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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, 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
McM Corporation
(Exact name of registrant as specified in its charter)
North Carolina 56-1171691
(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 March 31, 1999, 4,706,388 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, 1999 and
December 31, 1998
Consolidated Statements of Income --Three Months
Ended March 31, 1999 and 1998
Consolidated Statements of Cash Flows -- Three Months
Ended March 31, 1999 and 1998
Consolidated Statement of Changes in Shareholders' Equity --
March 31, 1999
Notes to Consolidated Financial Statements -- March 31, 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
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CONSOLIDATED BALANCE SHEETS (UNAUDITED)
McM CORPORATION AND SUBSIDIARIES
(Thousands of dollars)
<TABLE>
<CAPTION>
MARCH 31 December 31
ASSETS 1999 1998
---------- -----------
<S> <C> <C>
Invested Assets:
Securities available-for-sale, at fair value:
Fixed maturities (amortized cost: 1999 - $24,448; 1998 - $25,152) $ 24,681 $ 25,660
Equity securities (cost: 1999 - $19,336, 1998 - $18,093) 23,825 21,969
Fixed maturities held-to-maturity, at amortized cost
(fair value: 1999 - $3,140; 1998 - $3,275) 3,045 3,138
Short-term investments 8,213 11,572
--------- ---------
59,764 62,339
Cash 5,528 8,120
Accrued investment income 587 579
Premiums receivable 7,970 6,660
Reinsurance balances recoverable on:
Paid losses and settlement expenses 4,536 3,090
Reserves for losses and settlement expenses 26,423 27,539
Unearned premiums 2,500 2,847
Deferred policy acquisition costs 2,720 2,407
Equipment, at cost less accumulated depreciation
(1999 - $2,204; 1998 - $2,153) 1,622 1,639
Other assets 5,044 2,515
--------- ---------
TOTAL ASSETS $ 116,694 $ 117,735
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
Reserves for losses and settlement expenses $ 57,621 $ 60,844
Unearned premiums 11,443 10,793
Other policyholder funds 5,789 5,881
Amounts payable to reinsurers 3,411 3,233
Accrued expenses 9,122 8,527
--------- ---------
TOTAL LIABILITIES 87,386 89,278
Redeemable Preferred Stock - Series B PIK 26,468 26,000
Shareholders' equity:
Common Stock, par value $1 per share - authorized 1999 and 1998 - 10,000,000 shares;
issued and outstanding: 1999 and 1998 - 4,706,388 shares 4,706 4,706
Additional paid-in capital 1,540 1,540
Accumulated other comprehensive income 4,722 4,384
Retained deficit (8,128) (8,173)
--------- ---------
TOTAL SHAREHOLDERS' EQUITY 2,840 2,457
--------- ---------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 116,694 $ 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>
THREE MONTHS ENDED
MARCH 31
------------------------
1999 1998
-------- --------
<S> <C> <C>
REVENUES
Premiums earned $ 14,361 $ 18,113
Premiums ceded (4,010) (7,418)
-------- --------
Net premiums earned 10,351 10,695
Investment income, less investment expenses:
(1999 - $109; 1998 - $91) 559 627
Realized investment gains 1,149 17
Other income 105 130
-------- --------
TOTAL REVENUES 12,164 11,469
LOSSES AND EXPENSES
Losses and settlement expenses 9,629 11,706
Losses and settlement expenses ceded (2,051) (4,732)
-------- --------
Net losses and settlement expenses 7,578 6,974
Underwriting, acquisition and administrative expenses 4,072 4,390
-------- --------
TOTAL LOSSES AND EXPENSES 11,650 11,364
-------- --------
NET INCOME $ 514 $ 105
======== ========
PER SHARE DATA:
Net income per share - basic $ 0.11 $ 0.02
======== ========
Net income per share - assuming dilution $ 0.11 $ 0.02
======== ========
Dividends per share declared by McM $ 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>
THREE MONTHS ENDED
MARCH 31
----------------------
1999 1998
------- -------
<S> <C> <C>
OPERATING ACTIVITIES
Net income $ 733 $ 105
Adjustments to reconcile net income to net cash used by operating activities:
Policy liabilities (2,665) (2,366)
Premiums receivable (1,310) (1,016)
Accrued investment income (8) (190)
Net receivable from reinsurers 195 (2,317)
Amortization of deferred policy acquisition costs 2,471 1,876
Policy acquisition costs deferred (2,784) (2,298)
Other (2,496) 1,293
------- -------
CASH USED BY OPERATING ACTIVITIES (5,864) (4,913)
INVESTING ACTIVITIES
Securities available-for-sale:
Purchases (4,700) (2,051)
Sales 5,072 5,039
Securities held-to-maturity:
Maturities 95 0
Purchases of property and equipment (554) (107)
Decrease in short-term investments 3,359 2,940
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CASH PROVIDED BY INVESTING ACTIVITIES 3,272 5,821
FINANCING ACTIVITIES
Employee Stock Purchases 0 3
Cash dividends paid 0 0
------- -------
CASH PROVIDED BY FINANCING ACTIVITIES 0 3
------- -------
INCREASE (DECREASE) IN CASH ($2,592) $ 911
======= =======
</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 733 514
Change in unrealized gains on securities (195) 338
-----
Comprehensive income 852
Dividends on PIK Preferred Stock (469) (469)
----------------------------------------------------------------------------------
BALANCES AT MARCH 31, 1999 $4,706 $1,540 $4,189 ($7,909) $2,840
==================================================================================
</TABLE>
See notes to consolidated financial statements.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
McM Corporation and Subsidiaries
March 31, 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 4,706,388 and 4,696,479 at March 31, 1999, and March 31,
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
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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 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 as of March 31, 1999 and
1998 are as follows:
<TABLE>
<CAPTION>
March 31
1999 1998
------------------------
<S> <C> <C>
Net premiums earned:
Private passenger $ 1,520 $ 774
Commercial auto 8,831 9,921
------- -------
Total $10,351 $10,695
</TABLE>
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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, 1999, reflect
net income of $514,000 or basic net income of $.11 per share, compared to net
income of $105,000 or basic net income of $.02 per share for the first three
months of 1998. Consolidated gross revenues for the first three months of 1999
totalled $12,273,000 compared to $11,560,000 for the same period in 1998.
Included in gross revenues for the first quarter of 1999 are realized investment
gains of approximately $1.1 million compared to $17,000 for the same period last
year.
Shareholders' equity at March 31, 1999, totalled $2,840,000 or $.60 per
share compared to $2,457,000 or $.52 per share at December 31, 1998.
Consolidated assets totalled $116,694,000 at March 31, 1999, compared to
$117,735,000 at December 31, 1998.
Total net premium revenues were basically unchanged for the first three
months of 1999 totalling $10,351,000 compared to $10,695,000 for the same period
in 1998. This flat trend in net premiums 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.
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 an 8.0 percentage
point increase when compared to the same period in 1998. The loss ratio was
73.2% at March 31, 1999, compared to 65.2% at March 31, 1998. Development of
prior year's loss reserves was approximately $317,000 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) decreased approximately 1.7 percentage
points to 39.3% at March 31, 1999, compared to 41.0% at March 31, 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
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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 correct all remaining Year 2000
related problem products well ahead of December 31, 1999. The Company is
devoting all resources necessary to resolve 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 three months of 1999 totalling
$668,000 compared to $718,000 for the same period in 1998. This decline in
investment income reflects a $2.6 million decline in invested assets to $59.8
million at March 31, 1999, compared to $62.3 million at December 31, 1998. The
decline in invested assets is primarily attributable to reduced premium writings
and the settlement of claims.
Cash used by operating activities totalled $5.9 million for the first
three months of 1999 compared to $4.9 million for the same period of 1998.
Operating cash outflows for 1999 continue to be affected by increased settlement
of claims related liabilities. Reserves for losses and settlement expenses
declined approximately $3.2 million during the quarter to $57.6 million compared
to $60.8 million at December 31, 1998.
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
$65.3 million and $70.5 million at March 31, 1999, and December 31, 1998,
respectively.
<PAGE> 11
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.
EX-27 Financial Data Schedule (for SEC use only)
<PAGE> 12
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
May 17, 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 MARCH 31,
1999, 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-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> MAR-31-1999
<DEBT-HELD-FOR-SALE> 24,681
<DEBT-CARRYING-VALUE> 3,045
<DEBT-MARKET-VALUE> 3,140
<EQUITIES> 23,825
<MORTGAGE> 0
<REAL-ESTATE> 0
<TOTAL-INVEST> 59,764
<CASH> 5,528
<RECOVER-REINSURE> 33,459
<DEFERRED-ACQUISITION> 2,500
<TOTAL-ASSETS> 116,694
<POLICY-LOSSES> 57,621
<UNEARNED-PREMIUMS> 11,443
<POLICY-OTHER> 0
<POLICY-HOLDER-FUNDS> 5,789
<NOTES-PAYABLE> 0
0
26,468
<COMMON> 4,706
<OTHER-SE> (1,866)
<TOTAL-LIABILITY-AND-EQUITY> 116,694
10,351
<INVESTMENT-INCOME> 559
<INVESTMENT-GAINS> 1,149
<OTHER-INCOME> 105
<BENEFITS> 7,578
<UNDERWRITING-AMORTIZATION> 0
<UNDERWRITING-OTHER> 4,072
<INCOME-PRETAX> 514
<INCOME-TAX> 0
<INCOME-CONTINUING> 514
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 514
<EPS-PRIMARY> 0.11
<EPS-DILUTED> 0.11
<RESERVE-OPEN> 33,305
<PROVISION-CURRENT> 7,262
<PROVISION-PRIOR> 316
<PAYMENTS-CURRENT> 2,878
<PAYMENTS-PRIOR> 6,807
<RESERVE-CLOSE> 31,198
<CUMULATIVE-DEFICIENCY> 316
</TABLE>
