<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 (NO FEE REQUIRED, EFFECTIVE OCTOBER 7, 1996)
For the Fiscal Year Ended December 31, 1996
-----------------
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 (NO FEE REQUIRED)
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
incorporation or organization) Identification No.)
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
Securities registered pursuant to Section 12(b) of the Act:
Name of each exchange
Title of each class on which registered
- ---------------------------- ---------------------------------
NONE
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, par value - $1.00 per share
-----------------------------------------
(Title of Class)
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 twelve months, and (2) has been subject to such filing
requirements for the past ninety (90) days.
Yes X No
--- ---
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K. [ ]
State the aggregate market value of the voting
stock held by non-affiliates of the registrant
as of March 18, 1997.
-------------------------------------------------
Common Stock, $1.00 par value -- $6,088,137
At December 31, 1996, 4,678,183 shares of common stock of the registrant were
outstanding.
Documents Incorporated by Reference
Portions of the annual report to shareholders for the year ended December 31,
1996, are incorporated by reference into Parts I, II and IV.
Portions of the annual proxy statement for the year ended December 31, 1996, are
incorporated by reference into Part III.
<PAGE> 2
PART I
Item 1. Business
McM Corporation ("McM" or the "Company") is an insurance holding
company conducting its business through insurance and non-insurance
subsidiaries. The following schedule identifies the subsidiaries of McM and the
abbreviations by which they will be identified in this document.
Subsidiary Abbreviation
---------- ------------
PROPERTY AND CASUALTY
Occidental Fire & Casualty Company
of North Carolina OF&C
Wilshire Insurance Company Wilshire
OTHER:
Equity Holdings, Inc. Equity Holdings
In connection with and because it desires to take advantage of the
new "safe harbor" provisions of the Private Securities Litigation Reform Act of
1995, McM would like to caution readers regarding certain forward-looking
statements in the following discussion and elsewhere in this Form 10-K. While
McM believes in the veracity of all statements made herein, forward-looking
statements are necessarily based upon a number of estimates and assumptions
that, while considered reasonable by McM, are inherently subject to significant
business, economic and competitive uncertainties and contingencies, many of
which are beyond McM's control and many of which, with respect to future
business decisions, are subject to change. These uncertainties and contingencies
can affect actual results and could cause its actual results to differ
materially from those expressed in any forward-looking statements made by or on
behalf of McM. The forward looking statements are especially difficult for
lines of business that are longer tail in nature such as the Company's
commercial automobile liability line of business which is inherently subject to
considerable variability and volatility.
Item 1. (a) General Development of the Business
McM was organized as a North Carolina corporation on May 27, 1977, and
subsequently acquired or organized a number of insurance corporations and other
subsidiaries. From 1977 to 1991, McM operated as a multi-line holding company
with both life and health and property and casualty insurance operations.
The McMillen Trust, controlling shareholder of McM, currently owns
65.9% of the outstanding stock of McM. A petition was filed on behalf of the
McMillen Trust in the Chancery Court of Delaware on December 2, 1986, seeking
relief from the requirement that the Trust own at least
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65% of the shares of McM. The Court, on December 10, 1987, determined that the
Trust must divest itself of its ownership of the shares of McM and invest the
proceeds in a diversified portfolio for the benefit of present and future
beneficiaries of the Trust. The Board of Directors of McM and the Trust
believed that the interests of all shareholders would be best served by a
coordinated sales process by which potential purchasers could be qualified and
due diligence reviews scheduled with minimal disruption to ongoing operations.
In 1991, McM decided to discontinue its life and health insurance
segment. On October 24, 1991, Occidental Life Insurance Company and Peninsular
Life Insurance Company were sold to Pennsylvania Life Insurance Company, a
privately held life insurance company domiciled in Pennsylvania. On June 22,
1992, Atlantic Southern Insurance Company was sold to Global Life Assurance
Company Limited, a subsidiary of Life of Jamaica Ltd. The sale of Atlantic
Southern Insurance Company completed the disposition of the Company's life and
health segment.
On January 29, 1993, McM's Board of Directors announced that it had
decided to discontinue efforts to sell the remaining companies in the McM
group, including OF&C and Wilshire. The Board's decision was prompted by
market and economic conditions as well as other factors which had an adverse
effect on the general sale process being conducted by PaineWebber Incorporated.
However, McM's Board announced that PaineWebber would continue to serve the
McM group as its financial advisor.
In April 1993, the Chancery Court granted the petition of the
Wilmington Trust Company, Trustee of the McMillen Trust, for a clarification of
existing orders to make clear, among other things, that the timing and terms of
any disposition of the Trust's shares shall be determined in the sound
discretion of the Trustee.
On February 3, 1997, McM received a copy of an SEC Form 3 filing made
by McM Acquisition Corporation ("MAC"), controlled by local real estate
developer and private investor M. Roland Britt, and by Mr. Britt himself. The
Form 3 indicated that MAC had acquired an option to purchase all of the McM
shares owned by the Trust for $6.20 per share exercisable until March 1, 1998.
The next day, February 4, 1997, McM received a copy of an SEC
Schedule 13D filed by MAC and Mr. Britt. This Schedule 13D provided further
information in connection with the option. Attached to the Schedule 13D were
written agreements dated November 22, 1996, and January 24, 1997, between the
Trust and MAC relating to the option and to a possible merger between McM and
MAC. Also attached was a copy of an agreement
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entered into between McM and MAC on January 31, 1997, in a separate,
independent action wherein McM agreed to provide MAC with confidential access to
the Company's records and information to enable MAC to conduct due diligence
reviews and pursue appropriate financial arrangements for a possible
acquisition of all of McM's shares. This agreement, which expires May 31, 1997,
also grants to MAC an exclusive period during which McM will continue its
policy of not soliciting acquisition offers.
McM cannot predict whether MAC will exercise its option or obtain the
required approvals and financial arrangements necessary to acquire either the
Trust's shares or all of the shares of McM.
Total employees of McM and its subsidiaries numbered 139 at December
31, 1996, all of which are directly employed by the property and casualty
subsidiaries.
Item 1. (b) Financial Information About Industry Segments
As a result of discontinuing its life and health insurance segment,
McM, through its subsidiaries, is engaged only in the marketing and underwriting
of property and casualty insurance. Information concerning industry segments,
therefore, is no longer applicable.
Item 1. (c) Narrative Description of Business
PROPERTY AND CASUALTY INSURANCE
McM's property and casualty insurance business is conducted through two
insurance companies, OF&C and Wilshire. The business is concentrated in
liability, physical damage and cargo coverages for the trucking transportation
industry as well as non-standard private passenger automobile coverages. These
insurance policies are generally marketed through general and independent agents
who have no authority to alter any terms of the policies.
The agents who produce business for OF&C and Wilshire are not exclusive
agents of the companies and generally have affiliations with other insurance
companies which may compete with McM. One agent accounts for approximately 19%
of premium income of the property and casualty business of McM.
OF&C is licensed in the District of Columbia and all states other than
Connecticut and Hawaii. Certain states have placed restrictions on the amount of
premium that OF&C may write in those states. Wilshire is licensed in nineteen
states comprised of Arizona, California, Colorado, Hawaii, Idaho, Iowa, Kansas,
Minnesota, Montana, Nebraska, Nevada, New Mexico, North Carolina, Ohio, Oregon,
South Dakota, Utah, Washington and Wisconsin. Wilshire is also approved, as a
non-admitted carrier, to write coverages in the states of Alabama, Alaska,
Florida, Georgia, Illinois, Indiana, Kentucky, Louisiana, Maryland, North
Dakota, Oklahoma, Pennsylvania, Texas and Wyoming. A non-admitted carrier may
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write coverages at rates in excess of the rates approved by the various states,
provided that licensed carriers in those states are unwilling to provide
coverages at the approved rates. Wilshire's premium writings are not restricted
by any state. Also see "Geographic Distribution of Premiums Received."
Competition. The property and casualty insurance business is highly competitive.
In most jurisdictions in which McM's property and casualty insurance
subsidiaries market their policies, there are numerous large standard lines
stock and mutual companies as well as other specialty companies competing for
the same business. Many of the companies have greater financial resources,
larger marketing organizations and broader diversification of risks than the McM
companies. McM believes that the policies, rates, commissions and services of
its companies are competitive with other companies writing these types of
business.
Regulation. All insurance companies are subject to regulation and supervision by
the jurisdictions in which the companies are authorized to transact business.
These regulatory bodies have broad administrative powers relating to the
standards of solvency which must be met and maintained by insurance companies,
minimum capital and surplus requirements, limitations on the investments of
capital and surplus, granting and revoking of licenses, licensing of agents,
filing and approval of policy forms and rates, maintenance of required reserves,
unfair discrimination, form and content of financial statements and other
reporting forms, issuance and sale of stock, types of allowable investments, and
numerous other matters pertaining to insurance.
Insurance companies must keep assets equal to the minimum capital
required by law plus the accumulated reserves invested in certain classes of
investments as specified in the statutes applicable to such companies. In
addition, the National Association of Insurance Commissioners ("NAIC") has
adopted Risk-Based Capital ("RBC") requirements for property and casualty
insurance companies. RBC was developed to evaluate the adequacy of statutory
capital and surplus in relation to investment and insurance risks. The RBC
formula serves as an early warning tool for state insurance regulators to help
identify, for the purpose of initiating regulatory action, companies which are
potentially inadequately capitalized. The capital and surplus for McM's
insurance subsidiaries are well in excess of any regulatory action thresholds
defined by the NAIC.
The reporting practices for McM's property and casualty subsidiaries
are prescribed or permitted by state regulatory authorities ("statutory
accounting") and may differ from generally accepted accounting principles
("GAAP"). OF&C (which includes Wilshire on a statutory equity basis) reported to
insurance regulatory authorities combined statutory accounting capital and
surplus of $18.2 million and $19.2 million at December 31, 1996 and 1995,
respectively. Combined capital and surplus on a GAAP basis was $23.6 million and
$24.3 million at December 31, 1996 and 1995, respectively.
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There are two major reconciling differences between the statutory
accounting and GAAP capital and surplus balances of McM's property and casualty
subsidiaries. In GAAP accounting, costs which vary with and are primarily
related to the production of property and casualty business are deferred to the
extent recoverable and are amortized over the lives of the policies in
proportion to the recognition of premium earned. Statutory accounting does not
permit this deferral and requires property and casualty companies to fully
recognize these expenses in the period they were incurred. At December 31,
1996, McM's property and casualty subsidiaries recorded $4.0 million in
deferred policy acquisition as an asset on the GAAP balance sheet compared to
$3.3 million at December 31, 1995. Statutory accounting also requires property
and casualty companies to record as a liability and restriction to capital and
surplus the uncollateralized portion of balances receivable from non-admitted
reinsurers ("Schedule F Penalty"). The combined Schedule F Penalty recorded by
McM's property and casualty subsidiaries totalled $269,000 and $403,000 at
December 31, 1996 and 1995, respectively.
Insurance holding company laws grant additional powers to insurance
regulators with respect to acquisitions and control of insurance companies by
holding companies and the requirements of disclosure relating to transactions
with affiliated companies.
Each company files a detailed annual report with the insurance
department of each state or governmental jurisdiction in which it is licensed to
do business. Insurance companies are also subject to periodic examinations by
these regulatory bodies. Some of the jurisdictions in which OF&C is licensed to
do business have, for various reasons, instituted restrictions or limitations on
the amount of business written in that state. These restrictions were imposed
years ago when the property and casualty companies were generating substantial
losses and experiencing financial difficulties. Generally they involved states
in which the Company was not actively writing business nor had intentions to
write business. These restrictions have no current effect on liquidity, capital
resources or results of operations. In the future, should the Company desire to
further expand its market presence into any state with such restrictions, it
will then pursue the lifting of such restrictions by providing current financial
and operational information as required by individual state regulatory
authorities.
In May 1993, the North Carolina Commissioner of Insurance issued an
administrative order that required the property and casualty operations to
maintain a specified net premiums to surplus ratio and required prior approval
of the Commissioner for certain transactions. During 1993, management undertook
measures necessary to comply with the conditions of the order. In June 1994,
the Commissioner vacated the order.
Reinsurance. As with other property and casualty insurance companies, the McM
property and casualty insurance companies reinsure a portion of
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the insurance they write in order to control their exposure on large individual
risks or in the event of catastrophic losses. The companies remain contingently
liable on that portion of the risk reinsured should the reinsurer be unable to
meet its obligations under the reinsurance agreements. See Note C of the Notes
to Consolidated Financial Statements.
The largest liability exposure insured for any one risk is $2,000,000.
Reinsurance is in place to reduce the companies' exposure on premiums earned
subsequent to January 1, 1992, to $100,000 of loss per risk. The retention per
risk on premiums earned prior to January 1, 1992, generally is $100,000 with
the exception of 1991 when the loss retention was $250,000. Premiums payable
under certain of the companies' liability reinsurance treaties prior to January
1, 1990, are based in part on actual loss experience. Premiums for the
liability treaties subsequent to 1990 are calculated on a flat rate based on
policy limits. Separate physical damage (excluding theft and collision) and
motor cargo catastrophe reinsurance treaties provide reinsurance on any one
catastrophic occurrence. Coverages under these treaties are limited to a
maximum of 95% of $4,000,000 in excess of the first $500,000 of losses paid.
Quota share reinsurance coverages, by which the companies and their
reinsurers share risk on a proportionate basis, are also in place for both
commercial and private passenger automobile business. The companies cede 5% of
the retained commercial auto liability coverages. Prior to 1996, private
passenger automobile business was ceded at a rate of 40%; however, effective
January 1, 1996, the cession rate was reduced to 30%. These quota share
arrangements allow the companies to better control premium growth.
The principal reinsurers of the companies for current business are
Zurich Reinsurance, Ltd., Unionamerica Insurance Company, CNA International
Reinsurance Company, Ltd., Lloyds Underwriters, AXA Reassurance Company and
Sphere Drake Insurance. Reinsurance agreements cover commercial and private
passenger automobile liability, physical damage (excluding theft and collision),
motor cargo and ancillary coverages. In addition to the reinsurers named above,
principal reinsurers of the companies for prior years' reinsurance treaties are
Employers Reinsurance Corporation, National Reinsurance Company and Reinsurance
Corporation of New York.
Loss Reserves and Loss Adjustment Expenses
The consolidated financial statements include the estimated liability
for unpaid losses and loss adjustment expenses ("LAE") of the property and
casualty insurance subsidiaries. The liabilities for losses and LAE are
determined using case basis evaluations and statistical projections and
represent estimates of the ultimate net cost of all unpaid losses and LAE
incurred through December 31 of each year. These estimates give effect to trends
in claims severity and other
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factors which may vary as the liabilities are ultimately settled. The estimates
are continually reviewed and, as adjustments to these liabilities become
necessary, such adjustments are reflected in current operations.
The following table provides a reconciliation of beginning and ending
liability balances for 1996, 1995 and 1994.
Reconciliation of Net Liability for Losses
and Loss Adjustment Expenses
<TABLE>
<CAPTION>
1996 1995 1994
---- ---- ----
(Thousands of dollars)
<S> <C> <C> <C>
GAAP
Reserves for losses and
settlement expenses, net of
reinsurance recoverables, at
beginning of year $29,997 $38,415 $51,625
Provision for insured events of
the current year 37,651 31,282 29,106
Increase (decrease) in provision
for insured events of prior
years 1,559 (248) 18
------- ------- -------
Incurred losses and settlement
expenses during current year,
net of reinsurance 39,210 31,034 29,124
Payments for:
Losses and settlement expenses
attributable to insured event
of the current year 22,853 18,113 15,307
Losses and settlement expenses
attributable to insured events
of prior years 19,822 21,339 27,027
------- ------- -------
42,675 39,452 42,334
------- ------- -------
Reserves for losses and settlement
expenses, net of reinsurance
recoverables, at end of year 26,532 29,997 38,415
Reinsurance recoverable on unpaid
losses and settlement expenses
at end of current year 28,768 36,155 42,471
------- ------- -------
Gross reserves for losses and
settlement expenses at end
of year $55,300 $66,152 $80,886
======= ======= =======
</TABLE>
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The reconciliation above reflects the emergence of a $1,559,000
deficiency in the December 31, 1995, reserve during 1996. This deficiency
includes adverse reserve development of approximately $572,000 in private
passenger auto liability reserves, $1.2 million in private passenger auto and
commercial auto physical damage and inland marine reserves. In addition,
approximately $613,000 of this deficiency relates to discontinued lines of
business and participation in involuntary pools and other residual market
mechanisms in which OF&C and Wilshire are required to participate by the
various states in which the companies write insurance. The above adverse
development was partially offset by favorable reserve development of $800,000
in the commercial auto liability line of business.
The anticipated effect of inflation is implicitly considered when
estimating liabilities for losses and settlement expenses. While anticipated
cost increases due to inflation are considered in estimating the ultimate claim
costs, the increase in average severity of claims is caused by a number of
factors that vary with the individual type of policy written. Future average
severity is projected based on historical trends adjusted for anticipated
changes in these trends and general economic conditions. These anticipated
trends are monitored based on actual development and are modified as necessary.
The liability for losses and LAE of $55,300,000 reported in the
accompanying financial statements in accordance with generally accepted
accounting principles (GAAP) is reported on a gross basis, i.e., without
reduction for reinsurance, and differs from that reported in the annual
statements filed with state insurance departments in accordance with statutory
accounting practices (SAP), which are reported net of reinsurance. See Note A of
the accompanying 1996 financial statements.
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ANALYSIS OF LOSS AND LOSS ADJUSTMENT
EXPENSE DEVELOPMENT
NET OF REINSURANCE WITH SUPPLEMENTAL GROSS DATA
<TABLE>
<CAPTION>
(Thousands of dollars)
YEAR ENDED 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996
- ---------- -------- -------- ------- ------- ------- -------- -------- -------- -------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Liability for Unpaid
Claims and Claim
Adjustment Expense $100,942 $103,115 $96,308 $78,120 $64,002 $ 64,304 $ 59,580 $ 51,625 $ 38,415 $29,997 26,532
Paid (Cumulative)
as of:
One year later $ 48,008 $ 45,676 $48,461 $42,731 $41,726 $ 29,635 $ 28,500 $ 27,034 $ 21,338 $19,822 $ 0
Two years later 76,162 75,454 72,353 63,893 47,833 44,905 44,659 39,119 31,096
Three years later 96,646 90,546 84,912 67,649 56,343 54,980 51,326 44,649
Four years later 105,561 99,200 87,368 72,305 61,006 58,364 54,561
Five years later 109,964 101,072 90,495 75,568 62,341 60,459
Six years later 110,513 103,242 93,146 76,350 63,728
Seven years later 112,133 105,555 93,769 77,562
Eight years later 114,270 105,791 94,930
Nine years later 114,405 106,916
Ten years later 115,430
Liability Reestimated
as of:
One year later $112,928 $108,844 $97,562 $77,625 $68,679 $ 64,175 $ 60,849 $ 51,643 $ 38,167 $31,556 $ 0
Two years later 118,303 109,955 95,362 78,970 66,266 64,686 59,881 50,184 $ 38,060
Three years later 118,933 108,203 96,354 79,861 67,429 64,167 58,563 49,874
Four years later 117,628 109,058 96,874 80,345 67,540 63,204 58,713
Five years later 118,120 109,164 97,453 80,695 66,357 63,939
Six years later 117,622 109,198 97,619 79,909 67,115
Seven years later 117,739 109,415 97,251 80,698
Eight years later 118,238 109,226 98,054
Nine years later 117,618 110,008
Ten years later 118,386
-------- -------- ------- ------- ------- -------- -------- -------- -------- ------- -------
Cumulative Deficiency
(Redundancy) $ 17,444 $ 6,893 $ 1,746 $ 2,578 $ 3,113 ($ 365) ($ 867) ($ 1,751) ($ 355) $ 1,559 $ 0
======== ======== ======= ======= ======= ======== ======== ======== ======== ======= =======
0 0 0 0 0 0 0 0 0
Gross Data at End of Year
Gross Liability $66,152 $55,300
Reinsurance Recoverable 36,155 28,768
------- -------
Net Liability $29,997 $26,532
======= =======
</TABLE>
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The table above presents the development of balance sheet liabilities
for 1986 through 1996. The top line of the table shows the estimated liability
for unpaid losses and LAE recorded at the balance sheet date for each of the
indicated years. This liability represents the estimated amount of losses and
LAE for claims arising in all prior years that are unpaid at the balance sheet
date, including losses that had been incurred but not yet reported to the
Company. The lower portion of the table shows the re-estimated amount of the
previously recorded liability based on experience as of the end of each
succeeding year. The estimate is increased or decreased as more information
becomes known about the frequency and severity of claims for individual years.
The deficiency/(redundancy) represents the aggregate change in the
estimates over all prior years. For example, through 1996, the 1987 liability
has developed a $6,893,000 deficiency which has been recognized in operations
over the nine year period. The effects on income of the past three years of
changes in estimates of the liabilities for losses and LAE is shown in the
preceding table, "Reconciliation of Net Liability for Losses and Loss Adjustment
Expenses".
The upper section of the table, "Analysis of Loss and Loss Adjustment
Expense Development", shows the cumulative amount paid with respect to the
previously recorded liability as of the end of each succeeding year. For
example, as of December 31, 1996, the Company paid $115,430,000 of the current
re-estimated reserve for losses and loss adjustment expenses at December 31,
1986, of $118,386,000. Thus an estimated $2,956,000 of losses incurred through
1986 remain unpaid as of the current financial statement date.
In evaluating this information, it should be noted that each amount
includes the effects of all changes in amounts for prior periods. For example,
the amount of the deficiency related to losses settled in 1988, but incurred in
1986, will be included in cumulative redundancy (deficiency) amount for years
1986 and 1987. This table does not present accident or policy year development
data. Conditions and trends that have affected development of the liability in
the past may not necessarily occur in the future. In addition, the Company has
entered into numerous reinsurance commutations and assumption transactions, as
discussed below, which are included in the information presented. Accordingly,
it may not be appropriate to extrapolate future deficiencies or redundancies
based on this table.
On March 5, 1987, the Company entered into a commutation agreement with
Omaha Indemnity Company (OIC), a subsidiary of Mutual of Omaha, whereby OIC
remitted $26 million of cash to the Company in satisfaction of all liabilities
due under various reinsurance treaties. Of this amount, $5.5 million reimbursed
existing paid loss recoverables leaving $20.5 million available to cover future
loss payments on the commuted block
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of reserves. Based on a review of the commuted reserves by the Company's
actuary and by an independent actuarial consulting firm, the projected ultimate
value of commuted reserves and paid loss recoverables exceeded the commutation
proceeds by $5.5 million. This transaction was recorded in the 1986
consolidated GAAP financial statements, and is reflected in the loss
development schedule as additional adverse reserve development of approximately
$5.3 million relating to year-end reserves for 1985, as of December 31, 1986.
Loss and loss adjustment expense reserves related to this block of business and
recorded at December 31, 1996, are not significant.
During 1985 McM entered into a commutation agreement with Universal
Reinsurance Corporation and Northwestern National Insurance Company, whereby
they remitted $15.5 million of cash to McM's property and casualty subsidiaries
in satisfaction of all liabilities due under the various reinsurance treaties.
This cash settlement was supplemented by $1 million in development recorded
during 1986. An additional $1.7 million in development was recorded during 1987.
The Company has experienced no significant development on this business since
1987 and remaining loss and loss adjustment expense reserves at December 31,
1996, are not significant.
Additionally, the Company experienced adverse development of $1.2
million during 1987 on reserves commuted with several other reinsurers. No
significant development has been experienced on these reserves since 1987.
Effective December 31, 1985, OF&C assumed the liabilities on business
previously written by Peninsular Fire Insurance Company ("PFICO"), a former
subsidiary of McM. The coverages, which were primarily workers' compensation and
commercial multi-peril, are being run off and no new coverages have been
underwritten. Adverse development on the PFICO reserves was $2.5 million in
1985, $3.1 million in 1986, $3.9 million in 1987, and $3.1 million in 1988.
Development since 1988 has not been significant.
The information below the table is a reconciliation of the data in the
table, which is reported net of reinsurance, to the reserves in the balance
sheet which are stated gross of reinsurance.
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Geographic Distribution of Direct Written Premiums
The following is a summary of property and casualty direct premiums
written in 1996 by geographic location. States accounting for less than five
percent (5%) of premiums are combined in "Other".
STATE PERCENT
----- -------
California 34
Florida 9
Nevada 13
Ohio 6
Utah 5
Other 33
---
100%
Item 1. (d) Financial Information About Foreign and Domestic Operations
and Export Sales
The information called for under this item does not apply.
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Item 2. Properties
McM and its subsidiaries lease home office properties in various
locations. The major locations are set forth in the following table:
<TABLE>
<CAPTION>
Square Book Annual
Footage Value Rent
------- ----- ----
<S> <C> <C> <C>
Raleigh, North Carolina
OF&C 23,643 Not Owned $438,408
Wilshire
McM
Lancaster, California
Wilshire 8,322 Not Owned $121,920
Scottsdale, Arizona
OF&C 6,528 Not Owned $ 97,920
</TABLE>
Item 3. Legal Proceedings
The information called for under this item does not apply.
Item 4. Submission of Matters to a Vote of Security Holders
There were no matters submitted to a vote of security holders during
the fourth quarter of 1996.
Item 5. Market for the Registrant's Common Equity and Related
Stockholder Matters
The market information and related stockholder matters are incorporated
by reference from the Annual Report to Shareholders for the year ended
December 31, 1996. This information is included in the Annual Report to
Shareholders and is on page 31 of this report.
Item 6. Selected Financial Data
The selected financial data is incorporated by reference from the
Annual Report to Shareholders for the year ended December 31, 1996. See
page 31 of this report.
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations
Management's discussion is incorporated by reference from the Annual
Report to Shareholders for the year ended December 31, 1996. See pages 37
through 44 of this report.
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Item 8. Financial Statements and Supplementary Data
The consolidated financial statements of McM Corporation and
subsidiaries and the report of independent auditors filed in response to Item 8
are incorporated by reference from the Annual Report to Shareholders beginning
on page 45 of this report.
A summary of the quarterly results of operations for the years ended
December 31, 1996, and December 31, 1995, is incorporated by reference from the
Annual Report to Shareholders on page 69 of this report.
Item 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure
The information called for under this item does not apply.
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PART III
Item 10. Directors and Executive Officers of the Registrant
The information called for is incorporated by reference and will be
filed with the Commission with the definitive proxy statement within the
required 120-day period.
Item 11. Executive Compensation
The information called for is incorporated by reference and will be
filed with the Commission with the definitive proxy statement within the
required 120-day period.
Item 12. Security Ownership of Certain Beneficial Owners and
Management
The information called for is incorporated by reference and will be
filed with the Commission with the definitive proxy statement within the
required 120-day period.
Item 13. Certain Relationships and Related Transactions
The information called for is incorporated by reference and will be
filed with the Commission with the definitive proxy statement within the
required 120-day period.
15
<PAGE> 17
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on
Form 8-K
<TABLE>
<CAPTION>
Page
----
<S> <C>
(a) The following documents are filed as a part of this report.
1. Financial Statements--The financial statements required by
this item are incorporated by reference from the Annual Report
to Shareholders. The following consolidated financial
statements of McM and subsidiaries are filed in response to
Item 8:
Consolidated Balance Sheets - December 31, 1996
and 1995. 45
Consolidated Statements of Operations - Years Ended
December 31, 1996, 1995 and 1994. 46
Consolidated Statements of Shareholders' Equity -
Years Ended December 31, 1996, 1995 and 1994. 47
Consolidated Statements of Cash Flows - Years Ended December 31,
1996, 1995 and 1994. 48
Notes to Consolidated Financial Statements 49
Report of Independent Auditors 68
2. Financial Statement Schedules--The following
schedules are filed in accordance with the
requirements of Article 7 of Regulation S-X:
Schedule 1 - Summary of Investments - Other than 21
Investments in Related Parties (In
compliance with Schedule I of Rule
7-05):
Schedule 2 - Condensed Financial Information of 22
Registrant (In compliance with
Schedule II of Rule 7-05):
Schedule 3 - Reinsurance (In compliance with 26
Schedule IV of Rule 7-05):
Schedule 4 - Valuation and Qualifying Accounts 27
(In compliance with Schedule V of
Rule 7-05):
</TABLE>
16
<PAGE> 18
<TABLE>
<CAPTION>
Page
----
<S> <C>
Schedule 5 - Supplemental Information for Property 28
& Casualty Insurance Underwriters (In
compliance with Schedule IV of Rule 7-05):
All other schedules to the consolidated
financial statements required by Article
5 or 7 of Regulation S-X are not applicable and,
therefore, have been omitted.
3. The following exhibits are included in accordance
with the requirements of Item 601 of Regulation S-K.
Exhibit (3): a) Articles of Incorporation and the
By-laws of McM Corporation are incorporated by
reference from Form 10-K, dated December 31, 1995.
Exhibit (9): McMillen Trust Agreement is incorporated by reference
from Form 10, dated April 24, 1978.
Exhibit (10): Material contracts:
a) The 1986 Stock Option Plan (as amended) is
incorporated by reference from the December 31,
1994, Form 10-K. The 1996 Stock Option Plan is
incorporated by reference from the 1996
Proxy Statement.
b) The Phantom Stock Plan is incorporated by
reference from the December 31, 1994, Form 10-K.
The first amendment to this Plan dated August 6, 1996,
is attached. 78
c) Employment and retention bonus contracts for
certain executive officers are incorporated by
reference from the December 31, 1989, 1992,
1993 and 1994, Forms 10-K. Current amendments
are attached. 72
d) The Key Executive Incentive Compensation Plan is
incorporated by reference from the December 31,
1994 Form 10-K.
e) The Equity Appreciation Rights Plan is incorporated
</TABLE>
17
<PAGE> 19
<TABLE>
<CAPTION>
Page
----
<S> <C>
by reference from the 1993 Proxy Statement.
f) The 1996 Employee Stock Purchase Plan is incorporated
by reference from the 1996 Proxy Statement.
g) The 1996 Non-Employee Directors' Stock Purchase Plan
is incorporated by reference from the 1996 Proxy Statement.
Exhibit (13): Annual Report to Shareholders for year ended
December 31, 1996. 29
Exhibit (21): Subsidiaries of the Registrant. 80
Exhibit (23): Consent of Independent Auditors 81
Exhibit (27): Financial Data Schedule (for SEC use only)
Exhibit (28): Information from reports furnished to state
insurance regulatory authorities. The information included
in this exhibit, Schedule P, has been filed in hard copy form
under amended rule 311(c) of Regulation S-T 82
(b) There were no reports on Form 8-K filed by McM during the
last quarter of the period covered by this report.
(c) Exhibits--The response to this portion of Item 14 is submitted
as a separate section of this report beginning on page 29.
(d) Financial Statement Schedules--The response to this portion of
Item 14 is submitted as a separate section of this report
beginning on page 20.
</TABLE>
18
<PAGE> 20
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned, thereto duly authorized.
McM CORPORATION
By: /s/ STEPHEN L. STEPHANO
--------------------------
(Registrant)
Stephen L. Stephano,
President and
Chief Operating Officer
Date: 3/27/97
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the registrant and
in the capacities and on the dates indicated.
/s/ GEORGE E. KING 3/27/97 /s/ MICHAEL DIGREGORIO 3/27/97
- --------------------------------- ----------------------------------
George E. King, Chairman Emeritus Michael A. DiGregorio
Chief Executive Officer Director
and Director
/s/ STEPHEN L. STEPHANO 3/27/97 /s/ LAURENCE F. LEE, JR. 3/27/97
- --------------------------------- ----------------------------------
Stephen L. Stephano Laurence F. Lee, Jr.
President, Director
Chief Operating Officer
and Director
/s/ KEVIN J. HAMM 3/27/97 /s/ LAURENCE F. LEE III 3/27/97
- --------------------------------- ----------------------------------
Kevin J. Hamm Laurence F. Lee III
Vice President and Director
Chief Financial Officer
/s/ CLAUDE G. SANCHEZ, JR 3/27/97 /s/ R. PEYTON WOODSON III 3/27/97
- --------------------------------- ----------------------------------
Claude G. Sanchez, Jr. R. Peyton Woodson III
Director Director
19
<PAGE> 1
FIRST AMENDMENT TO THE MCM CORPORATION PHANTOM STOCK PLAN
THIS FIRST AMENDMENT TO THE McM CORPORATION PHANTOM STOCK PLAN (the
"Amendment") is made this 6 day of AUGUST, 1996, by the Board of Directors (the
"Board") of McM Corporation, a North Carolina corporation (the "Company").
W I T N E S S E T H:
WHEREAS, the Board has discussed the vesting schedule provided for in
paragraph 5.3(b) of the McM Corporation Phantom Stock Plan (the "Plan") and its
applicability to various situations that may arise;
WHEREAS, the Board has determined that it is in the best interests of
the Company for the application of the vesting schedule of the Plan to be
modified in the event of a) an involuntary termination of the employment of an
Employee without cause or b) a Change in Control (as defined below) of the
Company.
NOW, THEREFORE, the Board has resolved that the following changes be
made to the Plan:
1. Involuntary Termination Without Cause. Paragraph 5.3(c) of the Plan
shall be amended by adding the following sentence to the end of the current
paragraph 5.3(c):
The "Years From Award Date to Date of Termination of Employment" time
period referred to in Paragraph 5.3(b) of the Plan shall include any
remaining term under any employment agreement an Employee may have with
the Company and/or its Subsidiaries on the date of termination.
2. Change in Control. The following Paragraph 5.3(f) shall be added to
the Plan:
(f) Upon the execution of an agreement the performance of which will
result in a Change in Control (as defined below) of the Company, any
shares of phantom stock held by an Employee shall fully vest as of the
date of such execution. For purposes of this Plan, a "Change in
Control" shall be deemed to have occurred if any "person," as such term
is defined in Sections 13(d) and 14(d) of the Securities Exchange Act
of 1934, as amended from time to time (the "Exchange Act"), other than
a trustee or fiduciary holding securities under an employee benefit
plan of the Company and/or its subsidiaries, is or becomes the
"beneficial owner" (as defined in Rule 13d-3 under the Exchange Act),
directly or indirectly, of securities of the Company representing
fifty-one percent or more of the combined voting power of the Company's
then outstanding securities.
78
<PAGE> 2
3. No Other Modifications. Except as modified and amended herein, the
Plan is ratified and confirmed in all respects.
IN WITNESS WHEREOF, the Company, by action approved and directed by its
Board of Directors and consented to on his own behalf by the sole Employee
currently holding shares of phantom stock pursuant to the Plan, has executed
this Amendment as of the day and year first above written.
MCM CORPORATION, a North Carolina
corporation
Attest:
By: /s/ GEORGE E. KING
---------------------------------------
George E. King, Chief Executive Officer
/s/ MICHAEL D. BLINSON
- ----------------------------------------
Michael D. Blinson, Corporate Secretary
[Corporate Seal]
CONSENTED TO AND APPROVED:
/s/ STEPHEN L. STEPHANO (Seal)
- --------------------------------
Stephen L. Stephano, Employee
79
<PAGE> 1
SEVENTH AMENDMENT TO EMPLOYMENT AGREEMENT
THIS SEVENTH AMENDMENT TO EMPLOYMENT AGREEMENT (the "Amendment") is
made effective the 6th day of August, 1996, between GEORGE E. KING ("Employee"),
and McM CORPORATION ("McM"), OCCIDENTAL FIRE & CASUALTY COMPANY OF NORTH
CAROLINA, and WILSHIRE INSURANCE COMPANY (the three companies collectively being
the "Employer" or the "McM Group").
W I T N E S S E T H:
WHEREAS, the Employee and the Employer have entered an Employment
Agreement dated as of February 16, 1989, and amended March 28, 1990, October 18,
1990, December 30, 1991, February 1, 1993, September 1, 1993 and March 16, 1995
(collectively, the "Agreement"); and
WHEREAS, the Employee and Employer wish to amend the Agreement in
certain respects and agree that the mutual promises set forth in this Amendment
are full and valid consideration therefor.
NOW THEREFORE, the parties hereto agree as follows:
1. Employment. Paragraph 1 of the Agreement is hereby deleted in its
entirety and in its place is inserted the following:
1. Employment. King is hereby employed by McM
Corporation as its Chairman Emeritus and Chief
Executive Officer, by Occidental Fire & Casualty
Company of North Carolina as its Chairman and by
Wilshire Insurance Company as its Chairman. King's
duties and responsibilities as to McM Corporation and
the McM Group generally include all shareholder
relations, all legal and regulatory matters, all
sale, acquisition, divestiture and investment banking
issues.
2. Term of Employment. Paragraph 3 of the Agreement is hereby
deleted in its entirety and in its place is inserted the following:
72
<PAGE> 2
3. Term. The term of this Agreement shall continue until
December 31, 1996, at which time it shall
automatically renew on a daily rolling basis and
continue until the earlier of (a) one year from the
date the Employer delivers to the Employee written
notice of non-renewal, but in no event shall such
term expire before December 31, 1997, or (b) the
consummation of a Change in Control (as defined
herein) of McM occurring after December 31, 1996.
3. Clarification Regarding Lump Sum Payout. Paragraph 9 of the
Agreement is hereby deleted in its entirety, and in its place is inserted the
following:
9. Termination By Employer Without Cause. If the Employer
terminates this Agreement during its term without cause, the Employer
shall pay to the Employee a lump sum equal to the Employee's then
current annual salary plus the value of the Employee's annual benefits,
all divided by 12 and multiplied by the number of months (including any
fractional portion of any month) remaining in the term of this
Agreement, plus accrued vacation. Unless specifically provided for in
this Agreement, as amended, any benefits receivable by the Employee
under the McM Key Executive Incentive Compensation Plan, the 1986 or
1996 McM Employee Incentive Stock Option Plans, the McM Phantom Stock
Plan or the McM Equity Appreciation Rights Plan shall be in accordance
with the terms of those Plans.
3. Bylaws. The provisions of the second paragraph of Article III,
Section 1 of Employer's bylaws are extended from operation as to Employee until
the termination of the Agreement as provided herein.
4. Change in Control. For purposes of the Agreement and this Amendment,
a "Change in Control" shall be deemed to have occurred if any "person," as such
term is defined in Sections 13(d) and 14(d) of the Securities Exchange Act of
1934, as amended from time to time (the "Exchange Act"), other than a trustee or
other fiduciary holding securities under an employee benefit plan of McM or its
subsidiaries, is or becomes the "beneficial owner" (as defined in Rule 13d-3
under the Exchange Act), directly or indirectly, of securities of McM
representing fifty-one percent or more of the combined voting power of McM's
then outstanding securities.
5. Except as modified in this Amendment, the Agreement, as amended, is
ratified and confirmed in all respects.
73
<PAGE> 3
IN WITNESS WHEREOF, Employer, by action approved and directed by its
Board of Directors and Employee, on his own behalf, have executed this Amendment
as of the day and year first above written.
EMPLOYEE:
/s/ GEORGE E. KING (Seal)
--------------------------------
George E. King
EMPLOYER:
Attest: McM CORPORATION, a North Carolina
corporation
/s/ MICHAEL D. BLINSON
- -------------------------
Corporate Secretary By: /s/ STEPHEN L. STEPHANO
--------------------------------
Its: President & COO
[Corporate Seal]
OCCIDENTAL FIRE & CASUALTY
COMPANY OF NORTH CAROLINA, a North
Attest: Carolina corporation
/s/ MICHAEL D. BLINSON By: /s/ STEPHEN L. STEPHANO
- ---------------------------- ---------------------------------
Asst. Corp. Secretary Its: President & CEO
[Corporate Seal]
WILSHIRE INSURANCE COMPANY, a North
Attest: Carolina corporation
/s/ MICHAEL D. BLINSON By: /s/ STEPHEN L. STEPHANO
- ---------------------------- ----------------------------------
Asst. Corp. Secretary Its: President & CEO
[Corporate Seal]
74
<PAGE> 4
THIRD AMENDMENT TO EMPLOYMENT AGREEMENT
THIS THIRD AMENDMENT TO EMPLOYMENT AGREEMENT (the "Amendment") is made
effective the 6th day of August, 1996, between STEPHEN L. STEPHANO ("Employee"),
McM CORPORATION, OCCIDENTAL FIRE & CASUALTY COMPANY OF NORTH CAROLINA, and
WILSHIRE INSURANCE COMPANY (collectively, "Employer").
W I T N E S S E T H:
WHEREAS, the Employee and the Employer have entered an Employment
Agreement dated as of February 1, 1993, and amended September 1, 1993, and March
16, 1995 (the "Agreement");
WHEREAS, Employer and Employee desire to further amend the terms of the
Agreement in certain respects and agree that the mutual promises set forth in
this Amendment are full and valid consideration therefor.
NOW THEREFORE, the parties hereto agree as follows:
1. Term of Employment. Paragraph 2 of the Agreement is hereby
deleted in its entirety and in its place is inserted the following:
2. Term. The term of this Agreement shall continue until
December 31, 1996, at which time it shall
automatically renew on a daily rolling basis and
continue until two years from the date the Employer
delivers to the Employee written notice of
non-renewal, but in no event shall such term expire
before December 31, 1998.
2. Employee's Positions. Paragraph 4 of the Agreement is hereby
deleted in its entirety, and in its place is inserted the following:
4. Duties. The Employee is engaged by McM Corporation as
President and Chief Operating Officer, by Occidental
Fire & Casualty Company of North Carolina as its
President and Chief Executive Officer and by Wilshire
Insurance Company as its President and Chief
Executive Officer, and in all
75
<PAGE> 5
of such capacities shall devote substantially all of
his time and attention to the business of these
companies.
3. Clarification Regarding Lump Sum Payout. Paragraph 8 of the
Agreement is hereby deleted in its entirety, and in its place is
inserted the following:
8. Termination By Employer Without Cause. If the
Employer terminates this Agreement during its term without
cause, the Employer shall pay to the Employee a lump sum equal
to the Employee's then current annual salary plus the value of
the Employee's annual benefits, all divided by 12 and
multiplied by the number of months (including any fractional
portion of any month) remaining in the term of this Agreement,
plus accrued vacation. Unless specifically provided for in
this Agreement, as amended, any benefits receivable by the
Employee under the McM Key Executive Incentive Compensation
Plan, the 1986 or 1996 McM Employee Incentive Stock Option
Plans, the McM Phantom Stock Plan or the McM Equity
Appreciation Rights Plan shall be in accordance with the terms
of those Plans.
4. Except as modified in this Amendment, the Agreement is ratified
and confirmed in all respects.
[SIGNATURE PAGE ATTACHED]
76
<PAGE> 6
IN WITNESS WHEREOF, Employer, pursuant to action approved and directed
by its Board of Directors, and Employee, on his own behalf, have executed this
Amendment as of the day and year first above written.
EMPLOYEE:
/s/ STEPHEN L. STEPHANO (Seal)
----------------------------------
Stephen L. Stephano
EMPLOYER:
McM CORPORATION, a North Carolina
Attest: corporation
/s/ MICHAEL D. BLINSON By: /s/ GEORGE E. KING
- ---------------------------- ---------------------------------
Corporate Secretary Its: Chief Executive Officer
[Corporate Seal]
OCCIDENTAL FIRE & CASUALTY
COMPANY OF NORTH CAROLINA, a North
Attest: Carolina corporation
/s/ MICHAEL D. BLINSON By: /s/ GEORGE E. KING
- ---------------------------- ---------------------------------
Asst. Corp. Secretary Its: Chairman
[Corporate Seal]
WILSHIRE INSURANCE COMPANY, a North
Attest: Carolina corporation
/s/ MICHAEL D. BLINSON By: /s/ GEORGE E. KING
- ---------------------------- ---------------------------------
Asst. Corp. Secretary Its: Chairman
[Corporate Seal]
77
<PAGE> 1
EXHIBIT 13
ANNUAL REPORT ON FORM 10-K
Item 14 (c) - Exhibits
and
Item 14 (d) - Financial Statement Schedules
Year Ended December 31, 1996
McM CORPORATION AND SUBSIDIARIES
20
<PAGE> 2
SCHEDULE 1 -- SUMMARY OF INVESTMENTS
McM CORPORATION AND SUBSIDIARIES
December 31, 1996
<TABLE>
<CAPTION>
AMOUNT
SHOWN ON
MARKET BALANCE
TYPE OF INVESTMENT COST VALUE SHEET
------------------ ---- ----- -----
(Thousands of dollars)
<S> <C> <C> <C>
Fixed Maturity Securities Available-for-Sale
Bonds
Mortgage-backed securities $18,824 $18,999 $18,999
U.S. Government, government
agencies and authorities 17,449 17,371 17,371
Public utilities and other bonds 665 503 503
------- ------- -------
Total Fixed Maturities Available for Sale 36,938 36,873 36,873
Short-term investments 14,061 14,061 14,061
------- ------- -------
Total Securities Available-for-Sale 50,999 50,934 50,934
Held-to-Maturity
U.S. Government, government
agencies and authorities 5,745 5,799 5,745
States, municipalities and political
subdivisions 193 223 193
------- ------- -------
Total Securities Held To Maturity 5,938 6,022 5,938
======= ======= =======
Total Investments $56,937 $56,956 $56,872
======= ======= =======
</TABLE>
21
<PAGE> 3
SCHEDULE 2 - CONDENSED FINANCIAL INFORMATION OF REGISTRANT
BALANCE SHEETS
McM CORPORATON (PARENT COMPANY)
<TABLE>
<CAPTION>
(Thousands of dollars)
December 31
1996 1995
---- ----
<S> <C> <C>
ASSETS
Fixed maturities available-for-sale $ 0 $ 95
Short term investments 30 0
Cash 107 101
Other assets 80 118
------- -------
217 314
Investments in wholly-owned subsidiaries
at equity * 24,005 25,189
------- -------
TOTAL ASSETS $24,222 $25,503
======= =======
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities:
Accrued expenses $ 1,562 $ 1,509
Income taxes payable to wholly-owned subsidiaries * 387 205
Payable to wholly-owned subsidiaries * 618 549
------- -------
TOTAL LIABILITIES 2,567 2,263
Shareholders' Equity:
Common stock 4,678 4,675
Additional paid-in capital 1,489 1,477
Unrealized (loss) gain on securities available-for-sale
(including unrealized gain on securities
held by subsidiaries: 1996 - $78 ; 1995 - $570) (65) 465
Retained earnings 15,553 16,623
------- -------
TOTAL SHAREHOLDERS' EQUITY 21,655 23,240
------- -------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $24,222 $25,503
======= =======
</TABLE>
* Eliminated in consolidation
See notes to condensed financial information.
22
<PAGE> 4
SCHEDULE 2 - CONDENSED FINANCIAL INFORMATION OF REGISTRANT
STATEMENTS OF OPERATIONS
McM CORPORATON (PARENT COMPANY)
<TABLE>
<CAPTION>
(Thousands of dollars)
Year Ended December 31
1996 1995 1994
---- ---- ----
INCOME
<S> <C> <C> <C>
Administrative charges to subsidiaries * - Note B $ 650 $ 650 $1,200
Realized investment income 8 5 10
Other income 0 0 1
----- ------- ------
658 655 1,211
General and administrative expenses 893 680 866
----- ------- ------
(LOSS) INCOME BEFORE TAXES, AND EQUITY IN
UNDISTRIBUTED (LOSS) INCOME OF SUBSIDIARIES (235) (25) 345
Income taxes ( benefits) (140) 8 79
----- ------- ------
(LOSS) INCOME BEFORE EQUITY IN UNDISTRIBUTED
(LOSS) INCOME OF SUBSIDIARIES (95) (33) 266
Equity in undistributed (loss) income of subsidiaries (693) 2,243 1,088
----- ------- ------
NET (LOSS) INCOME ($788) $ 2,210 $1,354
===== ======= ======
</TABLE>
* Eliminated in consolidation.
See notes to condensed financial information.
23
<PAGE> 5
SCHEDULE 2 - CONDENSED FINANCIAL INFORMATION OF REGISTRANT
STATEMENTS OF CASH FLOWS
McM CORPORATON (PARENT COMPANY)
<TABLE>
<CAPTION>
(Thousands of dollars)
Year Ended December 31
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net Income (Loss) ($ 788) $ 2,210 $ 1,354
Adjustments to reconcile net income (loss) to net cash provided by
(used by) operating activities:
Depreciation 4 4 12
Equity in loss (income) of subsidiaries 693 (2,243) (1,088)
Other assets 33 (7) 227
Other liabilities 53 (72) (617)
Provisions for income taxes 182 126 114
Income taxes payable to wholly-owned subsidiaries 69 6 (17)
------- ------- -------
CASH PROVIDED BY (USED BY) OPERATING ACTIVITIES 246 24 (15)
INVESTING ACTIVITIES
Disposals of fixed maturities 57 0 0
Decrease in short-term investments (30) 0 0
------- ------- -------
CASH USED BY INVESTING ACTIVITIES 27 0 0
FINANCING ACTIVITIES
Employee stock purchases 15 0 0
Cash dividend paid (282) 0 0
------- ------- -------
CASH (USED BY) FINANCING ACTIVITIES (267) 0 0
------- ------- -------
INCREASE (DECREASE) IN CASH $ 6 24 ($ 15)
======= ======= =======
</TABLE>
See notes to condensed financial information
24
<PAGE> 6
SCHEDULE 2 -- CONDENSED FINANCIAL INFORMATION OF REGISTRANT
NOTES TO CONDENSED FINANCIAL INFORMATION
McM CORPORATION (PARENT COMPANY)
The accompanying condensed financial information should be read in conjunction
with the consolidated financial statements and notes thereto of McM Corporation
and Subsidiaries.
NOTE A -- Significant Accounting Policies
In the parent company financial statements, the Company's investments
in wholly-owned subsidiaries are stated at cost plus equity in undistributed
earnings of the subsidiaries. McM is actively engaged through certain of its
subsidiaries in the property and casualty insurance business.
NOTE B -- Administrative Charges
McM is compensated by its subsidiaries in the form of management fees
for providing management support, planning assistance, financial reporting and
investment services.
25
<PAGE> 7
SCHEDULE 3 - REINSURANCE
McM CORPORATION AND SUBSIDIARIES
Year Ended December 31, 1996, 1995, and 1994
<TABLE>
<CAPTION>
Premiums Earned
---------------------------------------------
Percentage
Ceded to Assumed of Amount
Direct Other From Other Net Assumed
(Thousands of dollars) Amount Companies Parties Amount to Net
------ --------- ------- ------ ------
<S> <C> <C> <C> <C> <C>
YEAR ENDED DECEMBER 31, 1996 $63,163 $21,714 $10,405 $51,854 20.07%
======= ======= ======= ======= =====
YEAR ENDED DECEMBER 31, 1995 $63,731 $23,901 $ 5,871 $45,701 12.85%
======= ======= ======= ======= =====
YEAR ENDED DECEMBER 31, 1994 $65,572 $25,720 $ 1,274 $41,126 3.10%
======= ======= ======= ======= =====
</TABLE>
26
<PAGE> 8
SCHEDULE 4 - VALUATION AND QUALIFYING ACCOUNTS
McM CORPORATION AND SUBSIDIARIES
<TABLE>
<CAPTION>
(Thousands of dollars)
ADDITIONS
------------------------
(1) (2)
Charged to Charged to
Balance at (Recovery of) Other Balance at
Beginning Costs and Accounts- Deductions- End
DESCRIPTION of Period Expenses Describe Describe of Period
--------- -------- -------- -------- ---------
<S> <C> <C> <C> <C> <C>
YEAR ENDED DECEMBER 31, 1996
Deducted from asset account:
Allowance for uncollectible accounts $ 345 $ 30 $0 $ 0 $ 375
====== ===== == ==== ======
Included as liability account:
Allowance for bad debts on liquidated reinsurers $1,060 ($150) $0 $752(1) $ 158
====== ===== == ==== ======
YEAR ENDED DECEMBER 31, 1995
Deducted from asset account:
Allowance for uncollectible accounts $ 315 $ 30 $0 $ 0 $ 345
====== ===== == ==== ======
Included as liability account:
Allowance for bad debts on liquidated reinsurers $1,349 $ 103 $0 $392(1) $1,060
====== ===== == ==== ======
YEAR ENDED DECEMBER 31, 1994
Deducted from asset accounts:
Allowance for uncollectible accounts $ 412 ($ 97) $0 $ 0 $ 315
====== ===== == ==== ======
Included as liability account:
Allowance for bad debts on liquidated reinsurers $2,095 ($ 41) $0 $705(1) $1,349
====== ===== == ==== ======
</TABLE>
(1) Write-off of paid recoverable balances for insolvent/liquidated reinsurers
against provision established.
27
<PAGE> 9
SCHEDULE 5 - SUPPLEMENTAL INSURANCE INFORMATION
PROPERTY/CASUALTY INSURANCE SUBSIDIARIES
YEAR ENDED DECEMBER 31, 1996, 1995 AND 1994
<TABLE>
<CAPTION>
(Thousands of dollars)
RESERVES CLAIMS AND CLAIM
FOR ADJUSTMENT EXPENSES
UNPAID DISCOUNT INCURRED RELATED TO AMORTIZATION
DEFERRE CLAIMS IF ANY ------------------- OF DEFERRED PAID CLAIMS
POLICY AND CLAIM DEDUCTED (1) (2) POLICY AND CLAIM
ACQUISITION ADJUSTMENT IN UNEARNED EARNED INVESTMENT CURRENT PRIOR ACQUISITION ADJUSTMENT PREMIUMS
COSTS EXPENSES RESERVES PREMIUMS PREMIUMS INCOME YEAR YEAR COSTS EXPENSES WRITTEN
----------- ---------- --------- -------- -------- ---------- ------- ----- ----------- ----------- --------
YEAR ENDED DECEMBER 31:
Net of Reinsurance
- ------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1996 $3,992 $26,532 -- $13,857 $51,854 $3,151 $37,651 $1,559 $9,116 $42,675 $53,420
1995 3,343 29,997 -- 12,291 45,701 3,492 31,282 (248) 7,141 39,452 46,663
1994 3,235 38,415 -- 11,329 41,126 3,674 29,106 18 6,098 42,334 38,020
<CAPTION>
Gross of Reinsurance
- --------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1996 $3,992 $55,300 -- $17,925 $73,568 $3,151 $52,711 ($ 930) $9,116 $62,633 $74,259
1995 3,343 66,152 -- 17,234 69,602 3,492 45,395 660 7,141 71,403 72,025
1994 3,235 80,886 -- 14,811 66,846 3,674 46,262 (774) 6,098 64,981 65,547
</TABLE>
28
<PAGE> 10
McM CORPORATION
ANNUAL REPORT TO SHAREHOLDERS
FOR THE YEAR ENDED
DECEMBER 31, 1996
29
<PAGE> 11
Corporate Mission and Profile
Mission
To market specialized insurance products within well defined
market areas at competitive prices and with exceptional service to
deliver better than average returns on investor capital.
Profile
McM Corporation is an insurance holding company headquartered in
Raleigh, North Carolina, which owns these major operating
subsidiary corporations:
Occidental Fire & Casualty Company of North Carolina
Raleigh, North Carolina
Wilshire Insurance Company
Raleigh, North Carolina
Contents
- --------------------------------------------------------------------------------
IFC Corporate Mission and Profile
Consolidated Financial Highlights
Common Stock
Report to Shareholders
Market Overview
Management's Discussion and Analysis of
Financial Condition and Results of Operations
Consolidated Balance Sheets
Consolidated Statements of Operations
Consolidated Statements of Shareholders' Equity
Consolidated Statements of Cash Flows
Notes to Consolidated Financial Statements
Report of Independent Auditors
Summary of Quarterly Results of Operations
Officers and Directors
Corporate Information
30
<PAGE> 12
Selected Financial Data
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------
McM CORPORATION AND SUBSIDIARIES 1996 1995 1994 1993 1992
- -----------------------------------------------------------------------------------------------------------------
(Thousands of dollars, except per share data)
<S> <C> <C> <C> <C> <C>
Assets $112,870 $126,568 $137,665 $158,984 $187,006
Liabilities 91,215 103,328 117,258 139,262 167,500
Retained earnings 15,553 16,623 14,413 13,059 13,354
Shareholders' equity 21,655 23,240 20,407 19,722 19,506
Net premiums earned 51,854 45,701 41,126 51,043 53,889
Net investment income 3,159 3,497 3,684 5,298 6,564
Realized investment gains 40 123 122 1,797 666
Total revenue 55,698 49,571 45,304 58,293 61,291
(Loss) income from continuing operations (788) 2,210 1,354 (295) (3,764)
(Loss) income from discontinued operations 0 0 0 0 31
Net (loss) income (788) 2,210 1,354 (295) (3,733)
Per share data:
Shareholders' equity $ 4.63 $ 4.97 $ 4.37 $ 4.22 $ 4.17
(Loss) income from continuing operations $ (0.17) 0.47 0.29 (0.06) (0.81)
Net (loss) income $ (0.17) 0.47 0.29 (0.06) (0.80)
Cash dividends $ 0.06 0.00 0.00 0.00 0.00
</TABLE>
Common Stock
- -------------------------------------------------------------------------------
McM Corporation Common Stock is traded on the national
over-the-counter securities market, under the NASDAQ symbol,
McMc.
The number of record shareholders of McM Corporation is 883 as
of December 31, 1996.
The table below sets forth by quarters, for the years 1996 and
1995, the range of the high and low bid prices of McM
Corporation's Common Stock as reported in The Wall Street
Journal. Dividends of $.02 per share were paid for the second,
third, and fourth quarters. See Management's Discussion and
Analysis and Note B to the consolidated financial statements
for information regarding restrictions on the ability of McM's
subsidiaries to transfer funds to McM and discussion regarding
nonpayment of dividends.
<TABLE>
<CAPTION>
1996 1995
High Low High Low
------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
First Quarter $4 3/4 $3 1/2 $2 7/8 $2 1/2
Second Quarter 6 1/8 5 1/2 3 1/8 2 3/4
Third Quarter 5 7/8 5 1/4 3 1/2 2 3/4
Fourth Quarter 5 3/4 5 1/4 4 7/8 3 1/2
------------------------------------------------------------------------------------
</TABLE>
31
<PAGE> 13
REPORT TO SHAREHOLDERS
McM Corporation's results for the year 1996 showed a loss of $788,000.
The loss experienced in the property and casualty operations is primarily
attributable to higher claims severity in the commercial automobile liability
line of business and increased claims frequency in other ongoing lines of
business throughout the year 1996. The level of claims severity experienced in
the fourth quarter of 1996 in the commercial automobile liability business was
the highest level experienced in this line of business in the past sixteen
quarters. We do not expect a continuation of this unusual level of severity.
The Company, after a thorough analysis of fourth quarter and 1996
results and related experience levels, strengthened overall loss reserves by
approximately $3.5 million. Although this action significantly impacted results
for the current year, we believe it was prudent and appropriate under the
circumstances and certainly positions the Company for improved results in the
future.
Consolidated revenues for the year 1996 were $55,698,000 compared to
$49,571,000 for the same period in 1995. This increase in consolidated revenues
reflects growth in the private passenger automobile line of business and
reduction in the premiums being ceded to the Company's reinsurers. The Company
continues to place its reinsurance with high quality and financially sound
reinsurers which specialize in commercial and private passenger automobile
coverages.
The gross investment income of the Company was $3,616,000 for the year
1996 compared to $3,971,000 for the year 1995. This decline of $355,000 in
investment income results from a decrease in invested assets. Consolidated
assets at December 31, 1996, totalled $112,870,000 compared to $126,568,000 at
December 31, 1995. The decrease in consolidated assets can be primarily
attributed to the continued settlement of claims related to the discontinued
lines of business and the acceleration of claims settlement for ongoing lines of
business. Consolidated liabilities at December 31, 1996, totalled $91,215,000
compared to $103,328,000 for the year 1995. This $12.1 million decline in
liabilities of the Company reflects the settlement of claims on the discontinued
business and the acceleration of claims payments.
As set forth in previous reports to Shareholders, the McMillen Trust,
which owns 66% of the outstanding stock of McM Corporation, filed a petition on
behalf of the Trust's beneficiaries in the Chancery Court of Delaware on
December 2, 1986, seeking relief from the requirement of the Trust that the
Trust own at least 65% of the shares of McM Corporation. The Court, on December
10, 1987, decided that the Trust
32
<PAGE> 14
must divest itself of its ownership of the shares of McM Corporation and
invest the proceeds in a diversified portfolio for the benefit of present and
future beneficiaries of the Trust. In April 1993, the Court granted the
petition of the Wilmington Trust Company, Trustee of the McMillen Trust, for a
clarification of existing orders to make clear, among other things, that the
timing and terms of any such disposition or sale of the Trust's shares shall be
determined in the sound discretion of the Trustee.
McM Corporation on February 4, 1997, announced that the Trustee of the
McMillen Trust, then holder of 65.9% of the stock of McM Corporation, had
informed the Company that the Trustee had granted to McM Acquisition
Corporation an option to purchase all of the Trust's shares at $6.20 per share,
such option to expire March 1, 1998. The announcement further stated that McM
Acquisition Corporation was controlled by a private investor and real estate
developer, Mr. M. Roland Britt, who has filed a Form 13D with the Securities
and Exchange Commission which shows that the possible purchase of the Trust's
shares is subject to the ability of McM Acquisition Corporation to obtain the
necessary financing as well as North Carolina Department of Insurance and other
regulatory approvals. The announcement included the statement that McM
Corporation is not a party to the option agreement and cannot predict whether
McM Acquisition Corporation will exercise its option or would be able to obtain
the required approvals and financial arrangements.
McM Corporation further announced on February 4, 1997, that in a
separate, independent action, the Company had already agreed to provide McM
Acquisition Corporation confidential access to the Company records and
information to enable McM Acquisition Corporation to conduct due diligence
reviews and to pursue appropriate financial arrangements for a possible
acquisition of all of McM Corporation's shares, such agreement to expire May 31,
1997. The announcement further stated that McM Corporation had granted McM
Acquisition Corporation an exclusive period during which McM will continue its
policy of not soliciting acquisition offers.
As reported to you in previous reports the McM Board of Directors has
discontinued its efforts to sell the remaining companies in the McM Group of
Companies. The Board has also continued the services of PaineWebber, Inc. in the
role of financial advisor to the McM Group of Companies. Management continues to
believe that the progress made thus far has placed the property and casualty
companies in a position to grow profitably in spite of the current highly
competitive market atmosphere and the loss in 1996.
33
<PAGE> 15
The discontinuance of the sale process has allowed management to
concentrate its focus on increasing shareholder value. All aspects of the
property and casualty coverages written by the Companies are continually being
evaluated in order to appropriately react to the rapidly changing marketplace.
This continuing evaluation enables management to more timely move its operating
systems to advanced and leading edge technologies thereby providing competitive
products and services to our policyholders and agents.
The investment portfolios of Occidental Fire & Casualty Company and
Wilshire continue to be comprised almost entirely of high quality government
securities. These conservative investments generally produce lower investment
yields. However, the liquidity provided in these conservative portfolios ensures
that policyholders' claims are paid in a timely manner. The McM Group has no
investments in real estate. The stock of Wilshire Insurance Company, the wholly
owned subsidiary of Occidental Fire, is the only stock investment in the
investment portfolios of the insurance companies.
As reported in previous annual reports to you, insurance regulators and
other non-governmental insurance rating entities continue their intensive
oversight of an insurance company's financial health and operating activities.
This is exemplified by the adoption and implementation of Risk-Based Capital
standards for all property and casualty insurance companies by the National
Association of Insurance Commissioners in 1994. McM's property and casualty
insurance subsidiaries' capital positions and other indicators of financial
solvency continue to be well in excess of any regulatory action thresholds
defined in the Risk-Based Capital framework.
The Board of Directors, on a quarterly basis, carefully reviews the
financial position of the Company to determine the advisability of the payment
of a cash dividend to shareholders. During the year 1996 McM declared and paid
three quarterly dividends of $.02 per share to its shareholders. However, in
light of McM's results for the fourth quarter of 1996 and after careful
consideration of all other relevant factors, the Board of Directors decided to
forgo a quarterly dividend payable in the first quarter of 1997. The Board of
Directors will continue to evaluate all relevant factors in the determination of
future dividend payments.
In summary, we are very disappointed with the overall results for the
year 1996. The level of claims severity and claims frequency has been thoroughly
reviewed. Management is now satisfied that these unusual claims patterns
constitute an aberration
34
<PAGE> 16
and that the property and casualty companies' existing underwriting practices
and claims procedures are performing properly. Also, after an analysis of
fourth quarter and 1996 results and current reserve levels, it was deemed
prudent to strengthen overall loss reserves by approximately $3.5 million. We
are confident that the actions taken will ensure the continuation of the
positive trends that have emerged over the last several years in the Company
and will result in overall profitability in 1997. Management continues to
believe that, in spite of the results for the year 1996 and the limited capital
position, the McM Group of Companies is well positioned to continue improving
the financial position and profitability of the Company and enhancing
shareholder value.
George E. King
Chief Executive Officer and Chairman
Stephen L. Stephano
President and Chief Operating Officer
35
<PAGE> 17
Market Overview
McM Corporation provides its property and casualty products and
services through two North Carolina subsidiaries, Occidental Fire & Casualty
Company of North Carolina and Wilshire Insurance Company.
Currently the focus of these companies is transportation insurance.
Both Wilshire and Occidental provide a competitive market to the trucking
industry for local, intermediate and long haul coverages. Occidental also writes
nonstandard private passenger auto coverages in select geographical areas.
Occidental Fire & Casualty Company of North Carolina actively markets
local, intermediate and long haul coverages in seventeen states utilizing
fourteen managing general agents. Non-standard auto coverages are marketed
through Occidental's branch office located in Scottsdale, Arizona, and one
managing general agent. The majority of the commercial auto premium volume is
produced through the Company's annual bill program.
The insureds of the Wilshire Insurance Company are served by the
Marketing and Service Center located in Lancaster, California, and four
managing general agents supervised by the home office. The California marketing
unit deals directly with selected local retail agents in the West Coast truck
marketplace utilizing a specialized monthly direct bill policy. The managing
general agents market intermediate and long haul coverages through an annual
bill program.
The home office located in Raleigh, North Carolina, provides general
management for both Occidental Fire & Casualty and Wilshire Insurance Company
operations including the corporate staff for claims, accounting, legal, data
processing, human resources and investment functions. Also located in the home
office are the marketing, underwriting and service functions for all commercial
automobile business written through managing general agents.
36
<PAGE> 18
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
McM Corporation and Subsidiaries
REVIEW OF OPERATIONS
McM Corporation reported a consolidated net loss for 1996 of $788,000
or $.17 per share compared to net income of $2,210,000 or $.47 per share for
1995 and net income of $1,354,000 or $.29 per share for 1994. Consolidated
results for 1996 were significantly affected by an unusually high level of
claims severity, particularly during the fourth quarter, in the property and
casualty operation's commercial automobile liability line of business.
Consolidated results were also affected by increased frequency in its other
insurance coverages throughout 1996. The Company, as a result of this
unfavorable underwriting experience, strengthened overall reserves by
approximately $3.5 million at year end 1996.
Consolidated results for 1995 and 1994 showed a trend of improving loss
ratios and overall underwriting results when compared to previous years.
Consolidated results for 1994 were favorably impacted by the reduction of
administrative expenses related to a legal action against McM in connection with
the final disposition of its life insurance operations in 1991, in which action
McM was ultimately successful.
Consolidated revenues increased approximately 12.4% in 1996 compared to
1995 following an increase of 9.4% in 1995 when compared to 1994. This trend of
increasing revenues reversed the declines experienced in 1994 and 1993 and
reflects the Company's ongoing commitment to continued moderate growth in
property & casualty insurance premiums. Consolidated revenues showed decreases
of approximately 22.3% and 4.9% in 1994 and 1993, respectively.
Net earned property and casualty insurance premiums for 1996 were $51.9
million compared to $45.7 million in 1995 and $41.1 million in 1994. As
mentioned above, this trend in increasing net premium revenue reflects
management's commitment to moderate premium growth in the insurance coverages it
offers. Gross written premium in the Company's commercial auto lines of
business, which comprised approximately 79.9% of gross written premiums in 1996,
showed a slight decrease of approximately 1.4% to $59.3 million when compared to
1995. Gross production of the Company's private passenger auto coverages in
1996, comprising 20.1% of gross written premiums in 1996, showed an increase of
26.1% to $14.9 million when compared to 1995. The decrease in commercial auto
premiums during 1996 reflects market conditions which have become increasingly
more competitive and price sensitive. The growth in private passenger auto
premiums over the last two years shows the Company's commitment to diversify its
premium portfolio. The overall
37
<PAGE> 19
increases in premium writings seen in 1995 and 1996 follows self induced
reductions in 1994 and 1993. During 1994 and 1993 the Company eliminated
unprofitable business in targeted markets and took measures to improve the
performance of its agency force including terminating relations with three
managing general agents who had been producing unprofitable commercial
automobile business. During this period the Company also established mechanisms
to help control future premium growth.
To help control premium growth, management increased the level of
premiums ceded to the Company's reinsurers by entering into quota share
reinsurance arrangements for its commercial auto liability and private passenger
automobile coverages. In 1996, the Company maintained a 30% quota share
reinsurance arrangement on its private passenger business (reduced from 40% in
1995) and a 5% quota share arrangement, which was reduced in 1995 from 10% in
1994, on its commercial automobile liability business retained after excess of
loss reinsurance coverage. The level of quota share participation necessary to
help control premium growth is reviewed annually by management.
The reduction in total revenues in 1994 mentioned above was also
impacted by a $1.6 million decline in net investment income, excluding realized
investment gains. The decline in net investment income for 1994 was attributed
to an overall reduction of $16.0 million or 19.3% in invested balances. Net
investment income showed moderate decreases of $338,000 and $187,000 in 1996 and
1995, respectively. Invested balances decreased $6.1 million or 9.7% in 1996
when compared to 1995. Realized investment gains of $40,000 are included in 1996
revenues compared to $123,000 in 1995 and $122,000 in 1994.
Prior to 1989, property and casualty insurance writings focused on
liability, cargo and physical damage coverages associated with the
transportation market with a primary emphasis on commercial trucking insurance.
To diversify its premium distribution, Occidental Fire & Casualty entered the
nonstandard personal auto market in 1989. The Company's plan for premium
diversification has continued as the proportionate share of private passenger
auto business increased to approximately 20.1% of gross written property and
casualty premium in 1996 compared to 16.5% and 11.0% in 1995 and 1994,
respectively. During 1994 and 1993, management re-engineered the underwriting
controls for this portion of the Company's business. This re-engineering effort
contributed to a decrease in private passenger written premiums in 1994 as
management kept production at minimum levels while new rates, underwriting
guidelines and personnel with extensive experience in the complexities of this
market were integrated into this book of business.
Over the last several years the Company also placed a heavy emphasis
on improving the profitability of the Company's commercial
38
<PAGE> 20
truck business. In 1994 and 1995 management implemented strategies to help
reduce overall loss ratios and improve the product mix within this portion of
the Company's business. Underwriting results for cargo (inland marine) and auto
physical damage coverages have been historically more profitable than
commercial auto liability coverages because claim costs for property coverages
are easier to determine and claims are settled more rapidly. Commercial auto
written premiums comprised 79.9% of gross written property & casualty premium
in 1996 compared to 83.5% and 89.0% in 1995 and 1994, respectively. The
percentage of cargo and commercial auto physical damage premiums to total
commercial auto premiums increased to 29.9% in 1996 compared to 26.6% and 23.3%
in 1995 and 1994, respectively.
Net investment income included in consolidated revenues was $3.2
million in 1996, $3.5 million in 1995 and $3.7 million in 1994. The decline in
investment income is primarily the result of reductions in invested asset
balances and overall lower investment yields. The decrease in invested balances
is attributed to the continued settlement of claims related to discontinued
lines of business and the acceleration of claims settlement relating to ongoing
lines of business. Overall, liabilities decreased 11.7% or $12.1 million during
1996 when compared to 1995 and have been reduced by $26.0 million since 1994.
As mentioned previously, realized investment gains have not materially
changed over the last three years. These gains totalled $40,000, $123,000 and
$122,000 for 1996, 1995 and 1994, respectively. At December 31, 1996, the
market value of the total long-term fixed income portfolio was $19,000 less than
amortized cost and $84,000 greater than its carrying value. The unrealized gain
of $84,000 relates to those investments the Company intends to hold to
maturity. The full value of these securities will be realized as they mature
(see Note F to the consolidated financial statements). At December 31, 1995,
the market value of the fixed income portfolio was $664,000 greater than its
amortized cost and $199,000 greater than its carrying value.
The overall ratio of net loss and settlement expenses to net premiums
earned was 75.6% for 1996 compared to 67.9% for 1995 and 70.8% for 1994. As
mentioned previously, the Company experienced an unusually high level of claims
severity, mostly in the fourth quarter of 1996, in the property and casualty
operation's commercial automobile liability line of business. In addition,
property and casualty operations experienced increased frequency in its other
lines of business including private passenger auto liability and commercial and
private passenger auto physical damage coverages throughout 1996. These factors
resulted in the strengthening of overall reserves for the 1996 accident year by
approximately $3.5 million, net of reinsurance, at December 31, 1996. This
reserve strengthening included $1.2 million for commercial auto liability, $1.5
million for commercial auto
39
<PAGE> 21
physical damage and approximately $800,000 for private passenger auto
coverages. Upon underwriting reviews of individual policy and claim files,
management firmly believes its underwriting practices are solid and does not
anticipate the continuation of the claims severity experienced in commercial
automobile liability.
Net losses and settlement expenses incurred in 1996 also includes adverse
development of approximately $1.6 million on reserves of prior accident years.
This development includes adverse reserve development of approximately $572,000
in private passenger auto liability reserves, $1.2 million in private passenger
and commercial physical damage and inland marine reserves and $613,000 related
to discontinued lines of business $382,000 of which relates to workers
compensation reserves. This adverse development, which totals $2.4 million, was
partially offset by favorable reserve development of $800,000 in the commercial
auto liability line of business.
The ratio of net loss and settlement expenses to net premiums earned for
1995 and 1994 reflected improved underwriting results and favorable or minimal
adverse development on reserves of prior accident years.
The Company's ratio of underwriting, acquisition and administrative
expenses to net earned premium ("expense ratio") continued to reflect the
declining trend seen over the last three years. Increased production levels
discussed previously, coupled with budgetary control and reduction measures
emphasized by management, have contributed to this declining trend. The expense
ratio for 1996 declined 2.4 percentage points to 33.3% when compared to the
expense ratio of 1995. The expense ratios for 1995 and 1994 were 35.7% and
36.1%, respectively.
As discussed previously, the Company maintained a 30% quota share
reinsurance treaty on its private passenger auto business in 1996. This
reinsurance treaty was entered into in 1993 to help reduce the Company's
statutory net writings to surplus ratio and to help control future premium
growth in that market. This treaty was subsequently reduced by 10% in 1996 from
a 40% cession rate to the current 30% rate. A portion of the Company's
retained commercial auto liability business was originally included in this
treaty but was eliminated in 1996. The Company also maintained a 5% quota share
reinsurance treaty on its net retained commercial auto liability business in
1996 and 1995 (10% for 1994). Management annually evaluates the necessity and
levels of these quota share arrangements and makes adjustments when
appropriate.
The Company utilizes a reinsurance intermediary with which it has a
long term relationship to assist in the development, placement and maintenance
of the Company's reinsurance program. The Company's current reinsurance program
has been placed with high quality and financially sound reinsurers specializing
in personal
40
<PAGE> 22
and commercial auto business. The creditworthiness of the Company's reinsurers
are continually reviewed by management and the intermediary. The majority of
the Company's reinsurance is placed through the London reinsurance market.
Participating reinsurers are generally very large international reinsurers
with capital and surplus in excess of $100 million and hold ISI or S&P ratings
of BBB or better. Participating Lloyds syndicates are well regarded syndicates
which have been approved by the National Association of Insurance Commissioners
("NAIC"). The Company's U.S. reinsurers are all rated A- or higher by A.M.
Best. For those reinsurers not admitted by the Company's state of domicile,
collateral is secured for the exposure ceded to them in the form of letters of
credit or other reinsurer funds held by the Company. This collateral would
minimize the impact of a potential reinsurer insolvency on the Company's
operations. A schedule of the Company's reinsurers whose balances are
approximately 10% of McM's shareholders' equity or greater is provided below:
<TABLE>
<CAPTION>
Ceded
Reinsurer Balances Receivable
--------- -------------------
(Thousands of dollars)
<S> <C>
Lloyds of London $ 9,247
CNA International 4,780
Unionamerica 4,676
Zurich Re 3,481
AXA Reassurance 2,836
All other 11,558
-------
Total $36,578
</TABLE>
The allowance for bad debts on liquidated reinsurers relating to
discontinued property and casualty programs was decreased by $150,000 in 1996,
increased by $103,000 in 1995 and decreased by $41,000 in 1994. Other than a
$2.5 million litigation settlement in 1993, overall exposure to losses
associated with discontinued property and casualty business has decreased
significantly over the last several years and has not had a material impact on
operations since 1990.
In the second quarter of 1995, the Company resolved a long standing
uncertainty concerning Proposition 103 by settling this issue with the
California Department of Insurance. The Company fully recognized this settlement
and its related cost in 1995 by including in consolidated results a $500,000
reduction of earned premiums attributable to this settlement. Offsetting this
charge and also included in results for 1995 is a $539,000 favorable arbitration
settlement related to discontinued property and casualty programs.
Amortization of deferred policy acquisition costs from continuing
operations was $9.1 million in 1996, compared to $7.1 million in 1995 and $6.1
million in 1994. Direct and assumed premiums written increased by $2.2 million
in 1996 and $6.5 million
41
<PAGE> 23
in 1995, resulting in an increase in the related amortization of deferred
policy acquisition costs. Conversely, a reduction in direct and assumed premium
written of $7.2 million in 1994 resulted in a decrease in the related deferral
and amortization of policy acquisition costs.
INCOME TAXES
McM Corporation files a consolidated tax return. The Company had
cumulative net operating loss tax carryforwards of approximately $88.0 million
as of December 31, 1996 (see Note D to the consolidated financial statements).
Subject to certain limitations and alternative minimum tax considerations,
future operations can earn up to the amount of these loss carryforwards without
being subject to federal income taxation.
LIQUIDITY AND CAPITAL RESOURCES
By statute, the majority of the Company's investments are required to
be held in investment grade securities which provide ample protection for both
the policyholder and the shareholder. Significant amounts of short-term
investments are held to meet the liquidity needs of the property and casualty
insurance operations.
As shown in the Consolidated Statements of Cash Flows, the Company
experienced negative cash flows from operations on a consolidated basis of $4.4
million in 1996 compared to $4.0 million in 1995 and $14.6 million in 1994. The
main source of the Company's cash flows is derived from its property and
casualty subsidiaries.
The Company's property and casualty subsidiaries experienced
consolidated negative cash flows of $683,000, $2.7 million and $19.2 million in
1996, 1995 and 1994, respectively. The negative cash flows for the property and
casualty operations can be primarily attributed to the settlement of claim
liabilities, including settlements on discontinued run-off business and the
decreased premium production levels, a primary source of long and short-term
liquidity, in 1994 and 1993. The reduction in written premiums during 1994 and
1993 was a result of management's successful strategy to reduce premium writings
in unprofitable markets and to reduce the Company's net writings to surplus
ratio. As previously mentioned, the property and casualty companies have
experienced moderate growth in premium writings in each of the last two years.
Management expects this increasing trend to continue in 1997, which trend should
provide further improvement in the property and casualty operations cashflows.
Liabilities for losses and loss settlement expenses and policyholder liabilities
decreased $10.8 million in 1996, $12.5 million in 1995 and $19.7 million in
1994.
Short-term investment balances remained relatively stable during 1996,
declining $700,000 to $14.1 million at December 31, 1996,
42
<PAGE> 24
compared to $14.8 million at December 31, 1995. As mentioned above, the Company
maintains fairly significant levels of short-term investments to meet its
liquidity needs. Total consolidated cash and invested assets at December 31,
1996, were approximately $58.6 million compared to $64.6 million at the end of
1995. The decline in cash and invested assets during 1996 is primarily
attributed to maturities of long-term investments which were absorbed by
operations as discussed above. Management believes the current level of cash
and short-term balances, as well as anticipated sources of cash in 1997, are
more than adequate to meet projected expenditures during the next year and that
the long-term investment portfolio is structured to meet the Company's
long-term liquidity needs.
At December 31, 1995, securities with an amortized cost of $25.8
million previously classified as held-to-maturity were transferred to the
available-for-sale portfolio. As a result of this transfer, unrealized gains of
$298,000 were recognized in the unrealized appreciation component of
shareholders' equity. This transfer was made to provide the Company greater
flexibility in managing its portfolio and was done in accordance with the
implementation guidance issued in November 1995 by the staff of the Financial
Accounting Standards Board.
Of the total cash and invested assets at December 31, 1996,
approximately 62.9% or $36.9 million were comprised of fixed maturities
available-for-sale and 10.1% or $5.9 million were classified as securities
held-to-maturity. Cash and short-term investments totalling $15.8 million
comprised the remaining 27.0% of the investment portfolio. At December 31, 1995,
approximately 49.4% or $31.9 million of cash and invested assets were comprised
of fixed maturities available-for-sale, 25.1% or $16.2 million were recorded as
securities held-to-maturity and 25.5% or $16.5 million represented cash and
short-term investments. The fixed maturity portfolio has a range of expected
maturities which, as mentioned previously, management believes are adequate to
meet long-term liquidity needs. The total market value of fixed maturity
investments was $42.9 million and $48.3 million at December 31, 1996, and 1995,
respectively. These market values were comprised fixed maturities
available-for-sale totalling $36.9 million and $31.9 million and Fixed
maturities held-to-maturity totalling $5.9 million and $16.4 million at
December 31, 1996 and 1995, respectively
Statutory capital positions of the property and casualty insurance
companies are closely monitored by the Company. In addition, the NAIC adopted
Risk-Based Capital ("RBC") requirements for property and casualty insurance
companies in December 1993 to be applied to annual statutory financial
statements beginning December 31, 1994. Annual statutory financial statements
are filed with state insurance regulators on or before March 1 following each
year's end.
43
<PAGE> 25
RBC was developed to evaluate the adequacy of statutory capital and
surplus in relation to investment and insurance risks such as asset quality,
asset and liability matching, loss reserve adequacy and other business
environmental factors. The RBC formula is used by state insurance regulators as
an early warning tool to identify, for the purpose of initiating regulatory
action, insurance companies that potentially are inadequately capitalized.
Regulatory compliance is determined by a ratio of the enterprise's regulatory
total adjusted capital, as defined by the NAIC, to its authorized control level
RBC, as defined by the NAIC. Enterprises below specific ratios are classified
within certain levels, each of which requires specific corrective action. The
ratios of total adjusted capital to authorized control level RBC for McM's
property and casualty insurance subsidiaries are in excess of any regulatory
action thresholds defined by the NAIC.
Combined statutory capital and surplus of the property and casualty
subsidiaries decreased $916,000 to $18.2 million at December 31, 1996, compared
to $19.2 million at December 31, 1995.
As previously reported, the Administrative Consent Order agreed to by
the Company and the Commissioner of the North Carolina Department of Insurance
on May 24, 1993, was vacated by the Commissioner in June 1994 upon management's
satisfactory compliance to the terms of the Consent Order. The Consent Order
directly concerned the property & casualty operations' net premium writings to
surplus ratio.
At December 31, 1996, consolidated shareholders' equity was $21.7
million, a decrease of 6.8% when compared to $23.2 million at December 31, 1995.
The Company's main source of funds from which dividends are paid to its
shareholders is its insurance subsidiaries which are subject to certain
restrictions as to the amount of dividends that can be paid in a given year.
These restrictions are discussed in Note B to the consolidated financial
statements. During 1996 the Company paid three quarterly dividends of $.02 per
share. Upon careful consideration of all relevant factors, including the net
loss reported in the fourth quarter of 1996, McM's Board of Directors decided to
forego a quarterly dividend payable im the first quarter of 1997. The Board of
Directors will continue to carefully consider all relevant factors in
determining the payment of dividends in the future.
44
<PAGE> 26
Consolidated Balance Sheets
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------------
December 31
McM CORPORATION AND SUBSIDIARIES 1996 1995
- -------------------------------------------------------------------------------------------------------------------------
(Thousands of dollars)
<S> <C> <C>
ASSETS
Invested assets:
Fixed maturity securities available-for-sale, at fair value (cost: 1996 - $36,938;
1995 - $31,477) $ 36,873 $ 31,942
Fixed maturity securities held-to-maturity, at amortized cost (fair value: 1996 - $6,022;
1995 - $16,429) 5,938 16,230
Short-term investments 14,061 14,848
- -------------------------------------------------------------------------------------------------------------------------
56,872 63,020
Cash 1,776 1,637
Accrued investment income 803 840
Premiums receivable 9,380 9,935
Reinsurance balances recoverable on:
Paid losses and settlement expenses 3,676 3,461
Unpaid losses and settlement expenses 28,768 36,155
Unearned premiums 4,068 4,943
Deferred policy acquisition costs 3,992 3,343
Equipment, at cost less accumulated depreciation (1996 - $1,699; 1995 - $1,437) 1,331 1,105
Other assets 2,204 2,129
- -------------------------------------------------------------------------------------------------------------------------
TOTAL ASSETS $112,870 $126,568
=========================================================================================================================
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities:
Reserves for losses and settlement expenses $ 55,300 $ 66,152
Unearned premiums 17,925 17,234
Other policyholder funds 6,580 7,247
Amounts payable to reinsurers 3,089 5,008
Accrued expenses and other liabilities 8,321 7,687
- -------------------------------------------------------------------------------------------------------------------------
91,215 103,328
Commitments and contingencies - Notes A, B, C and H
Shareholders' equity:
Common Stock, par value $1 per share - authorized 10,000,000 shares,
issued and outstanding: 1996 - 4,678,183; 1995 - 4,675,038 4,678 4,675
Additional paid-in capital 1,489 1,477
Unrealized (loss) gain on securities available-for-sale (65) 465
Retained earnings 15,553 16,623
- -------------------------------------------------------------------------------------------------------------------------
TOTAL SHAREHOLDERS' EQUITY 21,655 23,240
- -------------------------------------------------------------------------------------------------------------------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $112,870 $126,568
=========================================================================================================================
</TABLE>
See notes to consolidated financial statements.
45
<PAGE> 27
Consolidated Statements of Operations
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------
Year Ended December 31
McM CORPORATION AND SUBSIDIARIES 1996 1995 1994
- --------------------------------------------------------------------------------------------------------------------
(Thousands of dollars, except per share data)
<S> <C> <C> <C>
Revenues
Premiums earned $ 73,568 $ 69,602 $ 66,846
Premiums ceded (21,714) (23,901) (25,720)
------------------------------------
Net premiums earned 51,854 45,701 41,126
Investment income, less investment expense (1996 - $457; 1995 - $474;
1994 - $459) 3,159 3,497 3,684
Realized investment gains 40 123 122
Other income 645 250 372
- ------------------------------------------------------------------------------------------------------------------
TOTAL REVENUES 55,698 49,571 45,304
Losses and Expenses
Losses and settlement expenses 51,781 46,055 45,488
Losses and settlement expenses ceded (12,571) (15,021) (16,364)
------------------------------------
Net losses and settlement expenses 39,210 31,034 29,124
Underwriting, acquisition and administrative expenses 17,426 16,224 14,867
(Recoveries of) provision for bad debts on liquidated reinsurers (150) 103 (41)
- ------------------------------------------------------------------------------------------------------------------
TOTAL LOSSES AND EXPENSES 56,486 47,361 43,950
- ------------------------------------------------------------------------------------------------------------------
NET (LOSS) INCOME ($ 788) $ 2,210 $ 1,354
==================================================================================================================
Per Share Data
Net (loss) income per share ($ 0.17) $ 0.47 $ 0.29
==================================================================================================================
</TABLE>
See notes to consolidated financial statements.
46
<PAGE> 28
Consolidated Statements of Shareholders' Equity
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------
Net
Additional Unrealized
McM CORPORATION Common Paid-in Investment Retained
AND SUBSIDIARIES Stock Capital Gain (Loss) Earnings
- ------------------------------------------------------------------------------------------------------------------------
(Thousands of dollars)
<S> <C> <C> <C> <C>
BALANCES AT JANUARY 1, 1994 $ 4,675 $1,477 $ 511 $13,059
Net income for 1994 1,354
Change in net unrealized loss or gain on securities available-for-sale (669)
- ---------------------------------------------------------------------------------------------------------------------
BALANCES AT DECEMBER 31, 1994 4,675 1,477 (158) 14,413
Net income for 1995 2,210
Change in net unrealized loss or gain on securities available-for-sale 623
- ---------------------------------------------------------------------------------------------------------------------
BALANCES AT DECEMBER 31, 1995 4,675 1,477 465 16,623
Net loss for 1996 (788)
Change in net unrealized loss or gain on securities available-for-sale (530)
Employee stock purchases 3 12
Dividends declared and paid (282)
- ---------------------------------------------------------------------------------------------------------------------
BALANCES AT DECEMBER 31, 1996 $ 4,678 $1,489 ($ 65) $15,553
=====================================================================================================================
</TABLE>
See notes to consolidated financial statements.
47
<PAGE> 29
Consolidated Statements of Cash Flows
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------------------
Year Ended December 31
McM CORPORATION AND SUBSIDIARIES 1996 1995 1994
- -------------------------------------------------------------------------------------------------------------------------------
(Thousands of dollars)
<S> <C> <C> <C>
Operating Activities
Net (loss) income ($ 788) $ 2,210 $ 1,354
Adjustments to reconcile net (loss) income to net cash used by operating activities:
Policy liabilities (10,828) (12,461) (19,706)
Premiums receivable 555 (1,143) (244)
Accrued investment income 37 176 (251)
Net recoverable from reinsurers 6,128 6,625 3,342
Amortization of deferred policy acquisition costs 9,116 7,141 6,098
Policy acquisition costs deferred (9,765) (7,249) (5,801)
Other 1,150 673 590
- ------------------------------------------------------------------------------------------------------------------------------
CASH USED BY OPERATING ACTIVITIES (4,395) (4,028) (14,618)
Investing Activities
Fixed maturity securities available-for-sale:
Purchases (18,447) (109) (3,824)
Sales 0 3,377 3,372
Maturities 12,974 1,408 3,306
Fixed maturity securities held-to-maturity:
Purchases (1,118) (2,984) (10,107)
Maturities 11,362 120 3,095
Purchases of property and equipment, net (757) (474) (142)
Change in short-term investments 787 2,830 19,397
- ------------------------------------------------------------------------------------------------------------------------------
CASH PROVIDED BY INVESTING ACTIVITIES 4,801 4,168 15,097
- ------------------------------------------------------------------------------------------------------------------------------
Financing Activities
Employee stock purchases 15 0 0
Cash dividends paid (282) 0 0
- ------------------------------------------------------------------------------------------------------------------------------
CASH USED BY FINANCING ACTIVITIES (267) 0 0
- ------------------------------------------------------------------------------------------------------------------------------
NET INCREASE IN CASH $ 139 $ 140 $ 479
==============================================================================================================================
</TABLE>
See notes to consolidated financial statements.
48
<PAGE> 30
Notes to Consolidated Financial Statements
McM Corporation and Subsidiaries
NOTE A Significant Accounting Policies
Basis of Presentation: The consolidated financial statements have been prepared
in accordance with generally accepted accounting principles (GAAP) which, as to
the insurance subsidiaries, vary in some respects from statutory accounting
practices which are prescribed or permitted by the various state insurance
departments.
The consolidated financial statements include the accounts and
operations of McM and its wholly-owned subsidiaries. McM is actively engaged
through certain of its subsidiaries in the property and casualty insurance
business. All significant intercompany accounts and transactions have been
eliminated. The Company's subsidiaries are as follows:
Subsidiary Abbreviation
- --------------------------------------------------------------------------------
Property and Casualty:
Occidental Fire & Casualty Company of North Carolina OF&C
Wilshire Insurance Company Wilshire
Other:
Equity Holdings, Inc. Equity
- --------------------------------------------------------------------------------
The property and casualty insurance subsidiaries are primarily involved
in the sale of commercial automobile and private passenger automobile insurance.
The commercial automobile insurance consists primarily of liability, physical
damage and inland marine coverages. The commercial automobile lines of business
represented 80%, 84%, and 89% of gross written premium in 1996, 1995 and 1994,
respectively. Private passenger automobile insurance, which represents the
remainder of gross written premiums, consists primarily of liability and
physical damage coverages. The Company's products are generally marketed through
general and independent agents. In 1996, premiums were written in 27 states
throughout the U.S. Direct premiums written in California, all of which were for
commercial automobile insurance products, represented 34%, 37% and 40% of total
direct written premiums in 1996, 1995 and 1994, respectively.
Investments: Fixed maturity securities are classified as either held-to-maturity
or available-for-sale. Management determines the appropriate classification of
fixed maturity securities at the time of purchase and reevaluates such
designation as of each balance sheet date. The Company has identified and
accounted for its investments as follows:
49
<PAGE> 31
Securities held-to-maturity and available-for-sale: Debt securities are
classified as held-to-maturity when the Company has the positive intent and
ability to hold the securities to maturity. Held-to-maturity securities are
stated at amortized cost. Securities not classified as held-to-maturity are
classified as available-for-sale. Available-for-sale securities are stated at
fair value, with the unrealized gains and losses reported as a separate
component of shareholders' equity. The amortized cost of securities classified
as held-to-maturity or available-for-sale is adjusted for amortization of
premiums and accretion of discounts to maturity, or in the case of
mortgage-backed securities, over the estimated life of the security. Such
amortization is included in investment income. Realized gains and losses include
any declines in value judged to be other-than-temporary. The cost of securities
sold is based on the specific identification method. Short-term investments are
comprised of corporate master notes and United States Treasury Notes and Bills
maturing in twelve months or less. These investments are carried at fair value.
The Company had fixed maturity securities with a face value of
approximately $11.8 million and $16.1 million on deposit with various state
insurance departments at December 31, 1996, and 1995, respectively. The Company
also had $3.4 million in short-term investments held in a security trust as
collateral for assumed reinsurance balances at December 31, 1996 and 1995.
Cash: Cash represents cash balances deposited in banking institutions. Balances
invested in corporate master notes and other interest bearing cash equivalents
are included in short-term investments.
Equipment: Equipment is stated at cost less allowances for accumulated
depreciation which are computed principally on the straight-line method.
Recognition of Insurance Revenues: Premiums for property and casualty insurance
policies are recognized as revenues on a monthly pro rata basis over the terms
of the policies.
The Company utilizes a general agency force to market its annual
commercial automobile business and a portion of its private passenger automobile
business. As of December 31, 1996, agents' balances receivable of approximately
$3.9 million were associated with three general agents.
50
<PAGE> 32
Deferred Policy Acquisition Costs: Costs which vary with and are primarily
related to the production of property and casualty policies are deferred to the
extent recoverable and are amortized over the lives of the policies in
proportion to the recognition of premiums earned. Anticipated investment income
is considered in the evaluation of recoverability of unamortized deferred
acquisition costs.
Reserves for Losses and Settlement Expenses: Reserves for estimated losses are
determined on a case basis for reported claims and on estimates based on Company
experience for loss settlement expenses and incurred but not reported claims.
These liabilities give effect to trends in claims severity and other factors
which may vary as the losses are ultimately settled. Although considerable
variability is inherent in such estimates for losses and loss settlement
expenses, management believes that these liabilities are adequate. The estimates
are continually reviewed and, as adjustments to these liabilities become
necessary, such adjustments are reflected in current operations.
The reserves for losses include amounts assumed from involuntary pools
and other residual market mechanisms of the various states in which the
Companies have written policies. The estimated liability for the assumed pools
is recorded based on information provided to the Company by the pools.
Reinsurance: McM assumes and cedes reinsurance and participates in various pools
and associations. The reinsurance arrangements allow management to control
exposure to potential losses arising from large risks, and provide additional
capacity for growth. The reinsurance is effected under quota-share contracts and
by excess-of-loss contracts. Amounts recoverable from reinsurers for unpaid
losses and settlement expenses are estimated in a manner consistent with the
related liabilities associated with reinsured policies.
Income Taxes: The Company accounts for income taxes using the liability method.
Deferred tax assets, net of a valuation allowance, and liabilities are
recognized for the future tax consequences attributable to differences between
the financial statement carrying amounts of existing assets and liabilities and
their respective tax bases. Deferred tax assets and liabilities are measured
using enacted tax rates expected to apply to taxable income in the years in
which those temporary differences are expected to be recovered or settled. The
effect on deferred tax assets and liabilities of a change in tax rates is
recognized in income in the period that includes the enactment date.
Leases: The Company and its subsidiaries rent office space and
equipment under various operating lease agreements. The
51
<PAGE> 33
aggregate rental expense charged to operations was approximately $802,000 in
1996, $737,000 in 1995, and $658,000 in 1994. Future minimum lease commitments
require payments of approximately $642,000 in 1997 and $426,000 in 1998.
Use of Estimates: The preparation of financial statements requires management to
make estimates and assumptions that affect amounts reported in the financial
statements and accompanying notes. Such estimates and assumptions could change
in the future as more information becomes known which could impact the amounts
reported and disclosed herein.
New Accounting Standards: The Financial Accounting Standards Board ("FASB")
previously issued Statement of Financial Accounting Standards No. 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
be Disposed Of" ("SFAS 121"). SFAS 121 requires impairment losses to be recorded
on long-lived assets used in operations when indicators of impairment are
present and the undiscounted cash flows estimated to be generated by those
assets are less than the assets' carrying amount. SFAS 121 also addresses the
accounting for long-lived assets that are expected to be disposed of. Although
the Company adopted SFAS 121 in the first quarter of 1996, there was no impact
on current earnings.
The Company also adopted Statement of Financial Accounting
Standards No. 123, "Accounting for Stock-Based Compensation"
("SFAS 123") during 1996. See Note I for further discussion.
NOTE B Statutory Results and Dividend Restrictions
The reporting practices for McM's insurance subsidiaries prescribed or
permitted by state regulatory authorities ("statutory accounting") differ from
generally accepted accounting principles. OF&C (which includes Wilshire on a
statutory equity basis) reported to insurance regulatory authorities net income
of $49,000 in 1996, $2.0 million in 1995, and $578,000 in 1994 and combined
capital and surplus of $18.2 million and $19.2 million December 31, 1996 and
1995, respectively.
McM's insurance subsidiaries are subject to regulation and supervision
by regulatory authorities in the states in which they operate. The regulatory
bodies have broad administrative powers relating to standards of solvency,
minimum capital and surplus requirements, maintenance of required reserves,
payments of dividends, statutory accounting and reporting practices, and other
financial and operational matters. Generally, the net assets of the insurance
subsidiaries available for transfer to the parent company are limited to the
amounts by which the insurance subsidiaries' net assets, as determined in
accordance
52
<PAGE> 34
with statutory accounting practices, exceed the minimum statutory capital
requirement of $2,250,000. Also, by statute, dividends exceeding the lesser of
10% of statutory-basis capital and surplus or the previous year's net income,
excluding net realized capital gains, require the prior approval of the
Commissioner of the North Carolina Department of Insurance.
OF&C and Wilshire are domiciled in the State of North Carolina and
prepare their statutory-basis financial statements in accordance with accounting
practices and procedures prescribed or permitted by the North Carolina
Department of Insurance. "Prescribed" statutory accounting practices include
state laws, regulations, and general administrative rules, as well as a variety
of publications of the National Association of Insurance Commissioners ("NAIC").
"Permitted" statutory accounting practices may differ from state to state, may
differ from company to company within a state, and may change in the future. The
NAIC currently is in the process of codifying statutory accounting practices,
the result of which is expected to constitute the only source of "prescribed"
statutory accounting practices. The completion date of that project is currently
undeterminable. However, upon completion, prescribed statutory accounting
practices will likely change, to some extent, and may result in changes to the
accounting that insurance enterprises use to prepare their statutory financial
statements.
The North Carolina Department of Insurance imposes minimum risk-based
capital requirements on insurance enterprises that were developed by the NAIC.
The formulas for determining the amount of risk-based capital ("RBC") specify
various weighting factors that are applied to financial balances or various
levels of activity based on the perceived degree of risk. Regulatory compliance
is determined by a ratio ("the Ratio") of the enterprise's regulatory total
adjusted capital, as defined by the NAIC, to its authorized control level RBC as
defined by the NAIC. Enterprises below specific trigger points or ratios are
classified within certain levels, each of which requires corrective action. Each
of McM's insurance subsidiaries' Ratios exceed any minimum RBC requirement.
NOTE C Reinsurance
The property and casualty insurance subsidiaries have entered into
reinsurance agreements with various reinsurers in order to reduce their ultimate
claim risk. Current reinsurance agreements provide for premium rates based on
the amount of coverage in excess of the defined retention level.
Generally, the Company's retention level for all accident years was
$100,000 with the exception of the 1991 accident year which was $250,000. These
retention levels are effected under
53
<PAGE> 35
the Company's casualty excess of loss reinsurance treaties.
The Company is also party to quota share reinsurance arrangements on
its private passenger automobile and commercial auto liability coverages. A
quota share reinsurance treaty is maintained on the Company's private passenger
automobile business which became effective in April 1993. The rates pertaining
to this treaty were 30% during 1996, and 40% prior to 1996. This treaty was
placed to help control the Company's statutory net writings to surplus ratios as
well as future premium growth in that market. A 5% quota share reinsurance
treaty is also maintained by the Company to help control future growth in this
line of business.
The effect of reinsurance on premiums written and earned in 1996, 1995
and 1994 was as follows:
<TABLE>
<CAPTION>
For the Year Ended December 31
--------------------------------------------------------------------------------
1996 1995 1994
Premiums Premiums Premiums
Written Earned Written Earned Written Earned
------- ------ ------- ------ ------- ------
(Thousands of dollars)
<S> <C> <C> <C> <C> <C> <C>
Direct $ 62,698 $ 63,163 $ 64,099 $ 63,731 $ 62,558 $65,572
Assumed 11,561 10,405 7,926 5,871 2,989 1,274
Ceded (20,839) (21,714) (25,362) (23,901) (27,527) (25,720)
-------- -------- -------- -------- -------- -------
Net $ 53,420 $ 51,854 $ 46,663 $ 45,701 $ 38,020 $41,126
======== ======== ======== ======== ======== =======
</TABLE>
The Company has provided amounts for losses arising from uncollectible
balances due from various property and casualty reinsurers. These provisions are
based on the overall trends experienced in the reinsurance industry and an
evaluation and analysis of individual balances due the Company. To minimize its
exposure to significant losses from reinsurance insolvencies, OF&C and Wilshire
evaluate the financial condition of their reinsurers and monitor concentration
of credit risk arising from similar geographic regions, activities or economic
characteristics of the reinsurers. At December 31, 1996, reinsurance
recoverables of $5.9 million were associated with a single reinsurer. The
remaining reinsurance recoverables were associated primarily with six
reinsurers. OF&C and Wilshire's policy is to hold collateral under related
reinsurance agreements in the form of letters of credit for all reinsurers not
licensed to do business in North Carolina.
To the extent that reinsuring companies may later be unable to meet
obligations under the reinsurance agreements, the insurance subsidiaries would
remain liable.
54
<PAGE> 36
NOTE D Income Taxes
The Revenue Reconciliation Act of 1993 increased the U.S. Federal
income tax rate to 35% for taxable income in excess of $10 million. Because of
the large tax return net operating loss carryforwards of the Company and Company
estimates that annual taxable income in the near future, before utilization of
the carryforwards, will not exceed $10 million, a U.S. Federal income tax rate
of 34% has been used to compute deferred tax assets and liabilities for the
Company.
There was no income tax expense attributable to income from continuing
operations for the years ended December 31, 1996, 1995 and 1994. These amounts
differed from the amounts computed by applying the U.S. federal income tax rate
of 34 percent to pretax income from continuing operations as follows:
<TABLE>
<CAPTION>
Year Ended December 31
1996 1995 1994
(Thousands of dollars)
<S> <C> <C> <C>
Pretax income (loss) from
continuing operations $(788) $ 2,210 $1,354
- -------------------------------------------------------------------------------------
Computed "expected" tax expense (benefit) (268) 751 $ 460
Increase (decrease) in taxes resulting from:
Change in valuation allowance 257 (2,768) (281)
Other 11 33 (179)
Net operating and capital losses not
utilized -- 1,984 --
- -------------------------------------------------------------------------------------
Income Tax Expense $ 0 $ 0 $ 0
=====================================================================================
</TABLE>
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and deferred tax liabilities as of December
31, 1996 and December 31, 1995, are presented below.
55
<PAGE> 37
<TABLE>
<CAPTION>
December 31
--------------------------
1996 1995
(Thousands of dollars)
<S> <C> <C>
Deferred tax asset:
Unearned premium reserves $ 942 $ 836
Claim reserves 1,279 1,095
Tax return net operating and
capital loss carryforwards 30,810 30,804
Unrealized losses on fixed
maturity securities 22 --
Other 252 263
-------- --------
Total gross deferred tax assets 33,305 32,998
Less: Valuation allowance (31,624) (31,367)
-------- --------
Net deferred tax assets $ 1,681 $ 1,631
Deferred tax liabilities:
Deferred policy acquisition
costs $ 1,357 $ 1,137
Agent balances 47 180
Unrealized gains on fixed
maturity securities -- 158
Other 277 156
-------- --------
Total liabilities $ 1,681 $ 1,631
-------- --------
Net deferred tax account $ 0 $ 0
======== ========
</TABLE>
The valuation allowance for deferred tax assets as of January 1, 1996,
was $31,367,000. The net change in the total valuation allowance for the year
ended December 31, 1996, was an increase of $257,000.
McM and its subsidiaries file a consolidated income tax return.
The Company had cumulative tax operating loss carryforwards of
approximately $88 million as of December 31, 1996, with expiration dates of 1997
through 2011. In addition, the Company had tax capital loss carryforwards of
$3,172,000. The tax capital loss carryforwards expire in 1997.
No income taxes were paid in 1996, 1995, or 1994.
NOTE E Pension Plan
McM and its subsidiaries have a non-contributory defined benefit
pension plan covering substantially all their employees. The plan provides for
payments to qualified employees based on
56
<PAGE> 38
compensation and years of service. The Company and its subsidiaries make
contributions to the plan, if necessary, equal to the amounts required by ERISA.
The following table sets forth the plan's funded status and amounts
recognized in the Company's balance sheets at December 31:
<TABLE>
<CAPTION>
December 31
------------------------
1996 1995
- --------------------------------------------------------------------------------
(Thousands of dollars)
<S> <C> <C>
Actuarial present value of benefit obligations:
Accumulated benefit obligation, including
vested benefits of $1,890 in 1996 and
$1,707 in 1995 $ 2,027 $ 1,813
================================================================================
Projected benefit obligation for service
rendered to date $(2,816) $(2,591)
Plan assets at fair value, primarily listed stocks,
U.S. bonds, and money market accounts 1,819 1,161
- --------------------------------------------------------------------------------
Projected benefit obligation in excess of plan
assets (997) (1,430)
Unrecognized net loss 356 566
Deferred asset gain (157) (51)
Unrecognized prior service cost (52) (56)
Unrecognized net transition asset (78) (94)
- --------------------------------------------------------------------------------
Net pension liability $ (928) $(1,065)
================================================================================
</TABLE>
57
<PAGE> 39
Net periodic pension expense included the following components:
<TABLE>
<CAPTION>
Year Ended December 31
1996 1995 1994
- --------------------------------------------------------------------------------
(Thousands of dollars)
<S> <C> <C> <C>
Service cost-benefits earned
during the period $ 257 $ 208 $ 190
Interest cost on projected
benefit obligation 206 176 143
Actual return on plan assets (277) (135) 64
Net amortization and deferral 157 40 (151)
- --------------------------------------------------------------------------------
Net periodic pension cost $ 343 $ 289 $ 246
================================================================================
</TABLE>
The weighted average discount rate used to determine the actuarial
present value of the projected benefit obligation was 7.75% and 7.25% at
December 31, 1996, and 1995, respectively. The rate of increase in future
compensation levels used to determine the actuarial present value of the
projected benefit obligation was 4.75% at December 31, 1996, and at December 31,
1995. The expected long-term rate of return on plan assets was 9% for the years
ended December 31, 1996, 1995, and 1994. The unrecognized prior service cost and
the cumulative net recognized gains and losses in excess of the greater of the
market value of plan assets and the projected benefit obligation are being
amortized using the optional straight-line method over the average expected
future service of active participants.
NOTE F Investment Operations
The sources of investment income are summarized as follows:
<TABLE>
<CAPTION>
Year Ended December 31
------------------------------
1996 1995 1994
- --------------------------------------------------------------------------------
(Thousands of dollars)
<S> <C> <C> <C>
Fixed maturities $2,490 $3,155 $3,229
Other long-term investments 48 36 38
Short-term investments 1,078 780 876
------------------------------
3,616 3,971 4,143
Investment expenses 457 474 459
------------------------------
NET INVESTMENT INCOME $3,159 $3,497 $3,684
==============================
</TABLE>
58
<PAGE> 40
The amortized cost and estimated market values of investments in fixed
maturities at December 31, 1996 and 1995, are as follows:
<TABLE>
<CAPTION>
Gross Gross Gross Estimated
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
---------------------------------------------
(Thousands of dollars)
<S> <C> <C> <C> <C>
Fixed Maturity Securities Available-for-Sale:
December 31, 1996:
U.S. Treasury securities
and obligations of
U.S. governmental
corporations and agencies $17,449 $ 33 $(111) $17,371
Public utilities and other 665 -- (162) 503
Mortgage-backed securities 18,824 291 (116) 18,999
- --------------------------------------------------------------------------------
Total $36,938 $324 $(389) $36,873
================================================================================
</TABLE>
<TABLE>
<CAPTION>
Gross Gross Gross Estimated
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
---------------------------------------------------
(Thousands of dollars)
<S> <C> <C> <C> <C>
Fixed Maturity Securities Held-to-Maturity:
December 31, 1996:
U.S. Treasury securities
and obligations of
U.S. governmental
corporations and agencies $5,745 $58 $(4) $5,799
Obligations of states and
political subdivisions 193 30 -- 223
------ --- --- ------
Total $5,938 $88 $(4) $6,022
================================================================================
</TABLE>
59
<PAGE> 41
<TABLE>
<CAPTION>
Gross Gross Gross Estimated
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
---------------------------------------------------
(Thousands of dollars)
<S> <C> <C> <C> <C>
Fixed Maturity Securities Available-for-Sale:
December 31, 1995:
U. S. Treasury securities and
obligations of U.S.
governmental
corporations and
agencies $25,998 $329 $ -- $26,327
Public utilities 758 3 (7) 754
Mortgage-backed securities 4,445 294 (48) 4,691
U.S. corporate securities 276 -- (106) 170
- --------------------------------------------------------------------------------
Total $31,477 $626 $(161) $31,942
================================================================================
</TABLE>
<TABLE>
<CAPTION>
Gross Gross Gross Estimated
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
----------------------------------------------------
(Thousands of dollars)
<S> <C> <C> <C> <C>
Fixed Maturity Securities Held-to-Maturity:
December 31, 1995:
U.S. Treasury securities
and obligations of
U.S. governmental
corporations and
agencies $16,037 $166 $-- $16,203
Obligations of states and
political subdivisions 193 33 -- 226
- --------------------------------------------------------------------------------
Total $16,230 $199 $-- $16,429
================================================================================
</TABLE>
The amortized cost and estimated market value of fixed maturities at
December 31, 1996, by contractual maturity, are shown below. Expected maturities
may differ from contractual maturities as certain borrowers have the right to
call or prepay obligations without penalty.
60
<PAGE> 42
<TABLE>
<CAPTION>
Estimated
Amortized Market
Cost Value
----------------------
(Thousands of dollars)
<S> <C> <C>
Fixed Maturity Securities Available-for-Sale:
Due in one year or less $ 2,227 $ 2,089
Due after one year through five years 10,727 10,667
Due after five years through ten years 5,067 5,030
Due after ten years 93 88
- ----------------------------------------------------------------------------
18,114 17,874
Mortgage backed securities 18,824 18,999
- ----------------------------------------------------------------------------
$36,938 $36,873
============================================================================
Fixed Maturity Securities Held-to-Maturity:
Due in one year or less $ 77 $ 77
Due after one year through five years 4,643 4,683
Due after five years through ten years 1,218 1,262
Due after ten years -- --
- ----------------------------------------------------------------------------
$ 5,938 $ 6,022
============================================================================
</TABLE>
Realized gains and losses from sales of investments in fixed maturities
were as follows:
<TABLE>
<CAPTION>
Year Ended December 31
1996 1995 1994
------------------------
(Thousands of dollars)
<S> <C> <C> <C>
Realized gains and losses:
Fixed maturity securities available-for-sale:
Gross realized gains $40 $123 $122
Gross realized losses -- -- --
</TABLE>
61
<PAGE> 43
The carrying value of investments in persons (other than the U.S.
Government or a Government Agency or Authority, State, Municipality, or
Political Subdivision) exceeding 10% of total shareholders' equity is as
follows:
<TABLE>
<CAPTION>
December 31
----------------------
1996 1995
----------------------
(Thousands of dollars)
<S> <C> <C>
Southern Capital Corporation $3,628 $6,231
General Electric Capital Corporation $8,903 $8,617
</TABLE>
NOTE G Reserves for Losses and Settlement Expenses
The consolidated financial statements include the estimated reserve for
losses and settlement expenses of the property and casualty insurance
subsidiaries. The subsidiaries primarily write commercial auto liability,
physical damage and cargo coverages and non-standard private passenger
automobile coverages. The liabilities for losses and settlement expenses are
determined using case basis evaluations and statistical projections and
represent estimates of the ultimate net cost of all unpaid losses and settlement
expenses incurred through December 31 of each year. These estimates give effect
to trends in claims severity and other factors which may vary as the liabilities
are ultimately settled. The estimates are continually reviewed and, as
adjustments to these liabilities become necessary, such adjustments are
reflected in current operations.
The following table provides a reconciliation of the beginning and
ending reserve balances for losses and settlement expenses, on a
gross-of-reinsurance basis, for 1996, 1995 and 1994, to the gross amounts
reported in McM's balance sheet.
62
<PAGE> 44
<TABLE>
<CAPTION>
Year Ended December 31
------------------------------------
1996 1995 1994
------------------------------------
(Thousands of dollars)
<S> <C> <C> <C>
Reserves for losses
and settlement expenses,
net of reinsurance
recoverables, at
beginning of year $29,997 $ 38,415 $51,625
Provision for insured
events of the current
year 37,651 31,282 29,106
Increase (decrease) in
provision for insured
events of prior years 1,559 (248) 18
-----------------------------------
Incurred losses and
settlement expenses
during current year, net
of reinsurance 39,210 31,034 29,124
Payments for:
Losses and settlement
expenses attributable to
insured events of the
current year 22,853 18,113 15,307
Losses and settlement
expenses attributable to
insured events of prior
years 19,822 21,339 27,027
-----------------------------------
42,675 39,452 42,334
-----------------------------------
Reserves for losses and
settlement expenses, net
of reinsurance recoverables,
at end of year 26,532 29,997 38,415
Reinsurance recoverable on
unpaid losses and settlement
expenses at end of current
year 28,768 36,155 42,471
-----------------------------------
Gross reserves for losses and
settlement expenses at end
of year $55,300 $ 66,152 $80,886
===================================
</TABLE>
The reconciliation above reflects the emergence of a $1,559,000
deficiency in the December 31, 1995, reserve during 1996, approximately $800,000
of which relates to discontinued lines of business and participation in
involuntary pools and other residual market mechanisms in which OF&C and
Wilshire are required to participate by the various states in which the
companies write insurance. The remainder consists of
63
<PAGE> 45
approximately $68,000 relating to commercial auto lines of business, and
$691,000 relating to private passenger auto lines of business.
The anticipated effect of inflation is implicitly considered when
estimating liabilities for losses and settlement expenses. While anticipated
cost increases due to inflation are considered in estimating the ultimate claim
costs, the increase in average severity of claims is caused by a number of
factors that vary with the individual type of policy written. Future average
severity is projected based on historical trends adjusted for anticipated
changes in these trends and general economic conditions. These anticipated
trends are monitored based on actual development and are modified as necessary.
NOTE H 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, that the resolution of these matters will not
have a material adverse affect on the Company's consolidated financial
position, or results of operations.
Guaranty Associations: The insurance subsidiaries are required to be members of
various state insurance guaranty associations in order to conduct business in
those states. These associations have the authority to assess member companies
in the event that an insurance company conducting business in that state is
unable to meet its policyholder obligations. The Company recognizes the expense
for these assessments in the year they are assessed. The Company received net
refunds of $26,000 and 12,000 in 1996 and 1995, respectively, and incurred
expenses of $76,000 in 1994 related to these assessments.
NOTE I Stock Option Plan and Earnings Per Share
At December 31, 1996, the Company adopted Statement of Financial
Accounting Standards No. 123 "Accounting for Stock-Based Compensation" ("SFAS
123"). SFAS 123 introduces a fair-value based method of accounting for
stock-based compensation and encourages, but does not require, compensation
expense recognition for grants of stock, stock options and other equity
instruments to employees. In accordance with SFAS 123, the Company has elected
to continue to follow Accounting Principles Board Opinion No. 25, "Accounting
for Stock Issued to Employees" (APB 25) and related interpretations in
accounting for its employee stock options.
64
<PAGE> 46
The Company had an Employee Incentive Stock Option Plan, the 1986
Employee Incentive Stock Option Plan ("1986 Plan"), which expired by its terms,
May 16, 1996. The 1986 Plan provided that options be granted to selected key
employees at exercise prices equal to market value on the date the option is
granted. Options were granted for a period not exceeding ten years and were
exercisable at a rate of 20% per year starting one year from the date of grant.
Depending upon the circumstances of an optionee's termination of employment,
the optionee's options either a) remain exercisable for three months after
termination to the extent they were exercisable at termination unless vesting
is accelerated by the Compensation Committee, b) remain exercisable until a
change in control of the Company, as defined in the 1986 plan, c) remain
exercisable for five years and one day from the date of the optionee's
termination or d) terminate as of the termination of the optionee's employment.
The Company had reserved 250,000 shares of common stock for
distribution under the Plan. The following options to purchase the Company's
common shares were outstanding under the 1986 Plan as of December 31, 1996 and
1995:
NUMBER OF SHARES
UNDERLYING
OUTSTANDING
OPTIONS
<TABLE>
<CAPTION>
OPTION
PRICE
DATE OF GRANT 1996 1995 PER SHARE
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
January 15, 1988 1,000 11,000 $ 8.50
October 6, 1988 2,000 2,000 $10.00
January 15, 1993 42,962 42,962 $ 1.38
July 25,1994 19,000 19,000 $ 2.25
August 17, 1994 81,000 81,000 $ 2.75
- --------------------------------------------------------------------------------
145,962 155,962
================================================================================
</TABLE>
At December 31, 1996, 68,778 options were exercisable. No options have
been exercised under the Plan. The weighted-average exercise price is $2.42 per
share and the weighted-average remaining contractual life is 5.7 years at
December 31, 1996. Earnings per common share are based on the average number of
shares of Common Stock outstanding during the year. The effect of stock options
is not dilutive in the computation of earnings per share.
In 1996 the Company adopted the 1996 Employee Incentive Stock Option
Plan ("1996 Plan") which generally has the same terms as the 1986 Plan. The
Company has reserved 300,000 shares of common stock for distribution under the
1996 Plan. No options had been granted under the 1996 Plan as of December 31,
1996.
65
<PAGE> 47
The Company has a phantom stock plan under which shares of "phantom
stock" may be awarded to certain employees. A maximum of 250,000 shares of
phantom stock may be awarded under the plan. Upon maturity of an award, shares
of phantom stock are settled in cash equal to the market value of common shares
at the maturity date plus the amount of cash dividends paid on an equal number
of common shares over the life of the award. The awards generally vest over a
five year period beginning five years after the award date and mature on the two
year anniversary of the termination of the employee, or upon a change in control
(as defined in the plan) of the Company. In both 1996 and 1995, 50,000 shares
of phantom stock were granted under the plan and related expenses of $44,000
and $26,000 were accrued, respectively.
Pro forma information regarding net (loss) income and earnings per share is
required by SFAS 123, which also requires that the information be determined as
if the Company has accounted for its employee stock options and awards granted
subsequent to December 31, 1994, under the fair value method prescribed by SFAS
123. The estimated fair value of the phantom stock awards, calculated under a
Black-Scholes valuation model, did not have a material impact on the reported
net (loss) income or net (loss) income per share at December 31, 1996 and 1995.
Further, because SFAS 123 is applicable only to stock-based awards granted after
December 31, 1994, the pro forma effect of the amortization of the estimated
fair value of the Company's outstanding stock is not likely to be representative
of the effects on the reported net (loss) income for future years.
66
<PAGE> 48
NOTE J Summary of Fair Values
The method of determining fair values for investments in fixed maturity
securities is discussed in Note F. For all other financial instruments, carrying
value approximates fair value.
The following table summarizes the carrying value and fair value of
financial instruments:
<TABLE>
<CAPTION>
December 31
1996 1995
---------------------------------------------------
Carrying Fair Carrying Fair
Value Value Value Value
---------------------------------------------------
(Thousands of dollars)
<S> <C> <C> <C> <C>
Financial Assets:
Cash $ 1,776 $ 1,776 $ 1,637 $ 1,637
Short-term investments $14,061 $14,061 $14,848 $14,848
Fixed maturity securities
available-for-sale
(Note F) $36,873 $36,873 $31,942 $31,942
Fixed maturity securities
held-to-maturity
(Note F) $ 5,938 $ 6,022 $16,230 $16,429
</TABLE>
67
<PAGE> 49
Report of Independent Auditors
ERNST & YOUNG LLP
Board of Directors and Shareholders
McM Corporation
We have audited the accompanying consolidated balance sheets of McM
Corporation and subsidiaries as of December 31, 1996 and 1995, and the
related consolidated statements of operations, shareholders equity and
cash flows for each of the three years in the period ended December 31,
1996. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on
these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the
consolidated financial statements. An audit also includes assessing the
accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for
our opinion.
In our opinion, the financial statements referred to above present
fairly, in all material respects, the consolidated financial position
of McM Corporation and subsidiaries at December 31, 1996 and 1995, and
the consolidated results of their operations and their cash flows for
each of the three years in the period ended December 31, 1996, in
conformity with generally accepted accounting principles.
Raleigh, North Carolina
February 28, 1997
ERNST & YOUNG LLP
68
<PAGE> 50
SUMMARY OF QUARTERLY RESULTS OF OPERATIONS
The following is a summary of quarterly results of operations for the years
ended December 31, 1996 and 1995.
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------
March 31 June 30 Sept. 30 Dec. 31
- -------------------------------------------------------------------------------------------------
(Thousands of dollars, except per share data)
<S> <C> <C> <C> <C>
1996
Premiums $12,758 $12,862 $12,883 $ 13,351
Investment Income, Less Investment Expense 890 717 764 788
Realized Gains 0 0 0 40
Losses and Expenses 13,038 13,087 13,305 17,056
Net Income (Loss) 671 598 423 (2,480)
Net Income (Loss) Per Share $ 0.14 $ 0.13 $ 0.09 ($ 0.53)
1995
Premiums $10,590 $10,778 $11,915 $ 12,418
Investment Income, Less Investment Expense 896 891 857 853
Realized Gains 0 0 0 123
Losses and Expenses 10,927 11,173 11,974 13,287
Net Income 594 540 852 224
Net Income Per Share $ 0.13 $ 0.12 $ 0.18 $ 0.05
</TABLE>
69
<PAGE> 51
Officers and Directors
Officers Directors
George E. King Michael A. DiGregorio
Chairman Emeritus and Vice President/Senior Trust Counsel
Chief Executive Officer Wilmington Trust Company
Wilmington, DE
Stephen L. Stephano
President and George E. King
Chief Operating Officer Chairman Emeritus and
Chief Executive Officer
Michael D. Blinson McM Corporation
Senior Vice President Raleigh, NC
and Corporate Secretary
Laurence F. Lee, Jr.
Kevin J. Hamm Retired
Vice President and Jacksonville, FL
Chief Financial Officer
Laurence F. Lee III
Harold A. Strube President
Vice President and Plan Analysts, Inc.
Assistant Corporate Secretary Jacksonville, FL
Claude G. Sanchez, Jr.
Private Investor
Veguita, NM
Stephen L. Stephano
President and Chief Operating Officer
McM Corporation
Raleigh, NC
R. Peyton Woodson III
President
Enterprise Holdings Proprietary, Inc.
Raleigh, NC
70
<PAGE> 52
Corporate Information
McM Corporation Corporate Office
702 Oberlin Road
P.O. Box 12317
Raleigh, North Carolina 27605
Telephone: (919)833-1600
Registrar-Transfer Agent
Wachovia Bank and Trust Company, N.A.
Winston-Salem, North Carolina
General Counsel
Ragsdale, Liggett & Foley, PLLC
Raleigh, North Carolina
Independent Auditors
Ernst & Young LLP
Raleigh, North Carolina
Form 10-K
Annual Report for the year ended December 31, 1996, has been
filed with the Securities and Exchange Commission. A copy will
be made available to shareholders without charge upon request.
Please write to Corporate Secretary at the Corporation's
Corporate Office.
Annual Meeting
The Annual Shareholders' Meeting of McM Corporation will be
held at the corporate offices of McM Corporation, 702 Oberlin
Road, Raleigh, North Carolina, on May 22, 1997, at 10:00 a.m.
71
<PAGE> 1
CORPORATE ORGANIZATION CHART
As of December 31, 1996, the organization chart of corporate structure and
ownership is shown below. Percent figures show percent ownership of shares by
parent. Jurisdiction of organization is shown in parentheses.
McM CORPORATION (NC) 56-1171691
- - 100% - - Equity Holdings, Inc. (DE) 56-1651565
- - 100% - - Occidental Fire & Casualty Company of North
Carolina (NC) 84-0513811
- - 100% - - Wilshire Insurance Company (NC) 56-1507441
Note: Two entities, Equity American Financial Service, Inc. and
Equity American General Agency, Inc., have been formed as North
Carolina corporations. Although neither company has been fully
activated or capitalized, it is anticipated that they might be
utilized in additional marketing programs in the future.
80
<PAGE> 1
Exhibit 23
Consent of Independent Auditors
We consent to the incorporation by reference in this Annual Report (Form 10-K)
of McM Corporation and subsidiaries of our report dated February 28, 1997,
included in the 1996 Annual Report to Shareholders of McM Corporation.
Our audit also included the financial statement schedules of McM Corporation
listed in Item 14(a). These schedules are the responsibility of the Company's
management. Our responsibility is to express an opinion based on our audits. In
our opinion, the financial statement schedules referred to above, when
considered in relation to the basic financial statements taken as a whole,
present fairly, in all material respects, the information set forth therein.
We also consent to the incorporation by reference in the Registration
Statements (Forms S-8 No. 333-05991, 333-05989 and 333-05995) pertaining to the
1996 Non-Employee Directors' Stock Purchase Plan, the 1996 Employee Incentive
Stock Option Plan and the 1996 Employee Stock Purchase Plan, respectively, of
McM Corporation of our report dated February 28, 1997, with respect to the
consolidated financial statements incorporated herein by reference, and our
report included in the preceding paragraph with respect to the financial
statement schedules included in this Annual Report (Form 10-K) of McM
Corporation and subsidiaries.
ERNST & YOUNG LLP
Raleigh, North Carolina
March 25, 1997
81
<TABLE> <S> <C>
<ARTICLE> 7
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FINANCIAL STATEMENTS OF McM CORPORATION FOR THE TWELVE MONTHS ENDED
DECEMBER 31, 1996, AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> DEC-31-1996
<DEBT-HELD-FOR-SALE> 36,873
<DEBT-CARRYING-VALUE> 5,938
<DEBT-MARKET-VALUE> 6,022
<EQUITIES> 0
<MORTGAGE> 0
<REAL-ESTATE> 0
<TOTAL-INVEST> 56,872
<CASH> 1,776
<RECOVER-REINSURE> 36,512
<DEFERRED-ACQUISITION> 3,992
<TOTAL-ASSETS> 112,870
<POLICY-LOSSES> 35,300
<UNEARNED-PREMIUMS> 17,925
<POLICY-OTHER> 0
<POLICY-HOLDER-FUNDS> 6,580
<NOTES-PAYABLE> 0
0
0
<COMMON> 4,678
<OTHER-SE> 16,977
<TOTAL-LIABILITY-AND-EQUITY> 112,870
51,854
<INVESTMENT-INCOME> 3,159
<INVESTMENT-GAINS> 40
<OTHER-INCOME> 645
<BENEFITS> 39,210
<UNDERWRITING-AMORTIZATION> 0
<UNDERWRITING-OTHER> 17,276
<INCOME-PRETAX> (788)
<INCOME-TAX> 0
<INCOME-CONTINUING> (788)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (788)
<EPS-PRIMARY> (0.17)
<EPS-DILUTED> (0.17)
<RESERVE-OPEN> 29,997
<PROVISION-CURRENT> 37,651
<PROVISION-PRIOR> 39,210
<PAYMENTS-CURRENT> 22,853
<PAYMENTS-PRIOR> 19,822
<RESERVE-CLOSE> 26,532
<CUMULATIVE-DEFICIENCY> 1,559
</TABLE>
