______________________________________________________________________________
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
_______________________
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 or 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
_______________________
For the Quarterly Period ended Commission File Number
September 30, 1998 0-12926
_______________________
JMC GROUP, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 95-2627415
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
9710 Scranton Road, Suite 100, San Diego, California 92121
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: 619-450-0055
_______________________
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities
Exchange Act of 1934 during the preceding 12 months (or for such shorter
period that the registrant was required to file such reports), and (2) has
been subject to such filing requirements for the past 90 days.
Yes X No
------- -------
As of September 30, 1998, the registrant had 6,166,451 shares of its
common stock, $.01 par value, issued and outstanding.
______________________________________________________________________________
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
JMC GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
September 30, December 31,
1998 1997
------------- -------------
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 4,881,311 $ 4,261,531
Cash segregated under securities
regulations 338 922,207
Receivables from insurance companies 127,494 329,265
Receivable from financial institution - 1,462,861
Income taxes receivable 38,273 -
Deferred tax asset 106,105 251,426
Other assets 146,957 195,219
------------- -------------
TOTAL CURRENT ASSETS 5,300,478 7,422,509
Investment 1,000,000 -
Furniture, equipment and leasehold
improvements - net of accumulated
depreciation and amortization of
$1,468,519 in 1998 and $1,435,362
in 1997 40,205 77,925
Asset-based fees - net of accumulated
amortization of $1,051,646 in 1998 and
$978,575 in 1997 345,483 418,554
------------- -------------
TOTAL ASSETS $ 6,686,166 $ 7,918,988
============= =============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accrued fees to financial institutions $ 51,404 $ 113,009
Customer funds segregated under securities 338 922,207
regulations
Accrued restructuring charges 28,417 410,785
Accrued expenses and other liabilities 120,274 242,871
Allowance for contract cancellations 19,951 55,822
Income tax payable - 11,659
Accrued payroll and related expenses 46,301 81,572
------------- -------------
TOTAL CURRENT LIABILITIES 266,685 1,837,925
STOCKHOLDERS' EQUITY
Preferred stock, no par value; authorized
5,000,000 shares - -
Common stock, $.01 par value; authorized
20,000,000 shares; issued and
outstanding 6,166,451 shares in 1998
and 6,044,351 shares in 1997 61,664 60,443
Additional paid-in-capital 583,276 466,849
Retained earnings 5,774,541 5,553,771
------------- -------------
TOTAL STOCKHOLDERS' EQUITY 6,419,481 6,081,063
------------- -------------
TOTAL LIABILITIES AND STOCKHOLDERS'
EQUITY $ 6,686,166 $ 7,918,988
============= =============
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS.
JMC GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
Three Months Ended September 30,
1998 1997
------------- -------------
REVENUES
Commissions and fees $ 291,966 $ 1,022,328
Interest 73,833 54,955
Other 18,029 635
------------- -------------
TOTAL REVENUES 383,828 1,077,918
------------- -------------
EXPENSES
Employee compensation and benefits 121,493 611,237
Fees to financial institutions 87,355 366,066
Professional fees 36,614 71,218
Rent 20,712 67,662
Telephone 8,903 16,025
Depreciation and amortization 5,130 27,931
Other general and administrative
expenses (3,322) 142,198
------------- -------------
TOTAL EXPENSES 276,885 1,302,337
------------- -------------
INCOME (LOSS) BEFORE INCOME TAXES 106,943 (224,419)
INCOME TAX PROVISION (BENEFIT) 42,790 (63,518)
------------- -------------
NET INCOME (LOSS) $ 64,153 $ (160,901)
============= =============
EARNINGS (LOSS) PER SHARE
BASIC $ 0.01 $ (0.03)
============= =============
DILUTED $ 0.01 $ (0.03)
============= =============
WEIGHTED AVERAGE NUMBER OF SHARES
BASIC 6,166,451 6,044,351
DILUTED 6,173,079 6,044,351
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS.
JMC GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
Nine Months Ended September 30,
1998 1997
------------- -------------
REVENUES
Commissions and fees $ 1,004,212 $ 3,241,750
Gain on sale of certain future
asset-based fee revenue 330,000 -
Interest 230,165 171,004
Other 104,811 9,446
------------- -------------
TOTAL REVENUES 1,669,188 3,422,200
------------- -------------
EXPENSES
Employee compensation and benefits 556,873 2,136,911
Fees to financial institutions 328,592 1,171,925
Professional fees 126,611 243,966
Rent 63,021 200,080
Telephone 29,527 37,942
Depreciation and amortization 22,036 89,167
Other general and administrative
expenses 177,791 601,920
------------- -------------
TOTAL EXPENSES 1,304,451 4,481,911
------------- -------------
INCOME (LOSS) BEFORE INCOME TAXES 364,737 (1,059,711)
INCOME TAX PROVISION (BENEFIT) 143,967 (358,097)
------------- -------------
NET INCOME (LOSS) $ 220,770 $ (701,614)
============= =============
EARNINGS (LOSS) PER SHARE
BASIC $ 0.04 $ (0.12)
============= =============
DILUTED $ 0.04 $ (0.12)
============= =============
WEIGHTED AVERAGE NUMBER OF SHARES
BASIC 6,123,754 6,059,576
DILUTED 6,133,535 6,059,576
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS.
JMC GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
Nine Months Ended September 30,
1998 1997
-------------- --------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ 220,770 $ (701,614)
Adjustments to reconcile net income (loss)
to net cash provided (used) by operating
activities:
Gain on sale of furniture and equipment (31,924) (6,625)
Depreciation and amortization 20,887 89,167
Amortization of asset-based fees 73,071 89,865
Deferred tax provision 145,321 6,633
Changes in assets and liabilities:
Cash segregated under securities
regulations 921,869 1,175,635
Receivables from insurance companies 201,771 278,167
Receivable from financial institution 1,462,861 325,000
Income taxes receivable (38,273) 59,907
Other assets 48,262 30,450
Accrued fees to financial institutions (61,605) (174,536)
Customer funds segregated under
securities regulations (921,869) (1,175,635)
Accrued restructuring (359,572) -
Accrued expenses and other liabilities (122,597) (297,868)
Allowance for contract cancellations (35,271) (5,363)
Income tax payable (11,569) -
Accrued payroll and related expenses (35,271) (15,478)
-------------- --------------
NET CASH PROVIDED (USED) BY OPERATING
ACTIVITIES 1,476,171 (322,295)
-------------- --------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of OptiMark Technologies, Inc.
common stock (1,000,000) -
Purchase of furniture, equipment and
leasehold improvements (5,963) (116,036)
Proceeds from sale of furniture and
equipment 31,924 7,625
-------------- --------------
NET CASH USED BY INVESTING ACTIVITIES (974,039) (108,411)
-------------- --------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Repurchase of common stock - (194,548)
Proceeds from stock options exercised 117,648 15,000
-------------- --------------
NET CASH PROVIDED (USED) BY FINANCING
ACTIVITIES 117,648 (179,548)
-------------- --------------
NET INCREASE (DECREASE) IN CASH AND
CASH EQUIVALENTS 619,780 (610,254)
CASH AND CASH EQUIVALENTS AT BEGINNING
OF PERIOD 4,261,531 4,682,883
-------------- --------------
CASH AND CASH EQUIVALENTS AT END OF
PERIOD $ 4,881,311 $ 4,072,629
============== ==============
SUPPLEMENTAL DISCLOSURES OF CASH FLOW
INFORMATION
Cash paid for income taxes $ 54,293 $ 9,542
SUPPLEMENTAL DISCLOSURES OF NONCASH INVESTING
ACTIVITIES
Depreciation charged against accrued
restructuring expenses $ 22,796 $ -
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS.
NOTE 1. BASIS OF PRESENTATION
The accompanying financial statements have been prepared in
accordance with the instructions to Form 10-Q and, therefore, do
not include all information and footnote disclosures that are
otherwise required by Regulation S-X and that will normally be
made in the Company's Annual Report on Form 10-K. The financial
statements do, however, reflect all adjustments which are, in the
opinion of management, necessary for a fair statement of the
results of the interim period presented.
The balance sheet at December 31, 1997 has been derived from the
audited financial statements at that date. It is recommended
that these financial statements be read in conjunction with the
Company's financial statements and notes thereto included in the
Company's Form 10-K for the year ended December 31, 1997.
NOTE 2. INVESTMENTS
In September 1998, the Company utilized $1,000,000 of its cash to
purchase 100,000 shares of the common stock of Optimark
Technologies, Inc. (OptiMark), a private, development-stage
company based in Durango, Colorado. OptiMark owns all rights to
the OptiMark System, an electronic equity trading process. The
Company owns less than 1% of OptiMark's outstanding shares of
common stock.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The discussion of the Company's business contained in this Form 10-Q
includes certain forward-looking statements. For a discussion of factors
which may affect the outcome projected in such statements, see "Material
Customers," "Competition," "Registration and Licensing," "Regulation,"
"Legal Proceedings," "Management's Discussion and Analysis of Financial
Condition and Results of Operations" in the Company's Annual Report on Form
10-K for the year ended December 31, 1997.
RESULTS OF OPERATIONS
- ---------------------
THIRD QUARTER 1998 COMPARED TO THIRD QUARTER 1997
The Company realized net income of $64,000 (or $0.01 per share) in the
third quarter of 1998 compared to a net loss of $161,000 (or $0.03 per
share) for the third quarter of last year. For the nine months ended
September 30, 1998, the Company had net income of $221,000 (or $0.04 per
share) compared to a net loss of $702,000 (or $0.12 per share) during the
first nine months of 1997. The nine months ended September 30, 1998
results included a gain of $330,000 ($198,000 after estimated tax
provision) on the sale of the right to certain asset-based fee revenues to
a former client financial institution. Excluding this gain, the Company
would have a reportable net income of $23,000 for the first nine months of
1998.
Total revenues for the quarter ended September 30, 1998 were $384,000, a
decrease of $694,000 or 64% from $1,078,000 in the third quarter of 1997.
This reduction in revenues is primarily a result of the following:
. A decrease in sales production related commissions of $430,000 or 92%
as a result of management's decision to terminate retail bank operations at
the end of 1997.
. Asset-based fee revenues decreased approximately $195,000 in the third
quarter of 1998 compared to the third quarter of 1997 as a result of the
sale of the rights to asset-based fee revenues related to the Company's
Tennessee operation at the end of the fourth quarter of 1997. Third
quarter 1997 asset-based fees related to the Tennessee operation totaled
approximately $160,000.
Total revenues for the first nine months of 1998 were $1,669,000 versus
$3,422,000 for the comparable period in 1997, a decrease of $1,753,000 or
51%. Excluding the aforementioned gain in the first quarter 1998, total
revenues would have decreased by $2,083,000 or 61% to $1,339,000 for the
nine months ended September 30, 1998. The decrease in revenues for the
nine month period of 1998 as compared to 1997 is also a result of a
decrease in sales production related commissions of 86% and a decrease in
asset-based revenues due primarily to the previously described termination
of the Company's Tennessee operation and is offset by an increase in
service fee revenue.
Total expenses for the quarters ended September 30, 1998 and 1997 were
$277,000 and $1,302,000, respectively. This $1,025,000 or 79% decrease is
primarily attributable to:
. A $315,000 or 78% reduction in fees to financial institutions due to
lower sales volume. In addition, asset-based fees to financial
institutions decreased due to the sale of the rights to the asset-based fee
revenues in the fourth quarter of 1997, which eliminated the related fee
expense obligation.
. A decrease of $454,000 or 79% in payroll related expenses in the third
quarter of 1998 as compared to 1997, primarily as a result of personnel
reductions related to the Company terminating most of its personnel at the
beginning of 1998.
. The remaining decrease in other recurring operating expenses of
approximately $256,000 or 79% is a result of a general reduction in
operations.
For the same reasons, total expenses for the nine months ended September
30, 1998 decreased $3,177,000 or 71% to $1,305,000 from $4,482,000 in the
first three quarters of 1997.
LIQUIDITY AND CAPITAL RESOURCES
- -------------------------------
As of September 30, 1998, the Company had cash and cash equivalents of
approximately $4,881,311, an increase of approximately $620,000 from
$4,261,531 in cash and cash equivalents at December 31, 1997. Significant
sources of cash and cash equivalents include the following:
. Proceeds of $1,463,000 related to the sale of rights to certain future
asset based fees, which were recorded in the fourth quarter of 1997.
. Proceeds of $118,000 from stock options exercised.
. Offset by a purchase of 100,000 shares of OptiMark Technology Inc.'s
common stock for $1,000,000.
Future fees, both those due from provider companies and those due to
financial institution clients, are not reflected as an asset or a liability
in the Consolidated Balance Sheets. However, management does believe a
value exists related to the present value of the projected future net asset
fees to be retained by the Company. Such projected future net asset fees
are a function of the projected accumulated value of assets in-force
multiplied by the net asset fee rate (gross asset fee rate less amount
committed to the financial institution). The current value to the Company
is the discounted present value of such projected future asset fees less
the present value of an estimated cost to service the customers making up
such in-force assets. Management's belief that a present value for such
future asset-based fees exists and the estimates used to calculate the
range of such values have been supported by the sale of the rights to
certain future fees in the first quarter of 1998 and prior years. The
projected value of the future asset-based fees on the remaining block of
business at September 30, 1998 is based on assumptions as to growth,
persistency and risk adjusted discount rates. The assumptions as to
persistency and growth of the business are based on historical data
maintained by the Company since its inception. The discount rate used of
between 8% and 10% is based on a risk-free rate of return plus a nominal
additional factor for risk (taking into account that risk factors are
substantially covered by the estimated persistency and growth rates).
Management believes the value of these net future revenues is appropriately
estimated at $3 million to $4 million, pre-tax, based on the Company's
valuation calculations. Such value is based on the estimates of the
variables used in the calculation (which are consistent with estimates used
in prior sales of future rights) and the actual realization, if any, could
be higher or lower than this range.
As previously announced, the Company in September 1998 utilized $1,000,000
of its cash to purchase 100,000 shares of the common stock of Optimark
Technologies, Inc. (OptiMark), a private, development-stage company based
in Durango, Colorado. OptiMark owns all rights to the advanced trading
technology of the OptiMark System, an electronic equity trading process,
which offers investors the ability to match buying and selling orders in
multiple ranges and sizes. The system utilizes advanced computers and
patented algorithms in order to match the buyers and sellers within seconds
and with anonymity. OptiMark currently has agreements with the NASDAQ
National Market System and the Pacific Exchange, which announced in July that
it would be pursuing a merger with the Chicago Board Options Exchange.
OptiMark also announced in September 1998 that it had entered into a joint
venture agreement in Japan with Nihon Keizai Shumbun, Inc. (Nikkei), QUICK
Corporation and the Osaka Securities Exchange, to adapt the OptiMark System
for trading in Japanese listed securities. The OptiMark system is scheduled
to go online in late 1998 or early 1999.
TRENDS AND UNCERTAINTIES
- ------------------------
TERMINATION OF HISTORICAL BUSINESS LINES
The Company announced at the end of 1997 that it would be terminating its
retail sales bank programs. Accordingly, the Company has substantially
exited from its traditional lines of business. The Company will continue
to service and maintain all annuity contracts and mutual fund accounts
in place at the end of the third quarter of 1998 in order to maximize the
return on those assets.
BUSINESS OPPORTUNITIES
Management and the Board are actively seeking an appropriate business
combination opportunity for the Company. In addition, management and the
Board continue to explore strategic alternatives for enhanced utilization
of its remaining liquid assets. In the interim, the Company's cash assets
are invested in government securities, money market funds, cash equivalents
and other investments.
In the third quarter of 1998, the Company announced it had invested
$1,000,000 of its cash in OptiMark Technologies, Inc. Since a material
amount of its assets were no longer invested in only certain types of
securities (primarily government securities), the Company elected to file
as a business development company under the Investment Company Act of 1940,
as amended (the "Act"). Registration under the Act subjects the Company to
certain additional filing regulations and other substantive requirements.
NASDAQ COMPLIANCE
The Company has been advised by NASDAQ that the Common Stock may no longer
meet the requirements for continued listing on the Nasdaq Market System
(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.
YEAR 2000
The Company is aware of the issues associated with the programming code in
existing computer systems as the year 2000 approaches. The issue is
whether computer systems will properly recognize date-sensitive information
when the year changes to 2000. Management has identified its non-compliant
systems and has spent 90% of the amount it has estimated is required to
bring the Company into year 2000 compliance. The Company will continue to
expend necessary resources to assure that its computer systems are
reprogrammed in time to deal effectively with transactions in the year 2000
and beyond. The Company presently believes that, with further
modifications to existing software and conversions to new software, as well
as with the new software it has already purchased and the hardware which
has already been updated, the Year 2000 issue will not pose significant
operational problems for the Company's computer systems as so modified,
converted or replaced. The Company also believes that any additional costs
of conversion, modification or replacement will not have a material adverse
effect on the Company's financial condition or results of operations.
However, if such modifications and conversions are not completed in a timely
manner, the Year 2000 issue may have a material impact on the operations of
the Company.
The Company is also currently determining the extent to which third parties
on which the Company relies are able to address this issue in a timely
manner. For example, problems created by a lack of compliance by third
party service providers may inhibit the Company from adequately servicing
its current customer base thus causing a temporary impact on the Company's
operations. The Company has taken steps to prepare itself in the event any
third party service provider is unable to provide any or all services which
it has been contracted to provide. Should services from third parties
discontinue, whether due to non-compliance with Year 2000 issues or from
any natural disaster, the Company plans to continue providing assistance to
its customers.
Another possible problem would be if the insurance provider companies and
mutual fund companies which pay regular fees and commissions to the
Company, were unable to pay these amounts due to their lack of compliance,
computer system problems or a loss of customer account information. If the
ongoing fee revenue stream were interrupted, this would create a material
impact on the Company's financial condition. The Company has taken
measures to provide that customer account information is duplicated in both
electronic and physical formats to protect against any uncertainties in
account values, fee valuations or other loss of information.
With the Company's current operating expenses, the current cash and cash
equivalent position should adequately supply the Company with sufficient
capital to continue its operations for extended periods should any
temporary interruption in revenue occur.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
INSURANCE DEPARTMENT PROCEEDINGS
As previously reported, during March 1993 the Florida Department
of Insurance (the "Department") commenced an administrative
proceeding against the Company's wholly owned subsidiary, James
Mitchell & Co. ("JMC"). A Final Order was issued in July 1995,
however, the enforcement of the majority of the Final Order was
stayed pending the outcome of JMC's appeal. The District Court of
Appeal, for all material matters, affirmed the Final Order in
August 1996, and in October 1996, the District Court of Appeal
denied JMC's Motion for Rehearing. In March 1997, the Florida
Supreme Court denied JMC's petition for review. Effective
October 1995, JMC concluded its relationship with its Florida
financial institution client, Barnett Banks, Inc., and is not
presently doing business in the State of Florida.
On March 27, 1998, the California Department of Insurance ("DOI")
initiated proceedings in regards to the California insurance
licenses of James K. Mitchell and JMC Insurance Services
Corporation in order to review the allegations made by the
Florida Department of Insurance in a Final Order and to see
whether any actions should be taken by the California DOI. The
Company has requested a hearing concerning this matter.
Management does not believe that these proceedings will have a
material adverse effect on the Company's business, financial
condition or results of operations.
OTHER PROCEEDINGS
The Company's broker-dealer subsidiary, JMC Investment Services,
Inc. ("JMCI"), has been named as a defendant in a NASD
arbitration regarding the sales of real estate limited
partnerships by Spear Rees & Co. (the predecessor to JMCI)
between 1990 and 1993. Management does not believe that any such
proceeding will have a material adverse effect on the Company's
financial condition or results of operations.
ITEM 2. CHANGES IN SECURITIES
Not applicable.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
Not applicable.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Annual Meeting of Stockholders of JMC Group, Inc.
was held on August 31, 1998. The following matter was
submitted to a vote of security holders:
Election of Directors: James K. Mitchell and Robert G.
Sharp were elected to serve a three-year term, until
the annual meeting of stockholders in 2001, or until
their successors are duly elected.
The tally of voting for each nominee was as
follows:
For Withheld
--- --------
James K. Mitchell 5,258,425 169,152
Robert G. Sharp 5,258,425 169,152
ITEM 5. OTHER INFORMATION
Not applicable.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
a.) Exhibits.
The following exhibit is filed herewith:
27 Financial Data Schedule
b.) Reports on Form 8-K.
None.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of
1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned thereunto duly authorized.
Date: November 12, 1998 /s/ James K. Mitchell
------------------------------------------
James K. Mitchell, Chairman, President and
Chief Executive Officer
Date: November 12, 1998 /s/ Jacqueline O. Tran
-----------------------------------------
Jacqueline O. Tran, Controller and
Principal Accounting Officer
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This schedule contains summary financial information extracted from JMC Group,
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