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, 1999
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.
(Exact name of registrant as specified in its charter)
UTAH 95-4099866
(State or other jurisdiction of incorporation or (I.R.S.
organization) Employer
Identification No.)
9665 Wilshire Blvd., Suite 300 Beverly Hills, 90212
California
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area (310) 777-8888
code
Securities registered pursuant to Section 12(b) None
of the Act:
Securities registered pursuant to Section 12(g)
of the Act:
Name of exchange on
Title of each class which registered
Common stock, $0.01 par value: Nasdaq SmallCap Market
Indicate by check mark whether the Registrant (l) has filed
all reports required to be filed by Section l3 or l5(d) of the
Securities Exchange Act of l934 during the preceding 12 months
and (2) has been subject to such filing requirements for the past
90 days. Yes X No ___
Indicate by check mark if disclosure of delinquent filers
pursuant to Item 405 of Regulation S-K is not contained herein,
and will not be contained, to the best of registrant's knowledge,
in definitive proxy or information statements incorporated by
reference in Part III of this Form 10-K or any amendment to this
Form 10-K.
The aggregate market value of the voting stock held by non-
affiliates of the registrant at March 21, 2000 was approximately
$98,000,000, computed based on the average bid and asked prices
of the stock as of March 21, 2000.
Indicate the number of shares outstanding of each of the
registrant's classes of common stock, as of the latest
practicable date: 14,384,186 shares outstanding at March 21,
2000.
Portions of the registrant's definitive proxy statement for
the 2000 annual meeting are incorporated by reference into Part
III of this Form 10-K.
PART I
Special Note Regarding Forward-Looking Statements
Some of the statements contained in this Annual Report on Form
10-K, particularly under Items 1 through 8, constitute "forward-
looking statements" within the meaning of the Private Securities
Litigation Reform Act of 1995 (the "Reform Act"). These forward-
looking statements involve known and unknown risks,
uncertainties, and other factors which may cause the actual
results, performance, or achievements of JB Oxford Holdings, Inc.
and subsidaries to be materially different from any future results,
performance, or achievements, expressed or implied by the
forward-looking statements.
Item 1. Business Overview
JB Oxford Holdings, Inc. (together with its consolidated
subsidiaries, the "Company" or "JBOH"), through its wholly-owned
subsidiaries, is engaged in the business of providing brokerage
and related financial services to retail customers and broker-
dealers nationwide. The Company is fully integrated, providing
retail brokerage services, clearing services and market making
services to its customers.
The Company was incorporated in Delaware on March 31, 1987, and
completed an initial public offering in September 1987. The
Company changed its state of incorporation to Utah in 1990. The
Company's business is headquartered in Los Angeles and has
additional offices in New York and Miami.
The Company's primary subsidiary is JB Oxford & Company ("JBOC"),
a registered broker-dealer offering the following services: (i)
providing discount and electronic brokerage services to the
investing public; (ii) providing clearing and execution services
to independent broker-dealers ("correspondents") on a fully-
disclosed basis; and (iii) acting as a market maker in stocks
traded on NASDAQ National Market System and other national
exchanges.
For 1999, the Company's consolidated revenues were $104,211,781,
which consisted primarily of commission and interest income from
the Company's discount and electronic brokerage division.
Discount and Electronic Brokerage Services
In 1994, the Company began its strategy of providing retail
investors a full line of brokerage services at discount prices.
This strategy proved successful as few brokerage firms provided
brokerage services at discount prices at that time. The Company
was able to capitalize on this early position by providing
customer service and attention comparable to that offered by
larger full-service brokerage firms charging higher fees. Today,
JBOC offers a full line of products and services to customers,
which includes the ability to buy and sell securities, security
options, mutual funds, fixed income products, annuities and other
investment securities. JBOC customers are offered the choice of
being assigned a personal account representative or calling
directly to the Company's trading desk for order placement and
account information. The marketing strategy implemented in
recent years emphasizes this higher level of service compared to
other discount brokerages and has successfully generated growth
for the Company.
In 1995, in order to continue its commitment to providing a full
line of brokerage services to its customers, the Company began
providing electronic brokerage services. These services
initially included computer trading through a dial-up networking
connection and automated telephonic trading services. Since that
time, the Company has made many improvements to these services,
including the launch of Internet trading in 1996. The Company
continues to upgrade and improve its electronic brokerage
technologies in order to provide its customers with the resources
necessary to conveniently and economically execute securities
transactions and access related financial information. In
addition to its trading capabilities, the Company's Internet site
(www.jboxford.com) currently provides market quotes, charts,
company research, and customer account information, such as cash
balances, portfolio balances and similar information. To further
enhance its brokerage services, JBOC began offering extended
trading hours to its customers, allowing the placement of limit
order trades (authorizing the purchase or sale of stock at a
specified price or better) 45 minutes before and after
traditional market hours.
In recent years, the general public has become more comfortable
dealing with financial matters through electronic means. The
Company is positioned to take advantage of this growing market.
Many brokerage firms that compete directly with the Company have
positioned themselves to take advantage of this opportunity. The
growth of firms providing the electronic delivery of financial
services, particularly those on the Internet, has been strong in
recent years. In September 1999, JBOC unveiled its enhanced web
site featuring n*power, an integrated financial services account
offering free Internet access, online trading and electronic
financial services including online bill payment and free
ATM/check card for customers maintaining a minimum account
balance. The Company also redesigned its web site at
www.jboxford.com to include a brighter look, improved speed,
easier navigation and an expanded selection of timely market
information and research tools. The new website also offers
one-on-one technical support utilizing hosted live chat
technology. Throughout 2000, the Company will continue to
enhance its online services to its customers.
The Company also caters to customers within niche markets by
providing services that address the particular needs of these
customer bases. Examples of these markets include the Company's
efforts to develop divisions that cater specifically to Asian,
Latin American and European customers. The Company serves the
needs of the Asian American community through its two locations
in the Los Angeles area, and has launched efforts to focus on
serving the Latin American community through its office in Miami.
The Company launched its European division in 1995 to provide
discount brokerage services throughout Europe from its New York
office and its Internet trading site. These niche-marketing
efforts initially began as an outgrowth of the Company's
commitment to meeting the needs of its domestic U.S. customers,
such as providing account representatives who are fluent in a
customer's preferred language. With the growth in the electronic
delivery of financial services, it is becoming economically
feasible to provide these services to both domestic and
international customers using the Internet. The Company intends
to continue this niche marketing strategy; however, these markets
are not expected to constitute a material portion of the
Company's business in 2000.
Management believes that the Company can continue to grow its
discount and electronic brokerage division in 2000 due to its
ability to provide high quality, flexible, and customer-sensitive
responses and services. The Company continually upgrades
computer systems and services within each of its divisions to
utilize and take advantage of the most recent technological
developments.
Clearing and Execution Services
JBOC is self-clearing and as of March 21, 2000, JBOC provided
clearing and execution services for 28 correspondents. The
clearing business offers a high return on capital, and management
believes by careful selection and monitoring of its
correspondents, this business segment will remain profitable.
The clearing relationship involves the sharing of broker-dealer
responsibilities between the introducing broker and the clearing
broker. JBOC's correspondents (i.e., introducing brokers) are
responsible for all customer contact, including opening customer
accounts, determining customer suitability, placing customer
orders, and responding to customer inquiries. JBOC, acting as
the clearing broker, generally provides clearing and execution
services including the receipt, confirmation, settlement,
delivery and record-keeping functions involved in a securities
transactions as well as providing back office functions such as:
maintaining customer accounts; extending credit (in a margin
account) to the customer; settling security transactions with the
Depository Trust Company ("DTC") and the National Securities
Clearing Corporation ("NSCC"); preparing customer trade
confirmations and statements; performing certain cashiering and
safe keeping functions; transmitting tax information to the
customer and tax authorities; forwarding proxies and other
shareholder information to customers; and similar activities.
In providing clearing and execution services to correspondents,
JBOC assumes certain responsibilities for the possession or
control of customer securities and assets. As a result, JBOC's
statements of financial condition reflect amounts receivable from
customers on margin loans as well as amounts payable to customers
and correspondents related to free credit balances held by JBOC
for the benefit of its customers and correspondents.
There are inherent risks in operating as a clearing agent. See
"Forward-Looking Statements and Risk Factors" Clearing
Operations" below. Since JBOC makes loans to customers
collateralized by customer securities, JBOC incurs the risk of a
market decline that could reduce the value of the customer's
underlying collateral securities below the customer's loan
amount. For this reason, credit exposure must be monitored and
actions must be taken on a timely basis to mitigate and minimize
JBOC's exposure to these risks. JBOC mitigates its credit
exposure by monitoring the adequacy of collateral from both
individual customers and correspondents. Additionally, JBOC is
subject to the margin rules established by the Board of Governors
of the Federal Reserve System and the National Association of
Securities Dealers, Inc. ("NASD").
Acting as a clearing agent in the securities business requires
both working capital and capital for regulatory requirements.
See "Net Capital Requirements" below, for a more extensive
discussion of capital requirements.
Market Making Activities
In order to facilitate the execution of security transactions for
its own customers and the customers of its correspondents, JBOC
acts as a market maker for approximately 730 public corporations
whose stocks are traded on the NASDAQ National Market System, New
York Stock Exchange ("NYSE") or other national exchanges.
Generally, the Company does not maintain inventories of
securities for sale to its customers. However, the Company does
engage in certain principal transactions where, in response to a
customer order, the Company will go at risk to the marketplace to
attempt to capture the spread between the bid and offer. Most of
the Company's larger competitors are engaged in similar market
making activities through subsidiaries or receive order flow
payments from companies engaged in such market making activities.
The Company believes it can maintain better control and be
assured of proper executions of customer trades by providing
these market making services directly to its customers.
The Company's market making activities concentrate on the
execution of unsolicited transactions for customers and are
required to be in compliance with the NASD rules regarding best
execution.
Interest Income
The Company derives a portion of its income from interest
generated on the margin accounts of its customers and, to a
lesser extent, those of its correspondents. A margin account
allows the customer to deposit less than the full cost of the
security purchased while the Company lends the balance of the
purchase price to the customer, secured by the purchased
securities. Customers are charged interest on the amount
borrowed to finance their margin transactions ranging from 0.25%
below to 2.75% above the broker call rate, which is the rate at
which brokers can generally obtain financing using margined and
firm owned securities as collateral. As of December 31, 1999,
the total of all debit balances held in active margin accounts
was approximately $440,000,000. The Company finances its margin
lending business primarily through customer free credit balances,
stock loan and existing credit lines with commercial lenders.
Pursuant to written agreements with customers, broker-dealers are
permitted by the Securities and Exchange Commission's ("SEC")
regulations to lend customer securities held as collateral in
margin accounts. Customer free credit balances were
approximately $305,000,000 at December 31, 1999. These credit
balances are available to finance customer margin balances
subject to the requirements of SEC rules. The Company also
utilizes stock loan arrangements with other broker dealers to
finance customer debit balances.
In addition to the above financing, JBOC has established
omnibus/financing accounts and lines of revolving credit with
other broker-dealers and banking institutions with an aggregate
borrowing limit approximating $130,000,000.
Securities Industry Practices
JBOC is registered with the SEC and the NASD and is a member of
the following organizations: Chicago Stock Exchange, Pacific
Stock Exchange, Cincinnati Stock Exchange, DTC, NSCC and Options
Clearing Corporation ("OCC"). JBOC is registered as a securities
broker-dealer in all 50 states and the District of Columbia. JBOC
is also a member of the Securities Investors Protection Corporation
("SIPC"), which provides JBOC's customers with insurance
protection for amounts of up to $500,000 each, with a limitation
of $100,000 on claims for cash balances. JBOC has also acquired
an additional $10,000,000 in insurance coverage through National
Union Fire Insurance Company of Pittsburgh, a subsidiary of
American International Group ("AIG"), as added protection for
individual customers' securities, covering all clients of JBOC's
fully-disclosed correspondents and discount customers.
JBOC is subject to extensive regulation by federal and state
laws. The SEC is the federal agency charged with administration
of the federal securities laws. Much of the regulation of
broker-dealers, however, has been delegated to self-regulatory
organizations, principally the NASD and the national securities
exchanges. These self-regulatory organizations adopt rules,
subject to approval by the SEC, which govern the industry and
conduct periodic reviews of member broker-dealers. Securities
firms are also subject to regulation by state securities
commissions in the states in which they do business. The SEC,
self-regulatory organizations, and state securities commissions
may conduct administrative proceedings which can result in
censure, fine, suspension, or expulsion of a broker-dealer, its
officers or employees. The principal purpose of regulation and
discipline of broker-dealers is the protection of customers and
the securities markets, rather than protection of creditors and
shareholders of broker-dealers. See "Forward-Looking Statements
and Risk Factors " Government Regulation" below.
Net Capital Requirements
JBOC is subject to SEC Rule 15c3-1, Net Capital Requirements For
Brokers or Dealers (the "Rule"), which establishes minimum net
capital requirements for broker-dealers. The Rule is designed to
measure financial integrity and liquidity in order to assure the
broker-dealer's financial stability within the securities market.
The net capital required under the Rule depends in part upon the
activities engaged in by the broker-dealer.
In computing net capital under the Rule, various adjustments are
made to exclude assets not readily convertible into cash and to
reduce the value of other assets, such as a firm's position in
securities. A deduction is made against the market value of the
securities to reflect the possibility of a market decline prior
to sale. Compliance with the Rule could require intensive use of
capital and could limit JBOC's ability to pay dividends to the
Company, which in turn could limit the Company's ability to pay
dividends to its shareholders. Failure to comply with the Rule
could require the Company to infuse additional capital into JBOC,
could limit the ability of the Company to pay its debts and/or
interest obligations, and may subject JBOC to certain
restrictions which may be imposed by the SEC, the NASD, and other
regulatory bodies. Moreover, in the event that the Company could
not or elected not to infuse the additional capital or otherwise
bring the JBOC into compliance, JBOC would ultimately be forced
to cease operations. See "Forward-Looking Statements and Risk
Factors " Net Capital Requirements" below.
At December 31, 1999, and 1998 JBOC elected to use the
alternative method permitted by the Rule, which requires it to
maintain minimum net capital, as defined, equal to the greater of
$250,000 or 2% of aggregate debit balances arising from customer
transactions, as defined. At December 31, 1999, JBOC had net
capital of $27,491,404, which was $18,699,718 in excess of the
minimum amount required. At December 31, 1998, JBOC had net
capital of $14,380,292, which was $8,728,676 in excess of the
minimum amount required.
Employees
As of March 22, 2000, the Company and its subsidiaries had
approximately 331 employees. The Company considers its employee
relationships to be good.
Forward-Looking Statements and Risk Factors
You should carefully consider the risks described below before
making an investment decision in the Company. The risks and
uncertainties described below are not the only ones facing the
Company and there may be additional risks that we do not
presently know of or that we currently deem immaterial. All of
these risks may impair our business operations. The
forward-looking statements described below and elsewhere in this
document involve risks and uncertainties and actual results may
differ materially from the results we discuss in the
forward-looking statements. If any of the following risks
actually occur, our business, financial condition or results of
operations could be materially adversely affected. In that case,
the trading price of our stock could decline, and you may lose
all or part of your investment.
In accordance with "plain English" guidelines provided by the
SEC, the Forward-Looking Statements and Risk Factors have been
written in the first person.
Managing a Changing Business
Our business and operations have changed substantially since we
began offering discount brokerage services, and we expect the
pace of change in the brokerage business to continue. This rapid
change places significant demands on our administrative,
operational, financial and other resources.
We rely on a number of third parties to assist in the processing
of our transactions, including online and Internet service
providers, back office processing organizations, service
providers and market makers. Any problems caused by these third
parties could have a material adverse effect on our business,
financial condition and operating results.
Early Stage of Market Development
The market for discount and electronic brokerage services,
particularly over the Internet, is at an early stage of
development and is rapidly evolving. Consequently, demand and
market acceptance for recently introduced services and products
are subject to a high level of uncertainty.
Much of our growth will depend on consumers adopting the Internet
as a method of doing business. The Internet could lose its
viability due to slow development or adoption of standards and
protocols to handle increased activity, or due to increased
governmental regulation. Moreover, several key issues including
security, reliability, cost, ease of use, accessibility and
quality of service continue to be concerns and may negatively
affect the growth of Internet use or commerce on the Internet.
The Securities Industry; Concentration of Services
We, like other securities firms, are directly affected by
economic and political conditions, broad trends in business and
finance and changes in volume and price levels of securities
transactions. In recent years, the U.S. securities markets have
fluctuated considerably and a downturn in these markets could
adversely affect our operating results. In October 1987 and
October 1998, the stock market suffered major declines, as a
result of which many firms in the industry suffered financial
losses, and the level of individual investor trading activity
decreased after these events. Reduced trading volume and prices
have historically resulted in reduced transaction revenues. When
trading volume is low, our profitability may be adversely
affected because our overhead remains relatively fixed. Severe
market fluctuations in the future could have a material adverse
effect on our business, financial condition and operating
results. Some of our competitors with more diverse product and
service offerings might withstand such a downturn in the
securities industry better than we would. See "Forward-Looking
Statements and Risk Factors -- Substantial Competition" below.
Our brokerage business, by its nature, is subject to various
other risks, including customer default and employee misconduct
and error. We sometimes allow customers to purchase securities
on margin, therefore we are subject to risks inherent in
extending credit. This risk is especially great when the market
is rapidly declining and the value of the collateral we hold
could fall below the amount of a customer's indebtedness. Under
specific regulatory guidelines, any time we borrow or lend
securities, we must correspondingly disburse or receive cash
deposits. If we fail to maintain adequate cash deposit levels at
all times, we run the risk of loss if there are sharp changes in
market values of many securities and parties to the borrowing and
lending transactions fail to honor their commitments. Any such
losses could have a material adverse effect on our business,
financial condition and operating results.
Clearing Operations
Our clearing operations expose us to risks that exceed the simple
risk of loss of business due to loss of retail customers or
correspondent. Broker-dealers engaged in clearing operations for
other correspondent broker-dealers are exposed to losses beyond
the loss of business. If the correspondent fails, possible
losses include its obligations to customers and other third
parties, and any losses in the correspondent's own trading
accounts. We have established procedures to review
correspondent's own customer and firm accounts and activities in
an effort to prevent such losses if a correspondent fails. Any
such losses could have a material adverse effect on our business,
financial condition and operating results. See "Clearing and
Execution Services" above.
Delays In Introduction of New Services and Products
Our future success depends in part on our ability to develop and
enhance our services and products. There are significant risks
in the development of new services and products or enhanced
versions of existing services and products, particularly in our
electronic brokerage business. We may also experience
difficulties that could delay or prevent the development,
introduction or marketing of these services and products.
Additionally, these new services and products may not adequately
meet the requirements of the marketplace or achieve market
acceptance. If we are unable to develop and introduce enhanced
or new services and products quickly enough to respond to market
or customer requirements, or if they do not achieve market
acceptance, our business, financial condition and operating
results will be materially adversely affected.
Substantial Competition
The market for discount and electronic brokerage services is
rapidly evolving and intensely competitive. We face direct
competition from firms offering discount and electronic brokerage
services such as Charles Schwab & Co., Inc., Fidelity Brokerage
Services, Inc., Waterhouse Securities, Inc., Ameritrade, Inc. (a
subsidiary of Ameritrade Holding Corporation), and E*TRADE Group,
Inc. We also encounter competition from established full
commission brokerage firms such as PaineWebber Incorporated,
Merrill Lynch, Pierce, Fenner & Smith Incorporated and Solomon
Smith Barney, Inc., among others. In addition, we compete with
financial institutions, mutual fund sponsors and other
organizations. Further, the Company has seen a substantial
increase in the number of companies providing discount and
electronic brokerage services in recent years, and this trend is
expected to continue.
Many of our competitors have longer operating histories and
significantly greater financial, technical, marketing and other
resources than we do. In addition, many of our competitors have
greater name recognition and larger customer bases that could be
leveraged, thereby gaining market share from us. Our competitors
may conduct more extensive promotional activities and offer
better terms and lower prices to customers than we do. There can
be no assurance that we will be able to compete effectively with
current or future competitors or that such competition will not
have a material adverse effect on our business, financial
condition and operating results.
Customer Concentration
While no single correspondent broker-dealer or customer
represents more than 10% of the Company's consolidated revenues,
the Company has several significant customers whose loss, in the
aggregate, could be material to the Company. The Company
believes that the likelihood of losing a significant number of
such customers is remote.
Acquisitions
We may acquire other companies or technologies in the future, and
we from time to time evaluate such opportunities. Acquisitions
entail numerous risks, including difficulties in the assimilation
of acquired operations and products, diversion of management's
attention from other business concerns, amortization of acquired
intangible assets and potential loss of key employees of acquired
companies. We have limited experience in assimilating acquired
organizations into our operations. No assurance can be given as
to our ability to integrate successfully any operations,
personnel, services or products that might be acquired in the
future. Failure to successfully assimilate acquired
organizations could have a material adverse effect on our
business, financial condition and operating results.
Strategic Relationships
We have established a number of strategic relationships with
online and Internet service providers and software and
information service providers. There can be no assurance that
any such relationships will be maintained, or that if they are
maintained, they will be successful or profitable. Additionally,
we may not develop any new such relationships in the future.
Government Regulation
The securities industry in the United States is subject to
extensive regulation under both federal and state laws. See
"Securities Industries Practices" above. Broker-dealers are
subject to regulations covering all aspects of the securities
business. Because we are a self-clearing broker-dealer and
provide clearing and execution services for our correspondents,
we have to comply with many complex laws and rules relating to
possession and control of customer funds and securities, margin
lending and execution and settlement of transactions.
The SEC, the NASD or other self-regulatory organizations and
state securities commissions can censure, fine, issue
cease-and-desist orders or suspend or expel a broker-dealer or
any of its officers or employees. Our ability to comply with all
applicable laws and rules is largely dependent on our
establishment and maintenance of a compliance system to ensure
such compliance, as well as our ability to attract and retain
qualified compliance personnel. We could be subject to
disciplinary or other actions due to claimed noncompliance in the
future, which could have a material adverse effect on our
business, financial condition and operating results.
Our mode of operation and profitability may be directly affected
by additional legislation, changes in rules promulgated by the
SEC, the NASD, the Board of Governors of the Federal Reserve
System, the various stock exchanges and other self-regulatory
organizations, or changes in the interpretation or enforcement of
existing laws and rules.
We have initiated an aggressive marketing campaign designed to
bring brand name recognition to JBOC. All marketing activities
by JBOC are regulated by the NASD, and JBOC compliance officers
review all marketing materials prior to release. The NASD can
impose certain penalties for violations of its advertising
regulations, including censures or fines, suspension of all
advertising, the issuance of cease-and-desist orders or the
suspension or expulsion of a broker-dealer or any of its officers
or employees.
There can be no assurance that other federal, state or foreign
agencies will not attempt to regulate our business. If such
regulations are enacted, our business or operations would be
rendered more costly or burdensome, less efficient or even
impossible or otherwise have a material adverse effect on our
business, financial condition and operating results.
Net Capital Requirements
The SEC, the NASD and various other regulatory agencies have
stringent rules with respect to the maintenance of specific
levels of net capital by securities broker-dealers. Net capital
is the net worth of a broker or dealer (assets minus
liabilities), less deductions for certain types of assets. If a
firm fails to maintain the required net capital it may be subject
to suspension or revocation of registration by the SEC and
suspension or expulsion by the NASD, and could ultimately lead to
the firm's liquidation. If such net capital rules are changed or
expanded, or if there is an unusually large charge against net
capital, operations that require the intensive use of capital
would be limited. Such operations may include trading activities
and the financing of customer account balances. Also, our
ability to withdraw capital from brokerage subsidiaries could be
restricted, which in turn could limit our ability to pay
dividends, repay debt and redeem or purchase shares of our
outstanding stock. A large operating loss or charge against net
capital could adversely affect our ability to expand or even
maintain our present levels of business, which could have a
material adverse effect on our business, financial condition and
operating results. See "Business Overview " Net Capital
Requirements" above.
Systems Failure
We receive and process trade orders through internal trading
software, the Internet, and touch-tone telephone. Thus, we
depend heavily on the integrity of the electronic systems
supporting this type of trading. Heavy stress placed on our
systems during peak trading times or interference from third
parties over the Internet could cause our systems to operate too
slowly or by fail. If our systems or any other systems in the
trading process slow down significantly or fail even for a short
time, our customers would suffer delays in trading, potentially
causing substantial losses and possibly subjecting us to claims
for such losses or to litigation claiming fraud or negligence.
During a systems failure, we may be able to take orders by
telephone. However, only associates with securities broker's
licenses can accept telephone orders, and an adequate number of
associates may not be available to take customer calls in the
event of a systems failure. In addition, a hardware or software
failure, power or telecommunications interruption or natural
disaster could cause a systems failure. Any systems failure that
interrupts our operations could have a material adverse effect on
our business, financial condition and operating results.
Encryption Technology
A significant barrier to online commerce is the secure
transmission of confidential information over public networks.
We rely on encryption and authentication technology to provide
secure transmission of confidential information. There can be no
assurance that advances in computer and cryptography capabilities
or other developments will not result in a compromise of the
algorithms we use to protect customer transaction data. If a
compromise of our security were to occur, it could have a
material adverse effect on our business, financial condition and
operating results.
Stock Price Volatility
The trading price of our common stock has been and may continue
to be subject to wide fluctuations. For example, during the
twelve months ended March 15, 2000, our common stock closed as
low as $5.59 and as high as $25.13. Our stock price may
fluctuate in response to a number of events and factors, such as
quarterly variations in operating results, announcements of
technological innovations or new products by the Company or its
competitors, changes in financial estimates and recommendations
by securities analysts, the operating and stock price performance
of other companies that investors may consider comparable, and
news reports relating to trends in our markets. In addition, the
stock market in general, and the market prices for Internet
related companies in particular, have experienced extreme
volatility that has often been unrelated to operating
performance. These broad market and industry fluctuations may
adversely affect the price of our common stock, regardless of our
operating performance.
Item 2. Properties
The principal offices of the Company and JBOC are located at 9665
Wilshire Boulevard, 3rd Floor, Beverly Hills, California 90212.
As of March 2, 2000, the Company and its subsidiaries lease or
conduct their operations from and have their administrative
offices at the following locations:
Location Area (Sq. Principal Lease
Feet) Use
9665 Wilshire Blvd., 24,909 JBOH and Expires Oct.
3rd, 2nd , 5th and 8th JBOC 2002
Floors, Beverly Hills,
CA 90212
One Exchange Plaza, 6,050 JBOC Expires Jun.
19th Floor 2006
New York, NY 10006
801 Brickell Ave. Suite 6,993 JBOC Expires Feb.
2450 2003
Miami, FL 33131
140 West Valley Blvd., 2,017 JBOC Expires May
Suite 220/1 San 2002
Gabriel, CA 91776
The Company's office, and the offices and facilities of its
subsidiaries, are considered by management to be generally
suitable and adequate for their intended purposes.
Item 3. Legal Proceedings
The Company and its subsidiaries are a party to a number of
pending legal or administrative proceedings, including suits
involving various customers that allege damages arising as a
result of brokerage transactions by the Company. In addition to
these matters, the Company is named in the following two matters.
All of the legal and administrative proceedings have arisen in
the ordinary conduct of its business.
In February 2000, the Company reached a settlement with the
United States Attorney's Office for the Central District of
California (the "USAO") in connection with the USAO's
investigation of the prior management and ownership of the
Company. The investigation by the USAO and a concurrent
investigation by the U.S. Securities and Exchange Commission (the
"SEC") have been previously reported by JBOH in its periodic
filings with the SEC. Neither current management nor current
ownership is or was the subject of the USAO or the SEC
investigations.
While the Company maintains its innocence, it agreed to pay
$2,000,000 to the USAO over the next three years in settlement of
the investigation and to offset the USAO's costs of its
investigation. Under the terms of the Settlement Agreement
between the USAO and the Company, dated February 14, 2000 (the
"Settlement"), JBOH paid $500,000 concurrently with the signing
of the Settlement and will pay the remainder in $500,000 annual
installments over the next three years. JBOH recognized a charge
of $2,300,000 in the fourth quarter of 1999 to account for the
Settlement with the USAO and an anticipated settlement with the
SEC.
If JBOH fails to make payment of any installment when due, the
entire unpaid balance will become immediately due and payable,
and if JBOH sells a controlling interest in JBOC to a third
party, the remaining unpaid installments must be paid prior to
the closing of the sale. If on or before February 14, 2001 the
Company enters into a settlement with the SEC that involves a
payment of $1.0 million or more to the SEC, the USAO agreed that
JBOH's obligation to the USAO would be reduced by $500,000.
The Settlement provides that as long as the Company complies with
its terms, the USAO will not bring charges against the Company in
connection with the matters that are the subject of the
investigation. In addition, the USAO will, at the request of the
Company, notify the SEC, the National Association of Securities
Dealers or any other prosecutorial authority, regulatory or
administrative authority of the nature and extent of the
cooperation the Company provides under the terms of the
Settlement.
The Settlement requires the Company to comply with all applicable
federal and state securities and other laws and regulations and
to cooperate with the ongoing investigation of others by the USAO
and other governmental agencies, including producing documents
and other evidence, and providing technical assistance and
analysis. In addition, within 60 days of the signing of the
Settlement, JBOC is required to hire, with the USAO's approval, a
law firm to serve as an independent expert to insure JBOC's
compliance with applicable securities, broker-dealer laws and
regulations. Within 120 days of the appointment of the expert,
the expert is required to report to the USAO regarding JBOC's
compliance and, if applicable, to make recommendations for
bringing JBOC into compliance. With the express consent of the
USAO, the deadline for the report can be extended for up to an
additional 120 days. The USAO will provide JBOC with written
notice of the recommendations that it wants JBOC to implement,
and JBOC will have six months from the date of the notice to
complete the implementation of the recommendations, if any. JBOC
is required to pay all the costs of the expert.
In addition, the Settlement requires the Chief Executive Officer,
President, Chief Financial Officer, Chief Compliance Officer and
General Counsel of JBOC to execute semi-annual certificates
stating that the Company is abiding by the terms of the
Settlement, including adherence to the expert's recommendations,
if any, that were required to be implemented. The obligation to
provide the certificates will continue for the next three years.
Under the terms of the Settlement, the Company also agreed that
it would be subject to monetary penalties and the USAO would not
be bound by its promise of non-prosecution if JBOH or JBOC
materially failed to abide by the terms of the Settlement.
The Settlement also required the Company to enter into agreements
waiving possible defenses the Company might have raised in the
event of a breach of the Settlement. The defenses waived
included double jeopardy, indictment and the tolling of any
applicable statute of limitations.
While the Settlement brings a resolution to the USAO
investigation, the SEC investigation into these matters remains
ongoing. The Company continues to cooperate with the SEC and is
hopeful that the SEC investigation will be settled, but can make
no assurance as to if or when it might be resolved.
The USAO and SEC investigations appear to focus primarily on two
areas related to previous management of the Company. The first
is whether JBOH, in its proxy filings with the SEC, properly and
accurately reported shareholder information regarding its former
management and ownership. JBOH believes that is fulfilled its
duties and obligations under applicable securities law in
furnishing the required shareholder information.
The second area of focus is trading activity dating back to as
early as 1993 by entities alleged to be associated with a former
consultant to the Company. The Company has assessed its trading
in the securities in question and has determined that it lost
over $7.0 million on those positions. As previously reported,
the Company liquidated its remaining positions in these
securities in the fourth quarter of 1998 and has no further
downside risk from these securities.
Item 4. Submission Of Matters To A Vote Of Security
Holders
There were no matters submitted to a vote of the shareholders
during the fourth quarter of 1999.
PART II
Item 5. Market for Registrant's Common Equity & Related
Shareholder Matters
The Company's common stock is traded in the over-the-counter
market with prices quoted on the NASD's Automated Quotation
System SmallCap market ("NASDAQ") under the trading symbol
"JBOH." Quotations given are from NASDAQ and represent prices
between dealers exclusive of a retail mark-up, mark-down, or
commission. They do not necessarily represent actual
transactions.
Stock Price and Dividend Data
Month Ended
1-31-00 2-29-00
Price range of common stock
High $8.25 $7.94
Low 6.50 5.59
Close at end of 6.53 7.88
period
Quarter Ended
3-31-99 6-30-99 9-30-99 12-31-99
Price range of common stock
High $25.75 $25.13 $11.13 $10.38
Low 1.41 8.69 7.00 7.44
Close at end of 7.25 14.13 7.69 7.69
period
Quarter Ended
3-31-98 6-30-98 9-30-98 12-31-98
Price range of common stock
High $0.84 $1.75 $1.31 $4.50
Low 0.59 .69 .38 .44
Close at end of
period 0.72 .81 .69 1.81
The number of record holders of the Company's common stock as of
March 2, 2000 was 237. The Company believes the number of
beneficial holders of the Company's common stock as of January
27, 2000 to be approximately 19,860.
Dividends
JBOH has not declared or paid cash dividends on its common stock.
Given the Company's past expansion and overall business growth,
Management believes it has been prudent to retain and increase
the Company's capital base. The Company does not currently
anticipate paying cash dividends. Future payments of dividends
will depend upon, among other factors, regulatory restrictions,
the Company's consolidated earnings, overall financial condition,
and cash and capital requirements.
Item 6. Selected Financial Data
The information set forth below should be read and reviewed in
conjunction with the Management's Discussion and Analysis,
consolidated financial statements, and related notes, included
under Items 7 and 8 of this report.
JB Oxford Holdings, Inc.
Selected Consolidated Financial Information
(Amounts in thousands, except per share data)
1999 1998 1997 1996 1995
Income Statement Data
Revenues $104,212 $67,268 $69,962 $57,599 $39,605
Net Income (Loss)
Before Extraordinary
Item 10,008 (1,839) 1,523 4,040 5,225
Net Income (Loss) 10,445 (1,839) 1,523 4,040 5,225
Basic Earnings (Loss)
Before Extraordinary
Item 0.70 (0.13) 0.12 0.44 0.62
Basic Earnings (Loss)
Per Share 0.73 (0.13) 0.12 0.44 0.62
Diluted Earnings (Loss)
Before Extraordinary 0.43 (0.13) 0.09 0.23 0.40
Diluted Earnings (Loss)
Per Share 0.45 (0.13) 0.09 0.23 0.40
Dividends -- -- -- -- --
Balance Sheet Data
Total Assets $497,739 $405,990$341,586 $330,336 $175,764
Long-term and -- 1,250 1,500 2,000 6,623
Subordinated Debt
Liabilities (Excluding 471,368 390,374 326,463 315,978 160,697
Long-Term)
Total Shareholders' 26,371 15,617 15,123 12,358 8,444
Equity
Book Value Per Share* 1.83 1.12 1.07 1.18 0.74
* Computed using shareholders' equity less preferred stock with
the result divided by total outstanding common stock.
Item 7. Management's Discussion and Analysis Of Financial
Condition and Results Of Operations
Special Note Regarding Forward-Looking Statements
Some of the statements contained in this section of the Annual
Report on Form 10-K constitute "forward-looking statements"
within the meaning of the Private Securities Litigation Reform
Act of 1995 (the "Reform Act"). These forward-looking statements
involve known and unknown risks, uncertainties, and other factors
which may cause the actual results, performance, or achievements
of the Company to be materially different from any future
results, performance, or achievements, expressed or implied by
the forward-looking statements. Any potential investor in the
Company should carefully consider the matters discussed in Item 1
"Business Overview" Forward Looking Statements and Risk Factors"
above.
Business Overview
The Company, through its wholly owned subsidiaries, provides
discount brokerage services and related financial services to
retail customers and broker-dealers nationwide. The Company's
primary subsidiary, JB Oxford & Company ("JBOC"), is a registered
broker-dealer offering services including (i) discount and
electronic brokerage services to the investing public; (ii)
clearing and execution services to correspondents on a fully-
disclosed basis; and (iii) acting as a market maker in NASDAQ
National Market System, New York Stock Exchange ("NYSE"), and
other national exchange-listed securities.
The financial services industry is a dynamic and ever-changing
industry. Management believes that continued improvements in
technology and the widespread use of technology, including the
Internet, is dramatically changing the way financial services are
provided. The ability to obtain quotes, make trades, and obtain
account information instantly through the Internet has come to be
expected by many investors. Management believes that additional
technologies, products and services will become commonplace in
the not too distant future. Management's strategy is to position
the Company to take advantage of the opportunities presented by
the expected changes in the financial services industry. To that
end, in September 1999, the Company launched a new account
service package called JB Oxford n*power featuring free Internet
access, online trading capabilities, electronic financial
services " including online bill payment and a free ATM/check
card " for customers maintaining a minimum account balance. The
company also redesigned its web site at www.jboxford.com to
include a brighter look, improved speed, easier navigation and an
expanded selection of timely market information and research
tools. The new website also offers live, one-on-one technical
support utilizing voiceover IP technology.
Results of Operations
Years Ended December 31, 1999, 1998 and 1997
Revenues
The Company's total revenues were $104,211,781 in 1999, an
increase of 55% from $67,268,325 in 1998, which was down 4% from
$69,961,623 in 1997. The increase in total revenues from 1998 to
1999 was primarily attributable to an increase in all of the
Company's business divisions, including a 170% increase in
trading revenues and a 116% increase in clearing revenues. The
primary reason for the decrease in total revenues from 1997 to
1998 was a decrease in clearing and execution revenues of 34%.
Commission revenues increased 27% to $33,827,615 in 1999, from
$26,600,214 in 1998, which was up 3% from $25,939,576 in 1997.
Commission revenue was the largest source of revenue to the
Company during 1999, 1998, and 1997, consisting of 32%, 40%, and
37%, respectively, of total revenues during these years. In
2000, management anticipates increased commission revenue, as the
Company experiences continued growth in its discount and on-line
brokerage divisions, and as these revenues track the overall
growth in trading volume experienced during recent years.
Interest revenues increased 24% to $28,930,515 in 1999, from
$23,260,659 in 1998, which was down 1% from $23,601,341 in 1997.
Fluctuations in interest revenues are consistent with usual
fluctuations of debit balances in customers' brokerage margin
accounts, as well as changes in broker-call rates on which the
interest charged to customers is calculated.
Revenues from trading profits increased 170% to $15,517,700 in
1999, from $5,747,187 in 1998, which was up 155% from $2,250,940
in 1997. The increases for all periods presented were
attributable to an increase in trading volume from the Company's
discount and on-line brokerage operations. Trading profits
dramatically increased in 1999 due to the Company's consistently
trading orderflow from its retail operation and the liquidation
of certain investment positions held during 1998. The increase
from 1997 to 1998 was attributable to the discontinuance, in the
fourth quarter of 1998, of proprietary trading positions and
investment banking activities that negatively affected trading
profits, and from an increase in the Company's market-making
activities in listed securities. Management anticipates
continued growth in revenues from trading profits for 2000.
Other revenues increased 851% to $902,130 in 1999, from $94,838
in 1998, which was down 87% from $727,359 in 1997. The increase
in other revenue in 1999 was not attributable to any significant
or singular factor. The decrease in other revenue from 1997 to
1998 was attributable to a one-time gain of $500,000 recognized
in 1997 as compensation from a corespondent prematurely
terminating its clearing contract with the Company. Management
anticipates that other revenues will continue to account for a
negligible percentage of total revenues in the future.
Expenses
Operating expenses totaled $86,980,546 in 1999, an increase of
32% from $66,055,680 in 1998, which was a decrease of 2% from
$67,339,066 in 1997. Many of the Company's expenses, including
commission expense, interest expense and data processing charges,
are directly related to commission revenues, trading revenues,
and clearing and execution revenues, which all increased in 1999
from the prior year. The overall increase in expenses since 1997
is primarily the result of growth in the Company's discount and
online brokerage divisions. As a percentage of total revenues,
total operating expenses accounted for 83%, 98% and 96% in 1999,
1998 and 1997, respectively. The reduction in total expenses as
a percentage of total revenues is the result of management's
concerted effort to contain costs and improve operating
efficiencies, as well as increases in the Company's total
revenues.
Data processing expense increased 64% to $10,114,145 in 1999,
from $6,168,764 in 1998, which was up 18% from $5,214,148 in
1997. The increase in data processing expense from 1998 to 1999
was the result of growth in correspondent clearing activities, as
well as discount and trading volumes.
Expenses for salaries increased 5% in 1999 to $10,176,438 from
$9,725,313 in 1998, which was down 5% from $10,231,818 in 1997.
Occupancy and equipment costs increased 3% to $4,966,437 in 1999,
from $4,819,812 in 1998, which was up 17% from $4,108,926 in
1997. These increases were the result of new computer equipment
and technology in preparation of year 2000.
In the third quarter of 1999, JBOC launched a new national
advertising campaign to encourage consumers to "Put Your Money to
Work." As a result, in 1999 the Company's promotional expenses
increased 226% to $12,807,200 from $3,929,062 in 1998, which was
up 6% from $3,709,631 in 1997. Of the $12,807,200 spent in 1999,
$10,000,000 of that was spent directly on the advertising
campaign mentioned above. In 2000, the Company expects to spend
approximately $500,000 per month in promotional expenses.
However, the Company will remain flexible in its approach and may
adjust its advertising budget and strategy to maximize the
effectiveness of advertising dollars spent.
Bad debt expense increased 1% to $2,036,982 in 1999 from
$2,019,454 in 1998, which was an increase of 51% from $1,335,412
in 1997.
The Company recorded settlement expense of $2,537,880 in 1999
which was an increase of 302% from $630,539 in 1998, which was a
decrease of 78% from $2,897,313 in 1997. The increase in 1999
was the result of the Company settling the investigation with
USAO and the anticipated settlement with the SEC (See Note 16
Commitments and Contingencies). The decrease from 1997 to 1998
was primarily the result of the settlement of a litigation matter
during 1997 in which the Company paid $1,500,000 to settle the
matter, as well as resolutions of other matters related to an
inactive subsidiary of the Company, Reynolds Kendrick Stratton,
Inc. The Company recorded no non-cash interest expense in 1999,
compared to $2,530,000 in 1998. The 1998 amount reflected a
charge taken with respect to a change of control transaction that
occurred in the second quarter of 1998.
The Company's effective tax rate varied from its statutory
federal rate due to changes in state taxes net of federal benefit
and other temporary differences. (See Note 12 of the Notes to
Consolidated Financial Statements, below.)
Extraordinary Items/One-time Charges
In February 1999, the Company executed an agreement with Oeri
Finance, Inc. that resulted in the forgiveness of notes payable
to shareholders in the amount of $728,125, which was included in
1999 net income of $10,444,630 and has been reflected as an
extraordinary item during 1999. In the fourth quarter of 1999,
the Company recorded one-time charges totaling $2,300,000 related
to settlement with the USAO and an anticipated settlement with
the SEC.
Liquidity and Capital Resources
The Company completed an initial public offering of its common
stock in 1987 and has made several private placements of its
securities since that time. Currently, the Company finances its
growth though the use of funds generated from the business
operations of its subsidiaries, mainly JBOC. Additionally, JBOC
has established omnibus/financing accounts and lines of revolving
credit with other broker-dealers and banking institutions with an
aggregate borrowing limit of approximately $130,000,000.
Further, the Company has available stock loan financing when
necessary. Amounts borrowed bear interest at a fluctuating rate
based on the broker call and prime rates. The majority of the
Company's corporate assets at December 31, 1999, 1998 and 1997
were held by its subsidiary, JBOC, and consisted of cash or
assets readily convertible to cash. The Company's statement of
financial conditions reflects this largely liquid financial
position. Receivables with other brokers and dealers primarily
represent current open transactions that typically settle with a
few days, or stock borrow-and-loan transactions where the
contracts are adjusted to market values daily. Additionally,
JBOC is subject to the requirements of the NASD and the SEC
relating to liquidity, net capital, and the use of customer cash
and securities. (See Item 1 "Business Overview" Net Capital
Requirements above.) At December 31, 1999, JBOC had regulatory
net capital of $27,491,404, which exceeded the minimum
requirement by $18,699,718.
The Company currently anticipates that its cash resources and
available credit facilities will be sufficient to fund its
expected working capital and capital expenditure requirements for
the foreseeable future. However, in order to more aggressively
expand its business, respond to competitive pressures, develop
additional products and services, or take advantage of strategic
opportunities, the Company may need to raise additional funds.
If funds are raised through the issuance of equity securities, or
securities which are convertible into equity securities, the
Company's existing shareholders may experience additional
dilution in ownership percentages or book value. Additionally,
such securities may have rights, preferences and privileges
senior to those of the holders of the Company's common stock.
The Company cannot give any assurance that additional funds will
not be needed to respond to industry changes, competitive
pressures and unforeseen events. If additional funds are needed,
there can be no assurance that additional financing will be
available or whether it will be available on terms satisfactory
to the Company.
In February 1999, Hareton Sales & Marketing, Inc. ("Hareton"),
the holder of $502,615 in face value of the Company's 9% Senior
Secured Convertible Notes, exercised its right to convert this
debt into common stock of the Company, and the Company issued
718,021 shares of common stock in full satisfaction of this debt.
In February 1999, the Company established the JB Oxford Revocable
Government Trust (the "Trust"), a wholly owned subsidary, to
purchase common stock of the Company. Third Capital Partners,
LLC serves as trustee of the Trust, without compensation. The
Company loaned the Trust $586,915, which the Trust used to
purchase 469,540 shares of the Company's common stock for an
average price of $1.25 per share. Pursuant to the terms of the
Trust, Third Capital Partners, LLC has the right to vote the
shares held by the Trust, but has no right to dispose of them
except upon termination of the Trust. The Trust will terminate
on the earlier of February 18, 2001, or the completion of the
investigation relating to the Company being conducted by the
USAO, the Federal Bureau of Investigation and the SEC. The
investigation being conducted by the USAO was settled on
February 14, 2000. See Item 3. Legal Proceedings, above.
Concurrent with the Trust's purchase of shares, the Company
relinquished its right of first refusal as to any remaining
shares held by Felix Oeri and Oeri Finance, and Oeri Finance,
forgave $728,125 in demand debt owed by the Company.
Subsequently, Oeri Finance, Felix Oeri and Hareton filed 13D
Statements with the SEC indicating ownership of less than 5% of
the Company's stock. A subordinated loan agreement, payable to
Oeri Finance, Inc., matured on March 31, 1999 in the amount of
$1,000,000 and is included in "Notes payable" in the Company's
consolidated financial statements included below. The Company
has decided to delay payment on the debt in light of the ongoing
federal investigation (see Note 16, "Contingent Liabilities," to
the financial statements).
On November 8, 1999, Third Capital Partners, LLC, the beneficial
owner of two secured convertible notes of the Company in the
aggregate principal amount of $5,418,696, maturing December 31,
1999, agreed to extend the repayment of both notes for a period
of 12 additional months, to December 31, 2000. The Company will
continue to make interest payments only on each note, and no
other terms of the notes were affected by the extension
agreements.
Liquidity at December 31, 1999, 1998 and 1997
The Company's cash position increased significantly during 1999
by $3,526,523 to $6,023,095 at year-end. This compares with a
net decrease in cash and cash equivalents of $101,490 in 1998,
and a net increase of $1,628,191 in 1997. The fluctuation in the
Company's cash position can be impacted by the settlement cycles
of the business which relate directly to the cash provided from,
or used in, operations.
Cash Flows From Operating Activities
Net cash provided by (used in) operating activities was
$5,607,036, $(136,340) and $5,848,138 for 1999, 1998 and 1997,
respectively. The Company's net cash provided by (used in)
operating activities is impacted by changes in the brokerage-
related assets and liabilities of JBOC.
During 1999, the most significant use of cash was an increase in
receivables from customers of $171,429,660. The most significant
source of cash in operations was $82,977,416 provided from cash
segregated under federal and other regulations and $79,236,179
provided from payables to broker-dealers and clearing
organizations. This source of cash was offset by the uses of
cash indicated above.
During 1998, the most significant use of cash was the increase in
cash segregated under federal regulations in the amount of
$75,247,813. As a result of an decrease in securities loaned at
December 31, 1998, payables to broker-dealers and clearing
organizations decreased $32,158,241 to $58,064,209. The most
significant source of cash in operations was the change in
payables to receivables from customers of $90,925,459. This
source of cash was offset by the uses of cash indicated above.
Cash Flows Used In Investing Activities
The net cash used in investing activities during 1999, 1998 and
1997 was $1,512,160, $875,473 and $1,732,405, respectively.
These cash uses are a direct result of capital expenditures made
by the Company during these periods. The Company's requirement
for capital resources is not material to the business as a whole.
Although the Company continually upgrades its information and
communication systems, future expenditures for upgrading of the
Company's various information and communication systems are not
estimated to be material to the operations of the Company. The
Company presently has no plans to open additional offices and has
no significant commitments for capital expenditures.
Cash Flows From Financing Activities
Financing activities used $568,353 in cash during 1999, primarily
through the acquisition of $586,925 of treasury stock. This
compares with net cash provided from financing activities of
$910,323 during 1998, and net cash used in financing activities
of $2,487,542 in 1997. During 1998 the most significant source
of cash was loans issued from shareholders of $1,250,000. In
1997 the Company used $6,097,193 to pay short tem borrowings
while $2,867,500 was provided from shareholder loans and
$1,327,630 from the issuance of common stock
In 1998, the company's financing activities provided cash
primarily through the issuance of additional debt securities
which are convertible into the Company's common stock. See
"Liquidity and Capital Resources" above.
JB OXFORD & COMPANY
SHORT TERM BORROWING
(Amounts in thousands)
Category of aggregate short-term
borrowings a b c d e
Year Ended December 31, 1999
collateralized by:
Customer securities $ -- $ -- $10,500 $1,475 7.3%
Year Ended December 31, 1998
collateralized by:
Customer securities $ -- -- $6,005 $1,366 8.4%
Year Ended December 31, 1997
collateralized by:
Customer securities $ -- -- $12,262 $4,264 6.9%
Firm securities $ -- -- $ 1,500 $ 308 8.5%
a) Balance at end of period
b) Weighted average interest rate at end of the period
c) Maximum amount outstanding during the period
d) Average amount outstanding during the period
e) Weighted average interest rate during the period
The weighted average interest rate during the period was
calculated by factoring the balances at the end of each month at
the various rates, and computing a weighted average on the
results.
During the past year, the Company has experienced tremendous
growth in its customer transactions. In order for the Company to
continue this growth and assure stability, management is
continually exploring additional sources of capital to increase
the Company's liquidity and capital base. In the past two months,
Management secured an additional line of credit to help finance
regulatory capital. Management will continue its efforts to
increase liquidity and capital as the Company's business
continues to grow.
Impact of Inflation
Inflation has had a minimal impact on the operations and
financial condition of the Company in recent years. The Company
will continually monitor costs and productivity and will adjust
prices and operations as necessary to meet inflationary impacts
or market changes.
Recent Accounting Pronouncements
The Financial Accounting Standards Board (FASB) issued Statement
of Financial Accounting Standards No. 133, "Accounting for
Derivative Instruments and Hedging Activities" (SFAS 133), as
amended by SFAS No. 137, "Accounting for Derivative Instruments
and Hedging Activities-Deferred of the Effective Date of FASB
Statement No. 133." The Company is required to and will
implement the provision of this new standard on January 1, 2001.
SFAS No. 133 establishes accounting and reporting standards
requiring that every derivative instrument be recorded in the
Statement of Financial Condition as either an asset or as a
liability measured at is fair value and that changes in the fair
value be recognized currently in the statement of operations
unless specific hedge accounting criteria are met. The Company
has not yet quantified the impact of adopting SFAS No. 133 on its
financial statements but does not believe it will have a material
effect on the Company's financial position or results of
operations.
Item 7A. Quantitative and Qualitative Disclosures About Market
Risk
Market Risk Disclosures
The following discussion about the Company's market risk
disclosures involves forward-looking statements. Actual results
could differ materially from those projected in the forward-
looking statements. See Item 1 "Business Overview" Forward-
Looking Statements and Risk Factors" above. The Company is
exposed to market risk related to changes in interest rates and
equity security price risk. The Company does not have derivative
financial instruments for speculative or trading purposes.
Retail broker-dealers with clearing operations, such as the
Company, are exposed to risks that exceed the simple risk of loss
of business due to the loss of retail customers and/or
correspondents. Broker-dealers engaged in clearing operations
for other correspondent broker-dealers are exposed to losses
beyond the loss of business in the event that the correspondent
fails. These risks result where the total assets, securities
held in inventory, and cash of the failed correspondent are
insufficient to cover the unpaid customer debits, together with
losses which may be generated in the correspondent's trading
account. The Company has established procedures to review a
correspondent's inventory and activities in an effort to prevent
such losses in the event of a correspondent's failure.
Areas outside the control of the Company which affect the
securities market, such as severe downturns or declines in market
activity, may cause substantial financial exposure. This is
particularly true with regard to the receivables that are carried
in customers' margin accounts. A significant decline in market
value may decrease the value of securities pledged in the margin
accounts to a point that the margin loans would exceed such
value. While the Company is authorized to liquidate the
securities and to utilize the correspondent's account balances to
cover any shortfall, in a worst case scenario, such collateral
may not be sufficient to cover all losses.
Interest Rate Sensitivity and Financial Instruments
For its working capital and reserves that are required to be
segregated under federal or other regulations, the Company
invests primarily in U.S. Treasury securities under agreements to
resell. These agreements have maturity dates ranging from one to
seven days, and do not present a material interest rate risk.
Equity Price Risk
JBOC acts as a market maker for approximately 730 public
corporations whose stocks are traded on the NASDAQ National
Market System, NYSE or other national exchanges. The Company
selects companies in which it makes a market based on a review of
the current market activity, and also to facilitate trading
activity of its own and correspondent's clients. Market making
may result in a concentration of securities which may expose the
Company to additional risk; however, the Company does not
maintain a significant inventory of equity securities.
Item 8. Financial Statements and Supplementary Data
The financial statements and schedules required to be filed by
Item 8 of this form and paragraph (d) are contained herein as
follows:
Page
Report of Independent Public Accountants __
Report of Independent Certified Public Accountants __
Consolidated Statements of Financial Condition December 31, __
1999, and 1998
Consolidated Statements of Operations Years Ended December __
31, 1999, 1998, and 1997
Consolidated Statements of Changes in Shareholders' Equity __
(Deficit)Years Ended December 31, 1999, 1998, and 1997
Consolidated Statements of Cash Flows Years Ended December __
31, 1999, 1998, and 1997
Notes to Consolidated Financial Statements __
Financial Statement Schedule I - Condensed Financial __
Statements (Parent Company Only)
Financial Statement Schedule II - Valuation and Qualifying __
Accounts
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To JB Oxford Holdings, Inc.:
We have audited the accompanying consolidated statements of
financial condition of JB Oxford Holdings, Inc. (a Utah
corporation) and subsidiaries (the "Company") as of December 31,
1999 and 1998, and the related consolidated statements of
operations, changes in shareholders' equity and cash flows for
the years then ended. These financial statements, and the
schedules referred to below, are the responsibility of the
Company's management. Our responsibility is to express an
opinion on these financial statements and schedules based on our
audits.
We conducted our audits in accordance with auditing standards
generally accepted in the United States. Those standards require
that we plan and perform the audit to obtain reasonable assurance
about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as
well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the financial statements referred to above
present fairly, in all material respects, the financial position
of JB Oxford Holdings, Inc. and subsidiaries as of December 31,
1999 and 1998, and the results of their operations and their cash
flows for the years then ended in conformity with accounting
principles generally accepted in the United States.
Our audits were made for the purpose of forming an opinion on the
basic financial statements taken as a whole. The Financial
Statement Schedules I and II are presented for purposes of
additional analysis and are not a required part of the basic
financial statements. This information has been subjected to the
auditing procedures applied in our audits of the basic financial
statements and, in our opinion, is fairly stated in all material
respects in relation to the basic financial statements taken as a
whole.
ARTHUR ANDERSEN LLP
Los Angeles, California
February 25, 2000
Board of Directors
JB Oxford Holdings, Inc.
We have audited the accompanying consolidated statements of
income, stockholders' equity and cash flows for the year ended
December 31, 1997. We have also audited the schedules listed in
the accompanying index for the year ended December 31, 1997.
These financial statements and schedules are the responsibility
of the Company's management. Our responsibility is to express an
opinion on these financial statements and schedules based on our
audit.
We conducted our audit in accordance with generally accepted
auditing standards. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether
the financial statements are free of material misstatement. An
audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating
the overall financial statement presentation. We believe that our
audit provides a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to
above present fairly, in all material respects, the results of
the Company's operations and its cash flows for the year ended
December 31, 1997 in conformity with generally accepted
accounting principles.
Also, in our opinion, the schedules present fairly, in all
material respects, the information set forth therein for the year
ended December 31, 1997.
BDO Seidman, LLP
Los Angeles, California
March 27, 1998
JB Oxford Holdings, Inc. and Subsidiaries
Consolidated Statements of Financial Condition
December 31,
1999 1998
Assets:
Cash and cash equivalents (including
securities purchased under agreements to
resale of $0 and $140,516) $6,023,095 $2,496,572
Cash and securities purchased under
agreements to resell, segregated under
federal and other regulations 27,173,659 110,151,075
Receivable from broker-dealers and
clearing organizations (net of allowance
for doubtful accounts of $0 and
$2,103,802) 7,717,643 7,321,066
Receivable from customers (net of
allowance for doubtful accounts of
$1,601,178 and $5,354,864) 438,208,683 268,608,125
Other receivables (net of allowance for
doubtful accounts of $0 and $1,979,793) 1,614,254 1,591,482
Marketable securities owned - at market 223,034 2,927,071
value
Furniture, equipment, and leasehold
improvements (at cost - net of
accumulated depreciation and
amortization of $6,296,033 and
$5,389,576) 3,024,193 2,860,100
Income taxes receivable 1,012,881 717,396
Deferred income taxes 1,479,425 1,079,840
Clearing deposits 9,598,797 6,833,171
Other assets 1,663,442 1,404,455
Total assets $497,739,106 $405,990,353
See accompanying notes to Consolidated Financial Statements.
JB Oxford Holdings, Inc. and Subsidiaries
Consolidated Statements of Financial Condition
December 31,
1999 1998
Liabilities and shareholders' equity:
Liabilities:
Payable to broker-dealers and clearing $137,300,388 $58,064,209
organizations
Payable to customers 313,354,154 311,958,515
Securities sold, not yet purchased - at 96,904 868,085
market value
Accounts payable and accrued liabilities 12,303,092 9,010,480
Income taxes payable -- 552,648
Loans from shareholders 5,418,696 8,538,811
Notes payable 2,895,124 130,997
Subordinated borrowings -- 1,250,000
Total liabilities 471,368,358 390,373,745
Commitments and contingent liabilities
(Note 16)
Shareholders' equity:
Common stock ($0.01 par value,
100,000,000 shares authorized;
15,088,226 and 14,141,205 shares issued) 150,882 141,412
Additional paid-in capital 16,232,281 15,345,316
Retained earnings 10,772,290 327,660
Treasury stock, 704,040 and 234,500 (784,705) (197,780)
shares at cost
Total shareholders' equity 26,370,748 15,616,608
Total liabilities and shareholders'
equity $497,739,106 $405,990,353
See accompanying notes to Consolidated Financial Statements.
JB Oxford Holdings, Inc. and Subsidiaries
Consolidated Statements Of Operations
For The Years Ended December 31,
1999 1998 1997
Revenues:
Clearing and execution $25,033,821 $11,565,427 $17,442,407
Trading profits 15,517,700 5,747,187 2,250,940
Commissions 33,827,615 26,600,214 25,939,576
Interest 28,930,515 23,260,659 23,601,341
Other 902,130 94,838 727,359
Total Revenues 104,211,781 67,268,325 69,961,623
Expenses:
Employee compensation 10,176,438 9,725,313 10,231,818
Commission expense 12,473,534 9,259,410 9,169,351
Clearing and floor brokerage 3,650,676 3,621,816 2,954,415
Communications 6,934,245 5,983,039 6,560,425
Occupancy and equipment 4,966,437 4,819,812 4,108,926
Interest 14,615,836 13,960,009 14,191,646
Data processing charges 10,114,145 6,168,764 5,214,148
Professional services 4,592,666 3,346,260 4,585,781
Promotional 12,807,200 3,929,062 3,709,631
Bad debt expense 1,829,102 2,019,454 1,335,412
Settlement expense 2,537,880 630,539 2,897,313
Other operating expenses 2,282,387 2,592,202 2,380,200
Total Expenses 86,980,546 66,055,680 67,339,066
Income From Operations 17,231,235 1,212,645 2,622,557
Non-cash interest expense on -- 2,530,000 --
convertible notes
Income (Loss) Before Income 17,231,235 (1,317,355) 2,622,557
Taxes and Extra-ordinary Item
Income tax provision 7,223,480 521,251 1,099,872
Income (Loss) Before 10,007,755 (1,838,606) 1,522,685
Extraordinary Item
Extraordinary Item:
Forgiveness of Debt, Net of
Taxes 436,875 -- --
Net Income (Loss) $10,444,630 $(1,838,606) $1,522,685
See accompanying notes to Consolidated Financial
Statements.
JB Oxford Holdings, Inc. and Subsidiaries
Consolidated Statements Of Operations - continued
For The Years Ended December 31,
1999 1998 1997
Basic Net Income (Loss) Per
Share:
Income (loss) before income
taxes and extraordinary Item $0.70 $(0.13) $0.12
Extraordinary item: Forgiveness 0.03 -- --
of debt
Basic Net Income (Loss) Per $0.73 $(0.13) $0.12
Share
Diluted Income (Loss) Per Share:
Income (loss) before income
taxes and extraordinary Item $0.43 $(0.13) $0.09
Extraordinary item: Forgiveness 0.02 -- --
of debt
Diluted Net Income (Loss) Per $0.45 $(0.13) $0.09
Share
Weighted average number of
shares of common stock and
assumed conversions
Basic 14,295,751 14,127,800 12,334,517
Diluted 23,902,717 14,127,800 18,746,264
See accompanying notes to Consolidated Financial
Statements.
<TABLE>
JB Oxford Holdings, Inc. and Subsidiaries
Consolidated Statements Of Changes in Shareholders' Equity
<CAPTION>
Preferred Stock Common Stock
Additional
Paid-in Retained Treasury
Shares Amount Shares Amount Capital Earnings Stock Total
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at
January 1, 1997 $200,000 $2,000,000 $8,760,205 $87,602 $9,541,496 $729,060 -- $12,358,158
Issuance of
common stock -- -- 65,000 650 124,150 -- -- 124,800
Exercise of
warrants -- -- 1,316,000 13,160 1,189,670 -- -- 1,202,830
Conversion of
preferred stock (200,000) (2,000,000) 4,000,000 40,000 1,960,000 -- (85,479) --
Net Income -- -- -- -- -- 1,522,685 -- 1,522,685
Cash Dividends-
preferred stock -- -- -- -- -- ( 85,479) -- (85,479)
Balance at
December 31, 1997 -- -- 14,141,205 141,412 12,815,316 2,166,266 -- 15,122,994
Non-cash interest
expense -- -- -- -- 2,530,000 -- -- 2,530,000
Net (Loss) -- -- -- -- -- (1,838,606) -- (1,838,606)
Treasury stock -- -- -- -- -- -- (197,780) (197,780)
Balance at
December 31, 1998 -- -- 14,141,205 141,412 15,345,316 327,660 (197,780) 15,616,608
Issuance of common
stock -- -- 947,021 9,470 886,965 -- -- 896,435
Net Income __ -- -- -- -- 10,444,630 -- 10,444,630
Treasury stock -- -- -- -- -- -- (586,925) (586,925)
Balance at
December 31, 1999 -- -- 15,088,226 150,882 16,232,281 $10,772,290 $(784,705) $26,370,748
</TABLE>
See accompanying notes to Consolidated Financial Statements.
JB Oxford Holdings, Inc. and Subsidiaries
Consolidated Statements Of Cash Flows
For The Years Ended December 31,
1999 1998 1997
Cash flows from operating
activities:
Net income (loss) $10,444,630 $(1,838,606)$1,522,685
Adjustments to reconcile net
income (loss) to net cash
provided by (used in) operating
activities:
Depreciation and amortization 1,348,067 1,475,840 1,259,147
Deferred rent (121,464) (111,693) (62,700)
Provision for bad debts 1,829,102 2,019,454 1,335,412
Provision (benefit) for deferred (399,585) (127,415) (228,563)
income taxes
Non-cash interest expense for -- 2,530,000 --
convertible debentures
Forgiveness of debt (728,125) -- --
Changes in assets and
liabilities:
Cash segregated under federal 82,977,416(75,247,813) 60,773,200
and other regulations
Receivable from broker-dealers
and clearing organizations (396,577)(2,638,158) 2,351,805
Receivable from customers (171,429,660) 8,933,391 (71,169,319)
Other receivables (22,772) 641,839 (829,733)
Marketable securities owned 2,704,037 810,590 1,342,485
Clearing deposits (2,765,626) (104,581) (1,755,344)
Other assets (258,987) 640,133 (1,099,722)
Payable to broker-dealers and 79,236,179(32,158,241) 54,655,744
clearing organizations
Payable to customers 1,395,639 90,925,459 (40,986,941)
Securities sold not yet (771,181) (280,621) 904,842
purchased
Accounts payable and accrued 3,414,076 4,057,529 (2,478,854)
liabilities
Income taxes payable/refundable (848,133) 336,553 313,594
Net cash provided by (used in) 5,607,036 (136,340) 5,848,138
operating activities
Cash flows from investing
activities:
Capital expenditures (1,512,160) (875,473) (1,732,405)
Net cash used in investing (1,512,160) (875,473) (1,732,405)
activities
Cash flows from financing
activities:
Advances (repayments) of notes (125,248) 108,103 --
payable
Advances (repayments) on short -- -- (6,097,193)
term borrowing
Payment of subordinated loans (250,000) (250,000) (500,000)
Loans from shareholders -- 1,250,000 2,867,500
Issuance of stock 393,820 -- 1,327,630
Treasury stock (586,925) (197,780) --
Payment of cash dividends - -- -- (85,479)
preferred stock
Net cash provided by (used in) (568,353) 910,323 (2,487,542)
financing activities
Net increase (decrease) in cash 3,526,523 (101,490) 1,628,191
and cash equivalents
Cash and cash equivalents at 2,496,572 2,598,062 969,871
beginning of year
Cash and cash equivalents at end
of year $6,023,095 $2,496,572 $2,598,062
See accompanying notes to Consolidated Financial Statements.
JB Oxford Holdings, Inc. and Subsidiaries
Notes To Consolidated Financial Statements
Note 1. Basis of Presentation
Reporting Entity
The accompanying consolidated financial statements for 1999, 1998
and 1997 include the accounts of JB Oxford Holdings, Inc., a Utah
Corporation, and its wholly-owned subsidiaries, JB Oxford &
Company ("JBOC"), Stocks4Less, Inc. ("S4L"), JB Oxford Insurance
Services, Inc. ("JBOI"), Reynolds Kendrick Stratton, Inc.
("RKSI"); and its 90% owned subsidiary, Prolyx Data Systems, Inc.
("Prolyx") (collectively referred to as the "Company" or "JBOH").
The Company operates in a single industry segment, the Securities
Industry. The Company derives its revenues primarily from its
brokerage services operations, correspondent clearing services
and market making activities at JBOC. No individual customer or
correspondent accounts for 10% or more of consolidated revenues.
Intercompany balances have been eliminated in the consolidated
financial statements. Additionally, minority shareholders'
interests are not separately presented, as the amounts are not
significant.
The Company and JBOC have their principal offices in Beverly
Hills, California. JBOC's brokerage division has branches in
Beverly Hills, California; New York, New York; Miami, Florida;
and San Gabriel, California.
While no single correspondent broker-dealer or customer represents
more than 10% of the Company's consolidated revenues, the Company
has several significant customers whose loss, in the aggregate,
could be material to the Company. The Company believes that the
likelihood of losing a significant number of such customers is
remote.
Note 2. Summary of Significant Accounting Policies
Use of Estimates
The preparation of financial statements in conformity with
accounting principles generally accepted in the United States
requires management to make estimates and assumptions that affect
reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses
during the year. Actual results may differ from those estimates.
Cash and Cash Equivalents
The Company considers all highly liquid investments purchased
with maturities of three months or less when purchased to be cash
equivalents. Highly liquid investments are both readily
convertible to known amounts of cash and are so near their
maturity that they present insignificant risk of changes in value
because of interest rate changes.
Securities Purchased Under Agreement to Resell
Transactions involving purchases of securities under agreements
to resell are accounted for as collateralized financings except
where the Company does not have an agreement to sell the same or
substantially the same securities before maturity at a fixed or
determinable price. It is the policy of the Company to obtain
possession of collateral with a market value equal to or in
excess of the principal amount loaned under resale agreements.
Collateral is valued daily, and the Company may require
counterparties to deposit additional collateral or return
collateral pledged when appropriate.
Allowance for Doubtful Accounts
On an ongoing basis, the Company reviews its allowance for
doubtful accounts on receivables from broker-dealer and clearing
organizations, customer receivables and other receivables. The
Company establishes allowances to cover known and inherent
losses. As of December 31, 1999 and 1998, the Company believes
the allowance for doubtful accounts on receivables from broker-
dealers and clearing organizations, customer receivables and
other receivables are adequate.
Securities Transactions
Customers' securities transactions are recorded on a settlement
date basis, with related commission income and expenses recorded
on a trade date basis. Marketable securities owned and
securities sold, not yet purchased are recorded on a trade date
basis.
Securities Lending Activities
Securities borrowed and securities loaned transactions are
generally reported as collateralized financings except where
letters of credit or other securities are used as collateral.
Securities borrowed transactions require the Company to deposit
cash, letters of credit, or other collateral with the lender.
With respect to securities loaned, the Company receives
collateral in the form of cash or other collateral in an amount
generally in excess of the market value of securities loaned.
The Company monitors the market value of securities borrowed and
loaned on a daily basis, with additional collateral obtained or
refunded as necessary.
Marketable Securities Owned
Marketable securities and securities sold, not yet purchased are
reported at prevailing market prices as of December 31, 1999.
Realized and unrealized gains and losses on marketable securities
owned and securities sold, not yet purchased are included in
trading profits, net.
Collateral
The Company continues to report assets it has pledged as
collateral in secured borrowing and other arrangements when the
secured party cannot sell or repledge the assets or the Company
can substitute collateral or otherwise redeem it on short notice.
The Company generally does not report assets received as
collateral in secured lending and other arrangements because the
debtor typically has the right to redeem the collateral on short
notice.
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 statements 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 cannot determine whether or
not it is more likely that the net deferred tax asset will be
realized. The effect on deferred tax assets and liabilities of a
change in the rates is recognized in income in the period that
includes the enactment date.
Furniture, Equipment and Leasehold Improvements
Furniture, equipment and leasehold improvements are carried at
cost net of accumulated depreciation and amortization.
Depreciation on furniture and equipment is provided for on
accelerated and straight-line bases using an estimated useful
life of three to five years. Leasehold improvements are
amortized over the lesser of the useful life of the improvement
or the term of the lease. Expenditures for repairs and
maintenance that do not significantly increase the life of the
assets are charged to operations as incurred.
Fair Value of Financial Instruments
Substantially all of the Company's financial assets and
liabilities are carried at market or estimated fair value or are
carried at amounts that approximate current fair value because of
their short-term nature. Estimates are made at a specific point
in time, based on relevant market information and information
about the financial instruments.
Promotional
Advertising costs are expensed as incurred.
Earnings Per Share
Basic earnings per share of common stock are computed by dividing
net income, after deducting the preferred dividend
requirements, by the weighted average number of common shares
outstanding.
Diluted earnings per share are computed based on 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, the convertible debentures (after giving retroactive
effect to the elimination of interest expense, net of tax) and
convertible preferred stock. Securities are not included in the
weighted average number of shares when the inclusion would
increase the earnings per share or decrease the loss per share.
The following table reconciles the numerators and denominators of
the basic and diluted earnings per share computation:
For The Years Ended December 31,
1999 1998 1997
Basic Earnings Per Share
Net income (loss) $10,444,630 $(1,838,606) $1,522,685
Preferred stock dividends -- -- (85,479)
Income available to common
shareholders (numerator) $10,444,630 $(1,838,606) $1,437,206
Weighted average common shares
outstanding (denominator) 14,295,751 14,127,800 12,334,517
Basic Earnings (Loss) Per Share $0.73 $(0.13) $0.12
Diluted Earnings Per Share
Net income (loss) $10,444,630 $(1,838,606) $1,522,685
Interest on convertible
debentures, net of income tax 295,095 -- 238,752
Income available to common
shareholders plus assumed
conversions (numerator) $10,739,725 $(1,838,606) $1,761,437
Weighted average common shares
outstanding 14,295,751 14,127,800 12,334,517
Weighted average options
outstanding 2,195,701 __ 1,379,805
Weighted average convertible
debentures 7,813,780 -- 4,421,311
Weighted average convertible
preferred stock -- -- 1,494,505
Stock acquired with proceeds (402,515) -- (883,874)
Weighted average common shares
and assumed conversions
outstanding (denominator) 23,902,717 14,127,800 18,746,264
Diluted Earnings (Loss) Per
Share $0.45 $(0.13) $0.09
Options to purchase 2,222,500 shares of common stock at December
31, 1998, were not included in the computation of diluted EPS
because the options' exercise price was greater that the average
market price of the common share during the respective periods.
The options carry exercise prices ranging from $0.63 to $9.00 at
December 31, 1999, and $0.63 to $2.32 at December 31 1998. The
options at December 31, 1999 expire at various dates through 2008
and were still outstanding at the end of 1999.
Stock-Based Compensation
As of January 1, 1996 the Company adopted Statement of Financial
Accounting Standards No. 123, "Accounting for Stock-Based
Compensation" ("SFAS 123"). SFAS 123 allows an entity to elect
to continue to measure compensation cost under Accounting
Principles Board Opinion No. 25. "Accounting for Stock Issued to
Employees" ("APB No. 25"), but requires pro forma disclosure of
net earnings and earnings per share as if the fair-valued-based
method of accounting had been applied. In accordance with SFAS
123, the Company elected to continue to measure compensation cost
under APB No. 25 and comply with the pro forma disclosure
requirements.
Reclassifications
Certain reclassifications have been made to the 1998 and 1997
financial statements to conform with presentation in the 1999
financial statements.
Recent Accounting Pronouncements
The Financial Accounting Standards Board (FASB) issued Statement
of Financial Accounting Standards No. 133, "Accounting for
Derivative Instruments and Hedging Activities" (SFAS 133), as
amended by SFAS No. 137, "Accounting for Derivative Instruments
and Hedging Activities-Deferred of the Effective Date of FASB
Statement No. 133." The Company is required to and will
implement the provision of this new standard on January 1, 2001.
SFAS No. 133 establishes accounting and reporting standards
requiring that every derivative instrument be recorded in the
Statement of Financial Condition as either an asset or as a
liability measured at is fair value and that changes in the fair
value be recognized currently in the statement of operations
unless specific hedge accounting criteria are met. The Company
has not yet quantified the impact of adopting SFAS No. 133 on its
financial statements but does not believe it will have a material
effect on the Company's financial position or results of
operations.
Note 3. Cash and Cash Equivalents
Included in cash and cash equivalents are securities purchased
under agreements to resell on an overnight basis in the amount of
$0 and $140,516 at December 31, 1999 and 1998. Securities
purchased are U.S. Treasury instruments which must be at least
102% of the cash tendered. The market value of these securities
is $0 and $143,326 at December 31, 1999 and 1998.
Note 4. Cash Segregated Under Federal and Other
Regulations
Cash and securities purchased under agreement to resell of
$27,173,659 and $110,151,075 have been segregated in a special
reserve bank account for the exclusive benefit of customers under
Rule 15c3-3 of the Securities Exchange Act of 1934, as amended.
Securities purchased under agreements to resell on an overnight
basis represent $20,786,005 and $104,469,048 of the above amounts
at December 31, 1999 and 1998, respectively. Securities
purchased are U.S. Treasury instruments having a market value of
$21,220,679 and $106,558,427, respectively. The Company had
excess funds of $9,139,372 and $6,227,712 at December 31, 1999
and 1998.
Note 5. Receivable From and Payable to Broker-Dealers and
Clearing Organizations
At December 31, amounts receivable from and payable to broker-
dealers and clearing organizations result from the Company's
normal trading activities and consist of the following:
1999 Receivable Payable
Deposits for securities borrowed/loaned $4,773,720 $128,879,331
Securities failed to deliver/receive 2,172,210 1,661,703
Receivable from/payable to correspondents 56,023 6,745,177
Receivable from/payable to clearing 715,690 14,177
organizations
Total $7,321,066 $137,300,388
1998 Receivable Payable
Deposits for securities borrowed/loaned $4,666,656 $49,872,550
Securities failed to deliver/receive 2,628,410 2,620,379
Receivable from/payable to correspondents 25,990 4,694,127
Receivable from/payable to clearing
organizations 10 877,153
Total $7,717,643 $58,064,209
Securities borrowed and securities loaned represent cash paid or
received for securities borrowed or loaned from other
broker-dealers. The equivalent value in money is deposited by the
borrower. All open positions are adjusted to market values daily.
These deposits approximate the market value of the underlying
securities.
Securities failed to deliver and receive represent the contract
value of securities that have not been delivered or received
subsequent to settlement date. At December 31, 1999 the market
value of the securities failed to deliver was $2,249,577and
failed to receive was $1,622,497. At December 31, 1998 the
market value of the securities failed to deliver was $2,571,214
and failed to receive was $2,604,528.
The amounts receivable from and payable to clearing organizations
represents securities failed to deliver and failed to receive on
a continuous net settlement basis. All open positions are
adjusted to market value daily.
The Company clears security transactions for correspondent
broker-dealers. Settled securities and related transactions for
these correspondents are included in payable to correspondents.
Note 6. Receivable From and Payable to Customers
Receivables from customers include amounts due on cash and margin
transactions. Payables to customers represent debit balances in
the customer accounts. Securities owned by customers are held as
collateral for receivables. Such collateral is not reflected in
the financial statements.
Note 7. Marketable Securities Owned and Securities Sold,
Not Yet Purchased
Marketable securities owned and sold, not yet purchased consist
of trading and investment securities at quoted market values, as
illustrated below:
Sold, But Not
Owned Yet Purchased
Balances as of December 31, 1999:
Equity securities $223,034 $88,021
U.S. government and other -- 8,883
securities
Total $223,034 $96,904
Balances as of December 31, 1998:
Equity securities $1,870,572 $859,374
U.S. government and other 1,056,499 8,711
securities
Total $2,927,071 $868,085
As a part of its ongoing trading activities the Company may hold
derivative financial instruments for trading purposes. These
instruments consist of options and warrants and are not used as
hedge instruments to reduce financial market risks. The Company
does not trade futures, forward, swap or any other derivative
financial instruments except options and warrants. The Company
held no options or warrants at December 31, 1999, and 1998.
Trading gains or losses relating to options and warrants are not
material to the operations of the Company.
Note 8. Furniture, Equipment and Leasehold Improvements
The following summarizes the Company's furniture, equipment and
leasehold improvements at December 31:
1999 1998
Furniture and equipment $7,777,091 $6,726,258
Leasehold improvements 1,543,135 1,523,418
Less: Accumulated depreciation and
amortization (6,296,033)(5,389,576)
3,024,193 2,860,100
For the years ended December 31, 1999, 1998 and 1997, occupancy
and equipment expense includes depreciation and amortization
expense of $1,348,067, $1,475,840, and $1,259,147 respectively.
Note 9. Notes Payable
JBOC maintains firm and customer financing arrangements with an
aggregate borrowing limit approximating $130,000,000. Amounts
loaned bear interest at a fluctuating rate based on broker call
and prime and are fully collateralized by marketable securities.
The company had no such loans outstanding at December 31, 1999
and 1998.
At December 31, notes payable, related to customer activity,
consisted of the following (See Note 13 for discussion of related
party notes reclassified to notes payable):
Balance at
end of a b c d
period
1999
Collateralized
by:
Customer
securities $ -- -- $10,500,000 $1,475,000 7.3%
Other 5,749 9.5% 130,997 68,373 9.5%
$5,749
1998
Collateralized
by:
Customer
securities $ -- -- $6,004,856 $1,365,507 8.4%
Other 130,997 9.5% 265,943 195,805 9.5%
$130,997
a) Weighted average interest rate.
b) Maximum amount outstanding during the period.
c) Average amount outstanding during the period.
d) Weighted average interest rate during the period.
This amount was calculated by factoring the balances
at the end of each month at the various rates, and
computing a weighted average on the results.
Interest expense related to these notes was $217,447, $117,557 and
$162,550 for the years ended December 31, 1999, 1998 and 1997,
respectively.
Note 10. Subordinated Borrowings
The borrowings under subordinated loan agreements at December 31,
1998 consist of three separate loans totaling $1,250,000. Each
agreement carries interest at broker call plus 2%, not to exceed
9% payable monthly. All agreements where due March 31, 1999.
The fair value of the debt approximates carrying value. The
subordinated loan agreements have been approved by the NASD and
are thus available in computing regulatory net capital.
Note 11. Convertible Preferred Stock
The Company has been authorized to issue 10,000,000 shares of $10
par value convertible preferred stock. The preferred shares
shall carry a minimum of a 6% cumulative dividend and shall have
a liquidation preference of $10 per share, any other preference
given to be determined by the Board of Directors at the time of
issuance. On June 5, 1995, $2,000,000 of the convertible
debentures were exchanged for 200,000 shares of $10 par value
non-voting convertible preferred stock. The preferred stock was
convertible to common stock at the rate of $0.50 per share of
common stock based on the par value of the preferred stock. In
accordance with a provision of the preferred stock agreement, the
conversion rate changed from $0.90 to $0.50 due to an ownership
change during 1996. The preferred stock paid a quarterly
dividend of 11%. The convertible preferred stock was converted
to common stock in April of 1997.
Note 12. Income Taxes
The income tax provision in the Consolidated Statements of
Operations consists of the following components:
Years Ended December 31,
1999 1998 1997
Current
Federal $5,901,568 $440,619 $916,955
State 1,721,497 208,047 411,480
7,623,065 648,666 1,328,435
Deferred
Federal (424,715) (79,668) (174,101)
State 25,129 (47,747) (54,462)
(399,585) (127,415) (228,563)
Total $7,223,480 $521,251 $1,099,872
The major components of Deferred tax assets _ net, included in
the Consolidated Statements of Financial Condition are as
follows:
December
1999 1998
Deferred tax assets:
Bad debts reserve $839,999 $956,888
Depreciation 59,209 73,189
Deferred rent 51,272 54,623
State taxes 528,945 --
Total deferred tax assets 1,479,425 1,084,700
Deferred tax liabilities:
State taxes -- (4,860)
Total deferred tax liabilities -- (4,860)
Deferred tax asset - net $1,479,425 $1,079,840
Reconciliations of the provision for income taxes to the expected
income tax based on statutory rates are as follows:
Years Ended December 31,
1999 1998 1997
Provision (Benefit)- Federal
statutory rate $6,030,932 $(447,900) $891,669
Increase (decrease) in income
taxes resulting from:
State taxes net of Federal tax
benefit 1,179,894 105,798 271,576
Non cash interest charge -- 860,200 --
Other 12,654 3,153 (63,373)
Total $7,223,480 $521,251$1,099,872
Note 13. Related Party Transactions
The Company obtained $2,867,500 in demand notes from shareholders
during 1997. This debt bears interest at 8.25%, which is payable
quarterly. The Company has decided to delay payment on the debt
in light of the ongoing federal investigation. In 1998 $250,000
was paid on the demand notes. In 1999 $728,125 was forgiven and
$1,889,375 was reclassified to notes payable. See Note 16,
"Contingent Liabilities," below.
In March, 1995 the Company restructured 100% of its $5,031,000
demand debt to term debt in the form of senior secured
convertible notes (loans from shareholders) with an original
thirty month term, amortized over 10 years, at an annual interest
rate of 9%. As part of the restructuring, an additional
$2,000,000 of senior secured convertible notes were issued by the
Company under identical terms to the restructured demand debt.
In June 1998, the Company completed the sale of newly issued 9%
Secured Convertible Notes in the principal amount of $2,000,000
initially due December 31, 1999, and extended to December 31,
2000. The notes are convertible into the Company's $0.01 par
value common stock at a rate of $0.70 per share. In conjunction
with the above transaction, the purchasers of the newly issued 9%
Secured Convertible Notes and another investor also acquired
approximately $3,900,000 in outstanding principal amount of the
Company's 9% Senior Secured Convertible Notes. The Company
agreed to reduce the conversion ratio from $1.00 to $0.70 per
share of the Company's common stock for the entire $4,421,311 of
the then outstanding 9% Senior Secured Convertible Notes. The
maturity date of the notes was extended to December 31, 2000, and
they are immediately convertible into common shares. The Company
incurred a one time non-cash interest charge of $2,530,000 in the
second quarter of 1998 as a result of the discount conversion
feature on the debt instruments discussed above. The discount is
based on the difference between the conversion ratio and the fair
value of the underlying common stock at the time. Management fee
expense of $525,000 and $210,000 was paid to an affiliate of the
holders of the new notes in 1999 and 1998.
In February 1999, Hareton Sales & Marketing, Inc., the holder of
$502,615 in face value of 9% Senior Secured Convertible Notes,
exercised its right to convert this debt into common stock of the
Company and the Company issued 718,021 shares of common stock in
full satisfaction of this debt.
In February 1999, the Company established the JB Oxford Revocable
Government Trust (the "Trust") a wholly owned subsidiary, to
purchase common stock of the Company. Third Capital Partners,
LLC serves as trustee of the Trust, without compensation. The
Company loaned the Trust $586,915, which the Trust used to
purchase 469,540 shares of the Company's Common Stock for an
average price of $1.25 per share. Pursuant to the terms of the
Trust, Third Capital Partners, LLC has the right to vote the
shares held by the Trust, but has no right to dispose of them
except upon termination of the Trust. The Trust will terminate
on February 18, 2001, or, if sooner, the completion of the
investigation relating to the Company being conducted by the U.S.
Attorney's Office, the Federal Bureau of Investigation and the
SEC. See Note 16, "Contingent Liabilities," for a description of
the investigation. Concurrent with the transaction, the Company
relinquished its right of first refusal as to any remaining
shares held by Felix Oeri and Oeri Finance, Inc.; and Oeri
Finance, Inc. forgave $728,125 in demand debt owed by the
Company. Subsequently, Oeri Finance Inc., Felix Oeri and Hareton
filed 13D Statements with the SEC indicating ownership of less
than 5% of the Company's stock.
A subordinated loan agreement, payable to Oeri Finance, Inc.,
matured on March 31, 1999 in the amount of $1,000,000. The
Company has decided to delay payment on the debt in light of the
ongoing federal investigation (see Note 16, "Contingent
Liabilities"). The Company has reclassified the $1,000,000
subordinated loan to notes payable.
The following summarizes loans from shareholders outstanding at
December 31:
1999 1998
Senior secured convertible notes $5,418,696 $5,921,311
Demand shareholder notes -- 2,617,500
Total $5,418,696 $8,538,811
Related interest expense for 1999, 1998 and 1997 was $491,824,
$496,730 and $397,918 for the convertible notes. Interest expense
for 1998 and 1997 were $235,778 and $129,324 for the demand
notes. Due to the related party nature and terms of the
shareholder loans, the fair market value of such financial
instruments cannot be estimated.
Note 14. Options and Warrants
At December 31, 1999, the Company had three stock option plans,
each of which is described below. Under APB Opinion 25, because
the exercise price of the Company's employee stock options equals
the market price of the underlying stock on the date of grant, no
compensation cost is recognized.
The Company has adopted an employee stock option plan (the
"Plan") pursuant to which 920,000 shares of common stock have
been reserved for issuance to officers and full-time employees of
the Company. The Plan is administered by the Company's Board of
Directors which determines, among other things, the persons to be
granted options under the Plan, the number of shares subject to
each option and the option price, which shall not be less than
market value.
The Company has adopted a non-employee directors' stock option
plan (the "Director's Plan") pursuant to which 950,000 shares of
common stock have been reserved for issuance to directors who are
not employees of the Company. The Director's Plan is
administered by the Company's Board of Directors which
determines, among other things, the persons to be granted options
under the Director's Plan, the number of shares subject to each
option and the option price, which shall not be less than market
value. In addition, any action under the Director's Plan, any
action thereunder must be approved by the affirmative vote of a
majority of the directors who are not then eligible to
participate in the Director's Plan.
The Company has adopted the 1998 Stock Option and Award Plan (the
"1998 Plan"), pursuant to which 3,500,000 shares of common stock
have been reserved for issuance to officers, employee directors
and key employees of the Company. The Plan is administered by
the Company's Compensation Committee of the Board of Directors
which determines, among other things, the persons to be granted
options under the 1998 Plan, the number of shares subject to each
option and the option price, which shall not be less than market
value for incentive options. The Company has issued 2,103,500
options to executive officers of the Company pursuant to the 1998
Plan.
SFAS 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 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 1999, 1998, and 1997,
respectively: expected dividend yield of 0%; expected volatility
ranging from 22% to 38%; risk-free interest rates ranging from
5.09% to 6.89%; and expected life ranging from 3 to 10 years.
The weighted average fair value of options granted during 1999,
1998 and 1997 was $2.82, $0.78, and $0.60, respectively.
Under the accounting provisions of SFAS 123, the Company's net
income and earnings per share would have been reduced to the pro
forma amounts indicated below:
For The Years Ended December
31,
1999 1998 1997
Net income (loss):
As reported $10,444,630 $(1,838,606) $1,522,685
Pro forma 9,569,308 (2,624,276) 1,501,085
Basic earnings per share:
As reported $0.73 $(0.13) $0.12
Pro forma 0.67 (0.19) 0.11
Diluted earnings per share:
As reported $0.45 $(0.13) $0.09
Pro forma 0.41 (0.19) 0.09
Due to the fact that many of the Company's stock options vest
over a number of years and additional awards are made each year,
the above pro forma numbers are not indicative of the financial
impact had the disclosure provisions of FASB 123 been applicable
to all years of previous option grants. The above numbers do not
include the effect of options granted prior to 1996 that vested
from 1996 to 1999.
A summary of the status of the Company's stock options as of
December 31, 1999, 1998, and 1997, and changes during the years
ending on those date is presented below:
December 31,1999 December 31,1998 December 31, 1997
Weighted Weighted Weighted
Shares average Shares average Shares average
Outstanding
at beginning
of year 2,247,500 $1.47 965,000 $1.82 2,271,692 $1.28
Granted 553,500 7.50 1,685,000 1.29 205,000 1.79
Exercised (229,000) 1.72 -- -- (1,275,000) 0.90
Forfeited -- -- (402,500) 1.59 (236,692) 1.64
Outstanding
at end of
year 2,572,000 2.74 2,247,500 1.47 965,000 1.82
Options
exercisable
at year-end 1,177,996 $2.59 600,000 1.93 800,000 $1.82
Weighted-
average
fair value of
options granted
during the year $2.82 $0.78 $0.60
Information relating to stock options and warrants at December
31, 1999, summarized by exercise price are as follows:
Options Outstanding Options Exercisable
Number Weighted Weighted Number Weighted
Outstandi -Average -Average Exercisab -Average
Exercise ng at Contract Exercise le at Exercise
Prices 12/31/99 ual Life Price 12/31/99 Price
$0.63 25,000 9 $0.63 25,000 $0.63
1.08 50,000 5 1.08 50,000 1.08
1.13 5,000 2 1.13 5,000 1.13
1.22 50,000 8 1.22 50,000 1.22
1.31 1,550,000 8 1.31 516,666 1.31
1.32 10,000 9 1.32 3,333 1.32
1.78 13,500 7 1.78 13,500 1.78
1.94 50,000 6 1.94 50,000 1.94
1.97 15,000 7 1.97 15,000 1.97
2.25 200,000 6 2.25 200,000 2.25
2.32 50,000 7 2.32 50,000 2.32
7.44 531,000 10 7.44 176,997
9.00 22,500 9 9.00 22,500
Total 2,572,000 7 $2.74 1,177,996 $2.59
Note 15. Regulatory Requirements
JBOC is subject to the Securities and Exchange Commission's
Uniform Net Capital Rule (Rule 15c3-1), which requires the
maintenance of minimum net capital. JBOC has elected to use the
alternative method permitted by the Rule, which requires it to
maintain minimum net capital, as defined, equal to the greater of
$250,000 or two percent of aggregate debit balances arising from
customer transactions, as defined. The Rule also provides, among
other things, for a restriction on the payment of cash dividends,
payments on subordinated borrowings or the repurchase of capital
stock if the resulting excess net capital would fall below 5% of
aggregate debits.
At December 31, 1999, JBOC had net capital of $27,491,404, which
was $18,699,718 in excess of the minimum amount required. At
December 31, 1998, JBOC had net capital of $17,754,370, which was
$12,352,063 in excess of the minimum amount required.
Note 16. Commitments and Contingent Liabilities
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
1999, 1998, and 1997 amounted to $65,042, $40,799 and $43,731.
The Company has an Employee Stock Ownership Plan which covers
employees of the Company. Contributions to the Plan are determined
annually be the Board of Directors of the Company. No contributions
have been made for the years ended December 31, 1999, 1998 and 1997.
The Company and/or its subsidiaries are defendants in several
lawsuits and arbitrations the most significant of which follow:
a)In November 1997, in the Third Judicial District Court
of the State of Utah, a claim was filed by a former officer
and director of the Company, Mr. Stratton, alleging breach of
an employment agreement with OTRA Clearing Inc. (a subsidiary
of the Company, later known as Reynolds Kendrick Stratton,
Inc., which as been inactive since July 1994, but formerly
operated as a broker-dealer). Mr. Stratton alleges the
agreement is binding on the Company and claims that he is owed
damages of not less than $1,200,000, comprised of additional
compensation, insurance benefits, and vacation pay. The
Company has filed an answer denying that Mr. Stratton is owed
any additional amounts. The Company believes that it has paid
all compensation due under said agreement, and the Company
does not believe that the matter will have a material adverse
impact upon the Company. Accordingly, no provision for any
liability that might result has been made in the accompanying
financial statements.
b) On February 14, 2000, the Company reached a settlement
with the United States Attorney's Office for the Central
District of California ("USAO") in the USAO's investigation of
the Company's prior management. While the Company maintains
its innocence, it has agreed to pay a total of $2,000,000 over
three years to settle the USAO matter and to reimburse the
USAO for the substantial expense associated with the two and a
half-year investigation. The Company does not believe that
current management was the subject of the investigation and
the USAO did not bring charges against the Company. Of the
total, the Company paid $500,000 in the first quarter of 2000
and the remainder will be paid if equal annual installments
over three years. The Company recognized a charge in the
fourth quarter of 1999 to account for the settlement. While
the settlement brings a resolution to the USAO's
investigation, the investigation by the Securities and
Exchange Commission (the "SEC") is ongoing, see Item 3. Legal
Proceedings, above. Management continues to cooperate with
the SEC and is hopeful that this investigation will be
settled, but can make no assurance as to if or when it might
be resolved. If on or before February 14, 2001 the Company
enters into a settlement with the SEC that involves a payment
of $1,000,000 or more to the SEC, the USAO has agreed that
JBOH's obligation to the USAO would be reduced by $500,000.
Future annual minimum rental payments required under operating
leases that have initial or remaining non-cancelable lease terms
in excess of one year as of December 31, 1999, were as follows:
Year ending
December 31:
2000 $2,285,010
2001 2,013,862
2002 1,368,357
2003 287,338
2004 175,450
Thereafter 263,175
$6,393,192
The Company received certain concessions for a lease included
above which is being amortized ratably over the lease term.
Included in the above commitments is a lease on the Boston
office, which the Company has closed. This property has been
sublet for terms substantially the same as the original
commitment. The Boston office commitment is $127,266 and $42,422
for the years ended December 31, 2000 and 2001 respectively.
Rent expense was as follows:
Year ending
December 31:
1999 $2,335,472
1998 2,279,026
1997 1,995,852
Note 17. Financial Instruments With Off-Balance Sheet Risk
In the normal course of business, the Company's customer and
correspondent clearing activities involve the execution,
settlement and financing of various customer securities
transactions. These activities may expose the Company to off-
balance-sheet credit risk in the event that the customer is
unable to fulfill their contracted obligations. The Company's
customer securities activities are transacted on either a cash or
margin basis. In margin transactions, the Company extends credit
to the customer, subject to various regulatory and internal
margin requirements, collateralized by cash and securities in the
customer's account. The Company monitors collateral and required
margin levels daily and, pursuant to such guidelines, requests
customers to deposit additional collateral or
reduce securities positions when necessary. The Company is also
exposed to credit risk when its margin accounts or a margin
account is collateralized by a concentration of a particular
security and when that security decreases in value.
In addition, the Company executes and clears customer short sale
transactions. Such transactions may expose the Company to off-
balance sheet risk in the event that margin requirements are not
sufficient to fully cover losses that customers may incur. In
the event that the customer fails to satisfy their obligations,
the Company may be required to purchase financial instruments at
prevailing market prices in order to fulfill the customer's
obligations.
In accordance with industry practice, the Company records
customer transactions on a settlement date basis, which is
generally three business days after trade date. The Company is
therefore exposed to risk of loss on these transactions in the
event of the customer's or broker's inability to meet the terms
of their contractual obligations, in which case the Company may
have to purchase or sell financial instruments at prevailing
market prices. Settlement of these transactions is not expected
to have a material effect on the Company's statement of financial
condition.
As a securities broker-dealer, the Company provides services to
both individual investors and correspondents. The Company's
exposure to credit risk associated with the nonperformance of
these customers in fulfilling their contractual obligations
pursuant to securities transactions can be directly impacted by
volatile trading markets.
The Company is a market maker for approximately 730 public
corporations whose stocks are traded on the NASDAQ National
Market System, NYSE or other national exchanges. The Company
selects companies in which it makes a market based on a review of
the current market activity, and also to facilitate trading
activity of its own and correspondent's clients. Market making
may result in a concentration of securities which may expose the
Company to additional off-balance sheet risk.
Note 18. Supplemental Disclosures of Cash Flow Information
1999 1998 1997
Cash paid during the year for:
Interest $14,649,676 $14,431,512 $14,128,501
Income taxes 9,201,400 287,892 1,008,672
Supplemental disclosure of non-cash investing and financing
activities:
The Company incurred a non-cash interest charge of $2,530,000 as
a result of the discount conversion feature on the subordinated
convertible debt instruments issued and re-priced during 1998.
Note 19. Unaudited Supplemental Quarterly Financial Information
Below is selected quarterly financial data for each fiscal
quarter during the years ended December 31, 1999 and 1998. The
table below includes a restatement of non-cash interest expense
reported in the second quarter 1998 Form 10-Q. The original
filing reported non-cash interest expense of $560,000, this was
subsequently restated to $2,530,000. This information should be
read in conjunction with the consolidated financial statements
included elsewhere herein.
First Second Third Fourth
Quarter Quarter Quarter Quarter
1999
Revenues $22,993,599 $26,871,846 $22,914,635 $31,431,701
Income (loss)
before taxes 5,485,433 7,877,762 5,039,712 1,171,675
Net Income (loss)
Before
Extraordinary Item 3,266,225 4,346,970 2,820,615 (426,055)
Net income (loss) 3,703,100 4,346,970 2,820,615 (426,055)
Basic earnings (loss)
Before
Extraordinary Item 0.23 0.30 0.20 (0.03)
Basic earnings (loss)
per share 0.26 0.30 0.20 (0.03)
Diluted earnings (loss)
Before
Extraordinary Item 0.15 0.18 0.12 (0.03)
Diluted earnings (loss)
per share 0.15 0.18 0.12 (0.03)
1998
Revenues $16,002,424 $16,519,608 $15,309,741 $19,436,552
Income (loss) before
taxes (138,529) (3,036,975) (981,831) 2,839,981
Net income (loss) (85,900) (2,839,604) (603,831) 1,690,730
Basic earnings per
share (0.01) (0.20) (0.04) 0.12
Diluted earnings per
share (0.01) (0.20) (0.04) 0.08
PART III
Items 10, 11, 12 and 13. Directors and Executive Officers of the
Registrant; Executive Compensation; Security Ownership of Certain
Beneficial Owners and Management; and Certain Relationships and
Related Transactions
The information required by these Items is omitted because the
Company will file, by April 28, 2000, a definitive proxy
statement pursuant to Regulation 14A, which information, other
than the section entitled _Board of Directors Report on Executive
Compensation_ or matters related to such report contained
therein, is incorporated herein by reference as if set out in
full.
PART IV
Item 14. Exhibits, Financial Statement Schedules And Reports On
Form 8-K
The financial statements and schedules required to be filed by
Item 8 of this form and paragraph (d) are contained herein as
follows:
Page
Report of Independent Public Accountants __
Report of Independent Certified Public Accountants __
Consolidated Statements of Financial Condition December __
31, 1999, and 1998
Consolidated Statements of Operations Years Ended December __
31, 1999, 1998, and 1997
Consolidated Statements of Changes in Shareholders' Equity __
(Deficit)Years Ended December 31, 1999, 1998, and 1997
Consolidated Statements of Cash Flows Years Ended December __
31, 1999, 1998, and 1997
Notes to Consolidated Financial Statements __
Financial Statement Schedule I - Condensed Financial __
Statements (Parent Company Only)
Financial Statement Schedule II - Valuation and Qualifying __
Accounts
Listed below are exhibits as required by Item 601 of Regulation
S-K:
Exhibit No. Description
2.1 Purchase Agreement dated as of May 21, 1998 by and among the
Company, Third Capital Partners, LLC, a Tennessee limited
liability company, 3421643 Canada Inc., a Canadian
corporation, Felix A. Oeri and Oeri Finance Inc.
(incorporated herein by reference to Exhibit 2.1 of JBOH's
Current Report on Form 8-K, dated June 18, 1998, filed with
the SEC).
3.1 Articles of Incorporation of JBOH, as amended, October 16,
1990 (incorporated herein by reference to Exhibit 1 of
JBOH's Current Report on Form 8-K, dated October 30, 1990,
filed with the SEC).
3.2 By-Laws of JBOH, as amended November 24, 1998, filed
herewith.
4.1 9% Secured Convertible Note Due December 31, 1999 in the
principal amount of $2,000,000 between the Company and Third
Capital Partners, LLC (incorporated herein by reference to
Exhibit 4.1 of JBOH's Current Report on Form 8-K, dated
June 18, 1998, filed with the SEC).
10.1 Standard Office Lease between St. George Beverly Hills, Inc.
and OTRA Clearing, Inc., dated January 31, 1992, to lease
Beverly Hills office space (incorporated herein by reference
to Exhibit 10.3 of JBOH's Annual Report on Form 10-K for the
year ended December 31, 1991, filed with the SEC).
10.2 Data Service Agreement between Securities Industry Software
Corp. and OTRA Clearing, Inc., dated June 8, 1992
(incorporated herein by reference to Exhibit 10 of JBOH's
Quarterly Report on Form 10-Q for the period ended June 30,
1992, filed with the SEC).
10.3 Assignment and Assumption Agreement for Beverly Hills office
space between JBOH and RKSI, executed as of December 31,
1993 (incorporated herein by reference to Exhibit 10.8 of
the JBOH Form 10-K filed with the SEC for the year ended
December 31, 1993).
10.4 Commercial office lease Agreement between Bank of
Communications. and JB Oxford & Company, executed as of
June, 1995, to lease New York office space (incorporated
herein by reference to Exhibit 10.1 of the JBOH Form 10-Q
filed with the SEC for the quarter ended June 30, 1995).
10.5 Commercial office lease Agreement between Brickell Square
Corporation Limited and JB Oxford Holdings, Inc., executed
as of February 21, 1996, to lease Miami office space,
(incorporated herein by reference to Exhibit 10.16 of the
JBOH Form 10-K filed with the SEC for the year ended
December 31, 1995).
10.6 JB Oxford Revocable Government Trust Agreement, dated as of
February 18, 1999, by and between JB Oxford Holdings, Inc.
and Third Capital Partners, LLC, as Trustee (incorporated
herein by reference to Exhibit 10.1 of the JBOH Current
Report on Form 8-K, dated March 8, 1999, filed with the
SEC).
10.7 Extension Agreement dated November 8, 1999, between the
Company and Third Capital Partners, LLC, extending the
maturity date of the 9% Senior Secured Convertible Note in
the principal amount of $3,418,969 (incorporated herein by
reference to Exhibit 4.3 of the JBOH Form 10-Q filed with
the SEC for the quarter ended September 30, 1999).
10.8 Extension Agreement dated November 8, 1999, between the
Company and Third Capital Partners, LLC, extending the
maturity date of the 9% Secured Convertible Note in the
principal amount of $2,000,000 (incorporated herein by
reference to Exhibit 4.4 of the JBOH Form 10-Q filed with
the SEC for the quarter ended September 30, 1999).
27 Financial Data Schedule, filed herewith.
28 Employee Stock Ownership Plan (incorporated herein by
reference to Exhibit 28 of JBOH's Annual Report on Form 10-K
for the year ended December 31, 1988, filed with the SEC).
Reports on Form 8-K
A Report on Form 8-K was filed on February 17, 2000, reporting
under Item 5. Other Events, the settlement reached between the
Company and the Unites States Attorney's Office for the Central
District of California (the "USAO") in connection with the USAO's
investigation of the prior management and ownership of the
Company.
Schedule I. Condensed Financial Information (Parent Company
Only)
JB Oxford Holdings, Inc. Statements of Financial Condition
December 31,
1999 1998
Assets:
Cash and cash equivalents $917,591 $1,026,599
Investment in subsidiaries 34,945,111 23,048,220
Receivables from subsidiaries 2,970,570 1,925,283
Income taxes refundable 1,012,881 717,396
Deferred income taxes 1,479,425 1,079,840
Other assets 630,384 540,193
Total assets $41,955,962 $28,337,531
Liabilities and shareholders' equity:
Liabilities:
Accounts payable and accrued
liabilities $3,229,575 $949,703
Net payables to subsidiaries 5,041,819 2,505,336
Income taxes payable -- 596,076
Loans from shareholders 5,418,696 8,538,811
Notes payable 1,895,124 130,997
Total liabilities 15,585,214 12,720,923
Commitments and contingent liabilities
Shareholders' equity :
Common stock ($.01 par value
100,000,000 shares authorized;
15,088,226 and 14,141,205 shares
issued) 150,882 141,412
Additional paid-in capital 16,232,281 15,345,316
Retained earnings 10,772,290 327,660
Treasury stock, 704,040 and 234,500 (784,705) (197,780)
shares at cost
Total shareholders' equity 26,370,748 15,616,608
Total liabilities and shareholders' $41,955,962 $28,337,531
equity
See accompanying notes to Condensed Financial Information.
JB Oxford Holdings, Inc. Statements Of Operations
For The Years Ended December 31
1999 1998 1997
Revenues $3,060,012 $1,608,053 $1,534,483
Expenses
General and administrative 3,527,983 2,400,291 1,120,941
Interest expense 683,652 736,668 559,664
Bad debt and settlement 2,378,756 46,014 1,837,209
expense
Total Expenses 6,590,391 3,182,973 3,517,814
Income (Loss) before equity
interest in subsidiary income (3,530,379) (1,574,920) (1,983,331)
Equity interest in subsidiary
income (loss) 20,761,614 2,787,565 4,605,888
Income (Loss) Before Income 17,231,235 1,212,645 2,622,557
Taxes and Extra-ordinary Item
Non cash interest charge -- 2,530,000 --
Income Tax Provision (Benefit 7,223,480 521,251 1,099,872
Income (Loss) Before Extra- 10,007,755 (1,838,606) 1,522,685
ordinary Item
Extra-ordinary Item:
Forgiveness of Debt, Net of 436,875 -- --
Taxes
Net Income (Loss) $10,444,630 $(1,838,606) $1,522,685
JB Oxford Holdings, Inc. Statements Of Cash Flows
For The Years Ended December 31
1999 1998 1997
Net cash provided by (used in)
operating activities $465,114 $(106,463) $(3,466,659)
flows from investing
activities:
Investment in subsidiaries -- (450,000)
Capital expenditures (255,769) (266,588) --
Net cash provided by (used in) (255,769) (266,588) (450,000)
investing activities
Cash flows from financing
activities:
Notes payable (125,248) 97,407 (100,068)
Loans from shareholders -- 1,250,000 2,867,500
Issuance of stock 393,820 -- 1,327,630
Purchase of treasury stock (586,925) (197,780) --
Payment of cash dividends - -- -- (85,479)
preferred stock
Net cash provided by (used in) (318,353) 1,149,627 4,009,583
financing activities
Net increase (decrease) in cash (109,008) 776,576 92,924
and cash equivalents
Cash and cash equivalents at 1,026,599 250,023 157,099
beginning of year
Cash and cash equivalents at end
of year $917,591 $1,026,599 $250,023
See accompanying notes to Condensed Financial Information.
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 on the equity method.
The accompanying condensed financial information should be read
with the consolidated financial statements and notes to
consolidated financial statements.
Note 2. Revenues
The Company receives substantially all of its revenues from its
subsidiaries. Management fees of $1,650,000, $1,200,000 and
$1,300,000 were received from JBOC in 1999, 1998 and 1997,
respectively. The balance of the revenues for 1999, 1998 and
1997 consists of rents received from subsidiaries for office
space and furniture and equipment.
Note 3. Restrictions on the Transfer of Funds from
Subsidiary to the Parent
JBOC, as part of its normal broker-dealer activity has minimum
capital requirements as imposed by regulatory agencies which
restricts the amount of funds that can be transferred to the
Parent Company. See Note 14 to the consolidated financial
statements for discussion of these requirements.
Note 4. Loans from Shareholders
The Company obtained $2,867,500 in demand notes from shareholders
during 1997. This debt bears interest at 8.25%, which is payable
quarterly. The Company has decided to delay payment on the debt
in light of the ongoing federal investigation (see Note 16,
"Contingent Liabilities," to the financial statements).
In March, 1995 the Company restructured 100% of its $5,031,000
demand debt to term debt in the form of senior secured
convertible notes (loans from shareholders) with an original
thirty month term, amortized over 10 years, at an annual interest
rate of 9%. As part of the restructuring, an additional
$2,000,000 of senior secured convertible notes were issued by the
Company under identical terms to the restructured demand debt.
In June 1998, the Company completed the sale of newly issued 9%
Secured Convertible Notes in the principal amount of $2,000,000
initially due December 31, 1999, and extended to December 31,
2000. The notes are convertible into the Company's $0.01 par
value common stock at a rate of $0.70 per share. In conjunction
with the above transaction, the purchasers of the newly issued 9%
Secured Convertible Notes and another investor also acquired
approximately $3,900,000 in outstanding principal amount of the
Company's 9% Senior Secured Convertible Notes. The Company
agreed to reduce the conversion ratio from $1.00 to $0.70 per
share of the Company's common stock for the entire $4,421,311 of
outstanding 9% Senior Secured Convertible Notes. The maturity
date of the notes was extended to December 31, 2000, and they are
immediately convertible into common shares. The Company incurred
a one time non-cash interest charge of $2,530,000 in the second
quarter of 1998 as a result of the discount conversion feature on
the debt instruments discussed above. The discount is based on
the difference between the conversion ratio and the fair value of
the underlying common stock at the time. Management fee expense
of $525,000 and $210,000 was paid to an affiliate of the holders
of the new notes in 1999 and 1998.
In February 1999, Hareton Sales & Marketing, Inc., the holder of
$502,615 in face value of 9% Senior Secured Convertible Notes,
exercised it right to convert this debt into common stock of the
Company and the Company issued 718,021 shares of common stock in
full satisfaction of this debt.
In February 1999, the Company established the JB Oxford Revocable
Government Trust (the "Trust"), a wholly owned subsidiary, to
purchase common stock of the Company. Third Capital Partners,
LLC serves as trustee of the Trust, without compensation. The
Company loaned the Trust $586,915, which the Trust used to
purchase 469,540 shares of the Company's Common Stock for an
average price of $1.25 per share. Pursuant to the terms of the
Trust, Third Capital Partners, LLC has the right to vote the
shares held by the Trust, but has no right to dispose of them
except upon termination of the Trust. The Trust will terminate
on February 18, 2001, or, if sooner, the completion of the
investigation relating to the Company being conducted by the U.S.
Attorney's Office, the Federal Bureau of Investigation and the
SEC. See Note 16, "Contingent Liabilities," to the financial
statements for a description of the investigation. Concurrent
with the transaction, the Company relinquished its right of first
refusal as to any remaining shares held by Felix Oeri and Oeri
Finance, Inc.; and Oeri Finance, Inc. forgave $728,125 in demand
debt owed by the Company. Subsequently, Oeri Finance Inc., Felix
Oeri and Hareton filed 13D Statements with the SEC indicating
ownership of less than 5% of the Company's stock.
A subordinated loan agreement, payable to Oeri Finance, Inc.,
matured on March 31, 1999 in the amount of $1,000,000. The
Company has decided to delay payment on the debt in light of the
ongoing federal investigation (see Note 16, "Contingent
Liabilities," to the financial statements). The Company has
reclassified the $1,000,000 subordinated loan and $1,889,375 in
demand shareholder notes to notes payable.
The following summarizes loans from shareholders outstanding at
December 31:
1999 1998
Senior secured convertible notes $5,418,696 $5,921,311
Demand shareholder notes -- 2,617,500
Total $5,418,696 $8,538,811
Related interest expense for 1999, 1998 and 1997 was $491,824,
$496,730 and $397,918 for the convertible notes. Interest expense
for 1998 and 1997 were $235,778 and $129,324 for the demand
notes. Due to the related party nature and terms of the
shareholder loans, the fair market value of such financial
instruments cannot be estimated.
Note 5. Commitments and Contingent Liabilities
The Company is a defendant in several lawsuits and arbitrations.
The most significant of which is a District Court action
commenced in November 1997, in the Third Judicial District Court
of the State of Utah. The claim is brought by a former officer
and director of the Company and alleges breach of an employment
agreement with OTRA Clearing Inc., which Mr. Stratton alleges is
binding on the Company. Mr. Stratton alleges that he is owed
damages of not less than $1,200,000, comprised of additional
compensation, insurance benefits and vacation pay. The Company
believes that it has paid all compensation due under said
agreement, and the Company does not believe that the matter will
have a material adverse impact upon the Company. Accordingly, no
provision for any liability that might result has been made in
the accompanying financial statements.
On February 14, 2000, the Company reached a settlement with the
United States Attorney's Office for the Central District of
California ("USAO") in the USAO's investigation of the Company's
prior management. While the Company maintains its innocence, it
has agreed to pay a total of $2,000,000 over three years to
settle the USAO matter and to reimburse the USAO for the
substantial expense associated with the two and a half-year
investigation. The Company does not believe that current
management was the subject of the investigation and the USAO did
not bring charges against the Company. Of the total, the Company
paid $500,000 in the first quarter of 2000 and the remainder will
be paid if equal annual installments over three years. The
Company recognized a charge in the fourth quarter of 1999 to
account for the settlement. While the settlement brings a
resolution to the USAO's investigation, the investigation by the
Securities and Exchange Commission (the "SEC") is ongoing, see
Item 3. Legal Proceedings, above. Management continues to
cooperate with the SEC and is hopeful that this investigation
will be settled, but can make no assurance as to if or when it
might be resolved. If on or before February 14, 2001 the Company
enters into a settlement with the SEC that involves a payment of
$1,000,000 or more to the SEC, the USAO has agreed that JBOH's
obligation to the USAO would be reduced by $500,000.
The ultimate outcome of these uncertainties discussed above is
unknown. Moreover, due to the nature of arbitration matters, it
is impossible to predict the ultimate outcome and/or range of
loss. Accordingly, no provision for any liability that might
result has been made in the accompanying financial statements.
Future annual minimum rental payments required under operating
leases that have initial or remaining non-cancelable lease terms
in excess of one year as of December 31, 1999, were as follows:
Year ending
December 31:
2000 $1,682,430
2001 1,503,787
2002 1,141,757
2003 111,888
Thereafter --
Total $4,439,862
Schedule II - Valuation and Qualifying Accounts
Additions
Balance charged
at to costs Balance at
beginning and end of
of period expenses Deductions period
1999
Allowance for:
Receivable from
broker/ dealers and
clearing
organizations $2,103,802 $ --$(2,103,802) $ --
Receivable from
customers 5,354,864 1,829,102 (5,582,788) 1,601,178
Other Receivables 1,979,793 -- (1,979,793) --
1998
Allowance for:
Receivable from
broker/ dealers and
clearing
organizations $2,103,802 $ -- $ -- $2,103,802
Receivable from
customers 4,957,781 2,019,454 (1,622,371) 5,354,864
Other Receivables 1,979,793 -- -- 1,979,793
1997
Allowance for:
Receivable from
broker/ dealers and
clearing
organizations $2,103,802 $ -- $ -- $2,103,802
Receivable from
customers 3,931,080 1,335,412 (308,711) 4,957,781
Other Receivables 1,979,793 -- -- 1,979,793
Deductions represent amounts written off.
Pursuant to the requirements of Section 13 or 15(d) of the
Securities Exchange Act of 1934, JB Oxford Holdings, Inc. has
duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
JB Oxford Holdings, Inc.
___/s/Christopher L. Jarratt
Christopher L. Jarratt,
Chairman of the Board and
Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of
1934, this report has been signed below by the following persons
on behalf of JB Oxford Holdings, Inc. and in the capacities and
on the date indicated:
___/s/Christopher L. Jarratt _________/s/James G. Lewis
Christopher L. Jarratt James G. Lewis, President,
Chairman of the Board and Officer and Director
Chief Executive Officer
___/s/Michael J. Chiodo________ ____/s/Mark M. Grossi________
Michael J. Chiodo Mark M. Grossi, Director
Chief Financial Officer, Treasurer,
Chief Accounting Officer
____/s/David G. Mahood______
David G. Mahood, Director
March 29, 2000
Exhibit No. 3.2
AMENDED AND RESTATED BYLAWS OF
JB OXFORD HOLDINGS, INC.
a Utah Corporation
ARTICLE I
OFFICES
Section 1. PRINCIPAL OFFICES. The principal office for
the transaction of the business of the Corporation is fixed and
located at 9665 Wilshire Boulevard, Beverly Hills, California
90212. The Board of Directors of the Corporation (the "Board")
may change the principal office from one location to another as
from time to time may be necessary. Any change of this location
shall be noted by the Secretary on these Amended and Restated
Bylaws (the "Bylaws") opposite this section, or this section may
be amended to state the new location.
Section 2. OTHER OFFICES. The Board may, at any time,
establish branch or subordinate offices at any place or places.
ARTICLE II
MEETINGS OF SHAREHOLDERS
Section 1. ANNUAL MEETING. The annual meeting of
shareholders shall be held at such date, time and place, either
within or without the State of Utah, as may be designated by
resolution of the Board. At this meeting, directors shall be
elected, and any other proper business within the power of the
shareholders may be transacted.
Section 2. SPECIAL MEETINGS. A special shareholders'
meeting for any purpose whatsoever may be called at any time by
the Chairman of the Board, the President, any Vice-President,
the Board, or one or more shareholder holding not less than
one-fifth (1/5) of the voting power or the Corporation. The
date, time and place of a special shareholders' meeting shall be
determined by the Board. No business other than that specified
in the notice of special meeting shall be considered at any
special meeting.
Section 3. NOTICE OF MEETINGS. Written notices specifying
the place, day, and hour of the meeting and, in the case of a
special meeting, the general nature of the business to be
transacted, shall be given not less than ten (10) days, nor more
than sixty (60) days before the date of the meeting. Such
notice must be given personally or by mail or by other means of
written communication, addressed to the shareholder at the
address appearing on the books of the Corporation or given by
the shareholder to the Corporation for the purpose of notice.
If no such address appears or is given by a shareholder of
record entitled to vote at the meeting, notice is given at the
place where the principal executive office of the corporation is
located, or by publication at least once in a newspaper of
general circulation in the county where the principal executive
office is located.
The notice shall be deemed to have been given at the time
when delivered personally or deposited in the mail or sent by
other means of written communication. An affidavit of mailing
of any notice in accordance with the provisions of this Section
executed by the Secretary shall be prima facie evidence of the
giving of notice.
Section 4. WAIVER OF NOTICE. A shareholder may waive
notice of any annual or special meeting by signing a written
notice of waiver either before or after the date of such
meeting.
Section 5. QUORUM. The presence in person or by proxy of
the holders of at least fifty-one percent (51%) of the
outstanding shares entitled to vote at any meeting of the
shareholders shall constitute a quorum for the transaction of
business. The shareholders present at a duly called or held
meeting at which a quorum is present may continue to do business
until adjournment notwithstanding the withdrawal of enough
shareholders to leave less than a quorum, any action taken
(other than adjournment) is approved by at least a majority of
the shares required to constitute a quorum.
Section 6. PROXIES. Every person entitled to vote at a
shareholders meeting of the Corporation, or entitled to execute
written consent authorizing action in lieu of a meeting, may do
so either in person or by proxy executed in writing by the
shareholder or by his duly authorized attorney-in-fact. No
proxy shall be valid after eleven (11) months from the dated of
its execution unless otherwise provided in the proxy. All
proxies, to be valid, must be filed and recorded with the
Secretary of the Corporation at least forty-eight (48) hours
prior to any meeting in which such proxies are to be voted. All
questions attaching or concerning the validity or sufficiency of
such proxy shall he decided by the Secretary and such decision
shall be final.
Section 7. LIST OF SHAREHOLDERS. The Secretary shall
prepare, at least ten (10) days before every meeting of
shareholders, a complete list of the shareholders entitled to
vote at the meeting, arrange in alphabetical order and showing
address of each shareholder and the number of shares registered
in the name of each shareholder. Such list shall be open to the
examination of any shareholder, for any purpose germane to the
meeting, during ordinary business hours, for a period of at
least ten (10) days prior to the meeting, either at the place
within the city where the meeting is to be held, which place
shall be specified in the Notice of the meeting, or if not so
specified, at the place where the meeting is to be held. The
list shall be produced annd kept at the time and place of the
meeting during the whole time thereof and may be inspected by
any shareholder present.
Section 8. INSPECTORS. At each meeting of shareholders,
the chairman of the meeting shall appoint one or more inspectors
of voting, whose duty it shall be to receive and count the
ballots and make a written report showing the result of the
balloting.
Section 9. VOTING. Except as otherwise provided in the
Articles of Incorporation or by agreement or by the Utah General
Corporation Law, shareholders at the close of business on the
record date are entitled to notice and to vote. The record date
for this purpose shall be determined by the Board and shall be
not less than 10 days nor more than 70 days before the meeting
or action requiring a determination of shareholders.
Section 10. ELECTION BY BALLOT. Election for directors
need not be by ballot unless a shareholder demands election by
ballot at the meeting and before the voting begins. The
candidates receiving the highest number of votes, up to the
number of directorss to be elected, shall be elected.
Section 11. ORDER OF BUSINESS. The order of business at
the annual meeting of the shareholders insofar as possible, and
at all other meetings of shareholders, shall be as follows:
1. Call to order.
2. Proof of notice of meeting.
3. Reading and disposing of any unapproved minutes.
4. Reports of officers.
5. Reports of committees.
6. Election of Directors.
7. Disposition of unfinished business.
8. Disposition of new business.
9. Adjournment.
Section 12. ADVANCE NOTICE OF SHAREHOLDER PROPOSED
BUSINESS. At a meeting of the shareholders, only such business
may be conducted as is properly brought before the meeting. To
be properly brought before a meeting, business must be either
(i) specified in the notice of meeting (or any supplement
thereto) given by or at the direction of the Board,
(ii) otherwise properly brought before the meeting by or at the
direction of the Board, or (iii) otherwise properly brought
before the meeting by a shareholder. In addition to any other
applicable requirements, including any requirements under Rule
14a-8, as amended from time to time, under the Securities
Exchange Act of 1934, as amended (the "Exchange Act"), for
business to be properly brought before a meeting of the
shareholders, the shareholder must have given timely notice
thereof in writing to the Secretary. To be timely, a
shareholder's notice must be delivered to or mailed and received
at the principal executive offices of the Corporation not less
than sixty days nor more than ninety days prior to the meeting;
provided, however, that in the event that less than seventy
days' notice or prior public disclosure of the date of the
meeting is given or made to shareholders, notice by the
shareholder to be timely must be so received not later than the
close of business on the tenth day following the day on which
such notice of the date of the meeting was mailed or such public
disclosure was made, whichever occurs first; and provided
further that in the event Rule 14a-8 under the Exchange Act,
requires that notice of a shareholder's proposal be received by
the Corporation more than ninety days prior to the meeting, such
longer notice period shall control. A shareholder's notice to
the Secretary must set forth as to each matter the shareholder
proposes to bring before the meeting (i) a brief description of
the business desired to be brought before the meeting and the
reasons for conducting such business at the meeting, (ii) the
name and record address of the shareholder proposing such
business, (iii) the class and number of shares that are
beneficially owned by the shareholder, and (iv) any material
interest of the shareholder in such business.
Notwithstanding anything in these Bylaws to the contrary,
no business shall be conducted at a meeting of the shareholders
except in accordance with the procedures set forth in this
Section 12 of this Article; provided, however, that nothing in
this Section 12 shall be deemed to preclude discussion by any
shareholder of any business properly brought before such meeting
in accordance with said procedure.
The chairman at a meeting of the shareholders shall, if the
facts warrant, determine and declare to the meeting that
business was not properly brought before the meeting in
accordance with the provisions of this Section 12, and if he
should so determine, he shall so declare to the meeting and any
such business not properly brought before the meeting shall not
be transacted.
Notwithstanding anything contained in these Bylaws to the
contrary, this Section 12 shall not be altered, amended or
repealed except by the Board pursuant to the Articles of
Incorporation or by an affirmative vote of at least two-thirds
of the outstanding shares of all capital stock entitled to vote
at a shareholders' meeting duly called for such purpose.
ARTICLE III
BOARD OF DIRECTORS
Section 1. GENERAL POWERS. Subject to the provisions of
the Utah General Corporation Law, and any limitations in the
Articles of Incorporation and these Bylaws relating to actions
required to be approved by the shareholders or by the
outstanding shares, the business and affairs of the Corporation
shall be managed and all corporate powers shall be exercised by
or under the direction of the Board.
Section 2. ENUMERATION OF DIRECTORS' POWER. Without
prejudice to these general rules, and subject to the same
limitation, the Board shall have the power to:
a) Select and remove all officers, agents and
employees of the Corporation; prescribe any powers and duties
for them that are consistent with law, with the Articles of
Incorporation, and these Bylaws; fix their compensation; and
require from them security for faithful service.
(b) Change the principal executive office or the
principal business office from one location to another; cause
the Corporation to be qualified to do business in any other
state, territory, dependency, or country and conduct business
within or outside the State of Utah; and designate any place
within or outside the State of Utah for the holding of any
shareholders meeting of meetings, including annual meetings.
(c) Adopt, make, or use a corporate seal; prescribe
the forms of certificates of stock; and alter the form of the
seal and certificate.
(d) Authorize the issuance of shares of stock of
the Corporation on any lawful terms, in consideration of money
paid, labor done, services actually rendered, debts or
securities canceled, or tangible or intangible property actually
received.
(e) Borrow money and incur indebtedness on behalf
of the Corporation, and cause to be executed and delivered for
the Corporation's purposes, in the corporate name, promissory
notes, bonds, debentures, deeds of trust, mortgages, pledges,
hypothecations, and other evidences of debt and securities.
(f) Engage in and/or adopt employment agreements,
contracts, or other employment contracts with independent
contractors, companies, government agencies, or individuals.
Section 3. NUMBER, TENURE, QUALIFICATION AND ELECTIONS.
The Board shall be fixed from time-to-time by resolution of the
Board, but shall not be less than three (3), nor shall it exceed
seven (7). At the time of the adoption of these Bylaws, the
Board shall consist of five Directors who need not be
shareholders of the corporation. The number of Directors may be
increased beyond seven (7) only by approval of the outstanding
shares of the Corporation. The Directors of the Corporation
shall be elected at the annual meeting of the shareholders and
shall serve until the next succeeding annual meeting and until
their successors have been elected and qualified.
Section 4. VACANCIES. A vacancy or vacancies on the Board
shall be deemed to exist in the event of the death, resignation,
or removal of any Director, or if the Board by resolution
declares vacant that office of a Director who has been declared
of unsound mind by an order of court or convicted of a felony,
or if the authorized number of Directors is increased, the
shareholders fail at any meeting of share-holders at which any
Director or Directors are elected, to elect the number of
Directors to be voted for at that meeting.
Any Director may resign effective on giving written notice
to the Chairman of the Board, the President, the Secretary, or
the Board, unless a notice specifies a later time for that
resignation to become effective. If the resignation of a
Director is effective at a future time, the Board may elect a
successor to take office when the resignation becomes effective.
Vacancies on the Board may be filled by a majority of the
remaining Directors, whether or not less than a quorum, or by a
sole remaining Director, except that a vacancy created by the
removal of a Director by the vote or written consent of the
shareholders or by court order may be filled only by the vote of
a majority of the shares entitled to vote represented at a duly
held meeting at which a quorum is present, or by the unanimous
written consent of the shareholders of the outstanding shares
entitled to vote. The shareholders may elect a Director or
Directors at any time to fill any vacancy or vacancies not
filled by the Directors, but any such election by written
consent shall require the consent of a majority of the
outstanding shares entitled to vote, except that filling a
vacancy created by a removal of a Director shall require the
written consent of the holders of all outstanding shares
entitled to vote.
Each Director so elected shall hold office until the next
annual meeting of the shareholders and until a successor has
been elected and qualified.
Section 5. ANNUAL MEETING. Immediately following each
annual meeting of shareholders, the Board shall hold a regular
meeting at the place that the annual meeting of shareholders was
held or at any other place that shall have been designated by
the Board for the purpose of organization, any desired election
of officers, and the transaction of other business. Notice of
this meeting shall not be required.
Section 6. NOTICE OF MEETINGS. Notice need not be given
of regular meetings of the Board, nor is it necessary to give
notice of adjourned meetings. Any written waiver of notice,
signed by a director entitled to notice, shall be deemed
equivalent to notice. Attendance of a Director at a meeting
shall constitute a waiver of notice of such meeting, except when
the Director attends a meeting for the express purpose of
objecting, at the beginning of the meeting, to the transaction
of any business because the meeting is not lawfully called or
convened. Neither the business to be transacted at, nor the
purpose of any regular or special meeting of the Directors, need
be specified in any written waiver of notice.
Section 7. PLACE OF MEETINGS AND MEETINGS BY TELEPHONE.
Regular and special meetings of the Board may be held at any
place within or outside the State of Utah that has been
designated from time to time by the Board. In the absence of
such designation, meetings shall be held at the principal
executive office of the Corporation. Any meetings regular or
special, may be held by conference telephone, or similar
communication equipment, as long as all Directors participating
in the meeting, can hear one another, and all such Directors
shall be deemed to be present in person at the meeting.
Section 8. SPECIAL MEETINGS. Special meetings of the
Board for any purpose or purposes may be called at any time by
the Chairman of the Board, the President, or the Secretary.
Section 9. MAJORITY OR QUORUM. A majority of the
authorized number of Directors constitutes a quorum of the Board
for the transaction of business except as hereinafter provided.
Section 10. TRANSACTIONS QF BOARD. Except as otherwise
provided in the Articles or these Bylaws, or by law, every act
or decision done or made by a majority of the Directors present
at a duly held meeting at which a quorum is present, is the act
of the Board, provided, however, that any meeting at which a
quorum was initially present may continue to transact business
notwithstanding the withdrawal of Directors if any action taken
is approved by at least a majority of the required quorum for
such meeting.
Section 11. ADJOURNMENT. A majority of Directors present
at any meeting, whether or not a quorum is present, may adjourn
the meeting to another time and place. If the meeting is
adjourned for more that twenty-four (24) hours, notice of the
adjournment to another time and place must be given prior to the
time of the adjourned meeting to the Directors who were present
at the time of the adjournment.
Section 12. CONDUCT OF MEETINGS. The Chairman of the
Board, or if there is no such officer, the President, or in his
absence, any Director selected by the Director present shall
preside at the meeting of the Board. The Secretary of the
Corporation or, in the Secretary's absence any person appointed
by the presiding officer, shall act as Secretary of the Board.
Section 13. ACTION WITHOUT MEETING. Any action required
or permitted to be taken by the Board may be taken without a
meeting, if all members of the Board shall individually or
collectively consent in writing to such action. Such action by
written consent shall have the same force and effect as a
unanimous vote of the Board. Such written consent(s) shall be
filed with the minutes of the proceedings of the Board.
Section 14. FEES AND COMPENSATION OF DIRECTORS. Directors
and members of committees may receive such compensation, if any,
for their services, and such reimbursement of expenses, as may
be fixed or determined by resolution of the Board. Nothing
herein contained shall be construed to preclude any Director
from serving the Corporation in any other capacity as an
officer, agent, employee, or otherwise, and receiving
compensation for such services.
Section 15. APPROVAL OF BONUSES FOR DIRECTORS AND
OFFICERS. No bonuses or share in the earnings or profits of the
Corporation shall be paid to any of the officers, Directors, or
employees of the Corporation except in accordance with a plan
duly adopted by the Board in accordance with a meeting duly
called and held for that purpose or as provided in Section 13 of
this Article.
Section 16. COMMITTEES. The Board may, by resolution,
designate, change the membership of or terminate the existence
of any committee or committees. Each committee shall consist of
one or more of the Directors of the Corporation. The Board may
designate one or more Directors as alternate members of any
committee, who may replace any absent or disqualified member at
any meeting of the committee. In the absence or
disqualification of a member of the committee, the member or
members of the committee present at any meeting and not
disqualified from voting, whether or not he or they constitute a
quorum, may unanimously appoint another member of the Board to
act at the meeting in place of any such absent or disqualified
member. Any such committee, to the extent permitted by the Utah
General Corporation Law and to the extent provided in the
resolution of the Board, shall have and may exercise all the
powers and authority of the Board in the management of the
business and affairs of the Corporation.
Section 17. COMMITTEE RULES. Unless the Board otherwise
provides, each committee designated by the Board may make, alter
and repeal rules for the conduct of its business. In the
absence of such rules each committee shall conduct its business
in the same manner as the Board conducts its business pursuant
to Article III of these Bylaws.
Section 18. SHAREHOLDER NOMINATIONS FOR DIRECTOR
CANDIDATES. Except as may otherwise be provided in the Articles
of Incorporation, only persons who are nominated in accordance
with the following procedures shall be eligible for election as
Directors. Nominations of persons for election to the Board may
be made at a meeting of shareholders only (i) by or at the
direction of the Board, (ii) by any nominating committee or
person appointed by the Board or (iii) by any shareholder of the
Corporation entitled to vote for the election of directors at
the meeting who complies with the notice procedures set forth in
this Section 18. Such nominations, other than those made by or
at the direction of the Board, must be made pursuant to timely
notice in writing to the Secretary. To be timely, a
shareholder's notice must be delivered to or mailed and received
at the principal executive offices of the Corporation not less
than sixty days nor more than ninety days prior to the meeting;
provided, however, that in the event that less than seventy
days' notice or prior public disclosure of the date of the
meeting is given or made to shareholders, notice by the
shareholder to be timely must be so received not later than the
close of business on the tenth day following the date on which
such notice of the date of the meeting was mailed or such public
disclosure was made, whichever occurs first. Such shareholder's
notice to the Secretary must set forth: (i) as to each person
whom the shareholder proposes to nominate for election or
re-election as a Director, (a) the name, age, business address
and residence address of the person, (b) the principal
occupation or employment of the person, (c) the class and number
of shares of capital stock of the Corporation that are
beneficially owned by the person, and (d) any other information
relating to the person that is required to be disclosed in
solicitations for proxies for election of Directors pursuant to
Rule 14a, as amended from time to time, under the Exchange Act;
and (ii) as to the shareholder giving the notice, (a) the name
and record address of the shareholder, and (b) the class and
number of shares of capital stock of the Corporation that are
beneficially owned by the shareholder. The Corporation may
require any proposed nominee to furnish such other information
as may reasonably be required by the Corporation to determine
the eligibility of such proposed nominee to serve as a Director
of the Corporation. No person shall be eligible for election as
a Director of the Corporation unless nominated in accordance
with the procedures set forth herein.
The chairman of the meeting shall, if the facts warrant,
determine and declare to the meeting that a nomination was not
made in accordance with the foregoing procedure and, if he
should so determine and declare, the defective nomination shall
be disregarded.
Notwithstanding anything contained in these Bylaws to the
contrary, this Section 18 shall not be altered, amended or
repealed except by the Board pursuant to the Articles of
Incorporation or by an affirmative vote of at least two-thirds
of the outstanding shares of all capital stock entitled to vote
at a shareholders' meeting duly called for such purpose.
ARTICLE IV
OFFICERS
Section 1. OFFICERS. The officers of the Corporation
shall be a Chief Executive Officer, President, a Vice-President,
a Secretary, and a Chief Financial Officer (Treasurer). The
Corporation may also have, at the discretion of the Board, a
Chairman of the Board, one or more Assistant Secretaries, one or
more Assistant Treasurers, and such other officers as may be
appointed in accordance with the provisions of Section 3 of this
Article IV. Any number of offices may be held by the same
person.
Section 2. ELECTION OF OFFICERS. The officers of the
Corporation, except such officers as may be appointed in
accordance with the provisions of Section 3 or Section 5 of this
Article IV, shall be chosen by the Board, and each shall serve
at the pleasure of the Board, subject to the rights, if any, of
an officer under any contract of employment.
Section 3. SUBORDINATE OFFICERS. The Board may appoint,
and may empower the President to appoint, such other officers as
the business of the Corporation may require. Each of them shall
hold office for such period, have such authority and perform
such duties as are provided in the Bylaws, or as the Board may
from time to time determine.
Section 4. REMOVAL AND RESIGNATION OF OFFICERS. Subject
to the rights, if any, of an officer under a contract of
employment, any officer may be removed, either with or without
cause, by the Board, at any regular or special meeting of the
Board, or, except in case of an officer chosen by the Board, by
an officer upon whom such power of removal may be conferred by
the Board.
Any officer may resign at any time by giving written notice
to the Corporation. Any resignation shall take effect on the
date of receipt of that notice or at any later time specified in
that notice; unless otherwise specified in that notice. Any
resignation is without prejudice to the rights, if any, of the
Corporation under any contract for which the officer is a party.
Section 5. VACANCIES IN OFFICES. A vacancy in any office
because of death, resignation, removal, disqualification, or any
other cause, shall be filled in the manner prescribed in these
Bylaws for regular appointments to that office.
Section 6. CHIEF EXECUTIVE OFFICER AND PRESIDENT. Subject
to such powers, if any, as may be given by the Bylaws or Board
to other officers of the Corporation, the Chief Executive
Officer and President shall be the general manager and chief
executive officer of the Corporation and shall, subject to the
control of the Board, have general supervision, direction, and
control of the business and the officers of the Corporation.
The Chief Executive Officer shall preside at all meetings of the
shareholders. The Chief Executive Officer shall have the
general powers and duties of management usually vested in the
office of President of a Corporation, and shall have such other
powers and duties as may be prescribed by the Board or the
Bylaws. The Board may determine to have one person serve as
Chief Executive Officer and another as President, in which event
the Board shall determine the power of each.
Section 7. VICE-PRESIDENT. In the absence or disability
of the President, the Vice-President designated by the Board
shall perform all the duties of the President, and when so
acting shall have all the powers of and be subject to all of the
restrictions upon, the President. The sole duty of the office
of Vice-President of this Corporation shall be to function as a
representative of the President in such case as the President
may be absent or disabled. The Vice-President may, when not
acting in the representative capacity of the President, hold
other positions and be assigned other duties within the
Corporation.
Section 8. SECRETARY. The Secretary shall keep or cause
to be kept, at the principal executive office or such other
place as the Board may direct, a book of minutes of all meetings
and actions of Directors, committees of Directors and
shareholders, with the time and place of holding, whether
regular or special, and, if special, how authorized, the notice
given, the names of those present at Director meetings or
committee meetings, the number of shares present or represented
at share-holders meetings, and the proceedings.
The Secretary shall keep, or cause to be kept, a the
principal executive office or at the office of the Corporation's
transfer agent or registrar, as determined by resolution of the
Board, a record of shareholders, or a duplicate record of
shareholders showing the names of all shareholders and their
addresses, the number of shares held by each, the number and
date of certificates issued for the same, and the number and
date of cancellation of every certificate surrendered for
cancellation.
The Secretary or Assistant Secretary, if they are absent or
unable to act or refuse to act, any other officer of the
Corporation shall give, or cause to be given, notice of all
meetings of the shareholders, of the Board, and of committees of
the Board required by the Bylaws or by law to be given. The
Secretary shall keep the seal of the Corporation, if one is
adopted, in safe and custody and shall have such other powers
and perform such other duties as may be prescribed by the Board
or by the Bylaws.
Section 9. CHIEF FINANCIAL OFFICER. The Chief Financial
Officer (Treasurer) shall keep and maintain, or cause to be kept
and maintained, adequate and correct books and records of
accounts of the properties and business transactions of the
corporation, including accounts of its assets, liabilities,
receipts, disbursements, gains, losses, capital, retained
earnings, and shares. The book of accounts shall at all
reasonable times be opened to inspection by any Director.
The Chief Financial Officer shall deposit all monies and
other valuables in the name and to the credit of the Corporation
with such depositories as may be designated by the Board. He
shall disburse the funds of the Corporation as may be ordered by
the Board, shall render to the President and Directors, whenever
they request it, an account of all of his transactions as Chief
Financial Officer and of the financial condition of the
Corporation, and shall have other powers and perform other such
duties as may be prescribed by the Board or the Bylaws.
ARTICLE V
INDEMNIFICATION OF DIRECTORS,
OFFICERS, EMPLOYEES, AND OTHER AGENTS
Section 1. AGENTS, PROCEEDINGS AND EXPENSES. For the
purpose of this Article, "agent" means any person who is or was
a Director, officer, employee, or other agent of this
Corporation, or is or was serving at the request of this
Corporation as a Director, officer, employee, or agent of
another foreign or domestic corporation, partnership, joint
venture, trust or other enterprise, or was a Director, officer,
employee, or agent of a foreign or domestic corporation which
was a predecessor corporation of this corporation or of another
enterprise at the request of such predecessor corporation;
"proceeding" means any threatened, pending or completed action,
suit or proceeding, whether civil, criminal, administrative, or
investigative and whether formal or informal; and "expenses"
include, without limitation, attorneys' fees and any expenses of
establishing a right to indemnification under Section 4 or
Section 5(c) of this Article.
Section 2. ACTIONS OTHER THAN BY THE CORPORATION. This
Corporation shall indemnify any person who was or is a party, or
is threatened to be made a party, to any proceeding (other than
an action by or in the right of this Corporation) by reason of
the fact that such person is or was an agent of this
Corporation, against expenses, judgments, fines, settlements and
other amounts actually and reasonably incurred in connection
with such proceeding if that person acted in good faith and in a
manner that person reasonably believed to be in, or not opposed
to, the best interest of this Corporation and, in the case of a
criminal proceeding, had no reasonable cause to believe the
conduct of that person was unlawful. The termination of any
proceeding by judgment, order, settlement, conviction, or upon a
pleas of nolo contendere or its equivalent shall not, of itself,
create a presumption that the person did not act in good faith
and in a manner which the person reasonably believed to be in
the best interest of this Corporation or that the person had
reasonable cause to believe that the person's conduct was
lawful. No indemnification shall be made under this Section 2
of this Article in connection with any other proceeding charging
that the agent derived an improper personal benefit, whether or
not involving action in his official capacity, in which
proceeding he is adjudged liable on the basis that he derived an
improper personal benefit.
Section 3. ACTIONS BY THE CORPORATION. This Corporation
shall indemnify any person who was or is a party, or is
threatened to be made a party, to any threatened, pending or
completed action by or in the right of this Corporation to
procure a judgment in its favor by reason of the fact that that
person is or was an agent of this Corporation, against expenses
actually and reasonably incurred by that person in connection
with the defense or settlement of that action if that person
acted in good faith, in a manner that that person believed to be
in, or not opposed to, the best interest of this Corporation
and, in the case of a criminal proceeding, that person had no
reasonable cause to believe that the person's conduct was
unlawful. No indemnification shall be made under this Section 3
of this Article in respect of any claim, issue or matter as to
which that person shall have been adjudged to be liable to this
Corporation unless and only to the extent that the court in
which that action was brought shall determine upon application
that, in view of all the circumstances of the case, that person
is fairly and reasonably entitled to indemnify for the expenses
which the court shall determine.
Section 4. SUCCESSFUL DEFENSE BY AGENT. To the extent
that an agent of this Corporation has been successful on the
merits in defense of any proceeding referred to in Section 2 or
3 of this Article, or in defense of any claim, issue or matter
therein, the agent shall be indemnified against expenses
actually and reasonably incurred by the agent in connection
therewith.
Section 5. REQUIRED APPROVAL. Except as provided in
Section 4 of this Article, any indemnification under this
Article shall be made by this Corporation only if authorized in
the specific case on a determination that indemnification of the
agent is proper in the circumstances because the agent has met
the applicable standard of conduct set forth in Section 2 or 3
of this Article, by:
(a) A majority vote of a quorum consisting of
Directors who are not parties to the proceeding;
(b) A majority vote of the shareholders of the
votes entitled to be cast by holders of qualified shares present
in person or by proxy at a meeting;
(c) Special legal counsel; or
(d) The court in which the proceeding is or was
pending, on application made by this Corporation or the agent or
the attorney or other person rendering services in connection
with the defense, whether or not such application by the agent,
attorney or other person is opposed by this Corporation.
Section 6. ADVANCE OF EXPENSES. Expenses incurred in
defending any proceeding may be advanced by this Corporation
before the final disposition of the proceeding on receipt of (i)
a written affirmation of the agent's good faith belief that the
person has met the applicable standard of conduct described in
Section 2 or 3 of this Article and (ii) an undertaking by or on
behalf of the agent to repay the amount of the advance unless it
shall be determined ultimately that the agent is entitled to be
indemnified as authorized in this Article. A determination must
also be made that the facts then known to those making the
determination would not preclude indemnification.
Section 7. OTHER CONTRACTUAL RIGHTS. Nothing contained in
this Article shall affect any right to indemnification to which
persons other than Directors and officers of this Corporation or
any subsidiary hereof may be entitled to contract or otherwise.
Section 8. LIMITATIONS. No indemnification or advance
shall be made under this Article, except as provided in
Section 4 or Section 5(d), in any circumstance where it appears:
(a) That it would be inconsistent with a provision
of the Articles, a resolution of the shareholders, or an
agreement in effect at the time of the accrual of the alleged
cause of action asserted in the proceeding in which the expenses
were incurred or other amounts were paid, which prohibits or
otherwise limits indemnification; or
(b) That it would be inconsistent with any
condition expressly imposed by a court in approving a
settlement.
Section 9. INSURANCE. Upon and in the event of a
determination by the Board to purchase such insurance, this
Corporation shall purchase and maintain insurance on behalf of
any agent of the Corporation against any liability asserted
against or incurred by the agent in such capacity or arising out
of the agent's status as such whether or not this Corporation
would have the power to indemnify the agent against that
liability under the provisions of this Section.
ARTICLE VI
STOCK CERTIFICATES
Section 1. FORM. The shares of the Corporation shall be
represented by certificates signed by the President or Vice-
President, and the Secretary of the Corporation. Any or all of
such signatures may be facsimile. Each such certificate shall
also state:
(a) The name of the record holder of the shares
represented by such certificate;
(b) The number of shares represented thereby;
(c) A designation of any class or series or which
such shares are a part;
(d) That the shares have par value of $.0l;
(e) Any restrictions applicable to the shares shall
be so designated in bold type on the face thereof.
Section 2. TRANSFERS. Transfer of shares of the
Corporation shall be made in the manner set forth in the Utah
Uniform Commercial Code. The Corporation shall maintain stock
transfer books, and any transfers shall be registered thereon
only on request and surrender of the stock certificate
representing the transferred shares, duly endorsed if transfer
is by Power of Attorney, the Power of Attorney shall be
deposited with the Secretary of the Corporation or with the
designated Transfer Agent.
Section 3. LOST, DESTROYED, AND STOLEN CERTIFICATES. No
certificate or shares of stock in the Corporation shall be
issued in place of any certificate alleged to have been lost,
destroyed, stolen, or mutilated except on production of such
evidence and provision of such indemnity to the Corporation as
the Board may prescribe.
ARTICLE VII
CORPORATE ACTIONS
Section 1. CONTRACTS. The Board may authorize any officer
or officers, or any agent or agents of the Corporation, to enter
into any contract or to execute and deliver any instrument in
the name of and on behalf of the Corporation, and such authority
may be general or confined to specific instances.
Section 2. LOANS. No loan shall be made by the
Corporation to its officers or Directors. No loan shall be made
or contracted on behalf of the Corporation and no evidences of
indebtedness shall be issued in its name unless authorized by
resolution of the Board. Such authority may be general or
confined to specific instances.
Section 3. CHECKS, DRAFTS OR ORDERS. All checks, drafts,
or other orders for the payment of money by or to the
Corporation and all notes and other evidence of indebtedness
issued in the name of the Corporation shall be signed by such
officer or officers, agent or agents of the Corporation, and in
such manner as shall be determined by resolution of the Board.
Section 4. BANK DEPOSITS. All funds of the Corporation
not otherwise employed, shall be deposited to the credit of the
Corporation in such banks, trust companies, or other
depositories as the Board may select.
ARTICLE VIII
MISCELLANEOUS
Section 1. ANNUAL REPORT TO SHAREHOLDERS. At the annual
meeting of the shareholders, the Board shall issue an annual
report on the Corporation which shall detail the financial
status of the Corporation. Nothing herein shall be interpreted
as prohibiting the Board from issuing such annual or other
periodic reports to the shareholders of the Corporation as they
consider appropriate in addition to that required herein.
Financial statements and reports shall be prepared from and
in accordance with the books of the Corporation, in conformity
with general accepted accounting principals applied on a
consistent basis.
Section 2. INSPECTION OF CORPORATE RECORDS. Any records
maintained in the regular course of business including stock
ledger, books of account, and minute books may be kept by any
information storage device if readily convertible into legible
form. Any shareholder of record, in person or by an attorney or
agent who presents proof of such position with bank-guaranteed
signature on such proof, may, upon written demand under oath,
stating purpose, inspect for any proper purpose, the stock
ledger, list of shareholders and other books and records and
make copies and extracts of the same. Such copies and extracts
shall be made at the cost of the individual preparing or
requesting such inspection and such inspection shall be during
normal business hours and shall not be made without at least
forty-eight (48) hours written notice prior thereto.
Section 3. INSPECTION OF ARTICLES, OF INCORPORATION AND
BYLAWS. The original or a copy of the Articles of Incorporation
and Bylaws of the Corporation, as amended or otherwise altered
to date, and certified by the Secretary of the Corporation,
shall at all times be kept at the principal executive office of
the Corporation. Such Articles and Bylaws shall be open for
inspection to all shareholders of record or holders of voting
trust certificates at all reasonable times during the business
hours of the Corporation.
Section 4. FISCAL YEAR. The fiscal year of the
Corporation shall begin on the first day of January of each year
and end at midnight on the last day of December of the following
year.
Section 5. CONSTRUCTION AND DEFINITIONS. Unless the
context requires otherwise, the general provisions, rules of
construction, and definitions contained in the Corporation Law
of the State of Utah shall govern the construction of these
Bylaws.
Without limiting the foregoing, the masculine gender where
used included the feminine and neuter; the singular number
includes the plural, and the plural number includes the
singular; "shall" is mandatory and "may" is permissive; and
"person" includes the Corporation as well as a natural person.
ARTICLE IX
AMENDMENTS TO BYLAWS
These Bylaws may be amended at any time by a majority vote
of the Board or shareholders, except that any of the following
amendments shall require the approval of three-fourths (3/4) of
the Board or then-outstanding shares:
1. Any amendment reducing the percentage of outstanding
shares required to constitute a quorum for the transaction of
business or required to authorize any shareholder action;
2. Any amendment reducing the number of Directors
required to constitute a quorum for the transaction of business
or required to authorize any action on the part of the Board;
3. Any amendment increasing or decreasing the number of
Directors;
4. Any amendment imposing or eliminating any stock
transfer, restriction or mandatory stock purchase obligations;
5. Any amendment to this section.
CERTIFICATE OF SECRETARY OF ADOPTION BY DIRECTORS
I HEREBY CERTIFY, that I am the duly elected, qualified and
acting Secretary of the above-named Corporation and that the
above and foregoing Amended and Restated Bylaws were adopted as
the Bylaws of said Corporation on the date set forth above by
the Directors of said Corporation.
DATED: November 24, 1998 /s/ Scott G. Monson
SECRETARY
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