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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
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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
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McM Corporation
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(Exact name of registrant as specified in its charter)
North Carolina 56-1171691
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(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
Box 12317, 702 Oberlin Road, Raleigh, North Carolina 27605
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(Address of principal executive office) (Zip Code)
Registrant's telephone number, including area code (919) 833-1600
Securities registered pursuant to Section 12(b) of the Act:
Name of each exchange
Title of each class on which registered
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NONE
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, par value - $1.00 per share
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(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.
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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.
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PART I
Item 1. Business
McM Corporation ("McM" or the "Company") is an insurance holding
company conducting its business through insurance and non-insurance
subsidiaries. The following schedule identifies the subsidiaries of McM and the
abbreviations by which they will be identified in this document.
Subsidiary Abbreviation
---------- ------------
PROPERTY AND CASUALTY
Occidental Fire & Casualty Company
of North Carolina OF&C
Wilshire Insurance Company Wilshire
OTHER:
Equity Holdings, Inc. Equity Holdings
In connection with and because it desires to take advantage of the
new "safe harbor" provisions of the Private Securities Litigation Reform Act of
1995, McM would like to caution readers regarding certain forward-looking
statements in the following discussion and elsewhere in this Form 10-K. While
McM believes in the veracity of all statements made herein, forward-looking
statements are necessarily based upon a number of estimates and assumptions
that, while considered reasonable by McM, are inherently subject to significant
business, economic and competitive uncertainties and contingencies, many of
which are beyond McM's control and many of which, with respect to future
business decisions, are subject to change. These uncertainties and contingencies
can affect actual results and could cause its actual results to differ
materially from those expressed in any forward-looking statements made by or on
behalf of McM. The forward looking statements are especially difficult for
lines of business that are longer tail in nature such as the Company's
commercial automobile liability line of business which is inherently subject to
considerable variability and volatility.
Item 1. (a) General Development of the Business
McM was organized as a North Carolina corporation on May 27, 1977, and
subsequently acquired or organized a number of insurance corporations and other
subsidiaries. From 1977 to 1991, McM operated as a multi-line holding company
with both life and health and property and casualty insurance operations.
The McMillen Trust, controlling shareholder of McM, currently owns
65.9% of the outstanding stock of McM. A petition was filed on behalf of the
McMillen Trust in the Chancery Court of Delaware on December 2, 1986, seeking
relief from the requirement that the Trust own at least
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65% of the shares of McM. The Court, on December 10, 1987, determined that the
Trust must divest itself of its ownership of the shares of McM and invest the
proceeds in a diversified portfolio for the benefit of present and future
beneficiaries of the Trust. The Board of Directors of McM and the Trust
believed that the interests of all shareholders would be best served by a
coordinated sales process by which potential purchasers could be qualified and
due diligence reviews scheduled with minimal disruption to ongoing operations.
In 1991, McM decided to discontinue its life and health insurance
segment. On October 24, 1991, Occidental Life Insurance Company and Peninsular
Life Insurance Company were sold to Pennsylvania Life Insurance Company, a
privately held life insurance company domiciled in Pennsylvania. On June 22,
1992, Atlantic Southern Insurance Company was sold to Global Life Assurance
Company Limited, a subsidiary of Life of Jamaica Ltd. The sale of Atlantic
Southern Insurance Company completed the disposition of the Company's life and
health segment.
On January 29, 1993, McM's Board of Directors announced that it had
decided to discontinue efforts to sell the remaining companies in the McM
group, including OF&C and Wilshire. The Board's decision was prompted by
market and economic conditions as well as other factors which had an adverse
effect on the general sale process being conducted by PaineWebber Incorporated.
However, McM's Board announced that PaineWebber would continue to serve the
McM group as its financial advisor.
In April 1993, the Chancery Court granted the petition of the
Wilmington Trust Company, Trustee of the McMillen Trust, for a clarification of
existing orders to make clear, among other things, that the timing and terms of
any disposition of the Trust's shares shall be determined in the sound
discretion of the Trustee.
On February 3, 1997, McM received a copy of an SEC Form 3 filing made
by McM Acquisition Corporation ("MAC"), controlled by local real estate
developer and private investor M. Roland Britt, and by Mr. Britt himself. The
Form 3 indicated that MAC had acquired an option to purchase all of the McM
shares owned by the Trust for $6.20 per share exercisable until March 1, 1998.
The next day, February 4, 1997, McM received a copy of an SEC
Schedule 13D filed by MAC and Mr. Britt. This Schedule 13D provided further
information in connection with the option. Attached to the Schedule 13D were
written agreements dated November 22, 1996, and January 24, 1997, between the
Trust and MAC relating to the option and to a possible merger between McM and
MAC. Also attached was a copy of an agreement
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entered into between McM and MAC on January 31, 1997, in a separate,
independent action wherein McM agreed to provide MAC with confidential access to
the Company's records and information to enable MAC to conduct due diligence
reviews and pursue appropriate financial arrangements for a possible
acquisition of all of McM's shares. This agreement, which expires May 31, 1997,
also grants to MAC an exclusive period during which McM will continue its
policy of not soliciting acquisition offers.
McM cannot predict whether MAC will exercise its option or obtain the
required approvals and financial arrangements necessary to acquire either the
Trust's shares or all of the shares of McM.
Total employees of McM and its subsidiaries numbered 139 at December
31, 1996, all of which are directly employed by the property and casualty
subsidiaries.
Item 1. (b) Financial Information About Industry Segments
As a result of discontinuing its life and health insurance segment,
McM, through its subsidiaries, is engaged only in the marketing and underwriting
of property and casualty insurance. Information concerning industry segments,
therefore, is no longer applicable.
Item 1. (c) Narrative Description of Business
PROPERTY AND CASUALTY INSURANCE
McM's property and casualty insurance business is conducted through two
insurance companies, OF&C and Wilshire. The business is concentrated in
liability, physical damage and cargo coverages for the trucking transportation
industry as well as non-standard private passenger automobile coverages. These
insurance policies are generally marketed through general and independent agents
who have no authority to alter any terms of the policies.
The agents who produce business for OF&C and Wilshire are not exclusive
agents of the companies and generally have affiliations with other insurance
companies which may compete with McM. One agent accounts for approximately 19%
of premium income of the property and casualty business of McM.
OF&C is licensed in the District of Columbia and all states other than
Connecticut and Hawaii. Certain states have placed restrictions on the amount of
premium that OF&C may write in those states. Wilshire is licensed in nineteen
states comprised of Arizona, California, Colorado, Hawaii, Idaho, Iowa, Kansas,
Minnesota, Montana, Nebraska, Nevada, New Mexico, North Carolina, Ohio, Oregon,
South Dakota, Utah, Washington and Wisconsin. Wilshire is also approved, as a
non-admitted carrier, to write coverages in the states of Alabama, Alaska,
Florida, Georgia, Illinois, Indiana, Kentucky, Louisiana, Maryland, North
Dakota, Oklahoma, Pennsylvania, Texas and Wyoming. A non-admitted carrier may
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write coverages at rates in excess of the rates approved by the various states,
provided that licensed carriers in those states are unwilling to provide
coverages at the approved rates. Wilshire's premium writings are not restricted
by any state. Also see "Geographic Distribution of Premiums Received."
Competition. The property and casualty insurance business is highly competitive.
In most jurisdictions in which McM's property and casualty insurance
subsidiaries market their policies, there are numerous large standard lines
stock and mutual companies as well as other specialty companies competing for
the same business. Many of the companies have greater financial resources,
larger marketing organizations and broader diversification of risks than the McM
companies. McM believes that the policies, rates, commissions and services of
its companies are competitive with other companies writing these types of
business.
Regulation. All insurance companies are subject to regulation and supervision by
the jurisdictions in which the companies are authorized to transact business.
These regulatory bodies have broad administrative powers relating to the
standards of solvency which must be met and maintained by insurance companies,
minimum capital and surplus requirements, limitations on the investments of
capital and surplus, granting and revoking of licenses, licensing of agents,
filing and approval of policy forms and rates, maintenance of required reserves,
unfair discrimination, form and content of financial statements and other
reporting forms, issuance and sale of stock, types of allowable investments, and
numerous other matters pertaining to insurance.
Insurance companies must keep assets equal to the minimum capital
required by law plus the accumulated reserves invested in certain classes of
investments as specified in the statutes applicable to such companies. In
addition, the National Association of Insurance Commissioners ("NAIC") has
adopted Risk-Based Capital ("RBC") requirements for property and casualty
insurance companies. RBC was developed to evaluate the adequacy of statutory
capital and surplus in relation to investment and insurance risks. The RBC
formula serves as an early warning tool for state insurance regulators to help
identify, for the purpose of initiating regulatory action, companies which are
potentially inadequately capitalized. The capital and surplus for McM's
insurance subsidiaries are well in excess of any regulatory action thresholds
defined by the NAIC.
The reporting practices for McM's property and casualty subsidiaries
are prescribed or permitted by state regulatory authorities ("statutory
accounting") and may differ from generally accepted accounting principles
("GAAP"). OF&C (which includes Wilshire on a statutory equity basis) reported to
insurance regulatory authorities combined statutory accounting capital and
surplus of $18.2 million and $19.2 million at December 31, 1996 and 1995,
respectively. Combined capital and surplus on a GAAP basis was $23.6 million and
$24.3 million at December 31, 1996 and 1995, respectively.
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There are two major reconciling differences between the statutory
accounting and GAAP capital and surplus balances of McM's property and casualty
subsidiaries. In GAAP accounting, costs which vary with and are primarily
related to the production of property and casualty business are deferred to the
extent recoverable and are amortized over the lives of the policies in
proportion to the recognition of premium earned. Statutory accounting does not
permit this deferral and requires property and casualty companies to fully
recognize these expenses in the period they were incurred. At December 31,
1996, McM's property and casualty subsidiaries recorded $4.0 million in
deferred policy acquisition as an asset on the GAAP balance sheet compared to
$3.3 million at December 31, 1995. Statutory accounting also requires property
and casualty companies to record as a liability and restriction to capital and
surplus the uncollateralized portion of balances receivable from non-admitted
reinsurers ("Schedule F Penalty"). The combined Schedule F Penalty recorded by
McM's property and casualty subsidiaries totalled $269,000 and $403,000 at
December 31, 1996 and 1995, respectively.
Insurance holding company laws grant additional powers to insurance
regulators with respect to acquisitions and control of insurance companies by
holding companies and the requirements of disclosure relating to transactions
with affiliated companies.
Each company files a detailed annual report with the insurance
department of each state or governmental jurisdiction in which it is licensed to
do business. Insurance companies are also subject to periodic examinations by
these regulatory bodies. Some of the jurisdictions in which OF&C is licensed to
do business have, for various reasons, instituted restrictions or limitations on
the amount of business written in that state. These restrictions were imposed
years ago when the property and casualty companies were generating substantial
losses and experiencing financial difficulties. Generally they involved states
in which the Company was not actively writing business nor had intentions to
write business. These restrictions have no current effect on liquidity, capital
resources or results of operations. In the future, should the Company desire to
further expand its market presence into any state with such restrictions, it
will then pursue the lifting of such restrictions by providing current financial
and operational information as required by individual state regulatory
authorities.
In May 1993, the North Carolina Commissioner of Insurance issued an
administrative order that required the property and casualty operations to
maintain a specified net premiums to surplus ratio and required prior approval
of the Commissioner for certain transactions. During 1993, management undertook
measures necessary to comply with the conditions of the order. In June 1994,
the Commissioner vacated the order.
Reinsurance. As with other property and casualty insurance companies, the McM
property and casualty insurance companies reinsure a portion of
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the insurance they write in order to control their exposure on large individual
risks or in the event of catastrophic losses. The companies remain contingently
liable on that portion of the risk reinsured should the reinsurer be unable to
meet its obligations under the reinsurance agreements. See Note C of the Notes
to Consolidated Financial Statements.
The largest liability exposure insured for any one risk is $2,000,000.
Reinsurance is in place to reduce the companies' exposure on premiums earned
subsequent to January 1, 1992, to $100,000 of loss per risk. The retention per
risk on premiums earned prior to January 1, 1992, generally is $100,000 with
the exception of 1991 when the loss retention was $250,000. Premiums payable
under certain of the companies' liability reinsurance treaties prior to January
1, 1990, are based in part on actual loss experience. Premiums for the
liability treaties subsequent to 1990 are calculated on a flat rate based on
policy limits. Separate physical damage (excluding theft and collision) and
motor cargo catastrophe reinsurance treaties provide reinsurance on any one
catastrophic occurrence. Coverages under these treaties are limited to a
maximum of 95% of $4,000,000 in excess of the first $500,000 of losses paid.
Quota share reinsurance coverages, by which the companies and their
reinsurers share risk on a proportionate basis, are also in place for both
commercial and private passenger automobile business. The companies cede 5% of
the retained commercial auto liability coverages. Prior to 1996, private
passenger automobile business was ceded at a rate of 40%; however, effective
January 1, 1996, the cession rate was reduced to 30%. These quota share
arrangements allow the companies to better control premium growth.
The principal reinsurers of the companies for current business are
Zurich Reinsurance, Ltd., Unionamerica Insurance Company, CNA International
Reinsurance Company, Ltd., Lloyds Underwriters, AXA Reassurance Company and
Sphere Drake Insurance. Reinsurance agreements cover commercial and private
passenger automobile liability, physical damage (excluding theft and collision),
motor cargo and ancillary coverages. In addition to the reinsurers named above,
principal reinsurers of the companies for prior years' reinsurance treaties are
Employers Reinsurance Corporation, National Reinsurance Company and Reinsurance
Corporation of New York.
Loss Reserves and Loss Adjustment Expenses
The consolidated financial statements include the estimated liability
for unpaid losses and loss adjustment expenses ("LAE") of the property and
casualty insurance subsidiaries. The liabilities for losses and LAE are
determined using case basis evaluations and statistical projections and
represent estimates of the ultimate net cost of all unpaid losses and LAE
incurred through December 31 of each year. These estimates give effect to trends
in claims severity and other
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factors which may vary as the liabilities are ultimately settled. The estimates
are continually reviewed and, as adjustments to these liabilities become
necessary, such adjustments are reflected in current operations.
The following table provides a reconciliation of beginning and ending
liability balances for 1996, 1995 and 1994.
Reconciliation of Net Liability for Losses
and Loss Adjustment Expenses
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
======= ======= =======
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The reconciliation above reflects the emergence of a $1,559,000
deficiency in the December 31, 1995, reserve during 1996. This deficiency
includes adverse reserve development of approximately $572,000 in private
passenger auto liability reserves, $1.2 million in private passenger auto and
commercial auto physical damage and inland marine reserves. In addition,
approximately $613,000 of this deficiency relates to discontinued lines of
business and participation in involuntary pools and other residual market
mechanisms in which OF&C and Wilshire are required to participate by the
various states in which the companies write insurance. The above adverse
development was partially offset by favorable reserve development of $800,000
in the commercial auto liability line of business.
The anticipated effect of inflation is implicitly considered when
estimating liabilities for losses and settlement expenses. While anticipated
cost increases due to inflation are considered in estimating the ultimate claim
costs, the increase in average severity of claims is caused by a number of
factors that vary with the individual type of policy written. Future average
severity is projected based on historical trends adjusted for anticipated
changes in these trends and general economic conditions. These anticipated
trends are monitored based on actual development and are modified as necessary.
The liability for losses and LAE of $55,300,000 reported in the
accompanying financial statements in accordance with generally accepted
accounting principles (GAAP) is reported on a gross basis, i.e., without
reduction for reinsurance, and differs from that reported in the annual
statements filed with state insurance departments in accordance with statutory
accounting practices (SAP), which are reported net of reinsurance. See Note A of
the accompanying 1996 financial statements.
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ANALYSIS OF LOSS AND LOSS ADJUSTMENT
EXPENSE DEVELOPMENT
NET OF REINSURANCE WITH SUPPLEMENTAL GROSS DATA
(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
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The table above presents the development of balance sheet liabilities
for 1986 through 1996. The top line of the table shows the estimated liability
for unpaid losses and LAE recorded at the balance sheet date for each of the
indicated years. This liability represents the estimated amount of losses and
LAE for claims arising in all prior years that are unpaid at the balance sheet
date, including losses that had been incurred but not yet reported to the
Company. The lower portion of the table shows the re-estimated amount of the
previously recorded liability based on experience as of the end of each
succeeding year. The estimate is increased or decreased as more information
becomes known about the frequency and severity of claims for individual years.
The deficiency/(redundancy) represents the aggregate change in the
estimates over all prior years. For example, through 1996, the 1987 liability
has developed a $6,893,000 deficiency which has been recognized in operations
over the nine year period. The effects on income of the past three years of
changes in estimates of the liabilities for losses and LAE is shown in the
preceding table, "Reconciliation of Net Liability for Losses and Loss Adjustment
Expenses".
The upper section of the table, "Analysis of Loss and Loss Adjustment
Expense Development", shows the cumulative amount paid with respect to the
previously recorded liability as of the end of each succeeding year. For
example, as of December 31, 1996, the Company paid $115,430,000 of the current
re-estimated reserve for losses and loss adjustment expenses at December 31,
1986, of $118,386,000. Thus an estimated $2,956,000 of losses incurred through
1986 remain unpaid as of the current financial statement date.
In evaluating this information, it should be noted that each amount
includes the effects of all changes in amounts for prior periods. For example,
the amount of the deficiency related to losses settled in 1988, but incurred in
1986, will be included in cumulative redundancy (deficiency) amount for years
1986 and 1987. This table does not present accident or policy year development
data. Conditions and trends that have affected development of the liability in
the past may not necessarily occur in the future. In addition, the Company has
entered into numerous reinsurance commutations and assumption transactions, as
discussed below, which are included in the information presented. Accordingly,
it may not be appropriate to extrapolate future deficiencies or redundancies
based on this table.
On March 5, 1987, the Company entered into a commutation agreement with
Omaha Indemnity Company (OIC), a subsidiary of Mutual of Omaha, whereby OIC
remitted $26 million of cash to the Company in satisfaction of all liabilities
due under various reinsurance treaties. Of this amount, $5.5 million reimbursed
existing paid loss recoverables leaving $20.5 million available to cover future
loss payments on the commuted block
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of reserves. Based on a review of the commuted reserves by the Company's
actuary and by an independent actuarial consulting firm, the projected ultimate
value of commuted reserves and paid loss recoverables exceeded the commutation
proceeds by $5.5 million. This transaction was recorded in the 1986
consolidated GAAP financial statements, and is reflected in the loss
development schedule as additional adverse reserve development of approximately
$5.3 million relating to year-end reserves for 1985, as of December 31, 1986.
Loss and loss adjustment expense reserves related to this block of business and
recorded at December 31, 1996, are not significant.
During 1985 McM entered into a commutation agreement with Universal
Reinsurance Corporation and Northwestern National Insurance Company, whereby
they remitted $15.5 million of cash to McM's property and casualty subsidiaries
in satisfaction of all liabilities due under the various reinsurance treaties.
This cash settlement was supplemented by $1 million in development recorded
during 1986. An additional $1.7 million in development was recorded during 1987.
The Company has experienced no significant development on this business since
1987 and remaining loss and loss adjustment expense reserves at December 31,
1996, are not significant.
Additionally, the Company experienced adverse development of $1.2
million during 1987 on reserves commuted with several other reinsurers. No
significant development has been experienced on these reserves since 1987.
Effective December 31, 1985, OF&C assumed the liabilities on business
previously written by Peninsular Fire Insurance Company ("PFICO"), a former
subsidiary of McM. The coverages, which were primarily workers' compensation and
commercial multi-peril, are being run off and no new coverages have been
underwritten. Adverse development on the PFICO reserves was $2.5 million in
1985, $3.1 million in 1986, $3.9 million in 1987, and $3.1 million in 1988.
Development since 1988 has not been significant.
The information below the table is a reconciliation of the data in the
table, which is reported net of reinsurance, to the reserves in the balance
sheet which are stated gross of reinsurance.
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Geographic Distribution of Direct Written Premiums
The following is a summary of property and casualty direct premiums
written in 1996 by geographic location. States accounting for less than five
percent (5%) of premiums are combined in "Other".
STATE PERCENT
----- -------
California 34
Florida 9
Nevada 13
Ohio 6
Utah 5
Other 33
---
100%
Item 1. (d) Financial Information About Foreign and Domestic Operations
and Export Sales
The information called for under this item does not apply.
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Item 2. Properties
McM and its subsidiaries lease home office properties in various
locations. The major locations are set forth in the following table:
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.
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Item 8. Financial Statements and Supplementary Data
The consolidated financial statements of McM Corporation and
subsidiaries and the report of independent auditors filed in response to Item 8
are incorporated by reference from the Annual Report to Shareholders beginning
on page 45 of this report.
A summary of the quarterly results of operations for the years ended
December 31, 1996, and December 31, 1995, is incorporated by reference from the
Annual Report to Shareholders on page 69 of this report.
Item 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure
The information called for under this item does not apply.
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PART III
Item 10. Directors and Executive Officers of the Registrant
The information called for is incorporated by reference and will be
filed with the Commission with the definitive proxy statement within the
required 120-day period.
Item 11. Executive Compensation
The information called for is incorporated by reference and will be
filed with the Commission with the definitive proxy statement within the
required 120-day period.
Item 12. Security Ownership of Certain Beneficial Owners and
Management
The information called for is incorporated by reference and will be
filed with the Commission with the definitive proxy statement within the
required 120-day period.
Item 13. Certain Relationships and Related Transactions
The information called for is incorporated by reference and will be
filed with the Commission with the definitive proxy statement within the
required 120-day period.
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PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on
Form 8-K
Page
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(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):
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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
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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.
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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