<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, 1997
OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ___________ to __________
Commission File Number: 0-8678
McM Corporation
- --------------------------------------------------------------------------------
(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
- --------------------------------------------------------------------------------
(Address of principal executive office) (Zip Code)
Registrant's telephone number, including area code (919) 833-1600
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, 1997, 4,693,525 shares of Common Stock of the
registrant were outstanding.
<PAGE> 2
INDEX
McM CORPORATION AND SUBSIDIARIES
PART I. FINANCIAL INFORMATION (Unaudited)
Item 1. Financial Statements
Consolidated Balance Sheets -- September 30, 1997 and
December 31, 1996
Consolidated Statements of Income --Nine and Three Months
Ended September 30, 1997 and 1996
Consolidated Statements of Cash Flows -- Nine Months
Ended September 30, 1997 and 1996
Notes to Consolidated Financial Statements -- September 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
<PAGE> 3
CONSOLIDATED BALANCE SHEETS (UNAUDITED)
McM CORPORATION AND SUBSIDIARIES
(Thousands of dollars)
<TABLE>
<CAPTION>
September 30 December 31
ASSETS 1997 1996
---------------- ----------------
<S> <C> <C>
Invested Assets:
Securities available-for-sale, at fair value:
Fixed maturities (amortized cost: 1997 - $38,529; 1996 - $36,938) $38,744 $36,873
Fixed maturities held-to-maturity, at amortized cost
(fair value: 1997 - $3,223; 1996 - $6,022) 3,140 5,938
Short-term investments 9,646 14,061
---------------- ----------------
51,530 56,872
Cash 2,220 1,776
Accrued investment income 731 803
Premiums receivable 9,439 9,380
Reinsurance balances recoverable on:
Paid losses and settlement expenses 4,394 3,676
Reserves for losses and settlement expenses 28,073 28,768
Unearned premiums 3,644 4,068
Deferred policy acquisition costs 3,922 3,992
Equipment, at cost less accumulated depreciation
(1997 - $1,907; 1996 - $1,699) 1,688 1,331
Other assets 2,184 2,204
---------------- ----------------
TOTAL ASSETS $107,825 $112,870
================ ================
LIABILITIES AND SHAREHOLDERS' EQUITY
Reserves for losses and settlement expenses $54,554 $55,300
Unearned premiums 17,172 17,925
Other policyholder funds 6,368 6,580
Amounts payable to reinsurers 3,681 3,089
Accrued expenses 8,159 8,321
---------------- ----------------
TOTAL LIABILITIES $89,934 $91,215
Shareholders' equity:
Common Stock, par value $1 per share - authorized 1997 and 1996 - 10,000,000 shares;
issued and outstanding: 1997 - 4,693,525 and 1996 - 4,678,183 shares $4,694 $4,678
Additional paid-in capital 1,526 1,489
Unrealized gain (loss) on securities available-for-sale 215 (65)
Retained Earnings 11,456 15,553
---------------- ----------------
TOTAL SHAREHOLDERS' EQUITY 17,891 21,655
---------------- ----------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $107,825 $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>
Nine Months Ended Three Months Ended
September 30 September 30
-------------------------------- --------------------------------
1997 1996 1997 1996
-------------------------------- --------------------------------
<S> <C> <C> <C> <C>
REVENUES
Premiums earned $57,139 $54,961 $18,776 $18,098
Premiums ceded (15,020) (16,458) (4,884) (5,215)
-------------------------------- --------------------------------
Net premiums earned 42,119 38,503 13,892 12,883
Investment income, less investment expenses:
$316 and $344 for the nine months ended
September 30, 1997 and 1996, and $103 and $108 for the
three months ended September 30, 1997 and 1996 2,272 2,371 768 764
Other income 551 248 340 81
-------------------------------- --------------------------------
TOTAL REVENUES 44,942 41,122 15,000 13,728
LOSSES AND EXPENSES
Losses and settlement expenses 46,469 37,097 17,631 11,468
Losses and settlement expenses ceded (12,285) (11,733) (3,265) (2,723)
-------------------------------- --------------------------------
Net losses and settlement expenses 34,184 25,364 14,366 8,745
Underwriting, acquisition and administrative expenses 14,653 14,016 4,924 4,510
Provision for bad debts on liquidated reinsurers 202 50 142 50
-------------------------------- --------------------------------
TOTAL LOSSES AND EXPENSES 49,039 39,430 19,432 13,305
-------------------------------- --------------------------------
NET (LOSS) INCOME ($4,097) $1,692 ($4,432) $423
================================ ================================
PER SHARE DATA:
(Loss) income per share ($0.87) $0.36 ($0.94) $0.09
================================ ================================
Dividends per share declared by McM $0.00 $0.04 $0.00 $0.02
================================ ================================
</TABLE>
See notes to consolidated financial statements.
<PAGE> 5
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
MCM CORPORATION AND SUBSIDIARIES
(Thousands of dollars)
<TABLE>
<CAPTION>
Nine Months Ended
September 30
-----------------------------------
1997 1996
---------------- ---------------
<S> <C> <C>
OPERATING ACTIVITIES
Net income ($4,097) $1,692
Adjustments to reconcile net income to net cash used by operating activities:
Policy liabilities (1,711) (8,101)
Premiums receivable (59) (648)
Accrued investment income 72 181
Net receivable from reinsurers 993 3,797
Amortization of deferred policy acquisition costs 8,350 7,292
Policy acquisition costs deferred (8,280) (8,012)
Other 277 1,379
---------------- ---------------
CASH USED BY OPERATING ACTIVITIES (4,455) (2,420)
INVESTING ACTIVITIES
Securities available-for-sale:
Purchases (5,500) (9,881)
Sales 1,581 0
Maturities 2,340 6,965
Securities held-to-maturity:
Purchases 0 (1,961)
Maturities 2,762 10,603
Purchases of property and equipment (752) (383)
Decrease/(Increase) in short-term investments 4,415 (3,224)
---------------- ---------------
CASH PROVIDED BY INVESTING ACTIVITIES 4,846 2,119
FINANCING ACTIVITIES
Employee Stock Purchases 53 0
Cash dividends paid 0 (188)
---------------- ---------------
CASH PROVIDED (USED) BY FINANCING ACTIVITIES 53 (188)
---------------- ---------------
INCREASE (DECREASE) IN CASH $444 ($489)
================ ===============
</TABLE>
See notes to consolidated financial statements.
<PAGE> 6
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
McM Corporation and Subsidiaries
September 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 September 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 for
the periods presented because of the Company's reported loss or utilization of
tax return net operating loss carryforwards.
<PAGE> 7
NOTE D -- STOCK OPTION PLAN AND EARNINGS PER SHARE
Earnings per common share are based on 4,693,525 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:
1. An action purporting to be a shareholders' derivative action has
been brought against McM, each of its directors, the McMillen Trust (owner of
65% of McM's shares) and Wilmington Trust Company as Trustee of the McMillen
Trust. Also named as defendant is McM Acquisition Corporation ("MAC"), an
entity formed by Raleigh private investor and real estate developer, M. Roland
Britt, in his efforts to acquire shares of McM Corporation. The action was
filed on September 22, 1997, in the Guilford County, North Carolina, Superior
Court.
The suit was filed by Jesse Greenfield and David Robinson, two
shareholders of McM. The plaintiffs state that the suit was brought on behalf
of McM shareholders other than the McMillen Trust. Among other allegations,
the suit complains that the Trust, because it owns approximately two-thirds of
the shares of McM, has effectively exercised control of the Company. It
challenges the composition of the McM Board of Directors and the actions of the
Board as being controlled by the majority shareholder. The complaint alleges
that the action of the Trustee in connection with the McMillen Trust's grant of
an option to sell its shares at $6.20 per share to MAC was improper. The suit
also complains that the Company improperly allowed MAC an exclusive due
diligence period. (This due diligence period expired by its terms on
September 29, 1997.)
The plaintiffs ask the Court (a) to void the Trust's grant of the
option to MAC, (b) to void the Board's grant of the now-expired exclusive due
diligence period to MAC, (c) to remove the Company's directors who have an
affiliation with the Trust and replace them with directors who are unaffiliated
with the Trust and (d) to order the Trust, the Trustee, the directors
affiliated with the Trust and the Board of Directors to pay money damages to
the minority shareholders of McM, including plaintiffs' attorneys' fees.
The ultimate outcome of the litigation cannot presently be determined.
Accordingly, no provision for any liability has been made in the accompanying
financial statements.
2. 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, 1997, reflect
a net loss of $4,097,000 or $.87 per share, compared to net income of $1,692,000
or $.36 per share for the first nine months of 1996.
Consolidated gross revenues for the first nine months of 1997 increased
9% to $45,258,000 compared to $41,466,000 for the same period in 1996. Total net
premium revenues were $42,119,000 for the first nine months of 1997 compared to
$38,503,000 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.
Consolidated results for 1997 have been significantly affected by by
management's decision to increase prior year loss reserves for ongoing lines of
business by approximately $3.0 million. This action was taken primarily as a
result of deterioration in the Company's actuarial loss projections for the
commercial auto liability line of business for the 1996 and 1995 accident years.
Accordingly, $2.1 million of the increase relates to the commercial auto
liability line of business. In addition, commercial auto physical damage and
private passenger auto liability reserves for prior accident years were
increased by approximately $450,000 and $415,000, respectively. Management also
increased loss reserves for the current underwriting year by approximately $1.8
million primarily as a result of higher than anticipated claim costs in
commercial and private passenger physical damage coverages. Reserves relating to
these coverages were increased approximately $1.1 million and $370,000,
respectively. As a result of these reserve increases, the overall claims and
loss and loss settlement expense ratio increased 15.3 percentage points to 81.2%
for the first nine months of 1997, compared to 65.9% for the same period last
year.
The ratio of underwriting, acquisition and administrative expenses and
provision for liquidated reinsurance to net earned premium continued to show
improvement reflecting management's ongoing efforts to reduce expenses and
improve operating efficiency. This ratio showed a decline of 1.2 percentage
points to 35.3% for the first nine months of 1997 compared to 36.5% for the same
period last year.
Shareholders' equity at September 30, 1997, totalled $17,891,000 or
$3.81 per share compared to $21,655,000 or $4.63 per share at December 31, 1996.
Consolidated assets totalled $107,825,000 at September 30, 1997, compared to
$112,870,000 at December 31, 1996.
<PAGE> 9
Liquidity and Capital Resources
Consolidated gross investment income totalled $2,588,000 for the first
nine months of 1997, compared to $2,715,000 for the same period in 1996. This
decline in investment income is primarily the result of a reduction of invested
assets, which were $51.5 million at September 30, 1997, compared to $59.8
million at September 30, 1996. The decline in invested balances is primarily
attributed to accelerated settlement of claim related liabilities. Reserves for
claims losses and loss settlement expenses totalled $54.5 million and $55.3
million at September 30, 1997 and December 31, 1996, respectively. Excluding the
effects of the $4.8 million reserve increase discussed previously, claim
liabilities at September 30, 1997, showed a decrease of $5.6 million when
compared to claim related liabilities at September 30, 1996.
Cash used by operating activities totalled $4.5 million for the first
nine months of 1997, compared to $2.4 million during the same period in 1996.
This decline in operating cash flows is due primarily to the accelerated level
of claim payments discussed above.
Cash and short-term investments held by the Company at September 30,
1997 were approximately $11.9 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.
<PAGE> 10
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
1) The Company reported on Form 8-K dated October 3,
1997, the filing of an action denominated as a
shareholders' derivative action against the Company,
its majority shareholder, the Trustee of the
majority shareholder and McM's directors. Reference
is hereby made to Note E of the Consolidated
Statements provided in Part I, Item 1 of this
Form 10-Q for more detailed information concerning
the status of this action.
2) Exhibit 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
----------------------------------
(Registrant)
STEPHEN L. STEPHANO
----------------------------------
Stephen L. Stephano
President and
Chief Operating Officer
November 14, 1997
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,
1997, 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-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> SEP-30-1997
<DEBT-HELD-FOR-SALE> 38,744
<DEBT-CARRYING-VALUE> 3,140
<DEBT-MARKET-VALUE> 3,223
<EQUITIES> 0
<MORTGAGE> 0
<REAL-ESTATE> 0
<TOTAL-INVEST> 51,530
<CASH> 2,220
<RECOVER-REINSURE> 36,111
<DEFERRED-ACQUISITION> 3,922
<TOTAL-ASSETS> 107,825
<POLICY-LOSSES> 54,554
<UNEARNED-PREMIUMS> 17,172
<POLICY-OTHER> 0
<POLICY-HOLDER-FUNDS> 6,368
<NOTES-PAYABLE> 0
0
0
<COMMON> 4,694
<OTHER-SE> 13,197
<TOTAL-LIABILITY-AND-EQUITY> 107,825
42,119
<INVESTMENT-INCOME> 2,272
<INVESTMENT-GAINS> 0
<OTHER-INCOME> 551
<BENEFITS> 34,184
<UNDERWRITING-AMORTIZATION> 0
<UNDERWRITING-OTHER> 14,855
<INCOME-PRETAX> (4,097)
<INCOME-TAX> 0
<INCOME-CONTINUING> (4,097)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (4,097)
<EPS-PRIMARY> (0.87)
<EPS-DILUTED> (0.87)
<RESERVE-OPEN> 26,532
<PROVISION-CURRENT> 29,978
<PROVISION-PRIOR> 4,206
<PAYMENTS-CURRENT> 17,967
<PAYMENTS-PRIOR> 16,268
<RESERVE-CLOSE> 26,482
<CUMULATIVE-DEFICIENCY> 4,206
</TABLE>
