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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
_______________________
Form 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 or 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
_______________________
For the Quarterly Period ended Commission File Number
June 30, 1996 0-12926
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
_______________________
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 June 30, 1996, the registrant had 6,218,898 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)
June 30, December 31,
1996 1995
ASSETS
CURRENT ASSETS
Cash and cash equivalents $3,380,281 $ 5,832,598
Cash segregated under securities regulations 1,193,515 894,269
Receivables from insurance companies 876,857 826,971
Receivable from financial institution - 109,450
Income taxes receivable 464,941 65,334
Deferred tax asset 156,878 159,354
Other assets 788,621 281,947
----------- ------------
TOTAL CURRENT ASSETS 6,861,093 8,169,923
=========== ============
Furniture, equipment and leasehold improvements -
net of accumulated depreciation and
amortization of $1,541,857 in 1996 and
$1,498,291 in 1995 239,284 362,261
Consulting and marketing agreement - net of
accumulated amortization of $156,498 1,408,502 -
Asset-based fees purchased - net of accumulated
amortization of $491,967 in 1996 and $417,485
in 1995 905,162 979,644
----------- ------------
TOTAL ASSETS $9,414,041 $9,511,828
=========== ============
LIABILITIES & STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accrued fees to financial institutions $ 433,401 $ 367,287
Customer funds segregated under securities
regulations 1,193,515 894,269
Accrued expenses and other liabilities 437,650 833,811
Accrued restructuring expenses 15,749 60,369
Allowance for contract cancellations 131,028 142,503
Accrued payroll and related expenses 214,239 212,767
----------- -----------
TOTAL CURRENT LIABILITIES 2,425,582 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
6,218,898 shares in 1996 and 6,198,898 in 1995 62,189 61,989
Additional paid-in-capital 959,651 624,851
Retained earnings 5,966,619 6,313,982
----------- -----------
TOTAL STOCKHOLDERS' EQUITY 6,988,459 7,000,822
----------- -----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $9,414,041 $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 June 30,
1996 1995
------------ -----------
REVENUES
Commissions $2,491,021 $4,139,820
Interest 54,308 58,717
Other 1,879 15,336
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TOTAL REVENUES 2,547,208 4,213,873
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EXPENSES
Employee compensation and benefits 1,219,354 2,000,526
Fees to financial institutions 1,014,898 1,871,565
Professional fees 54,559 161,280
Rent 81,756 134,348
Telephone 36,723 93,507
Depreciation and amortization 145,084 99,687
Other general and administrative expenses 336,295 412,027
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TOTAL EXPENSES 2,888,669 4,772,940
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LOSS BEFORE INCOME TAXES (341,461) (559,067)
INCOME TAX BENEFIT (126,340) (223,933)
------------ -----------
NET LOSS $(215,121) $ (335,134)
============ ===========
LOSS PER SHARE: $ (0.03) $ (0.05)
============ ===========
WEIGHTED AVERAGE SHARES 6,218,898 6,198,898
The accompanying notes are an integral part of these financial statements.
JMC GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
Six Months Ended June 30,
1996 1995
------------- -------------
REVENUES
Commissions $5,255,000 $ 8,694,158
Interest 123,736 114,720
Other 8,549 1,358,946
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TOTAL REVENUES 5,387,285 10,167,824
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EXPENSES
Employee compensation and benefits 2,602,823 4,193,864
Fees to financial institutions 2,103,860 3,875,210
Professional fees 122,471 411,945
Rent 180,740 265,203
Telephone 82,183 195,247
Depreciation and amortization 294,674 202,705
Other general and administrative expenses 549,632 870,849
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TOTAL EXPENSES 5,936,383 10,015,023
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INCOME (LOSS) BEFORE INCOME TAXES (549,098) 152,801
INCOME TAX PROVISION (BENEFIT) (201,735) 68,609
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NET INCOME (LOSS) $ (347,363) $ 84,192
============= =============
EARNINGS (LOSS) PER SHARE: $ (0.06) $ 0.01
============= =============
WEIGHTED AVERAGE SHARES 6,218,898 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)
Six Months Ended June 30,
1996 1995
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CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ (347,363) $ 84,192
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 294,674 202,705
Amortization of asset-based fees purchased 74,482 79,816
Deferred tax provision 2,476 364,319
Changes in assets and liabilities:
Cash segregated under securities regulations (299,246) (864,045)
Receivables from insurance companies (49,886) (18,022)
Receivable from financial institution 109,450 (581,275)
Income taxes receivable (399,607) (340,318)
Other assets (512,575) (179,836)
Accrued fees to financial institutions 66,114 (82,006)
Customer funds segregated under securities
regulations 299,246 864,045
Accrued expenses and other liabilities (396,161) (88,444)
Accrued restructuring expenses (44,620) (152,883)
Allowance for contract cancellations (11,475) (93,459)
Accrued payroll and related expenses 1,472 (217,014)
--------------- ------------
NET CASH USED BY OPERATING ACTIVITIES (1,215,017) (1,022,225)
--------------- ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of furniture, equipment and leasehold
improvements (18,000) (56,963)
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 (1,257,300) (520,963)
--------------- ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from stock options exercised 20,000 -
--------------- ------------
NET CASH PROVIDED BY FINANCING ACTIVITIES 20,000 -
--------------- ------------
NET DECREASE IN CASH AND CASH EQUIVALENTS (2,452,317) (1,543,188)
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 5,832,598 3,610,888
--------------- ------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 3,380,281 $ 2,067,700
=============== ============
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash paid for:
Interest $ 520 $ 42
Income taxes $ 212,275 $ 13,600
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 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 one 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.
Note 3. Capitalized Merger Related Costs
On April 3, 1996 the Company entered into an agreement to merge
with USBA. During the quarter ended June 30, 1996, the Company
capitalized direct costs of acquisition totaling $445,000 in
anticipation of such merger.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
- ---------------------
Second Quarter 1996 Compared to Second Quarter 1995
The Company realized a net loss of $215,000 (or $0.03 per share) in the
second quarter of 1996 compared to a net loss of $335,000 (or $0.05 per
share) for the second quarter of last year. For the six months ended June
30, 1996, the Company had a net loss of $347,000 (or $0.06 per share)
compared to net income of $84,000 (or $0.01 per share) during the first six
months of 1995. Included in the 1995 first half results was revenue
related to a client financial institution's payment for the right to hire
certain employees of the Company's wholly-owned subsidiary and certain
other services in the amount of $1,308,000 ($785,000 or $0.13 per share
after tax provision of $523,000). Without this non-recurring revenue, the
Company would have posted a net loss of $701,000 (after tax benefit of
$454,000) or $0.11 per share for the first six months of 1995.
Total revenues for the quarter ended June 30, 1996 were $2,547,000, a
decrease of $1,667,000 or 40% from $4,214,000 in the second quarter of
1995. This reduction in revenues is primarily a result of the following:
* A decrease in sales production related gross revenues of $1,218,000 or
41% offset by a decrease in chargeback expense of $263,000 or 81%. These
decreases are a result of gross sales production volumes declining $20
million or 39% in the second quarter of 1996 as compared to the second
quarter of 1995. This decline in sales volume is primarily 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 $29 million decrease in gross sales
production while the Company's remaining client base generated an increase
of $9 million in the second quarter of 1996 compared to 1995. The combined
Annuity and Mutual Fund gross revenue rate for the second quarter of 1996
declined by approximately 3% as compared to such rate in the second quarter
of 1995.
* A decrease in asset-based fee revenues of approximately $796,000 in the
second quarter of 1996 compared to 1995 as a result of the sale of the
rights to the portion of such asset-based fee revenues that related to
the Company's Florida operations during the third quarter of 1995.
Second quarter 1995 asset-based fees related to the Florida operations
totaled approximately $841,000. Asset-based fees from remaining client
financial institutions have increased $61,000 since the first quarter of
1995.
* An increase in service fee revenues as a result of the reconfigured
Tennessee operations. Such service fee revenue increased $103,000 in the
second quarter of 1996 as compared to 1995.
Total revenues for the first six months of 1996 were $5,387,000 versus
$10,168,000 for the comparable prior year period, a decrease of $4,781,000
or 47%. Excluding 1995 non-recurring revenues of $1,308,000, as described
above, revenues in the six-month period of 1996 would have decreased
$3,473,000 or 39% compared to the same period of 1995. The decrease in
revenues for the six month period of 1996 as compared to 1995 is also a
result of a decrease in gross sales production of 39%; a decrease in asset-
based revenues; somewhat offset by an increase in service fee revenue.
Total expenses for the quarters ended June 30, 1996 and 1995 were
$2,889,000 and $4,773,000, respectively. This $1,884,000 or 39% decrease
is attributable to:
* A $857,000 or 46% reduction in fees to financial institutions due to
lower sales volume.
* A reduction of $81,000 or 35% in salespersons' commissions also due to
lower sales volume
* A $947,000 or 35% reduction in the remaining base operating expenses
primarily due to the restructuring and downsizing of the Company's
administrative and sales management functions and a reduction in personnel
related to the termination of the Company's Florida operations and the
reconfiguration of the Company's Tennessee operations as previously
discussed. Included in the base operating expenses for the second quarter
of 1996 is $78,000 related to the amortization of a payment made to USBA as
well as the value of warrants issued in the first quarter of 1996.
For the same reasons, total expenses for the six months ended June 30, 1996
decreased $4,079,000 or 41% to $5,936,000 from $10,015,000 in the first
half of 1995.
Second Quarter 1996 Compared to First Quarter 1996
The Company realized a net loss of $215,000 (or $0.03 per share) in the
second quarter of 1996 compared to net loss of $132,000 (or $.02 per share)
in the first quarter of 1996.
Total revenues declined $293,000 or 10% to $2,547,000 in the second quarter
of 1996 from $2,840,000 in the first quarter of 1996. The decrease is a
result of a 13% decrease in gross sales production; a 1% decrease in the
average gross revenue rate; and an increase of $30,000 in the second
quarter surrender chargeback expense, which is deducted from revenues.
Total expenses in the second quarter of 1996 were $2,889,000 versus
$3,048,000 in the first quarter of 1996, a reduction of $159,000 or 5%.
Such reduction is primarily attributable to the reduction in sales volumes
as well as the reconfiguration of the Tennessee operations on February 1,
1996.
LIQUIDITY AND CAPITAL RESOURCES
- -------------------------------
As of June 30, 1996, the Company had cash and cash equivalents of
approximately $3,380,000, a decrease of approximately $2,453,000 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 in the first quarter of 1996 to USBA for a
consulting agreement established in connection with a five year marketing
alliance.
* Estimated income tax payments of $212,000.
* Merger-related costs of $445,000 which were capitalized in the second
quarter of 1996.
* Pre-tax losses incurred in the first six months of 1996 of
approximately $549,000. The resulting tax benefit will positively impact
cash flows in future periods.
While the Company's cash balances were reduced, as described above, during
the first six months of 1996, management considers the following issues
significant to its future operating liquidity:
* The Company's base operating expenses, excluding non cash expenses
such as depreciation and amortization, have been reduced by more than $2.2
million in the first six months of 1996 as compared to the first six months
of 1995.
* The Company's asset-based fee revenues continue to grow as compared to
the first six months of 1995 (excluding the asset-based fee revenues which
had been generated from the Florida operations).
Subsequent to the end of the second quarter of 1996 the Company was
notified that its Virginia based client financial institution will not
renew its contract with the Company after December 31, 1996. Based on the
terms discussed and agreed upon, the Company will receive transition fees
in the fourth quarter of the current year as well as guarantees on
production levels through the end of 1996, supported by cost subsidies if
necessary. This event will have an impact on cash flow in periods
subsequent to December 31, 1996, however the Company anticipates a one time
payment for such client's purchase of the right to all future asset-based
fees associated with the client's program.
Due to these factors and the Company's cash position as of June 30,1996,
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 39% when comparing the second
quarter of 1996 to the second 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. Sales
production decreased 13% in the second quarter of 1996 compared to the
first quarter, however, if January 1996 First Tennessee production is
excluded, the second quarter production was the same as the first in 1996,
reflecting a stabilization of the Company's sales production levels with
its existing client base.
The Company has adjusted its cost structure for the reduced revenue base,
as compared to the second quarter of 1995. This is evidenced by the fact
that even with the sharp decline in sales production in the second quarter
of 1996, the Company generated better operating results in the second
quarter of 1996 as compared to 1995.
In addition to the reduced cost structure, the Company reconfigured its
Tennessee operations in the first quarter of 1996 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. JMC has
complied with all operative aspects of the Final Order.
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 by both JMC and the Department of Insurance
regarding the impact on this case by the recent Supreme
Court decision in Barnett v. Nelson. JMC and the
Department of Insurance have each complied with the
Court's order and we are waiting for a final
adjudication. While management cannot predict the
outcome of the appeal, the Company anticipates no future
financial impact as JMC 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. 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.
Date: August 14, 1996 /s/ James K. Mitchell
-------------------------------------
James K. Mitchell, Chairman and
Chief Executive Officer
Date: August 14, 1996 /s/ D. Mark Carlson
-------------------------------------
D. Mark Carlson, Senior Vice
President and Chief Financial Officer