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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, 1995 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(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. [_]
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The aggregate market value of the voting stock held by non-affiliates of the
registrant as of February 29, 1996 was approximately $13,606,202 representing
approximately 4,947,710 shares.
As of February 29, 1996, the registrant had 6,198,898 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
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.
The Company operates its business in one industry segment--annuity,
insurance and mutual fund sales through financial institutions and the related
servicing of products previously sold. This business has historically been
carried out through the Company's subsidiaries, James Mitchell & Co. and its
subsidiaries ("JMC") and Priority Investment Services, Inc. ("Priority"). JMC
and Priority are structured marketing organizations that sell 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. The Company's products consist
primarily of fixed and variable annuities underwritten by independent life
insurance companies (rated A or higher by A.M. Best) and mutual fund shares.
In January of 1996, the Company modified its relationship with First Tennessee
Bank National Association ("First Tennessee Bank") and Priority, which offered
and sold mutual funds and annuities exclusively to customers of First
Tennessee Bank. See "Material Customers." In addition, the Company terminated
its relationship with Barnett Banks, Inc. ("Barnett")during 1995. See
"Material Customers."
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. The First Tennessee Bank modification will result in JMC receiving
such asset fees as well as additional fees for services contracted for in the
new agreement. Barnett selected the option of acquiring JMC's right to such
future asset-based fees and made a one time payment to JMC during 1995 for
such right. See "Management's Discussion and Analysis of Financial Condition
and Results of Operations--Results of Operations--1995 compared to 1994."
During 1995, the average monthly accumulated value of assets being serviced,
for such clients (excluding First Tennessee Bank and Barnett), was over $273
million generating annual 1995 revenues of $1,019,000.
During 1995, the Company's subsidiaries entered into selling agreements with
numerous additional distributors of mutual fund shares.
During 1995, the Company further restructured its operations by closing down
its Florida operations upon the termination of its contract with Barnett and
moved the servicing of its Tennessee customers to its corporate office upon
the modification of its agreement with First Tennessee Bank. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations, --
Results of Operations--1995 Compared to 1994-- Restructuring."
PRINCIPAL MARKETS AND METHODS OF DISTRIBUTION
The principal market for JMC's services is banks, savings and loan
associations and thrifts. Management believes that these types of financial
institutions perceive a need to provide their customers with a wider mix of
financial products, yet often lack the infrastructure and corporate culture to
market products which are not traditional to financial institutions. In
addition, these institutions are focusing on developing fee income as a major
source of revenue. An independent marketing organization such as JMC provides
these institutions with the ability to make such products available to their
customers and receive fee income. Specifically, the Company believes the
primary market for such services, in the future, is the small to medium size
financial institution which would have more difficulty offering the depth of
services the Company provides in a cost effective manner.
1
Historically, the primary distribution method employed by the Company and
its financial institution clients for the sale of annuities and insurance
products has been a fully-managed alternative investment program. In most
cases, this program is implemented by the establishment of a group trust at
the institution, in which the client's customers may participate. The
institution acts as trustee of the trust, and acquires annuities and insurance
products for the benefit of the participants as they direct. The Company's
subsidiaries act as the trustor and are appointed as the record keeping and
servicing agent for the trust. Mutual fund products are generally sold
directly by JMC's or Priority's employees to financial institution customers.
In both cases, JMC's or Priority's structured retail marketing organization
employs the retail sales force and thereby controls the point of sale.
As a result of the streamlining of administrative and sales management
functions accomplished in the 1994 restructuring and further consolidation in
1995, the Company has positioned itself to expand the type and nature of
services which it provides and the manner in which they are delivered. In
addition to its fully-managed program, the Company will contract with
financial institution clients to provide other programs such as the dual
employee program where the financial institution rather than the Company
employs the retail sales force, or the integrated support services program
("ISS program") where the bank internalizes all sales functions while the
Company provides appointment tracking, business processing and customer
account servicing. The ISS program would enable the Company to deliver a
competitive package of services which would enhance the effectiveness and
efficiency of non-deposit alternative investment programs instituted and
managed by financial institutions themselves. These services include product
selection and due diligence, sales and appointment management tracking and
reporting, annuity and mutual fund transaction processing, commission
accounting, customer service, sales personnel licensing, sales and marketing
support, and training programs. The Company commenced its first ISS program at
First Tennessee Bank as of February 1, 1996. See "Material Customers" below.
On January 28, 1996, the Company signed an exclusive marketing agreement
with USBA Holdings, Ltd. ("USBA"), an Atlanta-based financial services company
which provides financial institutions across the country with programs,
products and financial expertise focused upon improving shareholder value.
Under the agreement, JMC will gain exposure to nearly 4,000 financial
institutions through the direct clients of US Banking Alliance, Diversified
Consulting, Inc., PROACTIVE, Inc., and Financial Suppliers, Inc., all wholly-
owned subsidiaries of USBA. JMC will become an integral part of USBA's package
of products and services as the exclusive provider of mutual funds, insurance
and annuity products to USBA's direct and indirect client financial
institutions.
Management believes the agreement benefits JMC by providing an immediate
avenue for substantial new client growth as part of a comprehensive financial
institution performance package. It benefits USBA by enhancing its offerings
to clients through the addition of alternative investment products and
services for its distribution system. Both parties hope to benefit from sales-
based fee income from these products.
This agreement is a result of JMC's strategic business plan to gain market
share and increase revenues. USBA currently has approximately 1,000 diverse
direct clients, most ranging in asset size from $100 million to $2 billion,
with several clients ranging up to $5 billion in assets. In addition, USBA has
exclusive agreements with data processors, trade associations and other
industry product providers who serve approximately 3,000 financial
institutions.
The terms of the marketing agreement offer JMC access to the USBA network as
the exclusive alternative investments provider. For this access, JMC granted
USBA one million common stock warrants exercisable after January 1, 1997, at
$2.50 per share. Under certain circumstances, the warrants would be
immediately exercisable at a lower price of $1.4375 per share.
USBA has established a program that offers banks a comprehensive analysis of
their financial performance in key areas and compares them to peers with
similar operating characteristics grouped by size, regions and markets. From
this, USBA has generated an array of products and services intended to allow
the institution to attract and retain customers, generate fee income and
provide quality products and competitive positioning while enhancing
efficiency and profitability. It is believed that the alliance with JMC
augments these abilities since alternative investment programs are often an
important avenue for banks to earn fee income while strengthening customer
relationships.
2
Under a separate consulting agreement, JMC paid USBA $1.25 million in cash
to provide a strategic plan, training and preparation to help JMC shift focus
into the new market segment to significantly increase market share over the
next five years.
PRINCIPAL PRODUCTS
The principal non-deposit investment products offered by JMC and Priority to
customers of their financial institution clients are annuities, both fixed and
variable, and mutual funds, including equity funds, fixed income funds and tax
exempt funds. Annuities are primarily used as tax-deferred retirement savings
vehicles. There is a penalty if funds are withdrawn before age 59 1/2 or
within a specified period of time, usually 5 to 8 years. Unlike individual
retirement accounts there is no maximum investment cap either annually or in
total and contributions are not tax-deductible. Immediate annuities provide
guaranteed income for a specified number of years or for an individual's
lifetime.
During 1995, the mix of annuities and insurance products sold by JMC was as
follows: 65% fixed annuities and 35% variable and other annuities. The
corresponding product mix percentages of annuities sold by the Company in 1994
and 1993 were 75% fixed/25% variable and other and 74% fixed/26% variable and
other, respectively. Sales of annuities represented 65%, 90% and 94%,
respectively, of total sales in each of 1995, 1994 and 1993. The gross revenue
rate received by JMC on the sale of annuity products is significantly greater
than the gross revenue rate received on mutual fund shares. In addition, the
gross revenue rate received on fixed annuity products is greater than the
gross revenue rate received on variable and other annuities. See "Managements
Discussion and Analysis of Financial Condition and Results of Operations--
Results of Operations--1995 Compared to 1994" for further explanation of the
impact of product mix on revenues and gross margin.
The Company's subsidiaries have negotiated relationships with numerous
national insurance providers and, during 1995, such subsidiaries sold the
products of Keyport Life Insurance Company, The Life Insurance Company of
Virginia, Aetna Life Insurance and Annuity Company, Liberty Life Assurance
Company, Allianz Life Insurance Company of North America, Western and Southern
Life Assurance Company and Transamerica Life Insurance and Annuity Company,
among others. All of these companies have A or higher ratings from A.M. Best.
The Company's subsidiaries' arrangements with each of its annuity and
insurance provider companies are very similar. JMC or Priority, as the case
may be, acts as an agent and sells the provider's products to customers of
financial institution clients. In addition, the Company's subsidiaries handle
certain administrative responsibilities and provide 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
earn commissions for 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 1995, the Company
earned approximately $7.3 million in annuity commissions and $4.6 million in
asset-based fee payments 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--1995 Compared to 1994" related to events impacting asset-based fee
income during 1995 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. Many of
the products are developed jointly by the Company with the annuity and
insurance provider companies specifically for use in the Company's programs.
During 1995, one of the Company's target provider companies, LICOVA, entered
into an agreement to be acquired by Great Northern Annuity Company (GNA), a
competitor of the Company. While this acquisition will not be consummated
until mid 1996, the impact on product availability is uncertain at this time.
However, the Company continues to work with current and prospective provider
companies to insure the availability of competitive consumer products.
3
In connection with the sale of annuity and insurance products, neither JMC
nor Priority assumes any of the underwriting risks or obligations of the
insurance company itself. The Company conducts due diligence and has an
established policy of selling only the products of insurance companies which
it believes are highly-rated and financially sound.
The Company's subsidiaries have agreements to sell mutual fund shares for a
large number of highly-regarded mutual fund families, including Putnam,
Federated, Fidelity, Oppenheimer, Flagship, Franklin-Templeton and American
Capital. JMC and Priority receive commissions for the sale of mutual fund
shares and, in most instances, receive ongoing asset-based fees for providing
continuing customer service. In connection with the sale of mutual fund
shares, JMC's and Priority's representatives act strictly as agents and
neither company underwrites securities. The Company reviews the mutual fund
families it offers to ensure that they provide what the Company believes to be
an appropriate range of quality products. JMC, through its subsidiary JMC
Financial Corporation ("JMC Financial") acts as a self-clearing agent and a
clearing agent for Priority and First Tennessee Brokerage, Inc.
The Company continues to work with and negotiate for new and more
competitive products supplied by current and potential insurance carriers and
thus believes that its business is not substantially dependent upon any one of
these provider company contracts, and that if the products of any one of its
suppliers were no longer available, they could be replaced by additional
providers without a material adverse impact on the Company's results of
operation or financial condition. As product competition increases, however,
the Company may have to lower its compensation in order to generate higher
rates of return to customers in order to increase or maintain production
levels.
MATERIAL CUSTOMERS
During 1995, Barnett, Central Fidelity National Bank ("Central Fidelity")
and First Tennessee Bank accounted for approximately 31%, 30% and 22%,
respectively, of the Company's commission revenues. During 1995, the Company
terminated its relationship with Barnett Bank and modified its relationship
with First Tennessee Bank. JMC's current contract with Central Fidelity
expires on December 31, 1996, but is subject to termination or may be renewed
upon written notice prior to that time.
On January 31, 1996, the Company signed definitive agreements with First
Tennessee Bank to provide for a transition of the Company's fully-managed
alternative investment sales program to a newly-developed integrated support
services program with an initial two-year term through 1997. The Company has
developed this program to provide a variety of services to support alternative
investment programs at banks utilizing an internal sales force to market
mutual funds and annuities to its customers. The new services program enables
First Tennessee Bank to internalize the sales functions of the Company's
fully-managed program while maintaining the controls and efficiencies of the
program's business processing and single-point customer service capabilities.
Although the Company will no longer earn fees for the provision of a fully-
managed sales program, the Company will generate revenues in the form of
administration fees which provide for a minimum monthly payment of $25,000
through December 31, 1997. The fees will increase from such minimum level
based on the success of the bank's internal sales program.
COMPETITION
The Company operates in a very competitive environment and competes for
client bank relationships with other third-party marketing firms. Some of its
competitors are subsidiaries of major insurance and mutual fund companies that
operate marketing organizations similarly targeting sales of annuities,
insurance products and mutual fund shares to customers of banks, savings and
loan associations and thrifts. Many of the organizations affiliated with
underwriters and distributors have the ability to offer very attractive
pricing to potential client financial institutions. The largest and most
recognized organizations competing in this general field are Great Northern
Annuity (GNA), Essex, Liberty Securities, Marketing One and INVEST. Some
financial institutions also elect to manage annuity, insurance and mutual fund
sales programs internally, rather than use an outside
4
marketing firm. Generally it is the larger financial institutions who
establish such internal programs. In addition, customers of financial
institutions who might purchase products from the Company can obtain similar
products from other licensed insurance agents, through stockbrokers and
through financial institutions not affiliated with JMC.
The principal method of competition is price. Product and service are also
important competitive factors.
From a competitive standpoint, management believes that many of the
Company's sales management and administrative procedures and systems set it
apart from its competitors and make its programs more attractive to potential
financial institution clients than its competitors' programs. These include
its proprietary sales and appointment tracking and reporting systems, which
support its regimented sales management approach and its comprehensive
recruiting procedures as well as established administrative procedures which
insure efficient business processing and high level customer service. Selling
is not left to chance or the individual methods of salespeople. Defined
operating procedures are implemented. Sales specialists account for their time
on a daily basis by communicating with one of the Company's two service
centers. Individual sales specialists are also directly supervised by sales
managers.
The Company maintains an independence towards product distribution which it
considers to be a competitive edge in terms of customer suitability and bank
regulatory control. The independence is created through the Company's strong
relationships with more than one insurance provider company as well as certain
internal procedures, such as, product neutral incentive compensation for sales
representatives. The result is the ability to offer a wide array of high-
quality, attractive alternative non-deposit investment products to suit the
needs of the customers of financial institutions. As banking regulators
continue to emphasize the quality and suitability of non-deposit investment
products sold through financial institutions, the ability of a marketing firm
to provide a broad selection of suitable and attractive products to their
customers will continue to be important to potential client financial
institutions.
REGISTRATION AND LICENSING
JMC and certain of its subsidiaries and Priority are required to be licensed
to do business in certain states where they transact business. In addition,
JMC Financial Corporation and Priority are registered broker-dealers with the
Securities and Exchange Commission ("SEC"), are members of the National
Association of Securities Dealers, Inc. ("NASD") and are required to be
licensed or registered as a securities broker-dealers in certain states where
they transact business. Finally, certain of JMC's subsidiaries and Priority
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
Priority 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 Priority 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 Priority do business and the
local ordinances of each city and county in which JMC and Priority maintain an
office.
REGULATION
JMC and certain of its subsidiaries and Priority are subject to extensive
state regulation in those states in which they are licensed to do insurance
business. Each insurance department 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. (See "Legal
Proceedings.")
5
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. Additional
legislation, changes in the rules promulgated by the SEC and the NASD, or
changes in the interpretation or enforcement of existing laws and rules, may
directly affect the mode of operation and profitability of broker-dealers. In
December, 1995, the NASD submitted for approval to the SEC proposed rules
applicable to NASD members operating on the premises of financial
institutions. These rules, if adopted, would be similar to the rules already
adopted by bank regulators. See the discussion of the "Interagency Guidelines"
below. These rules would allow the NASD to also regulate the physical location
of sales within financial institutions, the signage necessary, customer
disclosures, compensation of unregistered bank employees and public
communications, among other aspects of the business. While the rules are
substantially similar to those embodied in prior SEC communications on these
issues, they are more comprehensive and cover areas not previously addressed
by the SEC, but have been addressed and promulgated in the "Interagency
Guidelines," as discussed below. 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.
The Company's client financial institutions also operate in a highly
regulated environment. Existing federal rulings allow national banks and
certain other federally-regulated financial institutions to sell annuities and
mutual fund shares, but restrict the sale of many types of insurance products.
See the discussions of NationsBank vs. Variable Annuity Life Insurance Company
-------------------------------------------------------
below. In February, 1994, all of the primary federal banking regulators issued
a single set of guidelines (the "Interagency Guidelines") regarding the retail
sale of non-deposit investment products, such as annuities and mutual funds,
through banks, savings and loan associations and thrifts. These guidelines and
their manner of implementation could significantly affect the ability of, and
the means by which, the Company's subsidiaries conduct business with
federally-regulated banks, savings and loan associations and thrifts. Since
issuance of the Interagency Guidelines, the federal banking agencies conducted
audits of the non-deposit investment programs at numerous financial
institutions. As a result of these audits, certain of the agencies have
further clarified certain provisions of the Interagency Guidelines especially
in regards to customer disclosures. In addition, state-chartered financial
institutions are subject to regulation by state banking agencies. These
agencies and state insurance regulators may limit the ability of the Company's
financial institution clients and other banks, savings and loan associations
and thrifts to engage in the annuity, insurance and mutual fund sales
businesses through third-party marketing organizations or otherwise.
On January 18, 1995, the United States Supreme Court issued its decision in
the case of NationsBank vs. Variable Annuity Life Insurance Company (the
-------------------------------------------------------
"VALIC case"). The ruling upheld the Office of the Comptroller of the
Currency's ("OCC") decision that national banks could sell annuities. The
Comptroller had found that such products were not insurance within the meaning
of the National Bank Act and that the sale of annuities by national banks was
within the "incidental powers" granted to them under that act. The U. S.
Supreme Court concurred with this judgment. The ruling in the VALIC case
appears to open the door for federally-chartered financial institutions to
sell annuities, even in states where state insurance laws would prohibit such
sales. It also appears to create a similar opportunity for state banks in the
majority of states where state law permits state-chartered financial
institutions to engage in any business permitted for a national bank. In spite
of the decision in the VALIC case, at the present time there are federal court
proceedings and state and federal legislative proposals which could limit or
alter the ability of banking institutions to sell annuities and insurance
products. In particular, the United States Supreme Court recently heard oral
argument in the case of Barnett Bank of Marion County, N.A. vs. Gallagher.
--------------------------------------------------
This 11th Circuit Federal District Court case indicated that a state insurance
agency could prevent a bank from selling insurance through an insurance agency
located in a town of less than 5,000 people
6
in the exercise of its power to regulate the business of insurance within a
state. It is not possible to predict the outcome of any such proceeding or the
likelihood that any particular proposal will be enacted or what effect such a
change would have on the Company's continued ability to market annuities and
insurance products and mutual funds through banking institutions. In light of
the VALIC case, it is possible that banking institutions that currently
utilize the Company's subsidiaries to market such products would market such
products themselves, rather than through the Company. The same result might
flow from any other change in regulatory landscape. In such an event, the
Company's ability to continue its business as described herein would be
impaired. However, the Company's subsidiaries currently market annuities,
insurance products and mutual funds to customers of financial institutions
that could legally sell such products themselves. These financial institutions
prefer to use the Company's marketing services instead of developing their
own. It is possible that a number of banking institutions will choose to
utilize the Company's subsidiaries despite their ability to sell these
products directly. In such an event, the Company's subsidiaries would be able
to continue to sell annuities, insurance products and mutual funds through
such institutions, although perhaps on a more limited basis. It is also
possible that a change resulting from court proceedings or legislative
initiatives could further restrict the ability of banking institutions to make
annuities, insurance products and mutual funds available to their customers
either directly through third-party marketing organizations or otherwise.
Legislation or changes in tax regulations with regard to the tax-deferred
status of earnings from annuities could also significantly affect the ability
of the Company to market these products.
EMPLOYEES
As of February 29, 1996, the Company had 78 full-time employees.
ITEM 2. PROPERTIES
During 1995, the Company closed its Florida office upon the termination of
business with Barnett, and closed its Tennessee office on February 2, 1996,
moving all customer service for Tennessee to the Company's corporate office.
All facilities are suitable and adequate to meet the Company's requirements.
The Company intends to either renegotiate new leases for the existing
facilities or locate alternative suitable space upon expiration of these
leases, as market conditions indicate. The following is a list of the leases
for the principal facilities utilized in the Company's operations as of
January 1, 1996.
Corporate Headquarters
9710 Scranton Road
Suites 100 and 120
San Diego, CA 92121
Exp. Date: March 1998
Square Footage: 18,451
JMC TENNESSEE
850 Ridge Lake Blvd.
Suite 207
Memphis, TN 38120
Exp. Date: February 2, 1996
Square Footage: 2,814
JMC VIRGINIA
6800 Paragon Place
Suite 526
Richmond, VA 23230
Exp. Date: July 1997
Square Footage: 3,171
7
ITEM 3. LEGAL PROCEEDINGS
On July 7, 1995, the Florida Department of Insurance ( the "Department")
issued a Final Order in its administrative proceeding against the Company's
wholly-owned subsidiary, JMC, which was commenced on March 11, 1993. The
enforcement of the majority of the Final Order has been stayed pending the
outcome of its appeal and JMC has complied with all other aspects of the Final
Order.
The Final Order is similar in many respects to the Recommended Order which
was issued by an administrative hearing officer in August 1994. The Department
found that JMC was not involved in an unlawful association with its Florida
financial institution client with regard to the sale of annuities. JMC was
ordered to cease and desist from certain advertising and sales practices which
the Department found to be in violation of Florida insurance laws regarding
deceptive advertising and sales practices. The Final Order also requires JMC
to obtain an insurance agency license prior to engaging in any activity which
by state law may be performed only by a licensed agent and revokes the Florida
insurance license of James K. Mitchell, Chairman and Chief Executive Officer
of the Company. No monetary damages or penalties were assessed against JMC or
Mr. Mitchell.
JMC has filed an appeal of the Final Order and intends vigorously to pursue
the appeal. Until the Final Order was issued, JMC was limited to participating
in an administrative proceeding before what management believes was a
politically-motivated state agency. Management believes that many of its
strongest arguments could not be raised in the administrative proceeding.
These issues have been raised in the appeal before what management hopes is an
impartial judicial panel.
Effective October 31, 1995, JMC concluded its relationship with its Florida
financial institution client and is not presently in business in the state of
Florida. The Company has incurred most of the anticipated costs of the appeal
and management believes that amounts accrued as of December 31, 1995 will be
sufficient to cover any additional costs.
The Company's broker-dealer subsidiary, Priority (formerly Spear Rees &
Co.), has been named as a defendant in lawsuits arising out of the sale of
real estate limited partnerships to customers of Spear Rees & Co. and Rees
Financial Group, Inc. and Rees Capital Group, Inc. ("Rees") prior to 1992.
Spear Rees & Co. was a full service brokerage firm which acquired the assets
of Rees in September 1991. Subsequent to year-end, the Company reached a
settlement with certain of the Plaintiffs in this case, while other claims
remain the subject of NASD arbitration. The amounts to be paid subject to
Bankruptcy Court approval in the settlement were accrued in the Company's
financial statements and are included in accrued expenses and other
liabilities as of December 31, 1995. Management does not believe that
resolution of the NASD arbitration will have a material adverse effect on the
Company.
In addition, the Company and its subsidiaries are involved in various legal
and regulatory proceedings from time to time in the ordinary course of
business. Management does not believe that any such proceedings will have a
material adverse effect on the Company's financial condition or results of
operation.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders during the fourth
quarter of the fiscal year ended December 31, 1995.
8
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
MARKET INFORMATION
The common stock of the Company is principally traded in the NASDAQ National
Market System under the symbol JMCG and is owned as of February 29, 1996 by
approximately 262 shareholders of record with approximately 1,200 beneficial
owners. Approximately fifteen broker-dealers are market makers in the
Company's stock on the NASDAQ National Market System.
The Company is also listed on the Pacific Stock Exchange under the symbol
JMC, but the trading volume in the Company's common stock on the Pacific Stock
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 1995 and 1994.
SALES PRICES
-------------
HIGH LOW
------ ------
1995
First Quarter............................................. $1.875 $1.125
Second Quarter............................................ $1.625 $0.875
Third Quarter............................................. $1.188 $0.625
Fourth Quarter............................................ $1.031 $0.688
1994
First Quarter............................................. $9.375 $3.750
Second Quarter............................................ $4.750 $2.875
Third Quarter............................................. $3.250 $1.375
Fourth Quarter............................................ $2.375 $1.250
DIVIDENDS
No dividends were paid by the Company during fiscal 1995. 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.
9
ITEM 6. SELECTED FINANCIAL DATA
SELECTED ANNUAL FINANCIAL DATA
YEARS ENDED DECEMBER
31, 1995 1994 1993 1992 1991
-------------------- ---- ---- ---- ---- ----
Selected Financial Data:
Total Revenues........ $20,371,860 $33,357,242 $49,318,460 $39,247,926 $20,576,673
Income (loss) from
continuing operations
before extraordinary
item and accounting
change............... $ 1,741,124 $(2,370,155) $ 4,368,141 $ 4,422,688 $ 1,376,943
Income (loss) from
discontinued opera-
tions................ $ -- $ -- $ 514,904 $(2,912,225) $ 199,151
Extraordinary item.... $ -- $ -- $ -- $ -- $ 170,000
Accounting change..... $ -- $ -- $ -- $ 185,000 $ --
Net income (loss)..... $ 1,741,124 $(2,370,155) $ 4,883,045 $ 1,695,463 $ 1,746,094
----------- ----------- ----------- ----------- -----------
Earnings Per Share:
Income (loss) from
continuing operations
before extraordinary
item and accounting
change............... $ 0.28 $ (0.36) $ 0.62 $ 0.59 $ 0.19
Income (loss) from
discontinued
operations........... $ -- $ -- $ 0.07 $ (0.38) $ 0.03
Extraordinary item.... $ -- $ -- $ -- $ -- $ 0.02
Accounting change..... $ -- $ -- $ -- $ 0.02 $ --
Net income (loss)..... $ 0.28 $ (0.36) $ 0.69 $ 0.23 $ 0.24
----------- ----------- ----------- ----------- -----------
Balance Sheet Data:
Total assets.......... $ 9,511,828 $ 8,380,931 $15,426,738 $14,079,204 $50,324,413
Long-term debt........ $ -- $ -- $ -- $ -- $ 35,459
Total liabilities..... $ 2,511,006 $ 3,121,233 $ 6,868,923 $ 5,430,721 $40,119,067
Stockholders equity... $ 7,000,822 $ 5,259,698 $ 8,557,815 $ 8,648,483 $10,205,346
----------- ----------- ----------- ----------- -----------
No cash dividends were paid during the period from January 1, 1991 through
December 31, 1992.
Cash dividends of $456,465 and $969,798 were paid during 1994 and 1993,
respectively.
No cash dividends were paid during 1995.
SELECTED QUARTERLY FINANCIAL DATA
FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER
---------- ---------- ----------- ----------
1995
Commissions.................. $4,554,338 $4,139,820 $ 3,453,664 $2,164,885
Net income (loss)*........... $ 419,326 $ (335,134) $ 1,832,789 $ (175,857)
Earnings per share:
Net income (loss).......... $ 0.07 $ (0.05) $ 0.30 $ (0.03)
---------- ---------- ----------- ----------
1994
Commissions.................. $9,445,217 $9,620,564 $ 7,708,117 $5,373,657
Net income (loss)**.......... $ (217,839) $ 255,528 $(2,604,705) $ 196,861
Earnings per share:
Net income (loss).......... $ (0.03) $ 0.04 $ (0.40) $ 0.03
---------- ---------- ----------- ----------
- --------
* Non-recurring items included in the quarterly net income (loss) figures for
1995 include: (a) payment of $1,309,000 ($785,000 after-tax provision) for
the right to hire certain personnel in the first quarter; and (b) after-tax
net gain on sale of rights to certain future asset-based fees revenues of
$1,987,000 in the third quarter and $361,000 in the fourth quarter. See
further explanation of these items in "Management's Discussion and Analysis
of Financial Condition and Results of Operations--Results of Operations--
1995 Compared to 1994."
** Includes a one-time charge for restructuring of $557,000 (or $345,000 after
estimated tax benefit of $212,000) and a write-off of goodwill in the
amount of $2,517,000 (with no corresponding tax benefit) in the third
quarter. The fourth quarter includes revenue of approximately $1,000,000
(or $600,000 after estimated tax provision of $400,000) resulting from a
payment from a financial institution client for the right to hire certain
JMC employees.
10
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
1995 Compared to 1994
---------------------
General. Revenues and expenses include the accounts of the Company's
subsidiaries, JMC and Priority.
The Company reported net income for the year ended December 31, 1995 of
$1,741,000 (after providing for income taxes of $1,256,000) compared with a
net loss of $2,370,000 (after providing for income taxes of $492,000) in 1994.
Included in the 1995 and 1994 results were the following:
1995:
-----
. A net gain of $3,914,000 ($2,349,000 or $0.38 per share after
estimated tax provision) on the sale of the rights to certain future
asset-based fee revenues to a client financial institution.
. Other revenue in the amount of approximately $1,309,000 ($785,000 or
$0.13 per share after estimated tax provision) related to the final
portion of that same client financial institution's payment for the
right to hire certain employees and certain other services.
1994:
-----
. One-time pre-tax charges totaling $3,074,000. As explained in detail
below, the charges consisted of a restructuring charge of $557,000
($345,000 or $.05 per share after estimated tax benefit of $212,000)
and a write-off of goodwill which amounted to $2,517,000 (or $.39 per
share) with no corresponding tax benefit.
. Revenue in the amount of approximately $1,000,000 ($600,000 or $.09
per share after estimated tax provision of $400,000) resulting from a
payment from a financial institution client for the right to hire
certain JMC employees.
Excluding the above-mentioned items and amortization of goodwill in 1994,
the Company would have reported an after tax loss of $1,393,000 (or $0.22 per
share after an estimated tax benefit of $833,000) in 1995 compared to net
income of $407,000 (or $0.06 per share after providing for income taxes of
$304,000) in 1994.
Total revenues for 1995 were $20,372,000 compared to revenues of $33,357,000
in 1994, a decrease of $12,985,000 or 39%. Revenues for 1995 include the
previously mentioned one-time payments from a client financial institution and
the net gain on the sale of rights to certain asset-based fee revenues to that
same client totaling $5,223,000 as well as transition fees of $538,000 which
are included in other revenues:
. The transition fees were intended to cover the cost of operating the
Florida operations during a transitional period prior to termination
of the Company's relationship with its Florida financial institution
client. For purposes of analyzing revenues from operations, these
transition fees have been included as they relate to services
performed. As such, all expenses related to the same operational
transition are included in total operating expenses.
1994 revenues include the previously mentioned $1,000,000. Excluding the
one-time payments for the right to hire certain JMC employees in 1994 and 1995
and the net gain on the sale of the rights to certain asset-based fee revenues
in 1995, but including $538,000 for transition fees, revenues for 1995 would
have been $15,149,000 compared to $32,357,000 in 1994 (a decrease of
$17,208,000 or 53%). This reduction in revenues is primarily attributable to
the following:
. Lower gross sales volumes which declined $297 million or 62% due
primarily to:
* The reconfiguration and ultimate termination of the Company's
Florida operations contributed to $241 million or 81% of the sales
volume decline. The Company terminated its relationship with its
Florida financial institution client in August, 1995.
11
* The termination of another client relationship in the fourth quarter
of 1994 due to that client being acquired by First Interstate Bank
contributed to $18 million or 6% of the total gross sales decline in
1995 compared to 1994.
* Declining interest rates and increased competition, primarily from
Certificates of Deposits during 1995 also contributed to the sales
decline.
. A decrease of approximately 70 basis points or 12% in the gross revenue
rate on products sold in 1995 compared to 1994 due to a shift in the
product mix to mutual funds and variable annuities, both of which pay
lower commissions than that of fixed annuities. Annuity sales as a
percentage of total product sales were 65% in 1995 compared to 90% in
1994. In addition, fixed annuity sales as a percentage of total annuity
sales were 65% in 1995 as compared to 75% in 1994.
. A decrease of approximately $654,000 in asset-based fee revenue in 1995
compared to 1994. This decrease is a result of the sale of the rights to
certain future asset-based fee revenues at the end of August for which
the Company recognized a pre-tax net gain of approximately $3,914,000
during 1995. Because of the timing of this sale, the Company did not
receive asset-based fee revenues for the last four months of 1995 which
would have generated approximately $1.1 million in additional asset-based
fee revenue for 1995.
Total expenses for 1995 were $17,375,000 compared to $35,235,000 in 1994.
Excluding the previously described one-time charges of $3,074,000, total
expenses for 1994 would have been $31,646,000 (which also excludes
amortization of goodwill in 1994 of $515,000). Excluding the aforementioned
charges in 1994, total expenses in 1995 decreased $14,271,000 or 45% when
compared to 1994 expenses. This drop in total expenses is primarily
attributable to the following:
. A $6,744,000 or 51% reduction in fees to financial institutions due to
lower sales volume.
. A $783,000 or 48% reduction in salesperson's commissions also due to
lower sales volume, and
. An additional $6,745,000 or 40% reduction in base operating expenses as a
result of the following:
. The full impact of the Company's restructuring plan implemented in
the latter part of 1994, coupled with additional cost reductions
during 1995.
. The reconfiguration and ultimate termination of the Company's Florida
operations; and
. A reduction in legal fees related to the Company's administrative
proceeding with the Florida Department of Insurance. The Company
incurred significant legal expenses in connection with the five-week
administrative hearing which occurred in February and March of 1994.
The percentage decrease in fees to financial institutions in 1995 compared
to 1994 is less than the percentage decrease in sales volume primarily due to
the following:
. The Company pays out to its financial institution clients a higher
percentage of its asset-based fee revenue than it does on front
commission revenue. Thus, as asset-based fee revenue becomes a larger
percentage of total revenue (32% in 1995 vs. 17% in 1994) the total
payout percentage to the financial institution will increase. The
increased percentage of revenues paid out offset the decrease due to
decreased revenues generated.
The Company's gross margin rate (gross revenue rate less payout rate to
financial institutions and salesperson commissions) is 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. Mutual
funds achieve the lowest gross margin rate due to the significantly lower
gross revenue rate paid on
12
these products, even though the payout to the Company's financial institution
clients is a fixed percentage of the gross revenue rate. During 1995, variable
annuity and mutual fund sales comprised 58% of total sales compared to 33% of
total sales in 1994, resulting in a decline in the gross margin rate on total
product sales in 1995 from 1994.
RESTRUCTURING. During the third quarter of 1994, the Company's Board of
Directors approved a restructuring plan which was developed by management to
enhance operating efficiencies by streamlining the Company's administrative
and sales management functions. See explanation of restructuring in "Results
of Operations--1994 compared to 1993--Restructuring". During 1995 the Company
realized the benefits from this restructuring in terms of a reduced base
operating overhead at the beginning of the year. In addition, with the
centralization of support functions the Company was able to react quickly to
effect further cost reductions as sales volumes continued to decline,
primarily as a result of the reconfiguration and ultimate termination of its
Florida operations.
As of December 31,1995 the balance remaining in the restructuring reserve
was approximately $60,000 which is primarily to cover the remaining net
obligation on leases of offices closed during restructuring. Management
believes this reserve balance is adequate to cover its remaining obligations
related to the restructuring.
1994 COMPARED TO 1993
- ---------------------
General. Revenues and expenses include the accounts of the Company's
subsidiaries, JMC and Priority.
The Company reported a net loss for the year ended December 31, 1994 of
$2,370,000 (after providing for income taxes of $492,000) compared with after-
tax income from continuing operations of $4,368,000 (after providing for
income taxes of $3,256,000) and net income of $4,883,000 (after providing for
income taxes of $3,599,000) in 1993. Included in the 1994 results were the
following:
. One-time pre-tax charges totaling $3,074,000. As explained in detail
below, the charges consisted of a restructuring charge of $557,000 (or
$345,000 after estimated tax benefit of $212,000) and a write-off of
goodwill which amounted to $2,517,000 with no corresponding tax benefit.
. Revenue in the amount of approximately $1,000,000 (or $600,000 after
estimated tax provision of $400,000) resulting from a payment from a
financial institution client for the right to hire certain JMC employees.
Included in 1993 after-tax income from continuing operations was a one-time
pre-tax charge of $575,000 (or $352,000 after estimated tax benefit of
$223,000) recorded in the third quarter arising out of an arbitration
proceeding with a former bank client. Net income for 1993 included an after-
tax gain from disposal of the Company's specialist and securities brokerage
businesses of $515,000 (net of applicable income taxes of $343,000). Excluding
the above-mentioned items and amortization of goodwill for both periods, the
after-tax income from continuing operations would have been $407,000 (after
providing for income taxes of $304,000) in 1994 compared to $5,406,000 (after
providing for income taxes of $3,479,000) in 1993.
Total revenues for 1994 were $33,357,000 compared to revenues of $49,318,000
from continuing operations in 1993, a decrease of $15,961,000 or 32%. Included
in 1994 revenues was the previously mentioned one-time payment from a client
financial institution. Without this one-time payment, 1994 revenues would have
been $32,357,000, a reduction of $16,961,000 or 34% from 1993. This reduction
in revenues is primarily attributable to the following:
. Lower sales volume which declined 37% principally as a result of the
changing regulatory environment nationwide and surrounding negative news
coverage, changing economic conditions in the financial markets and the
reconfiguring of the Company's Florida operations. See "Trends and
Uncertainties--Declining Revenues". Annuity sales volume decreased 40%
while mutual fund sales remained relatively constant.
13
.Offset, in part, by:
. An approximately 3% increase in the gross revenue rate on annuities
resulting from an increase in the front commission rate paid on
variable annuities in the beginning of the second quarter of 1994.
The increase was accomplished by increasing front commissions and
reducing trail commissions on an actuarially-equivalent basis. The
Company also obtained a slight increase in trail commissions from
those previously paid; and
. A $1,593,000 increase in asset-based fee revenues due to an increase
over 1993 in the average accumulated value of assets generating fees.
Total expenses for 1994 were $35,235,000 compared to $41,694,000 in 1993.
Excluding the previously described one-time charges of $3,074,000 and $575,000
in 1994 and 1993, respectively, total expenses for 1994 would have been
$31,646,000 (excluding amortization of goodwill of $515,000) compared to total
expenses of $40,433,000 (excluding amortization of goodwill of $686,000) in
1993, a decrease of $8,787,000 or 22%. This drop in total expenses is
attributable to the following:
. A $6,118,000, or 32%, reduction in fees to financial institutions due to
lower sales volume;
. A $2,149,000, or 57%, reduction in salespersons' commissions also due to
lower sales volume; and
. An additional $1,333,000 or 8% reduction in base operating expenses
(excluding Florida legal fees) due to management of base operating
expenses and the initial impact from the Company's restructuring. See
"Restructuring".
. Offset, in part, by an increase of approximately $813,000 in legal fees
primarily related to the Florida Department of Insurance administrative
proceedings.
The percentage decrease in fees to financial institutions in 1994 is less
than the percentage decrease in sales volume due to the increase in asset-
based fees paid to the financial institutions. Asset-based fees increased due
to an increase over 1993 in the average accumulated value of assets generating
fees.
Excluding the one-time charges and non-recurring revenue in 1994, the one-
time charge in 1993 and amortization of goodwill for both periods, the Company
had pre-tax return on total revenues of 2.2% in 1994 compared to 18.0% in
1993. The principal reason for the reduction in pre-tax return was that the
decline in sales volume experienced throughout 1994 occurred more rapidly than
the Company was able to effectuate base operating expense reductions. This
resulted in a sales production level which only marginally exceeded the
minimum production level required to cover its base operating expenses. See
"Restructuring" and "Trends and Uncertainties--Declining Revenues".
The Company's gross revenue rate is sensitive to changes in product mix
which is impacted by fluctuations in interest rates. Fluctuations in gross
revenue rates are not followed by a change in production-based expenses due to
contractual obligations with financial institutions. Thus, changes in gross
revenue rate will impact the Company's gross margin rate. As interest rates
declined in 1993, the product mix moved toward a higher percentage of variable
annuities and mutual funds with lower gross revenue rates. This resulted in a
decrease in the gross revenue rate. Conversely, during 1994 interest rates
increased and during the second half of the year, the amount of fixed
annuities as a percentage of annuity sales also increased. As a result, the
Company's gross revenue rate increased. If interest rates stabilize or
increase further, management believes that the product mix will stabilize and
potentially move towards an even higher percentage of fixed rate annuity
products, but management is unable to predict interest rate movement and there
can be no assurance that product mix will react as management anticipates.
During 1994, management negotiated a change in the structure of commission
payments it receives on variable annuities. As a result, beginning in the
second quarter of 1994, the total compensation rate paid on variable annuities
increased.
14
Restructuring. During the third quarter of 1994, the Company's Board of
Directors approved a restructuring plan which was developed by management to
enhance operating efficiencies by streamlining the Company's administrative
and sales management functions. The primary reason for the restructuring plan
was to bring costs in line with the decline in sales volumes by taking
advantage of operating efficiencies. See "Trends and Uncertainties--Declining
Revenues". The restructuring, which was completed in the fourth quarter of
1994, involved the consolidation of five service centers in Florida into a
single center in Tampa, the consolidation of the Company's northern California
operations into its corporate offices in San Diego, the centralization of
mutual fund processing in San Diego and a reduction in the number of sales
managers in relation to active sales people. Approximately 31 administrative
employees were terminated as a result of the restructuring.
During the third quarter, the Company recorded one-time restructuring
charges in the amount of $557,000. The restructuring charges included current
and future cash requirements for severance costs and costs related to
premature lease terminations of $64,000 and $280,000, respectively and non-
cash expenses of $213,000 associated with the write-off of certain assets. As
of December 31, 1994, there was a balance of $295,000 remaining in the
restructuring accrual primarily related to premature lease termination costs.
Management estimated the Company will incur an additional $200,000 of
expenditures related to the revised structure of future operations which were
not included in the restructuring charges recorded during the third quarter.
These additional expenditures represent the cash outlays related to the
expansion of the Tampa and San Diego facilities to accommodate the
consolidated operations and the centralization of mutual fund processing. As
of February 28, 1995, $150,000 of these additional expenses had been incurred.
Management anticipates that most of these additional expenditures, which
relate to the purchase of fixed assets and the construction of leasehold
improvements, will be capitalized. The cash required to effect the
restructuring was, and will continue to be, generated from operations.
Write-off of Goodwill. The Company acquired JMC in 1988. The purchase price
was determined by an earn-out formula over a period which ended in 1992. The
Company allocated to goodwill the excess purchase price over the fair value of
the tangible assets acquired. The goodwill was being amortized over a ten-year
period which was an estimate of the time during which JMC would have strong
earnings potential from the financial institution clients it had at the time
of the acquisition.
During the third quarter of 1994, management was notified that JMC's
contract with Sacramento Savings would be terminated in the fourth quarter.
This contract was in fact terminated effective October 31, 1994. Sacramento
Savings was the last significant JMC client remaining from those existing at
the time of the 1988 acquisition. This event caused management to conclude
that the original amortization period was too long. Accordingly, the Company
accelerated its amortization and wrote off $2,517,000 representing the
remaining unamortized book value of the goodwill.
LIQUIDITY AND CAPITAL RESOURCES
As of December 31, 1995, the Company had cash and cash equivalents of
approximately $5,833,000, an increase of $1,686,000 from $4,147,000 in cash
and cash equivalents plus short-term investments at December 31, 1994.
Significant sources and uses of such amounts during 1995 included:
. The net proceeds on the sale of rights to certain future asset-based fees
generated approximately $2,348,000 (after providing for taxes of
$1,566,000). This sale was effective as of the end of August, in 1995,
thus the Company did not receive asset fee revenues related to this
business sold for September through December, 1995, which for that
period, would have generated approximately $177,000 in income after taxes
for the year.
. The Company recognized $1,309,000 (pre-tax) for the purchase of the right
to hire certain JMC personnel. As of December 31,1995, all but $109,000
of this amount had been received (the remaining amount was received in
January of 1996). Thus the Company generated $1,200,000 (or $720,000
after providing for taxes) in cash during 1995 related to this
transaction.
15
. Excluding the above two transactions and the tax effected non-cash
expense reflected in the Company's Statement of Operations for 1995 the
Company's operations used approximately $1,155,000 during 1995. As
previously noted, the Company has reduced operating expenses, however, it
was necessary to maintain the Company's Florida operations at a certain
level through August, 1995 despite the low sales volumes in order for it
to realize the previously noted revenues associated with the transition
and termination of its relationship with its Florida financial
institution client.
. The remaining uses of cash of approximately $220,000 are primarily due to
the reduction in liability balances from December 31, 1994 to December
31, 1995 and are not related to 1995 operating activities. Such
liabilities consisted primarily of payroll related accruals which were
paid down as personnel left the Company during the year.
The Company's cash needs are affected by its ongoing expenses. These
expenses include fees to financial institutions and sales commissions, which
fluctuate with sales production volumes ("production-based expenses") and
other operating expenses, such as employee salaries and rent, which bear no
precise correlation to sales volume ("base operating expenses"). The Company's
base operating expenses were significantly reduced during 1995 due to cost
containment and the impact from the Company's restructuring plan initiated in
the later part of 1994. Base monthly operating expenses decreased from
approximately $1,000,000 in January of 1995 to $600,000 in December of 1995.
The Company is actively pursuing new client financial institutions (see
explanation of USBA agreement). Management believes that, as new client
financial institutions are acquired, the Company will benefit from spreading
its base operating expenses over a larger revenue base. However, the exact
amount and nature of this benefit cannot be ascertained with any certainty and
will depend, in large part, upon the nature of the services provided to new
client financial institutions and sales volume generated. Depending upon the
nature of these services and sales volume produced, the Company may need to
increase base operating expenses from their current levels. In any event,
under the new consolidated structure, the Company believes it has the ability
to add new clients with significantly reduced start-up costs compared to
historical amounts. In addition, the Company will service these new
relationships on a more centralized basis to take full advantage of operating
efficiencies. In the past, as the Company added new client financial
institutions, it would incur between $125,000 to $250,000 in start-up costs to
establish a new distribution center, which also resulted in ongoing increased
base operating expenses. Management does not anticipate opening a new
distribution center for each new client financial institution in the future.
The Company sells financial products, primarily annuities and mutual funds.
Under its arrangements with the provider companies, the Company earns
commissions on each sale and it's entitled to ongoing asset-based fees and 12
B-1 fees on the average accumulated value of assets. Under arrangements with
most of its client financial institutions, the Company is also required to pay
an asset-based fee which, although varying by product, amounts to
approximately two-thirds of the fee earned from its provider companies for as
long as the marketing relationship with the financial institution continues.
The provisions for payment of asset-based fees to client financial
institutions after the termination of the marketing relationship varies from
institution to institution and depends upon the manner in which the
relationship is terminated. Future fees, both those due from the provider
company and those due to financial institution clients, are not reflected as
an asset or a liability in the Consolidated Balance Sheets. At December
31,1995, the accumulated value of assets on which the Company receives asset-
based fee payments was approximately $890 million (including mutual funds
paying 12 B-1 fees). Asset-based fee income and asset-based fees paid to
financial institutions amounted to approximately $4,866,000 and $3,068,000,
respectively, in 1995. The reduction in these amounts as compared to 1994 is a
result of the sale of the rights to asset-based fees generated by the Florida
operation at the end of August, 1995. The fourth quarter asset-based fee
income and asset-based fees paid to financial institutions amounted to
approximately $654,000 and $363,000 respectively. This is reflective of the
current levels of asset-based fee revenues and asset-based fees paid to
financial institutions after the sale of asset-based fee revenues during the
third quarter of 1995.
16
Due to the reduction in the Company's base operating expenses as a result of
the restructuring and other cost reductions, management expects the Company
will meet its operating and capital expenditure needs over the next twelve
months. The Company's cash flow from operations in 1996 is expected to
approximate net income with the exception of the depreciation and amortization
expense (estimated to be approximately $320,000 in 1996). However, in
connection with an exclusive Marketing Agreement executed with USBA Holding,
LTD., the Company paid out $1.25 million in the first quarter of 1996. This
payment is not reflected on the balance sheet as of December 31, 1995.
TRENDS AND UNCERTAINTIES
REGULATORY ENVIRONMENT. The Company and its financial institution clients
operate in a highly regulated environment. Both state and federal laws govern
the manner in which insurance agencies, broker-dealers and financial
institutions may make annuities, insurance products and mutual funds available
to customers of financial institutions. Recently, federal banking regulators,
the Securities and Exchange Commission and the National Association of
Securities Dealers, Inc. have focused attention in this area. Changes in, or
interpretations of, the laws and regulations governing these activities or
changes in the implementation or enforcement of such laws and regulations
could affect the ability of, and the means by which, the Company and its
financial institution clients make annuities, insurance products and mutual
funds available to customers of banks, savings and loan associations and
thrifts.
DECLINING REVENUES. During 1995, the Company experienced a continued decline
in sales volume which generated a corresponding decrease in revenues. The
primary reason for this decline was the transition and ultimate termination of
the Company's relationship with Barnett. This accounted for 81% of the
decrease in sales volume. See further explanation of revenue decline in
"Management's Discussion and Analysis of Financial Condition and Results of
Operations--Results of Operations--1995 Compared to 1994".
Management believes that interest rate competition also impacted sales
volumes and revenues adversely. As long term interest rates declined, the
Company's financial institution clients began aggressively pursuing deposit
growth to meet loan demand by offering attractive interest rates on bank
deposits which compete with the Company's products. Management believes that
many conservative investors were attracted to the higher rates on FDIC insured
deposits. In addition, as interest rates on fixed annuities came under
increasing competition and the stock market rose, the product mix shifted to
mutual funds and variable annuity products which provide the opportunity for
customers to realize higher returns but pay lower commission rates to the
Company. During the first quarter of 1995 the product mix was 65% fixed
annuities, 15% variable annuities and 20% mutual funds compared to 17%, 31%,
and 52%, respectively, for the fourth quarter of 1995.
Most of these factors are outside the Company's control and, accordingly,
management cannot predict when or if they will change or cease to affect sales
volumes and revenues. In 1995, management responded to these events by
developing an expanded choice of alternative investment programs for potential
bank clients and intensifying its marketing efforts for new client
acquisition. In addition, management reduced operating expenses to bring them
in line with revenue. See explanation of reduction in expenses in the
"Management's Discussion and Analysis of Financial Condition and Results of
Operation--Results of Operations--1995 Compared to 1994 and 1994 Compared to
1993--Restructuring". In January 1996, the Company announced an exclusive
marketing arrangement with USBA. See description of the USBA marketing
agreement in Item 1 "Description of Business--Principal Markets and Methods of
Distribution".
17
ITEM 8. FINANCIAL STATEMENTS
JMC GROUP, INC.
AND SUBSIDIARIES
CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED
DECEMBER 31, 1995, 1994 AND 1993
CONTENTS
INDEPENDENT AUDITORS' REPORT................................................ 19
CONSOLIDATED BALANCE SHEETS................................................. 20
CONSOLIDATED STATEMENTS OF OPERATIONS....................................... 21
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY.................. 22
CONSOLIDATED STATEMENTS OF CASH FLOWS....................................... 23
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.................................. 24
18
INDEPENDENT AUDITORS' REPORT
We have audited the accompanying consolidated balance sheets of JMC Group,
Inc. and subsidiaries as of December 31, 1995 and 1994 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, 1995.
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, 1995 and 1994, and the results of their
operations and their cash flows for each of the three years in the period
ended December 31, 1995 in conformity with generally accepted accounting
principles.
/s/ Deloitte & Touche LLP
San Diego, California
February 20, 1996
19
JMC GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, DECEMBER 31,
1995 1994
------------ ------------
ASSETS
CURRENT ASSETS:
Cash and cash equivalents.......................... $5,832,598 $3,610,888
Short-term investments............................. -- 536,000
Cash segregated under securities regulations....... 894,269 47,746
Receivables from insurance companies............... 826,971 1,425,466
Receivable from financial institution.............. 109,450 --
Income taxes receivable............................ 65,334 168,992
Deferred tax asset................................. 159,354 424,584
Other assets....................................... 281,947 354,261
---------- ----------
TOTAL CURRENT ASSETS............................. 8,169,923 6,567,937
Furniture, equipment and leasehold improvements--net
of accumulated depreciation and amortization of
$1,498,291 in 1995 and $1,321,307 in 1994........... 362,261 677,155
Asset-based fees purchased--net of accumulated
amortization of $417,485 in 1995 and $261,290 in
1994................................................ 979,644 1,135,839
---------- ----------
TOTAL ASSETS..................................... $9,511,828 $8,380,931
========== ==========
LIABILITIES & STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accrued fees to financial institutions............. $ 367,287 $ 978,542
Customer funds segregated under securities
regulations....................................... 894,269 47,746
Accrued expenses and other liabilities............. 833,811 878,172
Accrued restructuring expenses..................... 60,369 294,675
Allowance for contract cancellations............... 142,503 390,539
Accrued payroll and related expenses............... 212,767 531,559
---------- ----------
TOTAL CURRENT LIABILITIES........................ 2,511,006 3,121,233
STOCKHOLDERS' EQUITY:
Preferred stock, no par value; authorized 5,000,000
shares ........................................... -- --
Common stock, $.01 par value; authorized 20,000,000
shares;
issued and outstanding 6,198,898 shares in 1995
and 1994.......................................... 61,989 61,989
Additional paid-in-capital......................... 624,851 624,851
Retained earnings.................................. 6,313,982 4,572,858
---------- ----------
TOTAL STOCKHOLDERS' EQUITY....................... 7,000,822 5,259,698
---------- ----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY....... $9,511,828 $8,380,931
========== ==========
The accompanying notes are an integral part of these financial statements.
20
JMC GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31,
------------------------------------
1995 1994 1993
----------- ----------- -----------
REVENUES:
Commissions............................. $14,312,707 $32,147,555 $49,043,905
Net gain on sale of rights to certain
future asset-based fee revenues........ 3,914,350 -- --
Interest................................ 244,401 199,530 206,631
Other................................... 1,900,402 1,010,157 67,924
----------- ----------- -----------
TOTAL REVENUES........................ 20,371,860 33,357,242 49,318,460
----------- ----------- -----------
EXPENSES:
Employee compensation and benefits...... 7,428,369 13,095,319 15,964,591
Fees to financial institutions.......... 6,400,349 13,144,841 19,262,515
Professional fees....................... 770,121 1,514,468 637,084
Rent.................................... 510,691 638,744 640,582
Telephone............................... 231,714 474,148 508,896
Depreciation and amortization........... 394,188 1,054,770 1,257,034
Other general and administrative
expenses............................... 1,639,136 2,239,510 2,848,097
Goodwill write-off...................... -- 2,516,683 --
Restructuring charges................... -- 557,002 --
Litigation settlement and related costs. -- -- 575,401
----------- ----------- -----------
TOTAL EXPENSES........................ 17,374,568 35,235,485 41,694,200
----------- ----------- -----------
INCOME (LOSS) FROM CONTINUING OPERATIONS
BEFORE INCOME TAXES.................... 2,997,292 (1,878,243) 7,624,260
INCOME TAX PROVISION...................... 1,256,168 491,912 3,256,119
----------- ----------- -----------
INCOME (LOSS) FROM CONTINUING
OPERATIONS............................. 1,741,124 (2,370,155) 4,368,141
GAIN ON DISPOSAL OF SECURITIES BUSINESSES
(INCLUDES APPLICABLE TAX EXPENSE OF
$343,270)................................ -- -- 514,904
----------- ----------- -----------
NET INCOME (LOSS)................... $ 1,741,124 $(2,370,155) $ 4,883,045
=========== =========== ===========
EARNINGS (LOSS) PER SHARE:
INCOME (LOSS) FROM CONTINUING
OPERATIONS............................. $ 0.28 $ (0.36) $ 0.62
GAIN ON DISPOSAL OF SECURITIES
BUSINESSES............................. -- -- 0.07
----------- ----------- -----------
NET INCOME (LOSS)................... $ 0.28 $ (0.36) $ 0.69
=========== =========== ===========
The accompanying notes are an integral part of these financial statements.
21
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,
1993................... 6,829,698 $68,297 $ 5,093,955 $ 3,486,231 $ 8,648,483
Stock options exercised. 151,433 1,514 251,300 -- 252,814
Reduction of income
taxes payable due to
stock option
transactions........... -- -- 389,824 -- 389,824
Repurchase and retire-
ment of common stock... (496,233) (4,962) (4,641,591) -- (4,646,553)
Dividends paid ($0.14
per share)............. -- -- -- (969,798) (969,798)
Net income for the year
ended December 31,
1993................... -- -- -- 4,883,045 4,883,045
--------- ------- ----------- ----------- -----------
Balances--December 31,
1993................... 6,484,898 64,849 1,093,488 7,399,478 8,557,815
Dividends paid ($0.07
per share)............. -- -- -- (456,465) (456,465)
Stock options exercised. 40,000 400 56,960 -- 57,360
Reduction of income
taxes payable due to
stock option transac-
tions.................. -- -- 114,453 -- 114,453
Repurchase and retire-
ment of common stock... (326,000) (3,260) (640,050) -- (643,310)
Net loss for the year
ended December 31,
1994................... -- -- -- (2,370,155) (2,370,155)
--------- ------- ----------- ----------- -----------
Balances--December 31,
1994................... 6,198,898 61,989 624,851 4,572,858 5,259,698
Net income for the year
ended December 31,
1995................... -- -- -- 1,741,124 1,741,124
--------- ------- ----------- ----------- -----------
Balances--December 31,
1995................... 6,198,898 $61,989 $ 624,851 $ 6,313,982 $ 7,000,822
========= ======= =========== =========== ===========
The Company's certificate of incorporation also authorizes 5,000,000 shares
of no par value preferred stock, none of which have been issued.
The accompanying notes are an integral part of these financial statements.
22
JMC GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31,
------------------------------------
1995 1994 1993
---------- ----------- -----------
CASH FLOWS FROM OPERATING ACTIVITIES:
NET INCOME (LOSS)....................... $1,741,124 $(2,370,155) $ 4,883,045
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........ (3,914,350) -- --
Gain on disposal of securities
businesses............................. -- -- (514,904)
Realized loss on short-term
investments........................... -- 72,763 --
Loss on sale of furniture and
equipment............................. 28,170 -- --
Depreciation and amortization.......... 394,188 1,054,770 1,347,877
Goodwill write-off..................... -- 2,516,683 --
Amortization of asset-based fees
purchased............................. 156,195 170,447 --
Deferred tax provision................. 265,230 496,535 1,899,407
Changes in assets and liabilities:
Cash segregated under securities
regulations........................... (846,523) (47,746) --
Short-term investments................. 536,000 (536,000) --
Receivables from insurance companies... 598,495 587,565 (450,040)
Receivable from financial institution.. (109,450) -- --
Income taxes receivable................ 103,658 837,228 (1,006,220)
Other assets........................... 26,299 (64,877) 21,876
Accrued fees to financial institutions. (611,255) (630,101) 225,518
Customer funds segregated under
securities regulations................ 846,523 47,746 --
Payable to former officer/stockholder.. -- -- (165,740)
Accrued expenses and other liabilities. (44,361) (434,451) (902,230)
Accrued restructuring expenses......... (201,865) 472,804 --
Allowance for contract cancellations... (248,036) (344,968) 78,314
Accrued payroll and related expenses... (318,792) (109,970) (64,553)
Reserve for discontinued operations.... -- (492,836) 492,836
---------- ----------- -----------
NET CASH PROVIDED (USED) BY OPERATING
ACTIVITIES........................... (1,598,750) 1,225,437 5,845,186
---------- ----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of furniture, equipment and
leasehold improvements................ (109,677) (158,013) (632,917)
Proceeds from net sale of rights to
certain future asset-based fee
revenues.............................. 3,914,350 -- --
Proceeds from sale of furniture and
equipment............................. 15,787 -- --
Purchase of future asset-based fees and
related costs......................... -- -- (1,397,129)
Proceeds from sale of securities
businesses............................ -- -- 3,860,791
Purchase of short-term investments..... -- (2,389,463) (4,203,037)
Redemption of short-term investments... -- 6,519,737 --
---------- ----------- -----------
NET CASH PROVIDED (USED) BY INVESTING
ACTIVITIES........................... 3,820,460 3,972,261 (2,372,292)
---------- ----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Repurchase of common stock............. -- (2,606,641) (2,683,222)
Proceeds from stock options exercised.. -- 57,360 252,814
Dividends paid......................... -- (456,465) (969,798)
---------- ----------- -----------
NET CASH USED BY FINANCING ACTIVITIES. -- (3,005,746) (3,400,206)
---------- ----------- -----------
NET INCREASE IN CASH AND CASH
EQUIVALENTS.......................... 2,221,710 2,191,952 72,688
CASH AND CASH EQUIVALENTS AT BEGINNING
OF YEAR.............................. 3,610,888 1,418,936 1,346,248
---------- ----------- -----------
CASH AND CASH EQUIVALENTS AT END OF
YEAR................................. $5,832,598 $ 3,610,888 $ 1,418,936
========== =========== ===========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW
INFORMATION
Cash paid for:
Interest............................... $ 1,395 $ 6,365 $ 733,772
Income taxes........................... $ 979,550 $ 248,837 $ 2,612,402
SUPPLEMENTAL DISCLOSURES OF NON-CASH OP-
ERATING ACTIVITIES
Depreciation charged against accrued re-
structuring expenses.................... $ 32,441 $ -- $ --
The accompanying notes are an integral part of these financial statements.
23
JMC GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1. ORGANIZATION AND ACQUISITIONS
The consolidated financial statements include the accounts of JMC Group,
Inc. ("JMCG" or the "Company"), its wholly-owned subsidiaries, James Mitchell
& Co. ("JMC"), and Priority Investment Services, Inc. ("Priority") (formerly
known as Spear Rees & Co.). The Company is engaged in the business of selling
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. Priority is registered with the
Securities and Exchange Commission as a broker-dealer and during 1995
exclusively served customers of First Tennessee Bank National Association and
its affiliates and correspondent banks. All significant intercompany
transactions and balances have been eliminated in the consolidated financial
statements.
In 1988, JMCG acquired all of the outstanding stock of JMC in a business
combination accounted for by the purchase method of accounting. The total cost
of the acquisition exceeded the fair value of the net assets acquired and the
excess was allocated to the cost of goodwill which was originally being
amortized over ten years. This amortization period was derived from the terms
of the contracts that JMC had with its remaining financial institution clients
at the time of the acquisition. During the third quarter of 1994, management
was notified that JMC's contract with Sacramento Savings Bank ("SSB") would be
terminated during the fourth quarter of that year. This contract was in fact
terminated on October 31, 1994. SSB was the last significant JMC client
remaining from those existing at the time of the 1988 acquisition. This event
caused management to conclude that the original amortization period was too
long. Accordingly, the Company accelerated its amortization and wrote-off
$2,516,683 representing the remaining unamortized book value of goodwill
during 1994.
NOTE 2. SIGNIFICANT ACCOUNTING POLICIES
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.
Short-Term Investments
During 1994 the Company had a line of credit agreement which required it to
maintain a collateral account which had a balance of $536,000 as of December
31, 1994. In December of 1995, the line of credit agreement was terminated;
therefore, the collateral account is no longer required.
Cash Segregated Under Securities Regulations
JMC Financial, a wholly owned subsidiary of JMC and a broker-dealer
registered with the SEC and NASD, began self-clearing of mutual fund
transactions for itself and Priority at the end of 1994. As such, JMC
Financial carries cash balances for customers from the trade date of a mutual
fund transaction through the settlement date of such transactions. These cash
balances have been segregated in special bank accounts for the benefit of
customers under Rule 15C3-3 of the Securities and Exchange Commission. Total
deposits in these accounts as of December 31, 1995 are $894,269.
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
24
JMC GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
sales are recorded on the trade date of such sale. Commission revenues for
1995, 1994 and 1993 were $9,447,074, $26,628,216 and $45,117,202,
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 1995, 1994
and 1993 were $4,865,633, $5,519,339 and $3,926,703, 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 when 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.
Net Gain on Sale of Rights to Certain Future Asset-Based fee Revenue
During the third quarter of 1995 the Company signed an agreement to
terminate its Florida operations. As part of the termination agreement, the
Florida based financial institution exercised its rights to purchase certain
future asset-based revenues from the Company. The Company recorded a net gain
of $3,914,350 from the sale. See discussion of Barnett Bank, Inc. at Note 5
and 10.
Other Income
For 1995 and 1994, other income includes payments made by the Company's
Florida based financial institution client, for the right to hire certain JMC
employees of $1,308,500 and $1,000,000, respectively. In addition, 1995 other
income includes fees of $538,200 paid to the Company by the same financial
institution to transition the sales operation to the financial institution.
Costs incurred by the Company to facilitate such transactions are included in
Expenses for the year.
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
During 1993, the Company recorded $1,397,129 as a capital asset, which
represented the discounted present value of the future asset-based fees
acquired by the Company as a result of an arbitration proceeding involving a
former bank client. 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,
1995 was $979,644.
Financial Statement Classification
Certain reclassifications have been made to the 1994 and 1993 financial
statements in order for them to conform to the presentation for 1995.
25
JMC GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Restructuring
Restructuring expenses represent costs specifically associated with the
Company's restructuring, which was approved in the third quarter of 1994,
including employee severance, asset write-downs and lease write-offs for
closed offices.
NOTE 3. REVOLVING LINE OF CREDIT
As of December 31, 1994, the Company had available a $500,000 bank line of
credit for short-term working capital requirements, which permitted borrowing
at the bank's prime rate plus .5%. The line of credit required the Company to
maintain a collateral account of $536,000 which was recorded as short-term
investments as of December 31, 1994. The line of credit was terminated in
December 1995.
NOTE 4. DISCONTINUED OPERATIONS
During 1993, the Company entered into two separate agreements for the
disposition of its specialist and securities brokerage businesses. One
agreement was for the sale of TCW, Inc., Spear Investment Services, Inc. and
Spear Insurance Services, Inc. to a former officer/stockholder of the Company
for $1,554,017. An outstanding severance liability of $1,193,226 due to the
former officer/stockholder was offset against the sales price of these
entities at the time of the disposition. The second agreement was for the sale
of the customer accounts of Spear Rees & Co. to a major discount brokerage
firm for $3,500,000.
Amounts related to the dispositions, initially established as of December
31, 1992, were revised and a gain on disposal of securities businesses of
$514,904, net of applicable taxes, was recorded during the year ended December
31, 1993.
NOTE 5. COMMITMENTS AND CONTINGENCIES
Operating Leases
The Company leases office facilities and equipment under the terms of
operating leases which expire through 1998. At December 31, 1995 the aggregate
minimum annual noncancelable lease commitments are as follows:
MINIMUM
AGGREGATE
RENTALS
----------
Year Ending December 31,
1996......................................................... $ 462,703
1997......................................................... 426,565
1998......................................................... 324,803
----------
$1,214,071
==========
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, 1996 the Company had three offices which were being
subleased. The net obligation on such offices, included in the above minimum
aggregate rentals, is included in the remaining restructuring reserve and
reserve for discontinued operations, included in accrued restructuring
expenses and accrued expenses and other liabilities as of December 31, 1995.
26
JMC GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
LEGAL MATTERS
On July 7, 1995, the Florida Department of Insurance (the "Department")
issued a Final Order in its administrative proceeding against the Company's
wholly-owned subsidiary, JMC, which was commenced on March 11, 1993. The
enforcement of the majority of the Final Order has been stayed pending the
outcome of its appeal and JMC has complied with all other aspects of the Final
Order.
The Final Order is similar in many respects to the Recommended Order which
was issued by an administrative hearing officer in August 1994. The Department
found that JMC was not involved in an unlawful association with its Florida
financial institution client with regard to the sale of annuities. JMC was
ordered to cease and desist from certain advertising and sales practices which
the Department found to be in violation of Florida insurance laws regarding
deceptive advertising and sales practices. The Final Order also requires JMC
to obtain an insurance agency license prior to engaging in any activity which
by state law may be performed only by a licensed agent and revokes the Florida
insurance license of James K. Mitchell, Chairman and Chief Executive Officer
of the Company. No monetary damages or penalties were assessed against JMC or
Mr. Mitchell.
JMC has filed an appeal of the Final Order and intends vigorously to pursue
the appeal. The Company has incurred most of the anticipated costs of the
appeal and management believes that the amounts accrued as of December 31,1995
will be sufficient to cover any additional costs.
Effective October 31, 1995, JMC concluded its relationship with its Florida
financial institution client, Barnett Banks, Inc., and is not presently doing
business in the State of Florida. As described in Note 10, Barnett Bank
accounted for revenues of $10,239,630, $20,176,680 and $35,388,162 during
1995, 1994 and 1993, respectively.
The Company's broker-dealer subsidiary, Priority (formerly Spear Rees &
Co.), has been named as a defendant in lawsuits arising out of the sale of
real estate limited partnerships to customers of Spear Rees & Co. and Rees
Financial Group, Inc. and Rees Capital Group, Inc. ("Rees") prior to 1992.
Spear Rees & Co. was a full service brokerage firm which acquired the assets
of Rees in September 1991. Subsequent to year-end, the Company reached a
settlement with certain of the Plaintiffs in this case, while other claims
remain the subject of NASD arbitration. The amounts to be paid subject to
Bankruptcy Court approval in the settlement were accrued in the Company's
financial statements and are included in accrued expenses and other
liabilities as of December 31, 1995. Management does not believe that
resolution of the NASD arbitration will have a material adverse effect on the
Company.
In addition, the Company and its subsidiaries are involved in various legal
and regulatory proceedings from time to time in the ordinary course of
business. Management does not believe that any such proceedings will have a
material adverse effect on the Company's financial condition or results of
operation.
27
JMC GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NOTE 6. FURNITURE, EQUIPMENT, AND LEASEHOLD IMPROVEMENTS
Furniture, equipment and leasehold improvements consist of:
1995 1994
----------- -----------
Furniture and fixtures............................ $ 858,151 $ 967,062
Computer equipment................................ 959,440 973,913
Leasehold improvements............................ 42,961 57,487
----------- -----------
1,860,552 1,998,462
----------- -----------
Less:
Accumulated depreciation and amortization....... (1,498,291) (1,321,307)
----------- -----------
Net furniture, equipment and leasehold
improvements..................................... $ 362,261 $ 677,155
=========== ===========
NOTE 7. STOCKHOLDERS' EQUITY
In 1994, the Board of Directors authorized the purchase of up to 500,000
shares of the Company's common stock. During 1994, the Company repurchased
326,000 shares of common stock at a total cost of $643,310.
During 1993, the Company repurchased 496,233 shares of common stock at a
total cost of $4,646,553. During 1994, a final payment of $1,963,331 was made
related to this repurchase of stock.
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, although there are still options
outstanding under the 1983 Plan. 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 1995, 1994,
and 1993 follows:
NUMBER
OF OPTION PRICE
SHARES PER SHARE
-------- -------------
Stock options outstanding at December 31, 1992...... 279,433 $1.380- 6.380
1993
Granted........................................... 128,000 $6.250-11.000
Canceled or exercised............................. (153,433) $1.380- 6.380
1994
Granted........................................... 243,000 $4.000- 4.400
Canceled or exercised............................. (91,000) $1.380- 9.000
1995
Granted........................................... 218,000 $0.625- 3.625
Canceled or exercised............................. (112,000) $1.690-11.000
-------- -------------
Outstanding at December 31, 1995.................. 512,000 $0.625-11.000
======== =============
28
JMC GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Of the 218,000, 243,000 and 128,000 options granted in 1995, 1994 and 1993
respectively, options granted under the Executive Plan amounted to 152,000 for
1995, 170,000 for 1994 and 37,000 for 1993. Options granted under the Employee
Plan amounted to 66,000 in 1995 and 73,000 in 1994. The remaining shares in
each of these years were granted under the 1983 Plan. The 512,000 options
outstanding at December 31, 1995 became or will become exercisable as follows:
207,500 shares in 1995 and prior; 193,166 in 1996; 82,666 in 1997 and 28,668
in 1998. As of December 31, 1995, options to purchase 546,834 shares had been
exercised under the 1983 Plan and options for 101,000 shares were outstanding.
As of December 31, 1995, 436,000 shares were available for future grants under
the Executive Plan and 653,000 shares were available for future grants under
the Employee Plan. As of December 31, 1995, a total of 1,601,000 shares were
reserved for issuance under the Plans.
NOTE 8. EARNINGS PER SHARE
Earnings per share was computed based upon the weighted average number of
shares of common stock and common stock equivalents outstanding during the
periods. The weighted average number of shares outstanding was adjusted to
reflect the dilutive effect of the assumed exercise of stock options using the
treasury stock method.
The weighted average number of shares of common stock and common stock
equivalents outstanding for the periods presented is as follows: 1995-
6,201,318; 1994-6,494,388; 1993-7,010,004.
NOTE 9. INCOME TAXES
The provision (benefit) for income taxes is allocated as follows:
1995 1994 1993
---------- --------- ----------
Continuing operations........................ $1,256,168 $ 606,365 $3,645,943
Discontinued operations...................... -- -- 343,270
Additional tax deduction due to stock option
transactions................................ -- (114,453) (389,824)
---------- --------- ----------
Total.................................... $1,256,168 $ 491,912 $3,599,389
========== ========= ==========
1995 1994 1993
---------- --------- ----------
Current:
Federal.................................... $ 792,750 $ 86,843 $1,652,410
State...................................... 198,188 22,987 437,396
---------- --------- ----------
990,938 109,830 2,089,806
Deferred..................................... 265,230 496,535 1,899,407
Additional tax deduction due to stock option
transactions................................ -- (114,453) (389,824)
---------- --------- ----------
Total.................................... $1,256,168 $ 491,912 $3,599,389
========== ========= ==========
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:
1995 1994 1993
---------- ---------- ----------
Expecting tax (benefit) using statutory
rate....................................... $1,019,079 $ (638,603) $2,592,248
Effects of:
State income taxes, net of Federal tax
benefit.................................. 178,039 (109,051) 423,619
Nondeductible amortization................ -- 1,212,585 276,480
Other..................................... 59,050 26,981 (36,228)
---------- ---------- ----------
Total................................... $1,256,168 $ 491,912 $3,256,119
========== ========== ==========
29
JMC GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
At December 31, 1995 and 1994, the components of the deferred income tax
asset are as follows:
1995 1994
-------- --------
Allowance for contract cancellations..................... $ 56,916 $155,981
Accrued restructuring expenses........................... 24,111 117,693
Accrued payroll and related expenses..................... 69,161 101,692
Other.................................................... (22,760) 33,212
Franchise taxes.......................................... 31,926 16,006
-------- --------
Deferred taxes......................................... $159,354 $424,584
======== ========
NOTE 10. MAJOR CUSTOMERS
During the years ended December 31, 1995, 1994 and 1993, the following
client financial institutions individually accounted for 10% or more of the
Company's total revenues:
1995
Barnett Banks, Inc. (Florida)................................. $10,239,630
Central Fidelity National Bank (Virginia)..................... $ 4,331,633
First Tennessee Bank (Tennessee).............................. $ 3,149,677
1994
Barnett Banks, Inc. (Florida)................................. $20,176,680
Central Fidelity National Bank (Virginia)..................... $ 6,210,464
1993
Barnett Banks, Inc. (Florida)................................. $35,388,162
Central Fidelity National Bank (Virginia)..................... $ 7,579,735
As described in Note 5, the Company terminated its relationship with Barnett
Banks, Inc. effective October 31, 1995.
As described in Note 12, effective February 1, 1996, the Company reduced its
level of service provided to First Tennessee Bank from a fully-managed
alternative investments program to an administrative support program.
The Company's current contract with Central Fidelity expires on December 31,
1996, but is subject to termination or may be renewed upon written notice
prior to that time.
NOTE 11. 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.
30
JMC GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
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.
NOTE 12. SUBSEQUENT EVENTS
Effective February 1 1996, the Company entered into an agreement with First
Tennessee Bank pursuant to which such client has internalized the distribution
of annuities and mutual funds. Although the Company will no longer provide a
fully-managed alternative investment program to this client, effective with
the new agreement, the Company will provide this financial institution
administrative support for which it will receive fees based on the number of
customers serviced and the amount of transactions processed on a monthly
basis. Regardless of the volume administered, the Company will receive a
minimum monthly fee of $25,000 through December 31, 1997. For the period from
February 1, 1996 through December 31, 1996 the Company and the client bank
will share asset-based fees on the block of annuities and mutual funds
generated as of January 31,1996 in the same proportion as before the new
agreement. Subsequent to that date, the Company will earn a larger portion of
the shared fees. Based on this new agreement, no material liabilities were
created which would have required an accrual as of December 31, 1995.
The Company entered into an agreement with USBA Holdings, LTD ("USBA") on
January 28, 1996. This agreement was established to provide JMC with access to
financial institutions through the consulting and other relationships
established by USBA and its subsidiaries. In connection with this transaction,
the Company paid USBA $1.25 million on January 28, 1996 to assist in the
preparation and implementation of a five year marketing plan focusing on the
establishment of relationships with new financial institution clients. The
Company has the right to recover $1 million of the amount paid under certain
circumstances. In addition, USBA was given warrants to purchase up to 1
million shares of the Company's common stock at $2.50 per share which may be
adjusted to approximately $1.44 per share under certain circumstances. The
warrants, which are exercisable after January 29, 1997, have an estimated
value of $315,000. Amounts associated with this transaction will be deferred
and amortized over future benefit periods.
31
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not applicable.
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 February 29,
1996:
TERM OF OFFICE
NAME AGE POSITION AS DIRECTOR EXPIRES
---- --- -------- -------------------
James K. Mitchell........... 57 Chairman, Chief 1998
Executive Officer and
Director
Brian J. Finneran........... 52 President, Chief 1998
Operating Officer and
Director
D. Mark Carlson............. 36 Senior Vice President, --
Chief Financial Officer
William L. Webster.......... 48 Senior Vice President, --
Chief Administrative
Officer
Edward J. Baran............. 59 Director 1997
Barton Beek................. 72 Director 1996
Charles H. Black............ 69 Director 1997
Robert A. Cervoni........... 43 Director 1996
Herbert G. Kawahara......... 67 Director 1996
Robert G. Sharp............. 60 Director 1998
Donald A. Weeden............ 65 Director 1997
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. 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").
Brian J. Finneran became President and Chief Operating Officer and a
Director of the Company on January 10, 1994. From May 1, 1993 to January 9,
1994, he served as Executive Vice President of the Company, with
responsibility for sales and marketing. Mr. Finneran joined James Mitchell &
Co. in 1984. Prior to that time, Mr. Finneran was an officer of Security First
Group. He also held marketing and management positions with Allstate Insurance
Company and Investors Diversified Services (IDS). Mr. Finneran received
undergraduate and graduate degrees from Fairfield University and is a
registered Principal with the NASD.
D. Mark Carlson became Senior Vice President of the Company on January 10,
1994. Mr. Carlson joined James Mitchell & Co. in 1990 as Assistant Vice
President--Accounting and became Chief Financial Officer of James Mitchell &
Co. in January 1991. He became Vice President and Chief Financial Officer of
the Company on May 1, 1993. Prior to joining James Mitchell & Co., Mr. Carlson
was an audit manager with Steres, Alpert & Carne, a San Diego-based accounting
firm, which he joined in 1988 after serving as an audit supervisor with the
accounting firm of Arthur Young & Company. Mr. Carlson is a graduate of
California Lutheran University, is a certified public accountant and is a
registered Financial and Operations Principal with the NASD.
32
William L. Webster became Senior Vice President and Chief Administrative
Officer of the Company on January 10, 1994. Mr. Webster joined James Mitchell
& Co. in June 1993 as Vice President of Operations. Prior to that time, he was
Vice President of New Business Administration and Vice President of
Information Systems for The Holden Group. In such capacities, Mr. Webster was
responsible for the administration of the company's annuity sales business
which consisted of over 250,000 accounts representing approximately $4 billion
in assets. Prior to joining The Holden Group, Mr. Webster was an
Administrative Services Manager with Arthur Andersen & Co. Mr. Webster
received his undergraduate degrees from Lehigh University.
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 Compensation Committee 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
Compensation Committee 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 Stock Exchange and serves as a director of Investment Company of
America, AMCAP Fund, Inc., Fundamental Investors, Inc., American Variable
Insurance Trust, and The Global Swap Fund, all mutual funds. He also serves as
a director of Wilshire Technologies, Inc., in addition to several privately-
held corporations. Mr. Black is a graduate of the University of Southern
California. He is a member of the Audit Committee of the Board of Directors.
Robert A. Cervoni became a Director in June 1987. Mr. Cervoni is the
Managing Director of Finance and Compliance of Weeden & Co., L.P., a New York
Stock Exchange member firm. Weeden & Co., L.P. makes a market in the Company's
Common Stock on the NASDAQ National Market System. Mr. Cervoni served as
Treasurer and Chief Financial Officer of the Company and its subsidiaries
until July 1989. Prior to joining the Company, Mr. Cervoni was Controller of
Trading Company of the West. Before joining Trading Company of the West in
April 1982, Mr. Cervoni was audit manager with the public accounting firm of
Spicer & Oppenheim, formerly Oppenheim, Appel, Dixon & Co., where he
specialized in auditing securities brokerage firms and financial institutions.
Mr. Cervoni is a certified public accountant and an allied member of and a
Registered Financial Principal and Registered Compliance Officer with the New
York Stock Exchange. Mr. Cervoni is Chairman of the Audit Committee of the
Board of Directors.
Herbert G. Kawahara became a Director in June 1989. Mr. Kawahara is the
former President of the Pacific Stock Exchange, having served in that capacity
from January 1988 to May 1989. Previously, Mr. Kawahara had a 29-year career
with E.F. Hutton and Company Inc., starting as trainee in 1958 and filling
various positions in the retail system. From 1982 to 1987, he served as an
Executive Vice President and was the firm's top executive in Southern
California. Mr. Kawahara was also a member of the Board of Directors of E.F.
Hutton and Company, Inc. from 1982 to 1987. He is a graduate of the University
of California at Los Angeles. Mr. Kawahara is Chairman 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.
33
Donald E. Weeden became a Director in February 1987. Since January 1986, Mr.
Weeden has been the Chief Executive Officer of Weeden & Co., L.P. Weeden &
Co., L.P. makes a market in the Company's Common Stock on the NASDAQ National
Market System. Prior to that time, he was Vice President of Moseley,
Hallgarten, Estabrook & Weeden Inc. Mr. Weeden is a director of National
Semiconductor, Inc. Mr. Weeden is a member 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, 1995 all
Section 16(a) filing requirements applicable to its executive officers,
Directors and greater than 10% beneficial owners were complied with, except
for Donald A. Weeden, who filed his Form 4 on January 12, 1996, which was due
on January 10, 1996.
34
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 and the four highest paid executive officers of the
Company (the "named executive officers"):
LONG-TERM
ANNUAL COMPENSATION
COMPENSATION(1) AWARDS
--------------------- ------------
SECURITIES
UNDERLYING ALL OTHER
NAME AND PRINCIPAL OPTIONS/ COMPENSATION
POSITION YEAR SALARY($) BONUS($)(2) SARS(#)(3) ($)
- ------------------ ---- --------- ----------- ------------ ------------
James K. Mitchell, 1995 248,664 -- -- 9,449
Chairman and 1994 280,500 42,075 75,000 8,740
Chief Executive 1993 275,000 267,027 -- 8,617
Officer(4)
Brian J. Finneran, 1995 217,692 -- -- 8,542
President and 1994 240,000 36,000 30,000 7,970
Chief Operating 1993 306,450 106,171 30,000 7,847
Officer(5)
D. Mark Carlson, 1995 127,699 -- 20,000 3,600(6)
Senior Vice President 1994 130,000 19,500 15,000 3,600(6)
and Chief Financial 1993 101,100 45,179 15,000 3,547(6)
Officer
William L. Webster, 1995 112,880 -- 20,000 3,694(6)
Senior Vice President 1994 117,589 17,250 10,000 1,779(6)
and Chief 1993 -- -- -- --
Administrative Officer
G. Richard Sippel, 1995 133,526 -- 20,000 4,177
Senior Vice President 1994 134,486 16,500 15,000 4,175
and Chief Marketing 1993 -- -- -- --
Officer(7)
- --------
(1) Disclosure of compensation for fiscal 1993 is not required for Messrs.
Sippel and Webster, who were not executive officers of the Company at any
time during 1993. Mr. Sippel's position as an executive officer was
eliminated in February 1996.
(2) Reflects bonuses earned for the respective fiscal year, which in some
instances all or a portion of which was paid during the subsequent fiscal
year.
(3) The Company does not have any outstanding Stock Appreciation Rights
("SARs").
(4) Amounts reported for Mr. Mitchell in the "All Other Compensation" column
include $4,620, $4,620, and $4,497, respectively, for 1995, 1994 and 1993,
representing the Company's contributions to its 401(k) Savings Plan on his
behalf and $4,829 for 1995 and $4,120 for 1994 and 1993, representing life
insurance premiums advanced by the Company pursuant to a split dollar
insurance agreement.
(5) Salary amount for 1993 includes commission overrides of $171,650. Amounts
reported for Mr. Finneran in the "All Other Compensation" column include
$4,620, $4,620 and $4,497 representing the Company's contributions to its
401(k) Savings Plan on his behalf for 1995, 1994 and 1993, respectively,
and $3,922 for 1995, and $3,350 for 1994 and 1993 representing life
insurance premiums advanced by the Company pursuant to a split dollar
insurance agreement.
(6) Represents the Company's contributions to its 401(k) Savings Plan on
behalf of the named executive officer.
(7) Salary amount includes commission overrides of $25,506 for 1995 and
$24,486 for 1994. Amounts reported for Mr. Sippel in the "All Other
Compensation" column represent the Company's contribution to its 401(k)
Savings Plan on his behalf.
35
OPTION GRANTS
The following table provides information related to grants of options to
purchase Common Stock to the named executive officers during the 1995 fiscal
year:
POTENTIAL REALIZABLE
VALUE AT ASSUMED
ANNUAL RATE OF STOCK
PRICE APPRECIATION
INDIVIDUAL GRANTS FOR OPTION TERM(2)
- -------------------------------------------------------------------------------- --------------------
PERCENT OF TOTAL
NUMBER OF OPTIONS/SARS
SECURITIES GRANTED TO ALL
UNDERLYING EMPLOYEES EXERCISE PRICE
OPTIONS/SARS DURING FISCAL OR BASE PRICE EXPIRATION
NAME GRANTED(1) YEAR(1) ($/SH) DATE 5%($) 10%($)
---- ------------ ---------------- -------------- ---------- ---------- ----------
D. Mark Carlson......... 20,000 13.7% $1.00 6/15/00 12,578 31,875
William L. Webster...... 20,000 13.7% $1.00 6/15/00 12,578 31,875
G. Richard Sippel....... 20,000 13.7% $1.00 6/15/00 12,578 31,875
- --------
(1) The Company does not have any outstanding SARs. Each of the options shown
vest in two equal installments on December 31, 1995 and June 14, 1996, or
all shares may vest immediately under certain circumstances.
(2) The 5% and 10% assumed rates of appreciation are mandated by rules of the
Securities and Exchange Commission and do not represent the Company's
estimate or projection of the future Common Stock price. The potential
realizable value was calculated using the closing price of the Common
Stock on June 14, 1995, the date of grant, of $1.00 per share. The
exercise price was also determined by using the closing price of the
Common Stock on that date.
OPTION EXERCISES AND FISCAL YEAR-END OPTION VALUES
The following table provides information related to options exercised by the
named executive officers during the 1995 fiscal year and the number and value
of options held at fiscal year-end.
NUMBER OF SECURITIES
UNDERLYING UNEXERCISED VALUE OF UNEXERCISED
OPTIONS/SARS AT IN-THE-MONEY OPTIONS/
FY-END(#)(1) SARS AT FY-END($)(1)(2)
------------------------- -------------------------
SHARES ACQUIRED VALUE
NAME ON EXERCISE(#) REALIZED($) EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
---- --------------- ---------- ----------- ------------- ----------- -------------
James K. Mitchell....... 0 0 25,000 50,000 0 0
Brian J. Finneran....... 0 0 30,000 30,000 0 0
D. Mark Carlson......... 0 0 20,000 30,000 0 0
William L. Webster...... 0 0 13,334 16,666 0 0
G. Richard Sippel....... 0 0 15,000 20,000 0 0
- --------
(1) The Company does not have any outstanding SARs.
(2) The closing price for the Common Stock on December 29, 1995, as reported
by the NASDAQ National Market System, was $0.906. All of the named
executive officers' outstanding options were exercisable for a price
greater than $0.906 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. Committee chairpersons receive an
additional $500 per committee meeting. Non-employee Directors receive formula
grants of non-qualified
36
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. 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 1995 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 1995 as an executive
officer of a company whose board of directors had a representative from the
Company or the Company's Board of Directors.
BOARD COMPENSATION COMMITTEE REPORT ON EXECUTIVE COMPENSATION
The Company's Compensation Committee (the "Committee") is composed entirely
of independent members of the Board of Directors. During fiscal year 1995,
this Committee met three times, February 13, April 18 and June 6,1995. The
Committee recommends executive compensation policy and practice to the Board
of Directors and administers 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 1995.
The Committees 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. No executive is currently a party to an employment
contract. For the first three months of 1995 the salary of the Chief Executive
Officer remained fixed at $284,427 by a past employment agreement which
expired on January 1, 1996, but from April 1, he voluntarily reduced his
salary by 20% to an annual rate of $225,000. The President similarly reduced
his salary by 20%.
The Committee at its February 6, 1996 meeting considered the reporting
operating results for 1995 and recognized that when the net gain on sale of
rights to certain future asset fee revenue were not included, there was a net
operating loss for that year. Therefore, although the Committee felt that
management during the year had acted appropriately in attempting to maintain
revenues and reducing costs in a very difficult industry environment, it
decided not to award any cash bonuses to the Chief Executive Officer or the
other executive officers. However, the committee did reinstate the salaries of
the Chief Executive Officer as well as the President to the annual salary
rates earned prior to the 1995 salary reductions as of February 1, 1996.
While there is no established policy with respect to the frequency or amount
of options grants, the Committee 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 Committee considers the granting
of stock options annually and, in reviewing the Chief Executive Officers
recommendation, considers the individual executive officers contributions to
the Company and the amount and terms of existing options. The grants of
options made by the Committee on June 6, 1995 covering approximately 80,000
shares at an average exercise price of $1.00 were based solely upon the
recommendations of the Chief Executive Officer who desired to continue to
provide key executives with stock options to encourage retention in light of a
reduction in their salaries from mid year and to reinforce the objectives of
the Committee as articulated above. The options granted were to four
executives other than the Chief Executive Officer and President and
represented less than two percent of the outstanding Common Stock.
37
As noted above, Mr. Mitchell's compensation as Chairman and Chief Executive
Officer of the Company was governed by the terms of a written Employment
Agreement for the first three months of 1995. Mr. Mitchell, who became Chief
Executive Officer of the Company effective January 1, 1993, received a total
of $248,664 in salary for fiscal 1995. This compares to a $280,500 salary and
a $42,075 bonus for a total of $322,575, exclusive of standard benefits in
1994. This also compares to $275,000 salary and $267,027 bonus for a total of
$542,027 in 1993. At the close of 1995, Mr. Mitchell was the largest
stockholder of the Company with a total of 703,607 shares.
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 1993 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.
Herbert G. Kawahara, Chairman of the Compensation Committee
Edward J. Baran
Barton Beek
Donald E. Weeden
38
PERFORMANCE GRAPH
The following chart compares the yearly percentage change in the cumulative
total stockholder return on the Company's Common Stock during the five fiscal
years ended December 31, 1995 with the cumulative total return on the S&P 500
Index and the NASDAQ Financial Stocks Industry Index.
[GRAPH APPEARS HERE]
ASSUMES $100 INVESTED IN JNCG, S&P 500, AND MASDQ AS OF 12/31/88
INDEX $100 INVESTED
NASDAQ: NASDAQ FACTOR VALUE %INCREASE
------ ------ ------------- ---------
12/31/90 96.641 N/A 100
12/31/91 149.54 1.55 154.74
12/31/92 213.884 1.43 221.32
12/31/93 248.587 1.16 257.23
12/31/94 249.168 1.00 257.83
12/31/95 363.023 1.46 375.64
% $100 INVESTED
S&P 500: S&P 500 INC/(DEC) VALUE
------ --------- -------------
12/31/90 N/A 100
12/31/91 30.55% 130.55
12/31/92 7.67% 140.56
12/31/93 9.99% 154.61
12/31/94 1.20% 156.46
12/31/95 37.60% 215.29
# OF SHARES CLOSING
JMCG $100 INITIAL MARKET VALUE
JMCG STOCK PERFORMANCE: CLOSE MV/SHR INVESTMENT $100 INITIAL
------------ ------------ ------------
12/31/90 3 33.33 100
12/31/91 3.375 33.33 113
12/31/92 6.25 33.33 208
12/31/93 8.375 33.33 279
12/31/94 1.563 33.33 52
12/31/95 0.906 33.33 30
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.
39
ITEM 12. 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 February
29, 1996 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
FEBRUARY 29,
1996(1)
-----------------
NAME NUMBER(2)(3) %
---- ------------ ----
James K. Mitchell......................................... 732,826 11.5
JMC Group, Inc.
9710 Scranton Road, Suite 100
San Diego, CA 92121
Thomas W. Smith(4)........................................ 535,000 8.1
Edward J. McAree
Thomas N. Tryforos
323 Railroad Avenue
Greenwich, CT 06830
Brian J. Finneran......................................... 239,549 3.8
D. Mark Carlson........................................... 43,304 *
William L. Webster........................................ 15,170 *
G. Richard Sippel......................................... 22,222 *
Edward J. Baran........................................... 12,000 *
Charles H. Black(5)....................................... 257,031 4.0
Barton Beek............................................... 40,000 *
Robert A. Cervoni......................................... 34,000 *
Herbert G. Kawahara....................................... 20,000 *
Robert G. Sharp........................................... 0 *
Donald E. Weeden(6)....................................... 30,938 *
All Executive Officers and Directors as a group (12 per-
sons).................................................... 1,447,038 22.7
Total outstanding shares(7)........................... 6,383,232
- --------
* Less than 1%
(1) All ownership figures include options to purchase shares of Common Stock
exercisable within 60 days of February 29, 1996, 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 8,600, 8,549, 6,304, 7,222, 1,836 and 32,511 vested shares of
Common Stock contributed by the Company to the Company's 401(k) Savings
Plan for Messrs. Mitchell, Finneran, Carlson, Sippel, Webster and for all
executive officers and Directors as a group, respectively.
(3) Includes options to purchase 25,000, 30,000, 25,000, 15,000, 13,334,
12,000, 16,000, 8,000, 16,000, 12,000, 12,000 and 184,334 shares of Common
Stock for Messrs. Mitchell, Finneran, Carlson, Sippel, Webster, Baran,
Beek, Black, Cervoni, Kawahara, Weeden and for all executive officers and
Directors as a group, respectively.
(4) Information is as of March 13,1996. Each of Messrs. Smith, McAree and
Tryforos beneficially own the shares shown in his capacity as investment
manager for three private investment limited partnerships of which he is a
general partner.
(5) Includes 22,800 shares held by the Charles H. Black Pension Trust and
14,000 shares held by Mr. Black as trustee for the benefit of Richard S.
Black, Charles H. Black, Jr., and Mr. Black in which Mr. Black has a 1/3
beneficial ownership interest. Also includes 36,200 shares owned
individually by Mr. Black's wife as to which he disclaims beneficial
ownership.
(6) Includes 3,000 shares held by Weeden & Co., L.P., of which Mr. Weeden is
Chief Executive Officer.
(7) Includes 184,334 shares issuable upon exercise of stock options.
40
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Not applicable.
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, 1995 and 1994
Consolidated Statements of Operations
For the Years Ended
December 31, 1995, 1994 and 1993
Consolidated Statements of Changes in
Stockholders' Equity
For the Years Ended
December 31, 1995, 1994 and 1993
Consolidated Statements of Cash Flows
For the Years Ended
December 31, 1995, 1994 and 1993
Notes to Consolidated Financial Statements
(a)(2)Not applicable.
(a)(3)The following exhibits are filed herewith:
EXHIBITS DESCRIPTION
--------- -----------
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, be-
tween Spear Financial Services, Inc. and First Interstate Bank,
Ltd., as Rights Agent, as amended effective, July 16, 1992.*
m10.1 JMC Group, Inc. 1993 Executive 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 Compa-
ny, 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.
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 In-
surance 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.
41
EXHIBITS DESCRIPTION
--------- -----------
10.9 Assignment of Renewal (Asset) Fees and Notice of Assignment of Re-
newal (Asset) Fees between James Mitchell & Co., JMC Financial
Corporation and JMC Insurance Services Corporation and Barnett An-
nuities Corporation and the Acknowledgment and Consent to Assign-
ment 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 Finan-
cial 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 be-
tween JMC Group, Inc., James Mitchell & Co., JMC Insurance Serv-
ices 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 Servic-
es, Inc., and First Tennessee Bank National Association.
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 1995.
- --------
* 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.
m Management Contract or Compensatory Plan or Arrangement.
42
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 Los Angeles,
California, on the 25th day of March, 1996
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 and on the dates indicated.
SIGNATURE TITLE DATE
/s/ James K. Mitchell Chairman and Chief Executive March 25, 1996
- --------------------- Officer
James K. Mitchell
/s/ D. Mark Carlson Chief Financial Officer and March 25, 1996
- --------------------- Principal Accounting Officer
D. Mark Carlson
/s/ Edward J. Baran Director March 25, 1996
- ---------------------
Edward J. Baran
/s/ Charles H. Black Director March 25, 1996
- ---------------------
Charles H. Black
/s/ Robert Cervoni Director March 25, 1996
- ---------------------
Robert Cervoni
/s/ Brian J. Finneran Director March 25, 1996
- ---------------------
Brian J. Finneran
/s/ Herbert Kawahara Director March 25, 1996
- ---------------------
Herbert Kawahara
/s/ Robert G. Sharp Director March 25, 1996
- ---------------------
Robert G. Sharp
/s/ Donald E. Weeden Director March 25, 1996
- ---------------------
Donald E. Weeden
43