<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, 1999
------------------
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
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McM Corporation
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(Exact name of registrant as specified in its charter)
North Carolina 56-1171691
- ------------------------------- -------------------
(State or other jurisdiction of (IRS Employer
incorporation of organization) Identification No.)
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, 1999, 4,700,910 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 -- September 30, 1999 and
December 31, 1998
Consolidated Statements of Income --Nine and Three Months
Ended September 30, 1999 and 1998
Consolidated Statements of Cash Flows -- Nine Months
Ended September 30, 1999 and 1998
Consolidated Statement of Changes in Shareholders' Equity --
September 30, 1999
Notes to Consolidated Financial Statements -- September 30, 1999
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 1999 1998
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<S> <C> <C>
Invested Assets:
Securities available-for-sale, at fair value:
Fixed maturities (amortized cost: 1999 - $23,874; 1998 - $25,152) $ 23,495 $ 25,660
Equity securities (cost: 1999 - $28,361; 1998 - $18,093) 34,419 21,969
Fixed maturities held-to-maturity, at amortized cost
(fair value: 1999 - $3,652; 1998 - $3,275) 3,582 3,138
Short-term investments 8,731 11,572
--------- ---------
70,227 62,339
Cash 9,377 8,120
Accrued investment income 639 579
Premiums receivable 8,149 6,660
Reinsurance balances recoverable on:
Paid losses and settlement expenses 2,174 3,090
Reserves for losses and settlement expenses 24,415 27,539
Unearned premiums 2,394 2,847
Deferred policy acquisition costs 2,868 2,407
Equipment, at cost less accumulated depreciation
(1999 - $2,600; 1998 - $2,153) 1,983 1,639
Other assets 2,492 2,515
--------- ---------
TOTAL ASSETS $ 124,718 $ 117,735
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
Reserves for losses and settlement expenses $ 53,161 $ 60,844
Unearned premiums 12,071 10,793
Other policyholder funds 6,229 5,881
Amounts payable to reinsurers 3,106 3,233
Accrued expenses 19,356 8,527
--------- ---------
TOTAL LIABILITIES 93,923 89,278
Redeemable Preferred Stock - Series B PIK 28,066 26,000
Shareholders' equity:
Common Stock, par value $1 per share - authorized 1999 and 1998 -
10,000,000 shares; issued and outstanding: 1999 - 4,700,910
and 1998 - 4,706,388 shares 4,701 4,706
Additional paid-in capital 1,525 1,540
Accumulated other comprehensive income 5,679 4,384
Retained deficit (9,176) (8,173)
--------- ---------
TOTAL SHAREHOLDERS' EQUITY 2,729 2,457
--------- ---------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 124,718 $ 117,735
========= =========
</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
----------------------- -----------------------
1999 1998 1999 1998
-------- -------- -------- --------
<S> <C> <C> <C> <C>
REVENUES
Premiums earned $ 43,106 $ 52,184 $ 14,535 $ 16,055
Premiums ceded (11,346) (15,419) (3,631) (4,979)
-------- -------- -------- --------
Net premiums earned 31,760 36,765 10,904 11,076
Investment income, less investment expenses:
($331 and $267 for the nine months ended September 30,
1999 and 1998, and $113 and $89 for the three months
ended September 30, 1999 and 1998) 1,633 1,820 469 586
Realized investment gains 2,641 17 1,063 0
Other income 293 326 91 86
-------- -------- -------- --------
TOTAL REVENUES 36,327 38,928 12,527 11,748
LOSSES AND EXPENSES
Losses and settlement expenses 32,321 42,577 11,141 14,352
Losses and settlement expenses ceded (8,593) (16,034) (2,814) (4,952)
-------- -------- -------- --------
Net losses and settlement expenses 23,728 26,543 8,327 9,400
Underwriting, acquisition and administrative expenses 11,550 14,557 3,772 4,527
Provision for bad debts on liquidated reinsurers (16) 595 24 421
-------- -------- -------- --------
TOTAL LOSSES AND EXPENSES 35,262 41,695 12,123 14,348
-------- -------- -------- --------
NET INCOME (LOSS) $ 1,065 ($ 2,767) $ 404 ($ 2,600)
======== ======== ======== ========
PER SHARE DATA:
Net income (loss) per share $ 0.23 ($ 0.59) $ 0.09 ($ 0.55)
======== ======== ======== ========
Net income (loss) per share - assuming dilution $ 0.23 ($ 0.59) $ 0.09 ($ 0.55)
======== ======== ======== ========
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>
NINE MONTHS ENDED
SEPTEMBER 30
-------------------------
1999 1998
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<S> <C> <C>
OPERATING ACTIVITIES
Net income (loss) $ 1,065 ($ 2,767)
Adjustments to reconcile net income (loss) to net cash used
by operating activities:
Policy liabilities (6,057) (4,205)
Premiums receivable (1,489) (138)
Accrued investment income (60) (290)
Net receivable from reinsurers 4,365 (3,578)
Amortization of deferred policy acquisition costs 7,661 8,998
Policy acquisition costs deferred (8,122) (8,894)
Other 9,927 1,535
-------- --------
CASH PROVIDED (USED) BY OPERATING ACTIVITIES 7,290 (9,339)
INVESTING ACTIVITIES
Securities available-for-sale:
Purchases (18,986) (12,593)
Sales 9,222 5,683
Maturities 325 86
Securities held-to-maturity:
Maturities 1,800 0
Purchases of property and equipment (1,215) (356)
Decrease in short-term investments 2,841 12,950
-------- --------
CASH (USED) PROVIDED BY INVESTING ACTIVITIES (6,013) 5,770
FINANCING ACTIVITIES
Employee stock purchases 0 21
Certificates of contribution 0 5,000
Purchase of outstanding common shares (20) 0
-------- --------
CASH (USED) PROVIDED BY FINANCING ACTIVITIES (20) 5,021
-------- --------
INCREASE IN CASH $ 1,257 $ 1,452
======== ========
</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
Common Paid-in Comprehensive Retained
Stock Capital Income Deficit Total
-----------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
BALANCES AT JANUARY 1, 1999 $4,706 $1,540 $4,384 ($8,173) $2,457
Activity for 1999:
Comprehensive Income:
Net income 1,065 1,065
Change in unrealized gains on securities 1,295 1,295
---------
Comprehensive income 2,360
Repurchase of common stock (5) (15) (20)
Dividends on PIK Preferred Stock (2,068) (2,068)
-----------------------------------------------------------------------------
BALANCES AT SEPTEMBER 30, 1999 $4,701 $1,525 $5,679 ($9,176) $2,729
=============================================================================
</TABLE>
See notes to consolidated financial statements.
<PAGE> 7
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
McM Corporation and Subsidiaries
September 30, 1999
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, 1998.
NOTE B -- 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 C -- 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 4,700,910 and 4,701,556 at September 30, 1999 and 1998,
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 D -- 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
<PAGE> 8
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.
NOTE E -- SEGMENT INFORMATION
The major focus of McM Corporation and its property and casualty
insurance subsidiaries is providing commercial insurance protection to the
trucking industry including cargo, liability and physical damage coverages and
the personal automobile market providing liability and physical damage
coverages. The Company, therefore, has two segments: commercial automobile and
private passenger automobile. The segments are each managed separately because
their insurance products are tailored to meet the specific needs of their
respective clientele.
The Company does not account for assets on a segment basis and does not
prepare segment information as to operations by segment until after the filing
of the quarterly statements. Revenues of each segment for the nine months ended
September 30, 1999 and 1998 are as follows:
September 30
1999 1998
------------------------
Net premiums earned:
Private passenger $ 4,745 $ 4,616
Commercial auto 27,015 32,149
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Total $31,760 $36,765
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MANAGEMENT'S DISCUSSION AND ANALYSIS
McM Corporation and Subsidiaries
Review of Operations
Unaudited results for the nine months ended September 30, 1999, reflect
net income of $1,065,000 or basic net income of $.23 per share, compared to a
net loss of $2,767,000 or a basic net loss of $.59 per share for the first nine
months of 1998. Consolidated gross revenues for the first nine months of 1999
totalled $36,658,000 compared to $39,195,000 for the same period in 1998.
Realized investment gains of $2,641,000 were included in gross revenues for the
first nine months of 1999 compared to $17,000 for the same period in 1998.
Shareholders' equity at September 30, 1999, totalled $2,729,000 or $.58
per share compared to $2,457,000 or $.52 per share at December 31, 1998.
Included in shareholders' equity were unrealized gains in the Company's
investment portfolio totalling $5,679,000 and $4,384,000 at September 30, 1999,
and December 31, 1998, respectively. Consolidated assets totalled $124,718,000
at September 30, 1999, compared to $117,735,000 at December 31, 1998.
Total net premium revenues for the first nine months of 1999 totalled
$31,760,000 compared to $36,765,000 for the same period in 1998. This decrease
in net premiums reflects a $5.1 million overall decline in the Company's gross
written premiums when compared to those for the first nine months of 1998. The
reduction in premium writings for 1999 continues to reflect highly competitive
and price sensitive market conditions in both the commercial and private
passenger auto market sectors experienced by the insurance industry for the last
several years. In addition, the Company has reduced its private passenger auto
premium writings while it focuses on converting this business to new
computerized premium rating and policy administration systems designed to
provide better customer service and more efficient operations. Commercial
premium writings totalled $38.0 million for the nine months ended September 30,
1999, compared to $39.7 million for the same period last year. Private passenger
premium writings totalled $6.8 million and $10.2 million for the nine months
periods ended September 30, 1999 and 1998, respectively.
Consolidated underwriting results for 1999 are in line with
management's expectations and reflect the Company's decision to significantly
strengthen overall loss reserves and loss ratios at year end 1998. The claims
and loss settlement expense ratio (the "loss ratio") showed a 2.5 percentage
point increase when compared to the same period in 1998. The loss ratio was
74.7% at September 30, 1999, compared to 72.2% at September 30, 1998. Current
accident year loss reserves for commercial auto liability were strengthened
slightly in the third quarter of 1999 by approximately $310,000. Development of
prior
<PAGE> 10
year's loss reserves was approximately $577,000, all of which was related to the
Company's participation in involuntary pools and other residual market
mechanisms in which McM's property and casualty subsidiaries are required to
participate by the various states in which they write business. The ratio of
underwriting, acquisition and administrative expenses (including the provision
for bad debts of liquidated reinsurers) to net earned premium decreased
approximately 4.9 percentage points to 36.3% at September 30, 1999, compared to
41.2% at September 30, 1998.
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. The
Company continues to replace peripheral hardware and software such as personal
computers, telecommunications and spreadsheet software with Year 2000 compliant
products. The Company remains on target to resolve all remaining Year 2000
noncompliant products. The Company is devoting all resources necessary to
address any remaining Year 2000 issues in a timely manner and believes the year
2000 will pose no significant threat to its operations.
Liquidity and Capital Resources
Consolidated gross investment income excluding realized investment
gains showed a modest decline for the first nine months of 1999 totalling $2.0
million compared to $2.1 for the same period in 1998.
Cash from operating activities for the first nine months of 1999 showed
considerable improvement when compared to the same period in 1998 with an
increase in cash totalling $7.3 million compared to a decrease in cash of $9.3
million for the same period of 1998. Operating cash flows for 1999 were
favorably impacted by an investment management agreement entered into by the
Company and its affiliate, IAT Reinsurance Syndicate Ltd. For the first nine
months of 1999 this agreement resulted in a $9.0 million realized investment
gain which was largely offset by investment management fee of $8.4 million
payable to IAT. This investment management fee was not paid at September 30,
1999, but
<PAGE> 11
reflected as an accrued expense. Operating cash flows were adversely affected by
the decline in premium writings discussed previously and the settlement of prior
year claim liabilities. Reserves for losses and settlement expenses declined
approximately $7.7 million during 1999 to $53.1 million compared to $60.8
million at December 31, 1998.
The Company maintains a mix of high-quality fixed-maturity investments
that provide adequate returns, while limiting credit risk and providing
necessary levels of liquidity to meet projected expenditures. In addition, the
Company maintains an equity investment portfolio to diversify overall investment
risk and maximize total investment returns. Cash and invested assets totalled
$79.6 million and $70.4 million at September 30, 1999 and December 31, 1998,
respectively.
<PAGE> 12
McM CORPORATION AND SUBSIDIARIES
PART II
Item 1. Legal Proceedings.
1) Reference is hereby made to Note D of the
Consolidated Financial Statements provided in Part I,
Item 1 of this Form 10-Q.
Items 2 - 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
November 15, 1999
/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 THREE MONTHS ENDED SEPTEMBER 30,
1999, 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-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> SEP-30-1999
<DEBT-HELD-FOR-SALE> 23,495
<DEBT-CARRYING-VALUE> 3,582
<DEBT-MARKET-VALUE> 3,652
<EQUITIES> 34,419
<MORTGAGE> 0
<REAL-ESTATE> 0
<TOTAL-INVEST> 70,227
<CASH> 9,377
<RECOVER-REINSURE> 28,983
<DEFERRED-ACQUISITION> 2,868
<TOTAL-ASSETS> 124,718
<POLICY-LOSSES> 53,161
<UNEARNED-PREMIUMS> 12,071
<POLICY-OTHER> 0
<POLICY-HOLDER-FUNDS> 6,229
<NOTES-PAYABLE> 0
0
28,066
<COMMON> 4,701
<OTHER-SE> (1,972)
<TOTAL-LIABILITY-AND-EQUITY> 124,718
31,760
<INVESTMENT-INCOME> 1,633
<INVESTMENT-GAINS> 2,641
<OTHER-INCOME> 293
<BENEFITS> 23,728
<UNDERWRITING-AMORTIZATION> 0
<UNDERWRITING-OTHER> 11,534
<INCOME-PRETAX> 1,065
<INCOME-TAX> 0
<INCOME-CONTINUING> 1,065
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,065
<EPS-BASIC> 0.23
<EPS-DILUTED> 0.23
<RESERVE-OPEN> 33,305
<PROVISION-CURRENT> 23,152
<PROVISION-PRIOR> 579
<PAYMENTS-CURRENT> 13,204
<PAYMENTS-PRIOR> 15,084
<RESERVE-CLOSE> 28,747
<CUMULATIVE-DEFICIENCY> 579
</TABLE>
