<PAGE>
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
_________
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
_________
FOR THE FISCAL YEAR ENDED COMMISSION FILE NUMBER
DECEMBER 31, 1997 0-12926
_________
JMC GROUP, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 95-2627415
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
9710 SCRANTON ROAD, SUITE 100, SAN DIEGO, CALIFORNIA 92121
(Address of principal executive offices) (Zip Code)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: 619-450-0055
_________
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. / /
_________
The aggregate market value of the voting stock held by non-affiliates of
the registrant as of February 10, 1998 was approximately $3,735,258
representing approximately 4,980,344 shares.
As of February 10, 1998, the registrant had 6,044,351 shares of its
Common Stock, $.01 par value, issued and outstanding.
_________
DOCUMENTS INCORPORATED BY REFERENCE
None.
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<PAGE>
PART I
ITEM 1. DESCRIPTION OF BUSINESS
GENERAL
The discussion of the Company's business contained in this Annual Report
on Form 10-K includes certain forward-looking statements. For a discussion
of factors which may affect the outcome projected in such statements, see
"Material Customers," "Competition," "Registration and Licensing,"
"Regulation," "Legal Proceedings," "Management's Discussion and Analysis of
Financial Condition and Results of Operations."
JMC Group, Inc. (the "Company") is a Delaware corporation which was
founded in 1983. Its executive offices are located at 9710 Scranton Road,
Suite 100, San Diego, California 92121 and its telephone number is (619)
450-0055.
The Company has operated its business in one industry segment - annuity,
insurance and mutual fund sales and sales support services through financial
institutions and the related servicing of products previously sold. This
business has historically been carried out through the Company's
subsidiaries, James Mitchell & Co. and its subsidiaries ("JMC") and JMC
Investment Services, Inc. ("JMCI"). JMC and JMCI 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 and mutual
fund shares. The Company has provided support services ("Integrated Support
Services" or "ISS") for First Tennessee Bank's internal program for which the
Company earned monthly service fees from January 1996 until December 31,
1997, when the relationship with FTB was terminated. 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. First Tennessee Bank selected the option of acquiring JMC's right
to future asset-based fee revenues at the termination of its contract. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations -Results of Operations - 1997 compared to 1996."
During 1997, the average monthly accumulated value of assets being
serviced for such inactive clients was over $432 million generating annual
1997 asset-based fee revenues of $1,502,000.
On December 22, 1997 the Company announced that it was withdrawing from
its traditional retail sales business and terminating its relationship with
each of its remaining bank clients. Citing a severely restricted market for
the Company's services, the Board determined it was in the best interest of
stockholders to preserve capital and assets and to look for a business
alternative. As a result of these decisions, the Company commenced a
restructuring aimed at enhancing the servicing of the asset fee block to
maximize return and reducing costs in all areas of operations. All sales and
marketing efforts and costs are being evaluated and total personnel reduced
to a maintenance level. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations - 1997 Compared to 1996 -
Restructuring."
PRINCIPAL MARKETS AND METHODS OF DISTRIBUTION
Through the end of 1997, the principal market for JMC's services has
been banks, savings and loan associations and thrifts. An independent
marketing organization such as JMC provided these institutions with the
ability to make products available to their customers and receive fee income.
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. Mutual
fund products were generally sold directly by JMC's employees to financial
institution customers. JMC's structured retail marketing organization
employs the retail sales force and thereby controls the point of sale.
2
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PRINCIPAL PRODUCTS
The principal investment products offered by JMC to customers of its
financial institution clients have been fixed and variable annuities 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 1997, the mix of annuities and insurance products sold by JMC was
as follows: 41% fixed annuities and 59% variable and other annuities. The
corresponding product mix percentages of annuities sold by the Company in
1996 and 1995 were 41% fixed/59% variable and other and 65% fixed/35%
variable and other, respectively. Sales of annuities represented 56%, 55% and
65%, respectively, of total sales in each of 1997, 1996 and 1995. 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 "Management's Discussion and Analysis of Financial Condition and Results
of Operations -Results of Operations - 1997 Compared to 1996" and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations - Results of Operations - 1996 Compared to 1995" 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 1997, such subsidiaries sold the
products of New York Life Insurance and Annuity Company, Keyport Life
Insurance Company, Aetna Life Insurance and Annuity Company, Liberty Life
Assurance Company, The Life Insurance Company of Virginia, Allianz Life
Insurance Company of North America and Transamerica Life Insurance and
Annuity Company, among others. All of these companies have A or higher
ratings from A.M. Best.
Prior to the termination of sales activities, the Company's
subsidiaries' arrangements with each of its annuity and insurance provider
companies were very similar. JMC acted as an agent and sold the provider's
products to customers of financial institution clients. In addition, the
Company's subsidiaries handled certain administrative responsibilities and
provided ongoing customer service. Both of these functions are often provided
directly by the annuity and insurance provider in other agency relationships.
Historically, the Company's subsidiaries earned commissions from the sale of
the provider's products. In addition to the commission on the initial sale,
they also earned 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 1997, the Company received
approximately $1.3 million in annuity commissions and $1.5 million in
asset-based fee revenues related to annuity contracts. Commissions are net of
actual and projected chargebacks for surrenders. See "Management's Discussion
and Analysis of Financial Condition and Results of Operations - Results of
Operations - 1997 Compared to 1996" related to events impacting asset-based
fee income during 1997 such as the net gain on the sale of rights to certain
future asset-based fee revenue.
Management believes that the Company's subsidiaries have maintained
strong relations with their current annuity and insurance provider companies.
Many of the products were developed jointly by the Company with the annuity
and insurance provider companies specifically for use in the Company's
programs. In connection with the sale of annuity and insurance products, JMC
does not assume any of the underwriting risks or obligations of the insurance
company itself. 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.
Although sales of mutual funds have been suspended as well, the
Company's subsidiaries have agreements to sell mutual fund shares for a large
number of mutual fund families, including Putnam, Federated, Fidelity,
Oppenheimer, Franklin-Templeton and American Capital. JMC receives
commissions for the sale of mutual fund shares and, in most instances,
receives ongoing fees for providing continuing customer service. The Company
will continue to service its mutual fund customers. Until December 31, 1997,
JMC Financial Corporation acted as a clearing agent for First Tennessee
3
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Brokerage, Inc. In connection with the sale of mutual fund shares, JMC's
representatives act strictly as agents and neither company underwrites
securities.
MATERIAL CUSTOMERS
During 1997, Independence Savings Bank, First Tennessee Bank and
residual asset fees from Wells Fargo Bank (which includes First Interstate
Bank, from annuities sold to customers of former client Sacramento Savings)
accounted for approximately 32%, 26% and 12%, respectively, of the Company's
commission revenues. The Company's relationship with First Tennessee Bank
was terminated on December 31, 1997.
COMPETITION
From inception through the suspension of active sales efforts at the end
of 1997, the Company operated in a very competitive environment and competed
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 a third-party
marketing firm. Generally it is the larger financial institutions who
establish such internal programs. In addition, customers of financial
institutions who might have purchased products from the Company can obtain
similar products from licensed insurance agents, stockbrokers and financial
institutions not affiliated with JMC. The principal method of competition is
price, product and service.
REGISTRATION AND LICENSING
JMC and certain of its subsidiaries and JMCI are required to be licensed
to do business in certain states where they transact business. In addition,
JMC Financial Corporation and JMCI are registered broker-dealers with the
Securities and Exchange Commission ("SEC"), are members of the National
Association of Securities Dealers, Inc. ("NASD") and are licensed or
registered as securities broker-dealers in certain states where they transact
business. Finally, certain of JMC's subsidiaries and JMCI must be licensed
or registered as an insurance agency or agent in order to engage in business
in certain states. Each of JMC and its subsidiaries and JMCI are duly
qualified to transact business, and are duly registered or licensed or exempt
from the registration or licensing requirements of broker-dealers and
entities which engage in securities and insurance businesses, in every state
where management believes such entities should be so qualified, registered or
licensed.
Material federal, state and local regulations affecting the business of
JMC and its subsidiaries and JMCI include the Securities Exchange Act of
1934, as amended, the Investment Company Act of 1940, as amended, the
securities and insurance laws of each state in which JMC and JMCI do business
and the local ordinances of each city and county in which JMC and JMCI
maintain an office.
REGULATION
JMC and certain of its subsidiaries and JMCI are subject to extensive
state regulation in those states in which they are licensed to conduct
insurance business. Each state's insurance regulator exercises jurisdiction
over the licensing of agents, supervises the form and content of sales
literature and other materials distributed to the public, and generally acts
to protect consumers from misrepresentation and other unfair conduct.
Legislation changing the substantive or procedural rules governing the
insurance departments, insurers or agents may affect the mode of operation
and profitability of insurance agencies. Insurance commissioners, to protect
the public, may maintain administrative proceedings which could result in
cease and desist orders, fines or the suspension or cancellation of an
agent's license.
The securities industry in the United States is also subject to
extensive regulation under both federal and state law. The SEC is the
federal agency responsible for the administration of federal securities laws.
Much of the regulation of broker-dealers has been delegated to the
self-regulatory organizations, principally the NASD and the securities
exchanges.
4
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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. NASD rules applicable to members operating on the
premises of financial institutions are similar to the rules already adopted
by bank regulators. See the discussion of the "Interagency Guidelines"
below. These rules 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. The rules are more
comprehensive and cover areas not previously addressed by the SEC, but have
been addressed 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. 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 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. 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. 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 banking institutions.
EMPLOYEES
As of February 10, 1998, the Company had fourteen full-time employees.
5
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ITEM 2. PROPERTIES
During 1997, the Company maintained only its corporate office. The
facility exceeds the Company's requirements and the Company intends either to
renegotiate the lease or locate alternative suitable space upon or before the
expiration of the lease. The following is the lease for the principal
facility utilized in the Company's operations as of December 31, 1997:
Corporate Headquarters
9710 Scranton Road
Suites 100 and 120
San Diego, CA 92121
Exp. Date: October 1998
Square Footage: 14,169
ITEM 3. LEGAL PROCEEDINGS
The Company's broker-dealer subsidiary, JMC Investment Services, Inc.
(JMCI), has been named as a defendant in a NASD arbitration regarding sales
of real estate limited partnerships by Spear Rees & Co. (the predecessor to
JMCI) between 1990 and 1993. Management does not believe that any such
proceeding will have a material adverse effect on the Company's financial
condition or results of operations.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters other than election of directors at the annual meeting on May
5, 1997 were submitted to a vote of security holders during the fiscal year
ended December 31, 1997.
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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 ("NMS") under the symbol JMCG and is owned as of
February 10, 1998 by approximately 233 shareholders of record with
approximately 876 beneficial owners. Approximately six broker-dealers are
market makers in the Company's stock on the NASDAQ NMS. The Company has been
advised by NASDAQ that the Common Stock may no longer meet the requirements
for continued listing on the NMS and that the Common Stock may be removed
from trading on the NMS. If delisted from the NMS, the Company's Common
Stock may be listed on the NASDAQ SmallCap Market or Over-the-Counter
Bulletin Board.
The Company is also listed on the Pacific Exchange under the symbol JMC,
but the trading volume in the Company's Common Stock on the Pacific Exchange
is not material.
The following table reflects the high and low sales prices on the NASDAQ
National Market System for the Company's Common Stock for the four quarters
of each of 1997 and 1996:
<TABLE>
<CAPTION>
Sales Price
---------------------
High Low
---------------------
<S> <C> <C>
1997
First Quarter $1.531 $0.906
Second Quarter $1.188 $0.688
Third Quarter $0.969 $0.625
Fourth Quarter $0.953 $0.625
1996
First Quarter $3.125 $0.906
Second Quarter $4.125 $3.000
Third Quarter $3.688 $1.125
Fourth Quarter $1.563 $0.750
</TABLE>
DIVIDENDS
No dividends were paid by the Company during fiscal 1997. 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.
7
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ITEM 6. SELECTED FINANCIAL DATA
SELECTED ANNUAL FINANCIAL DATA
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------------------
Years ended December 31, 1997 1996 1995 1994 1993
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Selected Total revenues $ 6,303,291 $ 11,845,436 $ 20,371,860 $ 33,357,242 $ 49,318,460
Financial Data Income (loss) from continuing
operations $ (257,292) $ (502,919) $ 1,741,124 $ (2,370,155) $ 4,368,141
Income from discontinued
operations $ - $ - $ - $ - $ 514,904
Net income (loss) $ (257,292) $ (502,919) $ 1,741,124 $ (2,370,155) $ 4,883,045
- ----------------------------------------------------------------------------------------------------------------------------------
Earnings Per Income (loss) from continuing
Share - Basic operations $ (0.04) $ (0.08) $ 0.28 $ (0.36) $ 0.62
and Diluted Income from discontinued
operations $ - $ - $ - $ - $ 0.07
Net income (loss) $ (0.04) $ (0.08) $ 0.28 $ (0.36) $ 0.69
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Balance Sheet Total assets $ 7,918,988 $ 8,766,023 $ 9,511,828 $ 8,380,931 $ 15,426,738
Total liabilities $ 1,837,925 $ 2,248,120 $ 2,511,006 $ 3,121,233 $ 6,868,923
Stockholders' equity $ 6,081,063 $ 6,517,903 $ 7,000,822 $ 5,259,698 $ 8,557,815
- ----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
Cash dividends of $456,465 and $969,798 were paid during 1994 and 1993,
respectively.
No cash dividends were paid during 1997, 1996 or 1995.
SELECTED QUARTERLY FINANCIAL DATA
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------
First Second Third Fourth
Quarter Quarter Quarter Quarter
- ---------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
1997
Commission revenues $ 1,138,791 $ 1,080,631 $ 1,022,328 $ 952,814
Net income (loss)* $ (250,580) $ (290,133) $ (160,901) $ 444,322
Earnings per share - Basic
and Diluted:
Net income (loss) $ (0.04) $ (0.05) $ (0.03) $ 0.07
----------------------------------------------------------------------------------------------------
1996
Commission revenues $ 2,763,979 $ 2,491,021 $ 2,244,812 $ 2,041,916
Net income (loss)** $ (132,242) $ (215,121) $ (682,406) $ 526,850
Earnings per share - Basic
and Diluted:
Net income (loss) $ (0.02) $ (0.03) $ (0.11) $ 0.08
----------------------------------------------------------------------------------------------------
----------------------------------------------------------------------------------------------------
</TABLE>
*THE FOURTH QUARTER INCLUDES THE SALE OF RIGHTS TO FUTURE ASSET-BASED FEES OF
$1,870,000 ($1,234,000 AFTER ESTIMATED TAX PROVISION) AND ONE-TIME CHARGE FOR
RESTRUCTURING OF $589,000 ( $389,000 AFTER ESTIMATED TAX BENEFIT).
**NON-RECURRING ITEMS INCLUDED IN THE QUARTERLY NET INCOME (LOSS) FIGURES FOR
1996 INCLUDE: (a) EXPENSES RELATED TO THE PROPOSED MERGER WITH USBA OF $704,000
($433,000 AFTER-TAX BENEFIT) IN THE THIRD QUARTER; AND (b) NET GAIN ON SALE OF
RIGHTS TO FUTURE ASSET-BASED FEES OF $1,844,000 ($1,189,000 AFTER-TAX PROVISION)
AND THE WRITE-OFF OF THE REMAINING UNAMORTIZED BALANCE OF THE MARKETING
AGREEMENT WITH USBA, NET OF A SETTLEMENT WITH USBA, IN THE AMOUNT OF $515,000
($332,000 AFTER-TAX BENEFIT) IN THE FOURTH QUARTER.
8
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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
When used in this Annual Report on Form 10-K, the words "expects,"
"believes," "estimates," and similar expressions are intended to identify
forward-looking statements. Such statements are subject to risks and
uncertainties, including those set forth below and in Item 1 of this Annual
Report on Form 10-K, that could cause actual results to vary materially from
those projected. These forward-looking statements speak only as of the date
hereof. The Company expressly disclaims any obligation or undertaking to
release publicly any updates or revisions to any forward-looking statements
contained herein to reflect any change in the Company's expectations with
regard thereto or any change in events, conditions or circumstances on which
any such statement is based.
RESTRUCTURING. During the fourth quarter of 1997, the Company's Board
of Directors decided to withdraw from retail sales in the bank marketplace
and approved a restructuring plan which was developed and implemented by
management. The Company recorded one-time restructuring charges in the amount
of $589,000. The restructuring charges included current and future cash
requirements for severance costs and costs related to a premature lease
termination of $221,000 and $164,000, respectively, and non-cash expenses of
$204,000 associated with the write-off of certain assets. As of December 31,
1997, there was a balance of $411,000 remaining in the restructuring accrual
primarily related to severance costs and premature lease termination costs.
1997 COMPARED TO 1996
GENERAL. Revenues and expenses include the accounts of the Company's
subsidiaries, JMC and JMCI.
The Company reported a net loss for the year ended December 31, 1997 of
$257,000 (after providing for income tax benefit of $123,000) compared with
net loss of $503,000 (after providing for income taxes of $243,000) in 1996.
Included in the 1997 and 1996 results were the following:
1997:
- A gain of $1,870,000 ($1,234,000 or $.20 per share after estimated tax
provision) on the sale of the rights to future certain asset-based fee
revenues to a client financial institution.
- One-time, pre-tax charges for restructuring of $589,000 ($389,000 or
$0.06 per share after estimated tax benefit).
1996:
- A net gain of $1,844,000 ($1,189,000 or $.19 per share after estimated
tax provision) on the sale of the rights to future asset-based fee
revenues to a former client financial institution. The net gain is a
result of a sales price of $2.1 million less costs associated with the
loss of Central Fidelity Bank as a client of $256,000. These costs
are primarily related to closing of facilities and consolidation of
personnel functions due to the resulting loss of business created by
the Central Fidelity termination.
- Expenses net of recoveries related to a Marketing Plan and Marketing
Agreement as well as a proposed merger as follows:
- Payment for a Marketing Plan and Marketing Agreement of $1.25
million, which had been capitalized and was being amortized over
a five-year period, written off in its entirety in the fourth
quarter of 1996 ($806,000 or $.13 per share after estimated tax
benefit);
- Expenses related to the proposed merger including primarily
legal, accounting, investment banking and printing expenses of
$884,000 ($570,000 or $0.09 per share after estimated tax
benefit); and
- Recovery on settlement of legal proceedings for amounts paid on
the Marketing Plan as well as expenses incurred on the proposed
merger of $500,000 ($322,000 or $.05 per share after estimated
tax provision).
9
<PAGE>
Excluding the above-mentioned items, the Company would have reported an
after-tax loss of $1,102,000 (or $0.18 per share after an estimated tax
benefit of $559,000) in 1997 as compared to an after-tax loss of $639,000 (or
$.10 per share after an estimated tax benefit of $318,000) in 1996.
Total revenues for 1997 were $6,303,000 compared to revenues of
$11,845,000 in 1996, a decrease of $5,542,000 or 47%. As previously stated,
revenues for 1997 and 1996 include net gains on the sale of rights to
asset-based fee revenues of $1,870,000 and $1,844,000, respectively. In
addition to these revenue items, the Company earned transition fee revenue of
$250,000 in 1996. The transition fee, which was negotiated by the Company
with a client financial institution, was intended to cover the cost of
operation during a transitional period prior to termination of the Company's
relationship with this financial institution client.
Excluding the net gain on the sale of the rights to asset-based fee
revenues in 1997 and 1996, but including transition fees, revenues for 1997
would have been $4,433,000 compared to $10,001,000 in 1996 (a decrease of
$5,568,000 or 56%). This reduction in revenues is primarily attributable to
the following:
- Lower gross sales volumes which declined $78 million or 66% due
primarily to the termination of the Virginia operation at the end of
1996 and the transition of the Tennessee program as of January 31,
1996 (see also "Trends and Uncertainties" later in this section);
- A decrease of approximately $923,000 in asset-based fee revenue in
1997 compared to 1996. This decrease is primarily a result of the
sale of the rights to certain future asset-based fee revenues for its
Virginia-based client at the end of 1996.
Total expenses for 1997 were $6,684,000 compared to $12,592,000 in 1996.
Total expenses for 1997 would have been $6,095,000, a decrease of $4,863,000
or 44%, when compared to 1996 expenses, excluding the previously described
one-time charges of $589,000 for restructuring in 1997 and $884,000 in
merger-related expenses and $750,000 net loss on a marketing agreement in
1996. This drop in total expenses is primarily attributable to the following:
- A $2,182,000 or 56% reduction in fees to financial institutions due to
lower sales volume.
- A $388,000 or 70% reduction in salesperson's commissions also due to
lower sales volume, and
- An additional $2,293,000 or 35% reduction in base operating expenses
as a result of the termination of the Company's Virginia operations at
the end of 1996.
Prior to cessation of its sales efforts, the Company's gross margin rate
(gross revenue rate less payout rate to financial institutions and
salesperson commissions) was sensitive to changes in product mix which is
impacted by fluctuations in interest rates and other market conditions. The
highest gross margin rate is achieved on the sale of fixed annuities,
followed by variable annuities with mutual funds producing the lowest gross
margin rate.
Fixed annuities achieve a higher gross margin rate because the Company
receives a higher gross revenue rate on fixed annuities but makes payments to
its financial institution clients and sales personnel at a constant rate.
Mutual funds achieve the lowest gross margin rate due to the significantly
lower gross revenue rate paid on these products, even though the payout to
the Company's financial institution clients is a fixed percentage of the
gross revenue rate. During 1997 and 1996, variable annuity and mutual fund
sales comprised 77% of total sales.
1996 COMPARED TO 1995
GENERAL. Revenues and expenses include the accounts of the Company's
subsidiaries, JMC and JMCI.
The Company reported a net loss for the year ended December 31, 1996 of
$503,000 (after providing for income tax benefit of $243,000) compared with
net income of $1,741,000 (after providing for income taxes of $1,256,000) in
1995. Included in the 1996 and 1995 results were the following:
10
<PAGE>
1996:
- A net gain of $1,844,000 ($1,189,000 or $.19 per share after estimated
tax provision) on the sale of the rights to future asset-based fee
revenues to a client financial institution. The net gain is a result
of a sales price of $2.1 million less costs associated with the loss
of Central Fidelity Bank as a client of $256,000. These costs are
primarily related to closing of facilities and consolidation of
personnel functions due to the resulting loss of business created by
the Central Fidelity termination.
- Expenses net of recoveries related to a Marketing Plan and Marketing
Agreement as well as a proposed merger as follows:
- Payment for a Marketing Plan and Marketing Agreement of $1.25
million, which had been capitalized and was being amortized over
a five-year period, written off in its entirety in the fourth
quarter of 1996 ($806,000 or $.13 per share after estimated tax
benefit);
- Expenses related to the proposed merger including primarily
legal, accounting, investment banking and printing expenses of
$884,000 ($570,000 or $0.09 per share after estimated tax
benefit); and
- Recovery on settlement of legal proceedings for amounts paid on
the Marketing Plan as well as expenses incurred on the proposed
merger of $500,000 ($322,000 or $.05 per share after estimated
tax provision).
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. The net
gain is a result of a purchase price of $4.05 million less costs
associated with the loss of the Company's Florida operations of
$136,000.
- 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.
Excluding the above-mentioned items, the Company would have reported an
after-tax loss of $639,000 (or $.10 per share after an estimated tax benefit
of $318,000) in 1996 as compared to an after-tax loss of $1,393,000 (or $0.22
per share after an estimated tax benefit of $833,000) in 1995.
Total revenues for 1996 were $11,845,000 compared to revenues of
$20,372,000 in 1995, a decrease of $8,527,000 or 42%. As previously stated,
revenues for 1996 and 1995 include net gains on the sale of rights to certain
asset-based fee revenues of $1,844,000 and $3,914,000, respectively, and 1995
revenues include a payment of $1,309,000 for the right to hire certain
employees and certain other services. In addition to these revenue items,
the Company earned transition fee revenue of $250,000 and $538,000 in 1996
and 1995, respectively. These transition fees, which were negotiated by the
Company, were intended to cover the cost of operations during a transitional
period prior to termination of the Company's relationships with certain
financial institution clients. 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
transitions are included in total operating expenses.
Excluding the one-time payments for the right to hire certain JMC
employees in 1995 and the net gain on the sale of the rights to certain
asset-based fee revenues in 1996 and 1995, but including transition fees,
revenues for 1996 would have been $10,001,000 compared to $15,149,000 in 1995
(a decrease of $5,148,000 or 34%). This reduction in revenues is primarily
attributable to the following:
- Lower gross sales volumes which declined $67 million or 36% due
primarily to:
- The transition of the First Tennessee program as of January 31,
1996 and the termination of the Florida operations during 1995
(see also "Trends and Uncertainties" later in this section)
contributed to a $92 million sales volume decline in 1996 vs.
1995. This decrease is offset by an increase of $25 million from
existing clients. The Company transitioned the relationship
with its Tennessee client from sales to services
11
<PAGE>
on February 1, 1996 and thus sales production for this client is
not reflected after this date. The Company terminated sales
production with its Florida client after August 1995.
- A slight decrease in the gross revenue rate on products sold in 1996
compared to 1995 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 55% in 1996 compared to 65% in 1995. In addition, fixed
annuity sales as a percentage of total annuity sales were 41% in 1996
as compared to 65% in 1995.
- A decrease of approximately $2,161,000 in asset-based fee revenue in
1996 compared to 1995. This decrease is primarily a result of the
sale of the rights to certain future asset-based fee revenues for its
Florida-based client at the end of August 1995.
Total expenses for 1996 were $12,592,000 compared to $17,375,000 in
1995. Excluding the previously described one-time charges of $884,000 in
merger-related expenses and $750,000 net loss on a marketing agreement, total
expenses for 1996 would have been $10,958,000, a decrease of $6,417,000 or
37%, when compared to 1995 expenses. This drop in total expenses is
primarily attributable to the following:
- A $2,472,000 or 39% reduction in fees to financial institutions due
to lower sales volume. The percentage decrease to financial
institutions is slightly more than the decrease in production due
to the fact that the fee rates on those clients with lower production
volumes was greater than the fee rates on the remaining clients or
clients who had an increase in production;
- A $284,000 or 34% reduction in salesperson's commissions also due to
lower sales volume, and
- An additional $3,661,000 or 36% reduction in base operating expenses
as a result of the following:
- The reconfiguration and ultimate termination of the Company's
Florida operations in August 1995; and
- The reconfiguration of the Company's Tennessee operations in
February 1996.
During 1996, variable annuity and mutual fund sales comprised 77% of
total sales compared to 58% of total sales in 1995, resulting in a decline in
the gross margin rate on total product sales in 1996 from 1995.
LIQUIDITY AND CAPITAL RESOURCES
As of December 31, 1997, the Company had cash and cash equivalents of
approximately $4,262,000, a decrease of $421,000 from $4,683,000 in cash and
cash equivalents at December 31, 1996.
Significant sources and uses of such amounts during 1997 included:
- Approximately $407,000 related to the gain on sale of rights to future
asset fees. This amount was generated by a sales price of $2,200,000
less $1,463,000 of such sale price, which was deferred the first
quarter of 1998 and $330,000 payable March 31, 1998 if certain
contingencies are met.
- A $431,000 federal income tax refund and payment of the $300,000
remaining balance of the proceeds from the sale of rights to future
asset-based fees in 1996.
- A payment of $195,000 to repurchase stock from a former officer and
director of the Company.
- Purchases of computer equipment and program development of $144,000.
- A pre-tax loss of $2,250,000, excluding the gain on sale of
asset-based fees. These cash uses were offset, in part, by non-cash
expenses of $461,000 relating to depreciation and amortization and
$204,000 relating to restructuring charges and unpaid balance of
accrued charges and unpaid balance of accrued restructuring charges
of $361,000.
12
<PAGE>
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
has significantly reduced the level of base operating expenses since its
restructuring plans were implemented in 1994 and 1997. With the December
1997 restructuring, base monthly operating expenses were decreased from
approximately $366,000 in January of 1997 to approximately $180,000 in
January of 1998. The Company anticipates further reductions in operating
expenses as the effects of restructuring are realized.
The Company has in the past sold financial products, primarily annuities
and mutual funds. Under its arrangements with the provider companies, the
Company earns commissions on each sale and is entitled to ongoing asset-based
fees and 12b-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 50-55% 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. At December 31, 1997, the accumulated value of
assets on which the Company will receive asset-based fee revenue was
approximately $346 million (including mutual funds paying 12b-1 fees).
Asset-based fee revenue and asset-based fee expense to financial institutions
amounted to approximately $1,782,000 and $568,000, respectively, in 1997.
The reduction in these amounts as compared to 1996 is primarily the result of
the sale of the rights to asset-based fees generated by the Virginia
operation. Due to the sale of rights to future asset-based fees to First
Tennessee Bank at the end of 1997 and the termination of all bank programs,
future asset fee revenues and asset fees expensed to financial institutions
will be lower in 1998. During 1997, the First Tennessee Bank assets, for
which the right to future asset-based fees was sold to the bank on December
31, 1997, generated $641,000 in asset fee revenues but also required $282,000
in fees to the bank for a net to JMC of $359,000.
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 right to these types of future fees in 1997 and
prior years. The projected value of the future asset-based fees on the
remaining block of business at December 31, 1997 is based on assumptions as
to growth, persistency, the ability of the Company to provide any services
necessary to be entitled to such fees 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
materially covered by the estimated persistency and growth rates).
Management believes the range of values of these net future revenues is
appropriately estimated at $3.5 million to $4.5 million, pre-tax, based on
the Company's valuation calculations. Such estimated values are based on
realization of the estimates on the variables used in the calculation (which
are consistent with estimates used in prior sales of future rights) and the
actual realization, if any, could be higher or lower than this range.
While the Company's revenue base declined substantially during 1997 and
will decline even further in 1998 due to the termination of all bank
programs, base operating expenses have declined as well and will decline
further as the Company's restructuring is implemented. Thus, with the
approximate $4.3 million of cash at year-end coupled with the anticipated
cash flow in 1998 resulting from the final installment on the First Tennessee
purchase ($1.4 million received in January 1998 and $330,000 in second
quarter of 1998) and other asset fees, management expects the Company will
meet its operating and capital expenditure needs over the next twelve months.
TRENDS AND UNCERTAINTIES
TERMINATION OF HISTORICAL BUSINESS LINES. By terminating all bank
programs at the end of 1997, the Company has substantially exited from its
traditional lines of business. The Company will continue to service and
maintain all annuity contracts
13
<PAGE>
and mutual fund accounts in place at the year-end in order to continue to
maximize the return on those assets.
Management and the Board are actively seeking an appropriate business
combination opportunity for the Company. In the alternative, management and
the Board are looking for an investment opportunity for the Company to invest
some or all of its remaining liquid assets. In the interim, the Company's
cash assets are invested in government securities, mutual funds and cash
equivalents. If the Company does not find an operating entity to combine
with, and if its assets are not invested in certain types of securities
(primarily government securities), it may be deemed to be an investment
company under the terms of the Investment Company Act of 1940, as amended.
The Board intends to take defensive steps to avoid inadvertent application of
the Act to the Company and the attendant additional regulatory requirements.
The Company is aware of the issues associated with the programming code
in the existing computer systems as the year 2000 approaches. The issue is
whether computer systems will properly recognize date-sensitive information
when the year changes to 2000. The Company will expand necessary resources
to assure that its computer systems are reprogrammed in time to effectively
deal with transactions in the year 2000 and beyond. The Company presently
believes that, with modifications to existing software and conversions to new
software, the Year 2000 problem will not pose significant operational
problems for the Company's computer systems as so modified and converted.
However, if such modifications and conversions are not completed timely, the
Year 2000 problem may have a material impact on the operations of the
Company. Management has not yet assessed the year 2000 compliance expense
and related potential effect on the Company's earnings.
14
<PAGE>
ITEM 8. FINANCIAL STATEMENTS
JMC GROUP, INC.
AND SUBSIDIARIES
CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED
DECEMBER 31, 1997, 1996 AND 1995
CONTENTS
INDEPENDENT AUDITORS' REPORT . . . . . . . . . . . . . . . . . . . . . . . . .16
CONSOLIDATED BALANCE SHEETS. . . . . . . . . . . . . . . . . . . . . . . . . .17
CONSOLIDATED STATEMENTS OF OPERATIONS. . . . . . . . . . . . . . . . . . . . .18
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY . . . . . . . . . .19
CONSOLIDATED STATEMENTS OF CASH FLOWS. . . . . . . . . . . . . . . . . . . . .20
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS . . . . . . . . . . . . . . . . . .21
15
<PAGE>
INDEPENDENT AUDITORS' REPORT
We have audited the accompanying consolidated balance sheets of JMC
Group, Inc. and subsidiaries as of December 31, 1997 and 1996 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, 1997.
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, 1997 and 1996, and the results of their
operations and their cash flows for each of the three years in the period
ended December 31, 1997 in conformity with generally accepted accounting
principles.
As discussed in Note 1, to the financial statements, on December 22,
1997, the Company announced its intention to withdraw from the retail sales
business and terminate its relationship with each of its financial
institution clients.
/s/ DELOITTE & TOUCHE LLP
San Diego, California
February 16, 1998
16
<PAGE>
JMC GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
December 31, December 31,
1997 1996
------------- -------------
<S> <C> <C>
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 4,261,531 $ 4,682,883
Cash segregated under securities regulations 922,207 1,247,231
Receivables from insurance companies 329,265 674,409
Receivable from financial institution 1,462,861 325,000
Income taxes receivable - 424,746
Deferred tax asset 251,426 194,361
Other assets 195,219 243,256
------------- -------------
TOTAL CURRENT ASSETS 7,422,509 7,791,886
Furniture, equipment and leasehold improvements-
net of accumulated depreciation and amortization
of $1,435,362 in 1997 and $1,466,390 in 1996 77,925 212,844
Asset-based fees purchased - net of accumulated
amortization of $978,575 in 1997 and $635,836 in 1996 418,554 761,293
------------- -------------
TOTAL ASSETS $ 7,918,988 $ 8,766,023
------------- -------------
------------- -------------
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accrued fees to financial institutions $ 113,009 $ 321,609
Customer funds segregated under securities regulations 922,207 1,247,231
Accrued restructuring charges 410,785 11,560
Accrued expenses and other liabilities 242,871 479,996
Allowance for contract cancellations 55,822 53,813
Income tax payable 11,659 -
Accrued payroll and related expenses 81,572 133,911
------------- -------------
TOTAL CURRENT LIABILITIES 1,837,925 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 5,553,771 5,811,063
------------- -------------
TOTAL STOCKHOLDERS' EQUITY 6,081,063 6,517,903
------------- -------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 7,918,988 $ 8,766,023
------------- -------------
------------- -------------
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS.
</TABLE>
17
<PAGE>
JMC GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
1997 1996 1995
REVENUES ------------ ------------ -------------
<S> <C> <C> <C>
Commissions $ 4,194,564 $ 9,541,728 $ 14,312,707
Net gain on sale of rights to certain future asset-based fee revenues 1,870,000 1,844,393 3,914,350
Interest 229,140 204,505 244,401
Other 9,587 254,810 1,900,402
------------ ------------ -------------
TOTAL REVENUES 6,303,291 11,845,436 20,371,860
------------ ------------ -------------
EXPENSES
Employee compensation and benefits 2,757,601 4,852,670 7,428,369
Fees to financial institutions 1,746,266 3,928,024 6,400,349
Professional fees 337,369 1,089,861 770,121
Rent 273,368 376,917 510,691
Telephone 48,573 142,273 231,714
Depreciation and amortization 118,217 227,040 394,188
Other general and administrative expenses 813,164 1,224,926 1,639,136
Restructuring charges 589,224 - -
Marketing plan payment - net of recovery - 750,000 -
------------ ------------ -------------
TOTAL EXPENSES 6,683,782 12,591,711 17,374,568
------------ ------------ -------------
INCOME (LOSS) BEFORE INCOME TAXES (380,491) (746,275) 2,997,292
INCOME TAX PROVISION (BENEFIT) (123,199) (243,356) 1,256,168
------------ ------------ -------------
NET INCOME (LOSS) $ (257,292) $ (502,919) $ 1,741,124
------------ ------------ -------------
------------ ------------ -------------
EARNINGS (LOSS) PER SHARE - BASIC AND DILUTED $ (0.04) $ (0.08) $ 0.28
------------ ------------ -------------
------------ ------------ -------------
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS.
</TABLE>
18
<PAGE>
JMC GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN
STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
Common Stock
----------------------- Additional
Outstanding Paid-in Retained
Shares Amount Capital Earnings Total
----------- --------- ---------- ------------- ------------
<S> <C> <C> <C> <C> <C>
Balances -- January 1, 1995 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
Stock options exercised 20,000 200 19,800 - 20,000
Net loss for the year ended
December 31, 1996 - - - (502,919) (502,919)
----------- --------- ---------- ------------- ------------
Balances -- December 31, 1996 6,218,898 62,189 644,651 5,811,063 6,517,903
Repurchased common stock (194,547) (1,946) (192,602) - (194,548)
Stock options exercised 20,000 200 14,800 - 15,000
Net loss for the year
ended December 31, 1997 - - - (257,292) (257,292)
----------- --------- ---------- ------------- ------------
Balances -- December 31, 1997 6,044,351 $ 60,443 $ 466,849 $ 5,553,771 $ 6,081,063
----------- --------- ---------- ------------- ------------
----------- --------- ---------- ------------- ------------
The Company's certificate of incorporation also authorizes 5,000,000 shares of
no par value preferred stock, none of which has been issued.
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS.
</TABLE>
19
<PAGE>
JMC GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
1997 1996 1995
---------- ----------- ------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ (257,292) $ (502,919) $ 1,741,124
Adjustments to reconcile net income (loss) to net cash used
by operating activities:
Net gain on sale of rights to certain future asset-based fee revenues (1,870,000) (1,844,393) (3,914,350)
(Gain) loss on sale of fixed assets (5,852) 5,036 28,170
Depreciation and amortization 118,217 227,040 394,188
Marketing plan payment - net of recovery - 750,000 -
Amortization of asset-based fees purchased 342,739 218,351 156,195
Deferred tax provision (benefit) (57,065) (35,007) 265,230
Changes in assets and liabilities:
Cash segregated under securities regulations 325,024 (352,962) (846,523)
Short-term investments - - 536,000
Receivables from insurance companies 345,144 152,562 598,495
Receivable from financial institution 325,000 84,450 (109,450)
Income taxes receivable 436,405 (359,412) 103,658
Other assets 44,594 26,887 26,299
Accrued fees to financial institutions (208,600) (45,678) (611,255)
Customer funds segregated under securities regulations (325,024) 352,962 846,523
Accrued expenses and other liabilities (237,125) (402,624) (44,361)
Accrued restructuring expenses 561,142 - (201,865)
Allowance for contract cancellations 2,009 (88,690) (248,036)
Accrued payroll and related expenses (52,339) (78,856) (318,792)
---------- ----------- ------------
NET CASH USED BY OPERATING ACTIVITIES (513,023) (1,893,253) (1,598,750)
---------- ----------- ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sale of rights to certain future asset-based fee revenues 407,139 1,544,393 3,914,350
Purchase of furniture, equipment and leasehold improvements (143,545) (89,464) (109,677)
Proceeds from sale of furniture and equipment 7,625 18,609 15,787
Payment for the consulting and marketing agreement - (1,250,000) -
Recovery of payment and expenses for consulting and marketing agreement - 500,000 -
---------- ----------- ------------
NET CASH PROVIDED BY INVESTING ACTIVITIES 271,219 723,538 3,820,460
---------- ----------- ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Repurchase of common stock (194,548) - -
Proceeds from stock options exercised 15,000 20,000 -
---------- ----------- ------------
NET CASH PROVIDED (USED) BY FINANCING ACTIVITIES (179,548) 20,000 -
---------- ----------- ------------
NET INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS (421,352) (1,149,715) 2,221,710
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 4,682,883 5,832,598 3,610,888
---------- ----------- ------------
CASH AND CASH EQUIVALENTS AT END OF YEAR $ 4,261,531 $ 4,682,883 $ 5,832,598
---------- ----------- ------------
---------- ----------- ------------
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid for:
Interest $ - $ 765 $ 1,395
Income taxes $ 9,862 $ 273,468 $ 979,550
SUPPLEMENTAL DISCLOSURES OF NON-CASH OPERATING
ACTIVITIES:
Depreciation charged against accrued restructuring expenses $ - $ - $ 32,441
Disposal of furniture and computer software and equipment charged to
accrued restructuring charges $ 161,917 $ - $ -
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS.
</TABLE>
20
<PAGE>
NOTE 1. ORGANIZATION AND RESTRUCTURING
The consolidated financial statements include the accounts of JMC Group,
Inc. ("JMCG" or the "Company"), its wholly owned subsidiaries, JMC Investment
Services, Inc. ("JMCI") (formerly Priority Investment Services, Inc. which
was formerly Spear Rees & Co.) and James Mitchell & Co. and its subsidiaries
("JMC"). Through the end of 1997, the Company was engaged in the business of
selling and providing support services for the sales of annuities, insurance
products, and mutual funds to the customers of banks, savings and loan
associations and thrifts. Effective January 25, 1994, Spear Rees & Co.
changed its name to Priority Investment Services, Inc. Effective July 23,
1996, Priority Investment Services, Inc. changed its name to JMCI. JMCI is
registered with the Securities and Exchange Commission and the National
Association of Securities Dealers (NASD) as a broker-dealer.
RESTRUCTURING. During the fourth quarter of 1997, the Company's Board
of Directors decided to withdraw from retail sales in the bank marketplace
and approved a restructuring plan which was developed and implemented by
management. The Company recorded one-time restructuring charges in the amount
of $589,000. The restructuring charges included current and future cash
requirements for severance costs and costs related to a premature lease
termination of $221,000 and $164,000 respectively, and non-cash expenses of
$204,000 associated with the write-off of certain assets. As of December 31,
1997, there was a balance of $411,000 remaining in the restructuring accrual
primarily related to severance costs and premature lease termination costs.
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.
CASH SEGREGATED UNDER SECURITIES REGULATIONS
JMC Financial Corporation, James Mitchell & Co.'s broker-dealer
subsidiary ("JMC Financial"), began self-clearing mutual fund transactions
for itself and JMCI at the end of 1994. As such, JMC Financial carries
customer funds for transactions which have been initiated but not settled as
of the balance sheet date. Cash of $922,207 has been segregated in a special
bank account for the benefit of customers under Rule 15c3-3 of the Securities
and Exchange Commission.
LONG-LIVED ASSETS
Statement of Financial Accounting Standards No. 121 "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of"
("SFAS 121") was adopted by the Company in 1996. The Company periodically
reviews its long-lived assets in accordance with SFAS 121 to determine if an
impairment has occurred. Based on its review, the Company does not believe
that an impairment of its long-lived assets has occurred.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
21
<PAGE>
NOTE 2. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
REVENUE RECOGNITION
The Company recognizes and records commission revenue when a sale has been
consummated. Annuity and insurance sales are deemed to be consummated when
proof of premium payment, the completed application and supporting documentation
have been received in the Company's distribution/service center. Mutual fund
sales are recorded on the trade date of such sale. Front commission revenues
for 1997, 1996, and 1995 were $1,982,231, $6,470,807 and $9,447,074,
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 1997, 1996 and 1995 were
$1,782,347, $2,705,055 and $4,865,633, respectively. For the period of February
1, 1996 through December 31, 1997, the Company provided support services related
to the sale of annuities and mutual funds with its Tennessee client. Revenue
was recognized when services were performed. Service related fees for 1997 and
1996 were $429,669 and $365,866, respectively, and are included in commission
revenue for the year.
FEES TO FINANCIAL INSTITUTIONS
Fees to financial institutions consist of front commission fees and
asset-based fees. The Company records front commission fees when a sale has
been consummated as described in Revenue Recognition. Front commission fees
to financial institutions for 1997, 1996 and 1995 were $833,027, $2,369,951
and $3,332,006, respectively. The Company recognizes and records asset-based
fees monthly as they become due to the financial institutions, based upon the
average accumulated assets in force during the month. Asset-based fees to
financial institutions for 1997, 1996 and 1995 were $913,239, $1,558,074 and
$3,068,343, respectively.
ALLOWANCE FOR CONTRACT CANCELLATIONS
The Company reflects a liability on its balance sheet identified as
"Allowance for Contract Cancellations". This allowance is a recognition that
certain commissions earned by the Company on the sale of annuities and
insurance products must be returned to the provider companies if policies are
surrendered within the first year after purchase. A formula is used to
calculate the returned commission exposure. This formula was developed based
on the Company's policy surrender patterns, actual commissions received by
month, "known" unprocessed surrenders, and the availability of recoveries of
client fees and sales personnel commissions. The chargeback expense
associated with this liability is reflected as a reduction in commission
revenue as previously stated in "Revenue Recognition."
NET GAIN ON SALE OF RIGHTS TO CERTAIN FUTURE ASSET-BASED FEE REVENUE
At the end of the fourth quarter of 1997, the Company's agreement with
its Tennessee-based financial institution client terminated. As part of the
termination agreement, the financial institution exercised its right to
purchase future asset-based fee revenues from the Company. The Company
recorded a gain of $1,870,000 from the sales price of $2.2 million less
$330,000 recognizable after certain contingencies are met in the first
quarter of 1998. As of December 31, 1997, the Company received $407,139.
The remaining balance of $1,462,861, included in the line item "Receivable
from financial institution," is expected to be received in the first quarter
of 1998.
During the fourth quarter of 1996, the Company signed an agreement to
terminate its contract with its Virginia-based financial institution client.
As part of the termination agreement, the financial institution exercised its
right to purchase future asset-based fee revenues from the Company. The
Company recorded a net gain of $1,844,393 from the sale.
OTHER INCOME
For 1995, other income includes revenue received from the Company's
Florida-based financial institution client, for the right to hire certain JMC
employees of $1,308,500. 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. In 1996, other income
includes fees of $250,000 paid to the Company by the Company's Virginia-based
financial institution client
22
<PAGE>
NOTE 2. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
to transition the sales operations to the financial institution. Costs
incurred by the Company to facilitate such transactions are included in
expenses for each respective 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
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, 1997 was
$418,554.
RESTRUCTURING
Restructuring expenses represent costs specifically associated with the
Company's plan of restructuring, which was approved by the Board of Directors
in the fourth quarter of 1997, include employee severance, asset write-downs
and lease write-offs.
USBA MARKETING AGREEMENT AND PROPOSED MERGER
During the third quarter of 1996, the Company terminated an Agreement
and Plan of Merger with USBA Holdings, Ltd. ("USBA"), at which time all costs
previously capitalized and all costs incurred related to the merger were
expensed. These merger related expenses, which amounted to $884,000, are
included in the 1996 Statement of Operations, primarily within professional
fees and other general and administrative expenses.
During the fourth quarter of 1996, the Company settled with USBA and
received a cash payment of $500,000, constituting a partial refund of amounts
paid by the Company under a Marketing Agreement and Consulting Agreement and
payment of a portion of the Company's expenses incurred in connection with
the Agreement and Plan of Merger, and previously issued warrants were
returned. The Company, during this period, wrote off the remaining
unamortized balance of the payment of $1.25 million, reversed the
capitalization of the value of the returned warrants and the amortization
expense thereon for the first three quarters of 1996 and recorded the
recovery of $500,000. The write-off of the payment and the value of warrants
was made in the fourth quarter.
The entire $1.25 million payment to USBA and the subsequent recovery of
$500,000 are included in the line "Marketing Plan payment - net of recovery"
and thus, amortization of the plan payment included in depreciation and
amortization for the first three quarters of 1996 has been reclassified to
this line for more appropriate presentation of material operating
transactions.
NOTE 3. COMMITMENTS AND CONTINGENCIES
OPERATING LEASES
The Company leases an office facility and equipment under the terms of
operating leases which expire in October 1998. At December 31, 1997 the
aggregate minimum noncancelable lease commitment is $181,288. The minimum
aggregate rental represents lease payments on both of the Company's offices
as if rents were paid on both offices through their respective lease terms
less amounts to be received by the Company for the office which has been
subleased.
As of January 1, 1998 the Company had one office which was being
subleased. The net obligation on such office, included in the above minimum
aggregate rental, is included in accrued restructuring charges as of December
31, 1997.
23
<PAGE>
NOTE 3. COMMITMENTS AND CONTINGENCIES (CONTINUED)
LEGAL MATTERS
The Company's broker-dealer subsidiary, JMC Investment Services, Inc.
(JMCI), has been named as a defendant in a NASD arbitration regarding sales
of real estate limited partnerships by Spear Rees & Co. (the predecessor to
JMCI) between 1990 and 1993. Management does not believe that such
proceedings will have a material adverse effect on the Company's financial
condition or results of operations.
NOTE 4. FURNITURE, EQUIPMENT, AND LEASEHOLD IMPROVEMENTS
At December 31, 1997 and 1996, furniture, equipment and leasehold
improvements consist of:
<TABLE>
<CAPTION>
1997 1996
---------------------------
<S> <C> <C>
Furniture and fixtures $ 484,230 $ 621,247
Computer equipment 979,933 1,007,262
Leasehold improvements 49,124 50,725
---------------------------
1,513,287 1,679,234
Less:
Accumulated depreciation and amortization (1,435,362) (1,466,390)
---------------------------
Net furniture, equipment and leasehold improvements $ 77,925 $ 212,844
---------------------------
---------------------------
</TABLE>
NOTE 5. STOCKHOLDERS' EQUITY
COMMON STOCK
In January of 1997, the Company repurchased 194,547 shares of Common
Stock from a former officer and director at a price of $1.00 per share.
STOCK COMPENSATION PLANS
At December 31, 1997, the Company has two stock-based compensation plans
which are described below. The Company has adopted the disclosure-only
provisions of Statement of Financial Accounting Standards No. 123,
"Accounting for Stock-Based Compensation." Accordingly, no compensation cost
has been recognized for the stock option plans. Had compensation cost for
the Company's stock option plans been determined based on the fair market
value at the grant date for awards in 1997 and 1996, consistent with the
provisions of SFAS No. 123, the Company's net loss and loss per share would
have been increased to the pro forma amounts indicated below:
<TABLE>
<CAPTION>
1997 1996
----------------------------------
<S> <C> <C> <C>
Net loss As reported $ (257,292) $ (502,919)
Pro forma $ (352,292) $ (510,093)
Loss per share As reported $ (0.04) $ (0.08)
Pro forma $ (0.06) $ (0.08)
</TABLE>
The assumption regarding the stock options issued in 1997 and 1996 was
that 100% of such options vested in the respective year rather than the
actual vesting schedules which range from one year to three years.
The impact of outstanding non-vested stock options granted prior to 1996
has been excluded from the pro forma calculation; accordingly, the 1997 and
1996 pro forma adjustments are not indicative of future period pro forma
adjustments, when the calculation will apply to all applicable stock. The
estimated fair value of options granted is subject to the assumptions
illustrated below and if the assumptions changed, the estimated fair value
amounts could be significantly different.
24
<PAGE>
NOTE 5. STOCKHOLDERS' EQUITY (CONTINUED)
The fair value of options granted during 1997 and 1996 was estimated at
$147,000 and $11,000, respectively, on the date of grant using the
Black-Scholes option-pricing model with the following weighted average
assumptions by respective year:
<TABLE>
<CAPTION>
1997 1996
------- -------
<S> <C> <C>
Dividend yield rate 0% 0%
Volatility rate 74% 122%
Risk free interest rate 5.66% 6.04%
Expected lives 3 years 3 years
</TABLE>
In 1983, the Company adopted a Stock Option Plan (the "1983 Plan")
pursuant to which options to purchase an aggregate of 1,000,000 shares of
Common Stock could be granted to directors, officers and key employees. The
1983 Plan expired by its terms in November 1993, and there were no options
outstanding under the 1983 Plan as of December 31, 1997. In 1993, the
Company adopted the 1993 Executive Stock Option Plan (the "Executive Plan")
pursuant to which options to purchase an aggregate of 750,000 shares of
Common Stock may be granted to officers and directors of the Company and its
subsidiaries and the 1993 Employee Stock Option Plan (the "Employee Plan")
pursuant to which options to purchase an aggregate of 750,000 shares of
Common Stock may be granted to employees of the Company and its subsidiaries
(collectively, the "1993 Plans" and, together with the 1983 Plan, the
"Plans"). Under the Plans, incentive stock options, as defined in section
422A of the Internal Revenue Code, or non-qualified stock options may be
granted. Non-employee directors receive formula grants of options pursuant
to the Executive Plan.
<TABLE>
<CAPTION>
A summary of changes in outstanding Common Stock options during 1997,
1996, and 1995 follows:
- --------------------------------------------------------------------------------------------------
Number Option Price Per
of Shares Share
- --------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Stock options outstanding at December 31, 1994 406,000 $ 1.380 -- 11.000
1995
Granted 218,000 $ 0.625 -- 3.625
Canceled or exercised (112,000) $ 1.690 -- 11.000
1996
Granted 25,000 $ 0.969 -- 3.750
Canceled or exercised (107,000) $ 0.750 -- 4.000
1997
Granted 317,600 $ 0.688 -- 1.375
Canceled or exercised (257,400) $ 0.750 -- 9.250
- --------------------------------------------------------------------------------------------------
Outstanding at December 31, 1997 490,200 $ 0.625 -- 11.000
- --------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------
</TABLE>
Of the 317,600, 25,000 and 218,000 options granted in 1997, 1996 and
1995, respectively, options granted under the Executive Plan amounted to
212,000 for 1997, 12,000 for 1996 and 152,000 for 1995. Options granted
under the Employee Plan amounted to 105,600 in 1997, 13,000 in 1996 and
66,000 in 1995. The 490,200 options outstanding at December 31, 1997 became
or will become exercisable as follows: 311,003 shares in 1997 and prior;
98,265 in 1998; and 80,932 in 1999. As of December 31, 1997, options to
purchase 546,834 shares had been exercised under the 1983 Plan and no options
were outstanding. As of December 31, 1997, 370,000 shares were available for
future grants under the Executive Plan and 599,800 shares were available for
future grants under the Employee Plan. As of December 31, 1997, a total of
969,800 shares were reserved for issuance under the Plans.
25
<PAGE>
NOTE 6. EARNINGS PER SHARE
The Company adopted Statement of Financial Accounting Standards No. 128,
Earnings Per Share ("EPS") for the year ended December 31, 1997. This
statement prescribes new requirements for computing EPS to reflect both Basic
EPS as well as Diluted EPS for all periods EPS data is presented. For 1997
and 1996, net loss per common share was determined by dividing the net loss
by the weighted average number of common shares outstanding during the
period. Common shares issuable under Common Stock equivalents were not
included in the computation of net loss per common shares because their
effect was not dilutive. For 1995, Diluted EPS was determined based on the
adjusted weighted average common shares reflecting the dilutive effect of the
assumed exercise of stock options using the treasury method.
The weighted average number of shares of Common Stock for the periods
presented is follows: 6,055,738 in 1997; 6,218,898 in 1996 and 6,198,898 in
1995. The weighted average dilutive common shares for 1995 are 6,201,318,
reflecting the addition of 2,420 Common Stock equivalents.
NOTE 7. INCOME TAXES
<TABLE>
<CAPTION>
The provision (benefit) for income taxes is allocated as follows:
--------------------------------------------------------------------------------------------
1997 1996 1995
--------------------------------------------------------------------------------------------
<S> <C> <C> <C>
(Benefit) Provision $ (123,199) $ (243,356) $ 1,256,168
--------------------------------------------------------------------------------------------
--------------------------------------------------------------------------------------------
Current: 1997 1996 1995
--------------------------------------------------------------------------------------------
Federal $ (74,134) $ (166,680) $ 792,750
State 8,000 (41,669) 198,188
--------------------------------------------------------------------------------------------
(66,134) (208,349) 990,938
Deferred (57,065) (35,007) 265,230
--------------------------------------------------------------------------------------------
Total $ (123,199) $ (243,356) $ 1,256,168
--------------------------------------------------------------------------------------------
--------------------------------------------------------------------------------------------
<CAPTION>
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:
--------------------------------------------------------------------------------------------
1997 1996 1995
--------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Expected tax (benefit) using statutory rate $ (129,367) $ (253,734) $ 1,019,079
Effects of:
State income taxes, net of Federal tax
benefit 5,280 9,642 178,039
Other 888 736 59,050
--------------------------------------------------------------------------------------------
Total $ (123,199) $ (243,356) $ 1,256,168
--------------------------------------------------------------------------------------------
--------------------------------------------------------------------------------------------
<CAPTION>
At December 31, 1997 and 1996, the components of the deferred income tax asset are as follows:
----------------------------------------------------------------------------------------------
1997 1996
----------------------------------------------------------------------------------------------
<S> <C> <C>
Allowance for contract cancellations $ 7,712 $ 21,493
Accrued restructuring expenses 132,116 4,617
Accrued payroll and related expenses 26,473 102,016
Other 61,991 6,084
Franchise taxes 23,134 60,151
----------------------------------------------------------------------------------------------
Deferred taxes $ 251,426 $ 194,361
----------------------------------------------------------------------------------------------
----------------------------------------------------------------------------------------------
</TABLE>
26
<PAGE>
NOTE 8. MAJOR CUSTOMERS
During the years ended December 31, 1997, 1996 and 1995, the following
client financial institutions individually accounted for 10% or more
of the Company's total revenues:
<TABLE>
<CAPTION>
1997
----
<S> <C>
First Tennessee Bank (Tennessee) $ 2,980,268
Independence Savings Bank (New York) $ 1,361,207
---------------------------------------------------------------------------
1996
----
Central Fidelity National Bank (Virginia) $ 7,373,399
Independence Savings Bank (New York) $ 1,716,939
First Tennessee Bank (Tennessee) $ 1,346,557
---------------------------------------------------------------------------
1995
----
Barnett Banks, Inc. (Florida) $ 10,239,630
Central Fidelity National Bank (Virginia) $ 4,331,633
First Tennessee Bank (Tennessee) $ 3,149,677
---------------------------------------------------------------------------
</TABLE>
As described in Note 3, the Company's relationship with Barnett Banks,
Inc. was terminated effective October 31, 1995.
Effective February 1, 1996, the Company's level of service provided to
First Tennessee Bank was reduced from a fully managed alternative investments
program to an administrative support program. The administrative support
program was terminated as of December 31, 1997.
As described in Note 2, effective December 31, 1996, the Company's
relationship with Central Fidelity National Bank was terminated.
NOTE 9. SHAREHOLDER RIGHTS PLAN
In 1990, the Company's Board of Directors adopted a Shareholder Rights
Plan (the "Plan"). The Plan provided for the distribution of one Common
Stock purchase right as a dividend for each outstanding share of Common Stock
of the Company as of April 1, 1990. The right entitles stockholders to buy
one share of the Company's Common Stock at thirty dollars per share, subject
to adjustment per the Plan. All rights expire on February 23, 2000.
Generally, each right may be exercised ten days after any person or
group ("Acquirer") acquires beneficial ownership of 20% of the outstanding
shares of Common Stock, or ten days after an Acquirer announces a tender
offer or other business combination, which would result in the Acquirer
obtaining beneficial ownership of 20% or more of the voting power of the
Company, unless such tender offer or acquisition is made with approval of the
Board of Directors.
Under certain circumstances, including the acquisition of 25% of the
Company's Common Stock and the occurrence of certain "self-dealing
transactions" by an Acquirer or certain other 20% holders, all rights holders
except the Acquirer may purchase the Company's Common Stock at approximately
50% of the prevailing market price. Similarly, if the Company is acquired in
a merger after the acquisition of specified percentages of the voting power
of the Company, and the Acquirer is the resultant corporation, the rights
holders with the exception of the Acquirer, may purchase the Acquirer's
shares at a similar discount.
The Board of Directors may effect the redemption of the rights at any
time before the rights become exercisable at a nominal price payable in cash
and/or shares of Common Stock.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not applicable.
27
<PAGE>
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 10,
1998:
<TABLE>
<CAPTION>
TERM OF
OFFICE AS
DIRECTOR
NAME AGE POSITION EXPIRES
-------------------------------------------------------------------------------------------
<S> <C> <C> <C>
James K. Mitchell 59 Chairman, President and Chief Executive 1998
Officer and Director
Edward J. Baran 61 Director 2000
Barton Beek 74 Director 1999
Charles H. Black 71 Director 2000
Robert G. Sharp 62 Director 1998
</TABLE>
Information with respect to the principal occupation during the past
five years of each nominee, each current Director and each executive officer
is set forth below. There are no family relationships among Directors or
executive officers of the Company.
JAMES K. MITCHELL became a Director in October 1988 and became Chairman
and Chief Executive Officer of the Company on January 1, 1993 and assumed the
responsibilities of President of the Company as well on January 1, 1997. Mr.
Mitchell is the founder of the Company's principal subsidiary, James Mitchell
& Co. In 1973, Mr. Mitchell was a founding officer of Security First Group
(now The Holden Group), a financial services firm which pioneered the concept
of marketing insurance and annuity products through stock brokerage firms.
Before joining that firm, Mr. Mitchell served as Vice President of Marketing
for the Variable Annuity Life Insurance Company of Houston, Texas. He
attended Portland State University and is a registered Principal with the
National Association of Securities Dealers, Inc. (the "NASD").
EDWARD J. BARAN became a Director in August 1992. Mr. Baran, who has
spent more than thirty years in the insurance business, is currently Chairman
and Chief Executive Officer of BCS Financial Corporation, a financial
services holding company. Prior to joining BCS in November 1987, Mr. Baran
was Vice Chairman, President and Chief Executive Officer of Capitol Life
Insurance Company of Denver, Colorado. He is a graduate of Georgetown
University and a member of the Audit Committee of the Board of Directors. On
February 17, 1998, Mr. Baran became a member of the Compensation Committee as
well.
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. On February
17, 1998, Mr. Beek became a member of the Audit Committee as well.
CHARLES H. BLACK became a Director in June, 1993. Mr. Black is currently
a private investor, having most recently served as Vice Chairman of Pertron
Controls Corporation. From 1982 to 1985, Mr. Black served as Executive Vice
President, Director and Chief Financial Officer of Kaiser Steel Corporation.
He served as Executive Vice President and Chief Financial Officer of Great
Western Financial Corporation and Great Western Savings and Loan from 1980 to
1982 after having spent over 20 years in various financial and management
positions with Litton Industries, Inc., the most recent being Corporate Vice
President and Treasurer. Mr. Black is a member of the Board of Governors of
the Pacific Exchange and serves as a director of Investment Company of
America, Fundamental Investors, Inc., and the
28
<PAGE>
American Variable Insurance Series, all mutual funds. He also serves as a
director of Wilshire Technologies, Inc., a publicly-held company, and he is a
director of a number of privately-held corporations. Mr. Black is a graduate
of the University of Southern California. He is Chairman of the Audit
Committee of the Board of Directors. On February 17, 1998, Mr. Black became
a member of the Compensation Committee as well.
ROBERT G. SHARP became a Director in May 1995. Mr. Sharp retired from
his position as President and Chief Executive Officer of Keyport Life
Insurance Company in February 1992 after having served in that position since
1979. Mr. Sharp is the past chairman of the National Association for Variable
Annuities and a former director of the National Association of Life
Companies. Mr. Sharp is a graduate of the California State University at
Sacramento and is a registered Principal with the NASD. Mr. Sharp is a
member of the Audit Committee and Chairman of the Compensation Committee of
the Board of Directors.
COMPLIANCE WITH SECTION 16(a) OF THE SECURITIES EXCHANGE ACT OF 1934
Section 16(a) of the Securities Exchange Act of 1934 requires the
Company's Directors and executive officers, and persons who own more than 10%
of a registered class of the Company's equity securities, to file with the
Securities and Exchange Commission, NASDAQ and the Pacific Stock Exchange
initial reports of ownership and reports of changes in ownership of Common
Stock and other equity securities of the Company. Executive officers,
Directors and greater than 10% stockholders are required by Securities and
Exchange Commission regulations to furnish the Company with copies of all
Section 16(a) reports they file.
Specific due dates for these reports have been established and the
Company is required to identify those persons who failed to timely file these
reports. To the Company's knowledge, based solely on review of the copies of
such reports furnished to the Company and written representations that no
other reports were required, during the fiscal year ended December 31, 1997,
all Section 16(a) filing requirements applicable to its executive officers,
Directors and greater than 10% beneficial owners were complied with, except
for two Forms 4 filings which were due on August 10, 1997 and October 10,
1997 and were not made. These filings were regarding purchases of a total of
45,000 shares of Common Stock by Robert G. Sharp during July and September of
1997 and were reported on a subsequent Form 5 for the year ending December
31, 1997.
29
<PAGE>
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 three highest paid executive
officers of the Company (the "named executive officers") (1):
<TABLE>
<CAPTION>
LONG-TERM
COMPENSATION
AWARDS
SECURITIES
UNDERLYING ALL OTHER
ANNUAL COMPENSATION OPTIONS/ COMPENSATION
NAME AND PRINCIPAL POSITION YEAR SALARY($) BONUS($) SARs(#)(2) ($)
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
James K. Mitchell, Chairman and 1997 239,087 -- 100,000 7,811(3)
Chief Executive Officer 1996 291,627 -- -- 9,579(3)
1995 248,664 -- -- 9,449(3)
Daniel M. Harkins, Senior Vice President, 1997 128,364 -- 25,000 1,913(4)
General Counsel, Chief Financial Officer and Secretary 1996 -- -- -- --
1995 -- -- -- --
Stanley J. Mensing, Senior Vice President 1997 117,716 -- 25,000 3,844(4)
and Chief Marketing Officer 1996 -- -- -- --
1995 -- -- -- --
William L. Webster, 1997 112,878 -- 25,000 3,709(4)
Senior Vice President and 1996 127,462 -- -- 3,823(4)
Chief Administrative Officer 1995 112,880 -- 20,000 3,694(4)
</TABLE>
(1) Although SEC regulations require four highest paid executive officers in
the classification of the "named executive officers" (other than the Chief
Executive Officer), no other officer of the company qualifies for this
specification under Regulation S-K, Item 402a(3). Stanley J. Mensing and
Daniel M. Harkins became named executive officers in 1997, therefore no
compensation disclosure is required for the years 1996 and 1995.
(2) The Company does not have any outstanding Stock Appreciation Rights
("SARs").
(3) Amounts reported for Mr. Mitchell in the "All Other Compensation" column
include $2,982, $4,750 and $4,620, respectively, for 1997, 1996 and 1995,
representing the Company's contributions to its 401(k) Savings Plan on his
behalf and $4,829 for 1997, $4,829 for 1996 and $4,829 for 1995,
representing life insurance premiums advanced by the Company pursuant to
a split dollar insurance agreement.
(4) Represents the Company's contributions to its 401(k) Savings Plan on behalf
of the named executive officer.
30
<PAGE>
OPTION GRANTS
The following table provides information related to grants of options to
purchase Common Stock to the named executive officers during the 1997 fiscal
year:
<TABLE>
<CAPTION>
Individual Grants
- ------------------------------------------------------------------------------------------------
Percent of Total Potential Realizable
Number of Options/SARs Value at Assumed
Securities Granted to All Exercise Price Annual Rate of
Underlying Employees or Base Price Stock Price
Options/SARs During Fiscal ($/sh) Expiration Appreciation for
Name Granted (1) Year (1) Date (2) Option Term (3)
- ---------------------------------------------------------------------------------------------------------------------------------
5% ($) 10%($)
-----------------------------
<S> <C> <C> <C> <C> <C> <C>
James K. Mitchell 100,000 32.72% $1.375 2/10/02 $ 159,535.20 $ 201,313.76
Stanley J. Mensing 25,000 8.00% $1.250 2/10/02 $ 39,883.80 $ 50,328.44
Daniel M. Harkins 25,000 8.00% $1.250 2/10/02 $ 39,883.80 $ 50,328.44
William L. Webster 25,000 8.00% $1.250 2/10/02 $ 39,883.80 $ 50,328.44
</TABLE>
(1) The Company does not have any outstanding SARs. Each of the options for
Messrs. Mensing, Harkins and Webster were scheduled to vest in annual
installments of 8,334, 8,333 and 8,333 shares beginning December 31, 1997.
On December 30, 1997, the Board decided to amend these schedules and Mr.
Mensing's options were 100% vested on December 31, 1997, Mr. Webster's
options were 100% vested on January 31, 1998 and Mr. Harkins' Options will
be 100% vested on February 28, 1998. Mr. Mitchell's options vest in three
annual installments of 33,334, 33,333 and 33,333 shares beginning December
31, 1997.
(2) Dates shown are the original expiration dates for each option. However,
due to restructuring, if not previously exercised, Mr. Mensing's options
will lapse on March 31, 1998; Mr. Webster's options will lapse on May 1,
1998 and Mr. Harkins' options will lapse on May 29, 1998.
(3) 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 February 10, 1997 of $1.25 per share. The exercise price was
determined by using the same closing price. Mr. Mitchell's exercise price
was 10% higher due to his ownership of 10% or more of the outstanding
Common Stock, in accordance with the terms of the 1993 Executive Stock
Option Plan. However, as stated above, due to restructuring, Mr.
Mensing's options will lapse on March 31, 1998; Mr. Webster's options will
lapse on May 1, 1998 and Mr. Harkins' options will lapse on May 29, 1998,
which severely curtails the life of the option to less than two years.
OPTION EXERCISES AND FISCAL YEAR-END OPTION VALUES
The following table provides information related to options exercised by
the named executive officers during the 1997 fiscal year and the number and
value of options held at fiscal year-end.
<TABLE>
<CAPTION>
NUMBER OF SECURITIES
UNDERLYING UNEXERCISED VALUE OF UNEXERCISED
OPTIONS/SARS AT FY- IN-THE-MONEY OPTIONS/
SHARES ACQUIRED VALUE END(#)(1) SARS AT FY-END($)(1)(2)
NAME ON EXERCISE (#) REALIZED($) EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
James K. Mitchell 0 0 108,334 66,666 0 0
Stanley J. Mensing 0 0 55,000 0 0 0
Daniel M. Harkins 0 0 11,668 23,332 0 0
William L. Webster 0 0 38,334 16,666 0 0
</TABLE>
(1) The Company does not have any outstanding SARs.
31
<PAGE>
(2) The closing price for the Common Stock on December 31, 1997, as reported
by the NASDAQ National Market System, was $0.656. All of the named
executive officers' outstanding options were exercisable for a price
greater than $0.656 at fiscal year end.
COMPENSATION OF EXECUTIVES
Effective January 1, 1998, the Company reinstated a prior employment
contract with the President and Chief Executive Officer which had originally
expired on January 1, 1996. The reinstated contract provides for a base
salary of $225,000 per year plus basic company benefits for a three-year
term, subject to a provision that if the Board should decide to liquidate the
Company, the employment contract will terminate six months thereafter and
also subject to a provision that if there is a change in control of the
Company in a transaction not approved by the Board, Mr. Mitchell may
terminate his duties under the contract but will be entitled to receive
compensation and benefits under the contract for its stated term.
COMPENSATION OF DIRECTORS
The members of the Board of Directors who are not full-time employees of
the Company are entitled to receive reimbursement for out-of-pocket expenses
they incur in attending Board meetings and otherwise performing their duties
and receive fees of $1,000 for each meeting of the Board of Directors which
they attend. Members of committees additionally receive $500 per committee
meeting held on the same day as a Board of Directors' meeting, or $1,000 per
committee meeting if held on a different day. Non-employee Directors receive
formula grants of non-qualified stock options under the Company's 1993
Executive Stock Option Plan. Options to acquire 12,000 shares of Common Stock
are to be granted within six months after an individual takes office as a
Director and options to acquire an additional 12,000 shares are to be granted
within six months after every third anniversary of such Director's taking
office. On February 17, 1998, the outside Directors of the Company were each
granted stock options to purchase 25,000 shares of Common Stock at a price
equal to the closing price for the Common Stock on June 30, 1998, in addition
to their regular formula grants. Officers of the Company are not compensated
for their services as Directors or committee members.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
No member of the Compensation Committee of the Board of Directors served
as an officer or employee of the Company or its subsidiaries. No executive
officers of the Company served during fiscal 1997 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 1997
as an executive officer of a company whose board of directors had a
representative from the Company or the Company's Board of Directors.
COMPENSATION COMMITTEE REPORT ON EXECUTIVE COMPENSATION
During 1997, executive compensation policy was recommended by a
Compensation Committee (the "Committee") which was composed entirely of
independent members of the Board of Directors (the "Board"). This Committee
met once on February 10, 1997. The Committee is responsible for recommending
executive compensation policy and practice to the Board of Directors and was
responsible for administering the Company's 1993 Executive Stock Option Plan.
The Board of Directors did not modify or reject in any material way any
action or recommendation of the Committee during fiscal year 1997.
The Board's compensation policy with regards to the Company's executive
officers has been to provide these officers, in aggregate, with salary and
incentive compensation competitive with the marketplace. Compensation has
primarily consisted of salaries, stock options and cash bonuses based upon
the Company's pre-tax earnings. For 1997, no executive was a party to an
employment contract. However, on February 17, 1998, the Board elected to
reinstate the employment contract of the President and CEO which had
originally expired January 1, 1996. The reinstated contract provides for a
base salary of $225,000 per year plus basic company benefits for a three-year
term, subject to certain provisions described above. See "Compensation of
Executives" under this Item, above.
32
<PAGE>
In 1997, the President, Brian J. Finneran, resigned and the Chief
Executive Officer, James K. Mitchell, assumed this title and responsibility.
He notified the Committee during the February 10, 1997 Board meeting that he
would voluntarily reduce his salary 20% to $225,000 per year, effective April
1, 1997.
The Board, at its February 17, 1998 meeting, considered the operating
results for 1997 and although the Committee felt that management during the
year had acted appropriately in a very difficult environment and was
continuing to maintain energy and creativity in its search for new sources of
revenue for the Company, it decided not to award any cash bonuses to the
Chief Executive Officer or the other executive officers.
While there is no established policy with respect to the frequency or
amount of options grants, the Board desires that the executive officers own
Company stock to both provide incentive compensation based on performance
factors deemed important to the Company's stockholders and to provide an
element of downside risk to more closely align the interests of executives
with the interests of the stockholders. The Board considers the granting of
stock options annually and, in reviewing the Chief Executive Officer's
recommendation, considers the individual executive officer's contributions to
the Company and the amount and terms of existing options. As previously
reported, at the February 10, 1997 meeting, upon the recommendation of the
Chief Executive Officer, and in recognition of the fact that they would not
be getting salary increases or bonuses, the Compensation Committee
unanimously decided to grant options to three Senior Vice Presidents of the
Company totaling 75,000 shares at a purchase price of $1.25 per share, the
fair market value of the Company's Common Stock at the closing on February
10, 1997. Likewise, the Committee decided to grant the Chief Executive
Officer options to purchase 100,000 shares of Common Stock at a price of
$1.375 per share. (The higher exercise price was in accordance with the 1993
Executive Stock Option Plan which requires grants to owners of more than 10%
of the outstanding Common Stock to pay a price of 10% above the fair market
value on the date of grant.) The options granted to the three Senior Vice
Presidents and the Chief Executive Officer represented less than three
percent of the outstanding Common Stock.
James K. Mitchell, who became Chief Executive Officer of the Company
effective January 1, 1993, received a total of $239,087 in salary for fiscal
1997. This compares to $291,627 in salary for fiscal 1996. This also
compares to $248,664 salary in 1995. All salary totals are exclusive of
standard benefits. At the close of 1997, Mr. Mitchell was the largest
stockholder of the Company with a total of 713,179 shares beneficially owned
and vested options to purchase 75,000 shares of Common Stock at a price of
$4.40 per share and 33,134 shares at a price of $1.375 per share.
The report of the Board shall not be deemed incorporated by reference by
any general statement incorporating by reference this Form 10-K 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.
The Compensation Committee of the
Board of Directors of JMC Group, Inc.:
Robert G. Sharp, Chairman
Edward J. Baran
Barton Beek
Charles H. Black
33
<PAGE>
PERFORMANCE GRAPH
The following chart compares the yearly percentage change in the
cumulative total stockholder return on the Common Stock during the five
fiscal years ended December 31, 1997 with the cumulative total return on the
S&P 500 Index and the NASDAQ Financial Stocks Industry Index.
Assumes $100 invested on December 31, 1992 in JMC Group, Inc., S&P 500 Index
and NASDAQ Financial Stock Industry Index.
<TABLE>
<CAPTION>
PERFORMANCE 1992 1993 1994 1995 1996 1997
<S> <C> <C> <C> <C> <C> <C>
NASDAQ 100 116.23 116.50 169.67 217.50 333.81
S&P 500 100 104.464 111.834 110.113 147.673 240.624
JMCG 100 138 25.008 14.496 15.504 10.496
</TABLE>
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.
34
<PAGE>
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
10, 1998 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:
<TABLE>
<CAPTION>
SHARES OF COMMON
STOCK
BENEFICIALLY OWNED
AS OF FEBRUARY 10,
1998 (1)
NAME NUMBER(2)(3) %
---------------------------------------------------------------------------------
<S> <C> <C>
James K. Mitchell 821,513 12.95
JMC Group, Inc.
9710 Scranton Road, Suite 100
San Diego, CA 92121
Robert London (4) 498,500 7.86
Cruttendon Roth Incorporated
809 Presidio Avenue
Santa Barbara, CA 93101
Stanley J. Mensing 76,287 1.20
William L. Webster 65,945 1.04
Daniel M. Harkins 40,423 *
Charles H. Black(5) 261,031 4.18
Robert G. Sharp 53,000 *
Barton Beek 36,000 *
Edward J. Baran 8,000 *
All Executive Officers and Directors as a group (8 persons) 1,362,200 21.54
Total outstanding shares(6) 6,341,685
</TABLE>
* Less than 1%
(1) All ownership figures include options to purchase shares of Common Stock
exercisable within 60 days of February 10, 1998, 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 13,953, 12,429, 10,945, 2,423 and 39,750 vested shares of Common
Stock contributed by the Company to the Company's 401(k) Savings Plan for
Messrs. Mitchell, Mensing, Webster and Harkins and for all executive
officers and Directors as a group, respectively. Mr. Harkins' shares
will be 100% vested on February 28, 1998.
(3) Includes options to purchase 108,334, 55,000, 55,000, 35,000, 8,000,
12,000, 16,000, 8,000 and 297,334 shares of Common Stock for Messrs.
Mitchell, Mensing, Webster, Harkins, Baran, Beek, Black, Sharp and for all
executive officers and Directors as a group, respectively.
(4) Mr. London filed a Schedule 13D on November 25, 1997 for 423,500 shares of
Common Stock and an amended Schedule 13D on December 23, 1997 for an
additional 75,000 shares of Common Stock.
35
<PAGE>
(5) Includes 22,800 shares held by the Charles H. Black Pension Trust and
10,000 shares held by Mr. Black as trustee for the benefit of Charles H.
Black, Jr. and Mr. Black in which Mr. Black has a 1/2 beneficial ownership
interest. Also includes 36,200 shares owned individually by Mr. Black's
wife as to which he disclaims beneficial ownership.
(6) Includes 297,334 shares issuable upon exercise of stock options.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Not applicable.
36
<PAGE>
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, 1997 and 1996
Consolidated Statements of Operations
For the Years Ended
December 31, 1997, 1996 and 1995
Consolidated Statements of Changes in
Stockholders' Equity
For the Years Ended
December 31, 1997, 1996 and 1995
Consolidated Statements of Cash Flows
For the Years Ended
December 31, 1997, 1996 and 1995
Notes to Consolidated Financial Statements
(a) (2) Not applicable.
(a) (3) The following exhibits are filed herewith:
3.1 Certificate of Incorporation of the Registrant.*
3.2 Certificate of Amendment of Certificate of Incorporation
of the Registrant.*
3.3 By-laws of the Registrant.*
4.1 Shareholder Rights Agreement, dated as of February 21,
1990, between Spear Financial Services, Inc. and First
Interstate Bank, Ltd., as Rights Agent, as amended
effective, July 16, 1992.*
m10.1 JMC Group, Inc. 1993 Employee Stock Option Plan.**
m10.2 JMC Group, Inc. 1993 Employee Stock Option Plan.***
10.3 Agreement, dated December 9, 1994, by and between James
Mitchell & Co. and Barnett Banks, Inc.****
10.4 Amendment No. 3 to Services Agreement dated January 1,
1995, by and between James Mitchell & Co. and Central
Fidelity National Bank.****
10.5 Interim Services Agreement dated October 19, 1995 between
James Mitchell & Co., Barnett Banks, Inc. and Barnett
Banks Trust Company, N.A.*****
10.6 Termination and Assignment Agreement dated October 19,
1995 between James Mitchell & Co., Barnett Banks, Inc.
and Barnett Banks Trust Company, N.A.*****
37
<PAGE>
10.7 Assignment and Notice of Assignment of Renewal (Asset)
Fees between James Mitchell & Co., JMC Insurance Services
Corporation and JMC Financial Corporation and Barnett
Annuities Corporation and the Acknowledgment and
Acceptance of Assignment from Keyport Life Insurance
Company.*****
10.8 Assignment and Notice of Assignment of Renewal (Asset)
Fees between James Mitchell & Co., JMC Insurance Services
Corporation and JMC Financial Corporation and Barnett
Annuities Corporation and the Acknowledgment and
Acceptance of Assignment from Life Insurance Company of
Virginia.*****
10.9 Assignment of Renewal (Asset) Fees and Notice of
Assignment of Renewal (Asset) Fees between James Mitchell
& Co., JMC Financial Corporation and JMC Insurance
Services Corporation and Barnett Annuities Corporation
and the Acknowledgment and Consent to Assignment from
Transamerica Life and Annuity Co.*****
10.10 Assignment and Notice of Assignment between James
Mitchell & Co., JMC Financial Corporation and JMC
Insurance Services Corporation and Barnett Annuities
Corporation and the Acceptance and Release between
Western and Southern Life Assurance Company and James
Mitchell & Co., JMC Insurance Services Corporation and
JMC Financial Corporation.*****
10.11 Consulting Agreement between USBA Holdings, Ltd. and James
Mitchell & Co. dated January 26, 1996.*****
10.12 Marketing Agreement between JMC Group, Inc. and USBA
Holdings, Ltd. dated January 29, 1996 with exhibits.*****
10.13 Integrated Support Services Agreement dated January 31,
1996 between JMC Group, Inc., James Mitchell & Co., JMC
Insurance Services Corporation, JMC Financial
Corporation, First Tennessee Bank National Association
and First Tennessee Brokerage, Inc.*****
10.14 Termination and Transition Agreement dated January 31,
1996 between JMC Group, Inc., James Mitchell & Co.,
Priority Investment Services, Inc., and First Tennessee
Bank National Association.*****
10.15 Termination and Assignment Agreement dated December 31,
1996 between James Mitchell & Co., JMC Insurance Services
Corporation, JMC Financial Corporation and Central
Fidelity National Bank.******
10.16 Settlement and Mutual Release dated November 20, 1996
between JMC Group, Inc., James K. Mitchell, D. Mark
Carlson, Simon C. Baitler, Kevin L. Rakin, USBA Holdings,
Ltd., James P. Cotton, Jr., Ronald D. Wallace and Louie
W. Moon.******
10.17 Nondeposit Investment Sales Agreement dated November 6,
1996 between James Mitchell & Co., JMC Insurance Agency
of New York, Inc., JMC Financial Corporation, Provest
Services Corp. II and Provident Savings Bank, F. A. with
sample sublease and sub-sublease.******
10.18 Program Agreement dated August 30, 1996 between James
Mitchell & Co., JMC Insurance Services Corporation, JMC
Financial Corporation and Horizon Bancorp, Inc. with
sample lease attached.******
m10.19 Employment Agreement with James K. Mitchell dated as of
January 1, 1998.
38
<PAGE>
10.20 Termination and Assignment Agreement, effective December
31, 1997, between JMC Group, Inc., James Mitchell & Co.,
JMC Insurance Services Corporation and JMC Financial
Corporation and First Tennessee Bank National Association
and First Tennessee Brokerage, Inc.
10.21 Termination and Assignment Agreement, effective January
31, 1998, between James Mitchell & Co., JMC Insurance
Services Corporation and JMC Financial Corporation and
Hemet Federal Savings and Loan and First Hemet
Corporation.
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.
***** Filed as an exhibit to the Registrant's Form 10-k for the
Fiscal Year ended December 31, 1995.
****** Filed as an exhibit to the Registrant's Form 10-k for the
Fiscal Year ended December 31, 1996.
m Management Contract or Compensatory Plan or Arrangement.
39
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed
on its behalf by the undersigned, thereunto duly authorized, in San Diego,
California, on the 27th day of February, 1998.
JMC GROUP, INC.
By: /s/ JAMES K. MITCHELL
-----------------------
James K. Mitchell
CHAIRMAN AND CHIEF
EXECUTIVE OFFICER
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
Registrant and in the capacities on February 27, 1998.
SIGNATURE TITLE
/s/ JAMES K. MITCHELL Chairman and Chief
---------------------- Executive Officer
James K. Mitchell
/s/ DANIEL M. HARKINS Chief Financial Officer and
---------------------- Principal Accounting Officer
Daniel M. Harkins
/s/ EDWARD J. BARAN Director
----------------------
Edward J. Baran
/s/ BARTON BEEK Director
----------------------
Barton Beek
/s/ CHARLES H. BLACK Director
----------------------
Charles H. Black
/s/ ROBERT G. SHARP Director
----------------------
Robert G. Sharp
40
<PAGE>
EXHIBIT 10.19
EMPLOYMENT AGREEMENT
JAMES K. MITCHELL
APRIL 1, 1993
AS REINSTATED AND AMENDED
JANUARY 1, 1998
This employment agreement (the "Agreement") is between JMC Group, Inc.
("Employer") and James K. Mitchell ("Executive").
RECITALS
1. On July 18, 1988, Executive sold his ownership in James Mitchell &
Co. ("JMC") to Employer. Employer purchased JMC for, among other reasons,
its clients, its unique sales and business systems, its unique method of
selling insurance through bank trust departments, and the outstanding and
special skills and abilities of Executive and other key employees;
2. Executive is and has been employed as President of JMC and as
President and CEO of Employer since January 1, 1993. Through such
experience, he has acquired outstanding and special skills and abilities and
an extensive background in and knowledge of Employer's business and the
industry in which it is engaged;
3. Employer desires assurance of the continued association and
services of Executive in order to retain his experience, skills, abilities,
background and knowledge and is therefore willing to engage his services on
the terms and conditions set forth below;
4. Executive desires to continue in the employ of Employer and is
willing to do so on these terms and conditions;
5. In his capacity as an executive of Employer, Executive has access
to highly valuable and confidential trade secret information of Employer,
including but not limited to information regarding the identity of key
contact personnel and the contract terms with major clients and suppliers to
Employer; the identity and personnel information with regard to Employer's
personnel; and the terms, documents, methods and systems through which
Employer engages in business; and
6. The execution of this Agreement has been authorized by Employer's
Board of Directors (the "Board").
NOW THEREFORE, in consideration of the above recitals and of the mutual
promises and conditions in this Agreement, it is agreed as follows:
1
<PAGE>
1. POSITION.
Employer shall employ Executive as President and Chief Executive Officer
of Employer with such executive capacity or capacities as the Board may from
time to time prescribe.
2. SOLE EMPLOYMENT
During his employment, Executive shall devote his full energies,
interest, abilities and productive time to the performance of this Agreement
and shall not, without express written Board approval, render to others
services of any kind for compensation, or engage in other business activity
that would materially interfere with the performance of his duties under
this Agreement.
3. TERM OF EMPLOYMENT
a. This Agreement takes effect on January 1, 1998 and shall have an
initial term of three years.
b. Notwithstanding the foregoing, if the Board of Directors of the
Company should determine to liquidate the Company, other than as part of a
business combination, the term of the Agreement shall end six months after
such action by the Board.
4. SALARY
Employer shall pay a base salary to Executive at the rate of two hundred
and twenty five thousand dollars ($225,000) per annum ("Base Salary"),
payable in equal semi-monthly installments.
This Base Salary shall be automatically increased on the anniversary
dates of this Agreement based upon the most recent Consumer Price Index of
the Bureau of Labor Statistics of the Department of Labor for All Urban
Consumers (1982-84=100), "All Items," for Los Angeles-Long Beach-Anaheim,
California (hereinafter the "CPI"). The "Base CPI" shall be the CPI for
August 1998. CPI Adjustments shall be calculated as follows: the Base
Salary shall be multiplied by a fraction the numerator of which shall be the
CPI of the December immediately prior to the calculation date (i.e., December
1998 for the January 1, 1999 calculation) and the denominator of which shall
be the Base CPI. The sum so calculated shall constitute the Executive's
salary until the next adjustment; provided, however that in no event shall
the Executive's salary be reduced as a result of any such adjustment. If the
compilation and/or publication of the CPI shall be in some manner changed or
discontinued, then Executive agrees that Employer may use an alternate index
which it reasonably believes reflects changes in the cost of living.
2
<PAGE>
5. INCENTIVE COMPENSATION
In addition to the base salary provided for above, Employer shall, as
an incentive compensation payment plan, pay Executive a sum equal to three
percent (3.0%) of Employer's consolidated pre-tax operating profits
("Profits"), as verified on the Employer's year-end audited statement of
income, subject to a maximum of Executive's then current annualized salary.
Profits are as determined before any deduction for executive incentive
compensation or other Employer management bonuses. Such amounts are paid no
later than the completion of the year-end audit, and may be paid earlier in
the Board's discretion. Notwithstanding the above, the Board may in its
discretion adjust the pre-tax Profit results to take into account
non-operating or unusual and extraordinary items that could either decrease
or increase the applicable profit results. The Board may, in its discretion
also increase or remove the above described cap on Executive's incentive
compensation.
Should Executive for any reason cease his employment prior to the end of any
fiscal year, his incentive compensation for that year shall be determined
pursuant to the Section titled "Termination" below. Should such section
require that incentive compensation be "pro-rated" this means:
a. The incentive compensation shall still be based on pre-tax profits as
above calculated for the entire year;
b. The percentage to be applied to the pre-tax profits shall be pro-rated
according to the length of Executive's employment during the year;
c. The date of payment will be the same date as if Executive remained
employed by Employer.
6. BENEFITS
Executive shall be entitled to receive all other benefits of employment
generally available to Employer's employees, including reimbursement for
reasonable out-of-pocket expenses incurred in connection with Employer's
business, subject to such policies as Employer may from time to time
reasonably establish for its employees.
7. TERMINATION
In the absence of any other written agreement, should Employer continue
to employ Executive after the initial term of this Agreement, such employment
will continue at will and may be terminated for any reason, with or without
cause, on the effective date of any written termination notice delivered by
either party to the other. Executive's salary, incentive compensation and
benefits will continue as stated herein, with salary compensation continuing
to be increased annually as herein described.
3
<PAGE>
Notwithstanding the stated term hereof, this Agreement may be
terminated at any time on written notice by Executive or by Employer with or
without cause. In such event, Employer's obligations to pay salary, benefits
and incentive compensation hereunder will vary depending upon the reason for
termination, as described below:
a. RESIGNATION BY EXECUTIVE.
Except as provided in Section 7d hereof, if Executive voluntarily
terminates employment, then Employer shall pay salary, benefits and
incentive compensation pro-rated to the effective date of resignation.
b. TERMINATION BY EMPLOYER WITHOUT CAUSE.
If Employer terminates Executive without cause, or because of
incapacity from illness, accident or death, then Executive shall
receive salary and incentive compensation in the manner, timeframe and
amount to which he would have been entitled should employment have
continued through the stated term of this Agreement. Benefits shall
also be continued through the same term, to the extent the Company
reasonably believes continuation is permitted by law and the Company's
insurance carriers, so long as Executive is not eligible to receive
comparable benefits from another employer.
c. TERMINATION BY EMPLOYER FOR CAUSE.
If Employer terminates Executive for cause then Executive shall
receive salary and incentive compensation pro-rated to the date three
months following termination. Benefits shall also be continued
through the same three month period, to the extent permitted by law
and the Company's insurance carriers. "Termination for cause" shall be
termination by reason of malfeasance or misconduct which the Board of
Directors reasonably believes violates legal or ethical
responsibilities of the Executive, or by reason of gross negligence in
the conduct of the Employer's business.
d. TERMINATION BY EMPLOYEE FOR GOOD CAUSE.
The Employee shall be entitled to terminate the Agreement "for good
cause" with the same effect as a termination by the Employer without
cause, as set forth in Section 7(b) hereof. "Good cause" shall
include the following events:
1) Employer's breach of any material term of this Agreement,
including, but not limited to, the Company's failure, within fifteen
(15) days after written demand, to provide or pay Executive any Salary
or Benefits under this Agreement.
4
<PAGE>
2) The relocation of Executive's full-time office to a location more
than fifty (50) miles from Employer's present office at 9710 Scranton
Rd. Ste. 100, San Diego, California 92121;
3) A material reduction in Executive's duties, responsibilities or
title except for such a reduction arising from a change in the status
of the Employer or the nature of the Employer's business; or
4) A "Change in Control," defined as:
a) The acquisition by any individual, entity, or group (within
the meaning of Section 13 (d) (3) or 14 (d)(2) of the Securities
Exchange Act of 1934, as amended (the "Exchange Act")) (a
"Person") of beneficial ownership (within the meaning of Rule
13d-3 promulgated under the Exchange Act) of thirty percent (30%)
or more of either (A) the then outstanding shares of common stock
of Employer (the "Outstanding Company Common Stock") or (B) the
combined voting power of the then outstanding voting securities
of Employer entitled to vote generally in the election of
directors (the "Outstanding Company Voting Securities"); or
b) Individuals who, as of the date hereof, constitute the Board
of Directors (the "Incumbent Board") cease for any reason to
constitute at least two thirds of the Board; provided, however,
that any individual becoming a director subsequent to the date
hereof whose election, or nomination for election by Employer's
stockholders, was approved by a vote of at least a majority of
the directors then comprising the Incumbent Board shall be
considered as though such individual were a member of the
Incumbent Board, but excluding, for this purpose, any such
individual whose initial assumption of office occurs as a result
of an actual or threatened election contest with respect to the
election or removal of directors or other actual or threatened
solicitation of proxies or consents by or on behalf of a Person
other than the Board of Directors; or
c) Consummation of a reorganization, merger or consolidation,
or sale or other disposition of all or substantially all of the
assets of Employer (a "Business Combination") unless, following
such Business Combination, (A) all or substantially all of the
individuals and entities who were the beneficial owners,
respectively, of the Outstanding Company Common Stock and
Outstanding Company Voting Securities immediately prior to such
Business Combination beneficially own, directly or indirectly,
more than sixty percent (60%) of, respectively, the then
outstanding shares of common stock and the combined voting power
of the then outstanding voting securities entitled to vote
generally in the election of directors, as the case may be, of
the corporation resulting from such Business Combination
(including, without limitation, a corporation which as a
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result of such transaction owns Employer or all substantially
all of Employer's assets either directly or through one or more
subsidiaries) in substantially the same proportions as their
ownership, immediately prior to such Business Combination of the
Outstanding Company Common Stock and Outstanding Company Voting
Securities, as the case may be (with respect to this subsection
(A), such calculation shall be made with respect to all
considerations received in exchange for, or as a consequence of,
a Business Combination); or (B) no Person (excluding any
corporation resulting from such Business Combination or any
employee benefit plan (or related trust) of Employer or such
corporation resulting from such Business Combination)
beneficially owns, directly or indirectly, thirty percent
(30%) or more of, respectively, the then outstanding shares of
common stock of the corporation resulting from such Business
Combination or the combined voting power of the then
outstanding voting securities of such corporation except to
the extent that such ownership existed prior to the Business
Combination; and (C) at least two-thirds of the members of the
board of directors of the corporation resulting from such
Business Combination were members of the Incumbent Board at
the time of the execution of the initial agreement, or of the
action of the Board, providing for such Business Combination;
d) Approval by the stockholders of Employer of a complete
liquidation or dissolution of Employer; or
e) Occurrence of any of the events listed in 7d(4)(a) through
7d(4)(d) above in respect of any subsidiary (meaning any entity
over which Employer has voting control) of Employer that,
immediately prior to the relevant event, constituted at least
twenty percent (20%) of Employer's consolidated assets or, for
the fiscal year prior to the event, contributed at least twenty
percent (20%) or more of Employer's consolidated revenues.
f) Notwithstanding the foregoing, for purposes of the foregoing
provisions, a Change of Control shall not include any transaction
described above which has been previously approved by the
Incumbent Board.
8. PAYMENT LIMITATIONS
All payments to Executive hereunder shall be reduced by applicable
local, state and federal withholding requirements. Should any payments
hereunder be determined by Employer's independent public accounting firm to
be in excess of federal or state Golden Parachute limitations (currently
Internal Revenue Code Section 280G), then Executive and Employer hereby agree
that such payments shall be modified so as to be one dollar less than such
Golden Parachute limitations. If the determination is made after the
payment(s) have been made by Employer, then Executive shall promptly refund
the overpayment to Employer.
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Employer shall not be obligated to reimburse Executive for his expenses
(such as COBRA payments) in maintaining benefits that Employer has
discontinued hereunder.
Employer shall have the right to offset any debts or damages owed by
Executive to Employer against salary or other payment owed to Executive.
9. SURVIVAL OF THIS AGREEMENT
Employer shall not engage in any voluntary or involuntary dissolution or
any merger in which Employer is not the surviving or resulting corporation,
or any transfer of all or substantially all of Employer's assets, or any
similar change in ownership or control, unless the provisions of this
Agreement shall be binding on and inure to the benefit of the surviving
business entity to which ownership or control has passed, or to which such
assets were transferred.
10. PROTECTION OF TRADE SECRETS; CONFIDENTIAL INFORMATION & EMPLOYEE
RELATIONSHIPS.
Because of his employment by Employer, Executive has access to trade
secrets and confidential information of Employer, including but not limited
to knowledge of and contact with key employees; financial records; contract
terms; business plans, policies and procedures; cost information; customer
lists and client or acquisition opportunities; business and computer systems;
management information and methods which are unique to Employer's methods of
business; and customer servicing techniques (all of the above trade secrets
and confidential information hereinafter referred to as "Confidential
Information"). In consideration hereof and in recognition of the fact that
the Confidential Information constitutes a valuable trade secret or otherwise
valuable asset of Employer, Executive will not appropriate to his own use or
benefit in anyway whatsoever, or disclose to any third parties, any
Confidential Information during or after this Agreement.
Executive agrees that solicitation of Employer's customers and personnel
would constitute a misappropriation of Employer's Confidential Information.
In recognition thereof, Executive will not during his employment, and for one
year thereafter, solicit, hire, contract with or otherwise take away any
customer or employee of Employer or participate in any such solicitation,
hiring, contracting or otherwise taking away. In addition, all information
about such customers and employees which becomes known to Executive during
the course of this Agreement and which is not otherwise known to the public
is a trade secret of the Employer and shall not be used in soliciting or
taking away customers or employees of the Employer at any time.
Executive acknowledges that any breach of this Section will result in
irreparable damage to the Employer, for which Executive further acknowledges
that Employer shall be entitled to injunctive relief hereunder. The parties
hereby consent to an injunction in favor of Employer, without bond, enjoining
any breach of this Agreement by any court of competent jurisdiction, without
prejudice to any other right or remedy to which Employer may be entitled.
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Executive's obligations hereunder shall survive the termination of this
Agreement.
11. ENTIRE AGREEMENT
Except for an indemnification agreement between Employer and Executive,
this Agreement contains the entire agreement between the parties and
supersedes all prior oral and written agreements, understandings,
commitments, and practices between the parties. No waiver or modification to
this Agreement may be made except by a writing signed by the party against
whom it is enforced.
12. CHOICE OF LAW; INTERPRETATION OF AGREEMENT
The formation, construction, and performance of this Agreement shall be
construed in accordance with the laws of the State of California. This
Agreement shall not be interpreted for or against either party on the ground
that such party or its representative drafted the agreement or any portion
thereof.
13. ARBITRATION
Any claim for monetary damages hereunder shall be subject to binding
arbitration by the National Association of Securities Dealers or other
mutually agreeable arbitration or alternative dispute resolution forum.
14. NOTICES
Any notice required or permitted under this Agreement shall be given in
writing, either by personal delivery or by registered, overnight or certified
mail, postage prepaid, to the following addresses: Executive - then current
home address as shown on Employer's files; Employer - the CEO at the
company's then current place of business.
15. SEVERABILITY
If any portion of this Agreement is held invalid or unenforceable, the
remainder of this Agreement shall nevertheless remain in full force and
effect. If any provision is held invalid or unenforceable with respect to
particular circumstances, it shall nevertheless remain in full force and
effect in all other circumstances.
16. ACKNOWLEDGMENT
Executive acknowledges that he has had the opportunity to consult with
independent counsel of his own choice concerning this Agreement and has been
advised to do so by Employer, and Executive has read and understands this
Agreement, and is fully aware of its legal effect, and has entered into it
freely based on Executive's own judgment.
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17. HEADINGS
Section headings in this Agreement have been inserted for convenience
and reference only and shall not be construed to affect the meaning,
construction or effect of this Agreement.
Executed by the parties as of the day and year first above written.
AGREED AND ACCEPTED:
JMC Group, Inc.
By: /s/ ROBERT G. SHARP
------------------------------------
Robert G. Sharp, Chairman of the
Compensation Committee of the Board
of Directors of JMC Group, Inc.
AGREED AND ACCEPTED:
By: /s/ James K. Mitchell
------------------------------------
James K. Mitchell
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EXHIBIT 10.20
TERMINATION AND ASSIGNMENT AGREEMENT
This Termination and Assignment Agreement (this "Agreement") is executed
this 23rd day of December, 1997, effective December 31, 1997, by and between
and First Tennessee Bank National Association ("FTB"), in its own capacity
and as trustee under the Trust Agreement, dated August 31, 1988, as amended
from time to time, by and between James Mitchell & Co., as trustor and FTB,
as trustee of the trust thereby established and First Tennessee Brokerage,
Inc., a Tennessee corporation ("FTBR") and JMC Group, Inc. ("JMCG"), James
Mitchell & Co., JMC Insurance Services Corporation and JMC Financial
Corporation (the "JMC Entities"), (collectively "JMC").
R E C I T A L S
On January 31,1996, JMC and FTB entered into that certain Integrated
Support Services Agreement ("Services Agreement") pursuant to which JMC and
its Subsidiaries agreed to provide certain services to FTB.
Capitalized terms used herein and not otherwise defined shall have the
meanings assigned to those terms in the Services Agreement.
FTB and JMC have agreed to terminate the Services Agreement in
accordance with Article XV of such agreement, subject to the terms and
conditions set forth below. In connection with the termination of the
Services Agreement, FTB has exercised its option to purchase in accordance
with Article V and JMC has agreed to sell, transfer and assign all of its
right, title and interest to (1) all asset and renewal fees earned after
December 31, 1997 in connection with (a) fixed annuity contracts issued by
Keyport Life Insurance Company, and (b) whole life policies issued by all
provider companies sold to FTB customers by JMC since the date of inception
(c) fixed and variable annuity contracts issued by The Life Insurance Company
of Virginia, and (d) variable annuity products issued by all provider
companies sold to FTB customers by JMC since the date of inception (the
"Asset Fee Income"); (2) all 12b-1 fees earned after December 31, 1997 in
connection with the Current Mutual Fund Block (the "12b-1 Fee Income"); and
(3) all Trail Commissions payable by Product Providers on the Current Block
and ISS Block not described in (1) and (2) herein.
NOW THEREFORE, in consideration of the premises and mutual covenants and
undertakings hereinafter set forth, and for other good and valuable
consideration, the receipt and sufficiency of which are hereby acknowledged,
the parties hereto agree as follows:
ARTICLE I.
TERMINATION AND ASSIGNMENT
1.1 TERMINATION OF SERVICES AGREEMENT. The parties hereby acknowledge
that the Services Agreement shall be terminated effective December 31,1997
provided, however, that the
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indemnification provisions of the Services Agreement and such other
provisions of the Services Agreement which define the responsibilities and
duties of the parties after December 31, 1997, shall survive termination.
1.2 TRUST AGREEMENT. Effective January 1, 1998:
(a) JMC appoints FTBR its agent and attorney-in-fact for purposes
of appointing a successor trustee under the Trust Agreement or amending the
Trust Agreement;
(b) FTBR will serve as recordkeeping agent under the Trust
Agreement; and
(c) Hereinafter, the transactions and assignments described in
1.3(a), 1.3(b) and 1.3(c) hereof shall be referred to as the JMC Assignment.
1.3 ASSIGNMENTS.
(a) JMC agrees, and agrees to cause its wholly owned subsidiaries,
to (i) sell, assign, transfer and convey to FTB, or its designee, all of
JMC's right, title and interest in and to the Asset Fee Income earned by JMC
or its Subsidiaries after December 31, 1997 from Keyport Life Insurance
Company, the Life Insurance Company of Virginia and such other insurance
companies that wrote whole life policies, (collectively, the "Provider
Companies") as a result of sales of annuity contracts and whole life
insurance sold to FTB customers by JMC from inception to and including
December 31, 1997, and (ii) to execute any and all documents reasonably
required in connection therewith.
(b) JMC agrees, and agrees to cause its wholly owned subsidiaries,
to (i) sell, assign, transfer and convey to FTB, or its designee, all of
JMC's right, title and interest in and to the 12b-1 Fee Income earned by JMC
or its Subsidiaries after December 31, 1997 as a result of sales of the
Current Mutual Fund Block; and (ii) to execute any and all documents
reasonably required in connection with the JMC Assignment; and
(c) JMC agrees, and agrees to cause its wholly owned subsidiaries,
to (i) sell, assign, transfer and convey to FTB or its designee, all of JMC's
right, title and interest in and to, all other Trail Commissions earned by
JMC or its Subsidiaries after December 31, 1997 on the Current Block and the
ISS Block not described by (a) and (b) above.
1.4 CONSIDERATION. In connection with the JMC Assignments, the
parties agree to make the following payments in accordance with the Existing
Agreements:
(a) The Asset Purchase Price, as defined in Article V of the
Services Agreement is $2,200,000.00 (see Exhibit I). The Asset Purchase
Price will be paid as follows.
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(i) $478,987 for the Current Mutual Fund Block 12b-1 fees.
The 12b-1 fees will be paid by wire transfer on the later of December 31,
1997 or receipt by FTB or FTBR of (1) a list in form and substance
satisfactory to FTBR, which indicates each Active Account and the applicable
account value or fund balance as of September 30, 1997 (the "List of
Accounts"); (2) all customer books and records and FTB Information received
or under control of JMC ("Records") and (3) all agreements with the Product
Providers that provide for the payment of Trail Commissions ("Trail
Commission Agreements") related to the Current Mutual Fund Block;
(ii) $551,300 for the Keyport Life Insurance Company
("Keyport") Asset Fee Income to be paid by wire transfer the later of
December 31, 1997 or upon receipt by FTB or FTBR of (1) an executed consent
to the JMC Assignment by Keyport and (2) the List of Accounts, Records and
Trail Commission Agreements for that portion of the Current Block and ISS
Block for which Keyport is the Product provider;
(iii) $144,857 for the Beneficial Standard Life Insurance
Company ("Beneficial") Asset Fee Income to be paid by wire transfer on the
later of December 31, 1997 or upon receipt by FTB or FTBR of (1) an executed
Acknowledgment and Acceptance of Assignment by Beneficial and (2) the List of
Accounts, Records and Trail Commission Agreements for that portion of the ISS
Block and Current Block for which Beneficial is the Product Provider;
(iv) $24,856.00 for the First Penn-Pacific Life Insurance
Company ("First Penn") Asset Fee Income to be paid by wire transfer on the
later of December 31, 1997 or upon receipt by FTB or FTBR of (1) an executed
Acknowledgment and Acceptance of Agent of Record Change from First Penn and
(2) the List of Accounts, Records and Trail Commission Agreements for that
portion of the ISS Block and Current Block for which First Penn is the
Product Provider; and
(v) $1,000,000 for the Life Insurance Company of Virginia
("LICOVA") Asset Fee Income to be paid by wire transfer on the later of
December 31, 1997 or upon receipt by FTB or FTBR of (1) an executed
Acknowledgment and Acceptance of Assignment from LICOVA and (2) the List of
Accounts, Records and Trail Commission Agreements for that portion of the ISS
Block and Current Block for which LICOVA is the Product Provider.
(b) On or prior to February 14, 1998, JMC shall provide FTB with a
reconciliation of:
(i) any Asset Fee Income earned after December 31, 1997 and
received by JMC from the Provider Companies;
(ii) any 12b-1 Fee Income earned after December 31, 1997 and
received by JMC from the Investment Companies; and
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(iii) any Chargebacks processed by the Provider Companies on
or after December 31, 1997 which Chargebacks were deducted from amounts paid
to JMC.
(c) Notwithstanding the provisions of Section 1.4(a), 15% of each
payment of the Asset Purchase Price set forth in Section 1.4(a)(i)-(v) shall
be paid to the Escrow Agent in accordance with Article V of this Agreement
and the Escrow Agreement.
ARTICLE II.
SALES AND SERVICING
2.1 FUTURE SALES. JMC hereby acknowledges that, effective January 1,
1998, FTB is free of any restrictions imposed by the Services Agreement with
respect to offering annuity and mutual fund products directly to its
customers. FTB shall be entitled to continue to offer to its customers
annuity and mutual fund products previously designed and offered by JMC
("JMC Products"). FTB shall be entitled to receive all compensation related
to any future sales of annuity and mutual fund products, including premiums,
asset fees, front end loads and 12b-1 fees. To the extent FTB has not entered
into contracts with any Provider Company or mutual fund, Customers will need
to contact any such Provider Company or mutual fund directly if they wish to
make additional purchases and neither JMC nor FTB will receive any
compensation in connection with such additions.
2.2 CHARGEBACKS. In the event any Customer surrenders a JMC Product
during the chargeback period, the Provider Company will chargeback some or
all of the front sales commission paid at the time the products was sold
("Chargeback"). JMC and FTB agree FTB is financially responsible for all
Chargebacks processed by the Provider Companies on and after January 1, 1998.
Such Chargebacks shall be deducted from the Asset Fee Income otherwise
payable by the Provider Companies to FTB or paid to JMC by FTB as provided in
Section 1.4(b) hereof.
2.3 TRAIL COMMISSIONS. FTB or FTBR will receive 100% of all Trail
Commissions earned pursuant to the Trail Commission Agreements after December
31, 1997.
2.4 SALES MANAGEMENT AND COMPLIANCE. On and after January 1, 1998, FTB
or FTBR shall have complete and sole responsibility (including financial
responsibility) for all sales, sales management and compliance aspects of its
annuities program including, without limitation, the following:
(a) Supervision, management and compensation of the annuity and
mutual fund sales force;
(b) All appointment setting, tracking and reporting;
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(c) All sales support, including product training, promotions,
marketing materials and sales personnel inquiries;
(d) All compliance responsibilities, including suitability reviews
and sales supervision; and
(e) All commission, asset fee and 12b-1 fee accounting with the
exception of accounting on the existing block prior to the JMC Assignment of
the Asset Fee Income and 12b-1 fee income to FTB.
2.5 CUSTOMER COMPLAINTS.
(a) On and after January 1, 1998, FTB or FTBR shall have complete
and sole responsibility for the research and investigation of all complaints
(whether written or oral) received by JMC, any of its Subsidiaries or
affiliates, or by any officer, director, agent or employee of any of them or
by FTB or FTBR, any of its subsidiaries or affiliates, or by any officer,
director, agent or employee or any of them, from any person (including state
and government agencies, departments, divisions or offices or any
self-regulatory organization ("Regulators")) with respect to the sales of JMC
Products or the provision of any of the services described in the Existing
Agreements, the Service Agreement or the Clearing Agreement ("Customer
Complaints") which arise on and after January 1, 1998, including Customer
Complaints which arise out of sales made or services provided by JMC, any of
its Subsidiaries or affiliates or any officer, director, agent or employee of
any of them prior to January 1, 1998. Such responsibility shall include,
without limitation, the research and investigation necessary to determine the
validity of any Customer Complaint, any and all communication with the
complaining person, any former JMC officer, director, employee or agent, or
any Provider Company or mutual fund company concerning the Customer
Complaint. In the event JMC receives any Customer Complaints on and after
January 1, 1998, it will forward them promptly to FTB. Any action taken by
FTB or FTBR under this Section 2.5(a) shall not prejudice FTB or FTBR's right
to seek indemnification or JMC's obligation to indemnify FTB and FTBR under
the Existing Agreements, the Service Agreement or this Agreement.
(b) JMC shall have complete and sole responsibility for the
resolution of all Customer Complaints which are listed on the attached
Schedule 3.4.
(c) Notwithstanding the foregoing, in the event that any Regulator
with jurisdiction over JMC, any of its affiliates or Subsidiaries, or any
officer, director, agent or employee of any of them, shall initiate a
Customer Complaint or become involved in any manner in any Customer Complaint
or if a Customer Complaint is initiated or otherwise results in a proceeding
or action before a court or self-regulatory organization ("Action"), JMC
shall be responsible for the research and investigation necessary to
determine the validity of such Customer Complaint and any communication with
the complaining person, any current or former JMC officer, director, employee
or agent, any Provider Company, mutual fund company or such
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Regulator and FTB, its subsidiaries and affiliates, and any officer,
director, agent or employee of any of them, shall cooperate with JMC in
connection therewith. The defense of any such Action shall be in accordance
with the terms of the indemnification provisions of the Existing Agreements
and the Services Agreement.
(d) JMC, its affiliates and Subsidiaries will cooperate, and will
use their best efforts to cause any current officer, director, employee or
agent of any of them, to cooperate with FTB in connection with the research
and investigation of any Customer Complaint.
(e) FTB shall undertake a complete investigation of all Customer
Complaints as provided in Section 2.5(a) hereof and its recommendation for
resolution and shall provide JMC with a copy of its complete file on any
Customer Complaint for which it seeks reimbursement from JMC pursuant to
indemnification provisions of the Existing Agreements. Such file shall
include at a minimum all written communications from the complaining
persons(s) or any written summaries of the complaining persons(s) complaints
and allegations prepared by FTB or its employees or agents, any written
documentation provided by the licensed representative who sold the product at
issue, the confidential customer profile and the customer disclosure form, if
any. FTB agrees that in connection with the resolution of any Customer
Complaint that it will obtain a written release satisfactory in form and
substance to JMC from the complaining person or persons releasing JMC, its
affiliates and Subsidiaries, and any officer, director, employee or agent of
any of them, from any future liability to such persons(s) prior to paying any
compensation to such complaining person or persons. In addition, in
connection with the negotiation and resolution of any Customer Complaint by
any party hereto not involving an Action, the other party agrees that in
connection with the investigation and research of a Customer Complaint, no
licensed representative thereof or its agents will admit or imply orally or
in writing to a customer that the other party, any of its affiliates or
subsidiaries, or any officer, director, employee or agent or any of them,
engaged in any wrongful act or omission or is in any way responsible or
liable for any Customer Complaint nor will either party or any officer or
employee thereof issue any press release or make any statement to the press
or general public that would in any way damage or disparage the reputation of
the other party, its affiliates or subsidiaries.
(f) Nothing in this Section 2.5 is intended to modify the
obligations of the parties under the Existing Agreements or the Service
Agreement to indemnify, defend or hold harmless the other party for Claims as
provided therein.
ARTICLE III.
JMC REPRESENTATIONS AND WARRANTIES
3.1 CORPORATE AUTHORITY. JMCG is a Delaware corporation, duly
organized, validly existing and in good standing under the laws of the State
of Delaware and has all requisite corporate power and authority to enter into
this Agreement and to perform its obligations hereunder and
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thereunder and to consummate the transactions contemplated hereby and
thereby. Each of the JMC Entities are California corporations, duly
organized, validly existing and in good standing under the laws of the State
of California and has all requisite corporate power and authority to enter
into this Agreement and to perform its obligations hereunder and thereunder
and to consummate the transactions contemplated hereby and thereby.
3.2 ENFORCEABILITY OF AGREEMENT. The execution, delivery and
performance of this Agreement by JMC and the consummation by JMC of the
transactions contemplated hereby and thereby have been duly authorized by all
necessary corporate action. This constitutes legal, valid and binding
obligations of JMC enforceable against it in accordance with their respective
terms, except as such enforceability may be limited by applicable bankruptcy,
insolvency, reorganization, moratorium or other similar laws affecting the
enforcement of creditors rights generally and except as the enforcement of
certain provisions thereof may be limited by the application of general
equitable principals of law in certain circumstances (whether such provisions
are considered in a proceeding at law or in equity).
3.3 EFFECT OF AGREEMENT. The execution and delivery of this Agreement
and the consummation of all other transactions contemplated hereby and
thereby and the fulfillment of the terms hereof and thereof as well as the
terms of all other documents executed in connection herewith by JMC shall not
(a) result in a breach of any of the terms or provisions of, or constitute a
default under, or conflict with: (i) any agreement, indenture or other
instrument to which JMC is a party or by which it is bound except for
agreements with Provider companies that require the consent of such companies
to the assignment of JMC's rights which consents are being requested (See
Section 3.5 and attachments hereto); (ii) the Articles of Incorporation or
Bylaws of JMC; (iii) any judgment, decree, order or award of any court,
governmental body or arbitrator by which JMC is bound; or (iv) any law, rule
or regulation applicable to JMC or (b) require the consent, waiver, approval,
license or authorization of, or the filing with, any federal, state or local
government, governmental department or agency, with the exception of any
required filing with the Securities and Exchange Commission.
3.4 DISCLOSURE OF CUSTOMER COMPLAINTS. Schedule 3.4 attached hereto
contains a complete and accurate list of all pending or threatened Customer
Complaints received by JMC, or any of its subsidiaries or affiliates or by
any officer, director, agent or employee of any of them as of the date
hereof, from any person and JMC does not know or have reason to know of the
existence of any additional or threatened Customer Complaints other than as
listed in Schedule 3.4. JMC has furnished FTB copies of all correspondence
and other documents in its possession related to any pending or threatened
Customer Complaints. All Customer Complaints received by JMC, or any of its
Subsidiaries or affiliates or by any officer, director, agent or employee of
any of them, on or after January 1, 1998 will be delivered to FTB to be
handled as provided in Section 2.5 hereof.
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3.5 JMC ANNUITY PROVIDER COMPANIES. JMC has contacted all of the
Provider Companies to request their consent to the JMC Assignment. JMC has
also encouraged the Provider Companies to enter into agreements with FTB
which would enable FTB to continue to sell JMC Products through its annuity
sales program.
3.6 INFORMATION. All information, reports and records provided by JMC
to FTB, FTBR or its agents and all information to be provided to FTB, FTBR or
its agents as described in Exhibit II ("Information") including Information
provided in connection with the calculation of the Asset Purchase Price, and
the List of Accounts, the Records and the Trail Commission Agreements is, or
will be, true, correct and complete as of the date hereof and thereof and
does not contain any misstatement or omissions.
ARTICLE IV.
INDEMNIFICATION
JMC agrees to indemnify, defend and hold harmless FTB, FTBR, its agents,
officers and employees from and against any and all loss (including losses
due to misstatement or omission in the Information which if known to FTB
before the execution of this Agreement would have decreased in the aggregate
the Asset Purchase Price by an amount greater than $50,000), costs and
expenses, including reasonable attorney fees ("Loss") incurred by FTB or FTBR
which arise out of or relate to a breach of representations or warranties
contained herein. The representation as to Accumulated Value is as set out
and limited by Note 1 to Exhibit I, hereto. JMC agrees that $330,000 of the
Asset Purchase Price will be held in an escrow account (the "Funds") for
purposes of payment of any Loss as provided in Article V hereof. The Funds
will be released as provided in Article V hereof; provided however that JMC's
obligation to indemnify FTB and FTBR for Losses as provided herein shall
survive termination of the escrow and release of the Funds.
ARTICLE V.
ESCROW
5.1 THE FUNDS. JMC agrees that $330,000 of the Asset Purchase Price
(the "Funds") shall be held in escrow for purposes of payment of any Loss
incurred by FTB or FTBR which is indemnifiable under Article IV hereof.
5.2 90 DAY PERIOD. Subject to Section 5.3 hereof, the Funds will be
released to JMC ninety (90) days following the date as of which all of the
following has been received by FTB or FTBR:
(a) the Lists of Accounts described in 1.4(a)(i), (ii), (iii),
(iv) and (v);
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(b) the Records described in 1.4(a)(i), (ii), (iii), (iv) and (v);
(c) the Trail Commission Agreements described in 1.4(a)(i), (ii),
(iii), (iv) and (v); and
(d) the information requested from JMC by Milliman and Robertson,
Inc. described in Exhibit II (the "90 Day Period").
5.3 UNRESOLVED CLAIMS. Notwithstanding the foregoing, in the event that
FTB or FTBR has made a claim(s) for any Funds as of the end of the 90 Day Period
and such claim(s) remain(s) unresolved as of the end of the 90 Day Period
("Unresolved Claim") and such Unresolved Claim is less than the Funds, then at
the end of such 90 Day Period, the Escrow Agent will release only that portion
of Funds which equals the difference between the Funds and the amount of the
Unresolved Claim.
ARTICLE VI.
FTB REPRESENTATIONS AND WARRANTIES
6.1 CORPORATE AUTHORITY. FTB is a national bank, duly organized,
validly existing and in good standing under the laws of the United States and
has all requisite corporate power and authority to enter into this Agreement
and to perform its obligations hereunder and thereunder and to consummate the
transactions contemplated hereby and thereby. FTBR is a corporation, duly
organized, validly existing and in good standing under the laws of the State
of Tennessee and has all requisite corporate power and authority to enter
into this Agreement and the other Definitive Agreements to which it is a
party, to perform the obligations hereunder and thereunder and to consummate
the transactions contemplated hereby and thereby.
6.2 ENFORCEABILITY OF AGREEMENT. The execution, delivery and
performance of this Agreement by FTB and the consummation by FTB of the
transactions contemplated hereby and thereby have been duly authorized by all
necessary corporate action. This Agreement constitutes legal, valid and
binding obligations of FTB enforceable against it in accordance with its
respective terms, except as such enforceability may be limited by applicable
bankruptcy, insolvency, reorganization, moratorium or other similar laws
affecting the enforcement of creditors rights generally and except as the
enforcement of certain provisions thereof may be limited by the application
of general equitable principals of law in certain circumstances (whether such
provisions are considered in a proceeding at law or in equity).
6.3 EFFECT OF AGREEMENT. The execution and delivery of this
Agreement, the consummation of all other transactions contemplated hereby and
thereby and the fulfillment of the terms hereof and thereof as well as the
terms of all other documents executed in connection herewith by FTB shall not
(a) result in a breach of any of the terms or provisions of, or constitute a
9
<PAGE>
default under, or conflict with: (i) any agreement, indenture or other
instrument to which either FTB is a party or by which it is bound; (ii) the
Articles of Incorporation or Bylaws of FTB; (iii) the Trust Agreement; (iv)
any judgment, decree, order or award of any court, governmental body or
arbitrator by which FTB is bound; or (v) any law, rule or regulation
applicable to FTB, or (b) require the consent, waiver, approval, license or
authorization of, or the filing with, any federal, state or local government,
governmental department or agency, the receipt of which FTB has not obtained.
ARTICLE VII.
COOPERATION
The parties hereto shall execute and deliver any such additional
documents, and shall take such additional actions as are reasonably requested
by the other party hereto, for the purpose of accomplishing the transactions
contemplated hereby or carrying out the provisions hereof. In addition, FTB
will, to the full extent necessary, assist and cooperate with JMC in
negotiations to obtain the consent of the Provider Companies to the JMC
Assignment.
ARTICLE VIII.
MISCELLANEOUS
8.1 NOTICES. All notices that are required or may be given pursuant
to the terms of this Agreement shall be in writing and shall be sufficient in
all respects if delivered or mailed by registered or certified mail postage
prepaid, or if sent by telex or telefax (in each case promptly confirmed by
registered or certified mail postage prepaid), or by overnight courier,
addressed as follows:
If to FTB or FTBR:
4990 Poplar Avenue
Memphis, TN 381117
Attn: Paul Mann
President
Telecopy number: (901) 537-2627
If to JMC, to: JAMES MITCHELL & CO.
9710 Scranton Rd. Ste. 100
San Diego, California 92121
Attn.: James K. Mitchell, Chairman and
Chief Executive Officer
Telecopy number: (619) 450-9102
10
<PAGE>
8.2 EXPENSES. Except as otherwise expressly provided herein, or in
the Services Agreement the parties hereto shall pay all of their own expenses
relating to the transactions contemplated hereby, including, without
limitation, the fees and expenses of their respective counsel, accountants,
and financial advisors. In the event of litigation or other adversary
proceeding with respect to this Agreement or the transactions contemplated
hereby, the non-prevailing party shall reimburse the prevailing party for all
reasonable attorney's fees and court costs incurred in connection therewith.
8.3 AMENDMENTS. This Agreement may not be changed orally, but only by
agreement in writing signed by the parties hereto. Any provision of this
Agreement can be waived, amended, supplemented or modified only by written
agreement of the parties hereto.
8.4 INTERPRETATION. This Agreement has been negotiated fully and
fairly between the parties. If this Agreement becomes the subject of
interpretation by a court of law or equity or other third party, this
Agreement shall not be construed either against, or in favor of, JMC, FTB or
Trustee, by virtue of one of the parties being deemed the draftsman of this
Agreement.
8.5 SEVERABILITY. Any provision of this Agreement which is invalid,
illegal or unenforceable shall be ineffective to the extent of such
invalidity, illegality or unenforceability, without affecting in any way the
remaining provisions hereof or rendering any other provision of this
Agreement invalid, illegal or unenforceable.
8.6 SUCCESSORS AND ASSIGNS. This Agreement shall inure to the benefit
of and shall be binding upon the directors, principals, shareholders,
successors and assigns of the parties hereto.
8.7 DISPUTE RESOLUTION. In the event of any dispute, claim or
controversy which in any way relates to, results from or arises out of this
Agreement or the Interim Services Agreement, any amendment or breach hereof
or thereof, or any resulting transactions ("Dispute"), if the Dispute cannot
be settled through negotiations, the parties hereto agree to first try in
good faith to settle the Dispute by mediation under the Commercial Mediation
Rules of the American Arbitration Association, before resorting to
arbitration, as mandated below. Regardless of the outcome of such mediation,
each party shall bear its own costs and attorneys' fees and any mediation
fees shall be shared by the parties on an equal basis, one-half by JMC and
one-half by FTB.
Thereafter, any remaining Dispute shall be decided by neutral
binding arbitration in accordance with the rules of the NASD and not by court
action. Such arbitration shall be conducted in Memphis, TN. Regardless of
the outcome of the arbitration, each party shall bear its own costs and
attorneys' fees and any costs of expenses assessed by the NASD shall be
shared by the parties on an equal basis, one-half by JMC and one-half by FTB
and Trustee. Judgment upon the award rendered by the arbitrator may be
entered in any court having jurisdiction thereof; provided,
11
<PAGE>
however, that no arbitrator shall be permitted to award punitive damages in
such arbitration proceeding.
If any party hereto, after notice thereof, fails to be present or
represented at an arbitration hearing, or adjournment thereof, the arbitrator
may, nevertheless, in their discretion, proceed with the adjudication of the
Dispute.
8.8 CONFIDENTIALITY. Neither FTB nor JMC shall disclose any
information or make any public announcement with respect to this Agreement
prior to its execution. JMC and FTB will coordinate the content and timing
of any internal and public announcements regarding this Agreement.
8.9 APPLICABLE LAW. This Agreement is governed by, and shall be
construed and enforced in accordance with, the laws of the State of
Tennessee, except such laws that would render this choice of laws
ineffective.
8.10 ENTIRE AGREEMENT. This Agreement evidences the entire agreement of
the parties hereto with respect to the subject matter hereof.
This Agreement has been executed by the parties hereto as of the date
first above written.
JMC GROUP, INC.
JAMES MITCHELL & CO.
JMC INSURANCE SERVICES CORPORATION
JMC FINANCIAL CORPORATION
By: /s/ Daniel M. Harkins
------------------------------------
Daniel M. Harkins,
Senior Vice President and General
Counsel
FIRST TENNESSEE BANK NATIONAL FIRST TENNESSEE BROKERAGE,
ASSOCIATION INC.
By: /s/ C. Douglas Kelso, III By: /s/ Paul Mann
------------------------------------ -------------------------
Its: Senior Vice President Its: President
------------------------------------ -------------------------
12
<PAGE>
EXHIBIT I
ASSET PURCHASE PRICE
<TABLE>
<CAPTION>
ASSET FEE
------------------
ACCUMULATED VALUE (1) MEASURING DATE FACTOR VALUE
----------------- -------------- ------ -----
<S> <C> <C> <C> <C>
KEYPORT FIXED $60,122,364 9/26/97 .009143 $549,699
LIFE OF VIRGINIA FIXED $73,861,479 9/30/97 .007938 $586,312
VARIABLE ANNUITIES $33,909,823 9/30/97 .012488 $423,466
WHOLE LIFE $14,693,621 9/30/97 .014882 $218,670
MUTUAL FUNDS $72,208,750 9/30/97 .005842 $421,853
------------- -----------
TOTAL $254,796,037 $2,200,000
</TABLE>
(1) This information is as of the Measuring Date set out in each row. No
representation is made for accumulated values after such date.
13
<PAGE>
SCHEDULE 3.4
DISCLOSURE OF CUSTOMER COMPLAINTS
None.
14
<PAGE>
EXHIBIT 10.21
TERMINATION AND ASSIGNMENT AGREEMENT
This Termination and Assignment Agreement (this "Agreement") is executed
this 6th day of February, 1998, effective January 31, 1998, by and between
Hemet Federal Savings and Loan Association and First Hemet Corporation
formerly known as H.F. Eagle Insurance Agency (collectively "Hemet") and
James Mitchell & Co., JMC Insurance Services Corporation and JMC Financial
Corporation, (collectively "JMC")
R E C I T A L S
On June 15, 1985, JMC and Hemet entered into that certain Marketing
Agreement (as amended and restated), and on June 26, 1994, that certain
Mutual Fund Sales Agreement (collectively the "Existing Agreements") pursuant
to which JMC and its Subsidiaries agreed to provide certain services to Hemet.
Hemet and JMC have agreed to terminate the Marketing Agreement in
accordance with Section 9.1(a) of such agreement, as amended in Amendment No.
2 to the Marketing Agreement dated February 28, 1996, and have agreed to
terminate the Mutual Fund Sales Agreement dated June 8, 1994 in accordance
with Section 10.1 thereof, all subject to the terms and conditions set forth
below.
Capitalized terms used herein and not otherwise defined shall have the
meanings assigned to those terms in the Marketing Agreement or the Existing
Agreements, as the case may be.
NOW THEREFORE, in consideration of the premises and mutual covenants and
undertakings hereinafter set forth, and for other good and valuable
consideration, the receipt and sufficiency of which are hereby acknowledged,
the parties hereto agree as follows:
ARTICLE I.
TERMINATION AND ASSIGNMENT
1.1 TERMINATION OF MARKETING AGREEMENT. On December 22, 1997, JMC
notified Hemet of its desire to terminate all agreements between the parties.
The parties hereby acknowledge that the Existing Agreements shall be
terminated effective January 31, 1998 provided, however, that the
indemnification provisions of the Existing Agreements and such other
provisions of the Existing Agreements which define the responsibilities and
duties of the parties after January 31, 1998, shall survive termination.
1
<PAGE>
1.2 ACCOUNTING.
(a) On or prior to February 15, 1998, JMC shall provide Hemet with
a reconciliation and payment of:
(i) any Asset Fee Income earned prior to January 31, 1998 and
received by JMC from the Provider Companies;
(ii) any 12b-1 Fee Income earned prior to January 31, 1998
and received by JMC from the Investment Companies;. and
(iii) any Chargebacks processed by the Provider Companies on
or after January 31, 1998 which Chargebacks were deducted from amounts paid
to JMC.
(iv) any referral fees due.
It is understood and agreed that upon obtaining the
amounts identified in subsection 1.2(a)(i), (ii) and (iv) hereto, JMC will
promptly pay Hemet the amounts set forth and Hemet will promptly reimburse
JMC for the amounts set forth in subsection 1.2(a)(iii) above. JMC and Hemet
may agree to setoff the amounts owing from one to the other, such that only
one party is obligated to make any transfer of funds.
1.3 Following the termination date, and pursuant to 9.2(b) of Amendment
No. 2 to Marketing Agreement, trail commissions shall be divided as follows:
on annuity and insurance products, 65% to Hemet and 35% to JMC; and on trail
commissions on Mutual Funds, 42 1/2% to Hemet and 57 1/2% to JMC. Front-end
commissions shall be divided in accordance with 9.2(c) of said Amendment.
1.4 JMC SALES PERSONNEL. JMC will make every effort to assist Hemet
in hiring the sales personnel of JMC formerly assigned to Hemet. JMC can
make no assurance that any one of the sales personnel will accept the offer
of employment.
ARTICLE II.
SALES AND SERVICING
2.1 FUTURE SALES. JMC hereby acknowledges that, effective February 1,
1998 Hemet is free of any restrictions imposed by the Existing Agreements with
respect to offering annuity and mutual fund products directly to its customers.
Hemet and its agents are aware of regulatory and legal restrictions on
"churning" and "flipping" of customer accounts.
2
<PAGE>
2.2 CHARGEBACKS. In the event any Customers surrenders a JMC Product
during the chargeback period, the Provider Company will chargeback some or
all of the front sales commission paid at the time the products was sold
("Chargeback"). JMC and Hemet agree JMC is financially responsible for all
Chargebacks processed by the Provider Companies on and after February 1,
1998. Such Chargebacks shall be deducted from the Asset Fee Income otherwise
payable by the Provider Companies to JMC.
2.3 SALES MANAGEMENT AND COMPLIANCE. On and after February 1, 1998,
Hemet shall have complete and sole responsibility (including financial
responsibility) for all sales, sales management and compliance aspects of its
annuities program, without limitation.
2.4 CUSTOMER COMPLAINTS.
(a) On and after February 1, 1998, JMC shall have complete and
sole responsibility for the research and investigation of all complaints
(whether written or oral) received by JMC, any of its Subsidiaries or
affiliates, or by any officer, director, agent or employee of any of them or
by Hemet, any of its subsidiaries or affiliates, or by any officer, director,
agent or employee or any of them, from any person (including state and
government agencies, departments, divisions or offices or any self-regulatory
organization ("Regulators")) with respect to the sales of JMC Products or the
provision of any of the services described in the Existing Agreements
("Customer Complaints") which arise on and after February 1, 1998, including
Customer Complaints which arise out of sales made or services provided by
JMC, any of its Subsidiaries or affiliates or any officer, director, agent or
employee of any of them prior to February 1, 1998. Such responsibility shall
include, without limitation, the research and investigation necessary to
determine the validity of any Customer Complaint, any and all communication
with the complaining person, any former JMC officer, director, employee or
agent, or any Provider Company or mutual fund concerning the Customer
Complaint. In the event Hemet receives any Customer Complaints on and after
February 1, 1998, it will forward them promptly to JMC.
(b) JMC shall have complete and sole responsibility for the
resolution of all Customer Complaints which are listed on the attached
Schedule 2.4.
(c) Notwithstanding the foregoing, in the event that any Regulator
with jurisdiction over JMC, any of its affiliates or Subsidiaries, or any
officer, director, agent or employee of any of them, shall initiate a
Customer Complaint or become involved in any manner in any Customer Complaint
relating to the sale of JMC Products prior to February 1, 1998, JMC shall be
responsible for the research and investigation necessary to determine the
validity of such Customer Complaint and any communication with the
complaining person, any current or former JMC officer, director, employee or
agent, any Provider Company, mutual fund or such Regulator and Hemet, its
subsidiaries and affiliates, and any officer, director, agent or employee of
any of them, shall cooperate with JMC in connection therewith. In the event
such Customer Complaint is initiated by the Regulator, JMC shall be
responsible for the payment of all sums and other
3
<PAGE>
compensation to the complaining person unless Hemet is otherwise liable under
the indemnification provisions of the Existing Agreements.
(d) JMC, its affiliates and Subsidiaries will cooperate, and will
use their best efforts to cause any current officer, director, employee or
agent of any of them, to cooperate with Hemet in connection with the research
and investigation of any Customer Complaint.
ARTICLE III.
JMC REPRESENTATIONS AND WARRANTIES
3.1 CORPORATE AUTHORITY. Each of the JMC entities are California
corporations, duly organized, validly existing and in good standing under the
laws of the State of California and has all requisite corporate power and
authority to enter into this Agreement and to perform its obligations
hereunder and thereunder and to consummate the transactions contemplated
hereby and thereby.
3.2 ENFORCEABILITY OF AGREEMENT. The execution, delivery and
performance of this Agreement by JMC and the consummation by JMC of the
transactions contemplated hereby and thereby have been duly authorized by all
necessary corporate action. This constitutes legal, valid and binding
obligations of JMC enforceable against it in accordance with their respective
terms, except as such enforceability may be limited by applicable bankruptcy,
insolvency, reorganization, moratorium or other similar laws affecting the
enforcement of creditors rights generally and except as the enforcement of
certain provisions thereof may be limited by the application of general
equitable principals of law in certain circumstances (whether such provisions
are considered in a proceeding at law or in equity).
3.3 EFFECT OF AGREEMENT. The execution and delivery of this Agreement
and the consummation of all other transactions contemplated hereby and
thereby and the fulfillment of the terms hereof and thereof as well as the
terms of all other documents executed in connection herewith by JMC shall not
(a) result in a breach of any of the terms or provisions of, or constitute a
default under, or conflict with: (i) any agreement, indenture or other
instrument to which JMC is a party or by which it is bound except for
agreements with Provider companies that require the consent of such companies
to the assignment of JMC's rights which consents are being requested (See
Section 3.5 and attachments hereto); (ii) the Articles of Incorporation or
Bylaws of JMC; (iii) any judgment, decree, order or award of any court,
governmental body or arbitrator by which JMC is bound; or (iv) any law, rule
or regulation applicable to JMC or (b) require the consent, waiver, approval,
license or authorization of, or the filing with, any federal, state or local
government, governmental department or agency, with the exception of any
required filing with the Securities and Exchange Commission.
3.4 DISCLOSURE OF CUSTOMER COMPLAINTS. Schedule 3.4 attached hereto
contains a complete and accurate list of all pending or threatened Customer
Complaints received by JMC, or
4
<PAGE>
any of its subsidiaries or affiliates or by any officer, director,
agent or employee of any of them prior to December 31, 1997, from any person
and JMC does not know or have reason to know of the existence of any
additional or threatened Customer Complaints other than as listed in Schedule
3.4. JMC has furnished Hemet copies of all correspondence and other
documents in its possession related to any pending or threatened Customer
Complaints. JMC shall notify Hemet of all Customer Complaints received by
JMC, or any of its Subsidiaries or affiliates or by any officer, director,
agent or employee of any of them, on or after February 1, 1998.
ARTICLE IV.
HEMET REPRESENTATIONS AND WARRANTIES
4.1 CORPORATE AUTHORITY. Hemet is a Federal Savings and Loan
Association, duly organized, validly existing and in good standing under the
laws of the United States and has all requisite corporate power and authority
to enter into this Agreement and to perform its obligations hereunder and
thereunder and to consummate the transactions contemplated hereby and
thereby.
4.2 ENFORCEABILITY OF AGREEMENT. The execution, delivery and
performance of this Agreement by Hemet and the consummation by Hemet of the
transactions contemplated hereby and thereby have been duly authorized by all
necessary corporate action. This Agreement constitutes legal, valid and
binding obligations of Hemet enforceable against it in accordance with its
respective terms, except as such enforceability may be limited by applicable
bankruptcy, insolvency, reorganization, moratorium or other similar laws
affecting the enforcement of creditors rights generally and except as the
enforcement of certain provisions thereof may be limited by the application
of general equitable principals of law in certain circumstances (whether such
provisions are considered in a proceeding at law or in equity).
4.3 EFFECT OF AGREEMENT. The execution and delivery of this
Agreement, the consummation of all other transactions contemplated hereby and
thereby and the fulfillment of the terms hereof and thereof as well as the
terms of all other documents executed in connection herewith by Hemet shall
not (a) result in a breach of any of the terms or provisions of, or
constitute a default under, or conflict with: (i) any agreement, indenture or
other instrument to which either Hemet is a party or by which it is bound;
(ii) the Articles of Incorporation or Bylaws of Hemet; (iii) the Trust
Agreement; (iv) any judgment, decree, order or award of any court,
governmental body or arbitrator by which Hemet is bound; or (v) any law, rule
or regulation applicable to Hemet, or (b) require the consent, waiver,
approval, license or authorization of, or the filing with, any federal, state
or local government, governmental department or agency, the receipt of which
Hemet has not obtained.
5
<PAGE>
ARTICLE V.
COOPERATION
The parties hereto shall execute and deliver any such additional
documents, and shall take such additional actions as are reasonably requested
by the other party hereto, for the purpose of accomplishing the transactions
contemplated hereby or carrying out the provisions hereof.
ARTICLE VI.
MISCELLANEOUS
6.1 NOTICES. All notices that are required or may be given pursuant
to the terms of this Agreement shall be in writing and shall be sufficient in
all respects if delivered or mailed by registered or certified mail postage
prepaid, or if sent by telex or telefax (in each case promptly confirmed by
registered or certified mail postage prepaid), or by overnight courier,
addressed as follows:
If to Hemet, to: Hemet Federal Savings and Loan
445 East Florida Avenue
Hemet, CA 92543-4244
Attn.: Thomas R. Strait
If to JMC, to: JAMES MITCHELL & CO.
9710 Scranton Rd. Ste. 100
San Diego, California 92121
Attn.: James K. Mitchell, Chairman and
Chief Executive Officer
Telecopy number: (619) 450-9102
6.2 EXPENSES. Except as otherwise expressly provided herein, the
parties hereto shall pay all of their own expenses relating to the
transactions contemplated hereby, including, without limitation, the fees and
expenses of their respective counsel, accountants, and financial advisors.
In the event of litigation or other adversary proceeding with respect to this
Agreement or the transactions contemplated hereby, the non-prevailing party
shall reimburse the prevailing party for all reasonable attorney's fees and
court costs incurred in connection therewith.
6.3 AMENDMENTS. This Agreement may not be changed orally, but only by
agreement in writing signed by the parties hereto. Any provision of this
Agreement can be waived, amended, supplemented or modified only by written
agreement of the parties hereto.
6
<PAGE>
6.4 INTERPRETATION. This Agreement has been negotiated fully and
fairly between the parties. If this Agreement becomes the subject of
interpretation by a court of law or equity or other third party, this
Agreement shall not be construed either against, or in favor of, JMC or
Hemet, by virtue of one of the parties being deemed the draftsman of this
Agreement.
6.5 SEVERABILITY. Any provision of this Agreement which is invalid,
illegal or unenforceable shall be ineffective to the extent of such
invalidity, illegality or unenforceability, without affecting in any way the
remaining provisions hereof or rendering any other provision of this
Agreement invalid, illegal or unenforceable.
6.6 SUCCESSORS AND ASSIGNS. This Agreement shall inure to the benefit
of and shall be binding upon the directors, principals, shareholders,
successors and assigns of the parties hereto.
6.7 DISPUTE RESOLUTION. In the event of any dispute, claim or
controversy which in any way relates to, results from or arises out of this
Agreement or the Interim Marketing Agreement, any amendment or breach hereof
or thereof, or any resulting transactions ("Dispute"), if the Dispute cannot
be settled through negotiations, the parties hereto agree to first try in
good faith to settle the Dispute by mediation under the Commercial Mediation
Rules of the American Arbitration Association, before resorting to
arbitration, as mandated below. Regardless of the outcome of such mediation,
each party shall bear its own costs and attorneys' fees and any mediation
fees shall be shared by the parties on an equal basis, one-half by JMC and
one-half by Hemet.
Thereafter, any remaining Dispute shall be decided by neutral
binding arbitration in accordance with the rules of the American Arbitration
Association and not by court action. Such arbitration shall be conducted in
Hemet, California. Regardless of the outcome of the arbitration, each party
shall bear its own costs and attorneys' fees and any costs of expenses
assessed by the American Arbitration Association shall be shared by the
parties on an equal basis, one-half by JMC and one-half by Hemet. Judgment
upon the award rendered by the arbitrator may be entered in any court having
jurisdiction thereof; provided, however, that no arbitrator shall be
permitted to award punitive damages in such arbitration proceeding.
If any party hereto, after notice thereof, fails to be present or
represented at an arbitration hearing, or adjournment thereof, the arbitrator
may, nevertheless, in their discretion, proceed with the adjudication of the
Dispute.
6.8 CONFIDENTIALITY. Neither Hemet nor JMC shall disclose any
information or make any public announcement with respect to this Agreement
prior to its execution. JMC and Hemet will coordinate the content and timing
of any internal and public announcements regarding this Agreement.
7
<PAGE>
6.9 APPLICABLE LAW. This Agreement is governed by, and shall be
construed and enforced in accordance with, the laws of the State of
California, except such laws that would render this choice of laws
ineffective.
6.10 ENTIRE AGREEMENT. This Agreement evidences the entire agreement of
the parties hereto with respect to the subject matter hereof.
This Agreement has been executed by the parties hereto as of the date
first above written.
JAMES MITCHELL & CO.
JMC INSURANCE SERVICES CORPORATION
JMC FINANCIAL CORPORATION
By: /s/ DANIEL M. HARKINS
-----------------------------------
Daniel M. Harkins,
Senior Vice President and General
Counsel
HEMET FEDERAL SAVINGS & LOAN HEMET FEDERAL SAVINGS & LOAN
ASSOCIATION ASSOCIATION
By: By: /s/ Thomas R. Strait
---------------------------- -------------------------
Its: Its: Senior Vice President
---------------------------- -------------------------
FIRST HEMET CORPORATION FIRST HEMET CORPORATION
BY: By: /s/ Gerald A. Agnes
---------------------------- -------------------------
Its: Its: Executive Vice President
---------------------------- -------------------------
8
<PAGE>
EXHIBIT 22
SUBSIDIARIES OF THE REGISTRANT
- - James Mitchell & Co.
- JMC Insurance Services Corporation
- JMC Financial Corporation
- JMC Insurance Agency of New York, Inc.
- JMC Insurance Agency, Inc.
- JMC Insurance Services Corporation of Nevada
- JMC Insurance Services Corporation of Texas
- - JMC Investment Services, Inc.
<PAGE>
EXHIBIT 23
INDEPENDENT AUDITORS' CONSENT
We consent to the incorporation by reference in Registration Statement
No. 33-1482, Registration Statement No. 33-44354, Registration Statement
No. 33-74840, and Registration Statement No. 33-74842 of JMC Group, Inc. and
subsidiaries on Forms S-8 of our report dated February 16, 1998 in the Annual
Report on Form 10-K of JMC Group, Inc. and subsidiaries for the year ended
December 31, 1997.
/s/ Deloitte & Touche LLP
February 27, 1998
San Diego, California
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM JMC GROUP,
INC.'S FORM 10-K AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH 10-K
FILING.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> DEC-31-1997
<CASH> 4,262
<SECURITIES> 0
<RECEIVABLES> 1,792
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 7,423
<PP&E> 1,513
<DEPRECIATION> 1,435
<TOTAL-ASSETS> 7,919
<CURRENT-LIABILITIES> 1,838
<BONDS> 0
0
0
<COMMON> 60
<OTHER-SE> 6,021
<TOTAL-LIABILITY-AND-EQUITY> 7,919
<SALES> 0
<TOTAL-REVENUES> 6,303
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 6,683
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (380)
<INCOME-TAX> (123)
<INCOME-CONTINUING> (257)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (257)
<EPS-PRIMARY> (.04)
<EPS-DILUTED> (.04)
</TABLE>
