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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, 2004
OR
|_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from ______________ to _______________
Commission File Number 0-16240
JB Oxford Holdings, Inc.
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(Exact name of registrant as specified in its charter)
UTAH 95-4099866
(State or other jurisdiction of incorporation or organization) (I.R.S. Employer Identification No.)
15165 Ventura Boulevard, Suite 330, Sherman Oaks, CA 91403
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (818) 907-6580
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Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Title of each class Common stock, $0.01 par value:
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 |_|.
Indicate by checkmark whether the registrant is an accelerated filer (as
defined in rule 12b-2 of the Act). |_|.
The aggregate market value of the voting stock held by non-affiliates of
the registrant as of the last business day of the registrant's most recently
completed second fiscal quarter was approximately $4,744,230 computed based on
the closing price of the stock on June 30, 2004.
Indicate the number of shares outstanding of each of the registrant's
classes of common stock, as of the latest practicable date: 3,739,413 shares
outstanding at March 4, 2005.
Documents Incorporated by Reference: Portions of the registrant's
definitive proxy statement for the 2004 annual meeting, which will be filed on
or before 120 days after December 31, 2003, are incorporated by reference into
Part III, Items 10 - 14 of this Form 10-K.
PART I
Item 1. Business
Overview
JB Oxford Holdings, Inc. (Nasdaq: JBOH), through its JB Oxford & Company and
National Clearing Corp. subsidiaries, previously provided clearing and execution
services, and discount brokerage services with access to personal brokers,
online trading and cash management. In late 2004, the company completed the sale
of its retail, clearing and execution services, and maintains only its
institutional trading and market making activities.
Our former retail subsidiary is JB Oxford & Company ("JBOC"). JBOC was a
registered broker-dealer offering discount and electronic brokerage services to
the investing public. JBOC withdrew its broker/dealer license at the end of
2004. JBOC is now looking at investment opportunities for the proceeds of the
sale of assets to Ameritrade, Inc. in 2004.
Our institutional trading subsidiary is National Clearing Corp ("NCC"). NCC is a
registered broker-dealer, offering market making and institutional trading
services to institutional clients. NCC formerly was a self-clearing
broker/dealer offering clearing services to other broker/dealers. It ceased
offering clearing services in September 2004.
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 Sherman Oaks, California.
Our principal executive offices are located at 15165 Ventura Boulevard, Suite
330, Sherman Oaks, California 91403 and our telephone number at such address is
(818) 907-6580. Copies of our filings with the Securities and Exchange
Commission are available from the Company free of charge upon request, or can be
downloaded from the SEC's website (www.sec.gov).
Our Operations
Our operations are conducted primarily through our two wholly-owned
subsidiaries, JBOC and NCC. JBOC is looking at investment opportunities while
considering future business alternatives and NCC provides market making and
institutional trading services.
Our Investment Activities
Our JBOC subsidiary received $14 million in October 2004 from the sale of assets
to Ameritrade, Inc. In January 2005, we received an additional $8.3 million. The
final payment of $3.5 million is held in escrow under the terms of the Asset
Purchase Agreement with Ameritrade and is payable in 2006, less the amount of
any liabilities to Ameritrade thereunder.
Upon receipt, the sales proceeds were invested in cash equivalents such as money
market funds. In addition, on December 2, 2004, the Company, through a new 99.9%
owned subsidiary of JBOC, Dolphin Bay, LLC, acquired approximately 10 acres of
undeveloped land in Walton County, Florida, for $5.5 million. The Company
capitalized Dolphin Bay with approximately $2.413 million, and Dolphin Bay
obtained a loan in the amount of $2.6 million from a commercial bank. Dolphin
Bay paid $4.7 million of the purchase price in cash and delivered its promissory
note to the seller for the remainder of the purchase price ($800,000). Dolphin
Bay paid approximately $313,000 in closing costs on the acquisition, including
an interest reserve of $214,500 on the bank loan. Mortgages on the acquired
property secure the loans from the bank and from the seller. The Company
acquired the land as an investment in order to maximize the overall return of
its invested funds. The Company has not determined whether to hold the land for
short-term appreciation, longer-term appreciation or development. To assist with
management of the current investment, as well as to examine additional potential
investments, in December 2004, we purchased a 2001 Piper Meridian aircraft
through our FiCorp, Inc. subsidiary. The purchase price was $1,115,000.
2
JBOC continues to look for additional investment opportunities, including the
investment in, or acquisition of, an operating business. However, no decisions
have been made with regard to any particular further investment.
Our Market Making and Institutional Trading Services
Through our NCC subsidiary, we are an introducing broker-dealer, which provides
market making and institutional trading services for institutional customers. We
are registered with the SEC and the NASD. Our revenue from this business during
the fourth quarter of 2004 was $251,750.
In order to facilitate the execution of security transactions for our customers,
we act as a market maker for approximately 10 public corporations whose stocks
are traded primarily on the NASDAQ over-the-counter Bulletin Board System. We
derive revenue in our market making activities by going at risk against the
market to fill customer orders, and then entering into further trades to close
the position. Our revenue in this regard is the difference between the prices we
fill customer orders and the prices we incur to close the positions. Because
these activities are subject to many variables, including the specific security,
the level of overall trading in the market and the activities of competitors who
are also market making, the revenue we derive from these activities will vary.
Generally, we do not maintain inventories of securities for sale to our
customers.
We continually review and monitor these activities to ensure that established
policies are adhered to and that we operate in compliance with applicable
regulatory requirements. In addition, all of our market making activity is
reviewed on a near constant basis by the NASD through its automated trade review
system.
Governmental Regulations
General Securities Industry Regulations. The securities industry is subject to
extensive regulation and broker-dealers are subject to regulations covering all
aspects of the securities business. The SEC, NASD, and other self-regulatory
organizations and state and foreign regulators can, among other things, fine,
issue cease-and-desist orders to, suspend or expel a broker-dealer or any of its
officers or employees.
Our ability to comply with applicable laws and rules is largely dependent on our
internal system to ensure compliance, as well as our ability to attract and
retain qualified compliance personnel. We could be subject to disciplinary or
other actions in the future due to claimed noncompliance, which could have a
material adverse effect on our operations and profitability.
3
Federal Regulations. In general, broker-dealers are required to register with
the Securities and Exchange Commission ("SEC") and to be members of the National
Association of Securities Dealers "NASD." As such, we are subject to
requirements of the Securities Exchange Act of 1934 and the rules promulgated
thereunder relating to broker-dealers and to the Rules of Fair Practice of the
NASD. These regulations are extensive and establish, among other things, the
following:
o minimum net capital requirements for our brokerage subsidiary, NCC.
o rules regulating the trading of securities on behalf of customers
and the Company.
State Regulations. We are also subject to regulation under various state laws in
all 50 states and the District of Columbia, including registration requirements.
For the most part, however, state regulators typically rely on the existing
federal and self-regulatory organization rules for governing the actions of
broker-dealers. During the first quarter of 2005, we have withdrawn from
approximately 40 states and are no longer subject to the registration
requirements of those states.
Net Capital Requirements. We are subject to SEC Rule 15c3-1, Net Capital
Requirements For Brokers or Dealers, which establishes minimum net capital
requirements for broker-dealers. Rule 15c3-1 is designed to measure financial
integrity and liquidity in order to assure the broker-dealer's financial
stability within the securities market. The net capital required under Rule
15c3-1 depends in part upon the activities engaged in by the broker-dealer.
In computing net capital under Rule 15c3-1, various adjustments are made to
exclude assets not readily convertible into cash and to reduce the value of
other assets, such as a firm's position in securities. A deduction is made
against the market value of the securities to reflect the possibility of a
market decline prior to sale. Compliance with Rule 15c3-1 could require
intensive use of capital and could limit our future business operations. Failure
to comply with the minimum net capital requirements of Rule 15c3-1 would require
us to infuse additional capital into our NCC subsidiary, which could limit our
ability to pay our debts and/or interest obligations, and may subject us 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
increase the level of capital into that business or otherwise bring us into
compliance, we would ultimately be forced to cease its operations.
We have elected to use the alternative method of net capital computation, as
permitted by Rule 15c3-1, which requires us 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, 2004, NCC had
net capital of $2,640,170, which was $2,390,170 in excess of the $250,000
minimum required. JBOC, as an introducing broker-dealer, had net capital
requirements of only $5,000, as it did not hold customer funds or securities.
Further, JBOC withdrew as a broker/dealer at year-end, and no longer has any net
capital requirement. We file a Form X-17A-5 containing our Net Capital
calculations on a monthly basis with the NASD. In addition, these calculations
are reviewed during all periodic examinations by our regulators; the last such
examination occurred in May 2004. Reviews of our Form X-17A filings have not
resulted in any material action being taken by the NASD with respect to our Net
Capital Requirements.
Our Insurance
We maintain general liability insurance in amounts we believe are sufficient for
our operations. These current policies expire in April of 2005. Some of the
claims against us, however, could exceed the scope of our coverage in effect or
coverage of particular claims or damages could be denied. In addition, we may
not be able to obtain adequate insurance at a reasonable cost in the future.
4
Our Competition
Our execution and market making business faces competition in seeking new
clients from other broker-dealers, such as UBS PaineWebber, Merrill Lynch,
Pierce, Fenner & Smith Incorporated and Smith Barney, Inc. (a subsidiary of
Citigroup, Inc.), among other traditional firms, as well as Charles Schwab &
Co., Inc. and other discount brokerage firms that also provide market making
and/or institutional trading services. Competition is based upon many factors,
including reputation, size, experience, advertising, services, relationship,
cost and reliability. Many of our competitors in this business have
significantly greater resources than we have.
Our Employees
As of March 4, 2005, we had 9 employees. In October 2004, once the sale of
assets to Ameritrade was completed, we laid off the majority of our employees.
Item 2. Properties
Our principal offices are located at 15165 Ventura Blvd., Suite 330, Sherman
Oaks, California 91403.We lease or conduct our operations from, and have our
administrative offices at, the following locations:
Location Area (Sq. Feet) Principal Use Lease
-------- --------------- ------------- -----
One Exchange Plaza, 19th Floor 6050 Vacated - Sublet Expires Dec. 2006
New York, NY 10006
15165 Ventura Blvd., Suite 330 2,370 Administration and Expires Oct.. 2006
Sherman Oaks, CA 91403 NCC Operations
109 South Seventh Street, Suite 111 1,100 Vacated Expires Feb. 2008
Minneapolis, MN 55402
Our offices, 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 Beverly Hills,
Oakland, and Miami office leases, and we have sublet our space in New York.
Item 3. Legal Proceedings
In addition to those matters described below, we are from time to time subject
to legal, arbitration or administrative proceedings arising in the ordinary
course of our business, including claims by former customers relating to
brokerage services, as well as matters related to our former clearing services.
We are also subject to periodic regulatory audits and inspections by the SEC and
NASD that could give rise to claims against us. While we make provision for a
liability when it is probable that a liability has been incurred and the amount
of the loss can be reasonably estimated, legal matters are inherently
unpredictable and expensive to defend. If there are adverse outcomes in our
legal proceedings, it could have a material adverse effect on our business and
financial condition. Those proceedings that management believes may have a
significant impact are described below. However, there can be no assurance that
in the future, other current or future proceedings will not have a material
adverse effect on our financial condition or results of operations. In
particular, if we were required to pay a judgment in excess of the amount
reserved, such a payment would negatively impact the financial condition of the
Company. We regularly assesses its potential liability in all pending litigation
to properly set the level of reserves for such litigation. To the extent that
the reserves are sufficient to cover all awards and settlements, no currently
threatened or pending litigation should materially impact the our financial
position, results of operations or cash flows. Our aggregate reserve for pending
litigation was $611,452 as of December 31, 2004.
5
SEC Mutual Fund Lawsuit
On or about August 24, 2004, the SEC's Los Angeles Office commenced a civil
lawsuit against the Company, NCC, and three of its former officers and
employees, alleging violations of Section 17(a) of the Securities Act of 1933,
Section 10(b) of the Exchange Act of 1934 and Rule 10b-5 thereunder, and Section
22(c) of the Investment Company Act of 1940 and Rule 22c-1 thereunder. In
January 2005, all claims under Section 17(a) of the Securities Act of 1933 were
dismissed by the Court, with prejudice. The remaining claims remain pending. The
suit seeks unspecified monetary damages and penalties, as well as other remedies
against the individual defendants. The suit contends that we wrongfully allowed
customers to place mutual fund trades after 4:00 p.m. EST, and wrongfully
assisted clients in "market timing" of mutual funds. While we admit no
wrongdoing and intend to vigorously defend ourselves, no assurance can be given
as to the outcome of this matter. Although the likelihood of loss is reasonably
possible, we have not accrued any specific amounts related to this matter, as no
amount of loss in the our estimated range of loss of zero to $20 million is more
likely than another.
Litigation Related to Oeri Notes
We are a party to a lawsuit entitled EBC Trust v. JB Oxford Holdings, Inc., et
als., pending in the Federal District Court in Los Angeles. In this suit, EBC
Trust, as the assignee of certain notes described below issued by us is seeking
payment of the $2.9 million of such notes. We issued $2.9 million in demand
notes to former shareholders during 1997. The notes bore interest at 8 1/4%,
payable quarterly. In 1998, $250 thousand was paid on the demand notes. In 1999,
$728 thousand of the debt was forgiven by Oeri Financial, Inc. and Felix A. Oeri
(collectively "Oeri"), leaving a balance due of $1.9 million, which was
reclassified to notes payable in 1999. A $1.0 million subordinated loan
agreement, payable to Oeri Finance, Inc., matured by its terms on March 31,
1999. The balance due was reclassified to note payable at that time.
Since in or about March 1999, we have refused to make payment under the notes
payable totaling approximately $2.9 million, plus interest, and has asserted
defenses and counterclaims against the alleged holders of the notes related to:
i) an award entered jointly against us and the holders related to alleged
wrongful conduct by our NCC subsidiary in clearing certain customer accounts
during the time that the holders of the notes payable ran the Company; and, ii)
we have acquired a Judgment against Oeri Finance, Inc., which we intends to use
as a set-off against claims on the notes payable. The amount of the Judgment
acquired is substantially in excess of the total claimed due on the notes
payable.
6
In July 2002, the court magistrate granted a pre-judgment attachment against our
assets in favor of EBC Trust. In January 2003, the Court reversed the
magistrate's order and dissolved the attachment. In January 2003, EBC Trust
amended its claim to assert additional claims against us and to add claims
against our officers and directors, as well as to add a claim against NCC under
the $1.0 million Oeri subordinated note. By Order dated October 14, 2003, in
response to motions filed by us, the Court dismissed several claims, struck
portions of the Amended Complaint, and compelled EBC Trust to arbitrate all
claims against NCC.
As to the remaining claims, we have asserted a number of defenses to EBC Trust's
claims, including fraud, and contribution related to a judgment entered against
EBC Trust's predecessor-in-interest under the notes payable and NCC in an NASD
arbitration commenced by Stanley J. Cohen, Receiver for Secured Equity Title and
Appraisal Agency Corp. While normally a clearing case, the panel ruling relied
primarily on testimony regarding the activities of Irving Kott while present at
the Company. Mr. Kott is alleged to have provided most of the funds for the
loans now being pursued by EBC Trust. NCC settled all of the claims against it
in that matter in 2002, and as a part of that settlement, obtained the
assignment from Secured Equity of a Judgment against Oeri Finance, Inc.
Accordingly, we have asserted a claim of offset for the Judgment against Oeri
Finance, Inc. We recorded liabilities of approximately $2.9 million on our
balance sheet in notes payable, additionally, we have $816 thousand of accrued
interest related to these notes included in accounts payable and accrued
expenses. We have not yet recorded the offset of the judgment obtained in our
financial statements as the claim has not yet been adjudicated.
In December 2003, EBC Trust commenced an arbitration action with the National
Association of Securities Dealers, Inc., against JBOC, seeking recovery on the
$1.0 million subordinated note originally issued to RMS Network, Inc., and
subsequently assigned with approval from our NCC subsidiary and the NASD to Oeri
Finance, Inc. We intend to vigorously defend the action and believe that we have
meritorious defenses including, without limitation: i) the suit is brought
against the wrong party; ii) no valid assignment has ever been approved by us or
the NASD to EBC Trust, as required by the terms of the note; and iii) we will
assert an offset for the Judgment obtained against Oeri Finance, Inc., described
above.
Litigation Related to Correspondent Clearing
On August 20, 2004, NCC settled two pending arbitrations involving claims of
approximately 60 former customers of correspondent firms that previously cleared
through NCC. The settlement called for a lump sum payment by the Registrant of
$1.25 million on or before October 18, 2004, which payment was timely made. As a
result of this settlement, the Company recorded a charge of $750 thousand,
representing the amount paid in excess of the Company's litigation accrual at
the end of the third quarter.
Litigation Related to Account Acquisitions
In October 2002, Share King LLC, as successor to Mr. Stock, Inc. commenced an
arbitration proceeding related to the acquisition by us of the accounts of Mr.
Stock. We counter-sued for violations of the purchase agreement by Mr. Stock.
That litigation was settled in August 2003, on terms more favorable to us than
we originally accrued for, and the cost of the Mr. Stock acquisition was
adjusted down $356 thousand in 2003, as a result of settlement of the
arbitration. As a part of the settlement, we are required to distribute cash
and/or stock, at our election to Share King LLC. In early 2004, a further
dispute arose with Share King LLC regarding the registration requirements
related to the stock to be issued. In October 2004, we settled the dispute with
Share King LLC by making a one-time payment of $1.4 million. As a part of that
settlement, all shares issued to Share King LLC were returned to the Company and
were cancelled.
7
In a related action commenced in January 2005, OCC Ventures, LLC commenced suit
against Share King LLC and us alleging breach of the lease buyout agreement. In
March 2005, we reached a settlement with OCC Ventures, pursuant to which we have
made payments totaling approximately $686,000. In exchange, we have received a
return of 112,300 shares of our common stock to be cancelled, and a release of
the outstanding note to OCC Ventures. We have accrued a loss of approximately
$16,000 for the premium paid in excess of market value for the 112,300 shares at
December 31, 2004.
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
During the 4th quarter of 2004, three matters were submitted to a vote of our
stockholders.
At a special meeting held on October 7, 2004, our stockholders approved the sale
of substantially all the assets of our JBOC subsidiary to Ameritrade, Inc.,
pursuant to the terms of an asset purchase agreement between the parties dated
June 4, 2004.
In addition, on December 13, 2004 stockholder votes were held for the election
of directors and ratification of the appointment of BDO Seidman LLP as our
auditors.
PART II
Item 5. Market for Registrant's Common Equity, Related Shareholder Matters, and
Issuer Purchase of Equity Securities
Our common stock is traded in the over-the-counter market with prices quoted on
the NASD's Automated Quotation System SmallCap market ("NASDAQ") under the
trading symbol "JBOH." Quotations given are from NASDAQ and represent prices
between dealers exclusive of a retail mark-up, mark-down, or commission. They do
not necessarily represent actual transactions.
Stock Price and Dividend Data
Month Ended
1-31-05 2-28-05
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Price range of common stock
High $2.49 $2.30
Low 2.05 2.06
Close at end of period 2.22 2.27
8
Quarter Ended
3-31-04 6-30-04 9-30-04 12-31-04
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Price range of common stock
High $5.22 $4.14 $2.94 $4.24
Low 2.69 1.90 1.20 1.83
Close at end of period 4.11 2.59 2.50 2.18
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Quarter Ended
3-31-03 6-30-03 9-30-03 12-31-03
-------------- ------------- -------------- --------------
Price range of common stock
High $3.30 $5.10 $6.25 $4.01
Low 1.95 2.13 2.90 2.76
Close at end of period 2.30 4.46 3.75 3.12
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The number of record holders of our common stock as of March 4, 2005 was 319. We
believe the number of beneficial holders of our common stock as of March 4,
2005, the most recent date for which this data is available to us, was
approximately 7,250.
Dividends
We have not declared or paid cash dividends on our common stock. We are looking
at investment opportunities while considering business alternatives, and 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.
Sales of Unregistered Securities
In September 2004, Third Capital Partners, LLC converted $5.4 million of Secured
Convertible Notes into 2,029,474 shares of common stock, in accordance with the
terms of the Secured Convertible Notes. The common stock issued upon conversion
of the 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 September 2003 we issued 120,000 shares of our common stock to OCC Ventures,
LLC, in reliance upon the exemption set forth in Section 4(2). As a part of the
settlement of all outstanding matters with OCC Ventures, LLC, in April 2004, we
reacquired and cancelled 112,300 shares of the stock issued to OCC Ventures,
LLC, and received a release under the outstanding note and settlement agreement,
for a combined payment of $686 thousand. Please see Item 3, Legal Proceedings,
above, for more information.
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. All
per share amounts have been adjusted to give retroactive affect of the 1 for 10
reverse stock split effective in October 2002.
9
JB Oxford Holdings, Inc.
Selected Consolidated Financial Information
(Amounts in thousands, except per share data)
Income Statement Data: 2004 2003 2002 2001 2000
- ---------------------- ---- ---- ---- ---- ----
Revenues $ 523 $ 11 $ 18 $ 160 $ 204
Net loss from continuing operations (6,495) (4,547) (5,127) (5,675) (4,722)
Net income (loss) from
discontinued operations 14,659 (1,402) (2,347) (1,267) 9,695
Net income (loss) 8,164 (5,949) (7,474) (6,942) 4,973
Basic net income (loss) per share:
From continuing operations (2.71) (2.93) (3.57) (4.05) (3.32)
From discontinued operations 6.12 (0.90) (1.64) (0.90) 6.82
Basic net income (loss) per share 3.41 (3.83) (5.21) (4.95) 3.50
Diluted net income (loss) per share:
From continuing operations (2.71) (2.93) (3.57) (4.05) (1.89)
From discontinued operations 6.12 (0.90) (1.64) (0.90) 4.14
Diluted net income (loss) per share 3.41 (3.83) (5.21) (4.95) 2.25
Dividends -- -- -- -- --
Balance Sheet Data:
- -------------------
Total Assets $ 35,602 $ 262,905 $ 264,585 $ 262,439 $ 352,254
Long-term and Subordinated Debt 236 403 -- -- 3,734
Liabilities (Excluding Long-Term) 11,099 251,541 248,362 239,656 318,628
Total Shareholders' Equity 24,503 10,961 16,223 22,783 29,892
Book Value Per Share (1) 6.58 6.55 11.12 16.40 21.27
- -----------------------------------------------------------------------------------------------------------------------
(1) Computed using shareholders' equity divided by total outstanding common
stock.
Item 7. Management's Discussion and Analysis Of Financial Condition and Results
Of Operations
Special Note Regarding Forward-Looking Statements
Some of the statements contained in this section of the Annual Report on Form
10-K constitute "forward-looking statements" within the meaning of the Private
Securities Litigation Reform Act of 1995 (the "Reform Act"). These
forward-looking statements involve known and unknown risks, uncertainties, and
other factors which may cause 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 under "Risk Factors"
after Item 7A below.
10
Executive Level Overview
In the last four months of 2004, we completed the sale of both our retail
brokerage business, formerly conducted by JBOC, and our correspondent clearing
business, formerly conducted by NCC. Our only continuing brokerage business,
after completion of those asset sales, is a small market making and
institutional trading business conducted by NCC.
In late 2004, we acquired raw land in Destin, Florida, for speculation or
possible development. We also acquired an airplane, a 2001 Piper Merdian, to
assist with any possible development of the land, and to assist with locating
additional properties or other business ventures to invest in. We have not yet
made any decision as to whether to develop the property, or whether to acquire
other properties for speculation or development.
We are also considering other business opportunities; however, we have made no
decisions on any particular opportunity.
Critical Accounting Policies
Our discussion and analysis of our financial condition, results of operations
and cash flows are based on our consolidated financial statements, which have
been prepared in conformity with Generally Accepted Accounting Principles
accepted in the United States ("GAAP"). Note 2 to the Consolidated Financial
Statements contains a summary of our significant accounting policies, many of
which 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. We believe the following policies are noteworthy because
they are based on estimates and assumptions that require complex, subjective
judgments by management that can materially impact reported results on a going
forward basis. Estimates are made based upon information currently available at
the time the financial statements are prepared and we feel most reasonably
likely to occur, actual results may materially differ from those estimates. To
date, estimates made by management have not been materially different from
actual results achieved and there has been no change in the methods of deriving
such estimates. If new information becomes available causing an estimate to
change, such change is accounted for in the period the new information became
available.
Securities Owned and Securities Sold, Not Yet Purchased. 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. The Company estimates fair values
of such securities using cost, in addition to economic and operating trends of
the investments and other relevant information. Realized and unrealized gains
and losses on securities owned and securities sold, not yet purchased, are
included in the statement of operations, net.
Allowance for Doubtful Accounts. We no longer carry the accounts of customers
and have ceased our clearing operation as of December 31, 2004. The balances
remaining at December 31, 2004 are the result of winding down those operations.
We continue to review our other receivables for collectibility and establish
allowance to cover known and inherent losses. Prior to the sale of our brokerage
operations, we reviewed our allowance for doubtful accounts on receivables from
broker-dealer and clearing organizations, customer receivables and other
receivables. We established allowances to cover known and inherent losses, which
consisted almost exclusively of margin accounts that had become unsecured due to
adverse market price movements. We set our allowance based upon historical
experience and the level of margin borrowing by our customers. In addition,
management considered the ratio of the value of collateral being held against
the outstanding margin loans as a basis of determining the adequacy of its
allowance for doubtful accounts. Accounts were charged off to the allowance once
the collateral was liquidated and other collection efforts had been exhausted.
As an introducing broker, we no longer carry margin balances for our customers.
11
Investment in Land. Land is currently held as an investment, as such all costs
to acquire the land have been capitalized, but interest cost to finance the
purchase will be expensed as incurred. It is currently unknown if we will
develop the land and there have been no costs to develop the land as of December
31, 2004. If we choose to develop the land or partner with a developer the
investment in land will be accounted for on the full accrual method. All costs
to acquire and improve and prepare the land for sale are capitalized as
incurred, including interest cost to finance the acquisition of property. The
gain or loss on a sale of real estate will be recognized when a sale has been
consummated. A sale has been consummated when the following conditions have been
met: 1) the parties are bound by the terms of a contract, 2) all consideration
has been exchanged, 3) any permanent financing for which the seller is
responsible has been arranged, and 4) all conditions needed to close the sale
have been, and the risk of ownership has been transferred from the seller to the
buyer. A valuation loss is recognized on investment in land when a permanent
impairment of value has occurred to the property, on a individual property
basis.
Depreciation of Aircraft. The aircraft we acquired in December will be
depreciated on a straight line basis over seven years.
Intangible Assets. Intangible assets consist of customer accounts acquired from
other securities broker dealers and are carried at cost net of accumulated
amortization. Amortization is provided for using an estimated useful life of
four years. Intangible assets are reviewed for impairment annually and whenever
events or changes indicate the carrying value of an asset may not be
recoverable. Impairment is determined based upon the estimated discounted cash
flow of the intangible assets being held. All intangible assets were sold in
2004.
Contingencies. Contingent liabilities arise in the ordinary course of business
through interaction with our customers with respect to securities transactions.
Contingencies may also arise through our other general business and regulatory
dealings. We accrue contingent liabilities based on known claims that are
asserted against us. When a loss contingency exists, the likelihood that the
future event or events will confirm the loss or impairment of an asset or the
incurrence of a liability can range from probable to remote. Contingent losses
are recorded when information available prior to issuance of the financial
statements indicates that it is probable the loss contingency will occur and the
amount of loss can be reasonably estimated.
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. Conversely, when it subsequently
becomes apparent that a valuation allowance is no longer required due to changes
in circumstances, this portion of the valuation allowance is reversed and
reduces our overall income tax expense. 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.
12
Fair Value of Financial Instruments. The Company's financial assets (excluding
capital 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
On December 16, 2004, the Financial Accounting Standards Board (FASB)
issued FASB Statement No. 123 (revised 2004), "Share-Based Payment," or SFAS
123(R), which is a revision of FASB Statement No. 123, "Accounting for
Stock-Based Compensation." SFAS 123(R) supersedes APB Opinion No. 25,
"Accounting for Stock Issued to Employees," and amends FASB Statement No. 95,
"Statement of Cash Flows." Generally, the approach in SFAS 123(R) is similar to
the approach described in Statement 123. However, SFAS 123(R) requires all
share-based payments to employees, including grants of employee stock options,
to be recognized in the statement of operations based on their fair values. Pro
forma disclosure is no longer an alternative.
SFAS 123(R) must be adopted by us for interim periods beginning after
January 1, 2006. Early adoption will be permitted in periods in which financial
statements have not yet been issued. We expect to adopt SFAS 123(R) on January
1, 2006. SFAS 123(R) permits companies to adopt its requirements using one of
two methods.
The first method is a modified prospective transition method whereby a
company would recognize share-based employee costs from the beginning of the
fiscal period in which the recognition provisions are first applied as if the
fair value-based accounting method had been used to account for all employee
awards granted, modified, or settled after the effective date and to any awards
that were not fully vested as of the effective date. Measurement and attribution
of compensation cost for awards that are non-vested as of the effective date of
SFAS 123(R) would be based on the same estimate of the grant-date fair value and
the same attribution method used previously under SFAS 123.
The second adoption method is a modified retrospective transition method
whereby a company would recognize employee compensation cost for periods
presented prior to the adoption of SFAS 123(R) in accordance with the original
provisions of SFAS 123, that is, an entity would recognize employee compensation
cost in the amounts reported in the pro forma disclosures provided in accordance
with SFAS 123. A company would not be permitted to make any changes to those
amounts upon adoption of SFAS 123(R) unless those changes represent a correction
of an error. For periods after the date of adoption of SFAS 123(R), the modified
prospective transition method described above would be applied.
We currently expect to adopt SFAS 123(R) using the modified prospective
transition method, and expect the adoption to have an effect on our results of
operations similar to the amounts reported historically in our footnotes (see
Note 2 to our audited financial statements) under stock-based compensation.
During the year ended December 31, 2004, we sold substantially all of our
revenue producing operations. Effective September 2004, we sold our
correspondent clearing operation of National Clearing Corporation and effective
October 2004, we sold our retail brokerage operation of JB Oxford & Company. We
still maintain a small institutional brokerage and market making operation, with
the market making operation making 10 or less markets, to facilitate the
transactions of our institutional clients. We also acquired land as an
investment, which we may or may not develop, and we acquired and aircraft to
assist management with the current investment, as well as to examine additional
potential investments. This new investment could create a separately
identifiable segment with which to report operations of in future periods. Our
discussion of the results of operations of the year ended December 31, 2004
compared to 2003 and for the year ended 2003 compared to 2002 has been
segregated between continuing and discontinued operations.
13
Results of Operations
Year Ended December 31, 2004 Compared to Year Ended 2003
Continuing Operations
Revenues
Revenues from ongoing institutional sales and trading services provided $462,652
in commission revenue and $60,527 in the sale of miscellaneous security
positions for in 2004. We did not provide such services in 2003.
Expenses
Our general and administrative expense increased by $2,510,111 or 59% to
$6,732,215 in 2004 from $4,222,104 in 2003. This increase resulted primarily
from professional fees that increased $2,423,512 to $4,696,066 in 2004 from
$2,272,554 in 2003. These fees were incurred largely due to the SEC mutual fund
investigation and the lawsuit against JB Oxford Holdings, Inc. ("the Parent
Company"). See Note 15 to the financial statements, below. General and
administrative expenses included employee compensation of $866,918 and
$1,255,980 for the years ended December 31, 2004 and 2003, respectively. The
reduction in employee compensation is primarily a result of the declining number
of executive staff personnel. Historical interest expense is comprised of
interest payments on the convertible notes due to shareholder. These notes were
converted in September 2004.
Interest. Interest earned for 2004 amounted to $294,657. This compares to
$232,656 of interest earned in 2003. The interest earned is primarily on the
note receivable from shareholder. Historical interest expense is comprised of
interest payments on the convertible notes due to shareholder. These notes were
converted in September 2004.
Income taxes. Income tax expense relates to ongoing state and local obligations
for 2004.
Loss from continuing operations. Loss from continuing operations was $6,495,307
for the year ended December 31, 2004 compared to $4,546,851 for 2003. The
primary cause for the change is the legal fees discussed above.
14
Discontinued Operations
Revenues
Revenues from discontinued operations were $11,528,561 in 2004, a decrease of
41% from $19,656,817 in 2003. This decrease of $8,128,256 was primarily
attributable to the continued loss of customers, and the fact that operations
did not continue through year end due to the disposal of retail and clearing
brokerage operations. The clearing operation was sold in September 2004, and the
retail operation sale was completed in October 2004.
Clearing and Execution. Clearing and execution revenues were generated
principally through transaction charges to our correspondent brokers. Clearing
and execution revenues decreased 41% to $1,704,167 in 2004, from $2,897,911 in
2003. Included in clearing and execution revenues were inactivity fees charged
to customers. These fees decreased $475,432 to $262,850 in 2004 from $738,283 in
2003. This reduction results from fewer inactive accounts as customers closed
accounts in response to the fees. Additionally, reorganization fees and payment
for order-flow were down $213,146 and $209,879, respectively, during 2004
compared to 2003.
Trading Profits. Trading profits were realized and unrealized revenues generated
from market making activities and other proprietary trading. Revenues from
trading profits decreased 85% to $326,443 in 2004, from $2,187,974 in 2003. The
decrease in 2004 was attributable to a decline in retail customer order flow
related to trading volumes. The reasons for the decline was two fold, first,
customer activity was down in 2004 compared to 2003, secondly, the firm
converted to a proprietary order management system wherein orders were routed
only to other markets and not internally. This conversion took place in May of
2004.
Commissions. Commission revenues were generated from security transactions from
our retail customers. Commission revenues decreased 40% to $5,326,811 in 2004,
from $8,880,119 in 2003. The decrease in commission revenue was because of an
overall decrease in customer activity during 2004 and the fact that there were
only three quarters of commissions in 2004 due to the sale of the retail
brokerage operations in the fourth quarter of 2004.
Interest. Interest was earned principally from retail customer margin balances.
Other interest was earned from investments made in cash required to be
segregated by federal and other regulations. Interest revenues decreased 25% to
$4,043,384 in 2004, from $5,400,032 in 2003. This was attributable to the
decline in receivables due from customers and in customer segregated cash
balances. Interest rates were related to rates established by the Federal
Reserve Board (Fed Funds). Fed Funds were increase by 0.25% in June 2004, by
0.25% in August of 2004, and by 0.25% in September 2004. Margin interest charged
to customer margin accounts declined $89,507 to $2,685,614 in 2004 from
$2,775,121 in 2003. Interest earned on the cash reserves of the Company declined
$1,209,239 to $1,208,430 in 2004 from $2,417,669 in 2003 due to decreasing
balances in these accounts.
Other. Other revenue consisted of fees charged to retail customers and
correspondents incidental to the securities business, in addition to other
miscellaneous amounts earned. Other revenues decreased 56% or $163,025 to
$127,756 in 2004, from $290,781 in 2003.
15
Expenses
Expenses from discontinued operations decreased 5% to $18,978,762 in 2004 from
$20,016,583 in 2003. The slight decrease was offset by one-time expenses related
to the discontinuance of our retail and clearing brokerage business. As
discussed below, there were one-time expense related to the terminations of
employees and buyout of lease and other service agreements.
Employee and Broker Compensation. Compensation expense was salary and benefits
paid to and on behalf of employees of the Company. All brokers and traders
employed by the Company were considered employees. Expenses for employee
salaries and broker compensation increased 1% in 2004 to $5,194,954 from
$5,152,334 in 2003. The increase was primarily attributable to the severance
paid employees that were terminated at the end of October 2004. Employees were
paid from 3 to 6 months salary depending on the time of service. The severance
cost amounted to approximately $850,000 in 2004.
Clearing and Floor Brokerage. Clearance and Floor brokerage expense consisted of
costs incidental to the execution, comparison, receipt, settlement, custody and
delivery functions involved in clearing securities transactions. Clearing and
floor brokerage expense decreased 1% in 2004 to $987,556 from $992,633 in 2003.
The decrease was attributable to lower trading volumes mixed with higher
clearing fees.
Communications. Communications expense consisted of the preparation and delivery
of confirmations and statements to retail customers as well as market data and
communication costs for our website operation and telephones. Communications
expense decreased 18% in 2004 to $1,672,995 from $2,033,351. The decrease was
attributable to reduced costs for statements and confirmations production of
$97,943 to $509,327 in 2004 from $601,270 in 2003. This reduction was the result
of fewer statements and confirmations to process and mail. Telephone and data
communications costs decreased $87,194 to $371,455 in 2004 from $458,649 in
2003. This reduction was primarily the result of telephone and data
communication technology becoming less expensive and more efficient.
Occupancy and Equipment. Occupancy and equipment costs consisted of office and
equipment rental along with related maintenance and deprecation expense.
Occupancy and equipment costs decreased 32% to $2,684,889 in 2004, from
$3,960,577 in 2003. Rent expense for office space decreased $460,317 to
$1,761,928 in 2004 from $2,222,245 in 2003. Additionally, lease commitments for
some of our office space in Beverly Hills expired on June 30, 2004. We also
incurred an expense of $315,000 for the early termination of our remaining
office space in Beverly Hills, California. The expiration of lease commitments
for equipment reduced equipment rental expense to $133,315 in 2004 from $298,881
in 2003, for a decrease of $165,566.
Interest. Interest cost consisted principally of interest paid on stock lending
activities, retail customer credit balances and interest paid on loans to
shareholders. Interest expense decreased 39% to $441,169 in 2004, from $724,980
in 2003. Interest on stock loan activities decreased $194,167 to $193,758 in
2004 from $387,925 in 2003. The primary cause of this decrease was a reduction
of stock lending activities in 2004 compared to 2003. Credit interest expense
decreased $37,703 to $97,411 in 2004 from $135,114 in 2003.
Data Processing. Data processing costs were computer service bureau expenses to
operate our back office accounting and securities system, as well as third party
data processing for our website. Data processing expense increased 21% to
$2,755,814 in 2004, from $2,284,778 in 2003. The increase in data processing
expense for 2004 was the result of a buy out of a service provider contract for
$1,000,000. We had a contract that obligated us to pay approximately $2,000,000
over the next three years. We also have an obligation for additional service
contracts that require us to pay $55,000 per month until June 2005. Maintenance
of our relationship with this service provider is necessary to file the
appropriate tax documents with the Internal Revenue Service for our customers
for their 2004 activity.
16
Professional Services. Professional services were expenses incurred for outside
legal counsel. Professional services expense decreased 26% to $157,568 in 2004
from $213,077 in 2003. Most all of the professional service expense has been
included as continuing operations as such expenses will be ongoing for the
foreseeable future.
Promotional. Promotional expense consisted of advertising and name branding of
the Company and its subsidiaries. Promotional expense decreased 23% in 2004 to
$189,686 from $246,363 in 2003.
Bad Debt Expense. Bad debt expense was a function of the commission revenue and
specific write-offs that may occur based on the collateral in customer margin
accounts. Bad debt expense consisted of unsecured balances primarily written off
from margin accounts that have been deemed by us to primarily be un-collectible.
It may also have included losses due to trade errors that may occur, such as
providing price adjustments to customers when a trade was not properly executed
by a market center. Any such loss would be reduced by any adjustment received
from the market center. Bad debt expense decreased 36% to $51,340 in 2004 from
$80,122 in 2003.
Settlement Expense. Settlement expense consisted of the amounts paid or accrued
in the settlement of arbitrations and other legal matters. Settlement expense
increased 109% to $971,658 in 2004 from $464,500 in 2003. The expense for 2004
includes the accrual of $750,000 for the settlement of two arbitrations
involving claims of approximately 60 former customers of correspondent firms
that previously cleared through our NCC subsidiary. Full payment of the
settlement amount occurred in October 2004 in full satisfaction of the claims.
Amortization of Intangible Assets. Amortization expense consisted of charging to
expense the cost of intangible assets acquired including any impairment of
value. Amortization expense of intangible assets decreased 68% to $454,586 in
2004 from $1,442,908 in 2003. This expense related to the amortization of the
cost of customer accounts acquired from other broker dealers. The decrease was
attributable to the assets being classified as held for sale at the end of April
2004, and, as a result, only four months of amortization expense is included in
2004.
Other Operating Expenses. Other operating expenses consisted of insurance,
registration, travel, supplies and other costs incidental to the operations of
the business. Included in this category for 2004 was the $1,619,288 charge for
the abandonment of property and equipment that we were unable to otherwise
dispose of in connection with the sale of retail accounts. Other operating
expenses increased 41% to $3,416,547 in 2004 from $2,420,960 in 2003.
Other - Disposal of Retail and Clearing Brokerage Operations. We sold our retail
brokerage accounts to Ameritrade, Inc. for a gain on disposal of $22,966,749,
net of the $2,503,251 of remaining book value of intangible assets sold and the
$400,000 finders fee paid to Third Capital, LLC, our majority shareholder. The
clearing operation was also sold in 2004 for a gain on disposal of $247,790.
17
Income Taxes. Provision for income taxes increased $63,052 to an income tax
expense in 2004 of $1,105,400 from $1,042,348 in 2003. The expense in 2004
includes $950,000 of deferred tax expense (relating to the election of the
installment method for the sale of retail brokerage accounts) to be paid in
future periods, which may be offset by future losses. We have elected the
installment method for our tax filings with respect to the sale of our retail
customer accounts. We have approximately $6,300,000 in net operating loss carry
forward for Federal tax purposes while we have deferred approximately $9,200,000
of taxable income by electing the installment method. The expense in 2003 is the
result of a valuation allowance taken on approximately $1 million of benefit
record in 2002. Approximately $2,900,000 of the income benefit recorded in 2002
was realized through the use of its available Federal net operating loss
carry-back.
Effective Tax Rate. 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.)
Net income (loss) from discontinued operations. Income from discontinued
operations was $14,658,938 for the year ended December 31, 2004 compared to a
loss of $1,402,114 for 2003. The primary cause for the change was the sale of
the retail brokerage operation discussed above.
Year Ended December 31, 2003 Compared to Year Ended 2002
Continuing Operations
Revenues
Other revenue during 2003 and 2002 consisted of various miscellaneous items. The
institutional sales and trading services began in 2004, therefore there were no
brokerage revenues in 2003 or 2002.
Expenses
Our general and administrative expense decreased by $544,076 or 11% to
$4,222,104 in 2003 from $4,766,180 in 2002. This decrease resulted primarily
from professional fees that declined $1,442,425 to $2,272,554 in 2003 from
$3,714,979 in 2002. General and administrative expenses included employee
compensation of $1,255,980 and $786,907 for the years ended December 31, 2003
and 2002, respectively.
Interest. Interest earned for 2003 amounted to $232,656. This compares to
$306,165 of interest earned in 2002. Historical interest expense is comprised of
interest payments on the convertible notes due to shareholder.
Loss from continuing operations. Loss from continuing operations was $4,546,851
for the year ended December 31, 2003 compared to $5,127,449 for 2002. The
primary cause for the change is the legal fees discussed above.
18
Discontinued Operations
Revenues
Our revenues from discontinued operations were $19,656,817 in 2003, an decrease
of 11% from $22,063,920 in 2002. This decrease of $2,407,103 million was
primarily attributable to decreases of $2,273,588 in interest income, $989,701
in clearing and execution and $573,682 in other revenue which were partially
offset by increases of $711,194 in commissions and $718,674 in trading profits.
Clearing and Execution. Clearing and execution revenues decreased 25% to
$2,897,911 in 2003, from $3,887,612 in 2002. The decrease in 2003 was primarily
attributable to a 24% decline in total trade volume, and from servicing a lower
number of correspondents. There had also been a downward trend of the pricing to
clear for correspondent brokers. Included in clearing and execution revenues
were inactivity fees charged to customers. These fees decreased $414,993 to
$738,283 in 2003 from $1,153,276 in 2002. This reduction results from fewer
inactive accounts as customers closed accounts in response to the fees.
Trading Profits. Revenues from trading profits increased 49% to $2,187,974 in
2003, from $1,469,300 in 2002. The increase in 2003 was primarily attributable
to profits from proprietary trading of approximately $1,000,000 offset by a 34%
decline in retail customer order flow related to trading volumes. Proprietary
trading opportunities included event-based situations in which the firm will
take either a long or short position in a specific security or securities.
Commissions. Commission revenues increased 9% to $8,880,119 in 2003, from
$8,168,925 in 2002. The increase in commission revenue was because of an
increase of $751,566 on option commissions from 2003 over 2002. We received the
full benefit during 2003 of the Mr. Stock accounts acquired late in 2002,
consisting of mostly option commissions. Option commissions represented 32% of
total commissions for 2003 and 25% in 2002. Commissions charged to mutual fund
accounts increase by $329,107 to $529,311 in 2003 from $200,204 in 2002. These
revenues ceased in 2003 as result of the investigation of mutual fund trading
being conducted by regulatory agencies (see Items 3 Legal Proceedings, SEC
Mutual Fund Investigation). Total JBOC retail discount and on-line trade volume
increased 25% in 2003. This was in part due to the acquisition of customer
accounts during 2002, offset by a revised commission schedule implemented in
April 2003 that lowered average commissions.
Interest. Interest revenues decreased 30% to $5,400,032 in 2003, from $7,673,620
in 2002. This was attributable to declines in receivables due from customers and
in customer segregated cash balances as well as declines in the interest rate
earned on segregated balances. Interest rates were related to rates established
by the Federal Reserve Board (Fed Funds). Fed Funds were reduced by 0.50% in
November 2002 and by 0.25% in June of 2003. Margin interest charged to customer
margin accounts declined $1,385,709 to $2,775,121 in 2003 from $4,160,830 in
2002. Interest earned on the cash reserves of the Company declined $1,010,650 to
$2,676,268 in 2003 from $3,686,918 in 2002.
Other. Other revenues decreased 66% to $290,781 in 2003, from $864,463 in 2002.
The revenue in 2002 was in large part due to receipt of a $225,000 legal
settlement and a $150,000 World Trade Center Recovery Grant.
19
Expenses
Expenses from discontinued operations decreased 29% to $20,016,583 in 2003 from
$28,310,630 in 2002. The decrease was primarily attributable to a decrease of
$2,607,945 in employee compensation, $1,018,543 in occupancy and equipment, and
$1,110,557 million in promotional expenses, offset by an increase of $650,494 in
other expense.
Employee and Broker Compensation. Expenses for employee salaries and broker
compensation decreased 34% in 2003 to $5,152,334 from $7,760,279 in 2002. The
decrease was primarily attributable to the decrease in the number of employees
of 21% to 91 in 2003 from 115 in 2002, partially offset by annual salary
increases.
Clearing and Floor Brokerage. Clearing and floor brokerage expense decreased 5%
in 2003 to $992,633 from $1,040,498 in 2002. The decrease was attributable to
lower trading volumes.
Communications. Communications expense decreased 23% in 2003 to $2,033,351 from
$2,645,776. The decrease was attributable to reduced costs for statements and
confirmations production of $90,585 to $601,270 in 2003 from $691,855 in 2002.
This reduction was the result of fewer statements and confirmations to process
and mail. Telephone and data communications costs decreased $405,698 to $458,649
in 2003 from $864,347 in 2002. This reduction was primarily the result of
telephone and data communication technology becoming less expensive and more
efficient.
Occupancy and Equipment. Occupancy and equipment costs decreased 20% to
$3,960,577 in 2003, from $4,979,120 in 2002. The decrease was attributable to
the sublet of unused office space. Rent expense for office space decreased
$339,833 to $2,222,245 in 2003 from $2,562,078 in 2002. The expiration of lease
commitments for equipment reduced equipment rental expense to $298,881 in 2003
from $581,403 in 2002, for a decrease of $282,522. These decreases were
partially offset by the establishment of offices in Minneapolis, Minnesota and
Oakland, California, and higher costs for utilities.
Interest. Interest expense decreased 50% to $724,980 in 2003, from $1,442,610 in
2002. Interest on stock loan activities increased $43,520 to $387,925 in 2003
from $344,405 in 2002. The primary cause of this increase was an increased
reliance on stock lending activities to finance customer margin in 2003,
partially offset by the reduction of Fed Funds rate explained in interest income
above. Credit interest expense decreased $208,583 to $135,114 in 2003 from
$343,697 in 2002. The decrease was attributable to a substantial decrease in the
rate paid on customer free credit balances from 0.75% in the beginning of 2002
to 0.10% beginning in June 2003.
Data Processing. Data processing expense decreased 1% to $2,284,778 in 2003,
from $2,316,927 in 2002. The decrease in data processing expense for 2003 was
the result of a reduction in total trade volume together with a slight increase
in rates.
Promotional. Promotional expense decreased 82% in 2003 to $246,363 from
$1,356,920 in 2002. The decrease was primarily due to the termination of
advertising utilizing print media and an increased use of Internet based
advertising services.
Bad Debt Expense. Bad debt expense decreased 42% to $80,122 in 2003 from
$138,512 in 2002.
Settlement Expense. Settlement expense consisted of the amounts paid or accrued
in the settlement of arbitrations and other legal matters. Settlement expense
decreased 85% to $464,500 in 2003 from $3,057,500 in 2002. The expense recorded
in 2002 was in large part the result of an arbitration award to Secured Equity
Title and Appraisal Company for $3,000,000.
20
Amortization of Intangible Assets. Amortization expense consisted of charging to
expense the cost of intangible assets acquired including any impairment of
value. Amortization expense of intangible assets decreased 20% to $1,442,908 in
2003 from $1,802,021 in 2002. This expense related to the amortization of the
cost of customer accounts acquired from other broker dealers. The decrease was
attributable to the decline in impairment expense of $0 compared to an
impairment expense of $563,726 in 2002 ($449,023 impairment on the Bull and Bear
acquisition and $114,703 impairment of the Stockwalk.com acquisition), partially
offset by a higher amortization rate.
Other Operating Expenses. Included in this category for 2003 was the $1,500,000
charge for the abandonment of the lease in Oakland, California. Other operating
expenses increased 37% to $2,420,960 in 2003 from $1,770,466 in 2002. The
increase was primarily attributable to the abandonment of the Oakland lease,
partially offset by reduced travel and entertainment expense.
Income Taxes. Provision for income taxes increased $4,942,348 to an income tax
expense in 2003 of $1,042,348 from an income tax benefit of $3,900,000 in 2002.
The expense in 2003 was the result of a valuation allowance taken on
approximately $1 million of benefit record in 2002. Approximately $2,900,000 of
the income benefit recorded in 2002 was realized through the use of its
available Federal net operating loss carry-back. We had realized all of our
available Federal net operating loss carry-back. This together with continued
operating losses and no projection of operating profits in the future made the
realization of the deferred tax asset unlikely. See Note 11 to the financial
statements available net operating loss carry forward information.
Effective Tax Rate. 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.
Loss for discontinued operations. Loss from discontinued operations was
$1,402,114 for the year ended December 31, 2003 compared to $2,346,710 for 2002.
The primary cause for the change employee and broker compensation discussed
above.
Non-recurring Charges
The accrual for an anticipated settlement with the prior SEC investigation
initiated in the late 1990's 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 accrued a settlement expense of $3,000,000 as the
result of an arbitration award in the same amount to Secured Equity Title and
Appraisal Company. (See Note 15. "Commitments and Contingencies" of the Notes to
Consolidated Financial Statements, below.)
In the third quarter of 2004 we charged $750,000 to settlement expense relating
to the settlement of a group of two pending arbitrations involving claims of
approximately 60 former customers of correspondent firms that previously cleared
through NCC. The settlement called for a lump sum payment by the Registrant of
$1.25 million on or before October 18, 2004, which payment was timely made.
Management evaluated the adequacy of its litigation reserve at the end of the
third quarter. As a result of this settlement, we recorded a charge of $750,000.
During the forth quarter of 2004 we paid $1,000,000 to buy out a data processing
commitment and also paid $315,000 to buy out its lease commitment for the
property in Beverly Hills, California. Employees were paid severance salaries,
which varied from 3 to 6 months salary depending on the time of service. The
severance cost amounted to approximately $850,000 in the fourth quarter of 2004.
21
Liquidity and Capital Resources
During the year ended December 31, 2004, we sold substantially all of our
revenue producing operations. Effective September 2004, we sold our
correspondent clearing operation of National Clearing Corporation and effective
October 2004, we sold our retail brokerage operation of JB Oxford & Company.
These transactions have added liquidity to our current financial position,
however we currently have no significant operations that generate cash. As of
December 31, 2004, we have $5,063,752 in available cash. We received and
additional $8,370,000 in January 2005 from the sale of retail accounts to
Ameritrade and expect to receive and additional $3,500,000 in April 2006.
NCC 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, 2004,
NCC had regulatory net capital of $2,640,170, which exceeded the minimum
requirement by $2,390,170. Our net capital has declined from $9,554,544 and
$9,452,719 at December 31, 2003 and 2002. If this trend continues we could be
forced to limit further our brokerage activity. Because NCC is subject to the
Net Capital Rule, there are restrictions on advances to affiliates, repayment of
subordinated liabilities, dividend payments and other equity withdrawals that
are subject to regulatory notification.
We expect our current cash resources to be sufficient to fund our expected
working capital and capital expenditure requirements for the current calendar
year. We have no current commitments for capital resources; we did however
acquire an aircraft for $1,115,000 at the end of 2004. It is currently
anticipated that we will use approximately $4,400,000 of cash in operations for
the calendar year 2005 in our core brokerage operations, excluding any proceeds
we may realize from the sale of our investment in land or any costs we may incur
if we choose to develop our land investment. We anticipate generating
approximately $2,000,000 in gross commissions, interest earned, and continuing
receipts from the sale of our clearing operation. The primary use of cash for
operations is an estimated $4,000,000 in professional fees, primarily legal
costs to defend us in various legal matters. In the event our working capital is
not sufficient, in order to enter a new business or respond to legal matters, we
may need to raise additional funds through debt or equity offerings or private
placements. If funds, which may be needed, are raised through the issuance of
additional 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 current 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 September 31, 2004, Third Capital Partners, LLC, the beneficial owner of our
secured convertible notes in the aggregate principal amount of $5,418,696,
converted these notes to 2,029,474 shares of our common stock, thereby reducing
the amount debt owed by us to Third Capital Partners, LLC.
22
Going Concern
As noted in this section, we have sold substantially all of our ongoing business
operations and do not have an ongoing business plan for future operations. There
is significant doubt as to whether our limited remaining operations can generate
sufficient revenue to be a continuing viable going concern. Further, there is
significant uncertainty with respect to the outcome of the SEC lawsuit related
to the late trading allegedly conducted by us. As a result, the report of our
independent registered public accounting firm indicates there is substantial
doubt about our ability to continuing as a going concern.
Should the outcome or judgment against us from the SEC lawsuit related to the
ongoing mutual fund investigations (as disclosed in Note 15, Commitments and
Contingencies) be significant, the demand for payment resulting from such
outcome or judgment coupled with our deteriorating financial results will likely
affect our ability to meet our obligations as they become due in the normal
course of business. Should we be unable to meet our obligations as they become
due, we would be forced to immediately file for protection under Chapter 11 of
the United States Bankruptcy Code (Chapter 11).
We are working on developing a new business plan, and considering further
investments, including possibly the acquisition of other operating businesses.
However, no such plan or investment has been finalized, and there can be no
assurance that our efforts will result in the creation of sufficient revenues to
sustain us.
Liquidity at December 31, 2004, 2003, and 2002
Our cash and cash equivalents decreased by $1,627,893 to $5,063,752 in 2004.
This compares with a net increase of $1,318,215 in 2003 and a net decrease in
cash and cash equivalents of $1,114,577 in 2002. The fluctuation in our cash
position can be impacted by the settlement cycles of the business that relate
directly to the cash provided from, or used in, operations. In addition, in
2004, it was impacted by timing issues with the withdrawal of segregated funds
invested in certificates of deposit.
Cash Flows From Operating Activities
Net cash provided by (used in) operating activities was $(11,774,297),
$2,844,559, and $3,099,728 for 2004, 2003 and 2002, respectively. Our net cash
provided by (used in) operating activities is impacted by changes in the
brokerage-related assets and liabilities of NCC.
During 2004, the most significant use of cash was a decrease in payables to
customers of $195,333,224 and a decrease of $40,171,212 in payables to
broker-dealers and clearing organizations. The most significant source of cash
in operations was in cash segregated under federal and other regulations of
$127,616,400. These significant changes were related to the sale of assets to
Ameritrade, Inc. in the fourth quarter of 2004.
During 2003, the most significant use of cash for operating activities was an
increase in receivables from broker-dealers and clearing organizations of
$20,988,125 and a decrease in clearing deposits of $2,035,329. The most
significant source of cash in operations was in cash segregated under federal
and other regulations of $15,426,651 and receivable from customers of
$3,966,085.
During 2002, the most significant use of cash for operating activities was an
increase in cash segregated under federal and other regulations of $66,775,306
and a decrease in payables to broker-dealers and clearing organizations of
$12,521,538. The most significant sources of cash provided by operating
activities were reductions in 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.
23
Cash Flows Used In Investing Activities
The net cash provided by (used in) investing activities during 2004, 2003 and
2002 was $10,313,070, $(835,175), and $(2,123,807), respectively. The primary
source of funds in 2004 was the disposal of retail and clearing brokerage
operations of $13,847,790. The sale of retail customer accounts provided cash of
$13,600,000, net of expenses of $400,000 and amounts receivable of $11,870,000
at December 31, 2004. The sale of clearing operations provided cash of $247,790.
The primary use of funds in 2004 related to the acquisition of land in Florida
for speculation or possible future development of $2,198,675, net of $3,400,000
short term financing, The acquisition of an airplane used $1,115,000 of cash.
Cash used in 2002 includes $1,753,707 used to acquire the right to service
certain customer accounts. The Company issued common stock in the amount of
$155,556 during 2003 as consideration to acquire rights to service these
accounts. The value of the stock was determined based upon the market value at
the time of issuance or immediately preceding issuance. The remaining cash uses
were a direct result of our capital expenditures during these periods. Our
requirement for capital resources is not material to the business as a whole.
Cash Flows From Financing Activities
Financing activities used cash of $166,666, $41,667, and $2,740,000, in 2004,
2003 and 2002, respectively. In 2004, 2003 and 2002, repayments of notes payable
of $166,666, $41,667, and $2,740,000, respectively, was the most significant use
of cash for financing activities. The Board of Directors has previously
authorized us purchase up to 2,000,000 share of treasury stock in the open
market at the discretion of management, though no shares were purchased in 2004
or 2003.
24
JB OXFORD & COMPANY
SHORT TERM BORROWING
(Amounts in thousands)
Category of aggregate short-term
borrowings a b c d e
----------------------------------------------------
Year Ended December 31, 2004 collateralized by:
Investment in land $ 3,400 5.5% $3,400 $3,400 5.5%
Year Ended December 31, 2003
collateralized by:
Customer securities $ -- n/a $ -- $ -- n/a
Year Ended December 31, 2002 collateralized by:
Customer securities $ -- n/a $1,000 $ 3 4.0%
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 (starting from date debt
facility existed)
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.
The following table of our material contractual obligations as of December 31,
2004, summarizes the aggregate effect that these obligations are expected to
have on our cash flows in the periods indicated (in thousands):
Contractual obligations: Total Less Than 1 1-3 Years 3-5 Years More Than 5
- ------------------------ ----- ------------ --------- --------- ------------
Year Years
---- -----
Note payable (1) $ 403 $ 403 $ -- $ -- $ --
Mortgage payable (2) 3,400 3,400 -- -- --
Operating lease obligations 562 6 440 116 --
Purchase obligations (3) 331 331 -- -- --
Total contractual obligations $4,696 $4,140 $ 440 $116 $ --
(1) Is a non-interest bearing note. Does not include any payments on
notes payable in the principal amount of $2,889,375. See Note 15
Commitments and Contingencies, in the accompanying financial
statements regarding litigation with EBC Trust.
(2) Includes principle balances only and not any interest.
(3) Represents cost of contractually guaranteed minimum processing
volumes with certain of our third party vendors.
25
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.
Off-Balance Sheet Financial Arrangements
As a securities broker-dealer, we provide services to individual institutional
investors. We act as an introducing broker and clear our customer and
proprietary security transactions through another broker dealer on a fully
disclosed basis. The clearing broker dealer provides these services for a fee
and collects commission revenues generated. We are at risk of the nonperformance
by our customers and are responsible for losses sustained by our customers in
excess of their account equity. We are also responsible for losses occurring in
our own proprietary accounts. Our exposure to credit risk associated with the
nonperformance of our customers in fulfilling their contractual obligations
pursuant to securities transactions can be directly impacted by volatile trading
markets.
We are a market maker for less than 10 public corporations whose stocks are
traded primarily on the NASDAQ over-the-counter bulletin board system. We select
companies in which we make a market to facilitate trading activity of our own
institutional clients. Market making may result in a concentration of securities
that may expose us to additional off-balance sheet risk.
Related Party Transactions
Related party transactions are subject to the approval of the Audit Committee of
the Board of Directors. We currently have a note receivable from shareholder in
the amount of $2,500,000. This note bears interest at 9.25% and generates annual
interest income of $231,250. We also pay a consulting fee to related parties in
the amount of $510,000, plus expenses. The consulting fee is $42,500 per month,
this was reduced from $76,500 per month effective July 1, 2004.The following is
a more detailed discussion of these items and related matters.
Third Capital Partners, LLC
The Company has entered into four transactions with Third Capital Partners, LLC
("TCP"), a company controlled by our CEO and Chairman of the Board, and a
related affiliate, Third Capital, LLC. They are as follows:
1. On or about May 26, 1998, TCP acquired $3,418,695.59 principal amount of
the 9% Secured Convertible Note, issued pursuant to the Company's Senior
Secured Convertible Note Purchase Agreement dated March 10, 1995, and
having a maturity date of December 31, 1999. The note, when issued, was
convertible into the Company's $0.01 par value common stock at a rate of
$1.00 per share, before adjustment for the 1-for-10 reverse split which
occurred in October 2002. Under the initial conversion rate, this note was
convertible into 3,418,695 shares of common stock, before adjustment for
the reverse split.
26
On or about June 8, 1998, TCP acquired $2,000,000.00 principal amount of
the 9% Secured Convertible Note, issued pursuant to the Company's Senior
Secured Convertible Note Purchase Agreement dated June 8, 1998, and having
a maturity date of December 31, 1999 (the two notes are together referred
to as the "Secured Convertible Notes"). As part of the acquisition, on
April 8, 1998 the Company and TCP agreed to adjust the conversion rate for
the Secured Convertible Notes to $0.70 per share (our stock traded at an
average price of $0.79 on this day), before adjustment for the 1-for-10
reverse split which occurred in October 2002. The revised conversion rate
was based on the average price of JBOH during the three months prior to
the change. Since the new conversion rate was below the market price on
the date of change, 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 to market value under the intrinsic value method. After the
adjustment in conversion rate, the Secured Convertible Notes were
convertible into 7,740,993 shares of common stock, before adjustment for
the reverse split. The issuance of the Secured 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.
On or about November 8, 1999, the maturity date for the Secured
Convertible Notes was extended to December 31, 2000. On or about December
13, 2000, the maturity date for the Secured Convertible Notes was extended
to December 31, 2001. On or about December 31, 2001, the maturity date for
the Secured Convertible Notes was extended to December 31, 2002. On or
about December 31, 2002, the Company and TCP entered into a Note Extension
Agreement which, i) extended the maturity date to December 31, 2003, and
ii) adjusted the conversion rate to $2.67 per share of common stock, the
closing price of the Company's common stock on the Nasdaq SmallCap Market
on December 31, 2002. As a result, and after giving effect to the 1-for-10
reverse split which occurred in October 2002, the Secured Convertible
Notes are convertible into 2,029,474 shares of common stock. On December
31, 2002, the maturity date for the Secured Convertible Notes was extended
to December 31, 2003. On December 31, 2003, the maturity date for the
Secured Convertible Notes was extended to December 31, 2004. In September
2004, TCP converted the Secured Convertible Notes into 2,029,474 shares of
common stock.
2. On or about February 18, 1999, the Company approved a transaction between
TCP and Oeri Finance, Inc., and Felix A. Oeri (collectively, "Oeri"). Oeri
was a substantial shareholder of the Company prior to this transaction,
and Felix A. Oeri was Chairman of the Company's Board of Directors. The
transaction consisted of the following:
a. The Company agreed to waive certain rights it had under a Right of
First Refusal, dated May 27, 1998, to acquire shares of Company
stock held by Oeri;
b. Oeri forgave the outstanding balance of $728,125 (reported as an
extraordinary item net of income tax in 1999) due from the Company
under a Promissory Note dated May 27, 1998, in the original amount
of $1,213,125;
c. The Company transferred to Oeri Finance, Inc. all equipment and
furniture in its Basel, Switzerland office;
d. The Company established the JB Oxford Revocable Government Trust
(the "Trust"), and loaned it $586,915, which was used to purchase
469,540 shares of the Company's common stock at an average price of
$1.25 (46,954 shares at $12.50, after adjustment for the reverse
stock split in October 2002). The price was a mutually agreed upon
amount between the parties, the stock closed at $6.66 ($66.66 after
adjustment for the reverse stock split in October 2002) on February
18, 1999. The stock was accounted for as treasury stock, as the JB
Oxford Revocable Government Trust was considered a wholly owned
subsidiary. The Trust terminated pursuant to its terms on February
18, 2001, and ownership of the Trust's shares of the Company's
common stock were transferred to the Company in satisfaction of the
loan; and,
27
e. The Company agreed to allow TCP to acquire 100,000 shares of the
Company's common stock from Oeri Finance, Inc. for total
consideration of $10.00 (10,000 shares after adjustment for the
reverse stock split in October 2002).
Subsequent to these transactions, Oeri filed 13D statements with the SEC
indicating ownership of less than 5% of the Company's stock.
3. On or about December 13, 2000, the Company loaned $2,500,000 to TCP,
pursuant to a written Promissory Note, payable on or before December 31,
2001. The note bears interest at the rate of 9 1/4%, and may be pre-paid
in whole or in part without penalty. The loan was a re-classification of a
portion of a pre-existing margin debt owed by TCP to the Company's
brokerage subsidiary, and was secured by the $2,000,000 Secured
Convertible Note and Company common stock. The re-classification was
entered into to ensure that the amount of the remaining portion of the
margin debt complied with the Company's lending policies.
By agreement dated December 31, 2001, the maturity date for the Promissory
Note was extended to December 31, 2002. Effective on or about March 22,
2002, as part of a restructuring of inter-company debts between the
Company and its wholly-owned subsidiary, NCC (then known as JB Oxford &
Company), the Promissory Note was assigned to NCC, and the maturity date
was extended to December 31, 2007 Included in other receivables is accrued
interest receivable of $328,765 related to this note.
4. By agreement dated December 16, 1999, the Company agreed to pay a monthly
advisory fee to Third Capital, LLC, an affiliate of TCP, in the amount of
$85,000, included in professional services, plus all direct and indirect
expenses incurred in providing such advisory services to the Company and
its subsidiaries. Since that time, members of Third Capital, LLC have held
the executive positions of Chairman, Chief Executive Officer, and
President of the Company and its subsidiaries. Effective October 2001,
Third Capital, LLC agreed to reduce its fee by 10%, to $76,500 per month,
plus expenses. Effective July 1, 2004, the fee was reduced to $42,500,
plus all direct and indirect expenses incurred in providing such advisory
services to the Company and its subsidiaries. The advisory fee paid to
Third Capital, LLC was $714,000, $918,000, and $918,000 in 2004, 2003, and
2002, respectively.
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 "Special Note Regarding Risk
Factors" below. 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.
28
Areas outside our control that affect the securities market, such as severe
downturns or declines in market activity, may cause substantial financial
exposure.
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
NCC acts as a market maker for approximately 10 public corporations whose stocks
are traded primarily on the NASDAQ over-the-counter Bulletin Board System. 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 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.
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 in this
report 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 sold substantially all of our ongoing operations and have not announced
a new business plan.
In September 2004, we sold our correspondent clearing business to North American
Clearing, Inc. In October 2004, we sold our retail brokerage accounts to
Ameritrade, Inc. While these asset sales have provided us substantial working
capital, we have not announced our intention to enter into any particular new
business or any other use for the sales proceeds. Further, given that an entity
controlled by our CEO and Chairman of the Board owns over 53% of our outstanding
stock, he alone can require the Company to take certain actions by requesting a
shareholder vote.
We Have Incurred Operating Losses in the Past and May incur Future Operating
Losses.
While we did not incur a loss in 2004, this was as a result of the sale of
substantially all of our ongoing operations. We incurred a loss of $6.5 million
in 2004 on our continuing operations. Further, we incurred losses from
continuing operations of approximately $4.5 and $5.1 million for each of the
years ended December 31, 2003, and, 2002, respectively. 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. The unavailability of such capital could
require us to further curtail our operations in the future.
29
Substantial Doubt Exists Relating to Our Ability to Continue as a Going Concern.
As noted in this section, we have sold substantially all of our ongoing business
operations and do not have an ongoing business plan for future operations. There
is significant uncertainty as to whether our limited remaining operations can
generate sufficient revenue to be a continuing viable going concern. Further,
there is significant uncertainty with respect to the outcome of the SEC lawsuit
related to the late trading allegedly conducted by us. As a result, the report
of our independent registered public accounting firm indicates there is
substantial doubt about our ability to continuing as a going concern.
Securities Litigation Could Adversely Affect Our Business.
We are a party to several lawsuits, most particularly that commenced by
the SEC related to market timing and late trading, discussed above, that in the
aggregate seek millions of dollars in damages and penalties. A substantial
settlement or award against us in these actions could have a material adverse
effect on our business.
In addition, our ongoing 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.
Your Interests as a Stockholder May Conflict with Our Controlling Stockholder,
Our Chief Executive Officer and Our President.
Our executive officers, directors and principal shareholders beneficially
own approximately 56% of our outstanding common stock. 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 who also serves 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 being placed in a conflict
of interest should he have to make decisions that have materially different
implications for us and for Third Capital Partners. An affiliate of Third
Capital Partners receives management fees from us, which could influence
decisions.
Our Business is Subject to Extensive Regulation Under Both Federal and State
Laws.
The securities industry is subject to extensive regulation and
broker-dealers are subject to regulations covering all aspects of the securities
business. The SEC, NASD, and other self-regulatory organizations and state and
foreign regulators can, among other things, fine, issue cease-and-desist orders
to, suspend or expel a broker-dealer or any of its officers or employees.
Our ability to comply with applicable laws and rules is largely dependent
on our internal system to ensure compliance, as well as our ability to attract
and retain qualified compliance personnel. We could be subject to disciplinary
or other actions in the future due to claimed noncompliance, which could have a
material adverse effect on our operations and profitability.
30
The Trading Price of Our Common Stock has Been and May Continue to be Subject to
Wide Fluctuations.
During the past twelve months, our common stock traded as low as $1.20 and
as high as $5.22. Our stock price may fluctuate in response to a number of
events and factors, such as the nature and timing of any new business
alternatives or investments we determine to pursue, our litigation, and factors
bearing on our institutional trading and market making operations. 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.
Our stock price could materially decline if Third Capital sells it shares.
In September 2004, Third Capital Partners converted the notes then held by
it into approximately 2 million shares of our common stock. As a result of the
conversion, Third Capital Partners owns approximately 53% of our common stock.
If Third Capital Partners sells substantial amounts of our common stock
into the public market, it could cause a significant decrease in our stock
price. Furthermore, the awareness that a large number of shares is available for
sale under this registration statement could cause the price of our stock to
fall or could prevent the price from rising.
In addition to the adverse effect a price decline would have on our
shareholders, it could impede our ability to raise capital through the issuance
of securities or utilize our common stock for acquisitions. Furthermore, if the
price decline is significant enough, it could result in our common stock being
delisted from the NASDAQ SmallCap Market. A delisting of our shares could
further harm our stock price and make it more difficult for our shareholders to
sell their shares.
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 have entered into written employment agreements with the key
executive officers of our operating subsidiaries, which expire in June 2006.
However, we do not maintain "key person" life insurance on any of our executive
officers. There can be no assurance that any of our executive officers will
continue to work for us nor can there be any assurance that upon ceasing to work
for us they will not compete against us. The loss of our Chief Executive Officer
and President could have a material adverse effect on our business, financial
condition and results of operations.
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
Some of the information set forth in this prospectus and in the documents
incorporated herein by reference contain "forward-looking statements" within the
meaning of the Private Securities Litigation Reform Act of 1995. In addition, we
may make other written and oral communications from time to time that contain
such statements. Forward-looking statements, including statements as to industry
trends, future expectations and other matters that do not relate strictly to
historical facts, are based on certain assumptions by management. These
statements are often identified by the use of words such as "may," "will,"
"expect," "believe," "anticipate," "intend," "could," "estimate," or "continue"
and similar expressions or variations, and are based on various beliefs and
assumptions, some of which are beyond our control. Such forward-looking
statements are subject to risks, uncertainties and other factors that could
cause actual results to differ materially from future results expressed or
implied by such forward-looking statements. Important factors that could cause
actual results to differ materially from the forward-looking statements include,
among others, the risks described under "Risk Factors" above. We caution readers
to carefully consider such factors. Further, such forward-looking statements
speak only as of the date on which such statements are made and we undertake no
obligation to update any forward-looking statements to reflect events or
circumstances after the date of such statements.
31
Item 8. Financial Statements and Supplementary Data
The financial statements and schedules that are required to be filed by Item 8
of this form are contained herein as follows:
Page
----------
Report of Independent Registered Public Accounting Firm 33
Report of Independent Registered Public Accounting Firm 34
Consolidated Statements of Financial Condition December 31, 2004, and 2003 35-36
Consolidated Statements of Operations Years Ended December 31, 2004, 2003, and 2002 37-38
Consolidated Statements of Changes in Shareholders' Equity Years Ended December 31, 2004, 2003, and 2002 39
Consolidated Statements of Cash Flows Years Ended December 31, 2003, 2002, and 2001 40
Notes to Consolidated Financial Statements 41-65
Financial Statement Schedule I - Condensed Financial Statements (Parent Company Only) 72-78
Financial Statement Schedule II - Valuation and Qualifying Accounts 79
Financial Statement Schedule III - Real Estate Owned and Rental Income 80
32
Report of Independent Registered Public Accounting Firm
Board of Directors and Stockholders
JB Oxford Holdings, Inc.
Los Angeles, California
We have audited the accompanying consolidated statement of financial condition
of JB Oxford Holdings, Inc. as of December 31, 2004 and the related consolidated
statements of operations, shareholders' equity, and cash flows for the period
ended December 31, 2004. We have also audited the schedules listed in the
accompanying index. These financial statements 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 the standards of the Public Company
Accounting Oversight Board (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, 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 consolidated financial statements referred to above present
fairly, in all material respects, the financial position of JB Oxford Holdings,
Inc. at December 31, 2004, and the results of its operations and its cash flows
for the period ended December 31, 2004, in conformity with accounting principles
generally accepted in the United States of America.
The accompanying financial statements have been prepared assuming that JB Oxford
Holdings, Inc. will continue as a going concern. As more fully described in Note
1, the Company has incurred recurring operating losses, has sold its significant
business operations, has limited access to capital markets and has significant
pending litigation. Further, there is a significant uncertainty with respect to
the outcome of the SEC investigation into the late trading conducted by the
Company. These conditions raise substantial doubt about the Company's ability to
continue as a going concern. Management's plans with respect to these matters
are also described in Note 1. The financial statements do not include any
adjustments to reflect the possible future effects on the recoverability of
assets or the amounts of liabilities that may result from the outcome of this
uncertainty.
Also, in our opinion, the schedules present fairly, in all material respects,
the information set forth therein.
/s/ BDO Seidman, LLP
Los Angeles, California
April 20, 2005
33
Report of Independent Registered Public Accounting Firm
To the Shareholders and Board of Directors of
JB Oxford Holdings, Inc. and Subsidiaries:
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, 2003 and the related statements of operations, changes in
shareholders' equity and cash flows for each of the two years in the period
ended December 31, 2003. These financial statements are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (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. We were not engaged to perform an
audit of the Company's internal control over financial reporting. Our audit
included consideration of internal control over financial reporting as a basis
for designing audit procedures that are appropriate in the circumstances, but
not for the purpose of expressing an opinion on the effectiveness of the
Company's internal control over financial reporting. Accordingly, we express no
such opinion. An audit also includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements, assessing
the accounting principles used and significant estimates made by the Company's
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 consolidated financial position of JB Oxford
Holdings, Inc. and Subsidiaries at December 31, 2003 and the consolidated
results of their operations and their cash flows for each of the two years in
the period ended December 31, 2003, in conformity with U.S. generally accepted
accounting principles.
The accompanying financial statements have been prepared assuming that JB Oxford
Holdings, Inc. will continue as a going concern. As more fully described in Note
1, the Company has incurred recurring operating losses, has limited access to
capital markets and has significant pending litigation. Further, there is a
significant uncertainty with respect to the outcome of the SEC investigation
into the late trading conducted by the Company. These conditions raise
substantial doubt about the Company's ability to continue as a going concern.
Management's plans with respect to these matters are also described in Note 1.
The financial statements do not include any adjustments to reflect the possible
future effects on the recoverability of assets or the amounts of liabilities
that may result from the outcome of this uncertainty.
Our audits were performed 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 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 financial statements taken as a whole.
/s/ Ernst & Young LLP
Los Angeles, California
March 10, 2004
34
JB Oxford Holdings, Inc. and Subsidiaries
Consolidated Statements of Financial Condition
December 31
2004 2003
------------ ------------
Assets:
Cash and cash equivalents $ 5,270,077 $ 6,897,970
Cash segregated under federal and other regulations 3,132,172 130,748,572
Receivable from broker-dealers and clearing organizations 99,608 29,337,358
Receivable from customers 209 78,372,056
Other receivables 12,413,265 2,139,865
Securities owned - at market value 9,825 432,060
Note receivable from Shareholder 2,500,000 2,500,000
Investment in land 5,598,675 --
Furniture, equipment, and leasehold improvements (at cost - net of accumulated
depreciation and amortization of $ 344,347 and $6,352,333) 1,253,836 2,195,783
Clearing deposits 4,652,541 6,542,595
Intangible assets (net of accumulated amortization of $3,558,678 in 2003) -- 2,957,837
Other assets 671,561 780,771
------------ ------------
Total assets $ 35,601,769 $262,904,867
============ ============
35
JB Oxford Holdings, Inc. and Subsidiaries
Consolidated Statements of Financial Condition - continued
December 31
2004 2003
------------- -------------
Liabilities and shareholders' equity:
Liabilities:
Short term borrowings $ 3,400,000 $ --
Payable to broker-dealers and clearing organizations 160,543 40,331,755
Payable to customers 7,071 195,340,295
Income taxes payable 150,000 --
Deferred taxes payable 950,000 --
Securities sold, not yet purchased - at market value -- 1,957,909
Accounts payable and accrued liabilities 3,138,999 5,436,675
Loans from shareholder -- 5,418,696
Notes payable 3,292,153 3,458,819
------------- -------------
Total liabilities 11,098,766 251,944,149
------------- -------------
Commitments and contingencies (Note 15)
Shareholders' equity:
Common stock ($0.01 par value, 100,000,000 shares authorized;
3,739,413 and 1,756,499 shares issued) 37,394 17,565
Additional paid-in capital 23,282,397 18,039,086
Retained earnings (accumulated deficit) 2,096,413 (5,425,090)
Treasury stock, 46,954 and 130,494 shares, at cost (913,201) (1,670,843)
------------- -------------
Total shareholders' equity 24,503,003 10,960,718
------------- -------------
Total liabilities and shareholders' equity $ 35,601,769 $ 262,904,867
============= =============
See accompanying notes.
36
JB Oxford Holdings, Inc. and Subsidiaries
Consolidated Statements of Operations
Year Ended December 31,
2004 2003 2002
------------ ------------ ------------
Revenues:
Brokerage $ 462,652 $ -- $ --
Other 60,527 10,653 17,794
------------ ------------ ------------
Total revenues 523,179 10,653 17,794
------------ ------------ ------------
Expenses:
General and administrative 6,752,215 4,222,104 4,766,180
Depreciation 68,130 74,500 74,500
------------ ------------ ------------
Total expenses 6,820,345 4,296,604 4,840,680
------------ ------------ ------------
Loss from continuing operations before interest and
income taxes (6,297,166) (4,285,951) (4,822,886)
------------ ------------ ------------
294,657 232,656 306,165
Interest revenues
Interest expense 484,915 493,556 610,728
------------ ------------ ------------
Net interest (190,258) (260,900) (304,563)
------------ ------------ ------------
Loss from continuing operations before income taxes (6,487,424) (4,546,851) (5,127,449)
Income tax expense (benefit) 7,883 -- --
------------ ------------ ------------
Net loss from continuing operations (6,495,307) (4,546,851) (5,127,449)
------------ ------------ ------------
Income (loss) from discontinued operations
Income (loss) from discontinued operations (including
gain on disposal of retail and clearing brokerage
operations of $23,214,539) 15,764,337 (359,766) (6,249,709)
Income tax expense (benefit) 1,105,400 1,042,348 (3,900,000)
------------ ------------ ------------
Net income (loss) from discontinued operations 14,658,937 (1,402,113) (2,346,709)
------------ ------------ ------------
Net income (loss) $ 8,163,630 $ (5,948,964) $ (7,474,158)
============ ============ ============
See accompanying notes.
37
JB Oxford Holdings, Inc. and Subsidiaries
Consolidated Statements of Operations - continued
Year Ended December 31
2004 2003 2002
------------- ------------- -------------
Basic net income (loss) per share:
From continuing operations $ (2.71) $ (2.93) $ (3.57)
From discontinued operations 6.12 (0.90) (1.64)
------------- ------------- -------------
Basic net income (loss) per share $ 3.41 $ (3.83) $ (5.21)
============= ============= =============
Diluted income (loss) per share:
From continuing operations (2.71) (2.93) (3.57)
From discontinued operations 6.12 (0.90) (1.64)
------------- ------------- -------------
Diluted net income (loss) per share $ 3.41 $ (3.83) $ (5.21)
============= ============= =============
Weighted average number of shares of common stock and
assumed conversions
Basic 2,394,867 1,552,568 1,435,198
Diluted 2,394,867 1,552,568 1,435,198
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.
38
JB Oxford Holdings, Inc. and Subsidiaries
Consolidated Statements of Changes in Shareholders' Equity
Common Stock
--------------------------- Retained
Additional Earnings
Paid-in (Accumulated Treasury
Shares Amount Capital Deficit) Stock Total
------------ ------------ ------------ ------------ ------------ ------------
Balance at
January 1, 2002 1,519,323 $ 15,193 $ 16,583,120 $ 8,803,722 $ (2,619,228) $ 22,782,807
Issuance of common stock 70,741 707 913,659 -- -- 914,366
Cash paid for fractional
shares on reverse stock
split (125) (1) (383) -- -- (384)
------------ ------------ ------------ ------------ ------------ ------------
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
Treasury stock bonus (805,690) 948,385 142,695
Issuance of common stock 166,560 1,666 542,690 -- -- 544,356
Net loss -- -- -- (5,948,964) -- (5,948,964)
------------ ------------ ------------ ------------ ------------ ------------
Balance at
December 31, 2003 1,756,499 17,565 18,039,086 (5,425,090) (1,670,843) 10,960,718
Treasury stock bonus (642,128) 757,642 115,514
Issuance of common stock 132,244 1,322 465,344 -- -- 466,666
Conversion of
convertible debt 2,029,474 20,295 5,398,401 -- -- 5,418,696
Cancellation of stock (178,804) (1,788) (620,434) -- -- (622,222)
Net income -- -- -- 8,163,630 -- 8,163,630
------------ ------------ ------------ ------------ ------------ ------------
Balance at
December 31, 2004 3,739,413 $ 37,394 $ 23,282,397 $ 2,096,412 $ (913,201) $ 24,503,002
============ ============ ============ ============ ============ ============
See accompanying notes.
39
JB Oxford Holdings, Inc. and Subsidiaries
Consolidated Statements of Cash Flows
Year Ended December 31
2004 2003 2002
------------- ------------- -------------
Cash flows from operating activities:
Net income (loss) $ 8,163,630 $ (5,948,964) $ (7,474,158)
Adjustments to reconcile net income (loss) to net cash
provided by operating activities:
Depreciation and amortization 1,113,290 2,706,447 3,485,632
Provision for bad debts 51,340 80,122 138,512
Provision (benefit) for deferred income taxes -- 1,042,348 (391,961)
Gain on disposal of retail and clearing brokerage
operations (23,214,539) -- --
Loss on disposal of furniture, equipment and leasehold
improvements 1,619,288 -- 178,100
Changes in assets and liabilities:
Restricted cash -- 654,846 (654,846)
Cash segregated under federal and other regulations 127,616,400 15,426,651 (66,775,306)
Receivable from broker-dealers and clearing
organizations 29,237,750 (20,988,125) 44,019,430
Receivable from customers 78,371,847 3,966,085 19,084,588
Other receivables 1,596,600 (1,189,587) 398,007
Securities owned 422,235 197,023 723,757
Clearing deposits 1,890,054 (2,035,329) 692,011
Other assets 109,210 (295,899) 721,373
Payable to broker-dealers and clearing organizations (40,171,212) 1,518,712 (12,521,538)
Payable to customers (195,333,224) 1,745,289 23,659,104
Securities sold not yet purchased (1,957,909) 1,819,425 (708,101)
Accounts payable and accrued liabilities (2,337,717) (416,400) (1,484,061)
Income taxes payable/refundable 1,100,000 4,561,915 9,185
------------- ------------- -------------
Net cash provided by (used in) operating activities (11,774,297) 2,844,559 3,099,728
------------- ------------- -------------
Cash flows from investing activities:
Acquisitions of customer accounts -- -- (1,753,707)
Cash paid for land (2,198,675) -- --
Sale of clearing and retail brokerage operations 13,847,790 -- --
Purchase of furniture, equipment and leasehold improvements (1,336,045) (835,175) (370,100)
------------- ------------- -------------
Net cash provided by (used in) investing activities 10,313,070 (835,175) (2,123,807)
------------- ------------- -------------
Cash flows from financing activities:
Repayments of notes payable (166,666) (41,667) (2,740,000)
------------- ------------- -------------
Net cash provided by (used in) financing activities (166,666) (41,667) (2,740,000)
------------- ------------- -------------
Net increase (decrease) in cash and cash equivalents (1,627,893) 1,967,717 (1,764,079)
Cash and cash equivalents at beginning of year 6,897,970 4,930,253 6,694,332
------------- ------------- -------------
Cash and cash equivalents at end of year $ 5,270,077 $ 6,897,970 $ 4,930,253
============= ============= =============
See accompanying notes.
40
JB Oxford Holdings, Inc. and Subsidiaries
Notes To Consolidated Financial Statements
Note 1. Basis of Presentation
Reporting Entity
The accompanying consolidated financial statements for 2004, 2003, and 2002
include the accounts of JB Oxford Holdings, Inc., a Utah Corporation, and its
subsidiaries, National Clearing Corp ("NCC"), JB Oxford & Company ("JBOC"), and
FiCorp, Inc. (collectively referred to as the "Company" or "JBOH"). JB Oxford
Insurance Services, Inc., ISP Solutions, Inc., Reynolds Kendrick Stratton, Inc.
and Prolyx Data Systems, Inc were dissolved during 2004. Of these subsidiaries,
only NCC and JBOC were active in 2004, and both are wholly owned subsidiaries of
JB Oxford Holdings, Inc. The accounting and reporting policies of the Company
are in accordance with accounting principles generally accepted in the United
States (GAAP). During the year ended December 31, 2004 the Company sold
substantially all of its revenue producing operations. Effective September 2004
NCC sold its correspondent clearing operation and effective October 2004 JBOC
sold its retail brokerage operation. NCC still maintains a small institutional
brokerage and market making operation, with the market making operation making
10 or less markets, to facilitate the securities transactions of our
institutional clients. JBOC also acquired land as an investment, which we may or
may not develop and FiCorp acquired an aircraft to assist management with the
current investment, as well as to examine additional potential investments. This
new investment could create a separately identifiable segment with which to
report operations of in future periods. This potential segment is only comprised
of these assets and consequently separate segment disclosure has not been made.
During the periods presented, the Company operated in a single industry, the
securities industry. The Company derives its revenues primarily from its retail
brokerage services operations in JBOC, and its correspondent clearing services
and market making activities at NCC. These operations are reported as
discontinued operation in the accompanying statement of operations, see Note 17
for further discussion of discontinued operations. Inter-company balances have
been eliminated in the consolidated financial statements.
The corporate offices of the Company are located in Los Angeles, California.
Going Concern
The accompanying consolidated financial statements have been prepared on a going
concern basis, which reflects the realization of assets and the satisfaction of
liabilities in the normal course of business.
As noted in this section, the Company has sold substantially all of its ongoing
business operations and does not have an ongoing business plan for future
operations. There is significant doubt as to whether the Company's limited
remaining operations can generate sufficient revenue to be a continuing viable
going concern. Further, there is substantial uncertainty with respect to the
outcome of the SEC lawsuit related to the late trading allegedly conducted by
the Company.
41
Should the outcome or judgment against the Company from the SEC lawsuit related
to the ongoing mutual fund investigations (as disclosed in Note 15, Commitments
and Contingencies) be significant, the demand for payment resulting from such
outcome or judgment coupled with the Company's deteriorating financial results
will likely affect the Company's ability to meet its obligations as they become
due in the normal course of business. Should the Company be unable to meet its
obligations as they become due, the Company would be forced to immediately file
for protection under Chapter 11 of the United States Bankruptcy Code (Chapter
11).
The Company is working on developing a new business plan, and is considering
further investments, including possibly the acquisition of other operating
businesses. However, no such plan or investment has been finalized, and there
can be no assurance that the Company's efforts will result in the creation of
sufficient revenues to sustain the Company.
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 materially 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.
Allowance for Doubtful Accounts
We no longer carry the accounts of customers and have ceased our clearing
operation as of December 31, 2004. The balances remaining at December31, 2004
are the result of winding down those operations. We continue to review our other
receivables for collectibility and establish allowance to cover known and
inherent losses 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, which consist almost exclusively of margin
accounts that have become unsecured due to adverse market price movements. The
Company sets its allowance based upon its historical experience and the level of
margin borrowing by its customers. In addition, management considers the ratio
of the value of collateral being held against the outstanding margin loans as a
basis of determining the adequacy of its allowance for doubtful accounts.
Accounts are charged to the allowance once the collateral is liquidated and
other collection efforts have been exhausted.
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.
42
Securities Owned and Securities Sold Not Yet Purchased
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. The Company
estimates fair values of such securities using cost, in addition to economic and
operating trends of the investments and other relevant information. Realized and
unrealized gains and losses on securities owned and securities sold, not yet
purchased, are included in trading profits, net.
Other Receivables
Other receivables consist principally of dividends and interest, customer money
market funds receivable, and accruals of clearing fees and other miscellaneous
income. The accruals are recorded when the earning process has been completed.
At December 31, 2004, other receivables consisted primarily of the $11,870,000
balance of the purchase price due from Ameritrade, Inc. Of this amount,
$8,370,000 was received in January 2005. The remaining $3,500,000 is held in
escrow in accordance with the terms of the purchase agreement with Ameritrade.
Included in other receivables at December 31, 2003 is $1,565,496 of receivable
for unsettled transactions to adjust the Company's securities to a trade date
basis, the related amount at December 31, 2004 was $0.
Contingencies
Contingent liabilities arise in the ordinary course of business through
interaction with our customers with respect to securities transactions.
Contingencies may also arise through our other general business and regulatory
dealings. We accrue contingent liabilities based on know claims that asserted
against us. When a loss contingency exists, the likelihood that the future event
or events will confirm the loss or impairment of an asset or the incurrence of a
liability can range from probable to remote. Contingent losses are recorded when
information available prior to issuance of the financial statements indicates
that it is probable the loss contingency will occur and the amount of loss can
be reasonably estimated.
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.
43
Furniture, Equipment and Leasehold Improvements
Furniture, equipment and leasehold improvements are carried at cost net of
accumulated depreciation and amortization. Depreciation on furniture and
equipment is provided for on accelerated and straight-line bases using an
estimated useful life of three to five years. Leasehold improvements are
amortized over the lesser of the useful life of the improvement or the term of
the lease. Expenditures for repairs and maintenance that do not significantly
increase the life of the assets are charged to operations as incurred.
Investment in Land
Land is currently held as an investment, as such all costs to acquire the land
have been capitalized, but interest cost to finance the purchase will be
expensed as incurred. It is currently unknown if we will develop the land and
there have been no costs to develop the land as of December 31, 2004. If we
choose to develop the land or partner with a developer the investment in land
will be accounted for on the full accrual method. All costs to acquire and
improve and prepare the land for sale are capitalized as incurred, including
interest cost to finance development of the property. The gain or loss on a sale
of real estate will be recognized when a sale has been consummated. A sale has
been consummated when the following conditions have been met: 1) the parties are
bound by the terms of a contract, 2) all consideration has been exchanged, 3)
any permanent financing for which the seller is responsible has been arranged,
and 4) all conditions needed to close the sale have been, and the risk of
ownership has been transfer from the seller to the buyer. A valuation loss is
recognized on investment in land when a permanent impairment of value has
occurred to the property, on a individual property basis.
Intangible Assets
Intangible assets consisted of customer accounts acquired from other securities
broker dealers and are carried at cost net of accumulated amortization.
Amortization is provided for using an estimated useful life of four years.
Intangible assets are reviewed for impairment annually and whenever events or
changes indicate the carrying value of an asset may not be recoverable.
Impairment is determined based upon the estimated discounted cash flow of the
intangible assets being held. As of December 31,2004, the Company had disposed
of all of its intangible assets through the sale of the retail brokerage
operation.
Treasury Stock
The Company carries treasury stock acquired at cost. All treasury stock owned
was acquired in the open market. On January 2, 2004 and 2003, the Company
provided a treasury stock bonus to all employees who had been with Company for
six months or more as of the end of each year. All employees received 500
shares, except those who were with the Company for less than one year received
250 shares. The Company required employees to hold the shares for one year prior
to selling. The cost of the treasury stock was $757,642 and $948,385 and the
market value at the time of the bonus was $115,514 and $142,695, for 2003 and
2002, respectively. The difference of $642,128 and $805,690 was charged to
retained earnings in 2004 and 2003, respectively, when the stock was distributed
to employees.
44
Fair Value of Financial Instruments
Substantially all of the Company's financial assets (except capital 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.
Revenue Recognition and Securities Transactions
The Company records its security transactions on a settlement date basis (the
date the trade settles with its customers and contra parties) and accrues its
commission revenue and related expenses on a trade date basis (the date the
trade is executed). Current realized and unrealized trading profits and losses
are included in income. Unrealized profits and losses are determined based upon
the current market values of securities held in Company proprietary accounts.
The Company recognizes interest income and related expense when earned.
Clearing, execution and other revenues are recorded when the earning cycle has
been completed.
Other Revenue
Other revenue consists of fees charged to retail customers and correspondents
incidental to the securities business, in addition to other miscellaneous
amounts earned. The Company recognizes other revenue when the earnings cycle is
complete, which is typically when services are rendered and amounts are charged
to customers or amounts are due and receivable from third parties.
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.
45
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
2004 2003 2002
----------- ----------- -----------
Basic Income (Loss) Per Share
Net income (loss) $ 8,163,631 $(5,948,964) $(7,474,158)
----------- ----------- -----------
Income available to common shareholders (numerator) 8,163,631 $(5,948,964) $(7,474,158)
=========== =========== ===========
Weighted average common shares outstanding (denominator) 2,394,867 1,552,568 1,435,198
=========== =========== ===========
Basic income (loss) per share $ 3.41 $ (3.83) $ (5.21)
=========== =========== ===========
Year Ended December 31
2004 2003 2002
----------- ----------- -----------
Diluted Income (Loss) Per Share
Net income (loss) $ 8,163,630 $(5,948,964) $(7,474,158)
----------- ----------- -----------
Income available to common shareholders plus assumed
conversions (numerator) $ 8,163,630 $(5,948,964) $(7,474,158)
=========== =========== ===========
Weighted average common shares and assumed conversions 2,394,867 1,552,568 1,435,198
outstanding (denominator)
=========== =========== ===========
Diluted income (loss) per share $ 3.41 $ (3.83) $ (5.21)
=========== =========== ===========
The assumed conversions have been excluded in computing the diluted earnings per
share when there is a net loss in continuing operations for the period. They
have been excluded because their inclusion would reduce the loss per share or be
anti-dilutive. If included at December 31, 2004, 2003 and 2002 conversion of the
convertible debentures would add an additional 1,425,068 and 2,029,474, and
2,029,474 shares, respectively, of common stock to the diluted earnings per
share assumed conversion totals above.
Stock-Based Compensation
The Company measures compensation cost under Accounting Principles Board Opinion
No. 25, "Accounting for Stock Issued to Employees" (APB No. 25), using the
intrinsic value method. SFAS No.123, as amended by SFAS 148 "Accounting for
Stock-Based Compensation," requires the Company to provide pro forma information
regarding net income and earnings per share in accordance with the fair value
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 2003
and 2002, respectively: expected dividend yield of 0% for both years; computed
volatility of 19% and 28%, respectively; risk-free interest rates of 1.5% and
1.5%, respectively; and expected life of 5 years for all both years. There were
no stock options granted in 2004. The weighted average fair value of options
granted during 2004, 2003 and 2002 was $0.85 and $0.63, respectively. There are
no stock based compensation costs included in the net loss as reported for the
years ended December 31, 2004, 2003, and 2002. The Company's net loss and
earnings per share would have been adjusted to the pro forma amounts indicated
below:
46
Year Ended December 31
2004 2003 2002
------------- ------------- -------------
Net loss:
As reported $ 8,163,630 $ (4,966,945) $ (7,474,158)
Stock based compensation, net of tax -- 2,115 529
------------- ------------- -------------
Pro forma $ 8,163,630 $ (4,969,060) $ (7,474,687)
============= ============= =============
Basic earnings (loss) per share:
As reported $ 3.41 $ (3.83) $ (5.21)
Pro forma 3.41 (3.83) (5.21)
Diluted earnings (loss) per share:
As reported $ 3.41 $ (3.83) $ (5.21)
Pro forma 3.41 (3.83) (5.21)
Recent Accounting Pronouncements
On December 16, 2004, the Financial Accounting Standards Board (FASB)
issued FASB Statement No. 123 (revised 2004), "Share-Based Payment," or SFAS
123(R), which is a revision of FASB Statement No. 123, "Accounting for
Stock-Based Compensation." SFAS 123(R) supersedes APB Opinion No. 25,
"Accounting for Stock Issued to Employees," and amends FASB Statement No. 95,
"Statement of Cash Flows." Generally, the approach in SFAS 123(R) is similar to
the approach described in Statement 123. However, SFAS 123(R) requires all
share-based payments to employees, including grants of employee stock options,
to be recognized in the statement of operations based on their fair values. Pro
forma disclosure is no longer an alternative.
SFAS 123(R) must be adopted by us for interim periods beginning after
January 1, 2006. Early adoption will be permitted in periods in which financial
statements have not yet been issued. We expect to adopt SFAS 123(R) on January
1, 2006. SFAS 123(R) permits companies to adopt its requirements using one of
two methods.
The first method is a modified prospective transition method whereby a
company would recognize share-based employee costs from the beginning of the
fiscal period in which the recognition provisions are first applied as if the
fair value-based accounting method had been used to account for all employee
awards granted, modified, or settled after the effective date and to any awards
that were not fully vested as of the effective date. Measurement and attribution
of compensation cost for awards that are non-vested as of the effective date of
SFAS 123(R) would be based on the same estimate of the grant-date fair value and
the same attribution method used previously under SFAS 123.
47
The second adoption method is a modified retrospective transition method
whereby a company would recognize employee compensation cost for periods
presented prior to the adoption of SFAS 123(R) in accordance with the original
provisions of SFAS 123, that is, an entity would recognize employee compensation
cost in the amounts reported in the pro forma disclosures provided in accordance
with SFAS 123. A company would not be permitted to make any changes to those
amounts upon adoption of SFAS 123(R) unless those changes represent a correction
of an error. For periods after the date of adoption of SFAS 123(R), the modified
prospective transition method described above would be applied.
We currently expect to adopt SFAS 123(R) using the modified prospective
transition method, and expect the adoption to have an effect on our results of
operations similar to the amounts reported historically in our footnotes (see
Note 2 above to our audited financial statements) under stock-based
compensation.
Note 3. Restricted Cash
At December 31, 2002, the US Marshall's' office was holding $654,846 pursuant to
a 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 of $3,132,172 and $129,991,136 at December 31, 2004 and 2003, 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. The Company had excess funds of $2,974,588 and $839,824, at December
31, 2004 and 2003. Excess funds at 2004 were withdrawn in March 2005, when the
certificate of deposit matured. Cash of $757,436 had been segregated in a
special reserve bank account for the benefit of introducing brokers at December
31, 2003. See Note 14, Regulatory Requirements.
48
Note 5. Receivable From and Payable to Broker-Dealers and Clearing Organizations
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, 2004
---------------------------
Receivable Payable
----------- -----------
Deposits for securities borrowed $ 3,000 $ --
Securities failed to deliver/receive 96,608 14,417
Payable to clearing organizations -- 10,243
Other -- 135,883
----------- -----------
Total $ 99,608 $ 160,543
=========== ===========
December 31, 2003
---------------------------
Receivable Payable
----------- -----------
Deposits for securities borrowed/loaned $29,232,316 $38,557,179
Securities failed to deliver/receive 27,856 203,363
Receivable from/payable to correspondents 20 1,143,978
Payable to clearing organizations -- 269,480
Other 77,166 157,755
----------- -----------
Total $29,337,358 $40,331,755
=========== ===========
Securities borrowed and securities loaned represent cash paid or received for
securities borrowed or loaned from other broker-dealers. The equivalent market
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 no securities in stock borrow
transactions that have been re-pledged 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, 2004, the market value of the securities failed to deliver
was $69,632 and failed to receive was $5. At December 31, 2003, the market value
of the securities failed to deliver was $31,370 and failed to receive was
$80,692.
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.
Note 6. Receivable From and Payable to Customers
Receivables from customers include amounts due on cash and margin transactions.
Payables to customers represent debit balances in the customer accounts.
Securities owned by customers are held as collateral for receivables. Such
collateral is not reflected in the financial statements.
Note 7. Securities Owned and Securities Sold, Not Yet Purchased
Securities owned and sold, not yet purchased consist of trading and investment
securities at quoted market values, as illustrated below:
49
Sold, But
Not Yet
Owned Purchased
---------- ----------
Balances as of December 31, 2004:
Equity securities $ 1,070 $ --
U.S. government and other securities 8,755 --
---------- ----------
Total $ 9,825 $ --
========== ==========
Balances as of December 31, 2003:
Equity securities $ 321,202 $1,957,909
U.S. government and other securities 100,000 --
Securities owned not readily marketable 10,858 --
---------- ----------
Total $ 432,060 $1,957,909
========== ==========
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, 2004 and 2003. 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, aircraft and
leasehold improvements:
December 31
--------------------------
2004 2003
----------- -----------
Furniture and equipment $ 483,183 $ 6,780,692
----------- -----------
Aircraft 1,115,000 --
Leasehold improvements -- 1,767,424
----------- -----------
1,598,183 8,548,116
Less: Accumulated depreciation and amortization (344,347) (6,352,333)
----------- -----------
$ 1,253,836 $ 2,195,783
=========== ===========
For the years ended December 31, 2004, 2003 and 2002, depreciation and
amortization expense totaled $658,704, $1,263,539, and $1,683,611, respectively,
of which $68,130, $74,500 and $74,500, is included in depreciation and
amortization expense, respectively. For the years ended December 31, 2004, 2003
and 2002, depreciation and amortization of $590,574, $1,189,039 and $1,609,111
is included in discontinued operations, respectively. Additionally, assets with
a net book value of $1,619,288 were abandoned during the year ended December 31,
2004 with the book value being charged to expense included in discontinued
operations.
Note 9. Notes Payable and Uncommitted Lines
In 2003 and 2004, NCC maintained uncommitted customer financing arrangements
with an aggregate borrowing limit approximating $25,000,000. Amounts loaned bore
interest at a fluctuating rate based on broker call and prime rates and were
fully collateralized by marketable securities. The Company had no such loans
outstanding at December 31, 2004 and 2003. The lines were terminated in the
fourth quarter of 2004, after the sale of assets to Ameritrade, Inc.
50
At December 31, notes payable and short term borrowings 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
-------------------- ------------ ------------------- ----------------- --------------
2004
Collateralized by:
Customer securities $ -- -- $ -- $ -- n/a
Real Property $3,400,000 5.5% $3,400,000 $3,400,000 5.5%
2003
Collateralized by:
Customer securities $ -- -- $ -- $ -- n/a
Real Property $ -- -- $ -- $ -- n/a
a) Weighted average interest rate at end of period.
b) Maximum amount outstanding during the period.
c) Average amount outstanding during the period (starting from date debt
facility existed).
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 $0, $0, and $111 for the years ended
December 31, 2004, 2003 and 2002, respectively.
Short term borrowings consists of two notes secured by land held for investment.
The obligor of the notes is Dolphin Bay, LLC, a new 99% owned subsidiary of
JBOC, created in 2004, which acquired approximately 10 acres of undeveloped land
in Walton County, Florida, for $5.5 million. During December 2004, the Company
capitalized Dolphin Bay with approximately $2.413 million, and Dolphin Bay
obtained a loan in the amount of $2.6 million from a commercial bank due
December 2, 2005. Dolphin Bay paid $4.7 million of the purchase price in cash
and delivered its promissory note to the seller for the remainder of the
purchase price ($800,000). The promissory note accrues interest at 8.5% per
annum beginning February 15, 2005.
At December 31, the detail of notes payable is as follows:
December 31
2004 2003
---------- ----------
Demand notes payable $2,889,375 $2,889,375
Note payable 402,778 569,444
---------- ----------
Total notes payable $3,292,153 $3,458,819
---------- ----------
51
The demand notes payable are contested obligations on notes payable to former
shareholders of the Company, or their assignees. The Company is vigorously
contesting the claims. More information on the claims is set forth in the former
shareholder transactions section of Note 12, below.
The note payable is the result of a settlement and release agreement dated
September 4, 2003 associated with the abandonment of the lease in Oakland,
California. The original terms called for the execution of a non-interest
bearing promissory note in the amount of $611,111 due in 44 equal monthly
payments commencing October 1, 2003. The amounts disclosed above represent the
balance after applying monthly payments to the note. This note was paid off
subsequent to December 31,2004, see litigation related to account acquisitions
in Note 15, below. For information on notes payable to current related parties,
please see Note 12, below.
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 shares remain. The Company
previously issued 200,000 shares that were retired upon conversion to common
shares. The preferred shares carry a minimum of a 6% cumulative dividend and
have a liquidation preference of $10 per share. Any other preferences to be
given are to be determined by the Board of Directors at the time of issuance.
There are no shares of convertible preferred stock currently outstanding.
Note 11. Income Taxes
The income tax (benefit) provision consists of the following components:
Year Ended December 31
2004 2003 2002
----------- ----------- -----------
Current
Federal $ 100,000 $ -- $(3,509,039)
State 63,283 -- --
----------- ----------- -----------
163,283 -- (3,509,039)
----------- ----------- -----------
Deferred
Federal 620,241 (1,594,142) (391,961)
State 329,759 (242,810) (551,390)
Valuation Allowance -- 2,879,300 551,390
----------- ----------- -----------
950,000 1,042,348 (391,961)
----------- ----------- -----------
Total $ 1,113,283 $ 1,042,348 $(3,900,000)
=========== =========== ===========
52
The major components of deferred tax assets net, are as follows:
December 31
2004 2003
----------- -----------
Deferred tax assets (liabilities):
Bad debts reserve $ -- $ 306,827
Depreciation (112,600) 37,618
Amortization of intangible assets -- 1,179,112
Net operating loss carry-forward 2,888,680 2,854,645
Accrued liabilities -- 15,866
Other 156,951 --
Deferred gain on sale of customer and
correspondent accounts (3,883,031)
Less: Valuation allowance -- (4,394,068)
----------- -----------
Total deferred tax assets, net $ (950,000) $ --
----------- -----------
Reconciliation of the provision for income taxes to the expected income tax
based on statutory rates is as follows:
Year Ended December 31
2004 2003 2002
----------- ----------- -----------
Provision (benefit)- Federal statutory rate $ 3,253,920 $(1,717,316) $(3,980,956)
Increase (decrease) in income taxes resulting from:
State taxes 113,283 (242,810) (634,000)
Other (79,852) 123,174 80,956
Valuation allowance (2,174,068) 2,879,300 634,000
----------- ----------- -----------
Total $ 1,113,283 $ 1,042,348 $(3,900,000)
=========== =========== ===========
A valuation allowance was placed against 100% of the federal net deferred tax
asset as of December 31, 2003 due to the uncertainty of its ultimate
realization. For the state deferred tax asset, the Company recorded a valuation
allowance in 2003 and 2002 due to the uncertainty of its ultimate realization.
As of December 31, 2002, the Company has realized to the extent available its
Federal net operating loss carry-backs. For tax purposes at December 31, 2004,
the Company had a Federal net operating loss carry-forward (NOL) of $7.0
million, which will begin expiring in 2023. The Company has elected the
installment method for reporting the sale of customer and correspondent
accounts, see note 17. Such election has deferred $6.4 and $2.8 million of
taxable gain until 2005 and 2006. Accordingly, the Company has recorded a
deferred tax liability in connection with this deferred gain.
Note 12. Related Party Transactions
Third Capital Partners, LLC
The Company has entered into four transactions with Third Capital Partners, LLC
("TCP") and a related affiliate, Third Capital, LLC. They are as follows:
1. On or about May 26, 1998, TCP acquired $3,418,695.59 principal amount of
the 9% Secured Convertible Note, issued pursuant to the Company's Senior
Secured Convertible Note Purchase Agreement dated March 10, 1995, and
having a maturity date of December 31, 1999. The note, when issued, was
convertible into the Company's $0.01 par value common stock at a rate of
$1.00 per share, before adjustment for the 1-for-10 reverse split which
occurred in October 2002. Under the initial conversion rate, this note was
convertible into 3,418,695 shares of common stock, before adjustment for
the reverse split.
53
On or about June 8, 1998, TCP acquired $2,000,000.00 principal amount of
the 9% Secured Convertible Note, issued pursuant to the Company's Senior
Secured Convertible Note Purchase Agreement dated June 8, 1998, and having
a maturity date of December 31, 1999 (the two notes are together referred
to as the "Secured Convertible Notes"). As part of the acquisition, on
April 8, 1998 the Company and TCP agreed to adjust the conversion rate for
the Secured Convertible Notes to $0.70 per share (our stock traded at an
average price of $0.79 on this day), before adjustment for the 1-for-10
reverse split which occurred in October 2002. The revised conversion rate
was based on the average price of JBOH during the three months prior to
the change. Since the new conversion rate was below the market price on
the date of change, 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 to market value under the intrinsic value method. After the
adjustment in conversion rate, the Secured Convertible Notes were
convertible into 7,740,993 shares of common stock, before adjustment for
the reverse split. The issuance of the Secured 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.
On or about November 8, 1999, the maturity date for the Secured
Convertible Notes was extended to December 31, 2000. On or about December
13, 2000, the maturity date for the Secured Convertible Notes was extended
to December 31, 2001. On or about December 31, 2001, the maturity date for
the Secured Convertible Notes was extended to December 31, 2002. On or
about December 31, 2002, the Company and TCP entered into a Note Extension
Agreement which, i) extended the maturity date to December 31, 2003, and
ii) adjusted the conversion rate to $2.67 per share of common stock, the
closing price of the Company's common stock on the Nasdaq SmallCap Market
on December 31, 2002. As a result, and after giving effect to the 1-for-10
reverse split which occurred in October 2002, the Secured Convertible
Notes are convertible into 2,029,474 shares of common stock. On December
31, 2002, the maturity date for the Secured Convertible Notes was extended
to December 31, 2003. On December 31, 2003, the maturity date for the
Secured Convertible Notes was extended to December 31, 2004. In September
2004, TCP converted the Secured Convertible Notes into 2,029,474 shares of
common stock.
2. On or about February 18, 1999, the Company approved a transaction between
TCP and Oeri Finance, Inc., and Felix A. Oeri (collectively, "Oeri"). Oeri
was a substantial shareholder of the Company prior to this transaction,
and Felix A. Oeri was Chairman of the Company's Board of Directors. The
transaction consisted of the following:
a. The Company agreed to waive certain rights it had under a Right of
First Refusal, dated May 27, 1998, to acquire shares of Company
stock held by Oeri;
54
b. Oeri forgave the outstanding balance of $728,125 (reported as an
extraordinary item net of income tax in 1999) due from the Company
under a Promissory Note dated May 27, 1998, in the original amount
of $1,213,125;
c. The Company transferred to Oeri Finance, Inc. all equipment and
furniture in its Basel, Switzerland office;
d. The Company established the JB Oxford Revocable Government Trust
(the "Trust"), and loaned it $586,915, which was used to purchase
469,540 shares of the Company's common stock at an average price of
$1.25 (46,954 shares at $12.50, after adjustment for the reverse
stock split in October 2002). The price was a mutually agreed upon
amount between the parties, the stock closed at $6.66 ($66.66 after
adjustment for the reverse stock split in October 2002) on February
18, 1999. The stock was accounted for as treasury stock, as the JB
Oxford Revocable Government Trust was considered a wholly owned
subsidiary. The Trust terminated pursuant to its terms on February
18, 2001, and ownership of the Trust's shares of the Company's
common stock were transferred to the Company in satisfaction of the
loan; and,
e. The Company agreed to allow TCP to acquire 100,000 shares of the
Company's common stock from Oeri Finance, Inc. for total
consideration of $10.00 (10,000 shares after adjustment for the
reverse stock split in October 2002).
Subsequent to these transactions, Oeri filed 13D statements with the SEC
indicating ownership of less than 5% of the Company's stock.
3. On or about December 13, 2000, the Company loaned $2,500,000 to TCP,
pursuant to a written Promissory Note, payable on or before December 31,
2001. The note bears interest at the rate of 9 1/4%, and may be pre-paid
in whole or in part without penalty. The loan was a re-classification of a
portion of a pre-existing margin debt owed by TCP to the Company's
brokerage subsidiary, and was secured by the $2,000,000 Secured
Convertible Note and Company common stock. The re-classification was
entered into to ensure that the amount of the remaining portion of the
margin debt complied with the Company's lending policies.
By agreement dated December 31, 2001, the maturity date for the Promissory
Note was extended to December 31, 2002. Effective on or about March 22,
2002, as part of a restructuring of inter-company debts between the
Company and its wholly owned subsidiary, NCC (then known as JB Oxford &
Company), the Promissory Note was assigned to NCC, and the maturity date
was extended to December 31, 2007.
4. By agreement dated December 16, 1999, the Company agreed to pay a monthly
advisory fee to Third Capital, LLC, an affiliate of TCP, in the amount of
$85,000, included in general and administrative expenses, plus all direct
and indirect expenses incurred in providing such advisory services to the
Company and its subsidiaries. Since that time, members of Third Capital,
LLC have held the executive positions of Chairman, Chief Executive
Officer, and President of the Company and its subsidiaries. Effective
October 2001, Third Capital, LLC agreed to reduce its fee by 10%, to
$76,500 per month, plus expenses. Effective July 1, 2004, the fee was
reduced to $42,500, plus all direct and indirect expenses incurred in
providing such advisory services to the Company and its subsidiaries. The
advisory fee paid to Third Capital, LLC was $714,000, $918,000, and
$918,000 in 2004, 2003, and 2002, respectively.
55
Note 13. Options and Warrants
At December 31, 2004, 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 92,000 shares of common stock have been authorized for issuance to
officers and full-time employees of the Company. Under the Plan, 48,000 options
have been issued and converted to common stock, while 22,850 options are
outstanding at December 31, 2004 leaving 21,150 options available for future
issuance. 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
authorized for issuance to directors who are not employees of the Company. Under
the Director's Plan, 7,500 options to purchase common stock are outstanding at
December 31, 2004. No options have been converted to common stock under this
plan, leaving 87,500 options available for future issuance. 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 authorized for
issuance to officers, employee directors and key employees of the Company. Under
the 1998 Plan, 113,900 options to purchase common stock are outstanding at
December 31, 2004, of which 112,900 are held by executive officers of the
Company. No options have been converted to common stock under this plan leaving
236,100 options available for future issuance. 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. A summary of the status of the
Company's stock options as of December 31, 2004, 2003, and 2002, and changes
during the years ending on those dates is presented below:
56
December 31, 2004 December 31, 2003 December 31, 2002
Weighted Weighted Weighted
Shares average Shares average Shares average
-------------- ------------ --------------- ----------- ---------------- --------------
Outstanding at
beginning of year 256,825 $15.66 256,200 $15.72 383,120 $26.88
Granted -- 2,500 4.26 1,500 2.20
Forfeited (112,575) 3.98 (1,875) 22.23 (128,420) 49.43
-------------- --------------- ----------------
Outstanding at end of
year 144,250 16.05 256,825 15.66 256,200 15.72
============== =============== ================
Options exercisable at 144,250 16.05 255,725 15.81 254,217 15.81
year-end
Weighted-average fair
value of options
granted during the
year $ -- $0.85 $0.63
Information relating to stock options and warrants at December 31, 2004,
summarized by exercise price is as follows:
Options Outstanding Options Exercisable
Weighted- Weighted-
Number Weighted-Average Average Number Average
Outstanding at Contractual Exercise Exercisable at Exercise
Exercise Prices 12/31/03 Life Price 12/31/03 Price
------------------ ------------------- ---------------- ----------------- ------------------- ----------------
$2.20 1,000 8 $2.20 1,000 $2.20
5.00 1,000 8 5.00 1,000 5.00
6.25 2,500 4 6.25 2,500 6.25
13.13 80,000 3 13.13 80,000 13.13
17.80 1,350 2 17.80 1,350 17.80
18.20 35,500 6 18.20 35,500 18.20
19.70 1,500 3 19.70 1,500 19.70
22.50 15,000 1 22.50 15,000 22.50
23.20 5,000 2 23.20 5,000 23.20
36.88 700 5 36.88 700 36.88
90.00 200 4 90.00 200 90.00
91.25 500 4 91.25 500 91.25
------------------- -------------------
Total 144,250 4 $16.05 144,250 $16.05
=================== ===================
Note 14. Regulatory Requirements
NCC and JBOC were subject to the Securities and Exchange Commission's Uniform
Net Capital Rule (the Rule) in 2004, which requires the maintenance of minimum
net capital. NCC 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.
57
At December 31, 2004, NCC had net capital of $2,640,170, which was $2,390,170 in
excess of the minimum amount required of $250,000. At December 31, 2003, NCC had
net capital of $9,554,544, which was $7,873,465 in excess of the minimum amount
required.
At December 31, 2003, JBOC had net capital of $420,575, which was $414,478 in
excess of the minimum amount required of $25,000. JBOC computed its net capital
requirement in accordance with the aggregate indebtedness standard. The Rule
requires the maintenance of minimum net capital and requires that the ratio of
aggregate indebtedness to net capital, both as defined, shall not exceed 15 to
1. At December 31, 2004, JBOC withdrew as a broker-dealer, and accordingly, was
no longer subject to the Rule.
During 2004, NCC sold its correspondent clearing operation and accordingly, is
no longer required to perform a computation for the proprietary accounts of
introducing brokers ("PAIB") similar to the customer reserve computation set
forth in SEC Rule 15c3-3. As of December 31, 2003, PAIB debits aggregated
$69,264, and credits totaled $809,133. Included in the balance of cash
segregated under federal and other regulations as of December 31, 2004, and 2003
was $0 and $757,280, respectively, of cash held in a PAIB reserve account.
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 claims
regarding brokerage transactions, and claims related to clearing services
arising out of the failure of certain correspondent firms. All of the legal,
arbitration and administrative proceedings have arisen in the ordinary conduct
of its business. Those proceedings that management believes may have a
significant impact on the Company are described below. However, there can be no
assurance that in the future, other current or future proceedings will not have
a material adverse effect on the Company's financial condition or results of
operations. In particular, if the Company is required to pay a judgment in
excess of the amount reserved, such a payment would negatively impact the
financial condition of the Company. However, the Company regularly assesses its
potential liability in all pending litigation to properly set the level of
reserves for such litigation. To the extent that the reserves are sufficient to
cover all awards and settlements, no currently threatened or pending litigation
should materially impact the Company's financial position, results of operations
or cash flows. The Company's aggregate reserve for pending litigation was
$611,452 as of December 31, 2004.
SEC Mutual Fund Lawsuit
On or about August 24, 2004, the SEC's Los Angeles Office commenced a civil
lawsuit against the Company, NCC, and three of its former officers and
employees, alleging violations of Section 17(a) of the Securities Act of 1933,
Section 10(b) of the Exchange Act of 1934 and Rule 10b-5 thereunder, and Section
22(c) of the Investment Company Act of 1940 and Rule 22c-1 thereunder. In
January 2005, all claims under Section 17(a) of the Securities Act of 1933 were
dismissed by the Court, with prejudice. The remaining claims remain pending. The
suit seeks unspecified monetary damages and penalties, as well as other remedies
against the individual defendants. The suit contends that the Company wrongfully
allowed customers to place mutual fund trades after 4:00 p.m. EST, and
wrongfully assisted clients in "market timing" of mutual funds. While the
Company admits no wrongdoing and intends to vigorously defend itself, no
assurance can be given as to the outcome of this matter. Although the likelihood
of loss is reasonably possible, the Company has not accrued any specific amount
related to this matter, as no amount of loss in the Company's estimated range of
loss of zero to $20 million is more likely than another.
58
Litigation Related to Oeri Notes
The Company is a party to a lawsuit entitled EBC Trust v. JB Oxford Holdings,
Inc., et als., pending in the Federal District Court in Los Angeles. In this
suit, EBC Trust is seeking payment of the $2.9 million in notes payable
described above in section 2 of Note 12. In July 2002, the court magistrate
granted a pre-judgment attachment against the assets of the Company in favor of
EBC Trust. In January 2003, the Court reversed the magistrate's order and
dissolved the attachment. In January 2003, EBC Trust amended its claim to assert
additional claims against the Company and to add claims against the officers and
directors of the Company, as well as to add a claim against NCC under the
$1,000,000 Oeri subordinated note. By Order dated October 14, 2003, in response
to motions filed by the Company, the Court dismissed several claims, struck
portions of the Amended Complaint, and compelled EBC Trust to arbitrate all
claims against NCC.
As to the remaining claims, the Company has asserted a number of defenses to EBC
Trust's claims, including fraud, and contribution related to a judgment entered
against EBC Trust's predecessor-in-interest under the notes payable and NCC in
an NASD arbitration commenced by Stanley J. Cohen, Receiver for Secured Equity
Title and Appraisal Agency Corp. While nominally a clearing case, the panel
ruling relied primarily on testimony regarding the activities of Irving Kott
while present at the Company. Mr. Kott is alleged to have provided most of the
funds for the loans now being pursued by EBC Trust. NCC settled all of the
claims against it in that matter in 2002, and as a part of that settlement,
obtained the assignment from Secured Equity of a Judgment against Oeri Finance,
Inc. Accordingly, the Company has asserted a claim of offset for the Judgment
against Oeri Finance, Inc. As stated in Note 12, the Company has recorded
liabilities of approximately $2.9 million on its balance sheet in notes payable,
additionally, the Company has $816,429 of accrued interest related to these
notes included in accounts payable and accrued expenses. The Company has not yet
recorded the offset of the judgment obtained in its financial statements, since
the matter has not yet been adjudicated.
In December 2003, EBC Trust commenced an arbitration action with the National
Association of Securities Dealers, Inc., against JBOC, seeking recovery on the
$1,000,000 subordinated note originally issued to RMS Network, Inc., and
subsequently assigned with approval from the Company and the NASD to Oeri
Finance, Inc. The Company intends to vigorously defend the action and believes
that it has meritorious defenses including, without limitation: i) the suit is
brought against the wrong party; ii) no valid assignment has ever been approved
by the Company or the NASD to EBC Trust, as required by the terms of the note;
and iii) the Company will assert an offset for the Judgment obtained against
Oeri Finance, Inc., described above.
Litigation Related to Account Acquisitions
In October 2002, Share King LLC, as successor to Mr. Stock, Inc. commenced an
arbitration proceeding related to the acquisition by us of the accounts of Mr.
Stock. We counter sued for violations of the purchase agreement by Mr. Stock.
The main issue in the dispute related to whether and when Mr. Stock had met all
of the necessary conditions precedent to the formal closing of the transaction,
as calculation of the amount to be paid was based on when the closing occurred.
The key condition in dispute was whether and when certain required computer
programming was completed by Mr. Stock. That litigation was settled in August
2003, on terms more favorable to us than we originally accrued for, and the cost
of the Mr. Stock acquisition was adjusted down $356,174 in 2003, as a result of
settlement of the arbitration. As a part of the settlement, we are required to
distribute cash and/or stock, at our election to Share King LLC. In early 2004,
a further dispute arose with Share King LLC regarding the registration
requirements related to stock issued and to be issued. That dispute was resolved
and a cash payment of $1,400,000 was made to Share King, LLC in November 2004.
178,804 shares of the Company's common stock were reacquired in the transaction,
and cancelled by the Company, of which 132,244 and 46,560 shares were issued in
2004 and 2003, respectively.
59
In a related action commenced in January 2005, OCC Ventures, LLC commenced suit
against Share King LLC and us alleging breach of the lease buyout agreement. In
March 2005, we reached a settlement with OCC Ventures, pursuant to which we have
made payments totaling $386,111. In exchange, we have received a return of
112,300 shares of our common stock, and a release of the outstanding note to OCC
Ventures. The Company has accrued a loss of approximately $16,000 for the
premium paid in excess of market value for the 112,300 shares at December 31,
2004.
Lease Commitments
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, 2004, were as follows:
Year ending December 31:
2005 $329,228
2006 $182,964
2007 33,000
2008 16,500
2009 --
Thereafter --
--------
Total $561,692
========
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 2004, 2003 and 2002 amounted to $39,506, $106,503, and $28,296.
Note 16. Acquisitions of Customer Accounts
During the years ended December 31, 2004 and 2003, the Company did not acquire
customer accounts of other brokerage firms. The Company acquired the customer
accounts of Stockwalk.com. Inc., Wall Street Equities, Inc., Sunlogic
Securities, and Mr. Stock, Inc, in 2002, and Bull and Bear, Inc. and
eCapitalist, Inc. in 2001. The cost of these acquisitions is $4,362,689 and
$2,510,000 in 2002 and 2001, respectively. The cost of the Mr. Stock acquisition
was adjusted down $356,174 in 2003, as a result of settlement of litigation
related to the acquisitions, and has been included in the statement of financial
condition net of accumulated amortization of $3,558,678 and $2,115,771. For a
discussion of that litigation, please see Note 15, above. The summary of
customer account acquisitions are as follows:
60
Accumulated
Period Number of Amortization Book value of
Acquisition Acquired Accounts Cost at sale date assets sold
Bull & Bear, Inc. 1st qtr '01 9,000 $2,400,000 $1,909,544 $490,456
ECapitalist, Inc 2nd qtr '01 2,000 110,000 103,583 6,417
Stockwalk. com 1st qtr '02 11,500 1,652,772 927,762 725,010
Wall Street Equities, Inc 2nd qtr '02 3,800 460,369 211,002 249,367
Sunlogic Securities 2nd qtr '02 1,500 78,367 35,156 43,211
Mr. Stock 3rd qtr '02 8,000 1,815,007 826,217 988,790
Total 35,800 $6,516,515 $4,013,264 $2,503,251
The Company amortized these intangible assets over four years, which was the
estimated useful life. Amortization expense of $454,586, $1,442,908, and
$1,238,295 was recorded during the years ended December 31, 2004, 2003 and 2002,
respectively. These assets were sold in 2004. The Company ceased amortizing the
assets at the end of April 2004 once deemed to be assets held for sale.
Additionally, in 2002 the Company recognized an impairment charge of $563,726,
($449,023 impairment on the Bull and Bear acquisition and $114,703 impairment of
the Stockwalk.com acquisition) in addition to the $1,238,295 amortization above,
which is included in amortization expense. 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. Discontinued Operations
On June 4, 2004, JBOC signed an asset purchase agreement with Ameritrade, Inc.,
a subsidiary of Ameritrade Holding Corporation, to sell its online retail
accounts for up to $26 million in cash, subject to certain adjustments and an
escrow. That transaction closed on October 8, 2004, with the final purchase
price fixed at $25,870,000. JBOC has received $14,000,000 prior to December 31,
2004 and received an additional $8,370,000 in January 2005. Accordingly, a gain
of $22,966,749 is included in discontinued operations for the sale of its retail
accounts.
On August 20, 2004, NCC entered into an agreement with North American Clearing,
Inc. to sell all of its clearing rights for its correspondent accounts. Under
the terms of the agreement, NCC received an initial payment of $100,000 in
October 2004, and will receive 50% of the revenue related to the transferred
correspondent accounts over the next five years, up to a maximum total payment
of $2.5 million. NCC has received an additional $147,790 in the forth quarter
relating to this sale. Accordingly, a gain of $247,790 is included in
discontinued operations for 2004 for the sale of the correspondent clearing
accounts.
These asset groups are the brokerage operations (both clearing and retail
brokerage segments) of the Company and historically provided substantially all
of its operating revenues. These asset groups have met the criteria defined by
SFAS No. 144 to be reported as discontinued operations as of June 30, 2004, and
are presented as such as of December 31, 2004.
61
The following table reflects detailed amounts of revenue, expense and loss
reported in discontinued operations for the respective years ended December 31,
2004, 2003 and 2002. Operations previously reported have been restated to
reflect the change in status to discontinued operations.
2004 2003 2002
------------ ------------ ------------
Revenues:
Clearing and execution $ 1,704,167 $ 2,897,911 $ 3,887,612
Trading profits, net 326,443 2,187,974 1,469,300
Commissions 5,326,811 8,880,119 8,168,925
Interest 4,043,384 5,400,032 7,673,620
Other 127,756 290,781 864,463
------------ ------------ ------------
Total revenues 11,528,561 19,656,817 22,063,920
------------ ------------ ------------
Expenses:
Employee and broker compensation 5,194,954 5,152,334 7,760,279
Clearing and floor brokerage 987,556 992,633 1,040,498
Communications 1,672,995 2,033,351 2,645,776
Occupancy and equipment 2,684,889 3,960,577 4,979,120
Interest 441,169 724,980 1,442,611
Data processing charges 2,755,814 2,284,778 2,316,927
Professional services 157,568 213,077 --
Promotional 189,686 246,363 1,356,920
Bad debt expense 51,340 80,122 138,512
Settlement expense 971,658 464,500 3,057,500
Amortization of intangible assets 454,586 1,442,908 1,802,021
Other operating expenses 3,416,547 2,420,960 1,770,466
------------ ------------ ------------
Total expenses 18,978,762 20,016,583 28,310,630
------------ ------------ ------------
Loss from discontinued operations before (7,450,201) (359,766) (6,246,710)
disposal of operating assets and taxes
Gain on disposal of retail and clearing
brokerage operation 23,214,539 -- --
------------ ------------ ------------
Income (loss) from discontinued operations 15,764,338 (359,766) (6,246,710)
before income taxes
Income tax provision (benefit) 1,105,400 1,042,348 (3,900,000)
------------ ------------ ------------
Net income (loss) from discontinued operations $ 14,658,938 $ (1,402,114) $ (2,346,710)
============ ============ ============
62
The Company has no international or foreign operations; its institutional sales
operation does, however, service foreign accounts. Additionally, the Company has
no single customer or groups of customers under common control that constitute
more than 10% of its consolidated continuing operating revenues.
Note 18. Financial Instruments With Off-Balance Sheet Risk
As a securities broker-dealer, we provide services to individual institutional
investors. We act as an introducing broker and clear our customer and
proprietary security transactions through another broker dealer on a fully
disclosed basis. The clearing broker dealer provides these services for a fee
and collects commission revenues generated. We are at risk of the nonperformance
by our customers and are responsible for losses sustained by our customers in
excess of their account equity. We are also responsible for losses occurring in
our own proprietary accounts. Our exposure to credit risk associated with the
nonperformance of our customers in fulfilling their contractual obligations
pursuant to securities transactions can be directly impacted by volatile trading
markets.
Note 19. Supplemental Disclosures of Cash Flow Information
Year Ended December 31
2004 2003 2002
Cash paid for:
Interest $ 771,165 $1,062,663 $1,942,628
Income taxes 13,283 79,977 330,308
Cash received from income tax refund -- 4,629,066 3,854,492
Supplemental disclosure of non-cash investing and financing activities:
For the Year Ended December 31, 2004:
o Notes payable to shareholder converted to 2,029,474 shares of common
stock in the amount of $5,418,696.
o Treasury stock used to pay stock bonuses to employees of $115,514.
o 132,244 common shares, issued in connection with Mr. Stock account
acquisition, valued at the average closing price on the 10 business
days preceding issuance, of $466,667.
o Cancellation of 178,804 shares of common stock issued to Mr. Stock
of $622,222
o Investment in land of $5,598,675 partially acquired with $3,400,000
mortgage.
For the Year Ended December 31, 2003:
o Treasury stock used to pay stock bonuses to employees of $142,695.
o Note payable executed on lease abandonment of $611,111 less payments
of $41,667
o 120,000 common shares, issued in connection with lease abandonment,
valued at market value of $388,800
o 46,560 common shares, issued in connection with Mr. Stock account
acquisition, valued at the average closing price on the 10 business
days preceding issuance, of $155,556.
63
Note 20. Unaudited Supplemental Quarterly Financial Information
Below is selected quarterly financial data for each fiscal quarter during the
years ended December 31, 2004 and 2003. This information should be read in
conjunction with the consolidated financial statements included elsewhere
herein.
First Second Third Fourth
Quarter Quarter Quarter Quarter
----------------- ----------------- ------------------- ------------------
2004
Revenues $ 28,462 $ 71,753 $ 169,769 $ 253,195
From continuing operations (1,535,968) (1,613,229) (1,021,989) (2,324,121)
From discontinued operations (655,464) (150,097) (1,949,378) 17,413,876
Net income (loss) (2,191,432) (1,763,326) (2,971,367) 15,089,755
Basic income (loss) per share
From continuing operations (0.86) (0.88) (0.46) (0.62)
From discontinued operations (0.37) (0.08) (0.88) 4.68
Basic earnings per share (1.23) (0.96) (1.34) 4.06
Diluted income (loss) per share
From continuing operations (0.86) (0.88) (0.46) (0.62)
From discontinued operations (0.37) (0.08) (0.88) 4.68
Diluted earnings per share (1.23) (0.96) (1.34) 4.06
2003
Revenues $ 10 $ 9,955 $ -- $ 688
From continuing operations (866,705) (554,513) (701,349) (2,424,284)
From discontinued operations 185,434 (1,231,964) (438,042) 82,459
Net income (loss) (681,271) (1,786,477) (1,139,391) (2,341,825)
Basic net income (loss) per share
From continuing operations (0.58) (0.37) (0.45) (1.48)
From discontinued operations 0.12 (0.82) (0.28) 0.05
Basic net income (loss) per share (0.45) (1.19) (0.73) (1.43)
Diluted income (loss) per share
From continuing operations (0.58) (0.37) (0.45) (1.48)
From discontinued operations 0.12 (0.82) (0.28) 0.05
Diluted net income (loss) per share (0.45) (1.19) (0.73) (1.43)
64
Unusual or infrequently occurring items:
Fourth quarter 2004:
o During the fourth quarter the Company sold its retail customer
accounts generating net gain on sale of $22,966,749 and its
correspondent clearing operation for $247,790.
o The company bought out of a service provider contract for $1,000,000
included in expenses of discontinued operations.
o The Company paid approximately $850,000 in severance salaries to
terminated employees and brokers included in expenses of
discontinued operations.
o The Company paid $315,000 to terminate its lease agreement in
Beverly Hills, California included in expenses of discontinued
operations.
Second quarter 2004:
o The expense for the third quarter 2004 includes the accrual of
$750,000 (paid in the forth quarter) for the settlement of two
arbitrations involving claims of approximately 60 former customers
of correspondent firms.
Fourth quarter 2003:
o During the Forth quarter of 2003 the Company provided an allowance
for its federal income tax receivable in the amount of $1,615,051
and deferred taxes in the amount of $982,019. This increased income
tax expense for the quarter.
Second quarter 2003:
o During the Second quarter of 2003 the Company took a $1,500,000
charge for the abandonment of the lease in Oakland, California.
65
Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
On April 16, 2004, we engaged BDO Seidman, LLP to serve as our independent
auditors for 2004. Our audit committee made the appointment of BDO Seidman LLP.
Prior to that date, Ernst & Young LLP served as our independent auditors. On
April 12, 2004 we received notification from Ernst & Young LLP that it will not
stand for re-election for the audit of the December 31, 2004 financial
statements. The report issued by Ernst & Young LLP on March 10, 2004 was
qualified as to a going concern uncertainty.
During 2004, there were no disagreements with BDO Seidman 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, 2003 and there were no other matters or reportable events as
defined in Item 304(a)(1)(v) of Regulation S-K.
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 Audit Committee of our Board of Directors again
recommended Ernst & Young LLP to serve as our independent auditors for 2003, and
our Board of Directors approved this.
During 2003, 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, 2003 and there were no other matters or reportable events as
defined in Item 304(a)(1)(v) of Regulation S-K.
Item 9A. CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
We have adopted internal controls and procedures in order to ensure that the
information required to be disclosed in the report is recorded, processed,
summarized and reported on a timely basis. We carried out an evaluation (the
"Evaluation"), under the supervision and with the participation of our Chief
Executive Officer ("CEO") and Chief Financial Officer ("CFO"), of the
effectiveness of the design and operation of our disclosure controls and
procedures ("Disclosure Controls") as of the end of the period covered by this
report. Based on the Evaluation, our CEO and CFO concluded that our disclosure
controls and procedures were effective as of the end of the period covered by
this report.
66
Changes in Internal Controls
Because of the reduction of personnel, there have been changes in internal
accounting controls regarding the proper segregation of duties. Because of the
lack of personnel, some duties have been combined, where segregation of such
duties would be more desirable.
Item 9B. OTHER INFORMATION
NONE.
CEO and CFO Certifications
In Exhibits 31.1 and 31.2 of this report there are certifications of the CEO and
the CFO. The certifications are required in accordance with 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 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 29, 2005, a definitive proxy statement pursuant to Regulation
14A, which information is incorporated herein by reference as if set out in
full.
Item 14 Principal Accountant Fees and Services
Fees paid to BDO Seidman LLP, the Company's Principal Auditors:
2004 2003(1)
-------- --------
Audit Fees $204,206 $174,026
Audit-Related Fees 27,000 5,335
Tax Services -- --
All Other Fees -- --
(1) Fees in 2003 were paid to Ernst & Young LLP our prior independent auditor.
67
PART IV
Item 15. Exhibits and Financial Statement Schedules
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 Registered Public Accounting Firm 33
Report of Independent Registered Public Accounting Firm 34
Consolidated Statements of Financial Condition December 31, 2004 and 2003 35-36
Consolidated Statements of Operations Years Ended December 31, 2004, 2003 and 2002 37-38
Consolidated Statements of Changes in Shareholders' Equity
(Accumulated Deficit) Years Ended December 31, 2004, 2003 and 2002 39
Consolidated Statements of Cash Flows Years Ended December 31, 2004, 2003 and 2002 40
Notes to Consolidated Financial Statements 41-65
Financial Statement Schedule I - Condensed Financial Statements (Parent Company Only) 72-78
Financial Statement Schedule II - Valuation and Qualifying Accounts 79
Financial Statement Schedule III - Real Estate Owned and Rental Income 80
Listed below are exhibits as required by Item 601 of Regulation S-K:
Incorporated by Reference
---------------------------------------------
Exhibit Filing Filed
Number Exhibit Description Form File No Exhibit Date Herewith
- ------ ------------------- ---- ------- ------- ---- --------
2.1 Purchase Agreement dated as of May 21, 1998 by and among 8-K 0-16240 2.1 6/18/98
the Company, Third Capital Partners, LLC, a Tennessee
limited liability company, 3421643 Canada Inc., a Canadian
corporation, Felix A. Oeri and Oeri Finance Inc.
3.1 Articles of Incorporation of JBOH, as amended, October 16, 8-K 0-16240 1.0 10/30/90
1990.
3.2 By-Laws of JBOH, as amended November 24, 1998. 10-K 0-16240 3.2 12/31/99
4.1 9% Secured Convertible Note Due December 31, 1999 in the 8-K 0-16240 4.1 6/18/98
principal amount of $2,000,000 between the Company and
Third Capital Partners, LLC
4.2 Rights Agreement between the Company and Transfer Online, 10-K 0-16240 4.2 12/31/02
as Rights Agent.
10.1 Standard Office Lease between St. George Beverly Hills, 10-K 0-16240 10.3 12/31/92
Inc. and OTRA Clearing, Inc., dated January 31, 1992, to
lease Beverly Hills office space.
10.2 Data Service Agreement between Securities Industry Software 10-Q 0-16240 10.0 6/30/92
Corp. and OTRA Clearing, Inc., dated June 8, 1992.
68
Incorporated by Reference
----------------------------------------------
Exhibit Filing Filed
Number Exhibit Description Form File No Exhibit Date Herewith
- ------ ------------------- ---- ------- ------- ---- --------
10.3 Assignment and Assumption Agreement for Beverly Hills 10-K 0-16240 10.8 12/31/93
office space between JBOH and RKSI, executed as of December
31, 1993.
10.4 Commercial office lease Agreement between Bank of 10-Q 0-16240 10.1 6/30/95
Communications and JB Oxford & Company, executed as of June
1995, to lease New York office space.
10.5 Commercial office lease Agreement between Brickell Square 10-K 0-16240 10.16 12/31/95
Corporation Limited and JB Oxford Holdings, Inc., executed
as of February 21, 1996, to lease Miami office space.
10.6 JB Oxford Revocable Government Trust Agreement, dated as of 8-K 0-16240 10.1 3/8/99
February 18, 1999, by and between JB Oxford Holdings, Inc.
and Third Capital Partners, LLC, as Trustee.
10.7 Extension Agreement dated November 8, 1999, between the 10-Q 0-16240 4.3 9/30/99
Company and Third Capital Partners, LLC, extending the
maturity date of the 9% Senior Secured Convertible Note in
the principal amount of $3,418,969.
10.8 Extension Agreement dated November 8, 1999, between the 10-Q 0-16240 4.4 9/30/99
Company and Third Capital Partners, LLC, extending the
maturity date of the 9% Secured Convertible Note in the
principal amount of $2,000,000.
10.9 Amendment No. 6 to Commercial office lease Agreement 10-K 0-16240 10.9 12/31/00
between Arden Realty Limited Partnership and JB Oxford &
Company, executed as of December 21, 2000, to lease Beverly
Hills office space.
10.10 Amendment No. 7 to Commercial office lease Agreement 10-K 0-16240 10.10 12/31/00
between Arden Realty Limited Partnership and JB Oxford &
Company, executed as of March 21, 2001, to lease Beverly
Hills office space.
10.11 Commercial office lease Agreement between Kennedy-Wilson 10-K 0-16240 10.11 12/31/00
Properties, Ltd. and JB Oxford & Company, executed as of
January 18, 2001, to lease Beverly Hills office space.
69
Incorporated by Reference
----------------------------------------------
Exhibit Filing Filed
Number Exhibit Description Form File No Exhibit Date Herewith
- ------ ------------------- ---- ------- ------- ---- --------
10.12 Extension Agreement dated December 13, 2000, between the 10-K 0-16240 10.12 12/31/00
Company and Third Capital Partners, LLC, extending the
maturity date of the 9% Senior Secured Convertible Note in
the principal amount of $3,418,969.
10.13 Extension Agreement dated December 13, 2000, between the 10-K 0-16240 10.13 12/31/00
Company and Third Capital Partners, LLC, extending the
maturity date of the 9% Secured Convertible Note in the
principal amount of $2,000,000.
10.14 Extension Agreement dated December 31, 2001, between the 10-K 0-16240 10.14 12/31/01
Company and Third Capital Partners, LLC, extending the
maturity date of the 9% Senior Secured Convertible Note in
the Principal amount of $3,418,969.
10.15 Extension Agreement dated December 31, 2001, between the 10-K 0-16240 10.15 12/31/01
Company and Third Capital Partners, LLC, extending the
maturity date of the 9% Secured Convertible Note in the
Principal amount of $2,000,000.
10.16 Note Extension Agreement dated December 31, 2002 between 8-K 0-16240 4.1 2/13/03
the Company and Third Capital Partners, LLC.
10.17 Asset Purchase Agreement dated June 4, 2004, between the
Company, JB Oxford & Company and Ameritrade, Inc. 14A
Def.
10.18+ Employment Agreement between the Company and Barry S. X
Fischer date as of June 1, 2004
10.19+ Employment Agreement between the Company and Michael J. X
Chiodo dated as of June 1, 2004
14 Code of Ethics X
16 Letter to SEC from Arthur Andersen dated June 27, 2002. 8-K 0-16240 16.0 6/28/02
21 List of Subsidiaries. X
23.1 Consent of Ernst & Young. X
24 Power of Attorney (appears on signature page of this report) X
28 Employee Stock Ownership Plan. 10-K 0-16240 28 12/31/88
31.1 Rule 13a-14(a)/15d-14(a) Certification of Christopher L. X
Jarratt, Chief Executive Officer, pursuant to Section 906
of Sarbanes-Oxley Act of 2002, filed herewith.
70
Incorporated by Reference
---------------------------------------------
Exhibit Filing Filed
Number Exhibit Description Form File No Exhibit Date Herewith
- ------ ------------------- ---- ------- ------- ---- --------
31.2 Rule 13a-14(a)/15d-14(a) Certification of Michael J. X
Chiodo, Chief Financial Officer, pursuant to Section 906 of
Sarbanes-Oxley Act of 2002, filed herewith.
32.1 Section 1350 Certifications. X
32.2 Section 1350 Certifications. X
+ Executive management contract or compensatory plan or arrangement.
Reports on Form 8-K
During the fourth quarter, the Company made two filings on Form 8-K:
On October 13, 2004, the Company filed a Form 8-K indicating that it had
completed the sale of substantially all of the retail brokerage accounts of its
JB Oxford & Co. subsidiary to Ameritrade, Inc.
On November 5, 2004, the Company filed a Form 8-K gave notice that, by virtue of
the conversion of promissory notes held by Third Capital Partners, LLC, the
Company had become a "Controlled Company" as defined in the NASDAQ Stock
Market's Rule 4350.
71
Schedule I. Condensed Financial Information (Parent Company Only)
JB Oxford Holdings, Inc. Statements of Financial Condition
December 31
2004 2003
------------ ------------
Assets:
Cash and cash equivalents $ 36,572 $ 26,464
Investment in and advances to subsidiaries 32,174,557 21,574,272
Other assets 195,797 182,420
------------ ------------
Total assets $ 32,406,926 $ 21,783,156
============ ============
Liabilities and shareholders' equity:
Liabilities:
Accounts payable and accrued liabilities $ 1,130,670 $ 2,944,923
Advances from subsidiaries 3,381,101 --
Income taxes payable 1,100,000 --
Loans from shareholders -- 5,418,696
Notes payable 2,292,153 2,458,819
------------ ------------
Total liabilities 7,903,924 10,822,438
------------ ------------
Commitments and contingencies (note 5)
Shareholders' equity:
Common stock ($0.01 par value, 100,000,000 shares authorized;
1,756,499 and 1,589,939 shares issued) 37,394 17,565
Additional paid-in capital 23,282,397 18,039,086
Retained earnings (accumulated deficit) 2,096,413 (5,425,090)
Treasury stock, 83,244 and 130,494 shares, at cost (913,201) (1,670,843)
------------ ------------
Total shareholders' equity 10,960,718
24,503,003
------------ ------------
Total liabilities and shareholders' equity $ 32,406,926 $ 21,783,156
============ ============
See accompanying notes.
72
JB Oxford Holdings, Inc. Statements of Operations
For The Years Ended December 31
2004 2003 2002
------------ ------------ ------------
Revenues $ 610,825 $ 641,146 $ 2,376,011
------------ ------------ ------------
Expenses
General and administrative 2,264,128 2,230,678 1,271,365
Bad debt and settlement expense 750,000 -- --
------------ ------------ ------------
Total expenses 3,014,128 2,230,678 1,271,365
------------ ------------ ------------
Income (loss) before interest expense and equity (2,403,303) (1,589,532) 1,104,646
interest in subsidiary income
Interest expense (634,915) (643,556) (736,481)
Equity interest in subsidiary income (loss) 12,315,131 (2,673,528) (11,742,373)
------------ ------------ ------------
Income (loss) before income taxes 9,276,913 (4,906,616) (11,374,208)
Income tax provision (benefit) 1,113,283 1,042,348 (3,900,000)
------------ ------------ ------------
Net income (loss) $ 8,163,630 $ (5,948,964) $ (7,474,208)
============ ============ ============
JB Oxford Holdings, Inc. Statements of Cash Flows
For The Years Ended December 31
2004 2003 2002
------------ ------------ ------------
Net cash provided by operating activities $ 176,774 $ 185,341 $ 1,625,031
------------ ------------ ------------
Cash flows from investing activities:
Investment in subsidiaries -- (250,000) (55,000)
Acquisitions of customer accounts -- -- (1,753,707)
------------ ------------ ------------
Net cash used in investing activities -- (250,000) (1,808,707)
------------ ------------ ------------
Cash flows from financing activities:
Notes payable (166,666) -- (2,740,000)
------------ ------------ ------------
Net cash used in financing activities (166,666) -- (2,740,000)
------------ ------------ ------------
Net increase (decrease) in cash and cash equivalents 10,108 (61,659) 583,738
Cash and cash equivalents at beginning of year 26,464 91,123 162,231
------------ ------------ ------------
Cash and cash equivalents at end of year $ 36,572 $ 26,464 $ 745,969
============ ============ ============
See accompanying notes.
73
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 of JB Oxford Holdings, Inc. as of December 31, 2004 included
elsewhere herein.
Note 2. Revenues
The Company receives substantially all of its revenues from its subsidiaries.
Management fees of $400,000, $480,000, and $2,160,000 were received from NCC in
2004, 2003 and 2002, respectively. The balance of revenues for 2003, 2002 and
2001 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
NCC, as part of normal broker-dealer activities has minimum net 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/Related Party Transactions
Third Capital Partners, LLC
The Company has entered into four transactions with Third Capital Partners, LLC
("TCP") and a related affiliate, Third Capital, LLC. They are as follows:
1. On or about May 26, 1998, TCP acquired $3,418,695.59 principal amount of
the 9% Secured Convertible Note, issued pursuant to the Company's Senior
Secured Convertible Note Purchase Agreement dated March 10, 1995, and
having a maturity date of December 31, 1999. The note, when issued, was
convertible into the Company's $0.01 par value common stock at a rate of
$1.00 per share, before adjustment for the 1-for-10 reverse split which
occurred in October 2002. Under the initial conversion rate, this note was
convertible into 3,418,695 shares of common stock, before adjustment for
the reverse split.
On or about June 8, 1998, TCP acquired $2,000,000.00 principal amount of
the 9% Secured Convertible Note, issued pursuant to the Company's Senior
Secured Convertible Note Purchase Agreement dated June 8, 1998, and having
a maturity date of December 31, 1999 (the two notes are together referred
to as the "Secured Convertible Notes"). As part of the acquisition, the
Company and TCP agreed to adjust the conversion rate for the Secured
Convertible Notes to $0.70 per share, before adjustment for the 1-for-10
reverse split which occurred in October 2002. After the adjustment in
conversion rate, the Secured Convertible Notes were convertible into
7,740,993 shares of common stock, before adjustment for the reverse split.
The issuance of the Secured 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.
74
On or about November 8, 1999, the maturity date for the Secured
Convertible Notes was extended to December 31, 2000. On or about December
13, 2000, the maturity date for the Secured Convertible Notes was extended
to December 31, 2001. On or about December 31, 2001, the maturity date for
the Secured Convertible Notes was extended to December 31, 2002. On or
about December 31, 2002, the Company and TCP entered into a Note Extension
Agreement which, i) extended the maturity date to December 31, 2003, and
ii) adjusted the conversion rate to $2.67 per share of common stock, the
closing price of the Company's common stock on the Nasdaq SmallCap Market
on December 31, 2002. As a result, and after giving effect to the 1-for-10
reverse split which occurred in October 2002, the Secured Convertible
Notes are convertible into 2,029,474 shares of common stock. On December
31, 2002, the maturity date for the Secured Convertible Notes was extended
to December 31, 2004. In September 2004, TCP converted the Secured
Convertible Notes into 2,029,474 shares of common stock.
2. On or about February 18, 1999, the Company approved a transaction between
TCP and Oeri Finance, Inc., and Felix A. Oeri (collectively, "Oeri"). Oeri
was a substantial shareholder of the Company prior to this transaction,
and Felix A. Oeri was Chairman of the Company's Board of Directors. The
transaction consisted of the following:
a. The Company agreed to waive certain rights it had under a Right of
First Refusal, dated May 27, 1998, to acquire shares of Company
stock held by Oeri;
b. Oeri forgave the outstanding balance of $728,125 (reported as an
extraordinary item net of income tax in 1999) due from the Company
under a Promissory Note dated May 27, 1998, in the original amount
of $1,213,125;
c. The Company transferred to Oeri Finance, Inc. all equipment and
furniture in its Basel, Switzerland office;
d. The Company established the JB Oxford Revocable Government Trust
(the "Trust"), and loaned it $586,915, which was used to purchase
469,540 shares of the Company's common stock at an average price of
$1.25 (46,954 shares at $12.50, after adjustment for the reverse
stock split in October 2002). The price was a mutually agreed upon
amount between the parties, the stock closed at $6.66 on February
18, 1999. The stock was accounted for as treasury stock, as the JB
Oxford Revocable Government Trust was considered a wholly owned
subsidiary. The Trust terminated pursuant to its terms on February
18, 2001, and ownership of the Trust's shares of the Company's
common stock were transferred to the Company in satisfaction of the
loan; and,
75
e. The Company agreed to allow TCP to acquire 100,000 shares of the
Company's common stock from Oeri Finance, Inc. for total
consideration of $10.00 (10,000 shares after adjustment for the
reverse stock split in October 2002).
Subsequent to these transactions, Oeri filed 13D statements with the SEC
indicating ownership of less than 5% of the Company's stock.
3. On or about December 13, 2000, the Company loaned $2,500,000 to TCP,
pursuant to a written Promissory Note, payable on or before December 31,
2001. The note bears interest at the rate of 9 1/4%, and may be pre-paid
in whole or in part without penalty. The loan was a re-classification of a
portion of a pre-existing margin debt owed by TCP to the Company's
brokerage subsidiary, and was secured by the $2,000,000 Secured
Convertible Note and Company common stock. The re-classification was
entered into to ensure that the amount of the remaining portion of the
margin debt complied with the Company's lending policies.
By agreement dated December 31, 2001, the maturity date for the Promissory
Note was extended to December 31, 2002. Effective on or about March 22,
2002, as part of a restructuring of inter-company debts between the
Company and its wholly owned subsidiary, NCC (then known as JB Oxford &
Company), the Promissory Note was assigned to NCC, and the maturity date
was extended to December 31, 2007.
4. By agreement dated December 16, 1999, the Company agreed to pay a monthly
advisory fee to Third Capital, LLC, an affiliate of TCP, in the amount of
$85,000 plus all direct and indirect expenses incurred in providing such
advisory services to the Company and its subsidiaries. Since that time,
members of Third Capital, LLC have held the executive positions of
Chairman, Chief Executive Officer, and President of the Company and its
subsidiaries. Effective October 2001, Third Capital, LLC agreed to reduce
its fee by 10%, to $76,500 per month, plus expenses. Effective July 1,
2004, the fee was reduced to $42,500, plus all direct and indirect
expenses incurred in providing such advisory services to the Company and
its subsidiaries. The advisory fee paid to Third Capital, LLC was
$714,000, $918,000, and $918,000 in 2004, 2003, and 2002.
Note 5. Commitments and Contingencies
The Company is a party to a number of pending legal, arbitration or
administrative proceedings incidental to its business, including customer claims
regarding brokerage transactions, and claims related to clearing services
arising out of the failure of certain correspondent firms. All of the legal,
arbitration and administrative proceedings have arisen in the ordinary conduct
of its business. Those proceedings that management believes may have a
significant impact on the Company are described below. However, there can be no
assurance that in the future, other current or future proceedings will not have
a material adverse effect on the Company's financial condition or results of
operations. In particular, if the Company were required to pay a judgment in
excess of the amount reserved, such a payment would negatively impact the
financial condition of the Company. The Company regularly assesses its potential
liability in all pending litigation to properly set the level of reserves for
such litigation. To the extent that the reserves are sufficient to cover all
awards and settlements, no currently threatened or pending litigation should
materially impact the Company's financial position, results of operations or
cash flows. The Company maintains an aggregate reserve for pending and
threatened litigation in the amount of $611,452 as of December 31, 2004.
76
SEC Mutual Fund Lawsuit
On or about August 24, 2004, the SEC's Los Angeles Office commenced a civil
lawsuit against the Company, NCC, and three of its former officers and
employees, alleging violations of Section 17(a) of the Securities Act of 1933,
Section 10(b) of the Exchange Act of 1934 and Rule 10b-5 thereunder, and Section
22(c) of the Investment Company Act of 1940 and Rule 22c-1 thereunder. In
January 2005, all claims under Section 17(a) of the Securities Act of 1933 were
dismissed by the Court, with prejudice. The remaining claims remain pending. The
suit seeks unspecified monetary damages and penalties, as well as other remedies
against the individual defendants. The suit contends that the Company wrongfully
allowed customers to place mutual fund trades after 4:00 p.m. EST, and
wrongfully assisted clients in "market timing" of mutual funds. While the
Company admits no wrongdoing and intends to vigorously defend itself, no
assurance can be given as to the outcome of this matter. Although the likelihood
of loss is reasonably possible, the Company has not accrued any specific amounts
related to this matter, as no amount of loss in the Company's estimated range of
loss of zero to $20 million is more likely than another.
Litigation Related to Oeri Notes
The Company is a party to a lawsuit entitled EBC Trust v. JB Oxford Holdings,
Inc., et als., pending in the Federal District Court in Los Angeles. In this
suit, EBC Trust is seeking payment of the $2.9 million in notes payable
described above in section 2 of Note 4. In July 2002, the court magistrate
granted a pre-judgment attachment against the assets of the Company in favor of
EBC Trust. In January 2003, the Court reversed the magistrate's order and
dissolved the attachment. In January 2003, EBC Trust amended its claim to assert
additional claims against the Company and to add claims against the officers and
directors of the Company, as well as to add a claim against NCC under the
$1,000,000 Oeri subordinated note. By Order dated October 14, 2003, in response
to motions filed by the Company, the Court dismissed several claims, struck
portions of the Amended Complaint, and compelled EBC Trust to arbitrate all
claims against NCC.
As to the remaining claims, the Company has asserted a number of defenses to EBC
Trust's claims, including fraud, and contribution related to a judgment entered
against EBC Trust's predecessor-in-interest under the notes payable and NCC in
an NASD arbitration commenced by Stanley J. Cohen, Receiver for Secured Equity
Title and Appraisal Agency Corp. While nominally a clearing case, the panel
ruling relied primarily on testimony regarding the activities of Irving Kott
while present at the Company. Mr. Kott is alleged to have provided most of the
funds for the loans now being pursued by EBC Trust. NCC settled all of the
claims against it in that matter in 2002, and as a part of that settlement,
obtained the assignment from Secured Equity of a Judgment against Oeri Finance,
Inc. Accordingly, the Company has asserted a claim of offset for the Judgment
against Oeri Finance, Inc. As stated in Note 4, the Company has recorded
liabilities of approximately $2.9 million on its balance sheet in notes payable,
additionally, the Company has $816,429 of accrued interest related to these
notes included in accounts payable and accrued expenses. The Company has not yet
recorded the offset of the judgment obtained in its financial statements, since
the matter has not yet been adjudicated.
In December 2003, EBC Trust commenced an arbitration action with the National
Association of Securities Dealers, Inc., against JBOC, seeking recovery on the
$1,000,000 subordinated note originally issued to RMS Network, Inc., and
subsequently assigned with approval from the Company and the NASD to Oeri
Finance, Inc. The Company intends to vigorously defend the action and believes
that it has meritorious defenses including, without limitation: i) the suit is
brought against the wrong party; ii) no valid assignment has ever been approved
by the Company or the NASD to EBC Trust, as required by the terms of the note;
and iii) the Company will assert an offset for the Judgment obtained against
Oeri Finance, Inc., described above.
77
Litigation Related to Account Acquisitions
In October 2002, Share King LLC, as successor to Mr. Stock, Inc. commenced an
arbitration proceeding related to the acquisition by us of the accounts of Mr.
Stock. We counter-sued for violations of the purchase agreement by Mr. Stock.
That litigation was settled in August 2003, on terms more favorable to us than
we originally accrued for, and the cost of the Mr. Stock acquisition was
adjusted down $356,174 in 2003, as a result of settlement of the arbitration. As
a part of the settlement, we are required to distribute cash and/or stock, at
our election to Share King LLC. In early 2004, a further dispute arose with
Share King LLC regarding the registration requirements related to the stock to
be issued. In October 2004, we settled the dispute with Share King LLC by making
a one-time payment of $1.4 million. As a part of that settlement, all shares
issued to Share King LLC were returned to the Company to be cancelled. 178,804
shares of the Company's common stock were reacquired in the transaction, and
cancelled by the Company, of which 132,244 and 46,560.share were issued in 2004
and 2003, respectively.
In a related action commenced in January 2005, OCC Ventures, LLC commenced suit
against Share King LLC and us alleging breach of the lease buyout agreement. In
March 2005, we reached a settlement with OCC Ventures, pursuant to which we have
made payments totaling $686,111. In exchange, we have received a return of
112,300 shares of our common stock, and a release of the outstanding note to OCC
Ventures. The Company has accrued a loss of approximately $16,000 for the
premium paid in excess of market value for the 112,300 shares at December 31,
2004.
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, 2004, were as follows:
Year ending December 31:
2005 $ 67,906
2006 54,510
2007 --
2008 --
Thereafter --
--------
Total $122,416
========
78
Schedule II - Valuation and Qualifying Accounts
Additions
Balance at charged to
beginning of costs and Balance at end of
period expenses Deductions period
2004:
Allowance for:
Receivable from customers $2,781,305 $ 51,340 $(2,832,645) $ --
2003:
Allowance for:
Receivable from customers $2,701,183 $ 80,122 $ -- $2,781,305
2002:
Allowance for:
Receivable from customers $2,625,178 $ 138,512 $ (62,507) $2,701,183
Deductions represent amounts written off.
79
Schedule III - Real Estate Owned and Rental Income
(Amounts in thousands)
Amount at which
List classification of Initial Cost of carried at
property as indicated Amount of cost to improvements, close Reserve for
below incumbrances company etc. of period depreciation
Farms $ -- $ -- $ -- $ -- $--
Residential -- -- -- -- --
Apartments and business -- -- -- -- --
Unimproved 3,400 5,599 -- 5,599 $ --
------ ------ ------ ------ ------
Total $3,400 $5,599 $ -- $5,599 $ --
====== ====== ====== ====== ======
Balance at the beginning of period $ --
Additions during the period:
Acquisition through foreclosure $ --
Other acquisitions 5,599
Improvements, etc --
Other --
------
5,599
Deductions during period:
Cost of real estate sold --
Other --
------
Balance at close of period $5,599
======
The cost of above real estate is $5,598,675 for Federal income tax purposes.
80
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/ David G. Mahood
--------------------------------- -----------------------------------------
Christopher L. Jarratt David G. Mahood, Director
Chairman of the Board and
Chief Executive Officer
/s/Michael J. Chiodo /s/ Bernard M. Notas
--------------------------------- -----------------------------------------
Michael J. Chiodo Bernard M. Notas, Director
Chief Financial Officer, Treasurer,
Chief Accounting Officer
/s/ Terry N. Pefanis
-----------------------------------------
April 21, 2005 Terry N. Pefanis, Director
81