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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, 1998
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
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 June 30, 1998, 4,702,696 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, 1998 and
December 31, 1997
Consolidated Statements of Income --Six and Three Months
Ended June 30, 1998 and 1997
Consolidated Statements of Cash Flows -- Six Months
Ended June 30, 1998 and 1997
Consolidated Statement of Changes in Shareholders' Equity --
June 30, 1998
Notes to Consolidated Financial Statements -- June 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
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CONSOLIDATED BALANCE SHEETS (UNAUDITED)
McM CORPORATION AND SUBSIDIARIES
(Thousands of dollars)
<TABLE>
<CAPTION>
June 30 December 31
ASSETS 1998 1997
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<S> <C> <C>
Invested Assets:
Securities available-for-sale, at fair value:
Fixed maturities (amortized cost:
1998 - $33,003; 1997 - $25,755) $ 32,867 $ 25,284
Fixed maturities held-to-maturity, at amortized cost
(fair value: 1998 - $3,238; 1997 - $3,235) 3,136 3,134
Short-term investments 11,971 21,522
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47,974 49,940
Cash 3,023 1,698
Accrued investment income 583 531
Premiums receivable 8,293 8,552
Reinsurance balances recoverable on:
Paid losses and settlement expenses 2,920 1,476
Reserves for losses and settlement expenses 30,514 28,124
Unearned premiums 3,683 6,313
Deferred policy acquisition costs 2,901 2,802
Equipment, at cost less accumulated depreciation
(1998 - $2,072; 1997 - $1,954) 1,729 1,833
Other assets 2,203 2,871
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TOTAL ASSETS $ 103,823 $ 104,140
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
Reserves for losses and settlement expenses $ 56,534 $ 57,283
Unearned premiums 13,653 15,676
Other policyholder funds 6,199 6,380
Amounts payable to reinsurers 1,133 4,461
Accrued expenses 8,355 7,572
Certificates of Contribution 5,000 0
--------- ---------
TOTAL LIABILITIES $ 90,874 $ 91,372
Shareholders' equity:
Common Stock, par value $1 per share -
authorized 1998 and 1997 - 10,000,000 shares;
issued and outstanding: 1998 - 4,702,696 and
1997 - 4,695,621 shares $ 4,703 $ 4,696
Additional paid-in capital 1,536 1,530
Accumulated other comprehensive income (136) (471)
Retained Earnings 6,846 7,013
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TOTAL SHAREHOLDERS' EQUITY 12,949 12,768
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TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 103,823 $ 104,140
========= =========
</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
------------------------- -------------------------
1998 1997 1998 1997
-------- -------- -------- --------
<S> <C> <C> <C> <C>
REVENUES
Premiums earned $ 36,129 $ 38,363 $ 18,016 $ 19,506
Premiums ceded (10,440) (10,136) (3,022) (5,127)
-------- -------- -------- --------
Net premiums earned 25,689 28,227 14,994 14,379
Investment income, less investment expenses:
$178 and $213 for the six months ended
June 30, 1998 and 1997, and $87 and $103 for the
three months ended June 30, 1998 and 1997 1,234 1,504 607 764
Realized investment gains 17 0 0 0
Other income 240 211 110 114
-------- -------- -------- --------
TOTAL REVENUES 27,180 29,942 15,711 15,257
LOSSES AND EXPENSES
Losses and settlement expenses 28,225 28,838 16,519 14,039
Losses and settlement expenses ceded (11,082) (9,020) (6,350) (3,746)
-------- -------- -------- --------
Net losses and settlement expenses 17,143 19,818 10,169 10,293
Underwriting, acquisition and administrative expenses 10,030 9,729 5,640 4,877
Provision for bad debts on liquidated reinsurers 174 60 174 60
-------- -------- -------- --------
TOTAL LOSSES AND EXPENSES 27,347 29,607 15,983 15,230
-------- -------- -------- --------
NET (LOSS) INCOME ($ 167) $ 335 ($ 272) $ 27
======== ======== ======== ========
PER SHARE DATA:
Net (loss) income per share ($ 0.04) $ 0.07 ($ 0.06) $ 0.01
======== ======== ======== ========
Net (loss) income per share - assuming dilution ($ 0.04) $ 0.07 ($ 0.06) $ 0.01
======== ======== ======== ========
Dividends per share declared by McM $ 0.00 $ 0.00 $ 0.00 $ 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>
Six Months Ended
June 30
-------------------------
1998 1997
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<S> <C> <C>
OPERATING ACTIVITIES
Net (loss) income ($ 167) $ 335
Adjustments to reconcile net (loss) income to net cash used by operating
activities:
Policy liabilities (2,953) (3,161)
Premiums receivable 259 (141)
Accrued investment income (52) 79
Net receivable from reinsurers (4,532) 2,272
Amortization of deferred policy acquisition costs 6,329 6,230
Policy acquisition costs deferred (6,428) (6,280)
Other 1,791 587
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CASH USED BY OPERATING ACTIVITIES (5,753) (79)
INVESTING ACTIVITIES
Securities available-for-sale:
Purchases (12,593) (2,886)
Sales 5,237 285
Maturities 86 50
Securities held-to-maturity:
Maturities 0 1,077
Purchases of property and equipment (216) (381)
Change in short-term investments 9,551 2,002
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CASH PROVIDED BY INVESTING ACTIVITIES 2,065 147
FINANCING ACTIVITIES
Employee Stock Purchases 13 36
Certificates of Contribution 5,000 0
-------- -------
CASH PROVIDED BY FINANCING ACTIVITIES 5,013 36
-------- -------
INCREASE IN CASH $ 1,325 $ 104
======== =======
</TABLE>
See notes to consolidated financial statements.
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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
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<S> <C> <C> <C> <C> <C>
BALANCES AT JANUARY 1, 1998 ($471) $7,013 $4,696 $1,530 $12,768
Comprehensive Income:
Net loss (167) (167)
Other comprehensive income:
Unrealized gains on securities 335 335
----------------
Comprehensive income 168
Employee stock purchases 7 6 13
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BALANCES AT JUNE 30, 1998 ($136) $6,846 $4,703 $1,536 $12,949
===========================================================================
</TABLE>
See notes to consolidated financial statements.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
McM Corporation and Subsidiaries
June 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 June 30, 1998, and June 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 six months ended June 30, 1998, reflect a
net loss of $167,000 or $.04 per share, compared to net income of $335,000 or
$.07 per share for the first six months of 1997. Consolidated gross revenues for
the first six months of 1998 were $27,358,000 compared to $30,155,000 for the
same period in 1997.
Shareholders' equity at June 30, 1998, totalled $12,949,000 or $2.75
per share compared to $12,768,000 or $2.72 per share at December 31, 1997.
Consolidated assets totalled $103,823,000 at June 30, 1998, compared to
$104,140,000 at December 31, 1997.
Total net premium revenues were $25,689,000 for the first six months
of 1998 compared to $28,227,000 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 consolidated revenues for the
first six months of 1998 is approximately $3.1 million of premiums returned by
the Company's reinsurers. 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 and, accordingly, had no effect on net income.
Underwriting results for the first six months of 1998 showed a 3.5
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 66.7% at June 30, 1998, compared to 70.2% at June 30, 1997.
The loss and settlement expense ratio excluding the $3.1 million premium refund
discussed above would have been 75.9%. The ratio of underwriting, acquisition
and administrative expenses (including the provision for bad debts of liquidated
reinsurers)increased 5.0 percentage points to 39.7% at June 30, 1998, compared
to 34.7% at June 30, 1997. The increase in this expense ratio is 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
<PAGE> 10
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. However, if the Company and the third parties upon
which it relies are unable to address this issue in a timely manner, it could
result in a material financial risk to the Company. In order to assure that this
does not occur, the Company will devote all resources necessary to resolve any
significant 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 a $5 million cash infusion supported by five $1 million
certificates of contribution. The terms of the certificates provide 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.
Consolidated gross investment income totalled $1.4 million for the
first six months of 1998, compared to $1.7 million for the same period in 1997.
This decline in investment income is primarily the result of a reduction of
invested assets. Average cash and invested assets balances were approximately
$51.3 million and $58.3 million for the first six months of 1998 and 1997,
respectively. The decline in invested balances is mainly attributed to the
settlement of claim-related liabilities and the decline in gross premium
production. Gross premium production totalled $34.5 million and $38.7 million at
June 30,
<PAGE> 11
1998 and 1997, respectively.
Cash used by operating activities totalled $5.8 million for the first
six months of 1998 compared to $79,000 for the same period in 1997. This
increase in operating cash outflows also reflects the settlement of claim
reserves and the reduction in overall premium discussed above. Included in the
$5.8 million operating cash outflow is an increase of approximately $1.5 million
in paid losses and settlement expense recoverable from the Company's reinsurers
most of which emerged in the latter part of the second quarter of 1998. These
balances will be collected from the reinsurers in the next sixty days.
Cash provided by financing activities totalled approximately $5.0
million and reflect the capital contribution 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
$51.0 million and $51.6 million at June 30, 1998 and December 31, 1997,
respectively.
On July 17, 1998, the Company and IAT jointly announced the signing of an
agreement pursuant to which IAT intends to acquire up to 49% of McM's
outstanding common stock for a cash price of $3.65 per share. Of the 49% stake
IAT intends to acquire, up to 35% will be acquired in a public cash tender offer
and 14% will be acquired from the McMillen Trust, pursuant to an agreement
between IAT and the Trust. The McMillen Trust owned approximately 65% Of McM's
outstanding shares at the time the agreement was signed.
In accordance with the agreement, which was unanimously approved by
McM's Board of Directors, the tender offer commenced on July 23, 1998. The
tender offer was made through offering documents filed with the Securities and
Exchange Commission and mailed to McM shareholders. PaineWebber Incorporated has
acted and continues to act as financial advisor to the Company in connection
with this transaction.
<PAGE> 12
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 July 17, 1998, the Company and IAT Reinsurance
Syndicate Ltd., a Bermuda-based insurance and
investment company ("IAT") signed an agreement
pursuant to which IAT intends to acquire up to 49% of
McM's outstanding common stock. For more detailed
information regarding this agreement, see
Management's Discussion and Analysis included in Part
I, Item II of this Form 10-Q and Form 14D-9 filed by
the Company on August 23, 1998.
Item 6. Nothing to 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
(Registrant)
/s/ STEPHEN L. STEPHANO
--------------------------------
Stephen L. Stephano
President and
Chief Operating Officer
August 14, 1998
/s/ 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 SIX MONTHS ENDED JUNE 30, 1998,
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-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> JUN-30-1998
<DEBT-HELD-FOR-SALE> 32,867
<DEBT-CARRYING-VALUE> 3,136
<DEBT-MARKET-VALUE> 3,238
<EQUITIES> 0
<MORTGAGE> 0
<REAL-ESTATE> 0
<TOTAL-INVEST> 47,974
<CASH> 3,023
<RECOVER-REINSURE> 37,117
<DEFERRED-ACQUISITION> 2,901
<TOTAL-ASSETS> 103,823
<POLICY-LOSSES> 56,534
<UNEARNED-PREMIUMS> 13,653
<POLICY-OTHER> 0
<POLICY-HOLDER-FUNDS> 6,199
<NOTES-PAYABLE> 0
4,703
0
<COMMON> 0
<OTHER-SE> 8,246
<TOTAL-LIABILITY-AND-EQUITY> 103,823
25,689
<INVESTMENT-INCOME> 1,234
<INVESTMENT-GAINS> 17
<OTHER-INCOME> 240
<BENEFITS> 17,143
<UNDERWRITING-AMORTIZATION> 0
<UNDERWRITING-OTHER> 10,204
<INCOME-PRETAX> (167)
<INCOME-TAX> 0
<INCOME-CONTINUING> (167)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (167)
<EPS-PRIMARY> (0.04)
<EPS-DILUTED> (0.04)
<RESERVE-OPEN> 29,159
<PROVISION-CURRENT> 15,490
<PROVISION-PRIOR> 1,652
<PAYMENTS-CURRENT> 8,143
<PAYMENTS-PRIOR> 12,138
<RESERVE-CLOSE> 26,020
<CUMULATIVE-DEFICIENCY> 1,652
</TABLE>
