Corporate Headquarters 9710 Scranton Road Suite 100 San Diego, CA 92121 Exp. Date: July 31, 2002 Square Footage: 2,525 square feet
* The first quarter includes the sale of rights to future asset-based fees of $330,000 ($198,000 net of tax).
** The fourth quarter includes the sale of rights to future asset-based fees of $1,870,000 ($1,234,000 net of tax) and one-time charge for restructuring of $589,000 ( $389,000 net of tax).
The Company reported a net income for the year ended December 31, 1998 of $228,000 (net of taxes of $148,000) compared with net loss of $257,000 (after providing for income tax benefit of $123,000) in 1997. Included in the 1998 and 1997 results were the following:
. One-time charges for restructuring of $589,000 ($389,000 or $0.06 per share net of tax).
Excluding the above-mentioned items, the Company would have reported an after-tax income of $30,000 in 1998 as compared to after-tax loss of $1,102,000 (or $0.18 per share after an estimated tax benefit of $559,000) in 1997.
Total expenses for 1998 were $1,647,000 compared to $6,684,000 in 1997. Total expenses for 1997 would have been $6,095,000, excluding the previously described one-time charges of $589,000 for restructuring in 1997. This drop in total expenses is primarily attributable to the following:
. A $1,334,000 or 76% reduction in fees to financial institutions due to lower sales volume.
. An additional $1,008,000 or 63% reduction in base operating expenses as a result of the termination of the Company's retail sales operations at the end of 1997.
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:
. A gain of $1,870,000 ($1,234,000 or $0.20 per share net of tax) on the sale of the rights to future certain asset-based fee revenues to a client financial institution.
. One-time, pre-tax charges for restructuring of $589,000 ($389,000 or $0.06 per share net of tax).
1996: ----- . A net gain of $1,844,000 ($1,189,000 or $0.19 per share net of tax) on the sale of the rights to future asset-based fee revenues to a former client financial institution. The net gain is a result of a sales price of $2.1 million less costs associated with the loss of Central Fidelity Bank as a client of $256,000. These costs are primarily related to closing of facilities and consolidation of personnel functions due to the resulting loss of business created by the Central Fidelity termination.
. 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.
. A $388,000 or 70% reduction in salesperson's commissions also due to lower sales volume, and
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.
Significant sources and uses of cash and cash equivalents include the following:
The Company in September 1998 utilized $1,000,000 of its cash to purchase 100,000 shares of the common stock of OptiMark Technologies, Inc. (OptiMark), a private, development-stage company based in Durango, Colorado. OptiMark owns all rights to the advanced trading technology of the OptiMark System, an electronic equity trading process, which offers investors the ability to match buying and selling orders in multiple ranges and sizes. The system utilizes advanced computers and patented algorithms in order to match the buyers and sellers within seconds and with anonymity. OptiMark currently has agreements with the Nasdaq National Market System and the Pacific Exchange. OptiMark also announced in September 1998 that it had entered into a joint venture agreement in Japan with Nihon Keizai Shumbun, Inc. (Nikkei), QUICK Corporation and the Osaka Securities Exchange, to adapt the OptiMark System for trading in Japanese listed securities. The OptiMark system began online trading through the Pacific Exchange at the end of January 1999.
2. Limited Liquidity of Assets. Investments by a BDC are in securities of --------------------------- development-stage companies, for which there is usually no ready market.
5. Restriction on Business Opportunities. Unless its BDC status is terminated ------------------------------------- by vote of its shareholders, a BDC may not change its business or engage in new business activities. Consequently, the directors and management of a BDC do not have freedom to take advantage of business opportunities that may become available.
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.
JMC GROUP, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
The Company is registered under the Investment Company Act of 1940 as a Business Development Company.
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.
The investment in 100,000 shares of the common stock of OptiMark Technologies, Inc. ("OptiMark") has been valued by the Company's Board of Directors, after consideration of certain pertinent factors, including the results of operations of OptiMark since the date of purchase in August 1998. There is no quoted market for OptiMark shares.
Fees to financial institutions consist of front commission fees and asset- based fees. The Company records front commission fees when a sale has been consummated as described in Revenue Recognition. Front commission fees to financial institutions for 1998, 1997 and 1996 were $43,470, $833,027 and $2,369,951, respectively. The Company recognizes and records asset-based fees monthly as they become due to the financial institutions, based upon the average accumulated assets in force during the month. Asset-based fees to financial institutions for 1998, 1997 and 1996 were $218,900, $913,239 and $1,558,074, respectively.
At the end of the fourth quarter of 1997, the Company's agreement with its Tennessee-based financial institution client terminated. As part of the termination agreement, the financial institution exercised its right to purchase future asset-based fee revenues from the Company. The Company recorded a gain of $1,870,000 from the sales price of $2.2 million less $330,000 recognizable after certain contingencies were met in the first quarter of 1998. As of December 31, 1997, the Company had received $407,139. The remaining balance of $1,462,861, included in the line item "Receivable from financial institution," was received in the first quarter of 1998.
During the fourth quarter of 1996, the Company signed an agreement to terminate its contract with its Virginia-based financial institution client. As part of the termination agreement, the financial institution exercised its right to purchase future asset-based fee revenues from the Company. The Company recorded a net gain of $1,844,393 from the sale.
The asset is being amortized over 13 years from the acquisition date which represents the estimated life of the asset-based fees purchased. The unamortized balance of this capital asset as of December 31, 1998 was $323,743.
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 Company leases an office facility and equipment under the terms of operating leases which expire in July 2002 with an option to terminate on July 31, 2001 by paying an early termination fee. At December 31, 1998 the aggregate minimum noncancelable lease commitment is as follows:
As of January 1, 1997 the Company had two offices which were being subleased. The net obligation on such offices, included in the above minimum aggregate rentals, is included in accrued expenses and other liabilities as of December 31, 1996.
At December 31, 1998 and 1997, furniture, equipment and leasehold improvements consist of:
1998 1997 ---------- ---------- Furniture and fixtures $ 110,830 $ 484,230 Computer equipment 429,300 979,933 Leasehold improvements 1,000 49,124 ---------- ---------- 541,130 1,513,287 Less: Accumulated depreciation and amortization (520,840) (1,435,362) ---------- ---------- Net furniture, equipment and leasehold improvements $ 20,290 $ 77,925 ========= ===========
At December 31, 1998, the Company has two stock-based compensation plans which are described below. The Company has adopted the disclosure-only provisions of Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based Compensation." Accordingly, no compensation cost has been recognized for the stock option plans. Had compensation cost for the Company's stock option plans been determined based on the fair market value at the grant date for awards in 1998 and 1997, consistent with the provisions of SFAS No. 123, the Company's net income (loss) and income (loss) per share would have been increased to the pro forma amounts indicated below:
1998 1997 --------- ---------- Net income (loss) As reported $227,869 $(257,292) Pro forma $165,764 $(352,292)
Income (Loss) per share As reported $ 0.04 $ (0.04) Pro forma $ 0.03 $ (0.06)
The impact of outstanding non-vested stock options granted prior to 1997 has been excluded from the pro forma calculation; accordingly, the 1998 and 1997 pro forma adjustments are not indicative of future period pro forma adjustments, when the calculation will apply to all applicable stock. The estimated fair value of options granted is subject to the assumptions illustrated below and if the assumptions changed, the estimated fair value amounts could be significantly different.
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.
Of the 166,000, 317,600 and 25,000 options granted in 1998, 1997 and 1996, respectively, options granted under the Executive Plan amounted to 136,000 for 1998, 212,000 for 1997 and 12,000 for 1996. Options granted under the Employee Plan amounted to 30,000 in 1998, 105,600 in 1997 and 13,000 in 1996. The 412,400 options outstanding at December 31, 1998 became or will become exercisable as follows: 267,267 shares in 1998 and prior; 121,133 in 1999; 12,000 in 2000 and 12,000 in 2001. As of December 31, 1998, 313,000 shares were available for future grants under the Executive Plan and 612,500 shares were available for future grants under the Employee Plan. As of December 31, 1998, a total of 925,500 shares were reserved for issuance under the Plans.
The Company adopted Statement of Financial Accounting Standards No. 128, Earnings Per Share ("EPS") for the year ended December 31, 1997. This statement prescribes new requirements for computing EPS to reflect both Basic EPS as well as Diluted EPS for all periods EPS data is presented. For 1998, 1997 and 1996 net income or loss per common share was determined by dividing the net income or loss by the weighted average number of common shares outstanding during the period. Common shares issuable under Common Stock equivalents were not included in the computation of net loss per common shares because their effect was not dilutive.
The weighted average number of shares of Common Stock for the periods presented is follows: 6,134,516 in 1998; 6,055,738 in 1997; and 6,218,898 in 1996.
As described in Note 2, effective December 31, 1996, the Company's relationship with Central Fidelity National Bank was terminated.
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.