UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2005
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
For the transition period from ______________ to _______________
Commission File Number 0-16240
JB Oxford Holdings, Inc.
- --------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
UTAH 95-4099866
(State of incorporation or organization) (I.R.S. Employer
Identification No.)
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
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 whether the Registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act). Yes ___ No _X_
Indicate the number of shares outstanding of each of the issuer's classes
of common stock, as of the latest practicable date. As of May 8, 2005, the
Registrant had the following number of shares of common stock, $0.01 par value
per share, outstanding: 3,580,159.
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
JB Oxford Holdings, Inc. and Subsidiaries
Consolidated Statements of Financial Condition
Mar. 31, 2005 December 31,
(Unaudited) 2004
----------- -----------
Assets:
Cash and cash equivalents $14,497,373 $ 5,270,077
Cash segregated under federal and other regulations 212,123 3,132,172
Receivable from broker-dealers and clearing organizations 215,853 99,608
Receivable from customers -- 209
Other receivables 3,967,493 12,413,265
Securities owned - at market value -- 9,825
Notes receivable from shareholder 2,500,000 2,500,000
Investment in land 5,648,675 5,598,675
Furniture, equipment, and leasehold improvements (at cost - net of
accumulated depreciation and amortization of $406,248 and $344,347) 1,191,935 1,253,836
Clearing deposits 4,206,949 4,652,541
Other assets 641,253 671,561
----------- -----------
Total assets $33,081,654 $35,601,769
=========== ===========
See accompanying notes.
2
JB Oxford Holdings, Inc. and Subsidiaries
Consolidated Statements of Financial Condition
Mar. 31, 2005 December 31,
(Unaudited) 2004
------------ ------------
Liabilities and shareholders' equity:
Liabilities:
Short term borrowings $ 3,400,000 $ 3,400,000
Payable to broker-dealers and clearing organizations 113,817 160,543
Payable to customers -- 7,071
Income taxes payable 3,800 150,000
Deferred taxes payable 600,000 950,000
Accounts payable and accrued liabilities 2,598,208 3,138,999
Notes payable 2,889,375 3,292,153
------------ ------------
Total liabilities 9,605,200 11,098,766
------------ ------------
Commitments and contingencies
Shareholders' equity:
Common stock ($.01 par value, 100,000,000 shares authorized; 3,627,113
and 3,739,413 shares issued) 36,271 37,394
Additional paid-in capital 22,974,695 23,282,397
Retained earnings 1,378,689 2,096,413
Treasury stock at cost, 46,954 shares (913,201) (913,201)
------------ ------------
Total shareholders' equity 23,476,454 24,503,003
------------ ------------
Total liabilities and shareholders' equity $ 33,081,654 $ 35,601,769
============ ============
See accompanying notes.
3
JB Oxford Holdings, Inc. and Subsidiaries
Consolidated Statements Of Operations
(Unaudited)
For The Three Months Ended
March 31,
----------------------------
2005 2004
----------- -----------
Revenues:
Brokerage $ 279,358 $ 28,462
Other 24,979 --
----------- -----------
Total revenues 304,337 28,462
----------- -----------
Expenses:
General and administrative 1,524,538 1,369,076
Depreciation and amortization 61,901 34,065
----------- -----------
Total expenses 1,586,439 1,403,141
----------- -----------
Loss from continuing operations before interest and taxes (1,282,102) (1,374,679)
----------- -----------
Interest revenue 127,236 --
Interest expense 45,731 160,889
----------- -----------
Net Interest 81,505 (160,889)
----------- -----------
Loss from continuing operations before taxes
(1,200,597) (1,535,568)
Income tax expense (benefit) (350,013) 400
----------- -----------
Net loss from continuing operations (850,584) (1,535,968)
----------- -----------
Income (loss) from discontinued operations 132,860 (653,664)
Income tax expense (benefit) -- 1,800
----------- -----------
Net income (loss) from discontinued operations 132,860 (655,464)
----------- -----------
Net loss $ (717,724) $(2,191,432)
=========== ===========
Basic net income (loss) per share:
From continuing operations $ (0.23) $ (0.86)
From discontinued operations 0.04 (0.37)
Basic net income (loss) per share (0.20) (1.23)
Diluted net income (loss) per share:
From continuing operations $ (0.23) $ (0.86)
From discontinued operations 0.04 (0.37)
Diluted net income (loss) per share (0.20) (1.23)
Weighted average number of shares
Basic 3,662,472 1,786,764
Diluted 3,662,472 1,786,764
See accompanying notes.
4
JB Oxford Holdings, Inc. and Subsidiaries
Consolidated Statements Of Cash Flows
(Unaudited)
For The Three Months Ended
March 31,
------------------------------
2005 2004
------------ ------------
Cash flows from operating activities:
Net loss $ (717,724) $ (2,191,432)
Adjustments to reconcile net loss to cash used in operating activities:
Depreciation and amortization 61,901 727,828
Provision for bad debts -- 22,038
Deferred income taxes, net (350,000) --
Gain on disposal of clearing operation (220,413)
Changes in assets and liabilities:
Cash segregated under federal and other regulations 2,920,049 19,900,573
Receivable from broker-dealers and clearing organizations (116,245) 13,562,822
Receivable from customers 209 (24,458,895)
Other receivables 75,772 1,323,765
Securities owned 9,825 (406,768)
Clearing deposits 445,592 1,145,761
Other assets 30,308 (370,795)
Payable to broker-dealers and clearing organizations (46,726) (3,005,517)
Payable to customers (7,071) (5,658,029)
Securities sold, not yet purchased -- (1,886,781)
Accounts payable and accrued liabilities (540,791) 368,239
Income taxes, net (146,200) --
------------ ------------
Net cash provided by (used in) operating activities 1,398,486 (927,191)
------------ ------------
Cash flows from investing activities:
Capital expenditures -- (97,794)
Investment in land (50,000) --
Sale of clearing and retail brokerage operations 8,590,413 --
Acquisition and retirement of 112,300 share of treasury stock (308,825) --
------------ ------------
Net provided by (cash used) in investing activities 8,231,588 (97,794)
------------ ------------
Cash flows from financing activities:
Repayments of notes payable (402,778) (41,666)
------------ ------------
Net cash used in financing activities (402,778) (41,666)
------------ ------------
Net increase (decrease) in cash and cash equivalents 9,227,296 (1,066,651)
Cash and cash equivalents at beginning of the period 5,270,077 6,897,970
------------ ------------
Cash and cash equivalents at end of the period $ 14,497,373 $ 5,831,319
============ ============
See accompanying notes.
5
JB Oxford Holdings, Inc. and Subsidiaries
Notes To Consolidated Financial Statements
(Unaudited)
Note 1. Company's Quarterly Report under Form 10-Q
In the opinion of Management, the accompanying unaudited consolidated
financial statements contain all adjustments necessary to present fairly the
consolidated financial statements of JB Oxford Holdings, Inc. and subsidiaries
(the "Company") for the periods presented. The results of operations for the
interim periods presented are not necessarily indicative of the results to be
expected for the full year. The accompanying consolidated financial information
should be read in conjunction with the Company's 2004 Annual Report on
Securities and Exchange Commission ("SEC") Form 10-K. Footnote disclosures that
substantially duplicate those in the Company's Annual Report on Form 10-K,
including significant accounting policies, have been omitted.
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. The Company has
incurred recurring operating losses and has significant pending litigation.
Further, there is significant uncertainty with respect to the outcome of a
pending SEC lawsuit regarding alleged late trading of mutual funds conducted by
the Company. The report of the Company's independent registered public
accounting firm for the year ended December 31, 2004, included an explanatory
paragraph expressing substantial doubt about the Company's ability to continue
as a going concern.
The accompanying consolidated financial statements do not include any
adjustments relating to the possible future effects on the recoverability and
classification of assets or the amounts and classification of liabilities that
might be necessary should the Company file for protection under Chapter 11 or be
unable to continue as a going concern.
During the year ended December 31, 2004, the Company sold substantially
all of its revenue producing operations. Effective September 2004, National
Clearing Corp ("NCC") sold its correspondent clearing operation and effective
October 2004, JB Oxford & Company ("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, Inc. 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. The Company has incurred approximately
$185,000 of costs related to this new activity in the first quarter of 2005,
with no related revenues. During the periods presented, the Company generated
revenues in a single industry, the securities industry. During 2004, the Company
derived 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 4 for further discussion of discontinued
operations. In 2005, the Company generated revenues from its institutional
brokerage operation in NCC and revenues from its cash investments. Inter-company
balances have been eliminated in the consolidated financial statements.
6
Note 2. Earnings per Share
The following table reconciles the numerators and denominators of the
basic and diluted earnings per share computation:
For The Three Months Ended
March 31,
----------------------------
2005 2004
----------- -----------
Basic earnings per share:
Net loss $ (717,724) $(2,191,432)
----------- -----------
Loss available to common stockholders (numerator) $ (717,724) (2,191,432)
=========== ===========
Weighted average common shares outstanding (denominator) 3,662,472 1,786,764
=========== ===========
Basic earnings per share $ (0.20) $ (1.23)
=========== ===========
Diluted earnings per share:
Net loss $ (717,724) $(2,191,432)
----------- -----------
Loss available to common stockholders plus assumed conversions
(numerator) $ (717,724) $(2,191,432)
=========== ===========
Weighted average common shares outstanding 3,662,472 1,786,764
----------- -----------
Weighted average common shares and assumed conversions
outstanding (denominator) 3,662,472 1,786,764
=========== ===========
Diluted earnings per share $ (0.20) $ (1.23)
=========== ===========
The assumed conversions have been excluded in computing the diluted
earnings per share when there is a net loss for the period. They have been
excluded because their inclusion would reduce the loss per share or be
anti-dilutive. If the assumed conversions were used, the fully diluted shares
outstanding for the three months ended March 31, 2005 and 2004 would be
3,662,527 and 3,816,474, respectively.
The excluded options carry exercise prices ranging from $2.20 to $91.25 at
March 31, 2005 and 2004. Options to purchase 144,250 shares of common stock at
March 31, 2005 expire at various dates through October 4, 2012.
Note 3. Equity Transactions and Stock Options
During the first quarter of 2005, the Company acquired 112,300 shares of
common stock in connection with the final resolution of all matters related to
the Mr. Stock acquisition. The shares were acquired at an effective average
price of $2.89 per share, based upon mutual agreement of the parties and
settlement of all other remaining issues. The retirement of the stock was
recorded at a cost of $2.75 per share representing the fair market value on the
day the shares were acquired and $16,175 was accrued as an expense at December
31, 2004. The buy back resulted in the reduction of common stock of $1,123 and
additional paid in capital of $307,702 in the first quarter of 2005. The shares
have been returned to the Company and cancelled as of March 31, 2005.
7
During the first quarter of 2004, the Company issued 132,244 shares of
common stock related to the acquisition of intangible assets in the amount of
$466,667 in connection with the Mr. Stock transaction. The average closing
market price for the ten days prior to issuance was used to determine the number
of shares issued. The $466,667 was previously included in accounts payable prior
to issuance. See "Litigation Related to Account Acquisitions" included at Note 6
for additional information.
SFAS No.123, "Accounting for Stock-Based Compensation," requires the
Company to provide pro forma information regarding net income and earnings per
share in accordance with the compensation-based method prescribed in SFAS No.
123. SFAS No. 148, "Accounting for Stock-Based Compensation - Transition and
Disclosure," requires the Company to provide information required by SFAS 123 on
a quarterly basis. No options were issued during the three months ended March
31, 2005 and 2004; and there is no pro forma attribution expense on previously
issued options for those respective periods. A summary of the status of the
Company's stock options as of March 31, 2005 and 2004, and changes during the
periods ending on those dates is presented below:
March 31, 2005 March 31, 2004
---------------------- ----------------------
Weighted Weighted
Shares average Shares average
------- -------- ------- --------
Outstanding at
beginning of period 144,250 $16.05 256,825 $15.66
Forfeited -- -- (200) 35.94
------- -------
Outstanding at end of
period 144,250 16.05 256,625 15.64
======= =======
Options exercisable
at quarter-end 144,250 16.05 256,625 15.64
Weighted-average fair
value of options
granted during the
period $-- $--
Note 4. Discontinued Operations
On June 4, 2004, the Company signed an asset purchase agreement with
Ameritrade, Inc., a subsidiary of Ameritrade Holding Corporation, to sell the
online retail accounts of JB Oxford & Company ("JBOC"), a subsidiary of JB
Oxford Holdings, Inc. 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 $25.87 million. The Company received the initial
payment of $14 million in 2004, and received the second payment of $8.37 million
in January 2005. The final payment of $3.5 million is due to be received in
April 2006.
On August 20, 2004, the Registrant entered into an agreement with North
American Clearing, Inc. to sell all of its clearing rights for the correspondent
accounts of its wholly-owned subsidiary National Clearing Corp. ("NCC"). Under
the terms of the agreement, the Registrant 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. Gain on disposal of clearing operation of
$220,413 is included in discontinued operations for the period ended March 31,
2005.
8
These asset groups are the brokerage operations (both clearing and retail
brokerage segments) of the Company and provided substantially all of its
operating revenues in 2004. These asset groups met the criteria defined by SFAS
No. 144 to be reported as discontinued operations as of June 30, 2004. Certain
expenses, particularly professional fees, including legal defense costs, that
are related to the discontinued operations, but remain as obligations of the
Company after completion of the asset sales, are reported in ongoing operations.
The following table reflects detailed amounts of revenue, expense and loss
reported in discontinued operations for the respective periods ended March 31,
2005 and 2004. Operations previously reported have been restated to reflect the
change in status to discontinued operations.
For The Three Months Ended
March 31,
----------------------------
2005 2004
----------- -----------
Revenues:
Commissions $ -- $ 2,262,009
Interest -- 1,333,716
Trading profits -- 26,642
Clearing and execution -- 559,344
Other 272,347 18,408
----------- -----------
Total revenues 272,347 4,200,119
----------- -----------
Expenses:
Employee compensation -- 1,436,136
Clearing and floor brokerage 7,295 266,661
Communications 35,513 588,415
Occupancy and equipment 66,028 805,923
Interest -- 96,231
Data processing charges 223,271 670,002
Professional services 9,050 107,436
Promotional 885 88,390
Bad debts -- 22,038
Amortization of intangible assets -- 340,939
Other operating expenses 17,858 431,612
----------- -----------
Total Expenses 359,900 4,853,783
----------- -----------
Loss from discontinued operations before disposal of operating
assets and taxes (87,553) (653,664)
Gain on disposal of clearing operation 220,413 --
----------- -----------
Income (loss) before income taxes 132,860 (653,664)
Income tax expense (benefit) -- 1,800
----------- -----------
Income (loss) from discontinued operations $ 132,860 $ (655,464)
=========== ===========
9
Note 5. Regulatory Requirements
NCC is subject to the SEC's Uniform Net Capital Rule ("the Rule"), which
requires the maintenance of minimum net capital. The Rule requires NCC to
maintain minimum net capital, as defined, equal to the greater of $250,000 or 6
2/3 percent of aggregate indebtedness, as defined. At December 2004, NCC had
elected the alternative method to compute its minimum net capital requirement.
The alternative method requires the greater of $250,000 or two percent of
aggregate debit balances arising from customer transactions, as defined. NCC no
longer carried customer balances and used the aggregate indebtedness standard to
compute its minimum net capital requirement at March 31, 2005. This method
requires maintenance of minimum net capital of not less than 6 2/3% of aggregate
indebtedness, as defined.
At March 31, 2005, NCC had net capital of $2,398,168, which was $1,513,061
in excess of the minimum amount required and 18% of aggregate indebtedness with
ratio of aggregate indebtedness to net capital of 5.5 to 1. 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.
Note 6. Contingent Liabilities
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.
10
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. 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. 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.
11
In a related action commenced in January 2005, OCC Venture, 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 Venture, pursuant to which we have
made payments totaling $686,111, of which $361,111 represented the balance due
on the note payable to them. In exchange, we have received a return of 112,300
shares of our common stock, and a release of the outstanding note to OCC
Venture. The Company 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.
Note 7. Supplemental Disclosures of Cash Flow Information
For The Three Months
Ended March 31,
---------------------
2005 2004
-------- --------
Supplemental Disclosures of Cash Flow Information
Cash paid for:
Interest $ 37,231 $218,152
Income taxes 146,200 2,200
Supplemental disclosure of non-cash investing and financing activities:
o Treasury stock bonus issued to employees in the amount of $0 and
$115,514 for 2005 and 2004, respectively.
o Common stock issued to acquire intangible assets in the amount of
$466,667 for 2004 (See Note 3 Equity Transactions and Stock
Options).
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Special Note Regarding Forward-Looking Statements
Certain statements in this Quarterly Report on Form 10-Q, particularly under
Items 2 and 3, as well as certain information provided periodically in writing
or orally by us, constitute "forward-looking statements" within the meaning of
the Private Securities Litigation Reform Act of 1995. These forward-looking
statements involve known and unknown risks, uncertainties, and other factors
which may cause the actual results, performance, or achievements of the Company
to be materially different from any future results, performance, or
achievements, expressed or implied by such forward-looking statements.
12
Business Overview
Through our wholly-owned subsidiaries, we were previously engaged in the
business of providing brokerage and related financial services to retail
customers and broker-dealers nationwide. With the completion of the transactions
with Ameritrade, Inc. and North American Clearing, our brokerage operations are
now limited to providing market making and institutional trading services only.
See Note 4, Discontinued Operations. Our business is headquartered in Los
Angeles, California.
On May 16, 2005, our Board of Directors approved a new business plan for our JB
Oxford & Company subsidiary. Under the new business plan, JBOC will focus
primarily on the acquisition of real estate for investment and/or development.
In the fourth quarter of 2004, we made our first investment in real estate,
through the purchase of raw land in Destin, Florida. While we will continue to
look at investments in other market sectors, including the possibility of
acquiring an operating business, our primary focus at this time is in making
investments in real estate, both for investment and development purposes.
Recent Developments
On May 16, 2005, our Board approved a new business plan. In addition to
continuing our limited brokerage business, our primary focus is now the purchase
and sale of real estate for investment and/or development purposes. In addition,
we reserve the right to make investments in other areas, including the
possibility of investing in other operating entities.
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. In May 2005, we merged our JBOC
subsidiary into our FiCorp subsidiary. The sale proceeds, less operating
expenses to date, are available for investment.
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 Destin,
Florida, for $5.5 million. The Company has not determined whether to hold the
land for short-term appreciation, longer-term appreciation or development. We
did not acquire any additional property in the first quarter of 2005.
Market Making Activities
In order to facilitate the execution of security transactions for our own
customers, NCC acts as a market maker for approximately 10 public corporations
whose stocks are traded on the NASDAQ over-the-counter Bulletin Board System.
The number of companies in which NCC acts as a market maker fluctuates depending
upon various factors, including trading volume and the number of employees in a
trading capacity. Our market making activities concentrate on the execution of
unsolicited transactions for customers and are required to be in compliance with
the rules of the National Association of Securities Dealers, Inc. ("NASD")
regarding best execution.
13
Results of Operations
Quarter Ended March 31, 2005 Compared with Quarter Ended March 31, 2004
Continuing Operations
Revenues from ongoing institutional sales and trading services provided $279,358
in brokerage revenue for the three months ended March 31, 2005 as compared to
$28,462 for the same period in 2004. The Company started to provide these
services in March 2004. Interest earned for the three months ended March 31,
2005 amounted to $127,236. All of the interest earned in 2004 was included in
discontinued operations.
Our general and administrative expense increased by $155,463 or 11% to
$1,524,539 in the first three months of 2005 from $1,369,076 in the first three
months of 2004. This increase resulted primarily from employee compensation that
increased $277,512 to $331,204 in the first three months of 2005 from $53,692 in
the first three months of 2004. This increase is primarily the result of an
increase in broker salary and commission from the institutional sales operation
in the amount of $160,145. General and administrative expenses consist primarily
of legal fees of $948,053 and $1,146,463 for the three months ended March 31,
2005 and 2004, respectively, related to legal matters as discussed in Note 6
above.
Depreciation and amortization expense increased $27,836 for the three months
ended March 31, 2005 over the three months ended March 31, 2004 because of the
addition of the plane in late 2004. Depreciation on the plane amounted to
$39,821 for the period ended March 31, 2005.
We recognized a tax benefit of $350,013 in the first quarter of 2005, which was
the reversal of deferred tax credits, as compared to an income tax expense of
$400 for the same period in 2004.
Our loss from continuing operations decreased 45% to $850,584 for the period
ended March 31, 2005 compared to $1,535,968 for the period ended March 31, 2004.
$350,413 of this decrease was the change in the provision (benefit) for income
taxes in the respective periods.
Discontinued Operations
Discontinued operations generated net income of $132,860 in the first quarter of
2005 compared to a loss of $655,464 in the first quarter of 2004. This is a
change of $788,324 or 120% decrease in the loss.
Revenues from Discontinued Operations
Our total discontinued brokerage revenues totaled $272,347 for the first three
months of 2005, as compared $4,200,119 in the first three months of 2004.
Operations for the retail and clearing operations ceased in the forth quarter of
2004. The primary source of discontinued operations revenue for the period ended
March 31, 2005 is the result of our sales of security positions. The positions
consisted of low priced securities which are not widely traded.
14
Expenses from Discontinued Operations
Our total discontinued brokerage expenses totaled $359,900 for the first three
months of 2005, as compared $4,853,783 in the first three months of 2004. As
described above, operations for the retail and clearing operations ceased in the
forth quarter of 2004. The primary source of operations expense for the period
ended March 31, 2005 is data processing charges of $223,271. We expect these to
continue through June 2005, at such time we will have completed our filing of
information tax returns for our former retail customers. Additionally, we had
rent and maintenance expense for our former New York office totaling $66,028 for
the three months ended March 31, 2005, net of $47,714 sub rental payments
received.
Gain on Disposal of Operating Assets
Included in the discontinued operation for the period ended March 31, 2005 is
$220,413 from the sale of our clearing operation. We expect these proceeds to
continue on a gradually declining basis.
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
March 31, 2005, we have $14,497,373in 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 Note
5. "Regulatory Requirements" above.) At March 31, 2005, NCC had net capital of
$2,398,168, which was $1,513,061 in excess of the minimum amount required. 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. 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. 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. If we are unable to
raise additional funds when needed, we may have to file for protection under
Chapter 11 of the United States Bankruptcy Code.
15
Going Concern
As previously noted, we have sold substantially all of our ongoing business
operations and do not have generated significant revenues from current
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 issued
in connection with our December 31, 2004 consolidated financial statements
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 6, Contingent
Liabilities) 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).
Liquidity at March 31, 2005
Our cash position increased during the first three months of 2005 by $9,227,296
to $14,497,373. This compares with a net decrease in cash and cash equivalents
of $1,066,651 in the first three months of 2004. We do not anticipate making any
payments on notes payable in the principal amount of $2,889,375 (See "Litigation
Related to Oeri Notes" in Legal Proceedings in Part II, below).
Cash Flows from Operating Activities
Net cash provided by operating activities (including discontinued operating
activities) was $1,398,486 for the first three months of 2005, compared to cash
of $927,191 used in operations during the first three months of 2004. Our net
cash provided by or used in operating activities is impacted by changes in the
brokerage-related assets and liabilities of NCC.
During the first three months of 2005, the most significant source of cash was
the decrease in cash segregated under federal and other regulations of
$2,920,049. Additionally, clearing deposits decreased to provide cash of
$445,592. These sources of cash were offset by the decreases in accounts payable
and accrued liabilities of $540,791 and the net loss of $1,226,236 after
adjustments to reconcile net loss to cash used in operating activities.
16
Cash Flows Used In Investing Activities
The net cash provided by investing activities during the first three months of
2005 was $8,231,588 compared with cash used of $97,794 during the first three
months of 2004. The most significant source of cash was cash received from the
sale of operating assets of $8,590,413. The primary use of cash was to acquire
112,300 share of our common stock (see Note 3, "Equity Transactions and Stock
Options"). All of the cash used for investing activities in the period ended
March 31, 2004 was for capital expenditures. We presently have no plans to open
additional offices and no significant commitments for capital expenditures.
Therefore, our requirement for capital resources is not material to the business
as a whole.
Cash Flows from Financing Activities
The net cash used in financing activities during the first three months of 2005
was $402,778 compared with cash used in financing activities of $41,666 in the
first three months of 2004. The cash used in both periods was for the repayment
of notes payable. The payment made in 2005 was to pay the note off in
conjunction with the acquisition of 112,300 of share of our common stock (see
above and Note 6 "Contingent Liabilities" under "Litigation Related to Account
Acquisitions").
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 adopted 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 just announced our intention to enter into the real estate
investment and development business, and have yet to significantly begin work in
that area. 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.
17
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.
18
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.
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 $4.24. 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.
19
Item 3. 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.
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.
Item 4. 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.
20
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.
CEO and CFO Certifications
Appearing immediately following the Signatures section of this report 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 provides 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 II - OTHER INFORMATION
Item 1. 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.
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.
21
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.
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.
22
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 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.
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 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.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
None.
Item 3. Defaults upon Senior Securities.
None.
Item 4. Submission of Matters to a Vote of Security Holders.
None.
Item 5. Other Information
None.
23
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
31.1 Certification of Christopher L. Jarratt, Chief Executive Officer, pursuant
to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2 Certification of Michael J. Chiodo, Chief Financial Officer, pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002.
32.1 Certification of Christopher L. Jarratt, Chief Executive Officer, pursuant
to 18 U.S.C. ss. 1350.
32.2 Certification of Michael J. Chiodo, Chief Financial Officer, pursuant to
18 U.S.C. ss. 1350.
(b) Reports on Form 8-K.
During the first quarter, we we did not make any reports on Form 8-K.
After the end of first quarter, but before the date hereof, we filed one
Report on Form 8-K:
On April 25, 2005, the Company reported that it had received a notice from
the NASDAQ stock market indicating that it was subject to delisting due to late
filing of its Annual Report. The Company also indicated that subsequent to
receipt of the notice, it had filed its Annual Report on Form 10-K.
Pursuant to the requirements 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/ Michael J. Chiodo
- ---------------------
Michael J. Chiodo
Chief Financial Officer
May 19, 2005
24