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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 June 30, 1999
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OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
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Commission File Number: 0-8678
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McM Corporation
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(Exact name of registrant as specified in its charter)
North Carolina 56-1171691
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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
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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
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At June 30, 1999, 4,701,929 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 -- June 30, 1999 and
December 31, 1998
Consolidated Statements of Income --Six and Three Months
Ended June 30, 1999 and 1998
Consolidated Statements of Cash Flows -- Six Months
Ended June 30, 1999 and 1998
Consolidated Statement of Changes in Shareholders' Equity --
June 30, 1999
Notes to Consolidated Financial Statements -- June 30, 1999
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
Item 2. Changes in Securities
Item 3. Default Upon Senior Securities
Item 4. Submission of Matters to a Vote of Security Holders
Item 5. Other Information
Item 6. Exhibits and Reports on Form 8-K
SIGNATURES
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CONSOLIDATED BALANCE SHEETS (UNAUDITED)
McM CORPORATION AND SUBSIDIARIES
(Thousands of dollars)
June 30 December 31
ASSETS 1999 1998
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Invested Assets:
Securities available-for-sale, at fair value:
Fixed maturities (amortized cost: 1999 - $25,605; 1998 - $25,152) $25,373 $25,660
Equity securities (cost: 1999 - $21,451, 1998 - $18,093) 30,399 21,969
Fixed maturities held-to-maturity, at amortized cost
(fair value: 1999 - $1,722; 1998 - $3,275) 1,661 3,138
Short-term investments 8,577 11,572
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66,010 62,339
Cash 10,375 8,120
Accrued investment income 602 579
Premiums receivable 7,722 6,660
Reinsurance balances recoverable on:
Paid losses and settlement expenses 4,073 3,090
Reserves for losses and settlement expenses 25,393 27,539
Unearned premiums 2,353 2,847
Deferred policy acquisition costs 2,722 2,407
Equipment, at cost less accumulated depreciation
(1999 - $2,206; 1998 - $2,153) 1,948 1,639
Other assets 1,863 2,515
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TOTAL ASSETS $123,061 $117,735
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LIABILITIES AND SHAREHOLDERS' EQUITY
Reserves for losses and settlement expenses $54,792 $60,844
Unearned premiums 11,496 10,793
Other policyholder funds 5,871 5,881
Amounts payable to reinsurers 3,219 3,233
Accrued expenses 14,251 8,527
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TOTAL LIABILITIES 89,629 89,278
Redeemable Preferred Stock - Series B PIK 27,251 26,000
Shareholders' equity:
Common Stock, par value $1 per share - authorized 1999 and 1998 - 10,000,000 shares;
issued and outstanding: 1999 - 4,701,929 and 1998 - 4,706,388 shares 4,702 4,706
Additional paid-in capital 1,528 1,540
Accumulated other comprehensive income 8,716 4,384
Retained deficit (8,765) (8,173)
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TOTAL SHAREHOLDERS' EQUITY 6,181 2,457
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TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $123,061 $117,735
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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)
Six Months Ended Three Months Ended
June 30 June 30
----------------------------------- -----------------------------------
1999 1998 1999 1998
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REVENUES
Premiums earned $28,571 $36,129 $14,210 $18,016
Premiums ceded (7,715) (10,440) (3,705) (3,022)
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Net premiums earned 20,856 25,689 10,505 14,994
Investment income, less investment expenses:
($218 and $178 for the six months ended June 30, 1999
and 1998, and $109 and $87 for the three months
ended June 30, 1999 and 1998) 1,164 1,234 605 607
Realized investment gains 1,578 17 429 0
Other income 202 240 97 110
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TOTAL REVENUES 23,800 27,180 11,636 15,711
LOSSES AND EXPENSES
Losses and settlement expenses 21,180 28,225 11,551 16,519
Losses and settlement expenses ceded (5,779) (11,082) (3,728) (6,350)
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Net losses and settlement expenses 15,401 17,143 7,823 10,169
Underwriting, acquisition and administrative expenses 7,778 10,030 3,706 5,640
Provision for bad debts on liquidated reinsurers (40) 174 (40) 174
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TOTAL LOSSES AND EXPENSES 23,139 27,347 11,489 15,983
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NET INCOME (LOSS) $661 ($167) $147 ($272)
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PER SHARE DATA:
Net income (loss) per share $0.14 ($0.04) $0.03 ($0.06)
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Net income (loss) per share - assuming dilution $0.14 ($0.04) $0.03 ($0.06)
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Dividends per share declared by McM $0.00 $0.00 $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)
Six Months Ended
June 30
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1999 1998
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OPERATING ACTIVITIES
Net income (loss) $661 ($167)
Adjustments to reconcile net income to net cash used
by operating activities:
Policy liabilities (5,359) (2,953)
Premiums receivable (1,062) 259
Accrued investment income (23) (52)
Net receivable from reinsurers 1,643 (4,532)
Amortization of deferred policy acquisition costs 4,956 6,329
Policy acquisition costs deferred (5,271) (6,428)
Other 3,722 1,791
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CASH (USED) BY OPERATING ACTIVITIES (733) (5,753)
INVESTING ACTIVITIES
Securities available-for-sale:
Purchases (10,310) (12,593)
Sales 9,524 5,237
Maturities 325 86
Securities held-to-maturity:
Maturities 1,480 0
Purchases of property and equipment (1,009) (216)
Decrease in short-term investments 2,995 9,551
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CASH PROVIDED BY INVESTING ACTIVITIES 3,005 2,065
FINANCING ACTIVITIES
Employee stock purchases 0 13
Certificates of contribution 0 5,000
Purchase of outstanding common shares (17) 0
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CASH (USED) PROVIDED BY FINANCING ACTIVITIES (17) 5,013
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INCREASE IN CASH $2,255 $1,325
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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
Common Paid-in Comprehensive Retained
Stock Capital Income Deficit Total
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BALANCES AT JANUARY 1, 1999 $4,706 $1,540 $4,384 ($8,173) $2,457
Activity for 1999:
Comprehensive Income:
Net income 661 661
Change in unrealized gains on securities 4,332 4,332
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Comprehensive income 4,993
Repurchase of common stock (4) (12) (16)
Dividends on PIK Preferred Stock (1,253) (1,253)
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BALANCES AT JUNE 30, 1999 $4,702 $1,528 $8,716 ($8,765) $6,181
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See notes to consolidated financial statements.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
McM Corporation and Subsidiaries
June 30, 1999
NOTE A -- BASIS OF PRESENTATION
The accompanying unaudited financial statements have been prepared in
accordance with the instructions to Form 10-Q and, therefore, do not include all
information and footnotes necessary for a fair presentation of financial
position, results of operations, and cash flows in conformity with generally
accepted accounting principles. The statements include all adjustments
(consisting of normal recurring accruals) which are, in the opinion of
management, necessary for a fair statement of the results.
For further information regarding the significant accounting policies,
refer to the consolidated financial statements and footnotes thereto included in
McM's annual report on Form 10-K for the year ended December 31, 1998.
NOTE B -- INCOME TAXES
No provision for income taxes has been recognized by the Company
because of the utilization of net losses or tax return net operating loss
carryforwards.
NOTE C -- STOCK OPTION PLAN AND EARNINGS PER SHARE
Basic earnings per share are based on the weighted-average number of
common shares outstanding during the year. The weighted-average number of common
shares outstanding was 4,704,128 and 4,696,479 at June 30, 1999 and 1998,
respectively. Diluted earnings per share were computed assuming that the
weighted-average number of shares was increased by the conversion of fixed
awards (employee stock options). The diluted per share computations reflect a
change in the number of common shares outstanding (the "denominator") to include
the number of additional shares that would have been outstanding if the
potentially dilutive shares had been issued. In each period presented, net
income or loss, the numerator, is the same for both basic and dilutive per share
computations. The denominator was also unchanged for the periods presented.
NOTE D -- CONTINGENCIES
Litigation: In the normal course of operations, certain subsidiaries of
the Company have been named as parties to various pending and threatened
litigation. While the outcome of some of these
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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 June 30, 1999 and
1998 are as follows:
June 30
1999 1998
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Net premiums earned:
Private passenger $ 3,533 $ 2,605
Commercial auto 17,323 23,084
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Total $20,856 $25,689
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MANAGEMENT'S DISCUSSION AND ANALYSIS
McM Corporation and Subsidiaries
Review of Operations
Unaudited results for the six months ended June 30, 1999, reflect net
income of $661,000 or basic net income of $.14 per share, compared to a net loss
of $167,000 or a basic net loss of $.04 per share for the first six months of
1998. Consolidated gross revenues for the first six months of 1999 totalled
$24,018,000 compared to $27,358,000 for the same period in 1998. Realized
investment gains of $$1,578,000 were included in gross revenues for the first
six months of 1999 compared to $17,000 for the same period in 1998.
Shareholders' equity at June 30, 1999, totalled $6,181,000 or $1.31 per
share compared to $2,457,000 or $.52 per share at December 31, 1998. Included in
shareholders' equity were unrealized gains in the Company's investment portfolio
totalling $8,716,000 and $4,384,000 at June 30, 1999, and December 31, 1998,
respectively. Consolidated assets totalled $123,061,000 at June 30, 1999,
compared to $117,735,000 at December 31, 1998.
Total net premium revenues for the first six months of 1999 totalled
$20,856,000 compared to $25,689,000 for the same period in 1998. This decrease
in net premiums reflects a $5.0 million overall decline in the Company's gross
written premiums when compared to the those for the first six months of 1998.
The reduction in premium writings for 1999 continues to reflect highly
competitive and price sensitive market conditions in both the commercial and
private passenger auto market sectors experienced by the insurance industry for
the last several years.
Consolidated underwriting results for 1999 are in line with
management's expectations and reflect the Company's decision to significantly
strengthen overall loss reserves and loss ratios at year end 1998. The claims
and loss settlement expense ratio (the "loss ratio") showed a 7.1 percentage
point increase when compared to the same period in 1998. The loss ratio was
73.8% at June 30, 1999, compared to 66.7% at June 30, 1998. Development of prior
year's loss reserves was approximately $531,000 most of which was related to the
Company's participation in involuntary pools and other residual market
mechanisms in which McM's property and casualty subsidiaries are required to
participate by the various states in which they write business. The ratio of
underwriting, acquisition and administrative expenses (including the provision
for bad debts of liquidated reinsurers) to net earned premium decreased
approximately 2.6 percentage points to 37.1% at June 30, 1999, compared to 39.7%
at June 30, 1999.
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Year 2000
The Company completed an assessment of its computerized information
systems to determine the impact of the year 2000 on the ability of those systems
to accurately process information that may be date sensitive. It was found that
the Company's specialized monthly commercial auto direct bill program would have
to be modified to function properly with respect to dates in the year 2000 and
thereafter. This modification was successfully completed in 1997 at an
approximate cost of $96,000. Other Company computer applications, most of which
are licensed from third party program vendors, were determined to be year 2000
compliant or, based upon communication with these vendors, would be compliant
before any anticipated impact resulting from the year 2000.
The year 2000 project, as it relates to all of the Company's main
computer platforms, was completed and fully operational on July 1, 1998. The
Company continues to replace peripheral hardware and software such as personal
computers, telecommunications and spreadsheet software with Year 2000 compliant
products. The Company remains on target to resolve all remaining Year 2000
noncompliant products well ahead of December 31, 1999. The Company is devoting
all resources necessary to address any remaining Year 2000 issues in a timely
manner and believes the Year 2000 will pose no significant threat to its
operations.
Liquidity and Capital Resources
Consolidated gross investment income excluding realized investment
gains showed a modest decline for the first six months of 1999 totalling
$1,382,000 compared to $1,412,000 for the same period in 1998.
Cash used by operating activities totalled $733,000 for the first six
months of 1999 compared to $5.8 million for the same period of 1998. Operating
cash outflows for 1999 were affected by the decline in premium writings
discussed above and the settlement of prior years' claims related liabilities.
Reserves for losses and settlement expenses declined approximately $6.0 million
during 1999 to $54.8 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
$76.4 million and $70.5 million at June 30, 1999 and December 31, 1998,
respectively.
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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 - 4. Nothing to report.
Item 5. Other Information.
1) On April 1, 1999, the Company announced an offer to
purchase the issued and outstanding shares of its
"odd lot" shareholders, that is, those shareholders
who own less than 100 shares of McM common stock.
For more information regarding this matter see
Form 8-K filed by the Company on April 14, 1999.
Item 6. Exhibits and Reports on Form 8-K.
27 Financial Data Schedule (for SEC use only).
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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
August 16, 1999
/s/ KEVIN J. HAMM
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Kevin J. Hamm
Vice President
and Chief Financial Officer