<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, 1998
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
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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
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, 1998, 4,706,388 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, 1998 and
December 31, 1997
Consolidated Statements of Income --Nine and Three Months
Ended September 30, 1998 and 1997
Consolidated Statements of Cash Flows -- Nine Months
Ended September 30, 1998 and 1997
Consolidated Statement of Changes in Shareholders' Equity --
September 30, 1998
Notes to Consolidated Financial Statements -- September 30,
1998
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 1998 1997
-------- ---------
<S> <C> <C>
Invested Assets:
Securities available-for-sale, at fair value:
Fixed maturities (amortized cost: 1998 - $32,548; 1997 - $25,755) $ 33,282 $ 25,284
Fixed maturities held-to-maturity, at amortized cost
(fair value: 1998 - $3,304; 1997 - $3,235) 3,137 3,134
Short-term investments 8,572 21,522
-------- ---------
44,991 49,940
Cash 3,150 1,698
Accrued investment income 821 531
Premiums receivable 8,690 8,552
Reinsurance balances recoverable on:
Paid losses and settlement expenses 3,743 1,476
Reserves for losses and settlement expenses 31,238 28,124
Unearned premiums 3,389 6,313
Deferred policy acquisition costs 2,698 2,802
Equipment, at cost less accumulated depreciation
(1998 - $2,136; 1997 - $1,954) 1,710 1,833
Other assets 3,076 2,871
-------- ---------
TOTAL ASSETS $103,506 $ 104,140
======== =========
LIABILITIES AND SHAREHOLDERS' EQUITY
Reserves for losses and settlement expenses $ 56,327 $ 57,283
Unearned premiums 12,750 15,676
Other policyholder funds 6,057 6,380
Amounts payable to reinsurers 3,340 4,461
Accrued expenses 8,805 7,572
Certificate of Contribution 5,000 0
-------- ---------
TOTAL LIABILITIES $ 92,279 $ 91,372
Shareholders' equity:
Common Stock, par value $1 per share -
authorized 1998 and 1997 - 10,000,000 shares;
issued and outstanding: 1998 - 4,706,388 and
1997 - 4,695,621 shares $ 4,706 $ 4,696
Additional paid-in capital 1,540 1,530
Accumulated other comprehensive income 735 (471)
Retained Earnings 4,246 7,013
-------- ---------
TOTAL SHAREHOLDERS' EQUITY 11,227 12,768
-------- ---------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $103,506 $ 104,140
======== =========
</TABLE>
See notes to consolidated financial statements.
<PAGE> 4
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
------------------------ ------------------------
1998 1997 1998 1997
-------- -------- -------- --------
REVENUES
<S> <C> <C> <C> <C>
Premiums earned $ 52,184 $ 57,139 $ 16,055 $ 18,776
Premiums ceded (15,419) (15,020) (4,979) (4,884)
-------- -------- -------- --------
Net premiums earned 36,765 42,119 11,076 13,892
Investment income, less investment expenses:
$267 and $316 for the nine months ended
September 30, 1998 and 1997, and $89 and $103 for the
three months ended September 30, 1998 and 1997 1,820 2,272 586 768
Realized investment gains 17 0 0 0
Other income 326 551 86 340
-------- -------- -------- --------
TOTAL REVENUES 38,928 44,942 11,748 15,000
LOSSES AND EXPENSES
Losses and settlement expenses 42,577 46,469 14,352 17,631
Losses and settlement expenses ceded (16,034) (12,285) (4,952) (3,265)
-------- -------- -------- --------
Net losses and settlement expenses 26,543 34,184 9,400 14,366
Underwriting, acquisition and administrative expenses 14,557 14,653 4,527 4,924
Provision for bad debts on liquidated reinsurers 595 202 421 142
-------- -------- -------- --------
TOTAL LOSSES AND EXPENSES 41,695 49,039 14,348 19,432
-------- -------- -------- --------
NET LOSS ($ 2,767) ($ 4,097) ($ 2,600) ($ 4,432)
======== ======== ======== ========
PER SHARE DATA:
Net loss per share ($ 0.59) ($ 0.87) ($ 0.55) ($ 0.94)
======== ======== ======== ========
Net loss per share - assuming dilution ($ 0.59) ($ 0.87) ($ 0.55) ($ 0.94)
======== ======== ======== ========
Dividends per share declared by McM $ 0.00 $ 0.00 $ 0.00 $ 0.00
======== ======== ======== ========
</TABLE>
See notes to consolidated financial statements.
<PAGE> 5
CONSOLIDATED STATEMENTS OF CASHFLOWS (UNAUDITED)
MCM CORPORATION AND SUBSIDIARIES
(Thousands of dollars)
<TABLE>
<CAPTION>
Nine Months Ended
September 30
-------------------------
1998 1997
-------- -------
<S> <C> <C>
OPERATING ACTIVITIES
Net loss ($ 2,767) ($4,097)
Adjustments to reconcile net income to
net cash used by operating activities:
Policy liabilities (4,205) (1,711)
Premiums receivable (138) (59)
Accrued investment income (290) 72
Net receivable from reinsurers (3,578) 993
Amortization of deferred policy acquisition costs 8,998 8,350
Policy acquisition costs deferred (8,894) (8,280)
Other 1,535 277
-------- -------
CASH USED BY OPERATING ACTIVITIES (9,339) (4,455)
INVESTING ACTIVITIES
Securities available-for-sale:
Purchases (12,593) (5,500)
Sales 5,683 1,581
Maturities 86 2,340
Securities held-to-maturity:
Maturities 0 2,762
Purchases of property and equipment (356) (752)
Decrease in short-term investments 12,950 4,415
-------- -------
CASH PROVIDED BY INVESTING ACTIVITIES 5,770 4,846
FINANCING ACTIVITIES
Employee Stock Purchases 21 53
Surplus Note 5,000 0
-------- -------
CASH PROVIDED BY FINANCING ACTIVITIES 5,021 53
-------- -------
INCREASE IN CASH $ 1,452 $ 444
======== =======
</TABLE>
See notes to consolidated financial statements.
<PAGE> 6
CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY (UNAUDITED)
McM CORPORATION AND SUBSIDIARIES
(Thousands of dollars)
<TABLE>
<CAPTION>
Accumulated
Other
Comprehensive Retained Common Paid-in
Income Earnings Stock Capital Total
------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
BALANCES AT JANUARY 1, 1998 $ (471) $ 7,013 $ 4,696 $ 1,530 $ 12,768
Comprehensive Income:
Net loss (2,767) (2,767)
Other comprehensive income:
Unrealized gains on securities 1,206 1,206
---------------
Comprehensive income (1,561)
Employee stock purchases 10 10 20
------------------------------------------------------------------------------
BALANCES AT SEPTEMBER 30, 1998 $ 735 $ 4,246 $ 4,706 $ 1,540 $ 11,227
==============================================================================
</TABLE>
See notes to consolidated financial statements.
<PAGE> 7
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
McM Corporation and Subsidiaries
September 30, 1998
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,
1997.
NOTE B -- NEW ACCOUNTING STANDARDS
In June 1997, the Financial Accounting Standards Board ("FASB")
issued Financial Accounting Standard No. 130, "Reporting Comprehensive Income"
("SFAS 130") for years beginning after December 15, 1997. Comprehensive income
is defined as essentially all changes in shareholders' equity exclusive of
transactions with owners, such as capital investments, and includes net income
(loss) plus changes in certain assets and liabilities that are reported directly
in equity. The unrealized gain or loss on available-for-sale securities is the
Company's only component of other comprehensive income and is presented on the
Consolidated Statement of Changes in Shareholders' Equity.
Also during June 1997, the FASB issued Statement of Financial
Accounting Standards No. 131 "Disclosures about Segments of an Enterprise and
Related Information" ("SFAS 131")for years beginning after December 15, 1997.
Management is reviewing SFAS 131 but has not determined the potential segment
reporting or disclosure requirements of this statement on the Company.
In February 1998, the FASB issued Statement of Financial
Accounting Standards No. 132 "Employers' Disclosures about Pensions and Other
Postretirement Benefits" ("SFAS 132") for years beginning after December 15,
1997. The overall objective of SFAS 132 is to improve and standardize
disclosures about pensions and other postretirement benefits and to make the
required information easier to prepare and more understandable. Subsequent
adoption of this accounting standard will have no impact on the Company's
earnings or surplus.
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NOTE C -- INCOME TAXES
No provision for income taxes has been recognized by the Company
because of the utilization of net losses or tax return net operating loss
carryforwards.
NOTE D -- STOCK OPTION PLAN AND EARNINGS PER SHARE
Basic earnings per share are based on the weighted-average number
of common shares outstanding during the year. The weighted-average number of
common shares outstanding was 4,696,479 and 4,678,243 at September 30, 1998, and
September 30, 1997, respectively. Diluted earnings per share were computed
assuming that the weighted-average number of shares was increased by the
conversion of fixed awards (employee stock options). The diluted per share
computations reflect a change in the number of common shares outstanding (the
"denominator") to include the number of additional shares that would have been
outstanding if the potentially dilutive shares had been issued. In each period
presented, net income or loss, the numerator, is the same for both basic and
dilutive per share computations. The denominator was also unchanged for the
periods presented.
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> 9
MANAGEMENT'S DISCUSSION AND ANALYSIS
McM Corporation and Subsidiaries
Review of Operations
Unaudited results for the nine months ended September 30, 1998,
reflect a net loss of $2,767,000 or $.59 per share, compared to a net loss of
$4,097,000 or $.87 per share for the first nine months of 1997. Consolidated
gross revenues for the first nine months of 1998 totalled $39,195,000 compared
to $45,258,000 for the same period in 1997.
Shareholders' equity at September 30, 1998, totalled $11,227,000
or $2.39 per share compared to $12,768,000 or $2.72 per share at December 31,
1997. Consolidated assets totalled $103,506,000 at September 30, 1998, compared
to $104,140,000 at December 31, 1997.
Total net premium revenues were $36,765,000 for the first nine
months of 1998 compared to $42,119,000 for the same period in 1997. This
decrease in net premiums is primarily the result of an increase in the level of
premiums ceded to the Company's private passenger quota share reinsurance
program and a decline in overall premium production. Included in 1998
consolidated revenues is approximately $3.1 million of premiums returned by the
Company's reinsurers during the second quarter. This return of ceded premiums
resulted from an over cession of the Company's commercial auto liability
business attributable to prior years. Ceding commissions totalling approximately
$1.0 million relating to the over cession were returned to the reinsurers and
are included in the current period's underwriting, acquisition and
administrative expenses. The net effect of this recovery, $2.1 million, was
substantially offset by strengthening of prior accident years' reserves in the
second quarter.
Underwriting results for the first nine months of 1998 showed a
9.0 percentage point reduction in the overall claims loss and settlement expense
ratio when compared to the same period last year. The loss and settlement
expense ratio was 72.2% at September 30, 1998, compared to 81.2% at September
30, 1997. Consolidated results for 1998, however, have been adversely affected
by a net increase in overall loss reserves. Prior year loss reserves for ongoing
lines of business were increased by approximately $1.8 million all of which was
related to commercial automobile coverages and primarily the commercial auto
liability line of business. Prior year's loss reserves for private passenger
automobile coverages showed favorable development of approximately $278,000 for
the first nine months of 1998. Management also increased loss reserves for the
current underwriting year resulting in additional losses of approximately $1.2
million in the third quarter of 1998. All of the current underwriting year's
reserve increases related to the commercial
<PAGE> 10
automobile lines of business. The Company also experienced adverse loss
development of approximately $569,000 on discontinued insurance coverages most
of which was related to the workers compensation line of business.
The ratio of underwriting, acquisition and administrative
expenses (including the provision for bad debts of liquidated reinsurers)
increased 5.9 percentage points to 41.2% at September 30, 1998, compared to
35.3% at September 30, 1997. The increase in this expense ratio is primarily
attributed to costs associated with the sales process of the Company and the
overall decline in premium production.
Year 2000
The Company completed an assessment of its computerized
information systems to determine the impact of the year 2000 on the ability of
those systems to accurately process information that may be date sensitive. It
was found that the Company's specialized monthly commercial auto direct bill
program would have to be modified to function properly with respect to dates in
the year 2000 and thereafter. This modification was successfully completed in
1997 at an approximate cost of $96,000. Other Company computer applications,
most of which are licensed from third party program vendors, were determined to
be year 2000 compliant or, based upon communication with these vendors, would be
compliant before any anticipated impact resulting from the year 2000. The year
2000 project, as it relates to all of the Company's main computer platforms, was
completed and fully operational on July 1, 1998. Any remaining issues of the
year 2000 project will be completed no later than December 31, 1998. The Company
believes that the year 2000 issue will pose no significant operational problems
for its computer systems. The Company will devote all resources necessary to
resolve any remaining year 2000 issues in a timely manner.
Liquidity and Capital Resources
As discussed in the Company's 1997 Annual Report, Occidental Fire
& Casualty Company of North Carolina ("OF&C") triggered the first regulatory
threshold, Company Action Level, of the Risk-Based Capital framework established
by the National Association of Insurance Commissioners. This threshold required
the Company to submit an action plan to the North Carolina Department of
Insurance ("NCDOI") explaining the Company's intended course of action to
eliminate this RBC condition. The plan, submitted to the NCDOI on April 15,
1998, included a proposed capital infusion of $5 million. On June 15, 1998, IAT
Reinsurance Syndicate, Limited ("IAT"), a Bermuda-based insurance and investment
company, provided OF&C with a $5 million cash infusion supported by five $1
million certificates of contribution. The terms of the
<PAGE> 11
certificates provided for quarterly interest payments at the rate of 5% per
annum with the principal balance payable no later than December 31, 2000, upon
the approval of the Commissioner of the NCDOI. The certificates of contribution
under statutory accounting principles are treated as capital but under generally
accepted accounting principles and for income tax accounting purposes are
treated as debt.
On October 1, 1998, IAT completed its previously announced tender
offer for up to 35% of the outstanding shares of common stock of McM
Corporation. At the closing of the tender offer, IAT purchased 1,279,692 shares
(or 27.2%) at a price of $3.65 per share. On the same day, IAT also purchased an
additional 658,900 shares of McM common stock from the McMillen Trust, then
owner of approximately 65% of McM's outstanding shares. In total, IAT purchased
1,938,592 shares (or 41.2%) for an aggregate price of approximately $7,075,860.
On October 7, 1998, IAT provided a $10 million cash capital
contribution to McM Corporation. IAT made an additional $1 million cash
contribution to McM on October 28, 1998. In consideration of these
contributions, McM issued 11,000 shares of McM Corporation Series B PIK
Preferred Stock, $1,000 par value ("PIK Preferred Stock") to IAT. McM also
retired the five $1 million certificates of contribution issued to IAT by McM
subsidiary OF&C, replacing these certificates with a permanent $5 million cash
contribution to OF&C as additional paid-in-capital. McM simultaneously issued
5,000 shares of PIK Preferred Stock to IAT in exchange for the retirement of
these certificates of contribution.
The PIK Preferred Stock pays dividends at a rate of 12% per
annum, payable quarterly in arrears on January 7, April 7, July 7 and October 7
of each year. The dividends are cumulative from the date of issuance and will be
paid at the Board of Directors' discretion, either in cash or in kind with
additional fully paid and nonassessable shares of PIK Preferred Stock.
Consolidated gross investment income totalled $2.1 million for
the first nine months of 1998 compared to $2.6 million for the same period in
1997. This decline in investment income is primarily the result of a reduction
in invested assets. Average cash and invested assets were approximately $49.9
million and $56.2 million for the first nine months of 1998 and 1997,
respectively. The decline in cash and invested assets is primarily attributable
to an overall reduction in premium writings and the settlement of claims. Gross
premium writings were $50.0 million and $58.0 million at September 30, 1998 and
1997, respectively.
Cash used by operating activities totalled $9.3 million for the
first nine months of 1998 compared to $4.4 million for the same period of 1997.
The increase in operating cash outflows for 1998 reflects the $6.3 million
decline in premium writings shown above. In addition operating cashflows were
also affected by a $2.3 million increase in
<PAGE> 12
paid losses and settlement expenses recoverable from the Company's reinsurers.
Reinsurance balances are generally collected from the reinsurers no later than
sixty days from the initial claim settlement.
Cash provided by financing activities totalled approximately $5.0
million and reflect the initial capital contribution provided by IAT Reinsurance
Syndicate Ltd. in the form of certificates of contribution. A more detailed
discussion of IAT's financing activities were discussed above.
The Company maintains a mix of high-quality investments that
provide adequate returns, while limiting credit risk and providing necessary
levels of liquidity to meet projected expenditures. Cash and invested assets
totalled $48.1 million and $51.6 million at September 30, 1998 and December 31,
1997, respectively.
<PAGE> 13
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 - 4. Nothing to report.
Item 5. Other Information.
1) On October 1, 1998, the IAT Reinsurance Syndicate Ltd.,
a Bermuda-based insurance and investment company completed
its previously announced tender offer (the "Offer") for up
to 35% of the outstanding shares of common stock of McM
Corporation at a price of $3.65 per share pursuant to the
provisions of the Offer and Rights Agreement between IAT
and McM dated July 16, 1998, and the Tender Agreement
between IAT and the individual directors of McM dated July
16, 1998. On the same day IAT purchased 658,900 shares of
McM common stock from the McMillan Trust, then owner of 65%
of McM's outstanding shares. For more detailed information
regarding this matter see Management's Discussion and
Analysis included in Part I, Item II of this Form 10-Q and
Form 8-K filed by the Company on October 1, 1998.
Item 6. Exhibits and Reports on Form 8-K.
Exhibit 27 Financial Data Schedule (for SEC use only)
<PAGE> 14
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 16, 1998
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,
1998, 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-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> SEP-30-1998
<DEBT-HELD-FOR-SALE> 33,282
<DEBT-CARRYING-VALUE> 3,137
<DEBT-MARKET-VALUE> 3,304
<EQUITIES> 0
<MORTGAGE> 0
<REAL-ESTATE> 0
<TOTAL-INVEST> 44,991
<CASH> 3,150
<RECOVER-REINSURE> 38,370
<DEFERRED-ACQUISITION> 2,698
<TOTAL-ASSETS> 103,506
<POLICY-LOSSES> 56,327
<UNEARNED-PREMIUMS> 12,750
<POLICY-OTHER> 0
<POLICY-HOLDER-FUNDS> 6,057
<NOTES-PAYABLE> 0
0
0
<COMMON> 4,706
<OTHER-SE> 6,521
<TOTAL-LIABILITY-AND-EQUITY> 103,506
36,765
<INVESTMENT-INCOME> 1,820
<INVESTMENT-GAINS> 17
<OTHER-INCOME> 326
<BENEFITS> 26,543
<UNDERWRITING-AMORTIZATION> 0
<UNDERWRITING-OTHER> 15,152
<INCOME-PRETAX> (2,767)
<INCOME-TAX> 0
<INCOME-CONTINUING> (2,767)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (2,767)
<EPS-PRIMARY> (0.59)
<EPS-DILUTED> (0.59)
<RESERVE-OPEN> 29,159
<PROVISION-CURRENT> 24,219
<PROVISION-PRIOR> 2,323
<PAYMENTS-CURRENT> 14,526
<PAYMENTS-PRIOR> 16,087
<RESERVE-CLOSE> 25,088
<CUMULATIVE-DEFICIENCY> 2,323
</TABLE>
