-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, KvHxjpYNHGwt2xd6lst9hHHLDh6lJzo+slZcvkRtKbXneFfJoAfmyRhqD299nutF 1XCUqVURY5jjbxpSVnKJeQ== 0000950144-97-003460.txt : 19970401 0000950144-97-003460.hdr.sgml : 19970401 ACCESSION NUMBER: 0000950144-97-003460 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 7 CONFORMED PERIOD OF REPORT: 19961231 FILED AS OF DATE: 19970331 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: MCM CORP CENTRAL INDEX KEY: 0000275710 STANDARD INDUSTRIAL CLASSIFICATION: FIRE, MARINE & CASUALTY INSURANCE [6331] IRS NUMBER: 561171691 STATE OF INCORPORATION: NC FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: 1934 Act SEC FILE NUMBER: 000-08678 FILM NUMBER: 97569625 BUSINESS ADDRESS: STREET 1: 702 OBERLIN RD STREET 2: BOX 12317 CITY: RALEIGH STATE: NC ZIP: 27605 BUSINESS PHONE: 9198331600 MAIL ADDRESS: STREET 1: 702 OBERLIN ROAD STREET 2: P O BOX 12317 CITY: RALEIGH STATE: NC ZIP: 27605 10-K 1 MCM CORPORATION FORM 10-K 12-31-96 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. 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 1 3 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 2 4 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 3 5 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. 4 6 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 5 7 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 6 8 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
1996 1995 1994 ---- ---- ---- (Thousands of dollars) 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 ======= ======= =======
7 9 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. 8 10 ANALYSIS OF LOSS AND LOSS ADJUSTMENT EXPENSE DEVELOPMENT NET OF REINSURANCE WITH SUPPLEMENTAL GROSS DATA
(Thousands of dollars) YEAR ENDED 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 - ---------- -------- -------- ------- ------- ------- -------- -------- -------- -------- ------- ------- 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 ======= =======
9 11 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 10 12 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. 11 13 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. 12 14 Item 2. Properties McM and its subsidiaries lease home office properties in various locations. The major locations are set forth in the following table:
Square Book Annual Footage Value Rent ------- ----- ---- 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
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. 13 15 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. 14 16 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 17 PART IV Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K
Page ---- (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):
16 18
Page ---- 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
17 19
Page ---- 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.
18 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 EX-10.B 2 FIRST AMENDMENT TO MCM CORP. PHANTOM STOCK PLAN 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 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 EX-10.C 3 AMENDMENTS TO EMPLOYMENT AND BONUS CONTRACTS 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 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 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 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 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 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 EX-13 4 ANNUAL REPORT TO SHAREHOLDERS FOR 1996 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 2 SCHEDULE 1 -- SUMMARY OF INVESTMENTS McM CORPORATION AND SUBSIDIARIES December 31, 1996
AMOUNT SHOWN ON MARKET BALANCE TYPE OF INVESTMENT COST VALUE SHEET ------------------ ---- ----- ----- (Thousands of dollars) 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 ======= ======= =======
21 3 SCHEDULE 2 - CONDENSED FINANCIAL INFORMATION OF REGISTRANT BALANCE SHEETS McM CORPORATON (PARENT COMPANY)
(Thousands of dollars) December 31 1996 1995 ---- ---- 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 ======= =======
* Eliminated in consolidation See notes to condensed financial information. 22 4 SCHEDULE 2 - CONDENSED FINANCIAL INFORMATION OF REGISTRANT STATEMENTS OF OPERATIONS McM CORPORATON (PARENT COMPANY)
(Thousands of dollars) Year Ended December 31 1996 1995 1994 ---- ---- ---- INCOME 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 $1,354 ===== ======= ======
* Eliminated in consolidation. See notes to condensed financial information. 23 5 SCHEDULE 2 - CONDENSED FINANCIAL INFORMATION OF REGISTRANT STATEMENTS OF CASH FLOWS McM CORPORATON (PARENT COMPANY)
(Thousands of dollars) Year Ended December 31 1996 1995 1994 ---- ---- ---- OPERATING ACTIVITIES Net Income (Loss) ($ 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) ======= ======= =======
See notes to condensed financial information 24 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 7 SCHEDULE 3 - REINSURANCE McM CORPORATION AND SUBSIDIARIES Year Ended December 31, 1996, 1995, and 1994
Premiums Earned --------------------------------------------- Percentage Ceded to Assumed of Amount Direct Other From Other Net Assumed (Thousands of dollars) Amount Companies Parties Amount to Net ------ --------- ------- ------ ------ 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% ======= ======= ======= ======= =====
26 8 SCHEDULE 4 - VALUATION AND QUALIFYING ACCOUNTS McM CORPORATION AND SUBSIDIARIES
(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 --------- -------- -------- -------- --------- 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 ====== ===== == ==== ======
(1) Write-off of paid recoverable balances for insolvent/liquidated reinsurers against provision established. 27 9 SCHEDULE 5 - SUPPLEMENTAL INSURANCE INFORMATION PROPERTY/CASUALTY INSURANCE SUBSIDIARIES YEAR ENDED DECEMBER 31, 1996, 1995 AND 1994
(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 - ------------------ 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 Gross of Reinsurance - -------------------- 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
28 10 McM CORPORATION ANNUAL REPORT TO SHAREHOLDERS FOR THE YEAR ENDED DECEMBER 31, 1996 29 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 12 Selected Financial Data
- ----------------------------------------------------------------------------------------------------------------- McM CORPORATION AND SUBSIDIARIES 1996 1995 1994 1993 1992 - ----------------------------------------------------------------------------------------------------------------- (Thousands of dollars, except per share data) 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
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.
1996 1995 High Low High Low ------------------------------------------------------------------------------------ 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 ------------------------------------------------------------------------------------
31 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 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 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 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 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 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 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 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 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 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:
Ceded Reinsurer Balances Receivable --------- ------------------- (Thousands of dollars) 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
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 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 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 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 26 Consolidated Balance Sheets
- ------------------------------------------------------------------------------------------------------------------------- December 31 McM CORPORATION AND SUBSIDIARIES 1996 1995 - ------------------------------------------------------------------------------------------------------------------------- (Thousands of dollars) 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 =========================================================================================================================
See notes to consolidated financial statements. 45 27 Consolidated Statements of Operations
- -------------------------------------------------------------------------------------------------------------------- Year Ended December 31 McM CORPORATION AND SUBSIDIARIES 1996 1995 1994 - -------------------------------------------------------------------------------------------------------------------- (Thousands of dollars, except per share data) 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 ==================================================================================================================
See notes to consolidated financial statements. 46 28 Consolidated Statements of Shareholders' Equity
- ------------------------------------------------------------------------------------------------------------------------ Net Additional Unrealized McM CORPORATION Common Paid-in Investment Retained AND SUBSIDIARIES Stock Capital Gain (Loss) Earnings - ------------------------------------------------------------------------------------------------------------------------ (Thousands of dollars) 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) $15,553 =====================================================================================================================
See notes to consolidated financial statements. 47 29 Consolidated Statements of Cash Flows
- ------------------------------------------------------------------------------------------------------------------------------- Year Ended December 31 McM CORPORATION AND SUBSIDIARIES 1996 1995 1994 - ------------------------------------------------------------------------------------------------------------------------------- (Thousands of dollars) Operating Activities Net (loss) income ($ 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 ==============================================================================================================================
See notes to consolidated financial statements. 48 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 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 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 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 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 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:
For the Year Ended December 31 -------------------------------------------------------------------------------- 1996 1995 1994 Premiums Premiums Premiums Written Earned Written Earned Written Earned ------- ------ ------- ------ ------- ------ (Thousands of dollars) 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 ======== ======== ======== ======== ======== =======
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 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:
Year Ended December 31 1996 1995 1994 (Thousands of dollars) 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 =====================================================================================
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 37
December 31 -------------------------- 1996 1995 (Thousands of dollars) 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 ======== ========
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 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:
December 31 ------------------------ 1996 1995 - -------------------------------------------------------------------------------- (Thousands of dollars) 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) ================================================================================
57 39 Net periodic pension expense included the following components:
Year Ended December 31 1996 1995 1994 - -------------------------------------------------------------------------------- (Thousands of dollars) 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 ================================================================================
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:
Year Ended December 31 ------------------------------ 1996 1995 1994 - -------------------------------------------------------------------------------- (Thousands of dollars) 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 ==============================
58 40 The amortized cost and estimated market values of investments in fixed maturities at December 31, 1996 and 1995, are as follows:
Gross Gross Gross Estimated Amortized Unrealized Unrealized Market Cost Gains Losses Value --------------------------------------------- (Thousands of dollars) 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 ================================================================================
Gross Gross Gross Estimated Amortized Unrealized Unrealized Market Cost Gains Losses Value --------------------------------------------------- (Thousands of dollars) 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 ================================================================================
59 41
Gross Gross Gross Estimated Amortized Unrealized Unrealized Market Cost Gains Losses Value --------------------------------------------------- (Thousands of dollars) 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 ================================================================================
Gross Gross Gross Estimated Amortized Unrealized Unrealized Market Cost Gains Losses Value ---------------------------------------------------- (Thousands of dollars) 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 ================================================================================
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 42
Estimated Amortized Market Cost Value ---------------------- (Thousands of dollars) 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 ============================================================================
Realized gains and losses from sales of investments in fixed maturities were as follows:
Year Ended December 31 1996 1995 1994 ------------------------ (Thousands of dollars) Realized gains and losses: Fixed maturity securities available-for-sale: Gross realized gains $40 $123 $122 Gross realized losses -- -- --
61 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:
December 31 ---------------------- 1996 1995 ---------------------- (Thousands of dollars) Southern Capital Corporation $3,628 $6,231 General Electric Capital Corporation $8,903 $8,617
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 44
Year Ended December 31 ------------------------------------ 1996 1995 1994 ------------------------------------ (Thousands of dollars) 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 ===================================
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 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 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
OPTION PRICE DATE OF GRANT 1996 1995 PER SHARE - -------------------------------------------------------------------------------- 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 ================================================================================
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 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 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:
December 31 1996 1995 --------------------------------------------------- Carrying Fair Carrying Fair Value Value Value Value --------------------------------------------------- (Thousands of dollars) 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
67 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 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.
- ------------------------------------------------------------------------------------------------- March 31 June 30 Sept. 30 Dec. 31 - ------------------------------------------------------------------------------------------------- (Thousands of dollars, except per share data) 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
69 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 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 EX-21 5 SUBSIDIARIES OF THE REGISTRANT 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 EX-23 6 CONSENT OF INDEPENDENT AUDITORS ERNST & YOUNG 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 EX-27 7 FINANCIAL DATA SCHEDULE
7 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. 1,000 12-MOS DEC-31-1996 JAN-01-1996 DEC-31-1996 36,873 5,938 6,022 0 0 0 56,872 1,776 36,512 3,992 112,870 35,300 17,925 0 6,580 0 0 0 4,678 16,977 112,870 51,854 3,159 40 645 39,210 0 17,276 (788) 0 (788) 0 0 0 (788) (0.17) (0.17) 29,997 37,651 39,210 22,853 19,822 26,532 1,559
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