Cash dividends of $456,465 and $969,798 were paid during 1994 and 1993, respectively.
*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).
- 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).
- Expenses net of recoveries related to a Marketing Plan and Marketing Agreement as well as a proposed merger as follows:
- 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).
- A $2,182,000 or 56% reduction in fees to financial institutions due to lower sales volume.
- 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.
GENERAL. Revenues and expenses include the accounts of the Company's subsidiaries, JMC and JMCI.
- 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 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
- 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:
- 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.
- 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 payment of $195,000 to repurchase stock from a former officer and director of the Company.
- 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.
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.
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
INDEPENDENT AUDITORS' REPORT . . . . . . . . . . . . . . . . . . . . . . . . .16
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY . . . . . . . . . .19
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS . . . . . . . . . . . . . . . . . .21
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.
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.
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
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
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.
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.
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.
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.
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.
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:
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:
As described in Note 3, the Company's relationship with Barnett Banks, Inc. was terminated effective October 31, 1995.
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.