to any remaining shares held by Felix Oeri and Oeri Finance, Inc.,
and Oeri Finance, Inc. forgave $728,125 in demand debt owed by the Company.
Subsequently, Oeri Finance Inc., Felix Oeri and Hareton filed 13D Statements
with the SEC indicating ownership of less than 5% of the Company's stock.
A subordinated loan agreement, payable to Oeri Finance, Inc., matured on March
31, 1999 in the amount of $1,000,000. The Company has decided to delay payment
on the debt in light of the ongoing federal investigation (see Note 15,
"Commitments and Contingencies," to the consolidated financial statements). The
Company has reclassified the $1,000,000 subordinated loan and $1,889,375 in
demand shareholder notes to notes payable.
The following summarizes loans from shareholders outstanding at December 31:
2001 2000
------------ -----------
Senior secured convertible notes $ 5,418,696 $ 5,418,696
Demand shareholder notes -- --
------------ -----------
Total $ 5,418,696 $ 5,418,696
------------ -----------
Related interest expense for 2001, 2000 and 1999 was $486,943, $489,019 and
$491,824 for the convertible notes, the fair market value of such financial
instruments cannot be estimated.
NOTE 5. COMMITMENTS AND CONTINGENCIES
The Company and/or its subsidiaries are a party to a number of pending legal,
arbitration or administrative proceedings incidental to its business, including
customer brokerage transactions claims as well as matters related to JB Oxford's
clearing services resulting from the failure of certain correspondents. All of
the legal, arbitration and administrative proceedings have arisen in the
ordinary conduct of the Company's business. To date, these proceedings have not
had a material effect on the Company's financial condition or results of
operations. However, in the aggregate the amount of these claims is substantial
and there can be no assurance that in future periods these proceedings will not
have a material adverse effect on the Company's financial condition or results
of operations. Those proceedings that management believes may have a significant
impact on the Company are described below.
On February 14, 2000, the Company reached a settlement with the Los Angeles
Office of the United States Attorney's Office (the "USAO") in the USAO's
investigation of the Company's prior management. While the Company maintains its
innocence, it agreed to pay $2 million over three years to settle the USAO
matter and to reimburse the USAO for the substantial expense associated with the
two-year investigation. The agreement with the USAO stated that if on or before
February 14, 2001
54
the Company enters into a settlement with the SEC that involves a payment of $1
million or more to the SEC, the USAO has agreed that the Company's obligation to
the USAO would be reduced by $500,000. Discussions are ongoing with the USAO
regarding extending this agreement, based upon the proposed SEC settlement. On
October 12, 2000, the Pacific Regional Office of the SEC advised the Company
that it is recommending that the SEC accept the Company's $1.5 million offer to
settle the SEC's investigation. If the proposed settlement is accepted, the
Company will also agree to a censure, to refrain from any violations of
securities laws, and to take certain actions to ensure continued compliance with
federal securities law. The Company paid $500,000 of the USAO settlement amount
in the first quarter of 2000 and 2001, for a total of $1,000,000 as of December
31,2001. The remaining liability associated with these agreements as of December
31, 2001 is $2 million, which has been accrued for, in accounts payable and
accrued liabilities.
In August 2000, the assignee and holder of two of the demand notes payable by
the Company to Oeri Finance Inc., in the principal face amount of $1,939,375,
filed to collect the amounts due under the notes as well as seek return of
certain securities seized by the government. The Company filed an answer and
asserted defenses to payment including, among other defenses, a right of set-off
for certain expenses incurred by us in connection with the governmental
investigation described above and related matters. In February 2002, the US
District Court, Central District of California, issued an Order granting the
assignee's application for writ of pre-judgment attachment against the assets of
JB Oxford Holdings, Inc. A final determination of these issues on the merits has
yet to be made. The notes and underlying obligations have previously been
disclosed by the Company in its Annual Reports on Form 10-K and Quarterly
Reports on Form 10-Q since the issuance of the notes in July 1997. The Company
believes that it has valid defenses and set-offs to the claims and intends to
vigorously defend itself, although no assurance can be given as to the outcome
of this matter.
Future annual minimum rental payments required under operating leases that have
initial or remaining non-cancellable lease terms in excess of one year as of
December 31, 2001, were as follows:
Year ending December 31:
2002 $ 322,692
2003 111,888
2004 --
2005 --
2006 --
Thereafter --
-----------
Total $ 434,580
===========
55
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
Additions
Balance at charged to
beginning of costs and Balance at end of
period expenses Deductions period
2001:
Allowance for:
Receivable from customers $ 2,577,451 $ 1,146,244 $ (1,098,517) $ 2,625,178
2000:
Allowance for:
Receivable from customers $ 1,601,178 $ 1,524,655 $ (548,382) $ 2,577,451
1999:
Allowance for:
Receivable from broker/ dealers and
clearing organizations $ 2,103,802 $ -- $ (2,103,802) $ --
Receivable from customers 5,354,864 1,829,102 (5,582,788) 1,601,178
Other Receivables 1,979,793 -- (1,979,793) --
Deductions represent amounts written off.
56
SIGNATURES
Pursuant to the requirements of Section 13 or 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
- ---------------------------------
Christopher L. Jarratt,
Chairman of the Board and
Chief Executive Officer
KNOW ALL MEN BY THESE PRESENTS that each person whose signature appears
below constitutes and appoints Christopher L. Jarratt his or her true and lawful
attorney-in-fact and agent, with full power of substitution and resubstitution,
for him or her and in his name or her name, place and stead, in any and all
capacities, to sign any and all amendments to this Annual Report of Form 10-K,
and to file the same, with all exhibits thereto and other documents in
connection therewith, with the Securities and Exchange Commission, granting unto
said attorney-in-fact and agent, full power to do and perform each and every act
and things required and necessary to be done in and about the premises, as fully
as he or she might or could do in person, hereby ratifying and confirming all
that said attorney-in-fact and agent or his substitutes or substitute, may
lawfully do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of JB Oxford Holdings,
Inc. and in the capacities and on the date indicated:
/s/Christopher L. Jarratt /s/James G. Lewis
- ----------------------------------- ------------------------------------------
Christopher L. Jarratt James G. Lewis, President, Chief Operating
Chairman of the Board and Officer and 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
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David G. Mahood, Director
/s/Terry N. Pefanis
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Terry N. Pefanis, Director
March 28, 2002
57