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EXHIBIT 16
[PAINEWEBBER INCORPORATED LETTERHEAD]
July 16, 1998
Board of Directors
McM Corporation
702 Oberlin Road
Raleigh, North Carolina 27605
Ladies and Gentlemen:
IAT Reinsurance Syndicate, Ltd. (the "Purchaser") proposes to make a
tender offer (the "Offer") for the shares of the common stock, par value $1.00
per share (the "Shares"), of McM Corporation (the "Company") not owned by the
McMillen Trust (the "Trust") and to enter into an agreement with Wilmington
Trust Company, as trustee for the Trust, to purchase 658,900 shares of common
stock of the Company owned by the Trust (collectively the "Sale Transaction").
Shareholders participating in the Sale Transaction will be entitled to receive
$3.65 per share in cash at closing.
You have asked us whether or not, in our opinion, the proposed cash
consideration to be received by the shareholders participating in the Sale
Transaction is fair to such shareholders from a financial point of view.
In arriving at the opinion set forth below, we have, among other
things:
(1) Reviewed the Company's Annual Reports, Forms 10-K and related
financial information for the five fiscal years ended December
31, 1997, and the Company's Form 10-Q and the related
unaudited financial information for the three months ended
March 31, 1998;
(2) Reviewed the Purchaser's financial information for the fiscal
year ended December 31, 1997, and the unaudited financial
information for the three months ended March 31, 1998;
(3) Reviewed certain information relating to the business,
earnings, cash flow and assets of the Company, furnished to us
by the Company;
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(4) Conducted discussions with members of senior management of the
Company concerning its businesses;
(5) Compared the results of operations of the Company with that of
certain companies which we deemed to be relevant;
(6) Reviewed the historical market prices and trading activity for
the Shares and compared them with that of certain publicly
traded companies which we deemed to be relevant;
(7) Compared the proposed financial terms of the Offer with the
financial terms of certain other mergers and acquisitions
which we deemed to be relevant;
(8) Reviewed a draft of the materials dated July 13, 1998,
relating to the Offer; and
(9) Reviewed such other financial studies and analyses and
performed such other investigations and took into account such
other matters as we deemed necessary.
In preparing our opinion, we have relied on the accuracy and
completeness of all information supplied or otherwise made available to us by
the Company, and we have not assumed any responsibility to independently verify
such information. We have also relied upon assurances of the management of the
Company that they are unaware of any facts that would make the information
provided to us incomplete or misleading. We have not made any independent
evaluation or appraisal of the assets or liabilities (contingent or otherwise)
of the Company, nor have we been furnished with any such evaluations or
appraisals. We have also assumed, with your consent, that any material
liabilities (contingent or otherwise, known or unknown) of the Company are as
set forth in the consolidated financial statements of the Company. This opinion
does not constitute a recommendation to any shareholder of the Company as to
whether any such shareholder should or should not tender his shares in the
Offer. This opinion does not address the relative merits of the Offer and any
other transactions or business strategies discussed by the Board of Directors of
the Company as alternatives to the Offer or the decision of the Board of
Directors of the Company with respect to the Offer. Our opinion is based on
economic, monetary and market conditions existing on the date hereof.
In rendering this opinion, we have not been engaged to act as an agent
or fiduciary of, and the Company has expressly waived any duties or liabilities
we may otherwise be deemed to have had to, the Company's equity holders or any
other third party.
In the ordinary course of business, PaineWebber Incorporated may trade
in the securities of the Company and the Purchaser for our own account and for
the accounts of our customers and, accordingly, may at any time hold long or
short positions in such securities.
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PaineWebber Incorporated is currently acting as financial advisor to
the Company in connection with the Offer and will be receiving a fee in
connection with the rendering of this opinion and upon consummation of the
Offer. In the past, PaineWebber Incorporated and its affiliates have provided
investment banking and other financial services to the Company and have received
fees for rendering these services.
On the basis of, and subject to the foregoing, we are of the opinion
that the proposed $3.65 in cash consideration to be received by the shareholders
participating in the Sale Transaction is fair to such shareholders from a
financial point of view.
This opinion has been prepared for the information of the Board of
Directors of the Company in connection with the Offer and shall not be
reproduced, summarized, described or referred to, provided to any person or
otherwise made public or used for any purpose without the prior written consent
of PaineWebber Incorporated.
Very truly yours,
PAINEWEBBER INCORPORATED
/s/ PaineWebber Incorporated
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McM CORPORATION
702 OBERLIN ROAD
RALEIGH, NORTH CAROLINA 27605
INFORMATION STATEMENT PURSUANT TO
SECTION 14(F) OF THE SECURITIES
EXCHANGE ACT OF 1934 AND RULE 14F-1 THEREUNDER
This Information Statement is being mailed on or about July 23, 1998, to
the holders of record of the Shares at the close of business on or about July
16, 1998, as a part of the Company's Solicitation/ Recommendation Statement on
Schedule 14D-9 with respect to the Offer by Purchaser IAT Reinsurance Syndicate
Ltd. (the "Schedule 14D-9"). You are receiving this Information Statement in
connection with the possible election of persons designated by the Purchaser to
a majority of the seats on the Board of Directors of the Company (the "Board").
The terms of the Offer and Rights Agreement, a summary of the events
leading up to the Offer and the execution of the Offer and Rights Agreement and
other information concerning the Offer are contained in the Offer to Purchase,
the related Letter of Transmittal and the Schedule 14D-9, copies of which are
being delivered to the Company's shareholders contemporaneously herewith.
This Information Statement is required by Section 14(f) of the Exchange Act
and Rule 14f-1 thereunder. You are urged to read this Information Statement
carefully. You are not, however, required to take any action. Capitalized terms
used herein and not otherwise defined herein shall have the meaning set forth in
the Schedule 14D-9. The information contained in this Information Statement
concerning the Purchaser and the Purchaser Designees has been furnished to the
Company by the Purchaser, and the Company assumes no responsibility for the
accuracy or completeness of such information.
Pursuant to the Offer and Rights Agreement, Purchaser commenced the Offer
on July 23, 1998. The Offer is scheduled to expire at 5:00 p.m., New York City
Time, on Friday, August 21, 1998, unless the Offer is extended.
BOARD OF DIRECTORS AND EXECUTIVE OFFICERS
GENERAL
The Shares are the only class of voting securities of the Company
outstanding. Each Share has one vote. As of July 16, 1998, there were 4,706,388
Shares outstanding. The Board of Directors currently consists of eight members,
each of whom is elected to a one-year term. Each director holds office until
such director's successor is elected and qualified or until such director's
earlier resignation or removal.
RIGHT TO DESIGNATE DIRECTORS; THE PURCHASER DESIGNEES
Pursuant to the Offer and Rights Agreement, promptly upon the purchase by
Purchaser of Shares pursuant to the Offer, and from time to time thereafter,
Purchaser shall be entitled to designate up to such number of directors (the
"Purchaser Designees"), rounded up to the next whole number, on the Company's
Board of Directors as shall give Purchaser majority representation on the Board
of Directors, and the Company shall at such times promptly take all actions
necessary to cause the Purchaser Designees to be elected as directors of the
Company, including increasing the size of the Board of Directors or securing the
resignations of incumbent directors or both. At such times, the Company shall
use its best efforts to cause Purchaser Designees to constitute a majority of
(i) each committee of the Board of Directors, (ii) each board of directors of
each subsidiary of the Company and (iii) each committee of each such board, in
each case only to the extent permitted by applicable law. Notwithstanding the
foregoing, until such time as Purchaser acquires a majority of the then
outstanding Shares on a fully diluted basis, the Company shall use its best
efforts to ensure that all the members of the Board of Directors and each
committee of the Board of Directors and such boards and committees of such
subsidiaries as of the date of the Offer and Rights Agreement who are not
employees of the Company shall remain members of the Board of Directors and of
such boards and committees.
Purchaser has informed the Company that each of the Purchaser Designees
listed below has consented to act as a director.
It is expected that the Purchaser Designees may assume office at any time
following the consummation of the Offer, which purchase cannot be earlier than
August 21, 1998, and that, upon assuming office, the Purchaser Designees will
thereafter constitute at least a majority of the Board of Directors.
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Biographical information concerning each of the Purchaser Designees is
presented on the following page.
PURCHASER DESIGNEES
The following table sets forth the name, age, business or residence
address, principal occupation or employment at the present time and during the
last five years, and the name, principal business and address of any corporation
or other organization in which such employment is conducted or was conducted of
each Purchaser Designee. Except for Messrs. Amaral and Spurling, each of whom is
a citizen of Great Britain, each of Purchaser's Designees is a citizen or
permanent resident of the United States.
PRINCIPAL OCCUPATION OR EMPLOYMENT
AND MATERIAL OCCUPATIONS FOR PAST
FIVE YEARS, NAME, PRINCIPAL BUSINESS
BUSINESS (B) OR RESIDENCE (R) AND ADDRESS OF PRINCIPAL OFFICE OF
NAME ADDRESS EMPLOYER
- ---- ----------------------------- ------------------------------------
John D. Amaral, 40........ (b) Victoria Hall Vice President/Account Manager, J&H
11 Victoria Street Marsh & McLennan, a risk management
Hamilton HM11, Bermuda and insurance services firm.
11 Victoria Street
Hamilton HM11, Bermuda
Marguerite R. Gorman, (r) 56 Kilburn Road Secretary of Purchaser; Vice
67...................... Garden City, New York 11530 President, Spear, Leeds & Kellogg, a
broker-dealer.
120 Broadway
New York, New York 10271
Peter R. Kellogg, 55...... (b) 120 Broadway President of Purchaser; Senior
New York, New York 10271 Managing Director, Spear, Leeds &
Kellogg, a broker-dealer.
120 Broadway
New York, New York 10271
Richard D. Spurling, 52... (b) 41 Cedar Avenue Partner, Appleby Spurling & Kempe, a
Hamilton HM12, Bermuda...... law firm.
41 Cedar Avenue
Hamilton HM12, Bermuda
Edward A. Kerbs, 47....... (b) 813 River Road President, Oceanic Company Inc. 3/97
Fair Haven, New Jersey 07704 to present; Managing Director,
Spear, Leeds & Kellogg 2/84-12/96.
813 River Road
Fair Haven, New Jersey 07704
None of the Purchaser Designees (i) is currently a director of or holds any
position with, the Company, (ii) has a familial relationship with any of the
directors or executive officers of the Company or (iii) to the best knowledge of
the Company, beneficially owns any securities (or rights to acquire any
securities) of the Company. The Company has been advised by Purchaser that none
of the Purchaser Designees has been involved in any transactions with the
Company or any of its directors, executive officers or affiliates which are
required to be disclosed pursuant to the rules and regulations of the
Commission, except as may be disclosed herein or in the Schedule 14D-9. The
Company has been advised by Purchaser that none of the Purchaser Designees other
than Peter R. Kellogg is a director of a publicly held company. Mr. Kellogg is a
director of investment firms Interstate/Johnson Lane, Inc. and The Ziegler
Companies, Inc.
The Purchaser has advised the Company that none of the Purchaser Designees
has, during the last five years, been convicted in a criminal proceeding
(excluding traffic violations and similar misdemeanors) or was party to a civil
proceeding of a judicial or administrative body of competent jurisdiction and as
a result of such proceeding was, or is, subject to a judgment, decree or final
order enjoining future violations of, or prohibiting activities subject to,
federal or state securities laws or finding any violation of such laws.
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PRINCIPAL SHAREHOLDERS
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
Set forth below is the ownership of the Company's securities by all persons
or groups known to the Company to be the beneficial owner of more than five
percent of any class of the Company's voting securities as of April 10, 1998:
AMOUNT AND NATURE PERCENT
NAME AND ADDRESS OF BENEFICIAL OF
TITLE OF CLASS OF BENEFICIAL OWNER OWNERSHIP CLASS
- -------------- ----------------------------- ----------------- -------
Common....................... McMillen Trust(1) 3,087,500 shares 65.7%
Wilmington Trust Company, directly owned
Trustee
1100 North Market Street
Wilmington, Delaware
19890-0001
Common....................... Jesse Greenfield(2) 364,464 shares 7.8%
34 Boulder View Lane
Boulder, Colorado 80304
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(1) The McMillen Trust was created in 1925 pursuant to the terms of a deed of
trust from Alonzo B. and Florence O. McMillen. The Trust continues in
existence until the expiration of 21 years after the last to die of
Elizabeth Lee Long, Florence Lee Headley, R. Peyton Woodson III and Laurence
F. Lee, Jr. The McMillen Trust has been directed by the Chancery Court of
the State of Delaware to dispose of its interest in McM. 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
shall be determined in the sound discretion of the Trustee.
The Trustee of the McMillen Trust, subject to certain limitations, is
required to vote the shares which it owns in McM in the way that a majority in
interest of the income beneficiaries may decide. At present there are six income
beneficiaries of the McMillen Trust. All are lineal descendants of the Trust
grantors. The figures following each name show the relative interests in the
Trust of the income beneficiaries:
a. Mrs. Elizabeth Lee Long (1/9), Denver, Colorado.
b. Mrs. Florence Lee Headley (1/9), Denver, Colorado.
c. Mr. Laurence F. Lee, Jr. (1/9), Jacksonville, Florida. Mr. Lee is a
director of McM. (See Election of Directors)
d. Mrs. Lonnie McMillen Sanchez (1/6), Albuquerque, New Mexico. Mrs.
Sanchez is married to Claude G. Sanchez, Jr., a director of McM. (See
Election of Directors)
e. Mrs. Katherine Faust Roe (1/6), Sante Fe, New Mexico.
f. Mr. R. Peyton Woodson III (1/3), Raleigh, North Carolina. Mr. Woodson is
a director of McM. (See Election of Directors)
(2) Amount shown includes 118,455 shares owned by the Greenfield Children's
Limited Partnership, beneficial ownership of which is disclaimed by Mr.
Greenfield, and 246,009 shares owned by Jesse Greenfield I.R.A.
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The following table sets forth the name and age of each director, the
director's occupation, including positions and offices with the Company, the
period during which he has served as a director, together with the number of
shares of common stock beneficially owned, directly or indirectly, by such
director and the percentage of the outstanding shares that any such ownership
represented at the close of business on March 31, 1998.
PERIOD OF AMOUNT AND PERCENT
CONSECUTIVE NATURE OF CLASS
DIRECTOR'S NAME, PRINCIPAL OCCUPATION SERVICE OF BENEFICIAL BENEFICIALLY
(IN ADDITION TO DIRECTOR, IF APPLICABLE) AND ADDRESS AGE FROM OWNERSHIP(1) OWNED
- ---------------------------------------------------- --- ----------- ------------- ------------
Michael A. DiGregorio.................................. 51 1995 80 .002
Vice President/Senior Trust Counsel
Wilmington Trust Company Wilmington, DE
Jesse Greenfield....................................... 52 1998 364,464(2) 7.760
Independent Investor &
Venture Capitalist
Boulder, CO
George E. King......................................... 67 1989 97,281(3) 2.071
Chairman Emeritus/Chief Executive Officer
McM Corporation
Raleigh, NC
Laurence F. Lee, Jr.................................... 76 1989 779(4) .017
Retired
Jacksonville, FL
Laurence F. Lee III.................................... 47 1988 10(5) --
President
Plan Analysts
Jacksonville, FL
Claude G. Sanchez, Jr.................................. 43 1989(6) 50(7) .001
Sun Construction & Real Estate Company
Albuquerque, NM
Stephen L. Stephano.................................... 44 1992 85,496(8) 1.820
President/Chief Operating Officer
McM Corporation
Raleigh, NC
R. Peyton Woodson III.................................. 75 1991(9) 39,734(10) .846
President
Enterprise Holdings Proprietary, Inc.
Raleigh, NC
Share ownership of all Directors
and Executive Officers of McM as a Group (8 persons).................... 587,894(11) 12.517(11)
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(1) Except as otherwise noted, each person has sole investment and voting power
over the common stock indicated as being beneficially owned by such person.
(2) Amount shown includes 118,455 shares held by the Greenfield Children's
Limited Partnership, the limited partners of which are Mr. Greenfield's
children and the general partner of which is Mr. Greenfield's brother,
beneficial ownership of which is disclaimed by Mr. Greenfield, and 246,009
shares owned by Jesse Greenfield I.R.A.
(3) Share amount includes an exercisable option on 21,481 shares of McM common
stock at an option price of $1.38 per share, an exercisable option on 5,700
shares of McM common stock at an option price of $2.25 per share, an
exercisable option on 24,300 shares of McM common stock at an option price
of $2.75 per share and an exercisable option on 1,500 shares of McM common
stock at $3.94 per share. Mr. King owns 44,300 shares jointly with his
wife.
(4) Mr. Lee, Jr. is an income beneficiary of the McMillen Trust, which is the
owner of 3,087,500 shares (or 65.7%) of the Company. The Trust's shares are
not included in the total shown for Mr. Lee, Jr. (See
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Principal Shareholders). The number of shares shown is comprised of 500
shares directly owned by Mr. Lee, Jr. and 279 shares owned jointly with his
wife. Mr. Lee, Jr. is the first cousin of director R. Peyton Woodson III
and is the father of director Laurence F. Lee III.
(5) Mr. Lee III is the son of director Laurence F. Lee, Jr. who is an income
beneficiary of the McMillen Trust. Mr. Lee III directly owns 10 shares of
McM.
(6) Date on which Mr. Sanchez was elected currently to the Board of Directors
of McM. He previously served on the Board of McM from May 1985 to April
1988.
(7) Mr. Sanchez is the husband of Lonnie McMillen Sanchez. Mrs. Sanchez is an
income beneficiary of the McMillen Trust. Mrs. Sanchez directly owns 50
shares of McM.
(8) Share amount includes an exercisable option on 21,481 shares of McM common
stock at an option price of $1.38 per share, an exercisable option on 5,700
shares of McM common stock at an option price of $2.25 per share, an
exercisable option on 24,300 shares of McM common stock at an option price
of $2.75 per share and an exercisable option on 1,500 shares of McM common
stock at an option price of $3.94 per share. Mr. Stephano owns 23,675
shares jointly with his wife and 8,840 shares directly.
(9) Date on which Mr. Woodson was elected currently to the Board of Directors
of McM. He previously served on the Board from December 1977 to May 1985.
(10) Mr. Woodson is an income beneficiary of the McMillen Trust, which is the
owner of 3,087,500 shares (or 65.7%) of the Company. The Trust's shares are
not included in the total shown for Mr. Woodson (See Principal
Shareholders). The number of shares shown is comprised of 725 shares
directly owned by Mr. Woodson, 459 shares owned by Mr. Woodson's wife and
38,550 shares owned by a charitable foundation of which Mr. Woodson is one
of five trustees. Mr. Woodson is the first cousin of director-nominee
Laurence F. Lee, Jr.
(11) This number does not include shares owned by the McMillen Trust. See
Footnotes (4) and (10).
BUSINESS EXPERIENCE OF THE DIRECTORS
Mr. DiGregorio has served as a director of McM since May 1995. He has also
served for more than seven years as Vice President and Senior Trust Counsel with
Wilmington Trust Company in Wilmington, Delaware, where he manages the Estate
and Legal Services Division. A graduate of Temple University, Mr. DiGregorio was
admitted to the Pennsylvania Bar in 1979, and was then employed as an
Investigator for the United States Department of Labor. Prior to joining
Wilmington Trust, Mr. DiGregorio worked as an Employee Benefits Attorney for the
Fidelity Mutual Group in Radnor, Pennsylvania, and later at the law firm of
Stradley, Ronon, Stevens & Young in Philadelphia, Pennsylvania.
Mr. Greenfield has served as a director of McM since May 1998. Mr.
Greenfield has been involved as a private investor and venture capitalist for
many years. In addition, he has worked for thirty years in the stock brokerage
business as an OTC trader/specialist. Prior to his employment in the brokerage
business, he served on the professional staff of Haskins & Sells, an
international public accounting firm.
Mr. King has served as a director of McM since February 1989. Mr. King has
also acted as Chairman of the Board of McM and Chairman of all of its
subsidiaries since February 1989 when he was named President and Chief Executive
Officer. He was elected Chairman Emeritus of McM in August 1996. He served as
President of McM subsidiaries Occidental Life and Peninsular Life Insurance
Companies until McM sold those companies on October 24, 1991. Through December
1988, Mr. King served as Executive Vice President of McM, to which position he
was named in January 1985. Prior to his affiliation with McM, Mr. King was
Deputy Commissioner and Chief Examiner with the North Carolina Department of
Insurance.
Mr. Lee, Jr. has served as a director of McM since February 1989. Mr. Lee
retired as an insurance executive in 1975. He served as President of Peninsular
Life Insurance Company from 1959 to 1964 and as Chairman of the Board and Chief
Executive Officer from 1964 to 1973.
Mr. Lee III has served as a director of McM since January 1988. He is
President and owner of Plan Analysts, a group insurance and estate planning
organization located in Jacksonville, Florida, with which he has been associated
for more than fifteen years.
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Mr. Sanchez has served as a director of McM since February 1989. He
previously served as a director of McM from May 1985 to April 1988. He is
currently affiliated with Sun Construction & Real Estate Company in Albuquerque,
New Mexico. He is the former owner and operator of Lonkita Farms, a thoroughbred
horse racing and breeding operation located in Veguita, New Mexico. Mr. Sanchez
previously served as a director of British-American Insurance Company, Limited,
Nassau, Bahamas.
Mr. Stephano has served as a director of McM since August 1992. In August
1996, he was elected President of McM. In March 1995, he was elected Chief
Executive Officer of McM subsidiaries Occidental Fire & Casualty Company of
North Carolina and Wilshire Insurance Company after having been named President
of both companies in July 1994. He was named Chief Operating Officer of McM and
its subsidiaries in September 1992. Previously, Mr. Stephano was named Executive
Vice President of McM in January 1988. He had been named Senior Vice
President/Chief Financial Officer of McM in January 1985. Mr. Stephano's various
other previous positions at McM have been Vice President, Chief Financial
Officer and Treasurer beginning in 1983; Vice President and Controller beginning
in January 1983; Controller beginning in 1982. Prior to his employment with McM,
he served on the professional staff of Ernst & Young, an international public
accounting firm.
Mr. Woodson has served as a director of McM since August 1991. He
previously served as a director of McM from December 1977 to May 1985. He is
currently President of Enterprise Holdings Proprietary, Inc., a holding company
for several private ventures. Mr. Woodson held various executive positions
within the McM group of companies throughout his career, including Chairman of
the Board of McM from December 1977 to May 1985.
DIRECTORS' FEES
Directors who are not salaried officers of McM or its subsidiaries are
compensated at a rate of $15,000 per year plus $1,000 per diem for each Board or
Board committee meeting attended and $1,000 per diem for travel associated with
such meeting. The directors are also reimbursed for other expenses incurred in
attending the meetings. Similarly, directors involved in special assignments are
compensated at the rate of $1,000 per diem for special assignments and $1,000
per diem for travel associated with such special assignments. As with regular
Board meetings, other expenses incurred by these directors in attending such
special assignments are reimbursed.
In addition, directors who are not salaried officers are compensated at a
rate of $5,000 per year for each subsidiary company Board of Directors on which
they serve. Per diem allowances are the same as those for serving on the McM
Board of Directors except that no per diem allowances are paid if Board meetings
are held concurrently. During 1997, all subsidiary Board meetings were held
concurrently with McM Board meetings. Total fees in the amount of $251,500 were
expended for all regular McM and subsidiary Board meetings, Board committee
meetings and special assignments during 1997. Directors who are salaried
officers receive no compensation for their services as directors of McM.
Notwithstanding the foregoing, as part of a litigation settlement, Mr.
Greenfield is not entitled to any directors' fees during his first year of
service as director. He is, however, reimbursed for expenses incurred in
attending board meetings according to the same policies followed with regard to
all other directors.
BOARD AND COMMITTEES OF THE BOARD
The Board of Directors met thirteen times in formal session during the 1997
fiscal year. Directors of the Board also met seven times for special assignments
during 1997.
The committees of the McM Board are Audit, Executive, Personnel, Investment
and Compensation. The Company does not have a nominating committee. Due to the
size of the McM Board, all the directors serve on the Personnel, Executive and
Investment Committees. Only directors who are not salaried officers serve as
members of the Audit and Compensation Committees.
The Audit Committee met four times during 1997, with R. Peyton Woodson III
acting as Chairman. The Audit Committee reviews the arrangement, scope and
results of the external audit, considers comments made
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by the independent auditors with regard to internal controls and the response of
management to such comments.
The Executive Committee did not meet during 1997. The Executive Committee
has been granted the authority of the Board in the management of the business
affairs of McM when the Board is not in session.
The Personnel Committee met two times during 1997, with Michael A.
DiGregorio acting as Chairman. The Personnel Committee reviews and monitors
compensation plans, including incentive compensation and benefit plans, other
than those addressed by the Compensation Committee. The Personnel Committee is
also responsible for management succession planning.
The Investment Committee met four times during 1997, with Laurence F. Lee,
Jr., acting as Chairman. The Investment Committee formulates investment strategy
and policy and ratifies all investment transactions.
The Compensation Committee met two times during 1997, with Laurence F. Lee
III acting as Chairman. The Compensation Committee, comprised of independent
directors who are not employees of McM or its subsidiaries, is charged with
administering and monitoring the compensation and incentive plans for executive
officers of McM and issues an annual report on compensation policies for
inclusion in McM's proxy statement.
EXECUTIVE OFFICERS OF MCM CORPORATION
The table below sets forth the names and ages of all executive officers of
McM, all positions and offices with McM presently held by each such person, and
the period of service as an officer with McM and subsidiaries.
PERIOD OF
SERVICE
AS AN
NAME AGE OFFICES OFFICER
- ---- --- ------- ----------
George E. King........................ 67 Chairman Emeritus and Chief Executive
Officer 12/77
Stephen L. Stephano................... 44 President and Chief Operating Officer 1/82
Mr. King -- See "Business Experience of the Directors."
Mr. Stephano -- See "Business Experience of the Directors."
EXECUTIVE OFFICERS' SUMMARY COMPENSATION TABLE
LONG TERM COMPENSATION
-------------------------------------
AWARDS PAYOUTS
ANNUAL COMPENSATION ------------------------ ----------
-------------------------------------------------- SECURITIES
OTHER RESTRICTED UNDERLYING
NAME AND PRINCIPAL ANNUAL STOCK OPTIONS LTIP ALL OTHER
POSITION YEAR SALARY($) BONUS($) COMPENSATION($)(3) AWARD(S)($) (#) PAYOUTS($) COMPENSATION(4)
- ------------------ ---- --------- -------- ------------------ ----------- ---------- ---------- ---------------
George E. King(1).... 1997 274,992 19,350 -- -- -- 0 7,192
Chairman Emeritus/
CEO.............. 1996 274,992 90,320 -- -- -- 22,324 7,120
1995 259,995 97,600 -- -- -- 9,324 6,886
Stephen L.
Stephano(2)........ 1997 225,000 15,850 -- -- -- 0 1,219
President/COO...... 1996 225,000 66,863(5) -- -- -- 15,921 1,126
1995 192,400 72,250(5) -- -- -- 6,301 971
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(1) Effective February 16, 1989, the Company entered into an employment contract
with Mr. King. The contract, as amended effective March 28, 1990, October
18, 1990, December 30, 1991, February 1, 1993, September 1, 1993, March 16,
1995, August 6, 1996, and March 26, 1998, provides that Mr. King be employed
as Chairman Emeritus and Chief Executive Officer of McM and Chairman of the
two operating subsidiaries and provides for base salary and such additional
discretionary bonuses, stock options or other compensation or increases in
compensation, if any, as may be authorized by the Company. In addition,
should Mr. King's employment be terminated without cause or should he
terminate his employment as a result of the Company requiring him to
relocate his office more than 50
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miles from its present location, he would be entitled to receive a lump sum
payment equal to two years' total annual compensation.
(2) Effective February 1, 1993, the Company entered into an employment contract
with Mr. Stephano. The contract, as amended September 1, 1993, March 16,
1995, August 6, 1996 and March 26, 1998, provides that Mr. Stephano be
employed as President and Chief Operating Officer of McM and as President
and Chief Executive Officer of the McM subsidiaries and provides base salary
and such additional discretionary bonuses, stock options or other
compensation or increases in compensation, if any, as may be authorized by
the Company. In addition, should Mr. Stephano's employment be terminated
without cause or should he terminate his employment as a result of the
Company requiring him to relocate his office more than 50 miles from its
present location, he would be entitled to receive a lump sum payment equal
to two years' total annual compensation.
(3) Information regarding personal benefits totaled less than $50,000 or 10% of
annual salary and bonus.
(4) The amounts noted represent premiums paid by the Company on behalf of
executive officers for supplemental term life insurance.
(5) Mr. Stephano also received 50,000 shares of phantom stock in 1995 and in
1996.
RETIREMENT PLAN
Officers of McM, including the named executive officers, participate in the
McM Corporation Retirement Plan. A sample retirement benefit table for the
Retirement Plan is outlined below showing the anticipated annual amount of
normal retirement benefits associated with final average earnings and the number
of years of service for the named executive officers.
RETIREMENT PLAN TABLE
YEARS OF SERVICE
PARTICIPANTS' FINAL --------------------------------------------------
AVERAGE EARNINGS 15 20 25 30 35
- ------------------- ------- ------- -------- -------- --------
$125,000...................................... $34,465 $45,953 $ 57,442 $ 68,930 $ 80,418
150,000...................................... 41,965 55,953 69,942 83,930 97,918
175,000...................................... 49,465 65,953 82,442 98,930 115,418
200,000...................................... 56,965 75,953 94,942 113,930 132,918
225,000...................................... 64,465 85,953 107,442 128,930 150,418
250,000...................................... 71,965 95,953 119,942 143,930 167,918
Benefits under the Retirement Plan are determined by multiplying a
participant's final average earnings (the best five consecutive years of the
last ten years) by 1.35% times the years of benefit service, multiplying a
participant's final average earnings in excess of Social Security Average Wages
by .65% times the years of benefit service (not in excess of 35 years) and
adding the two results together.
Under federal law, the amount of compensation which may be considered for
purposes of calculating benefits is limited. That amount will be adjusted
periodically for inflation in increments of $10,000. The 1997 limit is $160,000
and will not change for 1998 benefit calculations. Benefits paid to participants
are reduced in the event of earlier retirement. The estimated credited years of
service for McM's executive officers are 19 years for Mr. King and 17 years for
Mr. Stephano. Benefits shown in the Retirement Plan Table are not subject to any
deduction for social security or other offset amounts.
OPTION GRANTS IN LAST FISCAL YEAR
POTENTIAL REALIZED
% OF TOTAL VALUE AT
OPTIONS ASSUMED ANNUAL
NUMBER OF GRANTED RATE OF STOCK
SECURITIES TO EXERCISE PRICE APPRECIATION
UNDERLYING EMPLOYEES OR BASE FOR OPTION TERM
OPTIONS IN FISCAL PRICE PER EXPIRATION -------------------
NAME GRANTED YEAR SHARE DATE 5% 10%
---- ---------- ---------- --------- ---------- -------- --------
George E. King....................... 7,500 21.4% $3.94 03/25/07 $18,584 $47,095
Stephen L. Stephano.................. 7,500 21.4% $3.94 03/25/07 $18,584 $47,095
- ---------------
Both Messrs. King and Stephano's stock options become exercisable at a rate
of 20% per year beginning one year from the date of the grant.
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AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR
AND FISCAL YEAR-END OPTION VALUES
NUMBER OF SECURITIES
UNDERLYING UNEXERCISED VALUE OF UNEXERCISED
OPTIONS AT IN-THE MONEY OPTIONS AT
12/31/97($) 12/31/97($)
---------------------- -----------------------
SHARES ACQUIRED VALUE EXERCISABLE/ EXERCISABLE/
NAME ON EXERCISE(#) REALIZED($) UNEXERCISABLE UNEXERCISABLE
---- --------------- ----------- ---------------------- -----------------------
George E. King................ -0- -0- 47,185/31,796 49,986/19,934
Chairman Emeritus/CEO
Stephen L. Stephano........... -0- -0- 47,185/31,796 49,986/19,934
President/COO
SHAREHOLDER RETURN PERFORMANCE GRAPH
Set forth below is a line graph comparing the yearly percentage change on
the cumulative total shareholder return on the Company's common stock against
the cumulative total return of the S&P 500 Composite Index and the Center for
Research in Security Prices Index (CRSP) for NASDAQ Stocks (U.S. Insurance
Companies) Insurance Composite, comprised of 125 listed insurance companies, for
the five-year period beginning December 31, 1992, and ending December 31, 1997.
The values are based on the assumption that the value of the investment in McM
and each comparative index was $100 on December 31, 1992, and that all dividends
are reinvested.
COMPARISON OF FIVE YEAR CUMULATIVE RETURN
AMONG MCM CORPORATION, S&P 500 INDEX AND
CRSP INDEX FOR NASDAQ STOCKS (U.S. COMPANIES)
CRSP INDEX
FOR NASDAQ
MEASUREMENT PERIOD S&P 500 STOCKS (U.S.
(FISCAL YEAR COVERED) MCM CORP. INDEX COMPANIES)
12/31/92 100.0 100.0 100.0
12/31/93 137.5 109.8 113.2
12/31/94 250.0 111.3 120.0
12/31/95 525.0 153.1 167.8
12/31/96 530.8 188.8 192.8
12/31/97 328.6 252.0 231.0
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COMPENSATION COMMITTEE REPORT ON EXECUTIVE COMPENSATION
The Compensation Committee of the Board of Directors, which consists of
independent directors who are not employees of the Company or its subsidiaries,
has furnished the following report on executive compensation:
The Compensation Committee of the Board of Directors has developed and
implemented executive compensation policies, plans and programs in an effort to
enhance the profitability of the Company and thus shareholder value by closely
aligning the financial interests of McM's executive officers with those of its
shareholders. To accomplish these goals, the Company relies on base salary,
incentive compensation and other long term compensation plans to attract and
retain key executive officers with outstanding abilities and to motivate them to
perform to the full extent of their abilities.
The base salaries are fixed at competitive levels paid to senior executives
with comparable qualifications, experience and responsibilities as other
companies engaged in the same or similar businesses as McM. The Committee
reviews with the McM Board of Directors and recommends, and the Board approves,
with any modifications it deems appropriate, an annual salary plan for the
Company's executive officers (including the Chief Executive Officer). Such
salary plan is based on industry, peer group and national surveys and
performance judgments as to the past and expected future contributions of the
individual senior executives.
The incentive compensation for the current year has been closely tied to
McM's success in achieving the previous year's financial performance goals of
the ongoing property and casualty operations as defined in the McM Corporation
Key Executive Compensation Plan. The incentive compensation provided under the
plan is dependent upon attaining a percentage of target plan income for each
year as defined by the plan. Portions of incentive awards under the plan are
held back to be paid only upon the achievement of earnings performance in future
years.
Mr. King's base salary was not increased during 1997. The decision to
forego an increase was made after a careful evaluation by the Compensation
Committee of several factors, including current operating results. Portions of
incentive awards from prior years that were being held back under the incentive
compensation plan were forfeited by Mr. King because required earnings
performance was not achieved. However, in March 1997, Mr. King received an
incentive award under the incentive compensation plan described above, which
award was based upon property and casualty operating results for fiscal year
1996.
During each fiscal year, the Committee considers the desirability of
granting executive officers' awards under the Company's Employee Incentive Stock
Option Plan, which provides for the granting of stock options. The Committee
believes that stock option grants afford a long-term compensation method because
they closely link the interests of management with shareholder value and
directly join the financial interest of executive officers with those of McM
shareholders. In determining the grants of stock options to the executive
officers, including the Chief Executive Officer, the Committee considers the
accountability, strategic and operational goals, anticipated performance
requirements and contributions of the executive officers. During 1997, the
Committee granted options as to 7,500 shares to each of its executive officers.
During 1994, the McM Board of Directors adopted the McM Corporation Phantom
Stock Plan as recommended by the Compensation Committee. This plan was
specifically developed to provide a strong incentive to accomplish the long term
retention of key executives. In determining eligibility of an executive to
receive awards under this plan, the Compensation Committee considers the
position held by the executive, the value of the executive's services and the
profitability of the Company and its subsidiaries. Vesting of any award under
the plan is based upon a minimum period of service of five years with full
vesting after ten years. Irrespective of this requirement, should a participant
in the plan be terminated involuntarily without cause, a minimum of 20% of
phantom stock would become vested. Recipients of phantom stock awards are
entitled to receive a lump sum cash payment equal to (a) the fair market value
per share of McM common stock at the applicable maturity date, including the
cumulative amount of dividends per share paid between the award date and the
maturity date, as defined by the plan, multiplied by (b) the number of units of
phantom stock held by the recipient that have reached maturity under the terms
of the plan. No phantom stock was awarded in 1997.
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The McM Corporation Equity Appreciation Rights Plan (the "EARs Plan")
allows awards of equity appreciation rights to key officers of McM. The
Compensation Committee determines to whom rights are awarded, the number of
rights to be awarded and the terms of such rights. Grantees of rights are
entitled to receive the net appreciation between grant date book value of one
share of McM common stock and the exercise date book value of one share of McM
common stock. Currently, no rights have been awarded under the plan.
Respectfully submitted,
Compensation Committee
Laurence F. Lee III, Acting Chairman
Michael A. DiGregorio
Laurence F. Lee, Jr.
Claude G. Sanchez, Jr.
R. Peyton Woodson III
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
Mr. Laurence F. Lee, Jr. served as President of Peninsular Life Insurance
Company from 1959 to 1964 and as Chairman of the Board and Chief Executive
Officer from 1964 to 1973. He also served as a director of Occidental Life
Insurance Company from 1950 until 1972. Both of those McM subsidiaries were sold
in 1991. Mr. R. Peyton Woodson III held various executive positions with the McM
group of companies throughout his career, including Chairman of the Board of McM
from December 1977 to May 1985.
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