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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 March 31, 1997
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 March 31, 1997, 4,682,284 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 -- March 31, 1997 and
December 31, 1996
Consolidated Statements of Income -- Three Months Ended
March 31, 1997 and 1996
Consolidated Statements of Cash Flows -- Three Months
Ended March 31, 1997 and 1996
Notes to Consolidated Financial Statements -- March 31, 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>
March 31 December 31
ASSETS 1997 1996
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<S> <C> <C>
Invested Assets:
Securities available-for-sale, at fair value:
Fixed maturities (amortized cost: 1997 - $40,090; 1996 - $36,938) $ 39,138 $ 36,873
Fixed maturities held-to-maturity, at amortized cost
(fair value: 1997 - $2,475; 1996 - $6,022) 2,504 5,938
Short-term investments 10,953 14,061
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52,595 56,872
Cash 1,618 1,776
Accrued investment income 636 803
Premiums receivable 9,719 9,380
Reinsurance balances recoverable on:
Paid losses and settlement expenses 3,438 3,676
Reserves for losses and settlement expenses 29,486 28,768
Unearned premiums 3,598 4,068
Deferred policy acquisition costs 4,203 3,992
Equipment, at cost less accumulated depreciation
(1997 - $1,769; 1996 - $1,699) 1,357 1,331
Other assets 2,853 2,204
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TOTAL ASSETS $ 109,503 $ 112,870
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LIABILITIES AND SHAREHOLDERS' EQUITY
Reserves for losses and settlement expenses $ 54,558 $ 55,300
Unearned premiums 17,979 17,925
Other policyholder funds 6,447 6,580
Amounts payable to reinsurers 1,400 3,089
Accrued expenses 8,024 8,321
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TOTAL LIABILITIES 88,408 91,215
Shareholders' equity:
Common Stock, par value $1 per share - authorized 1997 and 1996 - 10,000,000 shares;
issued and outstanding: 1997 - 4,682,284 and 1996 - 4,678,183 shares 4,684 4,678
Additional paid-in capital 1,502 1,489
Unrealized loss on securities available-for-sale (952) (65)
Retained Earnings 15,861 15,553
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TOTAL SHAREHOLDERS' EQUITY 21,095 21,655
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TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 109,503 $ 112,870
========= =========
</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
Three Months Ended
March 31
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1997 1996
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<S> <C> <C>
REVENUES
Premiums earned $ 18,857 $ 18,404
Premiums ceded (5,009) (5,646)
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Net premiums earned 13,848 12,758
Investment income, less investment expenses:
(1997 - $110; 1996 - $117) 740 890
Other income 97 61
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TOTAL REVENUES 14,685 13,709
LOSSES AND EXPENSES
Losses and settlement expenses 14,799 10,326
Losses and settlement expenses ceded (5,274) (2,052)
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Net losses and settlement expenses 9,525 8,274
Underwriting, acquisition and administrative expenses 4,852 4,764
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TOTAL LOSSES AND EXPENSES 14,377 13,038
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NET INCOME $ 308 $ 671
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PER SHARE DATA:
Income per share $ 0.07 $ 0.14
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Dividends per share declared by McM $ 0.00 $ 0.00
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</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>
Three Months Ended
March 31
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1997 1996
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<S> <C> <C>
OPERATING ACTIVITIES
Net income $ 308 $ 671
Adjustments to reconcile net income to net cash used
by operating activities:
Policy liabilities (821) (4,225)
Premiums receivable (339) 191
Accrued investment income 167 (213)
Net receivable from reinsurers (1,699) 1,452
Amortization of deferred policy acquisition costs 3,609 2,362
Policy acquisition costs deferred (3,820) (2,553)
Other (802) 2,072
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CASH USED BY OPERATING ACTIVITIES (3,397) (243)
INVESTING ACTIVITIES
Securities held-to-maturity:
Maturities 3,434 0
Securities available-for-sale:
Purchases (3,166) 0
Maturities 0 4,592
Purchases of property and equipment (156) (79)
Decrease/(Increase) in short-term investments 3,108 (4,088)
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CASH PROVIDED BY INVESTING ACTIVITIES 3,220 425
FINANCING ACTIVITIES
Employee Stock Purchases 19 0
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CASH PROVIDED BY FINANCING ACTIVITIES 19 0
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(DECREASE) INCREASE IN CASH ($ 158) $ 182
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</TABLE>
See notes to consolidated financial statements.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
McM Corporation and Subsidiaries
March 31, 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 March 31, 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 4,682,284 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 three months ended March 31, 1997, show net
income of $308,000 or $.07 per share, compared to net income of $671,000 or $.14
per share for the first three months of 1996. Consolidated gross revenues for
the first three months of 1997 increased 7% to $14,795,000 compared to
$13,826,000 for the same period in 1996.
Shareholders' equity at March 31, 1997, totalled $21,095,000 or $4.51
per share compared to $21,655,000 or $4.63 per share at December 31, 1996.
Consolidated assets totalled $109,503,000 at March 31, 1997, compared to
$112,870,000 at December 31, 1996.
Total net premium revenues were $13,848,000 for the first three months
of 1997 compared to $12,758,000 for the same period in 1996, an increase of
approximately 9%. 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.
Underwriting results for the first three months of 1997 are in line
with management's expectations showing a slight increase in the overall loss and
settlement expense ratio being partially offset by a reduction in the overall
expense ratio when compared to the same period last year. The overall claims
loss and settlement expense ratio for the first three months of 1997 increased
3.9 percentage points to 68.8% compared to 64.9% for the first three months of
1996 while the ratio of underwriting, acquisition and administrative expenses to
net earned premium for the current period decreased 2.3 percentage points to
35.0% compared to 37.3% for the same period in 1996.
Liquidity and Capital Resources
Consolidated gross investment income totalled $850,000 for the first
three months of 1997, compared to $1,007,000 for the same period in 1996. This
decline in investment income results from a reduction in invested assets
attributed to an overall decline in claims related liabilities and balances
payable to the Company's reinsurers.
Cash used by operating activities totalled $3.4 million for the first
three months of 1997 compared to $243,000 during the same period in 1996. The
increase in cash used by operations in 1997 is primarily attributed to the
payment of deposit premiums to McM's reinsurers which exceeded the actual ceded
premium liability. As a result, the Company's net reinsurance balances
receivable increased approximately $1.7 million
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in the first quarter of 1997. McM received these reinsurance balances in April
of 1997. Cash and short-term investments held by the Company at March 31, 1997,
were approximately $12.6 million compared to $15.8 million at December 31, 1996,
and in management's opinion are more than adequate to meet its current needs.
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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 and Reports on Form 8-K.
a) Exhibit 27 -- Financial Data Schedule (for SEC use only).
b) On February 4, 1997, the Company filed a current report on
Form 8-K relative to the majority shareholder's grant of an
option to purchase its shares. Also contained in the same
report was information relative to an agreement between the
Company and the option holder as further described in the
report.
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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
May 14, 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 THREE MONTHS ENDED
MARCH 31, 1997, AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> MAR-31-1997
<DEBT-HELD-FOR-SALE> 39,138
<DEBT-CARRYING-VALUE> 2,504
<DEBT-MARKET-VALUE> 2,475
<EQUITIES> 0
<MORTGAGE> 0
<REAL-ESTATE> 0
<TOTAL-INVEST> 52,595
<CASH> 1,618
<RECOVER-REINSURE> 36,522
<DEFERRED-ACQUISITION> 4,203
<TOTAL-ASSETS> 109,503
<POLICY-LOSSES> 54,558
<UNEARNED-PREMIUMS> 17,979
<POLICY-OTHER> 0
<POLICY-HOLDER-FUNDS> 6,447
<NOTES-PAYABLE> 0
4,682
0
<COMMON> 0
<OTHER-SE> 16,411
<TOTAL-LIABILITY-AND-EQUITY> 109,503
13,848
<INVESTMENT-INCOME> 740
<INVESTMENT-GAINS> 0
<OTHER-INCOME> 97
<BENEFITS> 9,525
<UNDERWRITING-AMORTIZATION> 0
<UNDERWRITING-OTHER> 4,852
<INCOME-PRETAX> 308
<INCOME-TAX> 0
<INCOME-CONTINUING> 308
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 308
<EPS-PRIMARY> 0.07
<EPS-DILUTED> 0.07
<RESERVE-OPEN> 26,532
<PROVISION-CURRENT> 9,424
<PROVISION-PRIOR> 101
<PAYMENTS-CURRENT> 3,689
<PAYMENTS-PRIOR> 7,296
<RESERVE-CLOSE> 25,071
<CUMULATIVE-DEFICIENCY> 101
</TABLE>
