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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, 1998
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
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(Exact name of registrant as specified in its charter)
North Carolina 56-1171691
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(State or other jurisdiction of (IRS Employer
incorporation of organization) Identification No.)
Box 12317, 702 Oberlin Road, Raleigh, North Carolina 27605
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(Address of principal executive office) (Zip Code)
Registrant's telephone number, including area code (919) 833-1600
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months, and (2) has been subject to such filing requirements
for the past 90 days. Yes [X] No [ ]
At March 31, 1998, 4,696,651 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, 1998 and
December 31, 1997
Consolidated Statements of Income --Three Months
Ended March 31, 1998 and 1997
Consolidated Statements of Cash Flows -- Three Months
Ended March 31, 1998 and 1997
Consolidated Statement of Changes in Shareholders' Equity --
March 31, 1998
Notes to Consolidated Financial Statements -- March 31, 1998
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
Item 2. Changes in Securities
Item 3. Default Upon Senior Securities
Item 4. Submission of Matters to a Vote of Security Holders
Item 5. Other Information
Item 6. Exhibits and Reports on Form 8-K
SIGNATURES
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CONSOLIDATED BALANCE SHEETS (UNAUDITED)
McM CORPORATION AND SUBSIDIARIES
(Thousands of dollars)
March 31 December 31
ASSETS 1998 1997
--------- ---------
Invested Assets:
Securities available-for-sale, at fair value:
Fixed maturities (amortized cost: 1998 - $22,750; 1997 - $25,755) $ 22,366 $ 25,284
Fixed maturities held-to-maturity, at amortized cost
(fair value: 1998 - $3,234; 1997 - $3,235) 3,135 3,134
Short-term investments 18,582 21,522
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44,083 49,940
Cash 2,609 1,698
Accrued investment income 721 531
Premiums receivable 9,568 8,552
Reinsurance balances recoverable on:
Paid losses and settlement expenses 2,585 1,476
Reserves for losses and settlement expenses 29,094 28,124
Unearned premiums 4,789 6,313
Deferred policy acquisition costs 3,224 2,802
Equipment, at cost less accumulated depreciation
(1998 - $2,014; 1997 - $1,954) 1,782 1,833
Other assets 2,765 2,871
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TOTAL ASSETS $ 101,220 $ 104,140
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LIABILITIES AND SHAREHOLDERS' EQUITY
Reserves for losses and settlement expenses $ 54,966 $ 57,283
Unearned premiums 15,669 15,676
Other policyholder funds 6,338 6,380
Amounts payable to reinsurers 2,699 4,461
Accrued expenses 8,585 7,572
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TOTAL LIABILITIES $ 88,257 $ 91,372
Shareholders' equity:
Common Stock, par value $1 per share - authorized
1998 and 1997 - 10,000,000 shares; issued and
outstanding: 1998 - 4,696,651 and 1997 - 4,695,621
shares $ 4,697 $ 4,696
Additional paid-in capital 1,532 1,530
Accumulated other comprehensive income (384) (471)
Retained Earnings 7,118 7,013
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TOTAL SHAREHOLDERS' EQUITY 12,963 12,768
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TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 101,220 $ 104,140
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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)
Three Months Ended
March 31
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1998 1997
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REVENUES
Premiums earned $ 18,113 $ 18,857
Premiums ceded (7,418) (5,009)
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Net premiums earned 10,695 13,848
Investment income, less investment expenses:
(1998 - $91; 1997 - $110) 627 740
Realized investment gains 17 0
Other income 130 97
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TOTAL REVENUES 11,469 14,685
LOSSES AND EXPENSES
Losses and settlement expenses 11,706 14,799
Losses and settlement expenses ceded (4,732) (5,274)
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Net losses and settlement expenses 6,974 9,525
Underwriting, acquisition and administrative expenses 4,390 4,852
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TOTAL LOSSES AND EXPENSES 11,364 14,377
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NET INCOME $ 105 $ 308
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PER SHARE DATA:
Net income per share $ 0.02 $ 0.07
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Net income per share - assuming dilution $ 0.02 $ 0.07
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Dividends per share declared by McM $ 0.00 $ 0.00
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See notes to consolidated financial statements.
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CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
MCM CORPORATION AND SUBSIDIARIES
(Thousands of dollars)
Three Months Ended
March 31
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1998 1997
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OPERATING ACTIVITIES
Net income $ 105 $ 308
Adjustments to reconcile net income to net cash used by operating activities:
Policy liabilities (2,366) (821)
Premiums receivable (1,016) (339)
Accrued investment income (190) 167
Net receivable from reinsurers (2,317) (1,699)
Amortization of deferred policy acquisition costs 1,876 3,609
Policy acquisition costs deferred (2,298) (3,820)
Other 1,293 (802)
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CASH USED BY OPERATING ACTIVITIES (4,913) (3,397)
INVESTING ACTIVITIES
Securities available-for-sale:
Purchases (2,051) (3,166)
Sales 5,039 0
Securities held-to-maturity:
Maturities 0 3,434
Purchases of property and equipment (107) (156)
Decrease/(Increase) in short-term investments 2,940 3,108
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CASH PROVIDED BY INVESTING ACTIVITIES 5,821 3,220
FINANCING ACTIVITIES
Employee Stock Purchases 3 19
Cash dividends paid 0 0
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CASH PROVIDED BY FINANCING ACTIVITIES 3 19
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INCREASE (DECREASE) IN CASH $ 911 ($ 158)
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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)
Accumulated
Other
Comprehensive Retained Common Paid-in
Income Earnings Stock Capital Total
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BALANCES AT JANUARY 1, 1998 (471) 7,013 4,696 1,530 12,768
Comprehensive Income:
Net income 105 105
Other comprehensive income:
Unrealized gains on securities 87 87
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Comprehensive income 192
Employee stock purchases 1 2 3
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BALANCES AT MARCH 31, 1998 (384) 7,118 4,697 1,532 12,963
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See notes to consolidated financial statements.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
McM Corporation and Subsidiaries
March 31, 1997
NOTE A -- BASIS OF PRESENTATION
The accompanying unaudited financial statements have been prepared in
accordance with the instructions to Form 10-Q and, therefore, do not include all
information and footnotes necessary for a fair presentation of financial
position, results of operations, and cash flows in conformity with generally
accepted accounting principles. The statements include all adjustments
(consisting of normal recurring accruals) which are, in the opinion of
management, necessary for a fair statement of the results.
For further information regarding the significant accounting policies,
refer to the consolidated financial statements and footnotes thereto included in
McM's annual report on Form 10-K for the year ended December 31, 1997.
NOTE B -- NEW ACCOUNTING STANDARDS
In June 1997, the Financial Accounting Standards Board ("FASB") issued
Financial Accounting Standards No. 130, "Reporting Comprehensive Income" ("SFAS
130") for years beginning after December 15, 1997. Comprehensive income is
defined as essentially all changes in shareholders' equity exclusive of
transactions with owners, such as capital investments, and includes net income
(loss) plus changes in certain assets and liabilities which are reported
directly in equity. The unrealized gain or loss on available-for-sale securities
is the Company's only component of other comprehensive income and is presented
on the Consolidated Statement of Changes in Shareholders' Equity.
Also during June 1997, the FASB issued Statement of Financial
Accounting Standards No. 131 "Disclosures about Segments of an Enterprise and
Related Information" for years beginning after December 15, 1997. The impact of
the adoption of this accounting standard is unknown at this time.
In February 1998, the FASB issued Statement of Financial Accounting
Standards No. 132 "Employers' Disclosures about Pensions and Other
Postretirement Benefits" ("SFAS 132") for years beginning after December 15,
1997. The overall objective of SFAS 132 is to improve and standardize
disclosures about pensions and other postretirement benefits and to make the
required information easier to prepare and more understandable. Subsequent
adoption of this accounting standard will have no impact on the Company's
earnings or surplus.
NOTE C -- INCOME TAXES
No provision for income taxes has been recognized by the Company
because of the utilization of tax return net operating loss carryforwards.
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NOTE D -- STOCK OPTION PLAN AND EARNINGS PER SHARE
Basic earnings per share are based on the weighted-average number of
common shares outstanding during the year. The weighted-average number of common
shares outstanding was 4,696,479 and 4,678,243 at March 31, 1998, and March 31,
1997, respectively. Diluted earnings per share were computed assuming that the
weighted-average number of shares was increased by the conversion of fixed
awards (employee stock options). The diluted per share computations reflect a
change in the number of common shares outstanding (the "denominator") to include
the number of additional shares that would have been outstanding if the
potentially dilutive shares had been issued. In each period presented, net
income or loss, the numerator, is the same for both basic and dilutive per share
computations. The denominator was also unchanged for the periods presented.
NOTE E -- CONTINGENCIES
Litigation: In the normal course of operations, certain subsidiaries of
the Company have been named as parties to various pending and threatened
litigation. While the outcome of some of these matters cannot be estimated with
certainty, it is the opinion of management, after consultation with legal
counsel, that the resolution of this litigation will not have a material adverse
effect on the Company's consolidated financial position.
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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, 1998, show net
income of $105,000 or $.02 per share, compared to net income of $308,000 or $.07
per share for the first three months of 1997. Consolidated gross revenues for
the first three months of 1998 were $11,560,000 compared to $14,795,000 for the
same period in 1997.
Shareholders' equity at March 31, 1998, totalled $12,963,000 or $2.76
per share compared to $12,768,000 or $2.72 per share at December 31, 1997.
Consolidated assets totalled $101,220,000 at March 31, 1998, compared to
$104,140,000 at December 31, 1997.
Total net premium revenues were $10,695,000 for the first three months
of 1998 compared to $13,848,000 for the same period in 1997. This decrease in
net premiums is primarily the result of an increase in the level of premiums
ceded to the Company's reinsurers on private passenger business and a slight
decline in overall premium production.
Underwriting results for the first three months of 1998 are in line
with management's expectations. An improvement in the overall claims loss and
settlement expense ratio was offset by an increase in the ratio of underwriting,
acquisition and administrative expenses to net earned premiums. The loss and
settlement expense ratio was 65.2% at March 31, 1998, compared to 68.8% at March
31, 1997. The ratio of underwriting, acquisition and administrative expenses was
41.0% and 35.0% at March 31, 1998, and March 31, 1997, respectively.
Liquidity and Capital Resources
Consolidated gross investment income totalled $718,000 for the first
three months of 1998, compared to $850,000 for the same period in 1997. This
decline in investment income is primarily the result of a reduction of invested
assets, which were $44.1 million at March 31, 1998, compared to $49.9 million at
December 31, 1997. The decline in invested balances is primarily attributed to
the settlement of claim-related liabilities. Net reserves for losses and loss
settlement expenses declined $2.3 million to $55.0 million at March 31, 1998,
compared to $57.3 million at December 31, 1997.
Cash used by operating activities totalled $4.9 million for the first
three months of 1998. Operating cash flows for 1998 were also affected by the
settlement of claim-related liabilities discussed above. Additionally,
reinsurance balances receivable increased approximately $2.3 million, primarily
as a result of overpayment of ceded premium
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related to the Company's excess of loss treaty.
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. At March 31, 1998, approximately 48.0%
or $22.4 million of cash and invested assets were comprised of fixed maturities
available-for-sale, 7.0% or $3.1 million were recorded as securities
held-to-maturity and 45.0% or $21.2 million represented cash and short-term
investments. The distribution of the Company's portfolio was similar at December
31, 1997, with 49.0% or $25.3 million invested in fixed maturities
available-for-sale, 6.0% or $3.1 million in securities held-to-maturity, and
45.0% or $23.2 million in cash and short-term investments.
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McM CORPORATION AND SUBSIDIARIES
PART II
Item 1. Legal Proceedings.
1) Reference is hereby made to Note E of the
Consolidated Financial Statements provided in Part I,
Item 1 of this Form 10-Q.
Items 2 - 5. Nothing to report.
Item 6. Exhibits and Reports on Form 8-K.
1) Exhibits
27 Financial Data Schedule (for SEC use only)
2) Reports on Form 8-K
Not applicable
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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
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(Registrant)
/s/ Stephen L. Stephano
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Stephen L. Stephano
President and
Chief Operating Officer
May 15, 1998
/s/ Kevin J. Hamm
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Kevin J. Hamm
Vice President
and Chief Financial Officer