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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, 2002
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
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
9665 Wilshire Blvd., Suite 300 Beverly Hills, California 90212
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (310) 777-8888
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Name of each exchange on
Title of each class which registered
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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 18, 2003 was approximately $3,403,437 computed based on
the average bid and asked prices of the stock as of March 18, 2003.
Indicate the number of shares outstanding of each of the registrant's
classes of common stock, as of the latest practicable date: 1,589,939 shares
outstanding at March 18, 2003.
Documents Incorporated by Reference: Portions of the registrant's
definitive proxy statement for the 2003 annual meeting, which will be filed on
or before 120 days after December 31, 2002, are incorporated by reference into
Part III, Items 10 - 13 of this Form 10-K.
PART I
Special Note Regarding Forward-Looking Statements
Some of the statements contained in this Annual Report on Form 10-K constitute
"forward-looking statements" within the meaning of the Private Securities
Litigation Reform Act of 1995 (the "Reform Act"). These forward-looking
statements involve known and unknown risks, uncertainties, and other factors
which may cause the actual results, performance, or achievements of JB Oxford
Holdings, Inc. and subsidiaries to be materially different from any future
results, performance, or achievements, expressed or implied by the
forward-looking statements. Such risks and uncertainties include, but are not
limited to, those discussed below in "Item 1. Business Overview -
Forward-Looking Statements and Risk Factors." We assume no obligation to update
or revise the forward-looking statement or risks and uncertainties to reflect
events or circumstances after the date of this Form 10-K or to reflect the
occurrence of unanticipated events.
Item 1. Business
Overview
Through our wholly-owned subsidiaries, we are engaged in the business of
providing brokerage and related financial services to retail customers and
broker-dealers nationwide. We are a fully integrated brokerage firm, providing
retail brokerage services, clearing services and market making services to our
customers.
We were incorporated in Delaware on March 31, 1987, and completed our initial
public offering in September 1987. We changed our state of incorporation to Utah
in 1990. Our business is headquartered in Beverly Hills, California and we
currently operate additional offices in New York, New York and Minneapolis,
Minnesota.
Our primary subsidiary is JB Oxford & Company ("JB Oxford"). JB Oxford is a
registered broker-dealer offering the following services: (i) providing discount
and electronic brokerage services to the investing public; (ii) providing
clearing and execution services to independent broker-dealers ("correspondents")
on a fully-disclosed basis; and (iii) acting as a market maker in stocks traded
on NASDAQ National Market System and other national exchanges. For 2002, our
consolidated revenues were $22,387,879, which consisted primarily of commission
and interest income from discount and electronic brokerage division.
Our principal executive offices are located at 9665 Wilshire Boulevard, Suite
300, Beverly Hills, California 90212 and our telephone number at such address is
(310) 777-8888. Our Internet address is www.jboxford.com and we make our filings
with the Securities and Exchange Commission available from our website free of
charge.
Discount and Electronic Brokerage Services
In 1994, we began our strategy of providing retail investors a full line of
brokerage services at discount prices. This strategy proved successful as few
brokerage firms provided brokerage services at discount prices at that time. We
were able to capitalize on this early position by providing customer service and
attention comparable to that offered by larger full-service brokerage firms
charging higher fees. Today, JB Oxford offers a full line of products and
services to customers, which includes the ability to buy and sell securities,
security options, mutual funds, fixed income products, annuities and other
investment
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securities. JB Oxford customers are offered the choice of being assigned a
personal account representative or calling directly our trading desk for order
placement and account information. The marketing strategy implemented in recent
years emphasizes this higher level of service compared to other discount
brokerages.
In 1995, in order to continue our commitment to providing a full line of
brokerage services to our customers, we began providing electronic brokerage
services. These services initially included computer trading through a dial-up
networking connection and automated telephonic trading services. Since that
time, we made many improvements to these services, including the launch of
Internet trading in 1996. Through 2002, we continued to upgrade and improve our
electronic brokerage technologies in order to provide our customers with the
resources necessary to conveniently and economically execute securities
transactions and access related financial information. In addition to our
trading capabilities, our Internet site (www.jboxford.com) currently provides
market quotes, charts, company research, and customer account information, such
as cash balances, portfolio balances and similar information. To further enhance
our brokerage services, JB Oxford began offering extended trading hours to its
customers, allowing the placement of limit order trades (authorizing the
purchase or sale of stock at a specified price or better) 45 minutes before and
after traditional market hours.
In early 2002, we redesigned our web site at www.jboxford.com to include an
upgraded navigational scheme and richer financial content. The JB Oxford trading
site provides integration of charts, market quotes, company research, customer
account information such as cash balances and portfolio balances, and includes
bond and mutual fund trading. Our online trading and electronic financial
services include online bill payment and free ATM/check card for customers
maintaining a minimum account balance. We are one of the few discount brokerages
to also offer online bond trading service to customers.
We also cater to customers within niche markets by providing services that
address the particular needs of these customer bases. Examples of these markets
include our efforts to develop divisions that cater specifically to Asian, Latin
American and European customers. We serve the needs of the Asian American
community and the Latin American community through our offices in Los Angeles
and New York. We provide discount brokerage services throughout Europe from our
New York office. These niche-marketing efforts initially began as an outgrowth
of our commitment to meeting the needs of our domestic U.S. customers, such as
providing account representatives who are fluent in a customer's preferred
language. With the growth in the electronic delivery of financial services, it
is becoming economically feasible to provide these services to both domestic and
international customers using the Internet. Currently we provide a link on our
web site to allow customers to access their accounts and conduct online trading
in Chinese. These markets did not constitute a material portion of our business
in 2002. We intend to continue this niche marketing strategy in 2003.
Clearing and Execution Services
JB Oxford is self-clearing and as of March 19, 2003, provided clearing and
execution services for 15 correspondents. The clearing business offers a
potential high return on capital, and management believes by careful selection
and monitoring of its correspondents, this business can remain profitable. We
continue to look for opportunities to selectively add new correspondents, in an
effort to replace clearing business that has been lost through attrition and
decreasing market volumes. In 2002, JB Oxford commenced clearing services for
one new correspondent.
The clearing relationship involves the sharing of broker-dealer responsibilities
between the introducing broker and the clearing broker. JB Oxford's
correspondents (i.e., introducing brokers) are responsible for all customer
relationships, including customer contact, opening customer accounts,
determining customer suitability, placing customer orders, and responding to
customer inquiries. JB Oxford, acting
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as the clearing broker, generally provides clearing services including the
receipt, confirmation, settlement, delivery and record-keeping functions
involved in securities transactions as well as providing back office functions
such as: maintaining customer accounts; extending credit (in a margin account)
to the customer; settling security transactions with the Depository Trust
Clearing Corporation ("DTCC"); preparing customer trade confirmations and
statements; performing certain cashiering and safe keeping functions;
transmitting tax information to the customer and tax authorities; forwarding
proxies and other shareholder information to customers; and similar activities.
In providing clearing and execution services to correspondents, JB Oxford
assumes certain responsibilities for the possession or control of customer
securities and assets. As a result, JB Oxford's statements of financial
condition reflect amounts receivable from customers on margin loans as well as
amounts payable to customers and correspondents related to free credit balances
held by JB Oxford for the benefit of its customers and correspondents.
There are inherent risks in operating as a clearing agent. See "Risk Factors"
below. Since JB Oxford makes loans to customers collateralized by customer
securities, JB Oxford incurs the risk of market decline that could reduce the
value of the customer's underlying collateral securities below the customer's
loan amount. For this reason, credit exposure must be monitored and actions must
be taken on a timely basis to mitigate and minimize JB Oxford's exposure to
these risks. JB Oxford mitigates its credit exposure by monitoring the adequacy
of collateral from both individual customers and correspondents. Additionally,
JB Oxford is subject to the margin rules established by the Board of Governors
of the Federal Reserve System and the NASD.
Acting as a clearing agent in the securities business requires both working
capital and capital for regulatory requirements. See "Net Capital Requirements"
below, for a more extensive discussion of capital requirements.
Market Making Activities
In order to facilitate the execution of security transactions for its own
customers and the customers of its correspondents, JB Oxford acts as a market
maker for approximately 300 public corporations whose stocks are traded on the
NASDAQ National Market System, NYSE or other national exchanges. The number of
companies for which we act as a market maker fluctuates depending upon various
factors, including trading volume and the number of employees acting in a
trading capacity.
Generally, we do not maintain inventories of securities for sale to our
customers. However, we do engage in certain principal transactions where, in
response to a customer order, we will go at risk to the marketplace to attempt
to capture the spread between the bid and offer. Most of our larger competitors
are engaged in similar market making activities through subsidiaries or receive
order flow payments from companies engaged in such market making activities. We
believe we can maintain better control and be assured of proper best executions
of customer trades by providing these market making services directly to our
customers.
Our market making activities concentrate on the execution of unsolicited
transactions for customers and are required to be in compliance with the NASD
rules regarding best execution.
Interest Income
We derive a portion of our income from interest generated on the margin accounts
of our customers and, to a lesser extent, those of our correspondents. A margin
account allows the customer to deposit less than the full cost of the security
purchased while we lend the balance of the purchase price to the
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customer, secured by the purchased securities. Customers are charged interest on
the amount borrowed to finance their margin transactions generally ranging from
0.25% below to 2.75% above the broker call rate, which is the rate at which
brokers can generally obtain financing using margined and firm owned securities
as collateral. As of December 31, 2002, the total of all debit balances held in
active margin accounts was approximately $80 million. We finance our 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 SEC's regulations to lend customer securities held as collateral in margin
accounts. Customer free credit balances were approximately $186 million as of
December 31, 2002. These credit balances are available to finance customer
margin balances subject to the requirements of SEC rules. We also utilize stock
loan arrangements with other broker dealers to finance customer debit balances.
In addition to the above financing, JB Oxford has established committed lines of
revolving credit with banking institutions approximating $25,000,000 and
uncommitted lines with broker dealers based upon available loan collateral.
Securities Industry Practices
JB Oxford is registered with the SEC and the NASD and is a member of the
following organizations: Chicago Stock Exchange, Pacific Stock Exchange,
Cincinnati Stock Exchange, DTC, NSCC and Options Clearing Corporation. JB Oxford
is registered as a securities broker-dealer in all 50 states and the District of
Columbia. JB Oxford is also a member of the Securities Investors Protection
Corporation, which provides JB Oxford's customers with insurance protection for
amounts of up to $500,000 each, with a limitation of $100,000 on claims for cash
balances. JB Oxford has also acquired an additional $10,000,000 per account,
$50,000,000 in the aggregate, in insurance coverage through Lloyds of London as
added protection for individual customers' securities, covering all clients of
JB Oxford's fully-disclosed correspondents and discount customers.
JB Oxford is subject to extensive regulation by federal and state laws. The SEC
is the federal agency charged with administration of the federal securities
laws. Much of the regulation of broker-dealers, however, has been delegated to
self-regulatory organizations, principally the NASD and the national securities
exchanges. These self-regulatory organizations adopt rules, subject to approval
by the SEC, which govern the industry and conduct periodic reviews of member
broker-dealers. Securities firms are also subject to regulation by state
securities commissions in the states in which they do business. The SEC,
self-regulatory organizations, and state securities commissions may conduct
administrative proceedings that can result in censure, fine, suspension, or
expulsion of a broker-dealer, its officers or employees. The principal purpose
of regulation and discipline of broker-dealers is the protection of customers
and the securities markets, rather than protection of creditors and shareholders
of broker-dealers. See "Risk Factors" below.
Net Capital Requirements
JB Oxford is subject to SEC Rule 15c3-1, Net Capital Requirements For Brokers or
Dealers, which establishes minimum net capital requirements for broker-dealers.
Rule 15c3-1 is designed to measure financial integrity and liquidity in order to
assure the broker-dealer's financial stability within the securities market. The
net capital required under Rule 15c3-1 depends in part upon the activities
engaged in by the broker-dealer.
In computing net capital under Rule 15c3-1, various adjustments are made to
exclude assets not readily convertible into cash and to reduce the value of
other assets, such as a firm's position in securities.
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A deduction is made against the market value of the securities to reflect the
possibility of a market decline prior to sale. Compliance with Rule 15c3-1 could
require intensive use of capital and could limit JB Oxford's ability to pay
dividends to us, which in turn could limit our ability to pay dividends to our
shareholders. Failure to comply with Rule 15c3-1 could require us to infuse
additional capital into JB Oxford, could limit our ability to pay our debts
and/or interest obligations, and may subject JB Oxford to certain restrictions
that may be imposed by the SEC, the NASD, and other regulatory bodies. Moreover,
in the event that we cannot or elect not to infuse the additional capital or
otherwise bring JB Oxford into compliance, JB Oxford would ultimately be forced
to cease operations. See "Risk Factors" above.
JB Oxford has elected to use the alternative method permitted by Rule 15c3-1,
which requires it to maintain minimum net capital, as defined, equal to the
greater of $250,000 or 2% of aggregate debit balances arising from customer
transactions, as defined. At December 31, 2002, JB Oxford had net capital of
$9,452,719, which was $7,656,245 in excess of the minimum amount required. At
December 31, 2001, JB Oxford had net capital of $18,975,361, which was
$16,891,455 in excess of the minimum amount required.
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 UBS PaineWebber, Merrill Lynch, Pierce, Fenner & Smith Incorporated and
Solomon Smith Barney, Inc., among other traditional firms, which typically also
offer their customers on-line services. In addition, we compete with financial
institutions, mutual fund sponsors and other organizations. Further, the
industry is currently undergoing consolidation, which may strengthen our
competitors and this trend is expected to continue.
Employees
As of March 19, 2003, we had approximately 106 employees. Beginning in January
2001 and continuing into 2003, we have reduced our workforce by approximately
62% due to market slowdown and reduction in transaction volume. As demand for
our products and services increases in the future, we expect to need to
correspondingly increase our personnel and there can be no assurance that we
will be able to hire and retain qualified personnel.
Forward-Looking Statements and Risk Factors
You should carefully consider the risks described below before making an
investment decision in our securities. The risks and uncertainties described
below are not the only ones we face and there may be additional risks that we do
not presently know of or that we currently deem immaterial. All of these risks
may impair our business operations. The forward-looking statements described
below and elsewhere in this document involve risks and uncertainties and actual
results may differ materially from the results we discuss in the forward-looking
statements. If any of the following risks actually occur, our business,
financial condition or results of operations could be materially adversely
affected. In that case, the trading price of our stock could decline, and you
may lose all or part of your investment.
We Have Incurred Operating Losses in the Past and May incur Future Operating
Losses.
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We incurred a net operating losses of approximately $11 million for the year
ended December 31, 2002, and approximately $9 million in 2001. As direct result
of the downturn in the U.S. securities markets that began in early 2000 and
still continues, we have suffered a significant reduction in transaction volume,
and consequently revenues. We continue to implement cost containment measures
that have reduced our expenses. However, we cannot assure you that our negative
cash flow and net losses from operations will not continue or increase for the
foreseeable future. If we continue to incur losses and negative cash flow we may
need additional capital to fund working capital and cash flow deficits. There
can be no assurance that such capital will be available to us, or if available,
on terms that are not substantially dilutive to existing shareholders.
Additionally, we could lose our stock loan lines and committed lines of credit,
which would greatly restrict our ability to finance our operations. Although we
were profitable in 2000, we may never generate sufficient revenues to achieve or
sustain profitability or generate positive cash flow.
Our Business is Adversely Affected by Downturns in the U.S. Securities Markets.
We, like other securities firms, are directly affected by economic and political
conditions, broad trends in business and finance and changes in volume and price
levels of securities transactions. In recent years, the U.S. securities markets
have fluctuated considerably and a downturn in these markets has adversely
affected our operating results. In October 1987 and October 1998, the stock
market suffered major declines, as a result of which many firms in the industry
suffered financial losses, and the level of individual investor trading activity
decreased after these events. Reduced trading volume and prices have resulted in
reduced transaction revenues. In March 2000, the stock market entered into a
protracted down-trend, resulting in reduced transaction volume, and
consequently, revenues. In 2001, the stock markets were closed for four (4) days
as a result of the events of September 11, which had a negative impact on our
revenues. In 2002, low trading volume and financial losses continued. If the
current war in Iraq and any significant acts of terrorism continue to impact the
U.S. financial markets, it could have a material adverse effect on our business,
financial condition and operating results. When trading volume is low, our
profitability is likely to be adversely affected because our overhead remains
relatively fixed. Severe market fluctuations in the future could have a material
adverse effect on our business, financial condition and operating results. Some
of our competitors with more diverse product and service offerings might
withstand such a downturn in the securities industry better than we would.
Demand and Market Acceptance for Our Services Are Subject to a High Level of
Uncertainty.
The market for discount and electronic brokerage services, particularly over the
Internet, is rapidly evolving. Consequently, demand and market acceptance for
recently introduced services and products are subject to a high level of
uncertainty. Much of our growth will depend on consumers adopting the Internet
as a method of doing business. The Internet could lose its viability due to slow
development or adoption of standards and protocols to handle increased activity,
or due to increased governmental regulation. Moreover, several key issues
including security, reliability, cost, ease of use, accessibility and quality of
service continue to be concerns and may negatively affect the growth of Internet
use or commerce on the Internet.
We are Exposed to Certain Credit Risks with Our Customers.
We sometimes allow customers to purchase securities on margin, therefore we are
subject to risks inherent in extending credit. This risk is especially great
when the market is rapidly declining and the value of the collateral we hold
falls below the amount of a customer's indebtedness. Under specific regulatory
guidelines, any time we borrow or lend securities, we must correspondingly
disburse or receive cash deposits. If we fail to maintain adequate cash deposit
levels at all times, we run the risk of
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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. If
such losses are significant, it could have a material adverse effect on our
business, financial condition and operating results.
Our Clearing Operations Expose Us to Losses Beyond the Loss of Business.
Our clearing operations expose us to risks that exceed the simple risk of loss
of business due to loss of retail customers or correspondents. Broker-dealers
engaged in clearing operations for other correspondent broker-dealers are
exposed to losses beyond the loss of business. If the correspondent fails,
possible losses include its obligations to customers and other third parties,
and any losses in the correspondent's own trading accounts. We have established
procedures to review a correspondent's own customer and firm accounts and
activities in an effort to prevent such losses if a correspondent fails but
there can be no assurance that such procedures will be effective in every case.
Any such losses could have a material adverse effect on our business, financial
condition and operating results.
Our Success is Dependent upon the Development and Enhancement of Our Services
and Products.
Our future success depends in part on our ability to develop and enhance our
services and products. We recently introduced online bond trading and expanded
our market maker and money management services that has changed our business
mix. There can be no assurance that this change in our business mix will
increase our revenues or otherwise be successful. There are significant risks in
the development of new services and products or enhanced versions of existing
services and products, particularly in our electronic brokerage business. We may
also experience difficulties that could delay or prevent the development,
introduction or marketing of these services and products. Additionally, these
new services and products may not adequately meet the requirements of the
marketplace or achieve market acceptance. If we are unable to develop and
introduce enhanced or new services and products quickly enough to respond to
market or customer requirements, or if they do not achieve market acceptance,
our business, financial condition and operating results will be materially
adversely affected.
The Discount and Electronic Brokerage Services Market is Highly Competitive
The market for discount and electronic brokerage services is rapidly evolving
and intensely competitive. We face direct competition from firms offering
discount and electronic brokerage services such as Charles Schwab & Co., Inc.,
Fidelity Brokerage Services, Inc., Waterhouse Securities, Inc., Ameritrade, Inc.
(a subsidiary of Ameritrade Holding Corporation), and E*TRADE Group, Inc. We
also encounter competition from established full commission brokerage firms such
as UBS PaineWebber, Merrill Lynch, Pierce, Fenner & Smith Incorporated and
Solomon Smith Barney, Inc., among other traditional firms which typically also
offer their customers on-line services. In addition, we compete with financial
institutions, mutual fund sponsors and other organizations. Further, the
industry is currently undergoing consolidation, which may strengthen our
competitors and this trend is expected to continue.
Many of our competitors have longer operating histories and significantly
greater financial, technical, marketing and other resources than we do. In
addition, many of our competitors have greater name recognition and larger
customer bases that could be leveraged, thereby gaining market share from us.
Our competitors may conduct more extensive promotional activities and offer
better terms and lower prices to customers than we do. There can be no assurance
that we will be able to compete effectively with current or future competitors
or that such competition will not have a material adverse effect on our
business, financial condition and operating results.
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The Loss of Significant Customers could Adversely Affect Our Business.
While no single correspondent broker-dealer or customer represents more than 10%
of our revenues, we have several significant customers whose loss, in the
aggregate, could have a material adverse effect on our financial condition and
operating results. While we believe that the likelihood of losing a substantial
number of such customers is remote, there can be no assurance that such event
will not occur.
Our Plans to Expand Through Acquisitions of Other Companies May Have A Material
Adverse Effect on Our Business.
During 2001 and 2002, we acquired approximately 35,800 customer accounts from
six other broker-dealers at a total cost of $6,872,689 and we plan to continue
to expand our business through strategic acquisitions. Our industry is currently
undergoing consolidation and there is intensive competition for acquisitions,
which may make acquisitions increasingly expensive. Any lack of capital for
additional acquisitions may limit our ability to grow. We will be competing for
acquisition opportunities with entities that have greater resources than we do
and we plan on using our previously authorized, unissued common stock as
consideration, which may limit our opportunities. Any issuance of our equity
securities in acquisitions will have a dilutive effect on our current
shareholders. We cannot assure you that we will be able to successfully
identify, negotiate and consummate suitable acquisitions. In addition, there can
be no assurance that any such acquisitions will generate profits. Furthermore,
completed acquisitions entail numerous risks, including difficulties in the
assimilation of acquired operations and products, diversion of management's
attention from other business concerns, assumption of unknown material
liabilities, amortization of acquired intangible assets and potential loss of
key employees and customers of acquired companies. We have limited experience in
assimilating acquired organizations into our operations. We cannot assure you
that we will be able to integrate successfully any operations, personnel,
services or products that might be acquired in the future. Our failure to
successfully complete and assimilate acquisitions could have a material adverse
effect on our business, financial condition and operating results.
Our Business is Dependent on Strategic Relationships with Online and Internet
Service Providers and Software and Information Services Providers.
We have established a number of strategic relationships with online and Internet
service providers and software and information service providers. There can be
no assurance that any such relationships will be maintained, or that if they are
maintained, they will be successful or profitable. Additionally, we may not
develop any new such relationships in the future.
Our Business is Subject to Extensive Regulation Under Both Federal and State
Laws.
The securities industry in the United States is subject to extensive regulation
under both federal and state laws. Broker-dealers are subject to regulations
covering all aspects of the securities business. Because we are a self-clearing
broker-dealer and provide clearing and execution services for our
correspondents, we have to comply with many complex laws and rules relating to
possession and control of customer funds and securities, margin lending and
execution and settlement of transactions. In addition, because we offer on-line
trading to our customers we are subject to rules and regulations involving
systems capacity, advertising and investor education, investor suitability, best
execution, pricing of market data, day trading, customer privacy and electronic
books and records. Although we periodically conduct internal compliance reviews
of our systems and operations to identify and correct any deficiencies, there
can be no assurance that we will be considered by regulatory authorities to be
in full compliance with all of the rules and regulations applicable to us. See
"Business-Securities Industries Practices" below.
The SEC, the NASD or other self-regulatory organizations and state securities
commissions can censure, fine, issue cease-and-desist orders or suspend or expel
a broker-dealer or any of its officers or employees. Our ability to comply with
all applicable laws and rules is largely dependent on our establishment and
maintenance of a compliance system to ensure such compliance, as well as our
ability to attract and retain qualified compliance personnel. We could be
subject to disciplinary or other
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actions due to claimed noncompliance in the future, which could have a material
adverse effect on our business, financial condition and operating results.
Our mode of operation and profitability may be directly affected by additional
legislation, changes in rules promulgated by the SEC, the NASD, the Board of
Governors of the Federal Reserve System, the various stock exchanges and other
self-regulatory organizations, or changes in the interpretation or enforcement
of existing laws and rules.
We have had in the past an aggressive marketing campaign designed to bring brand
name recognition to our registered broker-dealer, JB Oxford. All marketing
activities by JB Oxford are regulated by the NASD, and JB Oxford compliance
officers review all marketing materials prior to release. The NASD can impose
certain penalties for violations of its advertising regulations, including
censures or fines, suspension of all advertising, the issuance of
cease-and-desist orders or the suspension or expulsion of a broker-dealer or any
of its officers or employees.
There can be no assurance that other federal, state or foreign agencies will not
attempt to regulate our business. If such regulations are enacted, our business
or operations would be rendered more costly or burdensome, less efficient or
otherwise have a material adverse effect on our business, financial condition
and operating results.
Our Failure to Maintain the Net Capital Levels Required by Various Regulators
could Adversely Affect Our Business.
The SEC, the NASD and various other regulatory agencies have stringent rules
with respect to the maintenance of specific levels of net capital by securities
broker-dealers. Net capital is the net worth of a broker or dealer (assets minus
liabilities), less deductions for certain types of assets. If a firm fails to
maintain the required net capital it may be subject to suspension or revocation
of registration by the SEC and suspension or expulsion by the NASD, and could
ultimately lead to the firm's liquidation. If such net capital rules are changed
or expanded, or if there is an unusually large charge against net capital,
operations that require the intensive use of capital would be limited. Such
operations may include trading activities and the financing of customer account
balances. Also, our ability to withdraw capital from brokerage subsidiaries
could be restricted, which in turn could limit our ability to pay dividends,
repay debt and redeem or purchase shares of our outstanding stock. A large
operating loss or charge against net capital could adversely affect our ability
to expand or even maintain our present levels of business, which could have a
material adverse effect on our business, financial condition and operating
results.
We Could Suffer Substantial Losses and be Subject to Customer Litigation if Our
Electronic Systems Which Support Online Trading Fail or Our Transactions Process
is Slow.
We receive and process trade orders through internal trading software, the
Internet, and touch-tone telephone. Thus, we depend heavily on the integrity of
the electronic systems supporting this type of trading. Heavy stress placed on
our systems during peak trading times or interference from third parties over
the Internet could cause our systems to operate too slowly or to fail. If our
systems or any other systems in the trading process slow down significantly or
fail even for a short time, our customers would suffer delays in trading,
potentially causing substantial losses and possibly subjecting us to claims for
such losses or to litigation claiming fraud or negligence. During a systems
failure, we may be able to take orders by telephone. However, only associates
with securities broker's licenses can accept telephone orders, and an adequate
number of associates may not be available to take customer calls in the event of
a systems failure. In addition, a hardware or software failure, power or
telecommunications interruption, natural disaster or act of terrorism could
cause a systems failure. Any systems failure that interrupts our operations
could have a material adverse effect on our business, financial condition and
operating results.
10
Our Business Could Suffer if We Cannot Protect the Confidentiality of Customer
Information.
An important element of our operations is the secure transmission of
confidential information over public networks. We rely on encryption and
authentication technology to provide secure transmission of confidential
information. While we have not experienced problems in the past, there can be no
assurance that hackers, computer viruses and other problems will not result in a
breach of security. If a compromise of our security were to occur, it could have
a material adverse effect on our business, financial condition and operating
results.
The Trading Price of Our Common Stock has Been and May Continue to be Subject to
Wide Fluctuations.
During the twelve months ended December 31, 2002, our common stock closed as low
as $1.60 and as high as $21.50 (all prices have been adjusted to reflect the one
for ten reverse stock split which was effective October 15, 2002). Our stock
price may fluctuate in response to a number of events and factors, such as
quarterly variations in operating results, announcements of technological
innovations or new products by our company or our competitors, changes in
financial estimates and recommendations by securities analysts, the operating
and stock price performance of other companies that investors may consider
comparable, and news reports relating to trends in our markets. In addition, the
stock market in general, and the market prices for Internet related companies in
particular, have experienced extreme volatility that has often been unrelated to
operating performance. These broad market and industry fluctuations may
adversely affect the price of our common stock, regardless of our operating
performance.
Your Interests as a Stockholder May Conflict with Our Controlling Shareholders,
Our Chief Executive Officer and Our President.
Our executive officers, directors and principal shareholders beneficially own
approximately 58% of our outstanding common stock, including shares issuable
upon conversion of certain debt. As a result, our controlling shareholders have
the power to control or direct our business affairs including matters requiring
stockholder approval. This concentration of ownership could effectively delay,
defer or prevent a change in control or other significant corporate transactions
that might give you the opportunity to realize a premium over our then
prevailing stock price. In addition, various conflicts of interest may arise in
the future as a result of our relationship with Third Capital Partners, LLC,
("Third Capital Partners"), a company controlled by our Chief Executive Officer
and our President who also serve on our Board of Directors. Serving us as an
officer and director as well as Third Capital Partners could result in our Chief
Executive Officer and our President being placed in a conflict of interest
should they have to make decisions which have materially different implications
for us and for Third Capital Partners. Third Capital Partners receives
management fees from us, which could influence decisions. In addition, Third
Capital Partners is the beneficial owner of the aggregate principal sum of
$5,418,696 of our 9% Secured Convertible Notes (the "Notes"). Third Capital
Partners has extended the due date of the Notes from time to time but there can
be no assurance that they will continue to do so in the future. Our inability to
repay the Notes or otherwise obtain an extension from Third Capital Partners
could have a material adverse effect on our financial condition.
The Loss of Certain Key Executive Officers Could Harm Our Business.
Our success is substantially dependent upon the continuing services of certain
key executive officers, especially our Chief Executive Officer and our
President. We do not have written employment agreements with our key executive
officers and do not maintain "key person" life insurance on any of our executive
officers. There can be no assurance that any of our executive officers will
11
continue to work for us nor can there be any assurance that upon ceasing to work
for us they will not compete against us. The loss of our Chief Executive Officer
or President could have a material adverse effect on our business, financial
condition and results of operations. Our Shareholder Rights Plan and the Ability
of Our Board of Directors to Issue Preferred Stock Could Deter Takeover Bids
Even if Those Bids are in the Shareholders' Best Interests.
We adopted a shareholder rights plan designed to encourage parties seeking to
acquire us to negotiate with and seek the approval of our Board of Directors. In
addition, we have 10,000,000 shares of authorized preferred stock, of which
9,800,000 remain available for issuance to third parties selected by management.
Our shareholder rights plan and the ability of our Board of Directors to
establish the terms and provisions of different series of preferred stock could
discourage unsolicited takeover bids from third parties even if those bids are
in the shareholders' best interests.
Securities Litigation Could Adversely Affect Our Business.
The securities brokerage business involves substantial risks of liability and
corresponding litigation including class action and other suits that generally
seek substantial damages including punitive damages. Like other securities
brokerage firms, from time to time we are named as a defendant in civil lawsuits
and arbitrations. Any significant monetary judgments against us in the course of
litigation could have a material adverse effect on our business, financial
condition and operating results.
We May Be Unable to Hire and Retain Skilled Personnel.
The success of our business is dependent upon having adequate levels of
personnel with experience in the computer and brokerage business as well as
persons with the necessary broker-dealer licenses. As a result of the prolonged
market downturn, we have reduced our personnel by approximately 55% since
January 2001 and in the event that there is a significant increase in demand for
our products and services in the future we may not have adequate personnel to
handle the demand which could have a material adverse effect on our business,
financial condition and operating results. Further, there can be no assurance
that we can retain our existing personnel especially those whose stock options
are largely underwater and might have little long-term incentive to stay with
us. We expect competition for qualified personnel to be intense in the event of
a sustained upswing in the stock markets and there can be no assurance that we
will be able to hire or retain skilled or licensed personnel to meet any
increased demand.
You may be unable to recover damages from Arthur Andersen LLP in the event
financial information audited by Arthur Andersen LLP included or incorporated in
this Annual Report on Form 10-K and any of our other public filings is
determined to contain false statements.
This Annual Report on Form 10-K, which includes the report of Arthur Andersen on
our consolidated balance sheets as of December 31, 2001 and December 31, 2000,
and the related consolidated statements of operations, changes in shareholders'
equity and cash flows for the years then ended, is incorporated by reference
into our previously filed Registration Statements, File No. 333-44234 on Form
S-8 and File No. 333-71784 on Form S-4 (collectively, the "Registration
Statements"). After reasonable efforts, we have been unable to obtain Arthur
Andersen's consent to incorporate by reference into the Registration Statements
its audit report with respect to the financial statements of the Company as of
December 31, 2001 and the two years then ended. Under these circumstances, Rule
437(a) under the Securities Act of 1933, as amended, permits us to file this
Form 10-K without such consent from Arthur Andersen. However, as a result, the
absence of such consent may limit recovery by investors on certain claims,
including the inability of investors to assert claims against Arthur Andersen
under Section 11 of the Securities Act of 1933, as amended, for any untrue
statements of a material fact contained, or any omissions to state a material
fact required to be stated, in those audited financial statements. In addition,
the ability of Arthur Andersen to satisfy any claims (including claims arising
from Arthur Andersen's provision of auditing and other services to us) may be
limited as a practical matter due to recent events regarding Arthur Andersen.
12
Item 2. Properties
Our principal offices and the principal offices of JB Oxford are located at 9665
Wilshire Boulevard, 3rd Floor, Beverly Hills, California 90212. As of March 20,
2003, we lease or conduct our operations from, and have our administrative
offices at, the following locations:
Location Area (Sq. Feet) Principal Use Lease
-------- --------------- ------------- -----
9665 Wilshire Blvd., 3rd, 2nd, 5th and 27,240 Administration and Expires Dec. 2010
8th Floors, Beverly Hills, CA 90212 Operations
One Exchange Plaza, 19th Floor 6,050 Operations Expires Jun. 2006
New York, NY 10006
109 South Seventh Street, Suite 111 1,100 Operations Expires Feb. 2008
Minneapolis, MN 55402
9601 Wilshire Blvd., Suite GF-3, Beverly 8,258 Operations Expires Jun. 2004
Hills, CA 90210
Our office, and the offices and facilities of our subsidiaries, are considered
by management to be generally suitable and adequate for their intended purpose.
With our reductions in force over the past two years, some of our office space
has been vacated. We negotiated an early release from our former Miami office,
and we have sublet our excess space in New York and Los Angeles.
Item 3. Legal Proceedings
We and our subsidiaries are a party to a number of pending legal,
arbitration or administrative proceedings incidental to our business, including
customer brokerage transactions claims as well as matters related to our
clearing services resulting from the failure of certain correspondents. All of
the legal, arbitration and administrative proceedings have arisen in the
ordinary conduct of its business. To date, these proceedings have not had a
material effect on our financial condition or results of operations. However,
there can be no assurance that in future periods these proceedings will not have
a material adverse effect on our financial condition or results of operations.
Those proceedings that management believes may have a significant impact are
described below.
In August 2002, JBOC, jointly and severally with several other
unrelated respondents, was ordered by an arbitration panel to pay an award of
$3.0 million in an arbitration matter conducted before the National Association
of Securities Dealers (NASD) Dispute Resolution. The arbitration matter, Secured
Equity Title and Appraisal Agency Corporation, Stanley J. Cohen, Receiver v.
Monroe Parker Securities, Inc., et al, was filed in September 1998 and JBOC's
sole involvement was limited to being the clearing broker for Monroe Parker
Securities, Inc. JBOC filed a motion to vacate the arbitration award. During the
last quarter of 2002, we entered into a settlement agreement with Secured Equity
Title and Appraisal Agency Corporation, Stanley J. Cohen, Receiver (the
"Receiver"), settling all claims between the parties, and resolving all
then-pending litigation between us, our subsidiary JBOC and the Receiver and we
recorded a settlement expense in 2002.
This matter may also impact other litigation in which we are involved.
As previously reported we have refused to pay approximately $1.9 million in
promissory notes allegedly due EBC Trust and $1.0 million in subordinated debt
allegedly due Oeri Finance, Inc., both of whom were named respondents in the
Secured Equity Title matter and who the NASD ruled jointly and severally liable
together with JBOC in the award. In our refusal to pay, we have asserted
13
defenses and counterclaims, including a right of set-off related to other
litigation, including the claims settled with Secured Equity. In January 2003,
the US District Court, Central District of California, reversed the Magistrate's
Order granting the assignee's application for writ of pre-judgment attachment
against the assets of JB Oxford Holdings, Inc. All assets previously held by the
US Marshall's office were returned to JB Oxford Holdings, Inc. As stated above,
we have previously recorded liabilities of approximately $2.9 million on our
balance sheet in notes payable and will seek to offset these payables by any
amount ultimately paid pursuant to the NASD award. However, there can be no
assurance that we will be successful in obtaining an offset of these payables.
See also Note 15 "Commitments and Contingencies" of the Notes to the
Consolidated Financial Statements, below.
Item 4. Submission Of Matters To A Vote Of Security Holders
We held our 2002 annual meeting of shareholders on October 4, 2002. The
following matters were submitted to a vote of stockholders at that meeting:
1. Our shareholders elected a Board of Directors to serve until the next
annual stockholders' meeting, to be held in 2003. The following individuals
were so elected: Christopher L. Jarratt, receiving 11,504,354 votes for
election, 7 votes against and 1,476,705 abstentions; James G. Lewis,
receiving 11,473,295 votes for election, 7 votes against and 1,507,764
abstentions; Mark D. Grossi, receiving 12,224,000 votes for election, no
votes against and 757,066 abstentions; David G. Mahood, receiving
12,221,800 votes for election, no votes against and 759,266 abstentions;
Terry N. Pefanis, receiving 12,222,080 votes for election, no votes against
and 758,986 abstentions.
2. Our shareholders approved a one for ten reverse stock split of our common
stock. The proposal was approved with 11,119,091 votes for the reverse
stock split, 1,852,355 votes against and 9,620 abstensions.
3. Our shareholders ratified the appointment of Ernst & Young LLP as our
independent public accountants for fiscal year ending December 31, 2002.
The proposal was approved with 12,590,899 votes in favor of the
appointment, 296,505 votes against and 93,662 abstentions.
14
PART II
Item 5. Market for Registrant's Common Equity & Related Shareholder Matters
Our common stock is traded in the over-the-counter market with prices quoted on
the NASD's Automated Quotation System SmallCap market ("NASDAQ") under the
trading symbol "JBOH." Quotations given are from NASDAQ and represent prices
between dealers exclusive of a retail mark-up, mark-down, or commission. They do
not necessarily represent actual transactions. Prices have been retroactively
adjusted to give effect to the 1 for 10 reverse stock split that was effected in
2002
Stock Price and Dividend Data
Month Ended
1-31-03 2-28-03
-------------- -------------
Price range of common stock
High $3.30 $2.74
Low 2.32 2.15
Close at end of period 2.69 2.31
---------------------------------------------------------------------------------------------------
Quarter Ended
3-31-02 6-30-02 9-30-02 12-31-02
-------------- ------------- -------------- --------------
Price range of common stock
High $21.50 $15.20 $10.00 $4.83
Low 9.90 7.50 2.60 1.60
Close at end of period 15.50 10.10 2.70 2.67
---------------------------------------------------------------------------------------------------
Quarter Ended
3-31-01 6-30-01 9-30-01 12-31-01
-------------- ------------- -------------- --------------
Price range of common stock
High $30.00 $21.50 $17.50 $13.80
Low 11.50 10.00 7.50 8.70
Close at end of period 12.10 17.40 10.50 10.20
---------------------------------------------------------------------------------------------------
The number of record holders of our common stock as of March 19, 2003 was 321.
We believe the number of beneficial holders of our common stock as of October 4,
2002, the most recent date for which this data is available to us, was
approximately 10,100.
Dividends
We have not declared or paid cash dividends on our common stock. Given our past
expansion and overall business growth, management believes it has been prudent
to retain and increase our capital base. We do not currently anticipate paying
cash dividends. Future payments of dividends will depend upon, among other
factors, regulatory restrictions, our consolidated earnings, overall financial
condition, and cash and capital requirements.
15
Sales of Unregistered Securities
In February 2003, we reported on Form 8-K that we had entered into a Note
Extension Agreement whereby the maturity dates of our $3,418,696 Senior Secured
Convertible Note and our $2,000,000 Secured Convertible Note, both held by Third
Capital Partners, LLC, were extended for an additional year to December 31,
2003. As consideration for the extension, and to reflect the effect of the
reverse split which occurred in October 2002, the conversion rate on the Notes
was adjusted to $2.67 per share, which was the closing price of our common stock
on the Nasdaq SmallCap Market on December 31, 2002. Under the adjusted
conversion rate, the Notes are convertible into 2,029,474 shares of common
stock. The issuance of the convertible notes was not registered under the
Securities Act of 1933 in reliance upon the exemption set forth in Section 4(2)
of that Act relating to transactions by an issuer not involving a public
offering.
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. The historical
results presented below are not necessarily indicative of future results.
JB Oxford Holdings, Inc.
Selected Consolidated Financial Information
(Amounts in thousands, except per share data)
2002 2001 2000 1999 1998
---- ---- ---- ---- ----
Income Statement Data:
Revenues $ 22,388 $ 35,348 $ 100,862 $ 104,212 $ 67,268
Net Income (Loss) Before Extraordinary Item (7,474) (6,942) 4,973 10,008 (1,839)
Net Income (Loss) (7,474) (6,942) 4,973 10,445 (1,839)
Basic Earnings (Loss) Per Share Before
Extraordinary Item (5.21) (4.95) 3.50 7.00 (1.30)
Basic Earnings (Loss) Per Share (5.21) (4.95) 3.50 7.31 (1.30)
Diluted Earnings (Loss) Per Share Before
Extraordinary Item (5.21) (4.95) 2.25 4.31 (1.30)
Diluted Earnings (Loss) Per Share (5.21) (4.95) 2.25 4.49 (1.30)
Dividends -- -- -- -- --
Balance Sheet Data:
Total Assets $ 264,585 $ 262,439 $ 352,254 $ 497,739 $ 405,990
Long-term and Subordinated Debt -- -- 3,734 -- 1,250
Liabilities (Excluding Long-Term) 248,362 239,656 318,628 471,368 390,374
Total Shareholders' Equity 16,223 22,783 29,892 26,371 15,617
Book Value Per Share* 11.12 16.40 21.27 18.33 11.23
All per share amounts have been adjusted to give retroactive affect of the 1 for
10 reverse stock split effective in October 2002.
* Computed using shareholders' equity divided by total outstanding common stock.
16
Item 7. Management's Discussion and Analysis Of Financial Condition and Results
Of Operations
Special Note Regarding Forward-Looking Statements
Some of the statements contained in this section of the Annual Report on Form
10-K constitute "forward-looking statements" within the meaning of the Private
Securities Litigation Reform Act of 1995 (the "Reform Act"). These
forward-looking statements involve known and unknown risks, uncertainties, and
other factors which may cause our actual results, performance, or achievements
to be materially different from any future results, performance, or
achievements, expressed or implied by the forward-looking statements, including,
but not limited to, those risks and uncertainties discussed in Item 1. "Business
Overview - Forward Looking Statements and Risk Factors" above.
Business Overview
We, through our wholly owned subsidiaries, provide discount brokerage services
and related financial services to retail customers and broker-dealers
nationwide. Our primary subsidiary, JB Oxford & Company ("JB Oxford"), is a
registered broker-dealer offering services including (i) discount and electronic
brokerage services to the investing public, (ii) clearing and execution services
to correspondents on a fully-disclosed basis, and (iii) acting as a market maker
in NASDAQ National Market System, New York Stock Exchange ("NYSE") and other
national exchange-listed securities.
The financial services industry is a dynamic and ever-changing industry.
Management believes that continued improvements in technology and the widespread
use of technology, including the Internet, is dramatically changing the way
financial services are provided. The ability to obtain quotes, make trades, and
obtain account information instantly through the Internet has come to be
expected by many investors. Management believes that additional technologies,
products and services will become commonplace in the not too distant future.
Management's strategy is to position us to take advantage of the opportunities
presented by the expected changes in the financial services industry. JB Oxford
continually updates its web site at www.jboxford.com to improve speed, allow
easier navigation and expand selection of timely market information and research
tools. In early 2002 we redesigned our web site to include an upgraded
navigational scheme and richer financial content. The JB Oxford trading site
provides integration of charts, quotes and research, and includes bond and
mutual fund trading.
Results of Operations
Years Ended December 31, 2002, 2001 and 2000
Revenues
Our total revenues were $22,387,879 in 2002, a decrease of 37% from $35,347,821
in 2001, which was a decrease of 65% from $100,861,961 in 2000. Revenues are
down in 2002 compared to 2001 as a result of the general decline of business in
the securities industry. All revenue sources have continued to slide down, with
the largest declines in interest and commission revenues during 2002. The
decrease in total revenues from 2000 to 2001 was attributable to the same
declining trend for the industry, which began in late 2000.
Clearing and execution revenues decreased 2% to $3,887,612 in 2002, from
$3,985,922 in 2001, which was down 48% from $7,607,517 in 2000. The decrease in
17
2002 results from the continuing trend of declining volumes in the securities
industry. Our correspondent trade volumes were down 63% in 2002 from 2001,
however the price mix of the remaining activity is higher than in past years.
The decrease in 2001 was the result of declining trade volume. Overall
correspondent trades were down 50% in 2001 from 2000.
Interest revenues decreased 47% to $7,979,705 in 2002, from $14,968,622 in 2001,
which was a decrease of 63% from $40,154,797 in 2000. Interest revenue continued
to be a significant revenue source in 2002, accounting for 36%, 42% and 40% of
our revenues in 2002, 2001 and 2000, 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.
Commission revenues decreased 35% to $8,171,012 in 2002, from $12,498,400 in
2001, which was down 66% from $37,148,643 in 2000. Commission revenue was a
significant source of revenue during 2002, consisting of 36% of total revenues,
while consisting of 35% and 37% of revenues in 2001 and 2000, respectively.
Commission revenue is directly related to trade volume generated by our
customers. The retail trade volume was down 32% in 2002 from 2001, as compared
to a decline of 55% in 2001 from 2000. In 2003, we will continue to search for
opportunities to acquire compatible discount and on-line brokerage operations of
other firms, in an effort to expand customer base and transaction volume.
Revenues from trading profits decreased 52% to $1,471,277 in 2002, from
$3,095,203 in 2001, which was down 79% from $14,692,048 in 2000. The decrease in
2002 is primarily the result of declining trade volumes, which result from the
decrease in retail customer trade volumes as described in commission revenue
above. Trade volumes declined 32% in 2002 from 2001, and 55% in 2001 from 2000.
Management anticipates trading revenues to track our overall commission volumes
of the discount and on-line operations for 2003, however management is searching
for additional sources of wholesale orders for our trading department.
Other revenues increased 10% to $878,193 in 2002, from $799,674 in 2001, which
was down 36% from $1,258,956 in 2000. The change in other revenue in 2002 and
2001 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 $33,762,037 in 2002, a decrease of 24% from
$44,401,627 in 2001, which was a decrease of 52% from $92,203,973 in 2000. Many
of our expenses, including commission expense, interest expense and data
processing charges, are directly related to commission and trading revenues. The
largest decrease in expense for 2001 was in interest expense, which decreased
73% in 2002. This is consistent with the decrease in interest revenue discussed
above for the year 2002. The overall changes in total expenses during 2002, 2001
and 2000 is directly related to the volume levels in our discount and online
brokerage divisions. As a percentage of total revenues, total operating expenses
accounted for 151%, 126% and 91% in 2002, 2001 and 2000, respectively.
Management continues to look at ways to contain costs and improve operating
efficiencies through technology, as well as provide for ways in which we may
grow total revenues.
Data processing expense decreased 32% to $2,379,306 in 2002, from $3,484,346 in
2001, which was down 60% from $8,788,183 in 2000. The decrease in data
processing expense for 2002 and 2001 was the result of an overall decline the
trade volume for all of our activities, in addition to a new contract negotiated
with our back office service provider with more favorable terms in 2001.
18
Expenses for salaries and broker compensation decreased 25% in 2002 to
$8,547,186 from $11,451,551 in 2001, which was down 55% from $25,407,435 in
2000. We continue to monitor our work force and make reductions when necessary.
In 2002 we shifted to a salary based sales force. Broker compensation had been
based upon a percentage of commission revenue generated prior to 2002. Occupancy
and equipment costs decreased 6% to $5,493,046, from $5,838,467 in 2001, which
was down 2% from $5,988,058 in 2000. These cost have remained fairly static
during the three years ended 2002, however management believes these costs will
decline in 2003 as lease commitments expire. We vacated our Miami office in late
2002 and took a charge for rent expense of approximately $203,123 in the fourth
quarter of 2002 for the remaining lease commitment, which expires in June 2003.
Promotional expense increased 52% in 2002 to $1,361,100 from $895,536 in 2001,
which was down 86% from $6,624,512 in 2000. In 2002 we utilized print media as
our primary source of advertising and name branding. In 2001, we discontinued
the use of television ads and began to use the print media as our main source of
name branding. We have not set a fixed dollar amount advertising budget for
2003, but expect any such amounts to be less than what was spent in 2002. We
will remain flexible in our publicity approach and may adjust our advertising
budget and strategy to maximize the effectiveness of advertising dollars spent.
Professional fees decreased 21% to $3,714,979 in 2002 from $4,725,033 in 2001,
which was a decrease of 31% from $6,831,981 in 2000. We are reducing our
reliance on outside counsel for arbitration matters that may arise and we expect
that this will reduce the professional fees paid in 2003. Included in
professional fees for 2000 is $2,679,508 of consulting expense to prepare for a
conversion to a different back office system. These same expenses were $319,567
in 2001. Bad debt expense decreased 88% to $138,512 in 2002 from $1,146,244 in
2001, which was a decrease of 25% from $1,524,655 in 2000.
We recorded settlement expense of $2,111,249 in 2002, which was an increase of
773% from $241,792 in 2001, which was a decrease of 72% from $867,171 in 2000.
The expense recorded in 2002 was the result of an arbitration award to Secured
Equity Title and Appraisal Company. The expense was offset in part by the
reversal of $1,000,000 that had been accrued for an anticipated settlement with
the SEC, which action was terminated by the SEC in early 2002 (See Note 15.
"Commitments and Contingencies" of the Notes to Consolidated Financial
Statements, below). In 2000 we accrued an additional $500,000 for the
anticipated settlement with the SEC.
Amortization expense of intangible assets increased 474% to $1,802,021 in 2002
from $313,750 in 2001. This expense relates to the amortization of the cost of
customer accounts acquired from other broker dealers. Included in the
amortization for 2002 is an impairment of expense of $563,726. We will continue
to monitor the carrying value of these intangible assets.
Our effective tax rate varied from our statutory federal rate due to changes in
state taxes net of federal benefit and other temporary or permanent differences.
(See Note 11. "Income Taxes" of the Notes to Consolidated Financial Statements,
below.)
Extraordinary Items/One-time Charges
In the fourth quarter of 2000, we recorded an additional $500,000 for the
anticipated settlement with the SEC. The accrual for the anticipated settlement
with the SEC was reversed in the amount of $1,000,000 in early 2002 when we were
notified that the SEC was discontinuing its investigation. Additionally, in 2002
we recorded a settlement expense as the result of an arbitration award to
19
Secured Equity Title and Appraisal Company. (See Note 15. "Commitments and
Contingencies" of the Notes to Consolidated Financial Statements, below.)
Liquidity and Capital Resources
We finance our growth through the use of funds generated from the business
operations of our subsidiaries, mainly JBOC. Additionally, JBOC has established
uncommitted lines of credit with other banking institutions with terms subject
to bank discretion at December 31, 2002. Further, we have 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 our corporate assets
at December 31, 2002, 2001 and 2000 were held by our subsidiary, JBOC, and
consisted of cash or assets readily convertible to cash, or receivables secured
by marketable securities. Our statement of financial condition reflects this
largely liquid financial position. Receivables with other brokers and dealers
primarily represent current open transactions that typically settle within a few
days, or stock borrow and loan transactions where the contracts are adjusted to
market values daily. Additionally, JBOC is subject to the requirements of the
NASD and the SEC relating to liquidity, net capital, and the use of customer
cash and securities. (See Item 1. "Business Overview - Net Capital Requirements"
above.) At December 31, 2002, JBOC had regulatory net capital of $9,452,719,
which exceeded the minimum requirement by $7,656,245.
We currently anticipate that our cash resources and available credit facilities
will be sufficient to fund our expected working capital and capital expenditure
requirements for the short-term future. However, in order to expand our
business, respond to competitive pressures, develop additional products and
services or take advantage of strategic opportunities, we 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, our existing shareholders may experience additional dilution
in ownership percentages or book value. Additionally, such securities may have
rights, preferences and privileges senior to those of the holders of our common
stock. We 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 us.
On December 31 2002, Third Capital Partners, LLC, the beneficial owner of two of
our secured convertible notes in the aggregate principal amount of $5,418,696,
maturing December 31, 2002, agreed to again extend the repayment of both notes
for a period of 12 additional months, to December 31, 2003. As consideration for
the extension, and to reflect the effect of the reverse split which occurred in
October 2002, the conversion rate on the Notes was adjusted to $2.67 per share,
which was the closing price of the Company's common stock on the Nasdaq SmallCap
Market on December 31, 2002. We will continue to make interest payments only on
each note, and no other terms of the notes were affected by the extension
agreements.
Liquidity at December 31, 2002, 2001 and 2000
Our cash position, including securities purchased under agreements to resell,
decreased during 2002 by $1,114,577 to $5,579,755 at year-end. This compares
with a net decrease in cash and cash equivalents of $1,309,668 in 2001 and an
increase of $1,980,905 in 2000. The fluctuation in our cash position can be
impacted by the settlement cycles of the business, which relate directly to the
cash provided from, or used in, operations.
20
Cash Flows From Operating Activities
Net cash provided by operating activities was $6,071,130, $4,700,100, and
$3,464,036 for 2002, 2001 and 2000, respectively. Our net cash provided by
operating activities is impacted by changes in the brokerage-related assets and
liabilities of JBOC.
During 2002, the most significant reconciling items to decrease cash provided by
operating activities was an increase in cash segregated under federal and other
regulations of $66,780,650 and an increase in payables to broker-dealers and
clearing organizations of $12,521,538. The most significant reconciling items to
increase cash provided by operating activities was reductions in amounts
receivables from broker-dealer and clearing organizations of $44,019,430, and
receivables from customers of $19,084,588. Additionally, an increase in amounts
payable to customers provided cash of $23,659,104.
During 2001, the most significant reconciling items to decrease cash provided
operating activities was a decrease in payables to broker-dealers and clearing
organizations of $59,505,496 and increase in receivable from broker-dealers and
clearing organizations of $45,106,278. These changes relate to a decrease in
stock loaned and an increase in stock borrowed during 2001. An increase in cash
segregate under federal and other regulations and payable to customers decreased
cash provided by operating activities of $41,855,227 and 18,125,486,
respectively. The most significant reconciling items to increase cash provided
by operations was a decrease in receivable from customers of $175,723,929.
During 2000, the most significant reconciling items to decrease cash provided
operating activities 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 reconciling items to increase cash provided
by operations was $158,172,492 provided from a decrease in receivables from
customers.
Cash Flows Used In Investing Activities
The net cash used in investing activities during 2002, 2001 and 2000 was
$4,445,707, $3,834,688 and $4,773,089, respectively. Funds used in 2002 and 2001
include $4,253,707 and $2,510,000, respectively, used to acquire the right to
service certain customer accounts. Funds used in 2000 include a $2,500,000 loan
to a stockholder (see Note 12. "Related Party Transactions" of the Notes to
Consolidated Financial Statements, below.) The remaining cash uses are a direct
result of our capital expenditures during these periods. Our requirement for
capital resources is not material to the business as a whole. Although we
continually upgrade our information and communication systems, future
expenditures for upgrading our various information and communication systems are
not estimated to be material to our operations. As technology advances, however,
management intends to remain competitive and may incur costs accordingly. We
have no plans to open additional offices and have no significant commitments for
capital expenditures.
Cash Flows From Financing Activities
Financing activities provided (used) cash of $(2,740,000), $(2,175,080) and
$3,289,958 in 2002, 2001 and 2000, respectively. In 2002 and 2001, repayments of
notes payable of $2,740,000 and $2,008,000, respectively, was the most
significant use of cash for financing activities. In 2000, the most significant
source of cash was from a bank loan in the net amount of $4,742,251. The primary
use of cash for financing activities was the acquisition of treasury stock in
the amount of $1,667,443.
21
JB OXFORD & COMPANY
SHORT TERM BORROWING
(Amounts in thousands)
Category of aggregate short-term
borrowings a b c d e
--------------------------------------------------
Year Ended December 31, 2002 collateralized by:
Customer securities $ -- $ -- $ 1,000 $ 3 4.0%
Year Ended December 31, 2001
collateralized by:
Customer securities $ -- $ -- $21,000 $ 700 5.8%
Year Ended December 31, 2000
collateralized by:
Customer securities $ -- $ -- $88,079 $31,688 8.9%
a) Balance at end of period
b) Weighted average interest rate at end of the period
c) Maximum amount outstanding during the period
d) Average amount outstanding during the period
e) Weighted average interest rate during the period
The weighted average interest rate during the period was calculated by factoring
the balances at the end of each month at the various rates, and computing a
weighted average on the results.
In order for us to assure stability, management is continually exploring
additional sources of capital to increase our liquidity and capital base.
Management will continue its efforts to increase liquidity and capital.
Impact of Inflation
Inflation has had a minimal impact on our operations and financial condition in
recent years. We will continually monitor costs and productivity and will adjust
prices and operations as necessary to meet inflationary impacts or market
changes.
Critical 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.
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.
22
Income Taxes
Income taxes are accounted for under the asset and liability method. Deferred
tax assets and liabilities are recognized for future tax consequences
attributable to differences between the financial statement carrying amounts of
existing assets and liabilities and their respective tax bases. Deferred tax
assets and liabilities are measured using enacted tax rates expected to apply to
taxable income in the years in which those temporary differences are expected to
be recovered or settled. A valuation allowance is provided when management
believes it is more likely than not that the net deferred tax asset will not be
realized. The effect on deferred tax assets and liabilities of a change in the
rates is recognized in income in the period that includes the enactment date.
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.
Recent Accounting Pronouncements
In June 2001, the FASB issued SFAS No. 141, "Business Combinations" and SFAS No.
142, "Goodwill and Other Intangible Assets." We were required to adopt SFAS No.
141 upon issuance. As such, all business combinations for which we may
prospectively enter must be accounted for as purchase transactions. We adopted
SFAS No. 142 on January 1, 2002. The adoption of SFAS No. 142 ceases the current
amortization of goodwill and will instead be subject to at least an annual
assessment for impairment by applying a fair-value-based test. We did not have
any goodwill as of December 31, 2002. The adoption of this statement did not
have a material effect on our financial position or results of operations.
In August 2001, the FASB issued SFAS No. 144, "Accounting for the Impairment or
Disposal of Long-Lived Assets." This statement addresses financial accounting
and reporting for the impairment or disposal of long-lived assets and supercedes
or amends previous pronouncements including SFAS No. 121, Accounting Principles
Board Opinion No. 30, and Accounting Research Board No. 51. We adopted this
statement on January 1, 2002. The adoption of this statement did not have a
material effect on our financial position or results of operations.
In November 2002, the Financial Accounting Standards Board issued Interpretation
No. 45, "Guarantor's Accounting and Disclosure Requirements for Guarantees,
Including Indirect Guarantees of Indebtedness of Others," ("FIN 45") to clarify
accounting and disclosure requirements relating to a guarantor's issuance of
certain types of guarantees. FIN 45 requires entities to disclose additional
information about certain guarantees, or groups of similar guarantees, even if
the likelihood of the guarantor's having to make any payments under the
guarantee is remote. The disclosure provisions are effective for financial
statements for fiscal years ended after December 15, 2002. For certain
guarantees, the interpretation also requires that guarantors recognize a
liability equal to the fair value of the guarantee upon its issuance. This
initial recognition and measurement provision is to be applied only on a
prospective basis to guarantees issued or modified after December 31, 2002. The
adoption of FIN 45 is not expected to have a significant impact on the Company's
financial position or results of operations.
In December 2002, the FASB issued SFAS No. 148 "Accounting for Stock Based
Compensation -Transition and Disclosure-an amendment of FASB No.123" This
Statement amends SFAS No.123 "Accounting for Stock-Based Compensation" ("SFAS
No. 123") to provide alternative methods of transition for a voluntary change to
the fair value based method of accounting for stock-based employee compensation.
In addition, the Statement amends the disclosure requirements of SFAS No. 123
23
to require prominent disclosures in both annual and interim financial statements
about the method of accounting for stock-based compensation and the effect of
the method used on reported results. This Statement is effective for fiscal
years beginning after December 15, 2002. The Company plans to continue to
account for stock-based employee compensation under APB 25 to provide disclosure
of the impact of the fair value based method on reported income. Employee stock
options have characteristics that are significantly different from those of
traded options, including vesting provisions and trading limitations that impact
their liquidity. Therefore, the existing option pricing models, such as
Black-Scholes, do not necessarily provide a reliable measure of the fair value
of employee stock options. Refer to Note 13 of the Notes to Consolidated
Financial Statements for proforma disclosure of the impact of stock options
utilizing the Black-Scholes valuation method.
Off-Balance Sheet Financial Arrangements
In the normal course of business, our customer and correspondent clearing
activities involve the execution, settlement and financing of various customer
securities transactions. These activities may expose us to off-balance-sheet
credit risk in the event that the customer is unable to fulfill their contracted
obligations. Our customer securities activities are transacted on either a cash
or margin basis. In margin transactions, we extend credit to the customer,
subject to various regulatory and internal margin requirements, collateralized
by cash and securities in the customer's account. We monitor collateral and
required margin levels daily and, pursuant to such guidelines, request customers
to deposit additional collateral or reduce securities positions when necessary.
We are also exposed to credit risk when our margin accounts or a customer margin
account is collateralized by a concentration of a particular security and when
that security decreases in value.
In addition, we execute and clear customer short sale transactions. Such
transactions may expose us 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, we may be
required to purchase financial instruments at prevailing market prices in order
to fulfill the customer's obligations.
Securities sold but not yet purchased represent obligations of the Company to
purchase the securities at prevailing market prices. Therefore, the future
satisfaction of such obligations may be for an amount greater or less than the
amount recorded. The ultimate gain or loss is dependent on the price at which
the underlying financial instrument is purchased to settle the Company's
obligation under the sale commitment.
We record customer transactions on a settlement date basis, which is generally
three business days after trade date. We are 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 we 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 our statement
of financial condition.
As a securities broker-dealer, we provide services to both individual investors
and correspondents. Our 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.
24
We are a market maker for numerous public corporations whose stocks are traded
on the NASDAQ National Market System, NYSE or other national exchanges. We
select companies in which we make a market based on a review of the current
market activity, and also to facilitate trading activity of our own and
correspondent's clients. Market making may result in a concentration of
securities which may expose us to additional off-balance sheet risk.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
Market Risk Disclosures
The following discussion about our market risk disclosures involves
forward-looking statements. Actual results could differ materially from those
projected in the forward-looking statements. See Item 1. "Business Overview -
Forward-Looking Statements and Risk Factors" above. We are exposed to market
risks related to changes in interest rates and equity security price risk. We do
not have derivative financial instruments for speculative or trading purposes.
Retail broker-dealers with clearing operations such as us 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 that
may be generated in the correspondent's trading account. We have established
procedures to review a correspondent's inventory and activities in an effort to
prevent such losses in the event of a correspondent's failure. However, there
can be no assurance that our procedures will be effective in avoiding losses.
Areas outside our control that affect the securities market, such as severe
downturns or declines in market activity, may cause substantial financial
exposure. This is particularly true with regard to the receivables that are
carried in customers' margin accounts. A significant decline in market value may
decrease the value of securities pledged in the margin accounts to a point that
the margin loans would exceed such value. While we are authorized to liquidate
the securities and to utilize the correspondent's account balances to cover any
shortfall, in a worst case scenario, such collateral may not be sufficient to
cover all losses.
Interest Rate Sensitivity and Financial Instruments
For our working capital and reserves that are required to be segregated under
federal or other regulations, we invest primarily in U.S. bank certificates of
deposit and savings accounts. The certificates of deposit have maturity dates
ranging from three to six months, and do not present a material interest rate
risk.
Equity Price Risk
JBOC acts as a market maker for approximately 300 public corporations whose
stocks are traded on the NASDAQ National Market System, NYSE or other national
exchanges. We select companies in which we make 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 that may expose us to additional risk; however, we do not maintain a
significant inventory of equity securities.
25
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 Auditors 27
Report of Independent Public Accountants 28
Consolidated Statements of Financial Condition December 31, 2002, and 2001 29-30
Consolidated Statements of Operations Years Ended December 31, 2002, 2001, and 2000 31-32
Consolidated Statements of Changes in Shareholders' Equity Years Ended December 31, 2002, 2001, and 2000 33
Consolidated Statements of Cash Flows Years Ended December 31, 2002, 2001, and 2000 34
Notes to Consolidated Financial Statements 35-51
Financial Statement Schedule I - Condensed Financial Statements (Parent Company Only) 57-61
Financial Statement Schedule II - Valuation and Qualifying Accounts 62
26
REPORT OF INDEPENDENT AUDITORS
To the Shareholders and Board of Directors of
JB Oxford Holdings, Inc.:
We have audited the accompanying consolidated statement of financial condition
of JB Oxford Holdings, Inc. (a Utah corporation) and subsidiaries (the Company)
as of December 31, 2002, and the related consolidated statements of operations,
changes in shareholders' equity and cash flows for the year then ended. These
financial statements, and the schedules referred to below, are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audit.
We conducted our audit 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 audit provides a reasonable basis for our
opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of JB Oxford Holdings, Inc. and
subsidiaries as of December 31, 2002, and the results of their operations and
their cash flows for the year then ended in conformity with accounting
principles generally accepted in the United States.
Our audit was conducted for the purpose of forming an opinion on the basic
consolidated 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 consolidated financial statements. Such 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 consolidated financial statements taken as a
whole.
ERNST & YOUNG LLP
Los Angeles, California
February 28, 2003
27
We are including in this Annual Report on Form 10-K, pursuant to Rule 2-02(e) of
Regulation S-X, a copy of the prior year's Report of Independent Public Accounts
from the prior independent public accountants, Arthur Andersen LLP ("Andersen").
This report was previously issued by Andersen, for filing with our Annual Report
on Form 10-K for fiscal year 2001, and has not been reissued by Andersen.
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Shareholders and Board of Directors of JB Oxford Holdings, Inc.:
We have audited the accompanying consolidated statements of financial condition
of JB Oxford Holdings, Inc. (a Utah corporation) and subsidiaries (the
"Company") as of December 31, 2001 and 2000, and the related consolidated
statements of operations, changes in shareholders' equity and cash flows for
each of the three years in the period ended December 31, 2001. These financial
statements, and the schedules referred to below, are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements and schedules based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of JB Oxford Holdings, Inc. and
subsidiaries as of December 31, 2001 and 2000, and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 2001 in conformity with accounting principles generally accepted in
the United States.
Our audits were made for the purpose of forming an opinion on the basic
financial statements taken as a whole. The Financial Statement Schedules I and
II are presented for purposes of additional analysis and are not a required part
of the basic financial statements. Such information has been subjected to the
auditing procedures applied in our audits of the basic financial statements and,
in our opinion, is fairly stated in all material respects in relation to the
basic financial statements taken as a whole.
Arthur Andersen LLP
Los Angeles, California
February 27, 2002
28
JB Oxford Holdings, Inc. and Subsidiaries
Consolidated Statements of Financial Condition
December 31
-----------------------------
2002 2001
------------ ------------
Assets:
Cash and cash equivalents (including securities purchased under
agreements to resell of $0 and $6,034,839) $ 5,579,755 $ 6,694,332
Cash segregated under federal and other regulations (including
securities purchased under agreements to resell of $0 and $1,695,974) 146,180,567 79,399,917
Receivable from broker-dealers and clearing organizations 8,349,233 52,368,663
Receivable from customers (net of allowance for doubtful accounts of
$2,701,183 and $2,625,178) 82,418,263 101,641,363
Other receivables 950,278 1,348,285
Securities owned - at market value 629,083 1,352,840
Note receivable from Shareholder 2,500,000 2,500,000
Furniture, equipment, and leasehold improvements (at cost - net of
accumulated depreciation and amortization of $5,088,794 and $3,523,365) 2,624,147 3,310,758
Income taxes receivable 3,742,244 3,751,429
Deferred income taxes 1,862,019 1,470,058
Clearing deposits 4,507,266 5,199,277
Intangible assets (net of accumulated amortization of $2,115,771 and $313,750) 4,756,918 2,196,250
Other assets 484,872 1,206,245
------------ ------------
Total assets $264,584,645 $262,439,417
============ ============
29
JB Oxford Holdings, Inc. and Subsidiaries
Consolidated Statements of Financial Condition - continued
December 31
--------------------------------
2002 2001
------------- -------------
Liabilities and shareholders' equity:
Liabilities:
Payable to broker-dealers and clearing organizations $ 38,813,043 $ 51,334,581
Payable to customers 193,595,006 169,935,902
Securities sold, not yet purchased - at market value 138,484 846,585
Accounts payable and accrued liabilities 7,507,410 6,491,471
Loans from shareholder 5,418,696 5,418,696
Notes payable 2,889,375 5,629,375
------------- -------------
Total liabilities 248,362,014 239,656,610
------------- -------------
Commitments and Contingencies (Note 15)
Shareholders' equity:
Common stock ($0.01 par value, 100,000,000 shares authorized;
1,589,939 and 1,519,323 shares issued) 15,899 15,193
Additional paid-in capital 17,496,396 16,583,120
Retained earnings 1,329,564 8,803,722
Treasury stock, 130,494 shares at cost (2,619,228) (2,619,228)
------------- -------------
Total shareholders' equity 16,222,631 22,782,807
------------- -------------
Total liabilities and shareholders' equity $ 264,584,645 $ 262,439,417
============= =============
See accompanying notes.
30
JB Oxford Holdings, Inc. and Subsidiaries
Consolidated Statements of Operations
Year Ended December 31
------------------------------------------------
2002 2001 2000
------------ ------------ ------------
Revenues:
Clearing and execution $ 3,887,612 $ 3,985,922 $ 7,607,517
Trading profits, net 1,471,277 3,095,203 14,692,048
Commissions 8,171,012 12,498,400 37,148,643
Interest 7,979,785 14,968,622 40,154,797
Other 878,193 799,674 1,258,956
------------ ------------ ------------
Total revenues 22,387,879 35,347,821 100,861,961
------------ ------------ ------------
Expenses:
Employee and broker compensation 8,547,185 11,451,551 25,407,435
Clearing and floor brokerage 1,045,760 1,773,473 2,812,247
Communications 2,743,150 4,588,327 7,375,535
Occupancy and equipment 5,493,046 5,838,467 5,988,058
Interest 2,053,339 7,534,686 23,891,689
Data processing charges 2,379,306 3,484,346 8,788,183
Professional services 3,714,979 4,725,033 6,831,981
Promotional 1,361,100 895,536 6,624,512
Bad debt expense 138,512 1,146,244 1,524,655
Settlement expense 2,111,249 241,792 867,171
Amortization of intangible assets 1,802,021 313,750 --
Other operating expenses 2,372,390 2,408,422 2,092,507
------------ ------------ ------------
Total expenses 33,762,037 44,401,627 92,203,973
------------ ------------ ------------
Income (loss) from operations (11,374,159) (9,053,806) 8,657,988
Income tax provision (benefit) (3,900,000) (2,112,050) 3,684,800
------------ ------------ ------------
------------ ------------ ------------
Net income (loss) $ (7,474,158) $ (6,941,756) $ 4,973,188
============ ============ ============
See accompanying notes.
31
JB Oxford Holdings, Inc. and Subsidiaries
Consolidated Statements of Operations - continued
Year Ended December 31
---------------------------------------------------
2002 2001 2000
------------- ------------- -------------
Basic net income (loss) per share:
Income (loss) before income taxes and extraordinary item $ (5.21) $ (0.50) $ 0.35
------------- ------------- -------------
Basic net income (loss) per share $ (5.21) $ (0.50) $ 0.35
============= ============= =============
Diluted income (loss) per share:
Income (loss) before income taxes and extraordinary item $ (5.21) $ (4.95) $ 2.25
------------- ------------- -------------
Diluted net income (loss) per share $ (5.21) $ (4.95) $ 2.25
============= ============= =============
Weighted average number of shares of common stock and
assumed conversions
Basic 1,435,198 1,401,076 1,420,579
Diluted 1,435,198 1,401,076 2,340,691
All share amounts have been adjusted to give retroactive affect of the 1 for 10
reverse stock split effective in October 2002.
See accompanying notes.
32
JB Oxford Holdings, Inc. and Subsidiaries
Consolidated Statements of Changes in Shareholders' Equity
Common Stock Additional
----------------------------- Paid-in Retained Treasury
Shares Amount Capital Earnings Stock Total
------------ ------------ ------------ ------------ ------------ ------------
Balance at 1,508,823 15,088 16,368,075 10,772,290 (784,705) 26,370,748
January 1, 2000
Issuance of common stock 10,500 105 215,045 -- -- 215,150
Net income -- -- -- 4,973,188 -- 4,973,188
Treasury stock -- -- -- -- (1,667,443) (1,667,443)
------------ ------------ ------------ ------------ ------------ ------------
Balance at 1,519,323 15,193 16,583,120 15,745,478 (2,452,148) 29,891,643
December 31, 2000
Net income -- -- -- (6,941,756) -- (6,941,756)
Treasury stock -- -- -- -- (167,080) (167,080)
------------ ------------ ------------ ------------ ------------ ------------
Balance at 1,519,323 15,193 16,583,120 8,803,722 (2,619,228) 22,782,807
December 31, 2001
Issuance of common stock 70,741 706 913,276 -- -- 913,982
Net (loss) -- -- -- (7,474,158) -- (7,474,158)
------------ ------------ ------------ ------------ ------------ ------------
Balance at
December 31, 2002 1,589,939 $ 15,899 $ 17,496,396 $ 1,329,564 $ (2,619,228) $ 16,222,631
============ ============ ============ ============ ============ ============
See accompanying notes.
33
JB Oxford Holdings, Inc. and Subsidiaries
Consolidated Statements of Cash Flows
Year Ended December 31
---------------------------------------------------
2002 2001 2000
------------- ------------- -------------
Cash flows from operating activities:
Net income (loss) $ (7,474,158) $ (6,941,756) $ 4,973,188
Adjustments to reconcile net income (loss) to net cash
provided by (used in) operating activities:
Depreciation and amortization 3,485,632 1,868,052 1,756,912
Deferred rent -- (191,083) (168,197)
Provision for bad debts 138,512 1,146,244 1,524,655
Provision (benefit) for deferred income taxes (391,961) 1,290,790 (565,999)
Loss on disposal of furniture, equipment and leasehold
improvements 178,100 -- --
Changes in assets and liabilities:
Cash segregated under federal and other regulations (66,780,650) (41,855,227) (10,371,031)
Receivable from broker-dealers and clearing
organizations 44,019,430 (45,106,278) 455,258
Receivable from customers 19,084,588 175,723,929 158,172,492
Other receivables 398,007 753,293 (487,324)
Securities owned 723,757 (1,030,057) (99,749)
Clearing deposits 692,011 2,672,440 1,727,080
Other assets 721,373 354,012 103,184
Payable to broker-dealers and clearing organizations (12,521,538) (59,505,496) (26,460,311)
Payable to customers 23,659,104 (18,125,486) (125,292,766)
Securities sold not yet purchased (708,101) 739,865 9,816
Accounts payable and accrued liabilities (1,484,061) (3,615,596) (1,836,745)
Income taxes payable/refundable 9,185 (3,477,546) 23,573
------------- ------------- -------------
Net cash provided by operating activities 3,749,230 4,700,100 3,464,036
------------- ------------- -------------
Cash flows from investing activities:
Note receivable -- -- (2,500,000)
Acquisitions of customer accounts (1,753,707) (2,510,000) --
Purchase of furniture, equipment and leasehold improvements (370,100) (1,324,688) (2,273,089)
------------- ------------- -------------
Net cash used in investing activities (2,123,807) (3,834,688) (4,773,089)
------------- ------------- -------------
Cash flows from financing activities:
Advances (repayments) of notes payable (2,740,000) (2,008,000) 4,742,251
Issuance of common stock -- -- 215,150
Acquisition of treasury stock -- (167,080) (1,667,443)
------------- ------------- -------------
Net cash provided by (used in) financing activities (2,740,000) (2,175,080) 3,289,958
------------- ------------- -------------
Net increase (decrease) in cash and cash equivalents (1,114,577) (1,309,668) 1,980,905
Cash and cash equivalents at beginning of year 6,694,332 8,004,000 6,023,095
------------- ------------- -------------
Cash and cash equivalents at end of year $ 5,579,755 $ 6,694,332 $ 8,004,000
============= ============= =============
See accompanying notes.
34
JB Oxford Holdings, Inc. and Subsidiaries
Notes To Consolidated Financial Statements
Note 1. Basis of Presentation
Reporting Entity
The accompanying consolidated financial statements for 2002, 2001 and 2000
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), and Reynolds Kendrick Stratton, Inc.
(RKSI) (collectively referred to as the Company or JBOH). The accounting and
reporting policies of the Company are in accordance with accounting principles
generally accepted in the United States (GAAP). The Company operates in a single
industry, the securities industry. The Company derives its revenues primarily
from its brokerage services operations, correspondent clearing services and
market making activities at JBOC. Inter-company balances have been eliminated in
the consolidated financial statements. Additionally, minority shareholders'
interests are not separately presented, as the amounts are not significant.
The corporate offices of the Company are located in Beverly Hills, California.
JBOC's brokerage division has branches in Beverly Hills, California; New York,
New York; and opened an office in Minneapolis, Minnesota during the current
year. JBOC closed its branches in Miami, Florida; and San Gabriel, California
during 2002.
The Company has suffered a significant decline in revenue and considerable
operating losses over the past two years. Management, however has implemented
certain initiatives in order to expand their business and reduce operating
expenses. In addition management believes that its cash resources and available
credit facilities will be sufficient to fund the Company's working capital
requirements for the forseeable future.
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
35
where the Company does not have an agreement to sell the same or substantially
the same securities before maturity at a fixed or determinable price. It is the
policy of the Company to obtain possession of collateral with a market value
equal to or in excess of the principal amount loaned under resale agreements.
Collateral is valued daily, and the Company may require counter-parties to
deposit additional collateral or return collateral pledged when appropriate.
Allowance for Doubtful Accounts
On an ongoing basis, the Company reviews its allowance for doubtful accounts on
receivables from broker-dealer and clearing organizations, customer receivables
and other receivables. The Company establishes allowances to cover known and
inherent losses.
Securities Transactions
Customers' securities transactions are recorded on a settlement date basis, with
related commission income and expenses recorded on a trade date basis.
Marketable securities owned and securities sold, not yet purchased are recorded
on a trade date basis.
Securities Lending Activities
Securities borrowed and securities loaned transactions are generally reported as
collateralized financings except where letters of credit or other securities are
used as collateral. Securities borrowed transactions require the Company to
deposit cash, letters of credit, or other collateral with the lender. With
respect to securities loaned, the Company receives collateral in the form of
cash or other collateral (typically marketable securities) in an amount
generally in excess of the market value of securities loaned. The Company
monitors the market value of securities borrowed and loaned on a daily basis,
with additional collateral obtained or refunded as necessary.
Marketable Securities Owned and Securities Sold Not Yet Purchased
Marketable equity and other securities owned and securities sold, not yet
purchased, are reported at prevailing market prices. Other equity securities
included in securities owned that are not publicly traded are reported at
estimated fair value. Realized and unrealized gains and losses on securities
owned and securities sold, not yet purchased, are included in trading profits,
net.
Income Taxes
Income taxes are accounted for under the asset and liability method. Deferred
tax assets and liabilities are recognized for future tax consequences
attributable to differences between the financial statement carrying amounts of
existing assets and liabilities and their respective tax bases. Deferred tax
assets and liabilities are measured using enacted tax rates expected to apply to
taxable income in the years in which those temporary differences are expected to
be recovered or settled. A valuation allowance is provided when management
believes it is more likely than not that the net deferred tax asset will not be
realized. The effect on deferred tax assets and liabilities of a change in the
rates is recognized in income in the period that includes the enactment date.
Furniture, Equipment and Leasehold Improvements
Furniture, equipment and leasehold improvements are carried at cost net of
accumulated depreciation and amortization. Depreciation on furniture and
equipment is provided for on accelerated and straight-line bases using an
estimated useful life of three to five years. Leasehold improvements are
amortized over the lesser of the useful life of the improvement or the term of
36
the lease. Expenditures for repairs and maintenance that do not significantly
increase the life of the assets are charged to operations as incurred.
Fair Value of Financial Instruments
Substantially all of the Company's financial assets and liabilities are carried
at market or estimated fair value or are carried at amounts that approximate
current fair value because of their short-term nature. Estimates are made at a
specific point in time based on relevant market information and information
about the financial instruments.
Promotional Expense
Advertising costs are expensed as incurred.
Earnings Per Share
Basic earnings per share of common stock are computed by dividing net income by
the weighted average number of common shares outstanding.
Diluted earnings per share are computed by dividing net income adjusted for the
after-tax amount of interest associated with convertible debt and any other
charges resulting from assumed conversion of potential common shares by the
weighted average number of shares of common stock and dilutive securities
outstanding during the period. Dilutive securities are options that are freely
exercisable into common stock at less than market prices, and the convertible
debentures (after giving retroactive effect to the elimination of interest
expense, net of tax). Common shares and equivalents are not included in the
weighted average number of shares when the inclusion would increase the earnings
per share or decrease the loss per share.
The following table reconciles the numerators and denominators of the basic and
diluted earnings per share computation (all shares amounts have been adjusted to
give retroactive affect of the 1 for 10 reverse stock split effective in October
15, 2002):
Year Ended December 31
---------------------------------------------
2002 2001 2000
----------- ----------- -----------
Basic Earnings Per Share
Net income (loss) $(7,474,158) $(6,941,756) $ 4,973,188
----------- ----------- -----------
Income available to common shareholders (numerator) $(7,474,158) $(6,941,756) $ 4,973,188
=========== =========== ===========
Weighted average common shares outstanding (denominator) 1,435,198 1,401,076 1,420,577
=========== =========== ===========
Basic Earnings (Loss) Per Share $ (5.21) $ (4.95) $ 3.50
=========== =========== ===========
37
Year Ended December 31
---------------------------------------------
2002 2001 2000
----------- ----------- -----------
Diluted Earnings Per Share
Net income (loss) $(7,474,158) $(6,941,756) $ 4,973,188
Interest on convertible debentures, net of income tax -- -- 293,411
----------- ----------- -----------
Income available to common shareholders plus assumed
conversions (numerator) $(7,474,158) $(6,941,756) $ 5,266,599
=========== =========== ===========
Weighted average common shares outstanding 1,435,198 1,401,076 1,420,577
Weighted average options outstanding -- -- 231,044
Weighted average convertible debentures -- -- 774,099
Stock acquired with proceeds -- -- (85,030)
----------- ----------- -----------
Weighted average common shares and assumed conversions 1,435,198 1,401,076 2,340,690
outstanding (denominator)
=========== =========== ===========
Diluted earnings (loss) per share $ (5.21) $ (4.95) $ 2.25
=========== =========== ===========
Options to purchase 55,550 shares of common stock at December 31, 2000 were not
included in the computation of diluted EPS because the options' exercise price
was greater that the average market price of the common share during the
respective periods. The assumed conversions have been excluded in computing the
diluted earnings per share when there is a net loss for the period. They have
been excluded because their inclusion would reduce the loss per share or be
anti-dilutive.
Stock-Based Compensation
The Company measures compensation cost under Accounting Principles Board Opinion
No. 25, "Accounting for Stock Issued to Employees" (APB No. 25), and provides
pro forma disclosure of net earnings and earnings per share as if the
fair-valued-based method of accounting had been applied. See Footnote 13
"Options and Warrants".
Reclassifications
Certain reclassifications have been made to the 2001 and 2000 consolidated
financial statements to conform with presentation in the 2002 consolidated
financial statements.
Recent Accounting Pronouncements
In June 2001, the FASB issued SFAS No. 141, "Business Combinations" and SFAS No.
142, "Goodwill and Other Intangible Assets." The Company was required to adopt
SFAS No. 141 upon issuance. As such, all business combinations for which the
Company may prospectively enter must be accounted for as purchase transactions.
The Company adopted SFAS No. 142 on January 1, 2002. The adoption of SFAS No.
142 ceases the current amortization of goodwill and will instead be subject to
at least an annual assessment for impairment by applying a fair-value-based
test. The Company did not have any goodwill as of December 31, 2002. The
adoption of this statement did not have a material effect on the Company's
financial position or results of operations.
In August 2001, the FASB issued SFAS No. 144, "Accounting for the Impairment or
Disposal of Long-Lived Assets." This statement addresses financial accounting
and reporting for the impairment or disposal of long-lived assets and supercedes
or amends previous pronouncements including SFAS No. 121, Accounting Principles
38
Board Opinion No. 30, and Accounting Research Board No. 51. The Company adopted
this statement on January 1, 2002. The adoption of this statement did not have a
material effect on the Company's financial position or results of operations.
In November 2002, the Financial Accounting Standards Board issued Interpretation
No. 45, "Guarantor's Accounting and Disclosure Requirements for Guarantees,
Including Indirect Guarantees of Indebtedness of Others," ("FIN 45") to clarify
accounting and disclosure requirements relating to a guarantor's issuance of
certain types of guarantees. FIN 45 requires entities to disclose additional
information about certain guarantees, or groups of similar guarantees, even if
the likelihood of the guarantor's having to make any payments under the
guarantee is remote. The disclosure provisions are effective for financial
statements for fiscal years ended after December 15, 2002. For certain
guarantees, the interpretation also requires that guarantors recognize a
liability equal to the fair value of the guarantee upon its issuance. This
initial recognition and measurement provision is to be applied only on a
prospective basis to guarantees issued or modified after December 31, 2002. The
adoption of FIN 45 is not expected to have a significant impact on the Company's
financial position or results of operations.
In December 2002, the FASB issued SFAS No. 148 "Accounting for Stock Based
Compensation -Transition and Disclosure-an amendment of FASB No.123" This
Statement amends SFAS No.123 "Accounting for Stock-Based Compensation" ("SFAS
No. 123") to provide alternative methods of transition for a voluntary change to
the fair value based method of accounting for stock-based employee compensation.
In addition, the Statement amends the disclosure requirements of SFAS No. 123 to
require prominent disclosures in both annual and interim financial statements
about the method of accounting for stock-based compensation and the effect of
the method used on reported results. This Statement is effective for fiscal
years beginning after December 15, 2002. The Company plans to continue to
account for stock-based employee compensation under APB 25 to provide disclosure
of the impact of the fair value based method on reported income. Employee stock
options have characteristics that are significantly different from those of
traded options, including vesting provisions and trading limitations that impact
their liquidity. Therefore, the existing option pricing models, such as
Black-Scholes, do not necessarily provide a reliable measure of the fair value
of employee stock options. Refer to Note 13 of the Notes to Consolidated
Financial Statements for proforma disclosure of the impact of stock options
utilizing the Black-Scholes valuation method.
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 $0 and $6,034,839 at December
31, 2002 and 2001. 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 $0 and $6,157,171 at December 31, 2002 and 2001. At December
31, 2002, the US Marshall's' office was holding $654,846 pursuant to prejudgment
writ of attachment. In January 2003, the writ was dissolved and all assets
previously held by the US Marshall's office were returned to JB Oxford Holdings,
Inc. See Note 15. "Commitments and Contingencies," below.
Note 4. Cash Segregated Under Federal and Other Regulations
Cash and securities purchased under agreement to resell of $146,110,567 and
$79,399,917 at December 31, 2002 and 2001, 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 $0 and $1,695,974 of
the above amounts at December 31, 2002 and 2001, respectively.
39
Securities purchased are U.S. Treasury instruments having a market value of $0
and $1,732,797, respectively. The Company had excess funds of $917,140, and
$6,005,501 at December 31, 2002 and 2001.
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:
December 31, 2002
-----------------------------------
Receivable Payable
-----------------------------------
Deposits for securities borrowed/loaned $8,209,178 $37,449,293
Securities failed to deliver/receive 37,462 6,025
Receivable from/payable to correspondents 102,593 1,217,587
Payable to clearing organizations -- 140,138
-----------------------------------
Total $8,349,233 $38,813,043
===================================
December 31, 2001
-----------------------------------
Receivable Payable
-----------------------------------
Deposits for securities borrowed/loaned $51,501,242 $48,509,300
Securities failed to deliver/receive 585,307 782,047
Payable to correspondents -- 1,529,301
Receivable from/payable to clearing organizations 282,114 513,933
-----------------------------------
Total $52,368,663 $51,334,581
===================================
Securities borrowed and securities loaned represent cash paid or received for
securities borrowed or loaned from other broker-dealers. The equivalent value in
cash is deposited by the borrower. All open positions are adjusted to market
values daily. These deposits approximate the market value of the underlying
securities. The Company has received securities with a market value of $323,012
in stock borrow transactions that has been repledged in stock loan transactions.
Securities failed to deliver and receive represent the contract value of
securities that have not been delivered or received subsequent to settlement
date. At December 31, 2002, the market value of the securities failed to deliver
was $32,384 and failed to receive was $4,613. At December 31, 2001, the market
value of the securities failed to deliver was $566,692 and failed to receive was
$768,195.
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.
40
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, 2002:
Equity securities $ 441,023 $ 138,484
Securities owned not readily marketable 188,060 --
---------- ----------
Total $ 629,083 $ 138,484
========== ==========
Balances as of December 31, 2001:
Equity securities $1,185,638 $ 836,691
U.S. government and other securities 167,202 9,894
---------- ----------
Total $1,352,840 $ 846,585
========== ==========
As a part of its ongoing trading activities the Company may hold 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, 2002 and 2001. 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 table summarizes the Company's furniture, equipment and leasehold
improvements:
December 31
----------------------------
2002 2001
----------- -----------
Furniture and equipment $ 5,928,973 $ 5,036,291
Leasehold improvements 1,783,967 1,797,832
----------- -----------
7,712,940 6,834,123
Less: Accumulated depreciation and amortization (5,088,794) (3,523,365)
----------- -----------
$ 2,624,147 $ 3,310,758
=========== ===========
For the years ended December 31, 2002, 2001 and 2000, occupancy and equipment
expense includes depreciation and amortization expense of $1,683,611, $1,554,300
and $1,756,912, respectively.
Note 9. Notes Payable and Financing Arrangements
JBOC maintains an uncommitted financing arrangement with a bank at December 31,
2002. Terms of the financing arrangement are subject to the banks discretion.
Amounts loaned are fully collateralized by customer margin securities. The
Company had no such loans outstanding at December 31, 2002 and 2001.
41
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
-------------------- ------------ ------------------ ------------------ --------------
2002
Collateralized by:
Customer securities $ -- -- $1,000,000 $ 2,778 4.0%
2001
Collateralized by:
Customer securities $ -- -- $21,000,000 $ 700,000 5.8%
------------------
$ --
==================
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 $111, $40,646 and $2,845,393 for the
years ended December 31, 2002, 2001 and 2000, respectively.
At December 31, the detail of notes payable is as follows:
December 31
-------------------------
2002 2001
---------- ----------
Demand notes payable (see note 12) $2,889,375 $2,889,375
Bank note payable -- 2,740,000
---------- ----------
Total notes payable $2,889,375 $5,629,375
---------- ----------
The above bank note payable carries an interest rate of prime plus 1%. Principal
payments of $84,000, plus interest are due monthly, a balloon payment was made
satisfying the obligation in September 2002. See Note 12 for discussion of
related party notes.
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.
42
Note 11. Income Taxes
The income tax (benefit) provision consists of the following components:
Year Ended December 31
---------------------------------------------
2002 2001 2000
----------- ----------- -----------
Current
Federal $(3,509,039) $(3,402,840) $ 3,185,124
State -- -- 1,065,675
----------- ----------- -----------
$(3,508,039) (3,402,840) 4,250,799
----------- ----------- -----------
Deferred
Federal (391,961) 739,400 (407,609)
State 551,390 (158,390)
----------- ----------- -----------
(391,961) 1,290,790 (565,999)
----------- ----------- -----------
Total $(3,900,000) $(2,112,050) $ 3,684,800
=========== =========== ===========
The major components of Deferred tax assets - net, are as follows:
December 31
----------------------------
2002 2001
----------- -----------
Deferred tax assets:
Bad debts reserve $ 1,204,600 $ 1,494,497
Depreciation 386,127 420,576
Amortization of intangible assets 688,551 --
State taxes - NOL 1,032,541 275,504
Accrued liabilities 64,968 160,249
Less: Valuation allowance (1,514,768) (880,768)
----------- -----------
Total deferred tax assets $ 1,862,019 $ 1,470,058
----------- -----------
Reconciliation of the provision for income taxes to the expected income tax
based on statutory rates are as follows:
Year Ended December 31
---------------------------------------------
2002 2001 2000
----------- ----------- -----------
Provision (benefit)- Federal statutory rate $(3,980,956) $(3,078,294) $ 2,943,716
Increase (decrease) in income taxes resulting from:
State taxes (634,000) (342,545) 630,008
Other 80,956 428,021 111,076
Valuation allowance 634,000 880,768 --
----------- ----------- -----------
Total $(3,900,000) $(2,112,050) $ 3,684,800
=========== =========== ===========
A valuation allowance has been placed against 100% of the state net deferred tax
asset as of December 31, 2002 and 2001 due to the uncertainty of its ultimate
realization. For tax purposes at December 31, 2002, the Company had a Federal
net operating loss (NOL) of $10.2 million, which will be carried back to
previous years and a state NOL of $5.2 million and $6.4 million, which will be
suspended until 2013 and 2014, respectively.
Note 12. Related Party Transactions
The Company issued $2,867,500 in demand notes to former shareholders during
1997. This debt bears interest at 8.25%, which is payable quarterly. The Company
43
has declined repayment of the debt based upon indemnification claims asserted in
the litigation arising out of the prior 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 note restructuring, an additional
$2,000,000 of senior secured convertible notes were issued by the Company under
identical terms to the restructured demand debt.
In June 1998, the Company completed the sale of newly issued 9% Secured
Convertible Notes in the principal amount of $2,000,000 initially due December
31, 1999, and extended to December 31, 2002. The notes are convertible into the
Company's $0.01 par value common stock at a rate of $0.70 per share. In
conjunction with the above transaction, the purchasers of the newly issued 9%
Secured Convertible Notes and another investor also acquired approximately
$3,900,000 in outstanding principal amount of the Company's 9% Senior Secured
Convertible Notes. The Company agreed to reduce the conversion ratio from $1.00
to $0.70 per share of the Company's common stock for the entire $4,421,311 of
the then outstanding 9% Senior Secured Convertible Notes. The maturity date of
the notes was extended to December 31, 2002, and they are immediately
convertible into common shares. The Company negotiated an extension of these
notes to December 31, 2003 with substantially the same terms. Management fee
expense of $918,000, $1,040,276 and $1,020,000 was paid to an affiliate of the
holders of the new notes in 2002, 2001 and 2000.
In February 2003 the Company announced that it had entered into a Note Extension
Agreement whereby the maturity dates of the $3,418,696 Senior Secured
Convertible Note and the $2,000,000 Secured Convertible Note, both held by Third
Capital Partners, LLC, were extended for an additional year to December 31,
2003. As consideration for the extension, and to reflect the effect of the
reverse split which occurred in October 2002, the conversion rate on the Notes
was adjusted to $2.67 per share, which was the closing price of the Company's
common stock on the Nasdaq SmallCap Market on December 31, 2002. Under the
adjusted conversion rate, the Notes are convertible into 2,029,474 shares of
common stock. The issuance of the convertible notes was not registered under the
Securities Act of 1933 in reliance upon the exemption set forth in Section 4(2)
of that Act relating to transactions by an issuer not involving a public
offering.
In December 2000, the Company loaned $2,500,000 to Third Capital Partners, LLC
("Third Capital Partners") pursuant to a Promissory Note, payable on or before
December 31, 2002. The note bears interest at the rate of nine and one-quarter
percent per annum. The note may be prepaid in whole or in part at any time
without penalty. Additionally, the Company has borrowed $5,418,696 from Third
Capital Partners in the form of Senior Secured Convertible Notes which are
discussed above. The amounts payable to Third Capital Partners from the Senior
Secured Convertible Notes as of December 31, 2001 and 2000 is $5,418,696.
Related interest expense for 2002, 2001 and 2000 was $487,683, $486,943 and
$489,019 for the convertible notes. Due to the related party nature and terms of
the shareholder loans, the fair market value of such financial instruments
approximates the carrying value.
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 serves as trustee of the Trust, without
compensation. The Company loaned the Trust $586,915, which the Trust used to
44
purchase 46,954 shares of the Company's Common Stock for an average price of
$12.50 per share. The Trust terminated pursuant to its terms on February 18,
2001, and ownership of the Trust shares was transferred to the Company in
satisfaction of the loan. Concurrent with the Trust's purchase of shares, the
Company relinquished its right of first refusal as to any remaining shares held
by Felix Oeri and Oeri Finance, Inc., and Oeri Finance, Inc. forgave $728,125 in
demand debt owed by the Company. Subsequently, Oeri Finance Inc., Felix Oeri and
Hareton filed 13D Statements with the SEC indicating ownership of less than 5%
of the Company's stock.
A $1,000,000 subordinated loan agreement, payable to Oeri Finance, Inc., matured
on March 31, 1999. The Company has declined payment on the debt in light of the
ongoing litigation between the Company and the alleged assignor of the note (see
Note 15, "Commitments and Contingencies"). The Company has reclassified the
$1,000,000 subordinated loan to notes payable.
Note 13. Stock Options
At December 31, 2002, the Company had three stock option plans, each of which is
described below. As 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 in accordance with APB Opinion 25.
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 95,000 shares of common stock have been
reserved for issuance to directors who are not employees of the Company. The
Director's Plan is administered by the Company's Board of Directors which
determines, among other things, the persons to be granted options under the
Director's Plan, the number of shares subject to each option and the option
price, which shall not be less than market value. In addition, any action under
the Director's Plan, must be approved by the affirmative vote of a majority of
the directors who are not then eligible to participate in the Director's Plan.
The Company has adopted the 1998 Stock Option and Award Plan (the "1998 Plan"),
pursuant to which 350,000 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 210,350 options to executive officers of the Company pursuant to the 1998
Plan.
SFAS No.123, "Accounting for Stock-Based Compensation," requires the Company to
provide pro forma information regarding net income and earnings per share in
accordance with the compensation based method prescribed in SFAS No. 123. The
Company estimates the fair value of each stock option at the grant date by using
the Black-Scholes option-pricing model with the following weighted-average
assumptions used for grants in 2002, 2001, and 2000, respectively: expected
dividend yield of 0% for all three years; computed volatility of 28%, 22% and
31%, respectively; risk-free interest rates of 1.5%, 3.5% and 5.5%,
respectively; and expected life of 5 years for all three years. The weighted
average fair value of options granted during 2001, 2000 and 1999 was $0.63,
$4.60 and $13.50, respectively.
45
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:
Year Ended December 31
---------------------------------------------------
2002 2001 2000
------------- ------------- -------------
Net income (loss):
As reported $ (7,474,158) $ (6,941,756) $ 4,973,188
Pro forma (7,474,687) (7,136,110) 4,437,874
Basic earnings per share:
As reported $ (5.21) $ (4.95) $ 3.50
Pro forma (5.21) (5.09) 3.12
Diluted earnings per share:
As reported $ (5.21) $ (4.95) $ 2.25
Pro forma (5.21) (5.09) 1.90
A summary of the status of the Company's stock options as of December 31, 2002,
2001, and 2000, and changes during the years ending on those dates is presented
below:
December 31, 2002 December 31, 2001 December 31, 2000
Weighted Weighted Weighted
Shares average Shares average Shares average
------ ------- ------ ------- ------ -------
Outstanding at
beginning of year 383,120 $ 26.88 310,850 $ 29.37 257,200 $ 27.43
Granted 1,500 2.20 75,100 17.17 66,000 36.02
Exercised -- -- -- -- (10,500) 20.49
Forfeited (128,420) 49.43 (2,830) 37.40 (1,850) 47.62
-------- -------- --------
Outstanding at end of
year 256,200 15.72 383,120 26.88 310,850 29.37
======== ======== ========
Options exercisable at
year-end 254,217 15.81 320,300 $ 27.61 197,516 $ 28.10
Weighted-average fair
value of options
granted during the
year $ 0.63 $ 4.60 $ 13.50
Information relating to stock options and warrants at December 31, 2002,
summarized by exercise price is as follows:
46
Options Outstanding Options Exercisable
Number Weighted-Average Weighted-Average Number Weighted-Average
Outstanding at Contractual Exercise Price Exercisable at Exercise Price
Exercise Prices 12/31/02 Life 12/31/02
------------------ ------------------- ---------------- ----------------- ------------------- ----------------
$2.20 1,500 10 $2.20 -- $2.20
6.25 2,500 6 6.25 2,500 6.25
9.70 1,450 9 9.70 967 9.70
12.19 5,000 5 12.19 5,000 12.19
13.13 155,000 5 13.13 155,000 13.13
17.80 1,350 4 17.80 1,350 17.80
18.20 66,000 8 18.20 66,000 18.20
22.50 15,000 3 22.50 15,000 22.50
23.20 5,000 4 23.20 5,000 23.20
35.94 200 8 35.94 200 35.94
36.88 1,400 7 36.88 1,400 36.88
74.40 100 7 74.40 100 74.40
90.00 700 6 90.00 700 90.00
91.25 1000 6 91.25 1000 91.25
------------------- -------------------
Total 256,200 6 $15.72 254,217 $15.81
=================== ===================
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, 2002, JBOC had net capital of $9,452,719, which was $7,656,245
in excess of the minimum amount required. At December 31, 2001, JBOC had net
capital of $18,975,361, which was $16,891,455 in excess of the minimum amount
required.
The Company performs a required computation for proprietary accounts of
introducing brokers ("PAIB") similar to the customer reserve computation set
forth in SEC Rule 15c3-3. As of December 31, 2002, PAIB debits aggregated
$86,533, and credits totaled $933,926. As of December 31, 2001, PAIB debits
aggregated $251,267, and credits totaled $2,041,085. Included in the balance of
cash segregated under federal and other regulations as of December 31, 2002, and
2001 was $932,931 and $1,612,419, respectively, of cash held in a PAIB reserve
account. The Company deposited an additional $500,000 into the PAIB reserve
account on January 3, 2002.
Note 15. Commitments and Contingencies
The Company is a party to a number of pending legal, arbitration or
administrative proceedings incidental to its business, including customer
brokerage transactions claims as well as matters related to its clearing
services resulting from the failure of certain correspondents. All of the legal,
arbitration and administrative proceedings have arisen in the ordinary conduct
of its business. There can be no assurance that in future periods these
proceedings will not have a material adverse effect on the Company's financial
condition or results of operations. Those proceedings that management believes
may have a significant impact on the Company are described below.
47
In August 2002, JBOC, jointly and severally with several other unrelated
respondents, was ordered by an arbitration panel to pay an award of $3.0 million
in an arbitration matter conducted before the National Association of Securities
Dealers (NASD) Dispute Resolution. The arbitration matter, Secured Equity Title
and Appraisal Agency Corporation, Stanley J. Cohen, Receiver v. Monroe Parker
Securities, Inc., et al, was filed in September 1998 and JBOC's sole involvement
was limited to being the clearing broker for Monroe Parker Securities, Inc. JBOC
filed a motion to vacate the arbitration award. During the last quarter of 2002,
the Company entered into a settlement agreement with Secured Equity Title and
Appraisal Agency Corporation, Stanley J. Cohen, Receiver (the Receiver),
settling all claims between the parties, and resolving all then-pending
litigation between the Company, its subsidiary JBOC and the Receiver and
recorded a settlement expense in 2002.
This matter may also impact other litigation in which the Company is involved.
As previously reported the Company has refused to pay approximately $1.9 million
in promissory notes allegedly due EBC Trust and $1.0 million in subordinated
debt allegedly due Oeri Finance, Inc., both of whom were named respondents in
the Secured Equity Title matter and who the NASD ruled jointly and severally
liable together with JBOC in the award. In its refusal to pay, the Company has
asserted defenses and counterclaims, including a right of set-off related to
other litigation, including the claims settled with Secured Equity. In January
2003, the US District Court, Central District of California, reversed the
Magistrate's Order granting the assignee's application for writ of pre-judgment
attachment against the assets of JB Oxford Holdings, Inc. All assets previously
held by the US Marshall's office were returned to JB Oxford Holdings, Inc. As
stated above, the Company has recorded liabilities of approximately $2.9 million
on its balance sheet in notes payable and will seek to offset these payables by
any amount ultimately paid pursuant to the NASD award. However, there can be no
assurance that the Company will be successful in obtaining an offset of these
payables.
In February 2003, the Los Angeles office of the United States Attorney's Office
(the "USAO") agreed to extend the due date on the $500,000 payment then due
under the Settlement Agreement. The Company made a partial payment of $50,000 on
March 31, 2003, and the USAO has extended the time for any further payment until
June 2, 2003. The final payment of $500,000 remains due on February 14, 2004.
The Company originally accrued payments to the USAO and SEC totaling
approximately $3.0 million. Because the SEC investigation closed without action
or monetary assessment and due to the payments made to date, the amount accrued
has been reduced to $950,000.
Future annual minimum rental payments required under operating leases that have
initial or remaining non-cancelable lease terms in excess of one year as of
December 31, 2001, were as follows:
Year ending December 31:
2003 $1,980,947
2004 1,755,582
2005 1,452,964
2006 1,418,402
2007 1,238,277
Thereafter 3,864,021
--------------------
$11,710,193
====================
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. Rent
expense was as follows:
48
Year ending December 31:
2002 $2,675,129
2001 2,698,264
2000 2,554,744
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 2002, 2001 and 2000 amounted to $28,296, $61,413 and $130,236.
Note 16. Acquisitions of Customer Accounts
During the year ended December 31, 2002 the Company acquired certain customer
accounts of Stockwalk.com. Inc. Wall Street Equities, Inc. and Sunlogic
Securities. Additionally, in August 2002, the Company acquired the customer
accounts of Mr. Stock, Inc. of which the final terms are still being negotiated.
The cost of these acquisitions is $4,362,689 and $2,510,000 in 2002 and 2001,
respectively, and has been included in the statement of financial condition net
of accumulated amortization of $2,115,771 and $313,750. The Company is
amortizing these intangible assets over four years, which is the estimated
useful life. Estimated aggregate amortization expense for the five succeeding
fiscal years is as follows:
Year ending December 31:
2003 $1,484,928
2004 1,471,178
2005 1,260,982
2006 539,830
2007 --
-------------------
$4,756,918
===================
Amortization expense of $1,238,295 and $313,750 was recorded during the years
ended December 31, 2002 and 2001, respectively. Additionally the Company
recognized, an impairment charge of $563,726, which is included in amortization
expense in 2002. The impairment charge is related to the intangible assets
recorded for the acquisition of customer accounts for two acquisitions. Fair
value was determined by calculating the discounted cash flows on the underlying
customer accounts over the estimated useful life of the intangibles
Note 17. Financial Instruments With Off-Balance Sheet Risk
In the normal course of business, the Company's customer and correspondent
clearing activities involve the execution, settlement and financing of various
customer securities transactions. These activities may expose the Company to
off-balance-sheet credit risk in the event that the customer is unable to
fulfill their contracted obligations. The Company's customer securities
activities are transacted on either a cash or margin basis. In margin
transactions, the Company extends credit to the customer, subject to various
regulatory and internal margin requirements, collateralized by cash and
securities in the customer's account. The Company monitors collateral and
required margin levels daily and, pursuant to such guidelines, requests
customers to deposit additional collateral or reduce securities positions when
necessary. The Company is also exposed to credit risk when its margin accounts
or a margin account is collateralized by a concentration of a particular
security and when that security decreases in value.
49
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.
Securities sold but not yet purchased represent obligations of the Company to
purchase the securities at prevailing market prices. Therefore, the future
satisfaction of such obligations may be for an amount greater or less than the
amount recorded. The ultimate gain or loss is dependent on the price at which
the underlying financial instrument is purchased to settle the Company's
obligation under the sale commitment.
In accordance with industry practice, the Company records customer transactions
on a settlement date basis, which is generally three business days after trade
date. The Company is therefore exposed to risk of loss on these transactions in
the event of the customer's or broker's inability to meet the terms of his
contractual obligations, in which case the Company may have to purchase or sell
financial instruments at prevailing market prices. Settlement of these
transactions did not have a material effect on the Company's financial condition
or results of operations.
As a securities broker-dealer, the Company provides services to both individual
investors and correspondents. The Company's exposure to credit risk associated
with the nonperformance of these customers in fulfilling their contractual
obligations pursuant to securities transactions can be directly impacted by
volatile trading markets.
The Company is a market maker for numerous public corporations whose stocks are
traded on the NASDAQ National Market System, NYSE or other national exchanges.
The Company selects companies in which it makes a market based on a review of
the current market activity, and also to facilitate trading activity of its own
and correspondent's clients. Market making may result in a concentration of
securities which may expose the Company to additional off-balance sheet risk.
Note 18. Supplemental Disclosures of Cash Flow Information
Year Ended December 31
2002 2001 2000
Cash paid for:
Interest $1,942,628 $7,299,563 $23,715,632
Income taxes 330,308 70,000 4,165,627
Cash received from income tax refund 3,854,492 -- --
Supplemental disclosure of non-cash investing and financing activities:
Common stock issued to acquire intangible assets in the amount of $913,982.
50
Note 19. Unaudited Supplemental Quarterly Financial Information
Below is selected quarterly financial data for each fiscal quarter during the
years ended December 31, 2002 and 2001. This information should be read in
conjunction with the consolidated financial statements included elsewhere
herein.
First Second Third Fourth
Quarter Quarter Quarter Quarter
------------------- ----------------- ------------------- ------------------
2002
Revenues $5,276,121 $5,961,733 $5,492,035 $5,657,990
Income (loss) before taxes (617,874) (5,208,141) (1,755,631) (3,792,512)
Net income (loss) (407,874) (3,518,141) (1,085,631) (2,662,512)
Basic earnings per share (0.29) (2.47) (0.74) (1.82)
Diluted earnings per share (0.29) (2.47) (0.74) (1.82)
2001
Revenues $13,266,653 $9,422,030 $6,587,705 $6,071,433
Income (loss) before taxes (1,413,124) (2,046,968) (3,055,757) (2,537,957)
Net income (loss) (803,124) (1,169,968) (1,802,757) (3,165,907)
Basic earnings per share (0.57) (0.83) (1.28) (2.25)
Diluted earnings per share (0.57) (0.38) (1.28) (2.25)
51
Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
On June 27, 2002, we engaged Ernst & Young LLP to serve as our independent
auditors for 2002. Prior to that date, Arthur Andersen LLP had served as our
independent public accountant. The decision to replace Arthur Andersen LLP was
recommended by the Audit Committee of our Board of Directors and approved by our
Board of Directors.
The report of Arthur Andersen LLP dated February 27, 2002 expressed an
unqualified opinion on the consolidated financial statements for JB Oxford
Holdings and subsidiaries as of and for the two years ended December 31, 2001
and 2000.
Furthermore, during the two most recent fiscal years ended December 31, 2001 and
2000, and the subsequent interim period up through June 27, 2002, there were no
disagreements with Arthur Andersen LLP on matters of accounting principle or
practices, financial statement disclosure, or audit scope or procedure that, if
not resolved to their satisfaction, would have caused Arthur Andersen LLP to
refer to the subject matter in connection with their report on our consolidated
financial statements for such years; and there were no reportable events as
defined in Item 304(a)(1)(v) of Regulation S-K.
We provided Arthur Andersen LLP with a copy of the foregoing disclosures. A copy
of a letter dated June 27, 2002 from Arthur Andersen LLP addressed to the
Securities and Exchange Commission stating its agreement with such statements is
attached as Exhibit 16 to our Form 8-K filed on June 28, 2002.
During our two most recent fiscal years and the subsequent interim period up
through June 27, 2002, we did not consult Ernst & Young LLP, with respect to the
application of accounting principles to a specified transaction, either
completed or proposed, or the type of audit opinion that might be rendered on
our consolidated financial statements, or any other matters or reportable events
listed in Items 304(a)(1)(iv) and (v) of Regulation S-K.
During 2002, there were no disagreements with Ernst & Young LLP on any matter of
accounting principles or practices, financial statement disclosure or auditing
scope or procedure with respect to our consolidated financial statements that if
not resolved to the independent accountants' satisfaction, would have caused
them to make reference to the subject matter of the disagreement in connection
with their reports on our consolidated financial statements for the fiscal year
ended December 31, 2002 and there were no other matters or reportable events as
defined in Item 304(a)(1)(v) of Regulation S-K.
52
PART III
Items 10, 11, 12 and 13. Directors and Executive Officers of the Registrant;
Executive Compensation; Security Ownership of Certain Beneficial Owners and
Management; and Certain Relationships and Related Transactions
The information required by these Items is omitted because the Company will
file, by April 30, 2003, 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.
Item 14. CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
Within 90 days prior to the date of this report, we carried out an evaluation
(the "Evaluation"), under the supervision and with the participation of our
President and Chief Executive Officer ("CEO") and Chief Financial Officer
("CFO"), of the effectiveness of the design and operation of our disclosure
controls and procedures ("Disclosure Controls"). Based on the Evaluation, our
CEO and CFO concluded that, subject to the limitations noted below, our
Disclosure Controls are effective in timely alerting them to material
information required to be included in our periodic SEC reports.
Changes in Internal Controls
We have also evaluated our internal controls for financing reporting, and there
have been no significant changes in our internal controls or in other factors
that could significantly affect those controls subsequent to the date of their
last evaluation.
Limitations on the Effectiveness of Controls
Our management, including our CEO and CFO, does not expect that our Disclosure
Controls and internal controls will prevent all error and all fraud. A control
system, no matter how well conceived and operated, can provide only reasonable,
not absolute, assurance that the objectives of the control system are met.
Further, the design of a control system must reflect the fact that there are
resource constraints, and the benefits of controls must be considered relative
to their costs. Because of the inherent limitations in all control systems, no
evaluation of controls can provide absolute assurance that all control issues
and instances of fraud, if any, within the company have been detected. These
inherent limitations include the realities that judgments in decision-making can
be faulty, and that breakdowns can occur because of simple error or mistake.
Additionally, controls can be circumvented by the individual acts of some
persons, by collusion of two or more people, or by management or board override
of the control.
The design of any system of controls also is based in part upon certain
assumptions about the likelihood of future events, and there can be no assurance
that any design will succeed in achieving its stated goals under all potential
future conditions; over time, control may become inadequate because of changed
in conditions, or the degree of compliance with the policies or procedures may
deteriorate. Because of the inherent limitations in a cost-effective control
system, misstatements due to error or fraud may occur and not be detected.
53
CEO and CFO Certifications
Appearing immediately following the Signatures section of this report there are
Certifications of the CEO and the CFO. The Certifications are required in
accordance with Section 302 of the Sarbanes-Oxley Act of 2002 (the Section 302
Certifications). This Item of this report, which you are currently reading is
the information concerning the Evaluation referred to in the Section 302
Certifications and this information should be read in conjunction with the
Section 302 Certifications for a more complete understanding of the topics
presented.
PART IV
Item 15. 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 Auditors 27
Report of Independent Public Accountants 28
Consolidated Statements of Financial Condition December 31, 2002 and 2001 29-30
Consolidated Statements of Operations Years Ended December 31, 2002, 2001 and
2000 31-32
Consolidated Statements of Changes in Shareholders' Equity (Deficit)Years Ended
December 31, 2002, 2001 and 2000 33
Consolidated Statements of Cash Flows Years Ended December 31, 2002, 2001 and 2000 34
Notes to Consolidated Financial Statements 35-51
Financial Statement Schedule I - Condensed Financial Statements (Parent Company Only) 57-61
Financial Statement Schedule II - Valuation and Qualifying Accounts 62
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).
4.2 Rights Agreement between the Company and Transfer Online, as Rights
Agent, filed herewith.
10.1 Standard Office Lease between St. George Beverly Hills, Inc. and OTRA
Clearing, Inc., dated January 31, 1992, to lease Beverly Hills office
space (incorporated herein by reference to Exhibit 10.3 of JBOH's
Annual Report on Form 10-K for the year ended December 31, 1991, filed
with the SEC).
54
10.2 Data Service Agreement between Securities Industry Software Corp. and
OTRA Clearing, Inc., dated June 8, 1992 (incorporated herein by
reference to Exhibit 10 of JBOH's Quarterly Report on Form 10-Q for the
period ended June 30, 1992, filed with the SEC).
10.3 Assignment and Assumption Agreement for Beverly Hills office space
between JBOH and RKSI, executed as of December 31, 1993 (incorporated
herein by reference to Exhibit 10.8 of the JBOH Form 10-K filed with
the SEC for the year ended December 31, 1993).
10.4 Commercial office lease Agreement between Bank of Communications. and
JB Oxford & Company, executed as of June, 1995, to lease New York
office space (incorporated herein by reference to Exhibit 10.1 of the
JBOH Form 10-Q filed with the SEC for the quarter ended June 30, 1995).
10.5 Commercial office lease Agreement between Brickell Square Corporation
Limited and JB Oxford Holdings, Inc., executed as of February 21, 1996,
to lease Miami office space, (incorporated herein by reference to
Exhibit 10.16 of the JBOH Form 10-K filed with the SEC for the year
ended December 31, 1995).
10.6 JB Oxford Revocable Government Trust Agreement, dated as of February
18, 1999, by and between JB Oxford Holdings, Inc. and Third Capital
Partners, LLC, as Trustee (incorporated herein by reference to Exhibit
10.1 of the JBOH Current Report on Form 8-K, dated March 8, 1999, filed
with the SEC).
10.7 Extension Agreement dated November 8, 1999, between the Company and
Third Capital Partners, LLC, extending the maturity date of the 9%
Senior Secured Convertible Note in the principal amount of $3,418,969
(incorporated herein by reference to Exhibit 4.3 of the JBOH Form 10-Q
filed with the SEC for the quarter ended September 30, 1999).
10.8 Extension Agreement dated November 8, 1999, between the Company and
Third Capital Partners, LLC, extending the maturity date of the 9%
Secured Convertible Note in the principal amount of $2,000,000
(incorporated herein by reference to Exhibit 4.4 of the JBOH Form 10-Q
filed with the SEC for the quarter ended September 30, 1999).
10.9 Amendment No. 6 to Commercial office lease Agreement between Arden
Realty Limited Partnership and JB Oxford & Company, executed as of
December 21, 2000, to lease Beverly Hills office space (incorporated
herein by reference to Exhibit 10.9 of the JBOH Form 10-K filed with
the SEC for the year ended December 31, 2000).
10.10 Amendment No. 7 to Commercial office lease Agreement between Arden
Realty Limited Partnership and JB Oxford & Company, executed as of
March 21, 2001, to lease Beverly Hills office space (incorporated
herein by reference to Exhibit 10.10 of the JBOH Form 10-K filed with
the SEC for the year ended December 31, 2000).
10.11 Commercial office lease Agreement between Kennedy-Wilson Properties,
Ltd. and JB Oxford & Company, executed as of January 18, 2001, to lease
Beverly Hills office space (incorporated herein by reference to Exhibit
10.11 of the JBOH Form 10-K filed with the SEC for the year ended
December 31, 2000).
10.12 Extension Agreement dated December 13, 2000, between the Company and
Third Capital Partners, LLC, extending the maturity date of the 9%
Senior Secured Convertible Note in the principal amount of $3,418,969
(incorporated herein by reference to Exhibit 10.12 of the JBOH Form
10-K filed with the SEC for the year ended December 31, 2000).
10.13 Extension Agreement dated December 13, 2000, between the Company and
Third Capital Partners, LLC, extending the maturity date of the 9%
Secured Convertible Note in the principal amount of $2,000,000
(incorporated herein by reference to Exhibit 10.13 of the JBOH Form
10-K filed with the SEC for the year ended December 31, 2000).
10.14 Extension Agreement dated December 31, 2001, between the Company and
Third Capital Partners, LLC, extending the maturity date of the 9%
Senior Secured Convertible Note in the Principal amount of $3,418,969
(incorporated herein by reference to Exhibit 10.14 of the JBOH Form
10-K filed with the SEC for the year ended December 31, 2001).
55
10.15 Extension Agreement dated December 31, 2001, between the Company and
Third Capital Partners, LLC, extending the maturity date of the 9%
Secured Convertible Note in the Principal amount of $2,000,000
(incorporated herein by reference to Exhibit 10.15 of the JBOH Form
10-K filed with the SEC for the year ended December 31, 2001).
10.16 Note Extension Agreement dated December 31, 2002 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 filed with the SEC on
February 13, 2003).
16. Letter to SEC from Arthur Andersen dated June 27, 2002 (incorporated
herein by reference to Exhibit 16 of JBOH's Current Report on form 8-K
filed with the SEC on June 28, 2002).
21 List of Subsidiaries, filed herewith.
23.1 Consent of Ernst & Young, filed herewith.
23.2 Notice regarding consent of Arthur Andersen LLP, Independent Public
Accountants, file herewith.
24 Power of Attorney (appears on signature page of this report).
28 Employee Stock Ownership Plan (incorporated herein by reference to
Exhibit 28 of JBOH's Annual Report on Form 10-K for the year ended
December 31, 1988, filed with the SEC).
99.1 Certification of Christopher L. Jarratt, Chief Executive Officer,
pursuant to Section 906 of Sarbanes-Oxley Act of 2002, filed herewith.
99.2 Certification of Michael J. Chiodo, Chief Financial Officer, pursuant
to Section 906 of Sarbanes-Oxley Act of 2002, filed herewith.
Reports on Form 8-K
During the fourth quarter, the Company did not file a Report on Form 8-K.
On February 13, 2003, the Company filed a Report on Form 8-K, dated February 13,
2003, reporting under Item 5, Other Events and Regulation FD Disclosure, the
Note Extension Agreement between the Company and Third Capital Partners, LLC.
56
Schedule I. Condensed Financial Information (Parent Company Only)
JB Oxford Holdings, Inc. Statements of Financial Condition
December 31
------------------------------
2002 2001
------------ ------------
Assets:
Cash and cash equivalents $ 745,969 $ 162,231
Investment in subsidiaries 18,857,192 33,322,484
Receivables from subsidiaries 2,848,881 2,820,369
Note receivable -- 2,500,000
Income taxes receivable 3,745,244 3,751,429
Deferred income taxes 1,862,019 1,470,058
Other assets 52,442 2,575,269
------------ ------------
Total assets $ 28,108,747 $ 46,601,840
============ ============
Liabilities and shareholders' equity:
Liabilities:
Accounts payable and accrued liabilities $ 4,578,045 $ 3,117,264
Net payables to subsidiaries -- 10,653,698
Loans from shareholders 5,418,696 5,418,696
Notes payable 1,889,375 4,629,375
------------ ------------
Total liabilities 11,886,116 23,819,033
------------ ------------
Commitments and contingencies (note 5)
Shareholders' equity:
Common stock ($0.01 par value, 100,000,000 shares authorized;
1,589,939 and 1,519,323 shares issued) 15,899 15,193
Additional paid-in capital 17,496,396 16,583,120
Retained earnings 1,329,564 8,803,722
Treasury stock, 130,494 shares at cost (2,619,228) (2,619,228)
------------ ------------
Total shareholders' equity 16,222,631 22,782,807
------------ ------------
Total liabilities and shareholders' equity $ 28,108,747 $ 46,601,840
============ ============
See accompanying notes.
57
JB Oxford Holdings, Inc. Statements of Operations
For The Years Ended December 31
------------------------------------------------
2002 2001 2000
------------ ------------ ------------
Revenues $ 2,376,011 $ 4,366,405 $ 4,550,797
------------ ------------ ------------
Expenses
General and administrative 1,271,365 3,508,483 4,846,650
Interest expense 736,481 1,128,057 791,046
Bad debt and settlement expense -- 141,667 65,875
------------ ------------ ------------
Total expenses 2,007,846 4,778,207 5,703,571
------------ ------------ ------------
Income (loss) before equity interest in subsidiary 368,165 (411,802) (1,152,774)
income
Equity interest in subsidiary income (loss) (11,742,373) (8,642,004) 9,810,762
------------ ------------ ------------
Income (loss) before income taxes (11,374,208) (9,053,806) 8,657,988
Income tax provision (benefit) (3,900,000) (2,112,050) 3,684,800
------------ ------------ ------------
Net income (loss) $ (7,474,208) $ (6,941,756) $ 4,973,188
============ ============ ============
JB Oxford Holdings, Inc. Statements of Cash Flows
For The Years Ended December 31
---------------------------------------------
2002 2001 2000
----------- ----------- -----------
Net cash provided by (used in) operating activities $ 1,625,031 $ 3,772,603 $ (358,191)
----------- ----------- -----------
Cash flows from investing activities:
Investment in subsidiaries (55,000) (77,500) (225,000)
Notes receivable -- -- (2,500,000)
Acquisitions of customer accounts (1,753,707) (2,400,000) --
Capital expenditures -- (1,536) (80,614)
----------- ----------- -----------
Net cash used in investing activities (1,808,707) (2,479,036) (2,805,614)
----------- ----------- -----------
Cash flows from financing activities:
Notes payable (2,740,000) (2,008,000) 4,742,251
Issuance of stock -- -- 215,150
Purchase of treasury stock -- (167,080) (1,667,443)
----------- ----------- -----------
Net cash provided by (used in) financing activities (2,740,000) (2,175,080) 3,289,958
----------- ----------- -----------
Net increase (decrease) in cash and cash equivalents 583,738 (881,513) 126,153
Cash and cash equivalents at beginning of year 162,231 1,043,744 917,591
----------- ----------- -----------
Cash and cash equivalents at end of year $ 745,969 $ 162,231 $ 1,043,744
=========== =========== ===========
See accompanying notes.
58
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 $2,160,000, $3,000,000 and $3,050,000 were received from JBOC
in 2002, 2001 and 2000, respectively. The balance of the revenues for 2002, 2001
and 2000 consists of rents received from subsidiaries for office space and
furniture and equipment and interest earned on cash balances.
Note 3. Restrictions on the Transfer of Funds from Subsidiary to the Parent
JBOC, as part of its normal broker-dealer activity has minimum capital
requirements as imposed by regulatory agencies that restricts the amount of
funds that can be transferred to the Parent Company. See Note 14 to the
consolidated financial statements for discussion of these requirements.
Note 4. Loans from Shareholders
The Company obtained $2,867,500 in demand notes from shareholders during 1997.
This debt bears interest at 8.25%, which is payable quarterly. The Company has
declined repayment of the debt based upon indemnification claims asserted in the
litigation arising out of the prior federal investigation (see Note 15,
"Commitments and Contingencies," to the consolidated financial statements).
In March 1995, the Company restructured 100% of its $5,031,000 demand debt to
term debt in the form of senior secured convertible notes (loans from
shareholders) with an original thirty month term, amortized over 10 years, at an
annual interest rate of 9%. As part of the restructuring, an additional
$2,000,000 of senior secured convertible notes were issued by the Company under
identical terms to the restructured demand debt.
In June 1998, the Company completed the sale of newly issued 9% Secured
Convertible Notes in the principal amount of $2,000,000 initially due December
31, 1999, and extended to December 31, 2002. The notes are convertible into the
Company's $0.01 par value common stock at a rate of $0.70 per share. In
conjunction with the above transaction, the purchasers of the newly issued 9%
Secured Convertible Notes and another investor also acquired approximately
$3,900,000 in outstanding principal amount of the Company's 9% Senior Secured
Convertible Notes. The Company agreed to reduce the conversion ratio from $1.00
to $0.70 per share of the Company's common stock for the entire $4,421,311 of
outstanding 9% Senior Secured Convertible Notes. The maturity date of the notes
was extended to December 31, 2002, and they are immediately convertible into
common shares. The Company incurred a one-time non-cash interest charge of
$2,530,000 in the second quarter of 1998 as a result of the discount conversion
feature on the debt instruments discussed above. The discount is based on the
difference between the conversion ratio and the fair value of the underlying
59
common stock at the time. Management fee expense of $918,000, $1,040,276and
$1,020,000 was paid to an affiliate of the holders of the new notes in 2002,
2001 and 2000.
In February 2003 the Company announced that it had entered into a Note Extension
Agreement whereby the maturity dates of the $3,418,696 Senior Secured
Convertible Note and the $2,000,000 Secured Convertible Note, both held by Third
Capital Partners, LLC, were extended for an additional year to December 31,
2003. As consideration for the extension, and to reflect the effect of the
reverse split which occurred in October 2002, the conversion rate on the Notes
was adjusted to $2.67 per share, which was the closing price of the Company's
common stock on the Nasdaq SmallCap Market on December 31, 2002. Under the
adjusted conversion rate, the Notes are convertible into 2,029,474 shares of
common stock. The issuance of the convertible notes was not registered under the
Securities Act of 1933 in reliance upon the exemption set forth in Section 4(2)
of that Act relating to transactions by an issuer not involving a public
offering.
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 declined payment on the
debt in light of the ongoing litigation between the Company and the alleged
assignor of the notes (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:
2002 2001
----------------------------------
Senior secured convertible notes $5,418,696 $5,418,696
Related interest expense for 2002, 2001 and 2000 was $487,683, $486,943 and
$489,019 for the convertible notes, the fair market value of such financial
instruments cannot be estimated.
Note 5. Commitments and Contingencies
The Company and/or its subsidiaries are a party to a number of pending legal,
arbitration or administrative proceedings incidental to its business, including
customer brokerage transactions claims as well as matters related to JB Oxford's
clearing services resulting from the failure of certain correspondents. All of
the legal, arbitration and administrative proceedings have arisen in the
ordinary conduct of the Company's business. To date, these proceedings have not
had a material effect on the Company's financial condition or results of
operations. However, in the aggregate the amount of these claims is substantial
and there can be no assurance that in future periods these proceedings will not
have a material adverse effect on the Company's financial condition or results
of operations. Those proceedings that management believes may have a significant
impact on the Company are described below.
60
In August 2002, JBOC, jointly and severally with several other unrelated
respondents, was ordered by an arbitration panel to pay an award of $3.0 million
in an arbitration matter conducted before the National Association of Securities
Dealers (NASD) Dispute Resolution. The arbitration matter, Secured Equity Title
and Appraisal Agency Corporation, Stanley J. Cohen, Receiver v. Monroe Parker
Securities, Inc., et al, was filed in September 1998 and JBOC's sole involvement
was limited to being the clearing broker for Monroe Parker Securities, Inc. JBOC
filed a motion to vacate the arbitration award. During the last quarter of 2002,
the Company entered into a settlement agreement with Secured Equity Title and
Appraisal Agency Corporation, Stanley J. Cohen, Receiver (the "Receiver"),
settling all claims between the parties, and resolving all then-pending
litigation between the Company, its subsidiary JBOC and the Receiver and
recorded a settlement expense in 2002.
This matter may also impact other litigation in which the Company is involved.
As previously reported the Company has refused to pay approximately $1.9 million
in promissory notes allegedly due EBC Trust and $1.0 million in subordinated
debt allegedly due Oeri Finance, Inc., both of whom were named respondents in
the Secured Equity Title matter and who the NASD ruled jointly and severally
liable together with JBOC in the award. In its refusal to pay, the Company has
asserted defenses and counterclaims, including a right of set-off related to
other litigation, including the claims settled with Secured Equity. In January
2003, the US District Court, Central District of California, reversed the
Magistrate's Order granting the assignee's application for writ of pre-judgment
attachment against the assets of JB Oxford Holdings, Inc. All assets previously
held by the US Marshall's office were returned to JB Oxford Holdings, Inc. As
stated above, the Company has previously recorded liabilities of approximately
$2.9 million on its balance sheet in notes payable and will seek to offset these
payables by any amount ultimately paid pursuant to the NASD award. However,
there can be no assurance that the Company will be successful in obtaining an
offset of these payables.
In February 2003, the Los Angeles office of the United States Attorney's Office
(the "USAO") agreed to extend the due date on the $500,000 payment then due
under the Settlement Agreement. The Company made a partial payment of $50,000 on
March 31, 2003, and the USAO has extended the time for any further payment until
June 2, 2003. The final payment of $500,000 remains due on February 14, 2004.
The Company originally accrued payments to the USAO and SEC totaling
approximately $3.0 million. Because the SEC investigation closed without action
or monetary assessment and due to the payments made to date, the amount accrued
has been reduced to $950,000.
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, 2002, were as follows:
Year ending December 31:
2003 $10,800
2004 10,800
2005 2,700
2006 --
2007 --
Thereafter --
-----------------
Total $24,300
=================
61
Schedule II - Valuation and Qualifying Accounts
Additions
Balance at charged to
beginning of costs and Balance at end of
period expenses Deductions period
------ -------- ---------- ------
2002:
Allowance for:
Receivable from customers $2,625,178 $ 138,512 $ (62,507) $2,701,183
2001:
Allowance for:
Receivable from customers $2,577,451 $1,146,244 $(1,098,517) $2,625,178
2000:
Allowance for:
Receivable from customers $1,601,178 $1,524,655 $ (548,382) $2,577,451
Deductions represent amounts written off.
62
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, JB Oxford Holdings, Inc. has duly caused this report to be signed
on its behalf by the undersigned thereunto duly authorized.
JB Oxford Holdings, Inc.
/s/Christopher L. Jarratt
- -------------------------------
Christopher L. Jarratt,
Chairman of the Board and
Chief Executive Officer
KNOW ALL MEN BY THESE PRESENTS that each person whose signature appears
below constitutes and appoints Christopher L. Jarratt his or her true and lawful
attorney-in-fact and agent, with full power of substitution and resubstitution,
for him or her and in his name or her name, place and stead, in any and all
capacities, to sign any and all amendments to this Annual Report of Form 10-K,
and to file the same, with all exhibits thereto and other documents in
connection therewith, with the Securities and Exchange Commission, granting unto
said attorney-in-fact and agent, full power to do and perform each and every act
and things required and necessary to be done in and about the premises, as fully
as he or she might or could do in person, hereby ratifying and confirming all
that said attorney-in-fact and agent or his substitutes or substitute, may
lawfully do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of JB Oxford Holdings,
Inc. and in the capacities and on the date indicated:
/s/Christopher L. Jarratt /s/James G. Lewis
- --------------------------- ------------------------------------------
Christopher L. Jarratt James G. Lewis, President, Chief Operating
Chairman of the Board and Officer and Director
Chief Executive Officer
/s/Michael J. Chiodo /s/Mark M. Grossi
- --------------------------- ------------------------------------------
Michael J. Chiodo Mark M. Grossi, Director
Chief Financial Officer, Treasurer,
Chief Accounting Officer
/s/David G. Mahood
------------------------------------------
David G. Mahood, Director
/s/Terry N. Pefanis
------------------------------------------
Terry N. Pefanis, Director
April 11, 2003
63
April 11, 2003
CERTIFICATIONS OF PRINCIPAL EXECUTIVE OFFICER
AND PRINCIPAL FINANCIAL OFFICER REQUIRED
PURSUANT TO SECTION 302 OF THE
SARBANES-OXLEY ACT OF 2002
I, Christopher L. Jarratt, certify that:
1. I have reviewed this annual report on Form 10-K of JB Oxford
Holdings, Inc.;
2. Based on my knowledge, this annual report does not contain any
untrue statement of a material fact or omit to state a material fact necessary
to make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by this
quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this annual report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure
that material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this annual report is
being prepared;
b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to the filing
date of this annual report (the "Evaluation Date"); and
c) presented in this annual report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed,
based on our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):
a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the registrant's ability
to record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
b) any fraud, whether or not material, that involves
management or other employees who have a significant role in the
registrant's internal controls; and
6. The registrant's other certifying officers and I have indicated in
this annual report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
Dated: April 11, 2003 By: /s/ Christopher L. Jarratt
---------------------------------
Christopher L. Jarratt
Chief Executive Officer
64
I, Michael J. Chiodo, certify that:
1. I have reviewed this annual report on Form 10-K of JB Oxford
Holdings, Inc.;
2. Based on my knowledge, this annual report does not contain any
untrue statement of a material fact or omit to state a material fact necessary
to make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by this
annual report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this annual report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure
that material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this annual report is
being prepared;
b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to the filing
date of this annual report (the "Evaluation Date"); and
c) presented in this annual report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed,
based on our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):
a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the registrant's ability
to record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
b) any fraud, whether or not material, that involves
management or other employees who have a significant role in the
registrant's internal controls; and
6. The registrant's other certifying officers and I have indicated in
this annual report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
Dated: April 11, 2003 By: /s/ Michael J. Chiodo
-----------------------------------
Michael J. Chiodo
Chief Financial Officer
65