During 1997, the Company maintained only its corporate office. The facility exceeds the Company's requirements and the Company intends either to renegotiate the lease or locate alternative suitable space upon or before the expiration of the lease. The following is the lease for the principal facility utilized in the Company's operations as of December 31, 1997:
**NON-RECURRING ITEMS INCLUDED IN THE QUARTERLY NET INCOME (LOSS) FIGURES FOR 1996 INCLUDE: (a) EXPENSES RELATED TO THE PROPOSED MERGER WITH USBA OF $704,000 ($433,000 AFTER-TAX BENEFIT) IN THE THIRD QUARTER; AND (b) NET GAIN ON SALE OF RIGHTS TO FUTURE ASSET-BASED FEES OF $1,844,000 ($1,189,000 AFTER-TAX PROVISION) AND THE WRITE-OFF OF THE REMAINING UNAMORTIZED BALANCE OF THE MARKETING AGREEMENT WITH USBA, NET OF A SETTLEMENT WITH USBA, IN THE AMOUNT OF $515,000 ($332,000 AFTER-TAX BENEFIT) IN THE FOURTH QUARTER.
When used in this Annual Report on Form 10-K, the words "expects," "believes," "estimates," and similar expressions are intended to identify forward-looking statements. Such statements are subject to risks and uncertainties, including those set forth below and in Item 1 of this Annual Report on Form 10-K, that could cause actual results to vary materially from those projected. These forward-looking statements speak only as of the date hereof. The Company expressly disclaims any obligation or undertaking to release publicly any updates or revisions to any forward-looking statements contained herein to reflect any change in the Company's expectations with regard thereto or any change in events, conditions or circumstances on which any such statement is based.
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.
1996: - 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 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.
- 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);
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 $.10 per share after an estimated tax benefit of $318,000) in 1996.
Total revenues for 1997 were $6,303,000 compared to revenues of $11,845,000 in 1996, a decrease of $5,542,000 or 47%. As previously stated, revenues for 1997 and 1996 include net gains on the sale of rights to asset-based fee revenues of $1,870,000 and $1,844,000, respectively. In addition to these revenue items, the Company earned transition fee revenue of $250,000 in 1996. The transition fee, which was negotiated by the Company with a client financial institution, was intended to cover the cost of operation during a transitional period prior to termination of the Company's relationship with this financial institution client.
Excluding the net gain on the sale of the rights to asset-based fee revenues in 1997 and 1996, but including transition fees, revenues for 1997 would have been $4,433,000 compared to $10,001,000 in 1996 (a decrease of $5,568,000 or 56%). This reduction in revenues is primarily attributable to the following:
- 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 $388,000 or 70% reduction in salesperson's commissions also due to lower sales volume, and
1995: - A net gain of $3,914,000 ($2,349,000 or $0.38 per share after estimated tax provision) on the sale of the rights to certain future asset-based fee revenues to a client financial institution. The net gain is a result of a purchase price of $4.05 million less costs associated with the loss of the Company's Florida operations of $136,000.
- Other revenue in the amount of approximately $1,309,000 ($785,000 or $0.13 per share after estimated tax provision) related to the final portion of that same client financial institution's payment for the right to hire certain employees and certain other services.
Excluding the one-time payments for the right to hire certain JMC employees in 1995 and the net gain on the sale of the rights to certain asset-based fee revenues in 1996 and 1995, but including transition fees, revenues for 1996 would have been $10,001,000 compared to $15,149,000 in 1995 (a decrease of $5,148,000 or 34%). This reduction in revenues is primarily attributable to the following:
- 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.
- A $2,472,000 or 39% reduction in fees to financial institutions due to lower sales volume. The percentage decrease to financial institutions is slightly more than the decrease in production due to the fact that the fee rates on those clients with lower production volumes was greater than the fee rates on the remaining clients or clients who had an increase in production;
- A $284,000 or 34% reduction in salesperson's commissions also due to lower sales volume, and
During 1996, variable annuity and mutual fund sales comprised 77% of total sales compared to 58% of total sales in 1995, resulting in a decline in the gross margin rate on total product sales in 1996 from 1995.
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 significantly reduced the level of base operating expenses since its restructuring plans were implemented in 1994 and 1997. With the December 1997 restructuring, base monthly operating expenses were decreased from approximately $366,000 in January of 1997 to approximately $180,000 in January of 1998. The Company anticipates further reductions in operating expenses as the effects of restructuring are realized.
The Company has in the past sold financial products, primarily annuities and mutual funds. Under its arrangements with the provider companies, the Company earns commissions on each sale and is entitled to ongoing asset-based fees and 12b-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 50-55% 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. At December 31, 1997, the accumulated value of assets on which the Company will receive asset-based fee revenue was approximately $346 million (including mutual funds paying 12b-1 fees). Asset-based fee revenue and asset-based fee expense to financial institutions amounted to approximately $1,782,000 and $568,000, respectively, in 1997. The reduction in these amounts as compared to 1996 is primarily the result of the sale of the rights to asset-based fees generated by the Virginia operation. Due to the sale of rights to future asset-based fees to First Tennessee Bank at the end of 1997 and the termination of all bank programs, future asset fee revenues and asset fees expensed to financial institutions will be lower in 1998. During 1997, the First Tennessee Bank assets, for which the right to future asset-based fees was sold to the bank on December 31, 1997, generated $641,000 in asset fee revenues but also required $282,000 in fees to the bank for a net to JMC of $359,000.
While the Company's revenue base declined substantially during 1997 and will decline even further in 1998 due to the termination of all bank programs, base operating expenses have declined as well and will decline further as the Company's restructuring is implemented. Thus, with the approximate $4.3 million of cash at year-end coupled with the anticipated cash flow in 1998 resulting from the final installment on the First Tennessee purchase ($1.4 million received in January 1998 and $330,000 in second quarter of 1998) and other asset fees, management expects the Company will meet its operating and capital expenditure needs over the next twelve months.
and mutual fund accounts in place at the year-end in order to continue to maximize the return on those assets.
The Company is aware of the issues associated with the programming code in the 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. The Company will expand necessary resources to assure that its computer systems are reprogrammed in time to effectively deal with transactions in the year 2000 and beyond. The Company presently believes that, with modifications to existing software and conversions to new software, the Year 2000 problem will not pose significant operational problems for the Company's computer systems as so modified and converted. However, if such modifications and conversions are not completed timely, the Year 2000 problem may have a material impact on the operations of the Company. Management has not yet assessed the year 2000 compliance expense and related potential effect on the Company's earnings.
CONSOLIDATED STATEMENTS OF OPERATIONS. . . . . . . . . . . . . . . . . . . . .18
CONSOLIDATED STATEMENTS OF CASH FLOWS. . . . . . . . . . . . . . . . . . . . .20
We have audited the accompanying consolidated balance sheets of JMC Group, Inc. and subsidiaries as of December 31, 1997 and 1996 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, 1997. 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, 1997 and 1996, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 1997 in conformity with generally accepted accounting principles.
JMC Financial Corporation, James Mitchell & Co.'s broker-dealer subsidiary ("JMC Financial"), began self-clearing mutual fund transactions for itself and JMCI at the end of 1994. As such, JMC Financial carries customer funds for transactions which have been initiated but not settled as of the balance sheet date. Cash of $922,207 has been segregated in a special bank account for the benefit of customers under Rule 15c3-3 of the Securities and Exchange Commission.
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 1997, 1996 and 1995 were $833,027, $2,369,951 and $3,332,006, 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 1997, 1996 and 1995 were $913,239, $1,558,074 and $3,068,343, respectively.
to transition the sales operations to the financial institution. Costs incurred by the Company to facilitate such transactions are included in expenses for each respective year.
Restructuring expenses represent costs specifically associated with the Company's plan of restructuring, which was approved by the Board of Directors in the fourth quarter of 1997, include employee severance, asset write-downs and lease write-offs.
The entire $1.25 million payment to USBA and the subsequent recovery of $500,000 are included in the line "Marketing Plan payment - net of recovery" and thus, amortization of the plan payment included in depreciation and amortization for the first three quarters of 1996 has been reclassified to this line for more appropriate presentation of material operating transactions.
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. Management does not believe that such proceedings will have a material adverse effect on the Company's financial condition or results of operations.
At December 31, 1997 and 1996, furniture, equipment and leasehold improvements consist of:
The assumption regarding the stock options issued in 1997 and 1996 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 impact of outstanding non-vested stock options granted prior to 1996 has been excluded from the pro forma calculation; accordingly, the 1997 and 1996 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.
The fair value of options granted during 1997 and 1996 was estimated at $147,000 and $11,000, respectively, on the date of grant using the Black-Scholes option-pricing model with the following weighted average assumptions by respective year:
Of the 317,600, 25,000 and 218,000 options granted in 1997, 1996 and 1995, respectively, options granted under the Executive Plan amounted to 212,000 for 1997, 12,000 for 1996 and 152,000 for 1995. Options granted under the Employee Plan amounted to 105,600 in 1997, 13,000 in 1996 and 66,000 in 1995. The 490,200 options outstanding at December 31, 1997 became or will become exercisable as follows: 311,003 shares in 1997 and prior; 98,265 in 1998; and 80,932 in 1999. As of December 31, 1997, options to purchase 546,834 shares had been exercised under the 1983 Plan and no options were outstanding. As of December 31, 1997, 370,000 shares were available for future grants under the Executive Plan and 599,800 shares were available for future grants under the Employee Plan. As of December 31, 1997, a total of 969,800 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 1997 and 1996, net loss per common share was determined by dividing the net 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. For 1995, Diluted EPS was determined based on the adjusted weighted average common shares reflecting the dilutive effect of the assumed exercise of stock options using the treasury method.
The weighted average number of shares of Common Stock for the periods presented is follows: 6,055,738 in 1997; 6,218,898 in 1996 and 6,198,898 in 1995. The weighted average dilutive common shares for 1995 are 6,201,318, reflecting the addition of 2,420 Common Stock equivalents.
Effective February 1, 1996, the Company's level of service provided to First Tennessee Bank was reduced from a fully managed alternative investments program to an administrative support program. The administrative support program was terminated as of December 31, 1997.