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 MARCH 31, 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 (IRS Employer
of corporation or organization) Identification 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
5,252,008 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>
Three Months Ended March 31,
1995 1994
<S> <C> <C>
REINSURANCE OPERATIONS:
Gross premiums earned. . . . . . . . . . . $52,641,308 $50,321,190
Ceded premiums earned. . . . . . . . . . . (23,167,564) (21,655,314)
----------- -----------
Net premiums earned. . . . . . . . . . . . 29,473,744 28,665,876
Net investment income. . . . . . . . . . . 5,195,070 4,571,579
Realized capital gains . . . . . . . . . . 851,788 352,160
---------- -----------
Total revenues . . . . . . . . . . . . . . 35,520,602 33,589,615
Losses and loss expenses . . . . . . . . . 38,821,392 47,760,431
Reinsurance recoveries . . . . . . . . . . (15,542,706) (16,959,916)
---------- -----------
Net losses and loss expenses . . . . . . . 23,278,686 30,800,515
Acquisition & other underwriting expenses. 12,844,184 10,753,224
---------- ----------
Total expenses . . . . . . . . . . . . . . 36,122,870 41,553,739
Reinsurance operating loss . . . . . . . . (602,268) (7,964,124)
INVESTMENT ADVISORY OPERATIONS:
Advisory, counseling fees & other income.. 5,149,381 5,685,741
Service and marketing costs. . . . . . . . 4,295,931 4,717,876
--------- ---------
Investment advisory operating income . . . 853,450 967,865
PARENT COMPANY:
Investment and other income. . . . . . . . 233,238 244,435
Realized capital gains (losses). . . . . . 934 (4,211)
Interest expense . . . . . . . . . . . . . 512,199 97,541
Other corporate expenses . . . . . . . . . 319,518 403,081
------- --------
Parent company operating loss. . . . . . . (597,545) (260,398)
Loss before equity in net earnings (losses)
of investees and income tax benefits . . . (346,363) (7,256,657)
Equity in net earnings (losses) of investees 85,584 (19,535)
--------- ----------
(260,779) (7,276,192)
Credit for income taxes:
Current. . . . . . . . . . . . . . . . . . 30,058 2,144,227
Deferred . . . . . . . . . . . . . . . . . 209,626 706,577
------- ---------
239,684 2,850,804
Net loss . . . . . . . . . . . . . . . . . . $(21,095) $(4,425,388)
======== ===========
LOSS PER COMMON SHARE (EXHIBIT 11):
Net loss . . . . . . . . . . . . . . . . . . $ - $(.89)
Deduction for preferred dividends. . . . . . (.01) (.01)
----- -----
Net loss . . . . . . . . . . . . . . . . $(.01) $(.90)
===== =====
</TABLE>
See accompanying Notes to Financial Statements.
<PAGE>
PIEDMONT MANAGEMENT COMPANY INC. AND SUBSIDIARIES
<TABLE>
CONSOLIDATED BALANCE SHEETS
<CAPTION>
3/31/95 12/31/94
(Unaudited) (Audited)
<S> <C> <C>
Assets:
Fixed Maturities:
Held-to-Maturity, at amortized cost
(market: $9,012,859; $8,818,353). . . . . $ 8,798,605 $ 8,813,314
Available-for-Sale, at market
(amortized cost: $264,735,407; $262,325,625) 253,615,369 244,335,744
Equity Securities, at market
(cost: $51,363,026; $67,214,430). . . . . 50,991,671 66,666,764
Short-term investments, at cost.. . . . . . 69,398,267 51,703,561
Total investments . . . . . . . . . . . . 382,803,912 371,519,383
Cash. . . . . . . . . . . . . . . . . . . . 7,268,462 9,066,870
Investment in/advances to investee companies 4,818,800 4,634,527
Accrued interest and dividends receivable . 3,930,679 3,687,258
Reinsurance recoverable . . . . . . . . . . 170,108,811 170,278,300
Premiums receivable . . . . . . . . . . . . 33,407,494 35,602,712
Prepaid reinsurance premiums. . . . . . . . 25,273,924 22,980,856
Deferred policy acquisition costs . . . . . 10,978,413 10,896,632
Deferred income taxes . . . . . . . . . . . 19,113,713 21,799,010
Other assets. . . . . . . . . . . . . . . . 25,517,508 25,003,520
----------- -----------
Total assets. . . . . . . . . . . . . . . $683,221,716 $675,469,068
=========== ===========
Liabilities and Stockholders' Equity:
Outstanding losses and loss expenses. . . . $458,823,684 $461,533,490
Unearned premiums . . . . . . . . . . . . . 78,283,278 73,839,992
Loan payable. . . . . . . . . . . . . . . . 20,000,000 20,000,000
Expenses, taxes and other liabilities . . . 18,362,227 17,615,047
----------- -----------
Total liabilities . . . . . . . . . . . . 575,469,189 572,988,529
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: 5,252,008 and 5,250,539 . . 2,626,004 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. . . . . . . . . . . . (8,553,295) (13,929,580)
Retained earnings . . . . . . . . . . . . .. . 87,137,555 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. . . . . . . . . 107,752,527 102,480,539
Commitments and contingencies
Total liabilities and stockholders' equity $683,221,716 $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>
Three Months Ended March 31,
1995 1994
<S> <C> <C>
Cash flows from operating activities:
Net loss. . . . . . . . . . . . . . . . . $(21,095) $(4,425,388)
Adjustments to reconcile net loss to net
cash from operating activities:
Realized capital gains. . . . . . . . . (852,722) (347,949)
Outstanding losses and loss expenses. . (2,709,806) 14,254,663
Unearned premiums . . . . . . . . . . . 4,443,286 2,988,020
Reinsurance recoverable . . . . . . . . 169,489 (2,730,651)
Premiums receivable . . . . . . . . . . 2,195,218 (1,702,915)
Prepaid reinsurance premiums. . . . . . (2,293,068) (1,097,865)
Deferred acquisition costs. . . . . . . (81,781) 1,116,000
Amortization of bond premium, net . . . 188,365 228,016
Equity in net (earnings) losses of
investees. . . . . . . . . . . . . . (85,584) 19,535
Income taxes recoverable. . . . . . . . (30,058) (2,144,227)
Deferred income tax benefit . . . . . . (209,626) (706,577)
Accrued interest and dividends . . . . (243,421) (204,886)
Other items, net. . . . . . . . . . . . (15,151) (259,473)
---------- ----------
Total cash flows from operating activities 454,046 4,986,303
Cash flows from investing activities:
Purchases of Available-for-Sale securities (10,234,242) (21,951,549)
Maturities of Available-for-Sale securities - 17,334,399
Sales of Available-for-Sale securities 7,657,425 -
Net (purchases) sales of Equity Securities 17,697,415 (6,213,967)
Net (purchases) sales/maturities of
Short-term investments (17,385,877) 8,336,745
------------ ----------
Total cash flows from investing activities (2,265,279) (2,494,372)
Cash flows from financing activities:
Repayment of loan . . . . . . . . . . . . - (525,000)
Proceeds from exercise of stock options . 12,825 255,495
------- --------
Total cash flows from financing activities 12,825 (269,505)
Net increase (decrease) in cash. . . . . . (1,798,408) 2,222,426
Cash balance, beginning of year. . . . . . 9,066,870 6,727,821
---------- ----------
Cash balance, end of period. . . . . . . . $ 7,268,462 $ 8,950,247
Supplemental cash flow disclosure:
Interest paid. . . . . . . . . . . . . . $ - $97,541
</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 first quarter of 1995 and 1994, loss per share was computed 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 $.01 per share on cumulative convertible Series A preferred stock
were deducted in arriving at net loss per common share in both periods.
<PAGE>
PIEDMONT MANAGEMENT COMPANY INC.
AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
Three Months Ended March 31, 1995 and 1994
The 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.
CONSOLIDATED RESULTS OF OPERATIONS
The consolidated net loss for the period was $21,000, $0.01 per share,
compared to a net loss of $4.4 million, $0.90 per share, a year ago. The 1994
results included after-tax losses of $5.5 million, $1.12 per share, from
catastrophe losses, including the Northridge California earthquake. The
consolidated results also include after-tax investment gains of $554,000,
$0.11 per share, in 1995 compared to $348,000, $0.05 per share, in the prior
period. A preferred dividend per share of $0.01 was deducted in each period.
A discussion and analysis of results of operations on a segment basis
follows.
REINSURANCE OPERATIONS
The reinsurance pre-tax operating loss was $603,000 in 1995 compared to
to $8.0 million a year ago. The underwriting loss was $6.6 million compared
to $12.9 million in the 1994 period. The 1994 underwriting loss included $6.3
million in losses from the Northridge California earthquake and $2.2 million in
losses from winter storms. In 1995, underwriting results at The Reinsurance
Corporation of New York (RECO) were also adversely affected by large losses,
specifically, the occurrences of two fire losses totalling $2.1 million stemming
from the company's participation in a commercial property underwriting pool.
Added to this was $400,000 of aviation losses incurred through participation in
another underwriting pool.
In contrast to the prior year, the lack of any major catastrophes in the
quarter produced profitable results for the company's property/treaty rein-
surance lines and its primary (direct insurance) operations. The company has
taken action to address both the frequency and severity of catastrophe losses
by purchasing additional reinsurance protection to minimize overall net loss
from such occurrences in the future.
Earned premiums in the first quarter of 1995 were $29.5 million compared
to $28.7 million a year ago. Losses and loss expenses incurred dropped to
$23.3 million from $30.8 million last year. Acquisition and other underwriting
expenses increased to $12.8 million in 1995 from $10.8 million a year ago.
Much of this increase relates to commissions earned under reinsurance treaties
subject to sliding scale provisions where additional commissions are paid
depending upon profits generated under the treaty.
<PAGE>
PIEDMONT MANAGEMENT COMPANY INC.AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION (continued)
The combined ratio, computed on a generally accepted accounting
principles basis, was 122.6% in 1995 compared to 145.0% in the first quarter
of 1994. The 1995 combined ratio includes 8.5 percentage points resulting
from the large losses incurred by the underwriting pools and the 1994
combined ratio included 30 percentage points attributable to the earthquake
and winter storm losses. Reinsurance industry conditions continue to lack
balance. Although rates are firming in the property and personal lines areas,
competition is driving rates downward in the casualty area. The company
remains focused on specialty lines and development of its controlled source
business as a strategy to offset the unstable market conditions prevalent in
the reinsurance marketplace.
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.
Management expects that the 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. This
will occur on those accounts where cedants or insureds require a Best's rating
of A- or higher as a condition for placing business with a company. Any
potential effects of this rating downgrade on results of operations will depend
on the company's ability to replace the foregone new and renewal business
with alternative sources of premium volume and the underlying profitability of
the business replaced.
Net investment income in 1995 rose to $5.2 million compared to $4.6 million
last year. This improvement is primarily attributable to increases in
investment yields over the prior year period.
INVESTMENT ADVISORY OPERATIONS
Investment advisory pre-tax income was $853,000 in 1995 compared to
$968,000 a year ago, a 12% decline. Fees earned and other income decreased
to $5.1 million from $5.7 million, while service and marketing costs also
decreased to $4.3 million in 1995 from $4.7 million a year ago.
Mutual fund management fees, a component of total revenues, were
basically flat with the prior year, $2.4 million in each period. Investment
counseling fees for Lexington Management Corporation (LMC) and Lexington
Capital Management (LCM) combined fell approximately $300,000 from last
year, as did commissions on sales of the load funds. Average net assets, on
which management fees are calculated, declined for certain mutual fund and
<PAGE>
PIEDMONT MANAGEMENT COMPANY INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION (continued)
counseling accounts in comparison to the prior year period. The main factors
were the general decline in international equity markets, along with volatility
in the precious metals sector, two areas where LMC and LCM have significant
mutual fund and/or investment counseling asset bases.
The slow down in growth of investment advisory revenues thus far should
turn around somewhat, given the strong performance of the domestic capital
markets toward the latter part of the first quarter and continuing into the
second quarter.
PARENT COMPANY and INVESTEES
The pre-tax loss for the parent company was $598,000 in 1995 compared
to $260,000 a year ago. Investment and other income was flat in comparison
to the prior year with other corporate expenses declining to $320,000 from
$403,000 in 1994. Interest expense, however, was up significantly to $512,000
from $98,000 a year ago and is tied to the parent company's $20.0 million bank
loan agreement which was entered into at the end of 1994, replacing a much
lower level of bank debt previously outstanding. Equity in net earnings
(losses) of investees, represented by RECO's investment in Continental
National Corporation, resulted in a net earnings pick-up of $86,000 in 1995
compared to a net loss of $20,000 a year ago.
Reflecting the pre-tax loss of $261,000, the company has accrued current
and deferred tax benefits totalling $240,000 in 1995 compared to $2.9 million
last year. Management believes the net deferred tax asset carried on March 31,
1995 in the amount of $19.1 million will be realized based on estimates of
future taxable income. If actual future taxable income earned is lower than
estimated, the amount of the tax benefit ultimately realized would be reduced.
LIQUIDITY and FINANCIAL CONDITION
Total assets on March 31, 1995 grew to $683.2 million compared to
$675.5 million at the end of 1994. Invested assets were $382.8 million at the
end of March 1995 compared to $371.5 million at the end of 1994. 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 March 31, 1995 the weighted average maturity of the bond portfolio was 3.8
years and the average quality rating was AA+. This portfolio registered a gain
in market value during the quarter as bond yields fell for both short and
intermediate term securities. On March 31, 1995 bonds carried at market value
were $253.6 million with an amortized cost value of $264.7 million.
Total cash flow from operating activities was $454,000 on March 31, 1995
in comparison to $5.0 million a year earlier. The main components of the
<PAGE>
PIEDMONT MANAGEMENT COMPANY INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION (continued)
turnover in cash flow relate to the payment of claims and recovery of taxes
in periods subsequent to the first quarter last year. The Company's liquidity
position remains strong. Management expects to meet ongoing cash
obligations through internally generated funds without necessity for liquidating
significant amounts of invested assets.
In keeping with an investment policy decision to reduce RECO's level of equity
securities, during the first quarter a portion of its equity portfolio was
sold. Proceeds were primarily reinvested in short term securities.
The Company is in compliance with all covenants under its senior term
bank loan agreement and expects to be able to meet 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
by the end of 1995. Included among the loan covenants is a minimum
statutory policyholders' surplus requirement of $90.0 million. On March 31,
1995 RECO's policyholders' surplus was $90.6 million.
Consolidated stockholders' equity on March 31, 1995 was $107.8 million,
compared to $102.5 million at the end of 1994. The increase was attributable
to the $5.3 million positive change in unrealized depreciation on invested
assets during the period. Management is not aware of any events which are
likely to cause any significant change in the Company's financial position in
the foreseeable period.
Exhibit to Part I
"Computation of Loss Per Common Share and Common Equivalent Share for
Three Months Ended March 31, 1995 and 1994."
<PAGE>
PIEDMONT MANAGEMENT COMPANY INC. AND SUBSIDIARIES
Part II. OTHER INFORMATION
Three Months Ended March 31, 1995 and 1994
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: May 12, 1995 /s/ ROBERT M. DeMICHELE
-------------------------
Robert M. DeMichele, President
(Chief Executive Officer)
Date: May 12, 1995 /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 LOSS PER COMMON SHARE AND
COMMON EQUIVALENT SHARE (Unaudited)
<CAPTION>
Three Months Ended March 31,
1995 1994
(A) Loss per common share and common
equivalent share:
<S> <C> <C>
Number of common shares:
Issued (weighted average). . . . . . . 5,250,928 5,222,064
Less treasury stock . . . . . . . . . . (265,000) (265,000)
--------- ---------
Outstanding for period. . . . . . . . . 4,985,928 4,957,064
Common equivalent shares (two common for
each preferred share). . . . . . . . . - -
Average stock options outstanding
(net of repurchased shares under the
treasury stock method). . . . . . . . . - -
--------- ---------
4,985,928 4,957,064
Net loss. . . . . . . . . . . . . . . . . $(21,095) $(4,425,388)
Deduction ($.25 per share) for dividends
on preferred stock. . . . . . . . . . . (48,009) (48,183)
---------- ----------
Net loss applicable to common stock . . . $(69,104) $(4,473,571)
Loss per common share . . . . . . . . . . $(.01) $(.90)
(B)Loss per common share assuming
full dilution:
Number of common shares:
Outstanding for period. . . . . . . . . 4,985,928 4,957,064
Common equivalent shares (two common for
each preferred share). . .. . . . . . . 384,072 385,462
--------- ---------
5,370,000 5,342,526
Average stock options outstanding
(net of repurchased shares under the
treasury stock method). . . . . . . . . 57,995 162,551
--------- ----------
5,427,995 5,505,077
Net loss . . . . . . . . . . . . . . . $(21,095) $(4,425,388)
Loss per common share and common
equivalent share . . . . . . . . . . . . $ - $(.80)
</TABLE>
NOTE: In computing loss per common share in 1995 and 1994, results were
reduced by accrued dividends on cumulative convertible Series A preferred
stock. To include common stock equivalents would have been anti-dilutive.
Accordingly, only the weighted average shares outstanding were used in the
computations.
<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 MARCH 31, 1995 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-31-1995
<PERIOD-END> MAR-31-1995
<DEBT-HELD-FOR-SALE> 253,615
<DEBT-CARRYING-VALUE> 8,799
<DEBT-MARKET-VALUE> 9,013
<EQUITIES> 50,992
<MORTGAGE> 0
<REAL-ESTATE> 0
<TOTAL-INVEST> 382,804
<CASH> 7,268
<RECOVER-REINSURE> 170,109
<DEFERRED-ACQUISITION> 10,978
<TOTAL-ASSETS> 683,222
<POLICY-LOSSES> 458,824
<UNEARNED-PREMIUMS> 78,283
<POLICY-OTHER> 0
<POLICY-HOLDER-FUNDS> 0
<NOTES-PAYABLE> 20,000
<COMMON> 2,626
5,709
245
<OTHER-SE> 104,882
<TOTAL-LIABILITY-AND-EQUITY> 683,222
29,474
<INVESTMENT-INCOME> 5,195
<INVESTMENT-GAINS> 852
<OTHER-INCOME> 0
<BENEFITS> 0
<UNDERWRITING-AMORTIZATION> 10,967
<UNDERWRITING-OTHER> 1,877
<INCOME-PRETAX> (261)
<INCOME-TAX> (240)
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (21)
<EPS-PRIMARY> (.01)
<EPS-DILUTED> 0
<RESERVE-OPEN> 461,534
<PROVISION-CURRENT> 22,448
<PROVISION-PRIOR> 831
<PAYMENTS-CURRENT> 20,819
<PAYMENTS-PRIOR> 5,000
<RESERVE-CLOSE> 458,824
<CUMULATIVE-DEFICIENCY> 831
</TABLE>
