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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 June 30, 1997
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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
incorporation of organization) Identification No.)
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 June 30, 1997, 4,687,713 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 -- June 30, 1997 and
December 31, 1996
Consolidated Statements of Income -- Six Months Ended
June 30, 1997 and 1996
Consolidated Statements of Cash Flows -- Six Months
Ended June 30, 1997 and 1996
Notes to Consolidated Financial Statements -- June 30, 1997
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>
June 30 December 31
1997 1996
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<S> <C> <C>
ASSETS
Invested Assets:
Securities available-for-sale, at fair value:
Fixed maturities (amortized cost: 1997 - $39,499; 1996 - $36,938) $ 39,167 $ 36,873
Fixed maturities held-to-maturity, at amortized cost
(fair value: 1997 - $4,879; 1996 - $6,022) 4,824 5,938
Short-term investments 12,059 14,061
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56,050 56,872
Cash 1,880 1,776
Accrued investment income 724 803
Premiums receivable 9,521 9,380
Reinsurance balances recoverable on:
Paid losses and settlement expenses 1,917 3,676
Reserves for losses and settlement expenses 28,873 28,768
Unearned premiums 3,408 4,068
Deferred policy acquisition costs 4,042 3,992
Equipment, at cost less accumulated depreciation
(1997 - $1,832; 1996 - $1,699) 1,455 1,331
Other assets 2,283 2,204
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TOTAL ASSETS $ 110,153 $ 112,870
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LIABILITIES AND SHAREHOLDERS' EQUITY
Reserves for losses and settlement expenses $ 53,009 $ 55,300
Unearned premiums 17,128 17,925
Other policyholder funds 6,507 6,580
Amounts payable to reinsurers 3,047 3,089
Accrued expenses 8,704 8,321
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TOTAL LIABILITIES 88,395 91,215
Shareholders' equity:
Common Stock, par value $1 per share - authorized 1996 and 1995 - 10,000,000 shares;
issued and outstanding: 1997 - 4,687,713 shares; 1996 - 4,678,183 shares 4,688 4,678
Additional paid-in capital 1,515 1,489
Unrealized loss on securities available-for-sale (333) (65)
Retained Earnings 15,888 15,553
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TOTAL SHAREHOLDERS' EQUITY 21,758 21,655
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TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 110,153 $ 112,870
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</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>
Six Months Ended Three Months Ended
June 30 June 30
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1997 1996 1997 1996
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<S> <C> <C> <C> <C>
REVENUES
Premiums earned $ 38,363 $ 36,863 $ 19,506 $ 18,459
Premiums ceded (10,136) (11,243) (5,127) (5,597)
-------- -------- -------- --------
Net premiums earned 28,227 25,620 14,379 12,862
Investment income, less investment expenses:
$213 and $236 for the six months ended
June 30, 1997 and 1996, and $103 and $119 for the
three months ended June 30, 1997 and 1996 1,504 1,607 $ 764 $ 717
Other income 211 167 114 106
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TOTAL REVENUES 29,942 27,394 15,257 13,685
LOSSES AND EXPENSES
Losses and settlement expenses 28,838 25,629 $ 14,039 $ 15,303
Losses and settlement expenses ceded (9,020) (9,010) (3,746) (6,958)
-------- -------- -------- --------
Net losses and settlement expenses 19,818 16,619 10,293 8,345
Underwriting, acquisition and administrative expenses 9,729 9,506 $ 4,877 $ 4,742
Provision for bad debts on liquidated reinsurers 60 0 60 0
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TOTAL LOSSES AND EXPENSES 29,607 26,125 15,230 13,087
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NET INCOME $ 335 $ 1,269 $ 27 $ 598
======== ======== ======== ========
PER SHARE DATA:
Income per share $ 0.07 $ 0.27 $ 0.01 $ 0.13
======== ======== ======== ========
Dividends per share declared by McM $ 0.00 $ 0.02 $ 0.00 $ 0.02
======== ======== ======== ========
</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>
Six Months Ended
June 30
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1997 1996
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<S> <C> <C>
OPERATING ACTIVITIES
Net income $ 335 $ 1,269
Adjustments to reconcile net income to net cash used by operating activities:
Policy liabilities (3,161) (5,058)
Premiums receivable (141) (449)
Accrued investment income 79 35
Net receivable from reinsurers 2,272 (1,749)
Amortization of deferred policy acquisition costs 6,230 4,334
Policy acquisition costs deferred (6,280) (4,729)
Other 587 1,868
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CASH USED BY OPERATING ACTIVITIES (79) (4,479)
INVESTING ACTIVITIES
Securities available-for-sale:
Purchases (2,886) 0
Sales 285 0
Maturities 50 4,730
Securities held-to-maturity:
Maturities 1,077 7,755
Purchases of property and equipment (381) (238)
Decrease/(Increase) in short-term investments 2,002 (8,771)
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CASH PROVIDED BY INVESTING ACTIVITIES 147 3,476
FINANCING ACTIVITIES
Employee Stock Purchases 36 0
Cash dividends paid 0 (93)
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INCREASE (DECREASE) IN CASH $ 104 ($1,096)
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</TABLE>
See notes to consolidated financial statements.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
McM Corporation and Subsidiaries
June 30, 1997
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, 1996.
NOTE B -- NEW ACCOUNTING STANDARDS
In February 1997, the Financial Accounting Standards Board issued the
Statement of Financial Accounting Standards No. 128, "Earnings per Share" ("FAS
128"), which is required to be adopted on December 31, 1997. Upon adoption, the
Company will be required to change the method used currently to compute earnings
per share and to restate all prior periods presented. Under the new requirements
for calculating basic or primary earnings per share the dilutive effect of
common stock equivalents will be excluded. Currently, shares issuable under the
Company's employee stock option and other stock based plans are excluded from
the weighted average number of shares used in the Company's computation of
primary earnings per share on the assumption that their effect is not dilutive.
Consequently, adoption of FAS 128 will have no impact on the Company's
computation of primary earnings per share for the quarters ended June 30, 1997
and 1996. The impact of FAS 128 on the calculation of fully diluted earnings per
share for these quarters is not expected to be material.
NOTE C -- INCOME TAXES
No provision for income taxes has been recognized by the Company
because of the utilization of tax return net operating loss carryforwards.
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NOTE D -- STOCK OPTION PLAN AND EARNINGS PER SHARE
Earnings per common share are based on 4,687,713 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 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.
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MANAGEMENT'S DISCUSSION AND ANALYSIS
McM Corporation and Subsidiaries
Review of Operations
Unaudited results for the six months ended June 30, 1997, reflect net
income of $335,000 or $.07 per share, compared to net income of $1,269,000 or
$.27 per share for the first six months of 1996. Consolidated gross revenues for
the first six months of 1997 increased 9% to $30,155,000 compared to $27,630,000
for the same period in 1996.
Total net premium revenues were $28,227,000 for the first six months of
1997 compared to $25,620,000 for the same period in 1996, an increase of
approximately 10%. This increase in net premiums is primarily the result of
growth in direct private passenger automobile premium writings and a reduction
in the Company's private passenger quota share reinsurance program.
The overall claims and loss settlement expense ratio increased to 70.2%
for the first six months of 1997 compared to 64.9% for the same period last
year. The increase in the loss ratio, which includes approximately $500,000 of
reserve development on prior years' claims, was partially offset by improved
operating efficiency as reflected in the reduction in the Company's ratio of
underwriting, acquisition and administrative expenses to net earned premium.
This ratio declined 2.6 percentage points to 34.5% for the first six months of
1997 from 37.1% for the same period last year.
Shareholders' equity at June 30, 1997, totalled $21,758,000 or $4.64
per share compared to $21,655,000 or $4.63 per share at December 31, 1996.
Consolidated assets totalled $110,153,000 at June 30, 1997, compared to
$112,870,000 at December 31, 1996.
Liquidity and Capital Resources
Consolidated gross investment income totalled $1,717,000 for the first
six months of 1997, compared to $1,843,000 for the same period in 1996. This
decline in investment income is primarily the result of a reduction of invested
assets, which were $56.1 million at June 30, 1997, compared to $58.6 million at
June 30, 1996. The decline in invested balances was attributed to the settlement
of claims liabilities. Overall, reserves for claims losses and loss settlement
expenses decreased $2.3 million to $53.0 million at June 30, 1997, compared to
$55.3 million at December 31, 1996.
Cash used by operating activities totalled $79,000 for the first six
months of 1997, compared to $4.5 million during the same period in 1996. This
improvement in operating cashflows is due primarily to a
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decline in the level of claims severity experienced by the Company during 1997,
resulting in a substantial reduction in receivable balances related to reinsured
paid losses and loss adjustment expenses.
Cash and short-term investments held by the Company at June 30, 1997
were approximately $13.9 million, compared to $15.8 million at December 31,
1996. The Company maintains a portfolio of cash and short-term investments which
it believes is adequate to meet projected expenditures.
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McM CORPORATION AND SUBSIDIARIES
PART II
Item 1. Legal Proceedings.
1) Reference is hereby made to Note E 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.
27 Financial Data Schedule (for SEC use only).
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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/ STEPHEN L. STEPHANO
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Stephen L. Stephano
President and
Chief Operating Officer
August 8, 1997
/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 TWELVE MONTHS ENDED JUNE 30,
1997, AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL
STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> JUN-30-1997
<DEBT-HELD-FOR-SALE> 39,167
<DEBT-CARRYING-VALUE> 4,824
<DEBT-MARKET-VALUE> 4,879
<EQUITIES> 0
<MORTGAGE> 0
<REAL-ESTATE> 0
<TOTAL-INVEST> 56,050
<CASH> 1,880
<RECOVER-REINSURE> 34,198
<DEFERRED-ACQUISITION> 4,042
<TOTAL-ASSETS> 110,153
<POLICY-LOSSES> 53,009
<UNEARNED-PREMIUMS> 17,128
<POLICY-OTHER> 0
<POLICY-HOLDER-FUNDS> 6,507
<NOTES-PAYABLE> 0
0
0
<COMMON> 4,688
<OTHER-SE> 17,070
<TOTAL-LIABILITY-AND-EQUITY> 110,153
28,227
<INVESTMENT-INCOME> 1,504
<INVESTMENT-GAINS> 0
<OTHER-INCOME> 211
<BENEFITS> 19,818
<UNDERWRITING-AMORTIZATION> 0
<UNDERWRITING-OTHER> 9,729
<INCOME-PRETAX> 335
<INCOME-TAX> 0
<INCOME-CONTINUING> 335
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 335
<EPS-PRIMARY> 0.07
<EPS-DILUTED> 0.07
<RESERVE-OPEN> 26,532
<PROVISION-CURRENT> 18,996
<PROVISION-PRIOR> 823
<PAYMENTS-CURRENT> 9,948
<PAYMENTS-PRIOR> 12,267
<RESERVE-CLOSE> 24,136
<CUMULATIVE-DEFICIENCY> 823
</TABLE>
