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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, 2000
OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ______________ to _______________
Commission File Number 0-16240
JB Oxford Holdings, Inc.
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(Exact name of registrant as specified in its charter)
UTAH 95-4099866
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) 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 16, 2001 was approximately $18,974,656 computed based on
the average bid and asked prices of the stock as of March 16, 2001.
Indicate the number of shares outstanding of each of the registrant's
classes of common stock, as of the latest practicable date: 14,055,086 shares
outstanding at March 16, 2001.
Portions of the registrant's definitive proxy statement for the 2001 annual
meeting 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. See "Item 1. Business Overview - Forward-Looking
Statements and Risk Factors."
Item 1. Business Overview
JB Oxford Holdings, Inc. (together with its consolidated subsidiaries, the
"Company" or "JBOH"), through its wholly-owned subsidiaries, is engaged in the
business of providing brokerage and related financial services to retail
customers and broker-dealers nationwide. The Company is fully integrated,
providing retail brokerage services, clearing services and market making
services to its customers.
The Company was incorporated in Delaware on March 31, 1987, and completed an
initial public offering in September 1987. The Company changed its state of
incorporation to Utah in 1990. The Company's business is headquartered in Los
Angeles and has additional offices in New York and Miami.
The Company's primary subsidiary is JB Oxford & Company ("JBOC"), a registered
broker-dealer offering the following services: (i) providing discount and
electronic brokerage services to the investing public; (ii) providing clearing
and execution services to independent broker-dealers ("correspondents") on a
fully-disclosed basis; and (iii) acting as a market maker in stocks traded on
NASDAQ National Market System and other national exchanges.
For 2000, the Company's consolidated revenues were $100,861,961, which consisted
primarily of commission and interest income from the Company's discount and
electronic brokerage division.
Discount and Electronic Brokerage Services
- ------------------------------------------
In 1994, the Company began its strategy of providing retail investors a full
line of brokerage services at discount prices. This strategy proved successful
as few brokerage firms provided brokerage services at discount prices at that
time. The Company was able to capitalize on this early position by providing
customer service and attention comparable to that offered by larger full-service
brokerage firms charging higher fees. Today, JBOC 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. JBOC customers are offered the choice of being
assigned a personal account representative or calling directly to the Company's
trading desk for order placement and account information. The marketing strategy
implemented in recent years emphasizes this higher level of service compared to
other discount brokerages.
In 1995, in order to continue its commitment to providing a full line of
brokerage services to its customers, the Company began providing electronic
brokerage services. These services initially
2
included computer trading through a dial-up networking connection and automated
telephonic trading services. Since that time, the Company has made many
improvements to these services, including the launch of Internet trading in
1996. The Company continues to upgrade and improve its electronic brokerage
technologies in order to provide its customers with the resources necessary to
conveniently and economically execute securities transactions and access related
financial information. In addition to its trading capabilities, the Company's
Internet site (www.jboxford.com) currently provides market quotes, charts,
company research, and customer account information, such as cash balances,
portfolio balances and similar information. To further enhance its brokerage
services, JBOC 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. The Company is positioned to take
advantage of this growing market. Many brokerage firms that compete directly
with the Company have positioned themselves to take advantage of this
opportunity. The growth of firms providing the electronic delivery of financial
services, particularly those on the Internet, has been strong in recent years.
In September 1999, JBOC unveiled its enhanced web site featuring n*power, an
integrated financial services account offering free Internet access, online
trading and electronic financial services including online bill payment and free
ATM/check card for customers maintaining a minimum account balance. The Company
also redesigned its web site at www.jboxford.com to include a brighter look,
improved speed, easier navigation and an expanded selection of timely market
information and research tools. The new website also offers live, one-on-one
technical support utilizing hosted live chat technology. The Company will
continue to enhance its online services to its customers.
The Company also caters to customers within niche markets by providing services
that address the particular needs of these customer bases. Examples of these
markets include the Company's efforts to develop divisions that cater
specifically to Asian, Latin American and European customers. The Company serves
the needs of the Asian American community through its two locations in the Los
Angeles area, and the Latin American community through its office in Miami. The
Company also provides discount brokerage services throughout Europe from its New
York office and its Internet trading site. These niche-marketing efforts
initially began as an outgrowth of the Company's commitment to meeting the needs
of its domestic U.S. customers, such as providing account representatives who
are fluent in a customer's preferred language. With the growth in the electronic
delivery of financial services, it is becoming economically feasible to provide
these services to both domestic and international customers using the Internet.
The Company intends to continue this niche marketing strategy; however, these
markets are not expected to constitute a material portion of the Company's
business in 2001.
Clearing and Execution Services
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JBOC is self-clearing and as of March 20, 2001, JBOC 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. The Company
continues 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. JBOC's correspondents
(i.e., introducing brokers) are responsible for all customer contact, including
opening customer accounts, determining customer
3
suitability, placing customer orders, and responding to customer inquiries.
JBOC, acting as the clearing broker, generally provides clearing and execution
services including the receipt, confirmation, settlement, delivery and
record-keeping functions involved in a securities transactions as well as
providing back office functions such as: maintaining customer accounts;
extending credit (in a margin account) to the customer; settling security
transactions with the Depository Trust Company ("DTC") and the National
Securities Clearing Corporation ("NSCC"); preparing customer trade confirmations
and statements; performing certain cashiering and safe keeping functions;
transmitting tax information to the customer and tax authorities; forwarding
proxies and other shareholder information to customers; and similar activities.
In providing clearing and execution services to correspondents, JBOC assumes
certain responsibilities for the possession or control of customer securities
and assets. As a result, JBOC's statements of financial condition reflect
amounts receivable from customers on margin loans as well as amounts payable to
customers and correspondents related to free credit balances held by JBOC for
the benefit of its customers and correspondents.
There are inherent risks in operating as a clearing agent. See "Forward-Looking
Statements and Risk Factors - Clearing Operations" below. Since JBOC makes loans
to customers collateralized by customer securities, JBOC incurs the risk of a
market decline that could reduce the value of the customer's underlying
collateral securities below the customer's loan amount. For this reason, credit
exposure must be monitored and actions must be taken on a timely basis to
mitigate and minimize JBOC's exposure to these risks. JBOC mitigates its credit
exposure by monitoring the adequacy of collateral from both individual customers
and correspondents. Additionally, JBOC is subject to the margin rules
established by the Board of Governors of the Federal Reserve System and the
National Association of Securities Dealers, Inc. ("NASD").
Acting as a clearing agent in the securities business requires both working
capital and capital for regulatory requirements. See "Net Capital Requirements"
below, for a more extensive discussion of capital requirements.
Market Making Activities
- ------------------------
In order to facilitate the execution of security transactions for its own
customers and the customers of its correspondents, JBOC acts as a market maker
for approximately 630 public corporations whose stocks are traded on the NASDAQ
National Market System, New York Stock Exchange ("NYSE") or other national
exchanges.
Generally, the Company does not maintain inventories of securities for sale to
its customers. However, the Company does engage in certain principal
transactions where, in response to a customer order, the Company will go at risk
to the marketplace to attempt to capture the spread between the bid and offer.
Most of the Company's larger competitors are engaged in similar market making
activities through subsidiaries or receive order flow payments from companies
engaged in such market making activities. The Company believes it can maintain
better control and be assured of proper executions of customer trades by
providing these market making services directly to its customers.
The Company's market making activities concentrate on the execution of
unsolicited transactions for customers and are required to be in compliance with
the NASD rules regarding best execution.
4
Interest Income
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The Company derives a portion of its income from interest generated on the
margin accounts of its customers and, to a lesser extent, those of its
correspondents. A margin account allows the customer to deposit less than the
full cost of the security purchased while the Company lends the balance of the
purchase price to the customer, secured by the purchased securities. Customers
are charged interest on the amount borrowed to finance their margin transactions
ranging from 0.25% below to 2.75% above the broker call rate, which is the rate
at which brokers can generally obtain financing using margined and firm owned
securities as collateral. As of December 31, 2000, the total of all debit
balances held in active margin accounts was approximately $270,000,000. The
Company finances its margin lending business primarily through customer free
credit balances, stock loan and existing credit lines with commercial lenders.
Pursuant to written agreements with customers, broker-dealers are permitted by
the Securities and Exchange Commission's ("SEC") regulations to lend customer
securities held as collateral in margin accounts. Customer free credit balances
were approximately $185,000,000 at December 31, 2000. These credit balances are
available to finance customer margin balances subject to the requirements of SEC
rules. The Company also utilizes stock loan arrangements with other broker
dealers to finance customer debit balances.
In addition to the above financing, JBOC has established omnibus/financing
accounts and lines of revolving credit with other broker-dealers and banking
institutions with an aggregate borrowing limit approximating $180,000,000.
Securities Industry Practices
- -----------------------------
JBOC is registered with the SEC and the NASD and is a member of the following
organizations: Chicago Stock Exchange, Pacific Stock Exchange, Cincinnati Stock
Exchange, DTC, NSCC and Options Clearing Corporation ("OCC"). JBOC is registered
as a securities broker-dealer in all 50 states and the District of Columbia.
JBOC is also a member of the Securities Investors Protection Corporation
("SIPC"), which provides JBOC's customers with insurance protection for amounts
of up to $500,000 each, with a limitation of $100,000 on claims for cash
balances. JBOC has also acquired an additional $10,000,000 in insurance coverage
($1,000,000 for cash balances) through National Union Fire Insurance Company of
Pittsburgh, a subsidiary of American International Group ("AIG"), as added
protection for individual customers' securities, covering all clients of JBOC's
fully-disclosed correspondents and discount customers.
JBOC is subject to extensive regulation by federal and state laws. The SEC is
the federal agency charged with administration of the federal securities laws.
Much of the regulation of broker-dealers, however, has been delegated to
self-regulatory organizations, principally the NASD and the national securities
exchanges. These self-regulatory organizations adopt rules, subject to approval
by the SEC, which govern the industry and conduct periodic reviews of member
broker-dealers. Securities firms are also subject to regulation by state
securities commissions in the states in which they do business. The SEC,
self-regulatory organizations, and state securities commissions may conduct
administrative proceedings which can result in censure, fine, suspension, or
expulsion of a broker-dealer, its officers or employees. The principal purpose
of regulation and discipline of broker-dealers is the protection of customers
and the securities markets, rather than protection of creditors and shareholders
of broker-dealers. See "Forward-Looking Statements and Risk Factors - Government
Regulation" below.
5
Net Capital Requirements
- ------------------------
JBOC is subject to SEC Rule 15c3-1, Net Capital Requirements For Brokers or
Dealers (the "Rule"), which establishes minimum net capital requirements for
broker-dealers. The Rule is designed to measure financial integrity and
liquidity in order to assure the broker-dealer's financial stability within the
securities market. The net capital required under the Rule depends in part upon
the activities engaged in by the broker-dealer.
In computing net capital under the Rule, various adjustments are made to exclude
assets not readily convertible into cash and to reduce the value of other
assets, such as a firm's position in securities. A deduction is made against the
market value of the securities to reflect the possibility of a market decline
prior to sale. Compliance with the Rule could require intensive use of capital
and could limit JBOC's ability to pay dividends to the Company, which in turn
could limit the Company's ability to pay dividends to its shareholders. Failure
to comply with the Rule could require the Company to infuse additional capital
into JBOC, could limit the ability of the Company to pay its debts and/or
interest obligations, and may subject JBOC to certain restrictions which may be
imposed by the SEC, the NASD, and other regulatory bodies. Moreover, in the
event that the Company could not or elected not to infuse the additional capital
or otherwise bring the JBOC into compliance, JBOC would ultimately be forced to
cease operations. See "Forward-Looking Statements and Risk Factors - Net Capital
Requirements" below.
At December 31, 2000, and 1999 JBOC elected to use the alternative method
permitted by the Rule, which requires it to maintain minimum net capital, as
defined, equal to the greater of $250,000 or 2% of aggregate debit balances
arising from customer transactions, as defined. At December 31, 2000, JBOC had
net capital of $28,860,901, which was $23,275,591 in excess of the minimum
amount required. At December 31, 1999, JBOC had net capital of $27,491,404,
which was $18,699,718 in excess of the minimum amount required.
Employees
- ---------
As of March 20, 2001, the Company and its subsidiaries had approximately 238
employees. The Company considers its 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.
In accordance with "plain English" guidelines provided by the SEC, the
Forward-Looking Statements and Risk Factors have been written in the first
person.
6
Managing a Changing Business
- ----------------------------
Our business and operations have changed substantially since we began offering
discount brokerage services, and we expect the pace of change in the brokerage
business to continue. This rapid change places significant demands on our
administrative, operational, financial and other resources.
We rely on a number of third parties to assist in the processing of our
transactions, including online and Internet service providers, back office
processing organizations, service providers and market makers. Any problems
caused by these third parties could have a material adverse effect on our
business, financial condition and operating results.
Early Stage of Market Development
- ---------------------------------
The market for discount and electronic brokerage services, particularly over the
Internet, is at an early stage of development and is rapidly evolving.
Consequently, demand and market acceptance for recently introduced services and
products are subject to a high level of uncertainty.
Much of our growth will depend on consumers adopting the Internet as a method of
doing business. The Internet could lose its viability due to slow development or
adoption of standards and protocols to handle increased activity, or due to
increased governmental regulation. Moreover, several key issues including
security, reliability, cost, ease of use, accessibility and quality of service
continue to be concerns and may negatively affect the growth of Internet use or
commerce on the Internet.
The Securities Industry; Concentration of Services
- --------------------------------------------------
We, like other securities firms, are directly affected by economic and political
conditions, broad trends in business and finance and changes in volume and price
levels of securities transactions. In recent years, the U.S. securities markets
have fluctuated considerably and a downturn in these markets could adversely
affect our operating results. In October 1987 and October 1998, the stock market
suffered major declines, as a result of which many firms in the industry
suffered financial losses, and the level of individual investor trading activity
decreased after these events. Reduced trading volume and prices have 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. When trading volume is low, our profitability may be
adversely affected because our overhead remains relatively fixed. Severe market
fluctuations in the future could have a material adverse effect on our business,
financial condition and operating results. Some of our competitors with more
diverse product and service offerings might withstand such a downturn in the
securities industry better than we would. See "Forward-Looking Statements and
Risk Factors -- Substantial Competition" below.
Our brokerage business, by its nature, is subject to various other risks,
including customer default and employee misconduct and error. We sometimes allow
customers to purchase securities on margin, therefore we are subject to risks
inherent in extending credit. This risk is especially great when the market is
rapidly declining and the value of the collateral we hold could fall below the
amount of a customer's indebtedness. Under specific regulatory guidelines, any
time we borrow or lend securities, we must correspondingly disburse or receive
cash deposits. If we fail to maintain adequate cash deposit levels at all times,
we run the risk of loss if there are sharp changes in market values of many
securities and parties to the borrowing and lending transactions fail to honor
their commitments. Any such losses could have a material adverse effect on our
business, financial condition and operating results.
7
Clearing Operations
- -------------------
Our clearing operations expose us to risks that exceed the simple risk of loss
of business due to loss of retail customers or 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 correspondent's own customer and firm accounts and
activities in an effort to prevent such losses if a correspondent fails. Any
such losses could have a material adverse effect on our business, financial
condition and operating results. See "Clearing and Execution Services" above.
Delays In Introduction of New Services and Products
- ---------------------------------------------------
Our future success depends in part on our ability to develop and enhance our
services and products. There are significant risks in the development of new
services and products or enhanced versions of existing services and products,
particularly in our electronic brokerage business. We may also experience
difficulties that could delay or prevent the development, introduction or
marketing of these services and products. Additionally, these new services and
products may not adequately meet the requirements of the marketplace or achieve
market acceptance. If we are unable to develop and introduce enhanced or new
services and products quickly enough to respond to market or customer
requirements, or if they do not achieve market acceptance, our business,
financial condition and operating results will be materially adversely affected.
Substantial Competition
- -----------------------
The market for discount and electronic brokerage services is rapidly evolving
and intensely competitive. We face direct competition from firms offering
discount and electronic brokerage services such as Charles Schwab & Co., Inc.,
Fidelity Brokerage Services, Inc., Waterhouse Securities, Inc., Ameritrade, Inc.
(a subsidiary of Ameritrade Holding Corporation), and E*TRADE Group, Inc. We
also encounter competition from established full commission brokerage firms such
as PaineWebber Incorporated, Merrill Lynch, Pierce, Fenner & Smith Incorporated
and Solomon Smith Barney, Inc., among others. In addition, we compete with
financial institutions, mutual fund sponsors and other organizations. Further,
the Company has seen a substantial increase in the number of companies providing
discount and electronic brokerage services in recent years, and this trend is
expected to continue.
Many of our competitors have longer operating histories and significantly
greater financial, technical, marketing and other resources than we do. In
addition, many of our competitors have greater name recognition and larger
customer bases that could be leveraged, thereby gaining market share from us.
Our competitors may conduct more extensive promotional activities and offer
better terms and lower prices to customers than we do. There can be no assurance
that we will be able to compete effectively with current or future competitors
or that such competition will not have a material adverse effect on our
business, financial condition and operating results.
Customer Concentration
- ----------------------
While no single correspondent broker-dealer or customer represents more than 10%
of the Company's consolidated revenues, the Company has several significant
customers whose loss, in the aggregate, could be material to the Company. The
Company believes that the likelihood of losing a significant number of such
customers is remote.
8
Acquisitions
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We may acquire other companies or technologies in the future, and we from time
to time evaluate such opportunities. Acquisitions entail numerous risks,
including difficulties in the assimilation of acquired operations and products,
diversion of management's attention from other business concerns, amortization
of acquired intangible assets and potential loss of key employees of acquired
companies. We have limited experience in assimilating acquired organizations
into our operations. No assurance can be given as to our ability to integrate
successfully any operations, personnel, services or products that might be
acquired in the future. Failure to successfully assimilate acquired
organizations could have a material adverse effect on our business, financial
condition and operating results.
Strategic Relationships
- -----------------------
We have established a number of strategic relationships with online and Internet
service providers and software and information service providers. There can be
no assurance that any such relationships will be maintained, or that if they are
maintained, they will be successful or profitable. Additionally, we may not
develop any new such relationships in the future.
Government Regulation
- ---------------------
The securities industry in the United States is subject to extensive regulation
under both federal and state laws. See "Securities Industries Practices" above.
Broker-dealers are subject to regulations covering all aspects of the securities
business. Because we are a self-clearing broker-dealer and provide clearing and
execution services for our correspondents, we have to comply with many complex
laws and rules relating to possession and control of customer funds and
securities, margin lending and execution and settlement of transactions.
The SEC, the NASD or other self-regulatory organizations and state securities
commissions can censure, fine, issue cease-and-desist orders or suspend or expel
a broker-dealer or any of its officers or employees. Our ability to comply with
all applicable laws and rules is largely dependent on our establishment and
maintenance of a compliance system to ensure such compliance, as well as our
ability to attract and retain qualified compliance personnel. We could be
subject to disciplinary or other actions due to claimed noncompliance in the
future, which could have a material adverse effect on our business, financial
condition and operating results.
Our mode of operation and profitability may be directly affected by additional
legislation, changes in rules promulgated by the SEC, the NASD, the Board of
Governors of the Federal Reserve System, the various stock exchanges and other
self-regulatory organizations, or changes in the interpretation or enforcement
of existing laws and rules.
We have initiated an aggressive marketing campaign designed to bring brand name
recognition to JBOC. All marketing activities by JBOC are regulated by the NASD,
and JBOC compliance officers review all marketing materials prior to release.
The NASD can impose certain penalties for violations of its advertising
regulations, including censures or fines, suspension of all advertising, the
issuance of cease-and-desist orders or the suspension or expulsion of a
broker-dealer or any of its officers or employees.
9
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.
Net Capital Requirements
- ------------------------
The SEC, the NASD and various other regulatory agencies have stringent rules
with respect to the maintenance of specific levels of net capital by securities
broker-dealers. Net capital is the net worth of a broker or dealer (assets minus
liabilities), less deductions for certain types of assets. If a firm fails to
maintain the required net capital it may be subject to suspension or revocation
of registration by the SEC and suspension or expulsion by the NASD, and could
ultimately lead to the firm's liquidation. If such net capital rules are changed
or expanded, or if there is an unusually large charge against net capital,
operations that require the intensive use of capital would be limited. Such
operations may include trading activities and the financing of customer account
balances. Also, our ability to withdraw capital from brokerage subsidiaries
could be restricted, which in turn could limit our ability to pay dividends,
repay debt and redeem or purchase shares of our outstanding stock. A large
operating loss or charge against net capital could adversely affect our ability
to expand or even maintain our present levels of business, which could have a
material adverse effect on our business, financial condition and operating
results. See "Business Overview - Net Capital Requirements" above.
Systems Failure
- ---------------
We receive and process trade orders through internal trading software, the
Internet, and touch-tone telephone. Thus, we depend heavily on the integrity of
the electronic systems supporting this type of trading. Heavy stress placed on
our systems during peak trading times 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 or natural disaster could cause a systems
failure. Any systems failure that interrupts our operations could have a
material adverse effect on our business, financial condition and operating
results.
Encryption Technology
- ---------------------
A significant barrier to online commerce is the secure transmission of
confidential information over public networks. We rely on encryption and
authentication technology to provide secure transmission of confidential
information. There can be no assurance that advances in computer and
cryptography capabilities or other developments will not result in a compromise
of the algorithms we use to protect customer transaction data. If a compromise
of our security were to occur, it could have a material adverse effect on our
business, financial condition and operating results.
10
Stock Price Volatility
- ----------------------
The trading price of our common stock has been and may continue to be subject to
wide fluctuations. For example, during the twelve months ended March 20, 2001,
our common stock closed as low as $1.28 and as high as $9.03. Our stock price
may fluctuate in response to a number of events and factors, such as quarterly
variations in operating results, announcements of technological innovations or
new products by the Company or its competitors, changes in financial estimates
and recommendations by securities analysts, the operating and stock price
performance of other companies that investors may consider comparable, and news
reports relating to trends in our markets. In addition, the stock market in
general, and the market prices for Internet related companies in particular,
have experienced extreme volatility that has often been unrelated to operating
performance. These broad market and industry fluctuations may adversely affect
the price of our common stock, regardless of our operating performance.
Item 2. Properties
The principal offices of the Company and JBOC are located at 9665 Wilshire
Boulevard, 3rd Floor, Beverly Hills, California 90212. As of March 20, 2001, the
Company and its subsidiaries lease or conduct their operations from and have
their administrative offices at the following locations:
Location Area (Sq. Feet) Principal Use Lease
9665 Wilshire Blvd., 3/rd/, 2/nd/, 5/th/ and 27,240 JBOH and JBOC Expires Dec. 2010
8/th/ Floors, Beverly Hills, CA 90212
One Exchange Plaza, 19/th/ 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
The Company's office, and the offices and facilities of its subsidiaries, are
considered by management to be generally suitable and adequate for their
intended purposes.
Item 3. Legal Proceedings
The Company and its subsidiaries are a party to a number of pending legal or
administrative proceedings, including suits involving various customers that
allege damages arising as a result of brokerage transactions by the Company. All
of the legal and administrative proceedings have arisen in the ordinary conduct
of its business. Those that may have a significant impact on the Company have
been disclosed in previous filings, and an update of the ongoing federal
investigation is provided 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 connection with
the USAO's investigation of the
11
Company's prior management. While the Company maintains its innocence, it agreed
to pay a total of $2.0 million over three years to settle the USAO matter and to
reimburse the USAO for the substantial expense associated with the two and a
half-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 $1.0 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, JBOC 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 laws. The Company paid $500,000 of the USAO
settlement amount in the first quarter of 2000, $500,000 in the first quarter of
2001, and the remainder will be paid in equal annual installments over two
years. If the SEC accepts the regional office's recommendation, payments to the
USAO and SEC would total $3.0 million. This amount has been accrued and included
in accounts payable and accrued liabilities. The Company does not believe that
current management was the subject of the investigation and the USAO did not
bring charges against the Company.
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 2000.
12
PART II
Item 5. Market for Registrant's Common Equity & Related Shareholder Matters
The Company's common stock is traded in the over-the-counter market with prices
quoted on the NASD's Automated Quotation System SmallCap market ("NASDAQ") under
the trading symbol "JBOH." Quotations given are from NASDAQ and represent prices
between dealers exclusive of a retail mark-up, mark-down, or commission. They do
not necessarily represent actual transactions.
Stock Price and Dividend Data
Month Ended
1-31-01 2-29-01
-------------- -------------
Price range of common stock
High $3.00 $2.63
Low 1.56 1.44
Close at end of period 2.50 1.59
-----------------------------------------------------------------------------------------
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
-----------------------------------------------------------------------------------------
Quarter Ended
3-31-99 6-30-99 9-30-99 12-31-99
-------------- ------------- -------------- --------------
Price range of common stock
High $25.75 $25.13 $11.13 $10.38
Low 1.41 8.69 7.00 7.44
Close at end of period 7.25 14.13 7.69 7.69
The number of record holders of the Company's common stock as of March 20, 2001
was 228. The Company believes the number of beneficial holders of the Company's
common stock as of June 23, 2000, the most recent date for which this data is
available to the Company, was approximately 19,860.
Dividends
- ---------
JBOH has not declared or paid cash dividends on its common stock. Given the
Company's past expansion and overall business growth, Management believes it has
been prudent to retain and increase the Company's capital base. The Company does
not currently anticipate paying cash dividends. Future payments of dividends
will depend upon, among other factors, regulatory restrictions, the Company's
consolidated earnings, overall financial condition, and cash and capital
requirements.
13
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)
2000 1999 1998 1997 1996
---- ---- ---- ---- ----
Income Statement Data:
- ----------------------
Revenues $100,862 $104,212 $67,268 $69,962 $57,599
Net Income (Loss) Before Extraordinary Item 4,973 10,008 (1,839) 1,523 4,040
Net Income (Loss) 4,973 10,445 (1,839) 1,523 4,040
Basic Earnings (Loss) Before Extraordinary
Item 0.35 0.70 (0.13) 0.12 0.44
Basic Earnings (Loss) Per Share 0.35 0.73 (0.13) 0.12 0.44
Diluted Earnings (Loss) Before
Extraordinary Item 0.22 0.43 (0.13) 0.09 0.23
Diluted Earnings (Loss) Per Share 0.22 0.45 (0.13) 0.09 0.23
Dividends -- -- -- -- --
Balance Sheet Data:
- -------------------
Total Assets $352,254 $497,739 $405,990 $341,586 $330,336
Long-term and Subordinated Debt 3,734 -- 1,250 1,500 2,000
Liabilities (Excluding Long-Term) 318,628 471,368 390,374 326,463 315,978
Total Shareholders' Equity 29,892 26,371 15,617 15,123 12,358
Book Value Per Share* 2.13 1.83 1.12 1.07 1.18
* Computed using shareholders' equity divided by total outstanding common stock.
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 the actual results, performance, or achievements
of the Company to be materially different from any future results, performance,
or achievements, expressed or implied by the forward-looking statements. Any
potential investor in the Company should carefully consider the matters
discussed in Item 1. "Business Overview - Forward Looking Statements and Risk
Factors" above.
Business Overview
- -----------------
The Company, through its wholly and majority-owned subsidiaries, provides
discount brokerage services and related financial services to retail customers
and broker-dealers nationwide. The
14
Company's primary subsidiary, JB Oxford & Company ("JBOC"), 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 the Company to take advantage of the
opportunities presented by the expected changes in the financial services
industry. To that end, in September 1999, the Company launched a new account
service package called JB Oxford n*power featuring free Internet access, online
trading capabilities, electronic financial services - including online bill
payment and a free ATM/check card - for customers maintaining a minimum account
balance. The Company 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. The website also offers live, one-on-one
technical support utilizing voiceover IP technology.
Results of Operations
- ---------------------
Years Ended December 31, 2000, 1999 and 1998
- --------------------------------------------
Revenues
- --------
The Company's total revenues were $100,861,961 in 2000, a decrease of 3% from
$104,211,781 in 1999, which was an increase of 55% from $67,268,325 in 1998. 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. The primary reason for the increase in total revenues from 1998
to 1999 was an increase in all of the Company's business divisions, including a
170% increase in trading revenues and a 116% increase in clearing revenues.
Clearing and execution revenues decreased 70% to $7,607,517 in 2000, from
$25,033,821 in 1999, which was up 116% from $11,565,427 in 1998. The decline in
2000 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. The increase in 1999 was
from an increase in day-trading volumes of 275% over 1998.
Interest revenues increased 39% to $40,154,797 in 2000, from $28,930,515 in
1999, which was an increase of 24% from $23,260,659 in 1998. Interest revenue
became the largest revenue source in 2000, accounting for 40% of the Company's
revenues as compared to 28% and 35% in 1999 and 1998 respectively. 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 decline in 2001 as balances and interest rates have
trended down.
15
Commission revenues increased 10% to $37,148,643 in 2000, from $33,827,615 in
1999, which was up 27% from $26,600,214 in 1998. Commission revenue was the
largest source of revenue to the Company during 1999 and 1998, consisting of 32%
and 40%, respectively, of total revenues during these years. In 2001, management
anticipates decreased commission revenue, as the entire industry experiences
decreased volume in the current downtrending market. The Company will 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 5% to $14,692,048 in 2000, from
$15,517,700 in 1999, which was up 170% from $5,747,187 in 1998. 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. The increase in 1999 was attributable to an
increase in trading volume from the Company's discount and on-line brokerage
operations. Trading profits dramatically increased in 1999 due to the Company's
consistently trading orderflow from its retail operation and the liquidation of
certain investment positions held during 1998. The increase from 1998 was
attributable to the discontinuance, in the fourth quarter of 1998, of
proprietary trading positions and investment banking activities that negatively
affected trading profits, and from an increase in the Company's market-making
activities in listed securities. Management anticipates a decrease in trading
revenues to track the expected decrease in commission volumes of the discount
and on-line operations of the Company for 2001.
Other revenues increased 40% to $1,258,956 in 2000, from $902,130 in 1999, which
was up 851% from $94,838 in 1998. The increase in other revenue in 2000 and 1999
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 $92,203,973 in 2000, an increase of 6% from
$86,980,546 in 1999, which was a increase of 32% from $66,055,680 in 1998. 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 increase in expense for 2000 was in interest expense,
which increased 63% in 2000. This is directly related to the increase in
interest revenue discussed above. Additionally, the cost to finance customer
debits increased as the Company utilized higher interest short-term borrowings
to replace the reduction of customer credits during the year 2000. The overall
increase in expenses during 1999 and 1998 was primarily the result of growth in
the Company's discount and online brokerage divisions. As a percentage of total
revenues, total operating expenses accounted for 91%, 83% and 98% in 2000, 1999
and 1998, 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.
Data processing expense decreased 13% to $8,788,183 in 2000, from $10,114,145 in
1999, which was up 64% from $6,168,764 in 1998. The decrease in data processing
expense in 2000 was the result of decline in correspondent day-trading clearing
activities. This decline was offset in part by an increase in discount and
market making volumes. The increase in 1999 over 1998 was the result of growth
in correspondent clearing activities, as well as discount and market making
volumes.
Expenses for salaries increased 13% in 2000 to $11,533,833 from $10,176,438 in
1999, which was up 5% from $9,725,313 in 1998. The Company took steps in late
2000 to reduce its overall workforce by 12% and streamline operations. Occupancy
and equipment costs increased 21% to
16
$5,988,058 in 2000, from $4,966,437 in 1999, which was up 3% from $4,819,812 in
1998. These increases were primarily the result of new computer equipment and
technology to improve the informational systems of the Company.
Promotional expense decreased 48% to $6,624,512 in 2000, from $12,807,200 in
1999. 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 1999, the Company's promotional expenses increased 226% to
$12,807,200 from $3,929,062 in 1998. In 2001, the Company expects to spend
approximately $200,000 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 increased 49% to $6,831,981 in 2000 from $4,592,666 in 1999,
which was an increase of 37% from $3,346,260 in 1998. Included in the increase
for 2000 is $2,679,508 of consulting expense to prepare for a conversion to a
different back office system. Bad debt expense decreased 16% to $1,524,655 in
2000 from $1,829,102 in 1999, which was a decrease of 9% from $2,019,454 in
1998.
The Company recorded settlement expense of $867,171 in 2000, which was a
decrease of 66% from $2,537,880 in 1999, which was a increase of 302% from
$630,539 in 1998. The increase 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 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).
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 omnibus/financing accounts and lines of revolving credit with other
broker-dealers and banking institutions with an aggregate borrowing limit of
approximately $180,000,000 at December 31, 2000. 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, 2000, 1999 and 1998 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
17
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, 2000, JBOC had regulatory net capital of $28,860,901,
which exceeded the minimum requirement by $23,275,591.
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 and
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).
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, 2001. 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.
18
Liquidity at December 31, 2000, 1999 and 1998
- ---------------------------------------------
The Company's cash position, including securities purchased under agreements to
resell, increased during 2000 by $1,980,905 to $8,004,000 at year-end. This
compares with a net increase in cash and cash equivalents of $3,526,523 in 1999,
and a net decrease of $101,490 in 1998. 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 (used in) operating activities was $3,464,036, $5,607,036
and $(136,340) for 2000, 1999 and 1998, respectively. The Company's net cash
provided by (used in) operating activities is impacted by changes in the
brokerage-related assets and liabilities of JBOC.
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.
During 1998, the most significant use of cash was the increase in cash
segregated under federal regulations in the amount of $75,247,813. As a result
of a decrease in securities loaned at December 31, 1998, payables to
broker-dealers and clearing organizations decreased $32,158,241 to $58,064,209.
The most significant source of cash in operations was the change in payables to
customers of $90,925,459. 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 2000, 1999 and 1998 was
$4,773,089, $1,512,160, and $875,473, respectively. 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 acquired
office space next door to its existing Beverly Hills office and will relocate
the retail brokerage business to this space during the second quarter of 2001.
The Company has no plans to open additional offices and has no significant
commitments for capital expenditures.
19
Cash Flows From Financing Activities
- ------------------------------------
Financing activities provided $3,289,958 in cash during 2000, primarily 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.
Net cash used in financing activities was $568,353 during 1999, and net cash
provided from financing activities was $910,323 in 1998. In 1999 the most
significant cash used in financing activities was the acquisition of treasury
stock in the amount of $586,925. During 1998 the most significant source of cash
was loans issued from shareholders of $1,250,000.
In 1998, the company's financing activities provided cash primarily through the
issuance of additional debt securities which are convertible into the Company's
common stock. See "Liquidity and Capital Resources" above.
JB OXFORD & COMPANY
SHORT TERM BORROWING
(Amounts in thousands)
Category of aggregate short-term
borrowings a b c d e
------------------------------------------------
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%
Year Ended December 31, 1998
collateralized by:
Customer securities $ -- $ -- $ 6,005 $ 1,366 8.4%
a) Balance at end of period
b) Weighted average interest rate at end of the period
c) Maximum amount outstanding during the period
d) Average amount outstanding during the period
e) Weighted average interest rate during the period
The weighted average interest rate during the period was calculated by factoring
the balances at the end of each month at the various rates, and computing a
weighted average on the results.
During the past year, the Company has experienced moderate growth in its
customer transactions, most of which is attributable to the first quarter. In
order for the Company to continue this growth and 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 as the Company's business continues to grow.
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.
20
Recent Accounting Pronouncements
- --------------------------------
The Financial Accounting Standards Board (FASB) issued Statement of Financial
Accounting Standards (SFAS) No. 133, "Accounting for Derivative Instruments and
Hedging Activities", as amended by SFAS No. 138 which establishes accounting and
reporting standards requiring that every derivative instrument be recorded in
the Statement of Financial Condition as either an asset or as a liability
measured at is fair value and that changes in the fair value be recognized
currently in the statement of operations. The Company implemented the provision
of this new standard January 1, 2001. Based on the current operations of the
Company, the impact of adopting SFAS No. 133 did not have a material effect on
the Company's financial position or results of operations.
In September of 2000, the FASB issued SFAS No. 140 "Accounting for Transfers and
Servicing of Financial Assets and Extinguishments of Liabilities - a replacement
of FASB Statement No. 125." As of December 31, 2000, the Company has adopted
accounting and disclosure requirements of SFAS No. 140 as set forth in
paragraphs 15 and 17 of the Statement, respectively. The adoption of SFAS No.
140 did not have an impact on the financial condition or results of operations
of the Company.
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.
21
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 630 public corporations whose
stocks are traded on the NASDAQ National Market System, NYSE or other national
exchanges. The Company selects companies in which it makes a market based on a
review of the current market activity, and also to facilitate trading activity
of its own and correspondent's clients. Market making may result in a
concentration of securities which may expose the Company to additional risk;
however, the Company does not maintain a significant inventory of equity
securities.
Item 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 23
Consolidated Statements of Financial Condition December 31, 2000, and 1999 24-25
Consolidated Statements of Operations Years Ended December 31, 2000, 1999, and 1998 26-27
Consolidated Statements of Changes in Shareholders' Equity Years Ended December 31, 2000, 1999, and 1998 28
Consolidated Statements of Cash Flows Years Ended December 31, 2000, 1999, and 1998 29
Notes to Consolidated Financial Statements 30-44
Financial Statement Schedule I - Condensed Financial Statements (Parent Company Only) 47-51
Financial Statement Schedule II - Valuation and Qualifying Accounts 52
22
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, 2000 and 1999 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, 2000. 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, 2000 and 1999, and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 2000 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 26, 2001
23
JB Oxford Holdings, Inc. and Subsidiaries
Consolidated Statements of Financial Condition
December 31,
2000 1999
------------ ------------
Assets:
Cash and cash equivalents (including securities purchased under
agreements to resell of $2,541,193 and $0) $ 8,004,000 $ 6,023,095
Cash segregated under federal and other regulations (including securities
purchased under agreements to resell of $33,274,048 and
$20,786,005) 37,544,690 27,173,659
Receivable from broker-dealers and clearing organizations 7,262,385 7,717,643
Receivable from customers (net of allowance for doubtful accounts of
$2,577,451 and $1,601,178) 278,511,536 438,208,683
Other receivables 2,101,578 1,614,254
Marketable securities owned - at market value 322,783 223,034
Note receivable 2,500,000 --
Furniture, equipment, and leasehold improvements (at cost - net of
accumulated depreciation and amortization of $8,040,869 and
$6,296,033) 3,540,370 3,024,193
Income taxes receivable 989,308 1,012,881
Deferred income taxes 2,045,424 1,479,425
Clearing deposits 7,871,717 9,598,797
Other assets 1,560,258 1,663,442
------------ ------------
Total assets $352,254,049 $497,739,106
============ ============
See accompanying notes to Consolidated Financial Statements.
24
JB Oxford Holdings, Inc. and Subsidiaries
Consolidated Statements of Financial Condition
December 31,
2000 1999
------------- -------------
Liabilities and shareholders' equity:
Liabilities:
Payable to broker-dealers and clearing organizations $ 110,840,077 $ 137,300,388
Payable to customers 188,061,388 313,354,154
Securities sold, not yet purchased - at market value 106,720 96,904
Accounts payable and accrued liabilities 10,298,150 12,303,092
Loans from shareholders 5,418,696 5,418,696
Notes payable 7,637,375 2,895,124
------------- -------------
Total liabilities 322,362,406 471,368,358
------------- -------------
Commitments and Contingencies (Note 15)
Shareholders' equity:
Common stock ($0.01 par value, 100,000,000 shares authorized;
15,193,226 and 15,088,226 shares issued) 151,932 150,882
Additional paid-in capital 16,446,381 16,232,281
Retained earnings 15,745,478 10,772,290
Treasury stock, 1,138,140 and 704,040 shares at cost (2,452,148) (784,705)
------------- -------------
Total shareholders' equity 29,891,643 26,370,748
------------- -------------
Total liabilities and shareholders' equity $ 352,254,049 $ 497,739,106
============= =============
See accompanying notes to Consolidated Financial Statements.
25
JB Oxford Holdings, Inc. and Subsidiaries
Consolidated Statements of Operations
For The Years Ended December 31,
2000 1999 1998
------------ ------------ ------------
Revenues:
Clearing and execution $ 7,607,517 $ 25,033,821 $ 11,565,427
Trading profits 14,692,048 15,517,700 5,747,187
Commissions 37,148,643 33,827,615 26,600,214
Interest 40,154,797 28,930,515 23,260,659
Other 1,258,956 902,130 94,838
------------ ------------ ------------
Total revenues 100,861,961 104,211,781 67,268,325
------------ ------------ ------------
Expenses:
Employee compensation 11,533,833 10,176,438 9,725,313
Commission expense 13,873,602 12,473,534 9,259,410
Clearing and floor brokerage 2,812,247 3,650,676 3,621,816
Communications 7,375,535 6,934,245 5,983,039
Occupancy and equipment 5,988,058 4,966,437 4,819,812
Interest 23,891,689 14,615,836 13,960,009
Data processing charges 8,788,183 10,114,145 6,168,764
Professional services 6,831,981 4,592,666 3,346,260
Promotional 6,624,512 12,807,200 3,929,062
Bad debt expense 1,524,655 1,829,102 2,019,454
Settlement expense 867,171 2,537,880 630,539
Other operating expenses 2,092,507 2,282,387 2,592,202
------------ ------------ ------------
Total expenses 92,203,973 86,980,546 66,055,680
------------ ------------ ------------
Income from operations 8,657,988 17,231,235 1,212,645
Non-cash interest expense on convertible notes -- -- 2,530,000
------------ ------------ ------------
Income (loss) before income taxes and extra-ordinary Item 8,657,988 17,231,235 (1,317,355)
Income tax provision 3,684,800 7,223,480 521,251
------------ ------------ ------------
Income (loss) before extraordinary item 4,973,188 10,007,755 (1,838,606)
Extraordinary item:
Forgiveness of debt, net of taxes -- 436,875 --
------------ ------------ ------------
Net income (loss) $ 4,973,188 $ 10,444,630 $ (1,838,606)
============ ============ ============
See accompanying notes to Consolidated Financial Statements.
26
JB Oxford Holdings, Inc. and Subsidiaries
Consolidated Statements of Operations - continued
For The Years Ended December 31,
2000 1999 1998
-------------- -------------- --------------
Basic net income (loss) per share:
Income (loss) before income taxes and extraordinary Item $ 0.35 $ 0.70 $ (0.13)
Extraordinary item: forgiveness of debt -- 0.03 --
-------------- -------------- --------------
Basic net income (loss) per share $ 0.35 $ 0.73 $ (0.13)
============== ============== ==============
Diluted income (loss) per share:
Income (loss) before income taxes and extraordinary Item $ 0.22 $ 0.43 $ (0.13)
Extraordinary item: forgiveness of debt -- 0.02 --
-------------- -------------- --------------
Diluted net income (loss) per share $ 0.22 $ 0.45 $ (0.13)
============== ============== ==============
Weighted average number of shares of common stock and
assumed conversions
Basic 14,205,768 14,295,751 14,127,800
Diluted 23,406,905 23,902,717 14,127,800
See accompanying notes to Consolidated Financial Statements.
27
JB Oxford Holdings, Inc. and Subsidiaries
Consolidated Statements of Changes in Shareholders' Equity
Common Stock
-------------------------------
Additional
Paid-in Retained
Shares Amount Capital Earnings Treasury Stock Total
--------------- ------------ --------------- -------------- -------------- --------------
Balance at 14,141,205 $ 141,412 $ 12,815,316 $ 2,166,266 $ -- $ 15,122,994
January 1, 1998
Non-cash interest expense -- -- 2,530,000 -- -- 2,530,000
Net (loss) -- -- -- (1,838,606) -- (1,838,606)
Treasury stock -- -- -- -- (197,780) (197,780)
--------------- ------------ -------------- -------------- -------------- --------------
Balance at 14,141,205 141,412 15,345,316 327,660 (197,780) 15,616,608
December 31, 1998
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 15,088,226 150,882 16,232,281 10,772,290 (784,705) 26,370,748
December 31, 1999
Issuance of common stock 105,000 1,050 214,100 -- -- 215,150
Net income -- -- -- 4,973,188 -- 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
============== ============= ============== ============== ============== ==============
See accompanying notes to Consolidated Financial Statements.
28
JB Oxford Holdings, Inc. and Subsidiaries
Consolidated Statements of Cash Flows
For The Years Ended December 31,
2000 1999 1998
------------- ------------- -------------
Cash flows from operating activities:
Net income (loss) $ 4,973,188 $ 10,444,630 $ (1,838,606)
Adjustments to reconcile net income (loss) to net cash
provided by (used in) operating activities:
Depreciation and amortization 1,756,912 1,348,067 1,475,840
Deferred rent (168,197) (121,464) (111,693)
Provision for bad debts 1,524,655 1,829,102 2,019,454
Benefit for deferred income taxes (565,999) (399,585) (127,415)
Non-cash interest expense for convertible debentures -- -- 2,530,000
Forgiveness of debt -- (728,125) --
Changes in assets and liabilities:
Cash segregated under federal and other regulations (10,371,031) 82,977,416 (75,247,813)
Receivable from broker-dealers and clearing
organizations 455,258 (396,577) (2,638,158)
Receivable from customers 158,172,492 (171,429,660) 8,933,391
Other receivables (487,324) (22,772) 641,839
Marketable securities owned (99,749) 2,704,037 810,590
Clearing deposits 1,727,080 (2,765,626) (104,581)
Other assets 103,184 (258,987) 640,133
Payable to broker-dealers and clearing organizations (26,460,311) 79,236,179 (32,158,241)
Payable to customers (125,292,766) 1,395,639 90,925,459
Securities sold not yet purchased 9,816 (771,181) (280,621)
Accounts payable and accrued liabilities (1,836,745) 3,414,076 4,057,529
Income taxes payable/refundable 23,573 (848,133) 336,553
------------- ------------- -------------
Net cash provided by (used in) operating activities 3,464,036 5,607,036 (136,340)
------------- ------------- -------------
Cash flows from investing activities:
Note receivable (2,500,000) -- --
Capital expenditures (2,273,089) (1,512,160) (875,473)
------------- ------------- -------------
Net cash used in investing activities (4,773,089) (1,512,160) (875,473)
------------- ------------- -------------
Cash flows from financing activities:
Advances (repayments) of notes payable 4,742,251 (125,248) 108,103
Payment of subordinated loans -- (250,000) (250,000)
Loans from shareholders -- -- 1,250,000
Issuance of stock 215,150 393,820 --
Treasury stock (1,667,443) (586,925) (197,780)
------------- ------------- -------------
Net cash provided by (used in) financing activities 3,289,958 (568,353) 910,323
------------- ------------- -------------
Net increase (decrease) in cash and cash equivalents 1,980,905 3,526,523 (101,490)
Cash and cash equivalents at beginning of year 6,023,095 2,496,572 2,598,062
------------- ------------- -------------
Cash and cash equivalents at end of year $ 8,004,000 $ 6,023,095 $ 2,496,572
============= ============= =============
See accompanying notes to Consolidated Financial Statements.
29
JB Oxford Holdings, Inc. and Subsidiaries
Notes To Consolidated Financial Statements
Note 1. Basis of Presentation
Reporting Entity
- ----------------
The accompanying consolidated financial statements for 2000, 1999 and 1998
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. Intercompany balances
have been eliminated in the consolidated financial statements. Additionally,
minority shareholders' interests are not separately presented, as the amounts
are not significant.
The Company and JBOC have their principal offices in Beverly Hills, California.
JBOC's 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
30
substantially the same securities before maturity at a fixed or determinable
price. It is the policy of the Company to obtain possession of collateral with a
market value equal to or in excess of the principal amount loaned under resale
agreements. Collateral is valued daily, and the Company may require
counterparties to deposit additional collateral or return collateral pledged
when appropriate.
Allowance for Doubtful Accounts
- -------------------------------
On an ongoing basis, the Company reviews its allowance for doubtful accounts on
receivables from broker-dealer and clearing organizations, customer receivables
and other receivables. The Company establishes allowances to cover known and
inherent losses. As of December 31, 2000 and 1999, 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.
Collateral
- ----------
The Company continues to report assets it has pledged as collateral in secured
borrowing and other arrangements when the secured party cannot sell or repledge
the assets or the Company can substitute collateral or otherwise redeem it on
short notice. The Company generally does not report assets received as
collateral in secured lending and other arrangements because the debtor
typically has the right to redeem the collateral on short notice.
Marketable Securities Owned
- ---------------------------
Marketable securities and securities sold, not yet purchased are reported at
prevailing market prices. Realized and unrealized gains and losses on marketable
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
31
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 over the lesser of the useful life of the improvement or the term of
the lease. Expenditures for repairs and maintenance that do not significantly
increase the life of the assets are charged to operations as incurred.
Fair Value of Financial Instruments
- -----------------------------------
Substantially all of the Company's financial assets and liabilities are carried
at market or estimated fair value or are carried at amounts that approximate
current fair value because of their short-term nature. Estimates are made at a
specific point in time based on relevant market information and information
about the financial instruments.
Promotional
- -----------
Advertising costs are expensed as incurred.
Earnings Per Share
- ------------------
Basic earnings per share of common stock are computed by dividing net 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,
2000 1999 1998
------------ ------------ --------------
Basic Earnings Per Share
Net income (loss) $ 4,973,188 $ 10,444,630 $ (1,838,606)
------------ ------------ --------------
Income available to common shareholders (numerator) $ 4,973,188 $ 10,444,630 $ (1,838,606)
============ ============ ==============
Weighted average common shares outstanding (denominator) 14,205,768 14,295,751 14,127,800
============ ============ ==============
Basic Earnings (Loss) Per Share $ 0.35 $ 0.73 $ (0.13)
============ ============ ==============
32
For The Years Ended December 31,
2000 1999 1998
------------ ------------ ------------
Diluted Earnings Per Share
Net income (loss) $ 4,973,188 $ 10,444,630 $ (1,838,606)
Interest on convertible debentures, net of income tax 293,411 295,095 --
------------ ------------ ------------
Income available to common shareholders plus assumed
conversions (numerator) $ 5,266,599 $ 10,739,725 $ (1,838,606)
============ ============ ============
Weighted average common shares outstanding 14,205,768 14,295,751 14,127,800
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) 23,406,905 23,902,717 14,127,800
============ ============ ============
Diluted Earnings (Loss) Per Share $ 0.22 $ 0.45 $ (0.13)
============ ============ ============
Options to purchase 555,500 and 2,222,500 shares of common stock at December 31,
2000 and 1998, 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.
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 1999 and 1998 financial
statements to conform with presentation in the 2000 financial statements.
Recent Accounting Pronouncements
- --------------------------------
The Financial Accounting Standards Board (FASB) issued Statement of Financial
Accounting Standards (SFAS) No. 133, "Accounting for Derivative Instruments and
Hedging Activities," as amended by SFAS No. 138, which establishes accounting
and reporting standards requiring that every derivative instrument be recorded
in the Statement of Financial Condition as either an asset or as a liability
measured at is fair value and that changes in the fair value be recognized
currently in the statement of operations. The Company implemented the provision
of this new standard on January 1, 2001. Based on the current operations of the
Company and the fact that substantially all assets and liabilities of the
Company are already reported at fair value, the impact of adopting SFAS No. 133
did not have a material effect on the Company's financial position or results of
operations.
In September of 2000, the FASB issued SFAS No. 140, "Accounting for Transfers
and Servicing of Financial Assets and Extinguishments of Liabilities - a
replacement of FASB Statement No. 125." As of December 31, 2000, the Company has
adopted accounting and disclosure requirements of SFAS No. 140 as set forth in
paragraphs 15 and 17 of the Statement, respectively. The adoption of SFAS No.
140 did not have an impact on the financial condition or results of operations
of the Company.
33
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 $2,541,193 and $0 at December
31, 2000 and 1999. 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 $2,593,853 and $0 at December 31, 2000 and 1999.
Note 4. Cash Segregated Under Federal and Other Regulations
Cash and securities purchased under agreement to resell of $37,544,690and
$27,173,659 at December 31, 2000 and 1999, 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 $33,274,048 and
$20,786,005 of the above amounts at December 31, 2000 and 1999, respectively.
Securities purchased are U.S. Treasury instruments having a market value of
$33,939,733 and $21,220,679, respectively. The Company had excess funds of
$11,033,883 and $9,139,372 at December 31, 2000 and 1999.
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:
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
============ ============
1999 Receivable Payable
----------- ------------
Deposits for securities borrowed/loaned $4,773,720 $128,879,331
Securities failed to deliver/receive 2,172,210 1,661,703
Receivable from/payable to correspondents 56,023 6,745,177
Receivable from/payable to clearing organizations 715,690 14,177
------------ ------------
Total $7,717,643 $137,300,388
============ ============
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.
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, 2000 the market value of the securities failed to deliver
was $405,792 and failed to receive was $341,793. At December 31, 1999 the market
value of the securities failed to deliver was $2,249,577 and failed to receive
was $1,622,497.
34
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, 2000:
Equity securities $322,783 $ 97,344
U.S. government and other securities -- 9,376
-------- -----------------
Total $322,783 $ 106,720
======== =================
Balances as of December 31, 1999:
Equity securities $223,034 $ 88,021
U.S. government and other securities -- 8,883
-------- -----------------
Total $223,034 $ 96,904
======== =================
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, 2000, and 1999. 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:
2000 1999
----------- -----------
Furniture and equipment $ 9,514,321 $ 7,777,091
Leasehold improvements 2,066,918 1,543,135
Less: Accumulated depreciation and amortization (8,040,869) (6,296,033)
----------- -----------
$ 3,540,370 $ 3,024,193
=========== ===========
For the years ended December 31, 2000, 1999 and 1998, occupancy and equipment
expense includes depreciation and amortization expense of $1,756,912, $1,348,067
and $1,475,840, respectively.
35
Note 9. Notes Payable
JBOC maintains firm and customer financing arrangements with an aggregate
borrowing limit approximating $180,000,000. 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, 2000 and 1999.
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
-------------- -------- ------------ ----------- ----------
2000
Collateralized by:
Customer securities $ -- -- $ 88,079,279 $31,688,136 8.9%
Other -- -- 5,749 479 9.5%
--------------
$ --
==============
1999
Collateralized by:
Customer securities $ -- -- $ 10,500,000 $1,475,000 7.3%
Other 5,749 9.5% 130,997 68,373 9.5%
--------------
$ 5,749
==============
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 $2,845,393, $217,447 and $117,557
for the years ended December 31, 2000, 1999 and 1998, respectively.
At December 31, the detail of notes payable is as follows:
December 31,
2000 1999
---------- ----------
Demand notes payable (see note 12) $2,889,375 $2,889,375
Bank note payable 4,748,000 --
Other -- 5,749
---------- ----------
Total notes payable $7,637,375 $2,895,124
---------- ----------
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. The note is secured by the common stock of JB Oxford &
Company.
36
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 provision in the Consolidated Statements of Operations consists
of the following components:
Years Ended December 31,
2000 1999 1998
----------- ----------- -----------
Current
Federal $ 3,185,124 $ 5,901,568 $ 440,619
State 1,065,675 1,721,497 208,047
----------- ----------- -----------
4,250,799 7,623,065 648,666
----------- ----------- -----------
Deferred
Federal (407,609) (424,715) (79,668)
State (158,390) 25,129 (47,747)
----------- ----------- -----------
(565,999) (399,585) (127,415)
----------- ----------- -----------
Total $ 3,684,800 $ 7,223,480 $ 521,251
=========== =========== ===========
The major components of Deferred tax assets - net, included in the Consolidated
Statements of Financial Condition are as follows:
December 31,
2000 1999
---------- ----------
Deferred tax assets:
Bad debts reserve $1,473,085 $ 839,999
Depreciation 301,839 59,209
Deferred rent 47,920 51,272
State taxes 222,580 528,945
---------- ----------
Total deferred tax assets $2,045,424 1,479,425
---------- ----------
Reconciliations of the provision for income taxes to the expected income tax
based on statutory rates are as follows:
Years Ended December 31,
2000 1999 1998
------------------ ------------------ -----------------
Provision (benefit)- Federal statutory rate $2,943,716 $6,030,932 $(447,900)
Increase (decrease) in income taxes resulting from:
State taxes net of Federal tax benefit 630,008 1,179,894 105,798
Non cash interest charge -- -- 860,200
Other 111,076 12,654 3,153
------------------ ------------------ -----------------
Total $3,684,800 $7,223,480 $ 521,251
================== ================== =================
37
Note 12. Related Party Transactions
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. 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, 2001. 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, 2001, 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
$1,020,000, $525,000 and $210,000 was paid to an affiliate of the holders of the
new notes in 2000 and 1999 and 1998.
In December 2000, the Company loaned $2,500,000 to a shareholder pursuant to a
Promissory Note, payable on or before December 31, 2001. 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.
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 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.
38
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"). The Company has reclassified the $1,000,000
subordinated loan to notes payable.
The following summarizes loans from shareholders outstanding at December 31:
2000 1999
Senior secured convertible notes $5,418,696 $5,418,696
Total $5,418,696 $5,418,696
Related interest expense for 2000, 1999 and 1998 was $489,019, $491,824 and
$496,730 for the convertible notes. Interest expense for 1998 was $235,778 for
the demand notes. Due to the related party nature and terms of the shareholder
loans, the fair market value of such financial instruments cannot be estimated.
Note 13. Options and Warrants
At December 31, 2000, 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, any action thereunder must be approved by the affirmative
vote of a majority of the directors who are not then eligible to participate in
the Director's Plan.
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
39
weighted-average assumptions used for grants in 2000, 1999, and 1998,
respectively: expected dividend yield of 0% for all three years; computed
volatility of 31%, 28% and 38%, respectively; risk-free interest rates of 5.5%,
6.5% and 6.0%, respectively; and expected life of 5 years, 5 years and 3 to 10
years, respectively. The weighted average fair value of options granted during
2000, 1999 and 1998 was $1.35, $2.82, and $0.78, respectively.
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,
2000 1999 1998
------------- -------------- -------------
Net income (loss):
As reported $ 4,973,188 $ 10,444,630 $ (1,838,606)
Pro forma 4,437,874 9,569,308 (2,624,276)
Basic earnings per share:
As reported $ 0.35 $ 0.73 $ (0.13)
Pro forma 0.31 0.67 (0.19)
Diluted earnings per share:
As reported $ 0.22 $ 0.45 $ (0.13)
Pro forma 0.20 0.41 (0.19)
A summary of the status of the Company's stock options as of December 31, 2000,
1999, and 1998, and changes during the years ending on those date is presented
below:
December 31, 2000 December 31, 1999 December 31, 1998
Weighted Weighted Weighted
Shares average Shares average Shares average
---------- -------- ---------- ------- --------- --------
Outstanding at
beginning of year 2,572,000 $2.74 2,247,500 $1.47 965,000 $1.82
Granted 660,000 3.60 553,500 7.50 1,685,000 1.29
Exercised (105,000) 2.05 (229,000) 1.72 -- --
Forfeited (18,500) 4.76 -- -- (402,500) 1.59
---------- ---------- ----------
Outstanding at end of
year 3,108,500 2.94 2,572,000 2.74 2,247,500 1.47
========== ========== ==========
Options exercisable at
year-end 1,975,156 $2.81 1,177,996 $2.59 600,000 $1.93
Weighted-average fair
value of options granted
during the year $ 1.35 $ 2.82 $ 0.78
Information relating to stock options and warrants at December 31, 2000,
summarized by exercise price is as follows:
40
Options Outstanding Options Exercisable
Number Weighted-Average Weighted-Average Number Weighted-Average
Outstanding at Contractual Exercise Price Exercisable at Exercise Price
Exercise Prices 12/31/00 Life 12/31/00
------------------ ------------------- ---------------- ---------------- ------------------- ----------------
$0.63 25,000 8 $0.63 25,000 $0.63
1.08 50,000 4 1.08 50,000 1.08
1.22 50,000 8 1.22 50,000 1.22
1.31 1,550,000 8 1.31 1,033,333 1.31
1.78 13,500 7 1.78 13,500 1.78
1.97 15,000 7 1.97 15,000 1.97
2.25 150,000 6 2.25 150,000 2.25
2.32 50,000 7 2.32 50,000 2.32
3.59 637,000 10 3.59 212,332 3.59
3.69 21,000 9 3.69 6,996 3.69
5.31 2,000 10 5.31 666 5.31
7.44 530,000 9 7.44 353,329 7.44
9.00 15,000 8 9.00 15,000 9.00
------------------- -------------------
Total 3,108,500 6 $2.94 1,975,156 $2.81
=================== ===================
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, 2000, JBOC had net capital of $28,860,901, which was $23,275,591
in excess of the minimum amount required. At December 31, 1999, JBOC had net
capital of $27,491,404, which was $18,699,718 in excess of the minimum amount
required.
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 2000, 1999, and 1998 amounted to $130,236, $65,042 and $40,799.
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, 2000, 1999, and 1998.
The Company and/or its subsidiaries are defendants in several lawsuits and
arbitrations the most significant of which follows:
On February 14, 2000, the Company 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 the Company's prior management. While the Company
maintains its innocence, it agreed to pay a total of $2.0 million over three
years to settle the USAO matter and to reimburse the USAO for the
41
substantial expense associated with the two and a half-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 $1.0
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, JBOC
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 laws. The Company paid $500,000 of the USAO settlement amount in the
first quarter of 2000, $500,000 in the first quarter of 2001, and the remainder
will be paid in equal annual installments over two years. If the SEC accepts the
regional office's recommendation, payments to the USAO and SEC would total $3.0
million. This amount has been accrued and included in accounts payable and
accrued liabilities. The Company does not believe that current management was
the subject of the investigation and the USAO did not bring charges against the
Company.
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, 2000, were as follows:
Year ending December 31:
2001 $ 2,988,748
2002 2,774,099
2003 2,331,116
2004 1,764,539
2005 1,441,464
Thereafter 6,511,900
------------
$17,811,866
===========
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:
2000 $2,554,744
1999 2,335,472
1998 2,279,026
Note 16. 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
42
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 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 17. Supplemental Disclosures of Cash Flow Information
2000 1999 1998
Cash paid during the year for:
Interest $23,715,632 $14,649,676 $14,431,512
Income taxes 4,165,627 9,201,400 287,892
Supplemental disclosure of non-cash investing and financing activities:
- -----------------------------------------------------------------------
Convertible debt in the amount of $502,615 was converted into common stock
during 1999. The Company incurred a non-cash interest charge of $2,530,000 as a
result of the discount conversion feature on the subordinated convertible debt
instruments issued and re-priced during 1998.
Note 18. Unaudited Supplemental Quarterly Financial Information
Below is selected quarterly financial data for each fiscal quarter during the
years ended December 31, 2000 and 1999. This information should be read in
conjunction with the consolidated financial statements included elsewhere
herein.
43
First Second Third Fourth
Quarter Quarter Quarter Quarter
------------------- ----------------- ------------------- ------------------
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)
1999
Revenues $22,993,599 $26,871,846 $22,914,635 $31,431,701
Income (loss) before taxes 5,485,433 7,877,762 5,039,715 (1,171,675)
Net Income (Loss) Before
Extraordinary Item 3,266,225 4,346,970 2,820,615 (426,055)
Net income (loss) 3,703,100 4,346,970 2,820,615 (426,055)
Basic Earnings (Loss) Before
Extraordinary Item 0.23 0.30 0.20 (0.03)
Basic Earnings (Loss) per share 0.26 0.30 0.20 (0.03)
Diluted Earnings (Loss) Before
Extraordinary Item 0.15 0.18 0.12 (0.03)
Diluted earnings (loss) per share 0.15 0.18 0.12 (0.03)
44
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 28, 2001, 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 23
Consolidated Statements of Financial Condition December 31, 2000, and 1999 24-25
Consolidated Statements of Operations Years Ended December 31, 2000, 1999, and 1998 26-27
Consolidated Statements of Changes in Shareholders' Equity (Deficit) Years Ended December 31,
2000, 1999, and 1998 28
Consolidated Statements of Cash Flows Years Ended December 31, 2000, 1999, and 1998 29
Notes to Consolidated Financial Statements 30-44
Financial Statement Schedule I - Condensed Financial Statements (Parent Company Only) 47-51
Financial Statement Schedule II - Valuation and Qualifying Accounts 52
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
45
to Exhibit 10.3 of JBOH's Annual Report on Form 10-K for the year
ended December 31, 1991, filed with the SEC).
10.2 Data Service Agreement between Securities Industry Software Corp. and
OTRA Clearing, Inc., dated June 8, 1992 (incorporated herein by
reference to Exhibit 10 of JBOH's Quarterly Report on Form 10-Q for the
period ended June 30, 1992, filed with the SEC).
10.3 Assignment and Assumption Agreement for Beverly Hills office space
between JBOH and RKSI, executed as of December 31, 1993 (incorporated
herein by reference to Exhibit 10.8 of the JBOH Form 10-K filed with
the SEC for the year ended December 31, 1993).
10.4 Commercial office lease Agreement between Bank of Communications. and
JB Oxford & Company, executed as of June, 1995, to lease New York
office space (incorporated herein by reference to Exhibit 10.1 of the
JBOH Form 10-Q filed with the SEC for the quarter ended June 30, 1995).
10.5 Commercial office lease Agreement between Brickell Square Corporation
Limited and JB Oxford Holdings, Inc., executed as of February 21, 1996,
to lease Miami office space, (incorporated herein by reference to
Exhibit 10.16 of the JBOH Form 10-K filed with the SEC for the year
ended December 31, 1995).
10.6 JB Oxford Revocable Government Trust Agreement, dated as of February
18, 1999, by and between JB Oxford Holdings, Inc. and Third Capital
Partners, LLC, as Trustee (incorporated herein by reference to Exhibit
10.1 of the JBOH Current Report on Form 8-K, dated March 8, 1999, filed
with the SEC).
10.7 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, filed herewith.
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, filed herewith.
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, filed herewith.
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
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, filed
herewith.
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).
Reports on Form 8-K
During the fourth quarter, the Company did not file a Report on Form 8-K.
46
Schedule I. Condensed Financial Information (Parent Company Only)
JB Oxford Holdings, Inc. Statements of Financial Condition
December 31,
2000 1999
------------ --------
Assets:
Cash and cash equivalents $ 1,043,744 $ 917,591
Investment in subsidiaries 40,623,388 34,945,111
Receivables from subsidiaries 5,498,684 2,970,570
Note receivable 2,500,000 --
Income taxes receivable 989,308 1,012,881
Deferred income taxes 2,045,424 1,479,425
Other assets 606,540 630,384
------------ ------------
Total assets $ 53,307,088 $ 41,955,962
============ ============
Liabilities and shareholders' equity:
Liabilities:
Accounts payable and accrued liabilities $ 3,419,984 $ 3,229,575
Net payables to subsidiaries 7,939,390 5,041,819
Loans from shareholders 5,418,696 5,418,696
Notes payable 6,637,375 1,895,124
------------ ------------
Total liabilities 23,415,445 15,585,214
------------ ------------
Commitments and contingencies (note 5)
Shareholders' equity:
Common stock ($.01 par value 100,000,000 shares authorized;
15,193,226 and 15,088,226 shares issued) 151,932 150,882
Additional paid-in capital 16,446,381 16,232,281
Retained earnings 15,745,478 10,772,290
Treasury stock, 1,138,140 and 704,040 shares at cost (2,452,148) (784,705)
------------ ------------
Total shareholders' equity 29,891,643 26,370,748
------------ ------------
Total liabilities and shareholders' equity $ 53,307,088 $ 41,955,962
============ ============
See accompanying notes to Condensed Financial Information.
47
JB Oxford Holdings, Inc. Statements of Operations
For The Years Ended December 31
2000 1999 1998
------------ ------------ ------------
Revenues $ 4,550,797 $ 3,060,012 $ 1,608,053
------------ ------------ ------------
Expenses
General and administrative 4,846,650 3,527,983 2,400,291
Interest expense 791,046 683,652 736,668
Bad debt and settlement expense 65,875 2,378,756 46,014
------------ ------------ ------------
Total expenses 5,703,571 6,590,391 3,182,973
------------ ------------ ------------
Income (loss) before equity interest in subsidiary
income (1,152,774) (3,530,379) (1,574,920)
Equity interest in subsidiary income 9,810,762 20,761,614 2,787,565
------------ ------------ ------------
Income before income taxes and extraordinary item 8,657,988 17,231,235 1,212,645
Non cash interest charge -- -- 2,530,000
Income tax provision 3,684,800 7,223,480 521,251
------------ ------------ ------------
Income (loss) before extraordinary item 4,973,188 10,007,755 (1,838,606)
Extraordinary Item:
Forgiveness of debt, net of taxes -- 436,875 --
------------ ------------ ------------
Net income (loss) $ 4,973,188 $ 10,444,630 $ (1,838,606)
============ ============ ============
JB Oxford Holdings, Inc. Statements of Cash Flows
For The Years Ended December 31
2000 1999 1998
----------- ----------- -----------
Net cash provided by (used in) operating activities $ (358,191) $ 465,114 $ (106,463)
----------- ----------- -----------
Cash flows from investing activities:
Investment in subsidiaries (225,000) -- --
Notes receivable (2,500,000) -- --
Capital expenditures (80,614) (255,769) (266,588)
----------- ----------- -----------
Net cash (used in) investing activities (2,805,614) (255,769) (266,588)
----------- ----------- -----------
Cash flows from financing activities:
Notes payable 4,742,251 (125,248) 97,407
Loans from shareholders -- -- 1,250,000
Issuance of stock 215,150 393,820 --
Purchase of treasury stock (1,667,443) (586,925) (197,780)
----------- ----------- -----------
Net cash provided by (used in) financing activities 3,289,958 (318,353) 1,149,627
----------- ----------- -----------
Net increase (decrease) in cash and cash equivalents 126,153 (109,008) 776,576
Cash and cash equivalents at beginning of year 917,591 1,026,599 250,023
----------- ----------- -----------
Cash and cash equivalents at end of year $ 1,043,744 $ 917,591 $ 1,026,599
=========== =========== ===========
See accompanying notes to Condensed Financial Information.
48
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 $3,050,000, $1,650,000 and $1,200,000 were received from JBOC
in 2000, 1999 and 1998, respectively. The balance of the revenues for 2000, 1999
and 1998 consists of rents received from subsidiaries for office space and
furniture and equipment.
Note 3. Restrictions on the Transfer of Funds from Subsidiary to the Parent
JBOC, as part of its normal broker-dealer activity has minimum capital
requirements as imposed by regulatory agencies which restricts the amount of
funds that can be transferred to the Parent Company. See Note 14 to the
consolidated financial statements for discussion of these requirements.
Note 4. Loans from Shareholders
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, 2000. 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, 2000, 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
49
value of the underlying common stock at the time. Management fee expense of
$525,000 and $210,000 was paid to an affiliate of the holders of the new notes
in 1999 and 1998.
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:
2000 1999
---------- ----------
Senior secured convertible notes $5,418,696 $5,418,696
Demand shareholder notes -- --
---------- ----------
Total $5,418,696 $5,418,696
---------- ----------
Related interest expense for 2000, 1999 and 1998 was $489,019, $491,824and
$496,730 for the convertible notes. Interest expense for 1998 was $235,778 for
the demand notes. Due to the related party nature and terms of the shareholder
loans, the fair market value of such financial instruments cannot be estimated.
Note 5. Commitments and Contingencies
The Company is a defendant in several lawsuits and arbitrations, which arose
during the normal course of its business. Management intends to vigorously
contest these matters and does not believe the ultimate outcome of these
matters, if any, will have a material adverse effect on the financial condition
or the results of operations of the Company.
On February 14, 2000, the Company 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 the Company's prior management. While the Company
maintains its innocence, it agreed to pay a total of $2.0 million over three
years to settle the USAO matter and to reimburse the USAO for the substantial
expense associated with the two and a half-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 $1.0 million or more
to the SEC, the USAO has agreed that the
50
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, JBOC 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 laws. The Company paid $500,000 of the USAO
settlement amount in the first quarter of 2000, $500,000 in the first quarter of
2001, and the remainder will be paid in equal annual installments over two
years. If the SEC accepts the regional office's recommendation, payments to the
USAO and SEC would total $3.0 million. This amount has been accrued and included
in accounts payable and accrued liabilities. The Company does not believe that
current management was the subject of the investigation and the USAO did not
bring charges against the Company.
The ultimate outcome of these uncertainties discussed above is unknown.
Moreover, due to the nature of arbitration matters, it is impossible to predict
the ultimate outcome and/or range of loss. Accordingly, no provision for any
liability that might result has been made in the accompanying financial
statements.
Future annual minimum rental payments required under operating leases that have
initial or remaining non-cancellable lease terms in excess of one year as of
December 31, 2000, were as follows:
Year ending December 31:
2001 613,437
2002 477,464
2003 256,659
2004 12,064
2005 --
Thereafter --
----------
Total $1,359,624
==========
51
Schedule II - Valuation and Qualifying Accounts
Additions
Balance at charged to Balance at
beginning of costs and end of
period expenses Deductions period
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) --
1998
Allowance for:
Receivable from broker/ dealers and
clearing organizations $ 2,103,802 $ -- $ -- $ 2,103,802
Receivable from customers 4,957,781 2,019,454 (1,622,371) 5,354,864
Other Receivables 1,979,793 -- -- 1,979,793
Deductions represent amounts written off.
52
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
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
----------------------------
David G. Mahood, Director
March 29, 2001
53