During 1998, the Company maintained only its corporate office. The facility exceeded the Company's requirements and the Company renegotiated its lease to surrender a portion of its space on June 30, 1998. The following is the current lease for the principal facility utilized in the Company's operations as of December 31, 1998:
Cash dividends of $456,465 were paid during 1994. No cash dividends were paid during 1998, 1997, 1996 or 1995.
. A gain of $330,000 ($198,000 or $0.03 per share net of tax) on the sale of the rights to future certain asset-based fee revenues to a client financial institution.
Total revenues for 1998 were $2,023,000 compared to revenues of $6,303,000 in 1997, a decrease of $4,280,000 or 68%. As previously stated, revenues for 1998 and 1997 include net gains on the sale of rights to asset-based fee revenues of $330,000 and $1, 870,000, respectively.
Excluding the net gain on the sale of the rights to asset-based fee revenues in 1998 and 1997, revenues for 1998 would have been $1,692,000 compared to $4,433,000 in 1997 (a decrease of $2,741,000 or 62%). This reduction in revenues is primarily attributable to a decrease of sales volume of $2,900,000 in 1998 as compared to 1997. This decrease is primarily a result of the termination by the Company of all of its contracts with client financial institutions as part of its decision to substantially exit from the retail sales of annuities and mutual funds.
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.
. 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 $0.13 per share net of tax);
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 $0.10 per share after an estimated tax benefit of $318,000) in 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.
. 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.
As of December 31, 1998, the Company had cash and cash equivalents of approximately $4,895,000, an increase of $633,000 from $4,262,000 in cash and cash equivalents at December 31, 1997.
. 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 .
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 December 31, 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.
The Company has elected to be regulated as a Business Development Company ("BDC") under the Investment Company Act of 1940. The Act provides protection for investors but imposes restrictions on the Company's freedom of action. Risk factors that investors should consider are:
1. Speculative Nature of Investments. Investments by a BDC are confined to --------------------------------- stocks of companies that do not have an established "track record" of earnings, dividends or market value and frequently have no earnings at all.
3. Lack of Control of Portfolio Companies. Most investments by a BDC are -------------------------------------- confined to enterprises to which the BDC offers to provide significant managerial assistance. However, such assistance does not constitute control and a portfolio company may pursue policies or strategies which are opposed to the advice of the BDC.
4. Conflicts of Interests. The other owners, the management or the creditors ---------------------- of a portfolio company may have interests or objectives different from those of the BDC, creating the possibility of conflicts which may be detrimental to the interest of the BDC as investor.
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 in stock of OptiMark Technologies, Inc. as described above.
On March 16, 1999, the Registrant was informed by The Nasdaq Stock Market that the Company's Common Stock would be listed on the Nasdaq SmallCap Market via an exception from the minimum bid price requirements effective March 18, 1999 at the opening of the market. For the duration of the exception, the Company's Nasdaq symbol will be JMCGC.
The Company failed to meet the continued listing requirement for the NMS as of December 16, 1998 and was granted a temporary exception from this standard subject to JMCG meeting certain conditions. On or before May 7, 1999, the Company must demonstrate a closing bid price of at least $1.00 per share; thereafter, the Company's closing bid price must meet or exceed $1.00 per share for a minimum of ten consecutive trading days. The exception will expire on May 21, 1999. In the event the Company is deemed to have met the terms of the exception, it shall continue to be listed on the Nasdaq SmallCap Market. If the Company remains in compliance throughout the expiration date of the exception, the symbol will be returned to JMCG.
The Company previously announced that it would seek stockholder approval at the May 3, 1999 Annual Meeting of stockholders of a one-for-two reverse split of its Common Stock to effectively reduce the number of shares issued and outstanding to approximately 3,083,225 shares. The Company believes that this action may result in an increase of the bid price for the Company's Common Stock to over $1.00, which is Nasdaq's stated minimum bid price for shares on the SCM. However, there can be no assurance that the bid price for the Common Stock will be increased to over $1.00 or that the Company will otherwise be able to maintain listing on the SCM. If delisted from the Nasdaq SmallCap Market, the Company's Common Stock would be traded on the Over-the-Counter Bulletin Board.
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 budgeted 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, however, the Company does not expect to expend any more resources than it has currently budgeted for. 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
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.
We have audited the accompanying consolidated balance sheets of JMC Group, Inc. and subsidiaries as of December 31, 1998 and 1997 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, 1998. 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, 1998 and 1997, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 1998 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.
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 and for the first three months of 1998, 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. Charges to the accrual during 1998 essentially used up this balance and as of December 31, 1998, no restructuring accrual balance remains.
JMC Financial Corporation, James Mitchell & Co.'s broker-dealer subsidiary ("JMC Financial"), discontinued self-clearing mutual fund transactions for itself and clearing transactions for JMCI at the end of September 1998. Neither broker-dealer exercises control over customer funds and instead instructs customers to send funds directly to the insurance or mutual fund company depending on the transaction. This effectively eliminates any requirement to maintain a separate account for benefit of customers.
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 1998, 1997 and 1996 were $250,171, $1,982,231 and $6,470,807, 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 1998, 1997 and 1996 were $921,151, $1,782,347 and $2,705,055, 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 each year.
Net Gain on Sale of Rights to Certain Future Asset-Based Fee Revenue - --------------------------------------------------------------------
Restructuring charges represent employee severance, asset write-downs and lease write-offs specifically associated with the Company's plan of restructuring approved by the Board of Directors in the fourth quarter of 1997.
-------------------------------------------------------- Minimum Aggregate Year Ending December 31, Rentals -------------------------------------------------------- 1999......................................... $ 53,906 2000......................................... $ 56,062 2001......................................... $ 43,205 ---------- $153,173 ========================================================
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. In addition, other matters have arisen and are being addressed in the normal course of business. Management does not believe that such proceedings will have a material adverse effect on the Company's financial condition or results of operations.
The assumption regarding the stock options issued in 1998 and 1997 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 fair value of options granted during 1998 and 1997 was estimated at $96,000 and $147,000, respectively, on the date of grant using the Black-Scholes option-pricing model with the following weighted average assumptions by respective year:
1998 1997 ------- -------- Dividend yield rate 0% 0% Volatility rate 109% 74% Risk free interest rate 5.66% 5.66% Expected lives 3 years 3 years
A summary of changes in outstanding Common Stock options during 1997, 1996, and 1995 follows:
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:
At December 31, 1998 and 1997, the components of the deferred income tax asset are as follows:
During the years ended December 31, 1998, 1997, and 1996, the following client financial institutions individually accounted for 10% or more of the Company's total revenues.
---- First Tennessee Bank (Tennessee) $ 2,980,268 Independence Savings Bank (New York) $ 1,361,207 -------------------------------------------------------------
As described in Note 1, the company announced in December 1997 that it was exiting the retail bank market. Commission revenue for 1998 has been derived only from asset fee and 12b-1 fee compensation and from past customers adding to or renewing existing contracts or replacing existing contracts with ones with a better rate of return. There were no major customers during 1998.
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.