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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
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FOR THE FISCAL YEAR ENDED COMMISSION FILE NUMBER
DECEMBER 31, 1998 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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SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT:
TITLE OF EACH CLASS NAME OF EACH EXCHANGE ON WHICH IT IS REGISTERED
COMMON STOCK PACIFIC EXCHANGE
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
COMMON STOCK, PAR VALUE $.01 PER SHARE
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 [_]
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. [X]
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The aggregate market value of the voting stock held by non-affiliates of
the registrant as of March 26, 1999 was approximately $5,719,926 representing
approximately 5,084,379 shares.
As of March 26, 1999, the registrant had 6,166,451 shares of its Common
Stock, $.01 par value, issued and outstanding.
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DOCUMENTS INCORPORATED BY REFERENCE
None.
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PART I
ITEM 1. DESCRIPTION OF BUSINESS
GENERAL
The discussion of the Company's business contained in this Annual Report on
Form 10-K 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."
JMC Group, Inc. (the "Company") is a Delaware corporation which was founded
in 1983. Its executive offices are located at 9710 Scranton Road, Suite 100,
San Diego, California 92121 and its telephone number is (619) 450-0055.
In September 1998 the Company purchased for $1,000,000 in a private
transaction, 100,000 shares of a private development-stage company named
OptiMark Technologies, Inc., and concurrently made an election to be regulated
as a Business Development Company ("BDC") under the Investment Company Act of
1940 (the "Act"). As a BDC, the Company may only make investments or engage in
other activities to the extent allowed by the applicable provisions to the Act.
Such provisions allow the Company to continue to service existing accounts,
receive service fees, and receive asset-based fee income as described herein.
See "Business Development Company Risk Factors" under "Management's Discussion
and Analysis of Financial Condition and Results of Operation."
The Company may not, unless authorized by vote of a majority of its
outstanding Common Stock, change the nature of its business so as to cease to
be, or withdraw its election as, a BDC.
See "OptiMark Investment" under "Management's Discussion and Analysis -
Business Opportunities," for further information about OptiMark.
In prior years, the Company operated its business in one industry segment -
annuity, insurance and mutual fund sales and sales support services through
financial institutions and the related servicing of products previously sold.
This business had historically been carried out through the Company's
subsidiaries, James Mitchell & Co. and its subsidiaries ("JMC") and JMC
Investment Services, Inc. ("JMCI"). JMC and JMCI were structured marketing
organizations that sold tax-advantaged annuities, insurance products and mutual
funds as investment vehicles to customers of financial institutions through
relationships with banks and savings and loan associations and thrifts.
On December 22, 1997 the Company announced that it was withdrawing from its
traditional retail sales business and terminating its relationship with each of
its remaining bank clients. Citing a severely restricted market for the
Company's services, the Board determined it was in the best interest of
stockholders to preserve capital and assets and to look for a business
alternative. As a result of these decisions, the Company commenced a
restructuring aimed at enhancing the servicing of the existing asset fee block
to maximize return and reducing costs in all areas of operations. All sales and
marketing efforts and costs are being evaluated and total personnel have been
reduced to a maintenance level. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations - 1997 Compared to 1996 -
Restructuring."
Although the termination or modification of contracts with financial
institutions usually ends new sales activities, JMC continues, in most cases, to
provide services to the customers of the institution and earns fees for these
services based on the accumulated asset value of the accounts being serviced. In
1997, First Tennessee Bank selected the option of acquiring JMC's right to
future asset-based fee revenues at the termination of its contract. However,
the other client financial institutions opted to continue to receive fees in
accordance with termination provisions in their existing contracts. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations - Results of Operations - 1998 compared to 1997 and 1997 compared to
1996."
During 1998, the average monthly accumulated value of assets being serviced
for such inactive clients was over $262 million generating annual 1998 asset-
based fee revenues of $921,000.
2
PRINCIPAL MARKETS AND METHODS OF DISTRIBUTION
Through the end of 1997, the principal market for JMC's services was banks,
savings and loan associations and thrifts. An independent marketing
organization such as JMC provided these institutions with the ability to make
products available to their customers and receive fee income. As previously
discussed, JMC withdrew from this market but continues to service the block of
existing business, and when necessary, solicits new products to existing
customers to replace older products having lower rates of return with products
having more competitive returns.
PRINCIPAL PRODUCTS
The Company's subsidiaries have negotiated relationships with numerous
national insurance providers and, during 1998, such subsidiaries, to a limited
extent, continued to sell the products of New York Life Insurance and Annuity
Company, Keyport Life Insurance Company, Aetna Life Insurance and Annuity
Company, Liberty Life Assurance Company, The Life Insurance Company of Virginia,
Allianz Life Insurance Company of North America and Transamerica Life Insurance
and Annuity Company, among others. All of these companies have A or higher
ratings from A.M. Best.
Prior to the termination of sales activities, the Company's subsidiaries'
arrangements with each of its annuity and insurance provider companies were very
similar. JMC acted as an agent and sold the provider's products to customers of
financial institution clients. In addition, the Company's subsidiaries handled
certain administrative responsibilities and provided ongoing customer service.
Both of these functions are often provided directly by the annuity and insurance
provider in other agency relationships. The Company's subsidiaries continue to
earn commissions from the sale of the provider's products. In addition to the
commission on the initial sale, they also earn a monthly asset-based fee on most
products, based on the accumulated value of each contract for as long as the
contract is in force and annuity payments have not started. Contracts with
annuity and insurance providers are generally terminable by either party on
thirty days' notice with regard to all of their provisions, except that the
provider company continues to be obligated to pay the Company its monthly asset-
based fee so long as there remains in force any accumulated value of contracts
sold prior to termination of the contract. During 1998, the Company received
approximately $152,000 in annuity commissions and $921,000 in asset-based fee
revenues related to annuity contracts. Commissions are net of actual and
projected chargebacks for surrenders. See "Management's Discussion and Analysis
of Financial Condition and Results of Operations - Results of Operations - 1997
Compared to 1996" related to events impacting asset-based fee income during 1997
such as the net gain on the sale of rights to certain future asset-based fee
revenue.
Management believes that the Company's subsidiaries have maintained strong
relations with their current annuity and insurance provider companies and
continues to work with these provider companies to help insure that existing
customers receive competitive rates of return on either existing products or on
new ones. In connection with the sale of annuity and insurance products, JMC
does not assume any of the underwriting risks or obligations of the insurance
company itself.
Although sales efforts related to mutual funds have been suspended, the
Company's subsidiaries have agreements to sell mutual fund shares for a large
number of mutual fund families, including Putnam, Federated, Fidelity,
Oppenheimer, Franklin-Templeton and American Capital. JMC receives commissions
for the sale of mutual fund shares and, in most instances, receives ongoing fees
for providing continuing customer service. The Company will continue to service
its mutual fund customers.
MATERIAL CUSTOMERS
During 1998, no single customer accounted for a material portion of the
Company's sales.
COMPETITION
Since the Company's withdrawal from the retail bank market, it has
continued to earn revenues from servicing existing customers. The fees the
Company earns are contractually committed for the life of the product and may
only be terminated if the customer surrenders the product. Thus, the Company's
chief competition comes from independent agents who solicit the Company's
existing customer base in attempts to cause the customers to surrender their
products in order to reinvest the money in a product the agent is selling. The
Company diligently works to identify potential customers who may
3
wish to invest in different products due to low rates of return and solicits
them in order to provide products with more competitive rates of return. The
Company hopes that through providing superior customer service and more
competitive rates of return on investments that it can continue to service
existing blocks of business and minimize product surrenders by existing
customers.
REGISTRATION AND LICENSING
JMC and certain of its subsidiaries and JMCI are required to be licensed to
do business in certain states where they transact business. In addition, JMC
Financial Corporation and JMCI are registered broker-dealers with the Securities
and Exchange Commission ("SEC"), are members of the National Association of
Securities Dealers, Inc. ("NASD") and are licensed or registered as securities
broker-dealers in certain states where they transact business. Finally, certain
of JMC's subsidiaries and JMCI must be licensed or registered as an insurance
agency or agent in order to engage in business in certain states. Each of JMC
and its subsidiaries and JMCI are duly qualified to transact business, and are
duly registered or licensed or exempt from the registration or licensing
requirements of broker-dealers and entities which engage in securities and
insurance businesses, in every state where management believes such entities
should be so qualified, registered or licensed.
Material federal, state and local regulations affecting the business of JMC
and its subsidiaries and JMCI include the Securities Exchange Act of 1934, as
amended, the Investment Company Act of 1940, as amended, the securities and
insurance laws of each state in which JMC and JMCI do business and the local
ordinances of each city and county in which JMC and JMCI maintain an office.
REGULATION
JMCG is regulated by the SEC as a Business Development Company under the
Investment Company Act of 1940 (see "General" description above and "Trends and
Uncertainties" below).
JMC and certain of its subsidiaries and JMCI are subject to extensive state
regulation in those states in which they are licensed to conduct insurance
business. Each state's insurance regulator exercises jurisdiction over the
licensing of agents, supervises the form and content of sales literature and
other materials distributed to the public, and generally acts to protect
consumers from misrepresentation and other unfair conduct. Legislation changing
the substantive or procedural rules governing the insurance departments,
insurers or agents may affect the mode of operation and profitability of
insurance agencies. Insurance commissioners, to protect the public, may
maintain administrative proceedings which could result in cease and desist
orders, fines or the suspension or cancellation of an agent's license.
The securities industry in the United States is also subject to extensive
regulation under both federal and state law. The SEC is the federal agency
responsible for the administration of federal securities laws. Much of the
regulation of broker-dealers has been delegated to the self-regulatory
organizations, principally the NASD and the securities exchanges. Certain of
the Company's subsidiaries are subject to regulation by the SEC and the NASD.
The NASD conducts periodic examinations of member broker-dealers in accordance
with rules it has adopted and amended from time to time, subject to approval by
the SEC. These subsidiaries are also subject to regulation by state securities
authorities in those states in which they do business. The SEC, the NASD 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 the protection of creditors and stockholders of broker-dealers.
EMPLOYEES
As of March 26, 1999, the Company had 5 full-time employees.
4
ITEM 2. PROPERTIES
During 1998, the Company maintained only its corporate office. The
facility exceeded the Company's requirements and the Company renegotiated its
lease to surrender a portion of its space on June 30, 1998. The following is
the current lease for the principal facility utilized in the Company's
operations as of December 31, 1998:
Corporate Headquarters
9710 Scranton Road
Suite 100
San Diego, CA 92121
Exp. Date: July 31, 2002
Square Footage: 2,525 square feet
ITEM 3. LEGAL 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.
Although an agreement was reached with the Florida Department of Insurance that
the Final Order would be in effect for a period of two years beginning October
1996, no administrative action was taken against JMC Insurance Services
Corporation or James Mitchell's personal insurance license and he has been
continually licensed in the State of Florida as a non-resident life insurance
agent since 1991. Effective October 1998, all issues with the Florida
Department of Insurance were closed.
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 such
proceeding will have a material adverse effect on the Company's financial
condition or results of operations.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters other than election of directors at the annual meeting on August
31, 1998 were submitted to a vote of security holders during the fiscal year
ended December 31, 1998.
5
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
MARKET INFORMATION
As of March 18, 1999, the Common Stock of the Company is principally
traded in the Nasdaq SmallCap Market ("SCM") under the symbol JMCGC and is owned
as of March 3, 1999 by approximately 230 shareholders of record with
approximately 690 beneficial owners. Eight broker-dealers are presently market
makers in the Company's Common Stock on the Nasdaq SCM.
The Common Stock of the Company was principally traded in the Nasdaq
National Market System up until March 17, 1999. On March 16, 1999, the
Registrant was informed by The Nasdaq Stock Market that the Company's Common
Stock would be listed on the Nasdaq SmallCap Market via an exception from the
minimum bid price requirements effective March 18, 1999 at the opening of the
market. For the duration of the exception, the Company's Nasdaq symbol will be
JMCGC.
The Company failed to meet the continued listing requirement for the NMS as
of December 16, 1998 and was granted a temporary exception from this standard
subject to JMCG meeting certain conditions. On or before May 7, 1999, the
Company must demonstrate a closing bid price of at least $1.00 per share;
thereafter, the Company's closing bid price must meet or exceed $1.00 per share
for a minimum of ten consecutive trading days. The exception will expire on May
21, 1999. In the event the Company is deemed to have met the terms of the
exception, it shall continue to be listed on the Nasdaq SmallCap Market. If the
Company remains in compliance throughout the expiration date of the exception,
the symbol will be returned to JMCG.
The Company previously announced that it would seek stockholder approval at
the May 3, 1999 Annual Meeting of stockholders of a one-for-two reverse split of
its Common Stock to effectively reduce the number of shares issued and
outstanding to approximately 3,083,225 shares. The Company believes that this
action may result in an increase of the bid price for the Company's Common Stock
to over $1.00, which is Nasdaq's stated minimum bid price for shares on the SCM.
However, there can be no assurance that the bid price for the Common Stock will
be increased to over $1.00 or that the Company will otherwise be able to
maintain listing on the SCM. If delisted from the Nasdaq SmallCap Market, the
Company's Common Stock would be traded on the Over-the-Counter Bulletin Board.
The Company is also listed on the Pacific Exchange under the symbol JMC,
but the trading volume in the Company's Common Stock on the Pacific Exchange is
not material.
The following table reflects the high and low sales prices on the Nasdaq
National Market System for the Company's Common Stock for the four quarters of
each of 1998 and 1997:
Sales Price
-----------------------
High Low
-----------------------
1998
First Quarter $1.875 $0.656
Second Quarter $1.438 $0.906
Third Quarter $1.219 $0.500
Fourth Quarter $1.250 $0.500
1997
First Quarter $1.531 $0.906
Second Quarter $1.188 $0.688
Third Quarter $0.969 $0.625
Fourth Quarter $0.953 $0.625
6
DIVIDENDS
No dividends were paid by the Company during fiscal 1998. Future
dividends, if any, will be determined by the Company's Board of Directors, based
upon the Company's profitability, its cash position and other considerations
deemed appropriate.
ITEM 6. SELECTED FINANCIAL DATA
SELECTED ANNUAL FINANCIAL DATA
- --------------------------------------------------------------------------------------------------------------------------
Years ended December 31, 1998 1997 1996 1995 1994
- --------------------------------------------------------------------------------------------------------------------------
Selected Total revenues $2,022,567 $6,303,291 $11,845,436 $20,371,860 $33,357,242
Financial Income (loss) from continuing
Data operations $ 227,869 $ (257,292) $ (502,919) $ 1,741,124 $(2,370,155)
Net income (loss) $ 227,869 $ (257,292) $ (502,919) $ 1,741,124 $(2,370,155)
- --------------------------------------------------------------------------------------------------------------------------
Earnings Income (loss) from continuing
Per Share operations $ 0.04 $ (0.04) $ (0.08) $ 0.28 $ (0.36)
- - Basic
and Diluted
Net income (loss) $ 0.04 $ (0.04) $ (0.08) $ 0.28 $ (0.36)
- --------------------------------------------------------------------------------------------------------------------------
Balance Total assets $6,588,499 $7,918,988 $ 8,766,023 $ 9,511,828 $ 8,380,931
Sheet Total liabilities $ 161,919 $1,837,925 $ 2,248,120 $ 2,511,006 $ 3,121,233
Stockholders' equity $6,426,580 $6,081,063 $ 6,517,903 $ 7,000,822 $ 5,259,698
- --------------------------------------------------------------------------------------------------------------------------
Cash dividends of $456,465 were paid during 1994.
No cash dividends were paid during 1998, 1997, 1996 or 1995.
SELECTED QUARTERLY FINANCIAL DATA
- --------------------------------------------------------------------------------------------------------------------------
First Quarter Second Quarter Third Quarter Fourth Quarter
- --------------------------------------------------------------------------------------------------------------------------
1998
Commission revenues $ 368,745 $ 343,501 $ 291,966 $291,466
Net income (loss)* $ 92,923 $ 63,694 $ 64,153 $ 7,099
Earnings per share - Basic
and Diluted:
Net income (loss) $ 0.02 $ 0.01 $ 0.01 $ 0.00
---------------------------------------------------------------------------------------------------------------
1997
Commission revenues $1,138,791 $1,080,631 $1,022,328 $952,814
Net income (loss)** $ (250,580) $ (290,133) $ (160,901) $444,322
Earnings per share - Basic
and Diluted:
Net income (loss) $ (0.04) $ (0.05) $ (0.03) $ 0.07
===============================================================================================================
* The first quarter includes the sale of rights to future asset-based fees of
$330,000 ($198,000 net of tax).
** The fourth quarter includes the sale of rights to future asset-based fees of
$1,870,000 ($1,234,000 net of tax) and one-time charge for restructuring of
$589,000 ( $389,000 net of tax).
7
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
RESULTS OF OPERATIONS
When used in this Annual Report on Form 10-K, the words "expects,"
"believes," "estimates," and similar expressions are intended to identify
forward-looking statements. Such statements are subject to risks and
uncertainties, including those set forth below and in Item 1 of this Annual
Report on Form 10-K, that could cause actual results to vary materially from
those projected. These forward-looking statements speak only as of the date
hereof. The Company expressly disclaims any obligation or undertaking to
release publicly any updates or revisions to any forward-looking statements
contained herein to reflect any change in the Company's expectations with regard
thereto or any change in events, conditions or circumstances on which any such
statement is based.
1998 Compared to 1997
- ---------------------
GENERAL. Revenues and expenses include the accounts of the Company's
subsidiaries, JMC and JMCI.
The Company reported a net income for the year ended December 31, 1998 of
$228,000 (net of taxes of $148,000) compared with net loss of $257,000 (after
providing for income tax benefit of $123,000) in 1997. Included in the 1998 and
1997 results were the following:
1998:
-----
. A gain of $330,000 ($198,000 or $0.03 per share net of tax) on the sale
of the rights to future certain asset-based fee revenues to a client
financial institution.
1997:
-----
. A gain of $1,870,000 ($1,234,000 or $0.20 per share net of tax) on the
sale of the rights to future certain asset-based fee revenues to a
client financial institution.
. One-time charges for restructuring of $589,000 ($389,000 or $0.06 per
share net of tax).
Excluding the above-mentioned items, the Company would have reported an
after-tax income of $30,000 in 1998 as compared to after-tax loss of $1,102,000
(or $0.18 per share after an estimated tax benefit of $559,000) in 1997.
Total revenues for 1998 were $2,023,000 compared to revenues of $6,303,000
in 1997, a decrease of $4,280,000 or 68%. As previously stated, revenues for
1998 and 1997 include net gains on the sale of rights to asset-based fee
revenues of $330,000 and $1, 870,000, respectively.
Excluding the net gain on the sale of the rights to asset-based fee
revenues in 1998 and 1997, revenues for 1998 would have been $1,692,000 compared
to $4,433,000 in 1997 (a decrease of $2,741,000 or 62%). This reduction in
revenues is primarily attributable to a decrease of sales volume of $2,900,000
in 1998 as compared to 1997. This decrease is primarily a result of the
termination by the Company of all of its contracts with client financial
institutions as part of its decision to substantially exit from the retail sales
of annuities and mutual funds.
Total expenses for 1998 were $1,647,000 compared to $6,684,000 in 1997.
Total expenses for 1997 would have been $6,095,000, excluding the previously
described one-time charges of $589,000 for restructuring in 1997. This drop in
total expenses is primarily attributable to the following:
. A $1,334,000 or 76% reduction in fees to financial institutions due to
lower sales volume.
. A $2,106,000 or 76% reduction in wages, commissions and benefits due to
termination of the Company's retail sales operations at the end of 1997;
and
8
. An additional $1,008,000 or 63% reduction in base operating expenses as
a result of the termination of the Company's retail sales operations at
the end of 1997.
Prior to cessation of its sales efforts, the Company's gross margin rate
(gross revenue rate less payout rate to financial institutions and salesperson
commissions) was sensitive to changes in product mix which is impacted by
fluctuations in interest rates and other market conditions. The highest gross
margin rate is achieved on the sale of fixed annuities, followed by variable
annuities with mutual funds producing the lowest gross margin rate.
1997 Compared to 1996
- ---------------------
Restructuring. During the fourth quarter of 1997, the Company's Board of
Directors decided to withdraw from retail sales in the bank marketplace and
approved a restructuring plan which was developed and implemented by management.
The Company recorded one-time restructuring charges in the amount of $589,000.
The restructuring charges included current and future cash requirements for
severance costs and costs related to a premature lease termination of $221,000
and $164,000, respectively, and non-cash expenses of $204,000 associated with
the write-off of certain assets. As of December 31, 1997, there was a balance
of $411,000 remaining in the restructuring accrual primarily related to
severance costs and premature lease termination costs.
GENERAL. Revenues and expenses include the accounts of the Company's
subsidiaries, JMC and JMCI.
The Company reported a net loss for the year ended December 31, 1997 of
$257,000 (after providing for income tax benefit of $123,000) compared with net
loss of $503,000 (after providing for income taxes of $243,000) in 1996.
Included in the 1997 and 1996 results were the following:
1997:
-----
. A gain of $1,870,000 ($1,234,000 or $0.20 per share net of tax) on the
sale of the rights to future certain asset-based fee revenues to a
client financial institution.
. One-time, pre-tax charges for restructuring of $589,000 ($389,000 or
$0.06 per share net of tax).
1996:
-----
. A net gain of $1,844,000 ($1,189,000 or $0.19 per share net of tax) on
the sale of the rights to future asset-based fee revenues to a former
client financial institution. The net gain is a result of a sales price
of $2.1 million less costs associated with the loss of Central Fidelity
Bank as a client of $256,000. These costs are primarily related to
closing of facilities and consolidation of personnel functions due to
the resulting loss of business created by the Central Fidelity
termination.
. Expenses net of recoveries related to a Marketing Plan and Marketing
Agreement as well as a proposed merger as follows:
. Payment for a Marketing Plan and Marketing Agreement of $1.25
million, which had been capitalized and was being amortized over a
five-year period, written off in its entirety in the fourth
quarter of 1996 ($806,000 or $0.13 per share net of tax);
. Expenses related to the proposed merger including primarily legal,
accounting, investment banking and printing expenses of $884,000
($570,000 or $0.09 per share net of tax); and
. Recovery on settlement of legal proceedings for amounts paid on
the Marketing Plan as well as expenses incurred on the proposed
merger of $500,000 ($322,000 or $0.05 per share net of tax).
Excluding the above-mentioned items, the Company would have reported an
after-tax loss of $1,102,000 (or $0.18 per share after an estimated tax benefit
of $559,000) in 1997 as compared to an after-tax loss of $639,000 (or $0.10 per
share after an estimated tax benefit of $318,000) in 1996.
9
Total revenues for 1997 were $6,303,000 compared to revenues of $11,845,000
in 1996, a decrease of $5,542,000 or 47%. As previously stated, revenues for
1997 and 1996 include net gains on the sale of rights to asset-based fee
revenues of $1,870,000 and $1,844,000, respectively. In addition to these
revenue items, the Company earned transition fee revenue of $250,000 in 1996.
The transition fee, which was negotiated by the Company with a client financial
institution, was intended to cover the cost of operation during a transitional
period prior to termination of the Company's relationship with this financial
institution client.
Excluding the net gain on the sale of the rights to asset-based fee
revenues in 1997 and 1996, but including transition fees, revenues for 1997
would have been $4,433,000 compared to $10,001,000 in 1996 (a decrease of
$5,568,000 or 56%). This reduction in revenues is primarily attributable to the
following:
. Lower gross sales volumes which declined $78 million or 66% due
primarily to the termination of the Virginia operation at the end of
1996 and the transition of the Tennessee program as of January 31, 1996
(see also "Trends and Uncertainties" later in this section);
. A decrease of approximately $923,000 in asset-based fee revenue in 1997
compared to 1996. This decrease is primarily a result of the sale of
the rights to certain future asset-based fee revenues for its Virginia-
based client at the end of 1996.
Total expenses for 1997 were $6,684,000 compared to $12,592,000 in 1996.
Total expenses for 1997 would have been $6,095,000, a decrease of $4,863,000 or
44%, when compared to 1996 expenses, excluding the previously described one-time
charges of $589,000 for restructuring in 1997 and $884,000 in merger-related
expenses and $750,000 net loss on a marketing agreement in 1996. This drop in
total expenses is primarily attributable to the following:
. A $2,182,000 or 56% reduction in fees to financial institutions due to
lower sales volume.
. A $388,000 or 70% reduction in salesperson's commissions also due to
lower sales volume, and
. An additional $2,293,000 or 35% reduction in base operating expenses as
a result of the termination of the Company's Virginia operations at the
end of 1996.
Prior to cessation of its sales efforts, the Company's gross margin rate
(gross revenue rate less payout rate to financial institutions and salesperson
commissions) was sensitive to changes in product mix which is impacted by
fluctuations in interest rates and other market conditions. The highest gross
margin rate is achieved on the sale of fixed annuities, followed by variable
annuities with mutual funds producing the lowest gross margin rate.
Fixed annuities achieve a higher gross margin rate because the Company
receives a higher gross revenue rate on fixed annuities but makes payments to
its financial institution clients and sales personnel at a constant rate.
Mutual funds achieve the lowest gross margin rate due to the significantly lower
gross revenue rate paid on these products, even though the payout to the
Company's financial institution clients is a fixed percentage of the gross
revenue rate. During 1997 and 1996, variable annuity and mutual fund sales
comprised 77% of total sales.
LIQUIDITY AND CAPITAL RESOURCES
As of December 31, 1998, the Company had cash and cash equivalents of
approximately $4,895,000, an increase of $633,000 from $4,262,000 in cash and
cash equivalents at December 31, 1997.
Significant sources and uses 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 stock options exercised.
. Offset by a purchase of 100,000 shares of OptiMark Technologies, Inc.'s
common stock for $1,000,000.
10
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 December 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 million to $4 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.
OPTIMARK INVESTMENT
The Company in September 1998 utilized $1,000,000 of its cash to purchase
100,000 shares of the common stock of OptiMark Technologies, Inc. (OptiMark), a
private, development-stage company based in Durango, Colorado. OptiMark owns
all rights to the advanced trading technology of the OptiMark System, an
electronic equity trading process, which offers investors the ability to match
buying and selling orders in multiple ranges and sizes. The system utilizes
advanced computers and patented algorithms in order to match the buyers and
sellers within seconds and with anonymity. OptiMark currently has agreements
with the Nasdaq National Market System and the Pacific Exchange. OptiMark also
announced in September 1998 that it had entered into a joint venture agreement
in Japan with Nihon Keizai Shumbun, Inc. (Nikkei), QUICK Corporation and the
Osaka Securities Exchange, to adapt the OptiMark System for trading in Japanese
listed securities. The OptiMark system began online trading through the Pacific
Exchange at the end of January 1999.
BUSINESS DEVELOPMENT COMPANY RISK FACTORS
The Company has elected to be regulated as a Business Development Company
("BDC") under the Investment Company Act of 1940. The Act provides protection
for investors but imposes restrictions on the Company's freedom of action. Risk
factors that investors should consider are:
1. Speculative Nature of Investments. Investments by a BDC are confined to
---------------------------------
stocks of companies that do not have an established "track record" of
earnings, dividends or market value and frequently have no earnings at all.
2. Limited Liquidity of Assets. Investments by a BDC are in securities of
---------------------------
development-stage companies, for which there is usually no ready market.
3. Lack of Control of Portfolio Companies. Most investments by a BDC are
--------------------------------------
confined to enterprises to which the BDC offers to provide significant
managerial assistance. However, such assistance does not constitute control
and a portfolio company may pursue policies or strategies which are opposed
to the advice of the BDC.
4. Conflicts of Interests. The other owners, the management or the creditors
----------------------
of a portfolio company may have interests or objectives different from those of
the BDC, creating the possibility of conflicts which may be detrimental to the
interest of the BDC as investor.
5. Restriction on Business Opportunities. Unless its BDC status is terminated
-------------------------------------
by vote of its shareholders, a BDC may not change its business or engage in new
business activities. Consequently, the directors and management of a BDC do not
have freedom to take advantage of business opportunities that may become
available.
11
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 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 strategic alternatives for enhanced utilization of its
remaining liquid assets. In the interim, the Company's cash assets are invested
in government securities, money market funds, cash equivalents and in stock of
OptiMark Technologies, Inc. as described above.
NASDAQ COMPLIANCE
On March 16, 1999, the Registrant was informed by The Nasdaq Stock Market
that the Company's Common Stock would be listed on the Nasdaq SmallCap Market
via an exception from the minimum bid price requirements effective March 18,
1999 at the opening of the market. For the duration of the exception, the
Company's Nasdaq symbol will be JMCGC.
The Company failed to meet the continued listing requirement for the NMS as
of December 16, 1998 and was granted a temporary exception from this standard
subject to JMCG meeting certain conditions. On or before May 7, 1999, the
Company must demonstrate a closing bid price of at least $1.00 per share;
thereafter, the Company's closing bid price must meet or exceed $1.00 per share
for a minimum of ten consecutive trading days. The exception will expire on May
21, 1999. In the event the Company is deemed to have met the terms of the
exception, it shall continue to be listed on the Nasdaq SmallCap Market. If the
Company remains in compliance throughout the expiration date of the exception,
the symbol will be returned to JMCG.
The Company previously announced that it would seek stockholder approval at
the May 3, 1999 Annual Meeting of stockholders of a one-for-two reverse split of
its Common Stock to effectively reduce the number of shares issued and
outstanding to approximately 3,083,225 shares. The Company believes that this
action may result in an increase of the bid price for the Company's Common Stock
to over $1.00, which is Nasdaq's stated minimum bid price for shares on the SCM.
However, there can be no assurance that the bid price for the Common Stock will
be increased to over $1.00 or that the Company will otherwise be able to
maintain listing on the SCM. If delisted from the Nasdaq SmallCap Market, the
Company's Common Stock would be traded on the Over-the-Counter Bulletin Board.
YEAR 2000
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 has identified its non-compliant systems and
has spent 90% of the amount it has budgeted to bring the Company into year 2000
compliance. The Company will continue to expend necessary resources to assure
that its computer systems are reprogrammed in time to deal effectively with
transactions in the year 2000 and beyond, however, the Company does not expect
to expend any more resources than it has currently budgeted for. The Company
presently believes that, with further modifications to existing software and
conversions to new software, as well as with the new software it has already
purchased and the hardware which has already been updated, 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
any additional costs 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 in
a timely manner, the Year 2000 issue may have a material impact on the
operations of the Company.
The Company is also currently determining the extent to which third parties
on which the Company relies are able to address this issue in a timely manner.
For example, problems created by a lack of compliance by third party service
providers may inhibit the Company from adequately servicing its current customer
base thus causing a temporary impact on the Company's operations. The Company
has taken steps to prepare itself in the event any third party service provider
is unable to provide any or
12
all services which it has been contracted to provide. Should services from third
parties discontinue, whether due to non-compliance with Year 2000 issues or from
any natural disaster, the Company plans to continue providing assistance to its
customers.
Another possible problem would be if the insurance provider companies and
mutual fund companies which pay regular fees and commissions to the Company,
were unable to pay these amounts due to their lack of compliance, computer
system problems or a loss of customer account information. If the ongoing fee
revenue stream were interrupted, this would create a material impact on the
Company's financial condition. The Company has taken measures to provide that
customer account information is duplicated in both electronic and physical
formats to protect against any uncertainties in account values, fee valuations
or other loss of information.
With the Company's current operating expenses, the current cash and cash
equivalent position should adequately supply the Company with sufficient capital
to continue its operations for extended periods should any temporary
interruption in revenue occur.
ITEM 7A QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company maintains cash and cash equivalents consisting mainly of cash
accounts and money market accounts. Principal amounts of these accounts are not
affected by interest rate fluctuations. Interest rate fluctuations do not have
a material effect on the interest income returns earned by these accounts.
The Company also maintains a long-term investment portfolio consisting of
100,000 shares of common stock in OptiMark Technologies, Inc. The effect of
fluctuation in interest rates on this investment is not material. For more
information on the Company's OptiMark holdings and the market risk of investing
in a Business Development Company, see "OptiMark Investment" and "Business
Development Company Risk Factors," respectively, above.
13
ITEM 8. FINANCIAL STATEMENTS
JMC GROUP, INC.
AND SUBSIDIARIES
CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED
DECEMBER 31, 1998, 1997 AND 1996
CONTENTS
INDEPENDENT AUDITORS' REPORT............................................... 15
CONSOLIDATED BALANCE SHEETS................................................ 16
CONSOLIDATED STATEMENTS OF OPERATIONS...................................... 17
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY................. 18
CONSOLIDATED STATEMENTS OF CASH FLOWS...................................... 19
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS................................. 20
14
INDEPENDENT AUDITORS' REPORT
- ----------------------------
We have audited the accompanying consolidated balance sheets of JMC Group,
Inc. and subsidiaries as of December 31, 1998 and 1997 and the related
consolidated statements of operations, changes in stockholders' equity, and cash
flows for each of the three years in the period ended December 31, 1998. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits 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 audits provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in
all material respects, the financial position of JMC Group, Inc. and
subsidiaries at December 31, 1998 and 1997, and the results of their operations
and their cash flows for each of the three years in the period ended December
31, 1998 in conformity with generally accepted accounting principles.
As discussed in Note 1, to the financial statements, on December 22, 1997,
the Company announced its intention to withdraw from the retail sales business
and terminate its relationship with each of its financial institution clients.
/s/ Deloitte & Touche LLP
San Diego, California
February 12, 1999
15
JMC GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
December 31, December 31,
1998 1997
--------------- ---------------
ASSETS
CURRENT ASSETS
Cash and cash equivalents $4,895,190 $4,261,531
Cash segregated under securities regulations - 922,207
Receivables from insurance companies 94,274 329,265
Receivable from financial institution - 1,462,861
Income taxes receivable 68,851 -
Deferred tax asset 63,884 251,426
Other assets 122,267 195,219
---------- ----------
TOTAL CURRENT ASSETS 5,244,466 7,422,509
Investment in OptiMark Technologies, Inc. 1,000,000 -
Furniture, equipment and leasehold improvements-
net of accumulated depreciation and amortization
of $520,840 in 1998 and $1,435,362 in 1997 20,290 77,925
Asset-based fees purchased - net of accumulated
amortization of $1,073,386 in 1998 and $978,575 in 1997 323,743 418,554
---------- ----------
TOTAL ASSETS $6,588,499 $7,918,988
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accrued fees to financial institutions $ 48,966 $ 113,009
Customer funds segregated under securities regulations - 922,207
Accrued restructuring charges - 410,785
Accrued expenses and other liabilities 72,614 242,871
Allowance for contract cancellations 5,858 55,822
Income tax payable - 11,659
Accrued payroll and related expenses 34,481 81,572
---------- ----------
TOTAL CURRENT LIABILITIES 161,919 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 5,781,640 5,553,771
TOTAL STOCKHOLDERS' EQUITY 6,426,580 6,081,063
---------- ----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $6,588,499 $7,918,988
========== ==========
The accompanying notes are an integral part of these financial statements.
16
JMC GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
Years Ended December 31,
1998 1997 1996
-------------------------------------------------
REVENUES
Commissions $1,295,678 $4,194,564 $ 9,541,728
Net gain on sale of rights to certain future asset-based fee revenues 330,000 1,870,000 1,844,393
Interest 296,296 229,140 204,505
Other 100,593 9,587 254,810
---------- ---------- -----------
TOTAL REVENUES 2,022,567 6,303,291 11,845,436
---------- ---------- -----------
EXPENSES
Employee compensation and benefits 651,567 2,757,601 4,852,670
Fees to financial institutions 412,441 1,746,266 3,928,024
Professional fees 222,531 337,369 1,089,861
Rent 76,625 273,368 376,917
Telephone 34,311 48,573 142,273
Depreciation and amortization 28,025 118,217 227,040
Other general and administrative expenses 221,198 813,164 1,224,926
Restructuring charges - 589,224 -
Marketing plan payment - net of recovery - - 750,000
---------- ---------- -----------
TOTAL EXPENSES 1,646,698 6,683,782 12,591,711
---------- ---------- -----------
INCOME (LOSS) BEFORE INCOME TAXES 375,869 (380,491) (746,275)
INCOME TAX PROVISION (BENEFIT) 148,000 (123,199) (243,356)
---------- ---------- -----------
NET INCOME (LOSS) $ 227,869 $ (257,292) $ (502,919)
========== ========== ===========
EARNINGS (LOSS) PER SHARE - BASIC AND DILUTED $ 0.04 $ (0.04) $ (0.08)
========== ========== ===========
WEIGHTED AVERAGE NUMBER OF SHARES
BASIC 6,134,516 6,055,738 6,213,912
DILUTED 6,144,329 6,055,738 6,213,912
The accompanying notes are an integral part of these financial statements.
17
JMC GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN
STOCKHOLDERS' EQUITY
Common Stock
---------------------------- Additional
Outstanding Paid-in Retained
Shares Amount Capital Earnings Total
----------- ---------- ----------- ----------- -----------
Balances -- January 1, 1996 6,198,898 $61,989 $ 624,851 $6,313,982 $7,000,822
Stock options exercised 20,000 200 19,800 - 20,000
Net loss for the year ended
December 31, 1996 - - - (502,919) (502,919)
--------- -------- ---------- ---------- ----------
Balances -- December 31, 1996 6,218,898 62,189 644,651 5,811,063 6,517,903
Repurchased common stock (194,547) (1,946) (192,602) - (194,548)
Stock options exercised 20,000 200 14,800 - 15,000
Net loss for the year
ended December 31, 1997 - - - (257,292) (257,292)
--------- -------- ---------- ---------- ----------
Balances -- December 31, 1997 6,044,351 60,443 466,849 5,553,771 6,081,063
Stock options exercised 122,100 1,221 116,427 - 117,648
Net income for the year
ended December 31, 1998 - - - 227,869 227,869
--------- -------- ---------- ---------- ----------
Balances -- December 31, 1998 6,166,451 $ 61,664 $ 583,276 $5,781,640 $6,426,580
========= ======== ========== ========== ==========
The Company's certificate of incorporation also authorizes 5,000,000 shares of
no par value preferred stock, none of which has been issued.
The accompanying notes are an integral part of these financial statements.
18
JMC GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years Ended December 31,
1998 1997 1996
--------------------------------------------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ 227,869 $ (257,292) $ (502,919)
Adjustments to reconcile net income (loss) to net cash provided
(used) by operating activities:
Net gain on sale of rights to certain future asset-based fee revenues - (1,870,000) (1,844,393)
(Gain) loss on sale of fixed assets (27,496) (5,852) 5,036
Depreciation and amortization 28,025 118,217 227,040
Marketing plan payment - net of recovery - - 750,000
Amortization of asset-based fees purchased 94,811 342,739 218,351
Deferred tax provision (benefit) 187,542 (57,065) (35,007)
Changes in assets and liabilities:
Cash segregated under securities regulations 922,207 325,024 (352,962)
Receivables from insurance companies 234,991 345,144 152,562
Receivable from financial institution 1,462,861 325,000 84,450
Income taxes receivable (80,510) 436,405 (359,412)
Other assets 72,952 44,594 26,887
Accrued fees to financial institutions (64,043) (208,600) (45,678)
Customer funds segregated under securities regulations (922,207) (325,024) 352,962
Accrued expenses and other liabilities (170,257) (237,125) (402,624)
Accrued restructuring charges (382,758) 561,142 -
Allowance for contract cancellations (49,964) 2,009 (88,690)
Accrued payroll and related expenses (47,091) (52,339) (78,856)
----------- ----------- -----------
NET CASH PROVIDED (USED) BY OPERATING ACTIVITIES 1,486,932 (513,023) (1,893,253)
----------- ----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sale of rights to certain future asset-based fee revenues 407,139 1,544,393
Purchase of furniture, equipment and leasehold improvements (6,352) (143,545) (89,464)
Proceeds from sale of furniture and equipment 35,431 7,625 18,609
Payment for the consulting and marketing agreement - - (1,250,000)
Recovery of payment and expenses for consulting and marketing agreement - - 500,000
Purchase of OptiMark Technology, Inc. common stock (1,000,000) - -
----------- ----------- -----------
NET CASH PROVIDED (USED) BY INVESTING ACTIVITIES (970,921) 271,219 723,538
----------- ----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Repurchase of common stock - (194,548) -
Proceeds from stock options exercised 117,648 15,000 20,000
----------- ----------- -----------
NET CASH PROVIDED (USED) BY FINANCING ACTIVITIES 117,648 (179,548) 20,000
----------- ----------- -----------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 633,659 (421,352) (1,149,715)
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 4,261,531 4,682,883 5,832,598
----------- ----------- -----------
CASH AND CASH EQUIVALENTS AT END OF YEAR $ 4,895,190 $ 4,261,531 $ 4,682,883
=========== =========== ===========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid for:
Interest $ - $ - $ 765
Income taxes $ 62,388 $ 9,862 $ 273,468
SUPPLEMENTAL DISCLOSURES OF NON-CASH OPERATING
ACTIVITIES:
Disposal of furniture and computer software and equipment
charged to accrued restructuring charges $ - $ 161,917 $ -
The accompanying notes are an integral part of these financial statements.
19
NOTE 1. ORGANIZATION AND RESTRUCTURING
The consolidated financial statements include the accounts of JMC Group,
Inc. ("JMCG" or the "Company"), its wholly owned subsidiaries, JMC Investment
Services, Inc. ("JMCI") (formerly Priority Investment Services, Inc. which was
formerly Spear Rees & Co.) and James Mitchell & Co. and its subsidiaries
("JMC"). Through the end of 1997 and for the first three months of 1998, the
Company was engaged in the business of selling and providing support services
for the sales of annuities, insurance products, and mutual funds to the
customers of banks, savings and loan associations and thrifts. Effective
January 25, 1994, Spear Rees & Co. changed its name to Priority Investment
Services, Inc. Effective July 23, 1996, Priority Investment Services, Inc.
changed its name to JMCI. JMCI is registered with the Securities and Exchange
Commission and the National Association of Securities Dealers (NASD) as a
broker-dealer.
Restructuring. During the fourth quarter of 1997, the Company's Board of
Directors decided to withdraw from retail sales in the bank marketplace and
approved a restructuring plan which was developed and implemented by management.
The Company recorded one-time restructuring charges in the amount of $589,000.
The restructuring charges included current and future cash requirements for
severance costs and costs related to a premature lease termination of $221,000
and $164,000 respectively, and non-cash expenses of $204,000 associated with the
write-off of certain assets. As of December 31, 1997, there was a balance of
$411,000 remaining in the restructuring accrual primarily related to severance
costs and premature lease termination costs. Charges to the accrual during 1998
essentially used up this balance and as of December 31, 1998, no restructuring
accrual balance remains.
NOTE 2. SIGNIFICANT ACCOUNTING POLICIES
Registration
- ------------
The Company is registered under the Investment Company Act of 1940 as a
Business Development Company.
Cash and Cash Equivalents
- -------------------------
The Company considers cash on hand, cash in banks, and all highly liquid
investments purchased with a maturity of three months or less to be cash and
cash equivalents.
Cash Segregated Under Securities Regulations
- --------------------------------------------
JMC Financial Corporation, James Mitchell & Co.'s broker-dealer subsidiary
("JMC Financial"), discontinued self-clearing mutual fund transactions for
itself and clearing transactions for JMCI at the end of September 1998. Neither
broker-dealer exercises control over customer funds and instead instructs
customers to send funds directly to the insurance or mutual fund company
depending on the transaction. This effectively eliminates any requirement to
maintain a separate account for benefit of customers.
OptiMark Technologies, Inc. Investment
- --------------------------------------
The investment in 100,000 shares of the common stock of OptiMark
Technologies, Inc. ("OptiMark") has been valued by the Company's Board of
Directors, after consideration of certain pertinent factors, including the
results of operations of OptiMark since the date of purchase in August 1998.
There is no quoted market for OptiMark shares.
Long-Lived Assets
- -----------------
Statement of Financial Accounting Standards No. 121 "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of"
("SFAS 121") was adopted by the Company in 1996. The Company periodically
reviews its long-lived assets in accordance with SFAS 121 to determine if an
impairment has occurred. Based on its review, the Company does not believe that
an impairment of its long-lived assets has occurred.
20
NOTE 2. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Use of Estimates
- ----------------
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the 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
reporting period. Actual results could differ from those estimates.
Revenue Recognition
- -------------------
The Company recognizes and records commission revenue when a sale has been
consummated. Annuity and insurance sales are deemed to be consummated when
proof of premium payment, the completed application and supporting documentation
have been received in the Company's distribution/service center. Mutual fund
sales are recorded on the trade date of such sale. Front commission revenues
for 1998, 1997 and 1996 were $250,171, $1,982,231 and $6,470,807, respectively.
Annuity and insurance sales commission revenue is reported net of chargebacks.
The Company recognizes and records asset-based fee revenues as they become due
from the provider companies, based upon the average accumulated value of assets
in force. Asset-based fee revenues for 1998, 1997 and 1996 were $921,151,
$1,782,347 and $2,705,055, respectively. For the period of February 1, 1996
through December 31, 1997, the Company provided support services related to the
sale of annuities and mutual funds with its Tennessee client. Revenue was
recognized when services were performed. Service related fees for 1997 and 1996
were $429,669 and $365,866, respectively, and are included in commission revenue
for each year.
Fees to Financial Institutions
- ------------------------------
Fees to financial institutions consist of front commission fees and asset-
based fees. The Company records front commission fees when a sale has been
consummated as described in Revenue Recognition. Front commission fees to
financial institutions for 1998, 1997 and 1996 were $43,470, $833,027 and
$2,369,951, respectively. The Company recognizes and records asset-based fees
monthly as they become due to the financial institutions, based upon the average
accumulated assets in force during the month. Asset-based fees to financial
institutions for 1998, 1997 and 1996 were $218,900, $913,239 and $1,558,074,
respectively.
Allowance for Contract Cancellations
- ------------------------------------
The Company reflects a liability on its balance sheet identified as
"Allowance for Contract Cancellations". This allowance is a recognition that
certain commissions earned by the Company on the sale of annuities and insurance
products must be returned to the provider companies if policies are surrendered
within the first year after purchase. A formula is used to calculate the
returned commission exposure. This formula was developed based on the Company's
policy surrender patterns, actual commissions received by month, "known"
unprocessed surrenders, and the availability of recoveries of client fees and
sales personnel commissions. The chargeback expense associated with this
liability is reflected as a reduction in commission revenue as previously stated
in "Revenue Recognition."
Net Gain on Sale of Rights to Certain Future Asset-Based Fee Revenue
- --------------------------------------------------------------------
At the end of the fourth quarter of 1997, the Company's agreement with its
Tennessee-based financial institution client terminated. As part of the
termination agreement, the financial institution exercised its right to purchase
future asset-based fee revenues from the Company. The Company recorded a gain
of $1,870,000 from the sales price of $2.2 million less $330,000 recognizable
after certain contingencies were met in the first quarter of 1998. As of
December 31, 1997, the Company had received $407,139. The remaining balance of
$1,462,861, included in the line item "Receivable from financial institution,"
was received in the first quarter of 1998.
During the fourth quarter of 1996, the Company signed an agreement to
terminate its contract with its Virginia-based financial institution client. As
part of the termination agreement, the financial institution exercised its right
to purchase future asset-based fee revenues from the Company. The Company
recorded a net gain of $1,844,393 from the sale.
21
NOTE 2. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Furniture, Equipment and Leasehold Improvements
- -----------------------------------------------
Furniture and equipment are recorded at cost. Depreciation is provided
using the straight line method over the estimated useful lives of the property
which range from three to five years. Leasehold improvements, also recorded at
cost, are amortized over the lesser of the estimated life of the improvement or
the term of the lease.
Asset-Based Fees Purchased
- --------------------------
The asset is being amortized over 13 years from the acquisition date which
represents the estimated life of the asset-based fees purchased. The
unamortized balance of this capital asset as of December 31, 1998 was $323,743.
Restructuring
- -------------
Restructuring charges represent employee severance, asset write-downs and
lease write-offs specifically associated with the Company's plan of
restructuring approved by the Board of Directors in the fourth quarter of 1997.
USBA Marketing Agreement and Proposed Merger
- --------------------------------------------
During the third quarter of 1996, the Company terminated an Agreement and
Plan of Merger with USBA Holdings, Ltd. ("USBA"), at which time all costs
previously capitalized and all costs incurred related to the merger were
expensed. These merger related expenses, which amounted to $884,000, are
included in the 1996 Statement of Operations, primarily within professional fees
and other general and administrative expenses.
During the fourth quarter of 1996, the Company settled with USBA and
received a cash payment of $500,000, constituting a partial refund of amounts
paid by the Company under a Marketing Agreement and Consulting Agreement and
payment of a portion of the Company's expenses incurred in connection with the
Agreement and Plan of Merger, and previously issued warrants were returned. The
Company, during this period, wrote off the remaining unamortized balance of the
payment of $1.25 million, reversed the capitalization of the value of the
returned warrants and the amortization expense thereon for the first three
quarters of 1996 and recorded the recovery of $500,000. The write-off of the
payment and the value of warrants was made in the fourth quarter.
The entire $1.25 million payment to USBA and the subsequent recovery of
$500,000 are included in the line "Marketing Plan payment - net of recovery" and
thus, amortization of the plan payment included in depreciation and amortization
for the first three quarters of 1996 has been reclassified to this line for more
appropriate presentation of material operating transactions.
NOTE 3. COMMITMENTS AND CONTINGENCIES
Operating Leases
- ----------------
The Company leases an office facility and equipment under the terms of
operating leases which expire in July 2002 with an option to terminate on July
31, 2001 by paying an early termination fee. At December 31, 1998 the aggregate
minimum noncancelable lease commitment is as follows:
--------------------------------------------------------
Minimum
Aggregate
Year Ending December 31, Rentals
--------------------------------------------------------
1999......................................... $ 53,906
2000......................................... $ 56,062
2001......................................... $ 43,205
----------
$153,173
========================================================
22
NOTE 3. COMMITMENTS AND CONTINGENCIES (CONTINUED)
The above schedule of minimum aggregate rentals represents lease payments
on all of the Company's offices as if rents were paid on all offices through
their respective lease terms less amounts to be received by the Company for
offices which have been subleased.
As of January 1, 1997 the Company had two offices which were being
subleased. The net obligation on such offices, included in the above minimum
aggregate rentals, is included in accrued expenses and other liabilities as of
December 31, 1996.
Legal Matters
- -------------
The Company's broker-dealer subsidiary, JMC Investment Services, Inc.
(JMCI), has been named as a defendant in a NASD arbitration regarding sales of
real estate limited partnerships by Spear Rees & Co. (the predecessor to JMCI)
between 1990 and 1993. In addition, other matters have arisen and are being
addressed in the normal course of business. Management does not believe that
such proceedings will have a material adverse effect on the Company's financial
condition or results of operations.
NOTE 4. FURNITURE, EQUIPMENT, AND LEASEHOLD IMPROVEMENTS
At December 31, 1998 and 1997, furniture, equipment and leasehold
improvements consist of:
1998 1997
---------- ----------
Furniture and fixtures $ 110,830 $ 484,230
Computer equipment 429,300 979,933
Leasehold improvements 1,000 49,124
---------- ----------
541,130 1,513,287
Less:
Accumulated depreciation and amortization (520,840) (1,435,362)
---------- ----------
Net furniture, equipment and leasehold
improvements $ 20,290 $ 77,925
========= ===========
NOTE 5. STOCKHOLDERS' EQUITY
Common Stock
- ------------
In January of 1997, the Company repurchased 194,547 shares of Common Stock
from a former officer and director at a price of $1.00 per share.
Stock Compensation Plans
- ------------------------
At December 31, 1998, the Company has two stock-based compensation plans
which are described below. The Company has adopted the disclosure-only
provisions of Statement of Financial Accounting Standards No. 123, "Accounting
for Stock-Based Compensation." Accordingly, no compensation cost has been
recognized for the stock option plans. Had compensation cost for the Company's
stock option plans been determined based on the fair market value at the grant
date for awards in 1998 and 1997, consistent with the provisions of SFAS No.
123, the Company's net income (loss) and income (loss) per share would have been
increased to the pro forma amounts indicated below:
1998 1997
--------- ----------
Net income (loss) As reported $227,869 $(257,292)
Pro forma $165,764 $(352,292)
Income (Loss) per share As reported $ 0.04 $ (0.04)
Pro forma $ 0.03 $ (0.06)
23
NOTE 5. STOCKHOLDERS' EQUITY (CONTINUED)
The assumption regarding the stock options issued in 1998 and 1997 was that
100% of such options vested in the respective year rather than the actual
vesting schedules which range from one year to three years.
The impact of outstanding non-vested stock options granted prior to 1997
has been excluded from the pro forma calculation; accordingly, the 1998 and 1997
pro forma adjustments are not indicative of future period pro forma adjustments,
when the calculation will apply to all applicable stock. The estimated fair
value of options granted is subject to the assumptions illustrated below and if
the assumptions changed, the estimated fair value amounts could be significantly
different.
The fair value of options granted during 1998 and 1997 was estimated at
$96,000 and $147,000, respectively, on the date of grant using the Black-Scholes
option-pricing model with the following weighted average assumptions by
respective year:
1998 1997
------- --------
Dividend yield rate 0% 0%
Volatility rate 109% 74%
Risk free interest rate 5.66% 5.66%
Expected lives 3 years 3 years
In 1983, the Company adopted a Stock Option Plan (the "1983 Plan") pursuant
to which options to purchase an aggregate of 1,000,000 shares of Common Stock
could be granted to directors, officers and key employees. The 1983 Plan
expired by its terms in November 1993, and there were no options outstanding
under the 1983 Plan as of December 31, 1997. In 1993, the Company adopted the
1993 Executive Stock Option Plan (the "Executive Plan") pursuant to which
options to purchase an aggregate of 750,000 shares of Common Stock may be
granted to officers and directors of the Company and its subsidiaries and the
1993 Employee Stock Option Plan (the "Employee Plan") pursuant to which options
to purchase an aggregate of 750,000 shares of Common Stock may be granted to
employees of the Company and its subsidiaries (collectively, the "1993 Plans"
and, together with the 1983 Plan, the "Plans"). Under the Plans, incentive
stock options, as defined in section 422A of the Internal Revenue Code, or non-
qualified stock options may be granted. Non-employee directors receive formula
grants of options pursuant to the Executive Plan.
A summary of changes in outstanding Common Stock options during 1997,
1996, and 1995 follows:
--------------------------------------------------------------------------------------------------------------------
Number of
Shares Option Price Per Share
--------------------------------------------------------------------------------------------------------------------
Stock options outstanding at December 31, 1995 512,000 $ 0.625 -- $ 11.000
1996
Granted 25,000 $ 0.969 -- $ 3.750
Canceled or exercised (107,000) $ 0.750 -- $ 4.000
1997
Granted 317,600 $ 0.688 -- $ 1.375
Canceled or exercised (257,400) $ 0.750 -- $ 9.250
1998
Granted 166,000 $ 0.688 -- $ 1.375
Canceled or exercised (243,800) $ 0.688 -- $ 11.000
--------------------------------------------------------------------------------------------------------------------
Outstanding at December 31, 1998 412,400 $ 0.625 -- $ 4.400
====================================================================================================================
Of the 166,000, 317,600 and 25,000 options granted in 1998, 1997 and 1996,
respectively, options granted under the Executive Plan amounted to 136,000 for
1998, 212,000 for 1997 and 12,000 for 1996. Options granted under the Employee
Plan amounted to 30,000 in 1998, 105,600 in 1997 and 13,000 in 1996. The
412,400 options outstanding at December 31, 1998 became or will become
exercisable as follows: 267,267 shares in 1998 and prior; 121,133 in 1999;
12,000 in 2000 and 12,000 in 2001. As of December 31, 1998, 313,000 shares were
available for future grants under the Executive Plan and 612,500 shares were
available for future grants under the Employee Plan. As of December 31, 1998, a
total of 925,500 shares were reserved for issuance under the Plans.
24
NOTE 6. EARNINGS PER SHARE
The Company adopted Statement of Financial Accounting Standards No. 128,
Earnings Per Share ("EPS") for the year ended December 31, 1997. This statement
prescribes new requirements for computing EPS to reflect both Basic EPS as well
as Diluted EPS for all periods EPS data is presented. For 1998, 1997 and 1996
net income or loss per common share was determined by dividing the net income or
loss by the weighted average number of common shares outstanding during the
period. Common shares issuable under Common Stock equivalents were not included
in the computation of net loss per common shares because their effect was not
dilutive.
The weighted average number of shares of Common Stock for the periods
presented is follows: 6,134,516 in 1998; 6,055,738 in 1997; and 6,218,898 in
1996.
NOTE 7. INCOME TAXES
The provision (benefit) for income taxes is allocated as follows:
-----------------------------------------------------------------------------------------------
1998 1997 1996
-----------------------------------------------------------------------------------------------
(Benefit) Provision $148,000 $(123,199) $(243,356)
===============================================================================================
Current:
-----------------------------------------------------------------------------------------------
Federal $ 21,814 $ (74,134) $(166,680)
State 8,046 (8,000) (41,669)
-----------------------------------------------------------------------------------------------
29,860 (66,134) (208,349)
Deferred 118,140 (57,065) (35,007)
-----------------------------------------------------------------------------------------------
Total $148,000 $(123,199) $(243,356)
===============================================================================================
The provisions for income taxes for continuing operations differs from
the amount computed using the statutory federal tax rate of 34% as a
result of the following:
------------------------------------------------------------------------------------------------
1998 1997 1996
------------------------------------------------------------------------------------------------
Expected tax (benefit) using statutory rate $127,795 $(129,367) $(253,734)
Effects of:
State income taxes, net of Federal
tax benefit 18,896 5,280 9,642
Other 1,309 888 736
-----------------------------------------------------------------------------------------------
Total $148,000 $(123,199) $ 243,356
===============================================================================================
At December 31, 1998 and 1997, the components of the deferred income tax
asset are as follows:
---------------------------------------------------------------------------------------------
1998 1997
---------------------------------------------------------------------------------------------
Allowance for contract cancellations $ 2,437 $ 7,712
Accrued restructuring expenses - 132,116
Accrued expenses 13,721 26,473
Other 29,512 61,991
Franchise taxes 18,214 23,134
---------------------------------------------------------------------------------------------
Deferred taxes $63,884 $251,426
=============================================================================================
25
NOTE 8. MAJOR CUSTOMERS
During the years ended December 31, 1998, 1997, and 1996, the following
client financial institutions individually accounted for 10% or more of
the Company's total revenues.
1997
----
First Tennessee Bank (Tennessee) $ 2,980,268
Independence Savings Bank (New York) $ 1,361,207
-------------------------------------------------------------
1996
----
Central Fidelity National Bank (Virginia) $ 7,373,399
Independence Savings Bank (New York) $ 1,716,939
First Tennessee Bank (Tennessee) $ 1,346,557
-------------------------------------------------------------
As described in Note 1, the company announced in December 1997 that it was
exiting the retail bank market. Commission revenue for 1998 has been derived
only from asset fee and 12b-1 fee compensation and from past customers adding to
or renewing existing contracts or replacing existing contracts with ones with a
better rate of return. There were no major customers during 1998.
Effective February 1, 1996, the Company's level of service provided to
First Tennessee Bank was reduced from a fully managed alternative investments
program to an administrative support program. The administrative support
program was terminated as of December 31, 1997.
As described in Note 2, effective December 31, 1996, the Company's
relationship with Central Fidelity National Bank was terminated.
NOTE 9. SHAREHOLDER RIGHTS PLAN
In 1990, the Company's Board of Directors adopted a Shareholder Rights Plan
(the "Plan"). The Plan provided for the distribution of one Common Stock
purchase right as a dividend for each outstanding share of Common Stock of the
Company as of April 1, 1990. The right entitles stockholders to buy one share
of the Company's Common Stock at thirty dollars per share, subject to adjustment
per the Plan. All rights expire on February 23, 2000.
Generally, each right may be exercised ten days after any person or group
("Acquirer") acquires beneficial ownership of 20% of the outstanding shares of
Common Stock, or ten days after an Acquirer announces a tender offer or other
business combination, which would result in the Acquirer obtaining beneficial
ownership of 20% or more of the voting power of the Company, unless such tender
offer or acquisition is made with approval of the Board of Directors.
Under certain circumstances, including the acquisition of 25% of the
Company's Common Stock and the occurrence of certain "self-dealing transactions"
by an Acquirer or certain other 20% holders, all rights holders except the
Acquirer may purchase the Company's Common Stock at approximately 50% of the
prevailing market price. Similarly, if the Company is acquired in a merger
after the acquisition of specified percentages of the voting power of the
Company, and the Acquirer is the resultant corporation, the rights holders with
the exception of the Acquirer, may purchase the Acquirer's shares at a similar
discount.
The Board of Directors may effect the redemption of the rights at any time
before the rights become exercisable at a nominal price payable in cash and/or
shares of Common Stock.
26
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not applicable.
27
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The following table sets forth names and certain other information
concerning the Company's Directors and executive officers, as of March 26, 1999:
TERM OF
OFFICE AS
DIRECTOR
NAME AGE POSITION EXPIRES
---------------------------------------------------------------------------------------------------------
James K. Mitchell 60 Chairman, President and Chief Executive 2001
Officer and Director
Edward J. Baran 62 Director 2000
Barton Beek 75 Director 1999
Charles H. Black 72 Director 2000
Robert G. Sharp 63 Director 2001
Information with respect to the principal occupation during the past five
years of each nominee, each current Director and each executive officer is set
forth below. There are no family relationships among Directors or executive
officers of the Company.
James K. Mitchell became a Director in October 1988 and became Chairman and
Chief Executive Officer of the Company on January 1, 1993 and assumed the
responsibilities of President of the Company as well on January 1, 1997. Mr.
Mitchell is the founder of the Company's principal subsidiary, James Mitchell &
Co. In 1973, Mr. Mitchell was a founding officer of Security First Group (now
The Holden Group), a financial services firm which pioneered the concept of
marketing insurance and annuity products through stock brokerage firms. Before
joining that firm, Mr. Mitchell served as Vice President of Marketing for the
Variable Annuity Life Insurance Company of Houston, Texas. He attended Portland
State University and is a registered Principal with the National Association of
Securities Dealers, Inc. (the ''NASD'').
Edward J. Baran became a Director in August 1992. Mr. Baran, who has spent
more than thirty years in the insurance business, is currently Chairman and
Chief Executive Officer of BCS Financial Corporation, a financial services
holding company. Prior to joining BCS in November 1987, Mr. Baran was Vice
Chairman, President and Chief Executive Officer of Capitol Life Insurance
Company of Denver, Colorado. He is a graduate of Georgetown University and a
member of the Audit and Compensation Committees of the Board of Directors.
Barton Beek became a Director in January 1984. Mr. Beek is a senior partner
of O'Melveny & Myers, a law firm which he joined in 1955, with offices
worldwide. Mr. Beek is a graduate of the California Institute of Technology, the
Stanford University Graduate School of Business and Loyola College of Law. Mr.
Beek is a director of Wynns International, Inc. He is a member of the Audit and
Compensation Committees of the Board of Directors.
Charles H. Black became a Director in June, 1993. Mr. Black is currently a
private investor, having most recently served as Vice Chairman of Pertron
Controls Corporation. From 1982 to 1985, Mr. Black served as Executive Vice
President, Director and Chief Financial Officer of Kaiser Steel Corporation. He
served as Executive Vice President and Chief Financial Officer of Great Western
Financial Corporation and Great Western Savings and Loan from 1980 to 1982 after
having spent over 20 years in various financial and management positions with
Litton Industries, Inc., the most recent being Corporate Vice President and
Treasurer. Mr. Black is a member of the Board of Governors of the Pacific
Exchange and serves as a director of Investment Company of America and the
American Variable Insurance Series, all mutual funds. He also serves as a
director of Wilshire Technologies, Inc., and Anworth Mortgage Asset Corp., both
publicly-held companies, and he is a director of a number of privately-held
corporations. Mr. Black is a graduate of
28
the University of Southern California. He is Chairman of the Audit Committee and
a member of the Compensation Committee of the Board of Directors.
Robert G. Sharp became a Director in May 1995. Mr. Sharp retired from his
position as President and Chief Executive Officer of Keyport Life Insurance
Company in February 1992 after having served in that position since 1979. Mr.
Sharp is the past chairman of the National Association for Variable Annuities
and a former director of the National Association of Life Companies. Mr. Sharp
is a graduate of the California State University at Sacramento and is a
registered Principal with the NASD. Mr. Sharp is also a director of Navellier
Variable Funds, a mutual fund. Mr. Sharp is a member of the Audit Committee and
Chairman of the Compensation Committee of the Board of Directors.
COMPLIANCE WITH SECTION 16(A) OF THE SECURITIES EXCHANGE ACT OF 1934
Section 16(a) of the Securities Exchange Act of 1934 requires the Company's
Directors and executive officers, and persons who own more than 10% of a
registered class of the Company's equity securities, to file with the Securities
and Exchange Commission, NASDAQ and the Pacific Stock Exchange initial reports
of ownership and reports of changes in ownership of Common Stock and other
equity securities of the Company. Executive officers, Directors and greater than
10% stockholders are required by Securities and Exchange Commission regulations
to furnish the Company with copies of all Section 16(a) reports they file.
Specific due dates for these reports have been established and the Company
is required to identify those persons who failed to timely file these reports.
To the Company's knowledge, based solely on review of the copies of such reports
furnished to the Company and written representations that no other reports were
required, during the fiscal year ended December 31, 1998, all Section 16(a)
filing requirements applicable to its executive officers, Directors and greater
than 10% beneficial owners were complied with.
ITEM 11. EXECUTIVE COMPENSATION
Summary Compensation Table
The following table sets forth certain information regarding compensation
paid during each of the Company's last three fiscal years to the Company's Chief
Executive Officer (the ''named executive officer'') (1):
LONG-TERM
COMPENSATION
AWARDS
SECURITIES
UNDERLYING ALL OTHER
ANNUAL COMPENSATION OPTIONS/ COMPENSATION
Name and Principal Position YEAR SALARY($) BONUS($) SARs(#)(2) ($)(3)
--------------------------- ---- --------- -------- ------------ ------------
James K. Mitchell, Chairman and 1998 225,000 -- -- 9,740
Chief Executive Officer 1997 239,087 -- 100,000 7,811
1996 291,627 -- -- 9,579
- ---------------
(1) Although SEC regulations require four highest paid executive officers in the
classification of the "named executive officers" (other than the Chief
Executive Officer), no other officer of the company qualifies for this
specification under Regulation S-K, Item 402a(3).
(2) The Company does not have any outstanding Stock Appreciation Rights
("SARs").
(3) Amounts reported for Mr. Mitchell in the "All Other Compensation" column
include $4,911, $2,982 and $4,750, respectively, for 1998, 1997 and 1996,
representing the Company's contributions to its 401(k) Savings Plan on his
behalf and $4,829 for each of 1998, 1997 and 1996, representing life
insurance premiums advanced by the Company pursuant to a split dollar
insurance agreement.
29
OPTION GRANTS
No grants of options to purchase Common Stock were made to the named
executive officer during the 1998 fiscal year:
OPTION EXERCISES AND FISCAL YEAR-END OPTION VALUES
The following table provides information related to options exercised by
the named executive officer during the 1998 fiscal year and the number and value
of options held at fiscal year-end.
NUMBER OF SECURITIES
UNDERLYING UNEXERCISED VALUE OF UNEXERCISED
OPTIONS/SARS AT FY- IN-THE-MONEY OPTIONS/
SHARES ACQUIRED VALUE END(#)(1) SARs AT FY-END($)(1)(2)
Name ON EXERCISE (#) REALIZED($) EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
---- -------------- ----------- ----------- ------------- ----------- -------------
James K. Mitchell 0 0 141,667 33,333 0 0
- ---------------
(1) The Company does not have any outstanding SARs.
(2) The closing price for the Common Stock on December 31, 1998, as reported by
the NASDAQ National Market System, was $0.9380. The named executive
officer's outstanding options were exercisable for a price greater than
$0.9380 at fiscal year end.
COMPENSATION OF DIRECTORS
The members of the Board of Directors who are not full-time employees of
the Company are entitled to receive reimbursement for out-of-pocket expenses
they incur in attending Board meetings and otherwise performing their duties and
receive fees of $1,000 for each meeting of the Board of Directors which they
attend. Members of committees additionally receive $500 per committee meeting
held on the same day as a Board of Directors' meeting, or $1,000 per committee
meeting if held on a different day. Non-employee Directors receive formula
grants of non-qualified stock options under the Company's 1993 Executive Stock
Option Plan. Options to acquire 12,000 shares of Common Stock are to be granted
within six months after an individual takes office as a Director and options to
acquire an additional 12,000 shares are to be granted within six months after
every third anniversary of such Director's taking office. As reported in the
Form 10-K for the year ended December 31, 1997, on February 17, 1998, the
outside Directors of the Company were each granted stock options to purchase
25,000 shares of Common Stock at a price of $1.125, which was equal to the
closing price for the Common Stock on June 30, 1998, in addition to their
regular formula grants. Officers of the Company are not compensated for their
services as Directors or committee members.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
No member of the Compensation Committee of the Board of Directors served as
an officer or employee of the Company or its subsidiaries. No executive officers
of the Company served during fiscal 1998 on the board of directors of any
company which had a representative on the Company's Board of Directors. No
member of the Company's Board of Directors served during 1998 as an executive
officer of a company whose board of directors had a representative from the
Company or the Company's Board of Directors.
COMPENSATION COMMITTEE REPORT ON EXECUTIVE COMPENSATION
During 1998, executive compensation policy was recommended by a
Compensation Committee (the "Committee") which is composed of all the
independent members of the Board of Directors (the "Board"). The Committee held
one meeting during 1998. The Committee is responsible for recommending
executive compensation policy and practice to the Board of Directors and was
responsible for administering the Company's 1993 Executive Stock Option Plan.
The Board of Directors did not modify or reject in any material way any action
or recommendation of the Committee during fiscal year 1998.
30
The Board's compensation policy with regards to the Company's executive
officers has been to provide these officers, in aggregate, with salary and
incentive compensation competitive with the marketplace. Compensation has
primarily consisted of salaries, stock options and cash bonuses based upon the
Company's pre-tax earnings. For 1998, only Mr. Mitchell was a party to an
employment contract. The employment contract of the President and CEO which had
originally expired January 1, 1996, was reinstated by action of the Board with
Mr. Mitchell abstaining, on February 17, 1998, effective as of January 1, 1998.
The reinstated contract provides for a base salary of $225,000 per year plus
basic company benefits for a three-year term, subject to certain provisions
described above.
The Committee, at its March 1, 1999 meeting, considered the operating
results for 1998 and although the Committee felt that management during the year
had acted appropriately in a very difficult environment and was continuing to
maintain energy and creativity in its search for new sources of revenue for the
Company, it decided not to award any cash bonus to the Chief Executive Officer.
While there is no established policy with respect to the frequency or
amount of options grants, the Board desires that the executive officers own
Company stock to both provide incentive compensation based on performance
factors deemed important to the Company's stockholders and to provide an element
of downside risk to more closely align the interests of executives with the
interests of the stockholders. The Board considers the granting of stock
options annually and, in reviewing the Chief Executive Officer's recommendation,
considers the individual executive officer's contributions to the Company and
the amount and terms of existing options. No grants were made to Mr. Mitchell
during 1998.
James K. Mitchell, who became Chief Executive Officer of the Company
effective January 1, 1993, received a total of $225,000 in salary for fiscal
1998. This compares to $239,087 in salary for fiscal 1997. This also compares
to $291,627 in salary for fiscal 1996. All salary totals are exclusive of
standard benefits. At the close of 1998, Mr. Mitchell was the largest
stockholder of the Company with a total of approximately 718,041 shares
beneficially owned and vested options to purchase 75,000 shares of Common Stock
at a price of $4.40 per share and 66,667 shares at a price of $1.375 per share.
The report of the Committee shall not be deemed incorporated by reference
by any general statement incorporating by reference this proxy statement into
filing under the Securities Act of 1933 or under the Securities Exchange Act of
1934, except to the extent that the Company specifically incorporates this
information by reference, and shall not otherwise be deemed filed under such
Acts.
The Compensation Committee of the
Board of Directors of JMC Group, Inc.:
Robert G. Sharp, Chairman
Edward J. Baran
Barton Beek
Charles H. Black
31
PERFORMANCE GRAPH
The following chart compares the yearly percentage change in the cumulative
total stockholder return on the Common Stock during the five fiscal years ended
December 31, 1998 with the cumulative total return on the S&P 500 Index and the
NASDAQ Financial Stocks Industry Index.
[PERFORMANCE CHART APPEARS HERE]
PERFORMANCE 1993 1994 1995 1996 1997 1998
- ----------- ------- ------- -------- ------- ------- -------
NASDAQ 100 100.24 145.98 187.14 287.20 276.58
S&P 500 100 98.46 132.05 158.80 208.05 266.30
JMCG 100 18.12 10.52 11.23 7.61 10.88
The foregoing information shall not be deemed incorporated by reference by
any general statement incorporating by reference this Form 10-K into any filing
under the Securities Act of 1933 or under the Securities Exchange Act of 1934,
except to the extent the Company specifically incorporates this information by
reference, and shall not otherwise be deemed filed under such Acts.
32
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Unless otherwise noted below, the following table presents certain
information with respect to the ownership of the Common Stock as of March 26,
1999 by each person known by the Company to own beneficially more than 5% of the
Common Stock, by each person who is a Director or nominee for Director of the
Company, by each named executive officer and by all executive officers and
Directors of the Company as a group:
SHARES OF COMMON
STOCK
BENEFICIALLY OWNED
AS OF MARCH 26, 1999 (1)
NAME NUMBER(3) %
- ----------------------------------------------------------------------------------------------------
James K. Mitchell (2) 859,708 13.42%
JMC Group, Inc.
9710 Scranton Road, Suite 100
San Diego, CA 92121
Robert London (4) 498,500 7.78%
Cruttendon Roth Incorporated
809 Presidio Avenue
Santa Barbara, CA 93101
Charles H. Black(5) 265,531 4.14%
Barton Beek 102,500 1.60%
Robert G. Sharp 73,500 1.15%
Edward J. Baran 24,500 *
All Executive Officers and Directors as a group (5 persons) 1,325,739 20.68%
Total outstanding shares(6) 6,410,118
- ---------------
* Less than 1%
(1) All ownership figures include options to purchase shares of Common Stock
exercisable within 60 days of March 26, 1999, as set forth below. Except as
otherwise noted below, each individual, directly or indirectly, has sole or
shared voting and investment power with respect to the shares listed.
(2) Includes 18,815 vested shares of Common Stock contributed by the Company to
the Company's 401(k) Savings Plan for Mr. Mitchell. Directors do not have
401(k) Plan holdings with the Company.
(3) Includes options to purchase 141,667, 24,500, 28,500, 20,500, 28,500 and
243,667 shares of Common Stock for Messrs. Mitchell, Baran, Beek, Black,
Sharp and for all executive officers and Directors as a group, respectively.
(4) Mr. London filed a Schedule 13D on November 25, 1997 for 423,500 shares of
Common Stock and an amended Schedule 13D on December 23, 1997 for an
additional 75,000 shares of Common Stock. As of March 8, 1999, no other
Schedule 13D amendment had been filed.
(5) Includes 22,800 shares held by the Charles H. Black Pension Trust and 10,000
shares held by Mr. Black as trustee for the benefit of Charles H. Black, Jr.
and Mr. Black in which Mr. Black has a 1/2 beneficial ownership interest.
Also includes 36,200 shares owned individually by Mr. Black's wife as to
which he disclaims beneficial ownership.
(6) Includes 243,667 shares issuable upon exercise of stock options.
33
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENTS, SCHEDULES, AND REPORTS ON FORM 8-K
(a) (1) The following documents are filed herewith:
Independent Auditors' Report
Consolidated Balance Sheets as of
December 31, 1998 and 1997
Consolidated Statements of Operations
For the Years Ended
December 31, 1998, 1997 and 1996
Consolidated Statements of Changes in
Stockholders' Equity
For the Years Ended
December 31, 1998, 1997 and 1996
Consolidated Statements of Cash Flows
For the Years Ended
December 31, 1998, 1997 and 1996
Notes to Consolidated Financial Statements
(a) (2) Not applicable.
(a) (3) The following exhibits are filed herewith:
3.1 Certificate of Incorporation of the Registrant.*
3.2 Certificate of Amendment of Certificate of Incorporation of the
Registrant.*
3.3 By-laws of the Registrant.*
4.1 Shareholder Rights Agreement, dated as of February 21, 1990,
between Spear Financial Services, Inc. and First Interstate
Bank, Ltd., as Rights Agent, as amended effective, July 16,
1992.*
m10.1 JMC Group, Inc. 1993 Employee Stock Option Plan.**
m10.2 JMC Group, Inc. 1993 Employee Stock Option Plan.***
10.3 Agreement, dated December 9, 1994, by and between James
Mitchell & Co. and Barnett Banks, Inc.****
10.4 Amendment No. 3 to Services Agreement dated January 1, 1995, by
and between James Mitchell & Co. and Central Fidelity National
Bank.****
10.5 Interim Services Agreement dated October 19, 1995 between James
Mitchell & Co., Barnett Banks, Inc. and Barnett Banks Trust
Company, N.A.*****
10.6 Termination and Assignment Agreement dated October 19, 1995
between James Mitchell & Co., Barnett Banks, Inc. and Barnett
Banks Trust Company, N.A.*****
34
10.7 Assignment and Notice of Assignment of Renewal (Asset) Fees
between James Mitchell & Co., JMC Insurance Services
Corporation and JMC Financial Corporation and Barnett
Annuities Corporation and the Acknowledgment and Acceptance of
Assignment from Keyport Life Insurance Company.*****
10.8 Assignment and Notice of Assignment of Renewal (Asset) Fees
between James Mitchell & Co., JMC Insurance Services
Corporation and JMC Financial Corporation and Barnett
Annuities Corporation and the Acknowledgment and Acceptance of
Assignment from Life Insurance Company of Virginia.*****
10.9 Assignment of Renewal (Asset) Fees and Notice of Assignment of
Renewal (Asset) Fees between James Mitchell & Co., JMC
Financial Corporation and JMC Insurance Services Corporation
and Barnett Annuities Corporation and the Acknowledgment and
Consent to Assignment from Transamerica Life and Annuity
Co.*****
10.10 Assignment and Notice of Assignment between James Mitchell &
Co., JMC Financial Corporation and JMC Insurance Services
Corporation and Barnett Annuities Corporation and the
Acceptance and Release between Western and Southern Life
Assurance Company and James Mitchell & Co., JMC Insurance
Services Corporation and JMC Financial Corporation.*****
10.11 Consulting Agreement between USBA Holdings, Ltd. and James
Mitchell & Co. dated January 26, 1996.*****
10.12 Marketing Agreement between JMC Group, Inc. and USBA Holdings,
Ltd. dated January 29, 1996 with exhibits.*****
10.13 Integrated Support Services Agreement dated January 31, 1996
between JMC Group, Inc., James Mitchell & Co., JMC Insurance
Services Corporation, JMC Financial Corporation, First
Tennessee Bank National Association and First Tennessee
Brokerage, Inc.*****
10.14 Termination and Transition Agreement dated January 31, 1996
between JMC Group, Inc., James Mitchell & Co., Priority
Investment Services, Inc., and First Tennessee Bank National
Association.*****
10.15 Termination and Assignment Agreement dated December 31, 1996
between James Mitchell & Co., JMC Insurance Services
Corporation, JMC Financial Corporation and Central Fidelity
National Bank.******
10.16 Settlement and Mutual Release dated November 20, 1996 between
JMC Group, Inc., James K. Mitchell, D. Mark Carlson, Simon C.
Baitler, Kevin L. Rakin, USBA Holdings, Ltd., James P. Cotton,
Jr., Ronald D. Wallace and Louie W. Moon.******
10.17 Nondeposit Investment Sales Agreement dated November 6, 1996
between James Mitchell & Co., JMC Insurance Agency of New
York, Inc., JMC Financial Corporation, Provest Services Corp.
II and Provident Savings Bank, F. A. with sample sublease and
sub-sublease.******
10.18 Program Agreement dated August 30, 1996 between James Mitchell
& Co., JMC Insurance Services Corporation, JMC Financial
Corporation and Horizon Bancorp, Inc. with sample lease
attached.******
m10.19 Employment Agreement with James K. Mitchell dated as of
January 1, 1998.*******
35
10.20 Termination and Assignment Agreement, effective December 31,
1997, between JMC Group, Inc., James Mitchell & Co., JMC
Insurance Services Corporation and JMC Financial Corporation
and First Tennessee Bank National Association and First
Tennessee Brokerage, Inc.*******
10.21 Termination and Assignment Agreement, effective January 31,
1998, between James Mitchell & Co., JMC Insurance Services
Corporation and JMC Financial Corporation and Hemet Federal
Savings and Loan and First Hemet Corporation.*******
10.22 Termination and Assignment Agreement, effective March 1, 1998,
between James Mitchell & Co., JMC Insurance Services
Corporation and JMC Financial Corporation and Independence
Savings Bank.
22 Subsidiaries of the Registrant.
23 Independent Auditors' Consent.
27 Financial Data Schedule
(b) No current reports on Form 8-K were filed by the Company during the
fourth quarter of fiscal year 1998.
______________________________________
* Filed as an exhibit to the Registrant's Form 10-k for the Fiscal
Year ended December 31, 1993.
** Filed as an exhibit to the Registrant's Form S-8 Registration
Statement No. 33-74842 filed with the SEC on February 7, 1994.
*** Filed as an exhibit to the Registrant's Form S-8 Registration
Statement No. 33-74840 filed with the SEC on February 7, 1994.
**** Filed as an exhibit to the Registrant's Form 10-k for the Fiscal
Year ended December 31, 1994.
***** Filed as an exhibit to the Registrant's Form 10-k for the Fiscal
Year ended December 31, 1995.
****** Filed as an exhibit to the Registrant's Form 10-k for the
Fiscal Year ended December 31, 1996.
*******Filed as an exhibit to the Registrant's Form 10-k for the
Fiscal Year ended December 31, 1997.
m Management Contract or Compensatory Plan or Arrangement.
36
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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, in San Diego,
California, on the 29th day of March, 1999.
JMC GROUP, INC.
By: /s/ JAMES K. MITCHELL
------------------------------
James K. Mitchell
Chairman 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 the
Registrant and in the capacities on March 29, 1999.
SIGNATURE TITLE
/s/ JAMES K. MITCHELL Chairman and Chief
----------------------------------- Executive Officer
James K. Mitchell
/s/ LEE M. FORRESTER, CPA Controller and
----------------------------------- Principal Accounting Officer
Lee M. Forrester, CPA
/s/ EDWARD J. BARAN Director
-----------------------------------
Edward J. Baran
/s/ BARTON BEEK Director
-----------------------------------
Barton Beek
/s/ CHARLES H. BLACK Director
-----------------------------------
Charles H. Black
/s/ ROBERT G. SHARP Director
-----------------------------------
Robert G. Sharp
37