-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, Ly9PUScWhIB2fcJ1cUBGg6cxPMv0hUsXm8dNkhHg01huit/7M3kM5tL4ebqbLCoT UzF72IsVgkgKRhr0tj9sYw== 0000950144-97-012332.txt : 19971117 0000950144-97-012332.hdr.sgml : 19971117 ACCESSION NUMBER: 0000950144-97-012332 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19970930 FILED AS OF DATE: 19971114 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: MCM CORP CENTRAL INDEX KEY: 0000275710 STANDARD INDUSTRIAL CLASSIFICATION: FIRE, MARINE & CASUALTY INSURANCE [6331] IRS NUMBER: 561171691 STATE OF INCORPORATION: NC FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 000-08678 FILM NUMBER: 97719658 BUSINESS ADDRESS: STREET 1: 702 OBERLIN RD STREET 2: BOX 12317 CITY: RALEIGH STATE: NC ZIP: 27605 BUSINESS PHONE: 9198331600 MAIL ADDRESS: STREET 1: 702 OBERLIN ROAD STREET 2: P O BOX 12317 CITY: RALEIGH STATE: NC ZIP: 27605 10-Q 1 MCM CORPORATION 10-Q 9-30-1997 1 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 September 30, 1997 OR ( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from ___________ to __________ Commission File Number: 0-8678 McM Corporation - -------------------------------------------------------------------------------- (Exact name of registrant as specified in its charter) North Carolina 56-1171691 - -------------------------------------------------------------------------------- (State or other jurisdiction of (IRS Employer Identification No.) incorporation of organization) Box 12317, 702 Oberlin Road, Raleigh, North Carolina 27605 - -------------------------------------------------------------------------------- (Address of principal executive office) (Zip Code) Registrant's telephone number, including area code (919) 833-1600 Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months, and (2) has been subject to such filing requirements for the past 90 days. Yes X No ----- ----- At September 30, 1997, 4,693,525 shares of Common Stock of the registrant were outstanding. 2 INDEX McM CORPORATION AND SUBSIDIARIES PART I. FINANCIAL INFORMATION (Unaudited) Item 1. Financial Statements Consolidated Balance Sheets -- September 30, 1997 and December 31, 1996 Consolidated Statements of Income --Nine and Three Months Ended September 30, 1997 and 1996 Consolidated Statements of Cash Flows -- Nine Months Ended September 30, 1997 and 1996 Notes to Consolidated Financial Statements -- September 30, 1997 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 3 CONSOLIDATED BALANCE SHEETS (UNAUDITED) McM CORPORATION AND SUBSIDIARIES (Thousands of dollars)
September 30 December 31 ASSETS 1997 1996 ---------------- ---------------- Invested Assets: Securities available-for-sale, at fair value: Fixed maturities (amortized cost: 1997 - $38,529; 1996 - $36,938) $38,744 $36,873 Fixed maturities held-to-maturity, at amortized cost (fair value: 1997 - $3,223; 1996 - $6,022) 3,140 5,938 Short-term investments 9,646 14,061 ---------------- ---------------- 51,530 56,872 Cash 2,220 1,776 Accrued investment income 731 803 Premiums receivable 9,439 9,380 Reinsurance balances recoverable on: Paid losses and settlement expenses 4,394 3,676 Reserves for losses and settlement expenses 28,073 28,768 Unearned premiums 3,644 4,068 Deferred policy acquisition costs 3,922 3,992 Equipment, at cost less accumulated depreciation (1997 - $1,907; 1996 - $1,699) 1,688 1,331 Other assets 2,184 2,204 ---------------- ---------------- TOTAL ASSETS $107,825 $112,870 ================ ================ LIABILITIES AND SHAREHOLDERS' EQUITY Reserves for losses and settlement expenses $54,554 $55,300 Unearned premiums 17,172 17,925 Other policyholder funds 6,368 6,580 Amounts payable to reinsurers 3,681 3,089 Accrued expenses 8,159 8,321 ---------------- ---------------- TOTAL LIABILITIES $89,934 $91,215 Shareholders' equity: Common Stock, par value $1 per share - authorized 1997 and 1996 - 10,000,000 shares; issued and outstanding: 1997 - 4,693,525 and 1996 - 4,678,183 shares $4,694 $4,678 Additional paid-in capital 1,526 1,489 Unrealized gain (loss) on securities available-for-sale 215 (65) Retained Earnings 11,456 15,553 ---------------- ---------------- TOTAL SHAREHOLDERS' EQUITY 17,891 21,655 ---------------- ---------------- TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $107,825 $112,870 ================ ================
See notes to consolidated financial statements. 4 CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED) McM CORPORATION AND SUBSIDIARIES (Thousands of dollars, except per share data)
Nine Months Ended Three Months Ended September 30 September 30 -------------------------------- -------------------------------- 1997 1996 1997 1996 -------------------------------- -------------------------------- REVENUES Premiums earned $57,139 $54,961 $18,776 $18,098 Premiums ceded (15,020) (16,458) (4,884) (5,215) -------------------------------- -------------------------------- Net premiums earned 42,119 38,503 13,892 12,883 Investment income, less investment expenses: $316 and $344 for the nine months ended September 30, 1997 and 1996, and $103 and $108 for the three months ended September 30, 1997 and 1996 2,272 2,371 768 764 Other income 551 248 340 81 -------------------------------- -------------------------------- TOTAL REVENUES 44,942 41,122 15,000 13,728 LOSSES AND EXPENSES Losses and settlement expenses 46,469 37,097 17,631 11,468 Losses and settlement expenses ceded (12,285) (11,733) (3,265) (2,723) -------------------------------- -------------------------------- Net losses and settlement expenses 34,184 25,364 14,366 8,745 Underwriting, acquisition and administrative expenses 14,653 14,016 4,924 4,510 Provision for bad debts on liquidated reinsurers 202 50 142 50 -------------------------------- -------------------------------- TOTAL LOSSES AND EXPENSES 49,039 39,430 19,432 13,305 -------------------------------- -------------------------------- NET (LOSS) INCOME ($4,097) $1,692 ($4,432) $423 ================================ ================================ PER SHARE DATA: (Loss) income per share ($0.87) $0.36 ($0.94) $0.09 ================================ ================================ Dividends per share declared by McM $0.00 $0.04 $0.00 $0.02 ================================ ================================
See notes to consolidated financial statements. 5 CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) MCM CORPORATION AND SUBSIDIARIES (Thousands of dollars)
Nine Months Ended September 30 ----------------------------------- 1997 1996 ---------------- --------------- OPERATING ACTIVITIES Net income ($4,097) $1,692 Adjustments to reconcile net income to net cash used by operating activities: Policy liabilities (1,711) (8,101) Premiums receivable (59) (648) Accrued investment income 72 181 Net receivable from reinsurers 993 3,797 Amortization of deferred policy acquisition costs 8,350 7,292 Policy acquisition costs deferred (8,280) (8,012) Other 277 1,379 ---------------- --------------- CASH USED BY OPERATING ACTIVITIES (4,455) (2,420) INVESTING ACTIVITIES Securities available-for-sale: Purchases (5,500) (9,881) Sales 1,581 0 Maturities 2,340 6,965 Securities held-to-maturity: Purchases 0 (1,961) Maturities 2,762 10,603 Purchases of property and equipment (752) (383) Decrease/(Increase) in short-term investments 4,415 (3,224) ---------------- --------------- CASH PROVIDED BY INVESTING ACTIVITIES 4,846 2,119 FINANCING ACTIVITIES Employee Stock Purchases 53 0 Cash dividends paid 0 (188) ---------------- --------------- CASH PROVIDED (USED) BY FINANCING ACTIVITIES 53 (188) ---------------- --------------- INCREASE (DECREASE) IN CASH $444 ($489) ================ ===============
See notes to consolidated financial statements. 6 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS McM Corporation and Subsidiaries September 30, 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, 1996. NOTE B -- NEW ACCOUNTING STANDARDS In February 1997, the Financial Accounting Standards Board issued the Statement of Financial Accounting Standards No. 128, "Earnings per Share" ("FAS 128"), which is required to be adopted on December 31, 1997. Upon adoption, the Company will be required to change the method used currently to compute earnings per share and to restate all prior periods presented. Under the new requirements for calculating basic or primary earnings per share the dilutive effect of common stock equivalents will be excluded. Currently, shares issuable under the Company's employee stock option and other stock based plans are excluded from the weighted average number of shares used in the Company's computation of primary earnings per share on the assumption that their effect is not dilutive. Consequently, adoption of FAS 128 will have no impact on the Company's computation of primary earnings per share for the quarters ended September 30, 1997 and 1996. The impact of FAS 128 on the calculation of fully diluted earnings per share for these quarters is not expected to be material. NOTE C -- INCOME TAXES No provision for income taxes has been recognized by the Company for the periods presented because of the Company's reported loss or utilization of tax return net operating loss carryforwards. 7 NOTE D -- STOCK OPTION PLAN AND EARNINGS PER SHARE Earnings per common share are based on 4,693,525 shares of Common Stock issued and outstanding and exclude the effect of common stock equivalents. Stock options had no effect on the computation of earnings per share. NOTE E -- CONTINGENCIES Litigation: 1. An action purporting to be a shareholders' derivative action has been brought against McM, each of its directors, the McMillen Trust (owner of 65% of McM's shares) and Wilmington Trust Company as Trustee of the McMillen Trust. Also named as defendant is McM Acquisition Corporation ("MAC"), an entity formed by Raleigh private investor and real estate developer, M. Roland Britt, in his efforts to acquire shares of McM Corporation. The action was filed on September 22, 1997, in the Guilford County, North Carolina, Superior Court. The suit was filed by Jesse Greenfield and David Robinson, two shareholders of McM. The plaintiffs state that the suit was brought on behalf of McM shareholders other than the McMillen Trust. Among other allegations, the suit complains that the Trust, because it owns approximately two-thirds of the shares of McM, has effectively exercised control of the Company. It challenges the composition of the McM Board of Directors and the actions of the Board as being controlled by the majority shareholder. The complaint alleges that the action of the Trustee in connection with the McMillen Trust's grant of an option to sell its shares at $6.20 per share to MAC was improper. The suit also complains that the Company improperly allowed MAC an exclusive due diligence period. (This due diligence period expired by its terms on September 29, 1997.) The plaintiffs ask the Court (a) to void the Trust's grant of the option to MAC, (b) to void the Board's grant of the now-expired exclusive due diligence period to MAC, (c) to remove the Company's directors who have an affiliation with the Trust and replace them with directors who are unaffiliated with the Trust and (d) to order the Trust, the Trustee, the directors affiliated with the Trust and the Board of Directors to pay money damages to the minority shareholders of McM, including plaintiffs' attorneys' fees. The ultimate outcome of the litigation cannot presently be determined. Accordingly, no provision for any liability has been made in the accompanying financial statements. 2. 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. 8 MANAGEMENT'S DISCUSSION AND ANALYSIS McM Corporation and Subsidiaries Review of Operations Unaudited results for the nine months ended September 30, 1997, reflect a net loss of $4,097,000 or $.87 per share, compared to net income of $1,692,000 or $.36 per share for the first nine months of 1996. Consolidated gross revenues for the first nine months of 1997 increased 9% to $45,258,000 compared to $41,466,000 for the same period in 1996. Total net premium revenues were $42,119,000 for the first nine months of 1997 compared to $38,503,000 for the same period in 1996, an increase of approximately 9%. This increase in net premiums is primarily the result of growth in direct private passenger automobile premium writings and a reduction in the Company's private passenger quota share reinsurance program. Consolidated results for 1997 have been significantly affected by by management's decision to increase prior year loss reserves for ongoing lines of business by approximately $3.0 million. This action was taken primarily as a result of deterioration in the Company's actuarial loss projections for the commercial auto liability line of business for the 1996 and 1995 accident years. Accordingly, $2.1 million of the increase relates to the commercial auto liability line of business. In addition, commercial auto physical damage and private passenger auto liability reserves for prior accident years were increased by approximately $450,000 and $415,000, respectively. Management also increased loss reserves for the current underwriting year by approximately $1.8 million primarily as a result of higher than anticipated claim costs in commercial and private passenger physical damage coverages. Reserves relating to these coverages were increased approximately $1.1 million and $370,000, respectively. As a result of these reserve increases, the overall claims and loss and loss settlement expense ratio increased 15.3 percentage points to 81.2% for the first nine months of 1997, compared to 65.9% for the same period last year. The ratio of underwriting, acquisition and administrative expenses and provision for liquidated reinsurance to net earned premium continued to show improvement reflecting management's ongoing efforts to reduce expenses and improve operating efficiency. This ratio showed a decline of 1.2 percentage points to 35.3% for the first nine months of 1997 compared to 36.5% for the same period last year. Shareholders' equity at September 30, 1997, totalled $17,891,000 or $3.81 per share compared to $21,655,000 or $4.63 per share at December 31, 1996. Consolidated assets totalled $107,825,000 at September 30, 1997, compared to $112,870,000 at December 31, 1996. 9 Liquidity and Capital Resources Consolidated gross investment income totalled $2,588,000 for the first nine months of 1997, compared to $2,715,000 for the same period in 1996. This decline in investment income is primarily the result of a reduction of invested assets, which were $51.5 million at September 30, 1997, compared to $59.8 million at September 30, 1996. The decline in invested balances is primarily attributed to accelerated settlement of claim related liabilities. Reserves for claims losses and loss settlement expenses totalled $54.5 million and $55.3 million at September 30, 1997 and December 31, 1996, respectively. Excluding the effects of the $4.8 million reserve increase discussed previously, claim liabilities at September 30, 1997, showed a decrease of $5.6 million when compared to claim related liabilities at September 30, 1996. Cash used by operating activities totalled $4.5 million for the first nine months of 1997, compared to $2.4 million during the same period in 1996. This decline in operating cash flows is due primarily to the accelerated level of claim payments discussed above. Cash and short-term investments held by the Company at September 30, 1997 were approximately $11.9 million, compared to $15.8 million at December 31, 1996. The Company maintains a portfolio of cash and short-term investments which it believes is adequate to meet projected expenditures. 10 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) The Company reported on Form 8-K dated October 3, 1997, the filing of an action denominated as a shareholders' derivative action against the Company, its majority shareholder, the Trustee of the majority shareholder and McM's directors. Reference is hereby made to Note E of the Consolidated Statements provided in Part I, Item 1 of this Form 10-Q for more detailed information concerning the status of this action. 2) Exhibit 27: Financial Data Schedule (for SEC use only) 11 Signatures Pursuant to the requirements of the Securities and Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. McM Corporation ---------------------------------- (Registrant) STEPHEN L. STEPHANO ---------------------------------- Stephen L. Stephano President and Chief Operating Officer November 14, 1997 KEVIN J. HAMM ---------------------------------- Kevin J. Hamm Vice President and Chief Financial Officer EX-27 2 FINANCIAL DATA SCHEDULE
7 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE FINANCIAL STATEMENTS OF McM CORPORATION FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1997, AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1,000 9-MOS DEC-31-1997 JAN-01-1997 SEP-30-1997 38,744 3,140 3,223 0 0 0 51,530 2,220 36,111 3,922 107,825 54,554 17,172 0 6,368 0 0 0 4,694 13,197 107,825 42,119 2,272 0 551 34,184 0 14,855 (4,097) 0 (4,097) 0 0 0 (4,097) (0.87) (0.87) 26,532 29,978 4,206 17,967 16,268 26,482 4,206
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