<PAGE> 1
FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C.
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1995
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OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
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Commission File Number: 0-8678
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McM Corporation
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(Exact name of registrant as specified in its charter)
North Carolina 56-1171691
- - ------------------------------- --------------------------------
(State or other jurisdiction of (IRS Employer Identification No.)
incorporation of organization)
Box 12317, 702 Oberlin Road, Raleigh, North Carolina 27605
- - ------------------------------------------------------ ---------
(Address of principal executive office) (Zip Code)
Registrant's telephone number, including area code (919) 833-1600
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Indicate by check mark whether the registrant (1) has filed
all reports required to be filed by Section 13 or 15(d) of the
Securities Exchange Act of 1934 during the preceding 12
months, and (2) has been subject to such filing requirements
for the past 90 days. Yes X No
--- ---
At September 30, 1995, 4,675,038 shares of Common Stock of the
registrant were outstanding.
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INDEX
McM CORPORATION AND SUBSIDIARIES
PART I. FINANCIAL INFORMATION (Unaudited)
Item 1. Financial Statements
Consolidated Balance Sheets -- September 30, 1995 and
December 31, 1994
Consolidated Statements of Income -- Nine Months Ended
September 30, 1995 and 1994
Consolidated Statements of Cash Flows -- Nine Months Ended
September 30, 1995 and 1994
Notes to Consolidated Financial Statements -- September 30, 1995
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
Item 2. Changes in Securities
Item 3. Default Upon Senior Securities
Item 4. Submission of Matters to a Vote of Security Holders
Item 5. Other Information
Item 6. Exhibits and Reports on Form 8-K
SIGNATURES
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CONSOLIDATED BALANCE SHEETS (UNAUDITED)
McM CORPORATION AND SUBSIDIARIES
(Thousands of dollars)
<TABLE>
<CAPTION>
September 30, December 31,
ASSETS 1995 1994
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<S> <C> <C>
Invested Assets:
Securities available-for-sale, at fair value:
Fixed maturities (amortized cost: 1995 - $9,147; 1994 - $10,291) $ 9,506 $ 10,133
Fixed maturities held-to-maturity, at amortized cost
(fair value: 1995 - $42,026; 1994 - $37,370) 42,069 39,352
Short-term investments 7,850 17,678
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59,425 67,163
Cash 1,310 1,497
Accrued investment income 1,133 1,016
Premiums receivable 12,581 8,792
Reinsurance balances recoverable on:
Paid losses and settlement expenses 8,792 6,134
Reserves for losses and settlement expenses 36,671 42,471
Unearned premiums 5,481 3,482
Deferred policy acquisition costs 3,730 3,235
Equipment, at cost less accumulated depreciation
(1995 - $1,368; 1994 - $1,166) 985 1,187
Other assets 2,322 2,688
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TOTAL ASSETS $132,430 $137,665
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities:
Reserves for losses and settlement expenses $ 68,509 $ 80,886
Unearned premiums 17,994 14,811
Other policyholder funds 7,363 7,397
Amounts payable to reinsurers 1,117 3,105
Accrued expenses 14,537 11,059
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TOTAL LIABILITIES 109,520 117,258
Shareholders' equity:
Common Stock, par value $1 per share-authorized 1995 -
10,000,000 shares ; 1994 - 5,000,000 shares; issued and
outstanding 1995 and 1994 - 4,675,038 4,675 4,675
Additional paid-in capital 1,477 1,477
Unrealized appreciation (depreciation) on
securities available-for-sale 359 (158)
Retained earnings 16,399 14,413
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TOTAL SHAREHOLDERS' EQUITY 22,910 20,407
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TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $132,430 $137,665
======== ========
</TABLE>
See notes to consolidated financial statements.
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CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
McM CORPORATION AND SUBSIDIARIES
(Thousands of dollars, except per share data)
<TABLE>
<CAPTION>
Nine Months Ended Three Months Ended
September 30 September 30
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1995 1994 1995 1994
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<S> <C> <C> <C> <C>
REVENUES
Premiums earned $ 51,331 $49,783 $17,904 $16,625
Premiums ceded (18,048) (19,432) (5,989) (6,423)
----------------- ----------------
Net premiums earned 33,283 30,351 11,915 10,202
Investment income, less investment expenses:
$361 and $336 for the nine months ended
September 30, 1995 and 1994 and $118 and $121 for the
three months ended September 30, 1995 and 1994 2,644 2,770 857 890
Realized investment gains 0 122 0 103
Other income 133 349 54 27
----------------- ----------------
TOTAL REVENUES 36,060 33,592 12,826 11,222
LOSSES AND EXPENSES
Losses and settlement expenses 34,534 37,475 14,607 12,545
Losses and settlement expenses ceded (12,562) (16,401) (6,758) (5,291)
----------------- ----------------
Net losses and settlement expenses 21,972 21,074 7,849 7,254
Underwriting, acquisition and administrative expenses 12,102 11,362 4,125 3,656
----------------- ----------------
TOTAL LOSSES AND EXPENSES 34,074 32,436 11,974 10,910
----------------- ----------------
NET INCOME $ 1,986 $ 1,156 $ 852 $ 312
================= ================
PER SHARE DATA:
Income per share $ 0.42 $ 0.25 $ 0.18 $ 0.07
================= ================
Dividends per share declared by McM $ 0.00 $ 0.00 $ 0.00 $ 0.00
================= ================
</TABLE>
See notes to consolidated financial statements
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CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
MCM CORPORATION AND SUBSIDIARIES
(Thousands of dollars)
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
--------------------
1995 1994
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<S> <C> <C>
OPERATING ACTIVITIES
Net income $1,986 $ 1,156
Adjustments to reconcile net income to net cash used
by operating activities:
Policy liabilities (9,228) (11,916)
Premiums receivable (3,789) (870)
Accrued investment income (117) (327)
Net receivable from reinsurers (845) (602)
Amortization of deferred policy acquisition costs 4,995 5,463
Policy acquisition costs deferred (5,490) (5,176)
Other 4,371 (2,014)
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CASH USED BY OPERATING ACTIVITIES (8,117) (14,286)
INVESTING ACTIVITIES
Securities available-for-sale:
Purchases 0 (3,639)
Sales 0 3,987
Maturities 1,177 2,260
Securities held-to-maturity:
Purchases (2,984) (10,291)
Maturities 120 3,000
Purchases of property and equipment (211) (84)
Decrease in short-term investments 9,828 19,628
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CASH PROVIDED BY INVESTING ACTIVITIES 7,930 14,861
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(DECREASE)/INCREASE IN CASH ($187) $ 575
====== =======
</TABLE>
See notes to consolidated financial statements.
<PAGE> 6
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
McM Corporation and Subsidiaries
September 30, 1995
Note A -- BASIS OF PRESENTATION
The accompanying unaudited financial statements have been prepared in
accordance with the instructions to Form 10-Q and, therefore, do not include
all information and footnotes necessary for a fair presentation of financial
position, results of operations, and cash flows in conformity with generally
accepted accounting principles. The statements include all adjustments
(consisting of normal recurring accruals) which are, in the opinion of
management, necessary for a fair statement of the results.
For further information regarding the significant accounting policies,
refer to the consolidated financial statements and footnotes thereto included
in McM's annual report on Form 10-K for the year ended December 31, 1994.
NOTE B -- INCOME TAXES
The income tax provision is based upon the estimated effective tax
rate for the year. This rate varies from the normal federal income tax rate of
thirty-four percent (34%) because of the utilization of tax return net
operating loss carryforwards.
NOTE C -- SHAREHOLDERS' EQUITY
On May 11, 1995, the shareholders of McM approved an amendment to the
Articles of Incorporation of McM increasing the number of authorized Common
Shares from 5,000,000 to 10,000,000 and authorized the creation of a new class
of 1,000,000 Preferred Shares. The amendment vests in the Board of Directors
the authority to issue, at such time as the Board deems appropriate, the
5,000,000 newly authorized Common Shares and to fix by resolution any
designations, preferences, relative rights and limitations of the Preferred
Shares. At September 30, 1995, and December 31, 1994, there were 4,675,038
Common Shares issued and outstanding. No Preferred Shares had been defined or
issued at September 30, 1995.
NOTE D -- STOCK OPTION PLAN AND EARNINGS PER SHARE
Earnings per common share are based on 4,675,038 shares of Common
Stock issued and outstanding and exclude the effect of common stock
equivalents. Stock options had no effect on the computation of earnings per
share.
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NOTE E -- CONTINGENCIES
Litigation: In the normal course of operations, certain subsidiaries
of the Company have been named as parties to various pending and threatened
litigation. While the outcome of some of these matters cannot be estimated
with certainty, it is the opinion of management, after consultation with legal
counsel, that the resolution of this litigation will not have a material
adverse effect on the Company's consolidated financial position.
<PAGE> 8
MANAGEMENT'S DISCUSSION AND ANALYSIS
McM Corporation and Subsidiaries
Review of Operations
Unaudited results for the nine months ended September 30, 1995, show
net income of $1,986,000 or $.42 per share compared to net income of $1,156,000
or $.25 per share for the same period in 1994. Consolidated gross revenues for
the first nine months of 1995 were $36,421,000 compared to $33,928,000 for the
same period of 1994.
Shareholders' equity at September 30, 1995, totalled $22,910,000 or
$4.90 per share compared to $20,407,000 or $4.37 per share at December 31,
1994. Consolidated assets totalled $132,430,000 at September 30, 1995,
compared to $137,665,000 at December 31, 1994.
Total net premium revenues were $33,283,000 for the first nine months
of 1995 compared to $30,351,000 for the same period in 1994, an overall
increase of approximately 10%. This increase in net premiums is the result of
management's plan for continuing growth in premium writings that was
established in the fourth quarter of 1994.
The overall loss and settlement expense ratio for the first nine
months of 1995 was 3.4 percentage points less than that of the same period in
1994. Through September 30, 1995, the overall loss and settlement expense
ratios were 66% and 69.4% for the first nine months of 1995 and 1994,
respectively. Favorable loss development on reserves of prior accident years,
related primarily to the Company's assumed and discontinued business, has
contributed to this improvement. Favorable underwriting results of ongoing
operations for the first nine months of 1995 continued to reflect the trend
established in 1994. The loss and settlement expense ratio of 66.9% for
ongoing lines of business improved 1.4 percentage points from the 68.3% ratio
experienced for the same period last year.
The ratio of underwriting, acquisition and administrative expenses to
earned premium ("the expense ratio") for the first nine months of 1995 was
36.4% compared to 37.4% for the same period in 1994. This decrease in the
expense ratio reflects management's continuing effort to enhance productivity
and efficiency in the Company's operations through increased premium production
and cost control.
Included in consolidated net income for the first nine months of 1995
as a reduction of earned premium is a $500,000 charge relating to the
settlement of the Company's California Proposition 103 liability. This
settlement was finalized with the California Department of Insurance on July
21, 1995, and includes interest. Offsetting this charge and also included in
the first nine months' results for 1995 is a $539,000 favorable arbitration
settlement related to the Company's discontinued property and casualty
programs.
<PAGE> 9
Liquidity and Capital Resources
Consolidated gross investment income totalled $3,005,000 for the first
nine months of 1995 compared to $3,106,000 for the same period last year.
Investment earnings declined throughout 1994 as a result of a reduction in
invested assets and lower investment yields. Contributing to the overall
decrease in invested assets during 1993 and 1994 were planned reductions in net
written premiums, the Company's primary source of short and long-term
liquidity, and settlement of claims related to discontinued property and
casualty insurance programs. The reduction in net written premium during 1993
and 1994 is a result of management's successful strategy to reduce premium
writings in unprofitable markets and to reduce the Company's net writings to
surplus ratio. As mentioned previously, the Company is now experiencing
planned moderate growth in premium writings. Investment earnings have also
improved in the first nine months of 1995 as a result of overall higher
investment yields and improved operating cashflows. Invested assets totalled
$59.4 million at September 30, 1995, compared to $67.2 million at December 31,
1994. Claim liabilities decreased $12.4 million during the first nine months
of 1995 and total liabilities decreased $7.7 million in the same period.
Cash used by operating activities was $8.1 million for the first nine
months of 1995 compared to $14.3 million during the same period last year. The
cash used by operating activities reflects an overall decrease in liabilities
of $7.7 million for the first nine months of 1995. Cash and short-term
investments held by the Company at September 30, 1995, were approximately $9.2
million as compared to $19.2 million at December 31, 1994.
The Board of Directors did not declare a dividend to shareholders
during the first nine months of 1995. The Board will carefully consider the
Company's earnings, capital requirements, financial condition and other
relevant factors when determining whether to declare dividends in the future.
<PAGE> 10
McM CORPORATION AND SUBSIDIARIES
PART II
Item 1. Legal Proceedings.
1) Reference is hereby made to the Note D of the
Consolidated Financial Statements provided in Part I,
Item 1 of this Form 10-Q.
Items 2 - 6. Exhibits
27 - Financial Data Schedule (for SEC use only).
<PAGE> 11
Signatures
Pursuant to the requirements of the Securities and Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
McM Corporation
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(Registrant)
GEORGE E. KING
-------------------------
George E. King
President and
Chief Executive Officer
November 9, 1995
KEVIN J. HAMM
-------------------------
Kevin J. Hamm
Vice President
and Chief Financial Officer
<TABLE> <S> <C>
<ARTICLE> 7
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FINANCIAL STATEMENTS OF McM CORPORATION FOR THE NINE MONTHS ENDED SEPTEMBER 30,
1995, AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL
STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-START> JAN-01-1995
<PERIOD-END> SEP-30-1995
<DEBT-HELD-FOR-SALE> 9,506
<DEBT-CARRYING-VALUE> 42,069
<DEBT-MARKET-VALUE> 42,026
<EQUITIES> 0
<MORTGAGE> 0
<REAL-ESTATE> 0
<TOTAL-INVEST> 59,425
<CASH> 1,310
<RECOVER-REINSURE> 50,944
<DEFERRED-ACQUISITION> 3,730
<TOTAL-ASSETS> 132,430
<POLICY-LOSSES> 68,509
<UNEARNED-PREMIUMS> 17,994
<POLICY-OTHER> 0
<POLICY-HOLDER-FUNDS> 7,363
<NOTES-PAYABLE> 0
<COMMON> 4,675
0
0
<OTHER-SE> 18,235
<TOTAL-LIABILITY-AND-EQUITY> 132,430
33,283
<INVESTMENT-INCOME> 2,644
<INVESTMENT-GAINS> 0
<OTHER-INCOME> 133
<BENEFITS> 21,972
<UNDERWRITING-AMORTIZATION> 0
<UNDERWRITING-OTHER> 12,102
<INCOME-PRETAX> 1,986
<INCOME-TAX> 0
<INCOME-CONTINUING> 1,986
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,986
<EPS-PRIMARY> 0.42
<EPS-DILUTED> 0.42
<RESERVE-OPEN> 38,415
<PROVISION-CURRENT> 11,117
<PROVISION-PRIOR> 20,721
<PAYMENTS-CURRENT> 11,018
<PAYMENTS-PRIOR> 17,530
<RESERVE-CLOSE> 31,837
<CUMULATIVE-DEFICIENCY> (164)
</TABLE>
