_____________________________________________________________________________
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, 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 June 30, 1998, the registrant had 6,166,451 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,
1998 1997
------------ ------------
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 5,829,993 $ 4,261,531
Cash segregated under securities regulations 994 922,207
Receivables from insurance companies 129,715 329,265
Receivable from financial institution - 1,462,861
Income taxes receivable 14,464 -
Deferred tax asset 171,456 251,426
Other assets 162,085 195,219
------------ ------------
TOTAL CURRENT ASSETS 6,308,707 7,422,509
Furniture, equipment and leasehold
improvements - net of accumulated
depreciation and amortization of
$1,453,003 in 1998 and $1,435,362
in 1997 45,465 77,925
Asset-based fees - net of accumulated
amortization of $1,028,743 in 1998 and
$978,575 in 1997 368,386 418,554
------------ ------------
TOTAL ASSETS $ 6,722,558 $ 7,918,988
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accrued fees to financial institutions $ 59,527 $ 113,009
Customer funds segregated under securities
regulations 994 922,207
Accrued restructuring charges 122,598 410,785
Accrued expenses and other liabilities 118,536 242,871
Allowance for contract cancellations 32,345 55,822
Income tax payable - 11,659
Accrued payroll and related expenses 33,230 81,572
------------ ------------
TOTAL CURRENT LIABILITIES 367,230 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
6,166,451 shares in 1998 and 6,044,351
shares in 1997 61,664 60,443
Additional paid-in-capital 583,276 466,849
Retained earnings 5,710,388 5,553,771
------------ ------------
TOTAL STOCKHOLDERS' EQUITY 6,355,328 6,081,063
------------ ------------
TOTAL LIABILITIES AND STOCKHOLDERS'
EQUITY $ 6,722,558 $ 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 June 30,
1998 1997
------------ ------------
REVENUES
Commissions $ 343,501 $ 1,080,631
Interest 81,097 56,750
Other 80,587 675
------------ ------------
TOTAL REVENUES 505,185 1,138,056
------------ ------------
EXPENSES
Employee compensation and benefits 132,144 759,338
Fees to financial institutions 105,112 387,890
Professional fees 40,930 107,544
Rent 21,890 68,727
Telephone 9,035 5,457
Depreciation and amortization 7,866 29,109
Other general and administrative expenses 83,724 203,814
------------ ------------
TOTAL EXPENSES 400,701 1,561,879
------------ ------------
INCOME (LOSS) BEFORE INCOME TAXES 104,484 (423,823)
INCOME TAX PROVISION (BENEFIT) 40,790 (133,690)
------------ ------------
NET INCOME (LOSS) $ 63,694 $ (290,133)
============ ============
EARNINGS (LOSS) PER SHARE:
BASIC $ 0.01 $ (0.05)
============ ============
DILUTED $ 0.01 $ (0.05)
============ ============
WEIGHTED AVERAGE NUMBER OF SHARES
BASIC 6,156,044 6,044,351
DILUTED 6,170,084 6,050,020
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,
1998 1997
------------ ------------
REVENUES
Commissions $ 712,246 $ 2,219,422
Gain on sale of certain asset-based fee
revenue 330,000 -
Interest 156,332 116,049
Other 86,782 8,811
------------ ------------
TOTAL REVENUES 1,285,360 2,344,282
------------ ------------
EXPENSES
Employee compensation and benefits 435,380 1,525,674
Fees to financial institutions 241,237 805,859
Professional fees 89,997 172,748
Rent 42,309 132,418
Telephone 20,624 21,917
Depreciation and amortization 16,906 61,236
Other general and administrative expenses 181,113 459,722
------------ ------------
TOTAL EXPENSES 1,027,566 3,179,574
------------ ------------
INCOME (LOSS) BEFORE INCOME TAXES 257,794 (835,292)
INCOME TAX PROVISION (BENEFIT) 101,177 (294,579)
------------ ------------
NET INCOME (LOSS) $ 156,617 $ (540,713)
============ ============
EARNINGS (LOSS) PER SHARE:
BASIC $ 0.03 $ (0.09)
============ ============
DILUTED $ 0.03 $ (0.09)
============ ============
WEIGHTED AVERAGE NUMBER OF SHARES 6,102,051 6,067,315
WEIGHTED AVERAGE DILUTIVE COMMON SHARES 6,111,772 6,082,869
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,
1998 1997
------------ ------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ 156,617 $ (540,713)
Adjustments to reconcile net income (loss) to
net cash provided (used) by operating
activities:
Gain on sale of furniture and equipment (21,951) (6,733)
Depreciation and amortization 16,906 61,236
Amortization of asset-based fees 50,168 61,085
Deferred tax provision 79,970 (13,711)
Changes in assets and liabilities:
Cash segregated under securities regulations 921,213 (203,727)
Receivables from insurance companies 199,550 247,739
Receivable from financial institution 1,462,861 325,000
Income taxes receivable (14,464) (290,686)
Other assets 33,134 (13,166)
Accrued fees to financial institutions (53,482) (206,614)
Customer funds segregated under securities
regulations (921,213) 203,727
Accrued restructuring (271,282) (11,560)
Accrued expenses and other liabilities (124,335) (235,231)
Allowance for contract cancellations (23,477) 13,820
Income tax payable (11,659) -
Accrued payroll and related expenses (48,342) (21,902)
------------ ------------
NET CASH PROVIDED (USED) BY OPERATING
ACTIVITIES 1,430,214 (631,436)
------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of furniture, equipment and leasehold
improvements (1,351) (111,036)
Proceeds from sale of furniture and equipment 21,951 7,500
------------ ------------
NET CASH PROVIDED (USED) BY INVESTING
ACTIVITIES 20,600 (103,536)
------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Repurchased stocks - (194,548)
Proceeds from stock options exercised 117,648 15,000
------------ ------------
NET CASH PROVIDED (USED) BY FINANCING
ACTIVITIES 117,648 (179,548)
------------ ------------
NET INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS 1,568,462 (914,520)
CASH AND CASH EQUIVALENTS AT BEGINNING OF
PERIOD 4,261,531 4,682,883
------------ ------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 5,829,933 $ 3,768,363
============ ============
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash paid for:
Income taxes $ 51,835 $ 9,542
SUPPLEMENTAL DISCLOSURES OF NONCASH INVESTING
ACTIVITIES
Depreciation charged against accrued
restructuring expenses $ 16,905 $ -
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
- ---------------------
SECOND QUARTER 1998 COMPARED TO SECOND QUARTER 1997
The Company realized net income of $64,000 (or $0.01 per basic and fully
diluted share) in the second quarter of 1998 compared to a net loss of
$290,000 (or $0.05 per basic and fully diluted share) for the second quarter
of last year. For the six months ended June 30, 1998, the Company had a net
income of $157,000 (or $0.03 per basic and fully diluted share) compared to
net loss of $541,000 (or $0.09 per basic and fully diluted share) during the
first six months of 1997. The first half of 1998 results included a first
quarter gain of $330,000 ($198,000 after estimated tax provision) on the sale
of the rights to certain asset-based fee revenues to a former client financial
institution. Excluding this gain, the Company would have reported a net loss
of $41,000 for the first half of 1998.
Total revenues for the quarter ended June 30, 1998 were $505,000, a decrease
of $633,000 or 56% from $1,138,000 in the second quarter of 1997. This
reduction in revenues is primarily a result of the following:
. A decrease in sales production related commissions of $453,000 or 86% as
a result of management's decision to terminate retail bank operations at
the end of 1997.
. Asset-based fee revenues decreased approximately $179,000 in the second
quarter of 1998 compared to the second 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. Second
quarter 1997 asset-based fees related to the Tennessee operation totaled
approximately $158,000.
Total revenues for the first six months of 1998 were $1,285,000 versus
$2,344,000 for the first six months of 1997. Excluding the aforementioned
gain in the first quarter of 1998, total revenues would have decreased by
$1,389,000 or 59% to $955,000 for the first six months of 1998. The decrease
in revenues is also a result of a decrease in sales related commissions of
$908,000 or 84% and a decrease in asset-based revenues resulted from the sale
of rights to asset-based fee revenues at the end of the fourth quarter of
1997.
Total expenses for the quarters ended June 30, 1998 and 1997 were $401,000 and
$1,562,000, respectively. This $1,161,000 or 74% decrease is primarily
attributable to:
. A $283,000 or 73% 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 $627,000 or 83% in payroll related expenses in the second
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 in other recurring operating expenses of
approximately $251,000 or 61% is a result of a general reduction in
operations.
For the same reasons, total expenses for the six months ended June 30, 1998
decreased $2,152,000 or 68% to $1,028,000 from $3,180,000 in the first half of
1997.
SECOND QUARTER 1998 COMPARED TO FIRST QUARTER 1998
The net income for the second quarter of 1998 of $64,000 (or $0.01 per basic
and fully diluted share) compares to a net income of $93,000 (or $0.02 per
basic and fully diluted share) for the first quarter of 1998. Included in the
1998 first quarter results were revenues in the amount of $330,000 ($198,000
or $0.03 per basic and fully diluted share after estimated tax provision)
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, the first quarter 1998 would have a net loss of
$105,000. Excluding the gain in the first quarter 1998, total revenues for
the second quarter 1998 were $505,000 compared to $450,000 in the first
quarter 1998, an increase of $55,000 or 12%. Total expenses in the second
quarter of 1998 of $401,000 decreased $226,000, or 36%, from $627,000 in the
first quarter of 1998.
LIQUIDITY AND CAPITAL RESOURCES
- -------------------------------
As of June 30, 1998, the Company had cash and cash equivalents of
approximately $5,830,000, an increase of approximately $1,568,000 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 were recorded in the fourth quarter of 1997.
. Proceeds of $118,000 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 June 30, 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
second and first quarters of 1998, the Company's base operating expenses,
excluding noncash expenses such as depreciation and amortization, have been
reduced by nearly $190,000 or 40% compared to the first quarter of 1998. As a
result, based upon the Company's cash position as of June 30, 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 second 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 opportunities for enhanced utilization of 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 ISSUE
The Company is aware of the issues associated with the programming code in
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. Management is currently assessing the year 2000
compliance issue and has already taken initial steps toward the updating,
converting and replacement of its non-compliant systems in order to achieve
compliance in a cost effective and timely fashion. The Company will expend
necessary resources to assure that its computer systems are reprogrammed in
time to deal effectively 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 issue will not pose significant
operational problems for the Company's computer systems as so modified,
converted or replaced. The Company also believes that the cost of conversion,
modification or replacement will not have a material adverse effect on the
Company's financial condition or results of operations. However, if such
modifications and conversions are not completed timely or third parties on
which the Company relies are unable to address this issue in a timely manner,
the Year 2000 issue may have a material impact on the operations of the
Company.
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
None.
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: August 13, 1998 /s/ James K. Mitchell
------------------------------------------
James K. Mitchell, Chairman, President and
Chief Executive Officer
Date: August 13, 1998 /s/ Jacqueline O. Tran
------------------------------------------
Jacqueline O. Tran, Controller and
Principal Accounting Officer