-----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, TExBj8g1EUGs2580MyaN1uiE96PADhp3vhcSknhELaZS3FO6tMdnQnRF8bQm04gm fZ/IJXjAzKP3wYNJ96mafA== 0000950144-98-008730.txt : 19980724 0000950144-98-008730.hdr.sgml : 19980724 ACCESSION NUMBER: 0000950144-98-008730 CONFORMED SUBMISSION TYPE: SC 14D1 PUBLIC DOCUMENT COUNT: 18 FILED AS OF DATE: 19980723 SROS: NASD GROUP MEMBERS: IAT REINSURANCE SYNDICATE LTD GROUP MEMBERS: PETER R KELLOGG SUBJECT COMPANY: 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: SC 13D SEC ACT: SEC FILE NUMBER: 005-17461 FILM NUMBER: 98670480 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 SUBJECT COMPANY: 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: SC 14D1 SEC ACT: SEC FILE NUMBER: 005-17461 FILM NUMBER: 98670481 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 FILED BY: COMPANY DATA: COMPANY CONFORMED NAME: IAT REINSURANCE SYNDICATE LTD CENTRAL INDEX KEY: 0001066641 STANDARD INDUSTRIAL CLASSIFICATION: [] IRS NUMBER: 000000000 FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: SC 14D1 BUSINESS ADDRESS: STREET 1: VICTORIA HALL, II VICTORIA STREET STREET 2: HAMILTON, HM11, BERMUDA MAIL ADDRESS: STREET 1: VICTORIA HALL, VICTORIA STREET STREET 2: HAMILTON, HM11 BERMUDA FILED BY: COMPANY DATA: COMPANY CONFORMED NAME: IAT REINSURANCE SYNDICATE LTD CENTRAL INDEX KEY: 0001066641 STANDARD INDUSTRIAL CLASSIFICATION: [] IRS NUMBER: 000000000 FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: SC 14D1 BUSINESS ADDRESS: STREET 1: VICTORIA HALL, II VICTORIA STREET STREET 2: HAMILTON, HM11, BERMUDA MAIL ADDRESS: STREET 1: VICTORIA HALL, VICTORIA STREET STREET 2: HAMILTON, HM11 BERMUDA SC 14D1 1 MCM CORPORATION/IAT REINSURANCE SYNDICATE SC14D1 1 - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ------------------ SCHEDULE 14D-1 TENDER OFFER STATEMENT PURSUANT TO SECTION 14(d)(1) OF THE SECURITIES EXCHANGE ACT OF 1934 AND SCHEDULE 13D UNDER THE SECURITIES EXCHANGE ACT OF 1934 ------------------ McM CORPORATION (Name of Subject Company) ------------------ IAT REINSURANCE SYNDICATE LTD. (Bidder) ------------------ COMMON STOCK, $1.00 PAR VALUE (Title of Class of Securities) ------------------ 552674103 (CUSIP Number of Class of Securities) ------------------ MARGUERITE R. GORMAN SECRETARY IAT REINSURANCE SYNDICATE LTD. C/O SPEAR, LEEDS & KELLOGG 120 BROADWAY NEW YORK, NEW YORK 10271 TELEPHONE: (212) 433-7072 (Name, Address and Telephone Number of Person Authorized to Receive Notices and Communications on Behalf of Bidder) COPY TO: ROBIN L. HINSON, ESQ. ROBINSON, BRADSHAW & HINSON, P.A. 1900 INDEPENDENCE CENTER 101 NORTH TRYON STREET CHARLOTTE, NORTH CAROLINA 28246 TELEPHONE: (704) 377-2536 ------------------ CALCULATION OF FILING FEE
TRANSACTION VALUATION AMOUNT OF FILING FEE --------------------- -------------------- $6,239,756* $1,248
[ ] Check box if any part of the fee is offset as provided by Rule 0-11(a)(2) and identify the filing with which the offsetting fee was previously paid. Identify the previous filing by registration statement number, or the form or schedule and the date of its filing. Amount Previously Paid: Form or Registration No.: Filing Party: Date Filed: - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- *NOTE: THE TRANSACTION VALUE IS CALCULATED BY MULTIPLYING $3.65, THE PER SHARE TENDER OFFER PRICE, BY 1,709,522 SHARES, 35% OF THE NUMBER OF OUTSTANDING SHARES OF COMMON STOCK OF THE SUBJECT COMPANY ON A FULLY DILUTED BASIS. 2 CUSIP No. 552674103 SCHEDULE 14D-1 and SCHEDULE 13D ---------------
1 NAME OF REPORTING PERSONS S.S. OR I.R.S. IDENTIFICATION NO. OF ABOVE PERSONS IAT REINSURANCE SYNDICATE LTD. 2 CHECK THE APPROPRIATE BOX IF A MEMBER OF A GROUP (a) [ ] (b) [ ] 3 SEC USE ONLY 4 SOURCE OF FUNDS WC 5 CHECK BOX IF DISCLOSURE OF LEGAL PROCEEDINGS IS [ ] REQUIRED PURSUANT TO ITEM 2(e) or 2(f) 6 CITIZENSHIP OR PLACE OF ORGANIZATION BERMUDA 7 AGGREGATE AMOUNT BENEFICIALLY OWNED BY EACH REPORTING PERSON 0(1) 8 CHECK BOX IF THE AGGREGATE AMOUNT IN ROW (7) [ ] EXCLUDES CERTAIN SHARES 9 PERCENT OF CLASS REPRESENTED BY AMOUNT IN ROW (7) 0%(1) 10 TYPE OF REPORTING PERSON IC, CO
- --------------- (1) IAT Reinsurance Syndicate Ltd. is party to (i) a Trust Purchase Agreement (as defined herein) pursuant to which it has agreed, among other things and conditioned upon the consummation of the Offer (as defined herein) to purchase 658,900 shares of Common Stock, (as hereinafter defined) of McM Corporation from the McMillen Trust for $3.65 per share, and (ii) a Tender Agreement (as defined herein) with each director of McM Corporation, pursuant to which such directors have agreed to (A) tender, or cause to be tendered, approximately 481,932 shares of Common Stock in the Offer, and (B) to cancel approximately 157,962 options to purchase shares of Common Stock held by such directors in return for a per share cash payment equal to the positive difference, if any, between $3.65 and the exercise price for such share. IAT Reinsurance Syndicate Ltd. disclaims beneficial ownership of such shares. 2 3 CUSIP No. 552674103 SCHEDULE 13D ---------------
1 NAME OF REPORTING PERSONS S.S. OR I.R.S. IDENTIFICATION NO. OF ABOVE PERSONS PETER R. KELLOGG 2 CHECK THE APPROPRIATE BOX IF A MEMBER OF A GROUP (a) [ ] (b) [ ] 3 SEC USE ONLY 4 SOURCE OF FUNDS N/A 5 CHECK BOX IF DISCLOSURE OF LEGAL PROCEEDINGS IS [ ] REQUIRED PURSUANT TO ITEM 2(e) or 2(f) 6 CITIZENSHIP OR PLACE OF ORGANIZATION UNITED STATES 7 AGGREGATE AMOUNT BENEFICIALLY OWNED BY EACH REPORTING PERSON 0(1) 8 CHECK BOX IF THE AGGREGATE AMOUNT IN ROW (7) [ ] EXCLUDES CERTAIN SHARES 9 PERCENT OF CLASS REPRESENTED BY AMOUNT IN ROW (7) 0%(1) 10 TYPE OF REPORTING PERSON IN
- --------------- (1) IAT Reinsurance Syndicate Ltd. is party to (i) a Trust Purchase Agreement pursuant to which it has agreed, among other things and conditioned upon the consummation of the Offer to purchase 658,900 shares of Common Stock of McM Corporation from the McMillen Trust for $3.65 per share, and (ii) a Tender Agreement with each director of McM Corporation, pursuant to which such directors have agreed to (A) tender, or cause to be tendered, approximately 481,932 shares of Common Stock in the Offer, and (B) to cancel approximately 157,962 options to purchase shares of Common Stock held by such directors in return for a per share cash payment equal to the positive difference, if any, between $3.65 and the exercise price for such share. Peter R. Kellogg, holder of 100% of the voting securities of IAT Reinsurance Syndicate Ltd., disclaims beneficial ownership of such shares. 3 4 This Tender Offer Statement on Schedule 14D-1 (this "Statement") relates to the offer by IAT Reinsurance Syndicate Ltd., a Bermuda corporation ("Purchaser"), to purchase up to 35% of the outstanding shares (the "Shares") of Common Stock, par value $1.00 per Share (the "Common Stock"), of McM Corporation, a North Carolina corporation (the "Company"), at a price of $3.65 per Share, net to the seller in cash, without interest thereon, upon the terms and subject to the conditions set forth in Purchaser's Offer to Purchase dated July 23, 1998 (the "Offer to Purchase") and in the related Letter of Transmittal (which, as amended from time to time, together constitute the "Offer"), copies of which are attached hereto as Exhibits (a)(1) and (a)(2), respectively. This Statement also constitutes a statement on Schedule 13D with respect to the acquisition by Purchaser and Peter R. Kellogg, the holder of 100% of the voting securities of Purchaser, of beneficial ownership of all Shares to be purchased pursuant to this Statement and all Shares to be purchased pursuant to the Trust Purchase Agreement (as defined herein) described in Item 7 of this Statement. The item numbers and responses thereto below are in accordance with the requirements of Schedule 14D-1. 1. SECURITY AND SUBJECT COMPANY (a) The name of the subject company is McM Corporation, a North Carolina corporation, which has its principal executive offices at P.O. Box 12317, 702 Oberlin Road, Raleigh, North Carolina 27605. (b) The equity securities being sought are up to 35% of the outstanding shares of Common Stock, par value $1.00 per Share, of the Company. The information set forth in the Introduction and Section 1 ("Terms of the Offer; Proration; Expiration Date") of the Offer to Purchase is incorporated herein by reference. (c) The information concerning the principal market in which the Shares are traded and certain high and low bid prices for the Shares in such principal market set forth in Section 6 ("Price Range of Shares; Dividends") of the Offer to Purchase is incorporated herein by reference. 2. IDENTITY AND BACKGROUND (a)-(d) and (g) This Statement is filed by Purchaser. The information concerning the name, state or other place of organization, principal business and address of the principal office of Purchaser, and the information concerning the name, residence or business address, present principal occupation or employment and the name, principal business and address of any corporation or other organization in which such employment or occupation is conducted, material occupations, positions, offices or employments during the last five years and citizenship of each of the executive officers and directors of Purchaser are set forth in the Introduction, Section 8 ("Certain Information Concerning Purchaser") and Schedule I of the Offer to Purchase and are incorporated herein by reference. (e) and (f) During the last five years, neither Purchaser nor, to the best knowledge of Purchaser, any of the persons listed in Schedule I of the Offer to Purchase has been (i) convicted in a criminal proceeding (excluding traffic violations or similar misdemeanors) or (ii) a 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. 3. PAST CONTACTS, TRANSACTIONS OR NEGOTIATIONS WITH THE SUBJECT COMPANY. (a) The information set forth in Section 8 ("Certain Information Concerning Purchaser") and Section 10 ("Background of the Offer; Contacts with the Company; Certificates of Contribution") of the Offer to Purchase is incorporated herein by reference. (b) The information set forth in the Introduction, Section 7 ("Certain Information Concerning the Company"), Section 8 ("Certain Information Concerning Purchaser"), Section 10 ("Background of the Offer; Contacts with the Company; the Offer and Rights Agreement; the Trust Purchase Agreement; the Tender Agreement; Certificates of Contribution; Confidentiality Agreement") and Section 11 ("Purpose of 4 5 the Offer and Related Transactions; No Rights of Dissent; Going Private Transactions; Plans for the Company After the Offer and Related Transactions") of the Offer to Purchase is incorporated herein by reference. 4. SOURCE AND AMOUNT OF FUNDS OR OTHER CONSIDERATION. (a)-(c) The information set forth in Section 9 ("Financing of the Offer and Related Transactions") of the Offer to Purchase is incorporated herein by reference. 5. PURPOSE OF THE TENDER OFFER AND PLANS OR PROPOSALS OF THE BIDDER. (a)-(e) The information set forth in the Introduction, Section 10 ("Background of the Offer; Contacts with the Company; the Offer and Rights Agreement; the Trust Purchase Agreement; the Tender Agreement; Certificates of Contribution; Confidentiality Agreement") and Section 11 ("Purpose of the Offer and Related Transactions; No Rights of Dissent; Going Private Transactions; Plans for the Company After the Offer and Related Transactions") of the Offer to Purchase is incorporated herein by reference. (f) and (g) The information set forth in Section 13 ("Effect of the Offer on the Market for the Shares and Exchange Act Registration") of the Offer to Purchase is incorporated herein by reference. 6. INTEREST IN SECURITIES OF THE SUBJECT COMPANY. (a) and (b) The information set forth in Section 8 ("Certain Information Concerning Purchaser") and Section 10 ("Background of the Offer; Contacts with the Company; the Offer and Rights Agreement; the Trust Purchase Agreement; the Tender Agreement; Certificates of Contribution; Confidentiality Agreement") of the Offer to Purchase is incorporated herein by reference. 7. CONTRACTS, ARRANGEMENTS, UNDERSTANDINGS OR RELATIONSHIPS WITH RESPECT TO THE SUBJECT COMPANY'S SECURITIES The information set forth in the Introduction, Section 8 ("Certain Information Concerning Purchaser"), Section 10 ("Background of the Offer; Contacts with the Company; the Offer and Rights Agreement; the Trust Purchase Agreement; the Tender Agreement; Certificates of Contribution; Confidentiality Agreement") and Section 11 ("Purpose of the Offer and Related Transactions; No Rights of Dissent; Going Private Transactions; Plans for the Company After the Offer and Related Transactions") of the Offer to Purchase is incorporated herein by reference. 8. PERSONS RETAINED, EMPLOYED OR TO BE COMPENSATED The information set forth in the Introduction and Section 16 ("Fees and Expenses") of the Offer to Purchase is incorporated herein by reference. 9. FINANCIAL STATEMENTS OF CERTAIN BIDDERS The information set forth in Section 8 ("Certain Information Concerning Purchaser") of the Offer to Purchase and in the Non-Consolidated Financial Statements of Purchaser attached hereto as Exhibits 99.1 and 99.2 is incorporated herein by reference. 10. ADDITIONAL INFORMATION (a) The information set forth in Section 10 ("Background of the Offer; Contacts with the Company; the Offer and Rights Agreement; the Trust Purchase Agreement; the Tender Agreement; Certificates of Contribution; Confidentiality Agreement") of the Offer to Purchase is incorporated herein by reference. (b)-(c) and (e) The information set forth in Section 15 ("Certain Legal Matters and Regulatory Approvals") of the Offer to Purchase is incorporated herein by reference. (d) The information set forth in Section 13 ("Effect of the Offer on the Market for the Shares and Exchange Act Registration") of the Offer to Purchase is incorporated herein by reference. 5 6 (f) The information set forth in the Offer to Purchase, the Letter of Transmittal, the Offer and Rights Agreement, the Trust Purchase Agreement, the Tender Agreement, the Confidentiality Agreement, and the Certificate of Contribution, copies of which are attached hereto as Exhibits (a)(1), (a)(2) and (c)(1), (c)(2), (c)(3), (c)(4) and (c)(5), respectively, is incorporated herein by reference. 11. MATERIAL TO BE FILED AS EXHIBITS (a)(1) Form of Offer to Purchase dated July 23, 1998. (a)(2) Form of Letter of Transmittal. (a)(3) Form of Notice of Guaranteed Delivery. (a)(4) Form of Letter from Mackenzie Partners, Inc. to Brokers, Dealers, Commercial Banks, Trust Companies and Nominees. (a)(5) Form of Letter from Brokers, Dealers, Commercial Banks, Trust Companies and Nominees to Clients. (a)(6) Form of Guidelines for Certification of Taxpayer Identification Number on Substitute Form W-9. (a)(7) Summary Advertisement as published in The New York Times on July 23, 1998. (a)(8) Joint Press Release issued by Purchaser and the Company on July 17, 1998. (a)(9) Form of Letter from the Company to participants in the Company's Employee Stock Purchase Plan, with transmittal instructions. (a)(10) Form of Letter from The Company to participants in the Company's Stock Option Plans, with transmittal instructions. (b) None. (c)(1) Offer and Rights Agreement, dated July 16, 1998, between Purchaser and the Company (c)(2) Trust Purchase Agreement, dated July 16, 1998, between Purchaser and Wilmington Trust Company, as Trustee. (c)(3) Tender Agreement, dated July 16, 1998, among Purchaser and each of the directors of the Company (c)(4) Confidentiality Agreement, dated April 15, 1998, between Purchaser and the Company (c)(5) Certificate of Contribution, dated June 15, 1998 between Purchaser and OF&C (This Exhibit is substantially identical to four additional Certificates of Contribution, each for a principal sum of $1,000,000, dated June 15, 1998 between Purchaser and OF&C) (d) None. (e) Not applicable. (f) None. 99.1 Non-Consolidated Financial Statements of Purchaser for the years ended December 31, 1997 and 1996 and for the years ended December 31, 1996 and 1995. 99.2 Non-Consolidated Financial Statements of Purchaser for the three month periods ended March 31, 1998 and 1997 (unaudited).
6 7 After due inquiry and to the best of my knowledge and belief, I certify that the information set forth in this statement is true, complete and correct. IAT REINSURANCE SYNDICATE LTD. By: /s/ Peter R. Kellogg --------------------------------------- Name: Peter R. Kellogg Title: President By: /s/ Marguerite R. Gorman --------------------------------------- Name: Marguerite R. Gorman Title: Secretary
July 23, 1998 After due inquiry and to the best of my knowledge and belief, I certify that the information set forth in this statement is true, complete and correct. /s/ Peter R. Kellogg --------------------------------------- Peter R. Kellogg
July 23, 1998 7 8 EXHIBIT INDEX
EXHIBIT NO. - ------- (a)(1) -- Form of Offer to Purchase dated July 23, 1998............... (a)(2) -- Form of Letter of Transmittal............................... (a)(3) -- Form of Notice of Guaranteed Delivery....................... (a)(4) -- Form of Letter from Mackenzie Partners, Inc. to Brokers, Dealers, Commercial Banks, Trust Companies and Nominees..... (a)(5) -- Form of Letter from Brokers, Dealers, Commercial Banks, Trust Companies and Nominees to Clients..................... (a)(6) -- Form of Guidelines for Certification of Taxpayer Identification Number on Substitute Form W-9................ (a)(7) -- Summary Advertisement as published in The New York Times on July 23, 1998............................................... (a)(8) -- Joint Press Release issued by Purchaser and the Company on July 17, 1998............................................... (a)(9) -- Form of Letter from the Company to participants in the Company's Employee Stock Purchase Plan, with transmittal instructions................................................ (a)(10) -- Form of Letter from the Company to participants in the Company's Stock Option Plans, with transmittal instructions................................................ (c)(1) -- Offer and Rights Agreement, dated July 16, 1998, between Purchaser and the Company................................... (c)(2) -- Trust Purchase Agreement, dated July 16, 1998, between Purchaser and Wilmington Trust Company, as Trustee.......... (c)(3) -- Tender Agreement, dated July 16, 1998, between Purchaser and each of the directors of the Company........................ (c)(4) -- Confidentiality Agreement, dated April 15, 1998, between Purchaser and the Company................................... (c)(5) -- Certificate of Contribution, dated June 15, 1998 between Purchaser and OF&C (This Exhibit is substantially identical to four additional Certificates of Contribution, each for a principal sum of $1,000,000, dated June 15, 1998 between Purchaser and OF&C)......................................... 99.1 -- Non-Consolidated Financial Statements of Purchaser for the years ended December 31, 1997 and 1996 and for the years ended December 31, 1996 and 1995............................ 99.2 -- Non-Consolidated Financial Statements of Purchaser for the three month periods ended March 31, 1998 and March 31, 1997 (unaudited).................................................
8 EX-99.A1 2 OFFER TO PURCHASE 7/23/98 1 EXHIBIT (A)(1) 2 OFFER TO PURCHASE FOR CASH UP TO 35% OF THE OUTSTANDING SHARES OF COMMON STOCK OF McM CORPORATION AT $3.65 NET PER SHARE BY IAT REINSURANCE SYNDICATE LTD. THE OFFER, PRORATION PERIOD AND WITHDRAWAL RIGHTS WILL EXPIRE AT 5:00 P.M., NEW YORK CITY TIME, ON FRIDAY, AUGUST 21, 1998 UNLESS THE OFFER IS EXTENDED. THE OFFER IS CONDITIONED UPON, AMONG OTHER THINGS, (I) THERE BEING VALIDLY TENDERED AND NOT WITHDRAWN PRIOR TO THE EXPIRATION OF THE OFFER SUCH NUMBER OF SHARES THAT WOULD REPRESENT AT LEAST 32% OF THE VOTING POWER OF THE SHARES OUTSTANDING ON A FULLY DILUTED BASIS AT THE EXPIRATION OF THE OFFER, (II) THE APPROVAL OF THE TRUST PURCHASE AGREEMENT BY THE DELAWARE CHANCERY COURT, (III) APPROVAL OF THE OFFER AND RELATED TRANSACTIONS BY THE COMMISSIONERS OF INSURANCE IN THE STATES OF NORTH CAROLINA AND CALIFORNIA, (IV) ANY WAITING PERIOD UNDER THE HSR ACT APPLICABLE TO THE PURCHASE OF SHARES PURSUANT TO THE OFFER HAVING EXPIRED OR HAVING BEEN TERMINATED AND (V) THE SATISFACTION OF CERTAIN OTHER TERMS AND CONDITIONS. SEE SECTION 14. THIS OFFER IS BEING MADE IN CONNECTION WITH AN OFFER AND RIGHTS AGREEMENT, DATED AS OF JULY 16, 1998, BETWEEN IAT REINSURANCE SYNDICATE LTD. AND MCM CORPORATION (THE "COMPANY"). THE BOARD OF DIRECTORS OF THE COMPANY HAS UNANIMOUSLY APPROVED THE OFFER AND THE OFFER AND RIGHTS AGREEMENT, HAS DETERMINED THAT THE OFFER AND THE OFFER AND RIGHTS AGREEMENT ARE FAIR TO, AND IN THE BEST INTERESTS OF, THE COMPANY AND THE COMPANY'S SHAREHOLDERS AND RECOMMENDS THAT HOLDERS OF SHARES ACCEPT THE OFFER AND TENDER THEIR SHARES PURSUANT TO THE OFFER. --------------------- IMPORTANT Any shareholder of the Company desiring to tender Shares should either (i) complete and sign the Letter of Transmittal or a facsimile thereof in accordance with the instructions in the Letter of Transmittal and deliver the Letter of Transmittal with the Shares and all other required documents to the Depositary (as defined herein) or follow the procedure for book-entry transfer set forth in Section 3 or (ii) request such shareholder's broker, dealer, commercial bank, trust company or other nominee to effect the transaction for the shareholder. Shareholders having Shares registered in the name of a broker, dealer, commercial bank, trust company or other nominee must contact such person if they desire to tender their Shares. Any shareholder of the Company who desires to tender Shares and whose certificates representing such Shares are not immediately available or who cannot comply with the procedures for book-entry transfer on a timely basis must tender such Shares pursuant to the guaranteed delivery procedure set forth in Section 3. Questions and requests for assistance may be directed to MacKenzie Partners, Inc., the Information Agent, at its address and telephone number set forth on the back cover of this Offer to Purchase. Additional copies of the Offer to Purchase, the Letter of Transmittal, the Notice of Guaranteed Delivery and other related materials may be obtained from the Information Agent or from brokers, dealers, commercial banks and trust companies. --------------------- 3 TABLE OF CONTENTS
PAGE ---- INTRODUCTION............................................ 1 1. Terms of the Offer; Proration; Expiration Date......... 3 2. Acceptance for Payment and Payment for Shares.......... 4 3. Procedures for Tendering Shares........................ 6 4. Withdrawal Rights...................................... 8 5. Certain Federal Income Tax Consequences................ 9 6. Price Range of Shares; Dividends....................... 9 7. Certain Information Concerning the Company............. 10 8. Certain Information Concerning Purchaser............... 13 9. Financing of the Offer and the Related Transactions.... 14 10. Background of the Offer; Contacts with the Company; the Offer and Rights Agreement; the Trust Purchase Agreement; the Tender Agreement; Certificates of Contribution; Confidentiality Agreement................ 14 11. Purpose of the Offer and Related Transactions; No Rights of Dissent; Going Private Transactions; Plans for the Company After the Offer and Related Transactions........................................... 26 12. Dividends and Distributions............................ 27 13. Effect of the Offer on the Market for the Shares and Exchange Act Registration.............................. 28 14. Certain Conditions of the Offer........................ 29 15. Certain Legal Matters and Regulatory Approvals......... 31 16. Fees and Expenses...................................... 34 17. Miscellaneous.......................................... 34 Schedule I. Directors and Executive Officers of Purchaser.............................................. 36
(ii) 4 To the Holders of Common Stock of McM Corporation: INTRODUCTION IAT Reinsurance Syndicate Ltd., a Bermuda corporation ("Purchaser") hereby offers to purchase up to 35% of the outstanding shares (the "Shares") of common stock, par value $1.00 per Share (the "Common Stock"), of McM Corporation, a North Carolina corporation (the "Company"), at a price of $3.65 per Share, net to the seller in cash, without interest thereon, upon the terms and subject to the conditions set forth in this Offer to Purchase and in the related Letter of Transmittal (which, as amended from time to time, together constitute the "Offer"). According to the Company, there were 4,706,388 Shares outstanding as of July 16, 1998. Assuming no change in such number, the Offer is to purchase up to 1,647,235 Shares (subject to increase or decrease in the number of outstanding Shares at the time of purchase in accordance with the Offer). If more than 35% of the issued and outstanding Shares are validly tendered at or prior to the Expiration Date (as defined below) and not withdrawn, Purchaser will, upon the terms and subject to the conditions of the Offer, accept for payment and pay for 35% of the then issued and outstanding Shares on a pro rata basis (with adjustments to avoid purchases of fractional Shares), according to the number of Shares properly tendered by each shareholder at or prior to the Expiration Date and not withdrawn. The McMillen Trust (the "Trust"), which currently holds approximately 65% of the Shares, has agreed with Purchaser not to tender any of its Shares in the Offer. Accordingly, Purchaser does not anticipate that more than 35% of the outstanding Shares will be tendered or that proration will be required. Tendering shareholders will not be obligated to pay brokerage fees or commissions or, except as otherwise provided in Instruction 6 of the Letter of Transmittal, stock transfer taxes with respect to the purchase of Shares by Purchaser pursuant to the Offer. Purchaser will pay all charges and expenses of Wachovia Bank, N.A. (the "Depositary") and MacKenzie Partners, Inc. (the "Information Agent") incurred in connection with the Offer. See Section 16. THE BOARD OF DIRECTORS OF THE COMPANY (THE "BOARD") HAS UNANIMOUSLY APPROVED THE OFFER AND THE OFFER AND RIGHTS AGREEMENT (AS DEFINED BELOW), HAS DETERMINED THAT THE OFFER AND THE OFFER AND RIGHTS AGREEMENT ARE FAIR TO, AND IN THE BEST INTERESTS OF, THE COMPANY AND THE COMPANY'S SHAREHOLDERS AND RECOMMENDS THAT HOLDERS OF SHARES ACCEPT THE OFFER AND TENDER THEIR SHARES PURSUANT TO THE OFFER. PaineWebber Incorporated ("PaineWebber"), the Company's financial advisor, has delivered to the Board its written opinion that the consideration to be received by the shareholders of the Company pursuant to the Offer is fair to such shareholders from a financial point of view. A copy of the opinion of PaineWebber is contained in the Company's Solicitation/Recommendation Statement on Schedule 14D-9 (the "Schedule 14D-9"), which is being mailed to shareholders herewith. THE OFFER IS CONDITIONED UPON, AMONG OTHER THINGS, (I) THERE BEING VALIDLY TENDERED AND NOT WITHDRAWN PRIOR TO THE EXPIRATION OF THE OFFER SUCH NUMBER OF SHARES THAT WOULD REPRESENT AT LEAST 32% OF THE VOTING POWER OF THE SHARES OUTSTANDING ON A FULLY DILUTED BASIS AT THE EXPIRATION OF THE OFFER (THE "MINIMUM CONDITION"), (II) THE APPROVAL OF THE TRUST PURCHASE AGREEMENT (AS DEFINED HEREIN) BY THE DELAWARE CHANCERY COURT (AS DEFINED HEREIN), (III) APPROVAL OF THE OFFER AND RELATED TRANSACTIONS (AS DEFINED HEREIN) BY THE COMMISSIONERS OF INSURANCE IN THE STATES OF NORTH CAROLINA AND CALIFORNIA, (IV) ANY WAITING PERIOD UNDER THE HSR ACT (AS DEFINED BELOW) APPLICABLE TO THE PURCHASE OF SHARES PURSUANT TO THE OFFER HAVING EXPIRED OR HAVING BEEN TERMINATED AND (V) THE SATISFACTION OF 1 5 CERTAIN OTHER TERMS AND CONDITIONS CONTAINED IN THIS OFFER TO PURCHASE. SEE SECTION 14, WHICH SETS FORTH IN FULL THE CONDITIONS TO THE OFFER. The Offer is being made pursuant to an Offer and Rights Agreement, dated as of July 16, 1998 (the "Offer and Rights Agreement"), between Purchaser and the Company. The Offer and Rights Agreement provides, among other things, that, immediately upon the purchase by Purchaser of Shares pursuant to the Offer ("Purchaser's Election Time"), and from time to time thereafter, Purchaser shall be entitled to designate such number of directors on the Board as required to give Purchaser majority representation on the Board. In the Offer and Rights Agreement, the Company has agreed to take all actions necessary to cause Purchaser's designees to be elected as directors of the Company, including increasing the size of the Board or securing the resignations of incumbent directors or both. Pursuant to a Tender Agreement, dated as of July 16, 1998 (the "Tender Agreement"), between Purchaser and each current director of the Company (each, a "Director"), each Director has agreed, at the Purchaser's Election Time, and at the request of Purchaser, to resign immediately as a director of the Company. At the Purchaser's Election Time, each Director not asked by Purchaser to resign also has agreed in the Tender Agreement immediately to appoint a slate of directors designated by Purchaser to fill any vacancies created by such resignations. The Tender Agreement is more fully described in Section 10. Pursuant to the Trust Purchase Agreement, dated July 16, 1998 (the "Trust Purchase Agreement"), between Purchaser and the Wilmington Trust Company ("Trustee"), as trustee of the Trust, immediately following and conditioned upon the purchase of Shares by Purchaser pursuant to the Offer, the Trust has agreed to sell 658,900 Shares (the "Purchased Shares") to Purchaser for $3.65 per Share. The Trust Purchase Agreement also provides that, upon the closing of the purchase of the Purchased Shares, Purchaser would deposit with the Trust cash equal to $3.65 multiplied by the number of Shares owned by the Trust following the sale of the Purchased Shares (the "Retained Shares"). The deposit and any income thereon would be the sole property of the Trust, but could be used as a downpayment on purchase of the Retained Shares by Purchaser under certain circumstances. See Section 10. Pursuant to the Trust Purchase Agreement, the Trust has agreed not to tender any Shares into the Offer, to support the issuance of the Rights (as defined below) provided pursuant to the Offer and Rights Agreement and, if required by law or requested by Purchaser, to vote all of the Retained Shares in favor of the issuance of such Rights. The Trust Purchase Agreement is more fully described in Section 10. The Offer and Rights Agreement provides for the issuance to Purchaser, immediately following Purchaser's Election Time, of rights ("Rights") to purchase, at a nominal exercise price, 60,000 shares of a newly-issued series of preferred stock of the Company, with a liquidation preference of $1,000 per share, payable before any amount is distributable with respect to the Common Stock. Such preferred stock would also include a put right in favor of the holder thereof, exercisable at any time after issuance, to have such preferred stock redeemed by the Company at the par value of $1,000 per share, subject to the approval of regulatory authorities and compliance with the North Carolina Business Corporation Act. Such preferred stock would have no voting rights, would not pay dividends and would not be convertible into Common Stock. The Offer and Rights Agreement provides that Purchaser may exercise the Rights if the Trust sells any of its Retained Shares to a third party or if any third party other than Purchaser causes Purchaser's designees to the Board to cease to control the Board. See Section 10. The Purchaser's and the Company's obligations under the Offer and Rights Agreement are subject to the satisfaction or waiver of certain conditions. See Sections 10 and 14. In no event will Purchaser be obligated to consummate the transactions contemplated by the Offer and Rights Agreement unless the Purchaser is able to purchase pursuant to the Offer at least the Minimum Condition of 32% of the outstanding Shares on a fully diluted basis. In no event will either the Purchaser or the Company be obligated to consummate the transactions contemplated by the Offer and Rights Agreement unless (a) the Trust Purchase Agreement is approved by the Court of Chancery of the State of Delaware (the "Delaware Chancery Court"), (b) the Offer and the Related Transactions are approved by the Commissioners of Insurance of the States of North Carolina and California and (c) any waiting period under the Hart-Scott-Rodino Anti-Trust Improvements Act of 1976, as amended (the "HSR Act") applicable to the purchase of Shares pursuant to the Offer has expired or has been terminated ((a), (b) and (c) collectively, the "Regulatory Approvals"). In no event may 2 6 Purchaser waive the Minimum Condition below 25% of the outstanding Shares on a fully diluted basis or waive the receipt of the Regulatory Approvals as conditions to consummating the Offer. The Offer and Rights Agreement is more fully described in Section 10. The Company has advised Purchaser that as of July 16, 1998, 4,706,388 Shares were issued and outstanding and that (i) no Shares were held by the subsidiaries of the Company, and (ii) 177,962 Shares were reserved for future issuance to present or former employees or directors pursuant to employee and director stock options granted pursuant to the Company's stock option plans. As a result, as of the date of this Offer to Purchase, the Minimum Condition would be satisfied if Purchaser acquired pursuant to the Offer 1,562,992 Shares, and in no event could Purchaser reduce the Minimum Condition below 1,221,087 Shares. Pursuant to the Tender Agreement, the Directors have agreed, among other things, to tender in the Offer and not withdraw all Shares beneficially owned by the Directors or certain of their affiliates as of July 16, 1998 (including 481,932 Shares specified in the Tender Agreement) and all Shares thereafter acquired (unless such Director would as a result of such tender incur liability under Section 16(b) of the Securities Exchange Act of 1934). The Directors also agreed pursuant to the Offer to instruct the Company to cancel 157,962 options to purchase Shares held by such Directors in return for a per Share cash payment, subject to applicable withholding payments, equal to the positive difference, if any, between $3.65 and the exercise price for such Share. Holders of outstanding options ("Options") to purchase Shares granted under the Company's stock option plans may either exercise such Options and tender the Shares received in the Offer, or in lieu of such exercise and subject to the terms and conditions set forth herein, elect to cancel such Options and obtain from Purchaser an amount, subject to applicable withholding taxes, in cash equal to the product of (a) the number of Shares previously subject to such Option and (b) the excess, if any, of the per Share consideration payable pursuant to the Offer over the exercise price per Share previously subject to such Option. As used in this Offer to Purchase, "outstanding Shares on a fully diluted basis" shall mean Shares outstanding and Shares purchasable upon the exercise of outstanding Options to purchase Shares. As used in this Offer to Purchase, the "Related Transactions" shall mean the transactions contemplated by the Offer and Rights Agreement and the Trust Purchase Agreement (other than the Offer). THIS OFFER TO PURCHASE AND THE RELATED LETTER OF TRANSMITTAL CONTAIN IMPORTANT INFORMATION WHICH SHOULD BE READ CAREFULLY BEFORE ANY DECISION IS MADE WITH RESPECT TO THE OFFER. 1. TERMS OF THE OFFER; PRORATION; EXPIRATION DATE. Upon the terms and subject to the conditions of the Offer (including, if the Offer is extended or amended, the terms and conditions of such extension or amendment), Purchaser will accept for payment and pay for Shares validly tendered prior to the Expiration Date and not withdrawn as permitted by Section 4 and which represent up to 35% of the issued and outstanding Shares at such time. The term "Expiration Date" means 5:00 p.m., New York City time, on Friday, August 21, 1998, unless and until Purchaser, in its sole discretion, shall have extended the period during which the Offer is open, in which event the term "Expiration Date" shall mean the latest time and date at which the Offer, as so extended by Purchaser, shall expire. If more than 35% of the issued and outstanding Shares are validly tendered at or prior to the Expiration Date, and not withdrawn, Purchaser will, upon the terms and subject to the conditions of the Offer, accept for payment and pay for 35% of the then issued and outstanding Shares on a pro rata basis (with adjustments to avoid purchases of fractional Shares), according to the number of Shares properly tendered by each shareholder at or prior to the Expiration Date and not withdrawn. Under the Trust Purchase Agreement, the Trust, which currently holds approximately 65% of the Shares, has agreed not to tender any of its Shares in the Offer. Accordingly, Purchaser does not anticipate that more than 35% of the outstanding Shares will be tendered or that proration will be required. Purchaser expressly reserves the right (but will not be obligated), in its sole discretion, at any time and from time to time, to extend for any reason, including the occurrence of any of the conditions specified in Section 14, the period of time during which the Offer is open, by giving oral or written notice of such extension 3 7 to the Depositary. During any such extension, all Shares previously tendered and not withdrawn will remain subject to the Offer, subject to the rights of a tendering shareholder to withdraw his or her Shares. See Section 4. There can be no assurances that Purchaser will exercise its right to extend the Offer. Subject to the applicable regulations of the Securities and Exchange Commission (the "Commission"), Purchaser also expressly reserves the right, in its sole discretion, at any time and from time to time, (i) to delay acceptance for payment of, or, regardless of whether such Shares were theretofore accepted for payment, payment for, any Shares pending receipt of any regulatory approval specified in Section 15, (ii) to terminate the Offer and not accept for payment any Shares upon the occurrence of any of the conditions specified in Section 14 and (iii) to waive any condition (provided that Purchaser may not reduce the Minimum Condition below 25% and may not waive receipt of any of the Regulatory Approvals), or otherwise amend the Offer in any respect, by giving oral or written notice of such delay, termination, waiver or amendment to the Depositary and by making a public announcement thereof. The Offer and Rights Agreement provides, however, that no change may be made which decreases the per Share consideration payable in the Offer or which changes the form of consideration to be paid on the Offer or which reduces the maximum number of Shares to be purchased in the Offer or which imposes conditions to the Offer in addition to those set forth in Annex A to the Offer and Rights Agreement. Purchaser acknowledges that (i) Rule 14e-1(c) under the Securities Exchange Act of 1934, as amended (the "Exchange Act"), requires Purchaser to pay the consideration offered or return the Shares tendered promptly after the termination or withdrawal of the Offer and (ii) Purchaser may not delay acceptance for payment of, or payment for (except as provided in clause (i) of the first sentence of this paragraph), any Shares upon the occurrence of the conditions specified in Section 14 without extending the period of time during which the Offer is open. Any such extension, delay, termination, waiver or amendment will be followed as promptly as practicable by public announcement thereof, such announcement in the case of an extension to be made no later than 9:00 a.m., New York City time, on the next business day after the previously scheduled Expiration Date. Subject to applicable law (including Rules 14d-4(c) and 14d-6(d) under the Exchange Act, which require that material changes be promptly disseminated to shareholders in a manner reasonably designed to inform them of such changes) and without limiting the manner in which Purchaser may choose to make any public announcement, Purchaser shall have no obligation to publish, advertise or otherwise communicate any such public announcement other than by issuing a press release to the Dow Jones News Service. If Purchaser makes a material change in the terms of the Offer or the information concerning the Offer, Purchaser will extend the Offer to the extent required by Rules 14d-4(c), 14d-6(d) and 14e-1(b) under the Exchange Act. Subject to applicable law, if, prior to the Expiration Date, Purchaser should decide to increase the consideration being offered in the Offer, such increase in the consideration being offered will be applicable to all shareholders whose Shares are accepted for payment pursuant to the Offer and, if, at the time notice of any such increase in the consideration being offered is first published, sent or given to holders of such Shares, the Offer is scheduled to expire at any time earlier than the period ending on the tenth business day from and including the date that such notice is first so published, sent or given, the Offer will be extended at least until the expiration of such ten-business-day period. The Company has provided Purchaser with the Company's shareholder list and security position listings for the purpose of disseminating the Offer to holders of Shares. This Offer to Purchase and the related Letter of Transmittal and other related materials will be mailed to record holders of Shares whose names appear on the Company's shareholder list and will be furnished, for subsequent transmittal to beneficial owners of Shares, to brokers, dealers, commercial banks, trust companies and similar persons whose names, or the names of whose nominees, appear on the shareholder list or, if applicable, who are listed as participants in a clearing agency's security position listing. 2. ACCEPTANCE FOR PAYMENT AND PAYMENT FOR SHARES. Upon the terms and subject to the conditions of the Offer (including, if the Offer is extended or amended, the terms and conditions of any such extension or amendment), Purchaser will accept for payment up to 35% of the issued and outstanding Shares validly tendered prior to the Expiration Date and not withdrawn promptly after the later to occur of (i) the Expiration 4 8 Date, (ii) approval of the Trust Agreement by the Delaware Chancery Court, (iii) approval of the Offer and the Related Transactions by the Commissioners of Insurance of the States of North Carolina and California, (iv) the expiration or termination of any applicable waiting periods under the HSR Act, and (v) the satisfaction or waiver of the other conditions to the Offer set forth in Section 14, and will promptly pay for all Shares accepted for payment subject to satisfaction of conditions (ii) through (iv). Subject to applicable rules of the Commission, Purchaser expressly reserves the right to delay acceptance for payment of, or payment for, Shares pending receipt of any regulatory approvals specified in Section 15 or in order to comply in whole or in part with any other applicable law. In all cases, payment for Shares tendered and accepted for payment pursuant to the Offer will be made only after timely receipt by the Depositary of (i) the certificates evidencing such Shares (the "Share Certificates") or timely confirmation (a "Book-Entry Confirmation") of a book-entry transfer of such Shares into the Depositary's account at The Depository Trust Company or the Philadelphia Depository Trust Company (each, a "Book-Entry Transfer Facility" and, collectively, the "Book-Entry Transfer Facilities") pursuant to the procedures set forth in Section 3, (ii) the Letter of Transmittal (or a facsimile thereof), properly completed and duly executed, with any required signature guarantees, or an Agent's Message (as defined below) in connection with a book-entry transfer and (iii) any other documents required under the Letter of Transmittal. Participants in the Company's 1996 Employee Stock Purchase Plan and holders of Options must properly complete, execute and deliver to the Depository special instructions attached as Exhibit (a)(9) (for plan participants) or Exhibit (a)(10) (for Option holders) to the Schedule 14D-1 filed by Purchaser with the Commission in connection with the Offer (the "Schedule 14D-1"). The term "Agent's Message" means a message, transmitted by a Book-Entry Transfer Facility to, and received by, the Depositary and forming a part of a Book-Entry Confirmation, which states that such Book-Entry Transfer Facility has received an express acknowledgment from the participant in such Book-Entry Transfer Facility tendering the Shares, that such participant has received and agrees to be bound by the terms of the Letter of Transmittal and that the Purchaser may enforce such agreement against such participant. Under the HSR Act and the rules that have been promulgated thereunder by the Federal Trade Commission ("FTC"), certain acquisition transactions may not be consummated unless certain information has been furnished to the Antitrust Division of the Department of Justice (the "Antitrust Division") and the FTC and certain waiting period requirements have been satisfied. The acquisition of Shares by Purchaser pursuant to the Offer is exempt from such requirements. See Section 15 for additional information regarding the HSR Act. In 1987, the Trust, which owns approximately 65% of the outstanding Shares, was ordered by the Delaware Chancery Court to divest itself of its ownership of such Shares. In 1993, the Delaware Chancery Court granted the Trustee's petition for a clarification of its orders and clarified that it is within the sound discretion of the Trustee to determine the timing and terms of any disposition of the Shares owned by the Trust, subject to final approval by the Delaware Chancery Court. See Section 15 for additional information regarding approval by the Delaware Chancery Court. Under North Carolina's Insurance Holding Company Act, Sections 58-19-1 through 58-19-70, a tender offer for the voting securities of a domestic insurer resulting in the tender offeror's obtaining "control" of the insurer may not be made unless certain information is furnished to the North Carolina Commissioner of Insurance and such commissioner approves the offer. N.C. Gen. Stat. sec. 58-19-5 states that "control" is presumed to exist if a person directly or indirectly holds 10% or more of the voting securities of another person. The acquisition of Shares by Purchaser pursuant to the Offer is subject to the information and approval requirements of the North Carolina Insurance Holding Company Act. See Section 15. Under California's Insurance Holding Company System Regulatory Act, Sections 1215 through 1215.16, a tender offer for the voting securities of a domestic insurer or certain persons controlling a domestic insurer resulting in the tender offeror's obtaining "control" of the insurer may not be made unless certain information is furnished to the California Commissioner of Insurance and to the insurer and such commissioner either approves the acquisition of control within 60 days of the filing of such statement or fails to disapprove such acquisition within 60 days. Cal. Ins. Code sec. 1215 states that "control" is presumed to exist if a person directly or indirectly holds with the power to vote more than 10% of the voting securities of another person. The 5 9 acquisition of Shares by Purchaser pursuant to the Offer is subject to the information and approval requirements of the California Insurance Holding Company System Regulatory Act. See Section 15. For purposes of the Offer, Purchaser will be deemed to have accepted for payment (and thereby purchased) Shares validly tendered and not withdrawn as, if and when Purchaser gives oral or written notice to the Depositary of Purchaser's acceptance for payment of such Shares pursuant to the Offer. Upon the terms and subject to the conditions of the Offer, payment for Shares accepted for payment pursuant to the Offer will be made by deposit of the purchase price therefor with the Depositary, which will act as agent for tendering shareholders for the purpose of receiving payments from Purchaser and transmitting such payments to tendering shareholders whose Shares have been accepted for payment. Under no circumstances will interest on the purchase price for Shares be paid, regardless of any delay in making such payment. If any tendered Shares are not accepted for payment for any reason pursuant to the terms and conditions of the Offer (including without limitation proration), or if Share Certificates are submitted evidencing more Shares than are tendered, Share Certificates evidencing unpurchased Shares will be returned, without expense to the tendering shareholder (or, in the case of Shares tendered by book-entry transfer into the Depositary's account at a Book-Entry Transfer Facility pursuant to the procedure set forth in Section 3, such Shares will be credited to an account maintained at such Book-Entry Transfer Facility), as promptly as practicable following the expiration or termination of the Offer and determination of the final results of proration. 3. PROCEDURES FOR TENDERING SHARES. In order for a holder of Shares validly to tender Shares pursuant to the Offer, the Letter of Transmittal (or a facsimile thereof), properly completed and duly executed, together with any required signature guarantees, or an Agent's Message in connection with a book-entry delivery of Shares, and any other documents required by the Letter of Transmittal, must be received by the Depositary at one of its addresses set forth on the back cover of this Offer to Purchase and either (i) the Share Certificates evidencing tendered Shares must be received by the Depositary at such address or such Shares must be tendered pursuant to the procedure for book-entry transfer described below and a Book-Entry Confirmation must be received by the Depositary, in each case prior to the Expiration Date, or (ii) the tendering shareholder must comply with the guaranteed delivery procedures described below. THE METHOD OF DELIVERY OF SHARE CERTIFICATES AND ALL OTHER REQUIRED DOCUMENTS, INCLUDING DELIVERY THROUGH ANY BOOK-ENTRY TRANSFER FACILITY, IS AT THE OPTION AND RISK OF THE TENDERING SHAREHOLDER, AND THE DELIVERY WILL BE DEEMED MADE ONLY WHEN ACTUALLY RECEIVED BY THE DEPOSITARY. IF DELIVERY IS BY MAIL, REGISTERED MAIL WITH RETURN RECEIPT REQUESTED, PROPERLY INSURED, IS RECOMMENDED. IN ALL CASES, SUFFICIENT TIME SHOULD BE ALLOWED TO ENSURE TIMELY DELIVERY. Book-Entry Transfer. The Depositary will establish accounts with respect to the Shares at the Book-Entry Transfer Facilities for purposes of the Offer within two business days after the date of this Offer to Purchase. Any financial institution that is a participant in the system of any Book-Entry Transfer Facility may make a book-entry delivery of Shares by causing such Book-Entry Transfer Facility to transfer such Shares into the Depositary's account at such Book-Entry Transfer Facility in accordance with such Book-Entry Transfer Facility's procedures for such transfer. However, although delivery of Shares may be effected through book-entry transfer at a Book-Entry Transfer Facility, the Letter of Transmittal (or a facsimile thereof), properly completed and duly executed, together with any required signature guarantees, or an Agent's Message in connection with a book-entry transfer, and any other required documents, must, in any case, be received by the Depositary at one of its addresses set forth on the back cover of this Offer to Purchase prior to the Expiration Date, or the tendering shareholder must comply with the guaranteed delivery procedure described below. DELIVERY OF DOCUMENTS TO A BOOK-ENTRY TRANSFER FACILITY DOES NOT CONSTITUTE DELIVERY TO THE DEPOSITARY. Signature Guarantees. Signatures on all Letters of Transmittal must be guaranteed by a firm that is a member of the New York Stock Exchange Medallion Signature Guarantee Program, or by any other "eligible guarantor institution," as such term is defined in Rule 17Ad-15 under the Exchange Act (each of the foregoing being referred to as an "Eligible Institution"), except in cases where Shares are tendered (i) by a 6 10 registered holder of Shares who has not completed either the box entitled "Special Payment Instructions" or the box entitled "Special Delivery Instructions" on the Letter of Transmittal or (ii) for the account of an Eligible Institution. If a Share Certificate is registered in the name of a person other than the person who or which signs the Letter of Transmittal, or if payment is to be made or a Share Certificate not accepted for payment or not tendered is to be returned to a person other than the registered holder(s), then the Share Certificate must be endorsed or accompanied by appropriate stock powers, in either case signed exactly as the name(s) of the registered holder(s) appear on the Share Certificate, with the signature(s) on such Share Certificate or stock powers guaranteed by an Eligible Institution. See Instructions 1 and 5 of the Letter of Transmittal. Guaranteed Delivery. If a shareholder desires to tender Shares pursuant to the Offer and such shareholder's Share Certificates evidencing such Shares are not immediately available or such shareholder cannot deliver the Share Certificates and all other required documents to the Depositary prior to the Expiration Date, or such shareholder cannot complete the procedure for delivery by book-entry transfer on a timely basis, such Shares may nevertheless be tendered, provided that all the following conditions are satisfied: (i) such tender is made by or through an Eligible Institution; (ii) a properly completed and duly executed Notice of Guaranteed Delivery, substantially in the form made available by Purchaser, is received prior to the Expiration Date by the Depositary as provided below; and (iii) the Share Certificates (or a Book-Entry Confirmation) evidencing all tendered Shares, in proper form for transfer, in each case together with the Letter of Transmittal (or a facsimile thereof), properly completed and duly executed, with any required signature guarantees (or, in the case of a book-entry transfer, an Agent's Message), and any other documents required by the Letter of Transmittal are received by the Depositary within three trading days on the New York Stock Exchange after the date of execution of such Notice of Guaranteed Delivery. The Notice of Guaranteed Delivery may be delivered by hand or mail or transmitted by facsimile transmission to the Depositary and must include a guarantee, in the form set forth in the form of Notice of Guaranteed Delivery made available by Purchaser, by a firm which is a member of a registered national securities exchange or of the National Association of Securities Dealers, Inc. or which is a commercial bank or trust company having an office or correspondent in the United States that is a member in good standing of the Securities Transfer Agents Medallion Program, the New York Stock Exchange Medallion Signature Guarantee Program or the Stock Exchange Medallion Program. In all cases, payment for Shares tendered and accepted for payment pursuant to the Offer will be made only after timely receipt by the Depositary of the Share Certificates evidencing such Shares, or a Book-Entry Confirmation of the delivery of such Shares, and the Letter of Transmittal (or a facsimile thereof), properly completed and duly executed, with any required signature guarantees (or, in the case of a book-entry transfer, an Agent's Message), and any other documents required by the Letter of Transmittal. Lost or Destroyed Certificate(s). If any Share Certificate has been lost, stolen or destroyed, a shareholder should immediately notify the Depositary in writing. Such letter should be forwarded along with a shareholder's properly completed Letter of Transmittal and any Share Certificates a shareholder may have in his possession. Once written notification of the loss is received by the Depositary, an affidavit of loss and indemnity agreement, along with instructions which include the cost of replacing the Share Certificate, will be sent to the shareholder. The tenders cannot be processed until any missing Share Certificate has been replaced. Determination of Validity. All questions as to the validity, form, eligibility (including time of receipt) and acceptance for payment of any tender of Shares will be determined by Purchaser in its sole discretion, which determination shall be final and binding on all parties. Purchaser reserves the absolute right to reject any and all tenders determined by it not to be in proper form or the acceptance for payment of which may, in the opinion of its counsel, be unlawful. Purchaser also reserves the absolute right to waive any condition of the Offer (other than the Regulatory Approval Conditions and the Minimum Condition below 25%) or any defect 7 11 or irregularity in the tender of any Shares of any particular shareholder, whether or not similar defects or irregularities are waived in the case of other shareholders. No tender of Shares will be deemed to have been validly made until all defects and irregularities have been cured or waived. None of Purchaser, the Depositary, the Information Agent or any other person will be under any duty to give notification of any defects or irregularities in tenders or incur any liability for failure to give any such notification. Purchaser's interpretation of the terms and conditions of the Offer (including the Letter of Transmittal and the instructions thereto) will be final and binding. Other Requirements. By executing the Letter of Transmittal as set forth above, a tendering shareholder irrevocably appoints designees of Purchaser as such shareholder's proxies, each with full power of substitution, in the manner set forth in the Letter of Transmittal, to the full extent of such shareholder's rights with respect to the Shares tendered by such shareholder and accepted for payment by Purchaser (and with respect to any and all dividends, distributions, Shares and other securities declared, paid or distributed in respect of such Shares on or after July 16, 1998). All such proxies shall be considered coupled with an interest in the tendered Shares. Such appointment will be effective when, and only to the extent that, Purchaser accepts such Shares for payment. Upon such acceptance for payment, all prior proxies given by such shareholder with respect to such Shares (and such dividends, distributions, Shares and other securities) will be revoked without further action, and no subsequent proxies may be given nor any subsequent written consent executed by such shareholder (and, if given or executed, will not be deemed to be effective) with respect thereto. The designees of Purchaser will, with respect to the Shares for which the appointment is effective, be empowered to exercise all voting and other rights of such shareholder as they in their sole discretion may deem proper at any annual or special meeting of the Company's shareholders or any adjournment or postponement thereof, by written consent in lieu of any such meeting or otherwise. Purchaser reserves the right to require that, in order for Shares to be deemed validly tendered, immediately upon Purchaser's payment for such Shares, Purchaser must be able to exercise full voting rights with respect to such Shares. In order for participants in the Company's 1996 Employee Stock Purchase Plan validly to tender shares pursuant to the Offer, or a holder of Options to elect to cancel such Options in return for a cash payment pursuant to the Offer, such participants or holders, as the case may be, must properly complete, duly execute and deliver to the Depositary special instructions attached as Exhibit (a)(9) (for plan participants) and Exhibit (a)(10) (for Option holders) to the Schedule 14D-1. The acceptance for payment by Purchaser of Shares or Options pursuant to any of the procedures described above will constitute a binding agreement between the tendering shareholder and Purchaser upon the terms and subject to the conditions of the Offer. UNDER THE FEDERAL INCOME TAX LAWS, THE DEPOSITARY WILL BE REQUIRED TO WITHHOLD 31 PERCENT OF THE AMOUNT OF ANY PAYMENTS MADE TO CERTAIN SHAREHOLDERS PURSUANT TO THE OFFER. TO PREVENT SUCH BACKUP FEDERAL INCOME TAX WITHHOLDING WITH RESPECT TO PAYMENT TO CERTAIN SHAREHOLDERS OF THE PURCHASE PRICE OF SHARES PURCHASED PURSUANT TO THE OFFER, EACH SUCH SHAREHOLDER MUST PROVIDE THE DEPOSITARY WITH SUCH SHAREHOLDER'S CORRECT TAXPAYER IDENTIFICATION NUMBER AND CERTIFY THAT SUCH SHAREHOLDER IS NOT SUBJECT TO BACKUP FEDERAL INCOME TAX WITHHOLDING BY COMPLETING THE SUBSTITUTE FORM W-9 IN THE LETTER OF TRANSMITTAL. SEE INSTRUCTION 9 OF THE LETTER OF TRANSMITTAL. 4. WITHDRAWAL RIGHTS. Tenders of Shares made pursuant to the Offer are irrevocable except that such Shares may be withdrawn by the tendering shareholder at any time prior to the Expiration Date and, unless theretofore accepted for payment by Purchaser pursuant to the Offer, may also be withdrawn by such shareholder at any time after September 21, 1998. If Purchaser extends the Offer, is delayed in its acceptance for payment of Shares or is unable to accept Shares for payment pursuant to the Offer for any reason, then, without prejudice to Purchaser's rights under the Offer, the Depositary may, nevertheless, on behalf of Purchaser, retain tendered Shares, and such Shares may not be withdrawn except to the extent that tendering 8 12 shareholders are entitled to withdrawal rights as described in this Section 4. Any such delay will be by an extension of the Offer to the extent required by law. For a withdrawal to be effective, a written or facsimile transmission notice of withdrawal must be timely received by the Depositary at one of its addresses set forth on the back cover page of this Offer to Purchase. Any such notice of withdrawal must specify the name of the person who tendered the Shares to be withdrawn, the number of Shares to be withdrawn and the name of the registered holder of such Shares, if different from that of the person who tendered such Shares. If Share Certificates evidencing Shares to be withdrawn have been delivered or otherwise identified to the Depositary, then, prior to the physical release of such Share Certificates, the serial numbers shown on such Share Certificates must be submitted to the Depositary and the signature(s) on the notice of withdrawal must be guaranteed by an Eligible Institution, unless such Shares have been tendered for the account of an Eligible Institution. If Shares have been tendered pursuant to the procedure for book-entry transfer as set forth in Section 3, any notice of withdrawal must also specify the name and number of the account of the Book-Entry Transfer Facility to be credited with the withdrawn Shares, in which case a notice of withdrawal will be effective if delivered to the Depositary by any method of delivery described in the first sentence of this paragraph. Withdrawals of Shares may not be rescinded. Any Shares properly withdrawn will thereafter be deemed not to have been validly tendered for purposes of the Offer. However, withdrawn Shares may be re-tendered at any time prior to the Expiration Date by following one of the procedures described in Section 3. All questions as to the form and validity (including time of receipt) of any notice of withdrawal will be determined by Purchaser, in its sole discretion, whose determination will be final and binding. None of Purchaser, the Depositary, the Information Agent or any other person will be under any duty to give notification of any defects or irregularities in any notice of withdrawal or incur any liability for failure to give any such notification. 5. CERTAIN FEDERAL INCOME TAX CONSEQUENCES. The receipt of cash for Shares pursuant to the Offer will be a taxable transaction for federal income tax purposes and may also be a taxable transaction under applicable state, local or foreign tax laws. In general, a shareholder will recognize gain or loss for federal income tax purposes equal to the difference between the amount of cash received in exchange for the Shares sold and such shareholder's adjusted tax basis in such Shares. For federal income tax purposes, such gain or loss will be capital gain or loss if the Shares are capital assets in the hands of such shareholder, and will be long-term capital gain or loss if such Shares have been held for more than one year. A shareholder's ability to deduct capital losses may be limited. Withholding. Unless a shareholder complies with certain reporting and/or certification procedures or is an exempt recipient under applicable provisions of the Internal Revenue Code of 1986, as amended, and Treasury Regulations promulgated thereunder, such shareholder may be subject to backup withholding at a rate of 31% with respect to any consideration received pursuant to the Offer. See Section 3. Shareholders should consult their brokers to ensure compliance with such procedures. Foreign shareholders should consult with their own tax advisors regarding withholding taxes. THE FOREGOING DISCUSSION MAY NOT BE APPLICABLE TO CERTAIN TYPES OF SHAREHOLDERS, INCLUDING FINANCIAL INSTITUTIONS, BROKER-DEALERS, SHAREHOLDERS WHO ACQUIRED SHARES PURSUANT TO THE EXERCISE OF OPTIONS OR OTHERWISE AS COMPENSATION, INDIVIDUALS WHO ARE NOT CITIZENS OR RESIDENTS OF THE UNITED STATES AND FOREIGN CORPORATIONS. THE FEDERAL INCOME TAX DISCUSSION SET FORTH ABOVE IS INCLUDED FOR GENERAL INFORMATION ONLY AND IS BASED UPON PRESENT LAW. SHAREHOLDERS ARE URGED TO CONSULT THEIR TAX ADVISORS WITH RESPECT TO THE SPECIFIC TAX CONSEQUENCES OF THE OFFER TO THEM, INCLUDING THE APPLICABILITY AND EFFECT OF ANY STATE, LOCAL AND FOREIGN TAX LAWS. 6. PRICE RANGE OF SHARES; DIVIDENDS. The Shares are principally traded on the over-the-counter market under the NASDAQ symbol "MCMC." The following table sets forth, for the fiscal quarters 9 13 indicated, the range of high and low bid prices per Share as reported by NASDAQ and the cash dividends per Share declared during such periods.
QUARTERLY CASH HIGH LOW DIVIDENDS ---- --- --------- Fiscal 1996: First Quarter............................................. $4 3/4 $3 1/2 $ -- Second Quarter............................................ 6 1/8 5 1/2 .02 Third Quarter............................................. 5 7/8 5 1/4 .02 Fourth Quarter............................................ 5 3/4 5 1/4 .02 Fiscal 1997: First Quarter............................................. 4 5/8 3 7/8 -- Second Quarter............................................ 3 7/8 3 1/8 -- Third Quarter............................................. 3 3/8 2 7/8 -- Fourth Quarter............................................ 3 1/4 2 1/8 -- Fiscal 1998: First Quarter............................................. 2 7/8 1 3/4 -- Second Quarter............................................ 2 3/8 1 7/8 -- Third Quarter (through July 22, 1998)..................... 3 7/16 2 1/8 --
On July 16, 1998, the last full trading day prior to the announcement of the execution of the Offer and Rights Agreement and of Purchaser's intention to commence the Offer, the closing bid per Share as reported by NASDAQ was $2 5/8. On July 22, 1998, the closing bid per Share as reported by NASDAQ was $3 1/4. SHAREHOLDERS ARE URGED TO OBTAIN A CURRENT MARKET QUOTATION FOR THE SHARES. 7. CERTAIN INFORMATION CONCERNING THE COMPANY. Except as otherwise set forth herein, the information concerning the Company contained in this Offer to Purchase, including financial information, has been furnished by the Company or has been taken from or based upon publicly available documents and records on file with the Commission and other public sources. The Purchaser assumes no responsibility for the accuracy or completeness of the information concerning the Company furnished by the Company or contained in such documents and records or for any failure by the Company to disclose events that may have occurred or may affect the significance or accuracy of any such information but that are unknown to Purchaser. General. The Company is a North Carolina corporation with its principal executive offices located at P.O. Box 12317, 702 Oberlin Road, Raleigh, North Carolina 27605. The Company is an insurance holding company conducting its business through insurance and non-insurance subsidiaries. The Company's subsidiaries are as follows: Occidental Fire & Casualty Company of North Carolina ("OF&C"); Wilshire Insurance Company ("Wilshire"); and Equity Holdings, Inc. ("Equity Holdings"). The Company, through its subsidiaries, is engaged in the marketing and underwriting of property and casualty insurance. The Company'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 the Company. One agent accounts for approximately 16% of premium income of the property and casualty business of the Company. 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 deemed to be commercially domiciled in California and licensed in nineteen states: Arizona, California, Colorado, Hawaii, Idaho, Iowa, Kansas, Minnesota, Montana, Nebraska, Nevada, New Mexico, North 10 14 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 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. Financial Information. Set forth below is certain selected consolidated financial information relating to the Company and its subsidiaries which has been excerpted or derived from the audited financial statements contained in the Company's Annual Report on Form 10-K for the year ended December 31, 1997, and unaudited financial statements contained in the Company's Quarterly Reports on Form 10-Q for the periods ended March 31, 1998 and March 31, 1997 (collectively, the "Company's Reports"). More comprehensive financial information is included in the Company's Reports and other documents filed by the Company with the Commission. The financial information that follows is qualified in its entirety by reference to such reports and other documents, including the financial statements and related notes contained therein. Such reports and other documents may be examined and copies may be obtained from the offices of the Commission in the manner set forth below. MCM CORPORATION AND SUBSIDIARIES SELECTED CONSOLIDATED FINANCIAL INFORMATION (IN THOUSANDS, EXCEPT PER SHARE DATA)
THREE MONTHS ENDED YEAR ENDED MARCH 31, DECEMBER 31, ------------------- ----------------- 1998 1997 1997 1996 -------- -------- ------- ------- (UNAUDITED) Statement of Operations Data: Total revenue........................................... $11,469 $14,685 $59,537 $55,698 Total losses and expenses............................... 11,364 14,377 68,077 56,486 ------- ------- ------- ------- Net (loss) income....................................... $ 105 $ 308 $(8,540) $ (788) Net (loss) income per share............................. $ 0.02 $ 0.07 $ (1.82) $ (0.17)
AT --------------------------------------------------- MARCH 31, MARCH 31, DECEMBER 31, DECEMBER 31, 1998 1997 1997 1996 --------- --------- ------------ ------------ (UNAUDITED) Balance Sheet Data: Total assets.................................... $101,220 $109,503 $104,140 $112,870 Liabilities..................................... 88,257 88,408 91,372 91,215 Total shareholders' equity...................... 12,963 21,095 12,768 21,655
The Company has advised the Purchaser that during the second quarter of 1998, the Company determined it had over-ceded reinsurance premiums attributable to certain prior year excess of loss reinsurance treaties. The aggregate net recovery after quota share effects is estimated at approximately $2.1 million. The Company expects to offset any benefit from this recovery by increasing overall loss reserves and expects the above actions to have no significant impact on net income or surplus of the Company. In connection with Purchaser's review of the Company described in Section 10, the Company provided Purchaser access, as it did other prospective bidders, to a due diligence information package containing certain business and projected financial information. The information provided included certain projected statutory financial statement information prepared for the Company's insurance subsidiaries, OF&C and Wilshire, for each of the years 1998 through 2002. These projected financial statements were prepared for, and are on file with, the North Carolina Department of Insurance pursuant to certain regulatory obligations and the RBC Plan (as defined in Section 11), to which OF&C and Wilshire are subject. Such financial statement 11 15 information was prepared in accordance with statutory accounting principles rather than generally accepted accounting principles. The Company has advised Purchaser that it does not as a matter of course make public forecasts as to future performance or earnings, and that the projected financial statement information described above was prepared by the Company solely in connection with satisfying its regulatory obligations, independent of any potential sale to Purchaser. Purchaser also has advised the Company that it has not relied on such projected financial information in formulating the Offer. Such projections included forecasts of statutory combined net income for OF&C and Wilshire of approximately $700,000, $3.8 million, $5.4 million, $6.3 million and $7.2 million in fiscal 1998, 1999, 2000, 2001 and 2002, respectively. PROJECTED INFORMATION OF THIS TYPE IS BASED ON ESTIMATES AND ASSUMPTIONS THAT ARE INHERENTLY SUBJECT TO SIGNIFICANT ECONOMIC AND COMPETITIVE UNCERTAINTIES AND CONTINGENCIES, ALL OF WHICH ARE DIFFICULT TO PREDICT AND MANY OF WHICH ARE BEYOND THE COMPANY'S CONTROL. THESE FORWARD-LOOKING STATEMENTS ARE SUBJECT TO CERTAIN RISKS AND UNCERTAINTIES THAT COULD CAUSE ACTUAL RESULTS TO DIFFER MATERIALLY FROM THESE PROJECTIONS. THESE PROJECTIONS REFLECT NUMEROUS ASSUMPTIONS, ALL MADE BY MANAGEMENT OF THE COMPANY OR DICTATED BY INSURANCE REGULATORY REQUIREMENTS, WITH RESPECT TO INDUSTRY PERFORMANCE, GENERAL BUSINESS, ECONOMIC, MARKET AND FINANCIAL CONDITIONS AND OTHER MATTERS INCLUDING ASSUMED INTEREST EXPENSE AND EFFECTIVE TAX RATES CONSISTENT WITH HISTORICAL LEVELS FOR THE COMPANY, ALL OF WHICH ARE DIFFICULT TO PREDICT, MANY OF WHICH ARE BEYOND THE COMPANY'S CONTROL AND NONE OF WHICH WERE SUBJECT TO APPROVAL BY PURCHASER. ACCORDINGLY, THERE CAN BE NO ASSURANCE THAT THE PROJECTED RESULTS WILL BE REALIZED OR THAT ACTUAL RESULTS WILL NOT BE SIGNIFICANTLY HIGHER OR LOWER THAN THOSE SET FORTH ABOVE. IN ADDITION, THESE PROJECTIONS WERE NOT PREPARED WITH A VIEW TO PUBLIC DISCLOSURE OR COMPLIANCE WITH THE PUBLISHED GUIDELINES OF THE COMMISSION OR THE GUIDELINES ESTABLISHED BY THE AMERICAN INSTITUTE OF CERTIFIED PUBLIC ACCOUNTANTS REGARDING PROJECTIONS AND FORECASTS AND ARE INCLUDED IN THIS OFFER TO PURCHASE ONLY BECAUSE SUCH INFORMATION WAS MADE AVAILABLE TO PURCHASER BY THE COMPANY. NONE OF PURCHASER, ITS SHAREHOLDERS, THE COMPANY OR THEIR FINANCIAL ADVISORS OR ANY OTHER ENTITY OR PERSON ASSUMES ANY RESPONSIBILITY FOR THE ACCURACY OR VALIDITY OF THE FOREGOING PROJECTIONS. NONE OF PURCHASER, ITS SHAREHOLDERS, THE COMPANY AND ANY OF THEIR FINANCIAL ADVISORS HAS MADE, OR MAKES, ANY REPRESENTATION TO ANY PERSON REGARDING THE INFORMATION CONTAINED IN THESE PROJECTIONS AND NONE OF THEM INTENDS TO UPDATE OR OTHERWISE REVISE THESE PROJECTIONS TO REFLECT CIRCUMSTANCES EXISTING AFTER THE DATE WHEN MADE OR TO REFLECT THE OCCURRENCE OF FUTURE EVENTS EVEN IN THE EVENT THAT ANY OR ALL OF THE ASSUMPTIONS UNDERLYING THESE PROJECTIONS ARE SHOWN TO BE IN ERROR. The Shares are registered pursuant to Section 12(g) of the Exchange Act. Accordingly, the Company is subject to the informational filing requirements of the Exchange Act and, in accordance therewith, is required to file periodic reports, proxy statements and other information with the Commission relating to its business, financial condition and other matters. Information as to particular dates concerning the Company's directors and officers, their remuneration, Options granted to them, the principal holders of the Company's securities and any material interest of such persons in transactions with the Company is required to be disclosed in proxy statements distributed to the Company's shareholders and filed with the Commission. Such reports, proxy statements and other information should be available for inspection at the public reference facilities maintained by the Commission at Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549, and also should be available for inspection at the Commission's regional offices located at Seven World Trade Center, 12 16 13th Floor, New York, New York 10048 and Citicorp Center, 500 West Madison Street, Suite 1400, Chicago, Illinois 60661-2511. Copies of such materials may also be obtained by mail, upon payment of the Commission's customary fees. Requests should be directed to the Commission's Public Reference Branch, Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549. Such material may also be accessed electronically by means of the Commission's home page on the Internet (http://www.sec.gov). 8. CERTAIN INFORMATION CONCERNING PURCHASER. The Purchaser is a corporation organized under the laws of Bermuda, and its principal offices are located at Victoria Hall, 11 Victoria Street, Hamilton HM11, Bermuda. Purchaser is a licensed reinsurer in Bermuda, although Purchaser has not been an active writer of insurance since 1987. Purchaser's current principal business is the investment in and portfolio management of marketable securities, principally those traded in the United States securities markets. The name, citizenship, residence or business address, principal occupation or employment, and five-year employment history for each of the directors and executive officers of Purchaser and certain other information are set forth in Schedule I hereto. The voting securities of Purchaser are 100% owned by Peter R. Kellogg, and are not registered pursuant to Section 12(b) or 12(g) of the Exchange Act or listed or traded on any public securities market. Except as described in this Offer to Purchase, including Schedule I hereto, (i) neither Purchaser nor, to the best knowledge of Purchaser, any of the persons listed in Schedule I to this Offer to Purchase, or any associate of Purchaser or majority-owned subsidiary of Purchaser or any of the persons so listed, beneficially owns or has any right to acquire, directly or indirectly, any Shares and (ii) neither Purchaser nor, to the best knowledge of Purchaser, any of the persons or entities referred to above, nor any director, executive officer or subsidiary of any of the foregoing, has effected any transaction in the Shares during the past 60 days. Except as otherwise described in this Offer to Purchase, neither Purchaser nor, to the best knowledge of Purchaser, any of the persons listed in Schedule I to this Offer to Purchase, has any contract, arrangement, understanding or relationship with any other person with respect to any securities of the Company, including, but not limited to, any contract, arrangement, understanding or relationship concerning the transfer or voting of such securities, joint ventures, loan or option arrangements, puts or calls, guaranties of loans, guaranties against loss, guaranties of profits, division of profits or loss or the giving or withholding of proxies. Except as set forth in this Offer to Purchase, since January 1, 1995, neither Purchaser nor, to the best knowledge of Purchaser, any of the persons listed on Schedule I hereto, has had any business relationship or transaction with the Company or any of its executive officers, directors or affiliates that is required to be reported under the rules and regulations of the Commission applicable to the Offer. Except as set forth in this Offer to Purchase, since January 1, 1995, there have been no contacts, negotiations or transactions between Purchaser or any of its subsidiaries, or, to the best knowledge of Purchaser, any of the persons listed in Schedule I to this Offer to Purchase, on the one hand, and the Company or its affiliates, on the other hand, concerning a merger, consolidation or acquisition, tender offer or other acquisition of securities, an election of directors or a sale or other transfer of a material amount of assets. Financial Information. Set forth below are certain selected consolidated financial data relating to Purchaser (i) at or for the years ended December 31, 1997 and 1996 that have been excerpted or derived from the non-consolidated financial statements of Purchaser at such dates and for the fiscal years then ended, which have been audited by Coopers & Lybrand, Chartered Accountants, of Hamilton, Bermuda (now known as PricewaterhouseCoopers, Chartered Accountants, of Hamilton, Bermuda), and (ii) at or for the three months ended March 31, 1998 that have been excerpted or derived from the unaudited non-consolidated financial statements of Purchaser at such date and for the three-month period then ended. The following summary is qualified in its entirety by reference to the financial statements of Purchaser and the related notes therein included as Exhibits 99.1 and 99.2 to this Statement, which may be accessed electronically by means of the Commission's home page on the Internet (http://www.sec.gov). The financial statements of Purchaser have been prepared in accordance with generally accepted accounting principles applicable in the United States ("GAAP"). Amounts reflected in the financial statements of Purchaser are stated in United States dollars. 13 17 IAT REINSURANCE SYNDICATE LTD. SELECTED NON-CONSOLIDATED FINANCIAL DATA (IN THOUSANDS)
AT OR FOR THE ---------------------------------- THREE MONTHS ENDED YEAR ENDED MARCH 31, DECEMBER 31, ------------ ------------------- 1998 1997 1996 ------------ -------- -------- (UNAUDITED) Income Statement Data: Net earnings.............................................. $ 19,421 $ 36,429 $ 6,967 Balance Sheet Data: Total assets.............................................. 296,590 270,286 145,108 Equity securities at market value......................... 269,247 253,418 128,465 Total liabilities......................................... 9,430 18,981 17,144 Total shareholders' equity................................ 287,159 251,305 127,964
9. FINANCING OF THE OFFER AND THE RELATED TRANSACTIONS. The total amount of funds required by Purchaser to consummate the Offer and Related Transactions and to pay related fees and expenses is estimated to be approximately $18.0 million. Of this amount, it is estimated that approximately $6.2 million will be needed to consummate the purchase of the Shares in the Offer, approximately $2.4 million will be needed to effect purchase of Shares pursuant to the Trust Purchase Agreement, and approximately $8.9 million will be needed to fund the deposit to the Trust. Purchaser will provide all of such funds from its own working capital. 10. BACKGROUND OF THE OFFER; CONTACTS WITH THE COMPANY; THE OFFER AND RIGHTS AGREEMENT; THE TRUST PURCHASE AGREEMENT; THE TENDER AGREEMENT; CERTIFICATES OF CONTRIBUTION; CONFIDENTIALITY AGREEMENT. Background of the Offer; Contacts with the Company. In April 1998, Mr. Peter Kellogg and a representative of Oceanic Co. ("Oceanic"), a financial advisor to Purchaser, contacted George E. King, Chairman and Chief Executive Officer of the Company and representatives of PaineWebber, the Company's financial advisor, to discuss the Company and Purchaser's possible interest in acquiring an equity interest in the Company. On April 15, 1998, a representative of Oceanic had a conversation with Mr. King and Mr. Stephen L. Stephano, President and Chief Operating Officer of the Company, regarding the Company and Purchaser's possible interest in acquiring an equity interest in the Company. Later that day, Purchaser signed a confidentiality agreement with the Company, pursuant to which it agreed to keep confidential certain information disclosed to it by the Company. In late April, Mr. Kellogg met separately with PaineWebber and with Messrs. King and Stephano and engaged in discussions regarding Purchaser's possible interest in a transaction with the Company. During May 1998, Purchaser had several preliminary discussions with PaineWebber and Mr. DiGregorio, a director of the Company and vice president and senior counsel for the Trustee. On June 3, 1998, representatives of PaineWebber, and Messrs. King and Stephano of the Company, met with Mr. Kellogg and a representative of Oceanic to discuss in greater detail the possibility of Purchaser's acquiring an equity interest in the Company. On June 4, 1998, a representative of Oceanic discussed with Messrs. King and Stephano in detail the structure of a possible acquisition of such interest. On June 5, 1998, a representative of Oceanic had a discussion with Messrs. King and Stephano regarding the Trust and a possible proposal on the part of Purchaser to acquire shares held by the Trust. On June 8 and 9, 1998, a representative of Oceanic met at the Company's offices with the Company's outside legal counsel to discuss a possible acquisition structure and thereafter conducted a due diligence examination of certain information prepared for review of prospective acquirors of the Company. On June 12, 1998, a representative of Oceanic had a discussion with Messrs. King and Stephano and the Company's legal counsel regarding Purchaser's prospective investment of $5,000,000 in the Company pursuant to Certificates of Contribution (as defined below). See "Certificates of Contribution" below. At the end of this conversation, the Company and Purchaser reached an agreement in principle regarding Purchaser's financing of $5,000,000 to the Company 14 18 pursuant to the Certificates of Contribution. On June 15, 1998, the closing and funding of the Certificates of Contribution occurred. On June 17, 1998, a representative of Oceanic had a discussion with Messrs. King and Stephano regarding a possible meeting with representatives of A.M. Best Company, Inc., an insurance information publication and rating agency ("Best"), regarding Best's assessment of the Company and its reaction to prospective increases in capital investment in the Company. On June 18, 1998, a representative of Oceanic and Messrs. King and Stephano met with representatives of Best, during which meeting such representative of Oceanic discussed with the representatives of Best the structure of a proposal to acquire an equity interest in the Company. In early June 1998, Mr. Kellogg had a discussion with Mr. Michael A. DiGregorio regarding Purchaser's possible interest in purchasing Shares from the Trust. A representative of Oceanic contacted Mr. DiGregorio on June 9, 1998 and outlined the terms of a proposal by the Purchaser to acquire Shares from the Trust. A representative of Oceanic contacted Mr. DiGregorio again on June 26, 1998 to further discuss the proposal to purchase Shares from the Trust. On July 2, 1998, Purchaser sent a draft of the Trust Purchase Agreement to both the Trust and the Company's legal counsel. On that date, a representative of Oceanic also contacted Mr. DiGregorio requesting that he arrange a meeting with the Guardian Ad Litem for minor and unborn beneficiaries of the Trust (the "Guardian Ad Litem"), regarding the proposed Trust Purchase Agreement. On July 6, 1998, a representative of Oceanic met with Mr. DiGregorio and the Guardian Ad Litem and negotiated certain terms of the Trust Purchase Agreement. On July 7, 1998, Purchaser circulated a revised draft of the Trust Purchase Agreement to the Trust, the Company and their respective counsel. On July 8, 1998, a representative of Oceanic, Messrs. King and Stephano, their respective counsel, and representatives of PaineWebber discussed possible scheduling and timing of a proposed acquisition transaction. Later that day, a representative of Oceanic, Messrs. King and Stephano and counsel for the Purchaser appeared before the Department of Insurance of the State of North Carolina and delivered on behalf of Purchaser a preliminary draft of a statement on Form A regarding the acquisition of control of or merger with a domestic insurer. On July 10, 1998, a representative of Oceanic, Messrs. King and Stephano and respective counsel for the Purchaser and Company engaged in negotiations regarding certain aspects of a possible acquisition transaction. On Monday, July 13, 1998, Purchasers delivered to PaineWebber, the Board and its counsel drafts of the Trust Purchase Agreement, Offer and Rights Agreement and Tender Agreement. On Wednesday, July 15, 1998, Purchaser, through its financial advisor and outside legal counsel, made a presentation to the Board regarding a proposed transaction. Negotiations continued through Thursday, July 16. On July 16, 1998, the Board unanimously approved the Offer, the Offer and Rights Agreement and the transactions contemplated thereby, and recommended that shareholders of the Company tender their Shares in the Offer. The Offer and Rights Agreement, the Trust Purchase Agreement and the Tender Agreement were executed on July 16, 1998, and a press release announcing the execution of these agreements and the Offer was issued on the morning of July 17, 1998. The Offer and Rights Agreement. The following is a summary of the Offer and Rights Agreement, a copy of which has been filed as an exhibit to the Schedule 14D-1. Such summary is qualified in its entirety by reference to the Offer and Rights Agreement. The Offer. The Offer and Rights Agreement provides for the commencement of the Offer as promptly as reasonably practicable, but in no event later than five business days after the initial public announcement of the execution of the Offer and Rights Agreement. The obligation of Purchaser to accept for 15 19 payment Shares tendered pursuant to the Offer is subject to the satisfaction of the Minimum Condition and certain other conditions that are described in Section 14 hereof. Designation of Directors. The Offer and Rights Agreement provides that immediately following the Purchaser's Election Time and from time to time thereafter, Purchaser shall be entitled to designate a majority of the Board. Pursuant to the Offer and Rights Agreement, the Company agrees, at such time, to promptly take all actions necessary to cause Purchaser's designees to be elected as directors of the Company, including increasing the size of the Board or securing the resignations of incumbent directors or both. The Offer and Rights Agreement also provides that, at such time, the Company shall use its best efforts to cause persons designated by Purchaser to constitute a majority of (a) each committee of the Board (some of whom may be required to be independent as required by applicable law or the requirements of the rules of the National Association of Securities Dealers, Inc.), (b) each board of directors of each subsidiary and (c) each committee of each such board, in each case only to the extent permitted by applicable law. If any of Purchaser's designees dies, resigns or is removed upon the direction of Purchaser, the Company agrees in the Offer and Rights Agreement to take all action necessary to cause such vacancy to be filled by a designee of Purchaser within 10 business days after the opening of such vacancy. Notwithstanding the foregoing, the Offer and Rights Agreement provides that until the Purchaser's Election Time, the Company shall use its best efforts to ensure that all the members of the Board and each committee of the Board and such boards and committees of the subsidiaries of the Company as of the date thereof who are not employees of the Company shall remain members of the Board and of such boards and committees. Rights to Purchase Preferred Stock. Pursuant to the Offer and Rights Agreement, the Company agrees to issue to Purchaser, immediately following the acceptance for payment and payment by Purchaser for Shares validly tendered and not withdrawn pursuant to the Offer, Rights to purchase from the Company 60,000 shares of a new issue of Series A preferred stock, par value $1,000 per share ("Preferred Stock") at an exercise price of $.01 per share of Preferred Stock. The Rights are exercisable in whole or in part and at any time after issuance and prior to June 1, 2008 if, (i) the Trust sells (including without limitation, pursuant to a merger, consolidation or other business combination transaction involving the Company) any of the Retained Shares to any third party other than Purchaser or an assignee of Purchaser, or (ii) if any person or entity other than Purchaser causes Purchaser's designees to cease to constitute a majority of the members of the Board. Notwithstanding the foregoing, the Offer and Rights Agreement provides that the Rights shall not become immediately exercisable if Purchaser's designees fail to constitute a majority of the members of the Board due to the death, resignation or removal by Purchaser of any such designee; provided, that the Rights shall become exercisable following any such event if, prior to the time Purchaser's designees again represent a majority of the members of the Board, such board takes any action opposed by a majority of the remaining designees of Purchaser or, if no such designees remain, the then current chief executive officer of Purchaser. Pursuant to the Offer and Rights Agreement, the Company agreed to take all action necessary to fill any vacancy created by death, resignation or removal by Purchaser of Purchaser's designees to the Board within 10 business days of any such event. The Offer and Rights Agreement also provides that no delay or failure by Purchaser in exercising the Rights upon an occurrence of an event allowing for exercise shall operate as a waiver of such right to exercise, nor shall any partial exercise of the Rights preclude other or further exercise thereof. No Rights may be exercised for less than a whole share of Preferred Stock, and the Purchaser may surrender the Rights to the Company for cancellation at any time before June 1, 2008. The Offer and Rights Agreement also provides that Purchaser as holder of Rights shall not be deemed for any purposes the holder of any shares of Preferred Stock issuable on the exercise thereof, nor shall the Offer and Rights Agreement confer on Purchaser, as such holder of Rights, any of the rights of a shareholder of the Company until the Rights shall have been exercised and then only to the extent provided in the designation of Preferred Stock. Pursuant to the Offer and Rights Agreement, each person in whose name any certificate for shares is issued upon the exercise of Rights shall for all purposes be deemed to have become the holder of record of the shares of Preferred Stock represented thereby on, and such certificate shall be dated, the date upon which the Rights Certificate evidencing such Rights was duly delivered to the Company with payment of the exercise price (and any applicable taxes and other governmental charges payable by the exercising holder hereunder); provided, however, that if the date of 16 20 such delivery and payment is a date upon which the stock transfer books of the Company are closed, such person shall be deemed to have become the record holder of such shares on, and such certificate shall be dated, the next succeeding business day on which the stock transfer books of the Company are open. The Offer and Rights Agreement attaches as an exhibit a statement of the rights, preferences, limitations and characteristics (the "Designation") of the Preferred Stock, which provides for a series of 60,000 shares, which number may from time to time be increased or decreased (but may not be decreased below the number then outstanding) by the Board. The Designation provides that the Preferred Stock will have no dividend or voting rights (other than voting rights required by the North Carolina Business Corporation Act) and will not be convertible or exchangeable for shares of Common Stock or any other class or series of stock (or any other security) of the Company. The Designation provides that the Preferred Stock shall rank, as to distribution of assets upon liquidation, dissolution or winding up, senior to any other class or series of preferred stock of the Company. Moreover, upon the voluntary or involuntary liquidation, dissolution of winding up of the Company, the Designation provides that the holders of shares of Preferred Stock shall be entitled to receive out of the net assets of the Company, before any payment or distribution shall be made or set apart for payment on the Common Stock or any other class or series of stock of the Company, the amount of $1,000 per share; provided, that after such payment, the holders of Preferred Stock, as such, shall have no right or claim to any of the remaining net assets of the Company. Subject to the North Carolina Business Corporation Act and required regulatory approvals, the Designation also provides that the Preferred Stock shall at all times be redeemable at the option of the holder thereof in cash for $1,000 per share payable by the Company by official bank or certified check or wire transfer of immediately available funds. Such redemption shall occur within ten business days after receiving a written notice of redemption from the holder of shares of Preferred Stock accompanied by a certificate or certificates for such shares duly endorsed by the holder thereof with signature guaranteed by a financial institution. In the Offer and Rights Agreement, the Company covenants and agrees that it will (i) cause the Company's Articles of Incorporation to be amended immediately following Purchaser's purchase of Shares in the Offer to include the Designation of the Preferred Stock and such other matters as may be required by applicable law in connection with the establishment of the Preferred Stock, (ii) take all such action as may be necessary to insure that all shares of Preferred Stock delivered upon exercise of Rights shall, at the time of delivery of the certificates for such shares (subject to payment of the exercise price therefor), be duly and validly authorized, executed, issued and delivered and fully paid and nonassessable, (iii) take all such action as may be necessary to comply with any applicable laws, rules, or regulations in connection with the issuance of any shares upon exercise of Rights, and (iv) pay when due and payable any and all federal and state transfer taxes and charges that may be payable in respect of the original issuance or delivery of a certificate for the Rights or of any shares of Preferred Stock issued upon the exercise of Rights; provided, however, that the Company shall not be required to pay any transfer tax or charge that may be payable in respect of any transfer involved in the transfer or delivery of certificates for the Rights or the issuance or delivery of certificates for shares of Preferred Stock in a name other than of the holder of the Rights being transferred or exercised. Conduct of Business. Pursuant to the Offer and Rights Agreement, the Company has covenanted and agreed that, between the date of the Offer and Rights Agreement and the Purchaser's Election Time, unless Purchaser shall otherwise agree in writing, each of the Company and its subsidiaries shall conduct its business only in, and the Company and the subsidiaries shall not take any action except in, the ordinary course of business and in a manner consistent with past practice; and the Company shall use its best efforts to preserve substantially intact the business organization of the Company and the subsidiaries, to keep available the services of the current officers, employees and consultants of the Company and its subsidiaries and to preserve the current relationships of the Company and its subsidiaries with customers, suppliers and other persons with which the Company or any of its subsidiaries have significant business relations. The Offer and Rights Agreement also provides that, except as contemplated by the Offer and Rights Agreement, neither the Company nor any subsidiary shall, between the date of the Offer and Rights Agreement and the Purchaser's Election Time, directly or indirectly do, or propose to do, any of the following without the prior written consent of the Purchaser: (a) amend or otherwise change its Articles of Incorporation or Bylaws or equivalent organizational documents; (b) issue, sell, pledge, dispose of, grant, encumber, or authorize the issuance, sale, 17 21 pledge, disposition, grant or encumbrance of (i) any shares of capital stock of any class of the Company or any subsidiary, or any options, warrants, convertible securities or other rights of any kind to acquire any shares of such capital stock, or any other ownership interest (including, without limitation, any phantom interest), of the Company or any subsidiary or (ii) any assets of the Company or any subsidiary, except for sales in the ordinary course of business and in a manner consistent with past practice; (c) declare, set aside, make or pay any dividend or other distribution, payable in cash, stock, property or otherwise, with respect to any of its capital stock except for the regular quarterly dividend of Wilshire to OF&C; (d) reclassify, combine, split, subdivide or redeem, purchase or otherwise acquire, directly or indirectly, any of its capital stock; (e)(i) acquire (including, without limitation, by merger, consolidation, or acquisition of stock or assets or any other business combination) any corporation, partnership, other business organization or any division thereof or any material amount of assets other than in the ordinary course of business; (ii) incur any indebtedness for borrowed money (except for routine use of the Company's existing line of credit in the ordinary course of business) or issue any debt securities or assume, guarantee or endorse, pledge in respect of or otherwise as an accommodation become responsible for the obligations of any person, or make any loans or advances, except in the ordinary course of business and consistent with past practice; (iii) enter into any contract or agreement other than contracts or agreements entered into in the ordinary course of business, consistent with past practice and which require payments by the Company or its subsidiaries in an aggregate amount of less than $250,000; (iv) terminate, cancel or request any material change in, or agree to any material change in, any material contracts, except in the ordinary course of business consistent with past practice; (v) authorize any single capital expenditure (excluding software development activity) which is in excess of $100,000 or capital expenditures which are, in the aggregate, in excess of $250,000 for the Company and its subsidiaries taken as a whole; or (vi) enter into or amend any contract, agreement, commitment or arrangement with respect to any matter described in this clause (e); (f) increase the compensation payable or to become payable to its officers or employees, except for increases in accordance with past practices in salaries or wages of employees of the Company or any subsidiary who are not officers of the Company, or grant any severance or termination pay to, or enter into any employment or severance agreement with, any director, officer or other employee of the Company or any subsidiary, or establish, adopt, enter into or amend any collective bargaining, bonus, profit sharing, thrift, compensation, stock option, restricted stock, pension, retirement, deferred compensation, employment, termination, severance or other plan, agreement, trust, fund, policy or arrangement for the benefit of any director, officer or employee or circulate to any employee any details of any proposal to adopt or amend any such plan; (g) take any action, other than reasonable and usual actions in the ordinary course of business and consistent with past practice, with respect to accounting policies or procedures (including, without limitation, procedures with respect to the payment of accounts payable and collection of accounts receivable); (h) make any tax election or settle or compromise any material federal, state, local or foreign income tax liability; (i) pay, discharge or satisfy any claim, liability or obligation (absolute, accrued, asserted or unasserted, contingent or otherwise), other than the payment, discharge or satisfaction, in the ordinary course of business and consistent with past practice, of liabilities reflected or reserved against on the Company's consolidated balance sheet included in its Annual Report on Form 10-K for the period ended December 31, 1997 or subsequently incurred in the ordinary course of business and consistent with past practice; or (j) except for insurance claims settled in the ordinary course, certain litigation matters and insurance related claims, settle or compromise any pending or threatened suit, action or claim that is material or which relates to any of the transactions contemplated by the Offer and Rights Agreement; or (k) announce an intention, enter into any formal or informal agreement, or otherwise make a commitment, to do any of the foregoing or any action that would result in any of the conditions to the Offer not being satisfied (other than as contemplated by the Offer and Rights Agreement). Access to Information; Confidentiality. Pursuant to the Offer and Rights Agreement, from the date of the Offer and Rights Agreement to the Purchaser's Election Time, the Company agreed to, and to cause its subsidiaries and the officers, directors, employees, auditors and agents of the Company and its subsidiaries to, afford the officers, employees and agents of the Purchaser complete access at all reasonable times to the officers, employees, agents, properties, offices, and other facilities, books and records of the Company and each of its subsidiaries and to furnish Purchaser with all financial, operating and other data and information as Purchaser, through its officers, employees or agents, may reasonably request. The Purchaser agreed in the 18 22 Offer and Rights Agreement except as required by law to keep such information confidential in accordance with the Confidentiality Agreement dated as of April 15, 1998 (the "Confidentiality Agreement"), between Purchaser and the Company. No Solicitation of Transactions. The Company has agreed that neither the Company nor any subsidiary shall, directly or indirectly, through any officer, director, agent or otherwise, solicit, initiate or encourage the submission of any proposal or offer from any person relating to any acquisition or purchase of all or any material portion of the assets of, or any equity interest in, the Company or any of its subsidiaries or any business combination with the Company or any of its subsidiaries or participate in any negotiations regarding, or furnish to any other person any information with respect to, or otherwise cooperate in any way with, or assist or participate in, facilitate or encourage, any effort or attempt by any other person to do or seek any of the foregoing. Notwithstanding the foregoing, the Offer and Rights Agreement permits the Board to furnish information to, or enter into discussions or negotiations with, any person in connection with an unsolicited (from the date of the Offer and Rights Agreement) proposal in writing by such person to acquire the Company pursuant to a merger, consolidation, share exchange, business combination or other similar transaction or to acquire all or substantially all of the assets of the Company or any of its subsidiaries, if, and only to the extent that, (a) the Board, after consultation with independent legal counsel (which may include its regularly engaged independent legal counsel), determines in good faith that such action is required for the Board to comply with its fiduciary duties to shareholders imposed by North Carolina law and (b) prior to furnishing such information to, or entering into discussions or negotiations with, such person, the Company uses its reasonable best efforts to obtain from such person an executed confidentiality agreement on terms no less favorable to the Company than those contained in the Confidentiality Agreement (or obtained a confidentiality agreement prior to the date of the Offer and Rights Agreement). Pursuant to the Offer and Rights Agreement, the Company agreed to immediately cease and cause to be terminated all existing discussions or negotiations with any parties conducted prior to the date of the Offer and Rights Agreement with respect to any of the foregoing. Moreover, the Company agreed (x) to notify Purchaser promptly if any such proposal or offer, or any inquiry or contact with any person with respect thereto, is made and (y) not to release any third party from, or waive any provision of, any confidentiality or, subject to the fiduciary duties of the Board, standstill agreement to which the Company is or may become a party. Treatment of Stock Options; Employee Stock Purchase Rights. Under the terms of the Company's 1986 Employee Incentive Stock Option Plan and 1996 Employee Incentive Stock Option Plan (collectively, the "Stock Option Plans"), each outstanding Option to purchase Shares becomes exercisable in full, regardless of the vesting schedule contained in any stock option agreement or in any of the Stock Option Plans, five business days prior to the consummation of a change of control ("Change of Control") as defined in the Stock Option Plans. A Change of Control includes the acquisition by any person of beneficial ownership, directly or indirectly, of 25% or more of the voting power of the Company's then outstanding securities. The Stock Option Plans further provide that, in the event any Option holder is terminated as an employee of the Company within three months following a Change of Control, all Options granted to such employee on or before the date of such termination shall remain exercisable for a period ending on the earlier of (i) six months following such termination or (ii) the original expiration date of the Option. Consummation of the Offer in accordance with the terms described herein would constitute a Change of Control. Holders of Options under the Stock Option Plans wishing to tender such Option Shares in the Offer may either exercise such Options and tender the Shares received in accordance with the general instructions provided herein or, in lieu of exercising such Options and tendering such Shares in the Offer, elect to cancel such Options and obtain from the Purchaser, in exchange for such cancellation, an amount (subject to applicable withholding tax) in cash equal to the product of (a) the number of Shares previously subject to such Option and (b) the excess, if any, of the per Share consideration payable pursuant to the Offer over the exercise price per Share previously subject to such Option. Pursuant to the Tender Agreement, each Director has agreed to cancel his Options in exchange for the per share cash payment described above. Employees may elect to cancel their Options in return for the cash payment described above by completing the instructions attached as Exhibit (a)(10) to the Schedule 14D-1. 19 23 The Company has terminated the 1996 Employee Stock Purchase Plan (the "Employee Purchase Plan") effective July 15, 1998, the day after the last quarterly purchase date under the Employee Purchase Plan. Employees may elect to tender Shares held in their Employee Purchase Plan accounts by completing the instructions attached as Exhibit (a)(9) to the Schedule 14D-1. Directors' and Officers' Indemnification and Insurance. Following Purchaser's Election Time, and for a period of six years thereafter, the Offer and Rights Agreement requires Purchaser to cause the Board to retain provisions in the Articles of Incorporation and Bylaws of the Company no less favorable with respect to indemnification of officers and directors than are currently set forth in such documents, unless modification thereof shall be required by law. The Offer and Rights Agreement also provides that the Company, from and after the date of such Agreement and to and including the date six years after the Purchaser's Election Time, shall use its best efforts to maintain in effect, if available, the current directors' and officers' liability insurance policies maintained by the Company (provided that the Company may substitute therefor policies of at least the same coverage containing terms and conditions which are not materially less favorable) with respect to matters occurring on or prior to the Purchaser's Election Time. Notwithstanding the foregoing, in no event shall the Company be required to expend more than approximately $140,000 per year for such insurance. Representations and Warranties. The Offer and Rights Agreement contains various representations and warranties of the parties thereto, including representations by the Company as to the Company's due incorporation and valid existence and power and authority with respect to the transactions contemplated by the Offer and Rights Agreement, the enforceability of the Offer and Rights Agreement against the Company, the absence of conflicts between the transactions contemplated by the Offer and Rights Agreement and the organizational documents or contracts of the Company or applicable law, the brokers engaged by the company, the capitalization of the Company, the Company's filings with the Commission, the consolidated financial statements of the Company and its subsidiaries, and the absence of certain changes or events concerning the Company's business. The Company also represented in the Offer and Rights Agreement that (a) the Board has unanimously (i) determined that the Offer and Rights Agreement and the transactions contemplated thereby, including the Offer, are fair to and in the best interests of the shareholders of the Company, (ii) approved and adopted the Offer and Rights Agreement, and (iii) recommended that the shareholders of the Company accept the Offer. Conditions to Offer and Rights. The obligation of Purchaser to consummate the Offer is subject to the satisfaction of the Regulatory Approvals and the satisfaction or waiver of the Minimum Condition (which may not be waived below 25% of the voting power of the Company) and the other conditions set forth in Annex A to the Offer and Rights Agreement. See Section 14. The obligation of the Company under the Offer and Rights Agreement to issue the Rights is subject to the fulfillment, at or prior to such issuance, of the Regulatory Approval Conditions, the accuracy of the representations and warranties of Purchaser in the Offer and Rights Agreement and Purchaser's acceptance for payment and payment for Shares validly tendered and not withdrawn pursuant to the Offer. Termination. The Offer and Rights Agreement may be terminated and the Offer and other transactions contemplated by the Offer and Rights Agreement may be abandoned at any time prior to Purchaser's Election Time: (a) by mutual written consent duly authorized by the boards of directors of Purchaser and the Company prior to Purchaser's Election Time; (b) by Purchaser or the Company if (i) the Purchaser's Election Time shall not have occurred on or before the date 180 days following commencement of the Offer (so long as the party seeking such termination has not failed to fulfill any obligation under the Offer and Rights Agreement, which failure has been the cause of, or resulted in, the failure of the Purchaser's Election Time to occur on or before such date) or (ii) any court of competent jurisdiction in the United States or other governmental authority shall have issued an order, decree, ruling or taken any other action restraining, enjoining or otherwise prohibiting the Offer and such order, decree, ruling or other action shall have become final and nonappealable; (c) by Purchaser, upon approval of its board of directors, if (i) due to an occurrence or circumstance that would result in a failure to satisfy any condition to the Offer, Purchaser shall have (A) failed to commence the Offer within 30 days following the date of the Offer and Rights Agreement, (B) terminated the Offer without having accepted any Shares for payment thereunder or (C) failed to pay for 20 24 Shares pursuant to the Offer within 180 days following the commencement of the Offer, unless such action or inaction under (A), (B) or (C) shall have been caused by or resulted from the failure of Purchaser to perform in any material respect any material covenant or agreement of Purchaser contained in the Offer and Rights Agreement or the material breach by Purchaser of any material representation or warranty contained in the Offer and Rights Agreement or (ii) prior to the purchase of Shares pursuant to the Offer, the Board or any committee thereof shall have withdrawn or modified in a manner adverse to Purchaser its approval or recommendation of the Offer, the Offer and Rights Agreement, or any other transaction contemplated by the Offer and Rights Agreement or shall have recommended another merger, consolidation, business combination with, or acquisition of, the Company or any of its assets or another tender offer or exchange offer for Shares, or shall have resolved to do any of the foregoing; or (d) by the Company, upon approval of the Board, if (i) due to an occurrence or circumstance that would result in a failure to satisfy any condition to the Offer, Purchaser shall have (A) failed to commence the Offer within 30 days following the date of the Offer and Rights Agreement, (B) terminated the Offer without having accepted any Shares for payment thereunder or (C) failed to pay for Shares pursuant to the Offer within 180 days following the commencement of the Offer, unless such action or inaction under (A), (B), and (C) shall have been caused by or resulted from the failure of the Company to perform in any material respect any material covenant or agreement of it contained in the Offer and Rights Agreement or the material breach by the Company of any material representation or warranty of it contained in the Offer and Rights Agreement or (ii) prior to the purchase of Shares pursuant to the Offer, the Board shall have withdrawn or modified in a manner adverse to Purchaser its approval or recommendation of the Offer, the Offer and Rights Agreement, or any other transaction contemplated by the Offer and Rights Agreement in order to approve the execution by the Company of a definitive agreement providing for the acquisition of the Company or any of its assets by a sale, merger or other business combination or in order to approve a tender offer or exchange offer for Shares by a third party, in either case, as the Board determines in good faith that such action is required for the Board to comply with its fiduciary duties to shareholders, after consultation with its independent legal counsel and financial advisers, and is on terms more favorable to the Company's shareholders than the Offer; provided, however, that such termination under clause (ii) above shall not be effective until the Company has reimbursed Purchaser for its Expenses (as hereinafter defined). In the event of the termination of the Offer and Rights Agreement, pursuant to the terms in the preceding paragraph, the Offer and Rights Agreement provides that it shall forthwith become void, and there shall be no liability on the part of any party thereto, except under the provisions of the Offer and Rights Agreement related to expenses described below, confidentiality, and certain other miscellaneous provisions and except for liability of any party for breach of the Offer and Rights Agreement prior to its termination. Expenses. The Offer and Rights Agreement provides that in the event that (a) (i) on or after July 16, 1998 and prior to termination of the Offer and Rights Agreement, any person (including, without limitation, the Company or any affiliate thereof, but excluding the Trust, Purchaser or any affiliate of Purchaser), shall have become the beneficial owner of more than 10% of the then outstanding Shares and (ii) the Offer and Rights Agreement shall have been terminated pursuant to the termination section of such agreement and (iii) within 12 months of such termination a Third Party Acquisition (as defined hereinafter) shall occur; or (b) (i) on or after July 16, 1998 and prior to termination of the Offer and Rights Agreement any person shall have commenced, publicly proposed or communicated to the Company a proposal that is publicly disclosed for a tender or exchange offer for 25% or more (or which, assuming the maximum amount of securities that could be purchased, would result in any person beneficially owning 25% or more of the then outstanding Shares) or otherwise for the direct or indirect acquisition of the Company or all or substantially all of its assets for per Share consideration having a value greater than the per Share consideration provided in the Offer and (ii)(A) the Offer shall have remained open for at least 20 business days, (B) the Minimum Condition shall not have been satisfied and (C) the Offer and Rights Agreement shall have been terminated pursuant to the terms in the termination section of such agreement; or (c) the Offer and Rights Agreement is terminated pursuant to the termination provisions described in clause (c)(ii) or (d)(ii) of the second preceding paragraph; or (d) so long as Purchaser is not in material breach of its obligations under the Offer and Rights Agreement, if (i) the Offer and Rights Agreement is terminated as described in clause (c) of the second preceding paragraph due to the material breach of the Company's obligations under the Offer and 21 25 Rights Agreement or (ii) the Offer and Rights Agreement is terminated as described in clause (c) of the second preceding paragraph because of the failure of representations and warranties of the Company to be true and correct, which failures in the aggregate have or are reasonably likely to have any change or effect that is or is reasonably likely to be materially adverse to the business, operations, condition (financial or otherwise), assets or liabilities (including, without limitation, contingent liabilities) of the Company and its subsidiaries taken as a whole (a "Material Adverse Effect") or because of the failure of the Company to perform in any material respect any material obligation or to comply in any material respect with any material agreement or material covenant of the Company to be performed or complied with by it under the Offer and Rights Agreement, then in any event set forth in clauses (a), (b), (c) or (d) above, the Offer and Rights Agreement requires the Company to promptly reimburse Purchaser for all Expenses. The Offer and Rights Agreement, however, does not require payment of Expenses if the events described in clause (a) or (b) above are satisfied if (x) the Offer and Rights Agreement is terminated solely for failure to satisfy any Regulatory Approvals and (y) the failure to satisfy such Regulatory Approvals is in no respect due to the occurrence of any event described in clause (a)(i) or (b)(i) described above. "Expenses" is defined in the Offer and Rights Agreement to mean all out-of-pocket expenses and fees up to $250,000 in the aggregate (including, without limitation, fees and expenses payable to all banks, investment banking firms, other financial institutions and other persons and their respective agents and counsel for structuring the transactions contemplated by the Offer and Rights Agreement and all fees of counsel, accountants, experts and consultants to Purchaser, and all printing and advertising expenses) actually incurred or accrued by Purchaser or on its behalf in connection with the Offer and the Related Transactions, and/or actually incurred or accrued by banks, investment banking firms, other financial institutions and other persons and assumed by Purchaser in connection with the negotiation, preparation, execution and performance of the Offer and Rights Agreement and the Trust Purchase Agreement, the structuring of the Offer and the Related Transactions, and any agreements relating thereto. In the event that the Company shall fail to pay any Expenses when due, the term "Expenses" is deemed to include the costs and expenses actually incurred or accrued by Purchaser (including, without limitation, fees and expenses of counsel) in connection with the collection under and enforcement of the expenses provision of the Offer and Rights Agreement, together with interest on such unpaid Expenses, commencing on the date that such Expenses became due, at a per annum rate equal to the rate of interest publicly announced by First Union National Bank, from time to time, in the City of Charlotte, North Carolina, as such bank's prime rate plus 1.00 percentage point. In addition, in connection with any other action or proceeding by any party hereto against any other party hereto alleging a breach of a representation, warranty, covenant or agreement set forth herein, the prevailing party in such action or proceeding shall be entitled to recover costs and expenses actually incurred or accrued (including without limitation, fees and expenses of counsel) in connection with the prosecution or defense (as the case may be) of such action or proceeding. "Third Party Acquisition" is defined in the Offer and Rights Agreement to mean the occurrence of any of the following events: (i) the acquisition of the Company by merger, consolidation or other business combination transaction by any person other than Purchaser or any affiliate thereof (a "Third Party"); (ii) the acquisition by any Third Party of all or substantially all of the assets of the Company and its subsidiaries, taken as a whole; (iii) the acquisition by a Third Party of 25% or more of the outstanding Shares whether by tender offer, exchange offer or otherwise; (iv) the adoption by the Company of a plan of liquidation or the declaration or payment of an extraordinary dividend; or (v) the repurchase by the Company or any of its subsidiaries of 25% or more of the outstanding Shares. Except as set forth above, all costs and expenses incurred by Purchaser and the Company in connection with the Offer and Rights Agreement and the transactions contemplated thereby are required to be paid by the party incurring such expenses, whether or not the transactions are consummated. The Trust Purchase Agreement. The following is a summary of the Trust Purchase Agreement, a copy of which has been filed as an Exhibit to the Schedule 14D-1. Such summary is qualified in its entirety by reference to the Trust Purchase Agreement. 22 26 Purchase of Shares. Pursuant to the Trust Purchase Agreement, upon the purchase of Shares by Purchaser pursuant to the Offer, the Trustee, on behalf of the Trust, agrees to sell 658,900 Shares to Purchaser for $3.65 per Share or an aggregate purchase price of $2,404,985.00. Restrictions on Transfer. Under the Trust Purchase Agreement, Purchaser's resale of the Purchased Trust Shares to a third party on or prior to December 31, 2003, would require the written consent of the Trustee, such consent not to be unreasonably withheld if the Trustee is reasonably satisfied as to the financial and professional qualities of such third party. In addition, Purchaser grants to the Trustee a right of first refusal to buy the Purchased Shares and any other capital stock or rights to acquire capital stock of the Company. The Trust Purchase Agreement provides that if Purchaser receives an offer to purchase the Purchased Shares or any other capital stock or rights to acquire capital stock of the Company from a third party which Purchaser is willing to accept, Purchaser shall give the Trustee written notice of such offer describing the terms and the price of such offer and the Purchaser shall be free to transfer such Purchased Shares or other capital stock or rights to such third party on the terms described in such notice unless Purchaser receives written notice from the Trustee, within 5 business days after the delivery of Purchaser's notice described above, indicating that Trustee is exercising its right of first refusal. Under the Trust Purchase Agreement, Purchaser is also free to transfer such Purchased Shares, capital stock or other rights to such third party on the terms described in Purchaser's notice to the Trustee if, within 15 days after the Trustee indicates to Purchaser its desire to exercise its right of first refusal, the transaction between the Trustee and Purchaser is not closed due to no fault of Purchaser. Deposit. The Trust Purchase Agreement provides that, upon the closing of the purchase of the Purchased Shares, Purchaser will deposit $8,864,390 with the Trust, an amount in cash equal to $3.65 multiplied by the number of Retained Shares. Such deposit would be invested and reinvested by the Trustee. Any income earned on the deposit would be the sole property of the Trust and any losses thereon would be the sole responsibility of the Trust, all subject to the provisions described below. The Trust Purchase Agreement expressly provides that the agreement does not constitute any commitment on Purchaser's part to purchase the Retained Shares, any commitment on the Trust's part to sell the Retained Shares or any agreement with respect to a price for the Retained Shares, if and when Purchaser and the Trust might subsequently agree to a purchase and sale of the Retained Shares. The Trust Purchase Agreement generally provides that, if following the making of such deposit, Purchaser makes an offer to purchase the Retained Shares that is accepted by the Trust, the original deposit (without interest) will be used as a credit against the purchase price of the Retained Shares, regardless of the actual amount of funds related to the original deposit held by the Trust at such time. Pursuant to the Trust Purchase Agreement, if Purchaser makes a written offer to purchase the Retained Shares at a price in cash of at least $3.65 per Share determined by a nationally recognized independent investment banking firm to be fair from a financial point of view to the Trust as majority shareholder of the Company, then (i) if the Trust rejects such offer, the Trust must refund the entire original deposit (without interest) to Purchaser and may retain the Retained Shares, and (ii) if the Trust accepts such offer and the purchase price is greater than the original deposit, Purchaser pays the difference between (x) the agreed purchase price per Share and (y) the original deposit, plus interest at a rate of 6% per annum from the date the Trust received such deposit to the closing of the purchase, and the Trust is required to transfer the Retained Shares to Purchaser. Pursuant to the Trust Purchase Agreement, if the Trust at any time sells any Retained Shares to a third party, the Trust would refund to Purchaser a portion of the original deposit equal to $3.65 for each Retained Share sold by the Trust, and if the Company at any time enters bankruptcy, the deposit would become the property of the Trust and the Trust would transfer the Retained Shares to Purchaser without further consideration. Other Covenants. Pursuant to the Trust Purchase Agreement, the Trust agrees not to tender any of the Retained Shares in the Offer. In addition, the Trust agrees that it will support the issuance of the Rights provided pursuant to the Offer and Rights Agreement and, if required by law or requested by Purchaser, will vote all of the Retained Shares in favor of the issuance of such Rights. 23 27 Conditions; Termination. The transactions contemplated by the Trust Purchase Agreement are conditioned upon (i) the approval of such agreement and the transactions contemplated thereby by the Delaware Chancery Court and the North Carolina Commissioner of Insurance, (ii) the expiration of applicable antitrust waiting periods under the HSR Act, (iii) the acceptance for payment and payment by Purchaser of Shares pursuant to the Offer and (iv) the accuracy of the representations and warranties of the parties thereto. In addition, Purchaser's obligations are conditioned upon the Directors, the spouses of the Directors, the Greenfield Children's Limited Partnership, the Jesse Greenfield IRA and a charitable foundation of which Mr. Peyton Woodson is a trustee, agreeing to sell or tender to Purchaser an aggregate of 481,932 Shares at $3.65 per Share. The Trust Purchase Agreement terminates on the earlier of the mutual written consent of the Purchaser and the Trust and June 1, 2008. The Tender Agreement. The following is a summary of the Tender Agreement, a copy of which has been filed as an exhibit to the Schedule 14D-1. Such summary is qualified in its entirety by reference to the Tender Agreement. Tender of Shares; Cash-Out of Options. Pursuant to the Tender Agreement, each Director has agreed, among other things, to tender in the Offer and not withdraw, or to cause to be tendered and not withdrawn, 481,932 Shares listed on a schedule to the Tender Agreement and all other Shares beneficially owned by such Director as of July 16, 1998 or thereafter acquired; provided, that no such tender is required if such Director would as a result of such tender incur liability under Section 16(b) of the Exchange Act ("Section 16(b)"). In the Tender Agreement, each Director also agreed that in the event any Director fails to tender any Shares due to a prospective Section 16(b) liability, as soon as the risk of such liability lapses, such Director would tender such Shares in the Offer or, if Purchaser has accepted Shares for payment pursuant to the Offer, would sell each such Share to Purchaser for the per Share consideration payable in the Offer. Each Director also agreed, in accordance with the procedures set forth in the Offer, to instruct the Company to cancel any Options to purchase Shares held by such Director in return for a per Share cash payment, subject to applicable withholding taxes, equal to the positive difference, if any, between $3.65 and the exercise price for such Share. As of the date hereof, the Directors as a group hold Options to purchase 157,962 Shares. Board of Directors Matters. In the Tender Agreement, the Directors also agreed, upon the purchase of Shares and cash-out of Options by Purchaser pursuant to the Offer, and at the request of Purchaser, to resign immediately as a director of the Company, or at such later time requested by Purchaser. Each Director not asked by Purchaser to resign also agreed immediately to appoint a slate of directors designated by Purchaser to fill any vacancies created by such resignations. Other Covenants. The Directors also agreed in the Tender Agreement not to purchase any Shares from the Trust and not to sell or place a lien on any of the Shares to be tendered by them or Options to be canceled by them in the Offer prior to the earlier of the consummation of the Offer or the termination of the Tender Agreement. Certificates of Contribution. On June 15, 1998, pursuant to the approval of the North Carolina Department of Insurance, Purchaser provided the Company's OF&C subsidiary with $5,000,000 in financing in exchange for five Certificates of Contribution issued to OF&C in the amount of $1,000,000 each (the "Certificates of Contribution"). The Certificates of Contribution bear simple interest at the rate of 5% per annum and are repayable on December 31, 2000. The Certificates of Contribution may be repaid only out of the excess of the admitted assets of OF&C over the sum of: (1) All liabilities (including, but not limited to claims, losses, reserves, reinsurance, policyholder dividends, production and administrative expenses, taxes, loans and advances), but excluding any amounts for or on account of any outstanding certificates of contribution (including the above-mentioned Certificates of Contribution); and (2) An amount (of surplus) equal to the larger of (a) or (b) hereinafter: (a) The amount required by the laws of North Carolina at the time of such repayment for the issuance of a Certificate of Authority to transact the classes of insurance which it is then transacting anywhere, or which it is authorized to transact in North Carolina, or the amount required by the laws 24 28 of any other jurisdiction for the retention of its Certificate of Authority in that jurisdiction, whichever is the largest amount; or (b) The amount required in order to maintain capital and surplus at a level of $500,000 above the Company Action Level of Risk Based Capital as defined by NAIC-published guidelines. The principal sum of the Certificates of Contribution are not payable except upon approval by a majority of the Board of Directors of OF&C and approval in writing by the North Carolina Commissioner of Insurance. Interest payments are quarterly and are, subject to constraints similar to those applicable to repayment of principal. The Certificates of Contribution would become due if OF&C discontinues its insurance business. Additionally, should OF&C or the Company enter into a definitive agreement to sell 20% or more of the stock or assets of OF&C or the Company to a party other than Purchaser, the maturity of the Certificates of Contribution would be accelerated and the interest rate would be modified, ab initio to 15% per annum. For insurance regulatory accounting purposes, the Certificates of Contribution are reported as surplus, but are reported as liabilities under GAAP. Confidentiality Agreement. The following is a summary of the Confidentiality Agreement, a copy of which has been filed as an exhibit to the Schedule 14D-1. Such summary is qualified in its entirety by reference to the Confidentiality Agreement. On April 15, 1998, Purchaser entered into the Confidentiality Agreement with the Company. In the Confidentiality Agreement, Purchaser agreed, for itself, its affiliates and representatives, except as required by law, to keep confidential and to not disclose to any person other than those actively and directly participating in Purchaser's evaluation of a possible acquisition of the Company and to not use for any purpose other than in connection with the consummation of such an acquisition in a manner approved by the Company, all information about the Company furnished by the Company or its affiliates or representatives, excluding information which (a) becomes generally available to the public other than as a result of a disclosure by Purchaser or its representatives, (b) was available to Purchaser on a non-confidential basis prior to disclosure by the Company, or (c) becomes available to Purchaser from a person other than the Company or its representatives who is not otherwise bound by a confidentiality agreement with the Company or its representatives or is not otherwise prohibited from transmitting the information to Purchaser ("Proprietary Information"). Purchaser also agreed in the Confidentiality Agreement that if requested pursuant to, or required by, applicable law or regulation or legal process to disclose any Proprietary Information, it would provide the Company with prompt notice of such request(s) to enable the Company to seek an appropriate protective order or other appropriate remedy and to cooperate with the Company to obtain such protective order or other remedy. If such order or remedy is not obtained, or the Company waives compliance with the provisions of the Confidentiality Agreement, the Purchaser agreed in the Confidentiality Agreement to disclose only that portion of the Proprietary Information which it is advised by opinion of counsel is legally required to be disclosed. The Confidentiality Agreement also provides that, unless otherwise required by law, neither party nor any of such party's representatives will, without the prior written consent of the other party, disclose to any person (other than those actively and directly participating in the proposed acquisition) any information about such proposed acquisition. In the event the proposed acquisition is not consummated, the Confidentiality Agreement requires Purchaser to deliver all of the Proprietary Information in its, its affiliates', or its representatives' possession to the Company. Pursuant to the Confidentiality Agreement, Purchaser also agreed that until April 15, 1999, neither Purchaser nor any of its affiliates or representatives will, without the prior written consent of the Company or the Board: (a) acquire, offer to acquire, or agree to acquire, directly or indirectly, by purchase or otherwise, any voting securities or direct or indirect rights to acquire any voting securities of the Company or any subsidiary thereof, or of any successor to or person in control of the Company, or any assets of the Company or any subsidiary or division thereof or of any such successor or controlling person; (b) make, or in any way participate, directly or indirectly, in any "solicitation" or "proxies" to vote (as such terms are used in the rules of the Commission), or seek to advise or influence any person or entity with respect to the voting of any voting securities of the Company; (c) make any public announcement with respect to, or submit a proposal for, or offer of (with or without conditions) any extraordinary transaction involving the Company or its securities or 25 29 assets; (d) seek or propose to influence or control the Company's management or policies (or request permission to do so); (e) solicit, encourage or induce any person employed by the Company to leave the Company's employ, without the Company's prior written consent; or (f) form, join or in any way participate in a "group" as defined in Section 13(d)(3) of the Exchange Act in connection with any of the foregoing. 11. PURPOSE OF THE OFFER AND RELATED TRANSACTIONS; NO RIGHTS OF DISSENT; GOING PRIVATE TRANSACTIONS; PLANS FOR THE COMPANY AFTER THE OFFER AND RELATED TRANSACTIONS. Purpose of the Offer and Related Transactions. The purpose of the Offer and the Related Transactions is to acquire control of a substantial minority position in the entire equity interest of the Company and to secure an opportunity to negotiate the subsequent acquisition of the balance of such equity interest no later than June 1, 2008. Assuming consummation of the Offer, Purchaser may, from time to time, provide additional statutory capital, in the form of Certificates of Contribution, to the Company's insurance subsidiaries. See Section 10, "Certificates of Contribution." Purchaser has estimated that such additional statutory capital of up to approximately $8 million may be needed to further strengthen the statutory capital positions of the insurance subsidiaries. The exact amount and timing of such contributions has not been determined at this time. Purchaser desires to acquire only a 49% interest in the equity of the Company at this time because it believes that to acquire a majority interest would restrict the Company's ability to use substantial consolidated accumulated net operating loss carryforwards ("NOLs"), which otherwise may be used to reduce the Company's future federal income tax liabilities. The Company currently has a total of approximately $90 million in NOLs available as an offset against a comparable amount of future income. The NOLs expire in varying amounts during the tax years 1998 through 2012; however, such NOLs provide benefit to the Company only to the extent that the Company is able to generate taxable income to be offset by such available NOLs. There can be no assurance that the Company will be able to generate any income following consummation of the Offer or that any income generated will be at a level sufficient to permit the Company to obtain meaningful benefit from the NOLs prior to their expiration. Under Section 382 of the Internal Revenue Code (the "Code"), if a change in ownership of more than 50% in the equity capital of the Company were to occur (an "ownership change"), the amount of available NOLs that could be used in any year would be significantly reduced from the amount currently available to an amount determined by multiplying the value of the Company's equity capital prior to the ownership change by the applicable "long-term tax-exempt rate" (approximately 5% as of the date of this Offer to Purchase). The current amount of NOLs available to the Company is approximately $90 million. If the consummation of the Offer and the Related Transactions were deemed to constitute an ownership change, the annual amount of such NOLs available to the Company would be severely limited. If the consummation of the Offer and Related Transactions were not deemed to constitute an ownership change, Purchaser's acquisition of additional Shares within three years of the consummation of the Offer would trigger an ownership change under Section 382 of the Code. The Purchaser believes, under its interpretation of the Code, that the consummation of the Offer and the Related Transactions will permit the ongoing existence and use of the NOLs as described above in that the Offer and the Related Transactions do not constitute an ownership change under Section 382 of the Code. There can be no assurance, however, that if challenged, Purchaser's interpretation would be sustained by the Internal Revenue Service or any court. If the Company were unable to successfully defend such interpretation, the Company would be denied the potential benefit of significant amounts of its NOLs. The loss of such NOLs, however, would be detrimental to the Company only to the extent it is able to generate taxable income in excess of the NOLs that are otherwise available. Although Purchaser can give no assurance as to whether or when it might acquire additional Shares of the Company, Purchaser anticipates that its analysis of whether and when to do so may depend upon its assessment of the value of available NOLs in relation to the financial performance, including the future generation of taxable income, if any, of the Company. Upon consummation of the Offer, the Company has agreed in the Offer and Rights Agreement to issue the Rights, which become exercisable in the event any third party other than Purchaser causes Purchaser's designees to cease to control a majority of the Board (except due to the death, resignation or removal by 26 30 Purchaser of such designees) or in the event that the Trust sells (including without limitation, pursuant to a merger, consolidation or other business combination transaction involving the Company) any of the Retained Shares to a party other than Purchaser. Purchaser expects that such majority Board control, along with the Rights, would permit Purchaser to exert substantial influence over the Company's conduct of its business and operations. See Section 10. No Rights of Dissent; Going Private Transactions. Consummation of the Offer and the Related Transactions will not create rights of dissent for holders of the Shares. Upon the consummation of the Offer and the Related Transactions, assuming consummation of the Offer at a Minimum Condition of 32% of the voting power of the outstanding Shares on a fully diluted basis, Purchaser and the Trust would collectively control approximately 97% of the voting power of the outstanding Shares and could under North Carolina law, by call of and action at a special shareholder's meeting, approve a cash merger or other transaction with the effect of cashing out any remaining shareholders of the Company. Although such remaining shareholders would be entitled to assert dissenter's rights at that time under North Carolina law, there can be no assurance as to the value that any such shareholders could then obtain for their Shares under the dissent and appraisal process. Although Purchaser currently has no agreement with the Trust regarding such a subsequent transaction or any present intention to engage in such a subsequent transaction, if the Purchaser and the Trust were to agree that such a subsequent transaction were in their collective best interest, Purchaser and the Trust could approve and effect such a transaction and cash out of any remaining shareholders at a price which may or may not be equal to the per Share consideration payable in the Offer. There can be no assurance given regarding whether or when such a subsequent transaction might be effected and the price at which any such subsequent transaction would be effected. The Commission has adopted Rule 13e-3 under the Exchange Act, which is applicable to certain "going private" transactions and which may under certain circumstances be applicable to any subsequent merger business combination following the purchase of Shares pursuant to the Offer in which Purchaser, or Purchaser and the Trust collectively holding a substantial majority of the Shares, might seek to acquire or liquidate any remaining Shares not held by Purchaser. Rule 13e-3, if applicable to any such subsequent merger or other business combination, reverse stock split or similar transaction would require, among other things, that certain financial information concerning the Company and certain information relating to the fairness of the proposed transaction and the consideration offered to minority shareholders in such transaction be filed with the Commission and disclosed to shareholders prior to consummation of the transaction. Plans for the Company After the Offer and the Related Transactions. It is currently expected that, following consummation of the Offer, initially the business and operations of the Company will, except as set forth in this Offer to Purchase, be continued by the Company substantially as they are currently being conducted and that the Company's current management would be retained. Purchaser will continue to evaluate the business and operations of the Company during the pendency of the Offer and after the consummation of the Offer and the Related Transactions. Assuming consummation of the Offer, Purchaser may, from time to time, provide additional statutory capital to the Company's insurance subsidiaries. Except as indicated in this Offer to Purchase, Purchaser does not have any present plans or proposals that relate to or would result in an extraordinary corporate transaction, such as a merger, reorganization or liquidation, involving the Company or any subsidiary, a sale or transfer of a material amount of assets of the Company or any subsidiary or any material change in the Company's capitalization or dividend policy or any other material changes in the Company's corporate structure or business, or the composition of the Board or the Company's management. 12. DIVIDENDS AND DISTRIBUTIONS. The Offer and Rights Agreement provides that the Company shall not, between the date of the Offer and Rights Agreement and the Purchaser's Election Time, without the prior written consent of Purchaser, (a) issue, sell, pledge, dispose of, grant, encumber, or authorize the issuance, sale, pledge, disposition, grant or encumbrance of any shares of capital stock of any class of the Company or any subsidiary, or any options, warrants, convertible securities or other rights of any kind to acquire any shares of such capital stock, or any other ownership interest (including, without limitation, any phantom interest), of 27 31 the Company or any subsidiary, (b) declare, set aside, make or pay any dividend or other distribution, payable in cash, stock, property or otherwise, with respect to any of its capital stock except for the regular quarterly dividend of Wilshire to OF&C, or (c) reclassify, combine, split, subdivide or redeem, purchase or otherwise acquire, directly or indirectly, any of its capital stock. See Section 10. If, however, the Company should, during the pendency of the Offer, (i) split, combine or otherwise change the Shares or its capitalization, (ii) acquire or otherwise cause a reduction in the number of outstanding Shares or (iii) issue or sell any additional Shares (other than pursuant to outstanding Options, shares of any other class or series of capital stock, other voting securities or any securities convertible into, or options, rights, or warrants, conditional or otherwise, to acquire, any of the foregoing, then, without prejudice to Purchaser's rights described in Section 14 of this Offer to Purchase, Purchaser may (subject to the provisions of the Offer and Rights Agreement) make such adjustments to the purchase price and other terms of the Offer (including the number and type of securities to be purchased) as it deems appropriate to reflect such split, combination or other change, acquisition, reduction, issuance or sale. If, on or after July 16, 1998, the Company should declare or pay any dividend on the Shares or make any other distribution (including the issuance of additional shares of capital stock pursuant to a stock dividend or stock split, the issuance of other securities or the issuance of rights for the purchase of any securities) with respect to the Shares that is payable or distributable to shareholders of record on a date prior to the transfer to the name of Purchaser or its nominee or transferee on the Company's stock transfer records of the Shares purchased pursuant to the Offer then, without prejudice to Purchaser's rights described in Section 14 of this Offer to Purchase, (i) the purchase price per Share payable by Purchaser pursuant to the Offer will be reduced (subject to the Offer and Rights Agreement) to the extent any such dividend or distribution is payable in cash and (ii) any non-cash dividend, distribution or right shall be received and held by the tendering shareholder for the account of Purchaser and will be required to be promptly remitted and transferred by each tendering shareholder to the Depositary for the account of Purchaser, accompanied by appropriate documentation of transfer. Pending such remittance and subject to applicable law, Purchaser will be entitled to all the rights and privileges as owner of any such non-cash dividend, distribution or right and may withhold the entire purchase price or deduct from the purchase price the amount or value thereof, as determined by Purchaser in its sole discretion. 13. EFFECT OF THE OFFER ON THE MARKET FOR THE SHARES AND EXCHANGE ACT REGISTRATION. The purchase of Shares by Purchaser pursuant to the Offer will reduce the number of Shares that might otherwise trade publicly and will reduce the number of holders of Shares, which could adversely affect the liquidity and market value of the remaining Shares held by the public. The Shares are currently registered under the Exchange Act. Depending upon the number of record holders of Shares remaining after the purchase of Shares in the Offer, the Shares may qualify for termination of registration under Section 12(g) of the Exchange Act. Purchaser intends to cause the deregistration of the Shares following consummation of the Offer, if permitted by law. The Depository has advised Purchaser that, as of July 16, 1998, there were 4,706,388 Shares outstanding, held by approximately 834 holders of record. Even if the Shares do not become eligible for termination of registration under the Exchange Act following the consummation of the Offer, the purchase of a significant number of Shares by Purchaser could significantly reduce the number of publicly-traded Shares and the number of holders of Shares and could adversely affect the liquidity and market value of the remaining Shares. The extent of the public market therefor and the availability of quotations on the over-the-counter market or otherwise would depend upon such factors as the number of shareholders and/or the aggregate market value of such securities remaining at such time, the interest in maintaining a market in the Shares on the part of securities firms, the possible termination of registration under the Exchange Act as described below, and other factors. Purchaser cannot predict whether the reduction in the number of Shares that might otherwise trade publicly would have an adverse or beneficial effect on the market price for or marketability of the Shares or whether it would cause future market prices to be greater or less than the per Share consideration provided in the Offer. 28 32 The Shares are currently "margin securities," as such term is defined under the rules of the Board of Governors of the Federal Reserve System (the "Federal Reserve Board"), which has the effect, among other things, of allowing broker-dealers to extend credit on the collateral of such securities. Depending upon factors similar to those described above regarding listing and market quotations, following the Offer it is possible that the Shares might no longer constitute "margin securities" for purposes of the margin regulations of the Federal Reserve Board, in which event such Shares might no longer be eligible as collateral for credit extended by broker-dealers. Registration of the Shares under the Exchange Act may be terminated upon application of the Company to the Commission if the Shares are not listed on a national securities exchange and there are fewer than 300 record holders of the Shares. Termination of registration of the Shares under the Exchange Act, assuming there are no other securities of the Company subject to registration, would substantially reduce the information required to be furnished by the Company to its shareholders and to the Commission and would make certain provisions of the Exchange Act, such as the short-swing profit recovery provisions of Section 16(b), the requirement of furnishing a proxy statement in connection with shareholders' meetings pursuant to Section 14(a), and the requirements of Rule 13e-3 under the Exchange Act with respect to "going private" transactions, no longer applicable to the Company. Furthermore, if the Purchaser acquires a substantial number of Shares, the ability of affiliates of the Company and persons holding restricted securities of the Company to dispose of such securities pursuant to Rule 144 or 144A promulgated under the Securities Act of 1933, as amended, may be impaired or eliminated. If registration of the Shares under the Exchange Act were terminated, the Shares would no longer be "margin securities" or be eligible for NASDAQ reporting. It is the present intention of the Purchaser to seek to cause the Company to make an application for termination of registration of the Shares under the Exchange Act as soon as possible following the Offer if the requirements for termination of registration are met. If registration of the Shares under the Exchange Act may not be terminated following the Offer, Purchaser intends to seek to cause the registration of the Shares under the Exchange Act to be terminated at any subsequent time that the requirements for termination are met. 14. CERTAIN CONDITIONS OF THE OFFER. Notwithstanding any other provision of the Offer, Purchaser shall not be required to accept for payment or pay for any Shares tendered pursuant to the Offer, and may terminate or amend the Offer and may postpone the acceptance for payment of and payment for Shares tendered, if (i) the Minimum Condition shall not have been satisfied, (ii) approval of the transactions contemplated by the Trust Purchase Agreement by the Delaware Chancery Court shall not have been obtained, (iii) approval of the Offer and the Related Transaction by the Commissioners of Insurance in the States of North Carolina and California shall not have been obtained, (iv) any applicable waiting period under the HSR Act shall not have expired or been terminated prior to the expiration of the Offer or (v) at any time on or after the date of the Offer and Rights Agreement, and prior to the acceptance for payment of Shares, any of the following conditions shall exist: (a) there shall have been instituted or be pending any action or proceeding brought by any governmental, administrative or regulatory authority or agency, domestic or foreign, before any court or governmental, administrative or regulatory authority or agency, domestic or foreign, (i) challenging or seeking to make illegal, materially delay or otherwise directly or indirectly restrain or prohibit or make materially more costly the making of the Offer, the acceptance for payment of, or payment for, any Shares or Options by Purchaser or any other affiliate of Purchaser pursuant to the Offer, or the consummation of the transactions contemplated by the Offer and Rights Agreement, or seeking to obtain material damages in connection with any transactions contemplated by the Offer and Rights Agreement; (ii) seeking to prohibit or limit materially the ownership or operation by the Company, Purchaser or any of their subsidiaries of all or any material portion of the business or assets of the Company, Purchaser or any of their subsidiaries, or to compel the Company, Purchaser or any of their subsidiaries to dispose of or hold separate all or any material portion of the business or assets of the Company, Purchaser or any of their subsidiaries, as a result of any of the transactions contemplated by the Offer and Rights Agreement; (iii) seeking to impose or confirm limitations on the ability of Purchaser or any other affiliate of Purchaser to exercise effectively full rights of ownership of any Shares, including, without limitation, the right to vote any Shares acquired by Purchaser pursuant to the Offer, or otherwise on all matters properly 29 33 presented to the Company's shareholders, or (iv) seeking to require divestiture by Purchaser or any other affiliate of Purchaser of any Shares; (b) there shall have been issued any injunction, order or decree by any court or governmental, administrative or regulatory authority or agency, domestic or foreign, resulting from any action or proceeding brought by any person other than any governmental, administrative or regulatory authority or agency, domestic or foreign, that (i) restrains or prohibits the making of the Offer or the consummation of any transactions contemplated by the Offer and Rights Agreement; (ii) prohibits or limits ownership or operation by the Company or Purchaser of all or any material portion of the business or assets of the Company, taken as a whole, Purchaser or any of their subsidiaries, or compels the Company or Purchaser or any of their subsidiaries to dispose of or hold separate all or any material portion of the business or assets of the Company, Purchaser or any of their subsidiaries, in each case as a result of the transactions contemplated by the Offer and Rights Agreement; (iii) imposes limitations on the ability of Purchaser to exercise effectively full rights of ownership of any Shares, including, without limitation, the right to vote any Shares acquired by Purchaser pursuant to the Offer, or otherwise on all matters properly presented to the Company's shareholders; or (iv) requires divestiture by Purchaser of any Shares; (c) there shall have been any action taken, or any statute, rule, regulation, order or injunction enacted, entered, enforced, promulgated, amended, issued or deemed applicable to (i) Purchaser, the Company or any subsidiary or affiliate of Purchaser or the Company or (ii) any transactions contemplated by the Offer and Rights Agreement, by any legislative body, court, government or governmental, administrative or regulatory authority or agency, domestic or foreign, in the case of both (i) and (ii) other than the routine application of the waiting period provisions of the HSR Act to the Offer, in each case that results in any of the consequences referred to in clauses (i) through (iv) of paragraph (b) above; (d) there shall have occurred any change, condition, event or development that has a Material Adverse Effect (as defined in the Offer and Rights Agreement) with respect to the Company; (e) (i) the Board or any committee thereof shall have withdrawn or modified in a manner adverse to Purchaser the approval or recommendation of the Offer, the Offer and Rights Agreement or approved or recommended any takeover proposal or any other acquisition of Shares other than the Offer, or (ii) the Board or any committee thereof shall have resolved to do any of the foregoing; (f) any representation or warranty of the Company in the Offer and Rights Agreement shall not be true and correct with the effect that such failure of any such representation or warranty to be true and correct, when taken together with all other such failures of such representations and warranties to be true and correct, in the aggregate has, or is reasonably likely to have, a Material Adverse Effect; provided, however, that, for the purpose of the foregoing condition, in determining whether any such representation or warranty is true or correct, any qualification as to materiality or Material Adverse Effect contained in any such representation and warranty shall be deemed not to apply; (g) the Company shall have failed to perform in any material respect any material obligation or to comply in any material respect with any material agreement or material covenant of the Company to be performed or complied with by it under the Offer and Rights Agreement; (h) the Offer and Rights Agreement, shall have been terminated in accordance with its terms; or (i) Purchaser and the Company shall have agreed that Purchaser shall terminate the Offer or postpone the acceptance for payment of or payment for Shares and Options thereunder; which, in the sole judgment of Purchaser, in any such case, and regardless of the circumstances (including any action or inaction by Purchaser or any of its affiliates) giving rise to any such condition, makes it inadvisable to proceed with such acceptance for payment or payment. The foregoing conditions are for the sole benefit of Purchaser and may be asserted by Purchaser regardless of the circumstances giving rise to any such condition or may be waived by Purchaser in whole or in part at any time and from time to time in its sole discretion; provided, however, that Purchaser may not waive 30 34 the Regulatory Approvals or reduce the Minimum Condition below 25% of the voting power of the outstanding Shares on a fully diluted basis of the Company. The failure by Purchaser at any time to exercise any of the foregoing rights shall not be deemed a waiver of any such right; the waiver of any such right with respect to particular facts and other circumstances shall not be deemed a waiver with respect to any other facts and circumstances; and each such right shall be deemed an ongoing right that may be asserted at any time and from time to time. 15. CERTAIN LEGAL MATTERS AND REGULATORY APPROVALS. General. Based upon its examination of publicly available information with respect to the Company and the review of certain information furnished by the Company to Purchaser and discussions of representatives of Purchaser with representatives of the Company during Purchaser's investigation of the Company (see Section 10), except as set forth below, Purchaser is not aware of any license or other regulatory permit that appears to be material to the business of the Company and the subsidiaries, taken as a whole, that might be adversely affected by the acquisition of Shares by Purchaser pursuant to the Offer or, except as set forth below, of any approval or other action by any domestic (federal or state) or foreign governmental, administrative or regulatory authority or agency that would be required prior to the acquisition of Shares by Purchaser pursuant to the Offer and Related Transactions. Should any such other approval or other action be required, it is Purchaser's present intention to seek such approval or action. Purchaser does not currently intend, however, to delay the purchase of Shares tendered pursuant to the Offer pending the outcome of any such other action or the receipt of any such other approval (subject to Purchaser's right to decline to purchase Shares if any of the conditions in Section 14 shall have occurred). There can be no assurance that any such approval or other action, if needed, would be obtained without substantial conditions or that adverse consequences might not result to the business of the Company or Purchaser (or that certain parts of the businesses of the Company or Purchaser might not have to be disposed of or held separate, or other substantial conditions complied with) in order to obtain such other approval or other action or in the event that such other approval was not obtained or such other action was not taken. Purchaser's obligation under the Offer to accept for payment and pay for Shares is subject to certain conditions, including conditions relating to the legal matters discussed in this Section 15. See Section 14. State Takeover Laws; Antitakeover Provisions in Articles of Incorporation. The Company is incorporated in North Carolina and is subject to the provisions of North Carolina law. Under the North Carolina Control Share Acquisition Act, a person who acquires shares under certain circumstances in certain North Carolina corporations (including the Company), which, when aggregated with all other shares with respect to which such person has voting control, would result in such person having voting control over the stock of such corporation with certain ranges (one-fifth to one-third, one-third to a majority or a majority or more), (a "control share acquisition"), will not be able to vote any of such shares unless and until voting rights have been granted by resolution adopted by majority vote of the disinterested shareholders. If such voting rights are granted and the acquiring shareholder thereby holds a majority of voting power for the election of directors, all other shareholders have dissenters' appraisal rights to receive "fair value" for their shares, which shall not be less than the highest price per share paid by the acquiring shareholder for the shares in the control share acquisition. Under the North Carolina Shareholder Protection Act, a statute regulating certain "business combinations," the affirmative vote of 95% of the voting shares of a North Carolina corporation are required to approve certain business combinations with any "other entity" (defined generally as a person owning 20% or more of a corporation's outstanding voting stock), subject to certain exceptions if certain "fair price" and other procedural protections are met. Both the North Carolina Control Share Acquisition Act and the Shareholder Protection Act permit a corporation to elect in its bylaws not to be covered by such provisions. The Company has adopted provisions in its Bylaws not to be covered by these North Carolina statutes. A number of other states have adopted laws and regulations applicable to attempts to acquire securities of corporations that are incorporated, or have substantial assets, shareholders, principal executive offices or principal places of business, or whose business operations otherwise have substantial economic effects, in such 31 35 states. In Edgar v. MITE Corp., the Supreme Court of the United States invalidated on constitutional grounds the Illinois Business Takeover Statute, which, as a matter of state securities law, made takeovers of corporations meeting certain requirements more difficult. However, in 1987 in CTS Corp. v. Dynamics Corp. of America, the Supreme Court held that the State of Indiana could, as a matter of corporate law and, in particular, with respect to those aspects of corporate law concerning corporate governance, constitutionally disqualify a potential acquiror from voting on the affairs of a target corporation without the prior approval of the remaining shareholders. The state law before the Supreme Court was by its terms applicable only to corporations that had a substantial number of shareholders in the state and were incorporated there. Subsequently, in TLX Acquisition Corp. v. Telex Corp., a federal district court in Oklahoma ruled that certain Oklahoma corporate governance statutes were unconstitutional insofar as they applied to corporations incorporated outside Oklahoma because they could subject such corporations to inconsistent regulations. Similarly, in Tyson Foods, Inc. v. McReynolds, a federal district court in Tennessee ruled that four Tennessee takeover statutes were unconstitutional as applied to corporations incorporated outside Tennessee. This decision was affirmed by the United States Court of Appeals for the Sixth Circuit. In December 1988, a federal district court in Florida held in Grand Metropolitan PLC v. Butterworth that the provisions of the Florida Affiliated Transactions Act and the Florida Control Share Acquisition Act were unconstitutional as applied to corporations incorporated outside of Florida. The Company, directly or through subsidiaries, conducts business in a number of states throughout the United States, some of which have enacted takeover laws such as those described above. Purchaser does not know whether any of these laws will, by their terms, apply to the Offer or any of the Related Transactions and has not necessarily complied with any such laws. Should any person seek to apply any state takeover law, Purchaser will take such action as then appears desirable, which may include challenging the validity or applicability of any such statute in appropriate court proceedings. In the event it is asserted that one or more state takeover laws are applicable to the Offer or any of the Related Transactions, and an appropriate court does not determine that it is inapplicable or invalid as applied to the Offer or such Related Transactions, Purchaser might be required to file certain information with, or receive approvals from, the relevant state authorities. In addition, if enjoined, Purchaser might be unable to accept for payment any Shares tendered pursuant to the Offer and the Related Transactions, or be delayed in continuing or consummating the Offer and the Related Transactions. In such case, Purchaser may not be obligated to accept for payment any Shares tendered. See Section 14. Approval by the Delaware Chancery Court. On December 10, 1987, the Trust, which owns 65% of the outstanding Shares of the Company, was ordered by the Delaware Chancery Court to divest itself of its ownership of its Shares and to invest in a more diversified portfolio. In April 1993, the Delaware Chancery Court granted the Trustee's petition for a clarification of its orders to make clear that it is within the sound discretion of the Trustee to determine the timing and terms of any disposition of the Trust's Shares, subject to the Delaware Chancery Court's approval of the Trustee's plan for disposition of such Shares. See Section 2. Accordingly, representatives of the Purchaser and the Trust plan to appear before the Delaware Chancery Court and present the Trust Purchase Agreement for approval. Although the Purchaser anticipates that the Delaware Chancery Court will be able to hear and rule upon the parties' request for approval of the Trust Purchase Agreement on an expedited basis, there can be no assurance as to either the timing or outcome of any hearing or ruling on the matter. The inability to obtain court approval of the Trust Purchase Agreement would preclude Purchaser from consummating the Offer and the Related Transactions. See Section 2 and Section 14. Approval by the North Carolina Commissioner of Insurance. Under North Carolina's Insurance Holding Company Act, Sections 58-19-1 through 58-19-70 (the "North Carolina Act"), a tender offer for the voting securities of a domestic insurer resulting in the tender offeror's obtaining "control" of the insurer may not be made unless certain information is furnished to the North Carolina Commissioner of Insurance and the commissioner approves the offer. N.C. Gen. Stat. sec.58-19-5 states that "control" is presumed to exist if a person directly or indirectly holds 10% or more of the voting securities of another person. The acquisition of Shares by Purchaser pursuant to the Offer is subject to the information and approval requirements of the North Carolina Act. See Section 2. 32 36 Pursuant to the North Carolina Act, a statement on Form A must be filed with the Commissioner containing certain information: biographical, historical, and financial information of the entity seeking to acquire control (the "acquiring party") and its directors and executive officers; information regarding the acquiring party's ownership of, and arrangements to acquire, securities of the insurer; a description of the terms of the proposed tender offer; and a description of any plans or proposals by the acquiring party to make any material change to the insurer's business or corporate structure or management. To the extent that the required disclosure documents filed under the Exchange Act include this information, such documents may be used in furnishing the information required to be filed with the Commissioner. If the Commissioner holds a public hearing on the matter, such hearing must be held within 120 days after filing the statement and the Commissioner must give at least 30 days notice of the hearing to the acquiring person and the domestic insurer proposed to be acquired. At such hearing, the person filing the statement, the insurer, and any person whose interest may be affected may present evidence, examine and cross-examine witnesses, and present oral or written argument, and any such person may also conduct discovery from the time the statement is filed in the same manner as in the superior courts of North Carolina. The Commissioner may postpone, recess, convene, or reconvene the hearing if any party fails to make reasonable and adequate response to discovery on a timely basis. The North Carolina Act directs the Commissioner to approve such acquisition unless he elects to hold a hearing and finds that: after a change of control, the insurer would be unable to meet the same requirements for which it is presently licensed; the acquisition would substantially lessen competition or tend to create a monopoly to materially change the business; the financial stability of the insurer might be jeopardized; any plans of the acquiring party are unfair and unreasonable to the policyholders of the insurer and are not in the public interest; the competence, experience or integrity of those who would control the insurer would make the transaction adverse to the interests of policyholders and the public or the acquisition is likely to be hazardous or prejudicial to the insurance-buying public. A preliminary statement with respect to the Offer and the Related Transactions was delivered to the Commissioner on July 8, 1998. The North Carolina Insurance Department reports that the application process typically takes 90 days, although Purchaser anticipates that the Offer and Related Transactions will be approved prior to the initial Expiration Date. No assurance can be given, however, as to whether or when such approval will be obtained. The failure to obtain such approval would preclude the consummation of the Offer and the Related Transactions. See Section 2 and Section 14. Approval by the California Commissioner of Insurance. Under California's Insurance Holding Company System Regulatory Act, Sections 1215 through 1215.16 (the "California Act"), a tender offer for the voting securities of a California domestic insurer or certain controlling persons of such an insurer resulting in the tender offeror's obtaining "control" of the insurer may not be made unless certain information is furnished to the California Commissioner of Insurance and to the insurer. Cal. Ins. Code sec. 1215 states that "control" is presumed to exist if a person directly or indirectly holds, with the power to vote, more than 10% of the voting securities of another person. Because Wilshire is deemed to be commercially domiciled in California, the acquisition of Shares by Purchaser pursuant to the Offer is subject to the information and approval requirements of the California Act. See Section 2. Pursuant to the California Act, a statement must be filed with the Commissioner and sent to the insurer containing, among other things, the background and identity of all persons seeking the acquisition of control, the source and amount of the funds or other consideration for the acquisition of control, a description of any plans or proposals by the acquiring party to make any major change to the insurer's business or corporate structure or management, the amount of voting securities beneficially owned by the persons seeking the acquisition and their affiliates, and information as to any contracts, arrangements or understandings with any person with respect to any securities of such insurer or controlling person. All requests or invitations for tenders and any advertisements and solicitations for tenders are required to be filed with the Commissioner. All the above information may be required to be filed with respect to each officer and director of any corporation seeking control and of any person who is the beneficial owner of more than 10% of the outstanding voting securities of such corporation. 33 37 An acquisition of control may not be made until the Commissioner either approves such acquisition within 60 days after the required statement has been filed with the Commissioner or fails to disapprove such acquisition within such 60-day period. The required statement will not be deemed "filed" until the Commissioner deems the submitted statement and supporting material to be complete and adequate. The California Act states that the Commissioner may disapprove such acquisition within such 60-day period if he finds any of the following: after a change of control, the insurer would be unable to meet the requirements for the issuance of a license to write the insurance for which it is presently licensed; the acquisition would substantially lessen competition in insurance in California or create a monopoly therein; the financial stability of the insurer might be jeopardized; any plans of the acquiring party are unfair and unreasonable to the policyholders of the insurer; the competence, experience or integrity of those who would control the insurer indicate that it would not be in the interests of policyholders, or the public to permit them to do so. Purchaser anticipates filing a statement under the California Act with respect to the Offer and Related Transactions as soon as practicable and anticipates that such statement will be reviewed and approved concurrently with the statement required to be filed under the North Carolina Act, although no assurance can be given as to whether or when such approval will be obtained. Failure to obtain such approval would preclude the consummation of the Offer and the Related Transactions. Antitrust. Under the HSR Act and the rules that have been promulgated thereunder by the FTC, certain acquisition transactions may not be consummated unless certain information has been furnished to the Antitrust Division and the FTC and certain waiting period requirements have been satisfied. The acquisition of Shares by Purchaser pursuant to the Offer is exempt from such requirements. See Section 2. The FTC and the Antitrust Division frequently scrutinize the legality under the antitrust laws of transactions such as the proposed acquisition of Shares by Purchaser pursuant to the Offer. At any time before or after the purchase of Shares pursuant to the Offer by Purchaser, the FTC or the Antitrust Division could take such action under the antitrust laws as it deems necessary or desirable in the public interest, including seeking to enjoin the purchase of Shares pursuant to the Offer or seeking the divestiture of Shares purchased by Purchaser or the divestiture of substantial assets of Purchaser, the Company or their respective subsidiaries. Private parties and state attorneys general may also bring legal action under federal or state antitrust laws under certain circumstances. Based upon an examination of information available to Purchaser relating to the businesses in which Purchaser, the Company and their respective subsidiaries are engaged, Purchaser believes that the Offer will not violate the antitrust laws and will not require a filing under the HSR Act. Nevertheless, there can be no assurance that a challenge to the Offer on antitrust grounds will not be made or, if such a challenge is made, what the result would be. See Section 14 for certain conditions to the Offer, including conditions with respect to litigation. 16. FEES AND EXPENSES. Neither Purchaser nor any officer, director, shareholder, agent or other representative of Purchaser will pay any fees or commissions to any broker, dealer or other person (other than the Information Agent) for soliciting tenders of Shares pursuant to the Offer. Brokers, dealers, commercial banks and trust companies and other nominees will, upon request, be reimbursed by Purchaser for customary mailing and handling expenses incurred by them in forwarding materials to their customers. Oceanic has provided certain financial advisory services in connection with the Offer and the Related Transactions and Purchaser shall pay Oceanic certain fees in connection therewith and shall reimburse Oceanic for its out-of-pocket expenses. Purchaser has retained MacKenzie Partners, Inc. as the Information Agent and Wachovia Bank, N.A. as the Depositary in connection with the Offer. The Information Agent may contact holders of Shares by mail, telephone, telex, telecopy, telegraph and personal interview and may request banks, brokers, dealers and other nominee shareholders to forward materials relating to the Offer to beneficial owners. As compensation for acting as Information Agent in connection with the Offer, MacKenzie Partners, Inc. will be paid reasonable and customary compensation for its services, and will also be reimbursed for certain out-of-pocket expenses and will be indemnified against certain liabilities and expenses in connection with the Offer, including certain liabilities under the federal securities laws. Purchaser will pay the Depositary reasonable and customary compensation for its services in connection with the Offer, plus reimbursement for 34 38 out-of-pocket expenses, and will indemnify the Depositary against certain liabilities and expenses in connection therewith, including under the federal securities laws. 17. MISCELLANEOUS. The Offer is made only by this Offer to Purchase and the related Letter of Transmittal and is not being made to (nor will tenders be accepted from or on behalf of) holders of Shares in any jurisdiction in which the Offer or the acceptance thereof would not be in compliance with the securities, blue sky or other laws of such jurisdiction. However, Purchaser may, in its discretion, take such action as it may deem necessary to make the Offer in any jurisdiction and extend the Offer to holders of Shares in such jurisdiction. In those jurisdictions where securities laws require the Offer to be made by a licensed broker or dealer, the Offer shall be deemed to be made on behalf of Purchaser by one or more registered brokers or dealers licensed under the laws of such jurisdiction. NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR MAKE ANY REPRESENTATION ON BEHALF OF PURCHASER OR THE COMPANY NOT CONTAINED IN THIS OFFER TO PURCHASE OR IN THE LETTER OF TRANSMITTAL AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATION MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED. Pursuant to Rule 14d-3 of the General Rules and Regulations under the Exchange Act, Purchaser has filed with the Commission the Schedule 14D-1, together with exhibits, furnishing certain additional information with respect to the Offer. The Schedule 14D-1 and any amendments thereto, including exhibits, may be inspected at, and copies may be obtained from, the same places and in the same manner as set forth in Section 7 (except that they will not be available at the regional offices of the Commission). IAT REINSURANCE SYNDICATE LTD. July 23, 1998 35 39 SCHEDULE I DIRECTORS AND EXECUTIVE OFFICERS OF PURCHASER The following table sets forth the name, 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 director and executive officer of Purchaser. Except for Messrs. Amaral and Spurling, each of whom is a citizen of Great Britain, each of Purchaser's directors and executive officers is a citizen or permanent resident of the United States. Directors are indicated by an asterisk.
PRINCIPAL OCCUPATION OR EMPLOYMENT AND MATERIAL OCCUPATIONS FOR PAST FIVE YEARS, NAME, PRINCIPAL BUSINESS NAME BUSINESS (B) OR RESIDENCE (R) ADDRESS AND ADDRESS OF PRINCIPAL OFFICE OF EMPLOYER - ---- ------------------------------------- --------------------------------------------------------- John D. Amaral* (b) Victoria Hall Vice President/Account Manager, J&H Marsh & 11 Victoria Street McLennan, a risk management and insurance services firm, Hamilton HM11, Bermuda 11 Victoria Street Hamilton HM11, Bermuda Marguerite R. Gorman* (r) 56 Kilburn Road Secretary of Purchaser; Vice President, Spear Leeds & Garden City, New York 11530 Kellogg, a broker-dealer, 120 Broadway New York, New York 10271 Peter R. Kellogg* (b) 120 Broadway President of Purchaser; Senior Managing Director, New York, New York 10271 Spear Leeds & Kellogg, a broker-dealer, 120 Broadway New York, New York 10271 Richard D. Spurling* (b) 41 Cedar Ave. Partner, Appleby Spurling & Kempe, a law firm, Hamilton HM12, Bermuda 41 Cedar Ave. Hamilton HM12, Bermuda
36 40 Facsimile copies of the Letter of Transmittal, properly completed and duly executed, will be accepted. The Letter of Transmittal and certificates for Shares and any other required documents should be sent or delivered by each shareholder of the Company or such shareholder's broker, dealer, commercial bank, trust company or other nominee to the Depositary at one of the addresses set forth below. The Depositary for the Offer is: WACHOVIA BANK, N.A. By Registered Mail: By Overnight Courier: By Hand: New York Drop: c/o Wachovia Bank, N.A. c/o Wachovia Bank, N.A. c/o Wachovia Bank, N.A. Wachovia Bank, N.A. Corporate Reorganizations Corporate Reorganizations Shareholder Services c/o Boston Equiserve L.P. P.O. Box 9061 70 Campareili Drive Department Corporate Reorganizations, Boston, Massachusetts 02205 Braintree, Massachusetts Wachovia East Building, 3rd Floor 02184 2nd Floor 55 Broadway 301 North Church Street New York, New York 10006 Winston-Salem, North Carolina 27101
By Facsimile Transmission: (for Eligible Institutions Only) (781) 794-6352 Confirm by Telephone: (781) 848-0505 Questions and requests for assistance may be directed to the Information Agent at the address and telephone number set forth below. Additional copies of this Offer to Purchase, the Letter of Transmittal, the Notice of Guaranteed Delivery and all other tender offer materials may be obtained from the Information Agent. Shareholders may also contact their brokers, dealers, commercial banks and trust companies or other nominees for assistance concerning the Offer. The Information Agent for the Offer is: (MACKENZIE LOGO) 156 Fifth Avenue New York, New York 10010 (212) 929-5500 (Call Collect) Call Toll Free: (800) 322-2885 EX-99.A2 3 LETTER OF TRANSMITTAL 1 EXHIBIT (A)(2) 2 LETTER OF TRANSMITTAL To Tender Shares of Common Stock of McM CORPORATION PURSUANT TO THE OFFER TO PURCHASE DATED JULY 23, 1998 OF IAT REINSURANCE SYNDICATE LTD. THE OFFER, PRORATION PERIOD AND WITHDRAWAL RIGHTS WILL EXPIRE AT 5:00 P.M., NEW YORK CITY TIME, FRIDAY, AUGUST 21, 1998, UNLESS THE OFFER IS EXTENDED. The Depositary for the Offer is: WACHOVIA BANK, N.A. By Registered Mail: By Overnight Courier: By Hand: New York Drop: c/o Wachovia Bank, N.A. c/o Wachovia Bank, N.A. c/o Wachovia Bank, N.A. Wachovia Bank, N.A. Corporate Reorganizations Corporate Reorganizations Shareholder Services c/o Boston Equiserve L.P. P.O. Box 9061 70 Campareili Drive Department Corporate Reorganizations, Boston, Massachusetts 02205 Braintree, Massachusetts Wachovia East Building, 3rd Floor 02184 2nd Floor 55 Broadway 301 North Church Street New York, New York 10006 Winston-Salem, North Carolina 27101
By Facsimile Transmission: (for Eligible Institutions Only) (781) 794-6352 Confirm by Telephone: (781) 848-0505 DELIVERY OF THIS LETTER OF TRANSMITTAL TO AN ADDRESS, OR TRANSMISSION OF INSTRUCTIONS BY FACSIMILE, OTHER THAN AS SET FORTH ABOVE WILL NOT CONSTITUTE A VALID DELIVERY TO THE DEPOSITARY. YOU MUST SIGN THIS LETTER OF TRANSMITTAL IN THE APPROPRIATE SPACE THEREFOR PROVIDED BELOW AND COMPLETE THE SUBSTITUTE FORM W-9 SET FORTH BELOW. THE INSTRUCTIONS ACCOMPANYING THIS LETTER OF TRANSMITTAL SHOULD BE READ CAREFULLY BEFORE THIS LETTER OF TRANSMITTAL IS COMPLETED. This Letter of Transmittal is to be completed by shareholders either if certificates evidencing Shares (as defined below) are to be forwarded herewith or, unless an Agent's Message (as defined in Section 2 of the Offer to Purchase (as defined below)) is utilized, if delivery of Shares is to be made by book-entry transfer to the Depositary's account at The Depository Trust Company ("DTC") or the Philadelphia Depository Trust Company ("PDTC") (each a "Book-Entry Transfer Facility" and collectively, the "Book-Entry Transfer Facilities") pursuant to the book-entry transfer procedure described in Section 3 of the Offer to Purchase. DELIVERY OF DOCUMENTS TO A BOOK-ENTRY TRANSFER FACILITY DOES NOT CONSTITUTE DELIVERY TO THE DEPOSITARY. Shareholders whose certificates evidencing Shares ("Share Certificates") are not immediately available or who cannot deliver their Share Certificates and all other documents required hereby to the Depositary prior to the Expiration Date (as defined in Section 1 of the Offer to Purchase) or who cannot complete the procedure for delivery by book-entry transfer on a timely basis and who wish to tender their Shares must do so pursuant to the guaranteed delivery procedure described in Section 3 of the Offer to Purchase. See Instruction 2. 3 [ ] CHECK HERE IF SHARES ARE BEING DELIVERED BY BOOK-ENTRY TRANSFER TO THE DEPOSITARY'S ACCOUNT AT ONE OF THE BOOK-ENTRY TRANSFER FACILITIES AND COMPLETE THE FOLLOWING: Name of Tendering Institution: -------------------------------------------- Check Box of Applicable Book-Entry Transfer Facility: (CHECK ONE) [ ] DTC [ ]PDTC Account Number: Transaction Code Number: ----------------- ---------------- [ ] CHECK HERE IF SHARES ARE BEING TENDERED PURSUANT TO A NOTICE OF GUARANTEED DELIVERY PREVIOUSLY SENT TO THE DEPOSITARY AND COMPLETE THE FOLLOWING: Name(s) of Registered Holder(s): ----------------------------------------- Window Ticket No. (if any): ----------------------------------------------- Date of Execution of Notice of Guaranteed Delivery: ----------------------- Name of Institution that Guaranteed Delivery: ----------------------------- - --------------------------------------------------------------------------------------------------------------------------- DESCRIPTION OF SHARES TENDERED - --------------------------------------------------------------------------------------------------------------------------- NAME(S) AND ADDRESS(ES) OF REGISTERED HOLDER(S) (PLEASE FILL IN, IF BLANK, EXACTLY AS NAME(S) APPEARS(S) ON SHARE CERTIFICATE(S) AND SHARE(S) TENDERED SHARE CERTIFICATE(S) AND SHARE(S) TENDERED) (ATTACH ADDITIONAL LIST, IF NECESSARY) - --------------------------------------------------------------------------------------------------------------------------- TOTAL NUMBER OF SHARES SHARE REPRESENTED BY NUMBER CERTIFICATE SHARE OF SHARES NUMBER(S) CERTIFICATE(S)* TENDERED** ---------------------------------------------------------- ---------------------------------------------------------- ---------------------------------------------------------- ---------------------------------------------------------- ---------------------------------------------------------- TOTAL SHARES - --------------------------------------------------------------------------------------------------------------------------- * Need not be completed by shareholders delivering Shares by book-entry transfer. ** Unless otherwise indicated, it will be assumed that all Shares evidenced by each Share Certificate delivered to the Depositary are being tendered hereby. See Instruction 4. - ---------------------------------------------------------------------------------------------------------------------------
NOTE: SIGNATURE(S) MUST BE PROVIDED BELOW. PLEASE READ THE INSTRUCTIONS SET FORTH IN THIS LETTER OF TRANSMITTAL CAREFULLY. LADIES AND GENTLEMEN: The undersigned hereby tenders to IAT Reinsurance Syndicate Ltd., a Bermuda corporation ("Purchaser"), the above-described shares of common stock, par value $1.00 per share (the "Shares"), of McM Corporation, a North Carolina corporation (the "Company"), pursuant to Purchaser's offer to purchase up to 35% of the outstanding Shares at $3.65 per Share, net to the seller in cash, without interest thereon, upon the terms and subject to the conditions set forth in the Offer to Purchase, dated July 23, 1998 (the "Offer to Purchase"), receipt of which is hereby acknowledged, and in this Letter of Transmittal (which, as amended from time to time, together constitute the "Offer"). 4 Subject to, and effective upon, acceptance for payment of the Shares tendered herewith, in accordance with the terms of the Offer, the undersigned hereby sells, assigns and transfers to, or upon the order of, Purchaser all right, title and interest in and to all the Shares that are being tendered hereby and all dividends, distributions (including, without limitation, distributions of additional Shares) and rights declared, paid or distributed in respect of such Shares on or after July 16, 1998 (collectively, "Distributions"), and irrevocably appoints the Depositary the true and lawful agent and attorney-in-fact of the undersigned with respect to such Shares and all Distributions, with full power of substitution (such power of attorney being deemed to be an irrevocable power coupled with an interest), to (i) deliver Share Certificates evidencing such Shares and all Distributions, or transfer ownership of such Shares and all Distributions on the account books maintained by a Book-Entry Transfer Facility, together, in either case, with all accompanying evidences of transfer and authenticity, to or upon the order of Purchaser, (ii) present such Shares and all Distributions for transfer on the books of the Company and (iii) receive all benefits and otherwise exercise all rights of beneficial ownership of such Shares and all Distributions, all in accordance with the terms of the Offer. THE UNDERSIGNED HEREBY IRREVOCABLY APPOINTS PETER R. KELLOGG AND EDWARD A. KERBS, AND EACH OF THEM, AS THE ATTORNEYS AND PROXIES OF THE UNDERSIGNED, EACH WITH FULL POWER OF SUBSTITUTION, TO VOTE IN SUCH MANNER AS EACH SUCH ATTORNEY AND PROXY OR HIS SUBSTITUTE SHALL, IN HIS OR HER SOLE DISCRETION, DEEM PROPER AND OTHERWISE ACT (BY WRITTEN CONSENT OR OTHERWISE) WITH RESPECT TO ALL THE SHARES TENDERED HEREBY WHICH HAVE BEEN ACCEPTED FOR PAYMENT BY PURCHASER PRIOR TO THE TIME OF SUCH VOTE OR OTHER ACTION AND ALL SHARES AND OTHER SECURITIES ISSUED IN DISTRIBUTIONS IN RESPECT OF SUCH SHARES, WHICH THE UNDERSIGNED IS ENTITLED TO VOTE AT ANY MEETING OF SHAREHOLDERS OF THE COMPANY (WHETHER ANNUAL OR SPECIAL AND WHETHER OR NOT AN ADJOURNED OR POSTPONED MEETING) OR CONSENT IN LIEU OF ANY SUCH MEETING OR OTHERWISE. THIS PROXY AND POWER OF ATTORNEY IS COUPLED WITH AN INTEREST IN THE SHARES TENDERED HEREBY, IS IRREVOCABLE AND IS GRANTED IN CONSIDERATION OF, AND IS EFFECTIVE UPON, THE ACCEPTANCE FOR PAYMENT OF SUCH SHARES BY PURCHASER IN ACCORDANCE WITH THE TERMS OF THE OFFER. SUCH ACCEPTANCE FOR PAYMENT SHALL REVOKE ALL OTHER PROXIES AND POWERS OF ATTORNEY GRANTED BY THE UNDERSIGNED AT ANY TIME WITH RESPECT TO SUCH SHARES (AND ALL SHARES AND OTHER SECURITIES ISSUED IN DISTRIBUTIONS IN RESPECT OF SUCH SHARES), AND NO SUBSEQUENT PROXY OR POWER OF ATTORNEY SHALL BE GIVEN OR WRITTEN CONSENT EXECUTED (AND IF GIVEN OR EXECUTED, SHALL NOT BE EFFECTIVE) BY THE UNDERSIGNED WITH RESPECT THERETO. The undersigned understands that, in order for Shares to be deemed validly tendered, immediately upon Purchaser's acceptance of such Shares for payment, Purchaser must be able to exercise full voting and other rights with respect to such Shares and all Distributions, including, without limitation, voting at any meeting of the Company's shareholders then scheduled. The undersigned hereby represents and warrants that the undersigned has full power and authority to tender, sell, assign and transfer the Shares tendered hereby and all Distributions, and that when such Shares are accepted for payment by Purchaser, Purchaser will acquire good, marketable and unencumbered title thereto and to all Distributions, free and clear of all liens, restrictions, charges and encumbrances, and that none of such Shares and Distributions will be subject to any adverse claim. The undersigned, upon request, shall execute and deliver all additional documents deemed by the Depositary or Purchaser to be necessary or desirable to complete the sale, assignment and transfer of the Shares tendered hereby and all Distributions. In addition, the undersigned shall remit and transfer promptly to the Depositary for the account of Purchaser all Distributions in respect of the Shares tendered hereby, accompanied by appropriate documentation of transfer, and, pending such remittance and transfer or appropriate assurance thereof, Purchaser shall be entitled to all rights and privileges as owner of each such Distribution and may withhold the entire purchase price of the Shares tendered hereby, or deduct from such purchase price the amount or value of such Distribution as determined by Purchaser in its sole discretion. No authority herein conferred or agreed to be conferred shall be affected by, and all such authority shall survive, the death or incapacity of the undersigned. All obligations of the undersigned hereunder shall be binding upon the heirs, personal representatives, successors and assigns of the undersigned. Except as stated in the Offer to Purchase, this tender is irrevocable. The undersigned understands that tenders of Shares pursuant to any one of the procedures described in Section 3 of the Offer to Purchase and in the instructions hereto will constitute the undersigned's acceptance of the terms and conditions of the Offer. Purchaser's acceptance of such Shares for payment will constitute a binding agreement between the undersigned and Purchaser upon the terms and subject to the conditions of the Offer. Unless otherwise indicated herein in the box entitled "Special Payment Instructions," please issue the check for the purchase price of all Shares purchased, and return all Share Certificates evidencing Shares not purchased or not tendered in the name(s) of the registered holder(s) appearing above under "Description of Shares Tendered." Similarly, unless otherwise indicated in the box entitled "Special Delivery Instructions," please mail the check for the purchase price of all Shares purchased and all Share Certificates evidencing Shares not tendered or not purchased (and accompanying documents, as appropriate) to the address(es) of the registered holder(s) appearing above under "Description of Shares Tendered." In the event that the boxes entitled "Special Payment Instructions" and "Special Delivery Instructions" are both completed, please issue the check for the purchase price of all Shares purchased and return all Share Certificates evidencing Shares not purchased or not tendered in the name(s) of, and mail such check and Share Certificates to, the person(s) so indicated. The undersigned recognizes that Purchaser has no obligation, pursuant to the Special Payment Instructions, to transfer any Shares from the name of the registered holder(s) thereof if Purchaser does not purchase any of the Shares tendered hereby. 5 ------------------------------------------------------------ SPECIAL PAYMENT INSTRUCTIONS (SEE INSTRUCTIONS 1, 5, 6 AND 7) To be completed ONLY if the check for the purchase price of Shares purchased or Share Certificates evidencing Shares purchased or Share Certificates evidencing Shares not tendered or not purchased are to be issued in the name of someone other than the undersigned. Issue [ ] check [ ] Certificates to: Name --------------------------------------------------------------------- -------------------------------------------------------------------------- (PLEASE TYPE OR PRINT) Address ------------------------------------------------------------------ -------------------------------------------------------------------------- (INCLUDE ZIP CODE) -------------------------------------------------------------------------- (TAXPAYER IDENTIFICATION OR SOCIAL SECURITY NO.) SEE SUBSTITUTE FORM W-9 ON REVERSE SIDE ------------------------------------------------------------ ------------------------------------------------------------ SPECIAL DELIVERY INSTRUCTIONS (SEE INSTRUCTIONS 1, 5, 6 AND 7) To be completed ONLY if the check for the purchase price of Shares purchased or Share Certificates evidencing Shares not tendered or not purchased are to be mailed to someone other than the undersigned, or to the undersigned at an address other than that shown under "Description of Shares Tendered." Mail check and/or certificate(s) to: Name --------------------------------------------------------------------- -------------------------------------------------------------------------- (PLEASE TYPE OR PRINT) Address ------------------------------------------------------------------ -------------------------------------------------------------------------- (INCLUDE ZIP CODE) -------------------------------------------------------------------------- 6 IMPORTANT SHAREHOLDERS: SIGN HERE (PLEASE COMPLETE SUBSTITUTE FORM W-9 ON REVERSE) - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- SIGNATURE(S) OF SHAREHOLDER(S) Dated: ___________ , 1998 (Must be signed by registered holder(s) exactly as such registered holder(s) name(s) appear(s) on Share Certificates or on a security position listing or by a person(s) authorized to become registered holder(s) by certificates and documents transmitted herewith. If signature is by a trustee, executor, administrator, guardian, attorney-in-fact, officer of a corporation or other person acting in a fiduciary or representative capacity, please provide the following information and see Instruction 5.) Name(s): ------------------------------------------------------------------------ ------------------------------------------------------------------------ (PLEASE TYPE OR PRINT) Capacity (Full Title): ------------------------------------------------------------------------ (SEE INSTRUCTION 5) Address: ------------------------------------------------------------------------ ------------------------------------------------------------------------ (INCLUDE ZIP CODE) Daytime Area Codes and Telephone Numbers: ----------------------------------------------------------------------- HOME ---------------------------------------- BUSINESS Taxpayer Identification or Social Security No.: --------------------------------------------------------------------------- (COMPLETE SUBSTITUTE FORM W-9 ON REVERSE) GUARANTEE OF SIGNATURE(S) (IF REQUIRED -- SEE INSTRUCTIONS 1 AND 5) Authorized Signature ------------------------------------------------------------------------ Name: ------------------------------------------------------------------------ (PLEASE TYPE OR PRINT) Title: ------------------------------------------------------------------------ Name of Firm: ------------------------------------------------------------------------ Address: ------------------------------------------------------------------------ ------------------------------------------------------------------------ (INCLUDE ZIP CODE) ------------------------------------------------------------------------ (Area Code and Tel. No.) Dated: --------------------------- ------------ SPACE BELOW IS FOR USE BY FINANCIAL INSTITUTIONS ONLY. FINANCIAL INSTITUTIONS: PLACE MEDALLION GUARANTEE IN SPACE BELOW 7 INSTRUCTIONS Forming Part of the Terms and Conditions of the Offer 1. GUARANTEE OF SIGNATURES. All signatures on this Letter of Transmittal must be medallion guaranteed by a firm that is a member of the New York Stock Exchange Medallion Signature Guarantee Program, or by any other "eligible guarantor institution," as such term is defined in Rule 17Ad-15 under the Securities Exchange Act of 1934, as amended (each of the foregoing being referred to as an "Eligible Institution"), unless (i) this Letter of Transmittal is signed by the registered holder(s) of the Shares (which term, for purposes of this document, shall include any participant in a Book-Entry Transfer Facility whose name appears on a security position listing as the owner of Shares) tendered hereby and such holder(s) has (have) completed neither the box entitled "Special Payment Instructions" nor the box entitled "Special Delivery Instructions" on the reverse hereof or (ii) such Shares are tendered for the account of an Eligible Institution. See Instruction 5. 2. DELIVERY OF LETTER OF TRANSMITTAL AND SHARE CERTIFICATES. This Letter of Transmittal is to be used either if Share Certificates are to be forwarded herewith or, unless an Agent's Message is utilized, if Shares are to be delivered by book-entry transfer pursuant to the procedure set forth in Section 3 of the Offer to Purchase. Share Certificates evidencing all physically tendered Shares, or a confirmation of a book-entry transfer into the Depositary's account at a Book-Entry Transfer Facility of all Shares delivered by book-entry transfer as well as a properly completed and duly executed Letter of Transmittal (or facsimile thereof), with any required signature guarantees, or an Agent's Message in the case of a book-entry delivery, and any other documents required by this Letter of Transmittal, must be received by the Depositary at one of its addresses set forth on the reverse hereof prior to the Expiration Date (as defined in Section 1 of the Offer to Purchase). If Share Certificates are forwarded to the Depositary in multiple deliveries, a properly completed and duly executed Letter of Transmittal must accompany each such delivery. Shareholders whose Share Certificates are not immediately available, who cannot deliver their Share Certificates and all other required documents to the Depositary prior to the Expiration Date or who cannot complete the procedure for delivery by book-entry transfer on a timely basis may tender their Shares pursuant to the guaranteed delivery procedure described in Section 3 of the Offer to Purchase. Pursuant to such procedure: (i) such tender must be made by or through an Eligible Institution; (ii) a properly completed and duly executed Notice of Guaranteed Delivery, substantially in the form made available by Purchaser, must be received by the Depositary prior to the Expiration Date; and (iii) the Share Certificates evidencing all physically delivered Shares in proper form for transfer by delivery, or a confirmation of a book-entry transfer into the Depositary's account at a Book-Entry Transfer Facility of all Shares delivered by book-entry transfer, in each case together with a Letter of Transmittal (or a facsimile thereof), properly completed and duly executed, with any required signature guarantees (or, in the case of a book-entry delivery, an Agent's Message), and any other documents required by this Letter of Transmittal, must be received by the Depositary within three New York Stock Exchange trading days after the date of execution of such Notice of Guaranteed Delivery, all as described in Section 3 of the Offer to Purchase. THE METHOD OF DELIVERY OF THIS LETTER OF TRANSMITTAL, SHARE CERTIFICATES AND ALL OTHER REQUIRED DOCUMENTS, INCLUDING DELIVERY THROUGH ANY BOOK-ENTRY TRANSFER FACILITY, IS AT THE OPTION AND RISK OF THE TENDERING SHAREHOLDER, AND THE DELIVERY WILL BE DEEMED MADE ONLY WHEN ACTUALLY RECEIVED BY THE DEPOSITARY. IF DELIVERY IS BY MAIL, REGISTERED MAIL WITH RETURN RECEIPT REQUESTED, PROPERLY INSURED, IS RECOMMENDED. IN ALL CASES, SUFFICIENT TIME SHOULD BE ALLOWED TO ENSURE TIMELY DELIVERY. No alternative, conditional or contingent tenders will be accepted and no fractional Shares will be purchased. By execution of this Letter of Transmittal (or a facsimile hereof), all tendering shareholders waive any right to receive any notice of the acceptance of their Shares for payment. 3. INADEQUATE SPACE. If the space provided herein under "Description of Shares Tendered" is inadequate, the Share Certificate numbers, the number of Shares evidenced by such Share Certificates and the number of Shares tendered should be listed on a separate schedule and attached hereto. 8 4. PARTIAL TENDERS (NOT APPLICABLE TO SHAREHOLDERS WHO TENDER BY BOOK-ENTRY TRANSFER). If fewer than all of the Shares evidenced by any Share Certificate delivered to the Depositary herewith are to be tendered hereby, fill in the number of Shares that are to be tendered in the box entitled "Number of Shares Tendered." In such cases, new Share Certificate(s) evidencing the remainder of the Shares that were evidenced by the Share Certificates delivered to the Depositary herewith will be sent to the person(s) signing this Letter of Transmittal, unless otherwise provided in the box entitled "Special Delivery Instructions" on the reverse hereof, as soon as practicable after the expiration or termination of the Offer. All Shares evidenced by Share Certificates delivered to the Depositary will be deemed to have been tendered unless otherwise indicated. 5. SIGNATURES ON LETTER OF TRANSMITTAL; STOCK POWERS AND ENDORSEMENTS. If this Letter of Transmittal is signed by the registered holder(s) of the Shares tendered hereby, the signature(s) must correspond with the name(s) as written on the face of the Share Certificates evidencing such Shares without alteration, enlargement or any other change whatsoever. If any Share tendered hereby is owned of record by two or more persons, all such persons must sign this Letter of Transmittal. If any of the Shares tendered hereby are registered in the names of different holders, it will be necessary to complete, sign and submit as many separate Letters of Transmittal as there are different registrations of such Shares. If this Letter of Transmittal is signed by the registered holder(s) of the Shares tendered hereby, no endorsements of Share Certificates or separate stock powers are required, unless payment is to be made to, or Share Certificates evidencing Shares not tendered or not purchased are to be issued in the name of, a person other than the registered holder(s), in which case, the Share Certificate(s) evidencing the Shares tendered hereby must be endorsed or accompanied by appropriate stock powers, in either case signed exactly as the name(s) of the registered holder(s) appear(s) on such Share Certificate(s). Signatures on such Share Certificate(s) and stock powers must be guaranteed by an Eligible Institution. If this Letter of Transmittal is signed by a person other than the registered holder(s) of the Shares tendered hereby, the Share Certificate(s) evidencing the Shares tendered hereby must be endorsed or accompanied by appropriate stock powers, in either case signed exactly as the name(s) of the registered holder(s) appear(s) on such Share Certificate(s). Signatures on such Share Certificate(s) and stock powers must be guaranteed by an Eligible Institution. If this Letter of Transmittal or any Share Certificate or stock power is signed by a trustee, executor, administrator, guardian, attorney-in-fact, officer of a corporation or other person acting in a fiduciary or representative capacity, such person should so indicate when signing, and proper evidence satisfactory to Purchaser of such person's authority so to act must be submitted. 6. STOCK TRANSFER TAXES. Except as otherwise provided in this Instruction 6, Purchaser will pay all stock transfer taxes with respect to the sale and transfer of any Shares to it or its order pursuant to the Offer. If, however, payment of the purchase price of any Shares purchased is to be made to, or Share Certificate(s) evidencing Shares not tendered or not purchased are to be issued in the name of, a person other than the registered holder(s), the amount of any stock transfer taxes (whether imposed on the registered holder(s), such other person or otherwise) payable on account of the transfer to such other person will be deducted from the purchase price of such Shares purchased, unless evidence satisfactory to Purchaser of the payment of such taxes, or exemption therefrom, is submitted. Except as provided in this Instruction 6, it will not be necessary for transfer tax stamps to be affixed to the Share Certificates evidencing the Shares tendered hereby. 7. SPECIAL PAYMENT AND DELIVERY INSTRUCTIONS. If a check for the purchase price of any Shares tendered hereby is to be issued, or Share Certificate(s) evidencing Shares not tendered or not purchased are to be issued, in the name of a person other than the person(s) signing this Letter of Transmittal or if such check or any such Share Certificate is to be sent to someone other than the person(s) signing this Letter of Transmittal or to the person(s) signing this Letter of Transmittal but at an address other than that shown in the box entitled "Description of Shares Tendered" on the reverse hereof, the appropriate boxes on the reverse of this Letter of Transmittal must be completed. In such cases, a signature guarantee is required. See Instruction 1. 9 8. QUESTIONS AND REQUESTS FOR ASSISTANCE OR ADDITIONAL COPIES. Questions and requests for assistance may be directed to the Information Agent at its address or telephone number set forth below. Additional copies of the Offer to Purchase, this Letter of Transmittal and the Notice of Guaranteed Delivery may be obtained from the Information Agent or from brokers, dealers, commercial banks or trust companies. 9. SUBSTITUTE FORM W-9. Each tendering shareholder is required to provide the Depositary with a correct Taxpayer Identification Number ("TIN") on the Substitute Form W-9 which is provided under "Important Tax Information" below, and to certify, under penalties of perjury, that such number is correct and that such shareholder is not subject to backup withholding of federal income tax. If a tendering shareholder has been notified by the Internal Revenue Service that such shareholder is subject to backup withholding, such shareholder must cross out item (2) of the Certification box of the Substitute Form W-9, unless such shareholder has since been notified by the Internal Revenue Service that such shareholder is no longer subject to backup withholding. Failure to provide the information on the Substitute Form W-9 may subject the tendering shareholder to 31 percent federal income tax withholding on the payment of the purchase price of all Shares purchased from such shareholder. If the tendering shareholder has not been issued a TIN and has applied for one or intends to apply for one in the near future, such shareholder should write "Applied For" in the space provided for the TIN in Part I of the Substitute Form W-9, and sign and date the Substitute Form W-9. If "Applied For" is written in Part I and the Depositary is not provided with a TIN within 60 days, the Depositary will withhold 31 percent on all payments of the purchase price to such shareholder until a TIN is provided to the Depositary. 10. LOST OR DESTROYED CERTIFICATE(S). If any Share Certificate has been lost, stolen or destroyed, immediately notify the Depositary in writing. Your letter should be forwarded along with your properly completed Letter of Transmittal and any Share Certificates you may have in your possession. Once written notification of the loss is received by the Depositary, an affidavit of loss and indemnity agreement, along with instructions which include the cost of replacing the Share Certificate, will be sent to the shareholder. The tenders cannot be processed until any missing Share certificate has been replaced. IMPORTANT: THIS LETTER OF TRANSMITTAL (OR FACSIMILE HEREOF), PROPERLY COMPLETED AND DULY EXECUTED, OR AN AGENT'S MESSAGE IN THE CASE OF A BOOK-ENTRY DELIVERY (TOGETHER WITH ANY REQUIRED SIGNATURE GUARANTEES AND SHARE CERTIFICATES OR CONFIRMATION OF BOOK-ENTRY TRANSFER AND ALL OTHER REQUIRED DOCUMENTS), OR A PROPERLY COMPLETED AND DULY EXECUTED NOTICE OF GUARANTEED DELIVERY MUST BE RECEIVED BY THE DEPOSITARY PRIOR TO THE EXPIRATION DATE (AS DEFINED IN THE OFFER TO PURCHASE). IMPORTANT TAX INFORMATION Under the federal income tax law, a shareholder whose tendered Shares are accepted for payment is required to provide the Depositary (as payer) with such shareholder's correct TIN on Substitute Form W-9 below. If such shareholder is an individual, the TIN is such shareholder's social security number. If the Depositary is not provided with the correct TIN, the shareholder may be subject to a $50 penalty imposed by the Internal Revenue Service. In addition, payments that are made to such shareholder with respect to Shares purchased pursuant to the Offer may be subject to backup withholding of 31 percent (as described below). Certain shareholders (including, among others, all corporations and certain foreign individuals) are not subject to these backup withholding and reporting requirements. In order for a foreign individual to qualify as an exempt recipient, such individual must submit an Internal Revenue Service Form W-8, signed under penalties of perjury, attesting to such individual's exempt status. A Form W-8 may be obtained from the Depositary. See the enclosed Guidelines for Certification of Taxpayer Identification Number on Substitute Form W-9 for additional instructions. If backup withholding applies, the Depositary is required to withhold 31 percent of any payments made to the shareholder. Backup withholding is not an additional tax. Rather, the tax liability of persons subject to backup withholding will be reduced by the amount of tax withheld. If withholding results in an overpayment of taxes, a refund may be obtained from the Internal Revenue Service. 10 PURPOSE OF SUBSTITUTE FORM W-9 To prevent backup withholding on payments that are made to a shareholder with respect to Shares purchased pursuant to the Offer, the shareholder is required to notify the Depositary of such shareholder's correct TIN by completing the form below certifying (a) that the TIN provided on Substitute Form W-9 is correct (or that such shareholder is awaiting a TIN), and (b) that (i) such shareholder is exempt from backup withholding, (ii) such shareholder has not been notified by the Internal Revenue Service that such shareholder is subject to backup withholding as a result of a failure to report all interest or dividends or (iii) the Internal Revenue Service has notified such shareholder that such shareholder is no longer subject to backup withholding. WHAT NUMBER TO GIVE THE DEPOSITARY The shareholder is required to give the Depositary the social security number or employer identification number of the record holder of the Shares tendered hereby. If the Shares are in more than one name or are not in the name of the actual owner, consult the enclosed Guidelines for Certification of Taxpayer Identification Number on Substitute Form W-9 for additional guidance on which number to report. If the tendering shareholder has not been issued a TIN and has applied for a number or intends to apply for a number in the near future, the shareholder should write "Applied For" in the space provided for the TIN in Part I, and sign and date the Substitute Form W-9. If "Applied For" is written in Part I and the Depositary is not provided with a TIN within 60 days, the Depositary will withhold 31 percent of all payments of the purchase price to such shareholder until a TIN is provided to the Depositary. 11 PAYER'S NAME: WACHOVIA BANK, N.A. - --------------------------------------------------------------------------------
SUBSTITUTE PART I -- Taxpayer Identification Social Security Number FORM W-9 Number -- For all accounts, enter taxpayer OR identification number in the box at right. --------------------------- (For most individuals, this is your social Employer Identification Number security number. If you do not have a (If awaiting TIN, write "Applied For") number, see "Obtaining a Number" in the enclosed Guidelines.) Certify by signing and dating below. Note: If the account is in more than one name, see the chart in the enclosed Guidelines to determine which number to give the payer. --------------------------------------------------------------------------------------- DEPARTMENT OF THE TREASURY PART II -- For Payees Exempt From Backup Withholding, see the enclosed Guidelines INTERNAL REVENUE SERVICE and complete as instructed therein. --------------------------------------------------------------------------------------- PAYER'S REQUEST FOR TAXPAYER CERTIFICATION -- Under penalties of perjury, I certify that: IDENTIFICATION NUMBER ("TIN") (1) The number shown on this form is my correct Taxpayer Identification Number (or I am waiting for a number to be issued to me), and (2) I am not subject to backup withholding either because (a) I am exempt from backup withholding, (b) I have not been notified by the Internal Revenue Service (the "IRS") that I am subject to backup withholding as a result of failure to report all interest or dividends, or (c) the IRS has notified me that I am no longer subject to backup withholding. CERTIFICATE INSTRUCTIONS -- You must cross out item (2) above if you have been notified by the IRS that you are subject to backup withholding because of underreporting interest or dividends on your tax return. However, if after being notified by the IRS that you were subject to backup withholding you received another notification from the IRS that you are no longer subject to backup withholding, do not cross out item (2). (See also instructions in the enclosed Guidelines.) Signature Date ---------------------------- -------------------------------- NOTE: FAILURE TO COMPLETE AND RETURN THIS FORM MAY RESULT IN BACKUP WITHHOLDING OF 31 PERCENT OF ANY PAYMENT MADE TO YOU PURSUANT TO THE OFFER. FOR ADDITIONAL DETAILS, PLEASE REVIEW THE ENCLOSED GUIDELINES FOR CERTIFICATION OF TAXPAYER IDENTIFICATION NUMBER ON SUBSTITUTE FORM W-9.
- -------------------------------------------------------------------------------- The Information Agent for the Offer is: (MacKenzie Logo) 156 Fifth Avenue New York, New York 10010 (212) 929-5500 (call collect) or CALL TOLL-FREE (800) 322-2885 July 23, 1998 EX-99.A3 4 NOTICE OF GUARANTEED DELIVERY 1 EXHIBIT (A)(3) 2 NOTICE OF GUARANTEED DELIVERY FOR TENDER OF SHARES OF COMMON STOCK OF McM CORPORATION (NOT TO BE USED FOR SIGNATURE GUARANTEES) This Notice of Guaranteed Delivery, or one substantially in the form hereof, must be used to accept the Offer (as defined below) (i) if certificates ("Share Certificates") evidencing shares of common stock, par value $1.00 per share (the "Shares"), of the Company, are not immediately available, (ii) if Share Certificates and all other required documents cannot be delivered to Wachovia Bank, N.A., as Depositary (the "Depositary"), prior to the Expiration Date (as defined in Section 1 of the Offer to Purchase (as defined below)) or (iii) if the procedure for delivery by book-entry transfer cannot be completed on a timely basis. This Notice of Guaranteed Delivery may be delivered by hand or mail or transmitted by facsimile transmission to the Depositary. See Section 3 of the Offer to Purchase. The Depositary for the Offer is: WACHOVIA BANK, N.A. By Registered Mail: By Overnight Courier: By Hand: New York Drop: c/o Wachovia Bank, N.A c/o Wachovia Bank, N.A. c/o Wachovia Bank, N.A. Wachovia Bank, N.A. Corporate Reorganizations Corporate Reorganizations Shareholder Services Department c/o Boston Equiserve L.P. P.O. Box 9061 70 Campareili Drive Wachovia East Building, 2nd Floor Corporate Reorganizations, Boston, Massachusetts 02205 Braintree, Massachusetts 02184 301 North Church Street 3rd Floor Winston-Salem, North Carolina 27101 55 Broadway New York, New York 10006
By Facsimile Transmission: (for Eligible Institutions Only) (781) 794-6352 Confirm by Telephone: (781) 848-0505 DELIVERY OF THIS NOTICE OF GUARANTEED DELIVERY TO AN ADDRESS OTHER THAN AS SET FORTH ABOVE, OR TRANSMISSION OF INSTRUCTIONS VIA FACSIMILE TRANSMISSION OTHER THAN AS SET FORTH ABOVE, WILL NOT CONSTITUTE A VALID DELIVERY TO THE DEPOSITARY. THIS FORM IS NOT TO BE USED TO GUARANTEE SIGNATURES. IF A SIGNATURE ON A LETTER OF TRANSMITTAL IS REQUIRED TO BE GUARANTEED BY AN "ELIGIBLE INSTITUTION" UNDER THE INSTRUCTIONS THERETO, SUCH SIGNATURE GUARANTEE MUST APPEAR IN THE APPLICABLE SPACE PROVIDED IN THE SIGNATURE BOX ON THE LETTER OF TRANSMITTAL. 3 Ladies and Gentlemen: The undersigned hereby tenders to IAT Reinsurance Syndicate Ltd.., a Bermuda corporation, upon the terms and subject to the conditions set forth in the Offer to Purchase, dated July 23, 1998 (the "Offer to Purchase"), and the related Letter of Transmittal (which, as amended from time to time, together constitute the "Offer"), receipt of each of which is hereby acknowledged, the number of Shares specified below pursuant to the guaranteed delivery procedure described in Section 3 of the Offer to Purchase. Number of Shares: - ----------------------------------- Certificate Nos. (If available): - ------------------------------------------------------ Check one box if Shares will be delivered by book-entry transfer: [ ] The Depository Trust Company [ ] Philadelphia Depository Trust Company - ------------------------------------------------------ Name of Tendering Institution Account No: - --------------------------------------- Signature(s) of Holder(s): - ------------------------------------------------------ - ------------------------------------------------------ Dated: - ----------------------------------------, 1998 Name(s) of Holders: - ------------------------------------------------------ - ------------------------------------------------------ Please Type or Print - ------------------------------------------------------ Address - ------------------------------------------------------ Zip Code - ------------------------------------------------------ Area Code and Tel. No.: GUARANTEE (NOT TO BE USED FOR SIGNATURE GUARANTEES) The undersigned, a firm which is a member of a registered national securities exchange or of the National Association of Securities Dealers, Inc. or which is a commercial bank or trust company having an office or correspondent in the United States that is a member in good standing of the Securities Transfer Agents Medallion Program, the New York Stock Exchange Medallion Signature Guarantee Program or the Stock Exchange Medallion Program, guarantees to deliver to the Depositary, at one of its addresses set forth above, Share Certificates evidencing the Shares tendered hereby, in proper form for transfer, or confirmation of book-entry transfer of such Shares into the Depositary's account at The Depository Trust Company or the Philadelphia Depository Trust Company, in each case with delivery of a Letter of Transmittal (or facsimile thereof) properly completed and duly executed, with any required signature guarantees or an Agent's Message (as defined in the Offer to Purchase) in the case of a book-entry delivery, and any other required documents, all within three New York Stock Exchange trading days of the date hereof. - ----------------------------------------------------- ----------------------------------------------------- Name of Firm Authorized Signature - ----------------------------------------------------- ----------------------------------------------------- Address Title - ----------------------------------------------------- Name: ----------------------------------------------- Zip Code Please Type or Print - ----------------------------------------------------- Date: ----------------------------------------, 1998 Area Code and Telephone No.
DO NOT SEND SHARE CERTIFICATES WITH THIS NOTICE. SHARE CERTIFICATES SHOULD BE SENT WITH YOUR LETTER OF TRANSMITTAL. EX-99.A4 5 LETTER FROM MACKENZIE PARTNERS 1 EXHIBIT (A)(4) 2 FORM OF LETTER TO BROKERS, DEALERS (MACKENZIE LOGO) 156 Fifth Avenue New York, New York 10010 (212) 929-5500 (Call Collect) Call Toll Free: (800) 322-2885 OFFER TO PURCHASE FOR CASH UP TO 35% OF THE OUTSTANDING SHARES OF COMMON STOCK OF McM CORPORATION AT $3.65 NET PER SHARE BY IAT REINSURANCE SYNDICATE LTD. THE OFFER, PRORATION PERIOD AND WITHDRAWAL RIGHTS WILL EXPIRE AT 5:00 P.M., NEW YORK CITY TIME, ON FRIDAY, AUGUST 21, 1998, UNLESS THE OFFER IS EXTENDED. July 23, 1998 To Brokers, Dealers, Commercial Banks, Trust Companies and Other Nominees: We have been appointed by IAT Reinsurance Syndicate Ltd., a Bermuda corporation ("Purchaser"), to act as Information Agent in connection with Purchaser's offer to purchase up to 35% of the issued and outstanding shares (the "Shares") of common stock, par value $1.00 per Share (the "Common Stock"), of McM Corporation, a North Carolina corporation (the "Company"), at a price of $3.65 per Share, net to the seller in cash, without interest thereon, upon the terms and subject to the conditions set forth in Purchaser's Offer to Purchase, dated July 23, 1998 (the "Offer to Purchase"), and the related Letter of Transmittal (which, as amended from time to time, together constitute the "Offer") enclosed herewith. Please furnish copies of the enclosed materials to those of your clients for whose accounts you hold Shares registered in your name or in the name of your nominee. The Offer is being made in connection with the Offer and Rights Agreement, dated as of July 16, 1998, between Purchaser and the Company (the "Offer and Rights Agreement"). Holders of Shares whose certificates for such Shares (the "Share Certificates") are not immediately available or who cannot deliver their Share Certificates and all other required documents to Wachovia Bank, N.A. (the "Depositary") or complete the procedures for book-entry transfer prior to the Expiration Date (as defined in the Offer to Purchase) must tender their Shares according to the guaranteed delivery procedures set forth in Section 3 of the Offer to Purchase. THE OFFER IS CONDITIONED UPON, AMONG OTHER THINGS, (I) THERE BEING VALIDLY TENDERED AND NOT WITHDRAWN PRIOR TO THE EXPIRATION OF THE OFFER SUCH NUMBER OF SHARES THAT WOULD REPRESENT AT LEAST 32% OF THE VOTING POWER OF THE SHARES OUTSTANDING ON A FULLY DILUTED BASIS AT THE EXPIRATION OF THE OFFER, (II) APPROVAL BY THE CHANCERY COURT OF THE STATE OF DELAWARE OF THE TRUST PURCHASE AGREEMENT (AS DEFINED IN THE OFFER TO PURCHASE), 3 (III) APPROVAL OF THE OFFER AND THE RELATED TRANSACTIONS (AS DEFINED IN THE OFFER TO PURCHASE) BY THE COMMISSIONERS OF INSURANCE IN THE STATES OF NORTH CAROLINA AND CALIFORNIA, (IV) ANY WAITING PERIOD UNDER THE HSR ACT (AS DEFINED IN THE OFFER TO PURCHASE) APPLICABLE TO THE PURCHASE OF SHARES PURSUANT TO THE OFFER HAVING EXPIRED OR HAVING BEEN TERMINATED AND (V) THE SATISFACTION OF CERTAIN OTHER TERMS AND CONDITIONS CONTAINED IN THE OFFER TO PURCHASE. Enclosed for your information and use are copies of the following documents: 1. Offer to Purchase, dated July 23, 1998; 2. Letter of Transmittal to be used by holders of Shares in accepting the Offer and tendering Shares; 3. Notice of Guaranteed Delivery to be used to accept the Offer if the Shares and all other required documents are not immediately available or cannot be delivered to Wachovia Bank, N.A. (the "Depositary") by the Expiration Date (as defined in the Offer to Purchase) or if the procedure for book-entry transfer cannot be completed by the Expiration Date; 4. A letter to shareholders of the Company from George E. King, Chairman and Chief Executive Officer of the Company and Stephen L. Stephano, President and Chief Operating Officer of the Company, together with a Solicitation/Recommendation Statement on Schedule 14D-9 filed with the Securities and Exchange Commission by the Company; 5. A letter which may be sent to your clients for whose accounts you hold Shares registered in your name or in the name of your nominee, with space provided for obtaining such clients' instructions with regard to the Offer; 6. Guidelines for Certification of Taxpayer Identification Number on Substitute Form W-9; and 7. Return envelope addressed to the Depositary. WE URGE YOU TO CONTACT YOUR CLIENTS AS PROMPTLY AS POSSIBLE. PLEASE NOTE THAT THE OFFER AND WITHDRAWAL RIGHTS EXPIRE AT 5:00 P.M., NEW YORK CITY TIME, ON FRIDAY, AUGUST 21, 1998, UNLESS THE OFFER IS EXTENDED. In all cases, payment for Shares accepted for payment pursuant to the Offer will be made only after timely receipt by the Depositary of (i) certificates evidencing such Shares (or a confirmation of a book-entry transfer of such Shares into the Depositary's account at one of the Book-Entry Transfer Facilities (as defined in the Offer to Purchase)), (ii) a Letter of Transmittal (or facsimile thereof) properly completed and duly executed or an Agent's Message (as defined in the Offer to Purchase) in the case of a book-entry delivery and (iii) any other required documents in accordance with the instructions contained in the Letter of Transmittal. If a holder of Shares wishes to tender Shares, but cannot deliver such holder's certificates or other required documents, or cannot comply with the procedure for book-entry transfer, prior to the expiration of the Offer, a tender of Shares may be effected by following the guaranteed delivery procedure described in Section 3 of the Offer to Purchase. Purchaser will not pay any fees or commissions to any broker, dealer or other person (other than the Depositary and the Information Agent as described in the Offer) in connection with the solicitation of tenders of Shares pursuant to the Offer. However, Purchaser will reimburse you for customary mailing and handling expenses incurred by you in forwarding any of the enclosed materials to your clients. Purchaser will pay or cause to be paid any stock transfer taxes payable with respect to the transfer of Shares to it, except as otherwise provided in Instruction 6 of the Letter of Transmittal. Any inquiries you may have with respect to the Offer should be addressed to MacKenzie Partners, Inc. (the "Information Agent") at its address and telephone number set forth on the back cover page of the Offer to Purchase. 4 Additional copies of the enclosed material may be obtained from the Information Agent, at the address and telephone numbers set forth on the back cover of the Offer to Purchase. Very truly yours, MacKenzie Partners, Inc. NOTHING CONTAINED HEREIN OR IN THE ENCLOSED DOCUMENTS SHALL AUTHORIZE YOU OR ANY OTHER PERSON TO ACT ON BEHALF OF OR AS THE AGENT OF PURCHASER, THE COMPANY, THE INFORMATION AGENT OR THE DEPOSITARY, OR OF ANY AFFILIATE OF ANY OF THEM, OR AUTHORIZE YOU OR ANY OTHER PERSON TO USE ANY DOCUMENT OR TO MAKE ANY STATEMENT ON BEHALF OF ANY OF THEM IN CONNECTION WITH THE OFFER OTHER THAN THE ENCLOSED DOCUMENTS AND THE STATEMENTS CONTAINED THEREIN. EX-99.A5 6 LETTER TO CLIENTS 1 EXHIBIT (A)(5) 2 FORM OF LETTER TO CLIENTS OFFER TO PURCHASE FOR CASH UP TO 35% OF THE OUTSTANDING SHARES OF COMMON STOCK OF McM CORPORATION AT $3.65 NET PER SHARE BY IAT REINSURANCE SYNDICATE LTD. THE OFFER AND WITHDRAWAL RIGHTS WILL EXPIRE AT 5:00 P.M., NEW YORK CITY TIME, ON FRIDAY, AUGUST 21, 1998, UNLESS THE OFFER IS EXTENDED. July 23, 1998 To Our Clients: Enclosed for your consideration are an Offer to Purchase, dated July 23, 1998 (the "Offer to Purchase"), and a related Letter of Transmittal (which, as amended from time to time, together constitute the "Offer") in connection with the offer by IAT Reinsurance Syndicate Ltd., a Bermuda corporation ("Purchaser"), to purchase up to 35% of the issued and outstanding shares of common stock, par value $1.00 per share (the "Shares"), of McM Corporation, a North Carolina corporation (the "Company"), at a price of $3.65 per Share, net to the seller in cash, without interest thereon, upon the terms and subject to the conditions set forth in the Offer. The Offer is being made in connection with the Offer and Rights Agreement, dated as of July 16, 1998, between Purchaser and the Company (the "Offer and Rights Agreement"). Holders of Shares whose certificates for such Shares (the "Share Certificates") are not immediately available or who cannot deliver their Share Certificates and all other required documents to Wachovia Bank, N.A. (the "Depositary") or complete the procedures for book-entry transfer prior to the Expiration Date (as defined in the Offer to Purchase) must tender their Shares according to the guaranteed delivery procedures set forth in Section 3 of the Offer to Purchase. WE ARE (OR OUR NOMINEE IS) THE HOLDER OF RECORD OF SHARES HELD BY US FOR YOUR ACCOUNT. A TENDER OF SUCH SHARES CAN BE MADE ONLY BY US AS THE HOLDER OF RECORD AND PURSUANT TO YOUR INSTRUCTIONS. THE LETTER OF TRANSMITTAL IS FURNISHED TO YOU FOR YOUR INFORMATION ONLY AND CANNOT BE USED BY YOU TO TENDER SHARES HELD BY US FOR YOUR ACCOUNT. We request instructions as to whether you wish to have us tender on your behalf any or all of the Shares held by us for your account, upon the terms and subject to the conditions set forth in the Offer. Your attention is invited to the following: 1. The tender price is $3.65 per Share, net to the seller in cash without interest. 2. The Offer is being made for up to 35% of the outstanding Shares. If more than 35% of the issued and outstanding Shares are validly tendered at or prior to the Expiration Date (as defined in the Offer to Purchase), and not withdrawn, Purchaser will, upon the terms and subject to the conditions of the Offer, accept for payment and pay for 35% of the then issued and outstanding Shares on a pro rata basis (with 3 adjustments to avoid purchases of fractional Shares), according to the number of Shares properly tendered by each shareholder at or prior to the Expiration Date and not withdrawn. The McMillen Trust, which currently holds approximately 65% of the Shares, has agreed with Purchaser not to tender any of its Shares into the Offer. Accordingly, it is not anticipated that more than 35% of the outstanding Shares will be tendered or that proration will be required. 3. The Board of Directors of the Company has unanimously approved the Offer and the Offer and Rights Agreement (as defined in the Offer to Purchase), has determined that the Offer and the Offer and Rights Agreement is fair to, and in the best interests of, the Company and the Company's shareholders and recommends that holders of Shares accept the Offer and tender their Shares pursuant to the Offer. 4. The Offer and withdrawal rights will expire at 5:00 p.m., New York City time, on Friday, August 21, 1998, unless the Offer is extended. 5. The Offer is conditioned upon, among other things, (i) there being validly tendered and not withdrawn prior to the expiration of the Offer such number of Shares that would represent at least 32% of the voting power of the Shares outstanding on a fully diluted basis at the expiration of the Offer, (ii) approval by the Court of Chancery of the State of Delaware of the Trust Purchase Agreement (as defined in the Offer to Purchase), (iii) approval of the Offer and the Related Transactions (as defined in the Offer to Purchase) by the Commissioners of Insurance in the States of North Carolina and California, (iv) any waiting period under the HSR Act (as defined in the Offer to Purchase) applicable to the purchase of Shares pursuant to the Offer having expired or having been terminated and (v) the satisfaction of certain other terms and conditions contained in the Offer to Purchase. 6. Tendering shareholders will not be obligated to pay brokerage fees or commissions or, except as otherwise provided in Instruction 6 of the Letter of Transmittal, stock transfer taxes with respect to the purchase of Shares by Purchaser pursuant to the Offer. If you wish to have us tender any or all of your Shares, please so instruct us by completing, executing and returning to us the instruction form contained in this letter. An envelope in which to return your instructions to us is enclosed. If you authorize the tender of your Shares, all such Shares will be tendered unless otherwise specified in your instructions. YOUR INSTRUCTIONS SHOULD BE FORWARDED TO US IN AMPLE TIME TO PERMIT US TO SUBMIT A TENDER ON YOUR BEHALF PRIOR TO THE EXPIRATION OF THE OFFER. The Offer is made only by the Offer to Purchase and the related Letter of Transmittal and is not being made to (nor will tenders be accepted from or on behalf of) holders of Shares in any jurisdiction in which the Offer or the acceptance thereof would not be in compliance with the securities, blue sky or other laws of such jurisdiction. However, Purchaser may, in its discretion, take such action as it may deem necessary to make the Offer in any jurisdiction and extend the Offer to holders of Shares in such jurisdiction. In those jurisdictions where securities laws require the Offer to be made by a licensed broker or dealer, the Offer shall be deemed to be made on behalf of Purchaser by one or more registered brokers or dealers licensed under the laws of such jurisdiction. 4 INSTRUCTIONS WITH RESPECT TO THE OFFER TO PURCHASE FOR CASH OF UP TO 35% OF THE OUTSTANDING SHARES OF COMMON STOCK OF McM CORPORATION BY IAT REINSURANCE SYNDICATE LTD. The undersigned acknowledge(s) receipt of your letter and the enclosed Offer to Purchase, dated July 23, 1998, and the related Letter of Transmittal (which, as amended from time to time, together constitute the "Offer"), in connection with the offer by IAT Reinsurance Syndicate Ltd., a Bermuda corporation, to purchase up to 35% of the outstanding shares of common stock, par value $1.00 per share (the "Shares"), of McM Corporation, a North Carolina corporation. This will instruct you to tender the number of Shares indicated below (or, if no number is indicated below, all Shares) that are held by you for the account of the undersigned, upon the terms and subject to the conditions set forth in the Offer. Number of Shares to Be Tendered* Shares -------------------- Date: - ------------------------ SIGN HERE Signature(s) - -------------------------------------------------------------------------------- (Print Name(s)) - -------------------------------------------------------------------------------- (Print Address(es)) - -------------------------------------------------------------------------------- (Area Code and Telephone Number(s)) - --------------------------------------------------------------- (Taxpayer Identification or Social Security Number(s)) - ----------------------------------------------- * Unless otherwise indicated, it will be assumed that all Shares held by us for your account are to be tendered. EX-99.A6 7 GUIDELINES FOR CERTIFICATION 1 EXHIBIT (A)(6) 2 FORM OF GUIDELINES FOR CERTIFICATION GUIDELINES FOR CERTIFICATION OF TAXPAYER IDENTIFICATION NUMBER ON SUBSTITUTE FORM W-9 GUIDELINES FOR DETERMINING THE PROPER IDENTIFICATION NUMBER TO GIVE THE PAYER. -- Social Security numbers have nine digits separated by two hyphens: e.g., 000-00-0000. Employer identification numbers have nine digits separated by only one hyphen: e.g., 00-0000000. The table below will help determine the number to give the payer.
- ----------------------------------------------------------- GIVE THE SOCIAL SECURITY FOR THIS TYPE OF ACCOUNT: NUMBER OF-- - ----------------------------------------------------------- 1. An individual's account The individual 2. Two or more individuals (joint The actual owner of account) the account or, if combined funds, any one of the individuals(1) 3. Husband and wife (joint The actual owner of account) the account or, if joint funds, either person(1) 4. Custodian account of a minor The minor(2) (Uniform Gift to Minors Act) 5. Adult and minor (joint The adult or, if the account) minor is the only contributor, the minor(1) 6. Account in the name of The ward, minor, or guardian or committee for a incompetent person(3) designated ward, minor, or incompetent person 7. a. The usual revocable savings The grantor- trust account (grantor is trustee(1) also trustee) b. So-called trust account The actual owner(1) that is not a legal or valid trust under State law 8. Sole proprietorship account The owner(4) - -----------------------------------------------------------
- ----------------------------------------------------------- GIVE THE EMPLOYER IDENTIFICATION FOR THIS TYPE OF ACCOUNT: NUMBER OF-- - ----------------------------------------------------------- 9. A valid trust, estate, or Legal entity (Do not pension trust furnish the identifying number of the personal representative or trustee unless the legal entity itself is not designated in the account title.)(5) 10. Corporate account The corporation 11. Religious, charitable, or The organization educational organization account 12. Partnership account held in The partnership the name of the business 13. Association, club, or other The organization tax-exempt organization 14. A broker or registered nominee The broker or nominee 15. Account with the Department of The public entity Agriculture in the name of a public entity (such as a State or local government, school district, or prison) that receives agricultural program payments - -----------------------------------------------------------
(1) List first and circle the name of the person whose number you furnish. (2) Circle the minor's name and furnish the minor's social security number. (3) Circle the ward's, minor's or incompetent person's name and furnish such person's social security number. (4) Show the name of the owner. You may also enter your business or "doing business as" name. Furnish the owner's social security number or the employer identification number of the sole proprietorship. (5) List first and circle the name of the legal trust, estate, or pension trust. Note: If no name is circled when there is more than one name, the number will be considered to be that of the first name listed. 3 GUIDELINES FOR CERTIFICATION OF TAXPAYER IDENTIFICATION NUMBER ON SUBSTITUTE FORM W-9 PAGE 2 OBTAINING A NUMBER If you do not have a taxpayer identification number or you do not know your number, obtain Form SS-5, Application for a Social Security Number Card (for individuals), or Form SS-4, Application for Employer Identification Number (for businesses and all other entities), at an office of the Social Security Administration or the Internal Revenue Service. To complete Substitute Form W-9, if you do not have a taxpayer identification number, write "Applied For" in the space for the taxpayer identification number in Part 1, sign and date the Form, and give it to the requester. Generally, you will then have 60 days to obtain a taxpayer identification number and furnish it to the requester. If the requester does not receive your taxpayer identification number within 60 days, backup withholding, if applicable, will begin and will continue until you furnish your taxpayer identification number to the requester. PAYEES EXEMPT FROM BACKUP WITHHOLDING Payees specifically exempted from backup withholding on ALL payments include the following: - A corporation. - A financial institution. - An organization exempt from tax under section 501(a), or an individual retirement plan, or a custodial account under section 403(b)(7). - The United States or any agency or instrumentality thereof. - A State, the District of Columbia, a possession of the United States, or any subdivision or instrumentality thereof. - A foreign government or a political subdivision, agency or instrumentality thereof. - An international organization or any agency or instrumentality thereof. - A registered dealer in securities or commodities registered in the United States or a possession of the United States. - A real estate investment trust. - A common trust fund operated by a bank under section 584(a). - An entity registered at all times during the tax year under the Investment Company Act of 1940. - A foreign central bank of issue. - Payments of dividends and patronage dividends not generally subject to backup withholding include the following: - Payments to nonresident aliens subject to withholding under section 1441. - Payments to partnerships not engaged in a trade or business in the United States and which have at least one nonresident partner. - Payments of patronage dividends where the amount received is not paid in money. - Payments made by certain foreign organizations. - Payments made to a nominee. Payments of interest not generally subject to backup withholding include the following: - Payments of interest on obligations issued by individuals. NOTE: You may be subject to backup withholding if (i) this interest is $600 or more, (ii) the interest is paid in the course of the payer's trade or business and (iii) you have not provided your correct taxpayer identification number to the payer. - Payments of tax-exempt interest (including exempt-interest dividends under section 852). - Payments described in section 6049(b)(5) to non-resident aliens. - Payments on tax-free covenant bonds under section 1451. - Payments made by certain foreign organizations. - Payments made to a nominee. EXEMPT PAYEES DESCRIBED ABOVE SHOULD FILE A SUBSTITUTE FORM W-9 TO AVOID POSSIBLE ERRONEOUS BACKUP WITHHOLDING. FILE THIS FORM WITH THE PAYER, FURNISH YOUR TAXPAYER IDENTIFICATION NUMBER, WRITE "EXEMPT" ON THE FACE OF THE FORM, SIGN AND DATE THE FORM AND RETURN IT TO THE PAYER. Certain payments other than interest, dividends, and patronage dividends that are not subject to information reporting are also not subject to backup withholding. For details, see the regulations under sections 6041, 6041A(a), 6045, and 6050A. PRIVACY ACT NOTICE.--Section 6109 requires most recipients of dividends, interest, or other payments to give taxpayer identification numbers to payers who must report the payments to IRS. The IRS uses the numbers for identification purposes and to help verify the accuracy of your tax return. Payers must be given the numbers whether or not recipients are required to file tax returns. Payers must generally withhold 31% of taxable interest, dividends, and certain other payments to a payee who does not furnish a taxpayer identification number to a payer. Certain penalties may also apply. PENALTIES (1) PENALTY FOR FAILURE TO FURNISH TAXPAYER IDENTIFICATION NUMBER.--If you fail to furnish your correct taxpayer identification number to a payer, you are subject to a penalty of $50 for each such failure unless your failure is due to reasonable cause and not to willful neglect. (2) CIVIL PENALTY FOR FALSE STATEMENTS WITH RESPECT TO WITHHOLDING.--If you make a false statement with no reasonable basis which results in no imposition of backup withholding, you are subject to a penalty of $500. (3) CRIMINAL PENALTY FOR FALSIFYING INFORMATION.--If you falsify certifications or affirmations, you are subject to criminal penalties including fines and/or imprisonment. FOR ADDITIONAL INFORMATION CONTACT YOUR TAX CONSULTANT OR THE INTERNAL REVENUE SERVICE Unless otherwise noted herein, all references to section numbers or to regulations are references to the Internal Revenue Code of 1986, as amended, and the regulations promulgated thereunder. EX-99.A7 8 SUMMARY ADVERTISEMENT AS PUBLISHED 1 EXHIBIT (A)(7) 2 SUMMARY ADVERTISEMENT AS PUBLISHED This announcement is neither an offer to purchase nor a solicitation of an offer to sell Shares. The Offer is made only by the Offer to Purchase dated July 23, 1998, and the related Letter of Transmittal and is not being made to (nor will tenders be accepted from or on behalf of) holders of Shares in any jurisdiction in which the Offer or the acceptance thereof would not be in compliance with the securities, blue sky or other laws of such jurisdiction. NOTICE OF OFFER TO PURCHASE FOR CASH UP TO 35% OF THE OUTSTANDING SHARES OF COMMON STOCK OF McM CORPORATION AT $3.65 NET PER SHARE BY IAT REINSURANCE SYNDICATE LTD. IAT Reinsurance Syndicate Ltd., a Bermuda corporation ("Purchaser"), is offering to purchase up to 35% of the outstanding shares (the "Shares") of common stock, par value $1.00 per Share (the "Common Stock"), of McM Corporation, a North Carolina corporation (the "Company"), at a price of $3.65 per Share, net to the seller in cash, without interest thereon, upon the terms and subject to the conditions set forth in the Offer to Purchase, dated July 23, 1998 (the "Offer to Purchase"), and in the related Letter of Transmittal (which, as amended from time to time, together constitute the "Offer"). According to the Company, there were 4,706,388 Shares outstanding as of July 16, 1998. Assuming no change in such number, the Offer is to purchase up to 1,647,235 Shares (subject to increase or decrease in the number of outstanding Shares at the time of purchase in accordance with the Offer). If more than 35% of the issued and outstanding Shares are validly tendered at or prior to the Expiration Date (as defined in the Offer to Purchase), and not withdrawn, Purchaser will, upon the terms and subject to the conditions of the Offer, accept for payment and pay for 35% of the then issued and outstanding Shares on a pro rata basis (with adjustments to avoid purchases of fractional Shares), according to the number of Shares properly tendered by each shareholder at or prior to the Expiration Date and not withdrawn. The McMillen Trust (the "Trust"), which currently holds approximately 65% of the Shares, has agreed with Purchaser not to tender any of its Shares into the Offer. Accordingly, Purchaser does not anticipate that more than 35% of the outstanding Shares will be tendered or that proration will be required. THE OFFER, PRORATION PERIOD AND WITHDRAWAL RIGHTS WILL EXPIRE AT 5:00 P.M., NEW YORK CITY TIME, ON FRIDAY, AUGUST 21, 1998, UNLESS THE OFFER IS EXTENDED. THE OFFER IS CONDITIONED UPON, AMONG OTHER THINGS, (I) THERE BEING VALIDLY TENDERED AND NOT WITHDRAWN PRIOR TO THE EXPIRATION OF THE OFFER SUCH NUMBER OF SHARES THAT WOULD REPRESENT AT LEAST 32% OF THE VOTING POWER OF THE OUTSTANDING SHARES ON A FULLY DILUTED BASIS AT THE EXPIRATION OF THE OFFER, (II) APPROVAL OF THE TRUST PURCHASE AGREEMENT (AS DEFINED BELOW) BY THE COURT OF CHANCERY OF THE STATE OF DELAWARE, (III) APPROVAL OF THE OFFER AND THE RELATED TRANSACTIONS (AS DEFINED BELOW) BY THE COMMISSIONERS OF INSURANCE IN THE STATES OF NORTH CAROLINA AND CALIFORNIA, (IV) ANY WAITING PERIOD UNDER THE HART-SCOTT-RODINO ANTI-TRUST IMPROVEMENTS ACT OF 1976, AS AMENDED, APPLICABLE TO THE PURCHASE OF SHARES PURSUANT TO THE OFFER HAVING EXPIRED OR HAVING BEEN TERMINATED AND (V) THE SATISFACTION OF CERTAIN OTHER TERMS AND CONDITIONS CONTAINED IN THE OFFER TO PURCHASE. 3 The Offer is being made pursuant to an Offer and Rights Agreement, dated as of July 16, 1998 (the "Offer and Rights Agreement"), between Purchaser and the Company. Following the Offer, Purchaser intends to effect the Related Transactions (as defined below). As soon as practicable after the purchase of Shares pursuant to the Offer and the satisfaction of the other conditions set forth in the Offer and Rights Agreement, Purchaser will, pursuant to the Trust Purchase Agreement dated as of July 16, 1998 between Purchaser and the Trust, consummate the purchase of approximately 14% of the outstanding Shares from the Trust and will make a deposit (the "Deposit") with the Trust, in the amount of $3.65 per Share, with respect to the remaining 51% of the outstanding Shares of the Company held by the Trust (the "Retained Shares"). The Trust Purchase Agreement does not constitute a commitment of either Purchaser or the Trust to buy or sell the Retained Shares, nor does it constitute any agreement with respect to a price for the Retained Shares. The Deposit becomes the sole property of the Trust upon deposit, subject only to the conditions described in the Trust Purchase Agreement. Pursuant to a Tender Agreement between Purchaser and each of the Company's directors, each director has agreed, among other things, to tender in the Offer and not withdraw approximately 481,932 Shares (unless such director would as a result of such tender incur liability under Section 16(b) of the Securities Exchange Act of 1934) and to cancel options to purchase approximately 157,962 Shares held by such director in return for a per Share cash payment, subject to applicable withholding taxes, equal to the positive difference, if any, between $3.65 and the exercise price for such Share. Following the Offer, pursuant to the Offer and Rights Agreement and the Tender Agreement, the Company and its directors will cause designees of Purchaser to constitute a majority of the Company's Board of Directors. Additionally, following the Offer, pursuant to the Offer and Rights Agreement, the Company and its directors have agreed to cause the issuance to Purchaser, for a nominal price, of 60,000 shares of a newly created class of Preferred Stock of the Company with a liquidation preference, payable before any distribution upon the Common Stock, of $1,000 per share. Such preferred stock purchase rights will be exercisable in the event (i) any person other than Purchaser causes Purchaser's designees to cease to control a majority of the Company's Board of Directors or (ii) the Trust sells any of the Retained Shares to a third party (all transactions, other than the Offer, contemplated by the Offer and Rights Agreement and the Trust Purchase Agreement, a "Related Transaction"). The purpose of the Offer and the Related Transactions is to acquire control of a substantial minority position in the entire equity interest of the Company and to secure an opportunity to negotiate the subsequent acquisition of the balance of such equity interest no later than June 1, 2008. Although Purchaser currently expects that, following consummation of the Offer and the Related Transactions, the business and operations of the Company will generally be continued as currently conducted and that the Company's current management would be retained, Purchaser expects that the right to designate a majority of the Company's Board of Directors, combined with the Rights issuable pursuant to the Offer and Rights Agreement, would permit Purchaser to exert substantial influence over the Company's conduct of its business and operations. THE BOARD OF DIRECTORS OF THE COMPANY HAS UNANIMOUSLY APPROVED THE OFFER AND THE OFFER AND RIGHTS AGREEMENT, HAS DETERMINED THAT THE OFFER AND THE OFFER AND RIGHTS AGREEMENT ARE FAIR TO, AND IN THE BEST INTERESTS OF, THE COMPANY AND THE COMPANY'S SHAREHOLDERS AND RECOMMENDS THAT HOLDERS OF SHARES ACCEPT THE OFFER AND TENDER THEIR SHARES PURSUANT TO THE OFFER. For purposes of the Offer, Purchaser will be deemed to have accepted for payment (and thereby purchased) Shares validly tendered and not withdrawn as, if and when Purchaser gives oral or written notice to Wachovia Bank, N.A. (the "Depositary") of Purchaser's acceptance for payment of such Shares pursuant to the Offer. Upon the terms and subject to the conditions of the Offer, payment for Shares accepted for payment pursuant to the Offer will be made by deposit of the purchase price therefor with the Depositary, which will act as agent for tendering shareholders for the purpose of receiving payments from Purchaser and transmitting such payments to tendering shareholders whose Shares have been accepted for payment. Under no circumstances will interest on the purchase price for Shares be paid, regardless of any delay in making such payment. In all cases, payment for Shares tendered and accepted for payment pursuant to the Offer will be made only after timely receipt by the Depositary of (i) the certificates evidencing such Shares (the "Share 4 Certificates") or timely confirmation of a book-entry transfer of such Shares into the Depositary's account at one of the Book-Entry Transfer Facilities (as defined in Section 2 of the Offer to Purchase) pursuant to the procedures set forth in Section 3 of the Offer to Purchase, (ii) the Letter of Transmittal (or a facsimile thereof), properly completed and duly executed, with any required signature guarantees, or an Agent's Message (as defined in Section 2 of the Offer to Purchase) in connection with a book-entry transfer, and (iii) any other documents required by the Letter of Transmittal. In accordance with the Offer to Purchase, holders of options to purchase Shares under the Company's stock option plans and holders of Shares under the Company's employee stock purchase plan may tender such Shares in accordance with special instructions provided with the Offer to Purchase. Purchaser expressly reserves the right (but will not be obligated), in its sole discretion, at any time and from time to time, to extend for any reason, including the occurrence of any of the conditions specified in Section 14 of the Offer to Purchase, the period of time during which the Offer is open, by giving oral or written notice of such extension to the Depositary. Any such extension will be followed as promptly as practicable by public announcement thereof, such announcement to be made no later than 9:00 a.m., New York City time, on the next business day after the previously scheduled expiration date of the Offer. During any such extension, all Shares previously tendered and not withdrawn will remain subject to the Offer, subject to the rights of a tendering shareholder to withdraw such shareholder's Shares. There can be no assurances that Purchaser will exercise its right to extend the Offer. If any of the conditions set forth in the Offer to Purchase that relate to Purchaser's obligation to purchase the Shares are not satisfied by 5:00 p.m., New York City time, on Friday, August 21, 1998 (or the latest time and date at which the Offer, if extended by Purchaser, shall expire), Purchaser may (i) extend the Offer and, subject to applicable withdrawal rights, retain all tendered Shares until the expiration of the Offer as so extended, (ii) subject to complying with applicable rules and regulations of the Securities and Exchange Commission, accept for payment all Shares so tendered and not extend the Offer, or (iii) terminate the Offer and not accept for payment any Shares and return all tendered Shares to tendering shareholders. Tenders of Shares made pursuant to the Offer are irrevocable except that such Shares may be withdrawn at any time prior to 5:00 p.m., New York City time, on Friday, August 21, 1998 (or the latest time and date at which the Offer, if extended by Purchaser, shall expire) and, unless theretofore accepted for payment by Purchaser pursuant to the Offer, may also be withdrawn at any time after September 21, 1998. For the withdrawal to be effective, a written or facsimile transmission notice of withdrawal must be timely received by the Depositary at one of its addresses set forth on the back cover page of the Offer to Purchase. Any such notice of withdrawal must specify the name of the person who tendered the Shares to be withdrawn, the number of Shares to be withdrawn and the name of the registered holder of such Shares, if different from that of the person who tendered such Shares. If Share Certificates evidencing Shares to be withdrawn have been delivered or otherwise identified to the Depositary, then, prior to the physical release of such Share Certificates, the serial numbers shown on such Share Certificates must be submitted to the Depositary and the signature(s) on the notice of withdrawal must be guaranteed by an Eligible Institution (as defined in Section 3 of the Offer to Purchase), unless such Shares have been tendered for the account of an Eligible Institution. If Shares have been tendered pursuant to the procedure for book-entry transfer as set forth in Section 3 of the Offer to Purchase, any notice of withdrawal must also specify the name and number of the account of the Book-Entry Transfer Facility to be credited with the withdrawn Shares, in which case a notice of withdrawal will be effective if delivered to the Depositary by any method of delivery described in Section 4 of the Offer to Purchase. Withdrawals of Shares may not be rescinded. All questions as to the form and validity (including the time of receipt) of any notice of withdrawal will be determined by Purchaser, in its sole discretion, whose determination will be final and binding. The information required to be disclosed by Rule 14d-6(e)(1)(vii) of the General Rules and Regulations under the Securities Exchange Act of 1934, as amended, is contained in the Offer to Purchase and is incorporated herein by reference. The Company has provided Purchaser with the Company's shareholder list and security position listings for the purpose of disseminating the Offer to holders of Shares. The Offer to Purchase and the related Letter 5 of Transmittal and other related materials will be mailed to record holders of Shares whose names appear on the Company's shareholder list and will be furnished to brokers, dealers, commercial banks, trust companies and similar persons whose names, or the names of whose nominees, appear on the shareholder list or, if applicable, who are listed as participants in a clearing agency's security position listing for subsequent transmittal to beneficial owners of Shares. THE OFFER TO PURCHASE AND THE RELATED LETTER OF TRANSMITTAL CONTAIN IMPORTANT INFORMATION THAT SHOULD BE READ CAREFULLY BEFORE ANY DECISION IS MADE WITH RESPECT TO THE OFFER. Questions and requests for assistance may be directed to the Information Agent at its address and telephone number as set forth below. Purchaser will not pay any fees or commissions to any broker or dealer or to any other person (other than the Information Agent) for soliciting tenders of Shares pursuant to the Offer. Additional copies of the Offer to Purchase, the Letter of Transmittal and all other tender offer materials may be obtained from the Information Agent or from brokers, dealers, commercial banks and trust companies, and will be furnished promptly at Purchaser's expense. The Information Agent for the Offer is: (MACKENZIE LOGO) 156 Fifth Avenue New York, New York 10010 (212) 929-5500 (Call Collect) or CALL TOLL FREE (800) 322-2885 July 23, 1998 EX-99.A8 9 JOINT PRESS RELEASE 1 EXHIBIT (A)(8) 2 IAT TO ACQUIRE UP TO 49% STAKE IN MCM RALEIGH, N.C., July 17 /PRNewswire/ -- McM Corporation (Nasdaq: MCMC), a Raleigh based insurance holding company ("McM"), and IAT Reinsurance Syndicate Ltd., a Bermuda based insurance and investment company ("IAT"), jointly announce the signing of an agreement pursuant to which IAT intends to acquire up to 49% of McM's outstanding common stock for a cash price of $3.65 per share. Of the 49% stake IAT intends to acquire, up to 35% will be acquired in a public cash tender offer and 14% will be acquired from the McMillen Trust, pursuant to an agreement between IAT and the Trust. The McMillen Trust currently owns approximately 65% of McM's outstanding shares. Under the agreement, which has been unanimously approved by McM's Board of Directors, the tender offer will commence no later than Thursday, July 23, 1998, and will be conditioned on the satisfaction of customary conditions and certain governmental approvals, including the approval of the North Carolina Department of Insurance. The tender offer will be made only through offering documents filed with the Securities and Exchange Commission and mailed to McM shareholders. PaineWebber Incorporated has acted as financial advisor to McM in connection with the transaction. Contact: George E. King, McM Corporation, 919-833-1600. EX-99.A9 10 LETTER FROM THE COMPANY/STOCK PURCHASE PLAN 1 EXHIBIT (A)(9) 2 LETTER TO PARTICIPANTS IN THE 1996 EMPLOYEE STOCK PURCHASE PLAN OF MCM CORPORATION OFFER TO PURCHASE FOR CASH UP TO 35% OF THE OUTSTANDING SHARES OF COMMON STOCK OF McM CORPORATION AT $3.65 NET PER SHARE BY IAT REINSURANCE SYNDICATE LTD. THE OFFER, PRORATION PERIOD AND WITHDRAWAL RIGHTS WILL EXPIRE AT 5:00 P.M., NEW YORK CITY TIME, ON FRIDAY, AUGUST 21, 1998, UNLESS THE OFFER IS EXTENDED. July 23, 1998 To Participants in the 1996 Employee Stock Purchase Plan of McM Corporation ("ESPP"): Enclosed for your consideration are an Offer to Purchase, dated July 23, 1998 (the "Offer to Purchase"), a related Letter of Transmittal and a Notice of Instructions (ESPP) (which, as amended from time to time, together constitute the "Offer") in connection with the offer by IAT Reinsurance Syndicate Ltd., a Bermuda corporation ("Purchaser"), to purchase up to 35% of the issued and outstanding shares of common stock, par value $1.00 per share (the "Shares"), of McM Corporation, a North Carolina corporation (the "Company"), at a price of $3.65 per Share, net to the seller in cash, without interest thereon, upon the terms and subject to the conditions set forth in the Offer. The Offer is being made in connection with the Offer and Rights Agreement, dated as of July 16, 1998, between Purchaser and the Company (the "Offer and Rights Agreement"). THE COMPANY IS THE HOLDER OF RECORD OF SHARES HELD FOR YOUR ACCOUNT IN THE ESPP. A TENDER OF SUCH SHARES CAN BE MADE ONLY BY THE COMPANY AS THE HOLDER OF RECORD AND PURSUANT TO YOUR INSTRUCTIONS. THE LETTER OF TRANSMITTAL IS FURNISHED TO YOU FOR YOUR INFORMATION ONLY AND CANNOT BE USED BY YOU TO TENDER SHARES HELD BY THE COMPANY FOR YOUR ACCOUNT. Accordingly, we request instructions as to whether you wish to have us tender on your behalf any or all of the Shares held in your ESPP account, upon the terms and subject to the conditions set forth in the Offer. Your attention is invited to the following: 1. The tender price is $3.65 per Share, net to the seller in cash without interest. 2. The Offer is being made for up to 35% of the outstanding Shares. If more than 35% of the issued and outstanding Shares are validly tendered at or prior to the Expiration Date (as defined in the Offer to Purchase), and not withdrawn, Purchaser will, upon the terms and subject to the conditions of the Offer, accept for payment and pay for 35% of the then issued and outstanding Shares on a pro rata basis (with adjustments to avoid purchases of fractional Shares), according to the number of Shares properly 3 tendered by each shareholder at or prior to the Expiration Date and not withdrawn. The McMillen Trust, which currently holds approximately 65% of the Shares, has agreed with Purchaser not to tender any of its Shares in the Offer. Accordingly, it is not anticipated that more than 35% of the outstanding Shares will be tendered or that proration will be required. 3. The Board of Directors of the Company has unanimously approved the Offer, the Offer and Rights Agreement (as defined in the Offer to Purchase), has determined that the Offer and the Offer and Rights Agreement are fair to, and in the best interests of, the Company and the Company's shareholders and recommends that holders of Shares accept the Offer and tender their Shares pursuant to the Offer. 4. The Offer, proration period and withdrawal rights will expire at 5:00 p.m., New York City time, on Friday, August 21, 1998, unless the Offer is extended. 5. The Offer is conditioned upon, among other things, (i) there being validly tendered and not withdrawn prior to the expiration of the Offer such number of Shares that would represent at least 32% of the voting power of the outstanding Shares on a fully diluted basis at the expiration of the Offer, (ii) approval by the Court of Chancery of the State of Delaware of the Trust Purchase Agreement (as defined in the Offer to Purchase), (iii) approval of the Offer and the Related Transactions (as defined in the Offer to Purchase) by the Commissioners of Insurance in the States of North Carolina and California, (iv) any waiting period under the HSR Act (as defined in the Offer to Purchase) applicable to the purchase of Shares pursuant to the Offer having expired or having been terminated and (v) the satisfaction of certain other terms and conditions contained in the Offer to Purchase. 6. Tendering shareholders will not be obligated to pay brokerage fees or commissions or, except as otherwise provided in Instruction 6 of the Letter of Transmittal, stock transfer taxes with respect to the purchase of Shares by Purchaser pursuant to the Offer. 7. Shares in ESPP accounts as to which we have not received instructions from participants will not be tendered in the Offer. 8. Each tendering shareholder is required to provide the Depositary with a correct Taxpayer Identification Number ("TIN") on the Substitute Form W-9 which is provided under "Important Tax Information" below, and to certify, under penalties of perjury, that such number is correct and that such shareholder is not subject to backup withholding of federal income tax. If a tendering shareholder has been notified by the Internal Revenue Service that such shareholder is subject to backup withholding, such shareholder must cross out item (2) of the Certification box of the Substitute Form W-9, unless such shareholder has since been notified by the Internal Revenue Service that such shareholder is no longer subject to backup withholding. Failure to provide the information on the Substitute Form W-9 may subject the tendering shareholder to 31 percent federal income tax withholding on the payment of the purchase price of all Shares purchased from such shareholder. If the tendering shareholder has not been issued a TIN and has applied for one or intends to apply for one in the near future, such shareholder should write "Applied For" in the space provided for the TIN in Part I of the Substitute Form W-9, and sign and date the Substitute Form W-9. If "Applied For" is written in Part I and the Depositary is not provided with a TIN within 60 days, the Depositary will withhold 31 percent on all payments of the purchase price to such shareholder until a TIN is provided to the Depositary. 9. Cash received from any Shares in your ESPP account tendered and accepted for payment by the Purchaser will be distributed to participants by check (less applicable federal withholding taxes) and any Shares in your ESPP account tendered but not accepted by the Purchaser will remain in your account. If you wish to have us tender any or all of the Shares held in your ESPP account, please so instruct us by completing, executing, detaching and returning to Wachovia Bank, N.A. (the "Depositary") the instruction form contained in this letter. An envelope to return your instruction to the Depositary is enclosed. The Depositary will receive such instruction form on our behalf and is hereby authorized and instructed to forward such instruction form to us. If you authorize tender of your Shares in your ESPP account, all such Shares will be tendered unless otherwise indicated in such instruction form. PLEASE FORWARD YOUR INSTRUCTIONS TO THE DEPOSITARY SO THAT THEY ARE RECEIVED BY THE DEPOSITARY NO 4 LATER THAN 5:00 P.M., NEW YORK CITY TIME, ON WEDNESDAY, AUGUST 19, 1998, TO ALLOW THE COMPANY AMPLE TIME TO TENDER YOUR SHARES ON YOUR BEHALF PRIOR TO THE EXPIRATION OF THE OFFER. The Offer is made only by the Offer to Purchase and the related Letter of Transmittal and is not being made to (nor will tenders be accepted from or on behalf of) holders of Shares in any jurisdiction in which the Offer or the acceptance thereof would not be in compliance with the securities, blue sky or other laws of such jurisdiction. However, Purchaser may, in its discretion, take such action as it may deem necessary to make the Offer in any jurisdiction and extend the Offer to holders of Shares in such jurisdiction. In those jurisdictions where securities laws require the Offer to be made by a licensed broker or dealer, the Offer shall be deemed to be made on behalf of Purchaser by one or more registered brokers or dealers licensed under the laws of such jurisdiction. Any inquiries you may have with respect to your ESPP account should be addressed to Michael Blinson, Corporate Secretary of the Company at (919) 833-1600, and any inquiries you may have with respect to the Offer should be addressed to MacKenzie Partners, Inc. (the "Information Agent") at its address and telephone number set forth on the back cover page of the Offer to Purchase. Very truly yours, McM Corporation 5 NOTICE OF INSTRUCTIONS (ESPP) To Tender Shares of Common Stock of McM CORPORATION PURSUANT TO THE OFFER TO PURCHASE DATED JULY 23, 1998 OF IAT REINSURANCE SYNDICATE LTD. THE OFFER, PRORATION PERIOD AND WITHDRAWAL RIGHTS WILL EXPIRE AT 5:00 P.M., NEW YORK CITY TIME, FRIDAY, AUGUST 21, 1998, UNLESS THE OFFER IS EXTENDED. The Depositary for the Offer is: WACHOVIA BANK, N.A. By Registered Mail: By Overnight Courier or Hand: c/o Wachovia Bank, N.A. c/o Wachovia Bank, N.A. Shareholder Services Shareholder Services Department P.O. Box 3001 Wachovia East Building, Winston-Salem, North Carolina 27102 2nd Floor 301 North Church Street Winston-Salem, North Carolina 27101
The undersigned acknowledge(s) receipt of your letter and the enclosed Offer to Purchase dated July 23, 1998 (the "Offer to Purchase"), the related Letter of Transmittal and this Notice of Instructions (ESPP)(which, as amended from time to time, together constitute the "Offer"), in connection with the offer by IAT Reinsurance Syndicate Ltd., a Bermuda corporation (the "Purchaser"), to purchase up to 35% of the issued and outstanding shares of common stock, par value $1.00 per share (the "Shares"), of McM Corporation, a North Carolina corporation (the "Company"). This will instruct the Company to tender to the Purchaser the number of Shares indicated below (or if no number is indicated below, all Shares) which are held by the Company in the Employee Stock Purchase Plan of MCM Corporation ("ESPP") for the account of the undersigned, upon the terms and subject to the conditions set forth in the Offer. NOTE: Shares in ESPP accounts as to which the Company has not received instructions will not be tendered in the Offer. 6 Number of Shares to Be Tendered(1) Shares ------------------------ SIGN HERE - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- Signature(s) - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- (Print Name(s)) - -------------------------------------------------------------------------------- (Daytime Area Code and Telephone Number(s)) - -------------------------------------------------------------------------------- (Taxpayer Identification or Social Security Number(s)) (1) Unless otherwise indicated, it will be assumed that all Shares held by the Company for your account are to be tendered. 7 IMPORTANT TAX INFORMATION Under the federal income tax law, a holder whose tendered Shares are accepted for payment is required to provide the Depositary (as payer) with such holder's correct TIN on Substitute Form W-9 below. If such holder is an individual, the TIN is such holder's social security number. If the Depositary is not provided with the correct TIN, the holder may be subject to a $50 penalty imposed by the Internal Revenue Service. In addition, payments that are made to such holder with respect to Shares purchased pursuant to the Offer may be subject to backup withholding of 31 percent (as described below). Certain holders (including, among others, all corporations and certain foreign individuals) are not subject to these backup withholding and reporting requirements. In order for a foreign individual to qualify as an exempt recipient, such individual must submit an Internal Revenue Service Form W-8, signed under penalties of perjury, attesting to such individual's exempt status. A Form W-8 may be obtained from the Depositary. See the enclosed Guidelines for Certification of Taxpayer Identification Number on Substitute Form W-9 for additional instructions. If backup withholding applies, the Depositary is required to withhold 31 percent of any payments made to the holder. Backup withholding is not an additional tax. Rather, the tax liability of persons subject to backup withholding will be reduced by the amount of tax withheld. If withholding results in an overpayment of taxes, a refund may be obtained from the Internal Revenue Service. PURPOSE OF SUBSTITUTE FORM W-9 To prevent backup withholding on payments that are made to a holder with respect to Shares purchased pursuant to the Offer, the holder is required to notify the Depositary of such holder's correct TIN by completing the form below certifying (a) that the TIN provided on Substitute Form W-9 is correct (or that such holder is awaiting a TIN), and (b) that (i) such holder is exempt from backup withholding, (ii) such holder has not been notified by the Internal Revenue Service that such holder is subject to backup withholding as a result of a failure to report all interest or dividends or (iii) the Internal Revenue Service has notified such holder that such holder is no longer subject to backup withholding. WHAT NUMBER TO GIVE THE DEPOSITARY The holder is required to give the Depositary the social security number or employer identification number of the holder of the Shares tendered hereby. If the tendering holder has not been issued a TIN and has applied for a number or intends to apply for a number in the near future, the holder should write "Applied For" in the space provided for the TIN in Part I, and sign and date the Substitute Form W-9. If "Applied For" is written in Part I and the Depositary is not provided with a TIN within 60 days, the Depositary will withhold 31 percent of all payments of the purchase price to such holder until a TIN is provided to the Depositary. 8 PAYER'S NAME: WACHOVIA BANK, N.A. - --------------------------------------------------------------------------------
SUBSTITUTE PART I -- Taxpayer Identification FORM W-9 Number -- For all accounts, enter taxpayer ------------------------------ identification number in the box at right. Social Security Number (For most individuals, this is your social security number. If you do not have a ------------------------------ number, see "Obtaining a Number" in the Employer Identification Number enclosed Guidelines.) Certify by signing (If awaiting TIN, write "Applied For") and dating below. Note: If the account is in more than one name, see the chart in the enclosed Guidelines to determine which number to give the payer. --------------------------------------------------------------------------------------- DEPARTMENT OF THE TREASURY PART II -- For Payees Exempt From Backup Withholding, see the enclosed Guidelines INTERNAL REVENUE SERVICE and complete as instructed therein. --------------------------------------------------------------------------------------- OR CERTIFICATION -- Under penalties of perjury, I Certify That: (1) The number shown on this form is my correct Taxpayer Identification Number (or I am waiting for a number to be issued to me), and PAYER'S REQUEST FOR TAXPAYER (2) I am not subject to backup withholding either because (a) I am exempt from IDENTIFICATION NUMBER ("TIN") backup withholding, (b) I have not been notified by the Internal Revenue Service (the "IRS") that I am subject to backup withholding as a result of failure to report all interest or dividends, or (c) the IRS has notified me that I am no longer subject to backup withholding. CERTIFICATE INSTRUCTIONS -- You must cross out item(2) above if you have been notified by the IRS that you are subject to backup withholding because of underreporting interest or dividends on your tax return. However, if after being notified by the IRS that you were subject to backup withholding you received another notification from the IRS that you are no longer subject to backup withholding, do not cross out item (2). (See also instructions in the enclosed Guidelines.) Signature Date --------------------------------- ------------------------------- NOTE: FAILURE TO COMPLETE AND RETURN THIS FORM MAY RESULT IN BACKUP WITHHOLDING OF 31% OF ANY PAYMENT MADE TO YOU PURSUANT TO THE OFFER. PLEASE REVIEW THE ENCLOSED GUIDELINES FOR CERTIFICATION OF TAXPAYER IDENTIFICATION NUMBER ON SUBSTITUTE FORM W-9 FOR ADDITIONAL DETAILS.
- -------------------------------------------------------------------------------- EX-99.A10 11 LETTER FROM THE COMPANY/STOCK OPTION PLANS 1 EXHIBIT (A)(10) 2 LETTER TO HOLDERS OF MCM CORPORATION STOCK OPTIONS OFFER TO PURCHASE FOR CASH UP TO 35% OF THE OUTSTANDING SHARES OF COMMON STOCK OF McM CORPORATION AT $3.65 NET PER SHARE BY IAT REINSURANCE SYNDICATE LTD. THE OFFER, PRORATION PERIOD AND WITHDRAWAL RIGHTS WILL EXPIRE AT 5:00 P.M., NEW YORK CITY TIME, ON FRIDAY, AUGUST 21, 1998, UNLESS THE OFFER IS EXTENDED. July 23, 1998 To Holders of Options Granted under the McM Corporation Stock Option Plans identified herein: Enclosed for your consideration are an Offer to Purchase, dated July 23, 1998 (the "Offer to Purchase"), a related Letter of Transmittal and Notice of Instructions (Options) (which, as amended from time to time, together constitute the "Offer"), in connection with the offer by IAT Reinsurance Syndicate Ltd., a Bermuda corporation ("Purchaser"), to purchase up to 35% of the issued and outstanding shares of common stock, par value $1.00 per share (the "Shares"), of McM Corporation, a North Carolina corporation (the "Company"), at a price of $3.65 per Share, net to the seller in cash, without interest thereon, upon the terms and subject to the conditions set forth in the Offer. The Offer is being made in connection with the Offer and Rights Agreement, dated as of July 16, 1998, between Purchaser and the Company (the "Offer and Rights Agreement"). The Offer applies to Shares ("Option Shares") subject to options ("Options") granted under the Company's 1986 Employee Incentive Stock Option Plan and 1996 Employee Incentive Stock Option Plan (the "Plans"). Any holders of Options under the Plans may, in lieu of exercising such Options and tendering such Shares in the Offer, and subject to the terms and conditions of the Offer, cancel their Options in return for a per Option Share cash payment from Purchaser, subject to applicable withholding taxes, equal to the positive difference, if any, between $3.65 and the exercise price for such Option Share. IF THE PER SHARE EXERCISE PRICE APPLICABLE TO YOUR OPTION(S) EXCEEDS $3.65, UNDER THE CURRENT TERMS OF THE OFFER YOU WOULD NOT BE ENTITLED TO RECEIVE ANY CASH PAYMENT IN RETURN FOR THE CANCELLATION OF SUCH OPTION(S). 3 Accordingly, we request instructions as to whether you wish to cancel the Options held by you upon the terms and subject to the conditions set forth in the Offer. Your attention is invited to the following: 1. You will not pay the exercise price in cash for the Options. Instead, your Options will be cancelled and, subject to the terms of the Offer, Purchaser will pay you an amount in cash equal to the positive difference, if any, between $3.65 and your applicable per Option Share exercise price. Applicable taxes that Purchaser is required to deduct will be subtracted from the amount of cash you receive. 2. The Board of Directors of the Company has unanimously approved the Offer, the Offer and Rights Agreement (as defined in the Offer to Purchase), has determined that the Offer and the Offer and Rights Agreement are fair to, and in the best interests of, the Company and the Company's shareholders and recommends that holders of Shares accept the Offer and tender their Shares pursuant to the Offer. 3. The Offer, proration period and withdrawal rights will expire at 5:00 p.m., New York City time, on Friday, August 21, 1998, unless the Offer is extended. 4. The Offer is conditioned upon, among other things, (i) there being validly tendered and not withdrawn prior to the expiration of the Offer such number of Shares that would represent at least 32% of the voting power of the outstanding Shares on a fully diluted basis at the expiration of the Offer, (ii) approval by the Court of Chancery of the State of Delaware of the Trust Purchase Agreement (as defined in the Offer to Purchase), (iii) approval of the Offer and the Related Transactions (as defined in the Offer to Purchase) by the Commissioners of Insurance in the States of North Carolina and California, (iv) any waiting period under the HSR Act (as defined in the Offer to Purchase) applicable to the purchase of Shares pursuant to the Offer having expired or having been terminated and (v) the satisfaction of certain other terms and conditions contained in the Offer to Purchase. 5. Tendering Option holders will not be obligated to pay brokerage fees or commissions or stock transfer taxes with respect to the purchase of Options cancelled by Purchaser pursuant to the Offer. 6. By completing the attached instruction form, you undertake a "conditional" cancellation, which means that if some or all of your Options are not purchased in the Offer for any reason, the Options will be returned to you as unexercised Options. 7. Cash payments made with respect to cancelled Options will be distributed to Option holders by check (less applicable federal withholding taxes). If you wish to cancel any or all of your Options, please so instruct by completing, executing, detaching and returning to Wachovia Bank, N.A. (the "Depositary") the instruction form contained in this letter. An envelope to return your instruction to the Depositary is enclosed. PLEASE FORWARD YOUR INSTRUCTIONS TO THE DEPOSITARY SO THAT THEY ARE RECEIVED BY THE DEPOSITARY NO LATER THAN 5:00 P.M., NEW YORK TIME, ON FRIDAY, AUGUST 21, 1998. The Offer is made only by the Offer to Purchase and the related Letter of Transmittal and Notice of Instructions (Options) and is not being made to (nor will tenders be accepted from or on behalf of) holders of Option Shares in any jurisdiction in which the Offer or the acceptance thereof would not be in compliance 4 with the securities, blue sky or other laws of such jurisdiction. However, Purchaser may, in its discretion, take such action as it may deem necessary to make the Offer in any jurisdiction and extend the Offer to holders of Option Shares in such jurisdiction. In those jurisdictions where securities laws require the Offer to be made by a licensed broker or dealer, the Offer shall be deemed to be made on behalf of Purchaser by one or more registered brokers or dealers licensed under the laws of such jurisdiction. Very truly yours, McM Corporation 5 NOTICE OF INSTRUCTIONS (OPTIONS) To Cancel Options of McM CORPORATION PURSUANT TO THE OFFER TO PURCHASE DATED JULY 23, 1998 OF IAT REINSURANCE SYNDICATE LTD. THE OFFER, PRORATION PERIOD AND WITHDRAWAL RIGHTS WILL EXPIRE AT 5:00 P.M., NEW YORK CITY TIME, FRIDAY, AUGUST 21, 1998, UNLESS THE OFFER IS EXTENDED. The Depositary for the Offer is: WACHOVIA BANK, N.A. By Registered Mail: By Overnight Courier or Hand: c/o Wachovia Bank, N.A. c/o Wachovia Bank, N.A. Shareholder Services Shareholder Services Department P.O. Box 3001 Wachovia East Building, Winston-Salem, North Carolina 27102 2nd Floor 301 North Church Street Winston-Salem, North Carolina 27101
I acknowledge receipt of your letter and the enclosed Offer to Purchase dated July 23, 1998 (the "Offer to Purchase"), the related Letter of Transmittal and this Notice of Instruction (which documents, as amended from time to time, constitute the "Offer") with respect to an offer to purchase by IAT Reinsurance Syndicate Ltd., a Bermuda corporation (the "Purchaser") of up to 35% of the outstanding shares ("Shares") of common stock, par value $1.00 per Share, of McM Corporation, a North Carolina corporation (the "Company"). I understand that, subject to the terms and conditions of the Offer, holders of options ("Options") to purchase Shares ("Option Shares") may elect to cancel their Options in return for a per Option Share payment equal to the positive difference, if any, between $3.65 and the exercise price for such Option Share and that if such exercise price exceeds $3.65, I will not be entitled to receive any cash payment in return for the cancellation of such Options. 1. I hereby elect to cancel Options for the amount of Option Shares set forth herein granted to me under one of the following plans (collectively, the "Plans"): - McM Corporation 1986 Employee Incentive Stock Option Plan - McM Corporation 1996 Employee Incentive Stock Option Plan. 2. I hereby elect as follows with respect to my Options: (CHOOSE ONLY ONE) [ ] I wish to cancel all of my options. [ ] I wish to cancel Options covering the following Option Shares.
OPTION SHARES EXERCISE PRICE - ------------------------------------------ ------------------------------------------
(Indicate the number of Option Shares subject to the Option you wish to cancel and the respective exercise prices related thereto) If neither box is checked and the form is otherwise properly completed, signed and returned, to the Depositary, all of your Options will be cancelled. 6 3. This notice instructs you to cancel Options, as instructed above, pursuant to the terms and conditions set forth in the Offer to Purchase you have furnished to me. By signing this Notice of Instructions I hereby agree that upon consummation of the Offer, I will receive a cash payment equal to (a) the number of Option Shares subject to cancelled Options, times (b) the positive difference, if any, between $3.65 and the applicable Option Share exercise price(s) less (c) any taxes required to be withheld, and further agree to be bound by the terms and conditions set forth herein and in the Offer to Purchase. GENERAL TERMS AND CONDITIONS OF THE OFFER APPLICABLE TO OPTIONS: [NOTE: THE FOLLOWING TERMS AND CONDITIONS ARE IN ADDITION TO, AND SHALL NOT BE CONSTRUED TO LIMIT IN ANY WAY, THE TERMS AND CONDITIONS SET FORTH IN THE OFFER TO PURCHASE.] 1. The undersigned will, upon request, execute and deliver any additional documents deemed by the Purchaser, the Depositary or the Company to be necessary or desirable to complete the cancellation of the Options hereby and has read, understands and agrees with all of the terms of the Offer to Purchase. 2. The undersigned understands that cancellation of the Options pursuant to the procedures described in the Offer to Purchase and in this Notice of Instructions (Options) will constitute an agreement between the undersigned and the Company upon the terms and subject to the conditions of the Offer to Purchase. 3. All authority herein conferred or agreed to be conferred shall survive the death or incapacity of the undersigned and any obligation of the undersigned hereunder shall be binding upon the heirs, personal representatives, successors and assigns of the undersigned. Except as stated in the Offer to Purchase, this tender is irrevocable. 4. The Purchaser will pay any stock transfer taxes applicable with respect to the cancellation of any Options pursuant to the Offer to Purchase. The undersigned understands that (a) the purchase price will be paid to the undersigned (the holder cannot elect to have the purchase price paid to another person); and (b) the undersigned will be responsible for paying federal and state income taxes arising from the cancellation of the Options in the Offer (a portion of which will be withheld as described in Instruction 5 below). 5. Under the U.S. federal income tax laws, the Depositary will be required to withhold income and employment taxes from the amount of any payments made to Option holders pursuant to the Offer to Purchase. 6. All questions as to the number of Options accepted for cancellation, the form of documents and the validity, eligibility (including time of receipt) and acceptance for payment of any Options tendered for cancellation will be determined by the Purchaser in its sole discretion, which determinations shall be final and binding on all parties. The Purchaser reserves the absolute right to reject any or all tenders of Option for cancellation it determines not to be in proper form or the acceptance of which or payment for which may, in the opinion of the Purchaser's counsel, be unlawful. The Purchaser also reserves the absolute right to waive any of the conditions of the Offer (except as set forth in the Offer to Purchase) and any defect or irregularity in the tender for cancellation of any particular Option, and the Purchaser's interpretation of the terms of the Offer to Purchase (including this Notice of Instructions (Options)) will be final and binding on all parties. No tender of Options will be deemed to be properly made until all defects and irregularities have been cured or waived. Unless waived, any defects or irregularities in connection with tenders of Options must be cured within such time as the Purchaser shall determine. None of the Purchaser, the Company, the Depositary, the Information Agent or any other person is or will be obligated to give notice of any defects or irregularities in tenders and none of them will incur any liability for failure to give any such notice. 7. If this Notice of Instructions is signed by a trustee, executor, administrator, guardian, attorney-in-fact, officer of a corporation or other person acting in a fiduciary capacity, such person should so indicate when signing, and proper evidence satisfactory to the Purchaser of the authority of such person so to act must be submitted to the Depositary. 7 8. Each Option holder is required to provide the Depositary with a correct Taxpayer Identification Number ("TIN") on the Substitute Form W-9 which is provided under "Important Tax Information" below, and to certify, under penalties of perjury, that such number is correct and that such holder is not subject to backup withholding of federal income tax. If a tendering Option holder has been notified by the Internal Revenue Service that such holder is subject to backup withholding, such holder must cross out item (2) of the Certification box of the Substitute Form W-9, unless such holder has since been notified by the Internal Revenue Service that such holder is no longer subject to backup withholding. Failure to provide the information on the Substitute Form W-9 may subject the tendering option holder to 31 percent federal income tax withholding on the payment of the purchase price of all Options cancelled pursuant to the Offer. If the tendering Option holder has not been issued a TIN and has applied for one or intends to apply for one in the near future, such holder should write "Applied For" in the space provided for the TIN in Part I of the Substitute Form W-9, and sign and date the Substitute Form W-9. If "Applied For" is written in Part I and the Depositary is not provided with a TIN within 60 days, the Depositary will withhold 31 percent on all payments of the purchase price to such holder until a TIN is provided to the Depositary. 8 IMPORTANT OPTION HOLDERS: SIGN HERE (PLEASE COMPLETE SUBSTITUTE FORM W-9 ON REVERSE) - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- SIGNATURE OF OPTION HOLDER Dated: , 1998 ------------- (Must be signed by Option holder exactly as such Option holder's name appears on Options. If signature is by a trustee, executor, administrator, guardian, attorney-in-fact, officer of a corporation or other person acting in a fiduciary or representative capacity, please provide the following information and see Instruction 7.) Name(s): - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- (PLEASE TYPE OR PRINT) Capacity (full title): - -------------------------------------------------------------------------------- (SEE INSTRUCTION 7) Address: - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- (INCLUDE ZIP CODE) Area Codes and Daytime Telephone Numbers: - ------------------------------------------------------------------- HOME ---------------------------------------------- BUSINESS Taxpayer Identification or Social Security No.: - -------------------------------------------------------------------- (COMPLETE SUBSTITUTE FORM W-9 ON REVERSE) IMPORTANT TAX INFORMATION Under the federal income tax law, a holder whose Options are cancelled pursuant to the Offer is required to provide the Depositary (as payer) with such holder's correct TIN on Substitute Form W-9 below. If such holder is an individual, the TIN is such holder's social security number. If the Depositary is not provided with the correct TIN, the holder may be subject to a $50 penalty imposed by the Internal Revenue Service. In addition, payments that are made to such holder with respect to Options cancelled pursuant to the Offer may be subject to backup withholding of 31 percent (as described below). Certain holders (including, among others, all corporations and certain foreign individuals) are not subject to these backup withholding and reporting requirements. In order for a foreign individual to qualify as an exempt recipient, such individual must submit an Internal Revenue Service Form W-8, signed under penalties of perjury, attesting to such individual's exempt status. A Form W-8 may be obtained from the Depositary. See the enclosed Guidelines for Certification of Taxpayer Identification Number on Substitute Form W-9 for additional instructions. If backup withholding applies, the Depositary is required to withhold 31 percent of any payments made to the holder. Backup withholding is not an additional tax. Rather, the tax liability of persons subject to backup withholding will be reduced by the amount of tax withheld. If withholding results in an overpayment of taxes, a refund may be obtained from the Internal Revenue Service. PURPOSE OF SUBSTITUTE FORM W-9 To prevent backup withholding on payments that are made to a holder with respect to Options cancelled pursuant to the Offer, the holder is required to notify the Depositary of such holder's correct TIN by 9 completing the form below certifying (a) that the TIN provided on Substitute Form W-9 is correct (or that such holder is awaiting a TIN), and (b) that (i) such holder is exempt from backup withholding, (ii) such holder has not been notified by the Internal Revenue Service that such holder is subject to backup withholding as a result of a failure to report all interest or dividends or (iii) the Internal Revenue Service has notified such holder that such holder is no longer subject to backup withholding. WHAT NUMBER TO GIVE THE DEPOSITARY The holder is required to give the Depositary the social security number or employer identification number of the holder of the Options tendered for cancellation hereby. If the tendering holder has not been issued a TIN and has applied for a number or intends to apply for a number in the near future, the holder should write "Applied For" in the space provided for the TIN in Part I, and sign and date the Substitute Form W-9. If "Applied For" is written in Part I and the Depositary is not provided with a TIN within 60 days, the Depositary will withhold 31 percent of all payments of the purchase price to such holder until a TIN is provided to the Depositary. PAYER'S NAME: WACHOVIA BANK, N.A. - --------------------------------------------------------------------------------
SUBSTITUTE PART I -- Taxpayer Identification FORM W-9 Number -- For all accounts, enter taxpayer ------------------------------ identification number in the box at right. Social Security Number (For most individuals, this is your social security number. If you do not have a ------------------------------ number, see "Obtaining a Number" in the Employer Identification Number enclosed Guidelines.) Certify by signing (If awaiting TIN, write "Applied For") and dating below. Note: If the account is in more than one name, see the chart in the enclosed Guidelines to determine which number to give the payer. --------------------------------------------------------------------------------------- DEPARTMENT OF THE TREASURY PART II -- For Payees Exempt From Backup Withholding, see the enclosed Guidelines INTERNAL REVENUE and complete as instructed therein. --------------------------------------------------------------------------------------- OR CERTIFICATION -- Under penalties of perjury, I certify that: (1) The number shown on this form is my correct Taxpayer Identification Number (or I am waiting for a number to be issued to me), and PAYER'S REQUEST FOR TAXPAYER (2) I am not subject to backup withholding either because (a) I am exempt from IDENTIFICATION NUMBER ("TIN") backup withholding, (b) I have not been notified by the Internal Revenue Service (the "IRS") that I am subject to backup withholding as a result of failure to report all interest or dividends, or (c) the IRS has notified me that I am no longer subject to backup withholding. CERTIFICATION INSTRUCTIONS -- You must cross out item (2) above if you have been notified by the IRS that you are subject to backup withholding because of underreporting interest or dividends on your tax return. However, if after being notified by the IRS that you were subject to backup withholding you received another notification from the IRS that you are no longer subject to backup withholding, do not cross out item (2). (See also instructions in the enclosed Guidelines.) Signature Date --------------------------------- ------------------------------ NOTE: FAILURE TO COMPLETE AND RETURN THIS FORM MAY RESULT IN BACKUP WITHHOLDING OF 31 PERCENT OF ANY PAYMENT MADE TO YOU PURSUANT TO THE OFFER. FOR ADDITIONAL DETAILS, PLEASE REVIEW THE ENCLOSED GUIDELINES FOR CERTIFICATION OF TAXPAYER IDENTIFICATION NUMBER ON SUBSTITUTE FORM W-9.
- -------------------------------------------------------------------------------- EX-99.C1 12 OFFER AND RIGHTS AGREEMENT 7/16/98 1 EXECUTION COPY OFFER AND RIGHTS AGREEMENT THIS OFFER AND RIGHTS AGREEMENT (this "Agreement"), made and entered into this 16th day of July, 1998, is by and among MCM CORPORATION (the "Company"), a North Carolina corporation with its principal office in Raleigh, North Carolina, and IAT REINSURANCE SYNDICATE LTD. ("Buyer"), a Bermuda corporation with its principal office in Bermuda. BACKGROUND STATEMENT WHEREAS, Buyer wishes to acquire approximately 49% of the issued and outstanding shares ("Shares") of common stock, par value $1.00 per share ("Common Stock"), of the Company through a privately-negotiated transaction with the McMillen Trust (the "Trust"), and through a cash tender offer (the "Offer") to acquire up to 35% of the issued and outstanding Shares of Common Stock (the "Shares") for $3.65 per Share (such amount, or any greater amount per share paid pursuant to the Offer, being hereinafter referred to as the "Per Share Amount") net to the seller in cash, subject to withholding of taxes, if applicable, upon the terms and subject to the conditions of this Agreement and the Offer. WHEREAS, Buyer has invested $5 million in capital for the Company at a below market interest rate of 5% per annum and plans to commit additional capital to the Company in the future. The Company acknowledges that the management of Buyer has expertise in the management and operation of insurance companies and that the devotion of time and expertise by the management of Buyer to the Company will cause Buyer to forego significant opportunities in regard to other investments. Following the consummation of the Offer, Buyer intends to make available to the Company the services of Peter R. Kellogg, its President and Chief Executive Officer, in the management and direction of the Company. The Company acknowledges that Mr. Kellogg has vast experience and background and a proven record of success in the management and operation of insurance companies. Mr. Kellogg will devote significant time and effort to the management of the Company with no employment agreement and no compensation of any kind. Neither Buyer nor Mr. Kellogg will charge the Company any management or advisory fees. WHEREAS, in consideration of the Offer and the other benefits described above, the Company wishes to provide Buyer with rights ("Rights") to purchase from the Company, for a nominal sum, 60,000 shares of a new issue of preferred stock of the Company that will have a par value of $1,000 per share, will not have voting rights, will not pay dividends, will not be convertible into Common Stock of the Company, and will have the other rights, preferences and characteristics set forth in this Agreement, including but not limited to the right to a preference in any liquidation or dissolution of the Company equal to the par value of such preferred stock before any amount is payable or distributable with respect to the Common Stock of the Company. The Company acknowledges that the issuance of such preferred stock to Buyer is 2 appropriate in order to properly compensate Buyer for the Offer and its capital and management commitments to the Company. WHEREAS, the Board of Directors of the Company (the "Board") has unanimously approved the making of the Offer and resolved and agreed to recommend that holders of Shares tender their Shares pursuant to the Offer. The Board has also approved the granting of Rights following consummation of the Offer and upon the terms and subject to the conditions set forth herein. WHEREAS, the Wilmington Trust Company (the "Trustee") of the Trust, which owns approximately 65% of the issued and outstanding Common Stock of the Company, has agreed pursuant to a Trust Purchase Agreement, dated as of the date hereof (the "Trust Purchase Agreement"), between the Buyer and the Trustee, to privately sell to Buyer 658,900 Shares (the "Purchased Trust Shares") of the Common Stock of the Company at $3.65 per Share and has agreed not to tender any Shares in the Offer. After the purchase and sale of these Shares, the Trust will own 2,428,600 shares of Common Stock of the Company (the "Retained Trust Shares"). WHEREAS, each of the Directors of the Company has agreed, pursuant to a Tender Agreement dated the date hereof (the "Tender Agreement") to tender the Shares beneficially owned or hereafter acquired by them in the Offer and to liquidate for cash pursuant to the Offer all options to purchase shares held by such Directors. STATEMENT OF AGREEMENT NOW, THEREFORE, in consideration of the foregoing, and the representations, warranties, covenants, and agreements contained herein, and intending to be legally bound, the parties hereto agree as follows: ARTICLE 1. THE OFFER SECTION 1.1 THE OFFER. (a) Provided that this Agreement shall not have been terminated in accordance with Section 7.1 and none of the events or circumstances set forth in Annex A hereto shall have occurred or be existing, Buyer shall commence the Offer as promptly as reasonably practicable after the date hereof, but in no event later than five business days after the first public announcement of the execution hereof by all of the parties hereto. The obligation of Buyer to accept for payment and pay for Shares tendered pursuant to the Offer shall be subject to (i) the condition (the "Minimum Condition") that there be validly tendered and not withdrawn prior to the expiration of the Offer, such number of Shares that would represent at least 32% of the voting power of the Shares outstanding on a fully diluted basis (including, without limitation, all Shares issuable upon the conversion of any convertible securities or upon the exercise of any options, warrants or rights), (ii) the conditions (the "Regulatory Approval Conditions") that (A) any applicable waiting period under the Hart-Scott-Rodino Anti-Trust Improvements Act of 1976, as 2 3 amended (the "HSR Act") shall have expired or been terminated, (B) the transactions contemplated by the Trust Purchase Agreement be approved by the Court of Chancery of the State of Delaware having jurisdiction over the Trust and (C) the transactions contemplated by this Agreement and the Trust Purchase Agreement be approved by the North Carolina Commissioner of Insurance, and (iii) the satisfaction of the other conditions set forth in Annex A hereto. Buyer expressly reserves the right to waive any such condition (other than the Regulatory Approval Conditions), to increase the price per Share payable in the Offer, and to make any other changes in the terms and conditions of the Offer; provided, however, that no change may be made which decreases the Per Share Amount payable in the Offer or which changes the form of consideration to be paid in the Offer or which reduces the maximum number of Shares to be purchased in the Offer or which imposes conditions to the Offer in addition to those set forth in Annex A hereto or which reduces the Minimum Condition below 25% of the voting power of the Shares outstanding on a fully diluted basis. The Per Share Amount shall, subject to applicable withholding of taxes, be net to the seller in cash, upon the terms and subject to the conditions of the Offer. Subject to the terms and conditions of the Offer (including, without limitation, the Minimum Condition and the Regulatory Approval Conditions), Buyer shall pay, as promptly as practicable after expiration of the Offer, for all Shares validly tendered and not withdrawn. (b) Pursuant to the Offer, each holder of an outstanding option ("Option") to purchase Shares granted pursuant to the Company's 1986 Employee Incentive Stock Option Plan and 1996 Employee Incentive Stock Option Plan (the "Stock Option Plans") shall, in such holders' discretion, have right to elect to cancel such Option and receive, subject to the satisfaction of the Minimum Condition, the Regulatory Approval Conditions and the other conditions set forth in Annex A hereto, a cash payment from Buyer in an amount, subject to applicable withholding taxes and net to the holder in cash, equal to (x) the product of (i) the aggregate number of Shares subject to such Option multiplied by (ii) the Per Share Amount minus (y) the aggregate exercise price for all Shares subject to such Option. Subject to the terms and conditions of the Offer (including, without limitation, the Minimum Condition and the Regulatory Approval Conditions), Buyer shall pay, as promptly as practicable after expiration of the Offer, for all Options elected to be cancelled by Holders (which elections have not been withdrawn). (c) As soon as reasonably practicable on the date of commencement of the Offer, Buyer shall file with the Securities and Exchange Commission (the "SEC") a Tender Offer Statement on Schedule 14D-1 (together with all amendments and supplements thereto, the "Schedule 14D-1") with respect to the Offer and the other transactions contemplated by this Agreement ("Transactions"), which shall have been provided to the Company. The Schedule 14D-1 shall contain or shall incorporate by reference an offer to purchase (the "Offer to Purchase") and forms of the related letter of transmittal and any related summary advertisement (the Schedule 14D-1, the Offer to Purchase and such other documents, together with all supplements and amendments thereto, being referred to herein collectively as the "Offer Documents"). Buyer and the Company agree to correct promptly any information provided by any of them for use in the Offer Documents which shall have become false or misleading, and the Company and Buyer further agree to take all steps necessary to cause the Schedule 14D-1 as so corrected to be filed with the SEC and the other Offer Documents as so corrected to be disseminated to holders of Shares, in each case as and to the extent required by applicable federal securities laws. 3 4 SECTION 1.2 COMPANY ACTION. (a) The Company hereby approves of and consents to the Offer and represents that (i) the Board, at a meeting duly called and held on July 15-16, 1998, has unanimously (A) determined that this Agreement and the Transactions, including the Offer and the issuance of the Rights, are fair to and in the best interests of the shareholders of the Company, (B) approved and adopted this Agreement and the Transactions, including, without limitation, the Offer, the purchase of Shares pursuant to the Offer and the issuance of the Rights, contemplated hereby, and (C) recommended that the shareholders of the Company accept the Offer; (ii) PaineWebber Incorporated ("PaineWebber") has delivered to the Board an opinion to the effect that the consideration to be received by the holders of Shares (other than Buyer and its affiliates) pursuant to the Offer is fair to such holders of Shares. The Company hereby consents to the inclusion in the Offer Documents of the recommendation of the Board described in the immediately preceding sentence. (b) As soon as reasonably practicable on the date of commencement of the Offer, the Company shall file with the SEC a Solicitation/Recommendation Statement on Schedule 14D-9 (together with all amendments and supplements thereto, the "Schedule 14D-9") containing, subject only to the fiduciary duties of the Board under applicable law as advised by the Company's counsel, the recommendation of the Board described in Section 1.2(a)(i)(C) of this Agreement and shall disseminate the Schedule 14D-9 to the extent required by Rule 14d-9 promulgated under the Securities Exchange Act of 1934, as amended (the "Exchange Act"), and any other applicable federal securities laws. The Company and Buyer agree to correct promptly any information provided by any of them for use in the Schedule 14D-9 which shall have become false or misleading, and the Company further agrees to take all steps necessary to cause the Schedule 14D-9 as so corrected to be filed with the SEC and disseminated to holders of Shares, in each case as and to the extent required by applicable federal securities laws. (c) The Company shall promptly furnish Buyer with mailing labels containing the names and addresses of all record holders of Shares and with security position listings of Shares held in stock depositories, each as of a recent date, together with all other available listings and computer files containing names, addresses and security position listings of record holders and beneficial owners of Shares. The Company shall furnish Buyer with such additional information, including, without limitation, updated listings and computer files of shareholders, mailing labels and security position listings, and such other assistance as Buyer or its agents may reasonably request. Subject to the requirements of applicable law, and except for such steps as are necessary to disseminate the Offer Documents and any other documents necessary to consummate the Offer, Buyer shall hold in confidence the information contained in such labels, listings and files, shall use such information only in connection with the Offer and, if this Agreement shall be terminated in accordance with Section 7.1, shall deliver to the Company all copies of such information then in its possession. 4 5 ARTICLE 2. THE RIGHTS SECTION 2.1 ISSUANCE OF RIGHTS. The Company hereby agrees to issue to Buyer, immediately following the acceptance for payment and payment by Buyer for Shares validly tendered and not withdrawn in the Offer, Rights to purchase from the Company, at any time thereafter and prior to the close of business on June 1, 2008, at the registered office of the Company, 60,000 shares of fully paid and nonassessable shares of Series A preferred stock, $1,000 par value (the "Preferred Stock") of the Company at the Exercise Price referred to below. The Rights shall be evidenced by a Rights Certificate substantially in the form of Exhibit A attached hereto. The Election to Exercise shall be substantially in the form of Exhibit B attached hereto. SECTION 2.2 EXERCISE PRICE. The Exercise Price shall be $.01 per share of Preferred Stock. SECTION 2.3 PROVISIONS RELATING TO THE HOLDER OF RIGHTS. Buyer as holder of Rights pursuant to this Agreement shall not be deemed for any purpose the holder of any shares of Preferred Stock issuable on the exercise of such Rights, nor shall anything contained herein be construed to confer upon Buyer, as such holder of Rights, any of the rights of a shareholder of the Company or any right to vote for the election of directors or upon any matter submitted to shareholders at any meeting thereof, or to give or withhold consent to any corporate action, or to receive notice of meetings or other actions affecting shareholders, or to receive dividends or subscription rights, or otherwise, until the Rights evidenced by this Agreement shall have been exercised as provided herein, and then only to the extent provided in the designation of Preferred Stock attached hereto as Exhibit C. SECTION 2.4 EXERCISE IN PART. The Rights granted pursuant to this Agreement may be exercised in part, with the Exercise Price to be paid for each Right exercised. In such case, the Company shall issue to Buyer a new Rights Certificate for the number of Rights not exercised. Rights may be exercised only for whole shares of Preferred Stock, and fractional shares of Preferred Stock shall not be issued. SECTION 2.5 CONDITIONS OF EXERCISE OF RIGHTS. The Rights shall become immediately exercisable by Buyer, at any time and from time to time, in the event that, at any time immediately following the acceptance for payment and payment by Buyer of Shares validly tendered and not withdrawn in the Offer: (a) The Trust sells (including, without limitation, pursuant to a merger, consolidation or other business combination transaction involving the Company) to any third party other than Buyer or an assignee of Buyer, any of the Retained Trust Shares; or (b) Any person or entity other than Buyer causes designees of Buyer to cease to constitute a majority of the members of the board of directors of the Company. 5 6 Notwithstanding the foregoing, the Rights shall not become immediately exercisable if Buyer's designees fail to constitute a majority of the members of the board of directors of the Company due to the death, resignation or removal upon the direction of Buyer of any such designee; provided, that the Rights shall become exercisable following any such death, resignation or removal if, prior to the time Buyer's designees again represent a majority of the members of the Company's board of directors, such board takes any action opposed by a majority of the remaining designees of Buyer or, if no such designees remain, the then current chief executive officer of Buyer. No delay or failure by Buyer in exercising the Rights upon the occurrence of either of the above events shall operate as a waiver of such right to exercise, nor shall any partial exercise of the Rights preclude other or further exercise thereof. SECTION 2.6 CHARACTERISTICS OF SERIES A PREFERRED STOCK. The rights, preferences, limitations, and characteristics of the Preferred Stock shall be as set forth on Exhibit C attached hereto and hereby incorporated by reference. SECTION 2.7 PROCEDURE FOR EXERCISE OF RIGHTS. Rights will be issued immediately following the acceptance for payment and payment by Buyer for Shares validly tendered and not withdrawn in the Offer and may be exercised on any business day thereafter, and prior to the close of business on June 1, 2008, by submitting to the Company the Rights Certificate, together with an Election to Exercise accompanied by payment by certified or official bank check or wire transfer of immediately available funds payable to the Company of a sum equal to the Exercise Price multiplied by the number of Rights being exercised and a sum sufficient to cover any transfer tax or charge that may be payable in respect of any transfer involved in the transfer or delivery of the Rights Certificate or the issuance or delivery of certificates for shares of Preferred Stock to a person other than the holder of the Rights being exercised. Upon receipt of the foregoing, the Company will thereupon promptly requisition certificates evidencing such number of shares of Preferred Stock to be purchased (the Company hereby irrevocably authorizing its transfer agents, indenture trustees, subsidiaries or others, as the case may be, to comply with all such requisitions) and, after receipt of such certificates, deliver the same to or upon the order of the holder of the Rights exercised registered in such name or names as may be designated by such holder. SECTION 2.8 CERTAIN COVENANTS BY THE COMPANY. The Company covenants and agrees that it will (i) cause the Company's Articles of Incorporation to be amended immediately following Buyer's purchase of Shares in the Offer to include the designation of the Preferred Stock and such other matters as may be required by applicable law in connection with the establishment of the Preferred Stock, (ii) take all such action as may be necessary to insure that all shares of Preferred Stock delivered upon exercise of Rights shall, at the time of delivery of the certificates for such shares (subject to payment of the Exercise Price), be duly and validly authorized, executed, issued and delivered and fully paid and nonassessable, (iii) take all such action as may be necessary to comply with any applicable laws, rules, or regulations in connection with the issuance of any shares upon exercise of Rights, and (iv) pay when due and payable any and all federal and state transfer taxes and charges that may be payable in respect of the original issuance or delivery of a Rights Certificate or of any shares of Preferred Stock issued 6 7 upon the exercise of Rights; provided, however, that the Company shall not be required to pay any transfer tax or charge that may be payable in respect of any transfer involved in the transfer or delivery of Rights Certificates or the issuance or delivery of certificates for shares of Preferred Stock in a name other than of the holder of the Rights being transferred or exercised. SECTION 2.9 DATE ON WHICH EXERCISE IS EFFECTIVE. Each person in whose name any certificate for shares is issued upon the exercise of Rights shall for all purposes be deemed to have become the holder of record of the shares of Preferred Stock represented thereby on, and such certificate shall be dated, the date upon which the Rights Certificate evidencing such Rights was duly delivered to the Company with payment of the Exercise Price (and any applicable taxes and other governmental charges payable by the exercising holder hereunder); provided, however, that if the date of such delivery and payment is a date upon which the stock transfer books of the Company are closed, such person shall be deemed to have become the record holder of such shares on, and such certificate shall be dated, the next succeeding business day on which the stock transfer books of the Company are open. SECTION 2.10 MUTILATED, DESTROYED, LOST AND STOLEN RIGHTS CERTIFICATES. (a) If any mutilated Rights Certificate is surrendered to the Rights Agent prior to June 1, 2008, the Company will execute and deliver in exchange therefor a new Rights Certificate evidencing the same number of Rights as did the Rights Certificate so surrendered. (b) If there shall be delivered to the Company prior to June 1, 2008 (i) evidence to its satisfaction of the destruction, loss or theft of any Rights Certificate and (ii) such security or indemnity as may be required to save the Company harmless, then, and in the absence of notice to the Company that such Rights Certificate has been acquired by a bona fide purchaser, the Company shall execute and deliver, in lieu of any such destroyed, lost or stolen Rights Certificate, a new Rights Certificate evidencing the same number of Rights as did the Rights Certificate so destroyed, lost or stolen. (c) As a condition to the issuance of any new Rights Certificate, the Company may require the payment of a sum sufficient to cover any tax or other governmental charge that may be imposed in relation thereto and any other expenses connected therewith. SECTION 2.11 BUYER MAY SURRENDER RIGHTS. At any time before June 1, 2008, Buyer may surrender the Rights to the Company for cancellation and upon such surrender the Rights shall be void and of no effect. Such surrender of the Rights may be accomplished by delivery to the Company of the Rights Certificate with the following legend: "The Rights evidenced by this Rights Certificate are hereby surrendered to the Company for cancellation" with the date of surrender and the authorized signature of the holder of the Rights. SECTION 2.12 FRACTIONAL SHARES. No Rights shall be exercised for less than a whole share of Preferred Stock, and the Company shall not be obligated to issue certificates representing fractional shares upon exercise of Rights. 7 8 SECTION 2.13 TRANSFER OF RIGHTS. The Rights and the Preferred Stock shall be freely transferable by Buyer to the extent permitted by law, but Buyer represents to the Company that it is acquiring the Rights for investment purposes and not with the intent of making any distribution either of the Rights or the Preferred Stock. ARTICLE 3. REPRESENTATIONS AND WARRANTIES SECTION 3.1 REPRESENTATIONS AND WARRANTIES OF BUYER. Buyer hereby represents and warrants to the Company as follows: (a) Buyer is a corporation duly incorporated, validly existing and in good standing under the laws of Bermuda, and has full corporate power and authority to carry on its business as now conducted. (b) The execution, delivery and performance by Buyer of this Agreement and the transactions contemplated hereby have been duly and validly authorized and approved by all requisite shareholder and corporate action. Buyer has the power, authority and capacity to enter into and perform its obligations under this Agreement, and to consummate the transactions contemplated herein. This Agreement has been duly and validly executed by Buyer and is the legal, valid and binding obligation of Buyer, enforceable in accordance with its terms, except as enforceability may be limited by equitable principles or by bankruptcy, fraudulent conveyance or insolvency laws affecting the enforcement of creditors' rights generally. (c) Neither the execution and delivery of, nor the performance of its obligations under, this Agreement by Buyer, nor the consummation of the transactions contemplated herein, will conflict with, violate or result in a breach of any of the terms or provisions of, or constitute a default (with the passage of time or giving of notice or both) or give rise to any right of termination, cancellation or acceleration under any indenture, mortgage, deed of trust, lease, note, or other agreement or instrument to which Buyer is a party, conflict with any provision of the charter documents of Buyer, or violate any law, order, judgment, decree, rule or regulation of any court or governmental authority having jurisdiction over Buyer or its property. (d) The Rights acquired by Buyer pursuant to this Agreement are being acquired for investment purposes only and not with a view to any public distribution thereof, and Buyer will not offer to sell or otherwise dispose of the Rights so acquired by it in violation of any federal or state law applicable to the sale, resale, or distribution of securities. (e) Buyer has not retained any broker or finder in connection with the transactions contemplated herein so as to give rise to any valid claim against the Company for any fee, sales commissions, finders' fees, financial advisory fee or other fees or expenses for which the Company shall be liable. 8 9 (f) The Offer Documents will not, at the time the Offer Documents are filed with the SEC or are first published, sent or given to shareholders of the Company, as the case may be, contain any untrue statement of a material fact or omit to state any material fact required to be stated therein or necessary in order to make the statements made therein, in the light of the circumstances under which they are made, not misleading. The information supplied by Buyer for inclusion in the Information Statement (as defined in Section 3.2(f) of this Agreement) will not, on the date such document (or any amendment or supplement thereto) is first mailed to shareholders of the Company and, with respect to the Information Statement, at the time Shares are accepted for payment in the Offer, contain any statement which, at such time and in light of the circumstances under which it is made, is false or misleading with respect to any material fact, or omits to state any material fact required to be stated therein or necessary in order to make the statements therein not false or misleading. Notwithstanding the foregoing, Buyer makes no representation or warranty with respect to any information supplied by the Company or any of its representatives which is contained in any of the foregoing documents or the Offer Documents. The Offer Documents shall comply in all material respects as to form with the requirements of the Exchange Act and the rules and regulations thereunder. SECTION 3.2 REPRESENTATIONS AND WARRANTIES OF THE COMPANY. The Company hereby represents and warrants to Buyer as follows: (a) The Company is a corporation duly incorporated, validly existing and in good standing under the laws of North Carolina, and has full corporate power and authority to carry on its business as now conducted. (b) The execution, delivery and performance by the Company of this Agreement and the transactions contemplated hereby have been duly and validly authorized and approved by all requisite shareholder and corporate action. The Company has the power, authority and capacity to enter into and perform its obligations under this Agreement, and to consummate the transactions contemplated herein. This Agreement has been duly and validly executed by the Company and is the legal, valid and binding obligation of the Company, enforceable in accordance with its terms, except as enforceability may be limited by equitable principles or by bankruptcy, fraudulent conveyance or insolvency laws affecting the enforcement of creditors' rights generally. (c) Neither the execution and delivery of, nor the performance of its obligations under, this Agreement by the Company, nor the consummation of the transactions contemplated herein, will conflict with, violate or result in a breach of any of the terms or provisions of, or constitute a default (with the passage of time or giving of notice or both) or give rise to any right of termination, cancellation or acceleration under any indenture, mortgage, deed of trust, lease, note, or other agreement or instrument to which the Company is a party, or conflict with any provision of the charter documents of the Company, or violate any law, order, judgment, decree, rule or regulation of any court or governmental authority having jurisdiction over the Company or its property. 9 10 (d) The Company has not retained any broker or finder in connection with the transactions contemplated herein so as to give rise to any valid claim against Buyer for any fee, sales commissions, finders' fees, financial advisory fee or other fees or expenses for which Buyer shall be liable, except that the Company has engaged PaineWebber as its investment banking firm and financial advisor and may owe a fee in connection with the transactions contemplated hereby (which fee shall be paid by the Company). (e) Capitalization. The authorized capital stock of the Company consists of 1,000,000 shares of preferred stock (none of which is issued and outstanding) and 10,000,000 Shares. As of July 15, 1998, (i) 4,706,388 Shares are issued and outstanding, all of which are validly issued, fully paid and nonassessable, (ii) no Shares are held by the subsidiaries of the Company, (iii) 3,087,500 Shares are owned of record by the Trust, (iv) 442,962 Shares are reserved for issuance pursuant to Options granted pursuant to the Stock Option Plans and (v) 200,000 Shares are reserved for issuance pursuant to the Company's 1996 Non-Employee Director's Stock Option Plan. The Company has terminated its 1996 Employee Stock Purchase Plan (the "Employee Purchase Plan") effective as of July 15, 1998, the day after the last quarterly purchase date under the Employee Purchase Plan (and the Company has no obligations or liabilities (contingent or otherwise) with respect to such plan). Except as set forth in this Section 3.2(e), there are no options, warrants or other rights, agreements, arrangements or commitments of any character relating to the issued or unissued capital stock of the Company or obligating the Company to issue or sell any shares of capital stock of, or other equity interests in, the Company. Section 3.2(e) of the Disclosure Schedule that has been delivered prior to the date hereof by the Company to Buyer sets forth a list, as of the date hereof, of the names of each person holding Options under the Stock Option Plans, the number of shares purchasable thereunder, the exercise price of such Options, and the date such Options were granted. (f) Offer Documents; Schedule 14D-9. Neither the Schedule 14D-9, nor any information supplied by the Company for inclusion in the Offer Documents, nor the information to be filed by the Company in connection with the Offer pursuant to Rule 14f-1 promulgated under the Exchange Act (the "Information Statement"), other than information provided by Buyer for inclusion therein, shall, at the respective times the Schedule 14D-9, the Offer Documents, the Information Statement or any amendments or supplements thereto are filed with the SEC or are first published, sent or given to shareholders of the Company, as the case may be, contain any untrue statement of a material fact or omit to state any material fact required to be stated therein or necessary in order to make the statements made therein, in the light of the circumstances under which they are made, not misleading. Neither the Information Statement nor any information supplied by the Company for inclusion in the Offer Documents shall, at the date such document (or any amendment or supplement thereto) is first mailed to shareholders of the Company, and at the time Shares are accepted for payment in the Offer, be false or misleading with respect to any material fact, or omit to state any material fact required to be stated therein or necessary in order to make the statements made therein, in the light of the circumstances under which they are made, not misleading. The Schedule 14D-9 and the Information Statement shall comply in all material respects as to form with the requirements of the Exchange Act and the rules and regulations thereunder. 10 11 (g) SEC Filings; Financial Statements. (i) The Company has filed all forms, reports and documents required to be filed by it with the SEC since December 31, 1995, and has heretofore delivered to Buyer, in the form filed with the SEC, (A) its Annual Reports on Form 10-K for the fiscal years ended December 31, 1995, 1996, and 1997, respectively, (B) its Quarterly Reports on Form 10-Q for the period ended March 31, 1997 and March 31, 1998, (C) all proxy statements relating to the Company's meetings of shareholders (whether annual or special) held since December 31, 1995, and (D) all other forms, reports and other registration statements (other than Quarterly Reports on Form 10-Q not referred to in clause (B) above) filed by the Company with the SEC since December 31, 1995 (the forms, reports and other documents referred to in clauses (A), (B), (C) and (D) above being referred to herein, collectively, as the "SEC Reports"). The SEC Reports (x) were prepared in accordance with the requirements of the Securities Act of 1933, as amended (the "Securities Act"), and the Exchange Act, as the case may be, and the rules and regulations promulgated thereunder and (y) did not, at the time they were filed (or at the effective date thereof with respect to registration statements under the Securities Act), contain any untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary in order to make the statements made therein, in the light of the circumstances under which they were made, not misleading. (ii) Each of the consolidated financial statements (including, in each case, any notes thereto) contained in the SEC Reports was prepared in accordance with United States generally accepted accounting principles applied on a consistent basis ("GAAP") throughout the periods indicated (except as may be indicated in the notes thereto) and each fairly presents the consolidated financial position, results of operations and changes in shareholders equity and cash flows of the Company and its consolidated subsidiaries as at the respective dates thereof and for the respective periods indicated therein (subject, in the case of unaudited statements, to normal and recurring year-end adjustments which were not and are not expected, individually or in the aggregate, to have a material adverse effect on the business, operations, condition (financial or otherwise), assets or liabilities (including, without limitation, contingent liabilities) of the Company and its subsidiaries taken as a whole ("Material Adverse Effect")). (iii) Except as and to the extent set forth on the consolidated balance sheet of the Company and its consolidated subsidiaries as at December 31, 1997, including the notes thereto (the "1997 Balance Sheet"), in Section 3.2(g)(iii) of the Disclosure Schedule, or in any SEC Report filed by the Company after December 31, 1997, neither the Company nor any subsidiary of the Company has any liability or obligation of any nature (whether accrued, absolute, contingent or otherwise) that would be required to be reflected on a balance sheet, or in the notes thereto, prepared in accordance with GAAP, except for liabilities and obligations incurred in the ordinary course of business consistent with past practice since December 31, 1997, which would not, individually or in the aggregate, be material in amount. (iv) The Company has heretofore furnished to Buyer complete and correct copies of all amendments and modifications (if any) that have not been filed by the Company with the SEC to all agreements, documents and other instruments that previously had been filed by the Company with the SEC and are currently in effect. 11 12 (h) Absence of Certain Changes or Events. (i) Since March 31, 1998, except as set forth in Section 3.2(h)(i) of the Disclosure Schedule, or except as contemplated by this Agreement or disclosed in any SEC Report filed since March 31, 1998, and prior to the date of this Agreement, the Company and its subsidiaries have conducted their businesses only in the ordinary course and in a manner consistent with past practice and there has not been (A) any change in the business, operations, properties, condition, assets or liabilities (including, without limitation, contingent liabilities) of the Company or any of its subsidiaries having, individually or in the aggregate, a Material Adverse Effect, (B) any damage, destruction or loss (whether or not covered by insurance) with respect to any property or asset of the Company or any of its subsidiaries and having, individually or in the aggregate, a Material Adverse Effect, (C) any entry by the Company or any of its subsidiaries into any commitment or transaction material to the Company and its subsidiaries taken as a whole, (D) any increase in or establishment of any bonus, insurance, severance, deferred compensation, pension, retirement, profit sharing, stock option (including, without limitation, the granting of stock options, stock appreciation rights, performance awards or restricted stock awards), stock purchase or other employee benefit plan, or any other increase in the compensation payable or to become payable to any officers or key employees of the Company or any of its subsidiaries, except in the ordinary course of business consistent with past practice, or (E) any entering into, renewal, modification or extension of, any contract, arrangement or agreement with any other party having, individually or in the aggregate, a Material Adverse Effect. (ii) Since December 31, 1997, except as set forth in Section 3.2(h)9ii) of the Disclosure Schedule or as contemplated by this Agreement or disclosed in any SEC Report filed since December 31, 1997, and prior to the date of this Agreement, there has not been (A) any material change by the Company in its accounting methods, principles or practices, (B) any material revaluation by the Company of any asset (including, without limitation, any writing down of the value of inventory or writing off of notes or accounts receivable), (C) any failure by the Company to revalue any asset in accordance with GAAP, or (D) any declaration, setting aside or payment of any dividend or distribution in respect of any capital stock of the Company or any redemption, purchase or other acquisition of any of its securities. ARTICLE 4. CONDUCT OF BUSINESS SECTION 4.1 CONDUCT OF BUSINESS BY THE COMPANY. The Company covenants and agrees that, between the date of this Agreement and the date Buyer's designees are appointed to the Board pursuant to Section 5.1, without the prior written consent of Buyer, the businesses of the Company and its subsidiaries shall be conducted only in, and the Company and its subsidiaries shall not take any action except in, the ordinary course of business and in a manner consistent with past practice; and the Company shall use its best efforts to preserve substantially intact the business organization of the Company and its subsidiaries, to keep available the services of the current officers, employees and consultants of the Company and its subsidiaries and to preserve the current relationships of the Company and its subsidiaries with customers, suppliers and other persons with which the Company or any of its subsidiaries has significant business relations. By way of amplification and not limitation, except as contemplated by this Agreement (including, without limitation transactions 12 13 related to the termination of the Employee Purchase Plan), neither the Company nor any of its subsidiaries shall, between the date of this Agreement and the date Buyer's designees are appointed to the Board pursuant to Section 5.1 hereof, directly or indirectly do, or propose to do, any of the following without the prior written consent of Buyer: (a) amend or otherwise change its Articles of Incorporation or Bylaws or equivalent organizational documents; (b) issue, sell, pledge, dispose of, grant, encumber, or authorize the issuance, sale, pledge, disposition, grant or encumbrance of (i) any shares of capital stock of any class of the Company or any subsidiary, or any options, warrants, convertible securities or other rights of any kind to acquire any shares of such capital stock, or any other ownership interest (including, without limitation, any phantom interest), of the Company or any subsidiary or (ii) any assets of the Company or any subsidiary, except for sales in the ordinary course of business and in a manner consistent with past practice; (c) declare, set aside, make or pay any dividend or other distribution, payable in cash, stock, property or otherwise, with respect to any of its capital stock except for the regular quarterly dividend of Wilshire Insurance Company to Occidental Fire & Casualty Company of North Carolina; (d) reclassify, combine, split, subdivide or redeem, purchase or otherwise acquire, directly or indirectly, any of its capital stock; (e) (i) acquire (including, without limitation, by merger, consolidation, or acquisition of stock or assets or any other business combination) any corporation, partnership, other business organization or any division thereof or any material amount of assets other than in the ordinary course of business; (ii) incur any indebtedness for borrowed money, except for routine use of the Company's existing line of credit in the ordinary course of business, or issue any debt securities or assume, guarantee or endorse, pledge in respect of or otherwise as an accommodation become responsible for the obligations of any person, or make any loans or advances, except in the ordinary course of business and consistent with past practice; (iii) enter into any contract or agreement other than contracts or agreements entered into in the ordinary course of business, consistent with past practice and which require payments by the Company or its subsidiaries in an aggregate amount of less than U.S. $250,000; (iv) terminate, cancel or request any material change in, or agree to any material change in, any material contract, except in the ordinary course of business consistent with past practice; (v) authorize any single capital expenditure (excluding software development activity) which is in excess of U.S. $100,000 or capital expenditures which are, in the aggregate, in excess of U.S. $250,000 for the Company and its subsidiaries taken as a whole; or (vi) enter into or amend any contract, agreement, commitment or arrangement with respect to any matter set forth in this Section 4.1(e); (f) increase the compensation payable or to become payable to its officers or employees, except for increases in accordance with past practices in salaries or wages of 13 14 employees of the Company or any subsidiary who are not officers of the Company, or grant any severance or termination pay to, or enter into any employment or severance agreement with, any director, officer or other employee of the Company or any subsidiary, or establish, adopt, enter into or amend any collective bargaining, bonus, profit sharing, thrift, compensation, stock option, restricted stock, pension, retirement, deferred compensation, employment, termination, severance or other plan, agreement, trust, fund, policy or arrangement for the benefit of any director, officer or employee or circulate to any employee any details of any proposal to adopt or amend any such plan; (g) take any action, other than reasonable and usual actions in the ordinary course of business and consistent with past practice, with respect to accounting policies or procedures (including, without limitation, procedures with respect to the payment of accounts payable and collection of accounts receivable); (h) make any tax election or settle or compromise any material federal, state, local or foreign income tax liability; (i) pay, discharge or satisfy any claim, liability or obligation (absolute, accrued, asserted or unasserted, contingent or otherwise), other than the payment, discharge or satisfaction, in the ordinary course of business and consistent with past practice, of liabilities reflected or reserved against in the 1997 Balance Sheet or subsequently incurred in the ordinary course of business and consistent with past practice; or (j) except for insurance claims settled in the ordinary course, the AGA/ORRICO litigation and insurance related claims, settle or compromise any pending or threatened suit, action or claim that is material or which relates to any of the Transactions; or (k) announce an intention, enter into any formal or informal agreement, or otherwise make a commitment, to do any of the foregoing or any action that would result in any of the conditions to the Offer not being satisfied (other than as contemplated by this Agreement). ARTICLE 5. COVENANTS SECTION 5.1 COMPANY BOARD REPRESENTATION; SECTION 14(F). (a) Immediately following the time Buyer pays for Shares validly tendered and not withdrawn in the Offer (the "Buyer's Election Time"), and from time to time thereafter, Buyer shall be entitled to designate up to such number of directors, rounded up to the next whole number, on the Board as shall give Buyer majority representation on the Board, and the Company shall, at such time, promptly take all actions necessary to cause Buyer's designees to be elected as directors of the Company, including increasing the size of the Board or securing the resignations of incumbent directors or both. At such times, the Company shall use its best efforts to cause persons designated by Buyer 14 15 to constitute a majority of (i) each committee of the Board (some of whom may be required to be independent as required by applicable law or the requirements of the rules of the National Association of Securities Dealers, Inc.), (ii) each board of directors of each subsidiary and (iii) each committee of each such board, in each case only to the extent permitted by applicable law. If any of Buyer's designees dies, resigns or is removed upon the direction of Buyer, the Company shall take all action necessary to cause such vacancy to be filled by a designee of Buyer within 10 business days after the opening of such vacancy. Notwithstanding the foregoing, until the Buyer's Election Time, the Company shall use its best efforts to ensure that all the members of the Board and each committee of the Board and such boards and committees of the subsidiaries of the Company as of the date hereof who are not employees of the Company shall remain members of the Board and of such boards and committees. (b) The Company shall promptly take all actions required pursuant to Section 14(f) of the Exchange Act and Rule 14f-1 promulgated thereunder in order to fulfill its obligations under this Section 5.1 and shall include the Information Statement containing such information with respect to the Company and its officers and directors as is required under Section 14(f) and Rule 14f-1 as an annex to the Schedule 14D-9 to fulfill such obligations. Buyer shall supply to the Company any information with respect to it and its nominees, officers, directors and affiliates required by such Section 14(f) and Rule 14f-1. SECTION 5.2 ACCESS TO INFORMATION; CONFIDENTIALITY. (a) From the date hereof to the Buyer's Election Time, the Company shall, and shall cause its subsidiaries and the officers, directors, employees, auditors and agents of the Company and its subsidiaries to, afford the officers, employees and agents of Buyer complete access at all reasonable times to the officers, employees, agents, properties, offices, and other facilities, books and records of the Company and each of its subsidiaries, and shall furnish Buyer with all financial, operating and other data and information as Buyer, through its officers, employees or agents, may reasonably request. (b) Except as required by law, all information obtained by Buyer pursuant to this Section 5.2 shall be kept confidential, by Buyer and by any other party which is to be afforded access pursuant to Section 5.2(a), in accordance with the confidentiality agreement (the "Confidentiality Agreement"), between Buyer and the Company. SECTION 5.3 NO SOLICITATION OF TRANSACTIONS. Neither the Company nor any of its subsidiaries shall, directly or indirectly, through any officer, director, agent or otherwise, solicit, initiate or encourage the submission of any proposal or offer from any person relating to any acquisition or purchase of all or any material portion of the assets of, or any equity interest in, the Company or any of its subsidiaries or any business combination with the Company or any of its subsidiaries or participate in any negotiations regarding, or furnish to any other person any information with respect to, or otherwise cooperate in any way with, or assist or participate in, facilitate or encourage, any effort or attempt by any other person to do or seek any of the foregoing; provided, however, that nothing contained in this Section 5.3 shall prohibit the Board from furnishing information to, or entering into discussions or negotiations with, any person in connection with an unsolicited (from the date of this Agreement) proposal in writing by such person to acquire the Company pursuant to a merger, consolidation, share exchange, business combination 15 16 or other similar transaction or to acquire all or substantially all of the assets of the Company or any of its subsidiaries, if, and only to the extent that, (i) the Board, after consultation with independent legal counsel (which may include its regularly engaged independent legal counsel), determines in good faith that such action is required for the Board to comply with its fiduciary duties to shareholders imposed by North Carolina law and (ii) prior to furnishing such information to, or entering into discussions or negotiations with, such person the Company uses its reasonable best efforts to obtain from such person an executed confidentiality agreement on terms no less favorable to the Company than those contained in the Confidentiality Agreement (or obtained such a confidentiality agreement prior to the date hereof). The Company immediately shall cease and cause to be terminated all existing discussions or negotiations with any parties conducted heretofore with respect to any of the foregoing. The Company shall notify Buyer promptly if any such proposal or offer, or any inquiry or contact with any person with respect thereto, is made. The Company agrees not to release any third party from, or waive any provision of, any confidentiality or, subject to the fiduciary duties of the Board, standstill agreement to which the Company is or may become a party. SECTION 5.4 DIRECTORS' AND OFFICERS' INDEMNIFICATION AND INSURANCE. (a) Following the Buyer's Election Time, and for a period of six years thereafter, Buyer shall cause the Board to retain provisions in the Articles of Incorporation and Bylaws of the Company no less favorable with respect to indemnification of officers and directors than are currently set forth in such documents, unless such modification shall be required by law. Any determinations made pursuant to the provisions of the Articles of Incorporation or Bylaws of the Company, with respect to the appropriateness of indemnification, shall be made in good faith. (b) The Company, from and after the date of this Agreement and to and including the date six years after the Buyer's Election Time, shall use its best efforts to maintain in effect, if available, the current directors' and officers' liability insurance policies maintained by the Company (provided that the Company may substitute therefor policies of at least the same coverage containing terms and conditions which are not materially less favorable) with respect to matters occurring on or prior to the Buyer's Election Time; provided, however, that in no event shall the Company be required to expend pursuant to this Section 5.4(b) more than an amount per year equal to 200% of current annual premiums paid by the Company for such insurance (which annual premiums the Company represents to be approximately $70,000). (c) In the event the Company or any of its respective successors or assigns (i) consolidates with or merges into any other person and shall not be the continuing or surviving corporation or entity after such consolidation or merger or (ii) transfers all or substantially all of its properties and assets to any person, then, and in each such case, proper provision shall be made so that the successors and assigns of the Company, as the case may be, or at Buyer's option, Buyer, shall assume the obligations set forth in this Section 5.4. SECTION 5.5 NOTIFICATION OF CERTAIN MATTERS. The Company shall give prompt notice to Buyer, and Buyer shall give prompt notice to the Company, of (i) the occurrence, or non-occurrence, of any event the occurrence, or non-occurrence, of which causes any representation or warranty contained in this Agreement to be untrue or inaccurate in any material respect and (ii) any 16 17 failure of the Company or Buyer, as the case may be, to comply with or satisfy any covenant, condition or agreement to be complied with or satisfied by it hereunder; provided, however, that the delivery of any notice pursuant to this Section 5.5 shall not limit or otherwise affect the remedies available hereunder to the party receiving such notice. SECTION 5.6. FURTHER ACTION; REASONABLE BEST EFFORTS. Upon the terms and subject to the conditions hereof, each of the parties hereto shall (i) make promptly its respective filings, and thereafter make any other required submissions, under the HSR Act with respect to the Transactions, (ii) use its reasonable best efforts to take, or cause to be taken, all appropriate action, and to do, or cause to be done, all things necessary, proper or advisable under applicable laws and regulations to consummate and make effective the Transactions, including, without limitation, using its reasonable best efforts to obtain all consents, approvals, authorizations, qualifications and orders of governmental authorities and parties to contracts with the Company and its subsidiaries as are necessary for the consummation of the Transactions and to fulfill the conditions to the Offer (including, without limitation, obtaining the approval of the Chancery Court of the State of Delaware and the North Carolina Insurance Commission), and (iii) except as contemplated by this Agreement, use its reasonable best efforts not to take any action, or enter into any transaction, which would cause any of its representations or warranties contained in this Agreement to be untrue or result in a breach of any covenant made by it in this Agreement. SECTION 5.7 PUBLIC ANNOUNCEMENTS. Buyer and the Company shall consult with each other before issuing any press release or otherwise making any public statements with respect to this Agreement or any Transaction and shall not issue any such press release or make any such public statement prior to such consultation, except as may be required by law or pursuant to the rules of the National Association of Securities Dealers, Inc. SECTION 5.8 EMPLOYEE PURCHASE PLAN. The Company agrees to terminate its Employee Purchase Plan effective as of July 15, 1998. ARTICLE 6. CONDITIONS PRECEDENT SECTION 6.1 CONDITIONS PRECEDENT TO THE OFFER. The obligation of the Buyer to accept for payment and pay for Shares validly tendered and not withdrawn pursuant to the Offer and to cash out Options which holders elect to cancel pursuant to the Offer shall be subject to the satisfaction of the Regulatory Approval Conditions and the satisfaction or waiver of the Minimum Condition and the other conditions set forth in Annex A hereof. SECTION 6.2 CONDITIONS PRECEDENT TO THE ISSUANCE OF THE RIGHTS. The obligations of the Company under this Agreement to issue the Rights is subject to the fulfillment, at or prior to such issuance, of each of the following conditions: (a) Buyer and the Trust shall have executed and delivered the Trust Purchase Agreement and such agreement and the transactions contemplated thereby shall have been approved 17 18 by the Court of Chancery of the State of Delaware having jurisdiction over the Trust and by the North Carolina Commissioner of Insurance. (b) The representations and warranties of Buyer contained herein shall be true and correct on and as of the issuance date and on and as of the date hereof with the same effect as though made on and as of the Closing Date. (c) The waiting period under the HSR Act applicable to the transactions contemplated by this Agreement and the Trust Purchase Agreement shall have expired or terminated. (d) Buyer shall have accepted for payment and paid for Shares validly tendered and not withdrawn pursuant to the Offer. ARTICLE 7. TERMINATION, AMENDMENT AND WAIVER SECTION 7.1 TERMINATION. This Agreement may be terminated and the Offer and the other Transactions may be abandoned at any time prior to the Buyer's Election Time: (a) By mutual written consent duly authorized by the Boards of Directors of Buyer and the Company prior to the Buyer's Election Time; or (b) By Buyer or the Company if (i) the Buyer's Election Time shall not have occurred on or before the date 180 days following the commencement of the Offer, provided, however, that the right to terminate this Agreement under this Section 7.1(b) shall not be available to any party whose failure to fulfill any obligation under this Agreement has been the cause of, or resulted in, the failure of the Buyer's Election Time to occur on or before such date or (ii) any court of competent jurisdiction in the United States or other governmental authority shall have issued an order, decree, ruling or taken any other action restraining, enjoining or otherwise prohibiting the Offer and such order, decree, ruling or other action shall have become final and nonappealable; or (c) By Buyer, upon approval of its Board of Directors, if (i) due to an occurrence or circumstance that would result in a failure to satisfy any condition set forth in Annex A hereto, Buyer shall have (A) failed to commence the Offer within 30 days following the date of this Agreement, (B) terminated the Offer without having accepted any Shares for payment thereunder or (C) failed to pay for Shares pursuant to the Offer within 180 days following the commencement of the Offer; unless such action or inaction under (A), (B) or (C) shall have been caused by or resulted from the failure of Buyer to perform in any material respect any material covenant or agreement of Buyer contained in this Agreement or the material breach by Buyer of any material representation or warranty contained in this Agreement or (ii) prior to the purchase of Shares pursuant to the Offer, the Board or any committee thereof shall have withdrawn or modified in a manner adverse to Buyer its approval or recommendation of the Offer, this Agreement, or any other 18 19 Transaction or shall have recommended another merger, consolidation, business combination with, or acquisition of, the Company or any of its assets or another tender offer or exchange offer for Shares, or shall have resolved to do any of the foregoing; or (d) By the Company, upon approval of the Board, if (i) due to an occurrence or circumstance that would result in a failure to satisfy any of the conditions set forth in Annex A hereto, Buyer shall have (A) failed to commence the Offer within 30 days following the date of this Agreement, (B) terminated the Offer without having accepted any Shares for payment thereunder or (C) failed to pay for Shares pursuant to the Offer within 180 days following the commencement of the Offer, unless such action or inaction under (A), (B), and (C) shall have been caused by or resulted from the failure of the Company to perform in any material respect any material covenant or agreement of it contained in this Agreement or the material breach by the Company of any material representation or warranty of it contained in this Agreement or (ii) prior to the purchase of Shares pursuant to the Offer, the Board shall have withdrawn or modified in a manner adverse to Buyer its approval or recommendation of the Offer, this Agreement, or any other Transaction in order to approve the execution by the Company of a definitive agreement providing for the acquisition of the Company or any of its assets by a sale, merger or other business combination or in order to approve a tender offer or exchange offer for Shares by a third party, in either case, as the Board determines in good faith that such action is required for the Board to comply with its fiduciary duties to shareholders, after consultation with its independent legal counsel and financial advisers, and is on terms more favorable to the Company's shareholders than the Offer; provided, however, that such termination under this clause (ii) shall not be effective until the Company has reimbursed Buyer for its Expenses (as defined in Section 7.3(b)). SECTION 7.2 EFFECT OF TERMINATION. In the event of the termination of this Agreement pursuant to Section 7.1, this Agreement shall forthwith become void, except for Section 5.2(b), Section 7.3 and Article VIII which shall survive termination indefinitely, and there shall be no liability on the part of any party hereto, except as set forth in Section 7.3, and nothing herein shall relieve any party from liability for any breach hereof. SECTION 7.3 EXPENSES. (a) In the event that (i) (A) on or after the date hereof and prior to the termination of this Agreement, any person (including, without limitation, the Company or any affiliate thereof, but excluding the Trust, Buyer or any affiliate of Buyer), shall have become the beneficial owner of more than 10% of the then outstanding Shares and (B) this Agreement shall have been terminated pursuant to Section 7.1 and (C) within 12 months of such termination a Third Party Acquisition (as defined hereinafter) shall occur; or (ii) (A) on or after the date hereof and prior to the termination of this Agreement, any person shall have commenced, publicly proposed or communicated to the Company a proposal that is publicly disclosed for a tender or exchange offer for 25% or more (or which, assuming the maximum amount of securities that could be purchased, 19 20 would result in any person beneficially owning 25% or more of the then outstanding Shares) or otherwise for the direct or indirect acquisition of the Company or all or substantially all of its assets for per Share consideration having a value greater than the Per Share Amount and (B) (x) the Offer shall have remained open for at least 20 business days, (y) the Minimum Condition shall not have been satisfied and (z) this Agreement shall have been terminated pursuant to Section 7.1; or (iii) this Agreement is terminated pursuant to Section 7.1(c)(ii) or 7.1(d)(ii); or (iv) provided that Buyer is not in material breach of its obligations under this Agreement, this Agreement is terminated pursuant to Section 7.1(c) due to the occurrence of the condition set forth in either paragraph (f) or (g) of Annex A; then, in any such event set forth in clauses (i), (ii), (iii) or (iv) above, the Company shall promptly reimburse Buyer for all Expenses; provided, however, that the Company shall not be obligated to reimburse Buyer for any expenses under clauses (i) or (ii) above if (x) this Agreement is terminated solely for failure to satisfy any Regulatory Condition and (y) the failure to satisfy such Regulatory Condition is in no respect due to the occurrence of any event described in clause (i)(A) or (ii)(A) above. (b) "Expenses" means all out-of-pocket expenses and fees up to $250,000 in the aggregate (including, without limitation, fees and expenses payable to all banks, investment banking firms, other financial institutions and other persons and their respective agents and counsel for structuring the Transactions and all fees of counsel, accountants, experts and consultants to Buyer, and all printing and advertising expenses) actually incurred or accrued by Buyer or on its behalf in connection with the transactions contemplated by this Agreement and the Trust Purchase Agreement, and/or actually incurred or accrued by banks, investment banking firms, other financial institutions and other persons and assumed by Buyer in connection with the negotiation, preparation, execution and performance of this Agreement and the Trust Purchase Agreement, the structuring of the Transactions and any agreements relating thereto. In the event that the Company shall fail to pay any Expenses when due, the term "Expenses" shall be deemed to include the costs and expenses actually incurred or accrued by Buyer (including, without limitation, fees and expenses of counsel) in connection with the collection under and enforcement of this Section 7.3, together with interest on such unpaid Expenses, commencing on the date that such Expenses became due, at a per annum rate equal to the rate of interest publicly announced by First Union National Bank, from time to time, in the City of Charlotte, North Carolina, as such bank's prime rate plus 1.00 percentage point. In addition, in connection with any other action or proceeding by any party hereto against any other party hereto alleging a breach of a representation, warranty, covenant or agreement set forth herein, the prevailing party in such action or proceeding shall be entitled to recover costs and expenses actually incurred or accrued (including, without limitation, fees and expenses of counsel) in connection with the prosecution or defense (as the case may be) of such action or proceeding. 20 21 (c) Except as set forth in this Section 7.3, all costs and expenses incurred in connection with this Agreement and the Transactions shall be paid by the party incurring such expenses, whether or not any Transaction is consummated. (d) "Third Party Acquisition" means the occurrence of any of the following events: (i) the acquisition of the Company by merger, consolidation or other business combination transaction by any person other than Buyer or any affiliate thereof (a "Third Party"); (ii) the acquisition by any Third Party of all or substantially all of the assets of the Company and its Subsidiaries, taken as a whole; (iii) the acquisition by a Third Party of 25% or more of the outstanding Shares whether by tender offer, exchange offer or otherwise; (iv) the adoption by the Company of a plan of liquidation or the declaration or payment of an extraordinary dividend; or (v) the repurchase by the Company or any of its subsidiaries of 25% or more of the outstanding Shares. SECTION 7.4 AMENDMENT. This Agreement may not be amended except by an instrument in writing signed by the parties hereto. SECTION 7.5 WAIVER. At any time prior to the Buyer's Election Time, any party hereto may (i) extend the time for the performance of any obligation or other act of any other party hereto, (ii) waive any inaccuracy in the representations and warranties contained herein or in any document delivered pursuant hereto and (iii) waive compliance with any agreement or condition contained herein (other than the Regulatory Approval Conditions, and provided that the Minimum Condition shall not be reduced below 25% of the voting power of the fully diluted Shares of the Company). Any such extension or waiver shall be valid if set forth in an instrument in writing signed by the party or parties to be bound thereby. ARTICLE 8. MISCELLANEOUS SECTION 8.1 NON-SURVIVAL OF REPRESENTATIONS AND WARRANTIES. The representations and warranties in this Agreement shall terminate at the Buyer's Election Time or upon the termination of this Agreement pursuant to Section 7.1. SECTION 8.2 NOTICES. All notices, requests, claims, demands and other communications hereunder shall be in writing and shall be given (and shall be deemed to have been duly given upon receipt) by delivery in person, by cable, telecopy, telegram or telex or by registered or certified mail (postage prepaid, return receipt requested) to the respective parties at the following addresses (or at such other address for a party as shall be specified in a notice given in accordance with this Section 8.2): 21 22 if to Buyer: IAT Reinsurance Syndicate Ltd. c/o Spear Leeds & Kellogg 120 Broadway New York, New York 10271 Attention: Marguerite Gorman with a copy to: Robinson, Bradshaw & Hinson, P.A. 101 North Tryon Street, Suite 1900 Charlotte, North Carolina 28246 Attention: Mr. Robin L. Hinson if to the Company: McM Corporation 702 Oberlin Road, Box 12317 Raleigh, North Carolina 27605 Attention: George E. King with a copy to: Ragsdale, Liggett & Foley, PLLC Post Office Box 31507 Raleigh, North Carolina 27622 Attention: Mr. Frank R. Liggett III SECTION 8.3 SEVERABILITY. If any term or other provision of this Agreement is invalid, illegal or incapable of being enforced by any rule of law, or public policy, all other conditions and provisions of this Agreement shall nevertheless remain in full force and effect so long as the economic or legal substance of the Transactions is not affected in any manner materially adverse to any party. Upon such determination that any term or other provision is invalid, illegal or incapable of being enforced, the parties hereto shall negotiate in good faith to modify this Agreement so as to effect the original intent of the parties as closely as possible in a mutually acceptable manner in order that the Transactions be consummated as originally contemplated to the fullest extent possible. SECTION 8.4 ENTIRE AGREEMENT, ASSIGNMENT. This Agreement constitutes the entire agreement among the parties with respect to the subject matter hereof and supersedes, except as set forth in Section 5.2, all prior agreements and undertakings, both written and oral, among the parties, or any of them, with respect to the subject matter hereof. This Agreement shall not be assigned by operation of law or otherwise, except that Buyer may assign all or any of its rights and obligations 22 23 hereunder to any affiliate of Buyer provided that no such assignment shall relieve the Buyer of its obligations hereunder if such assignee does not perform such obligations. SECTION 8.5 PARTIES IN INTEREST. This Agreement shall be binding upon and inure solely to the benefit of each party hereto, and nothing in this Agreement, express or implied, is intended to or shall confer upon any other person any right, benefit or remedy of any nature whatsoever under or by reason of this Agreement, other than Section 5.4 (which is intended to be for the benefit of the persons covered thereby and may be enforced by such persons). SECTION 8.6 SPECIFIC PERFORMANCE. The parties hereto agree that irreparable damage would occur in the event any provision of this Agreement was not performed in accordance with the terms hereof and that the parties shall be entitled to specific performance of the terms hereof, in addition to any other remedy at law or equity. SECTION 8.7 DESCRIPTIVE HEADINGS, GENDER. Descriptive headings appear herein for convenience only and shall not control or affect the meaning or construction of any of the provisions hereof. As used herein, the singular shall include the plural and the plural the singular, and the use of any gender, including the neutral, shall be applicable to all genders. SECTION 8.8 GOVERNING LAW. This Agreement and each Right issued hereunder shall be deemed to be a contract made under the laws of the State of North Carolina and for all purposes shall be governed by and construed in accordance with the laws of such state applicable to contracts to be made and performed entirely within such state. SECTION 8.9 COUNTERPARTS. This Agreement may be executed in any number of counterparts and each of such counterparts shall for all purposes be deemed to be an original, and all such counterparts shall together constitute but one and the same agreement. 23 24 IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be duly executed as of the date first above written. MCM CORPORATION By: /s/ George E. King, Chairman/CEO -------------------------------- IAT REINSURANCE SYNDICATE LTD. By: /s/ Peter R. Kellogg -------------------------------- Peter R. Kellogg, President 24 25 ANNEX A CONDITIONS TO THE OFFER Notwithstanding any other provision of the Offer, Buyer shall not be required to accept for payment or pay for any Shares tendered pursuant to the Offer, or make any payment with respect to Options elected to be cancelled by holders thereof, and may terminate or amend the Offer and may postpone the acceptance for payment of and payment for Shares tendered or Options elected to be canceled, if (i) the Minimum Condition shall not have been satisfied, (ii) any applicable waiting period under the HSR Act shall not have expired or been terminated prior to the expiration of the Offer, (iii) the transactions contemplated by the Trust Purchase Agreement shall not have been approved by the Court of Chancery of the State of Delaware having jurisdiction over the Trust, (iv) the transactions contemplated by this Agreement and the Trust Purchase Agreement shall not have been approved by the North Carolina Commissioner of Insurance, or (v) at any time on or after the date of this Agreement, and prior to the acceptance for payment of Shares, any of the following conditions shall exist: (a) there shall have been instituted or be pending any action or proceeding brought by any governmental, administrative or regulatory authority or agency, domestic or foreign, before any court or governmental, administrative or regulatory authority or agency, domestic or foreign, (i) challenging or seeking to make illegal, materially delay or otherwise directly or indirectly restrain or prohibit or make materially more costly the making of the Offer, the acceptance for payment of, or payment for, any Shares or Options by Buyer or any other affiliate of Buyer pursuant to the Offer, or the consummation of any other Transaction, or seeking to obtain material damages in connection with any Transaction; (ii) seeking to prohibit or limit materially the ownership or operation by the Company, Buyer or any of their subsidiaries of all or any material portion of the business or assets of the Company, Buyer or any of their subsidiaries, or to compel the Company, Buyer or any of their subsidiaries to dispose of or hold separate all or any material portion of the business or assets of the Company, Buyer or any of their subsidiaries, as a result of the Transactions; (iii) seeking to impose or confirm limitations on the ability of Buyer or any other affiliate of Buyer to exercise effectively full rights of ownership of any Shares, including, without limitation, the right to vote any Shares acquired by Buyer pursuant to the Offer, or otherwise on all matters properly presented to the Company's shareholders, including, without limitation, the approval and adoption of this Agreement and the transactions contemplated hereby; or (iv) seeking to require divestiture by Buyer or any other affiliate of Buyer of any Shares; (b) there shall have been issued any injunction, order or decree by any court or governmental, administrative or regulatory authority or agency, domestic or foreign, resulting from any action or proceeding brought by any person other than any governmental, administrative or regulatory authority or agency, domestic or foreign, that (i) restrains or prohibits the making of the Offer or the consummation of any other Transaction; (ii) prohibits or limits ownership or operation by the Company or Buyer of all or any material portion of the business or assets of the Company, taken as a whole, 25 26 Buyer or any of their subsidiaries, or compels the Company, Buyer or any of their subsidiaries to dispose of or hold separate all or any material portion of the business or assets of the Company, Buyer or any of their subsidiaries, in each case as a result of the Transactions; (iii) imposes limitations on the ability of Buyer to exercise effectively full rights of ownership of any Shares, including, without limitation, the right to vote any Shares acquired by Buyer pursuant to the Offer, or otherwise on all matters properly presented to the Company's shareholders, including, without limitation, the approval and adoption of this Agreement and the Transactions; (iv) requires divestiture by Buyer of any Shares; (c) there shall have been any action taken, or any statute, rule, regulation, order or injunction enacted, entered, enforced, promulgated, amended, issued or deemed applicable to (i) Buyer, the Company or any subsidiary or affiliate of Buyer or the Company or (ii) any Transaction, by any legislative body, court, government or governmental, administrative or regulatory authority or agency, domestic or foreign, in the case of both (i) and (ii) other than the routine application of the waiting period provisions of the HSR Act to the Offer, in each case that results in any of the consequences referred to in clauses (i) through (iv) of paragraph (b) above; (d) there shall have occurred any change, condition, event or development that has a Material Adverse Effect with respect to the Company; (e) (i) the Board or any committee thereof shall have withdrawn or modified in a manner adverse to Buyer the approval or recommendation of the Offer, or this Agreement or approved or recommended any takeover proposal or any other acquisition of Shares other than the Offer or (ii) the Board or any committee thereof shall have resolved to do any of the foregoing; (f) any representation or warranty of the Company in the Agreement shall not be true and correct with the effect that such failure of any such representation or warranty to be true and correct, when taken together with all other such failures of such representations and warranties to be true and correct, in the aggregate has, or is reasonably likely to have, a Material Adverse Effect; provided, however that, for the purpose of the foregoing condition, in determining whether any such representation or warranty is true or correct, any qualification as to materiality or Material Adverse Effect contained in any such representation and warranty shall be deemed not to apply; (g) the Company shall have failed to perform in any material respect any material obligation or to comply in any material respect with any material agreement or material covenant of the Company to be performed or complied with by it under the Agreement; (h) the Agreement shall have been terminated in accordance with its terms; or 26 27 (i) Buyer and the Company shall have agreed that Buyer shall terminate the Offer or postpone the acceptance for payment of or payment for Shares and Options thereunder; which, in the sole judgment of Buyer, in any such case, and regardless of the circumstances (including any action or inaction by Buyer or any of its affiliates) giving rise to any such condition, makes it inadvisable to proceed with such acceptance for payment or payment. The foregoing conditions are for the sole benefit of Buyer and may be asserted by Buyer regardless of the circumstances giving rise to any such condition or may be waived by Buyer in whole or in part at any time and from time to time in its sole discretion; provided, however, that Buyer may not waive the Regulatory Approval Conditions or reduce the Minimum Condition below 25% of the voting power of the fully diluted Shares of the Company. The failure by Buyer at any time to exercise any of the foregoing rights shall not be deemed a waiver of any such right; the waiver of any such right with respect to particular facts and circumstances shall not be deemed a waiver with respect to any other facts and circumstances; and each such right shall be deemed an ongoing right that may be asserted at any time and from time to time. 27 28 EXHIBIT A [FORM OF RIGHTS CERTIFICATE] CERTIFICATE NUMBER RIGHTS ------ --------- RIGHTS CERTIFICATE MCM CORPORATION This certifies that IAT Reinsurance Syndicate Ltd., or registered assignees, is the registered holder of the number of Rights set forth above, each of which entitles the registered holder thereof, subject to the terms, provisions and conditions of the Offer and Rights Agreement, dated as of July 16, 1998 (as the same may be amended or supplemented from time to time, the "Agreement"), between McM Corporation (the "Company") and IAT Reinsurance Syndicate Ltd., to purchase from the Company, at any time after the acceptance for payment and payment for Shares validly tendered and not withdrawn pursuant to the Offer, and prior to the close of business on June 1, 2008, at the registered office of the Company, one (1) share of Series A Preferred Stock, $1,000 par value (the "Preferred Stock") of the Company at the Exercise Price referred to below, upon presentation and surrender of this Rights Certificate with the form of Election to Purchase duly executed. Capitalized terms used in this Rights Certificate without definition shall have the meanings given to them in the Agreement. The Exercise Price shall be $.01 per Right and shall be payable by official bank or certified check or wire transfer of immediately available funds. This Rights Certificate is subject to all of the terms, provisions and conditions of the Agreement, which terms, provisions and conditions are hereby incorporated by reference made a part hereof. Subject to the terms of the Agreement, this Rights Certificate, with or without other Rights Certificates, upon surrender at the registered office of the Company may be exchanged for another Right Certificate or Rights Certificate of like tenor evidencing an aggregate number of Rights equal to the aggregate number of Rights evidenced by the Rights Certificate or Rights Certificates surrendered. If this Rights Certificate shall be exercised in part, the registered holder shall be entitled to receive, upon surrender hereof, another Rights Certificate or Rights Certificates for the number of whole Rights not exercised. Subject to the provisions of the Agreement, each Right evidenced by this Rights Certificate may be surrendered by the holder thereof to the Company for cancellation. No holder of this Rights Certificate, as such, shall be deemed for any purpose the holder of any shares of Preferred Stock issuable on the exercise hereof, nor shall anything contained in the Agreement or herein be construed to confer upon the holder hereof, as such, any of the rights Exhibit A-1 29 of a shareholder of the Company or any right to vote for the election of directors or upon any matter submitted to shareholders at any meeting thereof, or to give or withhold consent to any corporate action, or to receive notice of meetings, or other actions affecting shareholders, or to receive dividends or subscription rights, or otherwise, until the Rights evidenced by this Rights Certificate shall have been exercised as provided in the Agreement. WITNESS signature of the proper offices of the Company and its corporate seal. Date: July ___, 1998 McM Corporation By: ------------------------------- Title: ------------------------- ATTEST: - --------------------------- Secretary [CORPORATE SEAL] Exhibit A-2 30 EXHIBIT B [TO BE ATTACHED TO EACH RIGHTS CERTIFICATE] FORM OF ELECTION TO EXERCISE (TO BE EXECUTED IF HOLDER DESIRE TO EXERCISE THIS RIGHTS CERTIFICATE) MCM CORPORATION The undersigned hereby irrevocably elects to exercise ___ whole Rights represented by the attached Rights Certificate to purchase the shares of Preferred Stock issuable upon the exercise of such Rights and requests that certificates for such shares be issued in the name of and delivered to: ----------------------------- ----------------------------- ----------------------------- (Please print name and address) Social Security or other taxpayer identification number: --------------------------- If such number of Rights shall not be all the Rights evidenced by the attached Rights Certificate, a new Rights Certificate for the balance of such Rights shall be registered in the name of and delivered to: ----------------------------- ----------------------------- ----------------------------- (Please print name and address) Social Security or other taxpayer identification number: --------------------------- Dated: , 19 ------------ -- -------------------------------- *Signatures must be guaranteed by an eligible guarantor institution (including banks, stockbrokers, savings and loan associations, clearing agencies and credit unions with membership in an approved signature guarantee medallion program). Exhibit B-1 31 EXHIBIT C MCM CORPORATION SERIES A PREFERRED STOCK RIGHTS, PREFERENCES, LIMITATIONS AND CHARACTERISTICS 1. Designation and Amount. The shares of this series shall be designated as "Series A Preferred Stock, $1,000 par value per share" (hereinafter called this "Series"). Each share of this Series shall be identical in all respects with the other shares of this Series. The number of shares in this Series shall initially be 60,000, which number may from time to time be increased or decreased (but not below the number then outstanding) by the Board of Directors of the Company. Shares of this Series purchased or otherwise acquired by the Company shall be cancelled and shall thereupon be restored to the status of authorized but unissued shares. 2. Dividends. The holders of shares of this Series shall not be entitled to receive any dividends. 3. Liquidation. Upon the voluntary or involuntary liquidation, dissolution of winding up of the Company, the holders of shares of this Series shall be entitled to receive out of the net assets of the Company, before any payment or distribution shall be made or set apart for payment on the Common Stock or any other class or series of stock of the Company, the amount of $1,000 per share of this Series. After the payment to the holders of the shares of this Series of $1,000 per share, the holders of shares of this Series, as such, shall have no right or claim to any of the remaining net assets of the Company. Neither the sale, lease or conveyance of all or substantially all of the property or business of the Company, nor the merger or consolidation of the Company into or with any other corporation or the merger or consolidation of any other corporation into or with the Company, shall be deemed to be a liquidation, dissolution or winding up, voluntary or involuntary, for purposes of this paragraph. 4. Redemption. Subject to the North Carolina Business Corporation Act and required regulatory approvals, the shares of this Series shall at all times be redeemable at the option of the holder thereof in cash for $1,000 per share payable by the Company by official bank or certified check or wire transfer of immediately available funds. Such redemption shall occur within ten business days after receiving a written notice of redemption from the holder of shares of this Series accompanied by a certificate or certificates for such shares duly endorsed by the holder thereof with signature guaranteed by a financial institution. 5. Conversion and Exchange. The holders of shares of this Series shall not have any rights to convert such shares into or to exchange such shares for shares of Common Stock of the Company or any other class or series of stock (or any other security) of the Company. 32 6. Voting Rights. The holders of shares of this Series shall not have a vote on any matter except as provided to the contrary by the North Carolina Business Corporation Act. 7. Rank. The shares of this Series shall rank, as to distribution of assets upon liquidation, dissolution or winding up, senior to any other class or series of preferred stock of the Company. Exhibit C-2 EX-99.C2 13 TRUST PURCHASE AGREEMENT 7/16/98 1 EXECUTION COPY TRUST PURCHASE AGREEMENT THIS AGREEMENT, made and entered into this 16th day of July, 1998, is by and among IAT REINSURANCE SYNDICATE LTD. ("Buyer"), a Bermuda corporation with its principal office in Bermuda, and WILMINGTON TRUST COMPANY ("Trustee"), a Delaware corporation with its principal office in Wilmington, Delaware, in its capacity as Trustee of the McMillen Trust. BACKGROUND STATEMENT The McMillen Trust (the "Trust") owns 3,087,500 shares of the issued and outstanding common stock of McM Corporation ("McM"), a North Carolina corporation headquartered in Raleigh, North Carolina. Buyer wishes to acquire approximately 49% of the issued and outstanding shares of McM by buying approximately 14% of such shares from the Trust and by buying approximately 35% of such shares in a tender offer (the "Tender Offer") to all persons owning shares other than the Trust. In consideration of the Trust's entering into this Agreement and for not participating in the Tender Offer, the Buyer will deposit with the Trust the sum of $8,864,390.00 (the "Fund"), to be held and invested and reinvested by the Trust as provided in this Agreement. STATEMENT OF AGREEMENT NOW, THEREFORE, in consideration of the foregoing, and the representations, warranties, covenants and agreements contained herein, and intending to be legally bound, the parties hereto agree as follows: 1. Sale and Purchase of Shares. (a) Subject to the terms and conditions of this Agreement, the Trustee shall sell, transfer, convey, assign and deliver to Buyer, and Buyer shall purchase from the Trustee, 658,900 shares of McM (the "Purchased Shares"). At the Closing (as hereinafter defined), the Trust shall deliver to Buyer the certificates representing the Purchased Shares, accompanied by stock powers duly executed and such other documents of transfer as may be required to transfer legal title to the Purchased Shares to Buyer. (b) The purchase price for the Purchased Shares shall be $3.65 per share or a total purchase price of $2,404,985.00 (the "Purchase Price"). The Purchase Price shall be paid by Buyer to the Trustee at the Closing. (c) The Closing of the purchase and sale of the Purchased Shares (the "Closing") will take place at the offices of Ragsdale, Liggett & Foley, Raleigh, North Carolina, within five business days after all of the conditions precedent to closing have been satisfied or waived, or at such other place, time and date as the parties may agree upon in writing (the "Closing Date"). 2 2. Deposit of the Fund. (a) Buyer agrees to transfer to the Trust the sum of $8,864,390.00 (the "Fund") on the Closing Date. The Fund shall be held by the Trust and invested and reinvested by the Trustee in accordance with the instrument creating the Trust as modified by orders of the Court of Chancery of the State of Delaware. Any income earned on the Fund and any increases in the principal of the Fund shall be and remain the sole property of the Trust. Buyer shall not be responsible or liable for any decreases in the value of the Fund as a result of investments by the Trustee. (b) After the purchase and sale of the Purchased Shares, the Trust will own 2,428,600 shares of McM (the "Retained Shares"). If Buyer makes an offer at any time to purchase the Retained Shares, the parties agree that the original principal amount of the Fund, or $8,864,390.00, regardless of any increases or decreases in the value of the Fund or any income earned on the Fund, shall constitute a credit against the purchase price for the Retained Shares. Buyer by this Agreement is making no commitment to purchase or make an offer to purchase the Retained Shares, and the Trust by this Agreement is making no commitment to sell the Retained Shares. Nor are the parties agreeing to a purchase price for the Retained Shares if and when an offer to sell or purchase the Retained Shares shall occur. (c) If the Trust at any time sells any of the Retained Shares to any third party other than Buyer or Buyer's assignee, the Trust shall within five (5) business days after such sale refund to Buyer an amount equal to $3.65 per share for each share of the Retained Shares sold to such third party. (d) If McM at any time makes a filing for protection or liquidation under any section of the United States Bankruptcy Code or similar state law relating to insolvency or receivership, or if the insurance commissioner of any state institutes receivership or liquidation proceedings against McM, the Fund shall become the absolute property of the Trust subject to no restrictions or obligations, and the Trust within five (5) business days of any such filing or proceeding shall transfer to Buyer all of the Retained Shares with no further consideration to be paid by Buyer to the Trust for such shares. The Trust shall deliver to Buyer the certificates representing the Retained Shares accompanied by stock powers duly executed and such other documents of transfer as may be required to transfer legal title to the Retained Shares to Buyer. 3. Representations and Warranties by the Trustee. The Trustee hereby represents and warrants to Buyer as follows: (a) The Trustee is a corporation duly incorporated, validly existing and in good standing under the laws of the State of Delaware. The Trustee is the duly qualified and acting trustee pursuant to the terms of a deed of trust from Alonzo B. and Florence O. McMillen created in 1925. The Trustee is duly authorized to execute and deliver this Agreement. (b) The Trustee has good and valid title to the Purchased Shares free and clear of all restrictions, claims, liens, charges and encumbrances whatsoever, and the Trustee has full right, power and authority to sell, transfer and deliver the Purchased Shares owned by the Trust to Buyer and, upon delivery of the certificate or certificates therefor pursuant to the terms hereof, 2 3 and Buyer's acceptance thereof, will have transferred to Buyer good, marketable and valid title thereto, free and clear of any restrictions, claims, liens, charges or encumbrances whatsoever. (c) The execution, delivery and performance by the Trustee of this Agreement and the transactions contemplated hereby have been duly and validly authorized and approved by all requisite corporate or other action on the part of the Trustee. The Trustee has the power, authority, and capacity to enter into and perform its obligations under this Agreement, and to consummate the transactions contemplated herein. This Agreement has been duly and validly executed by the Trustee and is the legal, valid and binding obligation of the Trustee and the Trust, enforceable in accordance with its terms, except as enforceability may be limited by equitable principles or by bankruptcy, fraudulent conveyance or insolvency laws affecting the enforcement of creditors' rights generally. (d) Neither the execution and delivery of, nor the performance of its obligations under, this Agreement by the Trustee, nor the consummation of the transactions contemplated herein, will conflict with, violate or result in a breach of any of the terms or provisions of, or constitute a default (with the passage of time or giving of notice or both) or give rise to any right of termination, cancellation or acceleration under any agreement or instrument to which the Trustee is a party or violate any law, order, judgment, decree, rule or regulation of any court or governmental authority having jurisdiction over the Trustee or any of the property of the Trust. (e) The Trustee has not retained any broker or finder in connection with the transactions contemplated herein so as to give rise to any valid claim against Buyer for any fee, sales commissions, finders' fees, financial advisory fee or other fees or expenses for which Buyer shall be liable. 4. Representations and Warranties of Buyer. Buyer hereby represents and warrants to the Trustee as follows: (a) Buyer is a corporation duly incorporated, validly existing and in good standing under the laws of Bermuda, and has full corporate power and authority to carry on its business as now conducted. (b) The execution, delivery and performance by Buyer of this Agreement and the transactions contemplated hereby have been duly and validly authorized and approved by all requisite shareholder and corporate action. Buyer has the power, authority and capacity to enter into and perform its obligations under this Agreement, and to consummate the transactions contemplated herein. This Agreement has been duly and validly executed by Buyer and is the legal, valid and binding obligation of Buyer, enforceable in accordance with its terms, except as enforceability may be limited by equitable principles or by bankruptcy, fraudulent conveyance or insolvency laws affecting the enforcement of creditors' rights generally. (c) Neither the execution and delivery of, nor the performance of its obligations under, this Agreement by Buyer, nor the consummation of the transactions contemplated herein, will conflict with, violate or result in a breach of any of the terms or provisions of, or constitute a default (with the passage of time or giving of notice or both) or give rise to any right of termination, cancellation or acceleration under any indenture, mortgage, deed of trust, lease, 3 4 note, or other agreement or instrument to which Buyer is a party, conflict with any provision of the charter documents of Buyer, or violate any law, order, judgment, decree, rule or regulation of any court or governmental authority having jurisdiction over Buyer or its property. (d) The Purchased Shares acquired by Buyer pursuant to this Agreement are being acquired for investment purposes only and not with a view to any public distribution thereof, and Buyer will not offer to sell or otherwise dispose of the shares so acquired by it in violation of any federal or state law applicable to the sale, resale, or distribution of securities. (e) Buyer has not retained any broker or finder in connection with the transactions contemplated herein so as to give rise to any valid claim against the Trustee or the Trust for any fee, sales commissions, finders' fees, financial advisory fee or other fees or expenses for which the Trustee or the Trust shall be liable. 5. Certain Covenants. (a) The Trustee acknowledges that Buyer has already invested $5,000,000 in capital for McM at a below market interest rate of 5% per annum and plans to commit additional capital to McM in the future. The Trustee also acknowledges that the management of Buyer has expertise in the management and operation of insurance companies and that the devotion of time and expertise by the management of Buyer to McM will cause Buyer to forego significant opportunities in regard to other investments. Buyer intends to make available to McM the services of Peter R. Kellogg, its president and chief executive officer, in the management and direction of McM. Mr. Kellogg has vast experience and background and a proven record of success in the management and operation of insurance companies. Mr. Kellogg will devote significant time and effort to the management of McM with no employment agreement and no compensation of any kind. Nor will Buyer or Mr. Kellogg charge McM any management or advisory fees. Buyer intends to negotiate an agreement with McM that will give Buyer rights to purchase from McM for a nominal sum 60,000 shares of a new issue of preferred stock of McM that will have a par value of $1000 per share, will not have a vote, will not pay a dividend, will not be convertible into common stock of McM, and will have such other rights, preferences and characteristics to which Buyer and McM may agree, including but not limited to the right to a preference in any liquidation or dissolution of McM equal to the par value of such preferred stock before any amount is payable or distributable with respect to the common stock of McM. The rights to purchase preferred stock of McM shall be exercisable only if, at any time, Buyer's designees cease to control the board of directors of McM or if the Trust sells to any third party other than Buyer or Buyer's assignee any of the Retained Shares. The Trustee acknowledges that the issuance of such rights to purchase preferred stock by McM to Buyer is appropriate in order to properly compensate Buyer for its capital and management commitments to McM. The Trustee covenants and agrees with Buyer that it will not oppose and will support the issuance of the rights to purchase preferred stock of McM, and, if required by law or requested by Buyer, the Trustee will vote all of the Retained Shares in favor of the issuance of such rights. (b) The Trustee covenants and agrees that it will not tender any of the Retained Shares in the Tender Offer. 4 5 (c) Should Buyer subsequently wish to sell the Purchased Shares to a third party on or before but not after December 31, 2003, Buyer shall first obtain the written consent of the Trustee, such consent not to be unreasonably withheld if the Trustee is reasonably satisfied as to the financial and professional qualifications of such third party. The certificate(s) for the Purchased Shares shall bear an appropriate legend with respect to this requirement. Buyer will grant to the Trustee a right of first refusal to buy the Purchased Shares and any other capital stock and rights to acquire capital stock of McM on the same terms and at the same price offered to any third party by Buyer. If Buyer receives an offer to purchase the Purchased Shares or any other capital stock or rights to acquire capital stock of McM from a third party which Buyer is willing to accept, Buyer shall give the Trustee written notice of such offer describing the terms and the price of such offer. The Buyer shall be free to transfer such Purchased Shares or other capital stock or rights to such third party on the terms described in such notice unless Buyer receives written notice from the Trustee, within 5 business days after the delivery of Buyer's notice described above, indicating that Trustee is exercising its right of first refusal. Buyer shall also be free to transfer such Purchased Shares, capital stock or other rights to such third party on the terms described in Buyer's notice to the Trustee, if within 15 days after the Trustee indicates to Buyer its desire to exercise its right of first refusal, the transaction between the Trustee and Buyer is not closed due to no fault of Buyer. (d) If Buyer makes an offer in writing to the Trust to purchase the Retained Shares at a price in cash that has been determined by a nationally recognized investment banking firm reasonably acceptable to the Trustee to be fair from a financial point of view to the Trust as majority shareholder of McM but which in no event shall be less than $3.65 per share, and if the Trustee declines to accept such offer within twenty business days after such offer is made, the Trustee shall, within five business days after the expiration of the period for acceptance of the offer, pay to Buyer an amount equal to the original principal amount of the Fund. If the Trustee accepts such offer (subject to approval of Court of Chancery of the State of Delaware having jurisdiction over the Trust, if required) within such twenty day period and if the price offered for the Retained Shares is greater than the original principal amount of the Fund, Buyer shall pay to the Trustee within five business days after expiration of the period for acceptance of the offer an amount equal to the difference between the price offered for the Retained Shares and the original principal amount of the Fund plus interest on the original principal amount of the Fund at a rate of 6% per annum from the date the Trust received the Fund to and including the date of payment by Buyer for the Retained Shares, and the Trustee shall transfer the Retained Shares to Buyer free and clear of all claims, liens, and encumbrances. If the Trustee accepts such offer within such twenty day period and if the price offered for the Retained Shares is less than the original principal amount of the Fund, Buyer shall have no obligation to pay any additional amount to the Trust for the Retained Shares, the Trustee shall not be obligated to refund any portion of the Fund to Buyer, and the Trustee shall transfer the Retained Shares to Buyer free and clear of all claims, liens, and encumbrances within five business days after expiration of the period for acceptance of the offer. (e) If the Buyer does not make an offer to purchase the Retained Shares, the Trustee shall retain the Fund subject to the provisions of paragraph 2 of this Agreement. 5 6 6. Conditions Precedent to Obligations of the Trustee. The obligation of the Trustee under this Agreement to sell the Purchased Shares is subject to the fulfillment, at or prior to the Closing, of each of the following conditions: (a) This Agreement and the transactions contemplated hereby have been approved by Court of Chancery of the State of Delaware having jurisdiction over the Trust and by the North Carolina Commissioner of Insurance. (b) The representations and warranties of Buyer contained herein shall be true and correct on and as of the Closing Date and on and as of the date hereof with the same effect as though made on and as of the Closing Date. (c) The waiting period under the Hart-Scott-Rodino Anti-Trust Improvements Act of 1976 shall have expired or terminated. (d) Buyer shall have accepted for payment and paid for the shares of McM validly tendered and not withdrawn pursuant to the Tender Offer. 7. Conditions Precedent to Obligations of Buyer. The obligations of Buyer under this Agreement to purchase the Purchased Shares and to consummate the other transactions contemplated by this Agreement are subject to the fulfillment, at or prior to the Closing, of each of the following conditions: (a) This Agreement and the transactions contemplated hereby have been approved by Court of Chancery of the State of Delaware having jurisdiction over the Trust and by the North Carolina Commissioner of Insurance. (b) Buyer and McM shall have executed and delivered a definitive agreement in form and substance satisfactory to Buyer with respect to the issuance of rights to purchase preferred stock as contemplated by paragraph 5 of this Agreement. (c) The waiting period under the Hart-Scott-Rodino Anti-Trust Improvements Act of 1976 shall have expired or terminated. (d) The representations and warranties of the Trustee contained herein shall be true and correct on and as of the Closing Date and on and as of the date hereof with the same effect as though made on and as of the Closing Date. (e) Buyer shall have accepted for payment and paid for the shares of McM validly tendered and not withdrawn pursuant to the Tender Offer. (f) The directors of McM, the spouses of the directors of McM, the Greenfield Children's Limited Partnership, the Jesse Greenfield IRA, and the charitable foundation of which Mr. Peyton Woodson is a trustee shall have agreed to sell or tender to Buyer an aggregate of 481,932 shares of common stock of McM at a price of $3.65 per share. 6 7 8. Miscellaneous. (a) This Agreement may be terminated at any time prior to the Closing by mutual written consent of Buyer and the Trustee. If this Agreement is terminated in accordance with the foregoing provisions, all further obligations of the parties hereunder shall terminate. Unless so terminated this Agreement shall remain in full force and effect to and including the 1st day of June 2008, at which time this Agreement shall terminate. (b) The parties hereto shall assume and bear all expenses, costs and fees incurred or assumed by them in the preparation and execution of this Agreement and compliance herewith, whether or not the transactions contemplated hereby are consummated. (c) This Agreement shall not be assigned by any party without the prior written consent of the other party, which consent shall not be unreasonably withheld; provided, however, that Buyer may cause any of its direct or indirect subsidiaries to take title to the Purchased Shares so long as Buyer shall guarantee punctual performance in full by such subsidiary of any and all obligations it may have under this Agreement or any agreement executed in connection herewith. This Agreement shall inure to the benefit of, and be binding upon and enforceable against, the successors and permitted assigns of the respective parties. (d) This Agreement or any term hereof may be changed, waived, discharged or terminated only by an agreement in writing signed by both parties. No waiver by a party of any condition or of any breach of any term, covenant, representation or warranty contained herein shall be effective unless in writing, and no waiver in any one or more instances shall be deemed to be a further or continuing waiver of any such condition or breach in any other instances or a waiver of any other condition or breach of any other term, covenant, representation or warranty. (e) All payments to be made pursuant to this Agreement shall be made by certified or official bank check or by wire transfer of immediately available funds. (f) This Agreement constitutes the entire agreement and supersedes all prior agreements and understandings, both written and oral, among the parties with respect to the subject matter hereof. This Agreement may be executed in any number of counterparts, each of which shall be deemed an original, and all of which, together, shall constitute one and the same instrument. This instrument shall be governed in all respects, including validity, interpretation and effect, by the laws of the State of North Carolina (without reference to conflict of law provisions). (g) Subject to the provisions of paragraphs 6(a) and 7(a) above, and except as otherwise required by applicable law, each party agrees to keep this Agreement and the transactions contemplated hereby in strictest confidence and not to disclose the existence or terms of this Agreement to any third party without the written consent of the other. (signature page to follow) 7 8 IN WITNESS WHEREOF, the parties have duly executed this Agreement as of the date first above written. BUYER: IAT REINSURANCE SYNDICATE LTD. By: /s/ Peter R. Kellogg ---------------------------------- Title: President ---------------------------------- Printed Name: Peter R. Kellogg, President --------------------------- WILMINGTON TRUST COMPANY, as Trustee of the McMillen Trust By: /s/ Michael A. DiGregorio ----------------------------------- Michael A. DiGregorio, Vice President/Senior Trust Counsel 8 EX-99.C3 14 TENDER AGREEMENT 7/16/98 1 EXECUTION COPY TENDER AGREEMENT THIS TENDER AGREEMENT (this "Agreement'), made and entered into this 16th day of July, 1998, is by and among IAT REINSURANCE SYNDICATE LTD. ("Buyer"), a Bermuda corporation with its principal office in Bermuda, and the persons listed on SCHEDULE A hereto (each, individually a "Shareholder" and, collectively, the "Shareholders"). BACKGROUND STATEMENT Buyer desires to acquire approximately 49% of the issued and outstanding shares ("Shares") of common stock, par value $1.00 per share (the "Common Stock"), of McM Corporation ("McM"), a North Carolina corporation headquartered in Raleigh, North Carolina, through the acquisition of approximately 14% of such Shares from the McMillen Trust (the "Trust") and a tender offer (the "Offer") to purchase up to 35% of such Shares for $3.65 per share net to the sellers thereof in cash (such amount or any greater per share amount paid in the Offer, the "Per Share Amount"). Buyer and McM have entered into an Offer and Rights Agreement, dated as of the date hereof (the "Offer and Rights Agreement"), which provides, among other things, upon the terms and subject to the conditions thereof, for the Offer. The Offer and Rights Agreement provides that holders of options ("Options") to purchase Shares ("Option Shares") may elect, in their sole discretion, to cancel their Options in return for a cash payment from Buyer equal to the Per Share Amount for each Option Share less the exercise price for each Option Share. The Shareholders are each directors of McM. As of the date hereof, the Shareholders own (beneficially or of record) the number of Shares and Options set forth opposite such Shareholder's name on SCHEDULE A attached hereto. As a condition to the willingness of Buyer to enter into the Offer and Rights Agreement, Buyer has required that the Shareholders agree, and in order to induce Buyer to enter into the Offer and Rights Agreement, the Shareholders have agreed, (i) to tender and not withdraw, or to cause to be tendered and not withdrawn, pursuant to the Offer, all of the Shares listed on Schedule A hereto and all other Shares now owned (beneficially or of record) by such Shareholders or which may hereafter be acquired by such Shareholders (the "Tendered Shares") and (ii) in connection with the Offer, to elect to cancel their Options in consideration of the cash-out payment from Buyer described above. 2 STATEMENT OF AGREEMENT NOW, THEREFORE, in consideration of the foregoing, and the representations, warranties, covenants and agreements contained herein, and intending to be legally bound, the parties hereto agree as follows: 1. Tender of Shares. Subject to the terms and conditions of this Agreement, each Shareholder agrees to validly tender and not withdraw, or to cause to be tendered and not withdrawn, pursuant to the Offer, all of Tendered Shares; provided, that no such tender shall be required if such Shareholder would as a result of such tender incur liability under Section 16(b) of the Securities Exchange Act of 1934, as amended ("Section 16(b)"). Notwithstanding the foregoing, in the event any Shareholder fails to tender any Tendered Shares due to Section 16(b) liability, as soon as such liability lapses with respect to any Tendered Shares, such Shareholder agrees to tender in the Offer, or if Buyer has accepted for payment Shares pursuant to the Offer, to sell to Buyer for the Per Share Amount, such Tendered Shares. 2. Cash-Out and Cancellation of Options. Subject to the terms and conditions of this Agreement, each Shareholder holding Options listed on SCHEDULE A hereto ("Cash-Out Options") agrees, in accordance with the procedures set forth in the Offer, to instruct McM to cancel all of his or her Cash-Out Options in consideration of a cash payment by Buyer for each such Cash-Out Option in an amount, subject to applicable withholding of taxes, equal to (x) the product of (i) the aggregate number of Option Shares subject to such Cash-Out Option times (ii) the Per Share Amount, minus (y) the aggregate exercise price for all Option Shares subject to such Cash-Out Option. In consideration of Buyer's Offer and entry into this Agreement, each Shareholder agrees that each Cash-Out Option with a per share exercise price in excess of the Per Share Amount ("Under Water Options"), upon Buyer's acceptance for payment and payment for Shares validly tendered and not withdrawn pursuant to the Offer, shall be cancelled by McM without payment by Buyer of any additional consideration therefor. 3. Representations and Warranties by the Shareholders. Each Shareholder hereby severally represents and warrants to Buyer as follows: (a) At the time the Tendered Shares are tendered in the Offer, each Shareholder, either individually or together with his spouse, will have good and valid title to the Tendered Shares, free and clear of all restrictions, claims, liens, charges and encumbrances. (b) Each Shareholder has good and valid title to the Cash-Out Options (including, without limitation, the Under Water Options), free and clear of all restrictions, claims, liens, charges and encumbrances other than those set forth in the 1986 Employee Incentive Stock Option Plan and the 1996 Employee Incentive Stock Option Plan (together, the "Plans"). (c) Each Shareholder has the power, authority, and capacity to enter into and perform its obligations under this Agreement, and to consummate the transactions contemplated herein. This Agreement has been duly and validly executed by each Shareholder and is the legal, valid and binding obligation of each Shareholder, enforceable in accordance with its terms, except as enforceability may be limited by equitable principles or by bankruptcy, fraudulent conveyance or insolvency laws affecting the enforcement of creditors' rights generally. 2 3 (d) Neither the execution and delivery of, nor the performance of its obligations under, this Agreement by each Shareholder, nor the consummation of the transactions contemplated herein, will conflict with, violate or result in a breach of any of the terms or provisions of, or constitute a default (with the passage of time or giving of notice or both) or give rise to any right of termination, cancellation or acceleration under any agreement or instrument to which such Shareholder is a party or violate any law, order, judgment, decree, rule or regulation of any court or governmental authority having jurisdiction over each Shareholder or any of the Tendered Shares or Cash-Out Options. (e) No Shareholder has retained any broker or finder in connection with the transactions contemplated herein so as to give rise to any valid claim against Buyer for any fee, sales commissions, finders' fees, financial advisory fee or other fees or expenses for which Buyer shall be liable. 4. Representations and Warranties of Buyer. Buyer hereby represents and warrants to each Shareholder as follows: (a) Buyer is a corporation duly incorporated, validly existing and in good standing under the laws of Bermuda, and has full corporate power and authority to carry on its business as now conducted. (b) The execution, delivery and performance by Buyer of this Agreement and the transactions contemplated hereby have been duly and validly authorized and approved by all requisite shareholder and corporate action. Buyer has the power, authority and capacity to enter into and perform its obligations under this Agreement, and to consummate the transactions contemplated herein. This Agreement has been duly and validly executed by Buyer and is the legal, valid and binding obligation of Buyer, enforceable in accordance with its terms, except as enforceability may be limited by equitable principles or by bankruptcy, fraudulent conveyance or insolvency laws affecting the enforcement of creditors' rights generally. (c) Neither the execution and delivery of, nor the performance of its obligations under, this Agreement by Buyer, nor the consummation of the transactions contemplated herein, will conflict with, violate or result in a breach of any of the terms or provisions of, or constitute a default (with the passage of time or giving of notice or both) or give rise to any right of termination, cancellation or acceleration under any agreement or instrument to which Buyer is a party, conflict with any provision of the charter documents of Buyer, or violate any law, order, judgment, decree, rule or regulation of any court or governmental authority having jurisdiction over Buyer or its property. (d) The Tendered Shares acquired by Buyer pursuant to this Agreement are being acquired for investment purposes only and not with a view to any public distribution thereof, and Buyer will not offer to sell or otherwise dispose of the shares so acquired by it in violation of any federal or state law applicable to the sale, resale, or distribution of securities. (e) Buyer has not retained any broker or finder in connection with the transactions contemplated herein so as to give rise to any valid claim against any Shareholder for any fee, 3 4 sales commissions, finders' fees, financial advisory fee or other fees or expenses for which any Shareholder shall be liable. 5. Certain Covenants. (a) Each Shareholder covenants and agrees that it will not buy any Shares from the Trust. (b) Each Shareholder covenants and agrees, at the request of Buyer made at any time after the purchase of the Tendered Shares and the cash-out of the Cash-Out Options by Buyer pursuant to the Offer, to resign as a director of McM, effective immediately upon such request or such later time as Buyer shall designate. (c) Each Shareholder not requested by Buyer to resign agrees to appoint to fill the vacancies created by the resignations given pursuant to clause (b) above, director nominees designated by Buyer, effective immediately upon Buyer's request or such later time as Buyer shall designate. (d) Except as contemplated by Sections 1 and 2 of this Agreement, each Shareholder hereby covenants and agrees that such Shareholder shall not, and shall not permit any other beneficial owner of his Tendered Shares to, sell, transfer, tender, exercise, assign, hypothecate or otherwise dispose of, or create or permit to exist any security interest, lien, claim, pledge, option, right of first refusal, agreement, limitation on such Shareholder's voting rights, charge or other encumbrance of any nature whatsoever with respect to such Tendered Shares or such Cash-Out Options, or agree to do any of the foregoing, at any time prior to the earlier of (x) the purchase by Buyer of the Tendered Shares and the cash-out by Buyer of the Cash-Out Options pursuant to the Offer or (y) the termination of this Agreement. (e) Each Shareholder agrees on the date hereof to terminate any election made by such Shareholder under the Company's 1996 Non-Employee Directors' Stock Plan (the "Directors Plan") to receive Shares in lieu of any accrued directors' fees otherwise payable in cash, which termination shall be effective with respect to all accrued fees payable on or after July 1, 1998. 6. Miscellaneous. (a) This Agreement may be terminated (i) at any time by mutual written consent of Buyer and the Shareholders or (ii) by Buyer or any Shareholder, at any time the date 180 days after the date hereof, if Buyer has not purchased the Tendered Shares and cashed out the Cash-Out Options by such date. If this Agreement is terminated in accordance with the foregoing provisions, all further obligations of the parties hereunder shall terminate. (b) The parties hereto shall assume and bear all expenses, costs and fees incurred or assumed by them in the preparation and execution of this Agreement and compliance herewith, whether or not the transactions contemplated hereby are consummated. (c) This Agreement shall not be assigned by any party without the prior written consent of the other party, which consent shall not be unreasonably withheld; provided, however, 4 5 that Buyer may cause any of its direct or indirect subsidiaries to take title to the Tendered Shares so long as Buyer shall guarantee punctual performance in full by such subsidiary of any and all obligations it may have under this Agreement or any agreement executed in connection herewith. This Agreement shall inure to the benefit of, and be binding upon and enforceable against, the successors, heirs and permitted assigns of the respective parties. (d) This Agreement or any term hereof may be changed, waived, discharged or terminated only by an agreement in writing signed by both parties. No waiver by a party of any condition or of any breach of any term, covenant, representation or warranty contained herein shall be effective unless in writing, and no waiver in any one or more instances shall be deemed to be a further or continuing waiver of any such condition or breach in any other instances or a waiver of any other condition or breach of any other term, covenant, representation or warranty. (e) This Agreement constitutes the entire agreement and supersedes all prior agreements and understandings, both written and oral, among the parties with respect to the subject matter hereof. This Agreement may be executed in any number of counterparts, each of which shall be deemed an original, and all of which, together, shall constitute one and the same instrument. This instrument shall be governed in all respects, including validity, interpretation and effect, by the laws of the State of North Carolina (without reference to conflict of law provisions). (f) The parties hereto agree that irreparable damage would occur in the event any provision of this Agreement was not performed in accordance with the terms hereof and that the parties shall be entitled to specific performance of the terms hereof, in addition to any other remedy at law or in equity. (g) If any term or other provision of this Agreement is invalid , illegal or incapable of being enforced by any rule of law, or public policy, all other conditions and provision of this Agreement shall nevertheless remain in full force and effect so long as the economic or legal substance of this Agreement is not affected in any manner materially adverse to any party. Upon such determination that any term or other provision is invalid, illegal or incapable of being enforced, the parties hereto shall negotiate in good faith to modify this Agreement so as to effect the original intent of the parties as closely as possible in a mutually acceptable manner in order that the terms of this Agreement remain as originally contemplated to the fullest extent possible. (h) Except as otherwise required by applicable law, each party agrees to keep this Agreement and the transactions contemplated hereby in strictest confidence and not to disclose the existence or terms of this Agreement to any third party without the written consent of Buyer and McM. 5 6 IN WITNESS WHEREOF, the parties have duly executed this Agreement as of the date first above written. BUYER: IAT REINSURANCE SYNDICATE LTD. ATTEST: By: /s/ Peter R. Kellogg ------------------------------- Title: President --------------------------- /s/ Marguerite R. Gorman Printed Name: Peter R. Kellogg - ------------------------------- -------------------- Marguerite R. Gorman, Secretary SHAREHOLDERS: /s/ Michael A. DiGregorio ---------------------------------- Michael A. DiGregorio /s/ Jesse Greenfield ---------------------------------- Jesse Greenfield /s/ George E. King ---------------------------------- George E. King /s/ Laurence F. Lee, Jr. ---------------------------------- Laurence F. Lee, Jr. /s/ Laurence F. Lee III ---------------------------------- Laurence F. Lee III /s/ Claude G. Sanchez, Jr. ---------------------------------- Claude G. Sanchez, Jr. /s/ Stephen L. Stephano ---------------------------------- Stephen L. Stephano /s/ R. Peyton Woodson III ---------------------------------- R. Peyton Woodson III 6 7 SCHEDULE A
- ------------------------------------------------------------------------------- OPTION CASH-OUT AMOUNT EXERCISE (ASSUMING $3.65 SHAREHOLDER(S) SHARES* OPTIONS PRICE PER SHARE AMOUNT) - ------------------------------------------------------------------------------- Michael A. DiGregorio 80 -- -- $ 0 - ------------------------------------------------------------------------------- Jesse Greenfield 364,464 -- -- $ 0 - ------------------------------------------------------------------------------- George E. King 44,300 21,481 $1.38 $48,761.87 9,500 $2.25 $13,300.00 40,500 $2.75 $36,450.00 7,500 $3.94 -- -------------- $98,511.87 - ------------------------------------------------------------------------------- Laurence F. Lee, Jr. 779 -- -- $ 0 - ------------------------------------------------------------------------------- Laurence F. Lee III 10 -- -- $ 0 - ------------------------------------------------------------------------------- Claude G. Sanchez, Jr. 50 -- -- $ 0 - ------------------------------------------------------------------------------- Stephen L. Stephano 32,515 21,481 $1.38 $48,761.87 9,500 $2.25 $13,300.00 40,500 $2.75 $36,450.00 7,500 $3.94 -- -------------- $98,511.87 - ------------------------------------------------------------------------------- R. Peyton Woodson III 39,734 -- - -------------------------------------------------------------------------------
* As reported on McM Corporation's Proxy Statement dated April 21, 1998. 7 EX-99.C4 15 CONFIDENTIALITY AGREEMENT 4/15/98 1 CONFIDENTIALITY AGREEMENT Confidential April 15, 1998 Mr. Peter Kellogg IAT Reinsurance Syndicate Ltd. 120 Broadway New York, NY 10271 Dear Mr. Kellogg: In order to allow you to evaluate the possible acquisition (the "Proposed Acquisition") of McM Corporation (the "Company"), we will deliver to you, upon your execution and delivery to us of this letter agreement, certain information about the properties and operations of the Company. All information about the Company furnished by us or our affiliates, or our respective directors, officers, employees, agents or controlling persons (such affiliates and other persons collectively referred to herein as "Representatives"), whether furnished before or after the date hereof, and regardless of the manner in which it is furnished, is referred to in this letter agreement as "Proprietary Information." Proprietary Information does not include, however, information which (a) is or becomes generally available to the public other than as a result of a disclosure by you or your Representatives, (b) was available to you on a non-confidential basis prior to its disclosure by us or (c) becomes available to you on a non-confidential basis from a person other than us or our Representatives who is not otherwise bound by a confidentiality agreement with us or our Representatives, or is not otherwise prohibited from transmitting the information to you. As used in this letter, the term "person" shall be broadly interpreted to include, without limitation, any corporation, company, partnership and individual. Unless otherwise agreed to in writing by us, you agree (a), except as required by law, to keep all Proprietary Information confidential and not to disclose or reveal any Proprietary Information to any person other than those employed by you or on your behalf who are actively and directly participating in the evaluation of the Proposed Acquisition or who otherwise need to know the Proprietary Information for the purpose of evaluating the Proposed Acquisition and to cause those persons to observe the terms of the agreement and (b) not to use Proprietary Information for any purpose other than in connection with the consummation of the Proposed Acquisition in a manner which we have approved. You will be responsible for any breach of the terms hereunder by you or the persons or entities referred to in subparagraph (a) of this paragraph. In the event that you are requested pursuant to, or required by, applicable law or regulation or by legal process to disclose any Proprietary Information, you agree that you will provide us with prompt notice of such request(s) to enable us to seek an appropriate protective order or other appropriate remedy, or, if appropriate, waive compliance with the terms of this letter agreement, and you shall 2 reasonably cooperate with the Company to obtain such protective order or other remedy. In the event that such protective order or other remedy is not obtained, or that the Company waives compliance with the provisions hereof, you or such Representative, as the case may be, may disclose to any tribunal only that portion of the Proprietary Information which you are advised by opinion of counsel is legally required to be disclosed. You hereby acknowledge that you are aware, and that you will advise each of your Representatives who are informed as to the matters which are the subject of this letter, that the United States securities laws prohibit any person who has received from an issuer material, non-public information concerning the matters which are the subject of this letter from purchasing or selling securities of such issuer or from communicating such information to any other person under circumstances in which it is reasonably foreseeable that such person is likely to purchase or sell such securities. Unless otherwise required by law, neither party nor any of such party's Representatives will, without our prior written consent, disclose to any person (other than those actively and directly participating in the Proposed Acquisition) any information about the Proposed Acquisition, or the terms, conditions or other facts relating thereto, including the fact that discussions are taking place with respect thereto or the status thereof, or the fact that the Proprietary Information has been made available to you. In consideration of our furnishing you with Proprietary Information, you also agree that for a period of one year from the date of this letter agreement, neither you nor any of your Representatives will, without the prior written consent of the Company or its Board of Directors: (a) acquire, offer to acquire, or agree to acquire, directly or indirectly, by purchase or otherwise, any voting securities or direct or indirect rights to acquire any voting securities of the Company or any subsidiary thereof, or of any successor to or person in control of the Company, or any assets of the Company or any subsidiary or division thereof or of any such successor or controlling person; (b) make, or in any way participate, directly or indirectly, in any "solicitation" or "proxies" to vote (as such terms are used in the rules of the Securities and Exchange Commission), or seek to advise or influence any person or entity with respect to the voting of any voting securities of the Company; (c) make any public announcement with respect to, or submit a proposal for, or offer of (with or without conditions) any extraordinary transaction involving the Company or its securities or assets; (d) seek or propose to influence or control the Company's management or policies (or request permission to do so); 3 (e) solicit, encourage or induce any person employed by the Company to leave the Company's employ, without the Company's prior written consent; or (f) form, join or in any way participate in a "group" as defined in Section 13(d)(3) of the Securities Exchange Act of 1934, as amended (the "Exchange Act"), in connection with any of the foregoing. You also agree that the Company will be entitled to equitable relief, including injunction, in the event of any breach of the provisions of this paragraph. If you determine that you do not wish to proceed with the Proposed Acquisition, you will promptly advise us of that decision. In that case, or in the event that the Proposed Acquisition is not consummated by you, you will, upon our request, promptly deliver to us all of the Proprietary Information, including all copies, reproductions, summaries, analyses or extracts thereof or based thereon in your possession or in the possession of any of your Representatives. Although the Proprietary Information contains information which we believe to be relevant for the purpose of your evaluation of the Proposed Acquisition, we do not make any representation or warranty as to the accuracy or completeness of the Proprietary Information. Neither we, our affiliates, nor any of our respective officers, directors, employees, agents or controlling persons within the meaning of Section 20 of the Exchange Act shall have any liability to you or any of your Representatives relating to or arising from the use of the Proprietary Information. Without prejudice to the rights and remedies otherwise available to us, you agree that money damages would not be a sufficient remedy for any breach of this letter agreement and, accordingly, we shall be entitled to equitable relief by way of injunction if you or any of your Representatives breach or threaten to breach any of the provisions of this letter agreement. It is further understood and agreed that no failure or delay by us in exercising any right, power or privilege hereunder shall operate as a waiver thereof, nor shall any single or partial exercise thereof preclude any other or further exercise thereof or the exercise of any right, power or privilege hereunder. This letter agreement will be construed and enforced in accordance with the laws of the State of North Carolina applicable to agreements made and to be performed entirely in such State. Please confirm your agreement with the foregoing by signing and returning the enclosed duplicate copy of this letter to PaineWebber Incorporated, 1285 Avenue of the Americas, 12th Floor, New York, New York 10019, Attention: Bradford I. Hearsh. Should you have any questions concerning this letter, please contact Mr. Hearsh at (212) 713-3148. Very truly yours, McM CORPORATION By /s/ George E. King --------------------------------------- George E. King Chairman and Chief Executive Officer Accepted and Agreed to as of the date first written above: IAT REINSURANCE SYNDICATE LIMITED By: /s/ Peter R. Kellogg --------------------------------- Peter Kellogg EX-99.C5 16 CERTIFICATE OF CONTRIBUTION 6/15/98 1 OCCIDENTAL FIRE & CASUALTY COMPANY OF NORTH CAROLINA 702 Oberlin Road Raleigh, North Carolina 27605 CERTIFICATE OF CONTRIBUTION Certificate No. 1 THIS IS TO CERTIFY THAT IAT REINSURANCE SYNDICATE, LTD., a Bermuda corporation, hereinafter called "Contributor," has advanced to OCCIDENTAL FIRE & CASUALTY COMPANY OF NORTH CAROLINA, a North Carolina corporation, hereinafter called "OF&C," the sum of ONE MILLION DOLLARS ($1,000,000) in cash, lawful money of the United States, hereinafter called the "Principal Sum." I This Certificate of Contribution is issued pursuant to the authority granted by The Honorable James E. Long, the Commissioner of Insurance of the State of North Carolina, and is hereby designated "Certificate No. 1 ." II The Principal Sum of this Certificate, to wit, ONE MILLION DOLLARS ($1,000,000), shall upon presentation of this Certificate for endorsement of any partial payment, or upon complete surrender for cancellation in return for final payment in full, be payable no later than December 31, 2000, by OF&C at its Home Office, only out of the excess of the admitted assets of OF&C over the sum of: (1) All liabilities (including, but not limited to claims, losses, reserves, reinsurance, policyholder dividends, production and administrative expenses, taxes, loans and advances), but excluding any amounts for or on account of any outstanding Certificates of Contribution, including this Certificate; and 2 (2) An amount (of surplus) equal to the larger of (a) or (b) hereinafter: (a) The amount required by the laws of North Carolina at the time of such repayment for the issuance of a Certificate of Authority to transact the classes of insurance which it is then transacting anywhere, or which it is authorized to transact in North Carolina, or the amount required by the laws of any other jurisdiction for the retention of its Certificate of Authority in that jurisdiction, whichever is the largest amount; or (b) The amount required in order to maintain capital and surplus at a level of $500,000 above the Company Action Level of Risk Based Capital as defined by NAIC-published guidelines. III The Principal Sum of this Certificate shall not be payable in whole or in part, except upon approval of a majority of the Directors of OF&C made and recorded at a regular or special meeting; provided, however, that the Directors of OF&C shall be required to vote payment of such Principal Sum, either in whole or in part, whenever the condition of OF&C is such that it meets the requirements of Paragraph II; provided, further, that in no event shall the principal sum be payable in whole or in part except upon approval in writing by the Commissioner of Insurance. IV Interest at the rate of 5.0% per annum,, not compounded, shall be due and payable quarterly by OF&C, at its Home Office, upon the unpaid balance of the Principal Sum of this Certificate to the extent, and only to the extent, that funds of OF&C exist on each such due date to (a) discharge all liabilities within the meaning of Paragraph II (2) hereinabove plus that amount of surplus required by the laws of any jurisdiction in which it is licensed to do business to retain unimpaired its Certificate of Authority there and (b) such amounts have been approved in writing by the Commissioner of Insurance. If no funds in whole or in part exist on any such date, such interest for which no funds for payment exist shall not become due or payable but shall accrue and shall become due and payable when and to the extent such funds do come into existence thereafter 3 and such amounts have been approved in writing by the Commissioner of Insurance. Any interest both due and payable by the terms of this paragraph shall create a cause of action in the contributor and be a liability of OF&C. V The obligations evidenced by this Certificate shall not be a liability or claim against OF&C or its funds or assets at any time except to the extent that the Principal Sum hereof, in whole or in part, shall be due and payable in accordance with the provisions of Paragraphs II and III hereof and except to the extent that interest on this Certificate, in whole or in part, shall be due and payable in accordance with the provisions of Paragraph IV hereof. The Contributor shall have no right of offset for amounts due under this Certificate of Contribution with regard to any reinsurance balances due or to become due or against any other obligations owed OF&C by Contributor. VI Should OF&C at any time discontinue the insurance business, then, after the payment or provisions for payment of all the obligations described in subdivision (1) of Paragraph II hereof, following the determination of such facts by the Commissioner of Insurance of the State of North Carolina, any remaining funds or assets of OF&C shall first be applied to the payment of any interest accrued hereon, then to the remaining unpaid balance of the Principal Sum of this Certificate. VII Should, at any time during the term of this Certificate, OF&C and/or its parent, McM Corporation, enter into a definitive agreement to sell or otherwise participate in a transaction for the transfer of a significant portion (20% or more) of the stock or assets of OF&C and/or McM Corporation to a party other than the Contributor, then the maturity of this Certificate shall 4 accelerate to the date of such definitive agreement, and the interest rate specified in Paragraph IV shall be modified ab initio to Fifteen Percent (15.0%) per annum. VIII It is understood and agreed that the Contributor has made the foregoing contribution upon the terms and conditions herein set forth, after having been furnished with a copy of the approval of the Commissioner of Insurance of the State of North Carolina authorizing the issuance of this Certificate and having read the same, and that this Certificate evidences the complete understanding and agreement between the Contributor and OF&C. [Signature pages follow.] 5 IN WITNESS WHEREOF, OF&C has executed this Certificate at Raleigh, North Carolina, this 15th day of June, 1998. OCCIDENTAL FIRE & CASUALTY COMPANY OF NORTH CAROLINA By: /s/ Stephen L. Stephano ---------------------------------- Attest: President and CEO /s/ Michael D. Blinson - ---------------------------------- Secretary [Corporate Seal] APPROVED AND ACCEPTED: IAT REINSURANCE SYNDICATE, LTD. By: /s/ Peter R. Kellogg - ---------------------------------- President Attest: /s/ Marguerite R. Gorman - ---------------------------------- Secretary [Corporate Seal] 6 Stephen L. Stephano and Michael D. Blinson, the undersigned, do each hereby certify under penalty of perjury that they are the President and Secretary of Occidental Fire & Casualty Company of North Carolina; they and each of them executed this Certificate of Contribution No. 1 pursuant to the authority granted to them by the Board of Directors of Occidental Fire & Casualty Company of North Carolina. Dated this the 15th day of June, 1998, at Raleigh, North Carolina. /s/ Stephen L. Stephano /s/ Michael D. Blinson - ---------------------------------- ---------------------------------- President and CEO Secretary Occidental Fire & Casualty Occidental Fire & Casualty Company of North Carolina Company of North Carolina EX-99.1 17 NON-CONSOLIDATED FINANCIAL STATEMENTS/YEAR 1 IAT REINSURANCE SYNDICATE LTD. (INCORPORATED IN BERMUDA) NON-CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEARS ENDED DECEMBER 31, 1997 AND 1996 "COPY" 2 COOPERS & LYBRAND CHARTERED ACCOUNTANTS Dorchester House telephone (441) 295-2000 7 Church Street West Hamilton, Bermuda HM 11 fax (441) 295-1242 (groups 1/2/3) P.O. Box HM 1171 Hamilton, Bermuda HM EX
MAY 21, 1998 AUDITORS' REPORT TO THE SHAREHOLDERS OF IAT REINSURANCE SYNDICATE LTD. We have audited the non-consolidated balance sheets of IAT Reinsurance Syndicate Ltd. as of December 31, 1997 and 1996 and the non-consolidated statements of earnings and retained earnings and cash flows for the years then ended. 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 auditing standards generally accepted in the United States of America. Those standards require that we plan and perform an 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 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 report dated April 1, 1997 we expressed an opinion that the Company had accounted for the funds received from the writing of call options to a related party as a reduction of investments, rather than as a deferred income item. Furthermore, the Company did not introduce a policy of amortization for the option premium as required under generally accepted accounting principles. As described in note 3 these call options were repaid during the year ended December 31, 1997 with no gain or loss arising on the transaction and accordingly the Company did not need to introduce a policy of amortization for the option premium for the year ended December 31, 1996. However, the Company had accounted for the funds received from the writing of call options to a related party as a reduction of investments, rather than as an amount due to a related party. Accordingly our present opinion on the financial statements for the year ended December 31, 1996 is different from that expressed in our previous report. Because of the departure from generally accepted accounting principles, assets and liabilities are understated by $44 million as of December 31, 1996. As described in note 2h) to these non-consolidated financial statements the Company's investment in its wholly-owned subsidiary as of December 31, 1997 and 1996 is recorded at cost. This is not in accordance with generally accepted accounting principles which require that the financial statements of the subsidiary be consolidated with those of the Company. In our opinion, except for the effects of the matters discussed in the preceding paragraphs, these non-consolidated financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 1997 and 1996 and the results of its operations and cash flows for the years then ended in conformity with accounting principles generally accepted in the United States of America. COOPERS & LYBRAND CHARTERED ACCOUNTANTS Coopers & Lybrand is a member of Coopers & Lybrand International, a limited liability association incorporated in Switzerland David E.W. Lines OBE, FCA, JP Raymond C. Medeiros George H. Holmes Peter C.B. Mitchell Thomas E.C. Miller Darren Q. Johnston E. Kirkland Cooper OBE, FCA, JP (Consultant) 3 IAT REINSURANCE SYNDICATE LTD. Non-Consolidated Balance Sheets As Of December 31, 1997 and 1996 (Expressed In U.S. Dollars)
================================================================================================================== 1 9 9 7 1 9 9 6 $ $ - ------------------------------------------------------------------------------------------------------------------ ASSETS Cash and cash equivalents 294,948 1,463,145 Investments (note 3): Equity securities at market value (cost: $80,873,808; 1996 - $43,332,074) 253,418,475 128,464,706 Fixed maturity investments at amortized cost (market value: $1,753,041; 1996 - $1,521,120) 982,028 1,215,304 Insurance balances receivable 127,917 119,989 Investment income receivable 5,458,781 3,862,653 Other investments (note 4) 2,343,243 1,154,095 Amounts due from related parties (note 5) 3,600,000 770,000 Funds withheld 56,009 58,399 Prepaid expense 5,040 0 Investment in subsidiary (note 15) 4,000,000 8,000,000 -------------------------------- 270,286,441 145,108,291 ================================ LIABILITIES Accounts payable and accrued liabilities 80,760 125,964 Loan from shareholder (note 15) 8,000,000 8,000,000 Loan from subsidiary (note 16) 1,500,000 0 Provision for losses and loss expenses 6,525,346 6,643,089 Dividends payable (note 7) 2,875,144 2,375,119 -------------------------------- 18,981,250 17,144,172 -------------------------------- SHAREHOLDERS' EQUITY Capital stock (note 7) 120,005 120,005 Contributed surplus 11,051,603 11,051,603 Unrealized appreciation on equity securities 172,544,667 85,132,632 Retained earnings 67,588,916 31,659,879 -------------------------------- 251,305,191 127,964,119 -------------------------------- 270,286,441 145,108,291 ================================
SIGNED ON BEHALF OF THE BOARD - ------------------------------------------------ ----------------------------------------------- Director Director
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE NON-CONSOLIDATED FINANCIAL STATEMENTS. 4 IAT REINSURANCE SYNDICATE LTD. Non-Consolidated Statements Of Earnings And Retained Earnings For The Years Ended December 31, 1997 and 1996 (Expressed in U.S. Dollars)
================================================================================================================== 1 9 9 7 1 9 9 6 $ $ - ------------------------------------------------------------------------------------------------------------------ UNDERWRITING INCOME Gross premiums written (returned) 10,464 (10,554) Other insurance income 0 39,625 -------------------------------- Net premiums written and earned 10,464 29,071 -------------------------------- UNDERWRITING EXPENSES Losses and loss expenses paid 128,627 171,079 Losses recovered (10,472) (6,374) Change in provision for losses and loss expenses (117,743) (501,597) Change in provision for losses recoverable 15,599 4,709 Commission and brokerage adjustments 7,118 9,911 Letter of credit charges 9,523 33,473 -------------------------------- 32,652 (288,799) ================================ NET UNDERWRITING PROFIT (LOSS) (22,188) 317,870 Investment income (note 8) 10,603,571 6,838,481 Net gain on sale of investments 26,497,176 607,744 General and administrative expenses (604,497) (515,001) -------------------------------- EARNINGS FOR THE YEAR - BEFORE TAX 36,474,062 7,249,094 Income Tax Expense (note 11) 45,000 281,950 -------------------------------- NET EARNINGS FOR THE YEAR 36,429,062 6,967,144 RETAINED EARNINGS - BEGINNING OF YEAR 31,659,879 25,192,760 DIVIDENDS (500,025) (500,025) -------------------------------- RETAINED EARNINGS - END OF YEAR 67,588,916 31,659,879 ================================
The accompanying notes are an integral part of these non-consolidated financial statements. 5 IAT REINSURANCE SYNDICATE LTD. Non-Consolidated Statements Of Cash Flows For The Years Ended December 31, 1997 And 1996 (Expressed In U.S. Dollars)
================================================================================================================== 1 9 9 7 1 9 9 6 $ $ - ------------------------------------------------------------------------------------------------------------------ CASH FLOWS FROM OPERATING ACTIVITIES: Net earnings for the year 36,429,062 6,967,144 Adjustments to reconcile net earnings to net cash provided by operating activities: Gain on sale of investments (26,497,176) (607,744) Amortization of discount on investments 233,276 (418,244) Change in assets and liabilities: Insurance balances receivable (7,928) (1,666) Investment income receivable (1,596,128) (2,829,072) Funds withheld 2,390 (17,875) Prepaid expenses (5,040) 65,415 Accounts payable and accrued liabilities (45,204) 72,112 Provision for losses and loss expenses (117,743) (501,597) --------------------------------- Net cash provided by operating activities 8,395,509 2,728,473 --------------------------------- CASH FLOWS FROM INVESTING ACTIVITIES: Purchase of other investments (1,189,148) (755,334) Proceeds from sale of other investments 0 70,000 Purchases of equities (191,867,752) (52,275,123) Proceeds from sales of equities 224,823,194 17,683,531 Purchases of fixed maturity investments 0 (10,000) Proceeds from sales of fixed maturity investments 0 1,666,099 --------------------------------- Cash provided by (used in) investing activities 31,766,294 (33,620,827) --------------------------------- CASH FLOWS FROM FINANCING ACTIVITIES: Loan from subsidiary 1,500,000 0 Repayment of call options (44,000,000) 0 Issue of call options 0 24,000,000 Repayment of loan 0 (2,350,000) Advance of amounts due from related parties (2,900,000) (70,000) Dividend of capital from subsidiary 4,000,000 0 Repayment of amounts due from related parties 70,000 7,705,075 --------------------------------- Cash provided by (used in) financing activities (41,330,000) 29,285,075 --------------------------------- DECREASE IN CASH AND CASH EQUIVALENTS (1,168,197) (1,607,279) CASH AND CASH EQUIVALENTS - BEGINNING OF YEAR 1,463,145 3,070,424 --------------------------------- CASH AND CASH EQUIVALENTS - END OF YEAR 294,948 1,463,145 ================================= SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION: Cash paid during the year for interest 8,129 654,054 Cash paid during the year for taxes 45,000 281,950 --------------------------------- 53,129 936,004 =================================
The accompanying notes are an integral part of these non-consolidated financial statements. 6 IAT REINSURANCE SYNDICATE LTD. Notes To Non-Consolidated Financial Statements For The Years Ended December 31, 1997 And 1996 (Expressed In U.S. Dollars) ================================================================================ 1. OPERATIONS The Company was incorporated on June 6, 1991 under the laws of Bermuda. The Company is managed in Bermuda by J&H Marsh & McLennan Management (Bermuda) Ltd. and is registered as a Class 3 insurer under The Insurance Act 1978 (Bermuda), amendments thereto and related regulations ("the Act"). Effective September 30, 1991, the Company assumed the assets and liabilities and insurance business of IAT Syndicate, Inc. ("the Syndicate"), a former member of the New York Insurance Exchange ("the Exchange"). The insurance business written by the Syndicate consisted of non-related property and casualty policies from February 1986 until its petition for voluntary withdrawal from the Exchange in December 1987, which was approved in November 1988. As a result, all of the insurance business previously assumed by the Company is in run-off. 2. SIGNIFICANT ACCOUNTING POLICIES These financial statements have been prepared on the basis of accounting principles generally accepted in the United States of America with the exception of note 2(h). The Company's significant accounting policies are: a) PREMIUMS WRITTEN Premiums written, adjustments for the return of premium overpayments and retrospective premium adjustments are based on information provided by the ceding company, and are recorded and earned by the Company as reported. Reinsurance premiums ceded, that are determined retrospectively based on claims experience, are recorded as paid. b) INVESTMENTS The Company's investments in equity securities have been classified as "securities available for sale", and are therefore reported at market value with the unrealized appreciation or depreciation on the investments reported as a separate component of shareholders' equity. The Company's investments in bonds have been classified as "held to maturity", as the Company has the positive intent and ability to hold the debt securities to maturity, and are therefore reported at amortized cost. Investment income is recognized when earned and includes the amortization of premium and discount on investments and is stated net of investment management fees. Realized gains and losses on sales are determined by specific identification. 7 IAT REINSURANCE SYNDICATE LTD. Notes To Non-Consolidated Financial Statements (Continued) For The Years Ended December 31, 1997 And 1996 (Expressed In U.S. Dollars) ================================================================================ 2. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) c) OTHER INVESTMENTS Other investments are carried at cost, unless it is determined that there is a permanent diminution in value, at which time investments are written down to the estimated realizable value, which becomes the new cost basis. d) LOSSES AND LOSS EXPENSES The provision for losses and loss expenses, which includes a provision for losses incurred but not reported and loss adjustment expenses, represents amounts reported by ceding companies and the estimates of management based upon an independent actuarial study. The Company believes that the provision for losses and loss expenses is adequate to cover the ultimate net cost of losses incurred; however, because of the short length of time the Syndicate wrote business, the estimates are primarily based on the experience of other entities writing similar lines of insurance and upon an actuarial study prepared by independent actuaries, using the latest available information. These estimates require assumptions and projections as to future events, and ultimate losses may vary significantly from amounts reflected in the accompanying financial statements. The methods of making such estimates are continually reviewed and updated by the Company and any adjustments resulting therefrom are reflected in earnings when they become known. e) STATEMENTS OF CASH FLOWS For purposes of the statements of cash flows, cash equivalents include highly-liquid investments with a maturity of under three months at the date of purchase. f) OPTIONS Funds received from the issue of options against the Company's securities are shown as a reduction of the value of the portfolio until such time as the option expires or is exercised, at which time the funds are taken to income. g) USE OF ESTIMATES The preparation of financial statements in accordance with generally accepted accounting principles, requires management to make estimates and assumptions that affect reported amounts of assets and liabilities and disclosure of contingent assets and liabilities as at the date of the financial statements. Estimates also affect the reported amounts of income and expenses for the reporting period. Actual results could differ from those estimates. h) INVESTMENT IN SUBSIDIARY This is accounted for at cost. 8 IAT REINSURANCE SYNDICATE LTD. Notes To Non-Consolidated Financial Statements (Continued) For The Years Ended December 31, 1997 And 1996 (Expressed In U.S. Dollars) ================================================================================ 3. INVESTMENTS The cost (amortized cost for fixed maturity investments), market value and related unrealized gains (losses) of investments are as follows:
COST/ GROSS GROSS AMORTIZED UNREALIZED UNREALIZED MARKET COST GAINS LOSSES VALUE $ $ $ $ ---------------------------------------------------------------- December 31, 1997 Fixed maturities (held to maturity and carried at amortized cost): Corporate 982,028 771,013 0 1,753,041 ================================================================ Equity securities (available for sale and carried at market value) 80,873,808 172,544,667 0 253,418,475 ================================================================
COST/ GROSS GROSS AMORTIZED UNREALIZED UNREALIZED MARKET COST GAINS LOSSES VALUE $ $ $ $ ---------------------------------------------------------------- December 31, 1996 Fixed maturities (held to maturity and carried at amortized cost): Corporate 1,215,304 305,816 0 1,521,120 ================================================================ Equity securities (available for sale and carried at market value) 87,332,074 85,132,632 0 172,464,706 Call options (44,000,000) 0 0 (44,000,000) ---------------------------------------------------------------- 43,332,074 85,132,632 0 128,464,706 ================================================================
Proceeds from the sale and redemption of available for sale investments for the years ended December 31, 1997 and 1996 were $224,823,194 and $17,683,531 respectively. Gross gains of $30,044,192 and $1,372,870 and gross losses of $3,547,016 and $799,766 respectively were realized on these sales. During the year ended December 31, 1997 the call options were repaid in full with no gain or loss arising on the transaction. 9 IAT REINSURANCE SYNDICATE LTD. Notes To Non-Consolidated Financial Statements (Continued) For The Years Ended December 31, 1997 And 1996 (Expressed In U.S. Dollars) ================================================================================ 3. INVESTMENTS (CONTINUED) The amortized cost and market value of debt securities as at December 31, 1997 and 1996, by contractual maturity, are shown below. Expected maturities will differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties.
AMORTIZED MARKET AMORTIZED MARKET COST VALUE COST VALUE 1 9 9 7 1 9 9 7 1 9 9 6 1 9 9 6 $ $ $ $ ---------------------------------------------------------------- Due 0 through 5 years 982,028 1,753,041 1,215,304 1,521,120 ================================================================
The estimated fair value of the investments approximate their market values. 4. OTHER INVESTMENTS Other investments comprise:
1 9 9 7 1 9 9 6 $ $ ----------------------------- Mortgage receivable (note 4a)) 1 1 Aviation Inc. (note 4b)) 821,534 751,534 Winery (note 4c)) 153,456 61,560 Griffin & Howe Mortgage (note 4d)) 1,285,045 341,000 Other 83,207 0 ----------------------------- 2,343,243 1,154,095 =============================
a) A mortgage receivable of $1,280,500 was assumed by the Company on incorporation (note 1). The mortgage was subsequently deemed uncollectible and written down to a nominal amount of $1. In addition, during 1994 the Company assumed a second mortgage receivable of $70,000. During the year ended December 31, 1996 $70,000 was received in full repayment of the debt. 10 IAT REINSURANCE SYNDICATE LTD. Notes To Non-Consolidated Financial Statements (Continued) For The Years Ended December 31, 1997 And 1996 (Expressed In U.S. Dollars) ================================================================================ 4. OTHER INVESTMENTS (CONTINUED) b) During 1992, the Company purchased one-third of a 12 1/2% interest in Aviation Inc., which owns an aircraft which is used by the majority shareholder. During 1997 and 1996 the Company contributed an additional $70,000 and $352,774 to Aviation Inc. respectively. c) During the years ended December 31, 1997 and 1996 the Company increased its investment in a winery by $91,896 and $61,560, respectively. d) During 1997 and 1996 the Company assumed mortgages receivable of $944,045 and $341,000 with Griffin & Howe. The directors are of the opinion that the fair value of these investments is at least equal to their carrying value. 5. AMOUNTS DUE FROM RELATED PARTIES
1 9 9 7 1 9 9 6 $ $ ---------------------------- Note receivable (note 5a)) 700,000 700,000 Loan to related parties (note 5b)) 0 70,000 Loan to Spear, Leeds & Kellogg ("SLK") (note 5c)) 2,900,000 0 ---------------------------- 3,600,000 770,000 ============================
a) The Company loaned $705,075 to a related party for the purchase of a seat on the New York Insurance Exchange. During the years ended December 31, 1997 and 1996 repayment of $Nil and $5,075 were received. Interest on this loan is payable monthly and is calculated based on an amount equal to the average of the monthly rate of the last 3 membership leases, as provided by the Exchange, as of the last day of each month. The loan is repayable on demand. The interest earned by the Company equated to approximately 24% and 20% in 1997 and 1996, respectively. b) During the years ended December 31, 1996 and 1995 the Company loaned $70,000 and $7,700,000 respectively to related parties. The loans were secured by promissory notes bearing interest at 0% and 0% respectively for 1997 and 1996 and were repayable on demand. During the years ended December 31, 1997 and 1996 the loans of $70,000 and $7,700,000, respectively, were repaid in cash. c) During the year ended December 31, 1997 the Company entered into a Cash Subordinated Agreement to lend SLK $2,900,000 bearing interest at 8%. Interest of $174,000 has been included in investment income for 1997. 11 IAT REINSURANCE SYNDICATE LTD. Notes To Non-Consolidated Financial Statements (Continued) For The Years Ended December 31, 1997 And 1996 (Expressed In U.S. Dollars) ================================================================================ 6. LOAN PAYABLE The Company has a line of credit from one of its investment managers. The total amount available to the Company under this credit facility is $11,000,000, of which $Nil had been drawn down as of December 31, 1997 and 1996. The amount borrowed bears interest at the United States Federal Fund Rate plus 1 1/4% and is repayable on demand. The Company paid interest at the effective rates of Nil% and 6.8% for the years ended December 31, 1997 and 1996 respectively. The Company's portfolio of equity securities held with this investment manager of $15,467,050 and $13,683,750 at December 31, 1997 and 1996 respectively are restricted by an amount equivalent to the amount drawn down at any point in time as collateral for the loan. 7. CAPITAL STOCK
CLASS 'A' CLASS 'B' TOTAL SHARES SHARES $ $ $ ------------------------------------------- Authorized, issued and outstanding 130,005 shares of a par value of $1.00 each 100,005 30,000 130,005 Less: Treasury Stock, 10,000 shares 0 (10,000) (10,000) ------------------------------------------- 100,005 20,000 120,005 ===========================================
The Class A voting preferred shares are cumulative preference shares entitled to dividends at the rate of $5 per annum per share which are payable annually on April 1, of each year. At December 31, 1997 and 1996 preferred dividends of $2,875,144 and $2,375,119 respectively are unpaid and have not been declared by the board of directors. Such dividends on Class A shares shall be cumulative so that if, for any dividend period, cash dividends have not been declared and paid or set apart for payment on the Class A shares outstanding, the deficiency shall be declared and paid or set apart for any payment before any dividend or other distribution. In the event of a dissolution of the Company, the holders of the Class A shares shall be entitled to the full par value plus dividends accumulated and unpaid to that date, with the remaining assets distributable pro-rata among the Class B shareholders. The holders of Class B shares are not entitled to a vote. 12 IAT REINSURANCE SYNDICATE LTD. Notes To Non-Consolidated Financial Statements (Continued) For The Years Ended December 31, 1997 And 1996 (Expressed In U.S. Dollars) ================================================================================ 8. INVESTMENT INCOME Investment income comprises:
1 9 9 7 1 9 9 6 $ $ ----------------------------- Investment income (note 8a)) 6,620,614 4,571,915 Interest expense (8,129) (654,054) Income from SLK Limited Partnership (note 8b)) 3,991,086 2,920,620 ----------------------------- 10,603,571 6,838,481 =============================
a) Investment income is net of investment manager fees of $6,179 and $70,740 for the years ended December 31, 1997 and 1996 respectively. b) Under the terms of the Secured Demand Note (note 14), IAT is entitled to 1/120 of the income of SLK. One of the Company's shareholders is a partner in the SLK Limited Partnership. 9. RELATED PARTY TRANSACTIONS Related party transactions not disclosed elsewhere in these financial statements comprise: During the years ended December 31, 1997 and 1996 the Company paid various expenses amounting to $287,175 and $213,467, respectively on behalf of a shareholder. 10. REINSURANCE As part of the assumption of business described in note 1, the Company obtained commercial reinsurance in order to limit its retained risks. Reinsurance contracts do not relieve the Company from its obligation to policyholders. Failure of reinsurers to honor their obligations could result in losses to the Company. The Company evaluates the financial condition of its reinsurers and provides for any amounts where the recovery is considered doubtful. 11. TAXATION Bermuda presently imposes no income, withholding or capital gains taxes. Additionally the Company is exempted until March 2016 from any such taxes to be imposed in the future pursuant to the Bermuda Exempted Undertakings Tax Protection Act 1966, Amendment Act 1987. The Company has elected to be taxed as a United States corporation under IRC Section 953(d) and has filed with the Internal Revenue Service ("IRS") an application for recognition of exemption from Federal Income Tax. 13 IAT REINSURANCE SYNDICATE LTD. Notes To Non-Consolidated Financial Statements (Continued) For The Years Ended December 31, 1997 And 1996 (Expressed In U.S. Dollars) ================================================================================ 11. TAXATION (CONTINUED) The IRS has ruled that the Company is exempt from Federal Income Tax under IRC Section 501 (c)(15) for all tax years where net premiums written are less than $350,000. The Company does pay Federal Income taxes on other business income. The full amount of tax expense for the 1997 year is current and has been paid. 12. LETTERS OF CREDIT At December 31, 1997 and 1996, one of the Company's investment managers issued letters of credit totaling $721,777 and $1,095,705 respectively, which are secured by an equal amount of equity securities held by the manager. 13. STATUTORY FINANCIAL DATA Under The Act, the Company is required to prepare and file Statutory Financial Statements and a Statutory Financial Return. The Act also requires the Company to maintain certain measures of solvency and liquidity. The Company's Statutory Capital and Surplus, net of the $73,000,000 and $40,000,000 commitment for 1997 and 1996, respectively, discussed in note 14, and the minimum required by the Act were as follows:
1 9 9 7 1 9 9 6 $ $ -------------------------------- Statutory Capital and Surplus 180,900,174 90,339,238 ================================ Minimum statutory capital and surplus required by the Act 1,000,000 1,000,000 ================================
Accordingly at December 31, 1997 and 1996, $879,995 and $879,995 respectively of retained earnings and contributed surplus are not available for distribution to shareholders. 14 IAT REINSURANCE SYNDICATE LTD. Notes To Non-Consolidated Financial Statements (Continued) For The Years Ended December 31, 1997 And 1996 (Expressed In U.S. Dollars) ================================================================================ 14. COMMITMENTS The Company entered into a Secured Demand Note agreement with SLK in 1993, to lend SLK a minimum of $10,000,000 on demand, either in cash or in Equity Securities. During the years ended December 31, 1995 and 1997 the Company entered into secured demand note agreements with SLK to lend a further $30,000,000 and $30,000,000 respectively. At December 31, 1997 and 1996, the Company had given SLK a collateral interest in a portfolio of Equity Securities with a total market value of $119,575,400 and $76,245,875 respectively, as security for the commitment under the note. The loan commitment initially extended to February 28, 1997 and was renewed for a further period of one year. The loan commitment is renewable annually thereafter. the Company receives an annual fee of 4% for the unused commitment. Commitment fee income of $1,673,000 and $1,693,012 is included in investment income for 1997 and 1996 respectively. As at December 31, 1997 no drawdown on this facility has been made. During the year ended December 31, 1997 the Company entered into a Secured Demand Note agreement with Bocklet & Company ("Bocklet") to lend Bocklet a minimum of $2,000,000 on demand, either in cash or Equity Securities. As of December 31, 1997 the Company had given Bocklet a collateral interest in a portfolio of Equity Securities with a total market value of $3,292,500, as security for the commitment under the note. The Company receives an annual fee of 5% for the unused commitment. Commitment fee income of $25,414 is included in investment income for 1997. As of December 31, 1997 no drawdown on this facility has been made. During the year ended December 31, 1997 the Company entered into a Secured Demand Note agreement with Lyden, Dolan, Nick & Co., LLC ("Lyden") to lend Lyden a minimum of $1,000,000 on demand, either in cash or Equity Securities. As of December 31, 1997 the Company had given Lyden a collateral interest in a portfolio of Equity securities with a total market value of $1,646,250 as security for the commitment under the note. The Company receives an annual fee of 5% for the unused commitment. Commitment fee income of $12,707 is included in investment income for 1997. As of December 31, 1997 no drawdown on this facility has been made. Under the terms of the Company's Secured Demand Note collateral agreements, the Company has the right to withdraw collateral to the extent that the value of the remaining collateral equals the outstanding facility. 15 IAT REINSURANCE SYNDICATE LTD. Notes To Non-Consolidated Financial Statements (Continued) For The Years Ended December 31, 1997 And 1996 (Expressed In U.S. Dollars) ================================================================================ 15. ACQUISITION OF SUBSIDIARY On December 27, 1996 the Company acquired 100% of the share capital of MML Reinsurance (Bermuda) Ltd. The acquisition, which cost $8 million was financed by means of a loan from a shareholder in the amount of $8 million. The loan bears interest at 0% and is repayable on demand. During the year ended December 31, 1997 the investment in subsidiary was reduced by a capital dividend of $4,000,000 which was declared and paid by MML Reinsurance (Bermuda) Ltd. to the Company. 16. LOAN FROM SUBSIDIARY During the year ended December 31, 1997 the Company was advanced $1,500,000 by its subsidiary MML Reinsurance (Bermuda) Ltd. This loan is interest free and repayable on demand. 16 IAT REINSURANCE SYNDICATE LTD. (INCORPORATED IN BERMUDA) NON-CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEARS ENDED DECEMBER 31, 1996 AND 1995 "COPY" 17 [COOPERS & LYBRAND LOGO] chartered accountants Dorchester House telephone (441) 295-2000 7 Church Street West Hamilton, Bermuda HM 11 fax (441) 295-1242 (groups 1/2/3) P.O. Box HM 1171 Hamilton, Bermuda HM EX
APRIL 1, 1997 AUDITORS' REPORT TO THE SHAREHOLDERS OF IAT REINSURANCE SYNDICATE LTD. We have audited the non-consolidated balance sheets of IAT Reinsurance Syndicate Ltd. as at December 31, 1996 and 1995 and the non-consolidated statements of earnings and retained earnings and cash flows for the years then ended. 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 auditing standards generally accepted in the United States of America. Those standards require that we plan and perform an 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 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. As more fully described in note 3b) to the non-consolidated financial statements, at December 31, 1996 and 1995 the company has accounted for the funds received from the writing of call options to a related party as a reduction of investments, rather than as a deferred income item. Furthermore, the company has not introduced a policy of amortization for the option premium as required under generally accepted accounting principles. Because of these departures from generally accepted accounting principles, assets are understated by $44 million and $20 million, liabilities are understated by $36.4 million and $18.1 million, earnings for the year are understated by $5.7 million and $1.9 million and retained earnings as at December 31, 1996 and 1995 are understated by $7.6 million and $1.9 million respectively. As more fully described in note 3c) the Company's investment in its wholly-owned subsidiary at December 31, 1996 is recorded at cost. This is not in accordance with generally accepted accounting principles which require that the financial statements of the subsidiary be consolidated with those of the Company. In our opinion, except for the effects of the matters discussed in the preceding paragraphs, these non-consolidated financial statements present fairly, in all material respects, the financial position of the Company as at December 31, 1996 and 1995 and the results of its operations and cash flows for the years then ended in conformity with accounting principles generally accepted in the United States of America. COOPERS & LYBRAND CHARTERED ACCOUNTANTS Coopers & Lybrand is a member of Coopers & Lybrand International, a limited liability association incorporated in Switzerland E. Kirkland Cooper OBE, FCA, JP David E.W. Lines OBE, FCA, JP Raymond C. Medeiros George H. Holmes Peter C.B. Mitchell Thomas E.C. Miller Darren Q. Johnston 18 IAT REINSURANCE SYNDICATE LTD. Non-Consolidated Balance Sheets As At December 31, 1996 And 1995 (Expressed In U.S. Dollars)
==================================================================================================== 1 9 9 6 1 9 9 5 $ $ ---------------------------------------------------------------------------------------------------- ASSETS Cash and cash equivalents 1,463,145 3,070,424 Investments (note 3) : Equity securities at market value (cost : $43,332,074; 1995 - $32,167,377) 128,464,706 64,281,457 Fixed maturity investments at amortized cost (market value : $1,521,120; 1995 - $2,430,800) 1,215,304 2,418,520 Insurance balances receivable 119,989 118,323 Investment income receivable 3,862,653 1,033,581 Other investments (note 4) 1,154,095 468,761 Amounts due from related parties (note 5) 770,000 8,405,075 Funds withheld 58,399 40,524 Prepaid expense 0 65,415 Investment in subsidiary (note 15) 8,000,000 0 -------------------------------- 145,108,291 79,902,080 ================================ LIABILITIES Accounts payable and accrued liabilities 125,964 53,852 Loan from shareholder (note 15) 8,000,000 0 Loan payable (note 6) 0 2,350,000 Provision for losses and loss expenses 6,643,089 7,144,686 -------------------------------- 14,769,053 9,548,538 -------------------------------- SHAREHOLDERS' EQUITY Capital stock (note 7) 120,005 120,005 Contributed surplus 11,051,603 11,051,603 Unrealized appreciation on equity securities 85,132,632 32,114,080 Retained earnings (notes 7 and 13) 34,034,998 27,067,854 -------------------------------- 130,339,238 70,353,542 -------------------------------- 145,108,291 79,902,080 ================================
SIGNED ON BEHALF OF THE BOARD - ----------------------------- -------------------------------- Director Director The accompanying notes are an integral part of these financial statements. 19 IAT REINSURANCE SYNDICATE LTD. Non-Consolidated Earnings And Retained Earnings For The Years Ended December 31, 1996 And 1995 (Expressed In U.S. Dollars)
=========================================================================================== 1 9 9 6 1 9 9 5 $ $ - ------------------------------------------------------------------------------------------- UNDERWRITING INCOME Gross premiums written (returned) (10,554) 32,426 Reinsurance premiums ceded 0 (2,246) Other insurance income 39,625 0 -------------------------------- Net premiums written and earned 29,071 30,180 -------------------------------- UNDERWRITING EXPENSES Losses and loss expenses paid 171,079 2,329,236 Losses recovered (6,374) (19,294) Change in provision for losses and loss expenses (501,597) (2,814,834) Change in provision for losses recoverable 4,709 9,443 Commission and brokerage adjustments 9,911 (11,765) Letter of credit charges 33,473 15,863 -------------------------------- (288,799) (491,351) -------------------------------- NET UNDERWRITING PROFIT 317,870 521,531 Investment income (note 8) 6,838,481 3,768,964 Gain on sale of investments 607,744 5,045,353 General and administrative expenses (515,001) (476,426) -------------------------------- EARNINGS FOR THE YEAR - BEFORE TAX 7,249,094 8,859,422 Income Tax Expense (note 11) 281,950 478,010 -------------------------------- NET EARNINGS FOR THE YEAR 6,967,144 8,381,412 RETAINED EARNINGS - BEGINNING OF YEAR 27,067,854 18,686,442 -------------------------------- RETAINED EARNINGS - END OF YEAR 34,034,998 27,067,854 ================================
The accompanying notes are an integral part of these financial statements. 20 IAT REINSURANCE SYNDICATE LTD. Non-Consolidated Statements Of Cash Flows For The Years Ended December 31, 1996 And 1995 (Expressed In U.S. Dollars)
============================================================================================= 1 9 9 6 1 9 9 5 $ $ - --------------------------------------------------------------------------------------------- CASH FLOWS FROM OPERATING ACTIVITIES: Net earnings for the year 6,967,144 8,381,412 Adjustments to reconcile net earnings to net cash provided by operating activities: Gain on sale of investments (607,744) (5,045,353) Amortization of discount on investments (418,244) (224,750) Change in assets and liabilities: Insurance balances receivable (1,666) 31,930 Investment income receivable (2,829,072) 1,116,554 Funds withheld (17,875) 25,728 Prepaid expenses 65,415 (65,415) Accounts payable and accrued liabilities 72,112 (88,154) Provision for losses and loss expenses (501,597) (2,814,834) -------------------------------- Net cash provided by operating activities 2,728,473 1,317,118 -------------------------------- CASH FLOWS FROM INVESTING ACTIVITIES: Purchase of other investments (755,334) (275,010) Proceeds from sale of other investments 70,000 0 Amount paid to investment manager 0 (15,271,197) Purchases of equities (52,275,123) (12,837,439) Proceeds from sales of equities 17,683,531 23,779,766 Purchases of fixed maturity investments (10,000) 0 Proceeds from sales of fixed maturity investments 1,666,099 0 -------------------------------- Cash used in investing activities (33,620,827) (4,603,880) -------------------------------- CASH FLOWS FROM FINANCING ACTIVITIES: Issue of call options 24,000,000 20,000,000 Repayment of loan (2,350,000) (7,675,000) Advance of loan (70,000) 0 Advance of loans to related parties 0 (6,100,000) Repayment of loans due from related parties 7,705,075 0 -------------------------------- Cash provided by financing activities 29,285,075 6,225,000 -------------------------------- INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (1,607,279) 2,938,238 CASH AND CASH EQUIVALENTS - BEGINNING OF YEAR 3,070,424 132,186 -------------------------------- CASH AND CASH EQUIVALENTS - END OF YEAR 1,463,145 3,070,424 ================================ SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION: Cash paid during the year for interest 654,054 922,974 Cash paid during the year for taxes 281,950 478,010 -------------------------------- 936,004 1,400,984 ================================
The accompanying notes are an integral part of these financial statements. 21 IAT REINSURANCE SYNDICATE LTD. Notes To Non-Consolidated Financial Statements For The Years Ended December 31, 1996 And 1995 (Expressed In U.S. Dollars) ================================================================================ 1. OPERATIONS The Company was incorporated on June 6, 1991 under the laws of Bermuda. The Company is managed in Bermuda by Johnson & Higgins (Bermuda) Ltd. and is registered as a Class III insurer under The Insurance Act 1978 (Bermuda), amendments thereto and related regulations ("the Act"). Effective September 30, 1991, the Company assumed the assets and liabilities and insurance business of IAT Syndicate, Inc. ("the Syndicate"), a former member of the New York Insurance Exchange ("the Exchange"). The insurance business written by the Syndicate consisted of non-related property and casualty policies from February 1986 until its petition for voluntary withdrawal from the Exchange in December 1987, which was approved in November 1988. As a result, all of the insurance business previously assumed by the Company is in run-off. 2. SIGNIFICANT ACCOUNTING POLICIES These financial statements have been prepared on the basis of accounting principles generally accepted in the United States of America with the exceptions of notes 2(f) and 3(c). The Company's significant accounting policies are : a) PREMIUMS WRITTEN Premiums written, adjustments for the return of premium overpayments and retrospective premium adjustments are based on information provided by the ceding company, and are recorded and earned by the Company as reported. Reinsurance premiums ceded, that are determined retrospectively based on claims experience, are recorded as paid. b) INVESTMENTS The Company's investments in equity securities have been classified as "securities available for sale", and are therefore reported at market value with the unrealized appreciation or depreciation on the investments reported as a separate component of shareholders' equity. The Company's investments in bonds have been classified as "held to maturity", as the Company has the positive intent and ability to hold the debt securities to maturity, and are therefore reported at amortized cost. Investment income is recognized when earned and includes the amortization of premium and discount on investments and is stated net of investment management fees. Realized gains and losses on sales are determined by specific identification. 22 IAT REINSURANCE SYNDICATE LTD. Notes To Non-Consolidated Financial Statements (Continued) For The Year Ended December 31, 1996 And 1995 (Expressed In U.S. Dollars) ================================================================================ 2. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) c) OTHER INVESTMENTS Other investments are carried at cost, unless it is determined that there is a permanent diminution in value, at which time investments are written down to the estimated realizable value, which becomes the new cost basis. d) LOSSES AND LOSS EXPENSES The provision for losses and loss expenses, which includes a provision for losses incurred but not reported and loss adjustment expenses, represents amounts reported by ceding companies and the estimates of management based upon an independent actuarial study. The Company believes that the provision for losses and loss expenses is adequate to cover the ultimate net cost of losses incurred; however, because of the short length of time the Syndicate wrote business, the estimates are primarily based on the experience of other entities writing similar lines of insurance and upon an actuarial study prepared by independent actuaries, using the latest available information. These estimates require assumptions and projections as to future events, and ultimate losses may vary significantly from amounts reflected in the accompanying financial statements. The methods of making such estimates are continually reviewed and updated by the Company and any adjustments resulting therefrom are reflected in earnings when they become known. e) STATEMENTS OF CASH FLOWS For purposes of the statements of cash flows, cash equivalents include highly-liquid investments with a maturity of under three months at the date of purchase. f) OPTIONS Funds received from the issue of options against the Company's securities are shown as a reduction of the value of the portfolio until such time as the option expires or is exercised, at which time the funds are taken to income. g) USE OF ESTIMATES The preparation of financial statements in accordance with generally accepted accounting principles, requires management to make estimates and assumptions that affect reported amounts of assets and liabilities and disclosure of contingent assets and liabilities as at the date of the financial statements. Estimates also affect the reported amounts of income and expenses for the reporting period. Actual results could differ from those estimates. h) INVESTMENT IN SUBSIDIARY This is accounted for at cost. 23 IAT REINSURANCE SYNDICATE LTD. Notes To Non-Consolidated Financial Statements (Continued) For The Years Ended December 31, 1996 And 1995 (Expressed In U.S. Dollars) ================================================================================ 3. INVESTMENTS a) The cost (amortized cost for fixed maturity investments), market value and related unrealized gains (losses) of investments are as follows :
COST/ GROSS GROSS AMORTIZED UNREALIZED UNREALIZED MARKET COST GAINS LOSSES VALUE $ $ $ $ ---------------------------------------------------------------- December 31, 1996 Fixed maturities (held to maturity and carried at amortized cost): U.S. Government 0 0 0 0 Corporate 1,215,304 305,816 0 1,521,120 ---------------------------------------------------------------- 1,215,304 305,816 0 1,521,120 ================================================================ Equity securities (available for sale and carried at market value) 87,332,074 85,132,632 0 172,464,706 Call options (note 3b)) (44,000,000) 0 0 (44,000,000) ---------------------------------------------------------------- 43,332,074 85,132,632 0 128,464,706 ================================================================ COST/ GROSS GROSS AMORTIZED UNREALIZED UNREALIZED MARKET COST GAINS LOSSES VALUE $ $ $ $ ---------------------------------------------------------------- December 31, 1995 Fixed maturities (held to maturity and carried at amortized cost): U.S. Government 151,195 59,855 0 211,050 Corporate 2,267,325 0 (47,575) 2,219,750 ---------------------------------------------------------------- 2,418,520 59,855 (47,575) 2,430,800 ================================================================ Equity securities (available for sale and carried at market value) 52,167,377 32,114,080 0 84,281,457 Call options (note 3b)) (20,000,000) 0 0 (20,000,000) ---------------------------------------------------------------- 32,167,377 32,114,080 0 64,281,457 ================================================================
24 IAT REINSURANCE SYNDICATE LTD. Notes To Non-Consolidated Financial Statements (Continued) For The Years Ended December 31, 1996 And 1995 (Expressed In U.S. Dollars) ================================================================================ 3. INVESTMENTS (CONTINUED) Proceeds from the sale and redemption of available for resale investments for the years ended December 31, 1996 and 1995 were $17,683,531 and $23,779,766 respectively. Gross gains of $1,372,870 and $5,145,665 and gross losses of $799,766 and $174,198 respectively were realized on these sales. The amortized cost and market value of debt securities as at December 31, 1996 and 1995, by contractual maturity, are shown below. Expected maturities will differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties.
AMORTIZED MARKET AMORTIZED MARKET COST VALUE COST VALUE 1 9 9 6 1 9 9 6 1 9 9 5 1 9 9 5 $ $ $ $ ---------------------------------------------------------------- Due 0 through 5 years 1,215,304 1,521,120 2,267,325 2,219,750 Due after 5 through 10 years 0 0 0 0 Due after 10 years 0 0 151,195 211,050 ---------------------------------------------------------------- 1,215,304 1,521,120 2,418,520 2,430,800 ================================================================
The estimated fair value of the investments approximate to their market values. b) During the years ended December 31, 1996 and 1995 the Company issued call options on equity securities to two related parties. For total premiums received by the Company of $24 million and $20 million, the parties have the option to purchase certain securities from the Company for a strike price of $198 million and $198 million. The market value of these securities at December 31, 1996 and 1995 was approximately $121 million and $121 million. These options expire May 31, 2001. The company has pledged securities in its portfolio as collateral on a line of credit from one of its investment managers (note 6), letters of credit issued by one of the Company's investment managers (note 12) and a Secured Demand Note agreement with Spear Leads and Kellogg (note 14). As a result the options may not be covered. If the option were to be exercised by the related parties, the Company may have to purchase certain equity securities in order to meet its obligations and therefore potentially expose itself to loss. 25 IAT REINSURANCE SYNDICATE LTD. Notes To Non-Consolidated Financial Statements (Continued) For The Years Ended December 31, 1996 And 1995 (Expressed In U.S. Dollars) ================================================================================ 4. OTHER INVESTMENTS Other investments comprise:
1 9 9 6 1 9 9 5 $ $ ---------------------------- Mortgage receivable (note 4a)) 1 70,001 Aviation Inc. (note 4b)) 751,534 398,760 Winery (note 4c)) 61,560 0 Griffin & Howe Mortgage (note 4d)) 341,000 0 ---------------------------- 1,154,095 468,761 ============================
a) A mortgage receivable of $1,280,500 was assumed by the Company on incorporation (note 1). The mortgage was subsequently deemed uncollectible and written down to a nominal amount of $1. During 1996 and 1995, $Nil and $825,000 of this amount and accrued interest thereon was recovered and is included in investment income for 1996 and 1995 respectively. In addition, during 1994 the Company assumed a second mortgage receivable of $70,000. During the year ended December 31, 1996 $70,000 was received in full repayment of the debt. b) During 1992, the Company purchased one-third of a 12 1/2% interest in Aviation Inc., which owns an aircraft which is used by the majority shareholder. During 1996 and 1995 the Company contributed an additional $352,774 and $275,000 to Aviation Inc. respectively. c) The company purchased an investment in a winery during the year ended December 31, 1996 for $61,560. d) During 1996 the company assumed mortgages receivable of $341,000 with Griffin & Howe. The directors are of the opinion that the fair value of these investments is at least equal to their carrying value. 26 IAT REINSURANCE SYNDICATE LTD. Notes To Non-Consolidated Financial Statements (Continued) For The Years Ended December 31, 1996 And 1995 (Expressed In U.S. Dollars) ================================================================================ 5. AMOUNTS DUE FROM RELATED PARTIES
1 9 9 6 1 9 9 5 $ $ ---------------------------- Note receivable (note 5a)) 700,000 705,075 Loan to related parties (note 5b)) 70,000 7,700,000 ---------------------------- 770,000 8,405,075 ============================
a) The Company loaned $705,075 to a related party for the purchase of a seat on the New York Insurance Exchange. During the years ended December 31, 1996 and 1995 repayment of $5,075 and $Nil were received. Interest on this loan is payable monthly and is calculated based on an amount equal to the average of the monthly rate of the last 3 membership leases, as provided by the Exchange, as of the last day of each month. The loan is repayable on demand. The interest earned by the company equated to approximately 20% and 14% in 1996 and 1995 respectively. b) During the years ended December 31, 1996 and 1995 the Company loaned $70,000 and $7,700,000 respectively to related parties. The loans are secured by promissory notes bearing interest at 0% and 6.58% respectively for 1996 and 1995 and are repayable on demand. During the year ended December 31, 1996 the initial loan of $7,700,000 was repaid in cash. 6. LOAN PAYABLE The Company has a line of credit from one of its investment managers. The total amount available to the Company under this credit facility is $11,000,000, of which $Nil and $2,350,000 has been drawn down at December 31, 1996 and 1995, respectively. The amount borrowed bears interest at the United States Federal Fund Rate plus 1 1/4% and is repayable on demand. The Company paid interest at the effective rates of 6.8% and 7.5% for the years ended December 31, 1996 and 1995 respectively. The Company's portfolio of equity securities held with this investment manager of $13,683,750 and $9,361,688 at December 31, 1996 and 1995 respectively are restricted by an amount equivalent to the drawndown at any point in time as collateral for the loan. 7. CAPITAL STOCK
CLASS 'A' CLASS 'B' TOTAL SHARES SHARES $ $ $ ------------------------------------------- Authorized, issued and outstanding 130,005 shares of a par value of $1.00 each 100,005 30,000 130,005 Less: Treasury Stock, 10,000 shares 0 (10,000) (10,000) ------------------------------------------- 100,005 20,000 120,005 ===========================================
27 IAT REINSURANCE SYNDICATE LTD. Notes To Non-Consolidated Financial Statements (Continued) For The Years Ended December 31, 1996 And 1995 (Expressed In U.S. Dollars) ================================================================================ 7. CAPITAL STOCK (CONTINUED) The Class A voting preferred shares are cumulative preference shares entitled to dividends at the rate of $5 per annum per share which are payable annually on April 1, of each year. At December 31, 1996 and 1995 preferred dividends of $2,375,119 and $1,875,094 respectively are unpaid and have not been declared by the board of directors. Such dividends on Class A shares shall be cumulative so that if, for any dividend period, cash dividends have not been declared and paid or set apart for payment on the Class A shares outstanding, the deficiency shall be declared and paid or set apart for any payment before any dividend or other distribution. In the event of a dissolution of the Company, the holders of the Class A shares shall be entitled to the full par value plus dividends accumulated and unpaid to that date, with the remaining assets distributable pro-rata among the Class B shareholders. The holders of Class B shares are not entitled to a vote. 8. INVESTMENT INCOME Investment income comprises:
1 9 9 6 1 9 9 5 $ $ ----------------------------- Investment income (note 8a)) 4,571,915 4,218,345 Interest expense (654,054) (922,974) Income from SLK Limited Partnership (note 8b)) 2,920,620 473,593 ----------------------------- 6,838,481 3,768,964 =============================
a) Investment income is net of investment manager fees of $70,740 and $40,964 for the years ended December 31, 1996 and 1995 respectively. b) Under the terms of the Secured Demand Note (note 14), IAT is entitled to 1/120 of the income of SLK. One of the Company's shareholders is a partner in the SLK Limited Partnership. 9. RELATED PARTY TRANSACTIONS Related party transactions not disclosed elsewhere in these financial statements comprise: During the years ended December 31, 1996 and 1995 the Company paid various expenses amounting to $213,467 and $153,754, respectively on behalf of a shareholder. 10. REINSURANCE As part of the assumption of business described in note 1, the Company obtained commercial reinsurance in order to limit its retained risks. Reinsurance contracts do not relieve the company from its obligation to policyholders. Failure of reinsurers to honor their obligations could result in losses to the company. The company evaluates the financial condition of its reinsurers and provides for any amounts where the recovery is considered doubtful. 28 IAT REINSURANCE SYNDICATE LTD. Notes To Non-Consolidated Financial Statements (Continued) For The Years Ended December 31, 1996 And 1995 (Expressed In U.S. Dollars) ================================================================================ 11. TAXATION Bermuda presently imposes no income, withholding or capital gains taxes. Additionally the Company is exempted until March 2016 from any such taxes to be imposed in the future pursuant to the Bermuda Exempted Undertakings Tax Protection Act 1966, Amended Act 1987. The Company has elected to be taxed as a United States corporation under IRC Section 953(d) and has filed with the Internal Revenue Service ("IRS") an application for recognition of exemption from Federal Income Tax. The IRS has ruled that the Company is exempt from Federal Income Tax under IRC Section 501 (c)(15) for all tax years where net premiums written are less than $350,000. The Company does pay Federal Income taxes on other business income. The full amount of tax expense for the 1996 year is current and has been paid. 12. LETTERS OF CREDIT At December 31, 1996 and 1995, one of the Company's investment managers issued letters of credit totaling $1,095,705 and $1,314,263 respectively, which are secured by an equal amount of equity securities held by the manager. 13. STATUTORY FINANCIAL DATA Under The Act, the Company is required to prepare and file Statutory Financial Statements and a Statutory Financial Return. The Act also requires the Company to maintain certain measures of solvency and liquidity. The Company's Statutory Capital and Surplus, net of the $40,000,000 commitment for 1996 and 1995 discussed in note 14, and the minimum required by the Act were as follows :
1 9 9 6 1 9 9 5 $ $ -------------------------------- Statutory Capital and Surplus 90,339,238 30,288,127 ================================ Minimum statutory capital and surplus required by the Act 1,000,000 1,071,703 ================================
Accordingly at December 31, 1996 and 1995, $879,995 and $1,017,113 respectively of retained earnings and contributed surplus are not available for distribution to shareholders. 29 IAT REINSURANCE SYNDICATE LTD. Notes To Non-Consolidated Financial Statements (Continued) For The Years Ended December 31, 1996 And 1995 (Expressed In U.S. Dollars) ================================================================================ 14. COMMITMENTS The Company entered into a Secured Demand Note agreement with Spear, Leads & Kellogg ("SLK") in 1993, to lend SLK a minimum of $10,000,000 on demand, either in cash or in Equity Securities. During the year ended December 31, 1995 the Company entered into another secured demand note agreement with SLK to lend a further $30,000,000. At December 31, 1996 and 1995, the Company had given SLK a collateral interest in a portfolio of Equity Securities with a total market value of $76,245,875 and $62,738,750 respectively, as security for the commitment under the note. Under the terms of the Second Demand Note collateral agreement, the Company has the right to withdraw collateral to the extent that the value of the remaining collateral equals the outstanding facility. The loan commitment initially extended to February 28, 1997 and was renewed for a further period of one year. The loan commitment is renewable annually thereafter. The Company receives an annual fee of 4% for the unused commitment. Commitment fee income of $1,693,012 and $1,162,996 is included in investment income for 1996 and 1995 respectively. As at December 31, 1996 no drawdown on this facility has been made. 15. ACQUISITION OF SUBSIDIARY On December 27, 1996 the company acquired 100% of the share capital of MML Reinsurance (Bermuda) Ltd. The acquisition, which cost $8 million was financed by means of a loan from a shareholder in the amount of $8 million. The loan bears interest at 0% and is repayable on demand. EX-99.2 18 NON-CONSOLIDATED FINANCIAL STATEMENTS/3 MONTH 1 IAT REINSURANCE SYNDICATE LTD. (INCORPORATED IN BERMUDA) NON-CONSOLIDATED FINANCIAL STATEMENTS FOR THE PERIOD FROM JANUARY 1, 1998 TO MARCH 31, 1998 UNAUDITED "Copy" 2 IAT REINSURANCE SYNDICATE LTD. NON-CONSOLIDATED BALANCE SHEETS AS OF MARCH 31, 1998 AND DECEMBER 31, 1997 UNAUDITED (Expressed in U.S. Dollars)
- ------------------------------------------------------------------------------------------------- March 31, December 31, 1998 1997 $ $ - ------------------------------------------------------------------------------------------------- ASSETS Cash and cash equivalents 10,237,947 294,948 Investments (note 3): Equity securities at market value (cost: $80,268,901; 1997 - $80,873,808) 269,246,952 253,418,475 Fixed maturity investments at amortized cost (market value: $1,753,041; 1997 - $1,753,041) 1,054,146 982,028 Insurance balances receivable 127,917 127,917 Investment income receivable 5,881,301 5,458,781 Other investments (note 4) 2,343,243 2,343,243 Amounts due from related parties (note 5) 3,600,000 3,600,000 Funds withheld 48,268 56,009 Prepaid expense 50,000 5,040 Investment in subsidiary (note 15) 4,000,000 4,000,000 ---------------------------------- 296,589,774 270,286,441 ================================== LIABILITIES Accounts payable and accrued liabilities 73,925 80,760 Loan from shareholder (note 15) 0 8,000,000 Loan from subsidiary (note 16) 0 1,500,000 Provision for losses and loss expenses 6,481,365 6,525,346 Dividends payable (note 7) 2,875,144 2,875,144 ---------------------------------- 9,430,434 18,981,250 ---------------------------------- SHAREHOLDERS' EQUITY Capital stock (note 7) 120,005 120,005 Contributed surplus 11,051,603 11,051,603 Unrealized appreciation on equity securities 188,978,051 172,544,667 Retained earnings 87,009,681 67,588,916 ---------------------------------- 287,159,340 251,305,191 ---------------------------------- 296,589,774 270,286,441 ==================================
3 IAT REINSURANCE SYNDICATE LTD. NON-CONSOLIDATED STATEMENTS OF EARNINGS AND RETAINED EARNINGS FOR THE PERIOD FROM JANUARY 1, 1998 TO MARCH 31, 1998 AND THE PERIOD FROM JANUARY 1, 1997 TO MARCH 31, 1997 UNAUDITED (Expressed in U.S. Dollars)
- --------------------------------------------------------------------------------------------- 1998 1997 $ $ - --------------------------------------------------------------------------------------------- UNDERWRITING INCOME Gross premiums written (returned) (10,034) 5,983 -------------------------------- UNDERWRITING EXPENSES Losses and loss expenses paid 21,932 43,496 Change in provision for losses and loss expenses (43,983) (34,924) Commission and brokerage adjustments (515) 963 Letter of credit charges 780 1,100 -------------------------------- (21,786) 10,635 -------------------------------- NET UNDERWRITING PROFIT (loss) 11,752 (4,652) Investment income (note 8) 2,225,858 339,122 Net gain on sale of investments 17,302,160 3,280,065 General and administrative expenses (164,005) (148,726) -------------------------------- EARNINGS FOR THE PERIOD - BEFORE TAX 19,375,765 3,465,809 Income Tax Expense (note 11) (45,000) 0 -------------------------------- NET EARNINGS FOR THE PERIOD 19,420,765 3,465,809 RETAINED EARNINGS - BEGINNING OF PERIOD 67,588,916 31,659,879 -------------------------------- RETAINED EARNINGS - END OF PERIOD 87,009,681 35,125,688 ================================
4 IAT REINSURANCE SYNDICATE LTD. NON-CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE PERIOD FROM JANUARY 1, 1998 TO MARCH 31, 1998 UNAUDITED (Expressed in U.S. Dollars)
- ------------------------------------------------------------------------------ $ - ------------------------------------------------------------------------------ CASH FLOWS FROM OPERATING ACTIVITIES: Net earnings for the period 19,420,765 Adjustments to reconcile net earnings to net cash provided by operating activities: Gain on sale of investments (17,302,160) Amortization of discount on investments (72,118) Change in assets and liabilities: Investment income receivable (422,520) Funds withheld 7,741 Prepaid expenses (44,960) Accounts payable and accrued liabilities (6,835) Provision for losses and loss expenses (43,981) ---------------- Net cash provided by operating activities 1,535,932 ---------------- CASH FLOWS FROM INVESTING ACTIVITIES: Purchases of equities (14,992) Proceeds from sales of equities 17,922,059 ---------------- Cash provided by (used in) investing activities 17,907,067 ---------------- CASH FLOWS FROM FINANCING ACTIVITIES: Loan from subsidiary (1,500,000) Loan from shareholder (8,000,000) ---------------- Cash provided by (used in) financing activities (9,500,000) ---------------- INCREASE IN CASH AND CASH EQUIVALENTS 9,942,999 CASH AND CASH EQUIVALENTS - BEGINNING OF PERIOD 294,948 ---------------- CASH AND CASH EQUIVALENTS - END OF PERIOD 10,237,947 ================ Supplemental disclosure of cash flow information: Cash received during the period for taxes 45,000 ================
The accompanying notes are an integral part of these non-consolidated financial statements. 5 IAT REINSURANCE SYNDICATE LTD. NOTES TO NON-CONSOLIDATED FINANCIAL STATEMENTS FOR THE PERIOD FROM JANUARY 1, 1998 TO MARCH 31, 1998 UNAUDITED (Expressed in U.S. Dollars) - -------------------------------------------------------------------------------- 1. OPERATIONS The Company was incorporated on June 6, 1991 under the laws of Bermuda. The Company is managed in Bermuda by J&H Marsh & McLennan Management (Bermuda) Ltd. and is registered as a Class 3 insurer under The Insurance Act 1978 (Bermuda), amendments thereto and related regulations ("the Act"). Effective September 30, 1991, the Company assumed the assets and liabilities and insurance business of IAT Syndicate, Inc. ("the Syndicate"), a former member of the New York Insurance Exchange ("the Exchange"). The insurance business written by the Syndicate consisted of non-related property and casualty policies from February 1986 until its petition for voluntary withdrawal from the Exchange in December 1987, which was approved in November 1988. As a result, all of the insurance business previously assumed by the Company is in run-off. 2. SIGNIFICANT ACCOUNTING POLICIES These financial statements have been prepared on the basis of accounting principles generally accepted in the United States of America with the exception of note 2(h). The Company's significant accounting policies are: a) Premiums written Premiums written, adjustments for the return of premium overpayments and retrospective premium adjustments are based on information provided by the ceding company, and are recorded and earned by the Company as reported. Reinsurance premiums ceded, that are determined retrospectively based on claims experience, are recorded as paid. b) Investments The Company's investments in equity securities have been classified as "securities available for sale", and are therefore reported at market value with the unrealized appreciation or depreciation on the investments reported as a separate component of shareholders' equity. The Company's investments in bonds have been classified as "held to maturity", as the Company has the positive intent and ability to hold the debt securities to maturity, and are therefore reported at amortized cost. Investment income is recognized when earned and includes the amortization of premium and discount on investments and is stated net of investment management fees. Realized gains and losses on sales are determined by specific identification. 6 IAT REINSURANCE SYNDICATE LTD. NOTES TO NON-CONSOLIDATED FINANCIAL STATEMENTS (Continued) FOR THE PERIOD FROM JANUARY 1, 1998 TO MARCH 31, 1998 UNAUDITED (Expressed in U.S. Dollars) - -------------------------------------------------------------------------------- 2. SIGNIFICANT ACCOUNTING POLICIES (continued) c) Other investments Other investments are carried at cost, unless it is determined that there is a permanent diminution in value, at which time investments are written down to the estimated realizable value, which becomes the new cost basis. d) Losses and loss expenses The provision for losses and loss expenses, which includes a provision for losses incurred but not reported and loss adjustment expenses, represents amounts reported by ceding companies and the estimates of management based upon an independent actuarial study. The Company believes that the provision for losses and loss expenses is adequate to cover the ultimate net cost of losses incurred; however, because of the short length of time the Syndicate wrote business, the estimates are primarily based on the experience of other entities writing similar lines of insurance and upon an actuarial study prepared by independent actuaries, using the latest available information. These estimates require assumptions and projections as to future events, and ultimate losses may vary significantly from amounts reflected in the accompanying financial statements. The methods of making such estimates are continually reviewed and updated by the Company and any adjustments resulting therefrom are reflected in earnings when they become known. e) Statement of cash flows For purposes of the statement of cash flows, cash equivalents include highly-liquid investments with a maturity of under three months at the date of purchase. f) Use of estimates The preparation of financial statements in accordance with generally accepted accounting principles, requires management to make estimates and assumptions that affect reported amounts of assets and liabilities and disclosure of contingent assets and liabilities as at the date of the financial statements. Estimates also affect the reported amounts of income and expenses for the reporting period. Actual results could differ from those estimates. g) Investment in subsidiary This is accounted for at cost. 7 IAT REINSURANCE SYNDICATE LTD. NOTES TO NON-CONSOLIDATED FINANCIAL STATEMENTS (Continued) FOR THE PERIOD FROM JANUARY 1, 1998 TO MARCH 31, 1998 UNAUDITED (Expressed in U.S. Dollars) - -------------------------------------------------------------------------------- 3. INVESTMENTS The cost (amortized cost for fixed maturity investments), market value and related unrealized gains (losses) of investments are as follows:
Cost/ Gross Gross Amortized Unrealized Unrealized Market Cost Gains Losses Value $ $ $ $ ---------------------------------------------------------------- March 31, 1998 Fixed maturities (held to maturity and carried at amortized cost): Corporate 1,054,146 698,895 0 1,753,041 ================================================================ Equity securities (available for sale and carried at market value) 80,268,901 188,978,051 0 269,246,952 ================================================================
Proceeds from the sale and redemption of available for sale investments for the period from January 1, 1998 to March 31, 1998 was $17,922,059. Gross gains of $17,302,160 and gross losses of $Nil were realized on these sales. The amortized cost and market value of debt securities as of March 31, 1998, by contractual maturity, are shown below. Expected maturities will differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties. Amortized Market Cost Value $ $ -------------------------------- Due 0 through 5 years 1,054,146 1,753,041 ================================ The estimated fair value of the investments approximate their market values. 8 IAT REINSURANCE SYNDICATE LTD. NOTES TO NON-CONSOLIDATED FINANCIAL STATEMENTS (Continued) FOR THE PERIOD FROM JANUARY 1, 1998 TO MARCH 31, 1998 UNAUDITED (Expressed in U.S. Dollars) - -------------------------------------------------------------------------------- 4. OTHER INVESTMENTS Other investments comprise: $ --------------- Mortgage receivable (note 4a) 1 Aviation Inc. (note 4b) 821,534 Winery (note 4c) 153,456 Griffin & Howe Mortgage (note 4d) 1,285,045 Other 83,207 --------------- 2,343,243 =============== a) A mortgage receivable of $1,280,500 was assumed by the Company on incorporation (note 1). The mortgage was subsequently deemed uncollectible and written down to a nominal amount of $1. In addition, during 1994 the Company assumed a second mortgage receivable of $70,000. During the year ended December 31, 1996 $70,000 was received in full repayment of the debt. b) During 1992, the Company purchased one-third of a 12 1/2% interest in Aviation Inc., which owns an aircraft which is used by the majority shareholder. During 1997 and 1996 the Company contributed an additional $70,000 and $352,774 to Aviation Inc. respectively. c) During the years ended December 31, 1997 and 1996 the Company increased its investment in a winery by $91,896 and $61,560, respectively. d) During 1997 and 1996 the Company assumed mortgages receivable of $944,045 and $341,000 with Griffin & Howe. The directors are of the opinion that the fair value of these investments is at least equal to their carrying value. 9 IAT REINSURANCE SYNDICATE LTD. NOTES TO NON-CONSOLIDATED FINANCIAL STATEMENTS (Continued) FOR THE PERIOD FROM JANUARY 1, 1998 TO MARCH 31, 1998 UNAUDITED (Expressed in U.S. Dollars) - -------------------------------------------------------------------------------- 5. AMOUNTS DUE FROM RELATED PARTIES $ -------------- Note receivable (note 5a) 700,000 Loan to Spear, Leeds & Kellogg ("SLK") (note 5b) 2,900,000 -------------- 3,600,000 ============== a) The Company loaned $705,075 to a related party for the purchase of a seat on the New York Insurance Exchange. During the years ended December 31, 1997 and 1996 repayment of $Nil and $5,075 were received. Interest on this loan is payable monthly and is calculated based on an amount equal to the average of the monthly rate of the last 3 membership leases, as provided by the Exchange, as of the last day of each month. The loan is repayable on demand. The interest earned by the Company equated to approximately 24% and 20% in 1997 and 1996, respectively. b) During the year ended December 31, 1997 the Company entered into a Cash Subordinated Agreement to lend SLK $2,900,000 bearing interest at 8%. Interest of $58,000 has been included in investment income for the period from January 1, 1998 to March 31, 1998. 6. LOAN PAYABLE The Company has a line of credit from one of its investment managers. The total amount available to the Company under this credit facility is $11,000,000, of which $Nil had been drawn down as of March 31, 1998. The amount borrowed bears interest at the United States Federal Fund Rate plus 1 1/4% and is repayable on demand. The Company paid interest at the effective rates of Nil% for the period from January 1, 1998 to March 31, 1998. The Company's portfolio of equity securities held with this investment manager of $6,363,750 at March 31, 1998 are restricted by an amount equivalent to the amount drawn down at any point in time as collateral for the loan. 10 IAT REINSURANCE SYNDICATE LTD. NOTES TO NON-CONSOLIDATED FINANCIAL STATEMENTS (Continued) FOR THE PERIOD FROM JANUARY 1, 1998 TO MARCH 31, 1998 UNAUDITED (Expressed in U.S. Dollars) - -------------------------------------------------------------------------------- 7. CAPITAL STOCK
Class 'A' Class 'B' Total Shares Shares $ $ $ ------------------------------------------- Authorized, issued and outstanding 130,005 shares of a par value of $1.00 each 100,005 30,000 130,005 Less: Treasury Stock, 10,000 shares 0 (10,000) (10,000) ------------------------------------------- 100,005 20,000 120,005 ===========================================
The Class A voting preferred shares are cumulative preference shares entitled to dividends at the rate of $5 per annum per share which are payable annually on April 1, of each year. At March 31, 1998 preferred dividends of $2,875,144 are unpaid and have not been declared by the board of directors. Such dividends on Class A shares shall be cumulative so that if, for any dividend period, cash dividends have not been declared and paid or set apart for payment on the Class A shares outstanding, the deficiency shall be declared and paid or set apart for any payment before any dividend or other distribution. In the event of a dissolution of the Company, the holders of the Class A shares shall be entitled to the full par value plus dividends accumulated and unpaid to that date, with the remaining assets distributable pro-rata among the Class B shareholders. The holders of Class B shares are not entitled to a vote. 8. INVESTMENT INCOME Investment income comprises: $ --------------- Investment income (note 8a) 1,855,635 Income from SLK Limited Partnership (note 8b) 0 --------------- 1,855,635 =============== a) Investment income is net of investment manager fees of $2,019 for the period from January 1, 1998 to March 31, 1998. b) Under the terms of the Secured Demand Note (note 14), IAT is entitled to 1/120 of the income of SLK. One of the Company's shareholders is a partner in the SLK Limited Partnership. 11 IAT REINSURANCE SYNDICATE LTD. NOTES TO NON-CONSOLIDATED FINANCIAL STATEMENTS (Continued) FOR THE PERIOD FROM JANUARY 1, 1998 TO MARCH 31, 1998 UNAUDITED (Expressed in U.S. Dollars) - -------------------------------------------------------------------------------- 9. RELATED PARTY TRANSACTIONS Related party transactions not disclosed elsewhere in these financial statements comprise: During the period from January 1, 1998 to March 31, 1998 the Company paid various expenses amounting to $72,137 on behalf of a shareholder. 10. REINSURANCE As part of the assumption of business described in note 1, the Company obtained commercial reinsurance in order to limit its retained risks. Reinsurance contracts do not relieve the Company from its obligation to policyholders. Failure of reinsurers to honor their obligations could result in losses to the Company. The Company evaluates the financial condition of its reinsurers and provides for any amounts where the recovery is considered doubtful. 11. TAXATION Bermuda presently imposes no income, withholding or capital gains taxes. Additionally the Company is exempted until March 2016 from any such taxes to be imposed in the future pursuant to the Bermuda Exempted Undertakings Tax Protection Act 1966, Amendment Act 1987. The Company has elected to be taxed as a United States corporation under IRC Section 953(d) and has filed with the Internal Revenue Service ("IRS") an application for recognition of exemption from Federal Income Tax. The IRS has ruled that the Company is exempt from Federal Income Tax under IRC Section 501 (c)(15) for all tax years where net premiums written are less than $350,000. The Company does pay Federal Income taxes on other business income. The full amount of tax expense for the 1997 year is current and has been paid. 12. LETTERS OF CREDIT As of March 31, 1998, one of the Company's investment managers issued letters of credit totaling $721,777 which are secured by an equal amount of equity securities held by the manager. 12 IAT REINSURANCE SYNDICATE LTD. NOTES TO NON-CONSOLIDATED FINANCIAL STATEMENTS (Continued) FOR THE PERIOD FROM JANUARY 1, 1998 TO MARCH 31, 1998 UNAUDITED (Expressed in U.S. Dollars) - -------------------------------------------------------------------------------- 13. STATUTORY FINANCIAL DATA Under The Act, the Company is required to prepare and file Statutory Financial Statements and a Statutory Financial Return. The Act also requires the Company to maintain certain measures of solvency and liquidity. The Company's Statutory Capital and Surplus, net of the $73,000,000 commitment for 1998, discussed in note 14, and the minimum required by the Act were as follows: $ ---------------- Statutory Capital and Surplus 213,739,117 ================ Minimum statutory capital and surplus required by the Act 1,000,000 ================ Accordingly as of March 31, 1998, $879,995 respectively of retained earnings and contributed surplus are not available for distribution to shareholders. 14. COMMITMENTS The Company entered into a Secured Demand Note agreement with SLK in 1993, to lend SLK a minimum of $10,000,000 on demand, either in cash or in Equity Securities. During the years ended December 31, 1995 and 1997 the Company entered into secured demand note agreements with SLK to lend a further $30,000,000 and $30,000,000 respectively. As of March 31, 1998, the Company had given SLK a collateral interest in a portfolio of Equity Securities with a total market value of $132,442,409 as security for the commitment under the note. The loan commitment initially extended to February 28, 1997 and was renewed for a further period of one year. The loan commitment is renewable annually thereafter. The Company receives an annual fee of 4% for the unused commitment. Commitment fee income of $700,000 is included in investment income for 1998. As of March 31, 1998 no drawdown on this facility has been made. During the year ended December 31, 1997 the Company entered into a Secured Demand Note agreement with Bocklet & Company ("Bocklet") to lend Bocklet a minimum of $2,000,000 on demand, either in cash or Equity Securities. As of March 31, 1998 the Company had given Bocklet a collateral interest in a portfolio of Equity Securities with a total market value of $3,622,500, as security for the commitment under the note. The Company receives an annual fee of 5% for the unused commitment. Commitment fee income of $25,000 is included in investment income for 1998. As of March 31, 1998 no drawdown on this facility has been made. 13 IAT REINSURANCE SYNDICATE LTD. NOTES TO NON-CONSOLIDATED FINANCIAL STATEMENTS (Continued) FOR THE PERIOD FROM JANUARY 1, 1998 TO MARCH 31, 1998 UNAUDITED (Expressed in U.S. Dollars) - -------------------------------------------------------------------------------- 14. COMMITMENTS (continued) During the year ended December 31, 1997 the Company entered into a Secured Demand Note agreement with Lyden, Dolan, Nick & Co., LLC ("Lyden") to lend Lyden a minimum of $1,000,000 on demand, either in cash or Equity Securities. As of March 31, 1998 the Company had given Lyden a collateral interest in a portfolio of Equity securities with a total market value of $1,811,250 as security for the commitment under the note. The Company receives an annual fee of 5% for the unused commitment. Commitment fee income of $12,500 is included in investment income for 1998. As of March 31, 1998 no drawdown on this facility has been made. Under the terms of the Company's Secured Demand Note collateral agreements, the Company has the right to withdraw collateral to the extent that the value of the remaining collateral equals the outstanding facility. 15. ACQUISITION OF SUBSIDIARY On December 27, 1996 the Company acquired 100% of the share capital of MML Reinsurance (Bermuda) Ltd. The acquisition, which cost $8 million was financed by means of a loan from a shareholder in the amount of $8 million. The loan bears interest at 0% and is repayable on demand. During the period from January 1, 1998 to March 31, 1998 this shareholder loan was repaid. During the year ended December 31, 1997 the investment in subsidiary was reduced by a capital dividend of $4,000,000 which was declared and paid by MML Reinsurance (Bermuda) Ltd. to the Company. 16. LOAN FROM SUBSIDIARY During the period from January 1, 1998 to March 31, 1998 the Company repaid an advance of $1,500,000 from its subsidiary MML Reinsurance (Bermuda) Ltd. This loan was interest free and repayable on demand. -----END PRIVACY-ENHANCED MESSAGE-----