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.
. 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);
. Recovery on settlement of legal proceedings with USBA 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).
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.
. 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 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.
. The reconfiguration of the Company's Tennessee operations in February 1996.
As of December 31,1996, the balance remaining in the restructuring reserve was approximately $12,000, which is primarily to cover the remaining net obligation on leases of offices closed during restructuring. Management believes this reserve balance is adequate to cover its remaining obligations related to the restructuring.
. One-time pre-tax charges totaling $3,074,000. As explained in detail below, the charges consisted of a restructuring charge of $557,000 ($345,000 or $.05 per share after estimated tax benefit of $212,000) and a write-off of goodwill which amounted to $2,517,000 (or $.39 per share) with no corresponding tax benefit.
. The termination of another client relationship in the fourth quarter of 1994 due to that client being acquired by First Interstate Bank contributed to $18 million or 6% of the total gross sales decline in 1995 compared to 1994.
. A decrease of approximately 70 basis points or 12% in the gross revenue rate on products sold in 1995 compared to 1994 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 65% in 1995 compared to 90% in 1994. In addition, fixed annuity sales as a percentage of total annuity sales were 65% in 1995 as compared to 75% in 1994.
. An additional $6,745,000 or 40% reduction in base operating expenses as a result of the following:
. The reconfiguration and ultimate termination of the Company's Florida operations; and
The Company's gross margin rate (gross revenue rate less payout rate to financial institutions and salesperson commissions) is 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.
As of December 31, 1995 the balance remaining in the restructuring reserve was approximately $60,000 which is primarily to cover the remaining net obligation on leases of offices closed during restructuring. Management believes this reserve balance is adequate to cover its remaining obligations related to the restructuring.
. The Company paid $1,250,000 to USBA Holdings, Ltd. for a Consulting Agreement established in connection with a five-year business plan and $884,000 in costs associated with a proposed merger with the same company. Upon termination of the Merger Agreement, the Company filed suit against USBA Holdings for which it received a cash settlement in the amount of $500,000, which payment constituted a partial refund of amounts paid by the Company under the Marketing Agreement and Consulting Agreement and a portion of the Company's expenses incurred in connection with the proposed JMCG/USBA merger during the fourth quarter of 1996.
. Excluding the above-mentioned items, the Company's operations generated a pre-tax loss of $957,000 for the year.
Note: While the Company did not realize the positive cash flow from tax benefits during 1996, it does intend to file for a refund on prior-year taxes paid. The Company plans to file for such refund immediately upon completion of its 1996 tax return and anticipates in excess of $300,000 to be generated during 1997.
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 made a diligent effort and has been successful in reducing and controlling the level of base operating expenses since its restructuring plan was implemented in 1994. Base monthly operating expenses decreased from approximately $650,000 in January of 1996 to $515,000 in December of 1996.
While the Company's revenue base declined during 1996 and will decline even further in 1997 due to the termination of the Central Fidelity program, base operating expenses have declined as well. Thus, with the approximate $4.7 million of cash at year-end coupled with the anticipated cash flow in 1997 resulting from the final installment on the Central Fidelity purchase ($300,000 in February 1997) and a tax refund (approximately $300,000 projected for the third quarter of 1997), management expects the Company will meet its operating and capital expenditure needs over the next twelve months, exclusive of adding new business which would most likely generate positive cash flow for the Company.
Declining Revenues. The Company experienced a continued decline in revenues in 1996 as compared to 1995. The primary reason for this decline was the termination of the Company's Florida program in August 1995 and the transition of the First Tennessee Bank fully managed program to an Integrated Support Services ("ISS") program effective February 1, 1996. The ISS program generates less gross revenue but produces a comparable pre-tax contribution as the Company's fully managed program due to the significantly reduced costs.
. Offer tracking, processing and servicing capabilities to other institutions outside the bank marketplace.
. Offer products to the larger financial institutions in a "wholesaling" capacity while still providing business processing and customer servicing for the provider company and the financial institution.
We have audited the accompanying consolidated balance sheets of JMC Group, Inc. and subsidiaries as of December 31, 1996 and 1995 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, 1996. 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.
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, 1996 and 1995, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 1996 in conformity with generally accepted accounting principles.
/s/ DELOITTE & TOUCHE LLP San Diego, California February 21, 1997
The Company periodically reviews the value of its long-lived assets to determine if an impairment has occurred. The Company measures the potential impairment of the recorded amount by the undiscounted value of expected future operating cash flows in relation to its net capital investment in the subsidiaries. Based on its review, the Company does not believe that an impairment of its long lived assets has occurred.
Fees to financial intermediaries 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 1996, 1995 and 1994 were $2,369,951, $3,332,006 and $9,379,359, respectively. The Company recognizes and records asset-based fees monthly as they become due to the financial intermediaries, based upon the average accumulated assets in force during the month. Asset-based fees to financial institutions for 1996, 1995 and 1994 were $1,558,074, $3,068,343 and $3,765,482, respectively.
Net Gain on Sale of Rights to Certain Future Asset-Based Fee Revenue
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, 1996 was $761,293.
In the second quarter of 1996, the Company and USBA entered into an Agreement and Plan of Merger and began the process of consummating such merger. All costs associated with such merger were capitalized, beginning in the second quarter of 1996, as these costs were expected to be included in the purchase price upon consummation of the transaction. During the third quarter of 1996, the Company terminated the Agreement and Plan of Merger, at which time all costs previously capitalized in the second quarter and all costs incurred during the third quarter related to the merger were expensed. These merger related expenses, which amounted to $884,000, are included in the 1996 Statements of Operations, primarily within professional fees and other general and administrative expenses.
The Company filed an action against USBA to recover costs incurred related to the terminated Agreement and Plan of Merger and to recover fees paid for the Marketing Agreement and for return of the warrants. During
the fourth quarter of 1996, the Company reached an agreement with USBA and received a cash payment of $500,000, constituting a partial refund of amounts paid by the Company under the 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 the 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 not made until the fourth quarter as the Marketing Plan and Marketing Agreement were in effect and the Company was working with several financial institutions referred through the Marketing Agreement up through the termination and settlement made in the fourth quarter.
The Company leases an office facility and equipment under the terms of operating leases which expire through 1998. At December 31, 1996 the aggregate minimum annual noncancelable lease commitments are as follows:
During March 1993, the Florida Department of Insurance (the "Department") commenced an administrative proceeding against the Company's wholly owned subsidiary, 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.
The Company's broker-dealer subsidiary, JMCI, has been named as a defendant in lawsuits arising out of the sale of real estate limited partnerships prior to 1992 to customers of its predecessor. In addition, the Company and its subsidiaries are involved in various legal and regulatory proceedings from time to time in the ordinary course of business. Management does not believe that any such proceedings will have a material adverse effect on the Company's financial condition or results of operation, and of March 10, 1997, no such proceedings were pending.
In 1994, the Board of Directors authorized the purchase of up to 500,000 shares of the Company's common stock. During 1994, the Company repurchased 326,000 shares of common stock at a total cost of $643,310. 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, 1996, the Company has three 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 1996 and 1995, consistent with the provisions of SFAS No. 123, the Company's net earnings and earnings per share would have been reduced to the pro forma amounts indicated below:
Of the 25,000, 218,000 and 243,000 options granted in 1996, 1995 and 1994 respectively, options granted under the Executive Plan amounted to 12,000 for 1996, 152,000 for 1995 and 170,000 for 1994. Options granted under the Employee Plan amounted to 13,000 in 1996, 66,000 in 1995 and 73,000 in 1994. The 430,000 options outstanding at December 31, 1996 became or will become exercisable as follows: 328,001 shares in 1996 and prior; 66,000 in 1997; 28,666 in 1998; and 7,333 in 1999. As of December 31, 1996, options to purchase 546,834 shares had been exercised under the 1983 Plan and options for 93,000 shares were outstanding. As of December 31, 1996, 482,000 shares were available for future grants under the Executive Plan and 661,000 shares were available for future grants under the Employee Plan. As of December 31, 1996, a total of 1,593,000 shares were reserved for issuance under the Plans.
At December 31, 1996 and 1995, the components of the deferred income tax asset are as follows:
During the years ended December 31, 1996, 1995 and 1994, the following client financial institutions individually accounted for 10% or more of the Company's total revenues:
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.