______________________________________________________________________________
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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Form 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 or 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
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For the Quarterly Period ended Commission File Number
March 31, 1996 0-12926
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JMC GROUP, INC.
(Exact name of registrant as specified in its charter)
Delaware 95-2627415
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
9710 Scranton Road, Suite 100, San Diego, California 92121
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: 619-450-0055
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Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities
Exchange Act of 1934 during the preceding 12 months (or for such shorter
period that the registrant was required to file such reports), and (2) has
been subject to such filing requirements for the past 90 days.
Yes X No
As of March 31, 1996, the registrant had 6,198,898 shares of its
common stock, $.01 par value, issued and outstanding.
_____________________________________________________________________________
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
JMC GROUP,INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
March 31, December 31,
1996 1995
------------- -------------
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 4,134,565 $ 5,832,598
Cash segregated under securities regulations 1,269,970 894,269
Receivables from insurance companies 983,681 826,971
Receivable from financial institution - 109,450
Income taxes receivable 293,341 65,334
Deferred tax asset 176,438 159,354
Other assets 227,508 281,947
------------ -------------
TOTAL CURRENT ASSETS 7,085,503 8,169,923
Furniture, equipment and leasehold
improvements - net of accumulated
depreciation and amortization of $1,477,972
in 1996 and $1,498,291 in 1995 285,169 362,261
Consulting and marketing agreement - net of
accumulated amortization of $78,249 1,486,751 -
Asset-based fees purchased - net of
accumulated amortization of $454,423
in 1996 and $417,485 in 1995 942,706 979,644
------------ -------------
TOTAL ASSETS $9,800,129 $9,511,828
============ =============
LIABILITIES & STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accrued fees to financial institutions $ 485,216 $ 367,287
Customer funds segregated under
securities regulations 1,269,970 894,269
Accrued expenses and other liabilities 474,240 833,811
Accrued restructuring expenses 22,240 60,369
Allowance for contract cancellations 122,474 142,503
Accrued payroll and related expenses 242,409 212,767
------------ -------------
TOTAL CURRENT LIABILITIES 2,616,549 2,511,006
STOCKHOLDERS' EQUITY
Preferred stock, no par value; authorized
5,000,000 shares - -
Common stock, $.01 par value; authorized
20,000,000 shares; issued and outstanding
6,198,898 shares in 1996 and 1995 61,989 61,989
Additional paid-in-capital 939,851 624,851
Retained earnings 6,181,740 6,313,982
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TOTAL STOCKHOLDERS' EQUITY 7,183,580 7,000,822
------------ -------------
TOTAL LIABILITIES AND STOCKHOLDERS'
EQUITY $9,800,129 $9,511,828
============ =============
The accompanying notes are an integral part of these financial statements.
JMC GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
Three Months Ended March 31,
1996 1995
-------------- -------------
REVENUES
Commissions $ 2,763,979 $4,554,338
Interest 69,428 56,003
Other 6,670 1,343,610
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TOTAL REVENUES 2,840,077 5,953,951
-------------- ------------
EXPENSES
Employee compensation and benefits 1,383,469 2,193,338
Fees to financial institutions 1,088,962 2,003,645
Professional fees 67,912 250,665
Rent 98,984 130,855
Telephone 45,460 101,740
Depreciation and amortization 149,590 103,018
Other general and administrative expenses 213,337 458,822
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TOTAL EXPENSES 3,047,714 5,242,083
-------------- ------------
INCOME (LOSS) BEFORE INCOME TAXES (207,637) 711,868
INCOME TAX PROVISION (BENEFIT) (75,395) 292,542
-------------- ------------
NET INCOME (LOSS) $ (132,242) $ 419,326
============== ============
EARNINGS (LOSS) PER SHARE: $ (0.02) $ 0.07
============== ============
WEIGHTED AVERAGE SHARES 6,198,898 6,198,898
The accompanying notes are an integral part of these financial statements.
JMC GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
Three Months Ended March 31,
1996 1995
CASH FLOWS FROM OPERATING ACTIVITIES: -------------- -------------
Net income (loss) $(132,242) $ 419,326
Adjustments to reconcile net income (loss)
to net cash used by operating activities:
Gain on sale of furniture and equipment (1,998) -
Depreciation and amortization 149,590 103,018
Amortization of asset-based fees purchased 36,938 40,344
Deferred tax provision (17,084) 458,338
Changes in assets and liabilities:
Cash segregated under securities regulations (375,701) (951,317)
Receivables from insurance companies (156,710) (83,497)
Receivable from financial institution 109,450 (1,080,129)
Income taxes receivable (228,007) (196,703)
Other assets 51,488 (5,972)
Accrued fees to financial institutions 117,929 (3,527)
Customer funds segregated under securities
regulations 375,701 951,317
Accrued expenses and other liabilities (359,571) (34,019)
Accrued restructuring expenses (38,129) (91,358)
Allowance for contract cancellations (20,029) (18,011)
Accrued payroll and related expenses 29,642 (186,693)
-------------- -------------
NET CASH USED BY OPERATING ACTIVITIES (458,733) (678,883)
-------------- -------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of furniture, equipment and leasehold
improvements - (71,191)
Proceeds from sale of furniture and equipment 10,700 -
Purchase of short-term investments - (464,000)
Payment for Consulting and Marketing Agreement (1,250,000) -
-------------- -------------
NET CASH USED BY INVESTING ACTIVITIES (1,239,300) (535,191)
-------------- -------------
NET DECREASE IN CASH AND CASH EQUIVALENTS (1,698,033) (1,214,074)
CASH AND CASH EQUIVALENTS AT BEGINNING OF
PERIOD 5,832,598 3,610,888
-------------- -------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $4,134,565 $2,396,814
============== =============
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash paid for:
Income taxes $ 186,575 $ 23,292
SUPPLEMENTAL DISCLOSURES OF NONCASH INVESTING
ACTIVITIES
Warrants issued in connection with the Consulting
and Marketing Agreement $ 315,000 $ -
The accompanying notes are an integral part of these financial statements.
Note 1. Basis of Presentation
The accompanying financial statements have been prepared in
accordance with the instructions to Form 10-Q and, therefore, do
not include all information and footnote disclosures that are
otherwise required by Regulation S-X and that will normally be
made in the Company's Annual Report on Form 10-K. The financial
statements do, however, reflect all adjustments which are, in the
opinion of management, necessary for a fair statement of the
results of the interim period(s) presented.
The balance sheet at December 31, 1995 has been derived from the
audited financial statements at that date. It is recommended
that these financial statements be read in conjunction with the
Company's financial statements and notes thereto included in the
Company's Form 10-K for the year ended December 31, 1995.
Note 2. JMCG/USBA Marketing and Consulting Agreement
The Company entered into an agreement with USBA Holdings, LTD
("USBA") on January 28, 1996. This agreement was established to
provide JMC with access to financial institutions through the
consulting and other relationships established by USBA and its
subsidiaries. In connection with this transaction, the Company
paid USBA $1.25 million on January 28, 1996 to assist in the
preparation and implementation of a five year marketing plan
focusing on the establishment of relationships with new financial
institution clients. The Company has the right to recover $1
million of the amount paid under certain circumstances. In
addition, USBA was given warrants to purchase up to 1 million
shares of the Company's common stock at $2.50 per share which may
be adjusted to approximately $1.44 per share under certain
circumstances. The warrants, which are exercisable after January
29, 1997, have an estimated value of $315,000. Amounts
associated with this transaction will be deferred and amortized
over future benefit periods.
Both the payment of the $1.25 million and the value of the
warrants have been capitalized and are being amortized on a
straight line basis over their current estimated useful lives of
five years.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
First Quarter 1996 Compared to First Quarter 1995
The Company realized a net loss of $132,000 (or $0.02 per share) in the
first quarter of 1996 compared to net income of $419,000 (or $0.07 per
share) for the comparable quarter of last year. Included in the first
quarter 1995 was revenue related to a client financial institution's
payment for the right to hire certain employees of the Company's wholly-
owned subsidiary, James Mitchell & Co. ("JMC"),and certain other services
in the amount of $1,308,000 ($785,000 or $0.13 per share after a tax
provision of $523,000). Without this non-recurring revenue, the Company
would have posted a net loss of $366,000 (after a tax benefit of $231,000)
or $0.06 per share in the first quarter of 1995.
Total revenues for the quarter ended March 31, 1996 were $2,840,000
compared to $5,954,000 in the first quarter of 1995. As mentioned above,
1995 revenues included non-recurring revenue of $1,308,000. Excluding this
non-recurring revenue in the first quarter of 1995, revenues declined
$1,806,000 or 39% in the first quarter of 1996 as compared to the first
quarter of 1995.
This reduction in revenues is primarily a result of the following:
* A decrease in sales production related revenues of $1,060,000 or 35%
as a result of sales production volumes declining $22 million or 38% in the
first quarter of 1996 as compared to the first quarter of 1995. This
decline in sales volume is attributable to the termination of the Company's
Florida operations in the third quarter of 1995 and the reconfiguring of
the Company's Tennessee operations effective February 1, 1996. See "Trends
and Uncertainties -- Declining Revenues". These two operations combined
for a $31 million decrease in gross sales production while the Company's
remaining client base generated an increase of $9 million in the first
quarter of 1996 compared to 1995. The decline in sales production volumes
was offset by an increase of approximately 5% in the net revenue rate on
product sales as well as the service-based revenues generated in the newly
configured Tennessee operations (such service arrangement began February 1,
1996).
* Asset-based fee revenues decreased approximately $791,000 in the first
quarter of 1996 compared to 1995 as a result of the sale of the rights to
such asset-based fee revenues related to the Company's Florida operations
during the third quarter of 1995. First quarter 1995 asset-based fees
related to the Florida operations totaled approximately $850,000, and thus
asset-based fees from remaining client financial institutions have
increased since the first quarter of 1995.
Total expenses for the quarters ended March 31, 1996 and 1995 were
$3,048,000 and $5,242,000, respectively. This $2,194,000 or 42% decrease
is primarily attributable to:
* A $915,000 or 46% reduction in fees to financial institutions due to
lower sales volume. The reduction in such fees is not in proportion to the
reduction in sales volume as the production decreases were generated from
clients which were being paid higher fee rates as compared to the remaining
client financial institutions. In addition, asset-based fees to financial
institutions decreased due to the sale of the rights to the asset-based fee
revenues in the third quarter of 1995, which eliminates a fee expense
obligation.
* A decrease of $810,000 or 37% in payroll related expenses which is
primarily attributable to a significant reduction in personnel in the first
quarter of 1996 as compared to 1995.
* A decrease of approximately $183,000 in professional fees which is a
result of the resolution of certain legal matters during the first quarter
of 1996.
* The remaining decrease of approximately $286,000 is a result of the
full impact of the restructured operations and the ability to reduce
operating expenses for lower sales volumes.
First Quarter 1996 Compared to Fourth Quarter 1995
The net loss for the first quarter of 1996 of $132,000 (or $0.02 per share)
compares to a net loss of $176,000 (or $0.03 per share) for the fourth
quarter of 1995. Included in the 1995 fourth quarter results was other
revenue in the amount of $602,000 ($361,000 or $0.06 per share after
estimated tax provision) related to the remaining net gain on the sale of
the rights to certain future asset-based fee revenues. Total revenues of
$2,840,000 in the first quarter of 1996 increased approximately $500,000 or
21% from revenues of $2,341,000 (excluding the aforementioned net gain) in
the fourth quarter of 1995 primarily as a result of increased sales
production of $4.6 million or 15% in the first quarter of 1996. Total
expenses in the first quarter of 1996 of $3,048,000 decreased $106,000 or
3% from $3,154,000 in the fourth quarter of 1995.
The improvement in operating results in the first quarter of 1996 is
primarily due to the reduced operating expense base, better production
results from the existing client financial institutions and the transition
to a fee based service arrangement in the Tennessee operations.
LIQUIDITY AND CAPITAL RESOURCES
As of March 31, 1996, the Company had cash and cash equivalents of
approximately $4,135,000, a decrease of approximately $1,698,000 from
$5,833,000 in cash and cash equivalents at December 31, 1995. Significant
uses of such amounts include the following:
* A payment of $1,250,000 to the USBA Holdings, LTD. ("USBA") for a consulting
agreement established in connection with a five year marketing alliance.
* An estimated payment of $187,000 for 1995 income taxes.
* A reduction of approximately $270,000 in current liability balances
(excluding "Customer funds segregated under securities regulations") during
the first quarter of 1996 primarily as a result of the transition of the
operations and closing of the Company's facilities in Tennessee (payment of
accrued vacation and other expenses accrued in prior periods).
While the Company's cash balances were reduced as described above during
the first quarter of 1996. Management believes its current and future
liquidity situation is strengthened for the following reasons:
* The Company's base operating expenses, excluding non cash expenses
such as depreciation and amortization, have been reduced by more than $1.2
million quarterly compared to the first quarter of 1995.
* The Company's asset-based fee revenues continue to grow as compared to
the first quarter of 1995 (excluding the asset-based fee revenues which had
been generated from the Florida operations, as they were sold during the
third quarter of 1995).
Due to these factors and the Company's cash position as of March 31,1996,
management expects the Company will meet its operating and capital
expenditure needs for the remainder of its current fiscal year.
TRENDS AND UNCERTAINTIES
- -------------------------
Declining Revenues
The Company's sales production decreased 38% when comparing the first
quarter of 1996 to the first quarter of 1995. This decrease is primarily
attributed to the Florida operations closing in the third quarter of 1995
and the transition of the Tennessee operations on February 1, 1996.
However, sales production increased 15% when comparing first quarter of
1996 to the fourth quarter 1995, which reflects an improved environment for
the Company's products as well as increased support from the Company's
remaining client financial institution relationships.
More importantly, the Company has adjusted its cost structure for the
reduced revenue base, as compared to the first quarter of 1995. This is
evidenced by the fact that even with the sharp decline in sales production
from the first quarter of 1996, the Company generated better operating
results in the first quarter of 1996 as compared to 1995 if the one time
revenue is excluded from the first quarter of 1995 results.
In addition to the reduced cost structure, the Company reconfigured its
Tennessee operations to provide sales support, product development and back
office support services on a fee basis. The fees generated by the Company
include transaction based fees (with a monthly minimum) as well as an
ongoing and increasing share of asset-based fee revenues on the blocks of
business generated prior to the transition. Factoring in the minimum
transactional fee revenues and the significantly reduced cost structure the
Company expects pre tax operating results generated by this client to be
comparable to those operating results generated by the same client when the
Company provided its fully managed program. Thus while revenues will
decrease, it is believed that pre-tax operating results will remain
relatively consistent and not have the same exposure to production break-
even levels due to the significantly reduced cost base.
JMCG/USBA Merger
On April 3, 1996 the Company and USBA signed a letter of intent to pursue a
merger of the two companies. The merger is intended to create an entity
that will combine the financial services, investment products and sales
management skills of JMCG with the diversified financial products,
analytical services, and strategic expertise of USBA. The merger is
subject to the execution of a definitive agreement, due diligence,
stockholder approval of both companies, regulatory approval, and a
satisfactory fairness opinion by an independent consulting firm
specializing in such types of valuations.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
On July 7, 1995, the Florida Department of Insurance
(the "Department") issued a Final Order in its
administrative proceeding against the Company which was
commenced on March 11, 1993. The enforcement of the
majority of the Final Order has been stayed pending
appeal and JMC has complied with all other aspects of
the Final Order.
The Final Order is similar in many respects to the
Recommended Order which was issued by an administrative
hearing officer in August 1994. The Department found
that JMC was not involved in an unlawful association
with its Florida financial institution client with
regard to the sale of annuities. JMC was ordered to
cease and desist from certain advertising and sales
practices which the Department found to be in violation
of provisions of Florida insurance law regarding
deceptive advertising and sales practices. It also
requires JMC to obtain an insurance agency license
prior to engaging in any activity which by state law
may be performed only by a licensed agent and revokes
the Florida insurance license of James K. Mitchell,
Chairman and Chief Executive Officer of the Company.
The Company has filed an appeal of the Final Order.
Until the Final Order was issued, JMC was limited to
participating in an administrative proceeding before
what management believes was a politically-motivated
state agency. Management believes that many of its
strongest arguments could not be raised in the
administrative proceeding. JMC filed its appellate
brief on November 13, 1995 and presented oral arguments
on April 11, 1996. Upon a motion by JMC, the Court of
Appeals ordered supplemental briefing to be filed by
both JMC and the Department of Insurance regarding the
impact on this case by the recent Supreme Court
decision in Barnett v. Nelson, which basically upheld
the authority of national banks which have branches or
agencies in towns with a population of less than 5,000
to market insurance products throughout the state.
Management cannot predict the outcome of the appeal,
although the Company ceased operations in Florida in
October, 1995.
The Company's broker-dealer subsidiary, Priority Investment
Services, Inc. (formerly Spear Rees & Co.), has been named as a
defendant in lawsuits arising out of the sale of real
estate limited partnerships to customers of Spear Rees
& Co. and Rees Financial Group, Inc. and Rees Capital
Group, Inc. ("Rees") prior to 1992. Spear Rees & Co.
was a full service brokerage firm which acquired the
assets of Rees in September 1991. In the first quarter
of 1996, the Company reached a settlement with certain
of the Plaintiffs in this case which was approved by
the Bankruptcy Court on May 7, 1996, while other claims
remain the subject of NASD arbitration. The amounts
paid have been adequately accrued in the Company's
financial statements and are included in accrued
expenses and other liabilities as of March 31, 1996.
Management does not believe that resolution of any NASD
arbitration which may be filed in the future will have
a material adverse effect on the Company.
ITEM 2. CHANGES IN SECURITIES
Not applicable.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
Not applicable.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
ITEM 5. OTHER INFORMATION
Not applicable.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
a.) Exhibits.
The following exhibit is filed herewith:
27 Financial Data Schedule
b.) Reports on Form 8-K.
None.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of
1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned thereunto duly authorized.
Date: May 14, 1996 /s/ James K. Mitchell
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James K. Mitchell, Chairman and
Chief Executive Officer
Date: May 14, 1996 /s/ D. Mark Carlson
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D. Mark Carlson, Senior Vice President
and Chief Financial Officer