SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
Quarterly Report Under Section 13 or 15(d)
of the Securities Exchange Act of 1934
For Quarter Ended June 30, 1995
Commission File Number 0-3578
Piedmont Management Company Inc.
(Exact name of registrant as specified in its charter)
Delaware 13-2612123
(State or other jurisdiction of corporation (IRS Employer Identification
or organization) Number)
80 Maiden Lane, New York, N.Y.
10038
(Address of principal executive offices)
(Zip Code)
Registrant's telephone number, including area code: (212) 363-4650
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 (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days.
YES X NO
---
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the close of the period covered by this report.
Common Stock - $.50 Par Value
Authorized 12,000,000 Shares
5,252,006 Shares Issued and Outstanding
(Includes 265,000 Shares of Treasury Stock)
<PAGE>
PIEDMONT MANAGEMENT COMPANY INC. AND SUBSIDIARIES
Part I. Financial Information
<TABLE>
CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited)
<CAPTION>
<C> <C>
Three Months Ended June 30, Six Months Ended June 30,
1995 1994 1995 1994
<S> <C> <C> <C> <C>
Reinsurance Operations:
Gross premiums earned . . . . $55,455,028 $50,223,449 $108,096,336 $100,544,639
Ceded premiums earned . . . (22,344,979) (22,450,132) (45,412,543) (44,105,446)
---------- ---------- ---------- -----------
Net premiums earned . . . . . 33,110,049 27,773,317 62,583,793 56,439,193
Net investment income . . . . 5,100,186 4,459,762 10,295,256 9,031,341
Realized capital gains. . . . 433,359 362,315 1,285,147 714,475
Total revenues. . . . . . . . 38,643,594 32,595,394 74,164,196 66,185,009
Losses and loss expenses. . . 38,935,174 55,452,639 77,756,566 103,213,070
Reinsurance recoveries. . . . (16,704,583) (33,108,093) (32,247,289) (50,068,009)
---------- ---------- ---------- ----------
Net losses and loss expenses 22,230,591 22,344,546 45,509,277 53,145,061
Acquisition and other
underwriting expenses. . . 11,203,427 9,818,861 24,047,611 20,572,085
Total expenses. . . . . . . . 33,434,018 32,163,407 69,556,888 73,717,146
Reinsurance operating
income (loss). . . . . . . 5,209,576 431,987 4,607,308 (7,532,137)
Investment Advisory Operations:
Advisory, counseling fees and
other income. . . . . . . 5,292,838 5,323,576 10,442,219 11,009,316
Service and marketing costs . 4,513,870 4,363,071 8,809,801 9,080,946
--------- --------- ---------- ----------
Investment advisory income. . 778,968 960,505 1,632,418 1,928,370
Parent Company:
Investment and other income . 210,985 174,072 444,223 418,507
Realized capital gains (losses) (1,059) 372,426 (125) 368,215
Interest expense. . . . . . . 460,388 112,415 972,587 209,956
Other corporate expenses. . . 423,699 465,129 743,217 868,210
-------- ------- -------- --------
Parent company operating loss (674,161) (31,046) (1,271,706) (291,444)
Income (loss) before equity
in net earnings (losses) of
investees and provision
(credit) for income taxes. . 5,314,383 1,361,446 4,968,020 (5,895,211)
Equity in net earnings (losses)
of investees . . . . . . . . 157,946 (31,465) 243,530 (51,000)
--------- ---------- --------- ----------
5,472,329 1,329,981 5,211,550 (5,946,211)
Provision (credit) for income taxes:
Current . . . . . . . . . . . 1,107,435 (5,794) 1,077,377 (2,150,021)
Deferred. . . . . . . . . . . 604,709 301,044 395,083 (405,533)
--------- -------- --------- ----------
1,712,144 295,250 1,472,460 (2,555,554)
Net income (loss) . . . . . . $ 3,760,185 $ 1,034,731 $ 3,739,090 $(3,390,657)
========= ========= ========= ===========
RESULTS PER COMMON SHARE (EXHIBIT 1):
Net income (loss). . . . . . . $.70 $.19 $.69 $(.68)
Deduction for preferred dividends - - - (.02)
--- --- --- ------
Net income (loss). . . . . . . $.70 $.19 $.69 $(.70)
=== === === =====
</TABLE>
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS.
PIEDMONT MANAGEMENT COMPANY INC. AND SUBSIDIARIES
<TABLE>
CONSOLIDATED BALANCE SHEETS
<CAPTION>
6/30/95 12/31/94
(Unaudited) (Audited)
<S> <C> <C>
ASSETS:
Fixed Maturities:
Held-to-Maturity, at amortized cost
(market: $9,255,575 and $8,818,353) $ 8,793,858 $ 8,813,314
Available-for-Sale, at market. . . . . .
(amortized cost: $261,345,152 and
$262,325,625). . . . . .. . . . . . 258,297,360 244,335,744
Equity Securities, at market
(cost: $55,844,448 and $67,214,430) . 57,872,389 66,666,764
Short-Term investments, at cost . . . . . . 65,469,740 51,703,561
----------- -----------
Total investments . . . . . . . . . . . . 390,433,347 371,519,383
Cash. . . . . . . . . . . . . . . . . . . . 15,070,439 9,066,870
Investments in and advances to investee companies 5,099,164 4,634,527
Accrued interest and dividends receivable . 3,507,053 3,687,258
Reinsurance recoverable . . . . . . . . . . 169,514,471 170,278,300
Premiums receivable . . . . . . . . . . . . 36,206,048 35,602,712
Prepaid reinsurance premiums. . . . . . . . 24,305,852 22,980,856
Deferred policy acquisition costs . . . . . 11,338,710 10,896,632
Deferred income taxes . . . . . . . . . . . 14,769,912 21,799,010
Other assets . . . . . . . . . . . . . . . 23,270,368 25,003,520
---------- ----------
Total assets. . . . . . . . . . . . . . . $693,515,364 $675,469,068
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY:
Outstanding losses and loss expenses. . . . $455,755,901 $461,533,490
Unearned premiums . . . . . . . . . . . . . 78,493,876 73,839,992
Loan payable. . . . . . . . . . . . . . . . 20,000,000 20,000,000
Expenses, taxes and other liabilities . . . 20,808,849 17,615,047
----------- ----------
Total liabilities . . . . . . . . . . . . 575,058,626 572,988,529
Stockholders' equity:
Capital stock:
Preferred stock, $1 par value, authorized 2,000,000
shares cumulative convertible Series A shares issued:
244,984 and 245,068 . . . . . . . . . . . 244,984 245,068
Common stock, $.50 par value, authorized 12,000,000
shares; shares issued: 5,252,006 and 5,250,539 2,626,003 2,625,269
Paid-in capital . . . . . . . . . . . . . . 28,019,779 28,007,604
Unrealized depreciation on investments and foreign
translation adjustment, net of deferred income taxes (1,609,267) (13,929,580)
Retained earnings . . . . . . . . . . . . . 90,897,739 87,254,678
Less cost of treasury stock (265,000 shares common,
53,000 shares preferred) . . . . . . . . . (1,722,500) (1,722,500)
---------- -----------
Total stockholders' equity. . . . . . . . 118,456,738 102,480,539
Commitments and contingencies
Total liabilities and stockholders' equity $693,515,364 $675,469,068
=========== ===========
</TABLE>
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS.
<PAGE>
PIEDMONT MANAGEMENT COMPANY INC. AND SUBSIDIARIES
<TABLE>
CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
<CAPTION>
Six Months Ended June 30,
1995 1994
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) . . . . . . . . . . . . . $3,739,090 $ (3,390,657)
Adjustments to reconcile net income (loss)
to net cash from operating activities:
Realized capital gains . . . . . . . . . (1,285,022) (1,082,690)
Outstanding losses and loss expenses . . (5,777,589) 28,117,849
Unearned premiums. . . . . . . . . . . . 4,653,884 9,158,849
Reinsurance recoverable. . . . . . . . . 763,829 (20,227,565)
Premiums receivable. . . . . . . . . . . (603,336) (1,359,957)
Prepaid reinsurance premiums . . . . . . (1,324,996) (1,086,735)
Deferred acquisition costs . . . . . . . (442,078) (1,800,000)
Amortization of bond premium, net. . . . 223,678 435,112
Equity in net (earnings) losses of investees (243,530) 51,000
Income taxes payable (recoverable) . . . 1,077,377 (2,151,400)
Deferred income tax expense (benefit). . 395,083 (405,533)
Accrued interest and dividends . . . . . 180,205 156,180
Other items, net . . . . . . . . . . . . 4,028,004 (1,275,803)
--------- -----------
Total cash flows from operating activities. 5,384,599 5,138,650
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of Held-to-Maturity securities. . - (3,051,094)
Purchases of Available-for-Sale securities. (27,760,100) (42,228,727)
Proceeds from maturity of Held-to-Maturity
securities. . . . . . . . . . . . . . . . - 4,000,000
Proceeds from maturity of Available-for-Sale
securities. . . . . . . . . . . . . . . . - 896,108
Proceeds from sale of Available-for-Sale
securities . . . . . . . . .. . . . . . . 29,218,356 35,232,296
Net (purchases) sales of Equity Securities. 12,914,068 (9,571,862)
Net (purchases) sales/maturities of Short
Term investments. . . . . . . . . . . . . (13,766,179) 15,388,256
----------- ----------
Total cash flows from investing activities . 606,145 664,977
CASH FLOWS FROM FINANCING ACTIVITIES:
Repayment of loans. . . . . . . . . . . . . - (1,050,000)
Proceeds from exercise of stock options . . 12,825 272,107
------- ----------
Total cash flows from financing activities. 12,825 (777,893)
Net increase in cash . . . . . . . . . . . . 6,003,569 5,025,734
Cash balance, beginning of year. . . . . . . 9,066,870 6,727,821
---------- ----------
Cash balance, end of period. . . . . . . . . $15,070,439 $11,753,555
========== ==========
Supplemental cash flow disclosure:
Interest paid . . . . . . . . . . . . . . . $ 479,589 $ 209,956
</TABLE>
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS.
<PAGE>
PIEDMONT MANAGEMENT COMPANY INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS (Unaudited)
1. BASIS OF PRESENTATION:
The interim financial information presented is unaudited. In the opinion of
Company management, all adjustments necessary to present fairly the
consolidated financial position and the results of operations for the interim
periods have been made. The financial statements should be read in
conjunction with the financial statements and related notes in the Company's
1994 Annual Report on Form 10K.
2. RESULTS PER COMMON SHARE:
In the six months ended June 30, 1994, loss per share was based on the
weighted average number of common shares outstanding, excluding the effect of
common stock equivalents which would be anti-dilutive. Dividends accrued of
$0.02 per share on cumulative convertible Series A preferred stock were
deducted in arriving at the net loss per share in this period.
3. SUBSEQUENT EVENT:
On August 7, 1995, the Company entered into an Agreement
and Plan of Merger (the "Merger Agreement") with Chartwell
Re Corporation ("Chartwell"), pursuant to which the
Company agreed to merge (the "Merger") with and into Chartwell,
with Chartwell being the surviving corporation. Following the
Merger, The Reinsurance Corporation of New York, the Company's
principal reinsurance underwriting subsidiary ("RECO"), will become
a subsidiary of Chartwell Reinsurance Company, the reinsurance
underwriting subsidiary of Chartwell.
In the Merger, holders of common and preferred stock of the Company
will receive newly-issued shares of common stock of Chartwell
representing approximately 45.25% of the outstanding common stock
of the combined entity. Chartwell intends to seek a stock exchange
listing of its common stock effective upon the closing of the Merger.
Prior to the Merger, Lexington Management Corporation (combined with
the Company's other asset management operations) will be spun-off to
the Company's stockholders in a tax-free transaction. Also prior to
the Merger, stockholders of the Company will receive a dividend of
contingent interest notes of the Company. The notes, which will
mature on June 30, 2006, unless previously redeemed, will not pay
any interest to holders until maturity. The notes will provide for
payment of up to $57.0 million to holders at maturity, substantially
depending on the results, particularly loss reserve development,
over time of RECO's previously written business. The notes may be
settled at maturity in registered common stock. The notes will be
assumed by Chartwell in the Merger.
The combined entity will be managed by Chartwell's current
management team. Four members of the Company's existing
Board of Directors will become directors of Chartwell upon
the Merger. Pursuant to the Merger Agreement, the Company
would increase RECO's reserves for losses incurred but not
reported in respect of its existing business by $25.0
million prior to closing.
The Merger is subject to the consent of the Company's and
Chartwell's stockholders, the consent of the holders of Chartwell's
10-1/4% Senior Notes due 2004, bank and regulatory approval and
certain other conditions. The Merger is expected to be
consummated in the fourth quarter of 1995.
<PAGE>
PIEDMONT MANAGEMENT COMPANY INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF
OPERATIONS AND FINANCIAL CONDITION
Management's Discussion and Analysis contained in the Company's Annual
Report on Form 10-K for December 31, 1994 is incorporated herein by
reference and should be read in conjunction with the following.
On August 7, 1995, the Company entered into an Agreement
and Plan of Merger (the "Merger Agreement") with Chartwell
Re Corporation ("Chartwell"), pursuant to which the
Company agreed to merge (the "Merger") with and into
Chartwell, with Chartwell being the surviving corporation.
Following the Merger, The Reinsurance Corporation of New
York, the Company's principal reinsurance underwriting
subsidiary ("RECO"), will become a subsidiary of Chartwell
Reinsurance Company, the reinsurance underwriting
subsidiary of Chartwell.
In the Merger, holders of common and preferred stock of
the Company will receive newly-issued shares of common
stock of Chartwell representing approximately 45.25% of
the outstanding common stock of the combined entity.
Chartwell intends to seek a stock exchange listing of its
common stock effective upon the closing of the Merger.
Prior to the Merger, Lexington Management Corporation
(combined with the Company's other asset management
operations) will be spun-off to the Company's stockholders
in a tax-free transaction. Also prior to the Merger,
stockholders of the Company will receive a dividend of
contingent interest notes of the Company. The notes,
which will mature on June 30, 2006, unless previously
redeemed, will not pay any interest to holders until
maturity. The notes will provide for payment of up to
$57.0 million to holders at maturity, substantially
depending on the results, particularly loss reserve
development, over time of RECO's previously written
business. The notes may be settled at maturity in
registered common stock. The notes will be assumed by
Chartwell in the Merger.
The combined entity will be managed by Chartwell's current
management team. Four members of the Company's existing
Board of Directors will become directors of Chartwell upon
the Merger. Pursuant to the Merger Agreement, the Company
would increase RECO's reserves for losses incurred but not
reported in respect of its existing business by $25.0
million prior to closing.
The Merger is subject to the consent of the Company's and
Chartwell's stockholders, the consent of the holders of Chartwell's
10-1/4% Senior Notes due 2004, bank and regulatory approval and
certain other conditions. The Merger is expected to be
consummated in the fourth quarter of 1995.
CONSOLIDATED RESULTS OF OPERATIONS
Consolidated net income for the six months ended June 30, 1995 was $3.7
million, $0.69 per share. This compares to a net loss for the six months
ended June 30, 1994 of $3.4 million, $0.70 per share, after a $0.02
deduction for preferred dividends. The 1994 results included $6.5 million,
$1.31 loss per share, from catastrophes and other major losses. The
consolidated results also include after-tax investment gains of $835,000,
$0.15 per share, compared to $704,000, $0.14 per share, for the six month
period of 1994.
PIEDMONT MANAGEMENT COMPANY INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION (cont'd)
A discussion and analysis of results of operations on a segment basis
follows.
SIX MONTHS ENDED JUNE 30, 1995 AND 1994
REINSURANCE OPERATIONS
RECO's pre-tax operating income was $4.6 million in 1995 compared to a
pre-tax operating loss of $7.5 million in 1994. The main reason for the
turnaround in operating results from the prior year was a lack of significant
catastrophe losses. The 1994 underwriting results were impacted by a series
of catastrophe losses, beginning with the Northridge, California earthquake on
January 17, 1994 followed by numerous other catastrophe losses during the
first half of 1994. RECO's combined ratio, computed on a generally accepted
accounting principles basis, was 111.1% in 1995 compared to 130.6% in 1994.
The prior year's results included 18 loss ratio points attributed to
catastrophe losses.
Net premiums written in 1995 were $65.9 million compared to $64.5 million
for the six months of 1994. Net premiums earned in 1995 rose to $62.6 million
compared to $56.4 million a year ago. The growth in earned premiums over the
prior year in contrast to the more modest growth in premiums written over the
prior year period relates to the fact that the company has not renewed a
number of property reinsurance accounts. This strategy has been employed in
an effort to reduce exposure to catastrophe loss. Losses and loss adjustment
expenses incurred declined to $45.5 million in 1995, compared to $53.1 million
a year ago, primarily as a result of the reduction in catastrophe and other
major loss activity year to year. Acquisition and other underwriting expenses
increased to $24.0 million in 1995 compared to $20.6 million a year ago. A
portion of the increase relates to commissions on the reinsurance treaties
subject to sliding scale provisions where additional commissions are paid
depending upon profits generated under the treaty. There were also significant
legal costs incurred in 1995 relating to certain claims in arbitration.
Net investment income was $10.3 million in 1995 compared to $9.0 million
recorded a year earlier. This growth in net investment income over the
prior year is mainly attributed to an increasing yield environment and an
increase in the base of invested assets provided by the $17.5 million capital
contribution to RECO made at the end of 1994.
In April, RECO's rating by A.M. Best Company, an independent rating entity
serving the insurance industry, was reduced from "A-" (Excellent) to "B++"
(Very Good). According to A.M. Best, although the rating downgrade primarily
reflected RECO's poor operating results over the last five years and
constrained growth in its policyholders' surplus, its rating outlook is stable
given the company's redirection toward a specialty lines company and other
operational changes which should benefit operating results in the future. This
rating downgrade will limit RECO's ability to quote and participate on certain
lines of new and renewal business during the remainder of 1995, resulting in a
potential reduction in premium volume. The effects of the rating downgrade on
results of operations depends on the company's ability to replace the foregone
new and renewal business with alternative sources of premium and the
underlying profitability of the business. However, management believes the
proposed business combination with Chartwell Reinsurance Company and the
redirecting of strategy toward specialty lines will have positive implications
toward RECO's regaining its A- rating.
INVESTMENT ADVISORY OPERATIONS
Investment advisory pre-tax income declined to $1.6 million in 1995 from
$1.9 million last year. Revenues of $10.4 million were down 5% in comparison
to 1994. This decline primarily resulted from lower sales commissions earned
on the load mutual funds managed by Lexington Management Corporation (LMC) and
also some account attrition at Lexington Capital Management (LCM). Service and
PIEDMONT MANAGEMENT COMPANY INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION (cont'd)
marketing costs in the period were down 3%. Total assets under management
at LMC were $3.4 billion on June 30, 1995, $1.5 billion of which represent
assets in the Lexington Family of Mutual Funds. The foregoing amounts of
assets are virtually unchanged from year end 1994.
PARENT COMPANY AND INVESTEES
The pre-tax operating loss for the parent company was $1.3 million in 1995
compared to $291,000 a year ago. While investment and other income
compared favorably with 1994, interest expense increased to $973,000 from
$210,000 a year ago. This reflects the $20.0 million loan refinancing at the
end of 1994 which replaced a lower level of bank debt previously outstanding.
The 1994 results also included pre-tax capital gains of $368,000. Other
corporate operating expenses declined to $743,000 in 1995 compared to $868,000
a year ago. The reason for the decline was lower compensation expenses in
comparison to last year and an increase in the allocation of certain operating
expenses to subsidiary companies.
Equity in net earnings (losses) of investees, represented by RECO's
investment in Continental National Corporation (CNC), was $244,000 in 1995
compared to a loss of $51,000 a year ago. CNC, like RECO, has experienced an
improvement in underwriting results, due to the abatement in catastrophe
losses in comparison to the prior year. Reflecting pre-tax income of $5.2
million, the Company has accrued current and deferred tax expenses totalling
$1.5 million in 1995 versus a tax benefit of $2.6 million a year ago when the
Company incurred a pre-tax loss of $5.9 million. Management believes the net
deferred tax asset carried on June 30, 1995 in the amount of $14.8 million
will be realized based on estimates of future taxable income.
SECOND QUARTER 1995 COMPARED WITH SECOND QUARTER 1994
Consolidated net income in the period was $3.8 million, $0.70 per share,
compared to net income of $1.0 million, $0.19 per share, for the second
quarter of 1994.
REINSURANCE OPERATIONS
RECO earned pre-tax operating income of $5.2 million in the period
compared to $432,000 a year earlier. This improvement was primarily
attributable to significantly better underwriting results in the period, the
underwriting loss was $324,000 in 1995 compared to $4.4 million in 1994.
There was an increase in net investment income to $5.1 million in 1995 from
$4.5 million last year. Pre-tax capital gains compared favorably in each
period, $433,000 in 1995 compared to $362,000 in 1994.
Net premiums written were $34.3 million in 1995 compared to $34.0 million
last year. Premiums earned, on the other hand, increased to $33.1 million
from $27.8 million a year ago. These year to year fluctuations in net
premiums written and earned are consistent with the fluctuations for the
semi-annual periods of each year and the reasons therefor are as explained in
the preceding section. Likewise the increase in acquisition and other
underwriting expenses over the prior year period reflect higher sliding scale
commissions.
INVESTMENT ADVISORY OPERATIONS
Investment advisory pre-tax operating income fell to $779,000 in 1995 from
$961,000 a year ago. Pre-tax income at LMC declined slightly to $800,000
from $855,000 a year ago. The remaining combined asset management
operations resulted in a slight loss on a pre-tax basis compared to income in
the prior period.
<PAGE>
PIEDMONT MANAGEMENT COMPANY INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION (cont'd)
PARENT COMPANY AND INVESTEES
The pre-tax operating loss at the parent company was $674,000 in 1995
compared to $31,000 a year ago. In 1994, the parent company realized $372,000
in capital gains. Revenues and operating expenses compared favorably with
1994; however, interest expense rose to $460,000 in 1995 from $112,000 a year
ago. This increase in interest expense is connected to the increase in the
bank debt outstanding in 1995 over 1994.
Equity in net earnings (losses) of investees improved to $158,000 in the
period versus a $31,000 loss in 1994.
SECOND QUARTER 1995 COMPARED WITH FIRST QUARTER 1995
Consolidated net income in the second quarter was $3.8 million, $0.70 per
share, in contrast to a net loss of $21,000, $0.01 per share, in the first
quarter this year. The improved result in the period primarily relates to the
turnaround in pre-tax operating results for RECO, where $5.2 million of
pre-tax operating income was earned in the second quarter compared to a
$602,000 operating loss in the first quarter. The underwriting loss for RECO
was $324,000 in the second quarter compared to $6.6 million in the first
quarter which included the effects of $2.5 million in major losses. The
combined ratio was 101.0% in the second quarter compared to 122.6% in
the first quarter. RECO's statutory policyholders' surplus, reflecting the
improved operating results as well as unrealized gains on equity securities,
rose to $97.4 million at the end of the second quarter, up from $90.6 million
at the end of the first quarter. Net investment income of $5.1 million in the
second quarter was down $95,000 in comparison with the first quarter.
Investment advisory pre-tax operating income was $779,000 in the second
quarter compared to $853,000 in the first quarter. Advisory fees and other
revenues increased to $5.3 million in the second quarter from $5.1 million in
the first quarter and service and marketing costs increased to $4.5 million
from $4.3 million in the second quarter. The parent company operating
loss in the second quarter was $674,000, up from $598,000 in the first
quarter, while RECO's equity in the net earnings of CNC nearly doubled from
$86,000 in the first quarter to $158,000 for the second quarter.
LIQUIDITY AND FINANCIAL CONDITION
Total assets on June 30, 1995 were $693.5 million, up from $675.5 million at
the end of 1994. Invested assets grew to $390.4 million from $371.5 million
during the same period. Virtually all of the Company's fixed income
investments, primarily bonds, are categorized as available-for-sale and
carried at market values, with unrealized gains and losses reflected in
stockholders' equity, net of related deferred income taxes. On June 30,
1995, the weighted average maturity of the bond portfolio was approximately
three years and the average quality rating was AA+. This segment of the
portfolio has gradually increased in market value during the first half of the
year as bond yields continue to fall for both short and intermediate term
securities. On June 30, 1995 fixed maturities carried at market value were
$258.3 million with an amortized cost of $261.3 million.
Total cash flow from operating activities was $5.4 million on June 30, 1995
compared to $5.1 million a year earlier. Cash flow from underwriting
improved in 1995 as a result of the decline in property losses. Operating cash
flow was also enhanced by investment income accretion during the period.
In keeping with an investment policy decision to reduce RECO's level of
equity securities, a program was initiated during 1995 to sell a portion of
those investments. Proceeds from the sales have been reinvested in short term
investments and intermediate term fixed income securities.
<PAGE>
PIEDMONT MANAGEMENT COMPANY INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION (cont'd)
The Company is in compliance with all covenants under its senior term
bank loan agreement and expects to be able to be able to fund principal and
interest payments on this loan mainly through the dividend paying capacity
of its subsidiary companies. Principal payments amounting to $1.1 million are
due under the terms of the bank loan by the end of 1995. Included among
the loan covenants is a minimum statutory policyholders' surplus requirement
of $90.0 million. On June 30, 1995, RECO's policyholders' surplus was $97.4
million.
The Company's liquidity position remains strong. Management intends to
satisfy ongoing cash obligations through internally generated funds without
any need to liquidate significant amounts of invested assets.
Consolidated stockholders' equity on June 30, 1995 was $118.5 million,
compared to $102.5 million at the end of 1994. Included in consolidated
stockholders' equity was net unrealized depreciation on invested assets of
$1.6 million, down substantially from $13.9 million at the end of 1994. This
improvement in carrying values of securities mainly reflects a turnaround in
the market value of RECO's fixed income portfolio and is consistent with
the generally lower interest rate environment of the first half of 1995.
EXHIBIT TO PART I
Computation of Earnings Per Common Share and Common Equivalent
Share for the Six Months Ended June 30, 1995 and 1994.
<PAGE>
PIEDMONT MANAGEMENT COMPANY INC. AND SUBSIDIARIES
Part II. Other Information
SIX MONTHS ENDED JUNE 30, 1995 AND 1994
Item 4. Submission of Matters to a Vote of Security Holders
(a) Date of Meeting: May 25, 1995 Annual Meeting of Stockholders
(b) Directors elected: Haynes G. Griffin; William R. Miller; Stuart
Smith Richardson; and Carl H. Tiedemann.
Each director received 4,799,160 votes, 99% of the votes cast, in favor of
his election and 2,456 withheld.
Directors with continuing terms of office are: Sion A. Boney III; Terence N.
Deeks; Robert M. DeMichele; L. Richardson Preyer; Lunsford Richardson, Jr.;
Peter L. Richardson; R. Randolph Richardson; and Marion A. Woodbury.
(c) Other Matters Voted Upon:
(1) The reelection of the Nominating and Proxy Committee was
voted as follows:
FOR: 4,791,990
AGAINST: 7,735
ABSTAIN: 1,891
(2) A proposal to ratify the selection of Coopers & Lybrand as
independent accountants of the Company was voted as follows:
FOR: 4,800,000
AGAINST: 831
ABSTAIN: 0
Item 6. Exhibits
Exhibit No. 27 Financial Data Schedule (filed with the Securities and
Exchange Commission)
Other items under Part II have been omitted since they are either not
required or are not applicable.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
PIEDMONT MANAGEMENT COMPANY INC.
Date: August 10, 1995 By /S/ ROBERT M. DeMICHELE
Robert M. DeMichele, President
(Chief Executive Officer)
Date: August 10, 1995 By /S/ PETER J. PALENZONA
Peter J. Palenzona, Senior Vice President
Finance and Administration
(Chief Financial Officer)
PIEDMONT MANAGEMENT COMPANY INC. AND SUBSIDIARIES
<TABLE>
COMPUTATION OF EARNINGS (LOSS) PER COMMON SHARE AND
COMMON EQUIVALENT SHARE (Unaudited)
<CAPTION>
Six Months Ended June 30,
1995 1994
<S> <C> <C>
(A) Earnings (loss) per common share and
common equivalent share:
Number of common shares:
Issued (weighted average) . . . . . . . 5,251,390 5,227,190
Less treasury stock . . . . . . . . . . (265,000) (265,000)
--------- ----------
Outstanding for period. . . . . . . . . 4,986,390 4,962,190
Common equivalent shares (two common
for each preferred share). . . . . . 384,028 -
Average stock options outstanding
(net of repurchased shares under the
treasury stock method). . . . . . . 21,840 -
--------- ----------
5,392,258 4,962,190
Net income (loss) . . . . . . . . . . . . $3,739,090 $(3,390,657)
Deduction ($.50 per share) for dividends
on preferred stock . . . . . . . . . - (96,359)
Net income (loss) applicable to common
stock. . . . . . . . . . . . . . . . $3,739,090 $(3,487,016)
Earnings (loss) per common share and common
equivalent share . . . . . . . . . . . . $.69 $(.70)
=== =====
(B) Earnings (loss) per common share assuming
full dilution:
Number of common shares:
Outstanding for period. . . . . . . . . 4,986,390 4,962,190
Common equivalent shares (two common
for each preferred share). . . . . . 384,028 385,434
--------- ---------
5,370,418 5,347,624
Average stock options outstanding
(net of repurchased shares under the
treasury stock method) . . . . . . 21,840 92,571
-------- -------
5,392,258 5,440,195
Net income (loss) . . . . . . . . . . . $3,739,090 $(3,390,657)
Earnings (loss) per common share and common
equivalent share . . . . . . . . . . . . $.69 $(.62)
=== ====
</TABLE>
NOTE: Earnings per common share and common equivalent share in 1995 were
computed based upon the weighted average number of common shares outstanding
assuming full conversion of common stock equivalents. In computing loss per
common share in 1994, results were reduced by accrued dividends on cumulative
convertible Series A preferred stock. The inclusion of common stock equiv-
alents would have been anti-dilutive and, accordingly, only the weighted
average number of shares were used in the computation.
<TABLE> <S> <C>
<ARTICLE> 7
<LEGEND>
THE SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION
EXTRACTED FROM THE PIEDMONT MANAGEMENT COMPANY INC. FORM 10-Q
QUARTERLY REPORT FOR THE PERIOD ENDED JUNE 30, 1995 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-31-1995
<PERIOD-END> JUN-30-1995
<DEBT-HELD-FOR-SALE> 258297
<DEBT-CARRYING-VALUE> 8794
<DEBT-MARKET-VALUE> 9256
<EQUITIES> 57872
<MORTGAGE> 0
<REAL-ESTATE> 0
<TOTAL-INVEST> 390433
<CASH> 15070
<RECOVER-REINSURE> 169514
<DEFERRED-ACQUISITION> 11339
<TOTAL-ASSETS> 693515
<POLICY-LOSSES> 455756
<UNEARNED-PREMIUMS> 78494
<POLICY-OTHER> 0
<POLICY-HOLDER-FUNDS> 0
<NOTES-PAYABLE> 20000
<COMMON> 2626
5709
245
<OTHER-SE> 115586
<TOTAL-LIABILITY-AND-EQUITY> 693515
33110
<INVESTMENT-INCOME> 10295
<INVESTMENT-GAINS> 1285
<OTHER-INCOME> 0
<BENEFITS> 0
<UNDERWRITING-AMORTIZATION> 20656
<UNDERWRITING-OTHER> 3392
<INCOME-PRETAX> 5212
<INCOME-TAX> (1472)
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 3739
<EPS-PRIMARY> .69
<EPS-DILUTED> .69
<RESERVE-OPEN> 461534
<PROVISION-CURRENT> 45136
<PROVISION-PRIOR> 373
<PAYMENTS-CURRENT> 9000
<PAYMENTS-PRIOR> 41523
<RESERVE-CLOSE> 455756
<CUMULATIVE-DEFICIENCY> 373
</TABLE>
