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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, 1996
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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
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(State or other jurisdiction of (IRS Employer Identification No.)
incorporation of organization)
Box 12317, 702 Oberlin Road, Raleigh, North Carolina 27605
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(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
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At September 30, 1996, 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, 1996 and
December 31, 1995
Consolidated Statements of Income -- Nine and Three Months Ended
September 30, 1996 and 1995
Consolidated Statements of Cash Flows -- Nine Months Ended
September 30, 1996 and 1995
Notes to Consolidated Financial Statements -- September 30, 1996
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 1996 1995
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<S> <C> <C>
Invested Assets:
Securities available-for-sale, at fair value:
Fixed maturities (amortized cost: 1996 - $27,956; 1995 - $31,477) $ 27,719 $ 31,942
Fixed maturities held-to-maturity, at amortized cost
(fair value: 1996 - $13,908; 1995 - $16,429) 13,980 16,230
Short-term investments 18,072 14,848
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59,771 63,020
Cash 1,148 1,637
Accrued investment income 659 840
Premiums receivable 10,583 9,935
Reinsurance balances recoverable on:
Paid losses and settlement expenses 2,686 3,461
Reserves for losses and settlement expenses 33,510 36,155
Unearned premiums 4,080 4,943
Deferred policy acquisition costs 4,063 3,343
Equipment, at cost less accumulated depreciation
(1996 - $1,628; 1995 - $1,437) 1,069 1,105
Other assets 2,106 2,129
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TOTAL ASSETS $119,675 $126,568
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LIABILITIES AND SHAREHOLDERS' EQUITY
Reserves for losses and settlement expenses $ 57,492 $ 66,152
Unearned premiums 18,266 17,234
Other policyholder funds 6,774 7,247
Amounts payable to reinsurers 4,522 5,008
Accrued expenses 8,579 7,687
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TOTAL LIABILITIES 95,633 103,328
Shareholders' equity:
Common Stock, par value $1 per share - authorized 1996 and 1995 - 10,000,000 shares;
issued and outstanding: 1996 and 1995 - 4,675,038 shares 4,675 4,675
Additional paid-in capital 1,477 1,477
Unrealized (loss) gain on securities available-for-sale (237) 465
Retained Earnings 18,127 16,623
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TOTAL SHAREHOLDERS' EQUITY 24,042 23,240
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TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $119,675 $126,568
======== ========
</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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1996 1995 1996 1995
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<S> <C> <C> <C> <C>
REVENUES
Premiums earned $ 54,961 $ 51,331 $ 18,098 $ 17,904
Premiums ceded (16,458) (18,048) (5,215) (5,989)
-------- -------- -------- --------
Net premiums earned 38,503 33,283 12,883 11,915
Investment income, less investment expenses:
$344 and $361 for the nine months ended
September 30, 1996 and 1995, and $108 and $121 for the
three months ended September 30, 1996 and 1995 2,371 2,644 764 857
Other income 248 133 81 54
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TOTAL REVENUES 41,122 36,060 13,728 12,826
LOSSES AND EXPENSES
Losses and settlement expenses 37,097 34,534 11,468 14,607
Losses and settlement expenses ceded (11,733) (12,562) (2,723) (6,758)
-------- -------- -------- --------
Net losses and settlement expenses 25,364 21,972 8,745 7,849
Underwriting, acquisition and administrative expenses 14,066 12,102 4,560 4,125
-------- -------- -------- --------
TOTAL LOSSES AND EXPENSES 39,430 34,074 13,305 11,974
-------- -------- -------- --------
NET INCOME $ 1,692 $ 1,986 $ 423 $ 852
======== ======== ======== ========
PER SHARE DATA:
Income per share $ 0.36 $ 0.42 $ 0.09 $ 0.18
======== ======== ======== ========
Dividends per share declared by McM $ 0.04 $ 0.00 $ 0.02 $ 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,
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1996 1995
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<S> <C> <C>
OPERATING ACTIVITIES
Net income $ 1,692 $ 1,986
Adjustments to reconcile net income to net cash used
by operating activities:
Policy liabilities (8,101) (9,228)
Premiums receivable (648) (3,789)
Accrued investment income 181 (117)
Net receivable from reinsurers 3,797 (1,054)
Amortization of deferred policy acquisition costs 7,292 4,995
Policy acquisition costs deferred (8,012) (5,490)
Other 1,379 4,580
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CASH USED BY OPERATING ACTIVITIES (2,420) (8,117)
INVESTING ACTIVITIES
Securities available-for-sale:
Purchases (9,881) 0
Maturities 6,965 1,177
Securities held-to-maturity:
Purchases (1,961) (2,984)
Maturities 10,603 120
Purchases of property and equipment (383) (211)
(Increase) decrease in short-term investments (3,224) 9,828
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CASH PROVIDED BY INVESTING ACTIVITIES 2,119 7,930
FINANCING ACTIVITIES
Cash dividends paid (188) 0
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DECREASE IN CASH $ (489) $ (187)
======== =======
</TABLE>
See notes to consolidated financial statements.
<PAGE> 6
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
McM Corporation and Subsidiaries
September 30, 1996
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, 1995.
NOTE B -- INCOME TAXES
No provision for income taxes has been recognized by the Company
because of the utilization of tax return net operating loss carryforwards.
NOTE C -- 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.
NOTE D -- 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.
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NOTE E -- RECLASSIFICATIONS
A reclassification of certain balance sheet accounts was made for the current
and prior periods. The reclassification was made for the purpose of enhanced
presentation and has no impact on shareholder's equity or net income.
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MANAGEMENT'S DISCUSSION AND ANALYSIS
McM Corporation and Subsidiaries
Review of Operations
Unaudited results for the nine months ended September 30, 1996, show
net income of $1,692,000 or $.36 per share, compared to net income of
$1,986,000 or $.42 per share for the first nine months of 1995. Consolidated
gross revenues for the first nine months of 1996 increased 14% to $41,466,000
compared to $36,421,000 for the same period in 1995.
Shareholders' equity at September 30, 1996, totalled $24,042,000 or
$5.14 per share compared to $23,240,000 or $4.97 per share at December 31,
1995. Consolidated assets totalled $119,675,000 at September 30, 1996,
compared to $126,568,000 at December 31, 1995.
Total net premium revenues were $38,503,000 for the first nine months
of 1996 compared to $33,283,000 for the same period in 1995, an increase of
approximately 16%. This increase in net premiums is primarily the result of
growth in private passenger automobile premium writings and a reduction in the
Company's quota share reinsurance program.
Underwriting results for the first nine months of 1996 are consistent
with those for the same period of 1995. The overall claims loss and settlement
expense ratio for the current period was 65.9% compared to 66.0% for the first
nine months of 1995. The ratio of underwriting, acquisition and administrative
expenses to net earned premium was 36.5% for the nine months ended September 30,
1996, compared to 36.3% for the same period in 1995.
Underwriting results for the Company's ongoing lines of business
continued to show improvement in the first nine months of 1996. The claims
loss and settlement expense ratio for these lines showed a decrease of 2.5
percentage points to 64.4% at September 30, 1996, from 66.9% at September 30,
1995. There was no significant loss development on reserves of prior accident
years related to ongoing lines of business during the current period.
The Company did experience unfavorable loss development totalling
$575,000 for the first nine months of 1996 on reserves of prior accident years
related to workers compensation and other discontinued insurance coverages
compared to favorable development of $618,000 during the same period in 1995.
<PAGE> 9
Liquidity and Capital Resources
Consolidated gross investment income totalled $2,715,000 for the first
nine months of 1996, compared to $3,005,000 for the same period in 1995. This
decline in investment income is primarily the result of lower investment yields
and a reduction in average invested asset balances during 1996. The decrease
in invested balances is primarily attributed to the continued settlement of
claims related to discontinued lines of business, and the acceleration of
claims settlement relating to ongoing lines of business. Overall, loss
reserves decreased by $8.7 million during the first nine months of 1996. In
addition, the Company experienced unrealized losses of $702,000 during the
first nine months of 1996 on securities available-for-sale, compared to
unrealized gains of $517,000 for the first nine months of 1995.
Cash used by operating activities totalled $2.4 million for the first
nine months of 1996 compared to $8.1 million during the same period in 1995.
This improvement is attributed to the overall increase in net premium writings,
the Company's main source of cash, experienced in 1995 and 1996. Additionally,
planned increases in premium writings during 1995 resulted in an increase in
premiums receivable balances at September 30, 1995, whereas 1996 production
levels show only a moderate increase. Cash and short-term investments held by
the Company at September 30, 1996, were approximately $19.2 million compared to
$16.5 million at December 31, 1995.
The Board of Directors declared quarterly dividends of $.02 per share
on May 23, 1996, and August 29, 1996, for payment on June 17, 1996, and
September 27, 1996, respectively. The payments were made to shareholders of
record on June 17 and September 9, 1996.
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McM CORPORATION AND SUBSIDIARIES
PART II
Item 1. Legal Proceedings.
1) Reference is hereby made to Note D of the Consolidated
Financial Statements provided in Part I, Item 1
of this Form 10-Q.
Items 2 - 5. Nothing to report.
Item 6. Exhibits and Reports on Form 8-K
a) Exhibits
27 Financial Data Schedule (for SEC use only).
b) Reports on Form 8-K
None
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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)
/s/ GEORGE E. KING
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George E. King
Chief Executive Officer
and Chairman Emeritus
August 14, 1996
/s/ KEVIN J. HAMM
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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, 1996, 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-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> SEP-30-1996
<DEBT-HELD-FOR-SALE> 27,719
<DEBT-CARRYING-VALUE> 13,980
<DEBT-MARKET-VALUE> 13,908
<EQUITIES> 0
<MORTGAGE> 0
<REAL-ESTATE> 0
<TOTAL-INVEST> 59,771
<CASH> 1,148
<RECOVER-REINSURE> 40,276
<DEFERRED-ACQUISITION> 4,063
<TOTAL-ASSETS> 119,675
<POLICY-LOSSES> 57,492
<UNEARNED-PREMIUMS> 18,266
<POLICY-OTHER> 0
<POLICY-HOLDER-FUNDS> 6,774
<NOTES-PAYABLE> 0
0
0
<COMMON> 4,675
<OTHER-SE> 19,367
<TOTAL-LIABILITY-AND-EQUITY> 119,675
38,503
<INVESTMENT-INCOME> 2,371
<INVESTMENT-GAINS> 0
<OTHER-INCOME> 248
<BENEFITS> 25,364
<UNDERWRITING-AMORTIZATION> 0
<UNDERWRITING-OTHER> 14,066
<INCOME-PRETAX> 1,692
<INCOME-TAX> 0
<INCOME-CONTINUING> 1,692
<DISCONTINUED> 0
<EXTRAORDINARY> 0
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<NET-INCOME> 1,692
<EPS-PRIMARY> 0.36
<EPS-DILUTED> 0.36
<RESERVE-OPEN> 29,997
<PROVISION-CURRENT> 24,642
<PROVISION-PRIOR> 722
<PAYMENTS-CURRENT> 14,825
<PAYMENTS-PRIOR> 16,556
<RESERVE-CLOSE> 23,982
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</TABLE>
