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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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Form 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 or 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
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For the Quarterly Period ended Commission File Number
March 31, 1997 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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Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days.
Yes X No
----- -----
As of March 31, 1997, the registrant had 6,044,351 shares of its common
stock, $.01 par value, issued and outstanding.
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PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
JMC GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
March 31, December 31,
1997 1996
ASSETS ------------- -------------
CURRENT ASSETS
Cash and cash equivalents $ 4,419,747 $ 4,682,883
Cash segregated under securities
regulations 2,060,020 1,247,231
Receivables from insurance companies 407,034 674,409
Receivable from financial institution - 325,000
Income taxes receivable 574,534 424,746
Deferred tax asset 206,422 194,361
Other assets 172,891 243,256
------------- -------------
TOTAL CURRENT ASSETS 7,840,648 7,791,886
Furniture, equipment and leasehold
improvements - net of accumulated
depreciation and amortization of
$1,447,180 in 1997 and $1,466,390
in 1996 227,023 212,844
Asset-based fees purchased - net of
accumulated amortization of $667,228
in 1997 and $635,836 in 1996 729,901 761,293
------------- -------------
TOTAL ASSETS $ 8,797,572 $ 8,766,023
============= =============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accrued fees to financial institutions $ 140,564 $ 321,609
Customer funds segregated under securities
regulations 2,060,020 1,247,231
Accrued expenses and other liabilities 314,544 491,556
Allowance for contract cancellations 58,800 53,813
Accrued payroll and related expenses 135,869 133,911
------------- -------------
TOTAL CURRENT LIABILITIES 2,709,797 2,248,120
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
6,044,351 shares in 1997 and 6,218,898
shares in 1996 60,443 62,189
Additional paid-in-capital 466,849 644,651
Retained earnings 5,560,483 5,811,063
------------- -------------
TOTAL STOCKHOLDERS' EQUITY 6,087,775 6,517,903
------------- -------------
TOTAL LIABILITIES AND STOCKHOLDERS'
EQUITY $8,797,572 $8,766,023
============= =============
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS.
JMC GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
Three Months Ended March 31,
1997 1996
REVENUES ------------- --------------
Commissions $ 1,138,791 $ 2,763,979
Interest 59,299 69,428
Other 8,136 6,670
------------- --------------
TOTAL REVENUES 1,206,226 2,840,077
------------- --------------
EXPENSES
Employee compensation and benefits 766,336 1,383,469
Fees to financial institutions 417,969 1,088,962
Professional fees 65,204 67,912
Rent 63,691 98,984
Telephone 16,460 45,460
Depreciation and amortization 32,127 149,590
Other general and administrative expenses 255,908 213,337
------------- --------------
TOTAL EXPENSES 1,617,695 3,047,714
------------- --------------
LOSS BEFORE INCOME TAXES (411,469) (207,637)
INCOME TAX BENEFIT (160,889) (75,395)
------------- --------------
NET LOSS $ (250,580) $ (132,242)
============= ==============
LOSS PER SHARE $ (0.04) $ (0.02)
============= ==============
WEIGHTED AVERAGE SHARES 6,090,533 6,198,898
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS.
JMC GROUP,INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
Three Months Ended March 31,
1997 1996
------------- --------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (250,580) $ (132,242)
Adjustments to reconcile net loss to net cash
used by operating activities:
Gain on sale of furniture and equipment (6,733) (1,998)
Depreciation and amortization 32,127 149,590
Amortization of asset-based fees purchased 31,392 36,938
Deferred tax provision (12,061) (17,084)
Changes in assets and liabilities:
Cash segregated under securities regulations (812,789) (375,701)
Receivables from insurance companies 267,375 (156,710)
Receivable from financial institution 325,000 109,450
Income taxes receivable (149,788) (228,007)
Other assets 67,414 51,488
Accrued fees to financial institutions (181,045) 117,929
Customer funds segregated under securities
regulations 812,789 375,701
Accrued expenses and other liabilities (177,012) (397,700)
Allowance for contract cancellations 4,987 (20,029)
Accrued payroll and related expenses 1,958 29,642
------------- --------------
NET CASH USED BY OPERATING ACTIVITIES (46,966) (458,733)
------------- --------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of furniture, equipment and leasehold
improvements (44,122) -
Proceeds from sale of furniture and equipment 7,500 10,700
Purchase of deferred marketing alliance - (1,250,000)
------------- --------------
NET CASH USED BY INVESTING ACTIVITIES (36,622) (1,239,300)
------------- --------------
CASH FLOW FROM FINANCING ACTIVITIES:
Repurchased stocks (194,548) -
Proceeds from stock options exercised 15,000 -
------------- --------------
NET CASH USED BY FINANCING ACTIVITIES (179,548) -
NET DECREASE IN CASH AND CASH EQUIVALENTS (263,136) (1,698,033)
CASH AND CASH EQUIVALENTS AT BEGINNING OF
PERIOD 4,682,883 5,832,598
------------- --------------
CASH AND CASH EQUIVALENTS AT END OF
PERIOD $ 4,419,747 $ 4,134,565
============= ==============
SUPPLEMENTAL DISCLOSURES OF CASH FLOW
INFORMATION
Cash paid for:
Income taxes $ 8,710 $ 186,575
SUPPLEMENTAL DISCLOSURES OF NONCASH INVESTING
ACTIVITIES
Warrants issued in connection with the
Consulting and Marketing Agreement $ - $ 315,000
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS.
NOTE 1. BASIS OF PRESENTATION
The accompanying financial statements have been prepared in
accordance with the instructions to Form 10-Q and, therefore, do
not include all information and footnote disclosures that are
otherwise required by Regulation S-X and that will normally be
made in the Company's Annual Report on Form 10-K. The financial
statements do, however, reflect all adjustments which are, in the
opinion of management, necessary for a fair statement of the
results of the interim period presented.
The balance sheet at December 31, 1996 has been derived from the
audited financial statements at that date. It is recommended that
these financial statements be read in conjunction with the
Company's financial statements and notes thereto included in the
Company's Form 10-K for the year ended December 31, 1996.
NOTE 2. NET LOSS PER SHARE
Net loss per share amounts are computed based on the weighted
average shares outstanding during the periods which include any
dilutive stock options and warrants.
In February 1997, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards ("SFAS") No. 128,
"Earnings Per Share". This statement specifies the computation,
presentation, and disclosure requirements for earnings per share
for entities with publicly held common stock. SFAS No. 128 is not
in effect for the Company in the first quarter of 1997, but will
be in effect for financial statements issued for periods ending
after December 15, 1997, including interim periods. The Company
does not expect the adoption of SFAS No. 128 to have a material
effect on its net earnings or loss per share.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The discussion of the Company's business contained in this Form 10-Q includes
certain forward-looking statements. For a discussion of factors which may
affect the outcome projected in such statements, see "Material Customers,"
"Competition," "Registration and Licensing," "Regulation," "Legal
Proceedings," "Management's Discussion and Analysis of Financial Condition and
Results of Operations" in the Company's Annual Report on Form 10-K dated March
31, 1997.
RESULTS OF OPERATIONS
- ---------------------
FIRST QUARTER 1997 COMPARED TO FIRST QUARTER 1996
The Company realized a net loss of $251,000 (or $0.04 per share) in the first
quarter of 1997 compared to net loss of $132,000 (or $0.02 per share) for the
comparable quarter of last year.
Total revenues for the quarter ended March 31, 1997 were $1,206,000 compared
to $2,840,000 in the first quarter of 1996, a reduction of $1,634,000 or 58%.
This decrease is primarily a result of the following:
. A decrease in sales production related revenues of $1,424,000 or 70% as
a result of sales production volumes declining $25 million or 69% in the
first quarter of 1997 as compared to the first quarter of 1996. This
decline in sales volume is attributable to the termination of the Company's
Virginia operations at the end of 1996 and the reconfiguring of the
Company's Tennessee operations effective February 1, 1996. See "Trends
and Uncertainties -- Declining Revenues". These two operations combined
for a $27 million decrease in gross sales production while the Company's
remaining client base generated an increase of $2 million in gross sales
production in the first quarter of 1997 compared to the first quarter of
1996. The combined annuity and mutual fund gross revenue rate for
the first quarter of 1997 was approximately 5.5% compared to 5.67% in the
first quarter of 1996.
. Asset-based fee revenues decreased approximately $225,000 in the first
quarter of 1997 compared to the first quarter of 1996 as a result of the
sale of the rights to asset-based fee revenues related to the Company's
Virginia operations at the end of the fourth quarter of 1996. First
quarter 1996 asset-based fees related to the Virginia operations totaled
approximately $209,000.
Total expenses for the quarters ended March 31, 1997 and 1996 were $1,618,000
and $3,048,000, respectively. This $1,430,000 or 47% decrease is primarily
attributable to:
. A $671,000 or 62% reduction in fees to financial institutions due to
lower sales volume. In addition, asset-based fees to financial
institutions decreased due to the sale of the rights to the asset-based fee
revenues in the fourth quarter of 1996, which eliminated the related fee
expense obligation.
. A decrease of $479,000 or 40% in payroll related expenses in the first
quarter of 1997 as compared to 1996, primarily as a result of personnel
reductions related to the Virginia based client terminating at the end of
1996 and the reconfiguration of the Tennessee operations at the end of
January 1996.
. A decrease of approximately $117,000 in depreciation and amortization
which is primarily due to fixed assets being written off or fully
depreciated at the end of 1996.
. The remaining decrease of approximately $163,000 is a result of a
general reduction in the size of operations.
FIRST QUARTER 1997 COMPARED TO FOURTH QUARTER 1996
The net loss for the first quarter of 1997 of $251,000 (or $0.04 per share)
compares to a net income of $527,000 (or $0.08 per share) for the fourth
quarter of 1996. Included in the 1996 fourth quarter results was revenue in
the amount of $1,844,000 ($1,189,000 or $0.19 per share after estimated tax
provision) related to the net gain on the sale of the rights to future asset-
based fee revenues to a client financial institution. Total revenues of
$1,206,000 in the first quarter of 1997 decreased approximately $1,022,000 or
46% from revenues of $2,228,000 (excluding the aforementioned net gain) in the
fourth quarter of 1996. This decrease in revenues is primarily a result of
decreased sales production of $11 million or 50% in the first quarter of 1997
as compared to the fourth quarter of 1996. Total expenses in the first
quarter of 1997 of $1,618,000 decreased $1,533,000 or 49% from $3,151,000 in
the fourth quarter of 1996. Included in the fourth quarter 1996, were
expenses related to the proposed merger with USBA in the amount of $95,000 and
expenses, net of recoveries, related to a Marketing Plan and Marketing
Agreement with USBA in the amount of $515,000. Excluding these non-recurring
expenses, total expenses in the first quarter of 1997 would have decreased by
$923,000 or 36% from $2,541,000 in the fourth quarter of 1996.
LIQUIDITY AND CAPITAL RESOURCES
- -------------------------------
As of March 31, 1997, the Company had cash and cash equivalents of
approximately $4,420,000, a decrease of approximately $263,000 from $4,683,000
in cash and cash equivalents at December 31, 1996. Significant uses of cash
and cash equivalents include the following:
. A payment of $195,000 to repurchase stock from a former officer and
director of the Company.
. A reduction of approximately $351,000 in current liability balances
during the first quarter of 1997 primarily as a result of the transition of
the operations and closing of the Company's facilities in Virginia.
. These cash uses were offset by the receipt of $300,000 for the remaining
balance of the net gain on sale of rights to future asset-based fees.
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. However, management does believe a value
exists related to the present value of the projected future net asset fees to
be retained by the Company. Such projected future net asset fees are a
function of the projected accumulated value of assets in-force multiplied by
the net asset fee rate (gross asset fee rate less amount committed to the
financial institution). The current value to the Company would then be the
discounted present value of such projected future asset fees less the present
value of an estimated cost to service the customers making up such in-force
assets. Management's belief that a present value for such future asset-based
fees exists and the estimates used to calculate the range of such value are
supported by the sale of the rights to certain future fees in 1996 and prior
years. The projected value of the future asset-based fees on the remaining
block of business at March 31, 1997 is based on assumptions as to growth,
persistency and risk adjusted discount rates. The assumptions as to
persistency and growth of the business are based on historical data maintained
by the Company since its inception. The discount rate used of between 8% and
10% is based on a risk-free rate of return plus a nominal additional factor
for risk (taking into account that risk factors are substantially covered by
the estimated persistency and growth rates). Management believes the value of
these net future revenues is appropriately estimated at $6 million to $8
million, pre-tax, based on the Company's valuation calculations. Such
estimated value is based on the estimates of the variables used in the
calculation (which are consistent with estimates used in prior sales of future
rights) and the actual realization, if any, could be higher or lower than this
range.
While the Company's cash balances and revenue base were reduced as described
above during the first quarter of 1997, the Company's base operating expenses,
excluding non cash expenses such as depreciation and amortization, have been
reduced by more than $458,000 compared to the first quarter of 1996. Thus,
based upon the Company's cash position as of March 31, 1997, Management
expects the Company will meet its operating and capital expenditure needs for
the remainder of its current fiscal year.
TRENDS AND UNCERTAINTIES
- ------------------------
DECLINING REVENUES
The Company's sales production decreased 69% when comparing the first quarter
of 1997 to the first quarter of 1996. This decrease is primarily attributed
to the Virginia operation closing in the fourth quarter of 1996 and the
transition of the Tennessee operations on February 1, 1996. Responding to
these decreases in revenues, the Company has reduced its operating expenses by
more than $450,000 as compared to the first quarter of 1996.
In addition to the reduced cost structure, the Company reconfigured its
Tennessee operations to provide sales support, product development and back
office support services on a fee basis. The fees generated by the Company
include fixed monthly fees as well as an ongoing share of asset-based fee
revenues on the blocks of business generated prior to the transition.
Factoring in the monthly service fee revenues and the significantly reduced
cost structure the Company expects pre-tax operating results generated by this
client to be comparable to those operating results generated by the same
client when the Company provided its fully managed program. Thus while
revenues will decrease, it is believed that pre-tax operating results will
remain relatively consistent under the reconfigured Tennessee operations and
not have the same exposure to production break-even levels due to the
significantly reduced cost base.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Florida Legal Proceedings
- -------------------------
During March 1993, the Florida Department of Insurance (the "Department")
commenced an administrative proceeding against the Company's wholly owned
subsidiary, James Mitchell & Co. ("JMC"). A Final Order was issued in July
1995, however, the enforcement of the majority of the Final Order was stayed
pending the outcome of JMC's appeal. The District Court of Appeal, for all
material matters, affirmed the Final Order in August 1996, and in October
1996, the District Court of Appeal denied JMC's Motion for Rehearing. In
March 1997, the Florida Supreme Court denied JMC's petition for review.
Effective October 1995, JMC concluded its relationship with its Florida
financial institution client, Barnett Banks, Inc., and is not presently doing
business in the State of Florida.
Other Proceedings
- -----------------
The Company's broker-dealer subsidiary, JMC Investment Services, Inc., has
been named as a defendant in lawsuits arising out of the sale of real estate
limited partnerships prior to 1992 to customers of its predecessor. 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,
and as of March 31, 1997, no such proceedings were pending.
ITEM 2. CHANGES IN SECURITIES
Not applicable.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
Not applicable.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY
HOLDERS
Not applicable.
ITEM 5. OTHER INFORMATION
Not applicable.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
a.) Exhibits.
The following exhibit is filed herewith:
27 Financial Data Schedule
b.) Reports on Form 8-K.
None.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Date: May 14, 1997 /s/ James K. Mitchell
--------------------------------------
James K. Mitchell, Chairman and
Chief Executive Officer
Date: May 14, 1997 /s/ D. Mark Carlson
--------------------------------------
D. Mark Carlson, Senior Vice President
and Chief Financial Officer
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This schedule contains summary financial information extracted from JMC Group,
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