Corporate Headquarters 9710 Scranton Road Suites 100 and 120 San Diego, CA 92121 Exp. Date: March 1998 Square Footage: 18,451
JMC TENNESSEE 850 Ridge Lake Blvd. Suite 207 Memphis, TN 38120 Exp. Date: February 2, 1996 Square Footage: 2,814
- -------- * Non-recurring items included in the quarterly net income (loss) figures for 1995 include: (a) payment of $1,309,000 ($785,000 after-tax provision) for the right to hire certain personnel in the first quarter; and (b) after-tax net gain on sale of rights to certain future asset-based fees revenues of $1,987,000 in the third quarter and $361,000 in the fourth quarter. See further explanation of these items in "Management's Discussion and Analysis of Financial Condition and Results of Operations--Results of Operations-- 1995 Compared to 1994." ** Includes a one-time charge for restructuring of $557,000 (or $345,000 after estimated tax benefit of $212,000) and a write-off of goodwill in the amount of $2,517,000 (with no corresponding tax benefit) in the third quarter. The fourth quarter includes revenue of approximately $1,000,000 (or $600,000 after estimated tax provision of $400,000) resulting from a payment from a financial institution client for the right to hire certain JMC employees.
1994: ----- . 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.
. Revenue in the amount of approximately $1,000,000 ($600,000 or $.09 per share after estimated tax provision of $400,000) resulting from a payment from a financial institution client for the right to hire certain JMC employees.
Total revenues for 1995 were $20,372,000 compared to revenues of $33,357,000 in 1994, a decrease of $12,985,000 or 39%. Revenues for 1995 include the previously mentioned one-time payments from a client financial institution and the net gain on the sale of rights to certain asset-based fee revenues to that same client totaling $5,223,000 as well as transition fees of $538,000 which are included in other revenues:
. Lower gross sales volumes which declined $297 million or 62% due primarily to:
* The reconfiguration and ultimate termination of the Company's Florida operations contributed to $241 million or 81% of the sales volume decline. The Company terminated its relationship with its Florida financial institution client in August, 1995.
* Declining interest rates and increased competition, primarily from Certificates of Deposits during 1995 also contributed to the sales decline.
Total expenses for 1995 were $17,375,000 compared to $35,235,000 in 1994. Excluding the previously described one-time charges of $3,074,000, total expenses for 1994 would have been $31,646,000 (which also excludes amortization of goodwill in 1994 of $515,000). Excluding the aforementioned charges in 1994, total expenses in 1995 decreased $14,271,000 or 45% when compared to 1994 expenses. This drop in total expenses is primarily attributable to the following:
RESTRUCTURING. During the third quarter of 1994, the Company's Board of Directors approved a restructuring plan which was developed by management to enhance operating efficiencies by streamlining the Company's administrative and sales management functions. See explanation of restructuring in "Results of Operations--1994 compared to 1993--Restructuring". During 1995 the Company realized the benefits from this restructuring in terms of a reduced base operating overhead at the beginning of the year. In addition, with the centralization of support functions the Company was able to react quickly to effect further cost reductions as sales volumes continued to decline, primarily as a result of the reconfiguration and ultimate termination of its Florida operations.
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.
1994 COMPARED TO 1993 - --------------------- General. Revenues and expenses include the accounts of the Company's subsidiaries, JMC and Priority.
. Lower sales volume which declined 37% principally as a result of the changing regulatory environment nationwide and surrounding negative news coverage, changing economic conditions in the financial markets and the reconfiguring of the Company's Florida operations. See "Trends and Uncertainties--Declining Revenues". Annuity sales volume decreased 40% while mutual fund sales remained relatively constant.
. An approximately 3% increase in the gross revenue rate on annuities resulting from an increase in the front commission rate paid on variable annuities in the beginning of the second quarter of 1994. The increase was accomplished by increasing front commissions and reducing trail commissions on an actuarially-equivalent basis. The Company also obtained a slight increase in trail commissions from those previously paid; and
Total expenses for 1994 were $35,235,000 compared to $41,694,000 in 1993. Excluding the previously described one-time charges of $3,074,000 and $575,000 in 1994 and 1993, respectively, total expenses for 1994 would have been $31,646,000 (excluding amortization of goodwill of $515,000) compared to total expenses of $40,433,000 (excluding amortization of goodwill of $686,000) in 1993, a decrease of $8,787,000 or 22%. This drop in total expenses is attributable to the following:
. A $6,118,000, or 32%, reduction in fees to financial institutions due to lower sales volume;
The percentage decrease in fees to financial institutions in 1994 is less than the percentage decrease in sales volume due to the increase in asset- based fees paid to the financial institutions. Asset-based fees increased due to an increase over 1993 in the average accumulated value of assets generating fees.
Excluding the one-time charges and non-recurring revenue in 1994, the one- time charge in 1993 and amortization of goodwill for both periods, the Company had pre-tax return on total revenues of 2.2% in 1994 compared to 18.0% in 1993. The principal reason for the reduction in pre-tax return was that the decline in sales volume experienced throughout 1994 occurred more rapidly than the Company was able to effectuate base operating expense reductions. This resulted in a sales production level which only marginally exceeded the minimum production level required to cover its base operating expenses. See "Restructuring" and "Trends and Uncertainties--Declining Revenues".
During the third quarter, the Company recorded one-time restructuring charges in the amount of $557,000. The restructuring charges included current and future cash requirements for severance costs and costs related to premature lease terminations of $64,000 and $280,000, respectively and non- cash expenses of $213,000 associated with the write-off of certain assets. As of December 31, 1994, there was a balance of $295,000 remaining in the restructuring accrual primarily related to premature lease termination costs. Management estimated the Company will incur an additional $200,000 of expenditures related to the revised structure of future operations which were not included in the restructuring charges recorded during the third quarter. These additional expenditures represent the cash outlays related to the expansion of the Tampa and San Diego facilities to accommodate the consolidated operations and the centralization of mutual fund processing. As of February 28, 1995, $150,000 of these additional expenses had been incurred. Management anticipates that most of these additional expenditures, which relate to the purchase of fixed assets and the construction of leasehold improvements, will be capitalized. The cash required to effect the restructuring was, and will continue to be, generated from operations.
As of December 31, 1995, the Company had cash and cash equivalents of approximately $5,833,000, an increase of $1,686,000 from $4,147,000 in cash and cash equivalents plus short-term investments at December 31, 1994.
. The Company recognized $1,309,000 (pre-tax) for the purchase of the right to hire certain JMC personnel. As of December 31,1995, all but $109,000 of this amount had been received (the remaining amount was received in January of 1996). Thus the Company generated $1,200,000 (or $720,000 after providing for taxes) in cash during 1995 related to this transaction.
. Excluding the above two transactions and the tax effected non-cash expense reflected in the Company's Statement of Operations for 1995 the Company's operations used approximately $1,155,000 during 1995. As previously noted, the Company has reduced operating expenses, however, it was necessary to maintain the Company's Florida operations at a certain level through August, 1995 despite the low sales volumes in order for it to realize the previously noted revenues associated with the transition and termination of its relationship with its Florida financial institution client.
. The remaining uses of cash of approximately $220,000 are primarily due to the reduction in liability balances from December 31, 1994 to December 31, 1995 and are not related to 1995 operating activities. Such liabilities consisted primarily of payroll related accruals which were paid down as personnel left the Company during the year.
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's base operating expenses were significantly reduced during 1995 due to cost containment and the impact from the Company's restructuring plan initiated in the later part of 1994. Base monthly operating expenses decreased from approximately $1,000,000 in January of 1995 to $600,000 in December of 1995.
The Company is actively pursuing new client financial institutions (see explanation of USBA agreement). Management believes that, as new client financial institutions are acquired, the Company will benefit from spreading its base operating expenses over a larger revenue base. However, the exact amount and nature of this benefit cannot be ascertained with any certainty and will depend, in large part, upon the nature of the services provided to new client financial institutions and sales volume generated. Depending upon the nature of these services and sales volume produced, the Company may need to increase base operating expenses from their current levels. In any event, under the new consolidated structure, the Company believes it has the ability to add new clients with significantly reduced start-up costs compared to historical amounts. In addition, the Company will service these new relationships on a more centralized basis to take full advantage of operating efficiencies. In the past, as the Company added new client financial institutions, it would incur between $125,000 to $250,000 in start-up costs to establish a new distribution center, which also resulted in ongoing increased base operating expenses. Management does not anticipate opening a new distribution center for each new client financial institution in the future.
The Company sells financial products, primarily annuities and mutual funds. Under its arrangements with the provider companies, the Company earns commissions on each sale and it's entitled to ongoing asset-based fees and 12 B-1 fees on the average accumulated value of assets. Under arrangements with most of its client financial institutions, the Company is also required to pay an asset-based fee which, although varying by product, amounts to approximately two-thirds of the fee earned from its provider companies for as long as the marketing relationship with the financial institution continues. The provisions for payment of asset-based fees to client financial institutions after the termination of the marketing relationship varies from institution to institution and depends upon the manner in which the relationship is terminated. 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. At December 31,1995, the accumulated value of assets on which the Company receives asset- based fee payments was approximately $890 million (including mutual funds paying 12 B-1 fees). Asset-based fee income and asset-based fees paid to financial institutions amounted to approximately $4,866,000 and $3,068,000, respectively, in 1995. The reduction in these amounts as compared to 1994 is a result of the sale of the rights to asset-based fees generated by the Florida operation at the end of August, 1995. The fourth quarter asset-based fee income and asset-based fees paid to financial institutions amounted to approximately $654,000 and $363,000 respectively. This is reflective of the current levels of asset-based fee revenues and asset-based fees paid to financial institutions after the sale of asset-based fee revenues during the third quarter of 1995.
REGULATORY ENVIRONMENT. The Company and its financial institution clients operate in a highly regulated environment. Both state and federal laws govern the manner in which insurance agencies, broker-dealers and financial institutions may make annuities, insurance products and mutual funds available to customers of financial institutions. Recently, federal banking regulators, the Securities and Exchange Commission and the National Association of Securities Dealers, Inc. have focused attention in this area. Changes in, or interpretations of, the laws and regulations governing these activities or changes in the implementation or enforcement of such laws and regulations could affect the ability of, and the means by which, the Company and its financial institution clients make annuities, insurance products and mutual funds available to customers of banks, savings and loan associations and thrifts.
The Company's certificate of incorporation also authorizes 5,000,000 shares of no par value preferred stock, none of which have been issued.
In 1988, JMCG acquired all of the outstanding stock of JMC in a business combination accounted for by the purchase method of accounting. The total cost of the acquisition exceeded the fair value of the net assets acquired and the excess was allocated to the cost of goodwill which was originally being amortized over ten years. This amortization period was derived from the terms of the contracts that JMC had with its remaining financial institution clients at the time of the acquisition. During the third quarter of 1994, management was notified that JMC's contract with Sacramento Savings Bank ("SSB") would be terminated during the fourth quarter of that year. This contract was in fact terminated on October 31, 1994. SSB was the last significant JMC client remaining from those existing at the time of the 1988 acquisition. This event caused management to conclude that the original amortization period was too long. Accordingly, the Company accelerated its amortization and wrote-off $2,516,683 representing the remaining unamortized book value of goodwill during 1994.
During 1994 the Company had a line of credit agreement which required it to maintain a collateral account which had a balance of $536,000 as of December 31, 1994. In December of 1995, the line of credit agreement was terminated; therefore, the collateral account is no longer required.
JMC Financial, a wholly owned subsidiary of JMC and a broker-dealer registered with the SEC and NASD, began self-clearing of mutual fund transactions for itself and Priority at the end of 1994. As such, JMC Financial carries cash balances for customers from the trade date of a mutual fund transaction through the settlement date of such transactions. These cash balances have been segregated in special bank accounts for the benefit of customers under Rule 15C3-3 of the Securities and Exchange Commission. Total deposits in these accounts as of December 31, 1995 are $894,269.
sales are recorded on the trade date of such sale. Commission revenues for 1995, 1994 and 1993 were $9,447,074, $26,628,216 and $45,117,202, 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 1995, 1994 and 1993 were $4,865,633, $5,519,339 and $3,926,703, respectively.
Net Gain on Sale of Rights to Certain Future Asset-Based fee Revenue
For 1995 and 1994, other income includes payments made by the Company's Florida based financial institution client, for the right to hire certain JMC employees of $1,308,500 and $1,000,000, respectively. 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. Costs incurred by the Company to facilitate such transactions are included in Expenses for the year.
During 1993, the Company recorded $1,397,129 as a capital asset, which represented the discounted present value of the future asset-based fees acquired by the Company as a result of an arbitration proceeding involving a former bank client. 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, 1995 was $979,644.
The Company leases office facilities and equipment under the terms of operating leases which expire through 1998. At December 31, 1995 the aggregate minimum annual noncancelable lease commitments are as follows:
As of January 1, 1996 the Company had three offices which were being subleased. The net obligation on such offices, included in the above minimum aggregate rentals, is included in the remaining restructuring reserve and reserve for discontinued operations, included in accrued restructuring expenses and accrued expenses and other liabilities as of December 31, 1995.
JMC has filed an appeal of the Final Order and intends vigorously to pursue the appeal. The Company has incurred most of the anticipated costs of the appeal and management believes that the amounts accrued as of December 31,1995 will be sufficient to cover any additional costs.
Effective October 31, 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. As described in Note 10, Barnett Bank accounted for revenues of $10,239,630, $20,176,680 and $35,388,162 during 1995, 1994 and 1993, respectively.
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.
The weighted average number of shares of common stock and common stock equivalents outstanding for the periods presented is as follows: 1995- 6,201,318; 1994-6,494,388; 1993-7,010,004.
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.