______________________________________________________________________________
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
March 31, 1998 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 March 31, 1998, the registrant had 6,119,951 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,
1998 1997
------------ ------------
ASSETS
CURRENT ASSETS
Cash and cash equivalents $5,803,018 $4,261,531
Cash segregated under securities regulations 78,713 922,207
Receivables from insurance companies 125,076 329,265
Receivable from financial institution - 1,462,861
Deferred tax asset 207,052 251,426
Other assets 160,983 195,219
------------ ------------
TOTAL CURRENT ASSETS 6,374,842 7,422,509
Furniture, equipment and leasehold
improvements- net of accumulated
depreciation and amortization of
$1,437,272 in 1998 and $1,435,362 in 1997 61,196 77,925
Asset-based fees purchased - net of
accumulated amortization of $1,004,564 in
1998 and $978,575 in 1997 392,565 418,554
------------ ------------
TOTAL ASSETS $6,828,603 $7,918,988
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accrued fees to financial institutions $ 67,795 $ 113,009
Customer funds segregated under securities
regulations 78,713 922,207
Accrued restructuring charges 240,686 410,785
Accrued expenses and other liabilities 92,764 242,871
Allowance for contract cancellations 42,858 55,822
Income tax payable 20,342 11,659
Accrued payroll and related expenses 38,690 81,572
------------ ------------
TOTAL CURRENT LIABILITIES 581,848 1,837,925
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
6,119,951 shares in 1998 and 6,044,351
shares in 1997 61,199 60,443
Additional paid-in-capital 538,862 466,849
Retained earnings 5,646,694 5,553,771
------------ ------------
TOTAL STOCKHOLDERS' EQUITY 6,246,755 6,081,063
------------ ------------
TOTAL LIABILITIES AND STOCKHOLDERS'
EQUITY $6,828,603 $7,918,988
============ ============
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,
1998 1997
------------- -------------
REVENUES
Commissions $ 368,745 $ 1,138,791
Gain on sale of certain future
asset-based fee revenue 330,000 -
Interest 75,235 59,299
Other 6,195 8,136
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TOTAL REVENUES 780,175 1,206,226
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EXPENSES
Employee compensation and benefits 303,236 766,336
Fees to financial institutions 136,125 417,969
Professional fees 49,067 65,204
Rent 20,419 63,691
Telephone 11,589 16,460
Depreciation and amortization 9,040 32,127
Other general and administrative
expenses 97,389 255,908
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TOTAL EXPENSES 626,865 1,617,695
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INCOME (LOSS) BEFORE INCOME TAXES 153,310 (411,469)
INCOME TAX PROVISION (BENEFIT) 60,387 (160,889)
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NET INCOME (LOSS) $ 92,923 $ (250,580)
============= =============
INCOME (LOSS) PER SHARE - BASIC AND DILUTED $ 0.02 $ (0.04)
============= =============
WEIGHTED AVERAGE NUMBER OF SHARES 6,046,958 6,090,533
WEIGHTED AVERAGE DILUTED COMMON SHARES 6,054,671 6,090,533
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,
1998 1997
------------- -------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ 92,923 $ (250,580)
Adjustments to reconcile net income (loss) to
net cash provided (used) by operating
activities:
Gain on sale of furniture and equipment (5,120) (6,733)
Depreciation and amortization 9,040 32,127
Amortization of asset-based fees purchased 25,989 31,392
Deferred tax provision 44,374 (12,061)
Changes in assets and liabilities:
Cash segregated under securities
regulations 843,494 (812,789)
Receivables from insurance companies 204,189 267,375
Receivable from financial institution 1,462,861 325,000
Income taxes receivable - (149,788)
Other assets 34,236 67,414
Accrued fees to financial institutions (45,214) (181,045)
Customer funds segregated under securities
regulations (843,494) 812,789
Accrued restructuring (161,059) (2,982)
Accrued expenses and other liabilities (150,107) (174,030)
Allowance for contract cancellations (12,964) 4,987
Income tax payable 8,683 -
Accrued payroll and related expenses (42,882) 1,958
------------- -------------
NET CASH PROVIDED (USED) BY OPERATING
ACTIVITIES 1,464,949 (46,966)
------------- -------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of furniture, equipment and leasehold
improvements (1,351) (44,122)
Proceeds from sale of furniture and equipment 5,120 7,500
------------- -------------
NET CASH PROVIDED (USED) BY INVESTING
ACTIVITIES 3,769 (36,622)
------------- -------------
CASH FLOW FROM FINANCING ACTIVITIES:
Repurchased common stocks - (194,548)
Proceeds from common stock options exercised 72,769 15,000
------------- -------------
NET CASH PROVIDED (USED) BY FINANCING
ACTIVITIES 72,769 (179,548)
------------- -------------
NET INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS 1,541,487 (263,136)
CASH AND CASH EQUIVALENTS AT BEGINNING
OF PERIOD 4,261,531 4,682,883
------------- -------------
CASH AND CASH EQUIVALENTS AT END OF
PERIOD $ 5,803,018 $ 4,419,747
============= =============
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash paid for:
Income taxes $ 11,835 $ 8,710
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, 1997 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, 1997.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The discussion of the Company's business contained in this Form 10-Q includes
certain forward-looking statements. For a discussion of factors which may
affect the outcome projected in such statements, see "Material Customers,"
"Competition," "Registration and Licensing," "Regulation," "Legal
Proceedings," "Management's Discussion and Analysis of Financial Condition and
Results of Operations" in the Company's Annual Report on Form 10-K dated
February 27, 1998.
RESULTS OF OPERATIONS
- ---------------------
FIRST QUARTER 1998 COMPARED TO FIRST QUARTER 1997
The Company realized a net income of $93,000 in the first quarter of 1998
compared to net loss of $251,000 for the comparable quarter of last year. The
first quarter 1998 results include a gain of $330,000 ($198,000 or $0.03 per
share after estimated tax provision) on the sale of the rights to certain
future asset-based fee revenues to a former client financial institution.
Excluding this gain, the Company would have reported a net loss of $105,000
(or $0.01 per share).
Total revenues for the quarter ended March 31, 1998 were $780,000 compared to
$1,206,000 in the first quarter of 1997, a reduction of $426,000 or 35%.
Excluding the gain of $330,000 described above, total revenues would have been
$450,000, a decrease of $756,000 or 63% from the first quarter of 1997.
This decrease is primarily a result of the following:
. A decrease in sales production related commissions of $499,000 or 81% as
a result of management's decision to terminate retail bank operations at
the end of 1997.
. Asset-based fee revenues decreased approximately $201,000 in the first
quarter of 1998 compared to the first quarter of 1997 as a result of the
sale of the rights to asset-based fee revenues related to the Company's
Tennessee operation at the end of the fourth quarter of 1997. First
quarter 1997 asset-based fees related to the Tennessee operation totaled
approximately $178,000.
Total expenses for the quarters ended March 31, 1998 and 1997 were $627,000
and $1,618,000, respectively. This $991,000 or 61% decrease is primarily
attributable to:
. A $282,000 or 67% reduction in fees to financial institutions due to
lower sales volume. In addition, asset-based fees to financial
institutions decreased due to the sale of the rights to the asset-based fee
revenues in the fourth quarter of 1997, which eliminated the related fee
expense obligation.
. A decrease of $463,000 or 60% in payroll related expenses in the first
quarter of 1998 as compared to 1997, primarily as a result of personnel
reductions related to the Company terminating most of its personnel at the
beginning of 1998.
. The remaining decrease of approximately $246,000 or 57% is a result of a
general reduction in operations.
FIRST QUARTER 1998 COMPARED TO FOURTH QUARTER 1997
The net income for the first quarter of 1998 of $93,000 compares to a net
income of $444,000 for the fourth quarter of 1997. Included in the 1998 first
quarter and 1997 fourth quarter results were revenues in the amount of
$330,000 ($198,000 or $0.03 per share after estimated tax provision) and
$1,870,000 ($1,234,000 or $0.20 per share after estimated tax provision),
respectively, related to the gain on the sale of the rights to future asset-
based fee revenues to a client financial institution. Excluding the
aforementioned gain in the first quarter of 1998 and fourth quarter of 1997,
total revenues of $450,000 in the first quarter of 1998 is a decrease of
approximately $561,000 or 56% from revenues of $1,011,000 in the fourth
quarter of 1997. This decrease in revenues is primarily due to the
termination of the Company's bank operations at the end of 1997. Total
expenses in the first quarter of 1998 of $627,000 decreased $1,575,000, or
72%, from $2,202,000 in the fourth quarter of 1997. The fourth quarter 1997
expenses included one-time restructuring charges in the amount of $589,000.
Excluding the restructuring charges, total expenses in the first quarter of
1998 would have decreased by $986,000 or 61% from $1,613,000 in the fourth
quarter of 1997.
LIQUIDITY AND CAPITAL RESOURCES
- -------------------------------
As of March 31, 1998, the Company had cash and cash equivalents of
approximately $5,803,000, an increase of approximately $1,541,000 from
$4,262,000 in cash and cash equivalents at December 31, 1997. Significant
sources of cash and cash equivalents include the following:
. Proceeds of $1,463,000 related to the sale of rights to certain future
asset based fees, which was recorded in the fourth quarter of 1997.
. Proceeds of $73,000 from Common Stock options exercised.
Future fees, both those due from provider companies and those due to financial
institution clients, are not reflected as an asset or a liability in the
Consolidated Balance Sheets. However, management does believe a value exists
related to the present value of the projected future net asset fees to be
retained by the Company. Such projected future net asset fees are a function
of the projected accumulated value of assets in-force multiplied by the net
asset fee rate (gross asset fee rate less amount committed to the financial
institution). The current value to the Company is the discounted present
value of such projected future asset fees less the present value of an
estimated cost to service the customers making up such in-force assets.
Management's belief that a present value for such future asset-based fees
exists and the estimates used to calculate the range of such values have been
supported by the sale of the rights to certain future fees in the first
quarter of 1998 and prior years. The projected value of the future asset-
based fees on the remaining block of business at March 31, 1998 is based on
assumptions as to growth, persistency and risk adjusted discount rates. The
assumptions as to persistency and growth of the business are based on
historical data maintained by the Company since its inception. The discount
rate used of between 8% and 10% is based on a risk-free rate of return plus a
nominal additional factor for risk (taking into account that risk factors are
substantially covered by the estimated persistency and growth rates).
Management believes the value of these net future revenues is appropriately
estimated at $3.5 million to $4.5 million, pre-tax, based on the Company's
valuation calculations. Such value is based on the estimates of the variables
used in the calculation (which are consistent with estimates used in prior
sales of future rights) and the actual realization, if any, could be higher or
lower than this range.
While the Company's revenue base was reduced as described above during the
first quarter of 1998, the Company's base operating expenses, excluding
noncash expenses such as depreciation and amortization, have been reduced by
nearly $500,000 compared to the fourth quarter of 1997. As a result, based
upon the Company's cash position as of March 31, 1998, management expects the
Company will meet its operating and capital expenditure needs for the
remainder of its current fiscal year.
TRENDS AND UNCERTAINTIES
- ------------------------
TERMINATION OF HISTORICAL BUSINESS LINES
The Company announced at the end of 1997 that it would be terminating its
retail sales bank programs. Accordingly, the Company has substantially exited
from its traditional lines of business. The Company will continue to service
and maintain all annuity contracts and mutual fund accounts in place at the
end of the first quarter of 1998 in order to maximize the return on those
assets.
BUSINESS OPPORTUNITIES
Management and the Board are actively seeking an appropriate business
combination opportunity for the Company. In addition, management and the
Board continue to explore investment opportunities for its remaining liquid
assets. In the interim, the Company's cash assets are invested in government
securities, mutual funds and cash equivalents. If the Company does not find
an operating entity to combine with, and if its assets are not invested in
certain types of securities (primarily government securities), it may be
deemed to be an investment company under the terms of the Investment Company
Act of 1940, as amended (the "Act"). The Board intends to take defensive
steps to avoid inadvertent application of the Act to the Company and the
attendant additional regulatory requirements. However, there can be no
assurance that the Act will not be applied to the Company.
YEAR 2000 PROBLEM
The Company is aware of the issues associated with the programming code in the
existing computer systems as the year 2000 approaches. The issue is whether
computer systems will properly recognize date-sensitive information when the
year changes to 2000. The Company will expend necessary resources to assure
that its computer systems are reprogrammed in time to effectively deal with
transactions in the year 2000 and beyond. The Company presently believes
that, with modifications to existing software and conversions to new software,
the Year 2000 problem will not pose significant operational problems for the
Company's computer systems as so modified and converted. However, if such
modifications and conversions are not completed timely, the Year 2000 problem
may have a material impact on the operations of the Company. Management is
currently assessing the year 2000 compliance issue and has taken initial steps
toward the updating of its systems in an attempt to achieve compliance in a
cost effective and timely fashion.
NASDAQ COMPLIANCE
The Company reported in its Form 10-K for 1997 that it had been advised by
NASDAQ that the Common Stock may no longer meet the requirements for continued
listing on the National Market System ("NMS") and that the Common Stock may be
removed from trading on the NMS. The Company received written notification on
April 21, 1998 that it has met the minimum requirements for trading on the NMS
and its Common Stock will not be removed from trading on the NMS at this time.
There can be no assurance, however, that the Company will continue to meet
present or future requirements for listing on the NMS.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
INSURANCE DEPARTMENT PROCEEDINGS
As previously reported, during March 1993, the Florida Department of Insurance
(the "Department") commenced an administrative proceeding against the
Company's wholly owned subsidiary, James Mitchell & Co. ("JMC"). A Final
Order was issued in July 1995, however, the enforcement of the majority of the
Final Order was stayed pending the outcome of JMC's appeal. The District Court
of Appeal, for all material matters, affirmed the Final Order in August 1996,
and in October 1996, the District Court of Appeal denied JMC's Motion for
Rehearing. In March 1997, the Florida Supreme Court denied JMC's petition for
review. Effective October 1995, JMC concluded its relationship with its
Florida financial institution client, Barnett Banks, Inc., and is not
presently doing business in the State of Florida.
On March 27, 1998, the California Department of Insurance ("DOI") initiated
proceedings in regards to the California insurance licenses of James K.
Mitchell and JMC Insurance Services Corporation in order to review the
allegations made by the Florida Department of Insurance in a Final Order and
to see whether any actions should be taken by the California DOI. The Company
has requested a hearing concerning this matter. Management does not believe
that these proceedings will have a material adverse effect on the Company's
business, financial condition or results of operations.
OTHER PROCEEDINGS
The Company's broker-dealer subsidiary, JMC Investment Services, Inc.
("JMCI"), has been named as a defendant in a NASD arbitration regarding the
sales of real estate limited partnerships by Spear Rees & Co. (the predecessor
to JMCI) between 1990 and 1993. Management does not believe that any such
proceeding will have a material adverse effect on the Company's financial
condition or results of operations.
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 13, 1998 /s/ James K. Mitchell
----------------------------------
James K. Mitchell, Chairman and
Chief Executive Officer
Date: May 13, 1998 /s/ Jacqueline O. Tran
----------------------------------
Jacqueline O. Tran, Controller and
Principal Accounting Officer